Transcript: Friday, January 31, 2014

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


Volatility is back. The Dow dives, recovers, but ends lower — logging its first January drop in four years.

Should investors get used to more big swings? And for how long?

Walmart, the world`s largest retailer, says it won`t earn as much as expected. Why? And does the new CEO have a plan to turn things around?

GHARIB: Market monitor. Our guest tonight is investing in a Main Street recovery and will name a stock he says will benefit from that.

We have all that and more tonight on NIGHTLY BUSINESS REPORT for this Friday, January 31st.

MATHISEN: Good evening, everyone, and welcome.

You heard of the polar vortex? How about the stock market vortex? It sure fell this month like the only thing falling as fast as the temperatures was stock prices. Add it all up or down, as the case may be, and you get the first January decline for stocks since 2010, and the worst start to a new year since President Obama`s first month in office.

For the month, the Dow lost 5.3 percent. NASDAQ down 1.7 percent.
The S&P 500 split the difference, losing 3.6 percent.

Pick your poison. Earnings and outlooks have been iffy. The Fed is cutting stimulus even more. And emerging markets aren`t so much emerging as submerging.

Just a pullback or something more? We`ll discuss that in detail tonight.

Meanwhile, today, the market dipped early, recovered, then swooned again, and here`s how it finished: the Dow fell 149 points, bouncing off an early 220-point loss. The NASDAQ was down 19. And the S&P lost 11.

With money coming out of stocks and going into safe haven bonds, the yield on the 10-year treasury fell from Thursday`s level.

GHARIB: Well, you can also blame the bad January on the emerging market crisis and the sell-off in those countries.

Sara Eisen has more on what`s causing the turmoil and what needs to be done to stop it.


What`s emerged from emerging markets in the last few weeks has been troublesome to investors. Almost $6.5 billion were drained out of emerging market stock funds this week, the most in more than two years, and $3 billion more from bonds.

Why? Interest rates in India, South Africa, and Turkey jumped this week. With money becoming tighter, GDP growth becomes more difficult.

The leader of India`s central bank complained about a lack of global policy coordination. And the International Monetary Fund issued a call to arms, asking central banks for vigilance over liquidity. There could be more moves next week as the leaders of both the European central bank and the Bank of England huddle on the heels of lower inflation data in Europe and central banks in less developed countries, Australia, Poland, the Czech Republic, and Romania will also be meeting.

To some like Bank of America`s David Woo, this was bound to happen, once the U.S. Federal Reserve decided to pare back or taper its economic stimulus.

With fewer dollars available the ones that are out there will cost more.

DAVID WOO, BANK OF AMERICA MERRILL LYNCH: Volatility across all markets was near historical low. People thought tapering was going to be a non-event. I think that was where the market was extremely complacent.
Because if QE plays such a big role, I think the market is simply underestimating what it means when the liquidity`s finally being withdrawn.

EISEN (on camera): Stabilization could come from better economic data which has been iffy recently at best. Pros say the outlook is bright for emerging markets in the long term but in the short term, there are significant head winds, many of which can be traced to China.

WOO: We all know emerging markets is what, 75 percent China because emerging markets are either indirectly, you know, exporting to China or directly exporting to China.

EISEN (voice-over): Slower growth in China has reduced the need for imports, raw materials, energy sources and for now at least, investors would be wise to buckle their seat belts.



MATHISEN: A troubling warning today from Walmart. The mega store chain cut its profit outlook for the latest quarter for a host reasons including disappointing consumer spending here in the U.S. and a cut to food stamps. Investors didn`t seem too worried, though, with shares ending just a fraction lower today.

But as Courtney Reagan tells us, the retail giant has to determine if this is a one-time slip or if there are a lot more issues to worry about.


The world`s largest retailer warning Wall Street its holiday quarter profit is falling short of the company`s original expectation. Walmart says a number of factors are negatively impacting profit, including closing a number of stores in Brazil, China, and India.

In the U.S., the discount retailer calls out the reduction in the government`s food stamp program and rough winter weather for larger than expected hits to sales and traffic respectively.

(on camera): Walmart isn`t the first retailer to warn about a less than jolly holiday season but it is the largest, leaving investors wondering if the weakness at Walmart is temporary, company specific, or indicative of larger consumer spending issues.

PATRICK MCKEEVER, MKM PARTNERS: The consumer has definitely been in a bit of a funk. It was a very difficult fourth quarter for retailers, particularly bricks and mortar retailers. But the underpinnings of consumer spending are actually a little better right now than they were this time a year ago.

REAGAN: The housing market is showing signs of recovery. Until recently, the stock market has been logging gains and prices at the pump are stable. But wage growth is stagnant, and millions of Americans have been unemployed for a long time. It`s a lot to wade through for both investors and retailers.

The strength of the U.S. consumer is a key issue Walmart`s international CEO, Doug McMillon, will no doubt be tackling as he takes over the top CEO slot at the retailer tomorrow. And it might take more than everyday low prices to reinvigorate shopper spending at Walmart.



MATHISEN: Our market guest tonight says that investors should prepare themselves for volatile and choppy trading for most of the year. He`s Jim Lowell, chief investment officer at Adviser Investments.

Mr. Lowell, welcome back.

You see the possibility or the likelihood rather of a pullback on the record of 15 percent to 20 percent. So we`re either a third of the way through that if you measure by the Dow or a fifth of the way through it if measuring by the S&P.

How quickly do you think this spasm goes by?

JIM LOWELL, ADVISER INVESTMENTS CHIEF INVESTMENT OFFICER: Well, it`s a great question, Tyler. The surprise so far this year has really been that this has been sort of an unhealthy pullback. It`s been very indistinct, very volatile, really reflecting I think significant uncertainty as regards not just the equity but the income market`s near- term future. The pullback of a magnitude of 10 percent, 15 percent, maybe as high as 20 percent would likely be spurred more by fear of assumptions than by fundamentals, at least that`s true currently.

We`re seeing no fundamental signs of a catalyst for any sort of significant selling. But fear has proven to be a significant factor in terms of both the movement up in the market and in the short-term down drafts that we`ve seen. So, it wouldn`t be surprising.

GHARIB: You know, we`ve been hearing, Jim, that dreaded word “contagion” popping up in a lot of market forecasts. You know, what could be the source of any kind of crisis like that out of the emerging markets or something else?

Are you looking for any kind of mini crisis out there that will give reason for the pullback?

LOWELL: Well, we certainly think China`s going to deteriorate, maybe perhaps measurably, and that the U.S. markets and the established foreign markets will assume that if China`s economy slows more measurably than currently forecast that that will be very bad news for the global markets and likely sell off.

But we think that sell-off will be a knee-jerk reaction to something we see increasingly more internal to the dynamics of China and less linked to the slow growth, not no growth economy in Europe and the slightly faster paced economic recovery here in the U.S.

So if China sells and the markets sell in sympathy, we would view that as a buying opportunity.

MATHISEN: You know, I gather you argue for a rather more balanced portfolio for most of your customers and obviously everybody`s different but if you start with the benchmark as I think you do of about 30 percent in fixed income, that leaves 60 percent or 70 percent for equities.

With specific reference to the equity slice of the pie, how do you sliver that between foreign and domestic, between large and small, between growth and value?

LOWELL: Great question, Tyler. The reality is it changes over time.
We`ve made good money in the emerging markets, both in the equity and the debt side of that fence, but we`re gone from that pasture for now.
Definitely figuring that the U.S. multinational battleship balance sheet blue chips look reasonably valued if not undervalued by some historic measures, have plenty of cash in the coffers to ride out any sort of tempest in the 2014 teapot.

We also like Europe. We have been out of Europe in any direct way really for years upon years, but we began to move back in in December. We just stepped up the trade back in to increase our position there. We think Europe is likely to be the bargain of 2014, but you`re going to need a good active manager with a proven track record to hold your hand through what could be some pretty difficult times.

GHARIB: Jim, we just have a little bit of time left. You did mention that investors should balance their portfolios with some bonds. What kind of bonds?

LOWELL: Well, surprisingly, of course, the one thing that was supposed to perform the worst this year has been performing the best. Ten- year treasury total bond funds or the Barclays aggregate. So, we continue to like investment grades, shorter, midterm duration, but we also like junk bonds. They`re more economically sensitive. And a good diversified well- managed fund you`re still getting relative yield advantage and you`re also getting a chicken-hearted way to play the stock market.

MATHISEN: I`m a chicken heart at heart.

Jim Lowell, always helpful, thanks — chief investment officer at Adviser Investments.

GHARIB: Still ahead on the program, the top job at Microsoft
(NASDAQ:MSFT) may soon be filled by insider Satya Nadella. Is he the right man and what can he do to turn Microsoft (NASDAQ:MSFT) into a growth machine?


MATHISEN: A big development today in the proposed and long-delayed Keystone XL oil pipeline.

The State Department issuing a report that raised no major environmental objections to the northern leg of the controversial pipeline.
It would bring crude from the oil sands of Canada more than 1,100 miles south through several states to Oklahoma. There, the pipeline would connect to the lower leg of the project. That stretch is already in operation, delivering oil to refineries along the Gulf of Mexico.

GHARIB: More worries about a different kind of fuel. The price of propane continues to rise. And a shortage of the gas is expected to continue well into February, making matters worse the fuel is currently being exported at historically high levels. That`s a big worry for many homeowners, especially as severe wintry weather shows no signs of letting up. More than a third of households in the Midwest, many of them in rural communities, use propane to heat their homes.

MATHISEN: As we told you last night, things have heated up in Microsoft`s search for a new CEO, with reports saying that company insider Satya Nadella, is poised to take the top job at the world`s largest software maker.

Josh Lipton now with more on Nadella and whether he`s the right person for the job.


JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): It`s taken them almost six months, but Microsoft`s search committee may have found its CEO.

Re/code`s Kara Swisher reports that Satya Nadella could be the front- runner to replace CEO Steve Ballmer. Analysts say the choice could make strategic sense. Nadella is a 22-year veteran of the software giant. He`s held leadership roles across multiple Microsoft (NASDAQ:MSFT) businesses.
Most recently, he`s been leading Microsoft`s transition to a Cloud and services company.

DAN IVES, FBR CAPITAL MARKETS: Cloud is the epicenter of Microsoft`s future success. They`re really going for the golden jewel within the Enterprise. More and more spending is going toward the Cloud. For Microsoft (NASDAQ:MSFT) to be a very relevant player, they need to have success in the Cloud, which speaks to why Mr. Nadella is sort of front and center as the potential CEO.

SATYA NADELLA, MICROSOFT: Our servers are all getting upgraded.

LIPTON: Nadella also has the technology credentials for the job. He has a deep background in electrical engineering and computer science.
There are concerns about choosing Nadella, however. Many on Wall Street want an outsider to take charge of Microsoft (NASDAQ:MSFT). Taking a long- time insider could disappoint investors who want dramatic change at the company.

IVES: At the end of the day, the optimism around Microsoft
(NASDAQ:MSFT) is that you could get a fresh perspective, an outsider, someone that was willing to make the tough decisions with the Enterprise, the concerned business, do you spin off Xbox. Now, they`ve gone with an insider, it looks like. That`s off the table.

LIPTON: Another worry, Nadella might have run business divisions but he`s never worked as a CEO.

RICK SHERLUND, NOMURA SECURITIES: I think for Satya never having been a CEO and stepping into what will soon be a 130,000-person company, he`s going to be a work in progress probably for a while, kind of ramping up.
There`s so much for him to accomplish strategically and operationally.

LIPTON (on camera): Ultimately, though, the job of the next CEO at Microsoft (NASDAQ:MSFT) is so big, involving strategic decisions on everything from the future of Windows to whether the company should keep trying to crack the consumer that it will take more than just one man or woman to meet these challenges.

Josh Lipton, NIGHTLY BUSINESS REPORT, Silicon Valley.


GHARIB: We begin tonight`s “Market Focus” with Chevron (NYSE:CVX) and a big drop in its stock. The big oil company said net income plunged 32 percent as global production slowed and refined product margins weakened.
Revenues missed estimates by $9 billion. Chevron (NYSE:CVX) also gave a weak outlook for this year. Shares tumbled 4 percent to $111.63.

Americans spent $600 billion this past holiday season, and much of that was charged on their MasterCard (NYSE:MA). Profits at the credit card company rose 3 percent. But that was less than Wall Street expected.
Disappointed investors sold the stock. MasterCard (NYSE:MA) fell 5 percent today to $75.68.

Mattel (NASDAQ:MAT) also took a hit in today`s session. The toy maker posted weaker than expected earnings as revenues fell 10 percent in North America and international sales were flat. Sales of Barbie and Fisher Price preschool items slid 13 percent. But Mattel (NASDAQ:MAT) still increased its dividend by more than 5 percent. Despite all of that, the stock fell 12 percent to $37.84.

MATHISEN: It was a very different story at Tyson Food. The country`s largest meat processor reported better than expected first quarter results, driven by higher chicken and beef sales. Tyson also reaffirmed sales and meat production forecasts for 2014. It did warn, however, that a virus will cut pork production by 2 percent to 4 percent. Shares rose anyway, up almost 8.5 percent to $37.40.

Shares of Chipotle were hotter than a habanero in today`s session. In its earning report out last night the Mexican food chain said more customers ate at its restaurants, boosting sales. The company also told investors it`s considering upping prices later this year, and that contributed to the stock`s gain today.

Look at that move, up almost 12 percent to $551.96.

GHARIB: Our market monitor guest says the January sell-off is a normal pullback even though it`s been painful for investors. He`s Michael Jones, chairman and chief investment officer at Riverfront Investment Group.

Michael, you probably heard Jim Lowell`s commentary at the top of the program. What do you think? Is this just a pullback? It certainly feels like something more than that.

MICHAEL JONES, RIVERFRONT INVESTMENT GROUP: I think it feels so bad because it`s been so long since we actually experienced a normal pullback.
Remember that for more than a year the Fed`s been printing $85 billion a month. And with that kind of liquidity coming into financial markets, we simply haven`t experienced a normal correction in over a year.

Now that they`re starting to taper, we`re going to have to get used to the fact that the market`s going to go back to its ordinary long-term behavior, and that`s three steps forward, two steps back. Volatility is a natural part of the process.

MATHISEN: The last couple years have been unusual with respect to that. In other words, we haven`t had the pullback. We haven`t had the volatility. And certainly the month of January and this week were volatile indeed.

Let`s get to a couple of stock picks. Companies that you like, beginning with Disney (NYSE:DIS). Why?

JONES: Well, as our Disney (NYSE:DIS) analyst, Paul Lui, likes to say, what`s not to love? This is a company that owns virtually every marquee entertainment franchise in the industry.

Marvel, ESPN, “Star Wars,” “Indiana Jones” — I mean, the list goes on and on. And now with “Frozen”, for the first time in over a decade they have a true franchise animated feature, which means Broadway musicals. It means ice extravaganzas. But most importantly, it means more traffic at their parks. There`s a lot of momentum behind the earnings of this company.

We also love their innovation. They just entered into an agreement with Netflix (NASDAQ:NFLX) for some original content on secondary characters from Marvel. It`s a great low-risk way to get even more money out of that franchise.

GHARIB: OK. You also like Discover Financial Services (NYSE:DFS), the credit card company. Tell us why you like DFS.

JONES: Well, they are first of all growing faster than the other credit card company. Six percent loan growth that they reported in the fourth quarter. They`re at a significant discount to all the other credit card issuers.

And probably as importantly, people underestimate the power of the Discover payment network. Remember, they have an alternative to Visa
(NYSE:V) and some of the other payment networks for online payment processing and the other ways in which e-commerce occurs. This is an undiscovered gem for this company, and as that industry continues to deregulate and innovate, we think it`s going to be a powerful driver of Discover`s earnings over the coming years.

MATHISEN: It`s an interesting argument because I usually am prone toward companies that are either one or two in their market niche, and they are not. But be that as it may, you make a strong case for it.

Let`s move on to the third one, which takes us a little farther afield to Japan and an ETF that is a hedge fund, Wisdomtree Japan. Why?

JONES: Well, this is a bit of a contrarian play because it has had a terrible January. But this is basically being long the big exporting stocks in Japan. It is short the currency. As the yen goes down, these stocks go up.

And one of the most powerful earnings recoveries since the Great Recession has occurred in Japan. Their earnings are up almost 40 percent relative to pre-crisis levels. And yet the stock prices are only now getting back to 2007 levels. That means you could easily see another 30 percent, 40 percent appreciation just to validate the earnings growth that has already happened.

We think with the bank of Japan getting ready for another round of money printing that will get the yen back on the down side and the stocks back on the up side.

GHARIB: OK. Good. Michael, any disclosures to make about these stock picks that you`ve given us?

JONES: Yes. We own Disney (NYSE:DIS), Discover, and DXJ, the Japan ETF, in our portfolios, and I own them personally.

GHARIB: OK. Thank you so much. Have a great weekend.

JONES: Thank you.

GHARIB: Michael Jones, chairman and chief investment officer at Riverfront Investment Group.

MATHISEN: Coming up, the Bernanke era comes to a close. On his last day as chairman of the Federal Reserve, will Ben Bernanke be remembered as the man who redefined central banking?


MATHISEN: Detroit wants to do right by its workers and put money into pension funds for municipal employees and retirees. The trouble is the bankrupt motor city wants to do that ahead of paying bank bond holders and bankers as part of its plan to restructure $18 billion in debt and emerge from Chapter 9 bankruptcy protection.

In a separate development, Detroit leaders reached a deal to continue to provide health insurance benefits to city retirees.

GHARIB: President Obama is asking CEOs to do more to hire out of work Americans, specifically people who have been unemployed for six months or more. The president invited today a group of 23 corporate leaders to the White House, including the CEOs of Boeing (NYSE:BA), eBay (NASDAQ:EBAY), Bank of America (NYSE:BAC), and Marriott.


BARACK OBAMA, PRESIDENT OF THE UNITED STATES: We`ve engaged employers of all sizes, all around the country, including many who are here today, to commit to a set of inclusive hiring policies for making sure recruiting and screening practices don`t disadvantage folks who`ve been out of work, to establishing an open door policy that actively encourages all qualified applicants.


GHARIB: The White House says more than 300 companies, including many of the nation`s largest corporations, have signed on to help spur job growth.

MATHISEN: Janet Yellen will make her first appearance as the new chairman of the Federal Reserve on February 11th. Yellen, who will be sworn in officially on Monday, is slated to testify in a semi-annual report about the economy in front of the House Financial Services Committee.

GHARIB: Meanwhile, today is Ben Bernanke`s final day as chairman of the Fed. After eight years of leading the central bank.

Steve Liesman takes a look at Bernanke`s two tumultuous terms and his legacy.


UNIDENTIFIED MALE: Raise your right hand and repeat after me.

Ben Bernanke entered office in 2006 with the intention of depersonalizing the chairman`s role. After nearly two decades of Alan Greenspan, whose popularity was bigger than the Fed itself. But in his full throttle response to the nation`s worst financial crisis since the Great Depression, Bernanke looks to have done more to change the Fed in eight years than Greenspan did in 18.

STANLEY FISCHER, FED VICE CHAIR NOMINEE: I believe that when the history books get written the innovations that were made in this crisis will be recognized as changing the way in which central banks deal with financial crises.

LIESMAN: Allen Sinai at Decision Economics calls it the Bernanke template — buying trillions of dollars in bonds to buy down interest rates or quantitative easing, telling the market what the Fed would do, so-called forward guidance, and then massive financial backstops put in place during the crisis, and letting the whole open market committee speak and for the first time ever press conferences and more transparency.

(on camera): Some of these Bernanke did because he was mandated by the new financial reform law. Others were born of necessity during the crisis.

But Emil Caship (ph) from the University of Chicago says Bernanke identified the policies quickly and when the Fed changes, the world changes, too.

OBAMA: The degree to which central bankers all across the world looked to him for sound advice and smart policymaking is remarkable.

LIESMAN (voice-over): For some Bernanke did too little. For some he did too much. And his forecasting sometimes left something to be desired.

BEN BERNANKE, OUTGOING FEDERAL RESERVE CHAIRMAN: The Federal Reserve is not currently forecasting a recession. We are forecasting slow growth.

LIESMAN: But when the facts about weakness became clear in the economy, Bernanke brought rates down quickly, first to 2 percent from 5.25 percent, and then to zero. Even before the unemployment rate would spike to 10 percent.

When Bernanke ran out of interest rates to cut, he put academic theory to work and bought bonds to push down rates. And when buying bonds wasn`t enough, he used another theory, forward guidance, trying to help the economy by convincing markets that the Fed would keep interest rates low for a very long time.

Those who believed in Bernanke were handsomely reward. Stocks surged
135 percent from the crisis bottom. History stands ready to judge Bernanke harshly if the exit from these policies creates a sharp recession or high inflation.

But a smooth exit by the Fed would solidify Bernanke`s status as a central banking legend.



MATHISEN: And finally tonight, an update on a story we brought you back in December about a rising star in the toy world. And now, she`s really about to hit the big-time.

A year and a half ago, GoldieBlox started making games that tried to get girls interested in careers in math and engineering. Founder Debbie Sterling entered into a small business big game contest and won, getting a free 30-second ad on this Sunday`s Super Bowl.


DEBBIE STERLING, GOLDIEBLOX FOUNDER & CEO: Even just entering the program has had a huge impact on our business. We`re now in over 1,000 mom and pop toy stores, Toys “R” Us, and we just launched in Target (NYSE:TGT).
We`re gearing up and we`re ready for it.


MATHISEN: One 30-second ad running during the big game costs around
$4 million. It`s hard to put a price tag on how much this victory means to GoldieBlox and the girls inspired by its games. Nice story there.

GHARIB: And hope everybody has a good Super Bowl Sunday this weekend.
That`s it for us for right now. NIGHTLY BUSINESS REPORT for tonight. I`m Susie Gharib. Thanks for watching.

MATHISEN: And I`m Tyler Mathisen. Thanks from me as well. Have a great weekend, everybody. We`ll see you back here on Monday 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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