Transcript: Monday, May 12, 2014

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

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TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Record setting day. Dow and S&P catapult to new highs. How solid are the gains, though? And can this rally really be trusted?

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Stress test. He was one of the most pivotal and controversial figures during the financial crisis. And tonight, former Treasury Secretary Timothy Geithner defends his actions and reveals what he would do over if he could.

MATHISEN: Love a sale? Well, not everybody does. And the big promotions could pinch some retailers’ profits when they report their earnings.

All that and more tonight on NIGHTLY BUSINESS REPORT for Monday, May 12th.

And good evening, everybody. I’m Tyler Mathisen.

HERERA: I’m Sue Herera, in tonight for Susie Gharib, who is off.

Well, what a way to kick off the week on Wall Street. Another record-setting day for the markets, with the Dow Jones Industrial Average and the broader S&P 500 both closing at fresh all time highs. And a rebound in beaten down momentum stocks helped the NASDAQ see its biggest one day gain in more than a month.

Here’s how things wrapped up on Wall Street today. The blue chip Dow stocks added 112 points, ending at a fresh record close of 16,695. The NASDAQ was up 72, nearly 2 percent jump and the S&P was up 18, closing at a new high of 1,896.

So what was behind today’s rally in stocks? And what may happen in the markets in the days ahead?

Well, Bob Pisani has more.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Stocks started up and stayed up today. No late day fade at all. The Dow Industrials, the Dow Transports and the S&P 500 all closed at historic highs.

Now, several factors kept the rally going all day long. First and foremost, there was stability in the two most volatility groups, the Internet and the biotech stocks. The NASDAQ Internet index and the biotech ETF both gained more than 3 percent.

Other sectors that have underperformed the market this quarter — the banks, the home builders and retailers — all posted strong showings as well. That quieted concerns that the recent sell off in Internet and biotech names might spread and infect the broader market.

Second, bond yields were higher across the globe. The ten-year treasury was safely above 2.6 percent.

Third, China and India had a strong showing overnight. Chinese stocks had a 2 percent pop on speculation. Authorities would open more the domestic market stock markets to foreign investors.

India popped another 2.5 percent to close at another historic high as the national elections there finally concluded and it appears pro-market opponent and the (INAUDIBLE) Moody is ahead in the opinion polls. The final results are due out May 16th.

What would keep this rally going? Better economic news. This is a very big week. Starting with April retail sales tomorrow. We’re looking for an 0.5 percent increase over March.

Later in the week, we get April industrial production, and housing starts, along with the inflation data.

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

(END VIDEOTAPE)

MATHISEN: And a big merger to tell you about in the food industry tonight. Combining a lot of top brands under one roof. Hillshire Brands, the maker of Hillshire Farm luncheon meats, Jimmy Dean sausages, and Ballpark franks, is paying more than $4 billion for Pinnacle Foods.

OK. What does Pinnacle own? Well, they have Duncan Hines, Hungry-Man frozen dinners, Wish-Bone salad dressing and Vlasic pickles. What a picnic you could have here.

Shares of Hillshire brands fell 3 percent on the news, but investors gobbled up shares of Pinnacle. They soared more than 13 percent.

HERERA: Makes you hungry.

All right. Another possible merger is facing a lot of scrutiny. Pfizer (NYSE:PFE) is defending its proposed takeover of British rival AstraZeneca, insisting that the $106 billion bid will benefit shareholders and that any promises made to U.K. officials regarding jobs or paying its fair share of British taxes will be kept.

Here’s Pfizer’s CEO Ian Read.

(BEGIN VIDEO CLIP)

IAN READ, PFIZER CEO: When you look at this combination, it really meets the scientific needs, it meets needs of efficiency, it meets needs of strengthening our balance sheet and strengthening our fiscal position. And it allows AZ shareholders to: number one, get an immediate benefit from the cash that we would pay them, it allows them to participate in a very strong combined company with great cash flows, great portfolio. And it allows a very efficient allocation of capital by the company.

(END VIDEO CLIP)

HERERA: This week, two British parliamentary committees will hear testimony from Pfizer (NYSE:PFE) about its bid to buy out AstraZeneca and what it means for the company and its workers.

MATHISEN: An update on another takeover attempt, much in the news these days. The unsolicited $46 billion offer by activist hedge fund manager Bill Ackman and Canada’s Valeant Pharmaceuticals to buy out the Botox maker Allergan (NYSE:AGN). Well, it was rejected by Allergan’s board today. Allergan (NYSE:AGN) says Valeant’s uncertain long term growth prospects and business model create a risk for Allergan (NYSE:AGN) shareholders.

HERERA: Former Treasury Secretary Timothy Geithner giving straight forward and honest answers about efforts to bail out the nation’s banks in order to rescue the U.S. economy from the depths of the 2008 financial collapse. It is all covered in his new book,” Stress Test: Reflections on Financial Crises”, and that book is out today.

Andrew Ross Sorkin spoke at length with the treasury secretary, and he joins us now with more on that conversation.

It was a pretty wide ranging one at that, Andrew.

ANDREW ROSS SORKIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: It was, Sue. Thank you for that.

I did sit down with him ahead of the publication of this book “Stress Test.” Of course, Secretary Geithner, a polarizing figure in the country because he became face of the bailout, the $700 billion TARP program.

And I started our discussion by asking about a criticism that Senator Elizabeth Warren has made repeatedly about his efforts to focus what she believes are more on Wall Street than on homeowners. Take a listen.

(BEGIN VIDEO CLIP)

TIMOTHY GEITHNER, FORMER TREASURY SECRETARY: If you want to protect the average person from mass unemployment, you have to make sure the system, the financial system doesn’t collapse. You have to keep the lights on. I mean, what’s the best way to think about it?

I don’t know — you’re on a plane. You’re in the cockpit. The engine is burning. There’s smoke filling the cabin.

You got a bunch of terrorists on board, or people who built the plane were somehow, you know, messed it up, and they want you to come out of the cabin and beat up the bad guys. But you got to make sure you land the plane first.

When you land the plane safely, you can figure out how to make sure to bring a measure of justice to people responsible. But your first obligation and the only way to prevent mass damage is to make sure you protect people most vulnerable to the fallout from a panic.

SORKIN: OK. But then the second critique you landed the plane safely but when there was an opportunity for reform to truly reform the system, to fundamentally perhaps even change the system, you didn’t take it.

GEITHNER: I don’t agree with that. Again, I don’t understand the perspective. But we did transformative reforms to the system much stronger consumer protection, much better authority for the cops than we had before the crisis, and instead of protections against risk-taking that makes the system a much more stable system.

SORKIN: Today, some people would suggest the banks are still too big to fail, if not too big to fail squared — they are bigger than ever. True?

GEITHNER: I think that Americans should be much more confident today that we have a system again where we can be indifferent to, safe from the failures of individual firms. We’re much closer to that reality we were at any time in the last 30 years because banks are forced to run much more capital. We’ve limited the size. No individual bank can be more than 10 percent of the banking system through acquisition. That’s a much more — that’s a much tougher constraint that exists anywhere around the world.

SORKIN: There’s a point in the book where you go to visit Bill Clinton. Talk about a couple of things. One being whether there’s a way to persuade the public, perhaps, that what you’re doing is the right thing.

What did he tell you?

GEITHNER: He said the basic reality and sort of the human thing is that people wanted blood. And you could — you could take your pick. You could take out your favorite investment banker and slit the throat in the alley and the next day people would want more.

SORKIN: To the extent a part of your job on the political side is persuading the public that what you’re doing is the right thing.

GEITHNER: This is kind of hard for me. I wasn’t successful at it.

SORKIN: If you could go back and do it again, is there something you could do differently on that piece of it?

GEITHNER: I don’t know. I think — you know, think about this way. I mean, it’s not my natural talent. How can you convince people that something that was still so terrible, worst recession in our lifetimes could have been worse? It’s hard to use a counter-factual argument to convince them what we did was necessary actually effective in preventing a Great Depression, since what they experienced was a great — it’s a terrible thing. And this other burden, again, which the things you have to do to protect people from worst damage just are going to look terribly unfair. Again, it looks like you’re rewarding the arsonist.

(END VIDEO CLIP)

SORKIN: Tim Geithner, of course, his legacy still in question. He saved the system but some believe the system at least as it stands today maybe shouldn’t have been saved.

So, there we have it. We’ll see how history ultimately judges this man’s legacy — Sue.

HERERA: The book is not without controversy, though, Andrew. As a matter of fact, Glenn Hubbard took issue with some of the things that the former treasury secretary put in the book. Can you elaborate on that?

SORKIN: Neal Barofsky, too. There’s been a number of controversies that have emerged over the weekend about this book, in particular the Glenn Hubbard piece that you mentioned. There’s an anecdote in the story that Geithner recalls where he talked to Hubbard during the elections when Hubbard was working for Mitt Romney.

Apparently he said or Geithner said that Hubbard told him after the elections if Mitt Romney were to win, the Republicans would have to raise taxes. Hubbard has since came back and said Geithner is a liar and in fact he never said any such thing. There’s been a back-and-forth. Geithner has come back and said that he remembers it crystal clear, is what his spokesman said. So, it’s going to be a bit of a he said/she said.

MATHISEN: Let’s go back to that passage there in your interview with him we said very carefully, we are closer than we’ve ever been in the past three decades to a place where we’re sort of inoculated from a failure of a big bank. That felt to me like very careful word choice, like, hey, wait a minute. If Bank of America (NYSE:BAC) or Citi or Chase ran into a cataclysmic problem, we’re closer but we’re not quite there to saying let it go.

SORKIN: So, one of those amazing things that I can recall from the interview that I did with him this time and I’ve been interviewing him over the past month, in fact, was the time I went to visit him — he taught at a class at Harvard with Larry Summers and he was asked about too big to fail and he said too big to fail very much still existed and that’s a different response by the way than he said when he had the title of treasury secretary, he publicly said prior to Dodd Frank being passed that too big to fail would be eradicated by Dodd-Frank. In private now, in this class, he said something very different.

So, you know, his view is that, you know, you will never really be able to take the fire department away and that he would even argue it’s misguided to take that fire department away because there will be another crisis in the future.

HERERA: Andrew, terrific job. Thank you so much for joining us tonight.

SORKIN: Thank you for having me.

HERERA: Andrew Ross Sorkin.

Ty?

MATHISEN: A new study says that Medicare spent nearly $2 billion on patients back in 2009 for tests and medical procedures that had little or no health benefits. In the first large scale study to directly measure wasteful spending in Medicare, Harvard researchers at the medical school there found that at least one in four Medicare recipients received one or more unnecessary or ineffective tests or procedures that year. The study results were published in today’s journal of the American Medical Association.

HERERA: Well, here’s something you don’t often see — a federal budget surplus. Washington ran a $107 billion surplus, in fact, in April — thanks to all of those individual and corporate tax receipts coming in last month.

More good news as well — seven months into the 2014 fiscal year, the federal budget shortfall is down 37 percent from last year.

MATHISEN: Still ahead, IBM stock price has been stagnant basically and the CEO admits this is a rocky patch for the company. But is her plan to get Big Blue back on track enough to jump-start sales?

(MUSIC)

HERERA: First quarter earnings out today from Chrysler, a unit of Italian automaker Fiat. Even though Chrysler saw big sales gains for its new Jeep Cherokee (NASDAQ:CHKE) and the Dodge Ram pickup, it lost a ton of money. But Fiat says the $690 million deficit was due to costs related to the merger. If you take those out, net income for Chrysler was nearly half a billion dollars.

MATHISEN: Chrysler, Ford and General Motors (NYSE:GM) all faring poorly in their relationships with auto parts suppliers. In the latest annual survey done by the industry, more than 400 suppliers were asked about their overall relationship with the six biggest carmakers in the United States, about things like tech support, cooperation, communication. Toyota (NYSE:TM), Honda, Nissan top marks, followed by Ford and Chrysler. General Motors (NYSE:GM) was last.

Meantime, attorneys for the parents of a Georgia woman killed in a car crash linked to General Motors (NYSE:GM) faulty ignition switches are re-filing a lawsuit against the automaker even though they already settled the case with GM, citing the admission by GM’s CEO Mary Barra that an engineer in the case may have lied under oath, concealing serious problems with the cars.

MATHISEN: Some of the nation’s biggest retailers are out with earnings later this week, including Walmart, Macy’s (NYSE:M) and JCPenney. But some are warning the steep discounts and other promotions that retailers had to offer this past winter and well into the spring, may have a big impact on their bottom line.

Courtney Reagan has more.

(BEGIN VIDEOTAPE)

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Not everyone loves a sale. Sure, it makes shoppers feel good. It helps drive traffic. But it also squeezes profit for retailers.

This past holiday season was one of the most promotional in recent history. Retailers are still offering larger than normal discounts. The harsh winter crimped retail foot traffic so the sales were deep as stores hoped to clear inventory.

But with 40 percent off less the exception and more the rule for some retailers, investors are starting to worry.

IAN KNIFFEN, J. ROGERS KNIFFEN WWE CEO: Last year, the norm became 40 percent off. Why is that important? Because it comes out of gross margin and, therefore, right out of the bottom line. So, if you don’t have some way to offset this and that’s what’s happening and I believe it’s going to be going on for a long, long time, I don’t think it was temporary, then you’re getting less return on your investment than you expected to get.

REAGAN: According to the Sale Tally ICSC promotion index, discounts across specialty and department stores are 5 percent to 10 percent larger this year than in 2013.

Ann Taylor, Express (NYSE:EXPR), J. Crew, Gap (NYSE:GPS), Banana Republic, and Old Navy are all offering promotions above last year’s levels. Ann Taylor, Gap (NYSE:GPS), Old Navy and J. Crew’s promotions are deeper than the index average, which suggests profit margins are going to be impacted more at those retailers when earnings are announced in the coming weeks.

But former department store executive Jan Kniffen isn’t concerned about the impact on Gap (NYSE:GPS) and its Old Navy and Banana Republican brand’s bottom lines.

KNIFFEN: They are big. They are powerful. They have a loud voice. They are a large company. They have great clout with the factories.

And so, their ability to offset is going to better than other people trapped inside the mall.

REAGAN: Specialty retailers aren’t the only ones offering deep discounts. Department stores like Macy’s (NYSE:M) are doing it too. But Macy’s (NYSE:M) size allows more opportunities to cut cost, to soften the hit to the bottom line.

But what about the long run? Something retailers are inadvertently training shoppers to only buy when there’s a 40 percent off sale, a costly habit to break for both sides.

For NIGHTLY BUSINESS REPORT, I’m Courtney Reagan.

(END VIDEOTAPE)

MATHISEN: The reported deal between DirecTV and AT&T (NYSE:T) may be heating up and that’s where we begin tonight’s “Market Focus”.

Earlier this month, we told you that AT&T (NYSE:T) reportedly approached DirecTV about a possible takeover. Well, now, there are reports that the two companies could strike a deal as soon as two weeks from now. That sent shares of DirecTV higher after the close during the regular session. The stock was off a fraction to $87.16.

Shares of Core Laboratories (NYSE:CLB) got hammered today after the company lowered its guidance. The energy services provider cut both its second quarter and fiscal 2014 outlook and the stock tumbled more than 11.5 percent to $167.02.

Shares of Tesaro surged after the drugmaker announced its medicine that prevents chemotherapy induced nausea met late stage study goals. The company aims to submit the drug for approval in mid-2014. The stocks spiked 21 percent to close at $29.05.

HERERA: Gogo shares were on the go in today’s trading session. The in-flight Internet provider posted a better than expected 35 percent jump in quarterly revenue as more travelers used its services. The company also saw an increase in the amount of commercial aircraft providing Gogo. The stock rose 6 percent to $12.67.

Elizabeth Arden (NASDAQ:RDEN) reported ugly third quarter results. The cosmetics company saw revenues decline by 27 percent, hurt by weak sales in North America in its perfume business. The company says it is exploring strategic alternatives. The stock was initially halted after the report but then it re-opened down double digits during the regular session. Shares were up almost 2 percent to $35.63.

And Rack Spaces first quarter beat the streets’ estimates and its revenues were pretty much inline. The Cloud company saw higher demand for its web hosting services. Shares spiked after hours, up as much as 11 percent. During the regular session, shares were almost 5 percent higher to $27.53.

IBM is getting a lot of attention today. Its CEO Ginni Rometty telling “The New York Times (NYSE:NYT)” Big Blue is facing a rocky time. But that the tech giant is poised for growth.

How much growth might be in IBM’s future? Let’s get some answers from Lou Miscioscia. He’s managing director of enterprise hardware with CLSA America.

Lou, welcome. Good to have you with us.

LOU MISCIOSCIA, CLSA AMERICA’S MANAGING DIRECTOR: OK. Thank you.

MATHISEN: Do you have a rating on this stock? Do you like it at these prices? It’s been basically flat or a little bit down over the past 12 months.

MISCIOSCIA: It has. We do actually have a buy rating in the shares, and a $225 price target. We’re looking out to the end of the year where we think a lot of the investments the companies making are going to start to kick in and expect their business to start to turn by then.

HERERA: Lou, what’s wrong with Big Blue. Is it one major aspect of the company that is not firing on all — you know what I mean.

MISCIOSCIA: Cylinders, sure.

HERERA: Thank you. Or it is many things at IBM that aren’t working?

MISCIOSCIA: Well, it is a number of things. It’s a number of things that actually hit all at once. In the hardware sector which is about 15 percent of revenue, they are not in the good cycle, which is an eight quarter cycle, but that should come back either at the end of this year early next. Their power business has also been weak. So, that’s dragged them down.

From a geographic standpoint, the emerging markets which had to actually been stellar growth for areas for the company, also hurt them. But Europe is starting to come back a bit and we expect by the end of the year the U.S. should return. So, it’s both the geographic thing and also product thing.

But we believe they’re making a lot of investments to offset these issues.

MATHISEN: Do you like what Ms. Rometty is doing and is she doing it fast enough?

MISCIOSCIA: Well, I think there’s a little bit of a perception she’s not doing it fast enough but she’s made quite a bit of investments. Besides all the acquisitions IBM historically makes, they did SoftLayer last year that was $2 billion and then they decided to invest an additional billion on top of that to double SoftLayer’s footprint, which compete with Amazon (NASDAQ:AMZN), DWS, and Google (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT) in web hosting. They are also investing in some of the hardware business in flash computing, in the power systems and (INAUDIBLE).

So, we think that she is stepping up and as you know on Wednesday, as analyst, we expect her to try to highlight some of these opportunities she sees in front of the company.

HERERA: But is acquisition and investment the way to go or do they have to fundamentally basically shake the tree and change the way a lot of the different units in IBM function or maybe it’s both?

MISCIOSCIA: It’s probably a little bit of both. You know, the software and services area, 80 percent of revenue, most of the profit has actually been doing OK. Software has been doing better than services. Service is growing slow, but action with very good margins.

So, don’t really look for huge changes in those areas. But, you know, they’re not standing still there either. They’re actually taking all their middle ware, a good portion of it, investing a billion dollars and turning it into applications for the web.

So, we don’t believe that they’re standing still. We think they are looking forward the future and actually starting to react and invest in it.

MATHISEN: This is a multi-faceted company, obviously. That’s an under statement. But, Lou, who do you consider their principle competitors to be and how do you rank them as a performer and as a stock against those competitors.

MISCIOSCIA: Well, I think when you look at their traditional competitors the other big tech companies, whether it’s, you know, Cisco (NASDAQ:CSCO) or EMC (NYSE:EMC), which they compete with, many of those in slices, or Oracle (NASDAQ:ORCL), many of them are actually having difficulties growing now and I’m sure you’ve talked on this show many, many times about the Cloud.

So, I think that the real competition is the secular changes in the I.T. industry, which are some of the things IBM is trying to now change and reform themselves with the investments that they are making. So, I wouldn’t say there’s any one large IT company that’s really hurting them. I think it’s more the secular changes in the IT industry.

MATHISEN: Lou, thank you very much. We’ll have you back after that analyst day on Wednesday.

Lou Miscioscia —

MISCIOSCIA: OK, thank you.

MATHISEN: — with CLSA Americas.

HERERA: Coming up, bring on the heat. Why a small factory that makes a spicy sauce is turning into a very hot commodity.

(MUSIC)

HERERA: A popular Asian hot sauce is the latest battleground in the war between California and Texas for jobs. It’s proof that for states seeking a competitive edge, no potential victory is too small.

Scott Cohn reports from Irwindale, California.

(BEGIN VIDEOTAPE)

SCOTT COHN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Everything you need to know about the war between the states for jobs is in these 28 ounce bottles. They are filled with Sriracha sauce. As many as 200,000 bottles of this stuff come out of this plant in Los Angeles every day.

Today, a state representative from Texas is trying to convince the plant’s owner to move the whole operation to his state.

STATE REP. JASON VILLALBA (R), TEXAS: We got a low tax environment. We got a low are regulatory environment. We got a fair legal system.

COHN: He sees an opening because the company, Huy Fong Foods, and its owner David Tran, are in a dispute with the city. Residents say the odors coming from the plant can be unbearable.

UNIDENTIFIED FEMALE: My sister has a toddler and we don’t bring her out because she will start coughing. It’s not safe for her to be out.

COHN: The city has declared the plant a public nuisance, sued in court and won. Tran suggested he may have to move.

(on camera): That mere suggestion fed off a feeding frenzy heavy on the sauce. As many as 15 states and cities have come calling, promising to be more hospitable. Remarkable since this plant represents only 80 full time jobs.

GOV. RICK PERRY (R), TEXAS: This is Texas Governor Rick Perry and I have a message for California business — come check out Texas.

COHN (voice-over): Texas governor Rick Perry has had much bigger successes in his campaign to poach jobs, including Toyota (NYSE:TM) and Occidental Petroleum (NYSE:OXY), both leaving California. Texas has no corporate or individual income tax, the pitch goes, a welcoming business climate, and apparently neighbors with less sensitive noses.

David Tran says he’s staying put in California for now.

DAVID TRAN, HUY FONG FOODS FOUNDER & CEO: I need to expand. In the meantime, I need to keep this plant running.

COHN: He says he may expand in Texas, a pungent reminder in California that the competition for every single job is hot, hot, hot.

Scott Cohn, NIGHTLY BUSINESS REPORT, Irwindale, California.

(END VIDEOTAPE)

HERERA: Have you ever had that sauce?

MATHISEN: It’s good sauce.

HERERA: It’s really good sauce.

MATHISEN: It’s very good.

HERERA: Well, wherever they end up or wherever they stay, it’s really good sauce. Give it a try.

That does it for NIGHTLY BUSINESS REPORT for tonight. I’m Sue Herera, in Susie. Thanks for joining us.

MATHISEN: And I’m Tyler Mathisen. Thanks from me as well. Have a greet evening, everybody. We’ll 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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