Transcript: Nightly Business Report- December 14, 2015

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

SHARON EPPERSON, NIGHTLY BUSINESS REPORT ANCHOR: Fed fixation. Wall Street is laser focused on the Federal Reserve this week as the Central Bank could raise interest rates for the first time since 2006. We’ll look at what it all means.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Fund safety. The company that blocked investor withdrawals from its junk bond fund and rattled the markets last week fires its CEO. So, how can you tell if your fund is safe?

EPPERSON: And force fed. How companies are lining up to get a piece of the multimillion-dollar pie the new “Star Wars” movie is expected to reap.

All that and more tonight on NIGHTLY BUSINESS REPORT for Monday, December 14th.

Good evening, everyone, and welcome. I’m Sharon Epperson, in tonight for Sue Herera.

MATHISEN: And I’m Tyler Mathisen. Welcome from me as well.

This is the week, folks, that Wall Street has been waiting for and waiting for and agonizing over. This is the week when the Federal Reserve is expected to raise its benchmark interest rate for the first time in nearly a decade.

Fed Chair Janet Yellen and her open market committee have laid the groundwork, signaled that barring some unforeseen change of heart, it is ready to raise. And one key thing many will be looking at is what effect will rising rates have on the housing market.

Diana Olick explains.


DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Wendra Johnson hasn’t found the perfect home yet, but she’s going over her mortgage options now.

WENDRA JOHNSON, HOME BUYER: I definitely want to pay attention to what happens this week.

OLICK: After years of record low interest rates, the possibility of rising rates has her speeding up her search.

JOHNSON: We’ve been doing our research, but the — knowing that this interest rate is going to hit, we definitely want to stay in a tight window for making that selection. So I would say it is pushing us along to be very purposeful in our approach to buying a home.

OLICK: Mortgage rates have been moving in a tight range, really since the spring of 2013. That’s when the Federal Reserve first said it would ease out of its mortgage bailout and mortgage rates then suddenly spiked. Unlike then, this Fed move has been expected for a while. So, the reaction could be more muted.

MATTHEW GRAHAM, MORTGAGE NEWS DAILY: So once they actually hike, it remains to be seen how much of that has already been priced in. But I think most would agree that a majority of the damage that is going to be done by the Fed rate hike has already come to pass.

OLICK: Mortgage rates don’t directly follow the Federal Reserve rate. They follow bond yields. Put simply, it is actually possible rates could move down a little bit in the short term depending on how investors react. The consensus is, though, that over the next year they will move up and both borrowers and lenders will face new challenges in getting mortgages done.

MATT WEAVER, FINANCE OF AMERICA MORTGAGE: We can get a little bit more creative in our offerings and figure out other solutions as to how we can get home buyers to borrow just a little less than where the market is today.

OLICK: It is likely we’ll sew more borrowers look to adjustable rate loans that carry lower interest rates but higher risk. More likely given how conservative buyers are today, they may simply settle for buying less house.

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


EPPERSON: One thing many companies will be looking at, what will rising rates mean for the dollar? The strong dollar has had a negative impact on earnings of multinational companies this year. So, what happens now that the Fed appears to be getting ready to tighten?

And for that, we turn to Sara Eisen.


SARA EISEN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Everyone loves the dollar right now. That’s largely thanks to the Federal Reserve.

In the currency market, money always chases yield. That’s why it’s been pouring into the U.S. dollar in hopes of the first Fed rate increase in a decade this week. It’s pushed the dollar to its strongest level in 12 years. Great if you’ve got travel plans to Europe or Asia, but painful for U.S. corporations across industries that do business abroad, from food and household products to farming and technology.

The dollar’s gotten so strong lately that it’s actually cutting into U.S. economic growth. So what happens now that a Federal Reserve rate hike is already priced into market? Well, most strategists say the dollar is set to continue to strengthen in 2016, even if the Fed does take it slow with raising rates because it is still raising rates, which is more than most major economies around the world are doing right now. They’re cutting rates or easing policies like Europe and China.

And that all makes the dollar an attractive bet. Many say next year, we’ll see it rise all the way to parity with the euro, one euro to one U.S. dollar, as long as the U.S. continues to be a bright spot in the world economy.

Still, the bulk of the dollar surge may be behind us. In other words, instead of the sharp climb that we’ve seen over the last year, the dollar’s gains may be slower and bumpier. And that would certainly be helpful for CEOs doing business overseas and even for the Fed because the more it talks up the recovery and its tighter policies, the stronger the dollar gets. Maybe a badge of honor for the U.S., but it also comes with some unwanted side effects.



MATHISEN: While this Fed is considered dovish, or one that leans toward keeping rates low, the makeup of the Fed will change next year.

Steve Liesman has a look at the Fed that in all likelihood will end the year with a rate hike and the new Fed that comes in next year.


STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: We’re expecting a more hawkish Federal Reserve next year as the Federal Market Committee changes over and old members go out and new members come in. What that means is we’re looking for maybe more rate increases or a board that’s more likely to hike rates.

Here’s a look at the CNBC Fed survey, the new dove-hawk index where we asked our respondents, 42 of them this time, to tell us on a scale of zero to 10 each member of the FOMC and how hawkish or dovish they were, zero being the most dovish. And that’s Charlie Evans, the Chicago Fed president, followed by Lael Brainard. You can see this cluster here — Bill Dudley, Janet Yellen, the chair, and Dan Tarullo, the governor being still on the dovish side.

Right here the center, Stan Fischer, the vice chair, and Dennis Lockhart from Atlanta. They’re both 5s. And the current most hawkish member of the FOMC is Jeff Lacker, the recent Fed president.

Now, we’ll take a look at what how it’s going to change. And what you see is over here, Jeff Lacker goes away, but three more hawkish or equally hawkish new members, new presidents come in, Jim Bullard for St. Louis, Loretta Mester from Cleveland, and Esther George from Kansas City.

A couple centers go away, and only one dove comes in, Eric Rosengren from Boston, replacing Charlie Evans.

The bottom line this is that if the average index in 2015 was 4.3, skewing dovish, it still skews dovish but the new index is 4.7.



EPPERSON: The CEO of Third Avenue Management is out, after last week’s move to stop investors from withdrawing funds from its high-yield bond fund. The company said it and CEO David Barse have mutually agreed to separate. The decision to stop withdrawals from its focused credit fund sent shock waves through the market and the mutual fund industry.

MATHISEN: So with the recent dramatic moves in the high-yield market, is your high-yield bond ETF or your plain old bond ETF or fund safe?

Ben Johnson is director of Global ETF research at Morningstar (NASDAQ:MORN), and he joins us now.

Mr. Johnson, welcome. Good to have you with us.

Obviously, there are important distinctions between ETFs and bond mutual funds. But for this purpose, they will function largely in similar ways. What was it about that Third Avenue fund that got it in such trouble, made it so vulnerable? And are other funds or ETFs similarly risky for similar reasons?

BEN JOHNSON, MORNINGSTAR DIRECTOR, GLOBAL ETF RESEARCH: So, Tyler, I think it’s absolutely critical not to take the problems that were experienced by the Third Avenue Fund and extrapolate those across the entire high-yield bond fund.

MATHISEN: Because?

JOHNSON: Because it’s a very diverse group and not all high-yield bond funds are created equal. The Third Avenue bond fund invested in the junkiest of junk debt, and it sealed off the doors as investors have scattered for the exits. If you look at that relative to the two biggest high-yield bond ETFs, I’ll use the tickers here, AGG — or HYG and JNK, what you see is those two funds invest in much higher quality, albeit still junk debt, and they’ve been trading at record levels, changing hands at record levels over the past two days.

So, not all junk bond funds are created equal. And it’s critical that investors understand that.

EPPERSON: So, are there certain funds that, Ben, you think are better than others for investors to get into in terms of bond ETFs? What should folks know about their bond ETFs, and if they’re skittish about the high-yield market altogether are there bond ETFs or bond funds they can get into without any exposure?

JOHNSON: Well, investors should understand first and foremost that ETFs just offer exposure to this asset class. They’re just one means of getting into the junk bond market. No different than a bond mutual fund. No different than owning individual bonds.

What they do is they group a basket of these bonds into one single ticker that is traded all day, every day on the public market just like a stock might be. So they’re more liquid certainly relative to the Third Avenue Fund and more liquid than traditional mutual funds as well.

Investors should ultimately understand the exposure they’re getting, which in this case involves understanding the exposure of the underlying indexes. The indexes underlie the biggest junk bond ETFs are very broad. They’re diversified. They’re optimized for liquidity.

Investors need to understand what they own, why they own it, and what it means to own junk bonds.

EPPERSON: Now, when they figure this out, Ben, and they understand what they own, what if they decide they also don’t like what they own and they want to get out? How easy is it to get your money out of some of these bond ETFs and would they face the same issue as what happened with third avenue management?

JOHNSON: Well, clearly what we’ve seen over the course of the past few days is that investors were holding their noses as they were reaching high, low, and everywhere in between for yield and they finally caught a whiff of what they own and they’re throwing it out the back door.

Now, in the case of the Third Avenue Fund that door is sealed tightly shut. In the case of ETFs like HYG and JNK, what we’ve seen is record trading volumes in those ETFs, as investors in some cases have been selling, in other cases have been stepping in as opportunistic buyers of these funds. What you get in the ETF wrapper versus other wrappers is all day every day liquidity. You have a huge number of potential buyers out there to take those shares off your hands should you decide you want to sell.

MATHISEN: Right. The distinction, isn’t it, Ben, is that with an open-end mutual fund the fund company is bound, subject to the restrictions that, for example, Third Avenue put in place, is bound to redeem your shares at the market price at the end of the day provided — and that may mean they have to go and sell some of their underlying securities to make good on that promise.

The difference with an ETF is, as you point out, you are trading the derivative ETF with a buyer of that ETF and there is presumably no need for that ETF sponsor then to liquidate the underlying holdings of that derivative security, right? I’m using big fancy words and I’m sorry — but do you get what I’m driving at?

JOHNSON: It’s a different layer of liquidity. So I sell my shares of HYG to you, Tyler. You might sell them back to me. And nothing happens in the underlying bond market.

MATHISEN: Exactly.

JOHNSON: And what we saw on Friday is the ratio of that activity, secondary market activity, Ben trading to Tyler, Tyler selling back to Ben, was 17 times greater the amount of actual primary market activity.


JOHNSON: The amount of trading that those ETFs, that ETF, HYG, did on the primary market where it was actually selling the underlying bonds.


JOHNSON: So while it doesn’t sort of sprinkle magical fairy dust over the high-yield asset class and make it more liquid, it provides another avenue to trade a basket of those bonds.

MATHISEN: We have to leave it there.

JOHNSON: To supplement that liquidity.

MATHISEN: Sorry. We’re running a little tight on time.

Ben, thank you very much. Ben Johnson with Morningstar (NASDAQ:MORN) — it is, if nothing else, gnarly.

EPPERSON: Meanwhile, stocks rallied today in the session, recovering a bit from last week’s sell-off as oil prices rebounded slightly. Domestic crude fell below $35 a barrel, touching its lowest level since 2008 before bouncing back. Once oil rebounded, so did stocks. The Dow Jones Industrial Average rose 103 points to 17,368. The NASDAQ was 18 points higher. The S&P 500 gained 9 points.

MATHISEN: Rubbermaid is buying rival Jarden (NYSE:JAH) Corporation for about $16 billion. The move will create a consumer goods powerhouse uniting household names, could dominate many household aisles in the stores.


MATHISEN: The hits, the deals, that is, just keep on coming. This time, it’s Newell Rubbermaid (NYSE:NWL) buying Jarden (NYSE:JAH) Corporation to form a business that will be called Newell Brands, worth about $16 billion.

In a record deal for mergers, almost $4.5 trillion worth of deals, this is one consumers will instantly recognize. Jarden (NYSE:JAH), founded in 2001, has more than 120 brands including names like Yankee Candle, Mr. Coffee, Crock Pots, Marmont Athletic Gear, Aerobed Inflatable Mattresses, Sunbeam Irons and Bicycle Playing Cards.

Newell Rubbermaid (NYSE:NWL), founded in 1903 originally, also makes pots and pans with its Calphalon line, along with Goody hair products, Sharpie pens and Graco (NYSE:GGG) baby products. Its biggest purchase, Rubbermaid, came in 1999 for about $6 billion.

Today’s move is aimed at cutting the combined cost of the two companies by $500 million, giving an immediate boost to earnings.

MICHAEL POLK, NEWELL RUBBERMAID CEO: There’s a number of great intuitive combinations that will unlock a tremendous value. And because the core businesses have momentum, you don’t have to worry about any underlying issues in the business getting in the way of playing for the up side in those combinations.

MATHISEN: Jarden’s been a grower. Its value is up 4,300 percent since the company was launched, but founder Martin Franklin, who’s taking a position on the board of the new company, says he’s committed to making this deal work.

MARTIN FRANKLIN, JARDEN EXECUTIVE CHAIRMAN: The reality is this is the right time for Jarden (NYSE:JAH). If I didn’t feel that we could get where we want to be faster as a result of this combination, we wouldn’t have done it. I mean, you know, we’ve been doing this for 15 years. We could have done it for another 15 years.

But the reality is the fit’s really good. If we had the multiple and we had the market cap, we’d be the buyer.

MATHISEN: Aside from the well-known brands it’s buying, Newell Rubbermaid (NYSE:NWL) says Jarden’s approach to e-commerce has been comparatively aggressive. And the new company will use those online capabilities to make its existing brands even more accessible to consumers.


EPPERSON: Activist investor Daniel Loeb is questioning the timing of the tie-up between Dow Chemical (NYSE:DOW) and DuPont. And he has called for Dow to remove its CEO Andrew Liveris. That’s according to “The Wall Street Journal.” Dow has come out in defense of Liveris and the deal, calling it a win for all shareholders. Under the terms of the merger, Liveris will be named executive chairman of the combined company. Shares fell nearly 4 percent on the news.

MATHISEN: Dell (NASDAQ:DELL) is looking to sell its tech outsourcing business Perot Systems for more than $5 billion. That’s according to tech Web site Re/code. The move reportedly to help raise money to lighten Dell’s debt load when it completes its $67 billion buy of the storage company EMC (NYSE:EMC). Some estimates have Dell (NASDAQ:DELL) borrowing as much as $50 billion to buy EMC (NYSE:EMC).

EPPERSON: Norfolk Southern (NYSE:SO) is rejecting Canadian Pacific’s revised $30 billion bid for the railroad. Norfolk calling the bid grossly inadequate, and that nothing in the revised proposal addresses the concerns of the Norfolk Southern (NYSE:SO) board. Shares of both rails were slightly lower on the day.

MATHISEN: When you think of December, you think of this. But when it’s warm like this it sends a shiver through a lot of companies. We’ll explain when we come back.


EPPERSON: While old man winter hits the Western states, it’s still being forecast as the second warmest December on record.

And while that’s a welcome break for those who have suffered through some harsh winters the past few years, Courtney Reagan tells us it’s real bad news for those retailers — those selling winter goods and at the most important time of the year.


COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: It may be just ten days from Christmas, but baby, it’s warm outside. Temperatures up to 30 degrees above average in much of the U.S. Golfers in Maine and the Midwest are hitting the links much later than normal. Runners are ditching long sleeves and pants in Pennsylvania. School children are at recess without coats in New York. Cherry blossoms are still on trees in Washington, D.C.

While November and December’s unseasonably warm weather may be a welcome break from the norm for many Americans, retailers are sweating and not because they’re enjoying the temperatures. Coats, boots, sweaters, and snow gear are clogging up retail racks in many parts of the country, and the most important selling time of the year.

OLIVER CHEN, COWEN & CO. MANAGING DIR., RETAIL ANALYST: It is a problem because apparel is so weather sensitive. A consumer really needs that stimulation in the form of colder weather just to get excited about shopping and to get excited about buying those kind of weather-sensitive articles of clothing.

REAGAN: Even retailers that don’t sell winter apparel are taking a hit. David’s Tea is reporting negative traffic trends due to the unseasonable weather, causing fewer loose tea purchases.

FBR analyst Susan Anderson tells investors some cold weather brands like Columbia and VF Corps’ North Face may fare better. Those brands’ merchandise were delivered to retail stores earlier this year and Anderson says sales are stronger than sales of similar non-branded goods.

On its earnings call, children’s place CEO Jane Elvers said while warm temperatures in the Northeast have hurt traffic, more normal weather in the Plains and Southwest are helping to offset the negative network.

Men’s Wearhouse (NYSE:MW) CEO Doug Ewert told investors the cold weather business at its Jos. A Bank stores is suffering more than the rest of the business, which isn’t doing well either, but that’s because the cold weather apparel doesn’t have a high fashion risk and it can be packed up and resold next year.

CHEN: It’s an industry-wide problem in apparel. So, from an investing perspective, we like names like Costco (NASDAQ:COST), like Target (NYSE:TGT), and others that have a more diversified basket of goods, and then we also like beauty concepts like Ulta and Sally Beauty.

REAGAN: But retailers’ woes are translating into consumer gains. In order to entice shoppers to buy, retailers including Abercrombie & Fitch (NYSE:ANF), Hollister, Gap (NYSE:GPS) and Urban Outfitters (NASDAQ:URBN) are slashing prices on cold weather gear, in some cases by 60 percent.



MATHISEN: Halliburton’s deal to buy Baker Hughes (NYSE:BHI) reportedly in limbo and that is where we begin tonight’s “Market Focus”.

The Department of Justice will conclude its review of Halliburton’s offer to buy Baker Hughes (NYSE:BHI), unless Halliburton (NYSE:HAL) agrees to an extension, according to the “New York Post.” But the company won’t agree to an extension unless the government is explicit about what it needs to do to win antitrust approval. Halliburton (NYSE:HAL) fell 1 percent to $36.55. Baker Hughes (NYSE:BHI) 2 percent lower at $46.78.

Cheniere will replace its CEO. This comes just a few months after the activist investor Carl Icahn hiked his stake in that firm. Board member Neal Shear will serve as interim chief while the company searches for a permanent replacement. Shares nearly 3 percent lower at $40.14.

And Valeant has hired a crisis management firm and an attorney. This according to reports. This comes as the company is under increasing pressure over its drug pricing policy. Shares up 1 percent at $94.14.

EPPERSON: Bridgestone’s retail unit has hiked its offer price to purchase Pep Boys to more than $850 million. The move is an effort to match billionaire investor Carl Icahn’s bid for the firm. Shares fell a fraction today to $16.22.

And Royal Dutch Shell announcing its plans to cut 2,800 jobs after it completes its takeover of its rival BG Group in an effort to cut costs. The news follows a green light from the deal from China. Shares fell more than 1 percent to $43.95.

MATHISEN: Today is December 14th, also one of the busiest shipping days of the year and the busiest bar none for the postal service.

Morgan Brennan takes a look at how the shippers are faring.


MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Today is Green Monday, the third largest online shopping day of the year, before holiday shipping deadlines come to a close later this week. It’s also the third peak day FedEx (NYSE:FDX) forecasted for this season. And the U.S. Postal Service’s expected busiest day for mailing cards and packages.

As we head into the holiday home stretch, how is this peak shipping season shaping up? For starters, it began earlier, ahead of Thanksgiving, shipments jumped as Amazon (NASDAQ:AMZN) and retailers like Target (NYSE:TGT) rolled out door buster deals early, and those volumes seem to have carried over into early December as well, which some shipping consultants claim taxed delivery networks.

ShipMatrix stats for the week of Cyber Monday, UPS ground had the most commerce packages move posted an on time delivery performance of 91 percent, down from 97 percent last year and 95 percent in 2013.

To put that in perspective, of say 30 million packages per day, that would mean more than 2.5 million were delayed.

SATISH JINDEL, SHIPMATRIX PRESIDENT: What we find is that the on-time performance for that cyber week Monday, the early part of the week was at a much higher number, high 90s, and then as the week progressed and the volume started to come into the network for the Cyber Monday, the service levels went down to the lower 90s.

BRENNAN: Service levels in smaller rival FedEx’s ground network stayed about even, 95 percent this year versus last.

Data also suggests some areas experienced larger surges, including Denver, Colorado and pockets of the Northeast. UPS has conceded some sites experienced, quote, “levels greater than the original peaks planned for those locations.” But that’s a, quote, “vast majority of customers have received shipments on time.” And FedEx (NYSE:FDX) said it’s experiencing record volume surges, quote, “earlier than ever before.”

Packages delayed in early December will still arrive in time for Christmas. The true test is the next week and a half, whether any more larger than expected surges occur and if so, how the carriers mitigate that. There’s one big factor working in their favor, unseasonably warm weather, after excessive snow contributed to major delivery snafus back in 2014.



MATHISEN: The companies looking to cash in on the latest chapter in the “Star Wars” saga, that’s next.


EPPERSON: “Star Wars: The Force Awakens” hits theaters this week. One of the most highly anticipated films in years. But it’s not just the Walt Disney (NYSE:DIS) studio that will cash in from the force.

Julia Boorstin looks at all the companies poised to profit.


JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: “Star Wars: The Force Awakens” is projected to gross more than $2 billion at the global box office. And while blockbuster performance will be a win for Disney’s studio, that’s not all. The theater chains, IMAX in particular, will benefit from a rush of moviegoers. The film set a ticket presale record a month before its open, selling more than $50 million in the U.S. alone.

PAUL DERGARABEDIAN, RENTRAK SR. ANALYST: Once “Star Wars” opens, this could be the real cherry on the top of the cake of a record box office year for Hollywood in movie theaters.

BOORSTIN: What really makes “Star Wars” different from any other movie in recent years is the scope and reach of its consumer products and the fact that they appeal to an older audience who went to the original “Star Wars” films decades ago plus kids who are being introduced to the characters.

The “Star Wars” logo is all over everything from Campbell’s Soup and Vans sneakers to “CoverGirl” makeup, plus a range of toys, for kids and adult collectors. Merchandise sales are predicted to range from $3 billion to $5 billion in the first year, an unusually large licensing event.

STEPHANIE WISSINK, PIPER JAFFRAY SR. ANALYST: We’re talking about once in a decade. We do think that this is going to be really the start of multiple years of the Walt Disney (NYSE:DIS) company bringing content to the marketplace that has tremendous translatability into products and consumer products could ultimately trump the box office size.

BOORSTIN: Hasbro’s the toymaker that will benefit the most from the film and has the most toy licenses along with Lego. The Mattel (NASDAQ:MAT) and JAKKS Pacific (NASDAQ:JAKK) also have licenses for different “Star Wars” toys.

WISSINK: This is a significant event not only for the toy industry but broadly across children’s entertainment. This is the first time that children under the age of 10 will have been exposed to “Star Wars” on a mainline basis. So, this is the first time that they’re going to really get to see and feel firsthand the box office experience.

BOORSTIN: With the film opening a week before Christmas, there’s time for all the new fans who went to go see it opening weekend to go out and buy toys to put under the tree.

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


EPPERSON: Can’t wait to see it.

That’s NIGHTLY BUSINESS REPORT for tonight. I’m Sharon Epperson.

MATHISEN: And I’m Tyler Mathisen. We’ll see you tomorrow.

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