Transcript: Thursday, July 17, 2014

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

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Stocks jolted. Blue chips have their worst day in three months as the Malaysia Airliner with
295 people on board crashes in conflict-ridden Eastern Ukraine. Was it brought down? If so, by whom? And what might the deadly incident mean for the investing climate worldwide?

Israel moves in to Gaza, adding to the tensions that roiled stocks and drove money into bonds. What you need to know about rising risks and how it could affect the market.

GHARIB: And deep job cuts. Microsoft (NASDAQ:MSFT) will lay off up to 18,000 workers, the largest number in its history, as the new CEO tries to reshape the company.

We have all that and more tonight on NIGHTLY BUSINESS REPORT for this Thursday, July 17th.

MATHISEN: Good evening, everyone, and welcome.

Geopolitical risks hammered stocks today, leading to a triple digit loss on the Dow Jones Industrial Average and S&P 500`s worst decline since April. The market rattling events began late morning with news a Malaysian jet en route from Amsterdam to Kuala Lumpur crashed over Eastern Ukraine.
All 295 on board were killed.

Immediately, speculation arose that the plane flying close to the Russian border in an area largely controlled by pro-Russian separatists have been brought down by a missile.

The stock selloff picked up steam late this afternoon when the Israeli prime minister instructed his military to begin a ground offensive in Gaza.
Thursday night, troops were already moving in, supported by tanks, artillery and naval gun boats.

The blue chip Dow finished at its lows of the day, falling 161 points, dropping below 17,000. NASDAQ off 62 to 4,363, a nearly 1 1/2 percent slide. The S&P 500 down 23, off 1.2 percent.

Safety seekers poured into treasuries sending prices higher and yields lower. Gold gained more than 1 percent, even the price of wheat rose because Ukraine and Russia are both big producers of that commodity.

Unanswered questions abound what happened to that Boeing (NYSE:BA) 777, what brought it out of the sky as it cruised above eastern Ukraine at
33,000 feet.

Phil LeBeau has been following the story all day and joins us with the very latest developments and what we know now — Phil.

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: And, Tyler, what we know is the U.S. has said that it was a surface-to-air missile that brought down MH17 earlier today while it was flying over Eastern Ukraine.

Here is what was involved in this entire incident when you look at today, the number of passengers on board, 295 — 280, I should say, and a crew of 15. It lost contact. The plane lost contact at 33,000 feet.
There was no distress signals.

So, it was very clear whatever happened was catastrophic at 33,000 feet and again, the surface-to-air missile, that`s no longer a question.
The U.S. government says intelligence confirms for them that this was, in fact, a case of the plane being shot down out of the sky, that`s according to Vice President Joe Biden. Those were his words, shot down out of the sky.

If you look at maps of the incident, it`s very clear that the plane as it was going from Amsterdam, over to Kuala Lumpur, was almost through Ukrainian airspace when it was hit by that missile, we went back and we looked at the same maps from Flight Radar 24, an hour or two later, all airlines flying around the air space of Ukraine, not surprising given the fact shortly after this happens, Tyler, almost every major airline that flies anywhere near Ukraine, all came out and said we`re telling our pilots to steer clear. All flight paths will go around there, and, in fact, some airlines have suspended flights into Kiev.

So, this is a place where they are still investigating exactly what happened in those final moments, but it is according to the U.S. government
a case of the plane being shot down.

MATHISEN: What do we know, Phil, about who is investigating the crash site on the ground and whether the black boxes have been discovered? Who is in control there?

LEBEAU: Well, the black boxes have been discovered. Whether or not they are being held by Ukrainian insurgent or the Russian government, that`s a big question at this point and who will take control of this
debris field that stretches over 10 miles, that remains to be seen.

MATHISEN: Phil LeBeau, thank you very much.

GHARIB: Joining us now, Larry McDonald. He`s senior director at NewEdge, where he deals with macro policy issues.

Larry, as you heard from Phil`s report, this is no longer an accident, it was an intentional act. How does this new information impact the investing climate, the business climate? How significant is all of this?

LARRY MCDONALD, NEWEDGE SENIOR DIRECTOR: Well, Susie, as we came into the summer, brokers, financial advisors, Wall Street has been telling viewers watching us now this will be the summer of low volatility. Stay away from bonds and stay away from gold.

And if you look at today, that`s been turned upside down. Bonds, the 35-year hit the lowest yield in almost a 24 — over 24 months and then if you look at volatility, we had one of the largest surges in many, many months, and there is just a whole different upside down world relative to
what Wall Street has been telling our viewers.

MATHISEN: So what is your advice to people who are wondering what I should do with respect to this? Is this a time to basically stay still and let things develop or is it the time for moves?

MCDONALD: Well, you want to consider, Tyler, air travel. You want to watch carefully because if this affects air travel, that affects consumption. Global GDP estimates going into the year were above 5 percent. Now, they are down to 3.75 percent. The U.S. GDP goings of the year in terms of economic activity were a lot higher, the expectations.

So, if we have less air travel, people staying at home it hurts consumption. So, I think you want to look very carefully at the trends over the next five days to figure if this really is a terrorist attack and
what are the next stems.

GHARIB: Yes, and what are sort of the next steps to expect here?
Because this is coming a day after sanctions were declared against Russia.
And now, we`ve got this incident and we don`t know all the connections here.

But if this turns out to be a prolonged superpower conflict, what does all that mean for us? You said the world has been turned upside down.
What does that exactly mean?

MCDONALD: Well, it means opportunities. If you look at Russian equities, I was on CNBC in March and we recommend getting long Russian equities. You could see tremendous buying opportunity there because those stocks are going to get absolutely destroyed.

So, emerging markets, foreign stocks, Russian equities. Everybody is terrified of them.

So, investors want to buy things that really are the greatest moment of fear and best buying opportunities. And I think this will play out over
the next month.

MATHISEN: Money moved into bonds and gold today. Is that an enduring trend?

MCDONALD: I think so. Tyler, there are so many things with both bonds and gold. The bond market has tried to sell off three or four times and each time we had vicious rallies. There is just a tremendous amount of
— there is a lack of supply really because the Feds have done a lot of Q.E., even though Q.E. is coming off, there is issues behind the scenes.
Gold — and Wall Street hates gold. While every firm on the street had a target below $1,300 on gold going into the year and now gold is going up.

So, I think you do the opposite of what the crowd is doing and I think
gold and bonds over the next couple months will be a nice place to be.

GHARIB: What if we get a lot more information over the next 24 hours?
Could everything just turn the other way around and go back to, quote, “normal”?

MCDONALD: Well, you still have uncertainty in the region. You got Mr. Putin and you have the midterm elections. So remember, Republicans, you`ve seen, watched the wires, Mr. McCain on Twitter has been going after the president a little bit. The midterm elections, we did a study over the last 60 years, volatility around the midterm elections is twice the normal, the rate of off years.

This is a midterm election year and you`ll see both the White House and the Congress throw barbs at each other that creates volatility and I think that`s what you`ll see going forward. Republicans only need to pick up six seats — six seats — in the Senate. The Republicans take the
Senate, it changes a whole bunch of dynamics for the economy.

GHARIB: All right. Larry, thank you so much for coming on the
program. Larry McDonald from NewEdge.

MCDONALD: Thank you.

MATHISEN: Well, there was other market-moving news today and Microsoft (NASDAQ:MSFT) led the way. We told you earlier this week that job cuts were coming at the company and today, we found out how deep those cuts would be and they are deep. Microsoft (NASDAQ:MSFT) will lay off
18,000 workers over the next year. It`s part of the company`s plan to stream line its operations and become the dominant player in the Cloud.
Shares up 1 percent on this down day.

Josh Lipton has more on Microsoft`s move.


Investors knew job cuts were coming at Microsoft (NASDAQ:MSFT) but the big surprise is how many employees the software giant is really letting go.

Microsoft (NASDAQ:MSFT) is cutting up to 18,000 jobs. That`s 14 percent of its workforce and about double what Wall Street expected. Most of the cuts are coming in the Nokia (NYSE:NOK) division. Microsoft
(NASDAQ:MSFT) bought Nokia`s phone business for $7 billion nearly a year
ago, and it`s now cutting about half of its employees.

RICK SHERLUND, NOMURA SECURITIES MANAGING DIRECTOR: It`s a pretty bold move, and I think what it does is it signals that Microsoft
(NASDAQ:MSFT) is not going to get on the slippery slope with Nokia (NYSE:NOK). They are actually going to trim the Nokia (NYSE:NOK) cost structure substantially and that was something worrying investors that this acquisition could really dilute earnings going forward. It will still have
an impact but this will help mitigate that, I think.

LIPTON: In a memo to employees, CEO Satya Nadella wrote, “The first step to building the right organization for our ambitions is to realign our workforce.”

The company will start with 13,000 cuts right away. The cuts are expected to be completed by next June. Microsoft (NASDAQ:MSFT) says the restructuring will result in a pretax charge of up to $1.6 billion.
Microsoft (NASDAQ:MSFT) stock moved higher on the news, hitting a 14-year high this morning. The stock is now up nearly 20 percent this year.

Since taking the helm from Steve Ballmer in February, Nadella has steered the company away from its PC-centric focus and instead emphasized mobile technology and the Cloud, where web-based software sold as
subscriptions rather than licenses.

DANIEL IVES, FBR CAPITAL: Yes, in terms of the cost savings, he really needs to put a lot of strategic endeavors on mobile and cloud. I can see more M&As specifically in those areas, as well as big data. And at this point, Nadella`s really the general, taking the troops to where they need to go, and making sure Microsoft (NASDAQ:MSFT) competes with the Apples, the Amazons, Goggles on the horizon. This puts them in a much
better position to do that over the coming years.

LIPTON: Today`s job cuts are the latest example of Nadella`s bold moves to make Microsoft (NASDAQ:MSFT) his own.

(on camera): So far, investors and analysts have cheered his decisions. We`ll get a lot more information about how Microsoft
(NASDAQ:MSFT) is performing in more details from Nadella about these job cuts, when the company reports earnings next Tuesday.

Josh Lipton, NIGHTLY BUSINESS REPORT, Silicon Valley.


MATHISEN: More now on whether the massive layoffs will help reshape the future of Microsoft (NASDAQ:MSFT), we`re joined by David Garrity of GVA Research.

David, welcome back. Good to have you with us.


MATHISEN: Is Satya Nadella on the right track?

GARRITY: I think Satya`s got the proper focus here in terms of the company. Bear in mind that Nadella came to the CEO role after having basically gotten Microsoft`s Cloud operations up and running, and to the extent that he had the great success there, it certainly positions him well from a vision standpoint to lead the company going forward.

Taking these costs out and investing in areas of higher growth certainly should get the company up to where earnings right now are going to be down 10 percent year over year, but revenue is growing 16 percent.
If we can get the earnings growth inline with the revenue growth, the stock
probably moves higher from where it is now.

GHARIB: So, talk to us a little bit about what is Microsoft
(NASDAQ:MSFT) going to look like, let`s say, five years from now. A lot of talk about mobile, about the Cloud, about restructuring, what`s Microsoft
(NASDAQ:MSFT) going to be? What are we going to say about it?

GARRITY: I think, you know, the Cloud operation will prep sent 1/3 to
50 percent of the company`s revenues in terms of the type of services that they offer. With respect to the kind of the core products we know Microsoft (NASDAQ:MSFT) for now, the Office productivity suite and Windows operating system, they face major competitions for the likes of Google
(NASDAQ:GOOG) with Android and also from Apple (NASDAQ:AAPL) with the iOS operating system there.

So, that`s going to be a far more competitive business. One question is, is that the Xbox where the company certainly has been moving into our living room, does that get spun off to shareholders? Possibility.

I think Microsoft (NASDAQ:MSFT) is going to have to stay with their search advertising business which they might actually take over entirely from Yahoo (NASDAQ:YHOO), who seems to be fumbling. So, I think from that standpoint, the major pieces you`re going to see obviously rise in terms of Cloud, certainly mobile services offerings, and delivery by the Internet over mobile devices.

MATHISEN: What would you like to see them do with respect to the Xbox? You anticipated my question. And second, the stock is already up 20 percent this year, you say it can go higher, how much?

GARRITY: Well, we`re going to have to see, clearly, how well the execution goes in the second half of the year but I would say it`s probably not out of the question, that if we have a positive market environment overall, without today`s volatility, you might see a $50 share price
between now and the end of the year.

MATHISEN: David, thank you very much. Appreciate you being with us.

GARRITY: Thank you.

MATHISEN: David Garrity of GVA Research covering Microsoft
(NASDAQ:MSFT) for us.

GHARIB: And staying in the tech arena, Google (NASDAQ:GOOG) posting a big jump in second quarter revenue and that`s thanks to strong demand for advertising. Google (NASDAQ:GOOG) revenue surged 22 percent to $16 billion. That topped Wall Street targets but earnings came in below.
Google (NASDAQ:GOOG) earned $6.08 a share. That`s a 16 cent missed. But shares still climbed after hours following the report.

Let`s bring in Morgan Brennan to talk more about Google (NASDAQ:GOOG).

So, Morgan, you`ve run through the numbers. What`s the key takeaway?

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, I think the key takeaway here — with Google (NASDAQ:GOOG), we can talk about Google (NASDAQ:GOOG) Glass. We can talk about driverless cars. But at the end of the day, Google`s biggest business is still online advertising and that`s why we saw those revenues jump 22 percent. That was because of strong ad demand and the biggest, most interesting thing about this report, this is the first time Google (NASDAQ:GOOG) has actually broken down it`s ad data to differentiate between its own sites like YouTube and Google (NASDAQ:GOOG).com, versus its network partners like AOL (NYSE:AOL).

And what this report shows is that Google`s sites have been performing relatively better with advertisers versus those networks. So, the key takeaway here, Google`s advertising platform has been doing better than perhaps earlier reports had suggested.

MATHISEN: All right. Morgan, stay right there.

We`re going to move on now to IBM, which, now, stay with me, it reported higher than expected quarterly revenue as it continues to shift to higher end of businesses such as big data and Cloud computing. But total revenue actually fell 2 percent to $24.04 billion in the second quarter.
It`s a long streak of declining revenue. Nevertheless, it was above the analyst average estimate of $24.1 billion, the world`s largest tech service company. The earnings there, up to $4.32 a share. That was 3 cents above estimates. Shares of IBM initially rose on the news and then fell back, as we see, in that graphic.

It`s an interesting story here, Morgan. What`s the takeaway?

BRENNAN: It certainly is. I think you hit the nail on the head when you said revenue. That`s the story with IBM because even though it did post better than expected results. We did see shares fall in afterhours after the reporting, it all did come down to that revenue number. It`s down 2 percent versus last year and this is the ninth consecutive quarter that we`ve seen revenue decline year over year for the company.

So, growth has been slowing there. It`s been falling there, and the real culprit here once again, it`s the hardware division. That has been falling, everyone — all but one of the past eight quarters, we have seen hardware sales fall by double digits percentages. This quarter was no

GHARIB: They have their work cut out for them.

Morgan, thank you so much. Morgan Brennan reporting from the NASDAQ.

Well, a big management change over at Hewlett-Packard (NYSE:HPQ). Meg Whitman, who is president and CEO, has taken on a new title of chairman of the board of directors. She replaces Ralph Whitworth who stepped down earlier this week for health reasons. Whitman has led the world`s largest computer maker since 2011.

MATHISEN: Still ahead, why senators are demanding the chief executive of General Motors (NYSE:GM) fire one of the company`s top execs.


GHARIB: On Capitol Hill today, General Motors (NYSE:GM) top lawyer came under attack. Senator Claire McCaskill senator demanded that the automaker fire its chief attorney after an investigation found the legal staff acted too slowly and didn`t alert engineers or top executives to a potential safety issue in some of its vehicles.

But CEO Mary Barra came to his defense.


SEN. CLAIRE MCCASKILL (D), MISSOURI: How do you have a system in place that doesn`t account for that?

MARY BARRA, GENERAL MOTORS CEO: We had senior lawyers who had this information and didn`t bring it forward who are in longer with this

MCCASKILL: Well, Debra Noak Vanderhoff (ph) is still with the company
and she had the knowledge.

BARRA: The — as we went through the details of the Valukas report very carefully and I would say when in doubt, we reached further to take
action, there are many lawyers that are no longer with the company.

MCCASKILL: I think — I think there is a blind spot here, I really do. My time is up. I think the failure of this legal department is stunning. And the notion — I mean, you look around government, when something like this happens, you know what? Secretary Shinseki didn`t know
about those problems with scheduling. Nobody told him. He`s gone.


GHARIB: Senator Richard Blumenthal also called for the firing of G.M.`s top lawyer, saying that the ongoing Justice Department investigation will likely find evidence, these are his words, cover up, concealment,
deceit and even fraud.

GHARIB: Morgan Stanley`s quarterly earnings more than doubled, beating estimates and that is where we begin tonight`s “Market Focus”.

Strong results from its wealth management and investment banking business help offset a decline in trading revenue. That revenue from trading stocks and bonds and commodities down 13 percent in the quarter.
Shares were down a fraction today to $32.30.

UnitedHealth Group (NYSE:UNH) also reported strong second quarter results, sending shares higher. The health insurer saw its revenue increase helped by growth in the public and senior markets, also cited the Affordable Care Act for its strong enrollment. On those results, the company hiked its full year revenue forecast and that helped send the stock
up more than 1 1/2 percent to $85.11.

Shares of Auto Nation moving the other way, dropping after the auto dealer posted earnings and revenue that missed estimates. The company CEO did note that it was the 15th consecutive quarter of double digit earnings growth, but investors still weren`t impressed. Shares were more than 8 percent lower at $55.82.

GHARIB: Disappointing news at Mattel (NASDAQ:MAT) as well. It posted
earnings that came in way below estimates and revenue that missed too.
Second quarter profits plunged more than 60 percent, way down by costs tied to its acquisition of mega brands. Sales of its iconic Barbie Doll also declined. The biggest drop since 2009. The stock was off 6.5 percent to

Regional lender Fifth Third Bank Corp reported a drop in profits, as its mortgage banking revenue declined and it took litigation related charges. It also lowered its full year guidance because of continued pressure on its mortgage business. Shares fell almost 6 percent to $20.28.

And then there`s Key Corp, another regional bank. It posted solid second quarter profits and revenue, thanks to loan growth. The company announced it reached a deal to buy Pacific Crest Securities. It`s a technology-focused investment bank and capital markets firm. Shares were down, though, 4 percent to $13.62.

MATHISEN: Shares of some of those regional banks have been on quite a run this year, but after some questionable earnings today, what is the state of the sector?

Dominic Chu takes a look.


Banks come in all shapes and sizes. You`ve got the Wall Street investment banks like Goldman Sachs (NYSE:GS) or Morgan Stanley (NASDAQ:NBXH) (NYSE:MS).

Then, you`ve got the big money center banks that have all kinds of operations, from investment banking to traditional lending. And then, there is the regional banks, smaller firms that tend to lend mostly to small and medium size businesses as well as homebuyers. Those more optimistic about economic growth and a stronger consumer often invest in
these types of banks.

MICHAEL CUGGINO, PERMANENT PORTFOLIO FUNDS: The right approach, I think, would maybe be for diversified investor to have exposure to each.
And that way, they are covered on the micro level, as well as the macro

CHU: Larger regional bank players like Pittsburgh-based PNC Financial and Atlanta-based Sun Trust Banks have both posted gains better than the overall sector. At the same time, Cincinnati-based Fifth Third Bank and Salt Lake City-based Zions Bank have lagged.

One of the reasons for the gap is the uneven nature of the economic recovery. That`s why many advocate taking a more diversified approach and investing across the entire spectrum of financials, because overall, the sector could be of good value for investors.

CUGGINO: We think the health of the financial services sector is going to be an integral part of a continued rally in the stock market. You know, financial firms provide the liquidity and grease and oil of keeping the economy going and growing. And so, financials under performed the broader market. They improved a little bit this year, but that means they are a little more of a better value proposition for investors going

CHU (on camera): Financial stocks have lagged the overall market since the depths of the financial crisis, but if the economy does manage to get better, these types of stocks may be the ones that benefit more than other stocks in the market.



GHARIB: Coming up on NIGHTLY BUSINESS REPORT: Phoenix real estate rose from the ashes after the downturn. But now, it might be stumbling again. That`s next.


MATHISEN: Almost as soon as housing was firmly declared to be in recovery, it seemed to have a relapse. The latest reading on new
construction: a dismal disappointment. Housing starts down 9 percent in June from just the month before, and building permits. The future indicator down 4 percent.

Now, nowhere has the road to recovery been more ridden with potholes than in Phoenix, where our real estate reporter Diana Olick takes a deeper


Julia and Mike Lersch put their North Phoenix home on the market last March
listing it at $300,000.

JULIA LERSCH, HOMEOWNER: My real estate agent says it`s like fishing.
You know, you throw your reel in and it`s just, how deep do you need to get
to hit some fish?

OLICK: After 107 days and several price drops, they still had no
bites so pulled it off the market.

JULIA LERSCH: We thought, well, I don`t want to sell it for a song.

OLICK: Phoenix overbuilt and over bought by flippers during the housing boom, it crashed hard. Home prices fell 56 percent from the peak in 2006, bottoming out in 2011.

Foreclosures were rampant. Then, fuelled by hungry investors, prices rose fast, now up 45 percent from the bottom, but investors priced themselves out of the market and left it to regular buyers, buyers who
can`t afford the higher prices.

MIKE LERSCH, HOMEOWNER: They are looking at it from the distressed property mindset a little bit that they should be getting this great deal, whereas a lot of the folks like us who have been maintaining properties well, we`re not just willing to give them away for a song. So, buyers are
very picky.

OLICK: Phoenix home sales are now falling again and prices are flat.

MIKE ORR, W.P. CAREY SCHOOL OF BUSINESS: Right now, demand is very weak for a number of reasons, and that`s kind of masking the fact that
supply is also weak.

OLICK (on camera): The reasons, like the rest of the nation, that some people are still repairing their credit, others don`t have enough equity in their homes to sell and move up. Demand is also weak because
prices are high, credit is tight, and younger Americans aren`t buying.

ORR: I`m starting to think if demand gets back to normal, then the
supply is not going to be able to get back to normal as quickly.

OLICK (voice-over): Builders are slowly coming back to Phoenix, but
they have had to drop prices dramatically this year.

JULIA LERSCH: I feel like it`s Groundhog`s Day where we`re over-
building. I feel like they are over-expanding for what there is out there.

OLICK: And perhaps, building on a foundation of recovery that still has too many cracks.

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


GHARIB: And before we leave you, we want to recap tonight`s top story. Stocks are selling off today on geopolitical concerns. At midday, a Malaysian airliner from Amsterdam to Kuala Lumpur went down over eastern Ukraine. Senior U.S. officials have since confirmed to NBC News the plane was shot down.

Then, late in the day, Israel`s prime minister gave the go ahead for a ground offensive in Gaza and the Dow dropped 160 points.

MATHISEN: That was a very busy day.

You`re going to be away for a couple weeks. We can`t wait for you to get back early —

GHARIB: I got a little surgery to take care of, but I`ll keep you posted, on what`s going on.

MATHISEN: We wish you — we want selfies now.

GHARIB: You can count on that.

That`s NIGHTLY BUSINESS REPORT for tonight. I`m Susie Gharib. Thanks for watching. I`ll be back in a few weeks.

MATHISEN: I`m Tyler Mathisen.

Good luck, Susie.

And have a great evening, everybody. We`ll see you back here tomorrow night.


Nightly Business Report transcripts and video are available on-line post broadcast at 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