Transcript: Friday, September 20, 2013

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

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TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: On edge. Investors sell stocks hard as they recalculate risks. Among them — the growing possibility of a government shutdown in 10 days time.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Power play. The EPA proposes tough new rules to cut greenhouse gas emissions from new coal- fired power plants. Industry says the plan reins in — relies, rather, on unproven technology and could spell the end of new plants that use one of America`s most abundant resources.

MATHISEN: And, money fund fight. You probably own one. You may even think it`s as safe as a bank account. Both sides tonight in a battle over proposed rules that some say could make the funds riskier, not safer.

All that and more tonight on NIGHTLY BUSINESS REPORT for Friday, September 20th.

Good evening, everybody. I`m Tyler Mathisen.

HERERA: And I`m Sue Herera. I`m in tonight for Susie Gharib.

Well, you can call it “Fallout Friday”. A litany of events converged on Wall Street today, sending stocks sharply lower.

First, the rebalancing of the Dow and the S&P 500 caused volatility as money managers had to adjust their portfolios.

Second, it was quadruple witching, which is the expiration of certain options and futures contracts.

Third, the growing fear that the government may be hurtling toward a shutdown at the end of the month. We`ll have more on that in just a moment.

And, lastly, officials making comments today about when the Federal Reserve will start pulling back on its bond buying program. Spooking the markets early on was St. Louis President James Bullard, who said next month isn`t out of the question.

(BEGIN VIDEO CLIP)

JAMES BULLARD, FEDERAL RESERVE BANK OF ST. LOUIS CEO: I do think October is a live meeting. We have — we have had press conferences at certain meetings, and not at other meetings, but the chairman did say that we could, if we wanted to, arrange a press conference for the October meeting. As to whether we`ll take action there or not, I don`t know. But it is a live meeting and it is possible that we would move.

(END VIDEO CLIP)

HERERA: All in all, the Dow fell 185 points on heavy volume. The NASDAQ was off by 14. And the S&P was down by 12.

MATHISEN: And more now on the collision course lawmakers are currently on in Washington this morning the Republican-controlled House passed a bill that will keep the federal government up and running, past the September 30th deadline. But it wipes out funding for the Affordable Care Act, President Obama`s signature legislation.

House Speaker John Boehner, surrounded by supporters at the Capitol, implored the Democrat-controlled Senate to support the House bill.

(BEGIN VIDEO CLIP)

REP. JOHN BOEHNER (R-OH), SPEAKER OF THE HOUSE: Our message to the United States Senate is real simple — the American people don`t want the government shutdown, and they don`t want Obamacare.

(CHEERS)

(END VIDEO CLIP)

MATHISEN: Senate Majority Leader Harry Reid called the House bill “dead”, adding a second “dead” for emphasis.

Meantime, President Obama was in Missouri, blaming what he called a faction of the far right for trying to undermine the health care law. He said some GOP lawmakers are trying to derail him and are not focused on Americans` needs.

HERERA: John Harwood joins us now from Washington with more on today`s vote in the House, and what it means, and what`s ahead for Congress.

So, John, did the vote today, in the House, make things better, or worse? And can lawmakers ever hope in reaching a deal on these very tough issues like the budget?

HARWOOD: Well, I don`t think it changed anything that we thought going in to the vote today, Sue. This may be the last time that those members are going to have an opportunity to cheer like they did today, because Harry Reid is right, that bill is dead in the Senate. You could say dead three times if you wanted to. The president would veto it even if it passed.

And now, what we`re going to do is have the Senate act. They`re going to extend government funding, and it will be on the shoulders of John Boehner to convince those members who were cheering today to pass a extension of government funding without the Obamacare provision, which he tried last week to do — couldn`t do it.

MATHISEN: You described this earlier today John as kabuki theater.
It certainly seemed like an apt description.

Do these shutdowns if they`re one — if one does happen, do they ever save money? Do they end up costing taxpayers?

HARWOOD: They cost money, Tyler, because they generate costs that have to be recouped later. We`ve seen this movie before, since 1976, we`ve had 17 different shutdowns of the government. The emblematic one that we all remember was from 1995 when Bill Clinton and Newt Gingrich faced off.
Those shutdowns cost the government around $1.4 billion.

And we know that a shutdown now would be more expensive on a per day basis. Why is that? Because in 1995, half of the government spending bills had already been passed. So, only half of the government was shut down. This would be all of the government, because not a single spending bill has passed both the House and Senate and been signed into law by the president.

HERERA: So, John, you`ve been following this whole situation for so long, and you`ve been on the Hill for so long, what`s your best guess? Are we going to see a 12th hour negotiation that avoids a shutdown or do you think they`ll let this shutdown go through?

HARWOOD: Still possible, but I think it`s unlikely, Sue. I think the likeliest event is that we do have a shutdown of some duration. Now the shutdown itself would not be catastrophic. What would be catastrophic is if that were not followed by a decision to raise the debt limit.

And so, what I would expect to happen is the shutdown for a few days or a week. There will be a lot of heat generated on the Congress, markets will get nervous and that shutdown then will be brought to an end.
Republicans will end up folding on this and raise the debt limit at the same time. That`s my best guess at this moment but it`s a highly unpredictable situation.

MATHISEN: John Harwood — thanks very much, John. Reporting from Washington tonight.

A problem with the Affordable Care Act`s rollout of its centerpiece health insurance marketplaces. With just 10 days to go before those state and federally-run exchanges are slated to open a computer glitch is causing some havoc in the federal program. “The Wall Street Journal” reported today that the government software can`t reliably determine how much people need to pay for coverage and are now scrambling to fix those problems.

HERERA: Home Depot (NYSE:HD) now plans on using those public exchanges. The world`s biggest do-it-yourself chain announced that starting October 1st, it plans to shift medical coverage for 20,000 part- time employees to those public marketplaces so workers can shop for new health care plans.

The Obama administration announced some tough new limits on the amount of carbon pollution that can be generated by newly built U.S. power plants.
Those rules took a big toll on shares of coal stocks today, one of the biggest sources of carbon emissions. Take a look at Alpha Natural Resources (NYSE:ANR), down 6 percent. Arch Coal (NYSE:ACI) falling 5 percent, really losses all the way across the sector.

Hampton Pearson takes a closer look at these new climate change requirements and why some energy producers see this as a White House war on coal.

(BEGIN VIDEOTAPE)

HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
Power plants account for about a third of all greenhouse gas emissions.
Over the next 12 months, the Environmental Protection Agency wants to mandate new rules using cutting-edge technology to dramatically reduce carbon dioxide emissions from new power plants. In a speech at the National Press Club, EPA administrator Gina McCarthy says the emission standards can be achieved with homegrown technologies.

GINA MCCARTHY, EPA ADMINISTRATOR: We are very confident that the carbon pollution standards we are proposing today for new power plants are both flexible and achievable. They pave a path forward for the next generation of power plants in this country.

PEARSON: The EPA goal is to cap carbon dioxide emissions at 1,100 pounds of CO2 per megawatt hour of power produced. That`s about 40 percent less on average than an existing coal fired plant. The utility industry says that standard can`t be met without cost and technology to capture and store carbon emissions.

SCOTT SEGAL, ELECTRIC RELIABILITY COORDINATING COUNCIL: They are trying to make standards based on highly speculative technology that would not even be applicable for the great majority of power plants in the U.S.
today.

PEARSON: This coal-fired power plant in Kemper County, Mississippi, due to go online next May, could be the first one worldwide to use carbon capture and storage technology. Cost overruns have pushed the price tag to
$4.7 billion, nearly $2 billion more than original projections. It`s also been approved for $270 million in Energy Department grants and millions more in tax credits.

SEGAL: You can`t look at the results of one plant, which is only 70 percent, 75 percent done, and apply that to an entire industry.

PEARSON (on camera): Environmental groups, however, say the EPA standard will create demand for that new technology. A more likely scenario, lawsuits from the utility industry over the new EPA proposed rule, as well as guidelines in the works for existing power plants a year from now.

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

(END VIDEOTAPE)

MATHISEN: And still ahead, could new rules make safe money market funds more risky?

But, first, a look at this week`s top performing stocks on the S&P 500.

(MUSIC)

MATHISEN: Shares of BlackBerry tumbled today and that`s putting it nicely. They were even halted from trading late in the session. Now, that`s because the company preannounced a massive second quarter loss of nearly a billion dollars, and that its revenue is about half of analyst estimates.

The struggling company, which has put itself up for sale, also announced plans to cut 4,500 employees. That`s about 40 percent of its total workforce. And it`s going to produce only four smartphones down from its current lineup of six.

Those shares plunged after trading resumed. Look at that chart. It eventually fell 17 percent on the day.

HERERA: Well, if you`re thinking of getting a new smartphone, you probably know the newest iPhones hit the stores today. Folks were lined up around the block outside Apple (NASDAQ:AAPL) Stores across the U.S., and the world, to get a hold of the new iPhone 5S, the one with fingerprint recognition software, and the less expensive 5C, which has a plastic backing and it comes in five bright colors.

So, we asked some people why they felt the need to get the new device today.

(BEGIN VIDEO CLIPS)

UNIDENTIFIED FEMALE: Today`s the first day, I want to be the first — first one to get the iPhone 5S.

UNIDENTIFIED FEMALE: When it`s Apple (NASDAQ:AAPL), people will stand on line for days and days and days and days no matter what it is.

UNIDENTIFIED MALE: I had an upgrade available and figured might as well get it right away.

(END VIDEO CLIPS)

MATHISEN: Well, there was no problem generating sales for the newest and hottest must-have video game to enter the market in years. Take Two Interactive`s “Grand Theft Auto 5”, full of bloody violence, carjackings and scantily clad women, book sales topping a billion dollars in just the first three days in stores.

Julia Boorstin has more on the biggest entertainment debut, ever.

(BEGIN VIDEOTAPE)

UNIDENTIFIED MALE: This is a legit business.

UNIDENTIFIED MALE: 401(k), tax returns and all.

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
Since “Grand Theft Auto 5” went on sale Tuesday, the game has been a record breaker, selling $800 million worth in its first 24 hours, hitting a billion dollars in sales in its first three days.

UNIDENTIFIED MALE: Yes! Whoo.

BOORSTIN: The five-year gap since the last “Grand Theft Auto” built anticipation, drawing gamers out to the 4,000 GameStop stores that opened for midnight sales Tuesday morning.

UNIDENTIFIED MALE: This is the most anticipated release of the year by far.

UNIDENTIFIED FEMALE: I`m probably just going to go home and play it all night and go straight to school right after.

UNIDENTIFIED MALE: You actually can steal cars, run around, rob banks, do all the stuff you wish you could do and get away with in society.

BOORSTIN: “GTA 5”, as it`s called by fans, beat previous record- holder Activision`s “Call of Duty: Black Ops II”.

(on camera): The record-breaking sale is great news for the company behind “Grand Theft Auto 5”, Take Two Interactive, considering the game reportedly cost more than $260 million to produce, making it not only one of the most expensive games ever made, but also pricier than nearly every movie.

(voice-over): Take Two Interactive will more than recoup its investment. Not just from GameSales, but also from ongoing revenue, from digital add-ons and content.

ARVIND BHATIA, STERN AGEE SENIOR RESEARCH ANALYST: You may buy new cars, new weapons, you know, and stuff like that. That you pay for, and that`s very profitable. You know, buying digital content for Take Two, the margin should be higher on digital content. So, it also keeps the game fresh.

BOORSTIN: The question now, how sales will hold up over the crucial holiday season. and whether “Grand Theft Auto 5” will eat in Ubisoft`s new “Assassin`s Creed” game, which debuts in October, and to Activision`s “Call of Duty: Ghosts” in November.

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

(END VIDEOTAPE)

MATHISEN: We begin tonight`s “Market Focus” with a trio of stocks making their Wall Street debut. First up, Rocket Fuel, those shares lived up to the name soaring on the first day of trading. The company which places digital advertising for clients priced 4 million shares at $29 apiece, the higher end of its range.

Now, watch this. The stock gained 93 percent to close at $56.10.

FireEye also having an advantage debut. The company provides protection for corporations against cyber attacks. It uses modern Cloud- based technology to help businesses fight computer viruses, demand for the offering was strong with more shares pricing than expected, and above the price range. The shares rose 80 percent to $36 a share.

And ClubCorp also gained on its first day but just not as much as the others. The largest owner and operator of private golf and country clubs priced 18 million shares at $14 apiece. That was below the expected range.
The stock did close at $14.50, up more than 3 percent.

HERERA: And now to earnings. Darden reporting a drop in profits, and its weakest sales at established restaurants in more than three years. The owner of the Olive Garden and Red Lobster also lowered its sales forecast for the full year blaming an uneven recovery, higher taxes, and some tough competition. The shares fell 7 percent, $45.78.

AK Steel also issuing weak guidance. The steelmaker warning that falling prices could lead to a larger-than-expected loss this quarter.
Additionally, the company said it had to reduce its steel shipments because of a mechanical failure at one of its facilities. The stock dropped 8 percent to finish at $4.09.

“The New York Times (NYSE:NYT)” will pay a quarterly dividend for the first time in five years. Shareholders of record as of October 9th will receive 4 cents a share. The company is using cash raised through a number of recent investitures to fund that dividend. “New York Times (NYSE:NYT)”
closed 1 percent higher to $11.66.

And Goodyear Tire will reinstate its quarterly dividend payment of 5 cents a share. The tiremaker suspended its dividend about a decade ago in order to preserve cash. It also plans on spending up to $100 million to buyback shares of its stock. Shares of Goodyear Tire closed fractionally lower to $22.22.

MATHISEN: Well, tens of millions of Americans keep more than $2.6 trillion in money market mutual funds. And yesterday, the Securities and Exchange Commission closed the comment period for proposed new rules aimed at making the funds safer. Rules the fund industry opposes.

Today, in “The New York Times (NYSE:NYT)”, financial writer Floyd Norris says the rules don`t go far enough, calling them pitifully weak and inadequate.

Mr. Norris joins us now as does Brian Reed, chief economist at the Investment Company Institute, the mutual fund industry`s chief trade group.

Floyd, welcome. Brian, welcome to you, as well.

Inadequate and weak — why do you say that, Floyd?

FLOYD NORRIS, “NEW YORK TIMES” CHIEF FINANCIAL CORRESPONDENT: Well, originally the regulators wanted to do one of two things, basically. One was to force them to admit their normal mutual funds, and trade with fluctuating MAVs, mid asset values. The other alternative, which they considered, was to treat them like what they really want to be deemed to be, which is real banks.

A bank is something that takes deposits and promises to pay you the money, whatever happens to its investment. And banks, of course, have to have reserves.

And around the world now, regulators are stiffening the reserve requirements for banks, because we learned five years ago they were too weak. And yet in this case, this is a huge banking industry, that is going to get away, it appears, without having to have any reserves at all.

HERERA: Brian what about that, though? There are a number of people who think given what we did go through a few years ago, that it can`t hurt to toughen up the rules a little bit. What would be wrong with holding some reserves?

BRIAN REED, INVESTMENT COMPANY INSTITUTE ECONOMICS: You know, I think the important thing to keep in mind here is that the rules have been toughened. And we`ve been in a public dialogue for nearly five years to look at ways to further strengthen those rules to make money market funds more resilient. In terms of reserves, I`m not really sure what that means, except that, you know, money funds right now hold in their portfolios 20 percent of their assets that can be liquidated in a single day, and 30 percent that can be illiquidated in a week. And so, that has added a lot of resiliency and those came about because of the 2010 reforms, which have been very effective.

MATHISEN: You know, Floyd, one of the things you point out is one of the proposed rules apart from requiring the funds to have a floating share price, it could go above or below a dollar a share, is the idea of putting up charges or gates for withdrawals. And you argue that it is possible that if you did that, that that could spawn sort of a metastasis of runs on money market funds. Explain that.

NORRIS: Well, the theory is this is an argument that`s been made by the Federal Reserve bank presidents that under some circumstances, we can see this put into effect and scare a lot of people. This proposal, what happened here was, the Securities and Exchange Commission under Mary Schapiro, she wanted to impose some real rules. Unfortunately, the lobbying from the industry was so intensive, that they got three of the five SEC commissioners to oppose any reform.

The result was, Mary left and the new SEC chairman, Mary Jo White, came in, under heavy pressure from other regulators to do something, and she managed to get through the SEC proposals for these two rules. One of which is very weak, the other of which I think is probably misguided, because she thought, I think, that that was all she could get given the political power of the industry.

HERERA: Brian, does your research show that most investors understand exactly what a money market fund is? Because back in the `08 financial crisis, a lot of people thought that basically it was — it was just cash.
It was just like a bank. And, obviously, that`s not the case.

Does your research show that they are more knowledgeable about that now?

REED: You know, survey after survey shows that money market fund investors — both retail investors, households, as well as institutions — know that there`s the possibility you lose money in a money market fund.
And so, when people argue that people don`t understand that risk and yet they also argue at the same time that they`ll run when the markets become troubled, seems to be sort of like an Orwellian double speak to say that well both of these can exist at one time when, in fact, investors do know and they understand.

What happened in 2008, and you know, researchers have shown is that fundamentally the U.S. banking system was insolvent in September of 2008.
And we saw a broad pullback from not only U.S. banks but from banks globally and money fund investors were just part of that. And they moved their money into treasury money market funds which were safer at that time.

MATHISEN: Brian, thank you very much. Floyd, thank you, as well. To be continued, I`m sure.

NORRIS: Thank you.

MATHISEN: Appreciate it.

REED: Thank you.

HERERA: All right. Coming up, get out your pen and paper because our market monitor, a top-rated fund manager by Morningstar (NASDAQ:MORN), has two large cap tech stocks on his buy list. That`s straight ahead.

But, first, a look at the worst performing stocks this week on the S&P 500.

(MUSIC)

MATHISEN: Tonight`s market monitor says he`s cautiously optimistic on the stock market but still thinks stocks are reasonably attractive. He`s Charlie Bobrinskoy, vice chairman of Ariel Investments and portfolio manager of the Ariel Funds.

I`m going to call you Charlie because your last name is a little long for me. But, welcome nonetheless.

CHARLIE BOBRINSKOY, ARIEL INVESTMENTS VICE CHAIRMAN: Thanks for having me.

MATHISEN: We heard earlier today, both from Warren Buffett and from Carl Icahn, who said that they thought the stock market broadly speaking was fully valued and that they were having a hard time finding things to buy. Do you share that view?

BOBRINSKOY: I think the word he used was fairly valued which is different from fully valued. I mean, we would agree with Warren. In that sometimes the market is overpriced. Sometimes it`s clearly underpriced.

Right now, it`s in the middle. So we would — expect to get normal returns on the stock market, maybe high single digits. Not spectacular returns but, reasonable returns.

HERERA: You know, there`s been a lot of volatility in the market this week, partly because of the Fed. But you`re watching another part of the market, the muni bonds. And you say that there could be trouble brewing there.

BOBRINSKOY: Yes. So while we think that the stock market is fairly valued, and no great opportunities, not massive risks, the muni market is where we do see danger.

And we think there are things like the state of Illinois, which frankly my home state is broke right now. They have over $100 billion of underfunded pensions. That doesn`t even count the city of Chicago, and Cook County.

And there are going to be big problems in the muni bond world, Puerto Rico, I could keep going on, and I think the investors in that market think that the federal government is going to bail them out, because they bailed out GM. But I don`t think that`s going to happen. I think it`s going to be real losses in the muni bond market.

MATHISEN: Let`s get to a couple of your stock picks. Two companies that are hardly broke, but maybe a little bit unloved.

Let`s begin with IBM and Microsoft (NASDAQ:MSFT). Why do you like them both?

BOBRINSKOY: Because so many people don`t like them. They`re very much out of favor and very cheap stocks. Trading for about eleven times forward earnings, both of them, in a market that`s about 14.

People think that Microsoft (NASDAQ:MSFT) is going away and it is not.
Microsoft (NASDAQ:MSFT) has a wonderful Cloud business where they provide services to people as big as Oracle (NASDAQ:ORCL). Try and write an e-mail without using Word. Send a Word document with something other than Word, and the person on the other side won`t be able to open it.

So, they still have a great business, and they have a ton of cash on the balance sheets, almost $72 billion of cash.

The other one we love is IBM. IBM is in the middle of big data.
Watson, the famous computer that beat “Jeopardy” is fabulous at mining data. And IBM is on the cutting edge of that.

That stock is also about 11, 12 times earnings. They had one bad quarter last quarter but we think their business is recovering.

HERERA: Let`s move on to Western Union (NYSE:WU) because you say they`re at a forefront of digital money transfer.

BOBRINSKOY: Absolutely. They have the highest margins in the business.

People sometimes say, oh, people in the future will be able to transfer money on their iPhone. Well, if you`re an immigrant worker from Mexico, the problem in sending money back to Mexico is not that the phone couldn`t do it, it`s that you don`t have the bank account in Chicago or in Dallas to do it.

And the limitations on sending money aren`t technology, they`re regulatory. The U.S. government has very strict controls on sending money across borders. And Western Union (NYSE:WU) is very well set up to handle that.

So, we believe it`s a great company with good growth trading again at about 11, 12 times earnings.

MATHISEN: We`re going to have to leave it there, Charlie. We appreciate it.

Do you have any disclosures? Do you own — I assume your funds or the company owns those stocks that you mention, but maybe you —

BOBRINSKOY: We own all three and then I personally own all three. We do no investment banking business with any of them.

MATHISEN: Charlie, thank you very much. Charlie Bobrinskoy of Ariel Investments, portfolio manager of the Ariel Focus Fund, which is up something like 30 percent, Sue, thus far this year.

HERERA: Very good performance.

A low-cost airline is grounding half of its fleet in order to conduct some safety checks. Las Vegas-based Allegiant Airlines took as many as 30 of its MD-80 jets out of service in order to inspect the plane`s emergency slides. The devices failed to deploy earlier this week on board one of those jets after a smoke condition was reported in the cabin at the Las Vegas airport.

MATHISEN: And finally tonight, one of the world`s top cut-rate airlines is changing its tune. Ireland`s Ryanair (NASDAQ:RYAAY) offers cheap tickets to city all over Europe but the carrier may be best known for charging passengers to use the bathroom, or to stand up during flights.
Now, it says it has to start treating its customers better.

Today, the airline`s chief executive told shareholders the company has to improve how it treats passengers, and how it handles complaints so they don`t take their business to the competition.

HERERA: Imagine that.

MATHISEN: Imagine that — putting the customer first.

HERERA: That`s right. What a novel concept.

MATHISEN: Wow.

HERERA: They`d be successful with that.

MATHISEN: Yes, yes.

HERERA: Thanks, Ty. It`s been a great week.

MATHISEN: Great week.

HERERA: Susie`s back on Tuesday. I`ll be here on Monday night, but she`s back on Tuesday.

And that`s NIGHTLY BUSINESS REPORT for tonight. I`m Sue Herera.
Thanks for joining us.

MATHISEN: I`m Tyler Mathisen. Thanks from me, as well. Have a great weekend, everybody. We hope t see you back here on Monday.

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) 2013 CNBC, Inc.

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