Transcript: Tuesday, June 24, 2014

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

(BEGIN VIDEO CLIP)

HENRY PAULSON, FORMER TREASURY SECRETARY: This crisis is a threat to our economy.

(END VIDEO CLIP)

BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Three former treasury secretaries and other high-powered executives have a warning for businesses and investors — climate change unchecked could cost the economy hundreds of billions of dollars.

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Curb appeal? New home sales store to a six year high. But are the numbers too good to be true?

GRIFFETH: Biotech breakout. A stock we reported on yesterday soared today. And that has investors with a strong stomach looking for the next potential success story.

All that and more tonight on NIGHTLY BUSINESS REPORT for this Tuesday, June the 24th.

And we bid you good evening, everybody. I`m Bill Griffeth, in for Tyler Mathisen tonight.

GHARIB: And I`m Susie Gharib.

We begin tonight with a stern warning about climate change and the huge economic risk for American businesses and investors. Now, don`t think it`s just another warning and just another report. This one comes from a coalition of prominent business leaders and former presidential cabinet members.

Leading the way, former Treasury Secretary Hank Paulson, who managed the financial crisis in the Bush administration. In their report, “Risky Business”, they describe the risks of climate change as more severe and catastrophic than the housing crisis, and the cost in the hundreds of billions of dollars.

They also say U.S. businesses are in the dark about the dangers and are urging them to take action now to reduce the impact of climate change.

Earlier today, I talked with Hank Paulson and began by asking him, how much time do we have before we`re really hit with the climate crisis?

(BEGIN VIDEOTAPE)

PAULSON: It`s both immediate and it`s decades away. So, this crisis is a threat to our economy. It`s not a financial threat, but it`s a real threat to our economy. And in many ways, it`s more cruel and perverse than the housing bubble because once CO2 is in the atmosphere, it`s there for many centuries. And so, there is no possibility of a government to come in at the very end and take action and avoid the very worst outcomes.

GHARIB: What do you want American businesses precisely to do?

PAULSON: First of all, I want investors to demand that American businesses make more disclosures, make more disclosures about their CO2 emissions, make more disclosures about risks that they face, risks from stranded assets.

I want businesses to make long-term investments that protect them, protect their shareholders, because the investments they make today are going to be key to protecting our economy in the future.

GHARIB: Now, you`re calling on a national tax on carbon emissions.
How would that fix the problem?

PAULSON: The key thing is until you put a price on carbon, until you charge a company that pollutes for the cost of pollution, it`s going to be very difficult to deal with this problem.

GHARIB: Some people would say that a carbon tax is coming at a time that the U.S. and global economies are struggling to grow. So, what`s the tradeoff between the risks to U.S. economic growth and the risk to a climate crisis, which is more important?

PAULSON: Well, I think that`s a false tradeoff, because I think a healthy economy and a healthy environment are opposite sides of the same coin. I think that you could structure a carbon tax so that it allowed us and encouraged us to remain competitive.

GHARIB: Let`s talk a little bit about the U.S. economy. Wall Street is very concerned about Inflation and higher interest rates, how concerned are you?

PAULSON: My big concern is growth and sustainable growth above 2 percent. Inflation isn`t my big concern today. Our economy has been growing at 2 percent roughly since the third quarter of 2009 and I think to accelerate growth, we`re going to need bipartisan structural reform, we`re going to need immigration reform, we`re going to need tax reform, you know, tax system that gives us the revenues we need and allows us to create jobs.

GHARIB: But as Federal Reserve chair Janet Yellen keeps interest rates super low, is that hurting or helping the economy in growth?

PAULSON: Yes, I`m not going to comment on monetary policy, what the fiscals are saying. I just really believe that, of course, we need to give back to a world where asset prices are set by the real economy, not set by monetary policy.

GHARIB: I just want to look around the world at key countries and get a few words from you on how they impact us.

First of all, China — weak, slow growth. What does it mean for the U.S. and our economy?

PAULSON: China has a growth model which has run out of stream. They need to reform their economy and if they do so, and I`m optimistic they will do so over time, this will be beneficial to the United States.

GHARIB: What about weak growth in Europe?

PAULSON: Obviously, weak growth in Europe is not good for the United States` economy, but the European economy is doing better now.

GHARIB: Rising tensions in Iraq?

PAULSON: Rising tensions in Iraq demonstrate that the — that Islamist terrorists haven`t gone away. They are very determined. They are very organized, and that`s a significant threat to stability of the world and the global economy.

(END VIDEOTAPE)

GRIFFETH: Well, it was a down day on Wall Street. There were concerns about violence and political turmoil in Iraq including some unfounded rumors about a Syrian military strike against militants in Iraq that helped wipe out early gains.

The major averages started higher following some strong data about new home sales in May and higher consumer confidence in June, but stocks lost steam around midday about those concerns about Iraq. There was, though, a dip in oil prices and therefore energy stocks and maybe some good old fashioned profit taking as we head toward the end of the quarter.

Added up, the Dow had its worst day in a month causing down 119 points, off the lows of the day. The NASDAQ, which hit a fresh 14-year high before retreating today, was down 18 at the close and the S&P was off by 12 after reaching an all-time intraday high this morning.

GHARIB: Well, adding to the pessimistic sentiment on Wall Street, some hawkish comments from Philadelphia Fed President Charles Plosser.
Speaking in New York today, Plosser said the Federal Reserve should begin raising interest rates as soon as next quarter. That`s much earlier than a lot of Fed watchers are expecting.

Plosser explained that benchmark rates should be higher because the Fed is closer to reaching goals it set for the unemployment rate, economic growth and even inflation.

GRIFFETH: More now on those solid housing reports out today. Sales of new homes surged in May, rising by a far more than expected 18.6 percent from the month of April, to the fastest pace in six years. Also, home prices in the nation`s largest cities rose by 11 percent in April, from the same month a year ago according to the latest home Case-Shiller home price index.

Now, all of that sent shares of a number of homebuilders higher including D.R. Horton (NYSE:DHI), Lennar (NYSE:LEN), Beazer, Hovnanian, and Toll Brothers (NYSE:TOL).

But realtors say that a combination of more listings and stronger employment also drove the surge in sales during May, and there may be more to it than that.

Diana Olick has our story.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORTER CORRESPONDENT (voice-over):
The new home numbers were good, perhaps even too good to be true.

MARK HANSON, REAL ESTATE ADVISOR: You have to take a look at it with suspect goggles on and I think it`s just that. New home sales suffers from the law of low numbers.

OLICK: Sales of newly built homes surged over 18 percent from May to June according to a government survey, which has a large margin of error.
While the monthly jump was high, the base numbers are very low, down over
60 percent from their peak in 2005.

TOM REDWITZ, THE NEW HOME COMPANY: We release our homes in smaller phases so that we can keep up with the sales rate.

OLICK: Prices for newly built homes surged 7 percent with the biggest sales gains on the pricier end of the market.

REDWITZ: We`re increasing prices just a little bit, but not in leaps and bounds.

OLICK: Prices for existing homes in April were up nearly 11 percent from a year ago, a smaller yearly gain than in March. Prices are still well below their peak eight years ago this month but some local markets may be in bubble territory.

SPENCER RASCOFF, ZILLOW CEO: The reason it`s noisy, it`s moved from a national real estate story to a very local real estate story, and you have some parts of the country that are appreciating very rapidly, like Manhattan and the Bay Area, 20-plus percent year over year. And you have other parts of the country, like the Midwest, that are flat to down.

OLICK: While some worry about the latest price moves, the most famous home price watcher is unconcerned.

ROBERT SHILLER, ECONOMIST: Prices are more or less OK where they are.
They went up way too high in 2006, and they came down like 50 percent, and now, they are going up. They look about right, and you know, I hope people just don`t get so worked up about them.

OLICK: Of course, homes are actually more expensive today than they were back in 2006. The sticker price may be lower, but we don`t have all those “no money down, interest only” mortgages to foot the bill.

For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Washington.

(END VIDEOTAPE)

GHARIB: Also in Washington today, two hearings on Capitol Hill, one in the House and the other in the Senate and both about the proposed $49 billion merger of AT&T (NYSE:T) and DirecTV.

AT&T (NYSE:T) chairman and CEO Randall Stephenson testified that offering DirecTV`s broadband service will make it more competitive, expand its offerings and could even lead to lower prices for consumers.

(BEGIN VIDEO CLIP)

RANDALL STEPHENSON, AT&T (NYSE:T) CHAIRMAN & CEO: Being able to offer DirecTV nationwide is a game changer in terms of economics for deploying broadband. It will allow us to expand and to enhance broadband service to at least 15 million locations across 48 different states. And those are mostly in underserved rural areas.

(END VIDEO CLIP)

GHARIB: Well, critics of the proposed deal also testified today, warning of less competition for pay TV services and potentially higher prices.

GRIFFETH: And there is another expense that may cost you more, that`s health care. A new report predicts that Americans will spend more on health care in 2015, almost 7 percent more, reversing five years of slowing growth.

And Ceci Connolly of PricewaterhouseCoopers which issued that report says more companies will pass along those cost increases to their employees.

(BEGIN VIDEO CLIP)

CECI CONNOLLY, PRICEWATERHOUSECOOPERS: Employers have been very actively pursuing the strategy of moving many other workers into high deductible health plans, and this means that the worker could face $1,000, $2,000, $3,000 first out-of-pocket before their insurance coverage kicks in.

(END VIDEO CLIP)

GRIFFETH: The report also says part of the increase comes from consumers who delayed treatment during a recession and now seeking the care that they have postponed.

GHARIB: We told you about Vertex Pharmaceuticals (NASDAQ:VRTX) last night and it`s promising cystic fibrosis medication. Well, today, Vertex released clinical trial results showing its combination of drugs improve patient`s long function and it`s looking to get regulatory approval to sale the drug in Europe and here in the U.S.

Shares of Vertex surged almost 41 percent. Now, that`s pretty impressive performance on a tough day in the markets.

Meg Tirrell has more on the news from Vertex and the potential next big breakout name in biotech.

(BEGIN VIDEOTAPE)

MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT: The results of Vertex`s clinical trial in cystic fibrosis were among the most anticipated events in the biotech industry this year and they didn`t disappoint. The stock soared and so did hope for thousands of patients with the rare lung disease.

For vertex, the results mean big business. Analysts estimate the drugs may draw more than $5 billion in peak annual revenue. The company already has approval for one of the drugs Kalydeco, that has helped just a fraction of patients with cystic fibrosis. The drug combo could extend the benefit from about 2,000 patients to more than 20,000.

JEFFREY LEIDEN, VERTEX: Everybody at Vertex right now is focused on two things: getting this medicine submitted to regulators and approved and out to patients, and then bringing our next set of medicines behind this that offer potentially more benefit forward in our pipeline and out to patients. And right now, for the next year, that`s what we`re going to be focused on.

TIRRELL: While questions lingered over the potential price of the drug combination, analysts said the data had positive implications for the rest of the biotech sector, lifting sentiment about the prospects for future clinical trials.

MICHAEL YEE, RBC: I think what it tells us, big picture, there is a lot of science playing out is working. A lot of the mechanisms and rational makes sense, and the clinical trials are just designed better.
So, we`re becoming smarter drug developers and that`s leading to more positive outcomes and that is leading to more successful studies which is obviously leading to bigger stock prices.

TIRRELL (on camera): If you missed today`s big move, never fear.
There are always more big risk return scenarios and biotech. RBC`s Michael Yee points to Biogen and Intercept as stocks to watch. Biogen could move
10 percent to 15 percent he says on data later this year on a multiple sclerosis drug known as Anti-LINGO. Intercept data are expected in July on a drug for the liver disease NASH.

(voice-over): But biotech is always a risky bet, and a move like Vertex`s today is certainly uncommon.

For NIGHTLY BUSINESS REPORT, I`m Meg Tirrell.

(END VIDEOTAPE)

GRIFFETH: Well, still ahead, which is the top state for business and what does it take to be the best of the best? The answer is coming up next.

(MUSIC)

GHARIB: Get ready to pay more to fly. Starting in July, ticket prices will cost you a little bit more no matter which airline you fly, because the TSA is raising fees it charges for airport security. The new fee is a flat rate of $5.60 per flight, doesn`t sound like a whole lot, but it`s double what you pay right now.

GRIFFETH: Meanwhile, Walgreens reports an earnings missed and withdraws its profit goals for 2016 and that is where we begin tonight`s “Market Focus”.

The drugstore operator says that it still has to figure out parts of its planned acquisition of European drug retailer Allianz Booth Holdings.
It blamed its lower-than-expected quarterly profit in a slowdown in the introduction of high margin generic drugs and lower reimbursement by insurers. Shares fell almost 2 percent of its result to $72.48.

Carnival (NYSE:CCL) Cruise expected to be earnings beat in the company`s second quarter, but a gloomy outlook weighed on the shares of the world`s largest cruise operator. Its profit forecast for the current quarter was below expectations. It blamed increase in the competition in the Caribbean but Carnival (NYSE:CCL) said that bookings for the remainder of this year are ahead of last year`s phase. Still, the stock was down 3 percent today to $38.23.

GHARIB: Shares of Elizabeth Arden (NASDAQ:RDEN) fell on news of a restructuring makeover. The cosmetics company is aiming to save as much as
$35 million a year by cutting staff, reorganizing its supply chain, discontinuing poorly performing products and closing its Puerto Rico affiliate. Still, the stock dropped 3 percent to $27.41.

A similar sort of story at Avon. Investors got a chance today to react to news that Avon plans to cut jobs. The world`s largest direct seller of cosmetics will slash another 600 workers in North America in an effort to also cut costs and return to profitability. The new strategy could result in annual savings of as much as $55 million. But despite that, shares fell about 1 percent to $14.55.

And the Federal Reserve is giving Citigroup (NYSE:C) six more months to resubmit a revised capital plan. The Central Bank rejected its original plan back in March, Citi needs the Fed`s OK. Without it, the bank will not be able to increase its dividend. Shares fell slightly to $47.81.

GRIFFETH: One sign that a nationwide economic recovery may take hold is happening in those states hard hit by the Great Recession.

Scott Cohn reports tonight on one state that saw massive job losses in the downturn, but now finds itself on top of a new study ranking America`s top states for businesses.

(BEGIN VIDEOTAPE)

SCOTT COHN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): The recession hit the people of Georgia where they lived, literally.

Georgia overbuilt — overbuilt badly. Then, the state lost more than
300,000 jobs. And the housing market, a mainstay of the state economy, crumbled.

At the worst of it, Georgia lead the nation in foreclosures, one in every 300 homes and as late as 2011, when Republican Governor Nathan Deal took office, unemployment was above 10 percent, as he recalled on this year`s State of the State Address.

GOV. NATHAN DEAL (R), GEORGIA: Business is closed. Buildings became vacant and the newspapers that serve as the legal organs for their counties were filled with foreclosure notices as families lost their homes.

COHN: So, what`s Georgia doing now on top of the eighth annual CBNC rankings of America`s top states for business? For one thing, capitalizing on its built-in advantages, even during the worst of the crisis, Georgia had a well developed infrastructure, tops in the nation, according to the CNBC study. Its workforce is tops two, unemployment is still high, rising in May to 7.2 percent. But that means lots of available workers in a right-to-work state.

More important, those workers are finding jobs at one of the fastest rates in the country as businesses come back to the state.

Governor Deal, who`s running for reelection this year, is happy to claim credit. He spoke to us today on a business recruiting trip in Israel.

DEAL: It is a state government where people have trust and confidence, and that`s the reason that businesses choose to grow in the state of Georgia.

COHN: His opponent, Jason Carter, the grandson of the former president says the recovery is uneven.

STATE SEN. JASON CARTER (D-GA), GUBERNATORIAL CANDIDATE: If you`re a big business, if you`re a political deal maker, or if you`re one of the governor`s friends, chances are things are going well for you in Georgia today. But if you`re a small business or a regular middle class family, chances are you`re feeling forgotten.

COHN (on camera): Georgia still has plenty of damage to repair, particularly when it comes to education, from kindergarten through college, schools are underfunded and test scores lag the nation. So, Georgia just passed a half billion dollar budget increase for education because states need to be smart to really compete.

Scott Cohn, NIGHTLY BUSINESS REPORT, Stone Mountain, Georgia.

(END VIDEOTAPE)

GRIFFETH: And rounding up the top five in that study, number two is Texas, followed by Utah, Nebraska and North Carolina. And you can read more about the top states for business on our Web site — all 50 are listed there in order — at NBR.com.

GHARIB: And coming up on the program, McDonald`s versus Yum. They`re two of the biggest — business world`s biggest rivals, but which one has a better competitive edge? That`s next.

(MUSIC)

GRIFFETH: Well, some big economic reforms are coming to Japan. The government of Prime Minister Shinzo Abe is overhauling its economic growth strategy. What they are doing is announcing cuts to the corporate tax rate, plans to ease up on health care and agricultural rules. New initiatives to get more women to enter the workforce and to allow more foreign workers into the country.

GHARIB: As soccer teams from around the world battle to qualify for the next round of the World Cup in Brazil, NBR`s ultimate stock cup hits two of the world`s biggest fast food giants against each other, battling out in the global marketplace.

Tonight, it`s McDonald`s versus Yum Brands (NYSE:YUM).

(BEGIN VIDEOTAPE)

GHARIB (voice-over): McDonald`s is a symbol of the Americanization of the world. McDonald`s Corporation was founded in 1955. It`s headquartered outside Chicago, in Oak Brook, Illinois. 2013 revenue, more than $28 billion.

In 1940, Richard and Maurice McDonald opened the first restaurant in San Bernardino, California. But it was Ray Crock, a franchisee who later bought the company and expanded it into a global icon with 35,000 restaurants in 119 countries, serving about 70 million people a day.

Yum is a collection of brands, Kentucky Fried Chicken, Taco Bell and Pizza Hut. It was founded in 1977 as it was spun off from Pepsi. It`s based in Louisville, Kentucky, and 2013 revenues were more than $13 billion. It has more restaurants than McDonald`s, about 40,000, and it`s in more countries, 128.

Like McDonald`s, its dividends have grown consistently. But also like McDonald`s, Yum has struggled to find growth at home. With few international competitors, Yum now gets 70 percent of the profit from outside the United States.

(END VIDEOTAPE)

GRIFFETH: So, who will win this food fight, McDonald`s or Yum Brands (NYSE:YUM)?

David Palmer weighs in on this rivalry for us tonight. He`s managing director at RBC Capital Markets.

David, good to see you again.

DAVID PALMER, RBC CAPITAL MARKETS: Good evening. Thank you.

GRIFFETH: Let`s start with McDonald`s, the giant. Give me one strength and one weakness for them.

PALMER: The strength is that their brand has an incredible presence in the developed markets and that platform has held them in great stead over the years, adding sales layers and with those sales layers came very strong earnings per share in the past.

The weakness has been that it seems like the scrutiny of the millennial generation and the way that they reach the consumer, largely through TV, they have had to think about changing those ways perhaps changing the type of food and then in most importantly in something you can get excited about in the future, the use of digital and mobile payment, things of that nature might be a way for them to win in the future.

GHARIB: David, correct me if I`m wrong. But it just seems like the main battle between Yum and McDonald`s will be in China. And if that is the case, who`s got the winning strategy?

PALMER: Well, Yum has over 40 percent of its profit from China. It`s a company owned business for them. It`s huge.

For McDonald`s, it`s single digits, it`s 3 to 5 percent, something like that. It`s not a big part of the story. For McDonald`s, the big part of the story is Europe and the U.S.

Markets like Germany, U.S., Australia, they are weighing McDonald`s down. Those are big parts, those are the things that really matter for McDonald`s.

And for Yum, China is a recovery story this year and have emerging markets, too, where KFC is a power brand and in many ways, a KFC is the McDonald`s of the emerging markets, where they have Yum, has over 60 percent of the profit in emerging markets today.

GRIFFETH: We should say, you favor Yum over McDonald`s in this particular rivalry. Why?

PALMER: Right. Well, Yum is playing out this year and already the stock is doing a nice job of climbing up towards the price target. We can see an upside scenario over $100 for this in a year. The fact is that Yum had a rough year in `13 with China, most of the brand is KFC over there,
3/4 the China business is KFC and antibiotics with the chicken really caused them to collapse in profit, profit down 20 percent. It buried results last year.

They are recovering this year. And the fact is, they were left behind in what has been a wonderful restaurant rally. They are catching up to their peers and as they do so, as China heals, people will appreciate this for the mid-teens EPS grower that it is, give it something like a poor man`s Starbucks (NASDAQ:SBUX) multiple and the stock has significant upside if it gets something like that in valuation.

GHARIB: Talk to us a little bit about McDonald`s stock which has been flat to down since early spring. You know, why — and it has a big fat dividend, 3 percent. So what`s outlook and do you have a target price for McDonald`s?

PALMER: Yes, we`re right around the target price right now at $100 or
$101 for McDonald`s. The fact is, it has a wonderful reoccurring cash flow story to it and that aspect makes it very stable like.

They take great care of the brand. They just need to return back to growth. And on that front, they need to find ways to spark breakfast beverages, things that play to their scale advantages.

Right now, unfortunately, they have a lot on their plate. They have European slow down. They have certainly competition in Wendy`s, domestically. Dunkin and Starbucks (NASDAQ:SBUX) are winning at breakfast.

The bottom line is that McDonald`s needs to find a way to win.
Digital could be one of those ways, but that`s really a 2015 event. So, we`ll wait and see.

GRIFFETH: Right. David Palmer, thanks for joining us.

PALMER: Thank you.

GRIFFETH: David with RBC Capital Market.

So, you heard his choice, he likes Yum Brands (NYSE:YUM) over McDonald`s. We want to hear you thoughts on that. Who do you vote for?
Vote on our Web site at NBR.com.

GHARIB: And now for the results from last week`s global rival`s challenge where we asked you to choose between Oracle (NASDAQ:ORCL) and SAP. And the winner is Oracle (NASDAQ:ORCL). But it was a close call, 51 percent of you voted for Oracle (NASDAQ:ORCL), 49 percent for SAP. And to some extent, you know, the stock since we did that report, has been steadily going down on those disappointing earnings.

And our guests like Oracle (NASDAQ:ORCL), too.

GRIFFETH: Exactly. That`s how the rivalry has gone.

GHARIB: That`s it for us. 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.

This entry was posted in Transcripts. Bookmark the permalink.

Leave a Reply