Transcript: Wednesday, April 16, 2014

NBR ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Susie Gharib.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Falling short. Two tech titans, IBM and Google (NASDAQ:GOOG), report disappointing revenues. And their stocks trend lower after-hours. What’s the one key takeaway that investors need to know now?

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Powering higher. China, earnings and Federal Reserve Chair Janet Yellen fueling the rally, as the Fed chief sends a message to Wall Street — don’t worry about interest rates.

MATHISEN: And hip to be square. Why utilities — usually stagnant, slow-moving sector — are leading the way on Wall Street this year.

All that and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, April 16th.

GHARIB: Good evening, everyone.

We begin tonight with IBM and Google (NASDAQ:GOOG). They are two iconic tech companies, two big disappointments and two stocks that carry a lot of weight. One of them the Dow, the other the NASDAQ.

We start with IBM. Big Blue’s quarterly report out after the market close was another in a long line of revenue misses. Income continued to be hurt by sharp declines in hardware sales. IBM earned $2.54 a share, right in line with predictions, but revenue missed, coming in at $22.5 billion. That was less than expected. That sent shares initially lower in after-hours trading.

Morgan Brennan has been looking through the report and has joined us now to tell us more about it.

So, Morgan, as you look through the numbers, what do you see as the key takeaway from IBM?

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, IBM is one of the ones with the bigger numbers. But one of the biggest takeaways here is that China and other emerging markets have continued to weigh on IBM’s growth. So, countries like Brazil, Russia, India and China, revenue has tumbled in those countries, about 11 percent from a year ago — but none more so than China. So, revenues in the world’s second largest economy actually fell about 20 percent from a year ago. That is as demand for servers and storage products continue to fall, also weighing on the hard-hit hardware division of the company. And IBM says that’s not likely to let up any time soon.

(BEGIN VIDEOTAPE)

BRENNAN (voice-over): Investors have been piling into the stock recently, favoring its perceived stability and dividend. But whether IBM makes a good investment will ultimately come down to the fundamentals in four key areas — services, software, hardware and emerging markets. The services division is by far the biggest, accounting for 60 percent of revenues. But it faces a number of challenges, including competition from Cloud storage, which helps other companies reduce the need for tech outsourcing. IBM’s second largest division is software, a bright spot, thanks to its core infrastructure business programs and cloud computing offering.

The real trouble has been in hardware, a division that lost half a billion dollars in 2013, analysts expect similar losses this year and hope the trend can be reversed by 2015.

JOE FORESI, JANNEY CAPITAL MARKETS MANAGING DIRECTOR: The transition period now is getting away from some of the commodities stuff like hardware, to some of the more higher margin value services like the Cloud.

BRENNAN: But there is one area that’s been crucial to IBM, emerging markets. Countries like China have accounted for double digit growth in recent years, but that changed in 2013 when slowing demand for equipment dragged on the company’s overall revenues.

(END VIDEOTAPE)

BRENNAN: So, the company has been implementing changes and it says that they expect to see those changes push towards better growth in the second half of this year. We’ll have to see whether that takes place — Tyler.

MATHISEN: Morgan Brennan, thank you very much.

Now to Google (NASDAQ:GOOG) which reported earnings and revenues that both missed Wall Street estimates. The Internet’s giant profits per share came in at $6.27, after adjusting for accounting items. Analysts had expected $6.40.

Revenue also a little bit light here, $15.4 billion. And that was enough to make investors edgy. Shares falling initially after the report, as you see on that graphic there.

Sheila Dharmarajan covers Google (NASDAQ:GOOG) from the NASDAQ.

Sheila, beyond the up-front numbers, is there anything else underneath the surface that the investors need to focus on, with this report?

SHEILA DHARMARAJAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Yes, Tyler. Bottom line, the shift from PCs to mobile devices like your tablet or your smartphone just isn’t as profitable for Google (NASDAQ:GOOG).

So, here is the issue, for now, Google (NASDAQ:GOOG) can’t charge as much for mobile ads as they do for ads on PCs. So, even if the mobile volume advertising is growing, they’re just not making as much money on it. Now, on top of that, you also have to add to the fact that Google (NASDAQ:GOOG) gets charged every time it wants to be default search engine on the phone, so the expenses are going up, pricing is coming down, certainly not the trends you want to see go in those direction.

Now, Google’s company did acknowledge some of these issues on the conference call and they said they’d be giving more transparency on the numbers. Interestingly, they also said in the long-term, they do think that mobile pricing will be better than PC pricing, but, of course, we’re going to have to wait to see if that actually happens.

MATHISEN: All right, Sheila. Sheila Dharmarajan, thanks very much.

GHARIB: Janet Yellen delivered a strong message for investors today. In so many words, she said stop panicking about interest rates. The Fed chief’s reassuring speech in New York gave a big lift to stocks and Tyler will have more on that in just a moment.

Also boosting investor confidence, encouraging news about economic growth in China. So, the Dow soared 162 points, the NASDAQ jumped 52, and the S&P added 19 points.

MATHISEN: And more now about that speech by new Fed Chair Janet Yellen. In a major address at the Economic Club of New York, Yellen said that interest rates will stay extremely low for a, quote, “considerable amount of time.” Yellen basically said the Fed is trying to thread the needle, that is getting inflation up closer to its target of 2 percent and get unemployment down closer to its target of full employment. That is between 5.2 percent and 5.6 percent. That, she thinks, could take a couple of years and will acquire a generally accommodative monetary policy.

Steve Liesman puts it all together for us.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Good evening.

New Fed Chair Janet Yellen in a major speech today before economists in New York suggested it could take as long as two years before the economy meets the Federal Reserve’s goals.

JANET YELLEN, FEDERAL RESERVE CHAIR: It’s a sign of how far the economy has come, the return to full employment is for the first time since the crisis in the medium term outlooks of many forecasters. It is a reminder of how far we have to go that this long-awaited outcome is projected to be more than two years away.

LIESMAN: The Fed sees full employment as between 5.2 percent and 5.6 percent. It’s currently at 6.7. And Yellen says that shortfall is significant — significant enough that she suggests the Fed will keep trying to help the economy as long as the goal is not being met.

Overall, Yellen made clear she was in no hurry to change the Fed’s current policy of slowly winding down its bond purchases and keeping short-term interests rates low for an extended period. In fact, she is more worried about inflation being too low rather than too high.

YELLEN: With inflation running at 1 percent, at this point as I mentioned, I think the risk is greater that we should be worrying about inflation under shooting our goal and getting inflation back up to 2 percent.

LIESMAN: Meanwhile, two Federal Reserve reports today suggest that the economy is rebounding from the effects of the harsh winter weather.

The Fed’s Beige Book, a collection of economic anecdotes from the Fed’s 12 districts said consumer spending and manufacturing have both picked up as severe weather has receded.

The Fed’s report on industrial production in March came well above Wall Street estimates and February was revised higher as well. Only housing data disappointed, but not by very much.

So, the economic data continues to support the idea of a spring snap back and the Fed chair suggests she is in no rush to raise rates and slow the economy down.

For NIGHTLY BUSINESS REPORT, I’m Steve Liesman.

(END VIDEOTAPE)

GHARIB: Nariman Behravesh joins us now with his analysis of the Fed and the economy. He’s chief economist at IHS (NYSE:IHS).

So, Nariman, I thought that in her speech, in Janet Yellen’s speech, the best part actually was in the question and answer where she was pinned about — you know, is she going to fall down behind the curve? Is she going to control inflation? And she seemed to give some very comforting answers that, no, the Fed is going to do the right thing when it comes to raising interest rates at the right time.

What was your take on that? And do you find it reassuring or still worrisome?

NARIMAN BEHRAVESH, IHS (NYSE:IHS) CHIEF ECONOMIST: No, I think it was very reassuring, and I think she got the message right this time compared with a month ago when she was speaking perhaps on a little impromptu basis and spooked the markets. But this time around, clearly, she was on message. And I think she’s very clear. She’s upbeat about the economy, and yet she was dovish on monetary policies, essentially saying, as you said, we’re in no hurry to raise rates.

And that’s the right policy at this point. We’re still a ways away as she said from full employment. So, until we get there, until inflation shows signs of life, which it hasn’t, no reason to raise rates.

MATHISEN: You know, I was curious as I listened to her today. And she said we’re probably two years away from full employment, which suggests an accommodative monetary policy until then. How do we get from six months from the end of Q.E. to two years in one month’s time?

BEHRAVESH: Yes. Well, I agree with you. I think — I’m not quite sure what was on her mind when she said that. Maybe she kind of felt trapped or something, or she’s just clearly misspoke. But I think our view is that the earliest the Fed is going to raise rates, Q.E. we think will be over by the end of this year. But in terms of raising rates, our view is the earliest is probably mid-2015, and that’s very consistent with what she said today.

GHARIB: And so, what is your take on how the economy is doing, your own views, and also what she was saying. Yellen was talking a lot about the job market and believes things are moving in the right direction, is that how you see it? And just generally, what’s your view on the economy?

BEHRAVESH: Well, first things first. The first quarter was badly affected by the weather. And when we get the first GDP numbers for the first quarter, which will be at the end of this month, it will show a very weak quarter, less than 1 percent. We think 0.9 percent. But that misreads the economy, because the underlying growth rate is more like 2 1/2 percent to 3 percent, which is more consistent with what she is saying. And we’re actually seeing that coming back in the second quarter.

You mentioned the industrial or Steve mentioned the industrial production numbers, the Beige Book, we’ve had the employment numbers starting to look better.

So, I think the answer is fairly clear. Bad weather hurt the first quarter, but by the second quarter we’re back to that set of sort of underlying growth of 2 percent.

MATHISEN: We’re going to talk a little bit more about China’s growth in just a moment. But if you broaden out your prism from the U.S. economy, how do you see the global economy right now?

BEHRAVESH: Well, ironically, it’s the developed economies, the advance economies that are doing better than the emerging world. They’re actually contributing to growth. You’ve got the U.S. picking up this year. Europe going from a negative to a positive this year. Japan doing OK.

Whereas, a lot of the emerging markets growth has fallen quite a bit in the last few years. And probably will continue to disappoint this year. Brazil, less than 2 percent, Russia, probably in recession. India, OK, doing a little bit better but maybe half the growth rate of two or three years ago. So, very disappointing.

GHARIB: All right. Nariman, thank you as always, for giving such good analysis. We appreciate it.

BEHRAVESH: You bet.

GHARIB: Nariman Behravesh with IHS (NYSE:IHS).

MATHISEN: More now on that economic data from China. It’s showed that growth in the nation’s second largest economy dropped to its lowest pace in 18 months in the first quarter. But the figures were a tick above the forecast and seen as evidence that the government might stimulate the economy soon.

With the details, here’s Eunice Yoon.

(BEGIN VIDEOTAPE)

EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: In its first quarter, China’s economy grew at its slowest pace in a year and a half. GDP growth came in at 7.4 percent from a year ago, beating consensus and coming close to where the Chinese leadership wants the economy to grow for the year, at about 7.5 percent.

Now, most economists believe that the better than expected numbers mean that the government won’t feel the need to stimulate the economy, at least in the short-term.

The authorities here have indicated that they’re willing (INAUDIBLE) slower growth and the jobs pictures will be key to their decisions to support the economy further. The latest figures show that wage growth and employment are holding up. Exports and the property markets, though, were weaker.

As for other data, retail sales and production recovered slightly. But the fixed asset investment did slip, further splitting economists about where China’s economy heads from here.

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

(END VIDEOTAPE)

GHARIB: Still ahead, the Camry has been the bestselling car in America for the past 12 years. So, why is Toyota (NYSE:TM) giving it an extreme makeover? We head to the New York Auto Show, next.

(MUSIC)

MATHISEN: General Motors (NYSE:GM) wants a U.S. court in Texas to bar ignition switch recall-related lawsuits for now until a bankruptcy court clarifies whether the claims violate GM’s 2009 bankruptcy. The auto maker previously filed a similar motion in California. Kenneth Feinberg, who is advising GM on these claims, said that the company is likely moving to develop a program to compensate victims.

(BEGIN VIDEO CLIP)

KENNETH FEINBERG, FEINBERG ROZEN LLP FOUNDER AND MANAGING PARTNER: I’m assuming, and it’s early, I’m just assuming that based on initial conversations with the company that they’re asking for me to help develop some sort of program that might be used to compensate eligible claimants.

Now, who is eligible, whether there will be a fund? How much money, what is the definition of how you’re going to calculate the damages or what proof will be required? All remains to be seen.

(END VIDEO CLIP)

MATHISEN: Feinberg said it may still be several weeks before he has a sense of how the fund will be structured.

GHARIB: Now, even though those faulty ignition switches have been getting lots of attention, General Motors (NYSE:GM) is also looking forward. It’s exhibiting its newest models along with the world’s other automakers at the New York Auto Show.

Phil LeBeau has been at the auto show kicking the tires and has the latest.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Here at the New York Auto Show, three of the most well-known names in the industry are getting plenty of attention, starting with this car right here, the all-new Toyota (NYSE:TM) Camry. Toyota (NYSE:TM) has changed virtually everything about the Camry to pump new life into the sedan. Camry has been the bestselling car in the U.S. for the last 12 years. But sales this year are lagging the industry as a whole. So, Toyota (NYSE:TM) is giving the Camry a slightly more aggressive look and a more refined interior in hopes of keeping the car on top.

Speaking of being on top, look at what’s on the observation of the Empire State Building. It’s the 50th anniversary limited edition Mustang. Ford is selling 1,964 copies of the car to commemorate the fact it was unveiled in 1964 here in New York. And getting the Mustang on top of the Empire State Building was a herculean task.

MARK FIELDS, FORD MOTOR COMPANY COO: We literally had about five hours to bring the vehicle up in the elevators. And the team had five hours to put it back together again. They had to deal with the rain, the sleet, the wind, and 7:00 a.m. this morning, it looked terrific.

LEBEAU: Finally, take a look at the first Alfa Romeo to be sold in the U.S. since the early 1990s. It’s the sleek and sporty 4C, which goes on sale in June starting at just over $55,000. Even though Alfa Romeo’s comeback has been a hot topic in the auto industry, its presence here at the New York Auto Show has been understated. No press conference, no big dog and pony show, just the 4C letting everyone know Alfa Romeo is back in the U.S.

Phil LeBeau, NIGHTLY BUSINESS REPORT, New York.

(END VIDEOTAPE)

MATHISEN: A sweet ride.
American Express (NYSE:EXPR) (NYSE:AXP) saw its first quarter profit rise as credit card customers spent more money. And that’s where we begin tonight’s “Market Focus”.

The world’s biggest credit card issuer said that although consumers are cautious about taking on more debt, loan balances have been modestly increasing. Revenue came in a little lighter than expected but rose from last year. Shares down initially after-hours. The stock ended the regular session though up 1 1/2 percent at $87.40.

Six billion dollars in legal charges weigh on Bank of America’s first quarter earnings. The hefty fees related to the bank’s mortgage settlement with regulators, stemming from the 2008 financial crisis. The nation’s second largest lender by assets did manage to top earnings expectations after you take out special accounting items. Separately, there are reports the bank is in talks with the Department of Justice to resolve a probe of Merrill Lynch’s sales of flawed mortgage securities. Shares of B of A tumbled more than 1 1/2 percent in trading today to close at $16.13.

And reports that SodaStream is in early talks to sell up to a 16 percent stake to a large investor sent shares way up in today’s session. PepsiCo, Dr. Pepper Snapple and Starbucks (NASDAQ:SBUX) all mentioned in the report as potential suitors for the at-home soda maker. Shares popped 8 percent to $40.75.

GHARIB: Shares of Gap (NYSE:GPS) rose on news it plans to triple sales in China over the next three years, making that Asian nation its second largest market. Gap (NYSE:GPS) opened its first Old Navy store in China earlier this year. The plans were announced at the annual retailer’s investor meeting that was held today. Shares closed at $39. That was a gain of more than 1 1/2 percent.

And United Health was the worst-performing component today after a downgrade from Citi. The insurer is set to report earnings tomorrow and Citi’s analyst says he expects strong first quarter results, but limited opportunities for earnings growth this year. The firm lowered its rating to neutral from buy. Shares fell more than 1 1/2 percent to $78.19.

MATHISEN: And the utility sector usually so sleepy is up 11 percent so far this year, but is there still more room to run and should you own utilities in your portfolio?

Joining us now is James Kee. He’s president of South Texas Money Management.

Mr. Kee, utilities are at an all-time highs earlier today, certainly multi-year highs. Is their run the best part behind them? Can they keep moving up?

JAMES KEE, SOUTH TEXAS MONEY MANAGEMENT: Well, the right way to look at valuation on utilities is probably their dividend yield compared with other alternatives like 10-year treasuries. You know, utilities are kind of a bond-like stock.

But the way to think about it, I think it’s instructive to look at, you know, they were the strongest sector this first quarter and who thought that at the beginning? You know, probably nobody. You know, our firm at South Texas Money Management, our view is that these momentum stocks like the biotech we saw recently and utilities are forever trading off alternating trading places, rather than trying to outsmart the market by getting in and out, and trying to figure out when they’re over or under-valued.

Our view is to take advantage of the natural diversification and own both — always own some utilities, always own some all-sector in your portfolio. And this is a great example of why that works. We tilted a little bit more in the utilities after the first month when we started to see some of the momentum stocks shift.

GHARIB: Jim, let me pick up on that, you said the utilities are a bond-like stock. You know, we hear from so many other experts, rotate out of bonds, given our uncertainty of where the interest rates are going. So, how do you know as an investor where you should be in the utilities or is it time to fully get out of them now that the economy is picking up a bit?

KEE: Well, you’re still going to want the bonds, even with rising interest rates. It’s important to have we think to own individual bonds pretty short maturity, so you can — you know, in the latter, so you can re-invest when the rates rise.

But utilities are going to dampen the equity part of your portfolio. They’re very defensive. They’re very low volatility. So, within stocks, utilities are automatically going to offset some of the declines in some of the higher beta stocks, some of the momentum and growth stocks.

GHARIB: All right. So let’s name some names here. I gather, though, that you are the believer that the best way to get into utilities is through ETFs. Why, and which one or ones?

KEE: That’s right. We usually like individual stocks, the utility sector is very unique and that it’s very regulated. The returns are basically held to the cost of capital, the ROI. So, there’s not much difference in corporate performance. So, it doesn’t really reward putting a lot of time into company analysis and security selection.

So, we argue — you know, own the group, buy a low-cost ETF, we use State Street’s SPDR ETFs. But it’s important to just make sure you have a place in your portfolio waiting of utilities, at least consistent with the market weightings at all time. Right now, utilities are at about 3 1/2 percent of the market.

GHARIB: All right.

MATHISEN: All right. James, thank you very much. We appreciate that.

KEE: Sure.

MATHISEN: James Kee with South Texas Money Management from San Antonio tonight.

All right. Coming up, it is college acceptance season and tuition bills from the fall semester, I should say, will soon be in the mail. Get ready. How can you make paying the bills less painful? We’ll take you through it step by step.

(MUSIC)

GHARIB: The New York attorney general has reportedly subpoenaed a half dozen high-frequency trading firms. This is according to Dow Jones. Eric Schneiderman is investigating whether some firms have an unfair advantage over others, and is looking to see whether there are any secret arrangements with exchanges that may give them the ability to trade ahead of others.

MATHISEN: Millions of college-bound high school seniors are receiving if they haven’t already, college acceptance letters and financial aid packages this month. But as families talk about which schools to use, relatively fewer of them have actually talked to their kids about how they’re going to pay for this big nut.

Sharon Epperson has some strategies to make paying the bills a little less painful.

(BEGIN VIDEOTAPE)

SHARON EPPERSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Many students may have already decided where they want to go to college this fall. Meanwhile, their parents are still figuring out how they’ll pay for it. Many parents seem to be overwhelmed by the cost of college which has ballooned since they were in undergrad.

A Sallie Mae study found families spent an average of $21,178 on college cost last year.

But there’s no need to panic, financial advisers say. Keep this in mind —

STUART RITTER, T. ROWE PRICE SR. FINANCIAL ADVISER: It doesn’t mean you have to do the whole thing. There are various funding options for college.

EPPERSON: Most families pay for a third of college costs with free money, scholarships and grants according to a Sallie Mae survey.

Twenty-seven percent of the total college tab is covered by students and parents loans, and the same percentage comes from parents’ income and savings. A plain vanilla savings account is often their top choice.

But 529 plans offer more tax savings.

RITTER: 529 accounts are built to give people tax benefits in saving for college and people who aren’t using them are missing out on those tax benefits and potentially having less money for college when it comes time to pay for that.

EPPERSON: With 529 plans, funds can be withdrawn tax free to pay for qualified education expenses. Including tuition, fees, room and board, books, supplies and equipment. But how much should parents withdraw from 529 plans each year?

JOSEPH HURLEY, SAVING FOR COLLEGE.COM FOUNDERS: My advice in general is to take your money out as quickly as long as you’re sure it’s going to be tax free, because that way, you lock in your tax-free gains, in that account, even if you decide to turn around and put more money in the account, I think that’s your best strategy.

EPPERSON (on camera): Some parents may be eligible for the American opportunity tax credit, too, for tuition expenses of up to $4,000. This creates a tax credit of up to $2,500. To be strategic, families may want to wait to withdraw money from the 529 plan to take advantage of these tax savings.

HURLEY: They should not be taking that $4,000 from their 529 plan. They should be taking that from other sources, out of pocket, or loans, because you cannot double dip. You cannot take that tax credit and take tax-free distributions from your 529 plan for those same expenses.

EPPERSON: Many families may also need to turn to loans to pay for at least a portion of the college bill. If your child qualifies for the federal Stafford Loan, Hurley says that’s a good deal, with zero percent interest while in college and a very low interest rate after graduation.

For NIGHTLY BUSINESS REPORT, I’m Sharon Epperson.

(END VIDEOTAPE)

GHARIB: And they better major in something they can get a good job afterwards to pay off those loans.

MATHISEN: To pay back some of those loans, exactly.

GHARIB: That’s NIGHTLY BUSINESS REPORT for us tonight. I’m Susie Gharib. Thanks for joining us.

MATHISEN: And I’m Tyler Mathisen. Thanks from me as well. Have a great evening, everybody. And we hope to see you right 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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