Transcript: Nightly Business Report — May 21, 2015

NBR-ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Battling back. Two companies that faced big challenges show investors they have what it takes to top earnings expectations.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Hot market. We`ll take you to one city in the U.S. where it`s getting really hard to find a house.

MATHISEN: And wealth gap widens to a record between the rich and poor. And now, one group says it`s holding back growth across the globe.

All that and more tonight on NIGHTLY BUSINESS REPORT for Thursday, May 21st.

HERERA: Good evening, everyone, and welcome.

The S&P 500 notched another record. The NASDAQ just shy of one.

But we begin tonight with earnings. Expectations were love for first quarter profits, but the results as it turned out weren`t as bad as expected. Tonight, Hewlett-Packard (NYSE:HPQ) continues that trend. The technology company that`s in the middle of the largest corporate split in history recorded earnings of 87 cents per share, two cents better than estimates.

Revenues, however, were a little light, coming in at $25.5 billion down from $27 billion last year. Despite the revenue drop and a cautious outlook, the stock initially climbed after the report.

Dominic Chu has the one thing to watch in HP`s report.

(BEGIN VIDEOTAPE)

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT: The big takeaway from the Hewlett-Packard (NYSE:HPQ) earnings report is that the company is still seeing declines in many of its major units, but companies appeared to be boosting technology spending, albeit at a more modest level. That`s important for a company like HP. Many of us know them as the ones that make desktop and notebook computers, as well printers. That`s still a very big part of the company.

But they are also devoting resources towards enterprise or business clients. Later on this year, HP`s going to split itself into two separate publicly traded companies, one that`s going to handle the traditional PC and printer market, the other is going to focus solely on selling technology solutions to business clients.

A lot of what HP does in the future will be about whether it can compete effectively for those more lucrative enterprise clients.

For NIGHTLY BUSINESS REPORT, I`m Dominic Chu.

(END VIDEOTAPE)

MATHISEN: Best Buy (NYSE:BBY) is bucking the retail trend. The consumer electronic chain reported a stronger quarter while many other retailers have posted disappointing results. Both sales and profits at Best Buy (NYSE:BBY) topped Wall Street forecasts. And that sent shares up nearly 4 percent.

Courtney Reagan has more.

(BEGIN VIDEOTAPE)

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
At least one retailer`s transformation seems to be paying off, gaining market share in a category with declining sales. Best Buy (NYSE:BBY) beat Wall Street estimates for quarterly profit, revenue, and comparable sales, thanks in part to continued cost cuts and strong sales of appliances, smartphones, and large TVs, though muted by softness in tablet and computer sales.

JAN KNIFFEN, J. ROGERS KNIFFEN WORLDWIDE ENTERPRISES: They`ve proved to me once more that a well-run company who`s executing well on the Internet can compete with Amazon (NASDAQ:AMZN), even in a space that the Internet has begun to dominate. If Amazon (NASDAQ:AMZN) had to make a profit, they really could win the game with them. They are managing to do it and make a profit. That`s pretty remarkable.

REAGAN: While many acknowledge Best Buy (NYSE:BBY) has garnered strengths from being one of the last large consumer electronics retailers still standing, consumers are shifting to spend discretionary dollars on experiences, like dining out and travel, and digital services rather than physical goods.

MICHAEL LASSER, UBS: You`re buying your songs online. You`re buying and consuming movies online, and what that means is that whereas in the past you might go to the store to buy those products, once Best Buy
(NYSE:BBY) got you in the store they had an opportunity to sell you other things, Best Buy (NYSE:BBY) now — to use a hockey analogy — loses out that potential shot on goal. So, it`s going to be harder as more of that shift continues.

REAGAN: Best Buy`s CEO Hubert Joly acknowledged to me on the phone that the trend towards experiences has been going on for a while. It is something that`s real, but it`s exciting. Using an example to explain, the Best Buy (NYSE:BBY) provides training and tools to capture images on your new camera at an experience like your child`s soccer game.

(on camera): Sixty-five percent of Best Buy`s business is consumer electronics, a category industry statistics show is contracting, but Joly says large appliances, particularly those with enhanced technology, is a growing opportunity for the retailer.

LASSER: Using appliances is a good category: (a), because their market share in that category right now is pretty low, (b), because we`ll probably see Sears (NASDAQ:SHLD), which has a significant amount of market share continue to donate that to other retailers.

REAGAN (voice-over): Joly specifically points to potential for connected home products and appliances, like ovens you can start or turn off remotely. And Best Buy (NYSE:BBY) wants not only to sell them to you, but also deliver, install, and teach you how to use them.

For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan.

(END VIDEOTAPE)

HERERA: Gap (NYSE:GPS) also out with its quarterly report. Earnings were in line while revenue missed. The retailer saw continued weakness at its namesake Banana Republic brands, and currency fluctuations also weighed on the results. Still, the company stuck to earnings guidance for the year. Shares were little changed initially after hours. Before the bell, the stock was off just a few cents.

MATHISEN: The big merger today, Sue, was in the health care sector.
CVS (NYSE:CVS) Health has agreed to acquire the pharmacy services provider Omnicare (NYSE:OCR) for more than $12 billion. The deal expands CVS`s presence in the rapidly growing specialty pharmacy and long term care business. Shares of both companies were higher today, with Omnicare
(NYSE:OCR) up about 1 1/2 percent, CVS (NYSE:CVS) gaining more than 2 percent.

Bertha Coombs has the details.

(BEGIN VIDEOTAPE)

BERTHA COOMBS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
Already, the nation`s second largest pharmacy benefit manager, covering over 65 million people, CVS (NYSE:CVS) Health`s acquisition of smaller PBM rival Omnicare (NYSE:OCR) will give the pharmacy giant ever greater exposure to the Medicare market.

MARIO GABELLI, GABELLI FUNDS CHAIRMAN: They want to grow and this is an area that they chose. And that is that, look, the plus side is that the number of individuals in the United States over the age of 80 growing significantly.

COOMBS: Omnicare (NYSE:OCR) is the leading pharmacy provider to nursing homes and assisted living facilities. CVS (NYSE:CVS) will take on debt to pay for the $12.7 billion deal. But analysts are positive on the acquisition, saying it will help the company hold on to Medicare clients as they age, while strengthening its position in the fast-growing specialty pharma business, which is helping drive industry consolidation. In March, UnitedHealth Group (NYSE:UNH) paid 12.8 billion to acquire Catamaran, following Rite Aide`s $2 billion deal to by Envision in February.

(on camera): In a battle against rising drug costs, it`s not the physical pharmacies but the PBMs that are playing an increasingly important role. And getting bigger can mean more leverage.

CECI CONNOLLY, PWC HEALTH RESEARCH INSTITUTE MANAGING DIR.: We estimate that in 2016 alone, specialty medications will cost about $192 billion. So, managing the cost of drugs is bigger, bigger business as well.

COOMBS (voice-over): The nation`s largest PBM, Express (NYSE:EXPR) Scripts, has been increasingly vocal about pushing back at drug makers on high priced specialty drugs like Gilead`s hepatitis treatment Sovaldi.
That has benefitted consumers and insurance plans by forcing lower pricing
— but not without disruption. When Express (NYSE:EXPR) Scripts boycotted the drug, many patients want it.

CONNOLLY: There is attention right now in health care. It`s consumers and physicians have a desire for these new breakthrough therapies, but they recoil at the high cost.

COOMBS: But more expensive drugs in the pipeline, that tug of war is likely to grow increasingly heated.

Bertha Coombs, NIGHTLY BUSINESS REPORT, New York.

(END VIDEOTAPE)

HERERA: On Wall Street, stocks ended higher, but not by much. The major averages came close to new records, but the S&P was the only index that managed to set a new high. The Dow ended a fraction higher at 18,285.
The NASDAQ notched the gain of 19 points, closing about a point away from a new record close. The S&P 500 ended at 2,130, a gain of about 5 points and its 10th record close so far this year.

MATHISEN: From mergers and markets, to meetings we go. Goldman Sachs (NYSE:GS) shareholders approved the company`s pay plan for its top executives, including Lloyd Blankfein. The bank held its meeting out in San Francisco, which Blankfein called ground zero for innovation.

Meanwhile in Illinois, McDonald`s shareholders approved a proposal that would make it easier to nominate directors to the board of the company. The vote comes as McDonald`s (NYSE:MCD) works to increase sales and traffic in its stores. And outside of McDonald`s headquarters, protesters demanded higher wages and the right to unionize, this for the second straight day.

HERERA: And now to the economy where the number of Americans filing new claims for unemployment benefits rose slightly more than expected last week, but despite the rise, claims remain below 300,000, a threshold associated with a strengthening labor market. That level has been below
300,000 for 11 straight weeks.

MATHISEN: Sales of previously occupied homes fell in April, as prices rose. The National Association of Realtors said sales of previously owned homes dropped more that 3 percent last month, from March to a seasonally adjusted annual rate of 5.04 million. The drop in sales is being blamed on a lack of supply, which in turn is driving up prices. And get this, in April, 40 percent of properties sold at or above their asking price.

HERERA: Well, the housing supply issue is widespread. It is most acute in Denver, where job growth and a controversial night construction low are keeping that market incredibly tight.

Diana Olick has more from the place some call America`s hottest housing market.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPODENT (voice-over):
Christopher Simmons is busy measuring rooms in a Denver home he just bought. But it took him six months to get here.

CHRISTOPHER SIMMONS, HOME BUYER: The buying process had definitely been a nightmare really pushing everyone throughout the process.

OLICK: Denver`s housing market is so tight that bidding wars are now the rule. Simmons lost two, one with 18 bidders, and had to be five others to get this house. He wrote the sellers a letter, pleading his case and then used some risky tactics.

SIMMONS: I waived the inspection and the appraisal contingencies on all offers I made, and this one, as well.

OLICK: That`s what it took in a market where listings are down 15 percent from a year ago and homes that are listed are flying off the shelves. Prices are up 11 percent from a year ago because supply is nowhere near demand.

(on camera): Demand here is very high thanks to above average employment growth. Companies like Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG), bringing new workers here, and there is new construction, but it`s mostly rentals, not condos.

CHRIS WAGGETT, CEO D4 URBAN: We`re not building condos because we don`t want to get sued.

OLICK (voice-over): Developer Christopher Waggett is talking about a controversial Colorado construction law put in place five years ago that makes developers far more susceptible to lawsuits for even the tiniest defect. It has nearly stalled condo construction here, fuelling rental demand and pushing rent.

WAGGETT: So, for investors it`s a fantastic market, but I don`t think incomes have been rising at that pace and we all know what happened in 2008-`09 when we got an imbalance between incomes and value of property, in this case rent.

OLICK: The only condos that are going up are on the very high end, where developers can afford to pay for insurance against lawsuits and go over the top testing for defects.

ROY KLINE: Two reviews, have people looking over each other`s shoulder continually to make sure everything gets done right.

OLICK: Roy Kline is developing 250 Columbine, where most units list for more than $1 million. The project is over 80 percent sold, and it doesn`t even open until August. Kline calls that amazing, but says lawyers will target the project, scouring the units for defects.

(on camera): So, there are sharks out there looking to get you?

KLINE: Absolutely. Absolutely. So, you really have to be careful.

OLICK: Just the cost of doing business in the Mile High City, where home prices have nowhere to go but up.

For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Denver.

(END VIDEOTAPE)

HERERA: And to find out more about Denver`s housing market, head to our Web site, NBR.com.

MATHISEN: Still ahead, the great divide, the split between the haves and the have-nots. It`s a big social issue and some are warning it`s also a big economic issue as well.

(MUSIC)

MATHISEN: The Trans Pacific trade initiative backed by President Obama has cleared a key procedural hurdle over in the Senate. Now, the bill faced major opposition from many Senate Democrats. But the final passage is not yet clear. The Senate will now consider a number of amendments, including controversial sanctions for trading partners that manipulate their currency. The bill is expected to face a quite tough time over in the House. The Trans Pacific trade deal is the biggest trade pact since the North American Free Trade Agreement, NAFT, two decades ago.

HERERA: The Senate Banking Committee has adopted a financial regulation bill, the measure alter rules for small and midsized banks and clears the way for months of negotiations. The Republican-backed bill takes aim at the 2010 Dodd-Frank law. And in addition to easing rules for small banks, it would increase congressional scrutiny of the Federal Reserve and give asset managers and insurance companies a chance to redo their business before being classified as systemically important.

MATHISEN: The Securities and Exchange Commission announced fraud charges against an Atlanta firm for its handling of the city`s pension funds for police, firefighters, and transit workers. In an SEC statement, the firm, Gray Financial Group, put pension fund clients into investments that did not comply with state law, and it collected more than $1.5 million as a result.

HERERA: A bit earlier in the program, we told you that Hewlett- Packard (NYSE:HPQ) reported better than expected earnings. Well, the company also sold part of its business in China to a Chinese company. This is viewed by many as a so-called win for the Chinese government, which has been concerned about cyber-spying following the Snowden revelations.

Eamon Javers is in Washington for us with more on the business impact of this.

And, Eamon, is this just another example of the really chilly relationship that U.S. tech companies now have with the Chinese?

EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: It is, also a lack of demand in China for American technology products in the wake of those Edward Snowden U.S. spying allegations. The HP subsidiary here is called H3C and what HP is doing is spinning that off, selling 51 percent of it to its another entity that`s controlled by Tsinghua University, which is the university that`s considered the MIT of China.

And that, of course, is affiliated with the Chinese government. So, the government there now getting a majority stake in this digital networking subsidiary.

MATHISEN: HP, I gather, is holding on to other divisions over there that work in sort of consumer products, printers and the like.

Let`s talk about the Patriot Act. What about the protests against it?

JAVERS: Yes, you know, you`ve seen the repercussions, excuse me, of the Edward Snowden spying allegations here in the United States, as well, with Rand Paul, United States senator, doing sort of a mini filibuster on the Senate floor against the Patriot Act.

Now, there`s some real question about whether the provisions of the Patriot Act that apply to spying on metadata for telephone records for American citizens, whether those provisions will be reauthorized by the June 1st deadline or not. There`s some question about whether or not there are a votes in the Senate to do that. The House has passed its version, not clear at this point what`s going to happen here.

HERERA: And we also heard from FBI Director Comey who expressed concerns over tech companies and their encryption.

JAVERS: Yes, broad number of companies wrote a letter to President Obama this week saying they don`t want any limits placed in U.S. law on their ability to sell encryption. Now, law enforcement, including FBI Director Comey said they want access to encryption so they can get into the iPhones and other devices of criminals they are targeting with a warrant.
But the companies would like to sell encryption to their companies uninhibited by the U.S. government.

Comey expressing his displeasure with those companies, saying he just doesn`t think they see what he sees and it`s a real culture clash now between law enforcement and U.S. tech companies and doesn`t look to be resolved any time soon.

HERERA: Eamon, thank you so much. Eamon Javers in Washington.

JAVERS: You bet.

MATHISEN: Well, things just keep getting worse for Lumber Liquidators, and that is where we begin tonight`s “Market Focus”.

The flooring retailer`s CEO, Robert Lynch, quit abruptly, as the firm has been embroiled in an investigation over products imported from China.
The probe was initiated because of allegations that some of the company`s flooring contains the carcinogen formaldehyde. Shares tumbled 16.5 percent, what a year it`s been at that company, right now at $21.10.

Management changes too at Chico`s to tell you about. The retailer`s chief says he will retire next spring and take the role of vice chairman until June of next year. No successor just yet. Shares were a fraction lower to $17.02.

Shake Shack getting a lift on speculation the company may flip some birds. The burger chain filed an application for “chicken shack” in April.
Investors liked the possibility of expansion, sending shares up 8.5 percent to $89.87.

HERERA: Dollar Tree (NASDAQ:DLTR) posting higher sales and traffic.
The company also updating investors saying it expects its nearly $9 billion deal to buy Family Dollar to close in early July. Its outlook for the current quarter came in below estimates. Nonetheless, shares were 3 percent higher to $78.68.

Qualcomm (NASDAQ:QCOM) announced plans to launch an accelerated $5 billion stock buyback program. The chip maker has been under pressure by activist investor Jana Partners to increase shareholder value. Shares were
1 percent higher to $70.09.

Financial Engines (NASDAQ:FNGN), which is an online advisory service, spiked on a “Reuters” report that Wells Fargo (NYSE:WFC) is planning to offer Financial Engines` service through its retirement platform. The move would make Financial Engines (NASDAQ:FNGN) available to nearly 4 million Wells Fargo (NYSE:WFC) 401(k) participants. Financial Engines
(NASDAQ:FNGN) rose about 4 percent to $42.49. Wells Fargo (NYSE:WFC) was off just a few cents to $56.01.

And Shopify surged in its trading debut. The tech startup saw strong investor interest even though shares were priced above expectations at $17 a share. The company, which makes software to help retailers sell things online, raised about $130 million. Shares were 51 percent higher to close at $25.68.

MATHISEN: Well, Sue, a new OECD study says income inequality in developed nations is at a record 30 year high and is hurting the global economy. The report found that the richest 10 percent of the population saw their earnings grow 10 percent while the income of the poorest fell 3 percent.

Josh Feinman, chief global economist at Deutsche Bank, at Deutsche Asset and Wealth Management, joins us.

Josh, it`s good as always to see you. Thanks for coming.

What`s interesting to me here is that beyond the sort of social strain that wealth disparity imposes, it may be transmitted in view of this study and in your view into slower growth and less vibrant economies.
What`s — how does that get transmitted? Why does that happen?

JOSHUA FEINMAN, DEUTSCHE ASSET & WEALTH MANAGEMENT CHIEF GLOBAL
ECONOMIST: It could. Keep in mind, if it works the other way, too. There is a certain amount of income inequality generally that`s a natural manifestation of a market economy, differential skills, abilities, effort, endowments, things like that. That if it were squashed, could potentially have negative impacts for incentives, things like that.

But on the other side coin, if inequality rises too much, it could have negative macro economic effects and one of them could be if it retards mobility. The ability of people, say, born in the lower income brackets from being able to move as they age into higher brackets by their ability, their education, and so forth.

If that is inhibited, that`s a key channel through which it could have negative effect on the macro economy. Before —

HERERA: Josh —

FEINMAN: Go ahead.

HERERA: Josh, a lot of people think that technology is one of the main reasons why we are seeing that gap widen so dramatically. Do you agree with that or not?

FEINMAN: I do. I mean, I think a big cause of it is increasing returns to skills and education. And people who get the right skills, the right education, their income`s growing rapidly, those folks who don`t, their incomes are lagging. That`s a big — not the only driver, but a big driver of a widening inequality.

MATHISEN: What`s the fix?

FEINMAN: You know, not easy to say, but clearly, if education`s a big part of the problem it`s got to be a big part of the solution, too.
And getting folks to get more education, expanding opportunities to people throughout the spectrum, income and social spectrum, access to education and skills will be part of it.

Important to keep in mind, this is not only a U.S. phenomenon. This is going on for decades across Democratic and Republican administrations, across countries, merging economies, as well as developed economies. So, there`s no, you know, local solution to this. This is a global situation.

HERERA: Although it is a global situation, the United States seems to be on the lead in terms of the gap widening.

FEINMAN: Well, the U.S. is certainly in the lead in terms of levels of inequality, but that`s always been true. In terms of its widening inequality, maybe a little bit in terms of the 1 percent, but not clear cut. Other countries have seen increases, too. In fact, some of the biggest increases, ironically, occurred in emerging economies, places like China.

And the other thing I just point out about the mobility issue — so far, it seems that the widening inequality in the U.S. and elsewhere has not caused deterioration in intergenerational mobility and the ability of folks at the lower end to move up. Now, some people worry it may if it were to continue, but so far, it hasn`t. And that`s at least encouraging to date.

MATHISEN: We leave on that good note.

Josh Feinman, thanks very much.

FEINMAN: Great to be here.

MATHISEN: Josh with Deutsche Asset and Wealth Management.

HERERA: Coming up, how one vineyard in drought-stricken California is turning water, waste water into wine.

(MUSIC)

HERERA: Here`s what to watch tomorrow: Fed Chair Janet Yellen will give a speech on the country`s economic outlook and we`ll have the highlights.

On the data front, the consumer price index is out, which is an important inflation indicator and that`s what`s on the agenda for Friday.

MATHISEN: California is getting about $33 million in federal money for water saving programs, programs will upgrade irrigation controls, line canals to prevent seepage, catch your storm water runoff and other water conservation projects. The program is designed to increase local water supplies in the long term. Other states impacted by the big drought will also receive funding.

HERERA: California`s drought has some local wineries looking for alternative ways to save water.

And as Jane Wells reports from the Napa Valley, one vineyard owner is putting a new spin on turning water into wine.

(BEGIN VIDEOTAPE)

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT: These are pinot noir?

WILL NORD, GREEN ISLAND VINEYARDS: These are pinot noir grapes, the small dollar cost you.

WELLS: The grapes which Will Nord grows in Napa Valley go into very well known wines, but wine for the affluent has been watered with effluent.

NORD: We`re only using good quality water, just has a perception it`s been passed through people.

WELLS: Have you ever tasted it?

JASON HOLLEY: No, I haven`t.

WELLS: The waste water which Jason Holley treats at the American Canyon Water Reclamation facility isn`t clean enough to drink, but a filtration system from GE, plus UV and chlorine makes it clean enough to irrigate.

HOLLEY: These are actual fibers, membrane fibers.

WELLS: The city of American Canyon in Southern (NYSE:SO) Napa County has invested $10 million in the system to recycle water and is about to spend $3 million more to upgrade and expand because of the drought.

BELIA RAMOS: Our water is sourced from state water projects, so we don`t have our own reservoir. So, when the state says you`re going to cut, we`re going to cut.

WELLS: We have cleaned up toilet water watering these grapes. No impact on the tastes at all?

NORD: No impact at all.

WELLS: Nord has been using recycled water for a long time and says the technology has only made it cleaner and better, and you can`t beat the price, less than half the cost of regular water.

How come more farmers aren`t using recycled water?

NORD: There`s still a negative perception about it. California`s got a lot of growing up to do on how to use water well.

WELLS: Nord insists using the recycled water has absolutely no impact on the taste of the wine and with other growers facing shortages of water, they are starting to believe him.

He may be on to something.

For NIGHTLY BUSINESS REPORT, Jane Wells, in the Napa Valley.

(END VIDEOTAPE)

HERERA: I love Jane Wells.

MATHISEN: If it`s good enough for Jane. It`s good enough for me.

HERERA: Absolutely.

All right. That does it for NIGHTLY BUSINESS REPORT for tonight.
I`m Sue Herera. Thanks for joining us.

MATHISEN: And I`m Tyler Mathisen. Thanks from me, as well. Have a great evening, everyone. And we will see you back here tomorrow for the last day before the long weekend.

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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