Transcript: Nightly Business Report — July 16, 2015

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Searching for profit, and Google (NASDAQ:GOOG) found it. The company topped earnings expectations and its stock soared initially after-hours trading.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Don`t look now.
Netflix (NASDAQ:NFLX) shares rocket higher. But is the dominant player in video streaming about to face some stiff competition?

HERERA: Five years later, did Wall Street reforms following the financial crisis price people out of the housing market?

All that and more tonight on NIGHTLY BUSINESS REPORT for Thursday, July 16th.

MATHISEN: Good evening, everybody. Glad you could join us.

A fresh record for the NASDAQ, but we begin tonight with earnings from Google (NASDAQ:GOOG). The company which is one of the most widely held stocks by mutual funds reported stronger than expected second quarter results. Earnings of $6.99 a share trumped estimates by 29 cents, revenue of $17.7 billion, just about in line with forecasts but was 11 percent higher than last year.

And investors like what they saw, sending shares spiking in initial after-hours trading as you see right there.

Jon Fortt has the one key thing in the report investors need to watch.

(BEGIN VIDEOTAPE)

JON FORTT, NIGHTLY BUSINESS REPORT CORRESPONDENT: One take away from the Google (NASDAQ:GOOG) earnings call is that YouTube is a big star in this report. The new CFO Ruth Porat reporting that viewing time of YouTube videos was up 60 percent year over year. That`s the best growth rate in two years.

Mobile viewing time was up 100 percent and that helped Google
(NASDAQ:GOOG) despite the currency headwinds that knocked revenue down $1.1 billion. It would have been $1.1 billion higher. If not with these currency headwinds, Google (NASDAQ:GOOG) would have seen 18 percent growth instead of 11 percent, that combined with expense discipline sent the stock a lot higher after hours.

Guys, back to you.

(END VIDEOTAPE)

HERERA: Jon, thank you. Upbeat earnings and progress in Greece helped send the NASDAQ composite to a new record high in today`s session.

By the close, the Dow Jones Industrial Average was 70 points higher to finish at 18,120. The NASDAQ was 64 points higher at that new record of 5,163. And the S&P 500 was up almost 17 points.

MATHISEN: Netflix (NASDAQ:NFLX) was far and away the top performing stock today on the S&P 500. Shares surged, get this, 18 percent to a new high after the company reported a strong quarter and sharp increase in subscribers as we told you last night. But even though the company is growing gangbusters, Julia Boorstin reports that Netflix (NASDAQ:NFLX) is about to face a whole lot more competition.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Streaming video pioneer Netflix (NASDAQ:NFLX) is the industry leader with 65 million subscribers around the world, drawing a range of rivals. In addition to Amazon (NASDAQ:AMZN) ramping up it`s investment in original content for its prime service, HBO and Showtime have recently launched direct to consumer streaming apps. And now, CEO Reed Hastings is facing a whole new kind of adversary. Traditional TV providers Comcast (NASDAQ:CMCSA) (NYSE:CCS) and Dish offering slimmed down digital content bundles.

And that`s not all.

MARK MAHANEY, RBC CAPITAL ANALYST: Facebook (NASDAQ:FB) may have some play in this long-term. YouTube should have some play in this. In the past, they should have had a play in this and they haven`t. That was an under-executed opportunity, you know, for them. And then, yes, of course, Amazon (NASDAQ:AMZN) is going to be out there.

BOORSTIN: What Netflix (NASDAQ:NFLX) CEO Reed Hastings says will distinguish the service is its content, saying it`s originals in particular have been a massive draw for subscribers. That`s why Netflix (NASDAQ:NFLX) is ramping up it`s investment in all type of originals, series, documentaries, and feature films, for a scope of content that analyst Rich Greenfield says will help it stay ahead of rivals, especially since Netflix
(NASDAQ:NFLX) isn`t planning on raising prices, $9 a month for new subscribers.

RICH GREENFIELD, UBS: HBO sitting out there charging $15 a month, Showtime is actually being featured 30 days free, but that`s an $11.99 product and you think about where the feeling is given the amount of usage.
There`s no way that the usage of HBO or Showtime is anywhere near Netflix (NASDAQ:NFLX).

BOORSTIN: Hastings says it`s not a winner-take-all game. That while Amazon (NASDAQ:AMZN) and others are growing quickly, so is Netflix (NASDAQ:NFLX).

REED HASTINGS, NETFLIX CEO: So what`s happening is everyone is maintaining their relative share but the total amount of Internet viewing is growing at a very vigorous rate. So I think they`re experiencing significant success on their investment as is Hulu. I think we`ll see that with HBO Now, because there`s massive move from linear programming on to the Internet.

BOORSTIN: One sign of the growing power of streaming video, Thursday, Netflix (NASDAQ:NFLX) earned 34 Emmy nominations, while rival Amazon
(NASDAQ:AMZN) went from zero to a dozen nominations. But they`re both still dwarfed by HBO`s 126 nods.

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

(END VIDEOTAPE)

HERERA: And now results from Dow component Goldman Sachs (NYSE:GS).
The company reported its smallest quarterly profit in nearly four years.
Earnings fell nearly 50 percent as fixed income trading dropped and litigation expenses rose. Shares of the bank closed down $1.78.

MATHISEN: Well, a fellow blue chip UnitedHealth, also a Dow member, fell in trading today. The nation`s largest insurer reported higher profit for the second quarter and increased its full year outlook.

The company benefitted from increased membership in its insurance operations, but analysts are concerned that medical costs grew at a greater rate than expected. That pressured shares today slightly as you see there.
They finished $124.93.

HERERA: To the economy now and the number of Americans filing new applications for unemployment benefits fell more than expected last week.
Initial claims for jobless benefits dropped 15,000 to a seasonally adjusted
281,000 last week. Levels below 300,000 are viewed as a sign of a healthy labor market.

MATHISEN: The job market being closely watched by the Federal Reserve and today, Chair Janet Yellen told a Senate panel she expects to see further gains in wage growth.

(BEGIN VIDEO CLIP)

JANET YELLEN, FEDERAL RESERVE CHAIRMAN: I would expect to see a pick up. It`s not a certainty here but it is — and to my mind it is evidence of some remaining slack in the labor market. So, that`s my forecast is that we will see some pick up in wage growth.

(END VIDEO CLIP)

MATHISEN: Yellen also said that three wage measures watched by the Fed are employment cost index, hourly compensation and average hourly earnings.

HERERA: Housing is also a key component of the economy and today, a new report showed home builder sentiment is at the highest level in a decade, which was the height of the housing boom.

According to the National Association of Home Builders, builders are optimistic about the outlook of sales which are supported by job growth and relatively low mortgage rates.

MATHISEN: New mortgage rules have been put in place since the government passed the Dodd-Frank Act nearly five years ago as a response to the financial crisis. The legislation and the consumer protections that grew from it have imposed a vast array of new regulations on both lenders and borrowers, but are we better off and safer when it comes to mortgage lending?

Diana Olick looks at the results.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: The effect of loose lending during the last housing boom was abundantly clear. Nearly 7 million U.S. homes lost to foreclosure. The response: a credit lockdown caused by new lending rules under Dodd-Frank.

JARET SEIBERG, GUGGENHEIM POLICY ANALYST: For lenders, this is all about paperwork, verification, and doing a lot of the grunt work that was ignored or passed over before the crisis.

OLICK: The rules fill thousands of pages but are pretty simple.
Highly risky loan products were banned. Borrowers now have to document their employment and debt level. Lenders must disclose all the costs involved in each loan and, most importantly, lenders must verify a borrower`s ability to repay.

SEIBERG: If you`re a high credit quality consumer, Dodd-Frank just made it a much bigger pain in the butt to let a loan. You`ve got to fill out more paperwork. You`ve got to dig out more tax returns. You`ve got to find information to lead to retirement accounts. Stuff that was never asked for before, but if you`re on the low end of the spectrum, it has made it tougher to get that mortgage.

OLICK: Tight credit is blamed for a still falling home ownership rate now at the lowest level in a quarter century. Even the Federal Reserve chair readying to raise interest rates is on that band wagon.

YELLEN: Demands for housing is still being restrained by limited availability of mortgage loans to many potential home buyers.

OLICK: Tight credit is also blamed for a shift in the lending landscape. Large bank lenders are moving out and independent nonbank lenders are moving in.

ANTHONY HIESH, CEO LOANDEPOT: I think Dodd-Frank not only does it add complexity, but it adds a lot of confusion.

OLICK: It also adds significant costs in both time and labor. Big banks have other businesses that are more lucrative.

SEIBERG: There are so many ways to make a mistake and the banks learn from the financial crisis that the regulators will keep coming after you over and over and over again for these errors.

OLICK: So, lending is less attractive to big banks. As a result, nonbank lender LoanDepot has tripled in size in the past year. But its CEO claims Dodd-Frank is forcing compliance at the expense of innovation.

HIESH: It`s always about making certain that we double check, and once we do that, we triple check and making absolutely certain that all the I`s are dotted and the T`s are crossed, because if you don`t and you make a mistake, once you make a mistake as a lender, you`re not going to be around for long.

OLICK: The home loans being made today are arguably the most pristine in history, but they`re also being made at the slowest pace in decades.

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

(END VIDEOTAPE)

HERERA: Up next, when are workers employees and when are they contractors? New guidelines to finding that business have the potential to rock businesses small and large.

(MUSIC)

MATHISEN: What is inside all those campaign money war chests? The latest filings give us a glimpse at how the fund-raising is going as we head into the 2016 elections. The first detailed accounts were released yesterday for the second quarter.

And Eamon Javers in Washington has been combing through the filings.

Eamon, the results are out. Who is leading, who`s lagging and how?

EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: The results are out, Tyler, and it`s a fascinating snapshot because what you`re seeing is a real surge here in fund-raising for Jeb Bush, also Hillary Clinton on the Democratic side and a surprising candidate, Bernie Sanders, also raising a lot of money here.

Take a look now at the top fund-raising totals for the campaigns and you get a set a sense of who`s on the lead here, starting with Hillary Clinton at $47.5 million raised for her campaign. Bernie Sanders, surprisingly large chunks of change here. $15.2 million. Then, Ted Cruz with $14 million, Marco Rubio with $12.1 million.

On down the list, you see Jeb Bush here at $11.4. Put an asterisk next to that money. It might not matter as much as you think for reasons we`ll get into.

Then, we see Carson, Paul, and Graham rounding out the field here in terms of the fundraising successes here, Tyler.

MATHISEN: All right, Eamon.

HERERA: You know, the campaign fund-raising isn`t the whole story, though, Eamon. What`s the other key piece of all of this?

JAVERS: Yes, that is the key difference that we`re seeing this year.
It`s not just the campaign themselves that are raising money but also the super PACs that are outside of the campaign`s control that are raising enormous amounts of cash.

That`s why I said watch that Jeb Bush number. Take a look now at the super PACs themselves and the fund-raising that they`ve done and you see the pictures changes a little bit. Jeb Bush at $103 million for his super PAC. We also see Cruz with $37 million, Rubio with $31.8.

Clinton with just $24.3 million. That might be a little paltry for Hillary Clinton.

Then, we see Perry, Kasich, Christie, and Fiorina at the bottom of the list on the Republican side, with just $3.4 million raised.

So, once you factor in the super PAC money, the picture changes dramatically, guys, and that`s the story of this campaign year. A lot of this money is now going to be outside of the direct control of the candidates themselves.

MATHISEN: All right. Eamon, thank you very much. Eamon Javers in Washington.

JAVERS: You bet.

HERERA: Greece received a financial lifeline today when the head of the European Central Bank increased its emergency lending to Greek banks.

Julia Chatterley reports from Frankfurt.

(BEGIN VIDEOTAPE)

JULIA CHATTERLEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: All we wanted to hear from Mario Draghi today at the European Central Bank meeting was, is he going to give more liquidity to the Greek banks?

Well, we got the answer quickly. Yes. Thanks to the vote in Greece last night and, of course, the financing arrangement, at least in the short-term, which will allow Greece to make the bond repayment to the European Central Bank on Monday, the 20th. So, very good news in that sense.

A lot of rumors swirling about whether or not the banks will be able to open on Monday. Sources close to the central bank telling us to be very cautious at this stage. It`s just too early to tell.

Similar stories as far as capital controls are concerned. We know how long they`ve been in place in countries like Cyprus, two years in that sense. So, also very difficult to tell.

Mario Draghi was asked about what he thought about the talks between countries like Germany and others, about whether or not Greece can leave the euro zone on a temporary basis.

He harsh some words to say on that too.

MARIO DRAGHI, ECB PRESIDENT: This union is imperfect. It`s — and being imperfect, it`s fragile, it`s vulnerable, and doesn`t deliver — at the very least, it doesn`t deliver all the benefits that it could if it were to be completed. And so, the future now should see the size and steps on further integration.

CHATTERLEY: He was forced to admit it`s not up to the European Central Bank to decide whether Greece leaves or stays in the euro zone, but he did say at no point throughout the last few months that we ever believed Greece would leave. So, perhaps some very strong words, coded message there to Germany that still suggests Greece should or could leave at some point in the future.

For NIGHTLY BUSINESS REPORT, I`m Julia Chatterley in Frankfurt.

(END VIDEOTAPE)

MATHISEN: Citigroup`s profit surges and that`s where we begin tonight`s “Market Focus”.

Earnings and revenue topped expectations as the bank was helped by sharply lower legal costs and strong trading results. It was Citi`s highest quarterly profit in eight years. Shares up nearly 4 percent to $58.59.

eBay (NASDAQ:EBAY) out with mixed results the day before it spins off its PayPal unit. The company beat on the bottom line, but the top line, the revenues — those results were below forecasts. The firm announced an additional $1 billion in its share buyback program. Separately, eBay
(NASDAQ:EBAY) will sell its enterprise unit for nearly $1 billion. Shares were more than 3 percent higher on that news to $65.59.

And Sherwin Williams cutting its earnings outlook for the year and the paint company offered a weak third-quarter forecast. This as a stronger dollar and rainy weather hurt demand for its products in certain markets.
Shares off 7.5 percent today to $261.23.

HERERA: Garmin (NASDAQ:GRMN) saw its shares plunge in today`s trading session. The firm issued disappointing earnings guidance for the second quarter and cut its yearly profit forecast. The maker of GPS devices blamed currency pressures and increased promotions. The stock slipped 7 percent to $43.10.

Mattel (NASDAQ:MAT) swung to a loss and posted its seventh straight quarter of declining sales. The toy maker blamed weak international demand for its Barbie doll. Shares shot up before falling back right after the close. The stock ended the regular session almost two percent lower to $25.15.

A big beat from Schlumberger (NYSE:SLB) on both the top and bottom lines. Despite that, the oilfield services provider saw its quarterly profit decline from last year, mainly because of restructuring charges.
Shares popped initially in after-hours trading. Before the close, the stock was up a fraction to $83.89.

MATHISEN: More business travelers are using Uber over traditional taxes. This according to a new report from Certify. That`s an expense management provider. Uber overtook taxis as the most expense form of ground transportation in the three months ending in June. Certify based its filings on millions of trip receipts that its North American clients submit.

HERERA: And Uber is just one of many companies that make up is to called gig economy, which relies on independent workers for short-term projects. The rise of these companies has sparked a debate over when workers are employees and when they`re contractors, and the answer could have implications for businesses across the country. And just yesterday, the Labor Department issued new guidance on the topic.

Harry Holzer is professor of public policy at Georgetown`s University`s McCourt School of Public Policy, and he joins us to talk about that.

Harry, welcome. Nice to have you here.

HARRY HOLZER, GEORGETOWN UNIV. MCCOURT SCHOOL OF PUBLIC POLICY: Thank you. Nice to be here.

HERERA: So, it seems as though with these new guidelines, the Labor Department is broadening out the definition of employees. Is that a correct read?

HOLZER: They`re trying to. They`re trying to.

Historically, the issue has been who really controls the work, the amount of work, whose equipment, Labor Department is now saying if the worker really depends on the company for the job, for the work at all, then they really are an employee and they have offered a broader set of guidelines to determine that.

MATHISEN: So, that`s what they wanted to do. In the case of Uber, who controls the work there?

HOLZER: Well, that will continue to be debated. And I think the courts are going to have to weigh in on that. You can make the case that the worker owns the car and chooses when and how much to work. They take some initiative in terms of how many passengers they pick up and how they drive. All of those would argue for them to be independent contractors.

On the other hand, if the worker is completely dependent on the company for the job at all, it could go the other way. I think the courts will have to help us sort these out.

HERERA: So, what are the implications for big businesses versus small businesses? Who do you think this change affects the most?

HOLZER: Well, if someone is classified as an employee it raises some costs in terms of overtime, minimum wage, Social Security and unemployment taxes. I think it probably affects small businesses more because they have fewer margins they can adjust on. For instance, bigger companies can try to take some of these fees out of the wages paid to the workers. Smaller companies have less flexibility on that.

So, I think it affects smaller companies a little more. On the other hand, we just talked ability Uber. Uber is a very large company this will affect a lot. So, it depends on how many of these workers are affected by these decisions.

MATHISEN: I was going to ask you. You sort of touched on it there, why does it matter?

HOLZER: It matters because once you`re called an employee, the company is more responsible to provide benefits, say, under Obamacare, or to pay overtime, or to pay minimum wages.

If you`re an independent contractor, the company doesn`t have to worry about all that. Now, again, some of those higher expenses can come out of the worker`s pay. They can be charged a fee, but not all of them. It does cost the company more. And that`s why a lot of companies would like to keep these folks as independent contractors if they can.

HERERA: Which I would think would lead to a lot of legal challenges.

HOLZER: It will. I think, the Labor Department has drawn a pretty fuzzy line. There`s six factors to help determine the answer to the question of, does the worker really depend on the company. You can imagine, there factors going one way, three in the other. The courts really have to weigh in about where that line gets drawn.

HERERA: Harry, thank you very much. Appreciate it.

HOLZER: Thank you. My pleasure.

HERERA: Harry Holzer at Georgetown University`s McCourt School of Public Policy.

MATHISEN: And coming up, the nation`s second largest pension fund uses indexing to invest. But is it the right strategy for you?

My interview with the chief investment officer of CalSTRS, next.

(MUSIC)

HERERA: And here`s what to watch for tomorrow. Dow component General Electric (NYSE:GE) will report it`s quarterly results. The consumer price index, a widely watched indicator of inflation, is due. And also on the data front, housing starts, an important read on the health of that industry. And that is what to watch for Friday.

MATHISEN: Well, Sue, when one of the biggest pension funds in the country makes a move, investors pay attention. And just yesterday, I had a chance to speak with Christopher Ailman, the head of the California State Teachers Retirement System. That`s the nation`s second largest pension outfit at Delivering Alpha, an investment conference co-sponsored by CNBC AND Institutional Investor.

(BEGIN VIDEOTAPE)

MATHISEN: Chris, about 70 percent of your U.S. equity portfolios basically indexed. Why does that work for you? And for the portion that isn`t indexed, what do you look for?

CHRIS AILMAN, CALSTRS CHIEF INVESTMENT OFFICER: Well, it works for me us and I think it works for individual investors as well because it`s low cost. Oftentimes, active management is expensive and doesn`t outperform the market. We have found that three quarters of the time, an active manager is not going to beat that broad market.

So, it`s easier for us to own the entire market. And we don`t just own the S&P 500. We own Russell 3000. So, we own 3,000 stocks in the USA, in their proper order, and when market goes up 1 percent, we go up 1 percent.

MATHISEN: So, lock-in average, that`s the smart way, the efficient way. And then when you play on the margins, what are you trying to do and where do you find that extra return that you`re looking for?

AILMAN: Well, that`s part of the challenge. We often said alpha, repeatable outperformance, which is alpha, is very difficult to find and we`re going to do it through a small cap. It`s an areas where the smaller stocks, where you start to see growth and value make a bit of a difference.
We`re definitely going to be investing with people that do a deep dive and a deep analysis into the company and try to add value.

What we have found is it`s hard to find those managers. They`re not as strong overtime.

MATHISEN: Biggest single holding today is?

AILMAN: Apple (NASDAQ:AAPL) stocks, largest stock in the USA. So, whatever is the biggest stock in the USA, it`s going to be biggest in our portfolio.

MATHISEN: You`re going to have it — of indexing alone.

AILMAN: Exactly.

MATHISEN: It would be the biggest one.

AILMAN: And I should point out, when we index, our cost is literally a fraction of a basis point on a $50 billion portfolio. It`s in the hundreds of thousands of dollars, a big different fee structure than what you pay a mutual fund.

MATHISEN: A lot of endowments and public pension funds like yours have started to move into alternative investments. A lot of the big college ones like Harvard and Yale have big holdings in hedge funds. Where does that play in your fund and is it expanding? Are you buying more private equity hedge funds?

AILMAN: It`s about a third of our portfolio and it`s going to stay about a third of our portfolio. We`re $23 billion because we`re so huge, we`re $23 billion in private equity. We think that that`s about the max of the large size you can do. For about $25 billion in real estate, we can probably grow that but real estate is fairly valued right now.

We are starting to grow our portfolio in infrastructure and other long-term, long dated assets, because we`re a long-term pension capital.

MATHISEN: How important and how limiting are what you describe as the ESG principles under which you have to operate — environmental, social and government issues? Is it net a positive for you or restraint for you and your shareholders?

AILMAN: Right now, we believe it`s going to be a net positive and it`s not going to be a value-add. It`s going to be a risk reduction, because what we`re trying to do is avoid environmental risks, social risks that we think our industries are going to die because they`re not adding value and we have long argued for over 25 years that good corporate governance actually adds value.

So, in almost every case in every asset class, I can make the argument that it`s a risk but it`s also going to be an opportunity for gains.

MATHISEN: And one of the points made earlier today was that in the world of big data, the costs, the externalities to use a fancy word of those environmental, social and government risks, are going to be easier to account for and it`s going to be a bigger risk.

AILMAN: No question about it. Let`s take environmental risk.
Companies pay to dispose of their water waste, their physical waste, at some point, we believe they`re going to be charged to dispose of their gaseous waste. And if you`re a long term owner of a company, then you want to factor that in and it`s going to effect earnings.

MATHISEN: Chris Ailman, thank you very much.

AILMAN: Thank you, sir.

(END VIDEOTAPE)

MATHISEN: California State Teachers Retirement System also known as CalSTRS has $193 billion in assets under management.

The point about big data, changing the way costs are accounted for and charged to companies. It`s coming in a big way.

HERERA: It sure is. That`s an awful lot of money to manage, too.

MATHISEN: Yes, fascinating. We learned something yesterday.

HERERA: That`s NIGHTLY BUSINESS REPORT for tonight. I`m Sue Herera.
Thanks for watching.

MATHISEN: I learn something every day.

HERERA: I know, we do. Absolutely.

MATHISEN: All right. Tyler Mathisen here, have a great evening, everybody. We`ll see you 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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