Transcript: Tuesday, October 21, 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: Snap back. The S&P 500 logs its best day of the year. The Dow is back in black for 2014. What’s driving this rally? And are the steep drops you saw last week behind us?

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Big beat. Yahoo (NASDAQ:YHOO) tops earnings estimates after the closing bell. Is the turnaround there on track? And could the results help shape the trading day tomorrow?

GHARIB: And tarnished icons. Coke and McDonald’s, all American brands, seem to have lost their way. What the companies are doing to reconnect with consumers.

We have all that and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, October 21st.

MATHISEN: Good evening, everyone, and welcome.

Remember last week’s big selloff when everyone wondered when the bull market croaked? Well, neither do we. Stocks surged again today, erasing more of last week’s steep losses, following a string of upbeat earnings reports, good news about the U.S. housing market, and news that the European Central Bank may be buying up corporate bonds to juice the struggling eurozone economy.

You add it up and you get a fourth day of gains for the S&P 500 and for the NASDAQ, which saw another rare triple digit gain on the strength of Apple (NASDAQ:AAPL) and other technology shares.

Here is how things looked when the closing bells were rung. The Dow raced up 215 points, third straight day of gains pack in positive territory for the year, NASDAQ up 103 points. That’s a 2.5 percent jump on the session. And the S&P 500 was up 37, its biggest one-day gain all year long.

Bob Pisani has more on what’s behind today’s market action on the floor of the New York Stock Exchange.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Stocks rallied big today, ending right at their highs. But why the melt-up?

Now, the several reasons why the markets have calmed down. First, traders believe the Fed will continue to be dovish during their meeting next week. Second, oil has stabilized and that’s calmed concerns about deflation. And, finally, Ebola fears have eased.

Now, does this mean the coast is clear for everything? Of course not. Oil could quickly drop again, and another outbreak of Ebola in the U.S. would renew those fears pretty quickly.

Here’s another problem. There is nine weeks left in the year and I think the hedge funds are panicking again.

A lot of hedge funds need to invest again. That’s right. A lot of them sold the S&P at 1,820 — that was the low last Wednesday — and they are clearly trying to buy it back today at 1,930. They need to buy stock because they’re dramatically underperforming on the year.

So, say, a fund is down 4 percent on the year. To have a chance to do anything, they’ve got to buy stocks. They’re forced to buy stock at this point.

Nine weeks could be a career in the hedge fund business. It could end your career. That means stocks could easily rise for another few days while these funds play catch-up.

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

(END VIDEOTAPE)

GHARIB: Strong earnings from Yahoo (NASDAQ:YHOO) after the market closed today could help the stock market rally tomorrow. The Internet portal earned 52 cents a share. That was way above Wall Street’s estimates, up 30 cents a share.

Revenues also rose more than expected, despite another drop in Yahoo’s online advertising business. Revenues topped $1 billion for a gain of 1 percent, with a good chunk coming from mobile devices. Yahoo (NASDAQ:YHOO) shares were initially higher in after-hours trading.

Bertha Coombs joins us now from the NASDAQ Exchange.

So, Bertha, tell us what you see as the one big takeaway from those Yahoo (NASDAQ:YHOO) numbers?

BERTHA COOMBS, NIGHTLY BUSINESS REPORT CORRESPONDENT: One big takeaway is really where are they going to grow this company? Several times on the conference call, Marissa Mayer says that, you know, they’re committed to taking this one iconic company and returning it to greatness.

But what the investors really want to know is, where is the road map? What are you going to do next? They’re going to get an awful lot of cash, eventually. And they’ve already got some from Alibaba, a lot of activist investors want them to make a good acquisition and to move more into mobile.

Marissa Mayer says mobile is a standout this quarter. For the year, they expect to get about $1.2 billion in mobile ad revenue.

But consider that that’s less than what Facebook (NASDAQ:FB) does in one quarter. So they have a long way to go here.

GHARIB: And everybody is going to be watching that company carefully.

Bertha, thank you so much. Bertha Coombs, reporting from the NASDAQ.

MATHISEN: Well, folks, not all the earnings news today was good. No, sire. Two of the most iconic American corporate brand names, Coca-Cola (NYSE:KO) and McDonald’s (NYSE:MCD), both Dow components, and both struggled last quarter because of changing consumer taste, changing times, and a stronger U.S. dollar.

Shares of Coke today 6 percent. McDonald’s (NYSE:MCD) also lower, just a fractionally, though. Now, imagine how much higher the Dow might have been if those two had posted better earnings.

Sara Eisen has more now on what’s behind the off-putting numbers.

(BEGIN VIDEOTAPE)

SARA EISEN, NIGHTLY BUSINESS REPORT CORRESPONDENT: When it comes to what we eat and drink, consumer tastes are shifting fast, they want it fresh, natural, good for you.

And giant consumer companies are struggling to keep up. Both McDonald’s and Coke citing lower U.S. sales as reasons for disappointing earnings.

DON THOMPSON, MCDONALD’S PRESIDENT & CEO: The reality is that we haven’t been changing at the same rate as our customer’s eating our expectations on what specifically their expectations of us at McDonald’s (NYSE:MCD). So, we’re changing.

EISEN: McDonald’s (NYSE:MCD) says it’s ramping up marketing campaigns to emphasize the quality of its food and is simplifying the menu, as it moves to share to new fast casual restaurants like Chipotle, and Five Guys, known for better, healthier ingredients.

For Coke, the change in attitude means consumers are ditching their sugary soft drinks, and even no calorie diet colas. Coke said the volume of cases sold for its drinks fell 1 percent in the quarter for North America.

MUHTAR KENT, COCA-COLA: There is no question we need to improve our execution in many markets, especially our consumer marketing and commercial strategies.

EISEN: One of Coke’s strategists to find the slump, investing in Monster, and Keurig Green Mountain, because their energy and coffee drinks are more appealing right now to millennials.

Those equity investments are valuable, but very small relative to the scale of the company, and I guess they have been a little late to get into the non-carbs, with good reason, because every non-carb they sell is less profitable than selling a CSD. But I do think that this is going to be a really long haul to get to where they want to be from a profit standpoint.

It’s a double whammy because these companies are also facing difficult challenges from overseas, a weaker European and Chinese economy, and a stronger U.S. dollar.

Both Coca-Cola (NYSE:KO) and McDonald’s (NYSE:MCD) get more sales abroad than they do at home, which means a stronger dollar cuts into profits, and should continue to do so. The timing could not be worse. As results increasingly are highlighting which companies are losing cuts with our core customers, and it’s some of the biggest most powerful consumer brands in the world.

For NIGHTLY BUSINESS REPORT, I’m Sara Eisen.

(END VIDEOTAPE)

GHARIB: Well, it’s a different story at another classic American brand, Harley Davidson, profits dipped last quarter, but they still topped Wall Street forecast. That sent shares of the motorcycle maker revving more than 7 percent higher today.

Morgan Brennan has more on how Harley Davidson is shifting gears for the road ahead.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): It’s been a rough year for Harley. Sluggish sales in the first half created an inventory buildup, and last month, 2014 touring bikes were recalled. That’s why they cut their forecasts in the summer and analysts expected lower profits, revenue and shipments this time around.

But today’s results showed something even more important. People are buying bikes again. Retail sales of new motorcycles grew nearly 4 percent worldwide, driving past expectations and up more than 3 percent in the U.S. — Harley’s biggest market.

JAIME KATZ, MORNINGSTAR: The Harley made it out of the very difficult spring selling season, moving units to the retail channel. They have managed to launch some products out there in both the street line and the road glides that are really well demanded and are sort of selling out fairly quickly in the retail channel. And that positions them very nicely for the spring selling season ahead of us.

BRENNAN: While the more classic touring bikes continue to be bestsellers, Harley’s new street bikes geared toward a younger, more urban demographic, added to sales as well, particularly outside the U.S., in markets like India and Southern (NYSE:SO) Europe.

Street bikes are important because they’re part of Harley’s strategy to attract new riders to make up for diminishing core base. Those new outreach customers grew double the rate of that core, in the first nine months of the year. And Harley’s new electric prototype Livewire is receiving feedback from riders to expand demos to Canada and Europe next year.

But the key is to expansion without alienating die hard HOG fans. One reason Harley is growing out new models for that base as well.

MATT LEVATICH, HARLEY DAVIDSON PRES. & CEO: I think what we’re seeing coming out of the recession in 2009 is this continued interest and strength in the brand that people are — as they get more secure in their jobs and they feel more confident about the future, particularly here in the United States, that they’re executing on that dream. And we’re offering them products like never before that really helped them compel them to really want to be a part of Harley Davidson.

BRENNAN (on camera): And while retail sales roared back to life, analysts warn there are plenty of head winds for Harley. Competition has revved up from other manufacturers like Polaris, and the stronger U.S. dollar has began to pressure revenue, a trend that could have a significant impact if it continues in 2015.

For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan.

(END VIDEOTAPE)

MATHISEN: Two other Dow components also out with earnings ahead of the opening bell today. Share of each edge higher. Profits did dip at Verizon (NYSE:VZ) last quarter on higher costs, but the company did add a million and a half new wireless subscribers.

United Technology sold more aerospace gear, and predicted growth in its industrial systems unit, and the insurance giant Travelers easily beat earnings estimates — estimates on higher investment income and fewer catastrophic losses.

GHARIB: And we have some good news about jobs to tell you.

Unemployment rates fell in 31 states in the month of September, and rose in only eight of them. That is the smallest number posting an increase since April. The states with the lowest unemployment rates benefitting from the shale oil boom, North Dakota, with a rate of 2.8 percent, and South Dakota at 3.4 percent, Utah just a notch higher at 3 1/2 percent.

Now, those with the highest jobless rate, Georgia at 7.9 percent, while Mississippi and the nation’s capital, Washington, D.C., each at 7.7 percent.

MATHISEN: Good news for any applying for a mortgage rate about right now, to spark more lending, especially the lower income borrowers, federal housing regulators approved new rules making it easier for lenders to package and sell mortgage-backed securities. They also dropped a requirement that meant 20 percent down payment for borrowers unless the lending bank held a substantial amount of its securitized loans on its own books.

GHARIB: More people buying homes again. Existing home sales rose 10.4 percent in September, hitting the fastest sales pace since the middle of 2013. But the numbers released today by a realtors group represent deals that were struck in July and August, even the realtors themselves say the picture today might not be so bright.

Diana Olick reports.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): On a brisk Sunday in Northern Virginia —

UNIDENTIFIED FEMALE: This fall big event.

OLICK: — potential home buyers were kicking the tires on this split level colonial.

JANICE OH, HOME BUYER: Just trying to see the homes are out here in the suburbs.

OLICK: But Janet Oh and her growing family just signed a one-year lease on a rental. They’re not ready to buy yet.

OH: Probably in the next year, more realistically, unless something really amazing comes up.

OLICK: Sales of existing homes rose just over 2 percent in September, but are still lower than they were a year ago. Prices are also cooling, no longer doing the double digit jump since last year.

SHERRY SPINELLI: It’s really turned into what I think is a buyer’s classic market. More days on the market, the prices are coming down. The offers are even lower. And there’s just a lot of houses out there. So, it’s a challenge for sellers.

OLICK (on camera): For their real estate agents. Realtor confidence is at a one-year low, according to their industry association. That may be because investors are moving out of the market. Just 14 percent of September buyers and there are 6 percent more listings today than they were a year ago.

SPENCER RASCOFF: The investor buyers — I mean, those are gold because it’s all cash, it’s easy, it’s quick, they close, no problem. And so, there are fewer of those now than they were before. They’re more first-time home buyers, and that’s — on the buy side, that makes for a harder transaction for real estate agent.

OLICK (voice-over): There may be more buyers looking, but they’re still having trouble pulling the trigger. Sticker shock, tight credit and general jitters about the economy do not seem to be changing with the season.

For NIGHTLY BUSINESS REPORT, I’m Diana Olick in Washington.

(END VIDEOTAPE)

MATHISEN: Still ahead, shape up or break up. Why the head of the New York Federal Reserve has some tough words for Wall Street’s biggest banks.

(MUSIC)

GHARIB: A tragic accident took the life of the CEO of French oil giant Total late Monday, when his plane hit a snowplow at a Moscow airport. Christophe de Margerie and three crew members were killed upon takeoff following a business meeting at the home of Russian President Dmitry Medvedev. A crash investigator told reporters that the snowplow operator was drunk, something that the driver’s lawyer disputes. De Margerie was 62 years old.

MATHISEN: Growing but slowing. That is the word out of Beijing today, about China’s economy. Growth there would thrill most finance ministers but was the slowest since 2009.

Eunice Yoon has the details.

(BEGIN VIDEOTAPE)

EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: On Wall Street, you have your bulls and bears. But in China, I’d like to say that you have your panda huggers and your dragon slayers. And these days, there are a lot more dragon slayers. Growth in the third quarter came in at 7.3 percent from a year ago, this is the slowest the economy has been since the global financial crisis and many people are worried that we’re going to see an even further slowdown.

So, what’s the problem? Weakness in the property sector, which is a major engine of growth here, as well as a lot of debts and excess capacity.

The Chinese government is putting on its best face. It said that it saw positive changes in the real estate sectors, thanks to its targeted stimulus measures. It also said that employment was stable. Those comments are important because it tells us that the authorities are relatively comfortable with the current level of growth and that Beijing will likely continue with its targeted stimulus rather than anything dramatic, at least for now.

For NIGHTLY BUSINESS REPORT, I’m Eunice Yoon in Beijing.

(END VIDEOTAPE)

GHARIB: Shares of Lockheed Martin (NYSE:LMT) slumped after the company reported mixed results, and that’s where we begin tonight’s “Market Focus.”

Third quarter earnings were better than forecast thanks to pension savings and higher production of its F-35 jet, but revenues came in below expectations. The company hiked its earnings outlook for 2014, but said sales and margins will drop. Shares fell 1 1/2 percent to $172.61.

Kimberly-Clark (NYSE:KMB) came out with a restructuring plan today, along with its earnings results. The marker of Kleenex tissues says it plans to cut up to 1,300 jobs. It also lowered its guidance for the year, despite posting better than expected quarterly earnings. Shares still rose almost 3 percent to $111.23.

Shares of Ocwen got hammered today. The selloff came after New York’s financial regulator charged the company with backdating loan modifications and foreclosure letters to borrowers. This denied many of them the ability to quickly correct loan issues. Shares plunged more than 18 percent to $21.48.

Activist investor Dan Loeb revealed his hedge fund Third Point has built a stake in Amgen (NASDAQ:AMGN) and he’s calling for the biotechnology company to split into two. He says the move could increase its share prices by more than 80 percent. Investors agreed and shares rose almost 5 percent to $144.09.

MATHISEN: UPS is boosting rates for a number of its shipping services by an average of nearly 5 percent for 2015. Last month, FedEx (NYSE:FDX) announced a similar price hike that will go into effect in January. Shares of both companies rose more than 2 1/2 percent on its up day.

Amazon (NASDAQ:AMZN) has a new book buddy. The online retailer has signed a new multi-year contract with book publisher Simon & Schuster over the pricing of e-books. This comes as Amazon (NASDAQ:AMZN) has been in a long-running fight over the pricing with the publisher Hachette. Shares of Amazon (NASDAQ:AMZN) popped 3 percent today to $315.33.

And Michigan Governor Rick Snyder signed legislation aimed at discouraging Tesla from selling its electric cars directly through company stores, instead of through a dealership. General Motors (NYSE:GM) was one of the backers encouraging the governor to sign the bill. Other states, including New Jersey, Arizona and Texas have already banned these direct sales. Separately, Daimler is selling a 4 percent stake in Tesla, and shares of Tesla down initially after that after-the-bell announcement. But before the close, shares were 2 percent higher at $235.34.

GHARIB: The nation’s biggest bank is facing a huge fine from European regulators from conspiring with some Switzerland based lenders to rig Swiss interest rates.

JPMorgan (NYSE:JPM), along with Credit Suisse and UBS were slapped with a $120 million fine for what the European Commission calls taking part in financial cartels to manipulate Swiss franc interest rate derivatives.

MATHISEN: More banks in the crosshairs, this time from Bill Dudley. The president of the New York Federal Reserve Bank who said that even after the financial crisis some Wall Street banks were fostering a culture of unethical and even, quote, “illegal behavior”.

Mary Thompson joins us with more on this workshop sponsored by the New York Fed, turned into a real dressing down of the banks by Bill Dudley.

Who was there and what specifically was he going after?

MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, it was yesterday at the New York Fed, and there were about 80 people in attendance, including CEOs and executives from major names from the financial industry like Morgan Stanley (NYSE:MS), JPMorgan (NYSE:JPM), AIG, G.E. It was a full day devoted to improving the culture on Wall Street.

Basically the firms were told by Dudley, who is the head of the New York Federal Reserve and Fed Governor Daniel Tarullo, the companies better clean up their act or else, because they’re sick of hearing about fines, like we just heard about from JPMorgan (NYSE:JPM). They don’t want to hear about any more bad mortgage practices at all. They want them to fix what the regulators have been trying to fix for a while.

GHARIB: So, you say, clean up your act or else? Or else what?

THOMPSON: Break up the banks. Basically, that was the message from both of those regulators.

GHARIB: Really?

THOMPSON: Dudley actually questioned whether these firms were too big to handle, citing bad behavior in small units, that actually led to big losses at firms like JPMorgan (NYSE:JPM) and AIG. Then, Tarullo said if the banks failed to police themselves and their workers in a better manner, regulators and law enforcement would have little choice but to impose more constraints and punishment on these firms.

MATHISEN: Did the federal regulators say anything about what they think the banks should do to police better?

THOMPSON: They did have a couple of suggestions, and no surprise here. Some of it centered on compensation, a deadly deferred compensation up to 10 years, pay bonuses and bank debt not equity, pay fines out of the bonus pool and self-report to regulators.

Also, they told them think about your public image.

Now, these suggestions may be a hint of something else coming down the road. But keep in mind as well, the Federal Reserve has been criticized by Congress, as well as other regulators as being too soft on the banks. So, it was a bit of a public image burnishing for the federal as well, but it also opens conversation about maybe some additional changes. We’ll see on the banking and financial front in the years ahead.

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

GHARIB: And coming up on the program, why the California beer industry is hitting a dry spell and what it is doing to solve the problem.

(MUSIC)

MATHISEN: The airlines are raising fares despite falling energy costs and fears about Ebola. The major airlines have approved a $4 round trip fare hike. JetBlue kicked off the increases last week, and Delta and Southwest jumped in, United and American soon followed suit. The fare hike suggests the airline industry believes that demand to fly is still very, very strong.

GHARIB: Some troubling news for Apple (NASDAQ:AAPL), coming just a day after posting the blockbuster quarterly earnings, Apple’s icloud.com storage and backup service in China has been hacked with hackers potentially gaining access to passwords, contacts and other user data. Now, Apple (NASDAQ:AAPL) called the breach, quote, “intermittent, organized network attacks”, and say its cloud servers were not compromised and the attacks did not impact the sign-ins via iPhones or Macs running on its latest OS X operating system.

MATHISEN: Another big U.S. retailers apparently been victimized by hackers. Staples (NASDAQ:SPLS) now investigating a possible data breach. Stores up in the Northeast after several banks noticed what appeared to be fraudulent charges on credit cards.

In a written statement, Staples (NASDAQ:SPLS) said, quote, “We take the protection of consumer information very seriously and are working to resolve the situation,” end quote. The chain said that customers won’t be responsible for fraudulent charges on their cards, so long as they report it very quickly.

GHARIB: Meanwhile, a new survey found that nearly half of holiday shoppers say they won’t go to retailers that have been hacked. That’s according to creditcards.com, which also found that about half of those surveyed said security breaches would be more likely to pay with cash this holiday season. It makes sense.

MATHISEN: A sobering look now at how the drought out West is impacting beer drinkers. There won’t be a dry eye at the bar.

Jane Wells has the story.

(BEGIN VIDEOTAPE)

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): How many bottles of water in the beer on the wall? A lot.

LUIS CAYO, BUDWEISER BREWERY: Beer has to have water.

WELLS: More than 90 percent of that bud is water. And one brewer said it could take seven gallons of water to make one gallon of beer. That’s a problem in California, where there isn’t much water left.

It’s impacting everyone from California’s fast-growing craft brew industry, to beer giants like Anheuser-Busch which is operated a brewery in L.A. for 60 years.

CAYO: Like I said, we used reclaimed waters to rinse first.

WELLS: At Budweiser, they’re using reclaimed water for cleaning and the replaced the landscaping, which alone save 5 million gallons.

CAYO: Since 2009, we reduced water usage 31 percent, 9 percent in the last year, and we’re targeting 10 percent in the following year.

RICHARD NORGROVE: The wine industry, has a crush once a year. We have a crush every day if you want to use that phrase.

WELLS: Up in Cloverdale, California, Bear Republic Brewing has taken similar measures to cut water usage. But it depends on the Russian River, which has turned into more of a stream. When the brewery sought permits to double in size because of growing sales, the city said no way, not until we can drill more wells. So, the brewery paid more than half a million dollars in impact fees in advance, to give the city the cash it needed to drill.

PAUL CAYLOR: So we were able to actually drill these wells last October before the third year of the drought began and became quite severe.

WELLS: Still, long-term, it may not be enough. Already some craft brewers are expanding on the East Coast, partly for water.

NORGROVE: Can you imagine the drought like this over the next ten years? I think you’re going to see a lot more than breweries leaving this area. You’re going to see the major agricultural areas picking up and going somewhere else.

WELLS: Leaving California high and dry and crying in its beer.

For NIGHTLY BUSINESS REPORT, Jane Wells, Los Angeles.

(END VIDEOTAPE)

GHARIB: And finally, Americans last year took the least amount of vacation time in nearly four decades. And in so doing, they forfeited billions of dollars in compensation. The U.S. travel association says the average U.S. worker used just 16 of about 21 allotted vacation days last year, because employees who forfeit time off do not get more raises or bonuses than those who take all their time off. The group says that works out to more than $52 billion in lost benefits, Tyler, not to mention work-related stress.

MATHISEN: I believe in vacation. I think you should take them. Get them, take ‘em, use them.

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

MATHISEN: And I’m Tyler Mathisen. It’s Gharib, right? It is Gharib.

I’m Tyler Mathisen. Have a great evening. 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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