Transcripts: Tuesday, October 8, 2013

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

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SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Stocks pounded. As the great divide in Washington escalates, investors are paying the price. The S&P and NASDAQ hit their worst day in six weeks. The Dow off 900 points from its record September high.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Earnings underway. Two big S&P 500 companies reported profits late today. But as the reporting season gets going, how much did the results and outlooks matter to the markets when Washington is such a huge concern?

GHARIB: And hidden debt storm. There is a developing crisis larger than Detroit — this time, Puerto Rico. And if you think it doesn`t affect you, take a look at your mutual fund. You may own Puerto Rico bonds and not know it.

We have all that and more tonight on NIGHTLY BUSINESS REPORT for this Tuesday, October 8th.

MATHISEN: Good evening, everyone, and welcome.

The war of words heated up and stocks and bonds cooled off again today with today`s losses driven by the political freeze up in Washington over the debt limit and government shutdown, the Dow has now shed all of September`s gains. It`s down a staggering 900 points from the all-time closing high hit just three weeks ago. That`s nearly 6 percent.

And today was the worst day in six weeks for the S&P 500 and NASDAQ. That market fell 2 percent, and volatility spiked to its highest level since June — all because there is seemingly no movement and no discussion between President Obama and House Speaker Boehner over the reopening of the government and averting a federal default in nine days time.

Here is how the president characterized the stakes during an hour-long appearance in the White House press room this afternoon.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: A decision to actually go through with it, to actually permit default, according to many CEOs and economists would be, and I`m quoting here, insane, catastrophic, chaos, these are some of the more polite words. Warren Buffett likened default to a nuclear bomb, a weapon too horrible to use. It would disrupt markets. It would undermine the world`s confidence in America as the bedrock of the global economy.

(END VIDEO CLIP)

MATHISEN: Later, House Speaker John Boehner had this to say in response.

(BEGIN VIDEO CLIP)

REP. JOHN BOEHNER (R-OH), SPEAKER OF THE HOUSE: There is going to be a negotiation here. We can`t raise the debt ceiling without doing something about what`s driving us to borrow more money and to live beyond our means. The idea that we should continue to spend money that we don`t have and give the bill to our kids and grandkids would be wrong.

(END VIDEO CLIP)

MATHISEN: On Wall Street, some of the biggest gainers so far this year, technology, biotech stocks became the biggest losers today as traders cashed out and took what profits they could.

Here are the numbers, if you care to look. The Dow tumbling nearly 160 points, the NASDAQ down 75, making for the 2 percent drop and the S&P 500 fell 20 points. Bond prices fell, too, and an auction of short-term treasury bills produced the highest yield since 2008.

GHARIB: Well, the partial government shutdown is bad enough but a U.S. default, if that happens, would have catastrophic consequences on the global economy, so says the chief economist of the International Monetary Fund. Although he called the default unlikely, the IMF says failure to pay would be, quote, “felt right away leading to potentially major disruptions of financial markets both in the United States and abroad,” end quote.

MATHISEN: The U.S.`s second largest creditor also weighing in on Washington use budget and debt limit impasse. Japan`s finance minister is pushing U.S. leader to resolve the deadlock. He says another fiscal crisis would wreak havoc on Japan`s finances because of its trillions of dollars worth of investments in U.S. treasury bonds.

And late today, we received reports that Treasury Secretary Lew held a conference call with the Financial Stability Oversight Council about what would happen if the debt limit is not raised. The chairs of the CFTC and the SEC discussed the impact of the lapse in funding in their ability to monitor and respond to potential market events. The details of the call are not known at this time.

GHARIB: And small business owners feeling less optimistic these days. The survey taken in September shows that they are worried about the economy, even though their outlook for sales and capital spending actually increased. The National Federation of Independent Business says it`s possible that the government shutdown would start just after the latest survey was taken weighed heavily on those business owners.

MATHISEN: And with the government shutdown now in its second week and the nation hurdling towards its debt limit, exactly how close is Uncle Sam from running out of money? How much more money does the Treasury need to borrow? And what do the bills look like, and when do they hit?

Eamon Javers takes a look.

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EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Treasury Secretary Jack Lew has said that after October 17th, the U.S. government will only have $30 billion in the coffers and soon be unable to pay its bills. But how soon will the United States miss its payments? It`s not totally clear since daily inflows to the Treasury are difficult to predict.

What`s not difficult to predict, however, are outlays. After October 17th, the payments come quickly for the United States government. On October 23rd, the U.S. owes $12 billion in Social Security benefits. On October 31st, the Treasury must pay $6 billion in treasury security interest.

But it`s November 1st that could be the highest hurdle of all. On that day, the U.S. must pay $67 million on a variety of expenditures — Social Security benefits, Medicare plans, active duty military pay, retiree and veterans payments and supplemental security income. That`s the date to watch if you`re worried about the U.S. missing a payment. It doesn`t get easier after that. On November 13th, Treasury must pay $12 million in Social Security benefits and on November 15th, it must pay $30 billion in treasury security quarterly interest.

Bottom line, it`s impossible to say when the United States would miss its first payment, but every day after the 17th, it`s going to get tougher and tougher to pay the bills.

For NIGHTLY BUSINESS REPORT, I`m Eamon Javers, in Washington.

(END VIDEOTAPE)

GHARIB: With so much focused on in Washington, it`s easy for investors to forget that earning season takes off this evening, with two household names reporting sales and profits for the just completed third quarter.

Alcoa (NYSE:AA), Pittsburgh`s aluminum giant, easily beat earnings forecast, thanks in part to U.S. automakers keeping plants open during the summer, increasing demand for metal. Alcoa (NYSE:AA) shares fell in the regular session but rose in after-hours.

Also reporting tonight, Yum Brands (NYSE:YUM), the owner of KFC, Taco Bell and Pizza Hut, it missed estimates after a sharp drop in sales in China. The company makes half its profits in the Asian nation. Yum shares fell sharply in after-hours.

But this is just the beginning. Kayla takes a closer look at the upcoming earning season and gives a preview of what to expect.

(BEGIN VIDEOTAPE)

KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Washington may be closed for business, but corporate America will be up and running this week when earnings season kicks off, and it could get ugly. So far, nearly a quarter of the companies in the S&P 500 have come out and said earnings this quarter are going to be worst than expected. And in just the last month, the spoken investment group said analysts have slashed expectations for 29 more companies than they raised those expectations. Just nine companies in the S&P index will report this week, but they could hold clues for a broader market reaction.

Most investors have their eyes on banks, which began reporting Friday. Executives have already forewarned about weakness on Main Street as mortgage activity dries up, and on Wall Street as trading activity halts. Analysts at KBW (NYSE:KBW) say Wells Fargo (NYSE:WFC) is most at risk at growth remains elusive for financials.

“Reuters`” Gregory Harrison says that will be the case for all sectors.

GREGORY HARRISON, REUTERS: I think it`s going to be more of the same of what we seen in the last several quarters. We`re looking at pretty slow earnings growth. Expectations are not real high, and there aren`t a lot of catalysts really to drive earnings into the more double digit range.

TAUSCHE (on camera): There might not be catalyst for awhile. The International Monetary Fund on Tuesday slashed its outlook for growth in 2013 and 2014. The IMF cautions specifically about the Federal Reserve`s pullback from its stimulus program.

(voice-over): As companies continue to weigh through low growth and low interest environment, Morgan Stanley (NASDAQ:NBXH) (NYSE:MS) analysts say more earnings should beat expectations than last quarter, mostly because expectations are getting lower.

For NIGHTLY BUSINESS REPORT, I`m Kayla Tausche.

(END VIDEOTAPE)

MATHISEN: So will the government shutdown and stalled budget talks in Washington hurt corporate earnings.

And here to tell us whether it will or it won`t is John Butters. He`s senior earnings analyst with FactSet.

John, welcome back. Good to have you with us again.

So, what`s your forecast for its earnings growth for the recently finished third quarter? What`s your forecast for the fourth, and how do you think the impasses in Washington will affect those earnings, if at all?

JOHN BUTTERS, FACTSET SENIOR EARNINGS ANALYST: Right, Tyler. Well, right now, for the third quarter, looking for 2.8 percent growth and that`s down from an expectation 6.5 percent at the start of the quarter. For the fourth quarter, analysts are looking for quite an improvement in earnings growth. But the growth rate jumps up to 10 percent that quarter.

So, in terms of the impact of Washington, you probably won`t see much of that in the third quarter as most of the companies, the index closed on third quarter on September 30th, but really the fourth quarter is the concern. Now, we haven`t seen downward divisions to that fourth quarter growth rate of 10 percent yet, but it`s certainly something to keep an eye on as we progress through the earnings season.

GHARIB: John, you`ve been monitoring earnings for years now and you`ve listened in on all of those analysts` calls with the CEOs of companies. What do you expect CEOs to say about the outlook for the fourth quarter and to what extent this whole Washington shutdown and the debate over the over the debt ceiling is impacting moves that they`ll make in their profits.

BUTTERS: Right. Well, you know, as we know, the markets and CEOs dislike uncertainty and that`s the situation we`re in right now. So, I think the comment you`ll hear leading up to October 17th is concerns about the uncertainty, you know, where things are go from here, and that is basically I think what you`ll hear up until that point, at least until we get some resolution.

Some of the other concerns for CEOs that we`ve seen so far in the companies that have reported, they`ve talked about global concerns, the negative impact of the stronger dollar against the yen and other currencies.

We`ve seen concerns about global economies, specifically in Europe in emerging markets. Europe continues to be weak, emerging markets are seeing a mixed picture. Yum`s report today tonight was obviously a weak performance in emerging markets.

And also, companies concerned about raising costs and cutting costs to maintain near record-level margins.

So, again, foreign exchange rates, the global economy, and cost-cutting are three themes to watch in the conference calls this quarter.

MATHISEN: As we look at the third quarter numbers are going to start rolling out with some speed here over the next 10 days or so, what do you expect the outliers will be? Which sectors are going to be the standouts on the plus side and the standouts on the negative side?

BUTTERS: Right. In terms of year to year growth, the financial sector is expected to be the best performing, nearly 9 percent growth is expected there. That`s the sector we haven`t really seen numbers come down that much during the course of the quarter. In that sector, a lot of the growth is concentrated with two companies, Bank of America (NYSE:BAC) and Morgan Stanley (NASDAQ:NBXH) (NYSE:MS).

The consumer discretionary sectors expected to be the second best performer. There, you are seeing growth across the sector, nine of the 12 industries are expecting growth.

And on the flip side, the energy sector is expecting the weakest growth. Earnings are expected to be down nearly 3 percent. In that sector, we`re seeing interesting dichotomy. Chevron (NYSE:CVX) is one of — is the largest contributor to growth in that sector. If you exclude Chevron (NYSE:CVX), we see a significant growth in the rate for the energy sector.

And on other hand, ExxonMobil (NYSE:XOM) is the largest attractor. If you exclude ExxonMobil (NYSE:XOM), the energy sector would actually have positive growth for the quarter.

GHARIB: John, you talked about financials. We know that JPMorgan (NYSE:JPM) and Wells Fargo (NYSE:WFC) reporting on Friday. What are you expecting from them not only about the third quarter, but what they might say about the outlook?

BUTTERS: Right. What`s interesting, two different scenarios for these companies, for JPMorgan (NYSE:JPM) looking for a decline in EPS of about 14 percent. In the other hand, Wells Fargo (NYSE:WFC) is looking for growth of 11 percent this quarter. The estimate for Wells Fargo (NYSE:WFC) hasn`t really moved all that much.

So, you know, again, the financial sector expected to be one of the better performers this quarter, and we`ll certainly see — keep an eye out for what sort of guidance those companies are giving, particularly in the case of Wells Fargo (NYSE:WFC), what they`re seeing in terms of the mortgage refinancing and the mortgage market.

MATHISEN: All right. John, thank you very much. John Butters is senior earnings analyst with FactSet.

GHARIB: And still ahead on NIGHTLY BUSINESS REPORT, a shot in the arm. Despite the glitches in the health care exchanges, will the increased number of insured patients help the long-term prognosis of hospitals and their stocks? That`s coming up.

But, first, take a look how the international stocks performed today.

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MATHISEN: New York state has released figures on the number of people signing up for low-cost health insurance over the past week, part of the Affordable Care Act. The state`s official health plan marketplace announced that over 40,000 New Yorkers have signed up for a health care plan so far. That`s more than any other state. And the agency`s customer service center says operators have provided help to more than 26,000 callers.

GHARIB: And the reason so many people were calling in, they were getting error messages or dealing with technical glitches. But experts say all is not lost. The insurance industry, along with some technology companies with experience in rolling out computer problems for millions of consumers say there`s still plenty of time to fix the problems before millions of uninsured Americas are required to begin paying for coverage on January 1st.

MATHISEN: Well, despite those glitches, many more Americans are expected to have health insurance at the start of the New Year, and many hospitals expect to see a surge in patients.

So, how will those hospitals handle the expected influx of new cases, and what will that mean for the bottom lines and the stock prices of the big for-profit hospital chains?

Bertha Coombs has our report.

(BEGIN VIDEOTAPE)

BERTHA COOMBS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): For hospitals, having more patients insured under the Affordable Care Act could be a game changer, especially for those with major emergency department operations like Universal (NYSE:UVV) Health, George Washington University Hospital.

ALAN MILLER, UNIVERSAL HEALTH SERVICES FOUNDER, CHAIRMAN & CEO: The industry in health care (ph) runs between 12 percent and 20 percent bet (ph) that as you know, people present themselves in the emergency room must be treated. Many of these people have no coverage.

COOMBS: Universal (NYSE:UVV) Health CEO Alan Miller expects new coverage rules will provide a bigger positive for his company`s behavioral health facilities, like this one in Ambler, Pennsylvania.

MILLER: The individual policies and the small business policies did not have to have mental coverage. Now they have to have mental coverage as of January 1st, `14.

COOMBS: That could make a big difference for the families of young people with mental health issues.

MILLER: Very often, the symptoms show up in youngsters and if you have the ability to pay or to be treated when you are young — teenagers, et cetera, young adults — it`s very meaningful in terms of the ultimate cure.

COOMBS: But the Affordable Care Act also imposes tougher reimbursement rules for hospitals and the sequester has already resulted in some payment cuts. Still, analysts say millions of newly insured patients should help offset those pressures.

DARREN LEHRICH, DEUTSCHE BANK, MANAGING DIRECTOR: We think there is about $3.5 billion of incremental revenue opportunity through the health care reform that should benefit the sector. When you take that revenue and you offset it against some of the Medicare cuts and other things that come down the line, you get a very beneficial margin bond in the industry`s profitability.

COOMBS: Hospitals seen patient volumes fall as unemployment has remained high the last five years, at the same time, uncompensated care has risen 8 percent annually, according to American Hospital Association, even low reimbursement rates will help.

SHERYL SKOLNICK, CRT CAPITAL GROUP MANAGING DIRECTOR: You have to see patients come instead of being no pay patients who maybe pay 8 cents on the dollar, at best, become full pay patients, even at very low Medicaid rates.

COOMBS: That`s why this fall, hospitals are proactive about helping their uninsured patients enroll and making sure they stay covered.

MILLER: People look to us for help and education about the health care system. They have forever.

COOMBS (voice-over): While he`s optimistic, Alan Miller is in no rush to add staff ahead of 2014. Next year, he says, will be a time to watch and learn just how the newly insured respond to being covered under Obamacare.

Bertha Coombs, NIGHTLY BUSINESS REPORT, Ambler, Pennsylvania.

(END VIDEOTAPE)

GHARIB: To “market focus” now, we begin with J.C. Penney. Shares rose today after the company said sales trends are improving. The struggling department store posted a smaller decline in September sales and expects the improvement to continue for the rest of the year. According to the company, women`s and men`s apparel, along with fine jewelry are performing better than average.

J.C. Penney stock up slightly today to $7.77. Just a year ago, it was trading around $27 a share.

Big job cuts announced at Alcatel-Lucent (NYSE:ALU). It will slash 10,000 jobs worldwide over the next two years, that`s 14 percent of its workforce. Those reductions could save roughly $1.3 billion a year, and restore profits at the struggling telecom equipment maker.

Shares fell more than 9 percent today to $3.49.

MATHISEN: Shares of Xerox (NYSE:XRX) fell today on news that the SEC is investigating a unit of the company. The investigation focuses on accounting practices at affiliated computer services, an IT outsourcing firm that Xerox (NYSE:XRX) bought back in 2010. According to Xerox (NYSE:XRX), the SEC is mainly looking at practices before the unit was acquired. Since the acquisition, Xerox (NYSE:XRX) gets more than half its revenue from that unit. The stock tumbled to almost 3 percent today, to $10.14.

And Amazon (NASDAQ:AMZN) won a major victory in a legal dispute with IBM today. A U.S. court ruled in favor of the online retailer in a case over its $600 million Cloud computing contract with the CIA. IBM contested the bidding process for the CIA contract, but the judge ruled that Amazon (NASDAQ:AMZN) had won the contract fair and square.

Shares of IBM fell nearly 2 percent to $178.72. Amazon (NASDAQ:AMZN) also dropped 2 percent to $303.23.

GHARIB: Investors have been fixated on the Washington crisis, the government shutdown and the debt ceiling deadline. But there is another financial crisis looming far away from the nation`s capital and this one could have a big impact on many American portfolios.

Michelle Caruso-Cabrera reports on why investors should pay attention to what`s going on in Puerto Rico.

(BEGIN VIDEOTAPE)

MICHELLE CARUSO-CABRERA, NIGHTLY BUSINESS REPORT CORRESPONDENT: Puerto Rico has some $70 billion of debt behind only New York and California, but it has a much smaller and weaker economy compared to those states. The island borrowed money in the past to cover pension costs and to fill budget gaps in the government. But that may finally be catching up to them.

Investors have been selling their bonds for the last several weeks for fear they might not get paid back. Rating agencies recently downgraded some bonds that are backed by revenue from Puerto Rico sales tax. Puerto Rico may be small, but its bonds are pervasive in municipal bond funds. That`s because bonds from Puerto Rico are one of the few munis that has what`s known as a triple exception. No matter what state you live in, if you own a bond from Puerto Rico, you don`t pay federal, state or local taxes on the interest.

Morning Star says there are 567 municipal bond funds in the United States and more than 400, or 75 percent, have some kind of exposure to Puerto Rico. While traditional investors may be selling Puerto Rico`s debt, hedge funds who are willing to take bigger risks are buying them, because they pay such high rates of interest, a bond that doesn`t mature until in 2039 is selling for only 71 cents on a dollar, and will pay more than 8 percent, fully tax free. That`s a great deal if you get paid back.

Puerto Rico has taken some step recently to control pension cost and raise revenue, with more taxes on businesses, which they hope will raise $2.5 billion in new revenues.

But those moves could also hurt the economy. It might not provide as much money as expected. Possible debt bond you should be watching for.

For NIGHTLY BUSINESS REPORT, Michelle Caruso-Cabrera.

(END VIDEOTAPE)

MATHISEN: And still ahead, a new experimental way to pay for education, but will it work?

(BEGIN VIDEO CLIP)

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT: I`m Jane Wells in Salt Lake City, Utah. What if you could fund education, save taxpayers money and make a profit? We`re going to look at a uniquely catalyst experiment in improving America`s schools.

(END VIDEO CLIP)

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GHARIB: More Americans are falling behind on paying their loans and a weak job growth and stagnant incomes are getting the blame. The American Bankers Association says consumer delinquencies rose slightly during the second quarter of the year, on several different types of loans. The largest increases in payments that were 30 days late or more were in personal loans, home improvement loans and auto loans.

MATHISEN: The fourth annual Education Nation Summit is underway now in New York City. It brings together leaders in government, education, business, philanthropy, to find fresh ways to fund and improve America`s public schools. One novel approach, a new investment vehicle called Social Impact Bonds.

Jane Wells explains how they work and how they could turn a profit.

(BEGIN VIDEOTAPE)

WELLS (voice-over): Some people invest in stocks, and some — invest in preschool, millions of dollars to fund preschools. Goldman Sachs (NYSE:GS) is doing both, committing millions of dollars to fund high quality preschool in Salt Lake City.

Goldman doesn`t just want to give money, it wants to make money.

ALICIA GLEN, GOLDMAN SACHS MANAGING EDITOR: The transaction we`ve done in Utah is the first time it`s ever invested directly in the actual program, the actual education services itself.

WELLS: The Wall Street giant has its second largest U.S. office in Salt Lake City. It`s drawing Chicago investor J.B. Pritzker to offer the local school district $7 million to fund preschool for children from low income areas. The hope — better prepare them for kindergarten.

(on camera): In the past, maybe 15 percent of the kids in the program like this would end up in special education, even though half of them didn`t really need to be there. They just needed to learn. And the challenge with special ed is once you check in, you almost never check out.

(voice-over): The new money is coming through what`s called a social impact bond. If the children get through third grade without needing special ed, investors will get their money back plus 5 percent interest.

Director of preschool services Brenda Van Gorder is used to winning grants, not repaying bonds.

BRENDA VAN GORDER, GRANITE SCHOOL DISTRICT PRESCHOOL SERVICES DIRECTOR: And it would be a bond. Do you understand what that means? That we would be — it would be a pay back with interest, and my heart just sunk. And I thought — I`m in a public school system, there is no way. How would I ever find the funds to be able to do that?

WELLS: For now, the county and United Way will repay the bond, but eventually, the state will need to be convinced to take over. But social impact bonds are new and untried and Van Gorder says she`s heard from skeptics.

VAN GORDER: Is it a big rip off? Who`s getting rich off of this?

WELLS: Parents do not feel rip-off. Taegan (ph) is one of three to go through preschool, all had delayed speech.

RICKI GALVIN, PARENT: My oldest that was in the program, he was caught up by kindergarten.

WELLS: Taegan`s brother is now reading a grade level ahead.

VAN GORDER: If kids can grow up into a system and become contributing members of our society, they can contribute in all different kind of ways. We know that high-quality preschool works.

WELLS: What is hoped is that investing in it for profit also works.

For NIGHTLY BUSINESS REPORT, Jane Wells, Salt Lake City.

(END VIDEOTAPE)

GHARIB: On Friday, you`ll remember that we told you about investors who sink money into the penny stock of bankrupt electronics retailer Tweeter after confusing its sticker symbol TWTRQ with that of Twitter, which will have the symbol TWTR when it begins trading.

Tweeter stocks shot up as much as 1,400 percent on that mistake. Well, today, to avoid any confusion in the future, Wall Street regulators changed Tweeter stock symbol to THEGQ. No comment or even a tweet from Twitter.

MATHISEN: And finally tonight, a major makeover for Ben Franklin, talk about the Benjamins. The brand-new $100 bill began circulating today. And according to Federal Reserve, they have the most advanced anti-counterfeiting technology ever produced. That includes a blue 3d security ribbon that runs throughout the bill, a color shifting Liberty Bell that sits inside an ink well, and some watermarks that have held over from earlier versions of the $100. I think Mr. Franklin would be pleased with all of that high tech stuff.

GHARIB: Pretty colorful bill.

MATHISEN: Very nice. Just need more of them.

GHARIB: And in Washington.

MATHISEN: And in Washington. Something hasn`t stopped.

GHARIB: That`s NIGHTLY BUSINESS REPORT for tonight, I`m Susie Gharib.

For more on all the stories that we covered tonight, head to our Web site, NBR.com.

MATHISEN: And I`m Tyler Mathisen.

Forgive me for interrupting you there.

Have a great evening, everybody. We`ll see you tomorrow night.

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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