Transcript: Thursday, October 9, 2014

NBR ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Susie Gharib, brought to you in part by —

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SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: About-face. Stocks tumbled just one day after the biggest rally of the year, making this the most volatile stretch for the markets since 2011.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Why now? And should investors like you get used to more ups and downs? Two experts share insight and advice on this volatile market.

All that and more tonight on NIGHTLY BUSINESS REPORT for Thursday, October 9th.

Good evening, everyone, and welcome. Only three times this year has the Dow Jones Industrial Average lost 300 points or more. Today made four and the losses were the steepest of the year in point terms, all three of the broad market barometers fell 2 percent, this just a day after the advance of the year.

The bottom line: volatility is back and the pros say it`s not going anywhere any time soon so get used to it. Crude oil crumbled, investors fretted about slowing global growth.

And European Central Bank Chief Mario Draghi speaking in Washington signaled his worries about deflation.

(BEGIN VIDEO CLIP)

MARIO DRAGHI, ECB PRESIDENT: We are accountable to the European people for delivering price stability, which today means lifting inflation from its excessively low level and we will do exactly that.

(END VIDEO CLIP)

MATHISEN: Here is the damage on Wall Street today, and it was thorough. The Dow plunging 335 points, the NASDAQ off by 90 and the S&P
500 down 40.

The energy sector was especially hard hit as domestic oil prices fell another buck and a half, closing below $86 a barrel for the first time since December of 2012. Brent crude dropped below $90 for the first time in two years.

Bob Pisani has our report.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: The issues dogging the market are essentially the same as what`s been dogging it for the last several days. There is a collision between concern over slowing growth in the rest of the world and the debate between the Feds should be raising interest rates.

Several specific issues today: first, a slowdown in Europe. German exports dropped almost 6 percent in August, the biggest drop since the financial crisis several years ago.

The head of the European Central Bank, Mario Draghi, again reiterated that there could be no recovery in Europe without structural and economic reforms. But a lot of experts are increasingly doubtful that the European leadership will be able to reenact those reforms and get Europe back on the growth track.

Third, there`s been a relentless drop in oil. Good news for the economy but very tough news for people who own oil stocks. Big oil names like Exxon, Chevron (NYSE:CVX), Total, BP, are down 3 percent to 9 percent just this month alone.

Finally, there`s general concerns about the ability to control the spread of Ebola, particularly if it spreads to other parts of the world like Southeast Asia or even Central America.

Finally, though, let`s try to keep a little perspective. The U.S. is not in a recession. The U.S. economy, in fact, is growing. The drop in oil is good news for us. The S&P 500 is only about 4 percent from its historic highs which hit only about three weeks ago.

For NIGHTLY BUSINESS REPORT, I`m Bob Pisani at the New York Stock Exchange.

(END VIDEOTAPE)

GHARIB: Well, those worries about a slowdown in the global economy were just one of the hot button issues facing delegates at the International Monetary Fund and the World Bank meeting in Washington today.

Sara Eisen has more.

(BEGIN VIDEOTAPE)

SARA EISEN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): The annual meeting of the IMF and World Bank are under way in Washington.
Finance ministers, central bankers and other financial heavyweights gathering to discuss global risks, after the IMF cut its outlook for world growth this week.

CHRISTINE LAGARDE, INTERNATIONAL MONETARY FUND MANAGING DIR.: Well, next year, we have revised it down as well to 3.8 percent. So, it is mediocre. That`s what I called the new mediocre, but it is recovery.

EISEN: A slowdown in Europe is front and center. The IMF says Germany must spend more to boost infrastructure and the European Central Bank should be prepared to do more to boost growth and consumer prices.
And while the U.S. is growing faster, leaders are trying to solve lingering issues like stagnant and inequality.

LAGARDE: The issue of income allocation. Who is benefitting from growth and where is income going? How much inequality can the systems bear for growth to continue to be sustainable? And we have a concern that if inequality continues to increase then growth will not be sustainable.

UNIDENTIFIED MALE: Our people are dying.

EISEN: Policymakers here also are discussing ways to fight the spreading risk of Ebola, after the World Bank said it could cost African nations by as much as $32 billion next year.

JIM YONG KIM, WORLD BANK PRESIDENT: The $32.6 billion is not because of the virus itself. Eighty to 90 percent of that is the inversion behavior, the stop in productivity, people don`t go to work, kids don`t got to school, there`s no flights coming in, people don`t go to work, trades slow down.

EISEN: The bottom line, six years after the financial crisis, and the world is recovering, but that recovery is bumpy and it is fragile, leaving it vulnerable to economic hiccups, bad weather and geopolitics. Wall Street has certainly taken notice.

For NIGHTLY BUSINESS REPORT, I`m Sara Eisen.

(END VIDEOTAPE)

MATHISEN: Let`s get more now on today`s market selloff, spend some time with two guests. Chris Wolfe, he`s chief investment officer at Merrill Lynch Private Banking and Investment Group. And Erin Gibbs is equity chief investment officer with S&P Capital IQ.

Folks, welcome. Good to have you with us.

Chris, why has volatility come back as strongly as it has? And is there anything individual investors can do about it?

CHRIS WOLFE, MERRILL LYNCH, PRIVATE BANKING & INVESTMENT GROUP CTR:
Yes. Well, I think there`s two reasons. One, it`s just been a combination of factors, many noted before, from Draghi speech today, coupled with the German myth and economic data. China recently has also been weak. And you`ve seen actually earnings revisions in the United States come down a little bit.

So, the long good ride of kind of having your cake and eating it too, good returns but not a lot of volatility given all of the fragile elements that I just described, seems to be kind of coming to an end.

Now, that doesn`t necessarily mean bad things. I think there`s still good elements going on, and the fundamentals for investors in the U.S. Cap X is picking up a bit, companies still generating a lot of cash. And while there are concerns that Europe is slowing down, many of the big multinational companies in the U.S. still have ways to manage their margins in order to generate strong cash flows.

And I think individual investors in this environment kind of benefit from doing two things. First, being patient. Let this settle a bit.
We`re coming into the earnings season, there is likely to be a little bit more noise.

Second, look for opportunities and higher quality spaces because those would be the places that have that volatility around international risks building in them.

GHARIB: Erin, let me ask you a little bit more about this volatility, why these sudden swings, even from what Chris is saying, we`ve heard that rationale before, about the fundamentals are pretty much the same, concerns about Europe. It`s the same conversation we`ve had all summer long.

So, is the beginning of something different and something bad?

ERIN GIBBS, S&P CAPITAL EQUITY CHIEF INVESTMENT OFFICER: No, I still see this as very much within the normal range of volatility. And one more point — so up until recently, we have been trading at fairly high valuations when we talk about P/E or price-to-earnings, we have had trading at about 16 times forward earnings, which is a little on the high side, above average, let`s say.

So, when you start seeing these global risks come in, naturally, it`s perfectly natural to have a bit of a pullback and a bit of a correction.
But volatility levels are still well below five-year averages. In fact, we still haven`t even hit the volatility we saw back in February.

So, investors need to have a slightly longer term memory. And basically stick to their game plans and stick to long-term investing.

MATHISEN: Chris, is this the correction so many have been warning about?

WOLFE: I think that`s a good question. I think it`s part of the correction that I think investors have been looking for since the beginning of the year, lots of statistics about how many days we`ve gone with a 5 percent move. And I think the last couple of days, at least around volatility, because remember, we`ve been down and back up and back down again, you know, indicate that investors may be wanting to look at opportunities from a longer term perspective.

To my point earlier, the bottom line around volatility being very low for so long, it set expectations maybe the wrong way, this was the normal –
– always up and no volatility. And that`s not how things are.

GHARIB: So, Chris, I mean, tell us — have you changed your investment strategy? And have changed your outlook for the rest of this year and where the stocks averages are going to end the year?

WOLFE: No, our strategists really haven`t made any changes to their forecast. I think what we`re trying to ensure to clients is the balance of opportunities. We`ve been pretty bullish on some of the cyclical, or cyclical sectors earlier in the year, they have been hammered actually very recently. Some of the defensive needs have come down as well.

So, for clients looking to reposition, where they have new cash, there is more around the defensive lines for clients looking for opportunities to kind of pick up the U.S.-centric growth, it`s more of those U.S. companies that benefit from U.S. growth given all the risks we see developing in Europe.

MATHISEN: Erin, let me get you to react to what Chris just said. If you have things on your buy list, what are they, Erin? Where would you be looking on these dips to buy?

GIBBS: So, I have two companies, both that have mostly domestic revenues, because one thing that we are concerned about is this huge increase we`ve seen in the dollar was actually up almost 8 percent over the past three months, which is a big change for just three months. So, two companies that I like are Lockheed Martin (NYSE:LMT), which is more the defense of very high quality dividend yield just like Chris said. And the other one is Southwest Airlines (NYSE:LUV), which really picked up great market share with the acquisition of AirTran Airlines. And this is one that we recommend buying on any dips.

MATHISEN: Chris, just to wrap it up. I`ve still sort of — I think like a lot of viewers watching this wondering, why is this happening? To what extent does any of this have to do with what`s going on in Washington, with the midterm elections coming up? Is this related to that, some nervousness?

WOLFE: Yes. I think there`s a little bit. I think a lot of times when you see big moves like this, it`s often because a lot of drive
(INAUDIBLE) down and then match was struck. In this case, I think the match was two things really — the weak German data and Mario Draghi`s speech to the Brookings Institution, where he talked about his speech in Jackson Hole which said expectations in Europe are unhinged, which is economist speak for — oh my gosh, this is a lot lower than I thought.
We`re going to have to do a lot more than we expected.

That was a surprise to markets. That`s the match that I think got people reassessing whether or not the European growth story is as strong as expected next year. Put the IMF lowered forecast in that mix, I think you get a reassessment of how strong growth will be next year. That`s a corporate revenue line issue which means it`s probably a little lower than people anticipate, markets adjusting to that.

MATHISEN: Chris, thank you very much. Erin, thank you, as well. You helped us out a good bit. We appreciate it a lot.

WOLFE: Thank you.

GHARIB: Well, here is something else that added to the market worries today, strong words from the president of the St. Louis Federal Reserve Bank about investors making a big mistake the timing of interest rate hikes. James Bullard said he was worried about the, quote, “disconnect between when investors expected to Fed to begin raising rates and when the Fed itself actually plans to do so.” Bullard said when there is a mismatch in thinking it doesn`t end well — those are his words.

MATHISEN: Well, he should just tell us when they`re going to do it, right? We`re going to do it right there.

Despite today`s selloffs of the market, one of the few stocks ending higher today was Apple (NASDAQ:AAPL). Shares there up a quarter of 1 percent. That`s not much. But when the rest of the market is down 300, it is. That comes after another round of pressure from a well-known activist investor about what Apple (NASDAQ:AAPL) should do for shareholders like him, with its massive pile of cash.

Josh Lipton has more.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): You can say this about Carl Icahn — he is consistent. The billionaire investor has repeatedly urged Apple (NASDAQ:AAPL) to buy back more of the stock. This morning, he was at it again.

In an open letter to Apple (NASDAQ:AAPL) CEO, Tim Cook, Icahn first praised Cook as the, quote, “ideal CEO”, then the activist investor told Cook what he`s doing wrong. Icahn says the Apple (NASDAQ:AAPL) shares are massively undervalued, and worth $203 a share, two times the current price.
He says the company should buyback more stock.

CARL ICAHN, ACTIVIST INVESTOR: Nobody is smart enough to know when do you buy at the bottom and when don`t you? And, hey, I`m not telling Apple
(NASDAQ:AAPL) go spend $100 billion tomorrow and buy the stock. I am saying, this is a great opportunity to buy this company and, hey, I`m not going to pick the day you buy it.

LIPTON: In response to Icahn, Apple (NASDAQ:AAPL) says it`s already aggressively executing the largest capital return program in corporate history. In July 22nd, when Apple (NASDAQ:AAPL) last reported results, the company said it had returned $74 billion to shareholders and plans to return $130 billion.

So, what`s Icahn`s real motivation here? Analysts say the activist who owns 53 millions shares of Apple (NASDAQ:AAPL) obviously wants to see the stock move higher, buybacks could help.

GENE MUNSTER, PIPER JAFFRAY SENIOR RESEARCH ANALYST: I think the single biggest motivation for the letter is that Icahn is fearful that investors are going to sell Apple (NASDAQ:AAPL) shares after the big iPhone
6 release quarters and ultimately he is going to lay the groundwork for the longer term.

LIPTON: While Munster doesn`t see the stock going as high as $203, he does agree with Icahn that Apple (NASDAQ:AAPL) should buy back more stock, and he says that could be announced next spring. But he says Tim Cook probably won`t be looking to Icahn for guidance about when or how to return more cash to shareholders.

For NIGHTLY BUSINESS REPORT, I`m Josh Lipton in Silicon Valley.

(END VIDEOTAPE)

GHARIB: And still ahead on the program, General Electric`s big bet on what it believes will drive the future of manufacturing. That story right after this.

(MUSIC)

GHARIB: General Electric (NYSE:GE) has a vision for the future of manufacturing, and it`s launching a new initiative to hopefully get ahead of it, save money and improve efficiency. Its goal: to get some of its biggest industrial machines to communicate with each other.

Morgan Brennan tells us how.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
General Electrical calls it the “industrial internet”, the integration of software and centers, big machines like airplanes, turbines, or locomotives.

JEFF IMMELT, GE CHAIRMAN & CEO: If you went to bed last night as an industrial company, you`re going to wake up in the morning as a software and analytics company. That this notion that there`s a huge separation between the industrial world and the world of digitalization (ph) and analyzing software, those days were over.

BRENNAN: GE has created an operating system called Predix to automate industrial machinery, working with partners like AT&T (NYSE:T), Verizon (NYSE:VZ), Intel (NASDAQ:INTC) and Cisco (NASDAQ:CSCO) to increase productivity and cut down on waste.

BILL RUH, GE SOFTWARE VP: You know, if you look at the wind turbine, what we`re doing is using software and analytics, coupled with a lot of data about the wind speed and things like that. And we`re optimizing individually each wind turbine in a farm and we`re finding we can generate up to 4 percent more electricity.

BRENNAN: GE developed the industrial Internet three years ago. And today, at its annual mind and machines events held in a building behind me, it announced that this new business will generate more than a billion dollars in revenue in 2014, still a small fraction of the company`s overall sales but one that analysts expect to grow dramatically over the long-term.

STEVEN WINOKER, BERNSTEIN SENIOR ANALYST: You`re talking about something that is a percentage of GE`s industrial business at this point.
But the opportunity is enormous, and I think the question is not whether there is an opportunity but how are they going to take advantage of that opportunity over time? How are they going to monetize that opportunity?

BRENNAN: An estimated 50 billion machines and devices will become automated by 2020, and not just by GE.

WINOKER: I think you can say most of the large industrial companies are trying to find ways to take advantage of this. And everybody is doing something.

BRENNAN: Companies like Rockwell Collins (NYSE:COL), Honeywell and Emerson are all investing in the space as well. But there are risks. The growing concerns over cyber security, which these companies say they are working hard to address and the possibility that more productive machines could lead to less demand for replacements in the future.

For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan in New York City.

(END VIDEOTAPE)

MATHISEN: Shares of a beverage giant bubbled up to an all-time before
— you know what they did — they fizzled out, they had to. And that`s where we begin tonight`s “Market Focus”.

PepsiCo raising its full year earnings forecast and its quarterly profit. They beat Wall Street expectations. The company says its smack sales, which include brands like Frito Lay helped lift earnings last quarter. PepsiCo has been urged by an activist investor to spin off the snack business from the sluggish beverage unit. Shares ended a third of a point lower at $93.57.

Endo International is buying Auxilium Pharmaceuticals (NASDAQ:AUXL) for more than $2.5 billion. The deal values Auxilium at $33.25 a share.
That`s a 12 percent premium over yesterday`s close. But it was a rough day for Endo today. It was 6 percent lower at $66.78. But Auxilium up 9 percent to $32.44.

And Kindred Healthcare (NYSE:KND) is buying Gentiva Health Services
(NASDAQ:GTIV) for nearly $2 billion. Gentiva provides home health and hospice services. Shares of both companies ending higher. Kindred was up a dollar a share. It finished at $20.75. Gentiva up nearly 17 percent to $19.49.

GHARIB: Allergan (NYSE:AGN) is raising its earnings estimate for the third quarter. The maker of Botox says the outlook shows the current takeover offer by Valeant undervalues the company. It`s been reported that Valeant may raised its bid. Shares of Allergan (NYSE:AGN) fell, though, 1
1/2 percent today, closing at $187.55 a piece.

Amazon (NASDAQ:AMZN), the 800-pound guerilla in online retail now wants to open its first brick and mortar store. According to Dow Jones, the site will open in Manhattan, right across from the Empire State Building, in time for the holiday shopping season. The store would also reportedly function as a mini-warehouse with limited inventory for same-day delivery right within New York City. The stock lost more than 2 percent, closing at $315 and change.

Symantec (NASDAQ:SYMC) is the latest company to split up. After of the closing bell, the tech firm which is best known for its Norton anti- virus software said it will form two publicly traded companies. One will be focused on software sales, the other on Cloud data storage. The stock initially rose on the news in the late day trading, but then finished the regular session down about 2.5 percent to close at $23.44.

Mixed quarterly results after the closing bell from Family Dollar.
The discount chain reported better than expected revenues as same store edged higher. But a slight lift on earnings per share. The company didn`t provide forward guidance because of its pending acquisition by the rival, Dollar Tree (NASDAQ:DLTR). In today`s trading, Family Dollar up 4 cents a share, closing at $70.75.

MATHISEN: A warning for many of the millions of Americans with an account at Fidelity Investments, one of the world`s biggest mutual fund companies, 401(k) servicer. “The Financial Times” reports that Fidelity is among the financial institutions to got hacked by the same cyber thieves who breached the servers at JPMorgan (NYSE:JPM) Chase. But the paper says there is no indication that any Fidelity customer data was stolen.

GHARIB: Bond king Bill Gross sounded upbeat today as he held his first conference call and web cast since his sudden departure from PIMCO last month. Speaking from his new office at Janus Capital, Gross says stocks are not in a bear market but he says investors need to, quote, “recognize that times have changed.” He expects stock gains of as much as
5 percent to 6 percent over the next couple of years, and 3 percent to 4 percent for bonds.

MATHISEN: Still ahead, it`s Ben Bernanke`s turn. The former chairman of the Federal Reserve took the stand and faced tough questions about the bailout of the insurance giant AIG.

(MUSIC)

GHARIB: Home equity loans on the rise. More homeowners, especially those who bought at the bottom of the market are tapping into the equity built up in their homes. RealtyTrac reports the number of homeowners opening home equity lines of credit in the 12 months ending in June rose 21 percent compared to a year ago.

And here is the story from the “where are they now” files. It`s been six years since anyone`s heard from Dick Fuld. He`s the former CEO of Lehman Brothers, the investment bank that collapsed at the height of the financial crisis.

Well, Fuld is reportedly back and doing deals again. His new firm, Matrix Advisers, is advising a small investing company called Open Match Holdings to acquire the National Stock Exchange. The 130-year-old exchange shut down in May because of low trading activity, but Fuld is helping match to reopen it.

MATHISEN: The (INAUDIBLE) from the financial crisis were on the stand today at former AIG CEO Hank Greenberg`s trial against the government over the terms of the insurance giant`s bailout. Former Treasury Secretary Timothy Geithner ended his testimony, while former Federal Reserve Chairman Ben Bernanke began his.

Mary Thompson has more from federal claims court in Washington.

Mary, what happened in court today?

MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPODENT: Well, you know, it was interesting to watch Bernanke`s testimony today, Tyler, because he was or he appeared vaguely annoyed and slightly combative when he took the witness stand. He replied to the questions from the lead plaintiff`s attorney David Boies with curt answers like “yes, sir,” and “I don`t recall.” But he did defend the government`s actions with the AIG bailout, saying the tough terms of the $185 billion rescue package were needed to:
(a), to compensate packages for the risks they were taking, and to minimize any windfalls that shareholders may have received because of the government`s actions.

Bernanke was on the stand for about two and a half hours today. He returned to the federal claims court tomorrow for more testimony — Susie.

GHARIB: Yes. Mary, David Boies spent a lot of time grilling Ben Bernanke on the equity portion of the bailout. Tell us what that was all about.

THOMPSON: Well, this is key to the shareholder`s lawsuit. They say that their Fifth Amendment rights were violated when the government didn`t adequately compensate them for what became a 92 percent stake in AIG that the government took.

So, Boies was repeatedly asking Bernanke, why did you take this equity stake? Did you know that a loan rate in 2008 included equity? Bernanke said no, loan rates only include interest rates. So, Boies pushed him.
What about this equity stake? He said it was taken in order again to protect the taxpayers who were assuming so much risk.

MATHISEN: Boies has had three big names in court this week, Bernanke and the former treasury secretary, Mr. Paulson and Mr. Geithner. What is it he`s trying to show the court with his questioning? Where is he going?

THOMPSON: What he is trying to do, Tyler, is paint a picture of a government or government officials that really didn`t do proper analysis on the value of AIG and its subsidiaries. And so — and as a result, they put together this kind of slap dash agreement and didn`t ask the proper questions, they didn`t seek any kind of outside analysis, you know, when they put this rescue package together.

So, that is what Boies is trying to show, that the government when it had these excessive powers to use, they did not use the proper due diligence to create the rescue package, and again did not treat the AIG shareholders fairly.

MATHISEN: All right. Mary Thompson, thank you very much. Mary, reporting from Washington tonight.

GHARIB: And from Washington to Wall Street, we recap our top story: a massive selloff in the markets, the worst day of the year for major averages on worries about the global economy and after a sharp drop in oil prices sent energy prices lower. The Dow tumbling 335 points, the NASDAQ falling 90, the S&P 500 losing 40 points.

MATHISEN: And before we go, “Fortune” magazine out with this year`s
40 under-40 of the most powerful and influential and important bigwig people in business under the age of 40.

At number five, Jan Koum, co-founder and CEO of WhatsApp, which was just acquired by Facebook (NASDAQ:FB) for $19 billion.

At number four, Andriy Kobolyev, head of Ukraine`s state-owned oil and gas giant.

And third, Matteo Renzi, he`s the prime minister of Italy.

And second, Facebook (NASDAQ:FB) founder Mark Zuckerberg.

And a tie for number one between Travis Kalanick, the brains behind the ride-sharing app Uber, and Brian Chesky, the man who started the home rental app, Airbnb.

GHARIB: We didn`t give everybody`s ages, but the prime minister of Italy is 39.

MATHISEN: Thirty-nine, jut gets in under the wire and not really a business guy. He`s a government guy. Come on.

GHARIB: That`s NIGHTLY BUSINESS REPORT for us. I`m Susie Gharib.
Thanks for watching.

MATHISEN: And I`m Tyler Mathisen. Thanks from me was well. 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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