Transcript: Wednesday October 16, 2013

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



SEN. HARRY REID (D-NV), MAJORITY LEADER: They will also see Congress reach a historic, bipartisan agreement to reopen the government and avert a default on the nation`s bills.

SEN. MITCH MCCONNELL (R-KY), MINORITY LEADER: It`s my hope that today, we can put some of those most urgent issues behind us.


SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Striking a deal. An 11th hour agreement to reopen the government and avoid default sends stocks soaring. But will this temporary fix prevent the market from moving forward and hold back American businesses from making important decisions?

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Leaving a mark. Some of the nation`s biggest companies have already been battered and bruised by Washington. What are their executives saying about the damage that`s already been done to the economy.

GHARIB: And singing the blues. IBM, the bluest of the blue chip, posting a missed revenue today, sending shares sharply lower after-hours, that could impact trading tomorrow.

We have all that and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, October 16th.

MATHISEN: Good evening, everyone, and welcome.

An end is in sight, barring some last-minute snag no one expects. After days of frantic bargaining and multiple false starts and stops, a deal has been reached to reopen the federal government and avoid default on its debts.

The agreement struck by Senate leaders Reid and McConnell is a temporary one, a truce more than an armistice, but it does meet two goals the White House insisted upon: get government employees back to work and authorize more federal borrowing without onerous conditions.

Now, the bill needs to pass in both the Senate and the House tonight, and reach the president`s desk by midnight Eastern Time. That way, it beats the Treasury`s stated deadline when it says it could start running out of cash fast.

John Harwood joins us now from Washington with more on the deal reached today, a timeline of tonight`s voting, and whether we have to go through this all over again in just a couple months time — John.
JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: Tyler, you know that congressional manufacturing process is built around just time of delivery. And that`s what we`re getting tonight. We expect that the Senate is going to pass this bipartisan deal between Harry Reid, the Democratic leader, and Mitch McConnell, the Republican leader, around 7:15 p.m. Eastern Time, that would reopen the government through January 15th. It would raise the debt limit through around February the 7th.

Meantime, Congress would negotiate a longer term budget deal that would alleviate part of the budget sequester — at least that`s the goal — and replace some of those sequester cuts with longer term cuts in entitlement programs, which both parties agreed need some reining in. That deal which we expect to get more than 80 votes in the Senate would then go to the House of Representatives.

Speaker Boehner, after meeting with his members this afternoon, said that resisting, blocking the Senate bill will not be a tactic for us. So, Republican opposition has essentially collapsed. It doesn`t mean a lot of Republicans won`t vote against it, but this is going to become law and will be signed by the president and it represents an alleviation of this threat of default that`s been hanging over us for several weeks.

GHARIB: And, so, John, and then we`re going to go through all of this again in January and February. Do you think Washington lawmakers have learned anything from this, or is that a dumb question?

HARWOOD: It`s not a dumb question at all. In fact, it`s the key question coming from this, Susie. The president`s goal in striking the line that he took, which is, I`m not going to negotiate on Congress doing its job to reopen the government and raise the debt limit was he`s trying to break the habit of Congress getting into crisis mode and, you know, doing last-minute haggling that he considered unreasonable.

So, if he`s right, if the president`s calculation was right, we won`t have as much drama in January and February, but we don`t know that. Some of his advisors aren`t so sure that he broke the habit. But we`re going to wait and see whether Republicans take a different tack next time around.

GHARIB: All right. Thanks a lot, John. John Harwood reporting from Washington.

Turning now to Wall Street. Stocks rallied on word of a deal in Congress that would avoid a devastating U.S. default. Relieve investors bought up stocks, sending all the major indexes soaring, each rising more than 1 percent. The Dow surged 205 points, the NASDAQ jumped 45, closing at the highest level since the year 2000, and S&P added 23 points. It`s just a few points away from a new record high.

MATHISEN: So, with a budget deal looking like it will pass tonight and hundreds of thousands of furloughed workers preparing to go back to work, just how much has the 16-day partial government shut down cost the economy? A lot.

The ratings agency Standard & Poor`s now says the 16-day shutdown has shaved at least 6/10 of 1 percent of the nation`s GDP, which adds up to a staggering loss of $24 billion ripped right out of the economy. And if that Senate bill doesn`t become law tonight and the country defaults on its debt, S&P says the economy would take an almost immediate 4 percent hit, sending the U.S. into another recession.

GHARIB: Here is another negative, the money taken out of long-term stock and bond mutual funds. According to the Investment Company Institute, outflows from U.S. stock and bond mutual funds added up to around $5.5 billion last year for the weekending October 9th domestic equity funds had outflows of more than $5 billion, while foreign equity funds added $2 billion, and municipal bond funds saw $1 billion moved out.

MATHISEN: So, a climactic day in Washington and for Wall Street. The question now: what`s next for the markets, the economy and your money?

Here with answers: Mohamed El Erian, CEO and co-chief investment officer of PIMCO, the world`s largest bond fund manager. And Richard Madigan, chief investment officer with JPMorgan (NYSE:JPM) Private Bank. Two of my favorite folks on Wall Street.

Welcome to you both.

Mohamed, let me begin with you, but I want to start by running a little sound byte from early today from your friend and rival, Larry Fink of Blackrock, where he expresses his sadness over what he saw this country just go through.


LARRY FINK, BLACKROCK, CHAIRMAN & CEO: I would say there is a profound sadness. They look at the United States as a beacon of hope. They look at the United States to have a secured investment. And now, they are raising questions is that — are those foundational principles correct going forward? That`s what I`m frightened of.

The answer is I don`t see any overt change in behavior yet, but I`m being asked questions related to this, and it may lead to changes in behavior.


MATHISEN: Mohamed, what do you think there? He`s referring to our standing in the world as a safe investment haven — our treasury securities most especially. How do you react to what you just heard?

MOHAMED EL-ERIAN, PIMCO CEO & CO-CIO: We are being asked questions. The rest of the world is looking saying, what are you up to? How can you be so irresponsible if you`re the issue of reserve currency and if we have delegated to you our financial intermediation? After all, we saved by holding your bond. So, the rest of the world is confused, is taken a back.

Now, you cannot replace something with nothing. So it`s not as if they can go elsewhere in the short run but it`s not a good idea to do this because at some point, they`re going to build pipes around the U.S. and that would harm our economic interest and our national security.

GHARIB: Richard, let me — and, Mohamed, too, let me bring up comments that came from the National Retail Federation today and this is a quote, saying, “Our economic recovery is retail-led and consumer-driven and political leaders on both ends of Pennsylvania Avenue need to stop undermining consumer confidence with partisan posturing. When consumers cut back their spending, it threatens jobs in every industry.”

So, let me ask you, Richard — and, Mohamed, feel free to jump in on this — is that, to what extent has this episode, what has it done to consumer confidence? What is it going to take? How long is it going to take for American businesses and the economy to bounce back from all of this?

RICHARD MADIGAN, J.P. MORGAN PRIVATE BANK CIO: Susie, from my prospective, I think the critical issue to this is what Washington accomplished was diminishing politics out and fundamentals back in. So, if this goes on longer, I think it becomes real meaningful consequence.

Beige Book today, and that was data through October 7th, continues to show resilient consumption, retail is still in place and growth. And S&P`s numbers that Tyler talked about in terms of cutting back growth by 60 basis points, I would probably argue they were over reaching a little bit in their expectations. We still have a view that we`ll see 2 percent growth this year.

So, confidence matters, but I think what the government accomplishes is getting people back to the fundamentals. And for more rearing markets right now, you`ll recognize we`ve literally reset to where we were September 18th, right after the FOMC meetings. That`s good news.

MATHISEN: Mohamed, markets broadly speaking, bond markets and the stock market maybe more especially, didn`t seem to freak out, didn`t seem to overreact to what we`ve just gone through and hopefully what will come to a conclusion this evening. But how should I as an individual investor position my money with the level of uncertainty that seems to be lingering even tonight as we look ahead to another set of deadlines two and three months down the road.

How should I invest?

EL-ERIAN: So to the assumption that were key to the market feeling relatively calm about this. One is, we would not default — and that was correct.

The other one was this notion that you could look through the economic damage. Why? Because people who weren`t being paid were going to be paid, so the damage would be temporary and reverseful.

This second assumption is more questionable today because what we`ve got is not a resolution. You called it a truce. I would call it a ceasefire. As if we`ve got a ceasefire for a few months, it does one thing you don`t want to do is play Russian roulette with consumer confidence ahead of the holiday season. That`s not a great time to do it.

So, our concern is the bounce back would be less dynamic than would have been otherwise people know there is a risk that we pay go through this again in January and February.

GHARIB: Mohamed, the other thing that`s up in the air is the U.S.`s credit rating. Does the U.S. deserve this sterling AAA rating given that we are going crisis to crisis and if there is a downgrade, how is that going to impact investor confidence, not only here in the U.S. but around the world?

EL-ERIAN: So we deserve it in the sense that this is not an ability to pay issue. We are so able to pay, Susie. This is a political willingness to pay issue.

So, if rationality prevails, which at the end of the day, it will prevail because there is so much at risk, we are at AAA.

Now if we get downgraded, it is problematic. OK? It is problematic because we are the AAA and a lot of people hold instruments because of the AAA. And also treasuries are used as collateral so it would mess up the plumbing of the system.

So, we need to avoid — not just for the good of the U.S. but for the good of the global system, we need to avoid more downgrades.

MATHISEN: Richard, you`re I know a calm guy. You always make me feel a little more secure when I listen to you. So — and I sense you have not changed your portfolio standing very much through all of this high drama, this opera. What would you say for a typical investor would be a good asset allocation as we move into the last quarter of this year and into 2014?

EL-ERIAN: I think separating views and vantage point from long-term money, Tyler, and what is short-term money. Long-term money we stay invested in and the theme I keep hitting with the team is, if we don`t believe there is a flat left-tail event that`s coming and we didn`t around this, we put a low probability of an all default around this, you stick the course and to me, I think the most important for upside from here is recognizing how high we`ve risen.

We have markets that are up 20 percent. It`s been an outstanding year. Most investors feel really good about that. But I think what it does, what people do is reset on the investment horizon. So, short-term money can trade ranges, lots of volatile. Long-term money stay the course, don`t chases and stay invested.

MATHISEN: All right. Richard Madigan, thank you very much. Appreciate you being with us.

Mohamed El-Erian, great as always to see you.

EL-ERIAN: Thanks.

GHARIB: Some stern words for lawmakers over the threat of a U.S. default on its debt. Warren Buffett, chairman of Berkshire Hathaway (NYSE:BRK.A), didn`t mince any words, giving his opinion of a possible default or about the lawmakers who would allow the country to miss payments on its bills. Listen up.


WARREN BUFFETT, BERKSHIRE HATHAWAY: It takes 20 years to build a reputation and 20 minutes to ruin it. Well, we`ve been building a reputation for proper fiscal behavior with our currency at least for 237 years. The United States, we`ve become the reserve currency of the world in the process, and people all over the world hold our paper.

So, to give up or to do anything that damages a 237-year period of good behavior is idiocy.


GHARIB: And Buffett also called the threat to not raise the debt ceiling a political weapon of mass destruction.

MATHISEN: And Buffett`s comments about Congress were echoed by some top executives and corporations today, and in some troubling earnings outlooks for the fourth quarter.

Mary Thompson has more.


MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): For package delivery giant Federal Express (NYSE:EXPR), CEO Fred Smith says a partial government shutdown is grounding a good part of its business.

FRED SMITH, FEDEX CEO: We have tens of thousands on shipments held right now that we can`t deliver to the U.S. government and a lot of the vendors shipping to the government are now — have ceased. So, there on the margin, there has been an effect.

THOMPSON: The shutdown and showdown in Washington hammering tool makers Stanley Black & Decker`s outlook. The firm citing a modest impact in the shutdown and budget cuts in the third quarter, an impact it sees getting worse in the fourth quarter.
Chip maker Linear Technology (NASDAQ:LLTC) also cutting its forecast for the current quarter because of uncertainty about Washington. That`s making its customers more cautious.

(on camera): That attitude unlikely to change given a short-term solution from lawmakers means that America could find itself in the midst of another debt ceiling just a few months from now.

(voice-over): And Larry Fink, the CEO of Blackrock, the world`s largest asset manager, says this could hurt the economy this quarter and well into the first quarter of next year.

FINK: If it feels like this is kicking a can down the road, it`s going to have a lasting damage to consumer confidence, a lasting damage to CEO behavior in terms of job creation.

THOMPSON: Pittsburgh-based PNC echoing those sentiments. The bank predicting a slowdown to economic activity this quarter tied directly to Washington. While U.S. Bancorp (NYSE:USB) says nervous customers are moving more money into cash and the influx of deposits is squeezing the bank`s net interest margin as it pays more interest on deposits, deposits it may not be able to lend.

BNY Mellon`s deposits ballooning, too, growing by $10 billion since the end of September. Its customers moving to cash seeking certainty and safety for their money as Washington dithers over what to do with its own.



GHARIB: Still ahead on NIGHTLY BUSINESS REPORT: Big Blue reports a big revenue miss, sending shares lower after-hours. That`s coming up next.

But, first, how the international markets performed today.


GHARIB: The U.S. economy grew at a modest to moderate pace over the last six weeks, but job growth was subdued. That`s a assessment from the Federal Reserve`s latest so-called Beige Book Survey, a snapshot of business and economic conditions in the Fed`s 12 regional bank districts.

The report also showed that growth slowed in Philadelphia, Richmond, Chicago and Kansas City regions. Many businesses reported optimism about the future, but also expressed uncertainty about the government shutdown and looming debt ceiling crisis.

MATHISEN: A banker`s group says new mortgage applications were flat last week. With lending rates leveling off, refinancings were higher, but requests for new home loans fell to a six-year low on worries about the government shutdown.

GHARIB: We begin market focus with a trio of earnings that came out after the market closed today.

First up, Dow component IBM, and it wasn`t good news. A revenue miss sent shares lower in after-hours trading. The company blamed it on a sharp decline in hardware sales.

But earnings beat analysts` estimates and IBM reiterated its full year outlook. Shares finished the regular session, up more than 1 percent, to $186 and change, but dropped about 6 percent after-hours. If the current losses hold, IBM would drag the Dow down by about 65 points tomorrow.

American Express (NYSE:EXPR) (NYSE:AXP) reporting a rise in net income in the third quarter beating Wall Street estimates. The credit card company said cardholders spent more in the U.S. and abroad. AmEx shares finished the day at $76.32, up almost 1.5 percent but didn`t move much after the bell.

GHARIB: EBay`s the third big company to report. It posted a rise in earnings but revenues fell short and the company issued a disappointing outlook. Now, even though profits in the third quarter grew, thanks to increasing mobile transactions and an increase in the number of people using its PayPal payment processer, investment focuses on that outlook.

It lost 45 cents in the regular session to $53.52 and fell 4.5 percent after-hours.

Now, Bank of America (NYSE:BAC) reporting a sharp increase in earnings, fueled by growth in its consumer and wealth management arms. It earned 20 cents a share. That was 2 cents above Wall Street estimates and reversing a year ago loss.

But it wasn`t all positive. The bank struggled in its mortgage department, bringing in just half of the revenue from a year earlier. As for the stock, it rose to $14.56.

MATHISEN: And Pepsi also beat street estimates and says it`s on track to meet financial goals for the year, thanks to strong sales of the snack foods. The company`s large global reach in successful Frito Lay division made up for declines in the U.S. soda market, and the stock popped 2 percent to $82.27.

Shoppers are buying up Barbie, and that helped boost Mattel`s bottom line. The toy market reported a 16 percent rise in quarterly profits, easily beating expectations. And Barbie wasn`t the only doll in high demand. Sales were also strong for Monster High and the American Girls line. The stocks up 1 percent to $41.97.

Shares of Advance Auto Parts (NYSE:AAP) hit an all-time high on news that it will buy General Parts International, privately held company, for a little more than $2 billion. The acquisition will make Advance the largest retail in auto parts in North America. The news sent the stock up 16.5 percent to $96.16.

And Regeneron Pharmaceuticals (NASDAQ:REGN) and Sanofi moved higher on promising results from a new drug they`re developing. Their cholesterol drug, when used by itself, can cut bad lipids in half, something industry analyst call a potential blockbuster.

Shares of Regeneron up almost 6 percent to $307.65. No change, though, today for Sanofi. It closed at $49.29.

GHARIB: And looking ahead, one of the most anticipated earnings reports due out before the opening bell tomorrow, Dow component Verizon (NYSE:VZ). There are high hopes for a blowout report between the aggressive expansion of its FiOS TV service and plans to take complete control of its wireless unit from its joint venture with Vodafone.

Julia Boorstin has more.


JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): The parent company of the nation`s largest wireless carrier Verizon (NYSE:VZ) is expected to report 4 percent higher revenue and 16 percent higher earnings per share, thanks to a strong wireless business on growing margins.

Pacific Crest analyst Michael Bowen points to the fact that Verizon (NYSE:VZ) continues to have three times the number of wireless subscribers as AT&T (NYSE:T).

MICHAEL BOWEN, PACIFIC CREST SECURITIES: Overall, the subscribers out there are pleased with the network. Verizon (NYSE:VZ) continues to have probably the highest quality wireless network out there. The wire line business continues to struggle to a degree. However, FiOS has been a strong point.

So, overall, it should be a pretty good quarter for the company.

BOORSTIN: While Verizon`s landline phone business is expected to continue to struggle like all land line providers, its high speed Internet and TV services, FiOS, are growing strong.

But perhaps the biggest focus will be on the Dow component`s $130 billion deal to buyout the remaining 47 percent stake of Verizon (NYSE:VZ) Wireless owned by Vodafone, which Wall Street sees as a positive for Verizon (NYSE:VZ) shares.

BOWEN: It really makes it a cleaner story, as far as the entire company. And now, they don`t have to distribute the profitable earnings that are coming from the wireless business, the Vodafone. They can keep it all within Verizon (NYSE:VZ).

BOORSTIN: Verizon (NYSE:VZ) is increasingly crowded space, with T-Mobile and Sprint proving formidable rivals. Thursday morning, we`ll see what kind of guidance Verizon (NYSE:VZ) management gives about the company`s potential to maintain growth into next year.

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


MATHISEN: Coming up, the company behind the push to reduce our dependence on foreign oil, and their ground-breaking technologies that could one day secure our energy future.

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


GHARIB: In Washington today, it wasn`t just the debt crisis in the spotlight. There was also a lot of talk about American energy independence. The big question at the energy conference, why is the U.S. still dependent on imported oil and how close are we to using energy to be self-sustaining in our energy needs?

Sharon Epperson reports.


SHARON EPPERSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): With the federal government shutdown, and some of the nation`s premiere institutions for energy innovation scale down or shutdown completely.

But many companies continue to forge ahead, with groundbreaking technologies that will help reduce this country`s dependence on oil, and increase our energy security.

(on camera): Corporate executives and policymakers have come together at the Securing America`s Future Energy National Summit on Energy Security, to increase awareness and spark action to help reduce the nation`s dependence on oil.

KAUSHIK VYAS, NOSTRUM CEO: Energy security is triple win. It`s a win for the customer because our technology reduces the price. It`s a win for the climate, and it`s a win for security of the nation. Politically, economically and from standpoint of cost to the end customer.

LARRY FROMM, ACHATES POWER VP OF BUSINESS: The fastest and most cost effective way we can achieve our energy goals and reduce our dependence on foreign sources of oil is to introduce more efficient engines.

EPPERSON (voice-over): Companies like Nostrum Energy are developing technologies to fine-tune internal engines to increase fuel efficiency, while others, like Achates Power, are developing new engines, including the next generation combat engine for the U.S. Army.

Domestic oil production is booming and fuel efficiency in cars and trucks is improving. Yet, with our heavy dependence on oil, the United States is just middle of the road when it comes to oil security based on a new index measuring more than a dozen countries.

But carmakers are making significant strides in reducing gasoline consumption. Nissan has sold more than 35,000 battery-powered Nissan Leaf. General Motor Chevy Volt, the first commercially available plug-in electric hybrid, has sold almost 50,000 vehicles.

MICHAEL ROBINSON, GENERAL MOTORS VP OF SUSTAINABILITY: This is part of our solution, really. It`s not a single silver bullet solution but it`s one of a number of avenues that are available to the transportation sector.

EPPERSON: Compressed natural gas vehicles like the Chevy Impala due out next year are another.

Electrification services for truck stops are enabling trucks to draw power from the grid rather than idle or run on diesel fuel.

MICHAEL PANICH, SHOREPOWER CEO: It`s not going to happen immediately. I think we need to take a lot of steps to get there. I think electrification of transportation is a major step forward.

EPPERSON: Another step, plant-based fuels that replace crude oil. Of course, that will take many years.

LEE EDWARDS, VIRENT CEO: This is a journey. It will take time but there is invasion in a number on companies and now is the time to press on harder than ever.

EPPERSON: The result will be a more secure energy landscape.

For NIGHTLY BUSINESS REPORT, I`m Sharon Epperson in Washington.


MATHISEN: And, finally, today marks the 90th anniversary of the founding of Walt Disney (NYSE:DIS) Company. It started making cartoon shorts that featured a familiar looking mouse who was then known as Steamboat Willie. Now, it`s number 66 on the Fortune 500, more than $40 billion in annual revenue and all the theme parks and characters you`d ever hope to encounter.

GHARIB: And you just got back —

MATHISEN: Just came back.

GHARIB: Is it still as magical?

MATHISEN: Always crowded, always bustling, a nice place to visit.

GHARIB: That`s why they make all the money.

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

For more on the stories we covered tonight, go to our Web site,

MATHISEN: And I`m Tyler Mathisen, thanks so much for joining us. Have a great evening everyone. We`ll see you back here tomorrow.


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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