Transcripts: Thursday, October 31, 2013

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

(COMMERCIAL AD)

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Trick or treat. Many expected the worst, but October turned out to be a big treat for investors.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Bubble trouble. With stocks in very high territory, some savvy investors are starting to use the dreaded B-word. So what should you do? We have the bull and bear cases for your money.

GHARIB: And no room for error. We know many people are one paycheck away from bankruptcy. But did you know there are major cities running perilously close, as well? The frightening names and numbers, ahead.

We have all that and more for this Halloween, October 31st.

MATHISEN: Good evening, everybody. And happy Halloween.

It is the final trading day of October, a month that historically has not been a very good one for stocks. But this year, October doesn`t look so scary after all. Today`s stocks move in a very narrow range for most of the session but traders did seem to get spooked in the final hour and they sold off. In the end, the Dow was down 73, NASDAQ off nearly 11 and S&P fell six.

But for the month, it was a good one for the bulls. The Dow up about 3 percent, the NASDAQ up about four and S&P 500 up better than 4 1/2 percent or thereabouts.

And with the month of October coming to a close, the nights are cold, and the days are shorter, and investors apparently afraid of very little for now.

(BEGIN VIDEOTAPE)

MATHISEN (voice-over): One by one, the ghouls that might have ruined October for investors were sent packing. Ben Bernanke didn`t start yanking on the monetary purse strings, as some expected. The government closed, but then reopened and everybody got paid, employees and creditors alike. Earnings a mixed bag with enough treats to balance out the tricks and the economy is OK.

ANDRES GARCIA-AMAYA, J.P. MORGAN: The economy is still growing at roughly 2 percent, right? So I think it`s fairly resilient. And if we didn`t get in our way, we would have actually been growing a little bit faster.

MATHISEN: All in all, a pretty good recipe for stocks in a month that`s earned its reputation for being unfriendly to equity investors. There was October 1929, of course. The market fell more than 20 percent, ushering in the Great Depression.

There was 1987. The Dow crashed almost 23 percent in a day. And finally, 2008, at one point in that dark month, the Dow was down 28 percent for the month, despite the index` biggest one-day gain ever, more than 936 points on October 13th.

This year, of course, it`s different — record highs for the Dow up 3 percent. The S&P 500 up almost 5 percent. The Russell 2000 nearly 3 percent higher. And NASDAQ, with a gain of 4 percent this month, is higher than it`s been in 13 years.

Investment trick or treat.

GARCIA-AMAYA: Try not to think about the levels because then it scares you.

RICHARD STEINBERG, STEINBERG GLOBAL ASSET MANAGEMENT: I`m getting more nervous. I`m fighting the greedy demons.

MATHISEN: So what happens from here? Well, that naturally is anybody`s guess really. Seasonality, though, is on your side. Typically, the markets go higher in November and December. Then, again, with the S&P 500 already up 23 percent or more this year, maybe there is a reason to be scared of hikes.

(END VIDEOTAPE)

GHARIB: And those lofty levels have some Wall Street pros scared of bubbles, market bubbles. That`s when investors drive up stock prices way above their true value. Remember the dotcom bubble?

Well, there`s been a lot of talk this week about the risk of a market bubble. Is it just talk? Here`s what some big name investors are saying.

(BEGIN VIDEO CLIPS)

BILL GROSS, PIMCO CO-CIO, FOUNDER & MANAGING EDITOR: I think the markets are bubbling and all asset prices are bubbling — bond prices, stock prices.

ROBERT SHILLER, CO-FOUNDER CASE-SHILLER INDEX: At this point of time, the stock market is somewhat bubbly. It has a high cape, but we can still find low cape sectors in the market.

KENNY POLCARI, O`NEIL SECURITIES DIRECTOR: There is that disconnect and sense of bubble brewing, right, although, today look at the market. We`re essentially flat, maybe up marginally, right?

(END VIDEO CLIPS)

GHARIB: And who is right? And what should you do with your money?

Let`s get the thoughts of two fund managers, one is a bull. The other is a bear.

The bull: Vince Lowry, CEO of RevenueShares and BTL Associates, will make his case to Tyler. And I`ll question the bear, Uri Landesman, president of Platinum Partners.

Gentlemen, thank you so much for joining us.

Uri, let me begin with you, so much optimism in the markets right now. Is there — are we at risk of a bubble? Why are you so bearish?

URI LANDESMAN, PLATINUM PARTNERS PRESIDENT: You know, I`m bearish because I think prices are way ahead of themselves. I think they are inflated because the safety net that Bernanke and the Fed pitched under us for a number of years right now. This too shall pass.

We`re at a point in the market where the market wants to hear bad news because that means the Fed is going to hang around longer. I think that`s the opposite way we should be looking at things. The market is not pricing in, any chance of bad news, and I think that there is a lot more room to the downside here than to the upside.

MATHISEN: All right. Vince, answer Uri there if you might. And specifically address why stocks have been rising so much when the economy and earnings aren`t rising nearly as quickly.

VINCE LOWRY, REVENUESHARES CEO: Sure. The only bubble out there is in the bond market today. Stock market is nowhere near a bubble.

Right now, you can buy the S&P 500 at $1.60 roughly for every dollar in revenue. To put that into prospective, the bubble of 1999, you were paying about $2.49 to buy the S&P 500. That was a bubble. This is nowhere near a bubble. Long-term history is about $1.50 when you include periods of the `70s with inflation, and non-inflation periods of $1.25.

But when interest rates were at 6 percent, that was considerable. Now, we`re at 10-year, around 250. The most important thing, the thing that`s been studied over 100 years is that when you have a positive sloping yield curve like this, especially one where you have short-term rates, 250 basis points below the tenure that everyone studies, that`s extraordinary bullish for stocks, although revenues are growing slow.

We`ve detected in the last couple quarters that they moved from going on average of the last two years by 1.8 percent to 2.8 percent, and when you consider that for the last five years in the structure bull market, and they have been cutting costs. If those revenues rise up to the normal of 5 percent to 7 percent in recovery, it`s Katy by the door for the stock market. If you`re sitting on the sidelines listening to these bears, you`re going to lose out.

GHARIB: Vince, let`s back to Uri and get your response to what Vince is saying. His indicators are showing things are bullish, a lot of cash on the sidelines he`s saying. Where is that cash going to go, probably the stock market, right, Uri?

LANDESMAN: I don`t think so. First of all, if the lead point in your argument is that this is a bubble and that`s why we should be buying stocks, that`s a fairly weak argument. I don`t know which country Vince is living in, but the one I`m in, what I`m seeing is a vast majority of America doing very poorly. So, what we have is an economy that`s giving the illusion of being OK but actually, when you look at it, it`s completely bifurcated.

And about 90 percent of Americans are actually living below their means and having less disposal income than they used to. This is a long-term very gray drag on the economy, and I don`t see strength from, you know, the upper 10 percent and from the enterprise dragging up the bottom.

So, I think this is a market that`s ignoring a lot of warning signs out there and will react accordingly when people get a little more sober.

MATHISEN: All right. Vince, quickly —

LOWRY: I don`t —

(CROSSTALK)

LOWRY: Warning signs are out there, I don`t know what warning signs are out there but there is no statistical data to call for a bubble in the stock market. It`s just not there.

We`re used to the previous 10 years growing our revenues and S&P 500 as a measurement around 6 percent to 7 percent. Now, we`re down to 2 percent. So, we think the world is falling apart. We got people running around worried to death.

Don`t be worried. There`s a lot of good things in place. All we need is some growth. Maybe some of these people, Washington, start some growth-oriented views of the world and do — provide some more growth-oriented economic behavior down there.

And I am telling you that`s all you need for a very big bull market.

MATHISEN: A good discussion.

LOWRY: That I think is going to go for another three years.

MATHISEN: Well, there you go. There is a bull call. Uri sees it the other way. That`s what the market is made of, people with different opinions.

Vince, Uri, thank you very much for being with us tonight.

But while the U.S. dollar gained strength today and stocks floated downward, gold prices plunged. It tumbled more than $20 an ounce this Halloween day.

Sharon Epperson has been looking into that spooky move.

(BEGIN VIDEOTAPE)

SHARON EPPERSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Gold prices extended the decline in the session after the Federal Reserves meeting as traders try to parse through every word of their statement. They are trying to figure when the Federal Reserve will actually start tapering its bond-buying program. But traders are also watching some technical levels for gold very carefully.

Here in the month of October, we`ve seen gold prices rally some $100 in about 10 days time, getting to a high of $13.55 an ounce. Now, gold was unable to maintain those highs and traders say that`s when profit-taking set in and looking at perhaps a downward trend now in gold prices, as we see prices getting below the $13.25 level.

The key determined in the next couple of days will be what happens to gold in terms of retail demand and physical demand. It is the Indian wedding season and often a time there is a strong physical demand for gold.

We`re also looking at ETF action to see the largest ETF, the GLD, does in terms of investor appetite for gold in the coming days. Those may be the key determining factors on where gold prices go next.

For NIGHTLY BUSINESS REPORT, I`m Sharon Epperson.

(END VIDEOTAPE)

GHARIB: Gold wasn`t the only commodity falling today. Oil prices closed at a four-month low, $96 a barrel and just today, ExxonMobil (NYSE:XOM), the world`s biggest publicly traded energy company reported profits fell 18 percent last quarter, even though it managed to earn nearly $8 billion. That helped ExxonMobil (NYSE:XOM) become the biggest gainer in the Dow. Its stock rose almost 1 percent.

But year to date, the company is one of the weakest performers in the index.

Bob Pisani drills down on the numbers.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Oil giant ExxonMobil (NYSE:XOM) reported revenues above expectations but earnings were lower than the same quarter last year because profit margins on refining operations, primarily gasoline production, were much lower.

The problem is growth. When you`re as big as Exxon, it`s tough to grow. Demand is weak and the supply of oil is strong, thanks to abundant new discoveries of oil and natural gas in the United States.

JOHN STEPHENSON, FIRST ASSET INVESTMENT MANAGEMENT SVP: This is a company that`s increasingly going to struggle for growth. In fact, there`s going to be no production growth next year and only 2 percent production growth for the next few years.

PISANI: On top of that, productions costs are rising worldwide.

Another issue for big oil: finding enough oil globally to replace what they lose each year. Exxon loses roughly 6 percent of their production each year. To replace that, they have to find more oil often in politically unstable parts of the world or in a more difficult geological environment. Little wonder that Exxon`s stock has been stuck in neutral all year, up only 2 percent in a year when the S&P 500 is up 24 percent.

RICHARD ROSS, AUERBACH CRAYSON GLOBAL TECHNICAL ANALYST: This is the third worst performing stock this year. So it is difficult to get too excited about it.

PISANI: All the growth and energy stocks are in smaller companies that are part of the fracking revolution in the U.S., where companies like Pioneer Natural Resources (NYSE:PXD) and service companies like Halliburton (NYSE:HAL) and Schlumberger (NYSE:SLB) have had huge returns this year.

(on camera): Face with slow growth, many investors are agitating for Exxon to return more cash to shareholders through a higher dividend or to buy back more stock.

Today, Exxon maintained its buyback program but did not increase it.

For NIGHTLY BUSINESS REPORT, I`m Bob Pisani at the New York Stock Exchange.

(END VIDEOTAPE)

MATHISEN: The Obama administration has called in some very powerful exterminators to kill the bugs in its Healthcare.gov Web site. Experts from Google (NASDAQ:GOOG), Oracle (NASDAQ:ORCL) and Red Hat (NYSE:RHT) are now working with the firms that developed the struggling online marketplace trying to ensure stability and security for the millions of health insurance shoppers.

GHARIB: For the first time in five years, the federal government ran a budget deficit that`s below $1 trillion. Thanks to those cuts in the sequester and higher tax revenues, the budget shortfall for 2013 is $680 billion. That`s the lowest since 2008.

And coming up, cities that have one or two days of cash on hand left. The ramifications coming up.

But, first, a look how international markets fared today.

(MUSIC)

MATHISEN: The buckle of the day — that is where we start tonight`s “Market Focus” and why not on this Halloween?

Ariad Pharmaceuticals, the stock pummeled after the company suspended sales of its blood cancer drug, Iclusig, barely two weeks after it stopped an ongoing trial of the medicine over safety concerns. The stock is down almost 45 percent today. And take a look at this next chart, down 88 percent for the month.

And ding dong, Avon falling. The shares tanked after the beauty company reported a big earnings miss. A drop in North American sales and weakness in emerging markets threatened the troubled company`s turn-around plan. The world`s largest door-to-door cosmetic seller also warned its numbers will be hurt by larger than expected fine by the SEC to settle a bribery probe. The stock dropped 22 percent today to $17.50.

More readers paid for “The Times”, boosting the media company`s revenue. “The Times” still reporting a net loss after selling “The Boston Globe”. Overall sales did beat forecast. Gains and subscription revenue offset a decline in online ad sells. The stock goes up a fraction, but it is up 62 percent so far this year.

GHARIB: Expedia (NASDAQ:EXPE) stocks soared after the company reported quarterly profits much higher than estimates and revenues also better than expected, up 17 percent. The online travel agency said a referral system from Trip Advisor improved, helping the company`s bookings. The stock popped 18 percent to almost $59 a share.

Growth overseas and an increase in people paying with plastic helped MasterCard`s bottom line. The world`s second largest credit card company posted a 16 percent rise in revenue. On the day, MasterCard (NYSE:MA) fell about 1 percent to $717.

And AIG reported earnings after the bell that beat estimates, but revenue came in light. Strong growth in its property and casualty business helped the insurer this quarter. But investors couldn`t ignore the revenue miss so shares fell a fraction to $51.65 and continue to fall in after hours trading.

MATHISEN: Everybody knows about Detroit`s bankruptcy but a study of U.S. city`s finances reported in today`s “Wall Street Journal” indicates that many of the 250 largest U.S. municipalities are perilously close to running out of cash. The median amount of cash on hand was equal to just 81 days of typical operating expenses. A city emergency requiring police and fire over time could consume much of that in a matter of days. Some of the cities with the smallest cash cushions, Shreveport, Louisiana, with 10 days. Chicago with 8.7, New Orleans with 2.5 days and Fresno with less than a day`s worth.

Here now to explain why the cities are so cash-strapped is Kil Huh. He`s director, state and local fiscal health for the Pew Charitable Trust.

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

How did cities get in this perilous state? And how bad is it?

KIL HUH, THE PEW CHARITABLE TRUSTS DIRECTOR: Well, cities still have many challenges and recovering from the great recession. Their revenue bottoms lit much later than the state and federal governments which took place in 2009 and they`re still struggling to get back on solid fiscal footing.

MATHISEN: Why did the revenue hit bottom later?

HUH: Well, it`s a large — it`s a function of the property tax. The property values are still struggling, as well as the lag in assessed values. And in addition to that, the state and federal aid was also cut during that time, as well.

GHARIB: You know, Kil, I was is surprised to see cities like Chicago, New Orleans on this list, very close to running out of cash over the next couple days.

Is it possible they could become the next to Detroit and go bankrupt? How bad is the situation?

KIL: Well, they`re not necessarily running out of cash. What the studies measured was the fiscal cushion they had. The reserve funds or rainy day funds they had in order to cope with emergency. That said, they are still struggling.

But bankruptcies are very rare. I don`t think you`ll see Chicago or Louisiana — Shreveport, Louisiana, become the next Detroit. Bankruptcy is often a measure of last resort, and it`s something that most municipalities try to avoid.

MATHISEN: You know, I read in the article they recommended that Fresno, for example, should ideally have something like $10 million in an emergency found. What is the typical cushion that a city you would recommend should have on hand to make sure that it can weather, for example, a weather emergency?

HUH: Well, every city is different and what they need in terms of reserve is going to vary from city to city. But typically, the reason why cities are in a position they are in is that they have to tap the reserves during the worst of the fiscal crisis for these cities.

And when they tap reserves, they often cut spending, letting people go, such as police officers, firefighters and sometimes administrators. And then when that wasn`t enough, they raise taxes.

So, cities had many tools that they utilize to get through the worst of the Great Recession and fiscal aftermath. But, you know, they are still recovering.

GHARIB: So, how do cities get healthy again? We know that in Washington, there is budget problems there. That trickles down to the state finances and then, of course, it goes to cities. So, how do you get out of this mess? And the economy is not growing much anywhere?

HUH: Well, I think you hit on a key point. Cities have their role in ensuring that they are on solid fiscal footing. But at the same time they need the economy to start growing again, too. And part of what the state needs to do is also — think about the aid they want to provide localities. The level of money that often is given to states, which is typically about — cities, rather which is typically a third of their budget have dwindled and nowhere near pre-crisis levels.

MATHISEN: All right. Mr. Huh, thank you very much.

Kil Huh is director of state and the local fiscal health at the Pew Charitable Trusts.

HUH: Thanks.

GHARIB: Now on the flip side, some cities and towns are doing better than others and that`s thanks to the housing recovery. As the landscape levels out and more traditional factors once again play in home buying and selling. A new survey lists the top 10 turnaround towns.

Diana Olick takes a look.

(BEGIN VIDEOTAPE)

SPORTS ANCHOR: The Red Sox are champions.

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): As if Boston doesn`t already have enough to celebrate, add to this list — one of housing`s top 10 turnaround markets.

LESLIE PIPER, REALTOR.COM SPECIALIST: There is different employers that are wanting to start new businesses in Boston, which is a great sign.

OLICK: A Realtor.com survey took median home prices, supplies of homes for sales and days on market to come up with its quarterly list of the top 10.

PIPER: The biggest change that we`re seeing just on our list is that the state of California really had saturated the top ten and those cities such as Oakland, San Jose, Sacramento have already sort of gone through the recovery process and now we`re seeing other communities and cities move up to the top 10 and top 20 list.

OLICK: Topping the list is Detroit, a market decimated by the auto industry implosion well before the rest of the nation saw any cracks in housing. A sharp jump in prices and selling speed pushed it to the top spot but critics say other factors still weigh on Detroit.

MARK FLEMING, CORELOGIC CHIEF ECONOMIST: When we look at Midwestern markets in general, there is, you know, strong long-term demographics to out immigration, that don`t bode well for the long-run health of many of those markets, as opposed to the coastal Sun Belt western kinds of markets where there is a lot more immigration.

OLICK: Detroit is riddled with foreclosures, while the nation as a whole saw completed foreclosures drop 39 percent in September from a year ago according to CoreLogic (NYSE:CLGX). And judges are not involved in the foreclosure process in Michigan, unlike in so-called judicial states where they have slowed the process dramatically.

(on camera): The top 10 list, as well as the housing market in general are becoming increasingly volatile. Rising home prices, rising mortgage rates and uncertainty here in Washington over the debt limit and the budget deal have and continue to take a toll.

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

(END VIDEOTAPE)

GHARIB: And to read more about the top turn around towns, go to our Web site at NBR.com.

MATHISEN: And just ahead, something really scary and it`s not good for your sweet tooth or your wallet.

But, first, a look at commodities, currencies, treasuries on this Halloween day.

(MUSIC)

MATHISEN: A few weeks ago, we gave you the estimate. Now, it`s official. If you`re among the 58 million Americans receiving Social Security, you`re payments will go up next year but not by much. Benefits will rise 1.5 percent in 2014. That`s the smallest increase since automatic cost of living adjustments began in 1975.

Now, that`s because the number is tied to consumer inflation, which barely budged over the past year. Now, the increase averages out to about $19 extra a month.

GHARIB: Here`s some good news for air travelers. If you like using electronic devices, federal regulators are easing up on restrictions once you board. You`ll soon be allowed to read, play games and watch movies during landing and take off. But you still can`t make cell phone calls.

Delta and JetBlue say flyers might be allowed to use their iPads and kindles as early as tomorrow.

MATHISEN: And finally tonight, it is, of course, Halloween — candy`s big day. And the ghoulish price of chocolate is enough to scare just about anybody. Cocoa prices have shot up 20 percent this year.

Jane Wells tells us why.

(BEGIN VIDEOTAPE)

KIDS: Trick or treat!

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Kids, get ready for something really scary, candy prices could go higher.

The reason: chocolate. Cocoa prices are up 20 percent this year, a combination of poor weather in Africa where most of the world`s cocoa is grown and rebounding demand.

JOHN BAUMGARTNER, WELLS FARGO SECURITIES: We think this is going to be the first year in 2013 where the level of global cocoa demand exceeds production for the first time since 2009.

WELLS: You probably won`t see price hikes soon. Hershey`s contracts cocoa prices as much as two years in advance. But retailers like Costco (NASDAQ:COST) say demand is so strong, some players may have to buy in the current market. Costco (NASDAQ:COST) says the cost of a ton of cocoa has risen to $2,200 to $2,700 and running through packaged chocolate faster than anticipated.

At the Ralphs, owned by Kroger (NYSE:KR), sales of candy are up this year. But so far, prices are not.

KENDRA DOYEL, RALPH`S GROCERY: Mixture is popular but chocolate is still king. It really is the best seller in our candy department.

WELLS (on camera): Now, no one is suggesting we`re going to run out of chocolate, at least not yet, and while Americans are always being encouraged to have a healthy Halloween, that`s no fun. In fact, one company is mocking the very idea.

UNIDENTIFIED MALE: Who likes Halloween candy?

KIDS: Me!

WELLS: Crest has created a viral YouTube hit with a video where kids are tricked into eating treats made from healthy foods like vegetables.

UNIDENTIFIED KID: Mine tastes like broccoli.

WELLS: The reactions are unscripted and a warning sometimes too real.

Crest parent company Procter and Gamble debated whether or not to show a little girl named Adrienne spitting up her (INAUDIBLE) butter cup.

RISHI DHINGRA, PROCTOR AND GAMBLE ORAL CARE MARKETING DIR.: I think the reason we kept to this because right after that she comfortably says I just threw up.

UNIDENTIFIED KID: I threw up.

UNIDENTIFIED MALE: You threw up? OK.

DHINGRA: I think the context of the spot is the one where you`re kind of getting a lot of chuckles. So we decided to keep it.

WELLS: Plus, her parents were nearby. The video may or may not sell toothpaste but it certainly proves Americans are crazy for cocoa. And no matter how much it costs, you can`t have Halloween without it.

For NIGHTLY BUSINESS REPORT, I`m Jane Wells, Los Angeles.

(END VIDEOTAPE)

GHARIB: Well —

MATHISEN: The poor little kid, I feel awful for her.

GHARIB: I`m crazy for chocolate and I don`t care what the price.

MATHISEN: You`ll pay. You`ll pay.

My son is being a police officer. I`m going to run home right now and catch up with him.

GHARIB: OK. Have a happy Halloween, everyone. That`s NIGHTLY BUSINESS REPORT for tonight. I`m Susie Gharib.

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