Transcript: Wednesday, March 19, 2014

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

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(BEGIN VIDEO CLIP)

REPORTER: Then once you do wind down the bond-buying program, could you tell us how long of a gap we might expect before the rate hikes to begin?

JANET YELLEN, FEDERAL RESERVE CHAIR: So, the language that we used in the statement is considerable period. So, I — you know, this is the kind of term it’s hard to define. But, you know, probably means something on the order of around six months, that type of thing.

(END VIDEO CLIP)

MATHISEN: From Yellen’s lips. New Federal Reserve Chief Janet Yellen in her press conference puts a chill into stocks when she indirectly spells out when interest rates may start to rise. The market was surprised. Should it have been? What investors need to know now.

All that and more tonight on a special edition of NIGHTLY BUSINESS REPORT from the nation’s capital, for Wednesday, March 19th.

Good evening, everyone. Susie Gharib has the night off. I’m Tyler Mathisen in Washington, where there was calm and confusion at Janet Yellen’s first policy meeting as chair of the Federal Reserve.

She dropped an explicit unemployment rate target for rising — raising that is — the federal funds rate. That was the calm it was widely expected. What wasn’t expected and caused some confusion was some musing — or was it more than that? — about specifically when the Fed might start raising interest rates. Her answer made many think that that day may be sooner rather than later.

Stocks quickly dropped. The Dow was off as much as 200 points, only to eventually pare some of those losses.

Steve Liesman was at the press conference with more on what the Fed Chair Yellen said, what she meant and what the long-term policy will be for the central bank.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: New Fed Chair Janet Yellen appeared to spook markets today by saying that it would be around six months from when the Fed ends its quantitative easing bond-buying program to when it starts hiking rates.

Here’s her comment about what the Fed means when those considerable period between the end of Q.E. and the first rate hike.

YELLEN: So the language that we used in the statement is considerable period. So, I — you know, this is the kind of term it’s hard to define. But, you know, probably means something on the order of around six months, that type of thing.

LIESMAN: But did she really make news there? The CNBC Fed survey shows that market participants expect Q.E. to end in December, after the first rate hike to happen in the third quarter of 2015. That’s around six months, give or take a few months.
The remark overshadowed more dovish comments in the Fed’s statement to which the Federal Reserve said that even when the economy returns to normal, interest rates won’t return to normal. They’ll try to keep them down to try to help the economy even then and that they will not raise them quickly.

YELLEN: In the sense of meeting our objectives, the stance of policy that will be appropriate to accomplish that will be easier or involve somewhat lower than would be normal short-term interest rates.

Now, eventually years later, most people think they will go back up. But as you said, that suggests the path will be gradual.

LIESMAN: Yellen was also asked about the Ukrainian situation and said the Federal Reserve is monitoring developments very closely.

YELLEN: We discussed in our meeting the direct trade linkages or exposures of the U.S. banking system to the Ukraine and Russia are not large. We’re not seeing many meaningful impacts now. Obviously, there are geopolitical risks here that it’s very important for us to be attentive to and to keep our eye on.

And we’re not seeing broader global financial repercussions, but if this were to escalate, that would certainly be something that would be on our radar screen.

LIESMAN: So, it seems like a rough response to the new Fed chair from markets at her first press conference where a more dovish message was overshadowed by some comments about when the Fed would hike rates. But it’s not uncommon for a new Fed chair to stumble a bit out of the box.

For NIGHTLY BUSINESS REPORT, I’m Steve Liesman.

(END VIDEOTAPE)

MATHISEN: Well, nonetheless, Yellen may have meant one thing but the markets did interpret it as perhaps another. Stocks did drop sharply during her press conference only to take back some of those losses.

By the close the Dow finished down 114 points, the NASDAQ was off 26, and the S&P 500 was lower by 11.

Bob Pisani at New York Stock Exchange with an explanation of the day’s big ups and downs.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: It was the land of confusion on Wall Street today. And traders cited several reasons for all that confusion.

First, during her press conference, Fed Chairman Janet Yellen said the time when rates may be hiked after the stimulus program ends may be six months. That is shorter than some expected. The Fed also changed its guidance on what factors they will consider when hiking rates, and that also confused the trading community somewhat.

Finally, and it wasn’t much discussed, but the Fed lowered the upper range of its expectations for GDP growth in 2014 to 3 percent from 3.2 percent. And they did essentially the same thing for 2015 and 2016. Now, that caused stocks to trade lower and stayed lower though ending the day off of their lows.

The Dow ended down a little more than 100 points, though at one point it was down more than 200 points.

Short-term bond yields particularly two, three, five-year notes jumped considerably. Interest rate sensitive sectors, like utilities, REITs, and even emerging markets were the biggest decliners on the day. Gold, which was weak earlier in the day, dropped even more ending down more than 2 percent.

Despite all the confusion, Yellen clearly implied rates would not be rising for some time, likely more than a year. But higher rates are indeed coming.

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

(END VIDEOTAPE)

MATHISEN: And joining us now with their Fed analysis is David Rosenberg, chief economist at Gluskin Sheff, and Patricia Edwards, managing director of investment at U.S. Bank Wealth Management.

Welcome to you both.

Patty, let me start with you. Should the market have been as surprised as it seemingly was?

PATRICIA EDWARDS, U.S. BANK WEALTH MANAGEMENT: You know, I don’t think there was a lot of surprise in the announcement today. But I do know how markets react. If you look at market reactions over time, anytime there is any scrap, any more sell of information that they can get from a Fed chairman or chairwoman in this case, they are going to pounce on it, parse it, dissect it, look at it three ways to Sunday, make some choices and then reverse those choices later in the day. That’s exactly what we saw today. And it’s just typical knee-jerk reaction.

MATHISEN: You know, to me, David Rosenberg, it seemed like those days where you kind of know you’re going to break up with your girlfriend or your boyfriend. But then when it really happens it’s really a shocker to you.

Talk to me a little bit, though, about the broader picture that the Fed painted of where the economy is right now. Should we be heartened by it?

DAVID ROSENBERG, GLUSKIN SHEFF CHIEF ECONOMIST: Well, I think that you probably should be heartened by it. I think one of the reasons why bond yields went up as much as they did was I think that investors broadly were expecting the Fed to be a little bit more downbeat. Janet Yellen to sound a little more dovish, but actually they talked about the first quarter of course being way down in part because of the weather. Should they see it as transitory. But household and business spending they see expanding, employment conditions actually improving. And Janet Yellen actually stressed that during the Q&A.

So, I think they were basically seeing more underlying momentum to the economy. I don’t think people really expected them to deal with that. And, of course, you know, beyond that everybody was talking about connecting the dots. And I think as we’re talking about the reality is that the consensus on the F1C is an extra 25 basis points in the funds rate next year, extra 50 basis points in 2016.

So, to some extent that’s what the markets were responding to.

MATHISEN: David, let me do a quick follow up here. As I listened to her, I sensed that she was perhaps a little more concerned about the slow pace of inflation than she was right now about the improvement that she seeks in the labor market. Did you hear it that way or not?

ROSENBERG: Well, I didn’t really hear it that way. I think that there’s no question that inflation remains very low but it is a lagging indicator. You know, what I found very interesting and I think extremely important, was even as we were focusing on the fact that they dropped the reference to the 6.5 unemployment rate, the Fed also dropped the reference to the 2.5 percent on inflation expectations as one of the caveats they’re starting to raise rates.

So, although inflation remains extremely low, I think that the other thing that the bond market caught onto was this notion that they could start actually raising rates before they get to the 2 percent inflation objective. And that wasn’t really in the marketplace beforehand.

MATHISEN: So, Patty Edwards, were there clues in here in either the statement from the Fed or the press conference that lead you to make any changes in your positioning of your portfolios? Particularly on the bond side maybe.

EDWARDS: Well, we’ve been pretty long-term in our direction for — well, the long term honestly. Tactically, we have already been looking for credit risk rather than duration or maturity risk. So we’ve been a little bit slightly short of benchmark neutral.

What that really means is that we’re focused on getting our returns out of taking more credit risk so taking into account some bonds that perhaps are not as much investment grade. And we’re looking at using as much as we can hedge vehicles for our fixed income because we’d much rather get the absolute return than put our investors in the way of rising interest rates.

(CROSSTALK)

MATHISEN: Go ahead. Finish your thought.

EDWARDS: I was going to say rising interest rates are not good for bond prices in the long run.

MATHISEN: No, certainly not much.

Was there anything in her statement or in her press conference that led you to believe this is really bad news for stocks?

EDWARDS: No. Honestly there wasn’t. I mean, if we’re looking at an economy that’s improving, that’s actually good for stocks.

And as we look out — we’re looking for more revenue growth out of companies. If we’re starting to see employment pick up, which it is, all of those things are going to be good for inflation, good for the economy, good for the stock market, good for earnings.

So, no, we still are looking for the S&P to go over 2,000 by the end of the year.

MATHISEN: David, very quickly, 10-year bonds a year from now. What will the rate be?

ROSENBERG: I think we’re going to be at least a 3.5 percent on the 10-year note, maybe as high as 4. I’ll put it this way, if we’re going to go to 2.25 percent of the fund rate by 2016, look at what the normal yield curve is going to look at that point. And you’re probably talking minimally I think in the mid to high 3s.

MATHISEN: Got you.

David Rosenberg of Gluskin Sheff, thanks very much. And, Patty Edwards, U.S. Bank Wealth Management, thanks to you as well.

A record settlement for Toyota (NYSE:TM). Automaker will pay more than $1 billion to settle a criminal safety investigation. It includes an admission by the company that it misled consumers about issues that caused cars to suddenly accelerate.

Phil LeBeau has the details and why this agreement may work as a road map for General Motors’ current problems.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Today, the Justice Department ramped up its case looking into how Toyota (NYSE:TM) handled the recall of millions of vehicles suspected of unintended acceleration. The outcome was not a pretty one for the Japanese automaker. Toyota (NYSE:TM) will pay a fine of $1.2 billion and be on probation for three years and will also agree to have an independent monitor look at how it implements safety protocols in the future. In exchange for meeting those terms, Toyota (NYSE:TM) will avoid further prosecution.

Again, this all resolves around how Toyota (NYSE:TM) handled the recall of 10 million vehicles suspected of unintended acceleration. The U.S. attorney says before Toyota (NYSE:TM) issued any recalls, it repeatedly lied about the problem.

PREET BHARARA, U.S. ATTORNEY SOUTHERN DISTRICT OF NY: And in that moment, in a misguided and ill-advised effort at crisis management, Toyota (NYSE:TM) made the fateful decision to mislead the public to protect its brand rather than come clean, the company covered up and misled again and again and again.

LEBEAU: The Toyota (NYSE:TM) case raises questions about how G.M. is handling the recall of 1.6 million vehicles with faulty ignition switches. G.M. has hired a former U.S. attorney to investigate what went wrong. And today, the attorney general said he would not comment on a potential investigation of G.M.

ERIC HOLDER, U.S. ATTORNEY GENERAL: I think this is a sign for the industry that we take these matters seriously. Individuals, corporations will be held accountable. And the great work has been done by this team can be replicated if that’s necessary.

LEBEAU (on camera): So far, G.M. CEO Mary Barra says she has not been contacted by the U.S. attorney’s office, but if she is, she says she will cooperate.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

(END VIDEOTAPE)

MATHISEN: Karl Brauer says the timing of the Toyota (NYSE:TM) settlement is interesting. He’s senior analyst at Kelley Blue Book.

Mr. Brauer, welcome. Good to have you with us.

Why do you think it’s interesting? Do you think it’s not a coincidence?

KARL BRAUER, KELLEY BLUE BOOK SENIOR ANALYST: I don’t think it’s a coincidence. I think the government wanted to resolve this issue as soon as they could once they saw that there was this next one coming down the line. They’ve only got so many resources to dedicate to this kind of things.

I also think they wanted to send a message very clearly at the start of the G.M. process so that they get full cooperation.

MATHISEN: Does this give you any hint as to what kinds of penalties General Motors (NYSE:GM) may face or what they may have to do?

BRAUER: It’s going to be interesting, because there are some similarities but there’s some differences, too. Similarly, you know, to Toyota (NYSE:TM), the G.M. issue took awhile to resolve, longer than it should have taken to resolve by many accounts given how early the first signs of this issue were.

But, conversely, the number of related fatalities and injuries was much lower, and the number of cars involved in the recall is much lower. And even the nature of it, you know, unintended acceleration has a more frightening, troubling sense to it. It’s still bad these engines were stalling and the engine was shutting off harder to control the vehicles. But there’s no nebulous kind of blur as to what the problem is. There was a long time it wasn’t (ph).

MATHISEN: Right.

BRAUER: People didn’t know for sure what was causing the Toyota (NYSE:TM) problem.

We know what caused the G.M. problem.

MATHISEN: Out of control acceleration certainly puts a chill into anybody’s mind, who is a driver.

So, thinking back to when Toyota (NYSE:TM) went through this 2009 into 2010, that company has come back very nicely and seems to have suffered relatively little reputational damage. Do you expect G.M. will have the same experience?

BRAUER: I think so. I think Toyota (NYSE:TM) had record profits there this last fiscal year that they’ve reported. And they’ve certainly recovered.

But it took some effort and it took some careful and focused management on their part for years. I think General Motors (NYSE:GM), their current management and their current product lineup, the company is the strongest it’s been I would argue in probably 20 to 30 years at least.

So they’re dealing with an issue that came from the old G.M. era. They’re dealing with cars that aren’t made anymore. So, I think this should have a smaller impact overall than Toyota (NYSE:TM) and it should be an easier recovery for G.M., particularly because the company seems to from day one of this new era, which really just started in January, they seem much more cooperative and ready to move forward and be very forward and transparent with the government.

MATHISEN: Quick thought. How do you grade Mary Barra so far in her handling of this?

BRAUER: I grade her at least an A, I would say. She is being very transparent, very forthcoming. She’s already acknowledged that she’s going to work with Congress and give them whatever they need. She’s appointed a high level individual to be focused on all global safety issues and report directly to her. So, she’s being very proactive.

MATHISEN: Karl, thank you very much.

BRAUER: Great being here.

MATHISEN: Karl Brauer, senior analyst with Kelley Blue Book.

And still ahead, one sector you should look at now if you’re in the market for some new dividend investments. It may surprise you.

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MATHISEN: General Electric (NYSE:GE), Boeing (NYSE:BA) and other companies with investments in Russia are in Washington today to express their concerns that U.S. sanctions against the Putin regime may cause the Russian leader to retaliate against their corporate interests. According to the Bloomberg news service, about 100 chief executives affiliated with the Business Roundtable met today with Defense Secretary Chuck Hagel about possible retribution or at the very least Russian pushback. The session was off the record.

And Morningstar (NASDAQ:MORN) lowers a key rating on PIMCO, the world’s largest bond fund operator. Analysts cut the bond house’s overall stewardship grade by one notch, reflecting a higher degree of uncertainty following the departure of co-CEO Mohamed El-Erian a few weeks back.

Its stewardship rating is backed on several factors, including the manner in which the funds are run. Now, this rating is distinctly different from the firm’s famous five-star rating system which is primarily based on risk-adjusted returns. Investor concern has been mounting ever since stories about the tensions between founder Bill Gross and El-Erian surfaced earlier this year.

Well, the Comcast (NASDAQ:CMCSA) (NYSE:CCS)-Time Warner (NYSE:TWX) deal not only faces an antitrust investigation from the Justice Department but also one from several states. According to “Reuters”, a multistate group is reviewing the proposed $45 million merger focusing on the possible effects on the broadband market rather than the cable industry.

Comcast (NASDAQ:CMCSA) (NYSE:CCS) has argued that the combination would not reduce competition. Comcast (NASDAQ:CMCSA) (NYSE:CCS) is the parent company of CNBC which produces this program.

Well, KB Homes swings to a profit and that is where we begin tonight’s “Market Focus”.

Higher home prices helped that big builder post a solid earnings report. It’s the first time KB Home (NYSE:KBH), by the way, has reported a first quarter profit since back in 2007. The company also told investors it’s expecting a strong spring selling season. Shares of KB up almost 6 percent to $18.72. Other stocks in the housing sector as you see there also moved up.

FedEx’s holiday results came in below analyst estimates. Harsh winter weather grounded flights, slowed shipments and increased costs. The world’s number two package delivery company also trimmed its profit forecast. Shares were off a fraction, $138.38 to close there.

Shares of Humana (NYSE:HUM) popped today reacting to a JPMorgan (NYSE:JPM) research note out yesterday that raised its priced target on the stock. Also driving the shares, the Obama administration’s latest estimate of 5 million Affordable Care Act enrollees as well, as a more bullish outlook for associated premium rates next year.

Shares of Humana (NYSE:HUM), all time high, rising 3 percent to $116.96. WellPoint and Aetna (NYSE:AET) also at record price levels.

Shares of Starbucks (NASDAQ:SBUX) rose after the coffee chain’s annual shareholder meeting today. CEO Howard Schultz says he doesn’t plan on upping prices at the company’s stores and he thinks the market has overreacted about rising coffee costs.

(BEGIN VIDEO CLIP)

HOWARD SCHULTZ, STARBUCKS CHAIRMAN & CEO: I think the market unfortunately has completely overreacted and misread the coffee situation. First off, we’re brought out almost 18 months. We have been through this many, many times over the last 40 years. The coffee market is going to do what it has to do. It’s less than 20 percent of our cost of goods.

The truth of the matter is, dairy is probably a bigger issue going forward than coffee. But we will be able to maintain our guidance, our EPS, and absolutely manage through and negotiate through any rise in coffee costs.

(END VIDEOI CLIP)

MATHISEN: Starbucks’s stock perked almost 2 percent to $75.91.

Well, investors looking for dividend growth typically focus on utility, consumer staples and health care companies. But should technology names be added to your list? Apple (NASDAQ:AAPL) issued its first dividend two years ago. And today is the second biggest payer in the S&P 500.

And as Seema Mody reports, more tech companies maybe ready to follow suit.

(BEGIN VIDEOTAPE)

SEEMA MODY, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Yesterday’s hot start-ups have quietly matured into some of today’s biggest cash cows for investors.

HOWARD SILVERBLATT, STANDARD & POOR’S SENIOR INDEX ANALYST: Technology is the biggest pay of dividends out there, more than banks, more than consumer groups. Even if you combine the two together, it’s something you wouldn’t have thought of five or ten years ago.

MODY: What’s driving tech companies to issue dividends? Analysts say there are three factors. First, tech is sitting on a record amount of cash, according to Thomson Reuters (NYSE:TRI), $486 billion. Second, more activist investors like Carl Icahn are pushing tech companies to give that cash back to shareholders. Third, many large cap names are dealing with slowing growth and maturing products.

According to S&P Capital IQ, a number of companies fall into these categories and are expected to increase their dividend this year.

Apple (NASDAQ:AAPL) already the second largest payer of dividends on the S&P 500. Microsoft (NASDAQ:MSFT), which typically increases its dividend in September. Intel (NASDAQ:INTC) has increased its dividend every year since 2004. And IBM has upped its payout every year since 2003.

Now, while these companies are big dividend payers, that hasn’t always resulted in gains on Wall Street. Take IBM. Shares are down 13 percent over the past one year, due to disappointing earnings and slowing growth.

It’s also important to note that some of tech’s biggest names still don’t pay a dividend, like Google (NASDAQ:GOOG) and Facebook (NASDAQ:FB) choosing instead to spend their money on things like acquisitions.

SILVERBLATT: High-flying technology issues that currently don’t pay I believe eventually will as they mature, to use the terminology, and are more secure in their footing with their cash flow and their product base. They will start to share their wealth with their shareholders.

MODY (on camera): But at some point, these companies may join the dividend craze, too.

For NIGHTLY BUSINESS REPORT, I’m Seema Mody.

(END VIDEOTAPE)

MATHISEN: Still ahead, why the looming bankruptcy and potential default of a Chinese real estate firm has investors on edge in the world’s second largest economy.

(MUSIC)

MATHISEN: The Boeing (NYSE:BA) Dreamliner is safe. This according to a comprehensive review of the plane by the Federal Aviation Administration. The agency says the aircraft met its intended level of design and safety.

The review of the plane’s design, manufacture and assembly began early last year after a lithium battery fire aboard an empty Japan Airlines jet.

Boeing’s rival Airbus is reportedly close to winning a Chinese order for passenger jets. According to “Reuters”, the deal would be for at least 150 planes, including long-haul A330s worth about $20 billion in total. The country is expected to buy more A330s as talks advance to open Airbus’ second major factory in China.

Well, a Chinese real estate firm may be on the verge of bankruptcy and is expected to default now on millions in debt. The company’s problems come to light less than two weeks after the country saw its first corporate bond default ever, which we’ve been reporting on.

But as Eunice Yoon tells us, this time, the company is in a key sector of China’s economy, triggering fears of a deepening crisis.

(BEGIN VIDEOTAPE)

EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: The markets here were rattled by news that China is facing another default. A property developer in a small city in eastern China borrowed $400 million from several banks and raised the rest from retail investors. But now, Xingrun says it can’t pay anyone back.

Now, in a different time, this case might not get attention. But it does come when jitters are ripe about the Chinese economy and health of the financial sector here, and after China’s first corporate bond default.

This time, the company is in real estate — a sector that is a major driver for the economy and one that many analysts fear is overinvested. This case is raising questions as the government constrains credit, and property prices soften, will the real estate industry see more defaults and raise risks in the overall economy?

There are reports that China’s central bank has been involved in emergency talks for a bailout which raised questions about moral hazard, but the people’s Bank of China has since denied those reports.

For NIGHTLY BUSINESS REPORT, I’m Eunice Yoon in Beijing.

(END VIDEOTAPE)

MATHISEN: And that is NIGHTLY BUSINESS REPORT for tonight. I’m Tyler Mathisen. Thanks for watching.

Have a great evening, everybody. Susie Gharib and I will hope to see you back here tomorrow night.

END

Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by CQRC Transcriptions, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2014 CNBC, Inc.

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