Transcript: Friday, March 14, 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: Nervous weekend.
Investors remain cautious ahead of a big vote in Ukraine on Sunday, as the market focuses on the possibility that tensions could quickly escalate.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Reputational damage.
Target (NYSE:TGT) warns its data breach could be worse than initially reported. And troubles deepen at General Motors (NYSE:GM) with respect to its recalled cars. What happens to companies when their brands get tarnished?

GHARIB: And, market monitor. Our guest tonight is looking for bargains in this market, and he has picks for your portfolios that he calls, quote, “stupid cheap”.

All that and more tonight on NIGHTLY BUSINESS REPORT for Friday, March 14th.

MATHISEN: Good evening, everyone. I`m Tyler Mathisen and welcome.

Markets here in the U.S. and around the world on edge again today, two days ahead of a referendum vote called by pro-Russian regional leaders in Crimea. The question — whether to stay part of Ukraine or secede and become part of Russian. Moscow spent this Friday shipping more armed forces into the disputed region and repeated threats to invade other parts of Ukraine in response to violent outbursts by protesters demanding that the Kremlin pull back its troops and heavy artillery.

Following six hours of what appeared to be fruitless diplomatic talks in London between U.S. and Russian officials today. Secretary of State John Kerry was emphatic today in how the White House views this Sunday`s vote.

(BEGIN VIDEO CLIP)

JOHN KERRY, SECRETARY OF STATE: The United States` position on that referendum, I must say, is clear, and it`s clear today. We believe the referendum is contrary to the constitution of Ukraine. It is contrary to international law, is in violation of that law, and we believe it is illegitimate, and as the president put it, illegal under the Ukrainian constitution.

(END VIDEO CLIP)

MATHISEN: Steve Sedgwick is in the Ukraine capital of Kiev and has more on how things are shaping up ahead of Sunday`s referendum.

(BEGIN VIDEOTAPE)

STEVE SEDGWICK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
Here in Kiev and throughout the Ukraine, the country remains on tense talks Friday off the last minute diplomatic talks between the U.S. and Russia failed to break the impasse. It now looks like the Crimean referendum for secession and possible annexation to Russia will now take place as planned by the Crimean parliament on Sunday, the 16th of March.

John Kerry after the talks said Russia should have to look at the consequences from their actions, and he still believes the vote would be illegal. Sergei Lavrov, the foreign minister of Russia, said he thought that sanctions would be counter-productive, and actually that the vote was legal and was backed up by the U.N. charter that said there was a right of self-determination for the people of Crimea.

He did offer some hope, though, by saying Russia would not look to expand its military activity into the mainland east of the Ukraine, despite, of course, military maneuvers within the last 24 hours.

(on camera): I spoke late on to the economy minister of the Ukraine who said despite the impact, he still hoped there would be a diplomatic solution brought about by western pressure and perhaps influential circles within Russia as well.

Steve Sedgwick for NIGHTLY BUSINESS REPORT in Kiev.

(END VIDEOTAPE)

GHARIB: Late Thursday night, acting Ukrainian prime minister was in New York City after addressing the United Nations Security Council and meeting with the Ukrainian-American advocacy group. He was asked about Sunday`s referendum in Crimea and how his government would respond if it passes as expected.

(BEGIN VIDEO CLIP)

ARSENIY YATSENYUK, UKRAINIAN PRIME MINISTER: This referendum is already preordered and then we can easily predict the outcome for (INAUDIBLE). But Russia is to stick to the U.N. charter and to its international obligation.

REPORTER: So, what is — what does Ukraine do on Monday?

YATSENKUK: On Monday?

REPORTER: Yes. After the results come out.

YATSENKUK: Preserve territorial integrity.

REPORTER: How?

YATSENKUK: In all possible means, using all leverage from the international community, from our international obligations, and pressing on Russia to stop this mess.

(END VIDEO CLIP)

GHARIB: He also believes that a peaceful solution with Kiev and Moscow becoming real partners is still possible.

MATHISEN: So how does the world`s best-known investor feel about the recent selloff in the market sparked by headlines like the crisis in Ukraine?

Warren Buffett says investors should stick with a long-term strategy.

(BEGIN VIDEO CLIP)

WARREN BUFFETT, BERKSHIRE HATHAWAY CHAIRMAN & CEO: I would bet a lot of money that income from a diversified group of stocks will increase significantly over the next 20 years. So the headlines will not make any difference in that. Stocks can go up and down. They always will go up and down. But American business is going to move forward over time.

(END VIDEO CLIP)

MATHISEN: But also warned that another financial crisis like the one we had in 2008 will happen again but not for some time. And he said it won`t happen the same way.

GHARIB: Well, there was no crisis on Wall Street today but stocks did end the session lower as investors braced for this weekend`s referendum in Crimea.

On Wall Street, the Dow fell for the fifth trading day in a row. This is something that we haven`t seen in nearly two years. And the NASDAQ wrapped up its biggest weekly decline in almost a year. By the closing bell, the Dow was down 43 points, the NASDAQ lost 15, and the S&P lower by five points.

MATHISEN: For the latest now on the deepening troubles at General Motors (NYSE:GM), including a new controversy over faulty air bags in G.M.
cars that one safety group says are responsible for more than 300 deaths.

Phil LeBeau has more.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): New allegations today that General Motors (NYSE:GM) should have done more to protect consumers when it comes to two models that are at the heart of the current recall crisis for the automaker.

The Center for Auto Safety did an analysis of crashes and accidents involving the Chevy Cobalt and Saturn Ion over the last ten years.
According to the Center for Auto Safety, there were 303 deaths linked to accidents where the air bag did not deploy. And again it`s with just two recalled models. The Center for Auto Safety says that General Motors
(NYSE:GM) and NHTSA, National Highway Traffic Safety Administration should have seen the pattern here and should have initiated a recall investigation.

We reached out to the National Highway Traffic Safety Administration.
It says that three separate crash investigation, of those models where the G.M. air bags were not deployed turned up inconclusive results. It also points out some of the factors involving these accidents need to be considered when somebody looks at the data as a whole.

Still, Clarence Ditlow, who runs the Center for Auto Safety says G.M.
and NHTSA should have done more.

CLARENCE DITLOW, CENTER FOR AUTOMOTIVE SAFETY: If they had done that when this database was being built in the 2003, `04, `05 model years, what they would have found was an increasing incidence of front seat occupant deaths where the air bag didn`t deploy, and no one asked the question why are these air bags not deploying? Let`s look at the individual crashes.
If they had done that, we would have had a recall years ago and we wouldn`t have the controversy we have today.

LEBEAU: We talked to General Motors (NYSE:GM) about these latest allegations. The company says as knowledgeable observers know, FARS, that stands for fatal analysis reporting system, which is part of the NHTSA Web site, tracks raw data. Without rigorous analysis, it is pure speculation to attempt to draw any meaningful conclusions.

Shares of General Motors (NYSE:GM) did get a bit of a bounce back today. Unclear whether or not these allegations from the Center for Auto Safety will have any lasting impact on the current crisis involving General Motors (NYSE:GM). But one thing is clear: it is one more day where General Motors (NYSE:GM) is dealing with headlines and questions about the safety of its vehicles.

Phil LeBeau, NIGHTLY BUSINESS REPORT in Chicago, back to you.

(END VIDEOTAPE)

GHARIB: Well, the ratings agency is weighing in on the trouble at General Motors (NYSE:GM). Fitch says the biggest risk to the automaker regarding the recall of faulty ignition switches will be, quote, “reputational.” Now, although direct costs associated with the recall are expected to be manageable and not affect the company`s credit rating, Fitch still says follow-up costs could add up.

MATHISEN: Target (NYSE:TGT) warns that last year`s massive data breach could be a lot worse than earlier thought. In a regulatory filing, Target (NYSE:TGT) says the investigation is still ongoing and additional information could cause reputational damage and worsen its losses. Up to now, the company said 40 million credit card customers` data may have been comprised and personal information could have been accessed on 70 million.

Joining us now with his thoughts on what it will take to change the public`s perception of General Motors (NYSE:GM) and Target (NYSE:TGT) is Dean Crutchfield. He`s a brand expert with his own firm Dean Crutchfield Associates.

Mr. Crutchfield, welcome.

DEAN CRUTCHFIELD, CRUTCHFIELD ASSOCIATES BRAND EXPERT: Thank you.

MATHISEN: You know, the two circumstances here are very, very different. But the common thread is a loss of trust between the customer and the company. When that happens, what do companies do, what can they do to restore trust? And does it ever go back to where it was?

CRUTCHFIELD: It`s a big question. And I think it`s, you know, case by case.

But if you actually look at this in the cold light of day, stocks don`t have a memory recall button but the public does. So that`s the big issue for them. How can they translate truthful information to the public so they can weigh up the options and make decisions as to what`s happened.

I think at the moment, none of us can believe what`s going on here. I think G.M. stands for ghastly mess. It`s an absolute outrage what`s happened. These are two major brands with major roles in our economy and major roles in our society. And both of them have a promise to customers to keep them safe, whether it`s their data or their motor car. And both of them have failed abysmally in delivering that.

GHARIB: So can they rebuild their reputation? And if so, how long will it take? What do they have to do?

CRUTCHFIELD: Well, to do this, it`s about providing information.
Right now, the court of public opinion is outside waiting to come in. So, it`s about the information that we deserve.

Now, Target (NYSE:TGT) provided information. And now, we`re finding the numbers could be double. So that brings a lot of suspicion and concern as to what truly did target know? So we need to dig deeper.

With G.M., it`s a different case all together, because there`s a possibility of cover-up, which has more sinister implications.

So, the two big things that are risks for the company: one, firms that go through deep crisis could lose up to 20 percent of their revenue based on research. So, that could have a big hit. But also, their reputation takes a major slam. That can take a long time to get over.

MATHISEN: Let`s go back to the case several years ago of Toyota
(NYSE:TM) and Lexus, which there were deaths involved and there was a belief that somehow foot guards in the front of the car were getting wedged under the accelerator and causing the car to accelerate anomalously. It was a damaging, damaging set of hearings.

But now four years later, most people recall it dimly, similar case of Audi some years before. Those brands are maybe more popular today than they ever were then.

CRUTCHFIELD: And G.M. has been doing a great job with the new lineup of vehicles that it`s putting on the market. I think that if they manage this well then — yes, it will be in a sense forgotten, I doubt forgiven.

But the difference here we`re talking about hundreds of people ease lives. It`s far more scalable. We`re talking about 70 million people`s data has been stolen. These are very large numbers of people who are not going to forget.

Target (NYSE:TGT) has affected every single customer that it`s got.
So, they`re not going to be jumping for joy. G.M. now is going to have — you know, there`s going to be a lot of concern and cautiousness from any customer approaching their business in terms of the vehicles they want to buy. This is trust that`s been broken.

GHARIB: Dean, real quickly, in 30 seconds or less, is there a corporate role model, somebody that was in this kind of situation and did everything right as far as customers were involved?

CRUTCHFIELD: Well, funnily enough the one example that everyone talks about is J&J and Tylenol. But that`s such an old case.

But I think one firm that did it very well was over the lead paint and that was Mattel (NASDAQ:MAT). The thing we learned from them is that the CEO opened up 300 lines of communication with a team of 30 people all responsible to deliver the news and information. It worked very well. It worked very efficiently. But that`s because they opened up all lines of communication.

Target (NYSE:TGT) and G.M. have not done that.

MATHISEN: All right. Dean, thank you very much.

CRUTCHFIELD: My pleasure.

Dean Crutchfield of Dean Crutchfield Associates.

CRUTCHFIELD: Thank you.

GHARIB: Still ahead on the program, President Obama wants to crack down on for-profit colleges to protect students and taxpayers. But it won`t happen without a fight. We have that story, next.

(MUSIC)

MATHISEN: President Obama is proposing some new rules aimed at keeping an tight lid on low performing for-profit colleges which often leave students buried under a ton of debt and not ready for the high-paying jobs they`ve been promised.

Hampton Pearson with a report.

(BEGIN VIDEOTAPE)

HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
The for-profit college industry is booming, with some 4.5 million students taking career training courses in what has become a multibillion dollar industry.

But the Obama administration says much of the trillion dollars in student loan debt has been accumulated by students at career colleges. And federal dollars provide up to 90 percent of the revenue at some of those training schools.

ARNE DUNCAN, SECRETARY OF EDUCATION: When that opportunity is leading to massive debt, when that opportunity is leading to massive default rates, that`s not opportunity any of us can be proud of. That`s not fair to people trying to climb the economic ladder. It`s not fair to taxpayers and frankly it`s abusive.

PEARSON: New gainful employment proposals from the Department of Education would penalize career-oriented programs that produce graduates without training needed to find a job with a salary that will allow them to pay off their debt. Schools for-profit or not that don`t comply would lose access to federal aid programs, currently about $30 billion a year.

DUNCAN: We want to see good actors, great programs grow and expand and serve more folks, but where the wrong thing is happening for both people and tax payers.

PEARSON: The administration proposals drew a sharp reaction from the Association of Private Colleges and Universities. Its member career schools have more than 3 million students enrolled.

STEVE GUNDERSON, ASSOCIATION OF PRIVATE SECTOR COLLEGES &
UNIVERSITIES: The reality is that as you look at the rule, this is really nothing more than a declaration of war against the private sector` involvement in delivery of post-secondary education. And while they might get some satisfaction that attacking our schools, the reality is the people who really get hurt are the students.

PEARSON (on camera): Two years ago, a federal court threw out a similar proposal from the department of education. The final version of this new plan could also face a legal challenge from private sector colleges and universities.

For NIGHTLY BUSINESS REPORT, I`m Hampton Pearson in Washington.

(END VIDEOTAPE)

GHARIB: Shares of Ann Inc. popped on better than expected earnings report. And that`s where we begin tonight`s “Market Focus”.

The retailer whose brands include Ann Taylor and Loft posted earnings that almost doubled as gross margins improved and sales grew. The company also announced a restructuring plan. It will cut 100 corporate jobs. That will save about $25 million a year. Shares rose more than 7.5 percent to $37.53.

Shares of General Mills (NYSE:GIS) fell after the company warned that third quarter earnings will come in below forecasts. The maker of Cheerios and Yoplait Yogurt blamed it on increasing competition from cheaper private label foods as well as negative currency effects. General Mills (NYSE:GIS) releases its quarterly report on Wednesday.

Ahead of that, the stock was down almost 2.5 percent to $49.77.

MATHISEN: Investors snapped up shares of Castlight Health in the company`s first day of trading. Castlight makes software that helps employers track health care costs. Shares of the company surged about 149 percent. That`s a nice day`s work. $39.80 the close there.

Cisco (NASDAQ:CSCO) investigating whether some of its activities in Russia and neighboring countries violated U.S. laws that banned bribes to foreign officials. The network equipment maker launched the probe at the request of federal regulators. The company doesn`t expect its financial results to be materially affected. Shares of Cisco (NASDAQ:CSCO) down a fraction, $21.35.

Our market monitor tonight says the stock market needs a solid correction, something between 7 percent and 9 percent, and that would open the way to a rally. He`s Chris Bertelsen, chief investment officer of Global Financial Private Capital. It`s a $3 billion fund in Sarasota Florida.

So, Chris, tell us about your correction call. Why and how soon might we get one?

CHRIS BERTELSEN, GLOBAL FINANCIAL PRIVATE CAPITAL CIO: I think it`s already started, Susie. When everybody thinks alike, watch out. At the end of 2013, you know, everybody was saying it`s great. And when it`s great, it`s the market, it`s usually too late.

All we have to see is reports like General Mills (NYSE:GIS), Coca-Cola (NYSE:KO), Proctor and Gamble, some of the teen retailers, you`ll see that we`re rolling over in a lot of areas. And I think next quarter`s earnings aren`t just going to cut it. And as a result, we need to get the weak hands out of the markets.

So, I see a correction starting right about now.

MATHISEN: You know, Chris, you call some of your choices tonight “stupid cheap”. But if I bought one of them, Intel (NASDAQ:INTC) a few years ago, it might have been cheap but I`d have felt pretty stupid. Why would I be smart today?

BERTELSEN: Well, I think that Intel (NASDAQ:INTC) is a buy right now.
Obviously, a few years ago what people were worried about has already been priced in. And that`s their legacy business. Sure, everybody knows that`s a slow growth no growth business. It`s got a rock of Gibraltar balance sheet. It yields 100 basis points more than 10 years. So, you`re getting paid while you wait. And what you`re waiting for I think is exciting.

And that`s in the mobile and tablet business. Most of their competitors use Taiwanese foundries to manufacture their equipment. But Intel (NASDAQ:INTC) does their own. And what they are manufacturing is smaller, cheaper, faster and cooler. And that`s the name of the game.

And they can already see that they`re starting off with Android and Google (NASDAQ:GOOG). And eventually, who knows, they may be with Apple (NASDAQ:AAPL). So, I`m looking for the stock to trade into the low 30s.

GHARIB: Let`s move on to another one of your picks, Harley Davidson, which you say could be a baby boomer play. Tell us why you like it.

BERTELSEN: Absolutely. People say that demographics are wrong. I say 11,000 baby boomers retiring every single day, now all of a sudden, they have the time and the money. And what do they want? They want to ride a hog.

And my view on that is that you`re going to see an explosion as far as the people who want it. Plus, the fact they`ve really restructured their manufacturing. Previously, they used to build inventory when nobody wanted to ride in the winter months. Now all of a sudden, they`ve got it streamlined so they can do it in the months that they need to. So, a real plus for Harley and should trade up 10, 15 points over the next 18 months.

MATHISEN: Some of your stocks are high concept. This is kind of low concept. Fastenal (NASDAQ:FAST), which makes screws, and washers, and all kinds of fasteners. But it`s also kind of against your hypothesis because it sells at 32 times earnings. It`s got a growth rate of 18 percent.

My schooling tells me that when the P/E is higher than growth rate, you`re looking for trouble.

BERTELSEN: Well, this one is an exception to the rule. But I think that what`s attractive are stocks that are growing. Anybody can manufacture profits by cutting. But when you have growth, then you can get real numbers to show real numbers. Then I think that we`re seeing a multiyear recovery in the housing and construction business.

Fastenal (NASDAQ:FAST) is worldwide. And they really have little competition, because nobody wants to get into manufacture screws and bolts and nuts and hangers and things like that. So I see Fastenal (NASDAQ:FAST) as a growth value play as opposed to the other two names.

GHARIB: All right. Chris, do you have any disclosures to make?

BERTELSEN: Yes. The firm owns all the stocks and I own none of them.

GHARIB: All right. Thank you so much. Have a great weekend.

BERTELSEN: Thank you.

GHARIB: Chris Bertelsen of Global Financial Private Capital.

MATHISEN: And coming up, what does it take to produce a blockbuster video game? Sony (NYSE:SNE) thinks it has the answer and is hoping for a billion dollar payoff.

(MUSIC)

GHARIB: Sony (NYSE:SNE) is hoping its new video game “Infamous Second Son” will be a huge hit. It`s spending nearly $100 million on production, marketing and advertising. That`s more than many Hollywood movies.

Josh Lipton takes us inside the making of a blockbuster.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
Think it costs a lot of money to make a blockbuster movie?

UNIDENTIFIED MALE: For all, we know we may be able to patch you through to their security.

LIPTON: Try producing a blockbuster video game.

One week from today, Sony (NYSE:SNE) will release “Infamous Second Son”, its first big exclusive game for the PS4 video game console. This is a third installment of a series that has been very successful for Sony (NYSE:SNE), and one that it hopes will help it continue beating Microsoft
(NASDAQ:MSFT) in the console wars.

Making and marketing a game like this can require an enormous budget.

DAVID COLE, DFC INTELLIGENCE CEO: A big budget game title right now will cost almost as much as a feature film. I mean, you can talk budgets from $50 million all the way up to over $200 million for a specific title.

LIPTON: It`s a multiyear, massive undertaking to make these big budget video games. There can be up to 100 people working on a game for years, game developers, engineers and artists. Just for the music, there were three composers and about 10 musicians creating the soundtrack for “Infamous Second Son”.

There`s also the marketing dollars that`s put to work for these games.
Analysts say that can cost another $30 million. But the payoff for these companies can be stunning. Take Two`s “Grand Theft Auto V”, for example, released just last fall, has already done $1.8 billion in sales.

Analysts say the broader strategy for Sony (NYSE:SNE) in releasing an exclusive title like “Infamous Second Son” getting more gamers to buy its
PS4 console. Sony (NYSE:SNE) says it has sold 6 million consoles.
Microsoft (NASDAQ:MSFT) says it has sold around 4 million Xbox One units.

EDWARD WILLIAMS, EMD CAPITAL MARKETS: What`s important about something like the “Second Son” or what`s important about a title that is exclusive to the system is, how will it help to drive the growth of the installed base?

So, you know, from a perspective of the category as a whole, you really need to see these exclusive titles come into the market — do well, drive traffic into stores and drive boxes out of the stores.

LIPTON: While the movie industry makes big bucks, nothing is like what the video game industry has become.

(on camera): Analysts tell me this is now a $100 billion industry.

Josh Lipton, NIGHTLY BUSINESS REPORT, San Mateo, California.

(END VIDEOTAPE)

MATHISEN: Finally tonight, if you feel richer you may not be alone.
There are now more millionaires than ever before in the United States.
According to an annual study by the research firm Spectrum Group, the total number of U.S. households with a net worth of at least $1 million surged to more than 9.6 million in 2013, 600,000 more than the previous year. And the most since the group started counting 10 years ago.

Good stock market, rising house prices and lower debt.

GHARIB: But you know, this does not — the thing that struck me, it does not include your home as part of the net worth.

MATHISEN: It`s just liquid assets.

GHARIB: Pretty incredible.

Well, that`s it for NIGHTLY BUSINESS REPORT for tonight. I`m Susie Gharib. And again, we want to remind you, this is the time of year your public television station seeks support to make programs like NIGHTLY BUSINESS REPORT possible.

MATHISEN: And I`m Tyler Mathisen. On behalf of your public TV station, thank you for your support. Have a great weekend, everybody.
We`ll see you back here on St. Patrick`s Day.

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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