Transcript: Wednesday, May 21, 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: Behind closed doors. Federal Reserve officials lay the groundwork for raising interest rates. But they also talked about another topic at their last meeting that could prove even more important to the economy.

BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Target’s transformation. A data breach, an ousted CEO, and now, disappointing earnings. What’s the retailer’s interim chief executive planning to do to attract shoppers and investors?

GHARIB: And financial lifeline. Why Wall Street’s biggest bank is giving new hope to bankrupt Detroit?

We have all that and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, May 21st.

Good evening, everyone. I’m Susie Gharib.

GRIFFETH: And I’m Bill Griffeth, Tyler Mathisen is on assignment. We will be hearing from Ty a little bit later on the broadcast.

But we begin this evening, with the bulls returning to Wall Street today, with all the major averages making all of Tuesday’s losses back and more, getting a boost from the Fed minutes, meeting that they had most recently. They met to talk about the nation’s central banks, talking about the prospect of finally raising interest rates.

But they gave no timetable about when they might raise those rates. And with that, stocks, which were already in the green edged even higher into the afternoon session. At the end of the trading day, the Dow was up 158 points, seeing its biggest one-day gain in five weeks. The NASDAQ rose by 34, the S&P was up 15.

And while the Fed’s minutes offered no time frame on raising rates or further tapering, its stimulus plans, it did show a spirited debate about the long-term unemployed. And one economist’s theory about that group’s impact on the overall economy.

Steve Liesman has more.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: It’s not every day that economist’s theories are seen as so important as to be discussed at the Federal Reserve. But the minutes of the Fed’s April meeting released today show the ideas of Princeton professor Alan Krueger, President Obama’s former top economic adviser, sparked a lengthy and lively discussion at the Fed, and they were rejected.

In the recent research paper, Krueger argued that the 3.4 million Americans who have been unemployed long-term, that’s 27 weeks or longer, are mostly not coming back to work.

ALAN KRUEGER, FORMER COUNCIL OF ECONOMIC ADVISORS CHAIRMAN: The evidence suggests that they exerted relatively little pressure on the labor market, that many of them sadly give up searching for a job and eventually withdraw from the labor force.

LIESMAN: As a result, the long-term unemployed do not help keep wages low, as the Fed believes. That means wages could rise fast as the economy picks up, fueling inflation, forcing the Fed to raise rates higher and faster than markets now think.

KRUEGER: I thin the longer people are unemployed, the more challenges they’d face. Employers are less likely to have them come in for an interviews, they grow discouraged, their skills go obsolete, they become more isolated, more disengaged.

LIESMAN: But minutes show, quote, “a number of participants express skepticism about Krueger’s work,” citing other work that says both the long-term and short-term unemployed keep wages low. The Fed thinks that because the wages didn’t fall out right during the recession, there’s little pressure for them to rise now. And with wage gauged relatively muted, the Fed doesn’t think it will face this problem any time soon.

But, when the employment rate does get back towards normal, the Fed is going to have to making the call on whether Krueger has it right. Told today his ideas were rejected at the Fed’s meeting, Krueger responded, quote, “I supposed that’s better than being ignored”, end quote.

For NIGHTLY BUSINESS REPORT, I’m Steve Liesman.

(END VIDEOTAPE)

GHARIB: Mark Zandi joins us now with his analysis of the job market and those Fed minutes. He’s chief economist at Moody’s (NYSE:MCO) Analytics.

So, Mark, let’s talk a little bit about the job market because in those minutes, the Fed officials said one of the growth risks to the economic growth is a slack in the job market. What’s your take on the job market? How’s it doing?

MARK ZANDI, MOODY’S ANALYTICS: It’s improved, much improved. We’re creating a couple of hundred thousand jobs per month. So, that translates to 2.5 million jobs per year. And, you know, in most times, that’d be considered pretty good. That’s probably double the pace we need for stable rate of unemployment. So, at this pace, unemployment continues to decline.

But that’s the rub. The unemployment rate is still very high. Well over 6 percent, there are still a lot of people out of the work force that probably would like to be working, a lot of under-employed.

So, when you add it all up, the job market is much improved but has a long way to go before anyone will consider it to be healthy.

GRIFFETH: Do you agree with Alan Krueger that there’s just a whole segment out there that had just give up and will not be able to return to this market? In other words, will we have to revise higher than what we believe to be the full employment in this economy now?

ZANDI: Yes, I think so. In fact, I think most economists already have. So, if you go back before the recession, I think most economists would have said, including folks at the Fed and the Congressional Budget Office that the full employment — unemployment rate was 5 percent.

GRIFFETH: Right.

ZANDI: Now, the view is it is probably closer to 5 1/2 percent, we’re still above that. So, you know, it’s much higher than it was.

But the other thing I’d say, though, is that there are still a lot of people out there that are under-employed. So, if you look at the number of people who work part-time but say they want a full-time job, that is still very elevated. And you’ve got a lot of people that are not even looking for work, not count as unemployment, that say they’d take a job if they could find one that was, you know, consistent with their skills and pay a wage, covering their commuting costs.

So, I think there is still a lot of slack in the labor market.

GHARIB: So, Mark, what a lot of people are trying to figure out whether you’re an investor, whether you’re a business owner, is what’s going to happen with interest rates, when is the Fed going to begin this process of raising interest rates. We didn’t seem to get any clues in today’s report. But what can you tell us on terms of your predictions, reading between the lines of when you think it is going to happen?

ZANDI: You know, Susie, I think there is — the Fed is actually pretty clear on this. You know, they each provide a forecast on where they think the interest rates are heading. If you look at the middle of the distribution forecasts, you know, the average, they’re pretty much telling us and they’ve been saying this since the end of last year that, the quantitative easing process is the bond buying program will end by this time next year. And that by this time next year, so, May, June, July of 2015, that’s when short-term interest rates will start to rise.

And I think that’s something — that’s about — they have been about as clear about that as they are about anything. And so, I think that that’s the script that they’re trying to stick to.

GRIFFETH: You think the markets are prepared for that? Let’s recall what Ben Bernanke did last year about this time when he talked about the possibility of beginning the tapering process, and the interest rates skyrocketed at that point, for that level.

ZANDI: Yes.

GRIFFETH: Are we ready now?

ZANDI: Yes, and, Bill, that is exactly why I think the fed became more clear and transparent with regard to where they think interest rates are headed. It was that scare, in fact, this time last year when interest rates jumped when Chairman Bernanke started talking about tapering.

So, since that time, they have become much more transparent with regard to where they think interest rates are going to go. And I think the market is fully on board with that. And, you know, the market reaction today was what it was because the Fed basically said in the minutes that, you know, we’re sticking to the script. Nothing has changed.

GHARIB: And that was very reassuring to the market.

Mark, thank you so much. Mark Zandi, with Moody’s (NYSE:MCO) Analytics.

ZANDI: Thank you.

GRIFFETH: More trouble at Target (NYSE:TGT) stores now following that massive Christmastime data breach and the troubled expansion into Canada. Profits at the retailer fell 16 percent last quarter and it lowered its earnings projections for the current quarter as well. Now, despite that, shares of Target (NYSE:TGT) rose by 1 percent today.

And as Courtney Reagan shows us right now, the company’s interim CEO is moving forward with new initiatives hoping to attract shoppers and investors alike.

(BEGIN VIDEO CLIP)

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): It’s been a rough five months for the retailer target, from the data breach to continued losses from its Canadian stores and the firing of its CEO and many other management shifts.

Today, the big box retailer fell shy of profit expectations but delivered better than anticipated U.S. sales results for the first quarter.

I spoke exclusively to Target’s interim CEO and current chief financial officer, John Mulligan, about what Target (NYSE:TGT) plans to do to improve sales and what that will cost.

JOHN MULLIGAN, TARGET INTERIM CEO: We want to bring great promotions to our guests, but ensure they are impactful. And where they’re impactful, we see the lift in sales, we need to pay for that. The first quarter, we used a significant amount of promotions and our gross margin rate was down a percentage point. We’ll strike more of a balance as we go forward here.

REAGAN (on camera): While Mulligan is sitting in as the CEO for now, he told me he’d be very content to go back to go back to focusing on his CFO role, once the right individual is found to lead Target (NYSE:TGT) forward.

When it comes to desirable qualifications, Mulligan says the Target (NYSE:TGT) board is focused on experience in three key areas.

MULLIGAN: The three focus areas which I’m sure they’ll be focused on as they think about the next individual is growing sales and traffic in the U.S., continuing to improve our performance in Canada, and third, really getting us to be a leading a Omni channel retailer, accelerating our transformation, that third one probably the most important.

REAGAN (voice-over): Target (NYSE:TGT) says surveyed shoppers have put the data breach behind them. Investors, however, have not been able to move on. Target (NYSE:TGT) says it isn’t able to estimate potential total costs of the data breach even though it may have a material impact on earnings, in the second quarter, the full year, and beyond.

MULLIGAN: Unfortunately, we’re in the place as it relates to the data breach where we don’t have visibility yet to the potential third-party liabilities and operating expenses they have incurred. The process is fairly well-defined between us and the networks. They will come back to us when they have an estimate of what the incremental expenses might be.

And the process — you know, we don’t have visibility to that. But what we’ve seen in other cases it can take several months.

REAGAN: Mulligan has acknowledged there is lots of work to be done. Target (NYSE:TGT) certainly hopes investors and shoppers will be patient.

For NIGHTLY BUSINESS REPORT, I’m Courtney Reagan.

(END VIDEOTAPE)

GHARIB: A warning today from the folks at eBay (NASDAQ:EBAY). The e-commerce giant says hackers stole e-mail addresses, birthdays and other personal information from account-holders earlier this year. The company insists that no financial data was breached but it’s urging clients to change their account password.

GRIFFETH: In fact, cyber attacks on companies like Target (NYSE:TGT) and eBay (NASDAQ:EBAY) are becoming more and more common. And one Internet security firm says that these attacks are discovered not only puts the company at risk but also the company’s top executives.

Josh Lipton has more.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Trustwave, a cyber security firm, investigated nearly 700 hacks in 2013. Retail was the top industry compromise, making up 35 percent of the attacks, food and beverage ranked second, and hospitality ranked third.

ROBERT J. MCCULLEN, TRUSTWAVE CHAIRMAN & CEO: They’re all similar and that they have many locations, they’re target rich, and that they have a lot of transactions from customers going to those locations. And that they have a lot of different vendors that are used in those environments.

LIPTON: Hackers continue to try and steal credit cards, but they’re also increasingly going after information such as financial account credentials, internal communications and merchant ID numbers, anything they can sell for financial gain.

MCCULLEN: The credit card information, that’s easy to turn a quick buck and to sell on the black market and to get quick funds.

The other is usually used by nation states for obtaining secrets of organizations, how they build things, blueprints, blackmail, things like that.

LIPTON: A breach doesn’t just mean headaches for a CEO, it can also mean their jobs. A number of CEOs stepped down after their companies experienced attacks.

In addition to Target (NYSE:TGT), AOL’s tech chief resigned after a breach, as did the CEO of Sony (NYSE:SNE), LivingSocial and three CEOs of three Korean financial firms.

These companies were experiencing problems at the time so their resignations can’t solely be attributed to data thefts, but no doubt it had something to do with it. Experts say no company is immune to hacking attacks, which is why spending on cyber security continues to rise, growing at roughly 15 percent annually, out-pacing the growth in overall at I.T. budgets at just 2 percent.

(on camera): And what’s more? These attacks aren’t always detected. Trustwave says 71 percent of firms aren’t even detecting the breach on their own. And when they do, the average time it takes to notice it, nearly three months.

Josh Lipton, NIGHTLY BUSINESS REPORT.

(END VIDEOTAPE)

GHARIB: And still ahead, new hope for Detroit. The bankrupt city just got a $100 million lifeline from one of Wall Street’s biggest banks. Is this the start of the Motor City’s comeback? That’s next.

(MUSIC)

GRIFFETH: The Obama administration is changing some provisions in the Affordable Care Act that critics say is nothing more than a bailout for health insurance companies. These new regulations allow the federal government to set aside money to compensate those insurers who may lose money because of the new health care law as they try to keep enrollee premiums down.

GHARIB: Jamie Dimon says he sees opportunity in Detroit and he is taking a bold step to prove it. The chairman and CEO of JPMorgan (NYSE:JPM) Chase is investing $100 million in the beleaguered Motor City. It’s struggling in $18 billion in unfunded debt.

Scott Cohn has our story.

(BEGIN VIDEOTAPE)

SCOTT COHN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): There is no question Detroit needs the money, the largest U.S. city ever to declare bankruptcy, riddled with blight, even basic services at a premium.

But the head of JPMorgan (NYSE:JPM) Chase sees opportunity.

JAMIE DIMON, JPMORGAN CHASE CEO: We want to see Detroit thrive. That’s why we’re here.

COHN: Chase will invest $100 million over five years, removing blight, funding community development loans, small businesses and worker training, even helping pay for a new light rail line.

DIMON: I think we can make this our finest moment.

COHN: Detroit may be bankrupt but for the first time in decades, there may be cause for optimism. Slowly but surely, officials have cobbled together what’s being called a grand bargain, more than $800 million from private foundations, individual contributions and the state of Michigan to shore up the city’s pension plans and save the city’s art collection.

JPMorgan’s investment is on top of that.

(on camera): One hundred dollars is a tiny amount for a bank that brought nearly $100 billion last year. It’s also roughly equivalent to about five years of Jamie Diamond’s pay. But that’s not to say the bank isn’t taking a risk, because that proposed grand bargain is not a done deal.

(voice-over): While some of the city’s unions and retirees have signed on, others are bitterly opposed to cuts in their pension and health care, municipal bondholders who thought their investments were safe had objected too. Even the U.S. government has filed an objection in court.

Then, there is the state legislator which has balked at its part of the deal, $195 million.

The state-appointed emergency manager for Detroit is appealing to lawmakers to get on board.

KEVYN ORR, DETROIT EMERGENCY MANAGER: Without this settlement, make no mistake about it, we will have to go back to the drawing board.

COHN: JPMorgan (NYSE:JPM) says it will invest in Detroit, grand bargain or not. But if the deal falls apart, it could be years before the bank gets anything back.

For NIGHTLY BUSINESS REPORT, I’m Scott Cohn.

(END VIDEOTAPE)

GRIFFETH: Yet another auto recall from General Motors (NYSE:GM). This is the 30th one so far this year. This newest involves 218,000 Chevy Aveos made during the years 2004 through 2008. This time for a possible fire hazard in the vehicle’s daytime running lights.

GHARIB: Shares of Tiffany (NYSE:TIF) surge after the retailer reported sparkling first quarter earnings, and that’s where we begin tonight’s “Market Focus”.

Tiffany (NYSE:TIF) easily beat analyst estimates as the worldwide sales jumped by double digits with new collections driving sales in the United States. The luxury good seller also raised its full year forecast. Looking at the stock, it popped 9 percent to $96.30.

Lowe’s says the rough winter weather weighed on its first quarter results but the home improvement retailer raised its full earnings forecast, saying business has already started to turn around. Still, earnings missed estimates and shares fell slightly to $45.41.

American Eagles first quarter profits plunge by more than 80 percent as the teen retailer was hit by weaker sales and margins. Investors were disappointed with news that the company also plans to close 150 more stores in North America, and its forecast for second quarter earnings was below estimates. Shares there tumbled 6 1/2 percent to $10.60.

GRIFFETH: Elsewhere, Williams Sonoma posted better than expected first quarter earnings and revenue. It also saw its same-store sales rise more than forecast, the outlook for the company for the second quarter came in a little bit light, though, but investors didn’t seem to mind that part. Shares were up after the close, during the regular session. The stock rose slightly to $63.73.

And Reynolds American (NYSE:RAI) is reportedly in active talks to buy Lorillard (NYSE:LO). That proposed deal would combine the second and third largest tobacco companies in the United States. The merger buzz late in the day sent shares of both companies higher. Lorillard (NYSE:LO) rose more than 10 percent to $62.63. Reynolds American (NYSE:RAI) was up more than 4 percent to $59.77.

GHARIB: Some good advice for individual investors from the head of one of the world’s biggest mutual fund management firms. Tyler sat down today with Bill McNabb. He’s chairman and CEO of vanguard, and began by asking him what investors are doing right and what they’re not doing right with their money.

(BEGIN VIDEOTAPE)

BILL MCNABB, VANGUARD CHAIRMAN & CEO: If you look at investors broadly, you know, one of the really promising trends we’ve seen is more investors are beginning to look toward what I will call a total solutions approach to their investment needs. And you know, the best evidence of that is the — the take off in target-date funds. So, today, in our 401(k) system, for example, that vanguard administers, 55 percent of participants now use target-date funds. And as you know those are balanced funds that are continually re-balanced, and in the sense, they expose the investor to the right level of risk for that time in his or her career.

So, that’s a really positive trend. Now, it’s not everywhere. There are still investors on the margin who pay too much attention to short-term performance. And you’ll see that in the data.

So, when a sector does well you will see money move into it or move out. That, to me, is still troubling. Probably the most troubling thing is there is a fairly big push towards higher yield. And again, understandable —

TYLER MATHISEN, NIGHTLY BUSINESS REPORT: Interest rates are so low. People want some interest to come into it, some income.

MCNABB: And the question we have is, do people understand the risks they’re taking? Because as you go to get more yield, obviously you take on more risk.

MATHISEN: Do you worry at all with specific reference to target-date funds that supposedly deliver the best results for your retirement age that people are relying on them too much? And what if they don’t deliver the way people expect?

MCNABB: You know — and again, I can’t speak for everybody’s target-date funds. But the way we’ve constructed ours, we have a very high degree of confidence. They’re highly diversified. They’re very — we use index funds as the underlying component, so they’re very low costs.

And as long as we keep the re-balancing on a consistent basis, we’re very confident they’re going to achieve the kind of results that people need.

MATHISEN: The fund industry has grown immensely. There are now 8,900 mutual funds, 1,500 or so ETFs. But 45 percent of total assets are controlled by baby boomers. They are starting to retire.

Does that mean that the total assets are going to come down as they start to withdraw?

MCNABB: So, unlikely, actually, because what you will find is most baby boomers as they get closer to retirement the longevity expectations are much greater than they were 15 or 20 years ago. You know, today, if you have a couple coming up on retirement, there are better than 50 percent odds that one of them is going to live to 90.

So, you now have to think about not investing two retirements but invest beyond through retirement, if you will. And that’s going to mean people will have to have equity exposure.

MATHISEN: You may end up living longer in retirement than you work.

MCNABB: You know, it is possible. And what it will mean is the drawdown will be pretty measured.

You know, again if you think about what is a good drawdown rate for portfolio, typically about 4 percent. So, if you think about your 45 percent, let’s just say everybody drew down at 4 percent — well, that would be roughly you know, by the time you do the dollars involved, 4 percent of that, 45 percent is a much smaller number.

MATHISEN: All right. Very quick question on a topical subject. You testified on the Hill yesterday about a controversy that has risen over whether certain large fund companies groups, like Vanguard, might well be designated as systemically important financial institutions. Tell me why quickly you believe that is a bad idea.

MCNABB: Well, if you look at mutual fund companies and investment managers broadly, we act as agents for our clients and we are not principals. And what got people into trouble during the financial crisis was they were principal-based organizations that had very high leverage and typically had a mismatch between assets and liability.

As a mutual fund provider, we have no leverage. The funds have no leverage and the investor is exposed to whatever risk he or she chooses. We’re not guaranteeing —

MATHISEN: The investor owns the assets.

MCNABB: The investor owns the assets. And that is the key point. That is the key point.

MATHISEN: Bill McNabb, thank you very much for being with us.

MCNABB: You’re welcome, Tyler. Thank you. Good to see you.

MATHISEN: Good to see you.

(END VIDEOTAPE)

GHARIB: And Vanguard has operations all across the globe and controls more than $2 trillion in total assets worldwide.

GRIFFETH: Coming up, while Alibaba has been getting all the attention lately, its arch-rival has now set to make its trading debut here in the U.S. Who is it? How does it work? We’ll have that story, next.

(MUSIC)

GRIFFETH: Well, Russian President Vladimir Putin finally got what he wanted from China after a decade of negotiations. Those two countries agreed to a $400 billion 30-year deal to supply China with Russian natural gas. That’s the biggest contract of its kind ever. The deal allows Moscow-run Gazprom to shift exports to Asia as the European community looks to sever the supply agreements with Russia over the annexation of Crimea.

GHARIB: Two other international power houses are looking to make a different impact on the U.S. Alibaba and JD.com, they are China’s biggest online retailers and they’re both preparing for initial public stock offerings on Wall Street.

Now, last week, we told you about Alibaba, and tonight, Eunice Yoon introduces us to JD.com.

(BEGIN VIDEOTAPE)

EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: JD.com is a competitor to Alibaba in China’s online retailing market. It’s known for selling electronics and people like the service because it has reputation for being reliable and people think that the products are priced well.

It’s pretty easy to use.

I want to buy USB. This one looks good. It’s about 25 yuan, or $5, one extra dollar for shipping. And in a big city like Beijing you can get same-day service so all we have to do now is wait.

JD.com is much smaller than Alibaba, but it could pose a threat. People expect to start seeing JD on WeChat. WeChat is a hugely popular social media platform and the owner of WeChat just bought a stake in JD.

Unlike Alibaba, though, JD.com is weighed down by cost. It spends a lot on warehouses and delivery staff, while Alibaba makes money off of transaction fees on its virtual marketplaces. JD is betting that as more people shop online, its investment and infrastructure will pay off. It plans to use part of the money from its IPO in New York to build out its distribution network into smaller cities.

Come in!

OK. So, it’s 12:30, and only two hours after I placed my order.

Bye-bye, and JD.com wants the service to be this fast all over the rest of the country.

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

(END VIDEOTAPE)

GRIFFETH: And finally tonight, which companies do you think rank highest in terms of global brand value?

Well, the new study commission by British advertising giant WPP (NASDAQ:WPPGY) made a list of the 100 most valuable global brand names. They found that a lot of technology companies have gained recognition and reliability and trust among consumers.

So, here is the top three. Susie, she wanted to read all 100, but we give you the top three. Third place, IBM. Number two, following the last three years into the top spot, Apple (NASDAQ:AAPL). What is number one now? Google (NASDAQ:GOOG), number one.

GHARIB: Yes, and the only non-tech company in the top five? McDonald’s (NYSE:MCD).

GRIFFETH: Wow, still number one.

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

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

END

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

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