Transcript: Thursday, January 23, 2014

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


SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Stocks tumble. The Dow falls to a 5-week low as China, the global growth engine, sputters. Is this time start of the correction so many have been calling for?

Microsoft (NASDAQ:MSFT) surprises investors with better than expected results. But is its bread and butter product, Windows, going stale?

GHARIB: On the front lines, some of the world`s biggest drugmakers want to change the way cancer is treated. And they`re investing big money in promising new therapies.

We have all that and more tonight on NIGHTLY BUSINESS REPORT for Thursday, January 23rd.

MATHISEN: Good evening, everyone, and welcome.

Stocks had one of their roughest days in months today. They fell sharply and broadly on some lackluster earnings reports.

But the real catalyst today was China. Data showed its manufacturing sector contracted this month. That plus concerns over credit conditions there sent shivers of worry around the globe and especially into the emerging markets.

One prominent emerging market`s fund lost 2.5 percent. U.S. economic data out today was pretty good. First time jobless claims are roughly back to pre-recession levels. Sales of existing homes rose 1 percent in December, enough to lift overall sales in 2013 to the highest level in seven years. But neither those reports nor a stunning 16 percent surge in Netflix (NASDAQ:NFLX) shares after yesterday`s blowout earnings could turn the tide on Wall Street today.

The Dow ended well off the lows of the session but still off a big 176 points, a 1 percent decline, even though the Dow Transports did manage to close at an all-time high. The NASDAQ was lower by 24, and the S&P 500 lost 16.

Bob Pisani has more now on how trading played out today from the New York Stock Exchange.


BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: It was not a good day for the market, though we ended off the lows for the day. It started overnight when Chinese manufacturing numbers came in below expectations.
Chinese economic data has been weaker than expected for a few weeks.

So, why does China matter so much? Emerging markets like China are an important part of the global growth picture. And if the markets believe that growth is below expectations investors are going to light up on their exposure and that`s what they`re doing. Not surprisingly, Chinese stocks were among the weakest performers. But other emerging market countries were also weak.

U.S. stocks saw declines in big multinational names, in the materials, energy and industrial sectors. While defensive sectors like utilities and telecom were very little changed.

Not surprisingly, the dollar weakened, gold rallied, and the yield on the 10-year treasury dropped.

It`s been a very strange year for stocks. There`s lots of divergences. The Dow Industrials, for example, is down 2.3 percent, but the Dow Transports are up over 2 percent, and the NASDAQ and Russell 2,000 are also up fractionally.

In other words, it`s been largely a big cap selloff in 2014. The rest of the market is holding up fine.

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


GHARIB: Let`s turn now to Nick Colas for his analysis of what`s going on in the market. He is chief market strategist at Convergex Group.

So, Nick, let me begin with what Bob Pisani just wrapped up with. He says, you know, the rest of the market is doing just fine. It`s not a broad-based selloff. And yet, so many people are saying this could be the beginning of a market correction.

What do you think? And if so, how big a correction could it be?

NICK COLAS, CONVERGEX GROUP CHIEF MARKET STRATEGIST: Well, certainly, there`s been a lot of complacency in the market. We had a very strong end to 2013. And the expectation at the beginning of this year was for continued gains. We haven`t gotten that. We`ve gotten a lot of volatility instead, particularly those big cap names.

Our expectation is volatility is going to continue for at least the next or so until the new Federal Reserve meeting has some clarification on Fed monetary policy and then, hopefully, things will calm down after that.

MATHISEN: Why are big caps suffering so much more than smaller companies?

COLAS: Big caps tend to have more exposure to overseas markets, such as China as Bob talked about. So, the investors investing in those sectors and those names worry a little bit more about overseas economic conditions than those investors who focus more on domestic names that tend to be smaller.

GHARIB: You just mentioned the Fed a moment ago. And we all know that that meeting is coming next week. We`ve gotten so many indications that the Fed policymakers are going to begin this tapering process. And yet, will this be a positive or negative for investors once the news is official?

COLAS: Right now, there`s a little bit of uncertainty about what the Fed policy will be next week when they announce how much more they may cut their quantitative easing or bond buying program. Right now, market knows them to be cutting $10 billion. But there`s been some talk about them cutting another $10 billion, reducing their monthly purchases to $65 million. So, still quite a bit of money to support the market.

But right now, the market has been uncertain about future Fed policy.
That`s never good. Investors don`t like that kind of uncertainty.

MATHISEN: You know, Nick, last year it seemed like investors played past the bad news. This year, they`re doing anything but. What changed?

COLAS: You know, what changed primarily is evaluation. Last year, we began the year at roughly 14 times the earnings that we`re going to see from U.S. companies through the course of 2013. This year, we begin closer to 16 times earnings, a higher valuation level. And when valuation levels get that high more things have to go right.

In any kind of interim difficult news like today tend to create selloffs because evaluations are higher, expectations are higher.

GHARIB: I also want to follow up on something else that was in that package that Bob was doing about a lot of divergences in the market. You see that the Dow transportation average is at a new record today. And usually that`s considered a bullish signal. And yet we saw gold prices were up, oil is up, the treasuries were up, which is a signal that things aren`t so good and you better put your money in these safe places.

So, which is it?

COLAS: Well, you know, I`ll tell you, it`s been very interesting to watch the market over the past five years. Because correlations among different asset classes, how much they move in common has been at record highs.

And while that was felt pretty good as the market was rallying, it`s actually unhealthy. Lower correlations are better because they provide more diversification. So, while it may feel odd on a day like today, the divergences that Bob noted are really a very healthy sign to the market for 2014.

MATHISEN: One of the things that sent shivers to the market today were the concerns about the sort of nonbank lending sector in China and specifically concerns that they may be up against a kind of subprime crisis of their own. How worried should American investors be about that?

COLAS: You know, right now, it does not appear to be a large concern.
China has about $1 trillion shadow banking system very analogous to the one that funded sub prime lending in the U.S. in the 2000s. The difference is that China`s economic growth is much better than the U.S. experienced in the 2000s. And so, for the moment, it is not a huge concern.

However, if it begins to grow or if the economy continues to slow in China, it could snowball into a bigger issue. For right now, not yet a big issue.

GHARIB: Nick, you`ve given us a lot to think about. Thank you so much for coming on the program.

COLAS: Thank you.

GHARIB: Nick Colas, chief market strategist at Convergex Group.

MATHISEN: Well, here`s some welcome news.

Strong second quarter results from the Dow component Microsoft
(NASDAQ:MSFT) after the closing bell. Very strong. The software giant earned 78 cents a share. That was a full 10 cents better than forecast.

Revenue was sweet, too, up 14 percent in the quarter, more than $25 billion. Strong sales of a new Xbox video game console helped. So did sales of its Office products to businesses. But Windows was a weak spot as consumers favored tablets over PCs.

Microsoft (NASDAQ:MSFT) shares initially rose after the results and finished the regular session slightly higher.

Seema Mody joins us now from the NASDAQ with more on Microsoft`s latest report.

Seema, what was the one thing you saw in this report that you just can`t overlook?

SEEMA MODY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Microsoft`s second quarter earnings beat analyst expectations, Tyler, thanks to strong demand for its cloud services. COO Kevin Turner says, quote, “We continue to take share from our competitors by delivering the devices and services our customers need as they transition to the Cloud.”

So, it`s Microsoft`s efforts to gain more traction in the Cloud. That was one of the factors that helped the software giant this quarter — Tyler.

MATHISEN: Money from the Cloud, pennies from heaven. Seema, thank you very much.

MODY: There you go.

GHARIB: Well, Microsoft (NASDAQ:MSFT) though has a lot more than just earnings to focus on, including a pending $7 billion hardware acquisition and the search for a new chief executive officer.

Josh Lipton has more.


JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: As soon as Steve Ballmer announced last August that he would step down as Microsoft`s CEO, investors started to focus on who would replace him.

WALTER PRITCHARD, CITI`S SOFTWARE ANALYST: Whoever comes in is going to have to choose where to focus.

LIPTON: Walter Pritchard, Citi`s software analyst, says the issue for Microsoft (NASDAQ:MSFT) isn`t so much about a person but rather a very important product which accounts for about 30 percent of the company`s profits.

PRITCHARD: I think at the end of the day, whether it`s an insider or outsider, they face the same set of challenges, which is a company that`s sort of increasingly losing a grip on its — on the core what built the company, which was Windows.

LIPTON: Windows has been the foundation of Microsoft`s product line for 30 years. Pritchard says it`s, quote, “waning in relevance” as fewer consumers are using PCs.

UNIDENTIFIED MALE: I think Gates is not going to let it go. Even with Ballmer leaving and mistakes made under his watch, I really think Microsoft`s going to adapt.

UNIDENTIFIED MALE: Personally I`m an Mac user as you can see. But do I run Windows for business services.

UNIDENTIFIED FEMALE: Well, you know, I know people that love it and hate Mac. And they swear by Windows.

LIPTON: Mobile devices, like smartphones and tablets, are growing rapidly. Microsoft (NASDAQ:MSFT) is moving hard into the mobile market by buying Nokia`s device business for $7 billion.

But that business is struggling. Today, Nokia (NYSE:NOK) reported that sales in its device business dropped 29 percent. Nokia (NYSE:NOK) runs Windows phone, the mobile version of Windows. Market researcher IDC says Windows phone controls a miniscule percentage of the global mobile operating system market. Far behind rivals like Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL).

Pritchard thinks the most successful strategy would be for Microsoft
(NASDAQ:MSFT) to pay back its Windows efforts, get out of consumer businesses, like phones and tablets and focus on enterprise opportunities.

Rick Sherlund of Nomura has a different take. He agrees with Pritchard that Microsoft (NASDAQ:MSFT) needs to rethink its business model.
But he says the most important question is who will be the next CEO?
Sherman says only an outsider who has the courage and self-confidence to stand up to Steve Ballmer and the board can fix Microsoft (NASDAQ:MSFT).

The next CEO will face tough choices between emphasizing its business customers or trying to crack the consumer market. Pritchard says it can`t do both.

Josh Lipton, NIGHTLY BUSINESS REPORT, Silicon Valley.


MATHISEN: Besides Microsoft (NASDAQ:MSFT), one of the few Dow components ending higher today was McDonald`s, even after reporting a sales decline last quarter. But there`s a lot more cooking at the world`s biggest burger chain.

Sara Eisen has the story.


SARA EISEN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): A challenging year. That`s how McDonald`s CEO Don Thompson is describing 2013.

The fast food giant struggling with the wobbly global economy, but also making some mistakes of its own on menus and pricing. Since Thompson took the reins about 18 months ago, the stock has only risen 8 percent, while the broader market is up 37 percent in that period. That disappointing performance is being driven by weaker sales, especially in the United States. And for the year, total sales were only 2 percent higher than last year.

Mickey D`s has been trying to beef up its menu options to draw customers, introducing Mighty Wings, the new dollar menu and more. But so far, they`ve been a flop.

And competition from smaller rival Burger King and Wendy`s for $1 menu items is intensifying.

The CEO says near-term challenges remain.

DON THOMPSON, MCDONALD`S CEO: 2013 was a difficult year. And we`re keenly aware of our short-term challenges. Due to economic predictions are mixed, but most assume some limited global improvement in 2014.

EISEN: But investors are betting the future may be looking up. The stock was one of the few bright spots in a down day on Wall Street.



GHARIB: Still ahead, Treasury Secretary Jack Lew tells Congress to act on the debt ceiling soon. Is another standoff taking shape in Washington?

But first, emerging market currencies were routed today on worries about China and the Fed. The Argentinian peso led the way lower off 12 percent.

And here`s how that all affected Latin and international markets.


GHARIB: Could Warren Buffett`s Berkshire Hathaway (NYSE:BRK.A) be too big to fail? Well, it could be according to the Financial Stability Oversight Council. It`s headed up by Treasury Secretary Jack Lew. This risk council is trying to determine if Berkshire could threaten the nation`s financial stability should it fail. And if so, the company would be subject to stricter regulatory oversight.

MATHISEN: And from the “here we go again” file, the economy could be in real trouble real soon if we hit the debt ceiling and Washington can`t borrow more money to pay its bills. Treasury Secretary Jack Lew told Congress it has to act now and not wait until the last minute to increase the nation`s borrowing limit.


JACK LEW, TREASURY SECRETARY: I think they know what they have to do.
I think they know it was not a good thing to create the kind of economic anxiety that was created just a few months ago. We`re doing pretty well in the U.S. economy right now. We`ve got some tail winds. We`re seeing the year ending strong, beginning strong. We have to make sure there are no more self-inflicted wounds.


MATHISEN: On Wednesday, Lew wrote to Congress telling lawmakers they have less time than originally thought before the country will hit the $16 trillion limit sometime in February.

John Harwood joins us now from Washington with more on the debt ceiling debate. John, we have been here before. How much time do we really, really, really have this time?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, you can never be exactly sure because of the extraordinary measures the Treasury can take. Also, their revenues depend on the strength of the economy. The stronger the economy is, the better the chances are that it could go a little bit later than the late February that Jack Lew has talked about.
Harry Reid, the Senate leader, has talked about much later in the spring, in fact.

But I think that everyone knows that sometime in the next couple of months, Congress is going to have to do this. And as Jack Lew said, Congress knows going to have to raise the debt limit. The only question is how we get there.

GHARIB: And that is a good point, John. And Speaker Boehner made some comments today, is he signaling he wants a fight on this issue? We`ve seen over the years that this drama over the debt ceiling has led to a government shutdown, a downgraded U.S. debt and market selloffs. So should investors be nervous?

HARWOOD: John Boehner does not want a fight over this issue but some of his members do. What he`s trying to do by saying, he will not permit or the House will not pass a clean debt limit increase is signal to his members that he`s not throwing in the towel. But I do think it is correct that as we saw in this most recent budget deal, people are weary of the brinksmanship. They want to get back to some sort of a normal operating atmosphere in Washington.

And I think that is going to pull Republicans back, even if some of the Tea Party members do want a confrontation over this.

MATHISEN: You know, we sort of know what the White House view is on this. Is this going to be a bargaining chip for some sort of negotiation or not this time?

HARWOOD: There will be a conversation. I was talking to a senior White House official today who said, yes, the Republicans want something but they`re not very specific about what they say that they want in a back and forth. Nobody`s talk about more spending cuts, because they`ve just made a budget agreement.

So, it is not clear what the back and forth will be. There will be some. There will be a courtship. Jack Lew is trying to begin that right now.

But I think investors can be reasonably confident that it`s not going to end in the sort of train wreck that we`ve seen in the past.

MATHISEN: John Harwood, thank you very much.

John in Washington for us tonight.

GHARIB: A Massachusetts senator calls for an investigation into Herbalife`s business practices, and that`s where we begin tonight`s market focus. Senator Edward Markey sent letters to the Securities and Exchange Commission, the Federal Trade Commission and Herbalife (NYSE:HLF) itself.
He`s asking for more information ant the company`s operation and compensation system.

Now, Herbalife (NYSE:HLF), which sells vitamins and drink mixes to a network of individual distributors, has been under scrutiny because of accusations that it`s operating a pyramid scheme. Shares plunged 10 percent today to $65.92.

Lenovo, the Chinese PC maker, is buying IBM`s low end server business for more than $2 billion. It could be China`s biggest tech deal ever. The purchase lets IBM focus on more profitable areas like software and services, and to move out of hardware. In IBM`s latest earnings report, weak results from its hardware operations were a big factor in the company`s revenue miss. Shares of Big Blue rose a fraction today to $182.73.

After the market close, Starbucks (NASDAQ:SBUX) reported that profits rose 25 percent last quarter. That was better than expected. But revenue came in below forecast. Sales fell during the holiday season because more consumers shopped online. Global sales were also slightly below estimates.
Shares fell a bit in the regular session closing at $73.39.

MATHISEN: Well, with those strong transports helping the markets today, Union Pacific (NYSE:UNP) beat street estimates thanks to strong grain, automotive and industrial shipments. The rail operators saw overall volume growth for the first time in six quarters despite weaker coal shipments. And that sent shares up more than 3 percent to $174.12.

Sticking with transports, United Continental also out today with earnings. They topped consensus the airline got helped last quarter from an increase in travel, higher ticket prices, cheaper fuel. But a weak view for the current quarter did overshadow those results today. United expects unit revenue to be flat because of the recent winter storms. Shares there fell 1.5 percent today to $48.43.

Shares of Johnson Controls (NYSE:JCI) took a nice hit today — well, not so nice if you`re one of the winners of it — after the company reported profits that matched forecasts and an outlook that trailed estimates. Sales at the auto parts maker were better than expected helped by higher automobile production, especially in China. But investors couldn`t get past the outlook and weakness in some of the company`s main units. The stock fell more than 4 percent today. It finished at $49.30.

GHARIB: And shares of Lockheed Martin (NYSE:LMT) tumbled 4 percent today. Profits at the nation`s biggest defense contractor fell 14 percent from a year ago. And that was because of budget cuts and job reductions at the Pentagon.

Dominic Chu takes a look at how those sequester cuts have impacted the entire defense sector.


Washington budget woes were viewed as an overhang on the overall defense industry. But optimism among investors those issues would ultimately be resolved helped propel some of the biggest companies in the business to big gains in the stock market.

Earlier this month, analysts at Goldman Sachs (NYSE:GS) said that they think there could be more up side returns because of the recent budget deal and improving margins. There was a similar tone among the experts at Oppenheimer who like the larger cap defense companies because of, quote, “budding confidence that the bottom of this budget cycle is finally coming into view.”

Take Lockheed Martin (NYSE:LMT), the world`s biggest defense contractor and maker of the next generation F-35 Joint Strike Fighter.
Profits fell from the same time last year, but CFO Bruce Tanner said that he hoped this year would represent a drop or low point in U.S. defense spending.

General Dynamics (NYSE:GD) also reported better profits in sales than analysts had anticipated. The maker of tanks and nuclear submarines said it plans to buy back 11.4 million of its own shares during the first quarter. But not all investors are convinced that everything will come up roses for the defense industry.

SARAT SETHI, DOUGLAS C. LANE MANAGING DIRECTOR: I think defense stocks have had their run. I think going forward is going to be cutting costs and really trying to prune their balance sheets. So, in our view, I think you take your money off the table and actually go after companies that can grow. So, the industry as a whole is going to have a hard time growing since they`ve had such a good run and demand has really been picking up in the last couple of years.

CHU: Investors will get a better idea of how things are shaping up.
Aerospace giant Boeing (NYSE:BA), combat drone maker Northrop Grumman (NYSE:NOC), and Tomahawk cruise missile maker Raytheon (NYSE:RTN) will also report earnings next week.

The big question is: what will get analysts to change their bullish tone on the defense stocks?



MATHISEN: And coming up, new and innovative ways to fight cancer and the drug companies that are leading the charge.


GHARIB: Neiman Marcus (NYSE:MCS) is coming clean about its own massive data breach. The luxury retailer now says more than 1 million customer credit cards were hacked between the months of July and end of October last year. But company insists that no Social Security numbers or birth dates were stolen, and that customers who shopped online were not affected.

MATHISEN: Hyundai has a problem for the first time in three years.
Global sales have declined. The automaker blames a stronger South Korean won and cheaper Japanese yen for making rival Asian models more affordable in the U.S. and other key export markets.

GHARIB: But business is booming at Toyota (NYSE:TM). For the second year in a row, Toyota (NYSE:TM) was the world`s number one automaker in 2013, selling nearly 10 million cars and trucks all around the globe.
Toyota (NYSE:TM) outsold General Motors (NYSE:GM) by 270,000 vehicles last year. Germany`s Volkswagen came in third.

MATHISEN: A new poll finds a marked decline in the number of uninsured Americans. The Gallup health ways index says because more people signed up for health care coverage under the Affordable Care Act, the number of uninsured adults in the U.S. fell by more than 1 percent this month, leaving roughly one in six people still without health care.

GHARIB: And finally tonight, drug companies big and small are investing in promising new cancer therapies, giving hope to millions of victims of the disease.

Morgan Brennan has more.


There`s a monumental shift taking place for the drug industry in the fight against cancer. It`s called immuno-oncology. Think of it as cancer treatments 2.0.

Immuno-oncology is a new class of therapies that use your own immune system to target cancer cells. They`re typically coupled with more traditional therapies and could help prevent relapses. Experts say it represents a paradigm shift for how different kinds of cancers will be treated.

MARK SCHOENEBAUM, ISI GROUP BIOTECH & PHARMACEUTICALS ANALYST: What we appear to be seeing is very, very profound tumor shrinkage. It`s not just a little, but very profound tumor shrinkage. And that tumor shrinkage appears to last than some group of patients who actually offering a cure.
We still need more data but this is why it`s generated so much excitement.

BRENNAN: Immuno-oncology is still in very early stages, with only a few drugs already on the market. But analysts believe this budding therapeutic area could grow very quickly as new drugs, particularly those already in late development stages begin to win approval.

Leer (ph) and Partners estimates that immuno-oncology could grow to
$14 billion by 2020, and more than double by 2025. A number of companies have been focusing in on these promising new therapies, including Roche, Merck (NYSE:MRK), AstraZeneca and Amgen (NASDAQ:AMGN). But no company has invested more in immuno-oncology than Bristol-Myers Squibb (NYSE:BMY), which reports its fourth quarter earnings on Friday.

JOHN SONNIER, SENIOR ANALYST, WILLIAM BLAIR: Roll the clock forward into the latter part of the decade, I think it`s plausible that it could be over half of their P&L. I think it`s going to be a very material part of what they become. And we have published that we think Bristol can double their earnings from these levels by the end of the decade.

BRENNAN (on camera): Immuno-oncology has been a long time in the making, with companies first trying to harness the immune system as far back as 15 years ago. The earliest examples were not commercial successes.
So, new research and promising trials mean cancer patients could soon have more options than ever before.



GHARIB: That`s some upbeat news.

MATHISEN: Yes, exactly.

GHARIB: Promising.

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

MATHISEN: And I`m Tyler Mathisen. Thanks very much from me as well.

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


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) 2014 CNBC, Inc.

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