Transcript: Wednesday, August 14, 2013

ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Susie Gharib, brought to you by — (COMMERCIAL AD)

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Cisco (NASDAQ:CSCO) shares slammed. The tech bellwether Cisco (NASDAQ:CSCO) warning the street of tough times ahead, and its earnings report tonight will likely set the tone for trading tomorrow.

Macy`s (NYSE:M) reports a rare earnings miss, casting a shadow over the outlook for consumer spending. Now, focus turns to tomorrow`s report from Walmart and Kohl`s (NYSE:KSS), and whether a key component of the U.S.
economy is starting to soften.

MATHISEN: A new threat to Apple (NASDAQ:AAPL). A company you likely never heard of is trying to beat Apple (NASDAQ:AAPL) at its own game. The
place: China. The weapon: a cheaper smartphone.

All that and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, August 14th.

GHARIB: Good evening, everyone.

Cisco (NASDAQ:CSCO) out tonight with earnings that top estimates and solid revenues, but it`s this quarter that`s worrying investors.

CEO John Chambers is warning its revenue will be below Wall Street expectations. And he says it will lay off 5 percent of its work force.
That`s about 4,000 people.

Shares fell as much as 9 percent in after-hours trading.

Jon Fortt joins us now from San Jose — John.

JON FORTT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Susie, yes. One of the things that John Chambers said on the call is that Cisco
(NASDAQ:CSCO) is having fits reading the economic data and that summarizes the after-hours action analysts questioned about what exactly Cisco
(NASDAQ:CSCO) is doing.

John Chambers said the global GDP growth and lack thereof just shows an enormous amount of inconsistency. One aspect of their business, the switching business looks good. On the other hand, the routing business except for at the edge looks pretty bad. Certain geographies, Northern Europe, North America look pretty good. But on the other hand, Japan, China don`t look as good.

So, what Chambers said is that Cisco (NASDAQ:CSCO) is committed to delivering on the financial model that Cisco (NASDAQ:CSCO) has put out around 61 percent, 62 percent gross margins and growth overall in earnings faster than revenue in most quarters. That necessitates these cuts.

But there are lots of questions going forward about whether Cisco
(NASDAQ:CSCO) really will be able to grow most of the time in that 5 percent to 7 percent revenue band that John Chambers has promised. That`s what we`re going to be talking about a lot tomorrow.

GHARIB: And tomorrow, Jon, a lot of investors are going to be wondering how Cisco (NASDAQ:CSCO) is saying translates over to other tech companies. Which companies might be impacted by these comments tonight?

FORTT: Well, Susie, I mean, I think you`ve got to consider what we saw from IBM. What we saw from Oracle (NASDAQ:ORCL) just a couple of few weeks ago, also having issues with their core product and with revenue.
Does this global uncertainty really mean that demand overall is getting soft in certain markets? Emerging markets being one of the areas where Cisco (NASDAQ:CSCO) cited real uncertainty. Some markets strong, some markets weak.

I think that is going to be the question from Cisco (NASDAQ:CSCO) that then gets asked to a lot of other executives in the days ahead. Are you seeing the same uncertainty? Is this revenue short fall just an overall macro demand issue that we`re going to continue to see cropping up?

MATHISEN: Very quickly, was anybody looking for the company to lay off 5 percent of its workforce, 4,000 workers? Did anybody think that the prospects were that weak?

FORTT: Nobody that I talked to, Tyler. Remember the stock was up 26 bucks a share. There was this idea that the turnaround is complete, seems not so much the case.

MATHISEN: All right. Jon Fortt, thank you very much.

Macy`s (NYSE:M) shares skidded today after the world`s largest department store chain reported lower than forecast earnings last quarter.

And that`s not all. It cut its full year outlook saying consumer spending was slower than expected over the past three months. Macy`s
(NYSE:M) stock down 4.5 percent — one of the worst performing companies in the S&P 500 index today.

And now, some economists fear that the slip in sales at Macy`s may foreshadow more disappointing earnings at more of the nation`s big retailers.

Courtney Reagan has the story.


For the first time in 25 quarters, Macy`s (NYSE:M) reported an earnings miss — the iconic department store posting profit sales and forward guidance below Wall Street`s expectations.

Macy`s (NYSE:M) CEO Terry Lundgren said consumers continue to feel uncertain about spending on discretionary items, suggesting the miss could be a broad base concern for the entire retail sector.

MATTHEW BOSS, JPMORGAN RETAIL ANALYST: You`re seeing auto sales strong, housing rebounding, but small ticket purchases seem to be under pressure.

REAGAN: Since many expected Macy`s (NYSE:M) to be one of the retail standouts this reporting season, there is further reason to be concerned that reports from Walmart, Kohl`s (NYSE:KSS), J.C. Penney and others could be even worse.

But Macy`s (NYSE:M) executives think the weak quarter is just a speed bump. On the earnings call, CFO Karen Hoguet told analyst the retailer is, quote, “doing significant better so far in Q3. It feels like we`re on to a trend in the past two and a half weeks.”

Good news for what many believe is a delayed back-to-school season.

BOSS: June and July were clearly weaker. That showed up in Macy`s results and I think we`re going to see it in others over the next two weeks. But I think the reality is what that could — what that could mean forward looking is a stronger push for back to school in August and September.

REAGAN (on camera): Walmart reports quarterly results before the opening bell tomorrow. The world`s largest retailer often indicates the financial health and standing (ph) of the lower income consumer. Analysts had been lowering expectations, though, ahead of Walmart`s earnings as the consumer appears to be holding off on discretionary spending.

(voice-over): The Walmart`s mass assortment of stapled goods will likely soften the blow, something Kohl`s (NYSE:KSS) may not be as insulated from. Nordstrom (NYSE:JWN) is expected to post the strongest result of the retailers reporting Thursdays. Many point to the resilience and confidence of the higher income consumer for more stable sales.

Overall, though, second quarter results may come in weaker than many had hoped, stronger sales could be ahead with the all-important fourth quarter on the horizon, retailers and investors are counting on it.



GHARIB: Those disappointing earnings from Macy`s (NYSE:M) pulled down the major stock averages today, and more Fed talk didn`t help matters, keeping investors focused on the timing and pace of a potential reduction in stimulus.

And not even a nearly 2 percent rise in Apple (NASDAQ:AAPL) shares, which briefly traded above $500 today could lift the markets out of the red. The blue chip Dow stocks recorded their worst day since the end of June falling 113 points, the NASDAQ lower by 15, and the S&P 500 ended down. Over in the bond market, the yield on the 10-year treasury note slipped to 2.71 percent.

MATHISEN: As Susie just mentioned, Apple (NASDAQ:AAPL) shares were up again. They hit their highest level since late January. The move capping the best three-day run for Apple (NASDAQ:AAPL) in more than three years, came a day after activist investor Carl Icahn tweeted that he`s made a big investment in the stock which he considers under-valued.

By contrast, tech titan Larry Ellison of Oracle (NASDAQ:ORCL) told an interviewer that he don`t think Apple (NASDAQ:AAPL) can regain its past glory without Steve Jobs.

Here to debate Apple (NASDAQ:AAPL) is Tim Lesko, portfolio manager at Granite Investment Advisers, and Max Wolff, senior analyst at Greencrest Capital.

Welcome to you both.

Max, I want to begin with you but before we do, why don`t we run that sound byte from the interview the other day with Mr. Ellison. Just listen in.


LARRY ELLISON, ORACE: We saw Apple (NASDAQ:AAPL) with Steve Jobs.
We saw Apple (NASDAQ:AAPL) without Steve Jobs. We saw Apple (NASDAQ:AAPL) with Steve Jobs. Now we`re going to see Apple (NASDAQ:AAPL) without Steve Jobs.

UNIDENTIFIED MALE: So, you`re shorting Apple (NASDAQ:AAPL)?

ELLISON: I`m not shorting Apple (NASDAQ:AAPL). I like Tim Cook. I mean, there are a lot of talented people over there. But Steve is irreplaceable.

UNIDENTIFIED MALE: You`ve said that Apple (NASDAQ:AAPL) is going down without Steve Jobs. That`s exactly what you said. Apple
(NASDAQ:AAPL) is going down without Steve Jobs.

ELLISON: OK, I`ll say it publicly. He`s irreplaceable, yes. I don`t see how they can — how they can — they will not be nearly so successful because he is gone.


MATHISEN: They are going down without Steve Jobs. Max, what do you think of that?

MAX WOLFF, GREENCREST CAPITAL SENIOR ANALYST: So, thanks for having me. I think there`s always a little bit of Ellison speak and I don`t think it`s totally shocking that as a larger than life, big ego, personality, who`s also a founder over at Oracle (NASDAQ:ORCL), Mr. Ellison he`s warmed his close friend and another founder and larger than life titan in Steve Jobs is not replaceable.

I think pretty much everyone believes that. The question is, is the company worth more than where it`s trading today? The answer is probably yes. But in the long term, are they going to regain the share price or momentum or the sort of lonely place atop the smartphone industry, and there I would cautiously, if for different reasons, more or less agree with Larry that I don`t think they`re going to go back to where they were two years ago.

MATHISEN: So, you think they can be good in the short term but not great the way they were?

WOLFF: Yes, I think that`s probably where they are going because of the way the technology industry works. It`s not really just a story about one larger than life CEO.

GHARIB: Tim, let`s get you in on this conversation. What do you think of what Max is saying and also what Larry Ellison said? Has Apple
(NASDAQ:AAPL) lost its magic and why are you bullish?

TIM LESKO, GRANITE INVESTMENT ADVISORS PORTFOLIO MANAGER: Oh, I think what the other guest has said is pretty fair. You know, Apple
(NASDAQ:AAPL) without Steve Jobs may lose the visionary products that are coming down the pipeline six or seven years from now, but the product life cycles that Apple (NASDAQ:AAPL) has are usually five, six, seven years in development. I don`t think we`ve quite —

MATHISEN: It looks like we`ve lost Mr. Lesko`s satellite.

Max, are you still with us? I hope you are.

WOLFF: Absolutely, absolutely.

MATHISEN: All right. Let`s come back to you and hope we can restore Mr. Lesko`s signal there.

So, Icahn goes in to the stock. I`m guessing he wants a product called “The Icahn” as the next thing out of Apple (NASDAQ:AAPL). But should I be following what he`s doing? I mean, you seem to share his view that at least in the short term the stock is under valued. Your concerns are about the long-term value and questioning those bulls — and, boy, I bet you Icahn is gone long before this that would like to see the stock go above 700, 800, 900, maybe 1,000 bucks.

WOLFF: So, certainly, Carl Icahn is a legendary investor. He`s having a very good year. He`s having an incredible career. Oh, he`s worth taking seriously what he has to say.

It`s also always worth remembering that Carl Icahn is always investing in two things. His own legacy and position as Carl Icahn and whatever he`s talking about in the moment. If you`re a retail investor, you should be less concerned with taking care of Carl, who is taking very good care of himself and will continue to do so and be more concerned in the underlying investment.

And I think his thesis makes a certain sense but he`s asking the company to do something that he knows full well that it basically can`t and definitely won`t do and folks should factor that in, even though Carl is widely respected and deservedly so, as a sort of leader in the space.

GHARIB: Max, a lot of people are counting on new products coming out of Apple (NASDAQ:AAPL), most notably in September, a new iPhone. If it`s not a wow factor, then what happens to Apple (NASDAQ:AAPL) stock after that?

WOLFF: Look, I absolute agree with you. It`s an excellent point.
There`s going to be a ton of pressure on the new iPad that we think is coming and at least one new iPhone 5S and maybe a more affordable version.
I`ll be looking most at iOS7, the new mobile operating system which will be running on all of their newer devices pretty quickly once people start downloading it, and also at the phone.

So, we need to see two things really hit. We need to see some kind of verbiage about new products, perhaps a watch, perhaps some other wearable, which we think is going to be the future here, and we need to see a public that`s excited about this bold new look in iOS7, the new operating system, which really will look and feel a bit different in the hands of the iPad and iPhone user than iOS6, the previous operating system, did because the design and the sort of thematic is radically altered.

MATHISEN: All right. Max Wolff, thank you very much. We hoped obviously for more of a bull-bear debate but our bull, Tim Lesko, we had a problem with this satellite. We apologizes for that. But we`re grateful to him for joining us.

Appreciate it, Max.

WOLFF: Thank you. Thank you very much.

GHARIB: And later in the show, we`ll tell you about a major challenge facing Apple (NASDAQ:AAPL), this one in China, one of the world`s key markets.

But, first, the road to energy independence. We`re going to look at how Mexico may soon play a role in reducing U.S. dependence on Mideast oil.
And here is a look at how the international markets closed today.


MATHISEN: Some encouraging news about the debt U.S. consumers carry.
The New York Federal Reserve Bank reports that Americans trimmed their overall debt in the second quarter of this year, getting help from falling mortgage rates, which allowed more borrowers to pay down their home loans and pay more of their other bills on time.

Total household debt is now at its lowest level since 2006, even though student debt and auto loans rose last quarter, delinquency rates on household debt dropped to just 7.6 percent in the spring.

GHARIB: Chegg, this is the online textbook rental company filed paperwork to being to ell stocks to the public. The hopes to raise $150 million in the initial public stock offering to help pay off $21 million in outstanding debt and to gain access to public equity markets. Chegg also announced four new additions to its board, including the CEO of Shutterfly
(NASDAQ:SFLY) and a Facebook (NASDAQ:FB) executive.

MATHISEN: And we begin “Market Focus” tonight with a company that went public today Envision Healthcare. The biggest operator of U.S.
ambulance services rose on its first day of trading. The company expects demand to grow for outsourced medical services as healthcare costs rise and population ages. It`s the biggest healthcare IPO to come to market since February.

Firm priced at $23 and closed today up 9 percent at $25.15.

Farmers bought tractors and harvesters last quarter and that helped Deere run like one. The world`s largest maker of agriculture equipment easily beat earnings expectations. At the same time, though, the company said fourth quarter profits may fall below last year`s levels, and that pressured the stock which fell almost 2 percent to $82.34.

And shares of Cree (NASDAQ:CREE), the energy efficient lighting maker, falling sharply today on a disappointing outlook. The company says sales of its high margin products are expected to remain flat from the prior quarter. Cree (NASDAQ:CREE) has stated that its long-term goal is to get all of its customers to upgrade to LED lighting. The stock down a whopping 22 percent today to close at $58.83.

GHARIB: A different story for tech firm, Brocade. Profits at the network equipment makers more than doubled compared to a year ago, and the company says demand for its storage products is improving. Even though its revenue fell, the company did beat expectations and that`s thanks to higher margins and a settlement gain.

The stock surged almost 16 percent to $7.99.

RadioShack is reportedly looking to refinance its debt with new lower cost loans. The struggling electronics retailer says it can avoid a restructuring if it can pay off current lenders, including Bank of America
(NYSE:BAC) and Wells Fargo (NYSE:WFC). But it`s not clear whether such a refinancing can actually be accomplished. The stock rose more than 7 percent — rather it — yes, rose about a fraction to $2.77.

And some sweet music is being played for Steinway shareholders. The stock climbing today after the musical instrument said it would be taken private by Paulson and Company. The price tag values the 160-year-old company at $512 million. Steinway cancelled its previous deal with Colbert and Company. The stock rose more than 7 percent to $41.29.

MATHISEN: Prosecutors in New York City charged two former JPMorgan
(NYSE:JPM) Chase employees in connection with last year`s massive $6 billion trading loss orchestrated by the bank`s so-called London Whale.
The two traders who were both based in London are accused of falsifying records to mask the plummeting value of derivative securities and concealing the size of the bank`s losses.

Here is part of what U.S. attorney Preet Bharara of the southern district of New York had to say about the charges he filed today and the impact on investors.


PREET BHARARA, U.S. ATTORNEY: The defendants deliberately and repeatedly lied about the fair value of billions of dollars in assets on JPMorgan`s books in order to cover up massive losses that mounted months after month at the beginning of 2012. Those lies misled investors, regulators, and the public, and they constituted federal crimes.


GHARIB: A tragic day for UPS — a large UPS cargo plane crashed and burst into flames, killing its pilot and co-pilot this morning, right outside the airport in Birmingham, Alabama. No one on the ground was injured. Aviation regulators say no distress calls were made to the airport tower just before the crash and the cause is under investigation.

GHARIB: The political turmoil in Egypt erupted into violent and deadly confrontations between military police officers and supporters of the ousted President Mohamed Morsi overnight. Now, a month-long state of emergency and a nighttime curfew had been imposed.

The latest on the bloody protest now from Ayman Mohyeldin in Cairo.


AYMAN MOHYELDIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: After 11 hours of operations involving armored personnel carriers, bulldozers and helicopters, the Egyptian police say they are in control of two squares in the capital Cairo that have been used for a major location for sit-in protests in support of ousted President Mohamed Morsi.

Now, the Egyptian government has declared a state of emergency across the country for the next 30 days and in addition to that, they are exposing a nightly curfew on the capital Cairo and other major cities across the country. Anyone that violates it they say will be in prison.

Now, the use of force today has come under sharp criticism, including from the country`s interim vice president. Mohamed ElBaradei, the noble laureate has resigned in opposition over how the government has used force in what many people here are describing as a bloody massacre.

For NIGHTLY BUSINESS REPORT, I`m Ayman Mohyeldin, in Cairo.


GHARIB: Mexico recently announced that it wants to overhaul the country`s restrictive energy laws, reversing more than 50 years of state- owned oil production. The move would open the region to foreign oil companies, including American ones, like Exxon and Chevron (NYSE:CVX).

Michelle Caruso-Cabrera has been following the story.

So, Michelle, 50 years it`s been done one way, no private company in
— sounds like a really big deal for Mexico.

MICHELLE CARUSO-CABRERA, NIGHTLY BUSINESS REPORT CORRESPONDENT: It`s incredibly significant. Yes, as you say, Mexican oil has always been produced now by a government-run monopoly, which is incredibly inefficient and they lack money now and know-how to keep up with the pace with what`s going on in innovation in oil exploration.

As a result, their oil production used to be as much as 3.5 million barrels per day. Now, it`s down to 2.5 million barrels per day and they`re spending a lot more money to get less oil. The government needs that revenue desperately so they have to do something to turn that around.

MATHISEN: So let`s say western companies come in and invest and more oil comes out of Mexico, does that mean that the price of oil in the United States and on the world markets will come down, and that we will be less dependent on Middle Eastern oil?

CARUSO-CABRERA: Presumably yes, right? If they start to increase production we have a triad, Canada, the United States and Mexico being producers and the United States getting energy from friendly countries. I would also point out Americans should think about the fact that companies like Chevron (NYSE:CVX), Exxon, et cetera, will now have another revenue stream possibly as well, and also, it will help the Mexican economy.

Great to have our southern neighbor have an even better economy. It would reduce illegal immigration, as well.

GHARIB: This still has to go through a political hurdle?


GHARIB: Mexican congress has to improve it. What are the chances that this gets blocked?

CARUSO-CABRERA: Likely, but it`s still going to be difficult. You have to understand that oil in Mexico is very personal to the Mexican people. If you look back at what happened in 1938, Mexicans piled into the streets and demanded that the socialist president nationalize 17 different mostly American and British oil companies. They wanted them to do that.
They felt that they were being exploited.

When those companies ask for money absolutely to be paid back, Mexicans handed in all of their valuables. They handed in jewelry.


CARUSO-CABRERA: They handed in chickens. If they were poor, they handed in musical instrument.

So, this is a long tradition. This is going to be a big psychological change for the country.

GHARIB: All right. Michelle, thanks so much for coming by.

MATHISEN: And still ahead, we will show you the cheap smartphone that`s gaining a cult-like following in China and posing the latest threat to Apple (NASDAQ:AAPL).

But, first, how commodities, treasuries and currencies performed today.


GHARIB: Some new trends what kind of phones people are buying these days. Gartner (NYSE:IT), a company that tracks technology trends, says global sales of smartphones ones that get e-mail and allow access to the Internet have finally overtaken sales of so-called dumb phones — those are the ones that merely make phone calls and send texts.

In the second quarter of this year, worldwide sales of smartphones rose more than 46 percent from the same period in 2012. And 79 percent of all those smartphones run on Google`s Android operating system.

MATHISEN: Google`s dominance of the smartphone market is not good news for Apple (NASDAQ:AAPL), which lost market share in the second quarter, according to a recent report from the research firm IDC. But Android isn`t Apple`s only challenge. A small company you`ve likely never heard of is also gaining ground in one of the world`s most important markets, China.

Eunice Yoon reports.


You`ve probably never heard of Xiaomi, but chances are, Apple (NASDAQ:AAPL) has. The Chinese smartphone maker is gaining a cult-like following in China, rivaling the U.S. tech giant. One reason the local media has dubbed CEO Lei Jun the Steve Jobs of China.

“Our influence in the Chinese market is very similar to Apple`s,” he says. China is Apple`s biggest market outside the U.S. Yet in the second quarter, the American company was overtaken in smartphone ranking by Xiaomi. Lei started Xiaomi three years ago. Like Apple (NASDAQ:AAPL), his company has created an aura of exclusivity around its phones, releasing limited quantities that sell within minutes.

But while Apple (NASDAQ:AAPL) is secretive about its design, Xiaomi asks its customers to redesign and invent features.

“Our goals are simple,” he says, “allow our customers who are interested in smartphones to make suggestions, work with us and let them enjoy the process.”

Xiaomi phones don`t have the thrills of an iPhone, but at $240, just the third the price of an iPhone here, they are a descent substitute for many Chinese.

(on camera): Apple`s products are popular here. Yet, with 300 million Chinese already using high-end handsets, most analyst say that the next phase of growth will be a low-cost smartphones.

(voice-over): Xiaomi keeps prices down by selling only online and markets through word of mouth.

“Most Chinese customers don`t believe ads,” he says, “they trust their friends.”

Xiaomi sold 7 million handsets last year, and plans to sell more than double that this year, still behind the Apple (NASDAQ:AAPL) iPhone sales here.

Xiaomi is starting to look beyond its border. “I believe Americans and Europeans would like our products,” he says — a hint that maybe one day, Xiaomi will take on Apple (NASDAQ:AAPL) on it`s home turf.

For NIGHTLY BUSINESS REPORT, I`m Eunice Yoon in Beijing.


GHARIB: And finally tonight, where were you 10 years ago tonight?

If you were on the East Coast of the United States, chances are you were likely in the dark. Today marks the 10-year anniversary of a massive east coast blackout caused by a storm in Ohio that shut power to 50 million people from Michigan to New England, all the way down to the mid-Atlantic region and even up to parts of Canada.

Hopefully, with cooler temperatures across much of the nation and less of a strain on the nation`s power grid, nothing like that will happen again tonight, Tyler.

I was in our offices at NIGHTLY BUSINESS REPORT and I had to walk down 19 flights.

MATHISEN: I remember we had guests coming to down and no air conditioning and that was a problem. That was a problem.

So, we injected liquidity and stayed cool that way.

We want to hear from you. Send us one stock you`d like our market monitor guest to discuss on Friday. Log on to our Web site,, click on the link to submit your question and don`t forget to include where you`re from.

GHARIB: And that`s NIGHTLY BUSINESS REPORT for tonight. I`m Susie Gharib. Thanks for watching.

MATHISEN: And thanks from as well. I`m Tyler Mathisen. Have a great evening, everybody. We`ll see you back here tomorrow, Thursday night.


Nightly Business Report transcripts and video are available on-line post broadcast at 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) 2013 CNBC, Inc.

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