Transcript: Monday January 6, 2014

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: Historic confirmation. Janet Yellen will become the first female chair of the Federal Reserve. When she takes the helm, what will be her biggest economic challenge?

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Deep freeze. The coldest weather in decades snarls business travel nationwide. Thousands of flights are scrubbed. How bad weather will hit the airlines` bottom line.

GHARIB: And $2 billion deal. JPMorgan (NYSE:JPM), Bernard Madoff`s main banker for more than two decades, is reportedly near a settlement over its role in the scandal. Will this end the bank`s massive issues?

We have all that and more tonight on NIGHTLY BUSINESS REPORT for this Monday, January 6th.

MATHISEN: Good evening, everyone, and welcome.

It`s an historic day for the United States and its economic policy. For the first time ever, a woman, Brooklyn-born economist Janet Yellen, is poised to be sworn in as the nation`s top banker. Early this evening, the Senate voted to confirm the 67-year-old Yellen as the chair of the Federal Reserve. She`s now its vice chair.

Eamon Javers joins us live in the nation`s capitol with more on tonight`s vote and what it means for interest rates, the Fed`s stimulus plan, and the American economy.

Eamon, welcome.

Let`s start with the details. How close was the vote?

EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: In the end, Tyler, she had more votes than she needed. The final vote was 56-26. And you may notice that that does not add up to 100 senators. We have a lot of missing senators today because of some of those travel glitches around the country. Senators were not able to make it back to Washington in time for this vote tonight. But 56-26 was the final margin.

In the end, she got fewer “no” votes than Ben Bernanke, who had 40 “no” votes back in 2010.

So, that would indicate a little bit more support, but it`s a little bit skewed by the weather and the travel. So, it`s hard to say exactly how popular the Fed is and exactly how popular Janet Yellen is in the United States Senate right now.

GHARIB: You know, there were so — all day long, everybody was wondering whether this vote was going to go through or not because as you mentioned about the weather. Any other surprises? Any other color that you can fill in on this historic vote?

JAVERS: Well, one of the interesting things here is that we have a number of Republican votes for her, but we`re going to have to take a look and break this down. One of the stats I`m going to be curious to see here is whether or not we saw the majority of the Republican Party vote against her. I think that would be a first if we saw the majority of a political party voting against a chair nominee for the Federal Reserve. And then obviously there`s the historic nature of tonight`s vote.

Already there are some people speculating that Janet Yellen with this vote has just become the most powerful woman in the entire world.

MATHISEN: You know, Eamon, there were some worries way back when Ms. Yellen was first nominated by the president that certain senators, notably Rand Paul of Kentucky, might put a so-called hold on her nomination. Those fears, if that`s the right word for it, were not realized. Why?

JAVERS: Well, I think part of it is that they were able to go with the nuclear option in the United States Senate so they were a able to lower the threshold of votes that she needed to just 50 votes in the Senate. So that helped ease things along. Then I think it`s a political calculation on the part of some of those senators who said, you know what, do I really want to be known for this or do I want to hang around here and fight on a different issue on a different day.

In the end, Rand Paul didn`t go to the United States Senate floor to speak about this until after the vote had concluded.

GHARIB: All right. Thanks a lot, Eamon. Eamon Javers reporting from Washington.

Well, our next guest says that Janet Yellen`s biggest challenge will be how to unwind the Fed`s stimulus without derailing economic growth. He`s Nariman Behravesh, chief economist at IHS (NYSE:IHS).

Nariman, thanks for joining us. Tell us what Janet Yellen should or shouldn`t do so that she`s successful in unwinding the stimulus out of the economy.

NARIMAN BEHRAVESH, CHIEF ECONOMIST IHS (NYSE:IHS): Well, I think first and foremost what she provides is some continuity in terms of what e fed is doing. But very importantly, I think the key goal here is flexibility in terms of gauging where the economy is, gauging how much to proceed with this tapering of the bond purchases, and do it in a way that obviously gets rid of that program let`s say, by the end of this year without derailing the economy. I mean, that`s the key challenge I think over the next year.

So, flexibility is key. Making sure the economy is on track, you know, not doing things too soon, not doing things too late. So, it`s a bit of a balancing act.

MATHISEN: How, if at all, do you expect her tenure to be different from Chairman Bernanke?

BEHRAVESH: It`s really not going to be that different. Again, what we`re going to get, as historic as this vote is, we`re going to get continuity. She`s been in the Fed system quite some time now, first as president of the San Francisco Fed, then as you said earlier, the vice chair of the Federal Reserve.

So what we get is continuity and we`ll get very similar policies, I suspect. There will be some nuances, some subtle differences, but in broad strokes it`s going to be very similar because she by and large has supported what Bernanke did.

GHARIB: You know, Nariman, you were talking about economic growth, and one thing we hear from so many economists as well as Fed policymakers is that what`s happened to business investment, when are businesses going to start spending and hiring and expanding. Do you think that now with Janet Yellen in charge and starting this tampering process, that we`re going to see businesses step up?

BEHRAVESH: Well, that`s certainly the hope. I mean, one of the biggest drags and biggest impediments, if you will, to business investment, businesses taking big risks, if you will, is uncertainty, uncertainty about monetary policy, in this case, uncertainty about fiscal policy, there`s huge uncertainty about fiscal policy in the last two or three years. And I think with Yellen being in office and that continuity being more or less assured, I think that source of uncertainty is diminished and hopefully on the congressional side this agreement that they came up with on spending means at least the government shutdown`s off the table for a while.

So, good news is I think that the level of policy uncertainty is coming down a little bit. That should help investment.

MATHESIN: All right. So, Nariman, tomorrow morning, your phone rings, it`s Janet Yellen on the other end of the line. She says, Nariman, what should I do? How quickly should I begin tapering these bond purchases that have stimulated the economy? What do you tell her?

BEHRAVESH: Well, it should be data driven. If the economy is coming along like gangbusters, if it`s strong, they should accelerate that process. If there`s any kind of faltering, they should slow it down. It shouldn`t be tied to a specific formula. They should just be very flexible here.

GHARIB: All right. So she does listen to you, by the end of this year, where should the unemployment rate be and how fast will the economy be growing.

BEHRAVESH: Well, you know, I think our view is they will taper, but we do think that the unemployment rate will be down in the low 6s by the end of this year and the economy probably going between 3 percent and 3.5 percent.

GHARIB: All right. We`ll leave it there. Nariman, thanks so much for coming on the program. Nariman Behravesh, he`s chief economist at IHS (NYSE:IHS) Global Insight.

MATHISEN: On Wall Street today, the major averages closed lower again after a mixed bag of economic reports. Factory orders did climb higher in November, thanks to a surge in orders for aircraft, machinery, and computers. But growth in the bigger services sector of the economy moderated in December.

Here`s how the day ended in the markets: The Dow was off 44 points, the NASDAQ lower by 18, and the S&P 500 down a modest 4.

GHARIB: Well, with stocks starting the year with a stream of losses, some market pros will tell you to stick with dividend-yielding value stocks in 2014. Others will urge you to put your money in companies poised for growth.

But as Seema Mody reports, there may be middle ground for investors, so-called hybrid stocks.

(BEGIN VIDEOTAPE)

SEEMA MODY, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Confused over whether to invest in high-yielding dividend stocks or high-growth stocks in 2014? You may not need to choose. B of A writes that as rates pick up and the economy accelerates, sheds extremes of high yield and high growth and find a hybrid of the two.

Scott Clemons, chief investment strategist of wealth management and Brown Brothers Harriman, also says investing in a combination of growth and income is a strategy to be used in 2014?

SCOTT CLEMONS, BROWN BROTHERS HARRIMAN: I think investors still want a mix of income and making a distinction between dividend-paying stocks and other stocks can be a little dangerous. So, I would be hesitant to get rid of all my dividend paying stocks yet for the simple reason that companies that pay dividends tend to have stronger balance sheets and I think stronger balance sheets are going to be a thing you want to be invested in as interest rates normalize.

MODY (on camera): We went looking for the hybrid stocks that offered growth and income and found quite a few in the financial sector.

(voice-over): Bank United, Wells Fargo (NYSE:WFC), and U.S. Bancorp (NYSE:USB) have all seen their earnings grow over the past three quarters. These banks also offering dividend yield that is higher than the S&P 500`s average of 2 percent.

Other attractive hybrid stocks are in the technology space.

Cisco (NASDAQ:CSCO) has seen its earnings grow by 18 percent over the past year. It`s also sitting on $50 billion of cash plus analysts say a recovery in emerging markets could help shares outperform in 2014, and, yes, yield-seekers, Cisco (NASDAQ:CSCO) has consistently increased its dividend payout over the past three years.

Another tech name that provides consistent earnings growth and a dividend, security player Symantec (NASDAQ:SYMC). Analysts say growing concerns over data breaches could result in corporations allocating more capital to its security software, which could provide a boost to Symantec`s bottom line.

And while technology is generally favored by Wall Street in a rising-rate environment, not all experts are expecting tech shares to outperform in 2014.

CLEMONS: Within the sector of technology, where companies have recurring revenue stream, the kind of business models like that, there are still some opportunities here and there, but they`re not terribly widespread after the rally we saw of 2013.

MODY: Keep in mind, investing in hybrid stocks is most appealing to investors who are not willing to take on a whole lot of risk.

For NIGHTLY BUSINESS REPORT, I`m Seema Mody.

(END VIDEOTAPE)

MATHISEN: The hits just keep on coming for the nation`s largest bank and not in a good way. JPMorgan (NYSE:JPM) is close to a $2 billion settlement with federal authorities to resolve allegations that the bank ignored obvious signs of fraud in the Bernard Madoff Ponzi scheme, ultimately harming investors.

Kayla Tausche has more.

(BEGIN VIDEOTAPE)

KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Five years after Bernie Madoff confessed to running a Ponzi scheme, questions still remain about how he kept his secret for so long. Speaking from jail in 2011, the convicted fraudster told “The New York Times (NYSE:NYT),” banks, quote, “had to know, but the attitude was sort of if you`re doing something wrong, we don`t want to know.”

Prosecutors perked up in a light shone on JPMorgan (NYSE:JPM) Chase, Madoff`s bank of record for two decades and custodian for nearly all his customer accounts.

(on camera): The multiyear investigation could come to a head this week, with a $2 billion settlement and reportedly a deferred prosecution agreement. That would rule out criminal charges against the bank.

(voice-over): The joint deal inked with the Department of Justice and the office of the comptroller of the currency closing two open cases and including a general penalty for anti-money laundering. Comptroller Tom Curry said in October banks like JPMorgan (NYSE:JPM) must be better at managing risk than the status quo.

THOMAS CURRY, COMPTROLER OF THE CURRENCY: The standard here is really strong corporate governance and individual institutions will be prodded to take a critical look at their structure and to make improvements that bring them up to that strong standard.

TAUSCHE: JPMorgan (NYSE:JPM) declined to comment but CEO Jamie Dimon has for months been working behind the scenes to cross off a long list of legal issues.

JAMIE DIMON, JPMORGAN CHASE CHAIRMAN & CEO: We`re a good company. We had these flaws. If you know your faults, you can fix them. If you deny them, you don`t fix them. So, we`re going to fix them, and I think we`re going to make the regulators happy with what we`re doing.

TAUSCHE: Those issues have become costly for the largest bank by assets. This year alone, paying some $20 billion to settle cases largely stemming from its mortgage products during the financial crisis, but also its London whale trading loss, and improper marketing of some consumer products like identity theft.

Shares of JPMorgan (NYSE:JPM) trade near a 52-week high. Investors view the industry favorably as the economy recovers but worry the bank has more legal issues to come. It`s the focus of nearly a dozen open investigations, though a settlement over Madoff would ease at least one concern ahead of its full-year earnings next Tuesday.

For NIGHTLY BUSINESS REPORT, I`m Kayla Tausche.

(END VIDEOTAPE)

GHARIB: Still ahead on NIGHTLY BUSINESS REPORT, an arctic blast halts thousands of commercial flights. What could that deep freeze cost the airlines?

(MUSIC)

MATHISEN: The coldest weather in decades has hit the midsection of the country and is heading east tonight. Temperatures early this evening were minus 12 in Chicago, minus 14 in Minneapolis, and zero in St. Louis. Travel especially by air has been mightily disrupted as you might expect. But in North Dakota, home to the Bakken fields, oil production, too, has been slowed. Brutal temperatures in the minus 20s make extraction and other operations extremely difficult.

Happily, by Thursday, it should be 40 degrees warmer in Fargo.

GHARIB: Well, speaking of air travel, that nasty winter storm has forced airlines to cancel more than 10,000 flights just since the weekend.

Phil LeBeau has more from O`Hare Airport in Chicago.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT COPRRESPONDENT (voice-over): As temperatures in Chicago dropped to 13 below zero with a wind-chill factor of 39 below zero, the cancellations and long lines at O`Hare airport moved higher.

Tom Fink (ph) and his family had their flight to Florida canceled twice and have no idea when they`ll leave.

UNIDENTIFIED MALE: Can you get any information from anybody? The airlines basically won`t even answer the phone anymore. So, we`re just hanging out in this line. We`ll be here probably four to five hours trying to get rebooked.

LEBEAU: They`re not alone. Across the country, stranded travelers have seen more than 9,000 flights canceled since last weekend.

UNIDENTIFIED MALE: Been canceled twice, and honestly, I mean, I have no idea when I`m going to be able to get out of here.

UNIDENTIFIED MALE: I`ve been canceled twice so far, but I`m not sure how long I`ll be here. I don`t know.

LEBEAU: Those flying JetBlue to New York and Boston will have to wait a little longer to make their trip, with the airline canceling all flights from JFK, LaGuardia, Newark, and Boston from late afternoon Monday through 10:00 a.m. Tuesday.

PAUL WALSH, THE WEATHER CHANNEL: They understand the weather. They have a very good understanding what the forecast was going to be. They have a very good understanding of what their limitations are, what the limitations of their crew are.

LEBEAU: Most airplanes can fly in extreme cold weather, but servicing and moving those planes on the tarmac is difficult. At O`Hare, refueling trucks struggled with freezing equipment and because ramp workers can`t be outside for long with wind-chills at 30 below, both American and United slowed down their schedules.

UNIDENTIFIED MALE: It is kind of ridiculous. All these planes being canceled and nobody knows what to do.

LEBEAU: What the airlines know is the longer this extreme winter freeze lasts, the more flights they`ll have to cancel and the greater the impact on the bottom line. How much this will cost is hard to say, but one thing is clear — this frigid start to 2014 has the potential to take a serious bite out of airline earnings.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

(END VIDEOTAPE)

GHARIB: Those cold temperatures are also causing record demand for natural gas and sending spot prices higher. According to Platts Analytics, that demand should be just as high tomorrow and may set another record.

MATHISEN: Even with all those grounded flights, Boeing (NYSE:BA) just capped off a record-setting year. The jet maker delivered 648 new aircraft in 2013, its most ever in a single year. Perhaps better yet for shareholders, Boeing`s backlog of commercial plane orders more than 5,000 now is also a company record.

GHARIB: Some of those jet orders will be built in Washington state. That`s thanks to a crucial union vote. As we reported on Friday, union machinists at Boeing (NYSE:BA) voted on a new eight-year contract extension that assures production of Boeing`s upcoming 777X jet will happen in Washington state. It was approved by the narrowest of margins. This is the same contract that union members rejected back in November because it takes away some pension and medical benefits.

MATHISEN: Well, Twitter`s stock took a nosedive after Morgan Stanley (NASDAQ:NBXH) (NYSE:MS) cut its rating on the company. That`s where we begin tonight`s “Market Focus.”

The firm downgraded Twitter to under weight from equal weight, citing growing competition for ad revenue. Twitter shares had been zooming and swooning since December. The stock was at its highest levels less than a month ago after the rollout of its targeted ad program. Today, the shares were down nearly 4 percent to $66.29.

Shares of the mattress company select comfort took some lumps today after it warned investors that it expects holiday quarter sales to come in below estimates. The maker of Sleep Number specialty beds blamed the outlook on a sales slowdown from Cyber Monday through December. That did not just weigh on Select Comfort (NASDAQ:SCSS) stocks.

Take a look at these. Rival Tempur Sealey fell almost 6 percent to $51.14. Mattress Firm`s shares were off nearly 3 percent to $43.30. Select Comfort (NASDAQ:SCSS) down 19 percent at $17.28.

It was a different story, though, at Walgreens. Sales at the retailer rose more than 7 percent in December compared with last year. The drugstore chain said customers bought more non-pharmacy items and it saw prescription sales increase, too. Shares were up slightly today to $57.14.

GHARIB: AutoNation (NYSE:AN) also had good sales news to report. The nation`s biggest automotive dealer said new vehicle sales rose 6 percent in December, led by premium luxury car sales. The company`s CEO thinks there are plenty of reasons why the run should continue.

(BEGIN VIDEO CLIP)

MIKE JACKSON, AUTONATION CHAIRMAN & CEO: The underlying forces are still there. Genuine replacement need, great finance, exciting new products, and, let`s face it, the jobs situation is significantly improving, and the overall economy`s rate of growth I think will be better this year in 2014.

So, you put it all together, we`re going to have a 16 million sales year, somewhere in the low 16 million.

(END VIDEO CLIP)

GHARIB: Despite all that optimism, AutoNation`s shares fell more than 1.5 percent today to $48.91.

General Electric (NYSE:GE) is buying health care unit from ThermoFisher Scientific. It`s a deal valued around $1 billion and helps G.E. expand its like sciences unit by selling new medicines, vaccines, and diagnostics. Shares of G.E. fell a fraction to $27.26, but ThermoFisher up slightly to $110 and change.

T-Mobile reached a deal with Verizon (NYSE:VZ) Wireless to buy some of its spectrum licenses for almost $2.5 billion, plus about $1 million worth of its own spectrum. The licenses will help T-Mobile to improve certain kinds of cell service across the U.S.

T-Mobile, this is the country`s number four mobile provider, needs more airways so it can compete with its bigger rival. Shares of T-Mobile jumped almost 4 percent to $33.48. Shares of Verizon (NYSE:VZ) rose a fraction to $48.69.

And after the market closed today, shares of Neurocrine Biosciences (NASDAQ:NBIX) surged. It announced positive results of a drug that helps patients suffering with a condition that causes involuntary motions. The stock soared as high as 60 percent in after-hours trading, then in the regular session, the stock rose 1 percent to $9.76.

MATHISEN: And still ahead, the next big issue for the markets, corporate profits. And with the unofficial start to earnings season just around the corner, are there any surprises in store?

(MUSIC)

GHARIB: Spending on health care continues to grow, but at historically low rates. New figures from the Centers for Medicare and Medicaid Services show that in 2012, this is the last year data was available, health care spending in the U.S. rose at a rate of 3.7 percent to a staggering $3 trillion. As big as that number sounds, the group says that health care spending fell as a percentage of the economy for the first time since 1997.

With the holiday shopping season behind us now, many will be turning that are attention to corporate earnings season, which kicks off later this week.

John Butters is senior earnings analyst at FactSet. And he`s here to tell us what he expects for the fourth quarter and the year ahead. Welcome back, John.

Good to see you and happy New Year.

JOHN BUTTERS, FACTSET SENIOR EARNINGS ANALYST: Great. Thanks for having me.

MATHISEN: All right. What`s your prediction and why?

BUTTERS: Well, coming into Q4 in terms of the earnings set, we`re looking for 6 percent growth, and that`s a little better than we`ve seen many the past few years. However, on the revenue side, growth is only expected to be 0.3 percent. And that`s a little bit lower than we`ve seen in recent years. So, a little bit stronger earnings and a little weaker revenues coming into this fourth-quarter earnings season.

GHARIB: And we`ve heard from an unusually large number of companies that are already preparing investors to lower their expectations because the numbers are not going to be that great. I mean, how unusual is this, and, you know, what does it mean for this whole Q-4 earnings season?

BUTTERS: Right. We`ve soon a record high number of companies in the S&P 500 give negative preannouncement. At this point of time, we`ve seen 94. And again, that`s a record high.

However, if we look at the estimate revisions during this time, the numbers have only come down about 3.5 percent. We`re at 9.6 percent growth expected at the start of the quarter. It`s down to 6.3 percent today. So, that`s relatively in line with averages.

So, again, even though we saw more negative preannouncements, we didn`t see the analysts take down their numbers more so than average this time around.

MATHISEN: John, where are the surprises going to be, positive and negative?

BUTTERS: Well, in terms of earnings growth, the financial sector is expected to be the driver of growth, looking for 24 percent. In that sector, the insurance companies are really driving the growth. They`re benefitting from some easy comparisons a year ago due to the catastrophic losses for Hurricane Sandy last year, a number of those insurance companies had to pay out losses. This year, that wasn`t the case, so those companies are seeing unusually high earnings growth this quarter and that`s helping to boost the overall growth for the financial sector, again at 24 percent.

GHARIB: You know, John, one thing that we`ve heard in from a lot of people in the business world and on the markets is that now that the Fed is tapering its stimulus, the key thing for investors is that fundamentals about companies` earnings, revenue, are really going to count. So, based on what you know, not just for this quarter but for this upcoming year and with the Fed pulling off stimulus, what are the key takeaways for investors as they look through all these numbers?

BUTTERS: Well, if we look ahead to 2014, analysts are very optimistic on the upcoming year. They`re looking for growth of 10.5 percent in 2014. That would be a significant improvement from the 5 percent growth expected for 2013 and the 5 percent growth we saw in 2012.

If you look at the earnings on a per-share basis, they`re looking for almost $120 per share. Again, that would be a record level. So, the question would be, you know, how likely it is that we`ll hit that number. We know that analysts do tend to overestimate at this point in time more so than underestimate, so we`ll certainly keep an eye on how companies perform and do we see that $120 estimate start to come down during the course of 2014.

MATHISEN: All right. John, I was going to ask you a quick question on how they`re going to be able to get 10 percent earnings growth if they`re not generating any revenue growth. How do they do it? Cost-cutting? Quickly.

BUTTERS: Right. Well, again, analysts are looking for profit margins to hit record highs as well. They`re looking for companies to squeeze more earnings out of the revenue. So, if we look at Q4, 9.5 percent profit margin expected. That`s near the record.

MATHISEN: Right.

BUTTERS: But into 2014 estimates are for profit margins to exceed 10 percent in three of the four quarters.

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

GHARIB: And finally tonight, “Forbes” magazine is out with its annual list of 30 people under the age of 30 who are changing the worlds of media, education, social media, philanthropy and more.

Now, among the magazine`s rising stars in the world of finances, here they are — in third place, George Bachiashvili. He`s 28. He runs a $6 billion private equity firm in the nation of Georgia.

Next, there`s 29-year-old Wells Fargo (NYSE:WFC) private bank investment researcher analyst Luis Alvarado. He helps oversee $170 billion in managed assets. And then at the time finance spot, 22-year-old Lucas Duplan. He raised more than $30 million from the likes of Sir Richard Branson and he`s starting a company calmed Clinkle.

But, you know, Tyler, we don`t know what the start-up is going to do. It has something to do with mobile devices.

MATHISEN: Thirty under 30. Hmm. We`ll see.

GHARIB: Not us.

MATHISEN: Not us. No.

GHARIB: That`s NIGHTLY BUSINESS REPORT for tonight. I`m Susie Gharib. Thanks for joining us.

MATHISEN: And I`m Tyler Mathisen. Have a great evening, everybody. We`ll hope to see you back here tomorrow night. Stay warm.

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) 2014 CNBC, Inc.

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