Transcript: Wednesday January 8, 2014

NBR ThumANNOUNCER: 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: Improving picture.
American businesses are hiring and Fed policymakers are optimistic about growth. So, if the economy is picking up, why are stocks falling down this year?

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: The Mulally effect.
Microsoft (NASDAQ:MSFT) shares drop after the CEO of Ford says he`s staying put. Why that clouds the outlook for the tech company and brightens the future for the automaker?

GHARIB: Going once, going twice. The first foreclosure auction of the year is luring big money investors. But what happens when they open the front door for the first time after buying the property sight unseen?

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

MATHISEN: Good evening, everyone, and welcome.

Temperatures may be warming if only by a little, and the job market too seems to be heating up. Just two days ahead of a Labor Department`s December jobs report, the payroll firm ADP said a far better than expected
238,000 private sector jobs were added in the month of December, the most in 13 months. Nearly 11 million Americans, though, remain out of work.

But the hopeful moves in the labor market were not lost on the Federal Reserve. And minutes from the Central Bank`s latest meetings show that part of the reason the Fed decided to start tapering its stimulus program is the improving employment picture.

Steve Liesman has more.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: The minutes of the Federal Reserve`s December meeting showing a majority of policymakers favor a measured cautious approach to reducing the Fed`s stimulus program known as quantitative easing. The Fed at the December meeting reduced the amount of Q.E. or bond purchases by $10 billion to $75 billion a month.
The impression left by the minutes there were strong views on both sides.

But the compromise position is for $10 billion reductions along with a stronger promise to keep interest rates low in the future. Several workers concerned about the high unemployment rate and low inflation, that group opposed reducing the amount of Q.E.

The Fed debated lowering the unemployment threshold for raising rates from 6.5 percent to 6 percent but decided against it.

From the other side, some participants preferred a larger taper, and a few even supported limiting the amount of quantitative easing and a given completion date.

Now, in a survey of its members, the Fed found a majority of participants picked the effect of quantitative easing on the economy is waning and that Q,E.`s effect could be one that creates financial instability in the months ahead. The fed could also suffer capital losses from quantitative easing. That`s a big concern.

On the economic outlook, many saw progress as meaningful and said consumer spending was helped by the waning effect of tax increases. The minutes also went on to say that consumer spending is by rising wealth in real estate and in equities, along with lower energy cost. The Fed saw less drag from reductions in government spending in 2014. The Fed was indeed counting on a budget deal by Congress when it met in December.

For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.

(END VIDEOTAPE)

GHARIB: Wall Street shrugged off that upbeat report from the Fed and those strong jobs numbers we told you about. Most of the major stock averages were down right from the opening bell to the close today. The Dow lost 68 points, the NASDAQ bucked the trend, adding 12, getting some help from a 10 percent jump in shares of Micron Technologies. And the S&P off just a fraction.

Over in the bond market, traders are now convinced that the Fed will trim back bond purchases this year so prices on U.S. government debt fell, sending the yield on the 10-year Treasury note to 3 percent for a little bit today, but ended at 2.994 percent — Tyler.

MATHISEN: All right. Susie, here with us now to talk more about the economy and how it all fits with this market and his outlook for 2014 is Richard Madigan. He`s chief investment officer with JPMorgan (NYSE:JPM) private bank.

Richard, welcome. Good to have you with us.

(CROSSTALK)

MATHISEN: Happy New Year to you as well.

You know, Susie begun the broadcast by sort of asking the question, if the economy and not just in the U.S., is improving, so why are stocks tumbling? And not just in the U.S., in the emerging markets as well. Why?

RICHARD MADIGAN, CHIEF INVESTMENT OFFICER, JPMORGAN PRIVATE BANK: So, I think two separate issues, developed markets in the U.S. You`ve got to put into perspective the sprint that we saw last year in markets.

So, I think people are more tired than nervous. They`re processing the direction. The macro data and Steve touched on this in terms of the ADP data. You`re seeing stronger labor markets. You`re seeing stronger growth.

People are trying to get their heads around what happens in valuation.
But we saw the very constructive outlook for U.S. markets.

MATHISEN: Yes. You`re actually positive for this year and next year, 2015. What drives that? And, you know, what is going to be the telltale signs?

MADIGAN: Sure. When we came into last year, we sent a note out to clients. We said it was the year of rational exuberance. Markets were cheap. People were hesitant. They were fearful of less tail risk.

So, you saw a lot of people that very, very concerned about the world erupting and going down again. What happened because of it? You watch people very begrudgingly build risk markets. This year and next year comment to me is very much predicated on exuberance but not irrational exuberance this year.

MATHISEN: So, Richard, how will the 2014 markets, U.S. and globally, be like 2013 and how will they be different?

MADIGAN: I think they`re like them because you`re watching broader dispersion with regard to growth. So, the single most important thing for us is not only the change in leadership that you alluded to, Tyler, between developed markets and emerging markets. Developed markets are leading the delta or the changing growth this year.

I think the bigger issue ends up being in terms of the risk appetite for investors.

MATHISEN: Is it higher or lower?

MADIGAN: I think it`s more stable, if you made me pick a word for what we`re looking at this year, a more normal environment. And that`s good. We haven`t seen that in awhile.

GHARIB: You were telling us just before the show began, you were saying you would welcome a correction in the markets. Now tell us why you would like that?

MADIGAN: Be careful what you wish for. I apologize for saying it.
But I think just watching a healthy degree of volatility in the markets. A correction last year was what, 3 percent? And it was people very begrudgingly coming back in. If you believe that people have established some basic risk positions at this point, a little bit of a pull back creates trading opportunity.

It also creates an opportunity for people to be more tactical. Last year you should not have been tactical. You should have just been invested. This year, you should be invested, and I`m hoping to be a little more tactical.

MATHISEN: So, stocks beat bonds, developed markets beat emerging markets?

MADIGAN: It`s — you know, it`s funny, no, I don`t think they do. I think there`s huge value in emerging markets out over the next 18 months.
We`ve been very firmly committed to North Asia.

So, we`ve looked at markets like Taiwan, like Korea, Singapore, even China to a lesser extent. Tech sector in China was up 30 plus percent last year. So, there are pockets of opportunity.

But emerging markets suffer from the throwing the baby out with the bath water. No one cares. No one is deciding that, you know, Asia is different than Latin America. They`re all different.

GHARIB: Tell us what are you avoiding?

MADIGAN: Bonds. And as funny as that sounds right now, we`ve gone up
100 to 125 basis points. So, we`ve gone to 3 percent as you said on 10- year treasuries. We think there`s a reasonable chance fair value this year on a 10-year treasury is 3.5 percent. But I don`t out-rule as growth is stronger than we think that we`ll see a 4 percent handle. On a 10-year Treasury investment, that means you`re running principal at risk that you can lose at 7 percent to 8 percent.

MATHISEN: So if you have bonds, very short term maybe floating rate.

MADIGAN: And very simply, the answer is yes to that. But you want to keep focus on bonds on making less and not losing, and wait, be patient before you extend.

MATHISEN: Richard, thank you very much. Richard Madigan of JPMorgan
(NYSE:JPM) Private Bank. Thanks again.

MADIGAN: Thanks.

GHARIB: And here`s another sign of how the economy is improving.
Confident Americans borrowed more money, a lot more in the month of November. There were big gains in student and auto loans. The Federal Reserve reports that Americans increased their borrowing by more than $12 billion that month to a seasonally adjusted record amount of more than $3 trillion. Yes, that`s trillion with a T.

And credit card debt reached its highest level in three years.

MATHISEN: All those auto loans have been a big boost to automakers.
And the chief executive of one of Detroit`s big three, Ford CEO Allan Mulally has told “The Associated Press” that he will remain at Ford, at least — at least through 2014, ending rumors that he might become the next CEO of Microsoft (NASDAQ:MSFT).

So, with Mulally off the short list, who are the frontrunners for that big job?

Josh Lipton has the story.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
Investors have been excited about the possibility of Ford CEO Alan Mulally replacing Steve Ballmer who is retiring. They thought Mulally would return cash to shareholders, cut costs, and maybe even sell or spin off Xbox and Bing.

There was debate among investors and analysts about the qualities the next Microsoft (NASDAQ:MSFT) CEO needs to have. There are reports today that the selection of a CEO is expected before February due in part to packed schedule of Chairman Bill Gates.

Some Microsoft (NASDAQ:MSFT) investors want an executive who will streamline the organization and boost capital return to shareholders.
Others are hoping for a person with a deep background in software.

But Colin Gillis of BGC doesn`t think the next CEO has to be a technologist.

COLIN GILLIS, BGC FINANCIAL: You`ve got Bill Gates on the board as the founder. He brings that technology component to the board level. So, the CEO does not necessarily need to have those components.

LIPTON: Instead, Gillis says the next CEO does have to have the ability and the experience in managing big, complex organizations. Which Microsoft (NASDAQ:MSFT) insider might qualify?

There`s Steven Elop, former Nokia (NYSE:NOK) CEO and current Microsoft
(NASDAQ:MSFT) V.P. of devices and services. Elop understands mobile technology and Microsoft`s culture. But analysts question his tenure at Nokia (NYSE:NOK) where the stocks dropped 60 percent under his watch.

Satya Nadella is another contender. He heads up Microsoft`s Cloud group. But Microsoft`s problems right now are in different business lines, like mobile. The question is whether Nadella can address those challenges.

Kevin Turner, Microsoft`s COO, knows Microsoft (NASDAQ:MSFT) inside and out, but picking Turner signals that the board is sticking with the status quo, that could upset activists who want real change.

Dan Nuys of FBR (ph) says one outsider to watch is Paul Maritz, CEO of Pivotal and former CEO of the VMware. He`s a tech veteran with a deep understanding of the Cloud and next generation data centers.

When talking to analysts who cover Microsoft (NASDAQ:MSFT), there doesn`t seem a lot of enthusiasm right now for any candidates. What analysts do agree on is this. The headwinds that Microsoft (NASDAQ:MSFT) faces as it adjusts to a post-P.C. world will be a big challenge for any CEO to overcome regardless of who ultimately gets the job.

Josh Lipton, NIGHTLY BUSINESS REPORT, Silicon Valley.

(END VIDEOTAPE)

GHARIB: Well, now that Alan Mulally has made it clear he`s staying on as CEO of Ford, this could be a start of what`s expected to be a very good year for the automaker and its shareholders.

Phil LeBeau has more.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Alan Mulally has been saying for months that he`s not leaving ford.

ALAN MULALLY, FORD CEO: Well, I am honored to serve Ford. And we have no change in my plan.

LEBEAU: Now that he`s made it official and says he is not going to Microsoft (NASDAQ:MSFT), Mulally and Ford are on the cusp of a very big year. Why? For starters, Ford will roll out 23 new models, including a completely redesigned Mustang and F Series pickup trucks. That truck could be a game changer.

With lightweight aluminum panels and far greater fuel-efficiency, the new F Series is scheduled to hit show rooms late fall.

JESSICA CALDWELL, EDMUNDS.COM SENIOR ANALYST: It could usher in a new buyer. And that`s kind of what this truck market needs. I mean, they`re kind of satisfying the demand of people that need trucks, small business owners, constructions, really that recreational truck buyer hasn`t come back.

LEBEAU: Meanwhile, Ford sales in China, which jumped 49 percent last year, could surpass 1 million vehicles in 2014. A long ways from 2006 when Mulally took over Ford and the company had paltry sales in a country with a booming auto market.

CALDWELL: But it seems they`ve got a good foothold into that market and really have penetrated in the right areas.

So, it seems relatively optimistic, but again you never know in a hyper competitive environment.

LEBEAU: Mulally`s plan to stick around also ensures a smooth transition to COO Mark Fields, who is expected to be Ford`s next CEO.
Fields has already taken over many of Mulally`s day-to-day duties.

(on camera): All of this is potentially good news for ford investors, who have seen their shares trail other auto stocks in recent months. If that changes in 2014, it will be Mulally`s parting gift to a company he put on the road to long-term success.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

(END VIDEOTAPE)

MATHISEN: Still ahead, Macy`s (NYSE:M) wants to cut costs. And to do that, it will close stores and lay off thousands. Details coming up.

(MUSIC)

MATHISEN: A new headache for some of the nation`s biggest banks.
Federal regulators are investing whether some banks cheated clients after the financial crisis, even though a number of banks have paid billions for fines about misleading investors about mortgage-backed securities before the economic downturn. There are fresh questions now on whether major lenders deliberately misrepresented the value of mortgage bonds after the crisis. Just to lock in deals.

Among the banks involved, JPMorgan (NYSE:JPM) Chase, Citigroup (NYSE:C), Morgan Stanley (NASDAQ:NBXH) (NYSE:MS) and Goldman Sachs (NYSE:GS).

GHARIB: The deep freeze and massive snowstorms that have impacted most of the U.S. over the past few days took a big financial toll on the nation`s airlines and all those displaced passengers. Mass flight reports that the effect of nearly 20,000 canceled flights, along with more than
75,000 delayed flights came to a total loss of about $1.5 billion.

MATHISEN: Macy`s (NYSE:M) announced a restructuring plan after the market close, and that is where we begin tonight`s market focus. The retailer will lay off 2,500 workers as part of plan to sustain its profitability and save $100 million a year. The company also reported a strong holiday season, same store sales were up in November and December by more than 3.5 percent.

Shares initially spiked after hours. The stock did end the regular session slightly lower at $51.84.

Forest Labs is buying Aptalis, a privately-held drug company, for $2.9 billion. Aptalis specializes in treatments for cystic fibrosis and gastrointestinal disorders. The move is an effort by Forest to find new drugs to replace blockbusters that are facing generic competition. Shares surged almost 18 percent to $69.30.

The billionaire investor Paul Singer`s hedge fund, Elliott Associates, offered to buy Riverbed Technology (NASDAQ:RVBD) for $3 billion. The firm already owns a large stake in the network equipment-maker. Elliott has been pressuring Riverbed since November to review its business, calling the stock significantly undervalued. The offer sent shares to the company soaring up more than 9 percent to $19.53.

Barnes & Noble (NYSE:NE) (NYSE:BKS) has a new CEO. The struggling book retailer promoted the head of its Nook division, Michael Huseby, to the company`s top spot. The chief position has been vacant for almost six months since the last CEO, William Lynch, resigned after several earnings misses and weak sales in that e-book business which he developed. Shares fell slightly to $14.63.

Constellation brands out with an earnings beat today. The liquor- maker said its profit nearly doubled last quarter, thanks to its acquisition of Corona. Constellation raised its 2014 outlook because it expects strong growth in beer sales. Shares rose 9.5 percent to $76.61.

Shares of McDonald`s (NYSE:MCD) were in the red after it was downgraded by Wells Fargo (NYSE:WFC). The firm lowered its rating to market perform from outperform, saying the company has lost market share in the U.S. in three of the last four months through November. The stocks fell 1 percent to $95.41.

JCPenney told investors it was, quote, “pleased” with its holiday performance but it skimped on specifics. Penney`s has been giving detailed reports on its progress, as it tries to turn around. So, the lack of hard numbers in this release fueled speculation that the retailer`s comeback is stalling. The stock slumped 10 percent to $7.37.

And then after the market closed today, Bed, Bath and Beyond posted weaker than expected earnings and cut its full year outlook. Profit was up
1.9 percent as the retailer saw an increase in sales, but that wasn`t enough to make up for that disappointing forecast. Shares plunged initially in after hours. During the regular session, the stock rose slightly to $79.68.

MATHISEN: A mixed bag at data about how Americans did their holiday shopping and how much we all spent. ShopperTrak reports that foot traffic inside brick and mortar stores this past holiday season was down nearly 15 percent year-over-year, even though overall spending rose by a healthy 2.7 percent. The reason, you`ve got it, so many more consumers did more of their shopping online.

GHARIB: And consumers have also been busy shopping for houses.
Mortgage applications rose last week coming off a 13-year low in the final week of last year. Applications were up about 2.5 percent as interest rates on mortgages held steady.

MATHISEN: With the housing market still on the mend, Atlanta`s first foreclosure auction of 2014 took place this week. And for those who say the business of buying foreclosures to then rent them out may be ending, they might want to think again.

Diana Olick followed investors from the auction block to neighborhood blocks for an inside look at this still soaring industry.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: They pitched tents in record-breaking Atlanta cold, huddled outside the county courthouse. Teams sent by large-scale institutional investors like Blackstone to bid on still hot commodities, foreclosed homes.

SIMON FROST, KEY PROPERTY SERVICES: I don`t think there`s any chance this is going to be over for at least another two years.

OLICK: Frost`s company Key Property Services buys and rehabs foreclosed homes and sells them to investors at turn key properties.

FROST: We get significant gains.

UNIDENTIFIED MALE: Third and final call. And we have sold it subject to the receipt of funds for $160,000.

OLICK: Some investors who got in early on the single family rental trade are already getting out, taking advantage of sharply rising home prices. But others are just moving their operations.

RICK SHARGA, AUCTIONS.COM: As the foreclosure discount has gone away in some of the warmer states, investors are looking for markets where they have properties that fit their sweet spot of somewhere between $85,000 and $150,000.

OLICK (on camera): Atlanta`s a hot market now because it`s still in the early stages of investor demand and home price appreciation. That`s why these investors will spend tens of millions of dollars in one day on homes they`ve only seen from the outside, because they know the kind of returns are going to get inside this trade.

UNIDENTIFIED MALE: Here`s the master key.

OLICK: There you go. Let`s go inside. Tell us what you do when you come into these homes first.

UNIDENTIFIED MALE: What we`re looking to see if there`s any plumbing or electrical that has been stolen, any damage to walls.

OLICK (voice-over): This is one of 130 homes purchased by Key Properties in one day of auctions. Despite the mess it seems, sweet says this home has only moderate damage. It should take about $20,000 to bring it back to what it was in a previous life. They bought it for $80,000, so net profit, $30,000 on just one home.

Sometimes, however, Sweet and his team are not so lucky in what they find.

(on camera): What could you possibly encounter, and how do you protect yourself?

KYLE SWEET, KEY PROPERTY RENOVATOR: The worst danger you have is actually if there`s a squatter, someone residing inside the property that shouldn`t be there in the first place. So, typically, a lot of our drivers or assessors will go and actually carry weapons on them.

OLICK (voice-over): All 130 homes purchased by Key will get seen and assessed in one day. Sweet, who has broken into over 3,000 homes so far in his career, will have many more to see after the next auction in February.

He does not expect to work on this new rental trade to slow down anytime soon.

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

(END VIDEOTAPE)

GHARIB: And coming up on the program, how a new generation of gadgets could shake up the media and entertainment industry, and what some of the traditional companies are doing about it.

(MUSIC)

MATHISEN: It may sound like something from the very distant future, but Nissan is ramping up its plans to put cells driving cars into production as early as 2020, just six years from now.

Nissan CEO Carlos Ghosn explains why the automaker is racing to make the futuristic-sounding cars a reality.

(BEGIN VIDEO CLIP)

CARLOS GHOSN, NISSAN CEO: The statistic today that more than 50 percent of babies born today are going to live more than 100 years. Well, when we see that a lot of people start to be impaired from driving at 75 or
80 years, well this technology is going to allow people, senior people, to continue to drive even if they hit 90 or 100 years old.

So, in terms of quality of life it`s huge. So, the needs are here.
The technology is getting ready.

(END VIDEO CLIP)

MATHISEN: Research firm IHS (NYSE:IHS) Automotive expects the market for self-driving cars to grow from 1 percent in 2025 to as much as 9 percent by the year 2035.

GHARIB: While we wait for those cars that drive themselves, the future is already here at the Consumer Electronics show in Las Vegas. This is the ultimate destination for gadget makers. But it`s not just about the devices. These new products have a huge impact on old media, especially in the entertainment business.

Julia Boorstin has more.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
All these tablets, smart phones and TVs will have ripple effects throughout the entertainment and music business. The fact that all these new devices are Internet-connected gives consumers more access anywhere anytime, to streaming music services including Pandora and iHeartRadio and video services, Netflix (NASDAQ:NFLX), YouTube, Amazon (NASDAQ:AMZN) Prime, and Hulu.

CHARLOTTE KOH (ph): It makes content consumption more ubiquitous in your daily life and that`s one of the great advantages of all the devices.

BOORSTIN: Technology companies are unveiling new ways to access more entertainment. Roku embedding its streaming into TVs. And Sony (NYSE:SNE) announcing an Internet TV service for later this year.

KAZ HIRAI, SONY CEO: We are combining really live television with other network-enabled content that`s streaming to people`s homes. It`s all about offering another choice and convenience.

BOORSTIN (on camera): And Internet giants are doing their part with more content and better access, to boost streaming, which means more advertising and subscription dollars.

YouTube launching high definition streaming at half the broadband speed. Hulu, owned by media giants Comcast (NASDAQ:CMCSA) (NYSE:CCS), Disney (NYSE:DIS) and Fox, is doubling its original content slate for 2014, announcing five new originals and a dozen returning series.

KOH: The ambition of the regional programming is to aggressively grow the business but to support an increase in ad revenue, as well as to have more subscribers join the service.

BOORSTIN: Media giants are hunting for more digital dollars. CBS
(NYSE:CBS) inking an exclusive licensing agreement with Amazon
(NASDAQ:AMZN) streaming service prime for a new CBS (NYSE:CBS) series produced by Steven Spielberg`s Amblin TV and starring Halle Berry.

Meanwhile, streaming music services Pandora and iHeartRadio are making access more ubiquitous, announcing more auto deals. While Pandora launches advertising on auto platforms this month, reaching 130 vehicle models. And the more people can easily listen and watch, the more money the services and artists make.

For NIGHTLY BUSINESS REPORT, I`m Julia Boorstin in Las Vegas.

(END VIDEOTAPE)

MATHISEN: And, finally tonight, things may not be so elementary for Watson. That`s the name of IBM`s super computer, the one with analytical software that beat human contestants on the game show “Jeopardy” a few years back. Well, three years after the company begun seriously marketing Watson, as having the ability to learn helping corporate clients tackle business and social problems, Watson is apparently struggling, smart as he is, to make money. Reports say total revenue was less than $100 million as of October. But IBM promises a major announcement about its Watson unit on Thursday, hoping finally that Watson is smart enough to make some bucks.

GHARIB: I`m going to make a prediction, Tyler. Health care.

MATHISEN: Health care.

GHARIB: It might have something to do with health care.

MATHISEN: Hope so.

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

MATHISEN: And I`m Tyler Mathisen. Have a great evening, everybody.
We`ll see you back here 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) 2014 CNBC, Inc.

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