Transcripts: Wednesday, February 26, 2014

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

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BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Mixed signals. New home sales surge while application for mortgages drop. Ivy Zelman, the analyst who called housing`s top and bottom, makes sense of the conflicting data for us.

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: A Penney for your thoughts. JCPenney reports a smaller loss than expected and says sales will improve. But have investors already lost faith in the company`s turnaround?

GRIFFETH: So, what`s at risk? In the third part of our healthcare series tonight — could taxpayers be on the hook if the new federal insurance coops do not work out as planned?

All that and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, February the 26th.

Good evening, everyone. I`m Bill Griffeth. Tyler is off tonight.

GHARIB: And I`m Susie Gharib. Good evening from me as well.

Well, you may not know by looking out your window or at the calendar, but the all-important spring housing season has already begun. And today, we got conflicting and divergent signals about the direction of the U.S. housing market. Sales of new homes in January unexpectedly shot up by nearly 10 percent, reaching the fastest sales pace in five years.

At the same time, mortgage applications last week fell almost 9 percent. That`s the lowest level in two decades.

So, how do investors make sense of the data? Which way is housing headed? And what does it mean for home buyers and sellers?

Diana Olick reports.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): It was last spring, in an interview on CNBC, that housing guru Ivy Zelman uttered these fateful words.

IVY ZELMAN, HOUSING GURU: I think we`re in nirvana for housing.

OLICK: Now after a sharp turn around in sales of both new and existing homes, Zelman explained her thinking.

ZELMAN: I think nirvana took a pause during that time home prices were surging and we had very attractive affordability. And a few months after I was on, we had rates spike about 100-plus basis points and we saw a pause. The consumer was rationally responding to the surge in prices, the backup in rates.

OLICK: New reports this week show home prices were up over 11 percent in 2013 from 2012. That and higher mortgage rates are making housing a far more expensive proposition today than just a year ago.

While buying is still 38 percent cheaper than renting, according to a new report from Trulia, that is down from 44 percent cheaper a year ago.

JED KOLKO, TRULIA CHIEF ECONOMIST: It`s still very cheap to buy compared to rent, mostly because mortgage rates are still very low by historical standards. They`re up over the last year, but mortgage rates at 4 1/2 would be the envy of anyone coming to us today from the 2000s or the `90s or the `80s.

OLICK: Mortgage applications to buy a home fell last week to their lowest level in nearly two decades. But Zelman is not concerned. She said credit loosening and spring will be stronger.

ZELMAN: I think we`re going to see things rip when we see the weather thaw and the consumers are coming out and there`s not enough supply.

OLICK (on camera): That supply was eaten up by investors in 2013. Investors may now be turning their sites on new construction. Zelman says it`s still a small slice of the market but she doesn`t dismiss the potential. Some large-scale investors are already buying new homes, able to rent them for far higher returns. That new cash could change the landscape for the nation`s still beleaguered builders.

For NIGHTLY BUSINESS REPORT, I`m Diana Olick.

(END VIDEOTAPE)

GRIFFETH: Carl Riccadonna joins us now to discuss his outlook for the housing market. Carl is senior economist at Deutsche Bank.

Good evening, Carl.

What do you make of the conflicting data on housing? Are we in recovery or not?

CARL RICCADONNA, DEUTSCHE BANK SENIOR ECONOMIST: I think we are definitely in recovery. But we have to be very discipline at this time of year, because this is the low season for the housing market. Activity`s typically about 40 percent higher during those peak selling months of March, April, May, June and July.

So, what we`re looking at now is really just a trickle of data, trickle of transactions. And it can really be distorted by things like the inclement weather that`s been impacting much of the eastern half of the country for — really from December into January and again into February. So I`m trying to stand back and not really cast judgment until we get a better look at things in a few months` time.

GHARIB: That makes a lot of sense, Carl. But when you look at the information we have now, as Diana was just reporting, you know, there`s not much supply of homes on the market. And then on top of that, we see that mortgage rates are notching up, you know, it`s 4 percent for a 30-year. Not bad but they are notching up.

Does this keep home buyers away?

RICCADONNA: I don`t think this keeps homebuyers away at all.

And in fact, if we said 2013 was the nirvana year for the housing market, I think 2014 might be nirvana squared. I think the rate of construction in the GDP accounts will double this year compared to what we saw last year. I think home price appreciation is going to continue.

Affordability while down a bit from where we were in the last couple of years, which is no surprise given that mortgage rates are higher and housing a bit more expensive, affordability is still at record high levels going from 1971 when the data began all the way up to 2007, we are still higher now relative to that period.

And even if we have a further back up in interest rates, let`s say a 1 percent increase in mortgage rates this year, affordability will still be higher than at any point during that period.

GRIFFETH: You anticipated my question. I know it`s a mug`s game to forecast interest rates. But with the Fed tapering, presumably eventually long interest rates which dictate mortgage rates will be rising. So, how much higher do you think we could see a mortgage rate be by the end of this year, and why doesn`t that mean less affordability?

RICCADONNA: Well, it`s all in relative terms. So, absolutely I think mortgage rates will back up. Let`s look at the 10-year treasury note, phones, which a lot of mortgages are based off of. Our view is that the 10-year treasury yield could increase by one percentage point, if not more by year end.

So, we`re looking at a 4 percent 10-year treasury compared to now where we are maybe 2.75 or so. So, significant room for backup. The same thing will happen to mortgage rates.

So, on the margin, yes, that makes housing less affordable. But affordability is a three-variable equation. It matters where home prices are, where mortgage rates are and also where household income growth is.

And if we have a year where the labor market finally turns over, and it`s going to be one of those years, that`s going to provide a solid support to household income creation and it`s going to enable the average household to be active in the real estate market.

GHARIB: Carl, there`s always this debate about buy versus rent. A lot of people got turned away from the whole concept, the American dream of owning your own home because of this latest financial crisis. What about now? Where do you see the trend?

And what does that mean for the economy if more people rent rather than buy?

RICCADONNA: Well, I don`t think it`s a case or once bitten twice shy with respect to the housing market. Just as people didn`t pull away from stocks after the bubble in the late `90s and early 2000s, I think people will be very active in re-entering the real estate market.

What`s interesting, though, there`s a shortage on both fronts. So, there`s a shortage of rental units. There`s also a shortage of homes for sale, either newly built ones or resales.

So, we have an inventory shortage on both fronts. And that means that we`ll see more rental inflation as the rental vacancy rate is back at 2001-2002 levels. It also means that we`ll see price appreciation in the housing sector, for both newly built homes and resales. We were up about 12 percent in home prices last year.

GRIFFETH: Right.

RICCADONNA: Given the lean inventory and ongoing increase in sales — I`m hinting of an inventory-sales ratio — that tells us that home price appreciation should be up probably 8 percent to 10 percent in 2014.

GRIFFETH: All right. A bullish housing forecast from Carl Riccadonna, the senior economist at Deutsche Bank.

Good to see you, Carl. Thanks.

RICCADONNA: Thank you.

GHARIB: On Wall Street today, investors were encouraged by those strong numbers on new home sales. Stocks rose early in the trading session with the S&P 500 hitting a fresh record high, and the NASDAQ reaching a 14-year high. And although those milestones didn`t last, the Russell 2000 small cap index did close at a new all-time high.

At the end of an up and down day, the Dow rose 18 points, the NASDAQ added 4 1/2 points and the S&P edged up a fraction.

GRIFFETH: And while a major U.S. stock average has inched higher today, Russia`s RTS index fell another 1 1/2 percent overnight. That`s after President Putin ordered combat readiness drills for 150,000 Russian troops near Ukraine, just as pro and anti-Russian groups clashed in Ukraine`s Crimea region.

Now, even without this latest saber-rattling from the Kremlin, the RTS Index is down nearly 11 percent so far this year.

GHARIB: And to update you with more about the Ukraine, where protest leaders named the former economy minister to head the new government following the overthrow of the president. And as Michelle Caruso-Cabrera explains from Kiev, formation of a new government is a key to stabilizing the country`s finances.

(BEGIN VIDEOTAPE)

MICHELLE CARUSO-CABRERA, NIGHTLY BUSINESS REPORT CORRESPONDENT: Thousands of Ukrainians have returned to the square tonight called, here by the acting leadership of the country so they can be consulted by a list of names for proposed new government. Forming a new government is the next crucial step for the country because it needs to begin negotiating a massive financial bailout of as much as $35 billion. The multinational lenders say they need someone to negotiate with.

This all occurs as the country`s currency continues to weaken due to fears about the economy and also amid rising tensions with Russia.

Today, a massive protest in Crimea, in the southern part of Ukraine, raising concerns about whether or not the country is drifting toward a civil war, and also as Russian leader Vladimir Putin ordered his troops from the western part of Russia near the border of Ukraine to begin combat preparedness exercises.

We wait to see tomorrow whether or not Ukraine has a new government.

For NIGHTLY BUSINESS REPORT, Michelle Caruso-Cabrera in Kiev.

(END VIDEOTAPE)

GHARIB: And late today, U.S. Secretary of State John Kerry said the U.S. is considering a $1 billion in loan guarantees to Ukraine, but no decision has been made yet.

GRIFFETH: Still ahead, JCPenney says it expects sales and gross profits to improve this year. But is it enough to turn investor sentiment?

(MUSIC)

GHARIB: Some positive news from JCPenney after the market closed today and investors seemed to be encouraged enough to buy the stock at least for now. After the bell, the struggling retailer reported a loss of 68 cents a share, but that was a lot less than analysts` estimates. Sales rose 2 percent to $3.8 billion, but that was below Wall Street forecasts. JCPenney says it expects sales and gross margins to improve in 2014. And that`s one reason shares initially jumped as much as 10 percent in after-hours trading.

But JCPenney isn`t in the clear. Courtney Reagan has more on the challenges ahead and what some analysts are advising investors to do with the stock.

(BEGIN VIDEOTAPE)

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): JCPenney seems to garner an outsize amount of attention every earnings season for the past few years, and with good reason. The 112-year-old department store is now just a shadow of its former self. JCPenney has shed more than $16 billion in market cap since its 2007 peak, sitting under 2 billion today.

The retailer was already struggling when it brought in Apple`s retail wiz Ron Johnson, though his bold turnaround cost JCPenney a 15 percent stock price decline in his 17 months at the helm.

Former CEO Mike Ullman returned to stem the bleeding in April of last year, but the stock has fallen a further 65 percent in just 10 months.

Cash is another concern. JCPenney closed 2013 with $2 billion in liquidity, but some think the department store won`t register enough in sales to offset the cash burn and might need to raise capital at the end of this year or the beginning of 2015.

(on camera): Investors are losing faith in a JCPenney turnaround. And analysts are growing more pessimistic about JCPenney`s future. While the same store sales were positive in the fourth quarter for the first time in nine quarters, Wall Street expected more.

MATTHEW BOSS, JPMORGAN SR. RETAIL ANALYST: I don`t think that this is necessarily an imminent bankruptcy as I think a lot of people out there believe. But I think you have to come to grips with what is going to be the timeline and what`s going to be the magnitude of recovery here.

REAGAN (voice-over): Boss doesn`t think JCPenney is a lost cause, but also doesn`t think it`s likely it will ever be a $17 billion retailer again. JPMorgan (NYSE:JPM) isn`t recommending JCPenney to its clients, echoing the advice of majority of analysts covering the retailer on Wall Street.

For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan.

(END VIDEOTAPE)

GRIFFETH: And out earlier today, earnings from Target (NYSE:TGT) showing that the discounter is paying a hefty price for last year`s massive credit card data breach. Fourth quarter net profit was cut in half with sales down by 5 percent. But the chain was still able to pull in 81 cents a share excluding certain items and it beat estimates by 2 cents. It even topped forecasts on revenue. That sent shares soaring by 7 percent in today`s session.

But Target`s troubles are not over yet. The chain`s CEO said that the data breach will continue to be a drag on future profits.

GHARIB: Well, after Target`s hack attack, cyber security is becoming a top priority for executives of some big and small companies.

Eamon Javers is in San Francisco, at the meeting of the top minds tasked with keeping our data safe from hackers.

(BEGIN VIDEOTAPE)

EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): In the wake of the Target (NYSE:TGT) security breach, the top minds in cyber security are gathered in San Francisco this week for the Annual RSA Security Conference. This is a place where companies hire ethical hackers to figure out weaknesses on their own networks and devices and fix them before the bad guys find the flaws.

Neal Hindocha of Trustwave is one such ethical hacker.

NEAL HINDOCHA, TRUSTWAVE SENIOR SECURITY CONSULTANT: If you view this screen over here, when I enter my PIN code in here, you can see that it`s installing. So, this is actually giving me information about the events that are occurring on the mobile device.

JAVERS (on camera): So, what this is, is what the hacker`s actually going to see once he`s cracked into your Android phone, right?

HINDOCHA: So, what you can see here is my PIN code being entered into the device.

JAVERS (voice-over): But what`s been bad for consumers and retailers in terms of stolen data, has been really good for cyber security companies. In fact, analysts predict a wave of mergers and acquisitions in this industry as companies consolidate and the big firms buy up innovative contenders.

DANIEL IVES, FBR MANAGING DIRECTOR SR. ANALYST: The RSAC (ph) is almost like a prom for these companies where on one side you have the natural buyers and the larger vendors, and on the other side, you have the smaller advanced security technology. I think you`re going see a lot of companies, you know, kicking the tires here.

JAVERS: Daniel Ives gave us a list of the companies he thinks might be the most likely buyers and sellers in 2014. Potential buyers include EMC (NYSE:EMC), Microsoft (NASDAQ:MSFT), Symantec (NASDAQ:SYMC), IBM and Oracle (NASDAQ:ORCL). Accusation targets potentially include Fortinet (NASDAQ:FTNT), Imperva, Proofpoint and Qualys.

(on camera): Business is clearly topic number one here at the RSA cybersecurity conference. But the other topic that people can`t stop talking about is politics. There`s been enormous controversy here over the degree to which each of these companies has cooperated with the NSA, and whether they should be doing that at all.

For NIGHTLY BUSINESS REPORT, I`m Eamon Javers in San Francisco.

(END VIDEOTAPE)

GRIFFETH: More retail news, Lowe`s reported profit growth and improving sales. That`s where we begin tonight`s “Market Focus”. The home improvement retailer, which continues to benefit from a recovering housing market, also issued a $5 billion stock buy back program. The chain`s earnings outlook for the year came in just shy of estimates, though. Still shares rose by more than 5 percent closing at $50.72.

Abercrombie and Fitch`s product plunged by 58 percent but the struggling teen retailer relieved investors with an earnings beat. Cost cuts and discounts helped the company win back younger shoppers during the holiday quarter. Abercrombie`s board also approved a $150 million share buyback program. That stock surged by 11 percent, closing at $40.04.

HomeGoods and Marshalls` parent TJX reported an earnings miss, blamed it on the cold weather. The retailer`s profit outlook also fell sort of analyst estimates. TJX, though, did announce a new $2 billion buyback program and said it plans to increase its quarterly dividend. But shares were off by 1 percent, closing at $60.29.

GHARIB: Also from the retail sector, Barnes & Noble (NYSE:NE) (NYSE:BKS) reported a profit for the holiday quarter. That`s despite a decline in revenue. But losses in its digital book business continue to weigh down the book seller. Barnes & Noble (NYSE:NE) (NYSE:BKS) also dismissed the offer it received last week from an investment firm for 51 percent stake. Shares rose 4 percent to $18.47.

Noodles and Company reporting earnings after the closing bell today. And the results were weaker than expected. Both profits and revenue missed expectations, and that sent shares initially lower after the report, ending the regular session at $39.55.

And Carl Icahn and eBay (NASDAQ:EBAY) took their battle to a whole new level today. The activist investor who owns more than 2 percent stake in the company is calling for eBay (NASDAQ:EBAY) to sell off its fast-growing PayPal business.

In a letter to shareholders, Icahn also called corporate governance at eBay (NASDAQ:EBAY), quote, “dysfunctional.” Well eBay`s reaction? Icahn`s claims are, quote, “dead wrong.”

The scuffle boosted shares, though, by 2 percent to $57.34.

GRIFFETH: We have an update now on a story we told you about yesterday, that “Wall Street Journal” report detailing the hostile relationship between PIMCO co-chief executives Bill Gross and Mohamed El-Erian, which culminated in Mohamed El-Erian`s resignation. Now, “The Financial Times” is reporting that shareholders of PIMCO`s parent company, the German insurance giant Allianz, are concerned and they are urging the firm to act on personnel issues at PIMCO to make sure that there are no more executive defections.

GHARIB: Delta Airlines (NYSE:DAL) making some big changes to its frequent flyer program. Beginning next January, members of Delta Sky Miles will rack up free miles and other rewards based on how much they pay for tickets, not how many miles are traveled. This could be good news for big-spending, first-class flyers and business travelers who often book flights just days ahead of a trip when tickets are the most expensive.

GRIFFET: Well, we know flying`s expensive. So is buying a new car.

But there`s a growing trend in the automotive industry with people buying their cars through third parties at a preset, no haggle price. And it`s the reason that auto sales are climbing at Costco (NASDAQ:COST). Yes, Costco (NASDAQ:COST).

Phil LeBeau explains why the warehouse retailer is where more shoppers are picking up a new car.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): From 1,200 sheets of toilet paper to 50-pound bags of rice, Costco (NASDAQ:COST) has long before the place to buy in bulk at low prices. But these days, Costco (NASDAQ:COST) members are checking out something else, new cars.

JEFF SKEEN, COSTCO AUTOMOTIVE CEO: On average, you`re probably saving $1,000 or more off of what you might spend hours haggling trying to get to.

LEBEAU: Mona Giamanco bought her Volkswagen Passat through Costco (NASDAQ:COST).

MONA GIAMANCO, COSTCO CAR BUYER: Oh, I love it. I feel great.

LEBEAU: Giamanco did what 340,000 other Costco (NASDAQ:COST) members have done in the last year. She wanted a Passat, so she went through Costco`s auto Web site, which sent her to a local VW deal who had the Passat at a preset price. Within 48 hours, Giamanco had her car.

GIAMANCO: I saved so much time. In the past, I would hop from deal dealership to dealership taking several weekends, combing the lots trying to get a deal, trying to bargain. But this was so much easier.

LEBEAU (on camera): Auto dealers around the country pay Costco (NASDAQ:COST) for referrals, even though they wind up selling below invoice. So, why do they do it? Because the dealers will make money in years to come servicing those vehicles, and they know direct, prearranged sales is the new way consumers are buying cars and trucks.

SIMON SOAF, MOSSY VOLKSWAGEN: Those days of going to six, seven dealerships to shop for a car are over.

LEBEAU (voice-over): For Costco (NASDAQ:COST) selling cars and trucks is not a huge moneymaker, but it is a way for it to offer members like Mona Giamanco what she was looking for, a quick, haggle-free way to buy a new car.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Carlsbad, California.

(END VIDEOTAPE)

GHARIB: And coming up on the program, federal insurance co-ops. They were born out of the new health care law. But could taxpayers be left holding the bag if things don`t work out as planned? The final time part of our health care series is next.

(MUSIC)

GHARIB: The poor condition of some nation`s railway is one of the reasons behind a massive new White House spending initiative that President Obama was in St. Paul, Minnesota, today announcing a four-year, $300 billion plan to create jobs by fixing the nation`s crumbling roads, bridges and rails.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: What companies are saying they intend to hire more people this year, we need to make that decision easier for them. And we can create jobs at the same time. Rebuilding our transportation systems, our power grids, our communications networks, all the things that commerce relies on.

(END VIDEO CLIP)

GHARIB: But about half that money relies on ending some federal corporate tax breaks.

GRIFFETH: Finally tonight, in an effort to spur competition, the Affordable Care Act provided government loans to launch non-profit insurers known as co-ops that were designed to compete against established commercial insurance plans.

Well, in the final part of our series, “Insurance Upstarts,” Bertha Coombs takes a look at these co-ops and whether they could end up leaving taxpayers on the hook if they falter.

(BEGIN VIDEOTAPE)

AD NARRATOR: Created to give us control of our own health care.

BERTHA COOMBS, NIGHTLY BUSINESS REPORT (voice-over): Health Republic of New Jersey uses its nonprofit status as a selling point.

JAMES MARTIN, HEALTH REPUBLIC INSURANCE OF NJ CEO: We`re proud of that. We found that message resonates with people. The whole idea of being a cooperative, consumer operated and oriented plan not for profit committed to innovating in health care.

COOMBS: The new insurer is one of three cooperatives or coops launched with help from the nonprofit Freelancers Union, using federal loans under the Affordable Care Act.

MARTIN: We`ve been granted a considerable amount of solvency dollars to make sure that we`re able to cover any of the issues and concerns around you utilization, so that none of our members would have to be concerned would we be able to cover their hospital bill.

COOMBS: Under the ACA, the Obama administration provided $2 billion in guaranteed loans to 24 new co-ops. One in Vermont failed to win approval from regulators, prompting comparisons from critics to the administration`s 2010 energy loan program which saw the high profile default of solar panel maker Solyndra on $535 million.

REP. JIM JORDAN (R), OHIO: This is what happens when the government takes winners and losers with taxpayer money.

COOMBS: At a House Oversight Committee hearing this month, Democrats cried foul.

REP. JACKIE SPEIER (D), CALIFORNIA: As much as the majority would like to manufacture a scandal, there simply isn`t one. There is no smoking gun. This is no Solyndra.

COOMBS: Then they walked out in protest, while Republicans grilled the Freelancers Unions executive director about her group`s dealings with the Obama administration and about $340 million in loans used to launch Health Republic coops in Oregon, New York and New Jersey.

SARA HOROWITZ, FREELANCERS UNION FOUNDER & EXEC. DIRECTOR: We did everything we said we would do to help those co-ops launch successfully and to move them quickly to self-sufficiency. And it worked. The co-ops were sponsored — I`m sorry. The co-ops we sponsored launched on time as independent entities.

COOMBS: James Martin chalks it up to politics.

MARTIN: I know the number of attempts to derail the Affordable Care Act.

COOMBS: He`s confident Health Republic will be financially sustainable. Though near-term, the botched healthcare.gov rollout has meant a slow start to enrollment.

MARTIN: We are not seeing the first-time enrollees that was part of the target audience and the target segment for the Affordable Care Act. Whether they`re the group that`s waiting until the end of March, I`m not sure.

COOMBS (on camera): Early enrollment has been mixed for the co-ops. Health Republic of New York has garnered 16 percent market share, making it competitive with commercial carriers. While Minutemen Health in Massachusetts has struggled, but ACA gives them time to get it right, up to 15 years to repay the bulk of their loans.

Bertha Coombs, NIGHTLY BUSINESS REPORT, Weehawken, New Jersey.

(END VIDEOTAPE)

GHARIB: And that is NIGHTLY BUSINESS REPORT for tonight. I`m Susie Gharib. Thanks for joining us.

GRIFFETH: I`m Bill Griffeth. Have a great evening. We`ll see you tomorrow.
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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