Transcript: Wednesday, February 18, 2015

NBR Thum ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Timing is everything. And the debate over when and how to raise interest rates is heating up inside the Federal Reserve.

Economic hit. A new report puts an estimate on how the slowdown at the ports out West could hit economic growth and it’s something to pay attention to.

Taking stock. Warren Buffett makes some big changes to his portfolio. What he’s buying, what he’s selling and what it says about the Oracle’s vision for the future.

All that and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, February 18th.

Good evening, everyone, and welcome. I’m Tyler Mathisen. Sue Herera is off tonight.

Well, no rush to raise. That was the big takeaway from Federal Reserve policy makers at their last meeting. According to the minutes released today, many said they were inclined to wait before hiking interest rates because moving too soon could stall the recovery.

Still, others said the central bank had waited long enough, suggesting that the majority is in a real hurry to move away from the zero interest rate policy as followed for some years now. Stocks briefly pared their losses on the release of the minutes but failed to end the session higher.

At the close, Dow Jones down to 18,029, NASDAQ eked out a gain of about 7 and S&P 500, it was just basically flat on the day.

And yields on the ten-year note fell on signals the Fed would continue to be in, its words, patient, on rates.

Hampton Pearson has more on the minutes and the road ahead for interest rates.

(BEGIN VIDEOTAPE)

HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Fed Chair Janet Yellen and her fellow monetary policymakers did not appear ready to start raising interest rates anytime soon. While job growth is increasing and the unemployment rate remains below 6 percent, policymakers say they want to see more signs of wage growth.

DAVID KELLY, JP MORGAN FUNDS: Remember this was January 28th. And since then, we’ve had a blockbuster jobs report. So, their worries about jobs should be even less so now. And what’s more, since January 28th, we’ve seen oil prices fall by 20 percent. They’ve bounced off their lows. So, again, if they’re worried about inflation not moving back up, I think they should be somewhat calmed in the fears by rising oil prices.

PEARSON: Minutes from the Fed’s two-day meeting at the end of January show policy makers concerned about the timing for beginning to raise key short-term interest rates, which had been at record lows for more than six years. Removing patient from the policy statement officials said could cause an overreaction in financial markets. And a premature rate hike could hurt the economic recovery.

MARK KIESEL, PIMCO: I think the market’s going to accept this as a positive and also, this is happening in the context where central banks all over the world are easing. So, with the Fed being patient and other central banks very accommodative, this is going to be supportive for equities.

PEARSON (on camera): Next week, Fed Chair Janet Yellen will have a chance to make the Fed case for patients with lawmakers when she delivers the semiannual report on Fed policy and the economy to Congress.

For NIGHTLY BUSINESS REPORT, I’m Hampton Pearson in Washington.

(END VIDEOTAPE)

MATHISEN: Inflation is one indicator the Federal Reserve is watching closely and today, a gauge of business prices fell in January. The producer price index recorded its biggest drop in more than five years, down 0.08 percent, as the cause of energy tumbled. The Central Bank would ideally like to see inflation heat up just a bit. There was also a slowdown in new home construction last month. Housing starts to fall 2 percent. That signals a possible uneven recovery in that important economic sector.

And for more now on the economy and the Federal Reserve, we’re joined by our friend Michael Farr, president of Farr, Miller and Washington.

Michael, good as always to see you.

MICHAEL FARR, FARR, MILLER & WASHINGTON PRESIDENT: Thank you.

MATHISEN: You know, the producer price index was down for the month. That indicates low inflation or even deflation. The rising dollar effectively means we are in importing disinflation or deflation. In that environment, it doesn’t sound like the kind of recipe for increasing interest rates anytime soon.

FARR: It really doesn’t, and I think the surprise today in the Fed’s statement was that there were — it sounded like there were a lot of the governors who really didn’t want to move off the zero benchmark.

Now, Tyler, you remember that I came on your air after having a presentation with Jim Bullard, president of the St. Louis Fed who says they have to raise interest rates, that they will raise interest rates this year and his reasoning is that a near zero rate policy is an emergency condition kind of a rate. That they’ve got to raise and then they’ll wait and see.

But they really seem determined to plant some sort of rate hike flag in the ground. And if they — and so now, I think as an indicator, we look at the word patience. As long as it’s in the statement, I think we can say they’re not going to do it, certainly, at the next meeting. I’m still thinking maybe September.

MATHISEN: You’re thinking September, and that they will indeed raise rates later this year. That’s your view.

FARR: Well, yes. I think it’s 50/50, really. The hawks keep telling me. I’ve talked with Jeff Lacker, I’ve talked with Richard Fischer recently, and I’ve talked to Jim Bullard. And they are determined. Now, those are the hawks, so I’m talking to hawks and they say we have to do this. I —

MATHISEN: And Fischer is no longer on the committee, is he? Fischer is no longer on the committee, as I recall.

FARR: Correct. He’s retiring.

MATHISEN: One of the guests in the segment that Hampton did there said the overall environment and the sort of zeitgeist within the Fed open market committee is open to equities. Do you agree?

FARR: No question about it. Equities have been trading on every breath and utterance out of the Fed for quite a while. I think that’s going to continue. But this dovish tone that we’re going to keep rates at zero for a long time I think is very supportive of equities.

I was surprised frankly that equities didn’t go up more today. The bond market rally was terrific. We saw six-basis-point move on the ten-year treasury. I thought stocks would do better. That was a little puzzling to me.

MATHISEN: All right. Michael, we’re going to leave it there, with Farr, Miller, and Washington.

You’re going to come back in just a little bit to join us later in the program for what promises to be a very interesting discussion on the rules governing retirement accounts and whether brokers today or should put their clients’ interests first. We’ll see you in a couple minutes.

FARR: And I’m charged up about that. I can’t wait.

MATHISEN: All right. Well, we’re excited too.

An explosion in fire erupted at a Southern (NYSE:SO) California ExxonMobil (NYSE:XOM) refinery. The blast happened in a processing facility, slightly injuring four people. Firefighters and refinery crews were able to contain a gasoline leak caused by the blast. The company is now looking into the cause of the explosion, the extent of the damage still being investigated. But as you see there, it does look like fairly significant damage.

The refinery, one of the largest in southern California, makes about 1.8 billion gallons of gasoline a year. The price of gasoline in the Los Angeles wholesale market jumped on the news. As for oil prices more broadly, West Texas Intermediate fell about 2 1/2 percent to $52.14 a barrel. Brent Crude also fell $2 a barrel.

Shares of Boeing (NYSE:BA) soared to a new high today after the company’s CEO said it will return significant cash to shareholders. The Dow component also addressing shareholder concerns saying that as it transitions developing the new 777, production rates won’t take a hit. Shares of Boeing (NYSE:BA) up almost 1 percent today.

But shares of Caterpillar (NYSE:CAT) went the other day, after it disclosed some not so reassuring news. The heavy equipment maker is being investigated by authorities regarding the movement of cash among its U.S. and overseas subsidiaries. According to a filing, the company believes the probe won’t have a material effect on its financial position.

Well, now to those West Coast ports and the economy. Deutsche Bank issued a report today, saying the slowdown will likely subtract a full percentage point off fourth quarter GDP and as the labor secretary tries to broker a deal to end the month’s long labor dispute, goods and cargo containers just sitting there stacked everywhere in the yards, out at sea, disrupting billions of dollars in international trade.

Jane Wells went out on the water for a closer look today.

(BEGIN VIDEOTAPE)

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT: As negotiations between management and dock workers entered a second day with U.S. Labor Secretary Tom Perez directly involved, there were about 30 ships parked offshore outside the ports of Los Angeles and Long Beach waiting for space to open up where they could park this up. This one has been here since February 12th. It left China last month, one year, sitting since February 9th.

They’re all carrying tons of cargo. Everything, as one local sailor put it, from garment GPS to hot pans. The last hitch in negotiations reportedly has been a demand by the union to be able to fire the arbitrator for the L.A. and Long Beach areas saying he favors management too much. Though the “A.P.” reports the arbitrator, who was basically appointed for life, is a former union guy.

There is some unloading of ships today but increasingly, customers pay more to ship elsewhere. One analyst estimates that normally, 10 percent of goods from China are shipped to the East Coast, that has jumped to 30 percent at twice the cost. And expect to see the word “port” show up in more earnings reports.

Already, Perry Ellis is blaming delays here on a $23 million short fall in sales in the fourth quarter and Los Angeles Mayor Eric Garcetti said even if everything ended today, it will take a long time to unclog the system.

ERIC GARCETTI, LOS ANGELES MAYOR: It’s going to be six to eight weeks when it’s resolved to dig the boxes out. We have pretty much stopped exporting. Imports are still coming in, but that means that our agriculture, that means that our raw materials that we’re exporting out of the port of L.A. are not moving.

WELLS: And while there are some imports, the delays here are so ridiculous that companies like Honda reportedly slowed down production at some U.S. plants because they can’t get parts in a timely fashion. And while anecdotally, some customers and consumers start to see some shortages on store shelves, Chris Thornburg (ph) at Beacon Economics says, generally speaking, the American consumer has feel the impact of this port problem.

For NIGHTLY BUSINESS REPORT, Jane Wells, outside the ports of Los Angeles and Long Leach.

(END VIDEOTAPE)

MATHISEN: And still ahead, does your broker have your best interest at heart when it comes to planning for your retirement? The Labor Department is pondering new regulations, and the financial services industry doesn’t like what it hears. We’ll debate.

(MUSIC)

MATHISEN: Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) disclosed a handful of changes to its stock holdings in its filings as of the end of December. Buffett increased the stake in IBM, which was the worst performing stock in the Dow last year. He took a new position in Deere, which began accumulating in the third quarter of 2014. And he also started buying 21st Century Fox.

Buffett dissolved his stake in ExxonMobil (NYSE:XOM), sold off a small position in ConocoPhillips (NYSE:COP) and he also cut his stake in National Oil Well Varco.

Dominic Chu is here with more on Buffett’s moves and what they might say about his view of the future.

When Buffett does something, everybody watches. Let’s talk about the companies that he’s sold. Exxon, a little bit of Conoco, National Oil Well Varco.

Does this suggest that I made my money and I don’t see an opportunity to make more anytime soon?

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT: You know what’s interesting is I don’t really think anybody knows what Warren Buffett is thinking besides Warren Buffett. And maybe his lieutenants Ted Weschler and Todd Combs.

But the interesting part about this, it speaks to Warren Buffett’s style and the kind of moves he made. Now, Warren Buffett has always been viewed as a man who has had the long-term view on things, the next five, 10, 15, maybe 20 years. It was interesting for investors to see him sell out of a large cap oil company like an ExxonMobil (NYSE:XOM) in a complete fashion.

What does that say about the future of oil and gas? I don’t know what that says about Warren Buffett, but what’s interesting about this is that this is a very high profile exit from a very large position. This was a $3.8 billion position.

MATHISEN: That’s what I was going to ask you. How big a position was it?

CHU: Almost $4 billion worth. This is — we’re talking about 41 plus million shares of ExxonMobil (NYSE:XOM) that they disposed of during —

MATHISEN: He’s known as a valued investor but just because a stock is down in price doesn’t mean it’s a value with the long-term potential. So, maybe he’s drawing some conclusion about the long-term prospects or maybe not. Who knows?

IBM, a beaten down stock, he is doubling in on this.

CHU: Absolutely. So, the worst performing Dow stock over the last four years in the fourth quarter when they announced the position increase, IBM shares were down around 17 percent.

So, it speaks to this idea that he’s a man who obviously does his homework about stock picking. His models, his research suggests that IBM is still a compelling value proposition, and if he liked it higher and still wants to add to his position, he can do so at a cheaper price.

What’s interesting about this is it wasn’t exactly a small increase. It was a position up by 6.5 million shares of IBM during the quarter. This now makes the position a total of about $12.5 billion.

MATHISEN: So almost four times what he sold out of Exxon.

CHU: I mean, it’s a huge, huge bet here. And again, remember, this is all about CEO Ginny Rometty. She’s taken the helm. A lot of insiders say this is now her company and Warren is obviously backing this particular bet.

MATHISEN: Dom Chu, thank you very much. Appreciate it.

CHU: You bet.

MATHISEN: Trifecta of hotel earnings. That’s where we begin tonight’s “Market Focus”.

We begin with late earnings with Marriott. Its results beat Wall Street estimates and it gave better than expected first quarter and full year guidance. Shares initially shot up after the close, before the bell, shares were up a fraction at $81.45.

But Hyatt Hotels (NYSE:H) was out with mixed results. Revenue missed consensus and national markets remaining challenged this year while U.S. markets expected to be relatively strong, shares off more than 1 percent today at $58.79.

Hilton forecasts lower than expected earnings for the first quarter in full year. This as the stronger dollar said Hilton makes it more expensive for foreigners to travel here in the U.S. The company’s CEO did tell CNBC Hilton plans to return cash to shareholders later this year.

(BEGIN VIDEO CLIP)

CHRISTOPHER NASSETTA, HITON WORLDWIDE CEO: Our view is first instituting a dividend which most of our competitive — not all of our competitive set had. And then it come in a form of buyback. So, I think we’re going to be in the zone of our targeted credit ratio the second half of this year and those things will be on the table at that time.

(END VIDEO CLIP)

MATHISEN: Hilton shares however dipped a fraction to $28.54.

Garmin (NASDAQ:GRMN) issued down beat guidance for the year sending shares way down. The company also citing the effects of the strong dollar and weak demand for car navigation devices for that outlook. Earnings in most recent quarter missed estimates. Shares tumbled 11 percent to $50.60.

Sony (NYSE:SNE) is on the offensive. The company says it plans to up its operating profit 25-fold by 2018. Its chief laid out plans to achieve the goal, saying Sony (NYSE:SNE) will focus on the video game entertainment and image censoring businesses. Shares of Sony (NYSE:SNE) up 5 percent to close $28.02.

Shares of Sherman-Williams were higher on news the company will hike its dividend of 22 percent. The new payout of 67 cents a share will be made to shareholders in March. The stock rose a fraction to $88.05 for Sherwin-Williams (NYSE:SHW).

Another eye popping valuation is being put on another tech company. Snapchat, the mobile messaging company that lets hundred million users send messages that then disappear after a few seconds reportedly raising around a venture capital that could value the company at $19 billion. That valuation would position Snapchat as the third largest venture capital backed firm worldwide.

Now to the discussion on the rules governing retirement accounts that we mentioned earlier in the program. The White House through the Labor Department is expected to announce proposals that would tighten retirement account standards and close what some see as loopholes in existing laws that allow brokers to skirt, in some people’s view, their so-called fiduciary duty. Will this help or hurt investors?

Kenneth Bentsen is president and CEO of the securities industry and financial markets association. He opposes the change in the rules. But Micah Hauptman, a financial and services counsel with the Consumer Federation of America is a supporter, and Michael Farr is back with us.

Welcome to all of you. I know this will be a lively and interesting conversation.

Kenneth, let me start with you. If I really read between the lines of your group’s position, you seem to be saying that if brokers are required to put their clients’ interests first, those brokers will not be able to stay in businesses and will not be able to serve clients.

Have I got that wrong?

KENNETH BENTSEN, JR. SIFMA PRESIDENT & CEO: Really, what you have here is if the deal goes forward with the rule like they tried to do in 2010 and establish this new standard, then you would have to move these accounts from a traditional brokerage account where most people have their accounts in a commission-based account into a wrapped account, a fiduciary account, which is more expensive.

So, what would happen is for the higher balanced accounts, they would pay more for services they don’t want to buy, and then the real problem is the lowered balance accounts. And by volume, most IRA accounts are in lower balanced accounts. Those are — that don’t make economic sense to put a wrapped account at any fee. So, they really would be left without any access to any advice. They would be left on their own. That’s really what the problem is with the proposal, as we know it from 2010.

MATHISEN: You say this would be, these charges, would be higher cost accounts. I’m curious about that because it would seem to me that what this rule would be aimed at doing would be to avoid the higher cost accounts that sometimes get sold to retirement account owners. You see what I’m saying there? They’re driven to high commissioned accounts or funds, for example, that have higher expenses.

BENTSEN: Well, first of all, it’s a very competitive marketplace. On a commission-based account, you pay commission on a transaction by transaction basis. On a managed account, where this would drive many accounts into, you’re paying an annual fee. Over time, that’s more expensive.

And you’re paying for services, and people do like managed accounts where they’re getting an ongoing service, where in many cases, a discretionary account were the advisers are making trades on your behalf as opposed to a buy and hold account, where the investors say, look, I want to buy this stock, I want to buy this fund, I’m going to hold it for a long period of time. I just want to pay for the transaction.

MATHISEN: Mr. Hauptman, why don’t you jump in here and tell us what you think? Would it raise costs to go to this standard to the point that many would not be able to afford it and that many brokers would be driven out of the business?

MICAH HAUPTMAN, CONSUMERS FEDERATION OF AMERICA: No. No. And Mr. Bentsen gets a number of things wrong.

So, first, we have a retirement industry in which financial professionals are allowed to hold themselves out as trusted advisors, but not comply with the standards that traditionally apply to those in a position of trust.

So, you have largely brokers who are allowed to steer their clients into high-cost, low-performing investments that don’t serve their clients’ best interest, they serve the financial advisors. They make the financial advisors a lot of money. And that’s because the rules that apply to retirement, investment advice haven’t been updated in 40 years. And they don’t serve the modern financial landscape.

And so, they don’t apply to rollovers, to IRAs, to IRAs (ph), it costs investors a lot of money. And the academic evidence suggests that the conflict of interest advice costs retirement investors anywhere between $6 billion and $17 billion a year.

MATHISEN: So, basically, what you’re saying if I’m understanding you correctly, correct me if I’m wrong, Mr. Hauptman, is that the advisor can’t wear two hats. He cannot be a commissioned salesperson and also have the client’s best interest at heart in all cases. It just doesn’t work.

HAUPTMAN: No, that’s not what I’m saying. So Mr. Bentsen said commissions won’t be allowed. That’s just not true. The DOL, first of all, hasn’t proposed a rule. Any analysis about what the rule is going to look like or the impact it’s going to have is just speculation. We want the DOL to propose the rule to update it, to close loopholes in the rules so it reflects the modern financial landscape and investors are better protected.

But also —

MATHISEN: I want to bring in — forgive me for interrupting. I want to bring in Michael Farr, who was in this business. He advises clients. He’s a money manager.

I do not know but I assume you follow what is known as the fiduciary standard. Michael, jump in here and speak to the guests.

FARR: Tyler, I think it’s ridiculous we’re still having this debate. I think it’s ridiculous that the securities industry has been able to protect and maintain a suitability standard as long as it has. The difference between a fiduciary and the suitability standard on — as an example on a mutual fund purchase, when a broker recommends a mutual fund, all it has to do is be appropriate for that client, that a conservative growth fund is OK for that client.

He’s not required, or she’s not required to recommend the lowest fee fund. So I could, if I’m a broker, all I need to know is that the fund is suitable and has a 4 percent low charge fee as a part of it. I can recommend the one with the load rather than the no load. That’s the suitability standard.

As a fiduciary, as a money manager fiduciary, I have to recommend the best deal for the client and if I am telling the client that I’m going to give them the advice in their interest, I think I’m obligated to do that. I don’t know how the industry has maintained the position of a suitability standard this long. I think it undermines the credibility of the industry.

And I agree with you, it does put you at a conflict of interest when you — are there to give the client advice and recommend something that’s going to pay you back.

MATHISEN: I want to get back to Mr. Bentsen. You get the last word.

BENTSEN: Well, great. First of all, I want to say it’s a mistake to say that this is an unregulated area. This is one of the most highly regulated areas of finance. There are different channels by which customers get products. They are different channels by how they’re regulated.

On the brokerage side is the most heavily regulated there is, with the greatest redressed opportunity to the client. But most important thing is the customer, the investors have been choosing with their feet, and they overwhelming choose the brokerage model because it is more cost-efficient to them. And so, they want to be able to buy the services they want.

(CROSSTALK)

MATHISEN: All right, gentlemen. We have to — I’ve got to leave it there because we’re out of time. I think our Facebook (NASDAQ:FB) page is going to light up on this. Mr. Bentsen with SIFMA, Michal Hauptman with Consumer Federation of America, and Michael Farr. We’ll come back to this, I promise.

Some of the biggest hurdles facing the biggest consumer product companies. We’ll be right back.

(MUSIC)

MATHISEN: The biggest consumer companies in the country face a number of head winds from stronger dollar to pick consumers and competition.

Sara Eisen reports.

(BEGIN VIDEOTAPE)

SARA EISEN, NIGHTLY BUSINESS REPORT CORRESPONDENT: For America’s biggest consumer companies, the global environment is tough right now.

IRENE ROSENFELD: The mood of the consumer around the world is cautious. It varies a little bit from one geography to the other. Certainly, in the U.S., we are seeing a little bit of an upturn, but at a very slow rate because I think consumers remain quite cautious. As we think about regions like Europe, that’s a tough place.

EISEN: The strong dollar cuts into overseas profit for snack giant Mondelez, which makes Oreos, Cadbury, Ritz Crackers and more.

For food companies, it does help if you have organic healthier options in the brand portfolio which continues to be a dominant trend separating winners and losers in the industry.

IRWIN SIMON, HAIN CELESTIAL: You can’t go out there and say buy my product because it contains vitamin C. Or, you know, this product tastes great. Consumers today are educated. They’re reading labels. They understand what GMOs are. They understand the whole animal welfare.

EISEN: Hain Celestial carries brand Rice Dream, Imagine Soup, and Taro Chips. It’s growing fast and plans to acquire even more brands in the near future.

SIMON: So, where Hain is going to move? More and more into fresh prepared foods, our personal care products. All these years, Johnson and Johnson used to put formaldehyde in their baby products. And it was like, oh my God. As a mom or dad, you’re putting what in my product?

So, personal care is a big deal for us.

EISEN: Deal talk is everywhere.

With other fast-growing companies like White Wave behind Silk Dairy and Horizon Milk, widely considered to be attractive buyout candidate bigger, slower growing companies like Coca-Cola (NYSE:KO), Pepsi, General Mills (NYSE:GIS) or Kellogg (NYSE:K).

Beyond the deal chatter, consumer companies are encouraged by better outlook here in the United States, with consumers helped lately by savings at the gas pump. The key question is going to be international growth. That and fast-moving trend changes like healthier eating and knowing what’s inside your food and your drink and how all of that changes the landscape for the industry going forward.

For NIGHTLY BUSINESS REPORT, I’m Sara Eisen.

(END VIDEOTAPE)

MATHISEN: And that is NIGHTLY BUSINESS REPORT for tonight. We’ll see you 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) 2015 CNBC, Inc.

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