Transcript: Tuesday, November 4, 2014

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

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TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Three-year low. Oil prices head lower into bear markets territory as one of OPEC’s most influential members declared a price war on U.S. drillers.

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Who wins and who loses? As crude crumbled, which industries will benefit, which will stumble?

MATHISEN: New faces? If voters flip control of the Senate to the Republicans, what could that mean for immigration, the budget, Obamacare and other issues important to business?

All that and more tonight for the NIGHTLY BUSINESS REPORT for Tuesday, November 4th.

GHARIB: Good evening, everyone.

Oil was the big news on Wall Street today with another sharp drop in prices. They touched $75 a barrel. That’s the lowest point in three years.

Brent Crude, the international benchmark, fell to a four-year low. Now, the sell-off was sparked by Saudi Arabia’s unexpected decision to cut what it charges the U.S. for crude. They’re now worried that could open the way for more prices to climb at a time when global demand for energy is slowing and as oil production is at an all time high.

West Texas Crude was down $1.59 a barrel, closing just about $77. Brent Crude fell to $82.82 a barrel.

Jackie DeAngelis has more on the slide in oil prices as traders wonder, how low can it go?

(BEGIN VIDEOTAPE)

JACKIE DEANGELIS, NIGHTLY BUSINESS REPORT CORRESPONDENT: A blood bath in the crude pit. Traders saying Saudi Arabia’s price cuts yesterday were the trigger and the technical sellers piled on.

ANTHONY GRISANTI, GRZ: OPEC was once again lowering prices, not cutting production. And the dollar started to strengthen again. So, we traded through that $79 area. It looks like good resistance now. And the next support would be the 74.95 number.

DEANGELIS: All eyes are on OPEC’s next meeting on November 27th. Traders were thinking that we could see supplies cut from the cartel. But Saudi’s latest move, as one of OPEC’s most influential member, indicates that this could be a price war.

GRISANTI: They want to put small of the smallest producers, the ones that have higher cost, higher capital cost, to produce crude oil. They want to put them out of business and they have shown that by reducing prices to the U.S.

DEANGELIS: The United Arab Emirates oil minister recently said there is no need to panic on pricing. But OPEC members Venezuela and Ecuador have been local in expressing concerns. Could their influence be enough to sway the cartel?

ALAN HARRY: The Middle Eastern powers have a lot of powers still. And the reason why they do is because the crude oil they produce is cheap. Therefore, they have a lot of leeway on what they want to do with the pricing. If they’re producing at $30 a barrel, they can sell it all the way down to $30 a barrel, and still scratch or make a little money if it’s over that. If you are a Latin American producer and you have a higher production cost, you can’t go down as far. So, you’re worried.

DEANGELIS: Meantime, everywhere you look, oil bulls are turning into bears. Traders that were looking for oil to drop to $75 now saying $70 and some to more downside from there.

The good news, oil slide has had a major impact on retail gas prices, hitting a 49-month low, with the national average under $3, now $2.97 according to AAA. We haven’t seen this since Christmas of 2010.

Christmas may have come early but consumers, but U.S. oil producers could be getting cold.

For NIGHTLY BUSINESS REPORT, I’m Jackie DeAngelis.

(END VIDEOTAPE)

MATHISEN: The decline in oil prices having a big impact on dozens of stock and entire market sectors. Some shares strained along with the price of oil, others gained.

Morgan Brennan takes a look at the winners and the losers.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Oil’s steep drop down more than 20 percent over the past three months is fuelling a sell-off in stocks associated with the commodity, as investors worry weaker prices will crimp U.S. production.

ED VARDENI: I think we have seen a pretty good response to lower oil prices, and I think people are a little in shock. They want to see how much lower it can go.

BRENNAN: Shale drillers, including Marathon Oil (NYSE:MRO) and Devon Energy (NYSE:DVN) could be impacted the most, especially if crude falls to 70 bucks a barrel, since expiration takes a lot of upfront capital.

Oil fields services companies like Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI) which help with production could also feel the effects, and since the slow down in output could mean a slow down in demand for drilling materials, investors are keeping a close eye on companies like Hi-Crush Partners and Emerge Energy Services, which mind the sand critical to the fracking process. But some experts think all of this has presented a buying opportunity.

HUGH JOHNSON: Right now, I’d be stepping into the integrated oil and gas numbers or companies. I’d also be looking very hard at some of the — some of the refining companies.

BRENNAN: Some industries are already benefiting. Airlines have soared, helped by cheaper jet fuel. And analysts say shipping giants UPS and FedEx (NYSE:FDX) could get a lift from falling diesel prices, just as they enter the busy holiday shipping season.

But the effects could be mixed for railroad operators. On one hand, companies like CSX (NYSE:CSX) and Union Pacific (NYSE:UNP) stand to gain from lower fuel costs. On the other, a drop in the fast growing crude by rail business could modestly cut into profits next year.

(on camera): And of course, there is a consumer. Gasoline prices are falling below $3 a gallon, with more markdowns on the way. Those savings could translate into higher sales for retailers, restaurants and leisure companies.

But all of this, winners and losers, depends not just on how low crude goes, but how long it stays there.

For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan.

(END VIDEOTAPE)

GHARIB: Bob Brusca joins us now with more analysis on the impact of lower oil prices. He’s chief economist with Fact and Opinion Economics.

Hi, Bob. Nice to have you with us.

BOB BRUSCA, FACT AND OPINION ECONOMICS: Hi, Susie. Thank you. Good to be here.

GHARIB: Well, you heard from all of our reports — I mean, low oil prices are great for consumers in needy industries like airlines. But in the end, is there a point at which oil prices get so low, maybe it’s $70, maybe it’s $60, where it has a negative impact on the U.S. economy? What are your thoughts?

BRUSCA: Well, I think that for the most part, low oil prices are good, because consumers get a break. And, of course, we don’t produce all of our oil. So, a lot of the damage that’s done by low prices to producers occurs on the imports side, not on the domestics production side.

But you also have knock on effects on natural gas and other kinds of energy where U.S. has been increasing its presence.

I think probably below $60 barrel you start to do more disruptive things on the producer’s side. But it’s just not getting to that region. As one of your reporters said, it’s not just getting prices down, it’s creating a perception that they’re going to stay down. And that’s what’s going to knock out some of the oil, shale and other producers.

MATHISEN: Some of the ones that are weaker and probably levered up with debt.

Let me get to the broader question of if the lowering price of oil puts more money in consumer’s pockets and they spend it, what does that do to U.S. economic growth? Does it add three-tenths of a percent or something more?

BRUSCA: Yes, I think we are on the order of three to four-tenths a percent more growth in the fourth quarter. I think that this could be — you know, a nice positive for GDP. It could also be a nice positive for retailer profits. It could help consumer confidence which has been moving up a little bit, to continue that rise and I think that rise to consumer confidence has been partly in the back of these low energy prices.

So, I think that’s good news. You get the multiplier effect from that. So, yes, I think there’s some positive there, but they’re modest, they’re good.

GHARIB: Any negatives to be concerned about there as consumers spend more? Does that create inflationary problems or deflationary problems with lower prices everywhere you look?

BRUSCA: Yes, that’s a great question. I think that you do create some distress and you create some opposite effects here.

First of all, the lower energy prices are going to create a problem for both the ECB and for the Feds. The Feds has an inflation target. They told us at the very last meeting the decline is temporary. I don’t know what they think temporary is. But it looks like it’s severe him it means it will go on some time.

And so, we’re likely to see the Fed, which is already missed this inflation target for 29 months in a row. They missed it a couple months in the future and probably missed it by even more.

So, that’s going to put the Fed under pressure to do more. Domestically, what it does is it puts money in people’s pockets. They are able to go and spend money on non-oil items. So, it could put some firmness into non-oil prices. But the main effect, of course, is inflation is lower. That they have to deal with more disinflationary consequences.

MATHISEN: You know, the Fed may have missed its inflation target for 29 months in a row, Bob, but I would think most consumer would cheer that, because they miss on the low side. I mean, the numbers have come in lower than they wanted, and that feels good to most consumers.

BRUSCA: Well, no, I don’t think it does because one of the reasons it’s been low is that wages haven’t been up. You know, in the last job, wages rose last month by zero. So that low inflation — people have a lot of nominal obligations they have to pay for. A little inflation is good for the consumer, it lets your high price go up. It makes the burden of your mortgage payments less.

Everybody recognizes a little bit inflation is a good thing for the consumer, because he’s got those nominal liabilities. So, you know, this undershooting is one of the things that helps keep the economy under a lot of strain and the Feds really want to get the inflation back.

From a standpoint of monetary policy, the old rules is that inflation overshooting is good. But we’ve come to appreciate the risk of deflation and the problems that low inflation creates for this economy.

GHARIB: All right. A lot of interesting push and pull in this economy. Bob, thanks so much. It’s always a pleasure talking with you.

BRUSCA: Thank you.

GHARIB: Bob Brusca with Fact and Opinion Economics.

MATHISEN: Stocks end the day mixed, and a little change, despite that slide in oil prices, a lower growth forecast for the eurozone from the European Union.

And some disappointing economic data here at home — the U.S. trade deficit got a bit wider in September. It expanded to $43 billion as U.S. exports slowed down.

Here’s how the markets looked at the closing bell. The Dow up 17 points, the NASDAQ down 15 and the S&P fell apart.

GHARIB: Well, it is election day and there is a lot at stake, 36 seats in the Senate up for grabs. The race for the governor’s mansion in 36 states and all 435 seats in the House. After billion have been spent advertising, millions of Americans are casting their boats in an election that could shift control of the Senate.

John Harwood is with us now to talk about what today’s mid-term elections mean for your money.

So, John, let’s just say the Republicans do take control of the Senate. If that were to happen, what does this mean for things like fiscal policy? Will there be another budget showdown?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: I wouldn’t expect that. I think Republicans are pretty well decided that a government shut down crisis, a debt ceiling crisis were things that are very bad for their party in their future elections.

But I do think it will make a change in the approach the Senate takes to issues like potentially tax reform. That’s not likely to happen in the next couple years. It makes trade deals more likely. The trade deals they are negotiating with our Pacific partners, as well as one in Europe. It makes the possibility the Keystone pipelines could, in fact, go through, which has been held up in part because Democrats are uneasy with it.

MATHISEN: Let’s talk about political issues that could be affected if the Senate flips. It’s one immigration, the other is Obamacare. Any changes there?

HARWOOD: I wouldn’t expect changes in immigration. The Senate has already passed the bipartisan immigration that went nowhere in the House. And so long as the House appears poised to block that measure, it’s hard to see what, in fact, could get through the Senate that would change the equation.

So, I think the president is poised to take unilateral action in trying to legalize some millions of people, maybe not all 11 million here. And on the EPA, carbon regulation, that energy initiative, the president is moving forward with this regulation. The question is going to be whether the Republican Senate can stop them.

GHARIB: You mentioned the EPA. I mean, there have been questions about the agency like the environmental protection agency, like the Consumer Financial Protection Bureau. Do you think that there will be is any changes? Or are those, you know, set for life?

HARWOOD: No, I do think there will be a budget pressure on Democratic parts of the government that Republicans don’t like. Mitch McConnell has said he’s going to use spending bills to try to squeeze the administration. You can bet the e is one he singled out. He’s been accusing the administration on a war on coal. He’s going to try to do that and other states are going to try it as well.

GHARIB: OK. It would be interesting. It’s going to be a long night. Thanks, so much, John Harwood, reporting on today’s election.

MATHISEN: And still ahead, turning point. Media companies report earnings this week as the industry undergoes a massive transformation. But can it keep pace with changing consumer habits without cannibalizing core businesses?

(MUSIC)

GHARIB: Shares of Dish Network moved a little lower on the dial today. The nation’s number two satellite TV provider missed earnings estimate last quarter, reporting a sharp drop in profits. Revenue also fell as it lost another 12,000 subscribers and broadband is slow.

Its outlook isn’t much better. Dish cut its revenue forecast for the full year.

MATHISEN: After the bell tonight, earnings from 21st Century Fox, that’s the media empire run in part by billionaire Rupert Murdoch, adjusted earnings of 39 cents a share beat Well Street estimates by three full pennies. It was a big beat on revenues, more than $1.5 billion more than forecast, mostly thanks to higher ad sales than the cable television properties and a stronger box office take for films like “The Fault in Our Stars” and “Dawn of Planet of the Apes.” I missed them both.

With profits up 10 percent, shares were initially higher in after hours trading.

GHARIB: Besides Fox, this is a big week for media earnings. And those results are coming just as the media giants grappled with changing viewer habits and the rise of streaming video services as TV watchers have figured out how to cut the cable cord.

Julia Boorstin has more.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: One thing for sure, consumers are changing how they watch TV.

UNIDENTIFIED FEMALE: I dropped cable a few years and I just watch Netflix (NASDAQ:NFLX) and other apps.

UNIDENTIFIED MALE: Most of my movie and TV shows intake is all online to be honest from my computer.

UNIDENTIFIED FEMALE: I actually watch on Netflix (NASDAQ:NFLX) on my laptop and on my phone than I actually watch my TV, like I don’t even turn on my TV anymore.

BOORSTIN: Media giants are experimenting with new services to keep up with that demand.

JASON BAZINET: We’re seeing the companies I think sort of struggle with the legacy business model, which predicated on views and trying to straddle the divide between embracing the legacy model and adapting to the new world.

This week’s media earnings comes on the heels of CBS (NYSE:CBS) and HBO announcing new services that could upend the media biz, direct streaming video, for people who don’t pay a cable TV bill.

Discovery CEO David Zaslav said he’s not concerned about consumers being able to pick and choose channels, rather than pay for a bundle.

DAVID ZASLAV, DISCOVERY CEO: The unbundling, I just don’t see it happening. I think if it does move in that direction over time, we own all of our content, which is an advantage.

BOORSTIN: Zaslav may not be worried for now. But Discovery shares fell on weak advertising growth.

BAZINET: The street is quite concerned with the near term, though, is that new platforms continue to gain traction with consumers and affects the ratings for these companies which is putting a dent in advertising growth rate.

BOORSTIN: We’ll see what CBS (NYSE:CBS) and HBO’s parent Time Warner (NYSE:TWX) say tomorrow about how they plan to create new revenue without cannibalizing their core business.

For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin in Los Angeles.

(END VIDEOTAPE)

MATHISEN: Time Incorporated beat estimates, but its outlook weighed on shares and that is where we begin tonight’s “Market Focus”.

Profit and revenue exceeded forecasts of the nation’s biggest magazine publisher, but a drop in print advertising revenue prompted the company to cut its full-year revenue outlook for the second time. Shares of Time Incorporated slumping almost 7 percent to $21.32.

Michael Kors dealt with a similar reaction from investors. Its earnings jumped as it continued to see strength across its retail and wholesale segments, but the company, known for its handbags and watches is forecasting that its sales and profit for the holiday quarter will be below consensus. Shares off about 8 1/2 percent to $71.42.

In Alibaba’s first report since its huge trading debut, the Chinese Internet company reported that its profit fell from a year ago. That’s largely because of stock awards to employees before its IPO. Its revenue jumped as online shopping transactions and its mobile services did continue to grow.

The company’s executive chairman explained how he plans to continue that growth.

(BEGIN VIDEO CLIP)

JOSEPH TSAI, ALIBABA: We’re going to be focused, meaning that we are bringing a lot of merchants from outside of China to sell on our Tmall platforms. We’re also going to be focused on mobile because the user behavior is very rapidly shifting to buying stuff on mobile devices.

(END VIDEO CLIP)

MATHISEN: Shares of Alibaba trading under the ticker symbol BABA up $4.27 to $106.07.

Priceline warned investors of turbulence ahead. The online travel booker gave fourth-quarter forecast that was well below expectations, citing weakness in Europe. That clouded its better than expected earnings report. Shares did fall $100, I don’t even read that right, full $100, to $1,097.70.

GHARIB: CVS (NYSE:CVS) saw its revenue rise on strength in its pharmacy business. That offset a decline in front of store sales since the company stopped selling cigarettes last month. But its fourth-quarter earnings projection fell below consensus. The stock was off a fraction to $85.47.

Archer Daniels Midland offered a bright outlook, saying it expects its corn-based ethanol business to remain strong for the year and that’s despite sliding energy prices that have cut into profit margins. Profits rose 60 percent at the grain processor and even though revenue fell short of estimates. Shares were up almost 5 percent to $49.54.

FireEye plunged after the cyber security company’s third quarter revenue missed. It reported a loss that was smaller than expected, but for the current quarter, its revenue forecast came in below analyst forecasts. Shares were way down initially after hours. During the regular session, the stock was up 1.5 percent to $34.25.

And Activision Blizzard’s results were better than expected on strong sales of its “Destiny” game and an increase in “World of Warcraft” subscribers. But the video game maker’s holiday outlook was disappointing. After the bell, shares were up initially. During the regular trading sessions, shares were off about 2 percent to $19.95.

MATHISEN: It may not sound sexy. But the payment space is attracting a lot of tech-savvy entrepreneurs looking to get a billion dollars moved globally every day, via credit cards, gift cards, over phones, on computers, by making the process of paying faster, cheaper, simpler.

Mary Thompson has more on the future of payments on the Money 20/20 Conference in, where else, Vegas.

(BEGIN VIDEOTAPE)

MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): The crowds speak volume. Payments are hot, generating heat welcomed by old line firms like American Express (NYSE:EXPR) (NYSE:AXP).

UNIDENTIFIED MALE: I love competition.

THOMPSON: The competition in full force at the Money 20/20 Conference where AmEx CEO Ken Chenault shed light on how the 164-year-old company stays relevant in a rapidly changing space.

KEN CHENAULT, AMERICAN EXPRESS CEO: If you don’t innovate, you die. You have to constantly innovate. You have to constantly challenge the status quo.

THOMPSON: The status quo is cash. Still used in over 80 percent of transactions, firms including Visa (NYSE:V) are trying to change.

RYAN MCINERNEY: There is still an enormous amount of cash in the world. Nobody likes to use cash. Nobody likes to carry it. Nobody likes to use it.

THOMPSON (on camera): The companies here knows that a faster safer alternative to cash scaled globally will be key to ending that dependency. Of course, technology is helping to speed the transition. And that means standards today could soon be obsolete.

(voice-over): Standards like passwords. Biometrics could soon hold the key to secure transactions. ValidSoft (INAUDIBLE) saying they can prevent massive hack attacks like those that hit Target (NYSE:TGT) and Home Depot (NYSE:HD). How? It’s not a password, but your voice the software uses to validate the user.

UNIDENTIFIED MALE: Please complete my transaction.

THOMPSON: Meaning it won’t process the payment until you, only you say so.

PAUL BURMESTER: If I get the password, it doesn’t matter how secure the systems are, I walk into the front door and that really is the issue. When you are at a biometric, you are now attaching control to a human and somebody can’t steal that biometric.

THOMPSON: Gift cards are broadly accepted substitute for cash at your local store, though the online gift cards for gifts that the future lies in their global reach.

VINNY LINGHAM: I think over three years, we’re going to see more things like remittances as well, people using gift cards, cross border, groceries home to Mexico, et cetera.

THOMPSON: At the heart of the future payments, though, a consumer dropping too many mobile purchases at checkout. Sweden’s Klarna solved this by covering the purchase and billing the consumer later, combining speed and simplicity they’ll bring to the U.S. market next year.

SEBASTIAN SIEMIATKOWSKI, KLARNA: It’s going to be a one click buying for everything.

THOMPSON: Bringing consumers one step closer to a future where cash may no longer be king.

For NIGHTLY BUSINESS REPORT, I’m Mary Thompson in Las Vegas.

(END VIDEOTAPE)

GHARIB: Coming up on NIGHTLY BUSINESS REPORT, want to board your flight early? That will cost you. Food, get out your wallet. A carry-on bag? Well, you get the idea.

We’re tallying up those extra fees to find out how much you’ll be paying this year when flying. That story is next.

(MUSIC)

MATHISEN: October turned out to be the worst month on record for casino revenues in Macau, the world’s biggest gambling Mecca. That’s because the former Portuguese colony now a part of China has seen a sharp drop in tourists and found itself in Beijing’s crosshairs in a war on corruption.

Last month, gambling revenues there tumbled 23 percent the fifth month in a row of declines in Macau. And shares of U.S.-based casino companies with big operations there have been impacted. Wynn Resorts (NASDAQ:WYNN) down 2 1/2 percent, Las Vegas Sands (NYSE:LVS), more than 4 percent lower, MGM off 3 percent.

GHARIB: Another recall to tell you about, this one from Ford. A total of 200,000 vehicles are being recalled for a variety of issues, including defective steering mechanism, gas leaks and stalling. The largest recall affects 135,000 brand-new F-150 pickups and Ford Flex vehicles that have heat weight sensors that can prevent the airbags from properly deploying in a crash.

MATHISEN: And finally, if you have been on a plane lately, you know the fees for extra leg room, boarding early, and to check a bag, is getting higher. And a new study shows just how much carriers rake in from all those fees.

World’s airlines are expected to collect nearly $50 billion worldwide from ancillary fees. That’s up 17 percent from just last year and average about 15 bucks a person on every single flight.

We asked some travelers about how they feel about being charged extra to fly.

(BEGIN VIDEO CLIP)

UNIDENTIFIED FEMALE: Let’s talk about the fees. An extra suitcase is so much money today.

UNIDENTIFIED MALE: Some of the fees may be a little absorbent, baggage fees.

UNIDENTIFIED FEMALE: It increases all the aggravation of travel.

UNIDENTIFIED MALE: It seems like people are really charging a lot.

UNIDENTIFIED FEMALE: I’m paying for my dog $125 and that is for like (INAUDIBLE)

UNIDENTIFIED MALE: You have to pay them, otherwise, you’re not going to be there.

(END VIDEOTAPE)

MATHISEN: Well, combine these higher fees with lower jet fuel prices and higher demand for seats, and you can see why the airlines are having one of their most profitable years ever.

GHARIB: Sometimes, you add $400 to a ticket. You think you have a cheap ticket.

MATHISEN: And then the fee adds it up.

GHARIB: Right.

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

MATHISEN: And I’m Tyler Mathisen. Have a great evening, everybody. We’ll see you back here, we hope, 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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