Transcript: Monday, October 27, 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: Breaking 80. The price of oil falls below a key level during the trading day. Now, while that’s good news for drivers, it could be bad news for parts of the job market.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: #Disappointing. Twitter’s quarterly revenue more than doubled, but its outlook failed to impress investors, and that sent the stock lower in initial after-hours trading.

GHARIB: And not accepted. Apple (NASDAQ:AAPL) Pay was supposed to usher in a new way to pay for just about anything. But a week after its launch, why are two major drugstore chains disabling the technology?

We have all that and more tonight on NIGHTLY BUSINESS REPORT for Monday, October 27th.

MATHISEN: Good evening, everyone. And welcome.

The price of oil has always had an outside impact on the economy, on the stock market and on consumers. Remember how careful you were about driving when gasoline was up above $4 a gallon and not so far ago? Or where you set your thermostat after getting your home heating bill?

But right now, with lackluster global demand and oil production especially here in the U.S. at a peak, gas prices are near a four-year low. The price of crude has fallen roughly 25 percent since hitting a high back in June. And that’s added to the volatility in the markets and worries now about how low oil can go.

Today, another sharp pullback in oil prices. For a time, they even dipped below the $80 a barrel level before they recovered. At the close, oil was basically flat, down a penny, and exactly $81 a barrel.

Jackie DeAngelis has more now on falling oil prices and what they could mean for the economy and you.

(BEGIN VIDEOTAPE)

JACKIE DEANGELIS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Oil prices continuing their decline, and that has retail gas prices sinking like a stone.

The national average for a gallon of regular gas now $3.08, a four-year low. Prices at the pump falling 18 cents in just the last two weeks, according to the Lundberg Survey.

This is good news for consumers who are saving roughly $50 a month on gas. Not only will they feel this power of low gas prices, but they may choose to spend that money elsewhere. But could there be bad news, too? The U.S. oil boom is adding thousands of jobs to the U.S. economy. If oil prices continue to fall, analysts expect that could force the producers to scale back on drilling, which could mean less job growth in the industry.

JEFF GROSSMAN, BRG BROKERAGE: The main reason you have a problem here is that at a certain level, it doesn’t pay to explore, it doesn’t pay to produce more. At that level, that’s why we heard all this talk about all this exploration in new technologies when we were at the higher prices. At this level, now all your producers are going to have to think twice about taking on people and going further in their explorations.

DEANGELIS: And the oil majors spend money on other things, they make capital expenditures for equipment and exploration, reduced purchasing could put a big dent in the economy.

So, when will oil producers start to feel the pinch? It really is difficult to say. Estimates suggest the cause to produce in this country is anywhere from $70 to $77 a barrel. So, there’s still wiggle room.

But with Goldman Sachs (NYSE:GS) reducing its 2015 forecast to $75 a barrel — well, that’s dangerous territory. The question now, of course, how low can we go?

PETER AMANDIO, CHICAGO ENERGIES: It looks like it’s going to take a while. Maybe take a few months, but once we broke through certain levels on a monthly chart, it looks like you could see levels as low as $50 some months from now.

DEANGELIS: If oil prices continue to collapse, AAA says gas prices will move lower in tandem. We could see the national average fall under $3 in the coming months. But it does seem like that could come at a price.

For NIGHTLY BUSINESS REPORT, I’m Jackie DeAngelis.

(END VIDEOTAPE)

GHARIB: Falling crude prices haven’t just impacted major producers like Chevron (NYSE:CVX) or ExxonMobil (NYSE:XOM). Lesser known companies involved in drilling, exploration, oil field services and other energy-related businesses have seen their shares plunge since oil prices hit a high on June 20th.

Shares of Nabors Industries (NYSE:NBR), one of the world’s biggest drillers, tumbled 38 percent from those June highs. Transocean (NYSE:RIG), the offshore oil rig giant down 36 percent. Newfield Exploration (NYSE:NFX), Denbury Resources (NYSE:DNR) and Southwestern Energy (NYSE:SWN) each off 34 percent.

MATHISEN: The cost of fuel, of course, one of the biggest expenses for airline. So, when fuel prices decline, it’s generally good news for carriers and their shareholders. Here’s how some of the nation’s biggest airline fared today. United shares up 4 percent, JetBlue higher by 1 percent, American, Delta and Southwest all fractionally higher.

GHARIB: Meanwhile, OPEC will likely keep production levels right where they are. “Reuters” reports say a senior oil official from Iran says the oil cartel is not likely to lower its production ceiling at its next meeting in November.

MATHISEN: Anthony Chan joins us to talk about what lower oil prices and what they mean for the U.S. economy. He’s chief economist at Chase.

OK, Anthony, you’ve heard the conversation. There are two sides to this story. One is that low oil prices helps U.S. consumers. The other is that it hurts, increasingly significant, U.S. producers.

On balance, is oil at $80 a barrel, at $75, at $70 a good thing for the American economy?

ANTHONY CHAN, CHASE CHIEF ECONOMIST: Well, remember, when oil prices come down, it certainly gives a big boom to consumers adding as much as a billion a more for every penny that gasoline prices go down.

But as you always know, whenever something happens, there’s two sides to the issue. Will it cut some capital expenditures? Will it cut some jobs? Of course.

But you’ve got to ask yourself what on net is the balance. And on net I think is a much bigger positive contribution to the overall economy, given that consumer spending is close to two-thirds of the economy, and given the fact that capital spending on oil services and exploration is such a small share of the employment market that you all of a sudden see these fuel prices come down, you’re going to have more demand for goods and services and certainly even more demand for airline tickets and things like that. That on net is going to be a positive.

GHARIB: Is there a point where oil prices get so low that it has a negative impact on the economy? So that right now $75 a barrel is sort of the number that a lot of people are talking about. If it goes below that, is there a point where it can have a negative impact?

CHAN: It can always have a negative impact to the extent that people start to think that that’s a sign that the global economy is actually deteriorating. But when you look at the last couple years, the major reason why oil price are coming down is because the supply of oil has been growing at a fast pace, yes demand has slipped a little bit. But in terms of trying to balance both of those factors, it clearly is more supply driven than demand-driven.

But to the extent that lower oil prices reflect the fact that global economic growth is slowing, we’re going to see investor sentiment and ultimately consumer sentiment taking a hit if prices go down too far.

MATHISEN: I guess what’s different in this oil price slide, and it certainly has been a slide from the over the 100 barrel level back just a few months ago is that it used to be that when oil prices went down, who got hurt? OPEC got hurt. Non-U.S. producers got hurt and there were some U.S. producers.

But now, there is a much more domestic oil industry in this country and so those American producers do feel a pinch, right?

CHAN: Absolutely. Because if you look at U.S. oil production over the last couple of years, it’s been increasing at a pace of a little bit more than a million barrels of oil. And, by the way, all expectations are it will continue to do that.

On the other side, what you also see is that U.S. producers are getting more and more efficient and, in fact, increasing their efficiency by almost 20 percent every year or every year and a half. So, believe it or not, even though they’ll be hurt if oil prices come down, if you just wait long enough, the efficiency gains in production will, in fact, offset some of this decline, but that will take time.

GHARIB: Picking up on what Tyler just said, there was a time when OPEC called all the shots and they have a big meeting on Thanksgiving day, actually. Is there some decision that they can make whether to cut production or any other move that you can make that really will influence the prices of oil?

CHAN: Susie, that’s exactly correct. Right now, OPEC has a major decision to make.

All indications suggest that OPEC is probably producing a little over a million barrels more than the world actually needs right now. So, to the extent that OPEC can, with cooperation from OPEC members cut the supply of oil not necessarily by a million but something close to that, that will do a lot to stabilize prices. They’ve made some moves already.

They’ve cut 300 million barrels in joint production with Kuwait. And recently, we saw some numbers out of September suggesting that cut a little close to 300,000 barrels of oil or more. So, we need a couple hundred thousand more in terms of cuts and that will stabilize prices.

MATHISEN: Anthony, great to see you as always. Anthony Chan with JPMorgan (NYSE:JPM) Chase.

CHAN: A pleasure.

GHARIB: Well, the price of oil was a big driver of stocks on Wall Street today. Also, investors were cautious as they wait for a slew of major earnings reports and the latest policy announcement from the Federal Reserve later this week.

Concerns about the housing market also weighed on the markets after pending home sales rose by just a fraction of a point last month because credit is still tight for many would-be homebuyers.

A mixed finish on Wall Street, the Dow rose by 12 points, the NASDAQ added 2 point but the S&P lost 3 points.

And the price of gold fell for fourth straight session, down $2.50 an ounce.

MATHISEN: Earnings after the bell from Twitter, that’s the micro blogging site, posted a loss of $175 million last quarter. Adjusted earnings were one cent a share. That matched expectations. Revenue more than doubled last quarter, slightly beating expectations.

But shares were sharply lower in late trading on concerns about slowing user growth and a softer fourth quarter sales target. Look at that falloff after hours.

Julia Boorstin spoke with Twitter’s CEO Dick Costolo after the numbers came out.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Twitter’s revenue beat projections but the stock initially dropped after-hours as its earnings per share and monthly active users came right in line with expectations. Investors were hoping for an upside surprise.

CEO Dick Costolo weighed in in our exclusive interview, saying the company’s user growth is actually larger than it appears.

DICK COSTOLO, TWITTER CEO: In the last quarter, we reached our mobile profiles experience. And those new mobile profiles have dramatically increased the number of views, the number of engagements and the number of specifically of media content views on those profile experiences. So, we like a lot the strategy we’ve got to grow that logout audience.

BOORSTIN: As to questions of whether Twitter can rev up its user growth, Costolo said he believes Twitter will be useful and vital to every person on the planet.

For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin in San Francisco.

(END VIDEOTAPE)

GHARIB: Some mixed news about Merck’s quarterly results. It reported better than expected earnings, but revenues at the pharmaceutical giant came in lower than analysts’ estimates. The drugmaker was helped by cost-cutting but got hurt by costs tied to acquisitions and from a sharp drop in sales from its Gardasil vaccine. Investors were also disappointed that Merck (NYSE:MRK) lowered its full year earnings outlook. Shares of the Dow component fell 2 percent.

MATHISEN: It was a rough day for some big European banks, nearly one in five of the Eurozone’s top lenders, 25 in all, failed so-called stress tests performed by the European Central Bank to see whether the firms could withstand another economic downturn. Nine of the failing banks were in Italy. Greece and Cyprus had three each, but ECB officials say most of those failing banks have actually made big strides in repairing their finances.

GHARIB: Turning now to Brazil where that country’s stock market and its currency cooled off today in reaction to the razor thin electoral victory by the incumbent president over her pro-business rival.

Michelle Caruso-Cabrera has more.

(BEGIN VIDEOTAPE)

MICHELLE CARUSO-CABRERA, NIGHTLY BUSINESS REPORT CORRESPONDENT: An incredibly negative reaction from investors to the re-election of leftist Brazilian President Dilma Rousseff.

Take a look at shares on the most actively traded Brazilian ETF, the EWZ, getting hit very hard today on heavy volume. And, in fact, trading was heavy before the market opened.

Some of the Brazilian companies that have shares that trade on the New York Stock Exchange also sharply lower. Oil giant Petrobras off by double digits in percentage terms, and it’s down 21 percent. Mining company Vale also sharply lower, along with shares of Brazilian bank Itau. Investors preferred challenger Aecio Neves who is much more centrist and pro-business.

For NIGHTLY BUSINESS REPORT, I’m Michelle Caruso-Cabrera.

(END VIDEOTAPE)

MATHISEN: Coming up, just how healthy is the health care sector? What to expect this week when a number of major companies in the industry report their earnings.

(MUSIC)

GHARIB: It’s been one week since Apple (NASDAQ:AAPL) launched its new iPhone based mobile payment system and already, some retailers are dropping Apple (NASDAQ:AAPL) Pay.

Mary Thompson has more.

(BEGIN VIDEOTAPE)

MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): It’s a battle for bragging rights in mobile payments heats up, one of the newest entrants proves too hot to handle for two retailer. Drugstore chains CVS (NYSE:CVS) and Rite Aid (NYSE:RAD) were not among Apple (NASDAQ:AAPL) Pay’s retailing partners, but they did have the technology needed to accept it. So, less than a week after Apple (NASDAQ:AAPL) Pay’s launch they disabled those systems.

And with good reason, according to analyst Sanjay Sakhrani.

SANJAY SAKHRANI, KEEFE, BRUYETTE & WOODS: CVS (NYSE:CVS) and Rite Aid (NYSE:RAD) are part of the merchant customer exchange which is a competing initiative to Apple (NASDAQ:AAPL) Pay.

THOMPSON: Known as MCX, the exchange is a group of more than 50 merchants frustrated and fed up with the fees they pay debit and credit card processors like Visa (NYSE:V), MasterCard (NYSE:MA) and American Express (NYSE:EXPR) (NYSE:AXP). Industry experts say their refusal to take Apple (NASDAQ:AAPL) Pay is less about the app and more about the retailer’s problems with its processing partners.

(on camera): MCX declined comment, though the moves by Rite Aid (NYSE:RAD) and CVS (NYSE:CVS) come ahead of next year’s launch of the exchange’s own mobile payment app called CurrentC.

(voice-over): CurrentC links to a client’s bank account or prepaid card. There are no credit card payments, so there are no processing fees charged to retailers. If CurrentC gains wide acceptance, retailers might save millions, given mobile payments are forecast to hit $90 billion in the U.S. by 2017.

But that, analysts say, and CurrentC and Apple (NASDAQ:AAPL) Pay success will depend on the consumer.

SAKHRANI: I think the costumers are going to decide who are the winners and losers. Are.

THOMPSON: They might choose Apple (NASDAQ:AAPL) Pay’s ease of use and greater privacy, or opt for currencies reported promise of discounts and rewards from retailers who track their spending habits. Both, say security experts, offer stepped up protection through tokenization.

ROBERT PARISI, MARSH USA INC: The intent is to protect the consumer, the cardholder from being identified with the transaction.

THOMPSON: Ultimately, what consumers identify as being best for them will determine the winners in this space — a space changing quickly and with plenty of room for current and future players.

For NIGHTLY BUSINESS REPORT, I’m Mary Thompson.

(END VIDEOTAPE)

MATHISEN: Amgen (NASDAQ:AMGN) beats and hikes its outlook and that is where we begin tonight’s “Market Focus”.

The drug company had a strong quarter thanks to high demand for its white blood cell drug and increased sales of its newer treatments. Following the report the company raised its full-year forecast. Shares were volatile in after-hours trading. During regular trading the stock was up slightly to $148.20.

Valeant Pharmaceuticals says its prepared to sweeten its offer for the Botox maker Allergan (NYSE:AGN) to at least $200 a share. As you may recall, Allergan (NYSE:AGN) has repeatedly brushed off the buyout attempts by Valeant and its takeover partner Bill Ackman. This new bid came as Allergan (NYSE:AGN) posted results today that topped analyst estimates. Still, shares were off $1.99 to $182.33.

Shares of Novavax (NASDAQ:NVAX) surged today on news that trials for its Ebola vaccine are advancing. The drug developer is already doing a non-human study of the vaccine and the CEO says testing will progress rapidly.

(BEGIN VIDEO CLIP)

STANLEY ERCK, NOVAVAX CEO: We expect to be able to make doses in the tens of thousands for this clinical trial by December and by the end of the first quarter, we would be able to manufacture — at our by biotech company, be able to manufacture in the millions of doses per month.

(END VIDEO CLIP)

MATHISEN: The stock popped 13 percent on that news to $5.80.

A setback, though, for Sarepta. The Food and Drug Administration is asking for additional data on the biotech company’s application for its new muscular dystrophy drug. This means the filing for the treatment will not be delayed into mid-2015. Shares there down 32 percent today alone, closing at $15.91.

GHARIB: Strong quarterly earnings from Citizens (NYSE:CIA) Financial. They were up more than 30 percent from last year. It also declared a 10 cent quarterly dividend that it will pay to shareholders in November. But despite all that, shares were down 1 1/2 percent to $22.85.

Micron Technology’s board authorized a $1 billion share buyback program sending its shares higher. This is the chip maker’s first share repurchase plan in three years. Micron rose 4 percent to $32.30.

Amazon (NASDAQ:AMZN) is buying Rooftop Media. This is the online comedy services company, as it looks to build its digital media library. Rooftop places comedian’s performances online and distributes the content. Shares of Amazon (NASDAQ:AMZN) rose 1 percent to $289.97, recovering a bit from last week’s selloff.

And shares of Kohl’s (NYSE:KSS) plunged initially in afterhours trading after the retailer issued a warning. The company said it sees earnings for the year hitting the low end of its previous guidance. Kohl’s (NYSE:KSS) is blaming weak sales so far in the month of October. That sent the stock initially lower in afterhours trading, finishing the regular session with a slightly drop at $58.55.

MATHISEN: Well, we heard from Merck (NYSE:MRK) today. But later this week, a number of pharmaceutical health care giants are slated to post their latest earnings reports.

Bertha Coombs now with more on what Wall Street will be watching for.

(BEGIN VIDEOTAPE)

BERTHA COOMBS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Pfizer (NYSE:PFE) is expected to report 3 percent profit growth when it reports its third quarter in the morning. Sales still pressured after the patent expiration of blockbusters like it’s cholesterol drug Lipitor, with the new breast cancer treatment in development still years away.

A very different story for Gilead. Sales of its $1,000 a day hepatitis C drug Sovaldi are expected to top $10 billion this year, resulting in earnings growth of 10 percent. But when the biotech giant reports Tuesday, investors will be anxious to hear more about its newly approved all-in-one hepatitis treatment, Harvoni.

Morningstar (NASDAQ:MORN) analyst Karen Anderson says specialty drugs are where the growth is now.

KAREN ANDERSEN, MORNINGSTAR HEALTHCARE SPECIALIST: It’s been such a strong combination of a lot of really powerful launches for drugs that are extremely innovative, very high unmet need. Because of that, they have such strong pricing power.

COOMBS: For the major insurers, low medical cost trends have helped boost profits. A big question is, how long will it continue, especially for the large players in the Affordable Care Act exchanges?

Aetna (NYSE:AET) will be the first of the group to report Tuesday, followed later in the week by WellPoint, the biggest exchange player, and Cigna, which cited low margins on exchange plans, pressuring profits in the second quarter.

But for some, ACA pressures could be offset by the bounce back in overall enrollment since the Great Recession.

ANDERSEN: The availability of new insurance, people being able to afford the co-pays, through having higher employment levels — I mean, I think all of that is kind of tying together and supporting just a lot of fundamental strength in the health care sector.

COOMBS (on camera): Earnings momentum from biotech and insurers have helped send the health care sector to all-time highs, putting it on pace to outperform the overall markets for the fourth straight year.

Bertha Coombs, NIGHTLY BUSINESS REPORT.

(END VIDEOTAPE)

GHARIB: Coming up, place your bets on what’s shaping up to be a big fight in the Garden State, on the future of sports betting. We’ll explain, right after this.

(MUSIC)

GHARIB: There’s a new kind of Grinch threatening to ruin some Christmas mornings this year. Congestion at the twin ports of Los Angeles and Long Beach, California, is doubling the amount of times it’s taking ships to offload cargo. Those delays are hitting the toy industry especially hard as it tries to get imports to stores ahead of the all-important holiday shopping season. Union labor talks and a lack of enough equipment are getting the blame.

MATHISEN: A big setback in New Jersey’s plan that would have allowed casinos in the Garden State to begin sports betting yesterday. That didn’t happen. And now some are questioning whether it will ever happen.

Morgan Brennan has more.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Racetrack Monmouth Park had plans to open the first sports book in New Jersey, after a new law repealed the state’s ban on sports betting for casinos and racetracks.

But that was put on hold after a federal judge granted the NFL and other major sports leagues a temporary restraining order on grounds of irreparable harm. That means a lawsuit by the most powerful leagues against the state to keep betting banned will now proceed, but not without New Jersey and its businesses pushing back.

DENNIS DRAZIN, MONMOUTH PARK RACETRACK ADVISOR: We believe firmly that when we get back to the 3rd Circuit Court of Appeals at a higher level, we’ll be successful and this is a delay not the elimination of being able to offer sports betting to fans in New Jersey.

BRENNAN (on camera): Thanks to a 1992 federal law, sports betting is illegal in the U.S. and all but four grandfathered states, Nevada, Delaware, Oregon and Montana. And of those, only one, Nevada, actually takes wagers on individual games at sports books, New Jersey will become the second.

(voice-over): State officials argue this is needed to help save New Jersey’s struggling gambling industry, particularly Atlantic City, where falling gaming revenues have caused four casinos to close so far this year, costing thousands of jobs.

But analysts say the casinos are less prone to adopt this, at least for now, because the federal ban and the fact that it’s unlikely to be a major revenue driver. In Nevada, for example, sports betting accounts for roughly 1 percent of overall gaming revenue.

ROBERT SHORE, UNION GAMING RESEARCH: I don’t think you’ll see any of the major Atlantic City casinos in a rush to put in sports books until the federal rule is, you know, very, very clear. You know, these guys have licenses in multi-states and other countries and they won’t put that at risk where a racetrack in New Jersey is probably running break-even cash flow at best and has much less to lose putting money into a sports book.

BRENNAN: Which is why it is a race track that’s first out of the gate. But the legal battle is only just getting started, with this case widely expected to get appealed no matter the outcome. Meantime, if you want to bet on football, you’ll have to fly to Vegas.

For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan.

(END VIDEOTAPE)

MATHISEN: Some good news today for Toyota (NYSE:TM) which reaffirmed its position as the world leader in auto sales. For the first nine months of this year, Toyota (NYSE:TM) has sold 7.6 million cars and trucks, 3 percent more than a year ago, and it beat out Volkswagen and General Motors (NYSE:GM) for that title.

GHARIB: And finally tonight, “Consumer Reports” magazine is out with its annual list of the most and least reliable new cars. Here they are. The top spots, the Scion xB, followed by the Lexus CT 200h and the Lexus ES 300h Hybrid.

As to the bottom of the list, the Fiat 500L, the Ford Fiesta, and the Mercedes-Benz CLA 250.

The biggest problem this year, infotainment systems and in-car electronics that don’t function properly. All those bugs and glitches you get when you have too many electronics.

MATHISEN: And the three of the top most reliable cars were all Toyota (NYSE:TM) brands, which is Toyota (NYSE:TM) leading the top selling car. Coincidence, I think —

GHARIB: Good time for Toyota (NYSE:TM), after a long time.

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

MATHISEN: And I am Tyler Mathisen. Have a great evening, everybody. We’ll see you right back here tomorrow.

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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