Transcript: Wednesday, July 30, 2014

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

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Firing on all cylinders. The economy bounced back last quarter, growing at a 4 percent annual rate. But how long will the good times last?

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Rates debate. It’s heating up. But did the Federal Reserve offer any hint as to when and by how much it may start hiking?

MATHISEN: And, super-sized decision. A legal finding at the National Labor Relations Board triggers a fire storm between big business and big labor. And at the center of it all: McDonald’s (NYSE:MCD).

All that and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, July 30th.

And, good evening, everyone. Welcome. I’m Tyler Mathisen.

HERERA: And I’m Sue Herrera, filling in tonight for Susie Gharib.

Well, the day started out with a pretty pleasant surprise. The economy grew at a 4 percent annual rate last quarter, bouncing back nicely from the sharp winter contraction. But the fast expansion put some market watchers on edge. Could a strengthening economy force the Federal Reserve to act sooner rather than later?

The prospect of higher interest rates sent stocks lower and at the conclusion of the Central Bank’s meeting today, few direct hints were given. Fed’s fatigue set in and that sent traders to the sidelines. By the close, the Dow Industrial Average fell 32 points to 16,880, the NASDAQ helped by those strong Twitter results, rose 20 points to 4,462, and S&P 500 had just a fractional gain.

Steve Liesman has more on today’s Fed meeting and what may come next.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Federal Reserve tapered by the expected $10 billion and brought bond down to $25 billion. It had been as $80 billion back in December. And there was maybe a slightly hawkish tilt to the Fed’s statements certainly brought about by some better economic numbers we’ve got. Philadelphia Fed President Charles Plosser dissented, saying that he thought the current statement did not reflect the improvement in the economic numbers.

The Fed also said the likelihood of below 2 percent inflation had, quote, “diminished somewhat”, a sign that the Fed was less concerned about deflation. The Fed upgraded the characterization of the labor market, saying it improved.

The one dovish thing was the inclusion of this notion that there remains significant labor slack in the economy.

DAVID KELLY, JPMORGAN ASSET MANAGEMENT: There is attention in here. I think the real question is, is this real slack? Are these workers going to easily (ph) bring into the labor market or bring in to employment without raising wages? Time will tell. And ultimately, I think that the story is running against Janet Yellen in this for a long time. The economy is doing better but that labor market is tightening faster than she told it would.

LIESMAN: Second quarter GDP coming in at 4 percent, when 3 percent was expected, the first quarter revised upward to minus 2.1 from a 2.9 percent.

And ADP, the payroll company that predicts the jobs report on Friday, came in at 218,000, a tad below consensus but still strong — the fourth month above 200,000. That estimate for Friday remains 230,000.

PAUL RICHARDS, UBS MANAGING DIRECTOR: I think what we’re seeing is five years of hard work finally playing out. It’s more than headwinds here. This is genuine growth. Plus, we’re seeing an element of fiscal discipline coming into the U.S., which I like this. But still, there’s still more work to be done, I think patience is just so key here.

LIESMAN: The jobs report and third quarter data are now very significant. A repeat of a strong quarter like we had in the second could prompt the Fed to speed up its pace of tightening, either when it begins or how far and fast it goes when it starts. Otherwise, look for the Fed to not raise rates until mid-2015 if we stay on the current course.

For NIGHTLY BUSINESS REPORT, I’m Steve Liesman.

(END VIDEOTAPE)

MATHISEN: Here with perspective on what the Fed said today, and what it may do and when is Alan Blinder. He’s a university professor of economics and public affairs at Princeton and a former vice chair of the Federal Reserve.

Professor, welcome. Good to have you with us.

Before we get to the Fed, I would like to get your reaction to the GDP report this morning — a 4 percent growth rate in the second quarter. Do you think that is sustainable, one, and was it, two, really boosted by a sort of snap back factor from the very weak first quarter?

ALAN BLINDER, PRINCETON UNIVERSITY: I don’t think it is sustainable. I don’t want to sound like a naysayer because it was a good report and I was happy to see it. But I don’t think it’s sustainable, one, for the reason that you just mentioned, Tyler. In addition, if you get — look into the details, you’ll see that a sizable portion of the 4 percent accounting for most of the forecasters errors, by the way, was inventory accumulation and firms don’t just keep on piling in and piling in inventories.

HERERA: So what type of growth are you looking for in the near term, Professor? I mean, if the 4 percent is not sustainable, what would be sustainable and what would indicate to you that the economy is on a steady growth rate?

BLINDER: I think the two answers are the same in this case, at least for awhile, which is the rest of the year sort of looks three to three and a half, that kind of a number. That is sustainable for awhile, assuming as Steve mentioned in the setup piece that we have slack in the economy and I think we do.

It’s not sustainable, of course, in the long run. There is a lot of controversy right now about the long-run rate of growth of the U.S. economy, but nobody thinks it’s 3.25.

MATHISEN: Let’s talk a little bit about the Fed. You heard Steve Liesman say that the going consensus is that interest rates won’t rise until mid 2015. Do you share that view?

And in what would you say to the descending voice on the Fed today, Mr. Plosser of Philadelphia who seems to want rates to move a little quicker?

BLINDER: So, I think that Steve’s estimate is a little bit long, but not very much. I’m thinking that the likelihood if plays thing out as we expect them is in the second quarter of next year. That’s not very different, but just a little different.

Now, if Charlie Plosser was here, I would say, look, if the inflation rate keeps on going up and crosses 2 percent, and if the economy keeps on growing at 4 percent per annum, and I don’t think either of those is going to happen, but if they do, I’ll switch to your side and think the Fed should be moving faster.

HERERA: Professor, it’s widely expected that the Fed will announce the end of its taper at the October meeting, two questions for you — one, do you agree with that? Is that part of your consensus?

BLINDER: Oh, sure.

HERERA: And, two, how much of that is factored into the market, if any, at all?

BLINDER: I think it’s 100 percent factored into the market and I’ll be shocked if it doesn’t happen. Something really unusual, the Fed has gone as close as it can to promising that it ends in October. It doesn’t quite promise, but it would feel it was reneging on a near promise if it didn’t end it in October. So, I’m pretty confident it will end in October. That is the announcement that the end will come at the October meeting, and I think that’s completely factored into the markets.

MATHISEN: Two quick questions for you. Are you worried about inflation? Number one. Number two, we’ve been debating this week whether the Feds exit from the stimulus policies can or necessarily will end badly, or will it end well? What do you think?

BLINDER: I think it will end well, but there is no total guarantee on that. It is true, as critics say, that the Fed is about to enter uncharted — well, you can say it’s in uncharted waters now, but it’s really going to enter uncharted waters.

It has a sensible plan for exit. It has the ability to execute that plan. I personally don’t think the job is all that tough, although, a lot of people think it’s tougher than I do. So, I expect it to be largely successful. Now, that doesn’t mean perfection will be achieved.

(CROSSTALK)

MATHISEN: If inflation —

BLINDER: So, I was going to say, yes, if you look at the Fed’s target, they want 2 percent inflation and they want 5.6 or so percent unemployment. Will they hit those exact numbers? I doubt it.

MATHISEN: Right.

BLINDER: That’s just asking for too much.

Inflation could come out a little higher in the end, it could come out lower, also. But there is a possibility inflation comes out a bit higher at the end.

MATHISEN: Professor, thank you, as always for being with us. Alan Blinder of Princeton.

BLINDER: You’re welcome.

HERERA: The National Labor Relations Board had served up a victory for fast food workers fighting for better working conditions at McDonald’s (NYSE:MCD), but the world’s largest restaurant chain says it’s fighting back. Both sides agree if the finding stands, it could change the balance of power in an industry that employs one in every 10 American workers.

Scott Cohn has the story.

(BEGIN VIDEOTAPE)

SCOTT COHN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): The fast food workers say they are over worked and under paid and they have been protesting.

McDonald’s (NYSE:MCD) says it doesn’t set wages and hours, it’s franchises do, and the are independent. But the National Labor Relations Board says that’s not exactly the case. In a two-paragraph statement, the NLRB’s general counsel office says McDonald’s (NYSE:MCD) corporate is a joint employer, potentially liable in dozens of allegations of unfair labor practices.

Labor advocates say it’s a step toward a much bigger goal.

KENDALL FELLS, FAST FOOD FORWARD: The ultimate goal is for fast food workers in the U.S. to get $15 an hour, and to have the right to form a union without retaliation from their employer.

COHN (on camera): But who is their employer? For decades, the industry is operated on the idea that it’s the franchisee and McDonald’s (NYSE:MCD) has more than 3,000 of them. But the workers argue that corporate headquarters controls virtually every aspect of a franchisee’s business, including their profit margins and, by extension, the wages they pay.

(voice-over): McDonald’s (NYSE:MCD) says it will fight, says the decision changes the rules for thousands of small businesses. The National Restaurant Association agrees and says the ruling will give franchisees even less control than they have now, will cost jobs, not just in the restaurant business.

ANGELO AMADOR, NATIONAL RESTAURANT ASSOCIATION: We’re talking hotels. We’re talking health care. We’re talking a number of other industries, as well.

COHN: Any business that uses the decades old franchise model, one reason this decision could ultimately wind up in court.

Scott Cohn, NIGHTLY BUSINESS REPORT, Englewood, New Jersey.

(END VIDEOTAPE)

HERERA: We have two different points of views on this subject tonight.

Steven Caldeira is the president and CEO of the International Franchise Association. And Michael Rubin is an attorney at Altshuler Berzon, who is also a lawyer for the McDonald’s (NYSE:MCD) class action plaintiffs in California.

Mr. Rubin, I’m going to start with you. This is a big win for your side, is it not?

MICHAEL RUBIN, ALTSHULER BERZON ATTORNEY: This is a huge win. It’s important not only for the workers involved in these NLRB cases, but will impact McDonald’s (NYSE:MCD) workers and fast food workers throughout the country.

MATHISEN: Mr. Caldera, I don’t think I’m going to have to strike the match more than once here. I think you disagree with Mr. Rubin.

My question for you, though, is why wouldn’t franchises want to share some of the liability with their potentially more financially strong and well-lawyered parent companies?

STEVEN CALDEIRA, INTERNATIONAL FRANCHISE ASSOCIATION: Well, Tyler, there is a reason the franchise industry is out pacing the growth through the U.S. economy because there is a proven, time-tested model. It’s a way for inspiring entrepreneurs and existing franchisees to be in business for themself but not by themself, because they get certain support from the franchisor, which they pay initial franchise fees and ongoing royalty fees.

And so given the fact that we create jobs and business, small business ownership opportunities for all folks, you know, diverse folks, whether veterans, minorities, all Americans is a great story. We represent 3.5 percent of GDP, and that’s pretty significant.

And to hold McDonald’s (NYSE:MCD) accountable for the alleged labor violations of their franchises, we believe is, you know, ill-advised and just isn’t true.

HERERA: What about that, Mr. Rubin? I mean, there are those out there who say that this will hurt franchisees, not just McDonald’s (NYSE:MCD), if this case is applied to other franchise entities, that it could really basically thwart competition and make it prohibitively expensive for people to buy franchises?

RUBIN: No, the problem here isn’t the use of the franchise model. It’s the abuse of the franchise model. McDonald’s (NYSE:MCD) exercises an extraordinarily detailed degree control over every aspect of its franchises and their crew members. It has on going real-time computer monitoring that lets it know at every moment how many workers are working, what they are being paid, whether they are entitled to over time and instructs franchises if the labor costs exceed a certain fixed ratio to the income that franchise is receiving, then the labor costs have to be cut.

McDonald’s (NYSE:MCD) is not a typical franchise in that respect. It has people going into each restaurant, interviewing workers, telling them what to do. It’s employing those workers. Workers know that McDonald’s (NYSE:MCD) is doing that.

HERERA: If I’m a shareholder of McDonald’s (NYSE:MCD), I might look at the practices and say you know what? That’s good corporate governance. You keep an eye on the cost, you know what your franchises are doing, you have quality control over the product, et cetera. What’s your response to those criticisms?

RUBIN: When a company is in the degree of control and micro management that McDonald’s (NYSE:MCD) exercises in the work place it is an employer. It’s an employer under the National Labor Relations Act. It’s an employer under state law. It’s an employer under federal wage law.

These are not new principles of the board general counsel is pursuing in the complaints that were announced yesterday. These are well-stated, well-established standards that fully apply to McDonald’s (NYSE:MCD) based on a voluminous factual record that the general counsel is carefully examined.

MATHISEN: Address that, Mr. Caldeira. Mr. Rubin is saying, in fact, in practice, McDonald’s (NYSE:MCD) in this case is in every material way an employer just in the same way as the franchise because McDonald’s (NYSE:MCD) is controlling the labor practice. What do you say to that?

CALDEIRA: Well, I would argue the fact the franchisor’s responsibility is to ensure brand standards are met, to protect good operators, to ensure consistent quality of the products and services that they provide, and I think it’s important to state that these franchisees, again, out growing and out pacing the growth of the U.S. economy the last five years, are independent operators.

They put up their own savings. They take out loans. In some cases, they do both. They have the ability to hire, fire, set wages. They process their own payroll. They are given an employer identification number by the Internal Revenue Service.

And to hold them accountable would push back decades long precedent that defines them as independent operators and all we have to do is look at the Small Business Administration, how they define franchises, the Federal Trade Commission, the Internal Revenue Service, as I just mentioned, federal and state courts and the NLRB for that matter.

What this is in my respectful opinion is a way to put more money in the union. It’s easier to organize when all the franchises are lumped together as opposed to one mom and pop shop. I really think that’s what this is all about.

HERERA: All right. Gentlemen, we’ll be following this very closely. Thank you both for joining us.

RUBIN: Thank you.

CALDEIRA: Thank you.

HERERA: Thank you very much.

Ty?

MATHISEN: Still ahead, could auto sales up big this year be nearing the peak?

(MUSIC)

HERERA: Argentina’s credit rating was cut by S&P as debt talks continue past the country’s grace period. The country failed to meet a technical payment demand on bonds due on 2023. The Argentine economic minister is in New York trying to solve the dispute between Argentina and the hedge funds, which are owed that money.

MATHISEN: Bank of America (NYSE:BAC) has been ordered to pay $1.3 billion in damages after a federal jury in New York found it liable for fraud over defective mortgages sold by its Countrywide unit. The jury found Bank of America (NYSE:BAC) liable for defrauding the government-controlled mortgage companies Fannie Mae and Freddie Mac, through the sale of loans that emphasized quantity over quality in 2007 and ’08. B of A says it is reviewing the ruling and considering an appeal.

HERERA: Shares of Humana (NYSE:HUM) drop as investors worry about higher cost and that’s where we begin tonight’s “Market Focus”.

The insurer’s profit matched estimates and revenue came in above expected ranges, that as the company saw strong membership growth in part because of the public health exchanges. But second quarter profit was down from a year ago because of higher costs, which the insurer attributed to medical spending from those new enrollees on the public exchanges. The stock fell 5.5 percent to $120.34.

Those worries also weighed on WellPoint, even though the company posted earnings that trumped estimates and better than expected revenue. Profit fell in the quarter, which it also said was because of higher cost stemming from the health care reform law. The insurer raised the profit expectations for the year, but nonetheless, shares finished slightly lower at $112.47.

Sprint posted a surprise profit in its second quarter, but it lost subscribers, which put a damper on its earnings report. The company was able to expand the high-speed coverage and make progress completing its overhaul to stop calls from dropping out. Still, shares fell 3 percent to $7.76.

MATHISEN: The insurance giant MetLife (NYSE:MET) saw its quarterly profit more than double helped by derivative gains and the Chilean business it acquired last year. Despite that, earnings came in lower than what analysts have been looking for. Shares dropped right after that report during the regular session. The stock was up a fraction at $54.44.

Whole Foods market saw its third quarter earnings rise, but the company lowered its sales projections for the entire fiscal year. The supermarket chain also said same store sales were up but not as much as analysts had expected. On that, shares plunged initially in after-hours trading. Look at them fall right off the cliff there. During the regular session, the stock was up almost 4 percent to $39.11.

In Kraft’s after-hour earnings report, the company said second quarter sales were crimped because it hiked prices. Profits fell more than 40 percent in a quarter since a slight increase in revenue couldn’t offset the extraordinary gain it had last year. Shares didn’t move initially after hours. During the regular trading session, the stock was slightly lower at $57.24.

HERERA: Toyota (NYSE:TM) is still number one in global vehicle sales six months into the year. The Japanese auto maker, though, is followed by Volkswagen, which bumped General Motors (NYSE:GM) down to third place, as the U.S. auto maker responds to a massive recall scandal. Toyota (NYSE:TM) says January to June global sales totaled more than 5 million, up nearly 4 percent from a year ago. Sales grew in its home market as well as the rest of Asia, the U.S. and Europe.

MATHISEN: Later this week, auto makers will report their July sales and numbers are expected to be quite strong. But on Wall Street, some auto analysts wonder whether the current cycle of sales is nearing a top.

Phil LeBeau as more.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): This is a hot summer at Fox Ford in downtown Chicago.

MIKE FULLMER, FOX FORD MANAGER: Right now, I’m saying we don’t have enough inventory. I’m saying we need more cars.

LEBEAU: It’s a familiar refrain at dealerships around the country. Over the last five years, annual auto sales have surged from just over 10 million to more than 16 million. And with it has come a surge in auto production. Third shifts have been added to assembly lines and all new plants are being built. That’s adding so much supply of new vehicles, analysts are worried the industry is driving toward a wreck.

ADAM JONAS, MORGAN STANLEY: We think we’re adds back about 120 to 130 percent of the capacity from the downturn.

LEBEAU: That means more vehicles headed for showrooms. For now, there is enough buyers looking to replace an older car or truck, but as the supply of vehicles grows, some wonder if auto makers and dealers will start pushing sales by offering more generous leases and long-term loans.

JONAS: We think we’re going from consumer attitude of “I need to replace my car” to “I really just want to replace my car”, or “I can’t afford to give up this great deal given by various financial institutions.” So that is starting to concern us a bit.

LEBEAU: Wall Street may be worried but at dealerships, this boom market shows no signs of slowing down.

(on camera): In a cyclical business like the auto industry, peak sales have historically led auto makers to building too many cars and trucks. Auto executives say they are aware of that history and they will not make that mistake this time around and they will cut production if inventories start to build.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

(END VIDEOTAPE)

HERERA: Coming up, the media industry, which has been undergoing a major transformation begins reporting earnings tomorrow and there are a few key things to watch for in those reports. That’s next.

(MUSIC)

MATHISEN: Cell phone users have likely paid hundreds of millions of dollars in unauthorized charges crammed onto their bills. That’s according to a report by a U.S. Senate subcommittee. The committee says cramming often starts with small companies that provide celebrity gossip, ring tones or similar services, but the money is then collected by the major providers like AT&T (NYSE:T), Sprint, T-Mobile and Verizon (NYSE:VZ).

HERERA: A flood of media companies, including Time Warner (NYSE:TWX) Cable and DirecTV will begin reporting second quarter earnings tomorrow. As the sector undergoes a wave of consolidation and really a transformation, Julia Boorstin takes a look at what investors can expect from those results.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: With Comcast (NASDAQ:CMCSA) (NYSE:CCS) acquisition of Time Warner (NYSE:TWX) Cable, and AT&T’s acquisition of DirecTV looming, the focus will be on the two companies being acquired. They both report results Thursday morning.

These mega deals consolidating content distribution shine a spotlight on a big and pressing question.

CRAIG MOFFETT, MOFFETT RESEARCH: Everybody is very focused on this obvious question of are we starting to see the beginning of a real cord-cutting trend? It’s a steady and slow drip, drip, drip, but everybody lives on the edge of their seat wondering and fearing that it might get a little faster.

BOORSTIN: For Time Warner (NYSE:TWX) Cable, as well as smaller cable company Charter, which reports earnings Thursday morning, the question is how they are able to gain share in broadband to compensate for TV subscriber decline.

Against the backdrop of regulatory scrutiny of the Comcast (NASDAQ:CMCSA) (NYSE:CCS)-Time Warner (NYSE:TWX) Cable merger, it’s complicated. Moffett says growing broadband market share is a good thing but the company doesn’t want to add so many broadband subscribers, that it draws attention to the combined company’s power.

For DirecTV, which doesn’t benefit from having a broadband offering, its results will be important to show where AT&T (NYSE:T) ownership can yield cost savings, and all this mergers put the spotlight on one potential M&A target also reporting tomorrow, Discovery, a rare cable company with huge international exposure.

MOFFETT: Now, you’re seeing the follow-on, which is the media companies going back and saying, if we’re going to have to sit down across the table from the likes of Comcast (NASDAQ:CMCSA) (NYSE:CCS) or an AT&T (NYSE:T), DirecTV, we’re going to have to get bigger.

And so, you’re starting to see the media company strategizing about all the different potential combinations.

BOORSTIN: And Discovery’s value hinges on how its advertising fares in light of a softer ad market, as well as ongoing international growth.

Next Wednesday, we’ll hear from 21st Century Fox and the media giant it wants to buy, Time Warner (NYSE:TWX), as well as some other media players.

For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin, in Los Angeles.

(END VIDEOTAPE)

MATHISEN: “Forbes” is out with the seventh annual ranking of what it calls America’s 100 top college colleges. Here we go: number five, MIT. Number four, Princeton, the only Ivy League school to crack the top five. Swarthmore, number three. Number two, Stanford. Number one, Williams College.

The rankings are based on factors like educational outcomes, teaching quality, student satisfaction, graduation rate — I can really read, folks, I did graduate, and student debt levels.

HERERA: OK. There are all, though, about 60,000 bucks, right?

MATHISEN: Sixty grand and up.

HERERA: And up.

MATHISEN: Most of the private ones.

HERERA: And that doesn’t include room, board, books, et cetera. I’m going to have three in college at the same time. OK, we’re in trouble here.

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

MATHISEN: And I’m Tyler Mathisen. Thanks from me, as well. Have a great evening. 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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