Transcript: Tuesday, September 9, 2014

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

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Spike and slide.
Apple unveils new phones, a mobile payment system, a watch — and the stock twitches, word by word. Did the company prove it`s still on the cutting edge of innovation?

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Safe to swipe? Could the latest data breach at Home Depot be more serious than Target? A security expert explains if this is just the tip of the iceberg.

MATHISEN: And, watch your language. The odds are increasing that the Federal Reserve may make an important change to its policy statement as soon as next week.

All that and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, September 9th.

GHARIB: Good evening, everyone.

A big day for Apple fans and invests, and what the company calls the next chapter in its history. In a launch with lots of hype and hoopla, from Cupertino, California, Apple CEO Tim Cook unveils two new iPhones, a wearable smart watch, its first all new device in four years and a payment system that turns iPhone into a virtual wallet.

And while technology geeks cheered with each new device or service announcement, Wall Street investors sent Apple shares on a wild ride, trying to figure out what each product means for Apple`s bottom line.
After rising more than 3 percent when the iPhone 6 was unveiled, Apple shares wavered. And at the end of the session, they closed by nearly half a percent.

A lot of other stocks, moved lower today, illustrating the reach of Apple`s dominance in devices and services. EBay, the owner of PayPal, down nearly 3 percent, along with communication systems Sonus, watch and wearable devices like Garmin, Movado and Fossil Group, also all headed lower.

And GT Advance Tech, this is the maker of sapphire glass which may not be used in the new iPhone 6, tumbling 13 percent.

Josh Lipton has more on Apple`s big device announcement.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESSS REPORT CORRESPONDENT: Crowds lined up for Apple`s mystery event days ago in New York City, and early this morning in Cupertino, California. All to see what Apple`s CEO Tim Cook would reveal.

TIM COOK, APPLE CEO: Today, we have amazing products to share with you. And we think at the end of the day that you will agree that this, too, is a very key day for Apple.

LIPTON: And they got it all — a new and improved iPhone. This new version is thinner, has a longer battery life, and will be supported by more carriers. It will be available on September 19th — $199 for the iPhone 6 and $299 for the larger iPhone 6-plus.

Cook introduced a new mobile payment system, as well, called Apple Pay, which turns your iPhone into a one-touch payment system.

And, finally, the much-anticipated Apple watch, the company`s first wearable features dozens of apps to manage time, health and weather on a thin screen with personalized bands. It`s slated to be available early next year for $349.

COOK: As much about personal technology as it is style and taste.

LIPTON: The nearly two-hour presentation was capped off with an appearance by U2 when a band offered their new release free to iTunes to customers through October, the crowds weren`t disappointed.

HENRY YOSHIDA, AUSTIN, TX: I thought it was kind of neat that Tim is ushering a new era where they`re highlighting a lot of the other technical talent that works at Apple, giving them a chance to present. I thought it was cool.

LIPTON: But analysts do have concerns because Apple`s new watch requires the user to also have an iPhone.

SCOTT KESSLER: Really, we saw the falloff just as Apple talked about the iWatch and people were really getting excited. And then guess what?
You need the iPhone to use the iWatch. And more details to come. That limits the market opportunity at least over the near term, we think.

LIPTON (on camera): Today`s event was critical for investors as it was Tim Cook`s first big launch since becoming CEO in 2011. The focus will now turn to the new products as customers and developers eagerly await their release.

For NIGHTLY BUSINESS REPORT, I`m Josh Lipton.

(END VIDEOTAPE)

MATHISEN: So what will the new products and a refashioned iPhone mean for the world`s most valuable company and its shareholders, including scores of mutual funds you may own?

Let`s find out from David Garrity. He`s principle at GVA Research.
And Channing Smith, co-portfolio manager at Capital Advisors.

Welcome to both of you.

David, was today`s event a single, a double, a triple, a home run or a strike out? What do you think?

DAVID GARRITY, GVA RESEARCH: I think the event today was a very good triple, to the extent that we`ve actually got the large factor phone coming out that basically puts Apple in a category that`s been growing — showing faster growth. They may not have been innovating in this respect, because they`re following Samsung, but the thing is now, they`re competitive and the product will be out in size, in stores, before the year-end holiday shopping season. So, it`s going to drive earnings estimates near-term in terms of those will be going up.

Relative to the other announcements on Apple Pay, this may be a service that doesn`t necessarily drive the bottom line in a very large way, but it will drive consumer loyalty from the standpoint we think it`s going to bring more consumers doing off of Apple`s platform, and at the same time, it will give Apple access to consumer data streams that they`ll be able to monetize.

Where we were disappointed, we would have thought to have perhaps heard more about their partnership with IBM that was announced over the summer. IBM, understand, has very strong capabilities in the data analytics, given their Watson program. We think also that IBM has very strong security capabilities, something that Apple investors might be concerned about given the recent reaches in their iCloud offering.

GHARIB: So, David, you laid out a lot of the issues that you want to discuss. But I want to bring Channing into the conversation.

Channing, you own Apple in your portfolio. How did you feel about the announcements today? Which one of these was a game-changer if at all?

CHANNING SMITH, CAPITAL ADVISORS: Well, I think what we`re focused on is the iPhone, and that`s the true driver of revenue and earnings growth going forward. We were very pleased to see, you know, the enhancements, the larger form factor is going to be enormous. We think this will be the biggest upgrade site we`ve ever seen.

You know, if you look at 300 million to 400 million units that are out there, probably half of those are two years old. So, you`re going to see enormous upgrade cycle. We`re also very happy to see the carriers that are out there become a lot more flexibility with their plans.

So, we think this is going to be an enormous cycle. We think the new iPhone is good enough.

You know, you see the different — the Apple Pay, you see the watch.
We`re not very excited about that. We don`t think that they`re going to drive —

GHARIB: Why not?

SMITH: Well, I don`t think they`re a big revenue driver. If you think about the last two big category killers and that would be the iPhone.
That changed the way we communicated. If you think about the iPad, it`s the way we absorb content. It changed the way we absorb content.

When we look at the iWatch, I say — well, its that going to change the way I tell time? I also think and it was mentioned in the segment earlier, that you have to have the iPhone. That`s going to create a big headwind for a lot of people spending a lot of money on the Apple products.
I don`t really know if the functionality is there. You have an iPhone in your pocket. It does a lot of the functionality —

GHARIB: Right.

SMITH: — would be done on your iPhone.

MATHISEN: Very quickly, Channing, I note that you had been selling Apple shares basically for portfolio reasons. Recently, did you become a buyer today?

SMITH: No, we really didn`t. You know, we love Apple and have a 5.5 percent position. We cut it down to 3, the stock is up 25 percent. We felt that a lot of this good news has really been priced into the stock.
What do you have today and I`m feeling the Apple fatigue, I think the market is going to feel a lot of Apple fatigue.

But it`s more of, you know, what`s priced in. We think all of this is priced in. Now, you get to a point where everybody knows what`s out there.
Now, Apple has to execute.

And remember, two years ago, they had a lot of manufacturing problems and a lot of execution problems. So, now, at this point I believe they were going to have an excellent Christmas holiday. We think they`ll sell
60 million phones through the end of the year. But now, they have to execute. And that could be an issue.

The iWatch, we`re not going to hear about that really until next year.
But we just don`t really have a lot of high revenue expectations.

GHARIB: All right, let me ask David about the stock. You have a $125 target on the stock today. It`s around $97. You heard what Channing said.
I mean, what`s the motivation to own the stock?

GARRITY: Well, traders will basically follow the near-term earning estimates, and to the extent that we`re going to have a very strong holiday shopping season, I would argue that the estimates going up into those numbers probably support the stock on a relative basis, obviously, in terms of broader markets, there are a lot of concerns about the Feds. There are a lot of concerns about Europe and the economy overseas.

But the fact of the matter is the U.S. market is still the best house in a bad neighborhood. And in this bad neighborhood, Apple is probably going to be one of the better performing names from an earnings momentum perspective. So, I don`t argue from that standpoint. I think $125 a share six to 12 months out, is not out of the question, because I also think at the same time, a lot of the potential in terms of data monetization that we`ve talked about earlier around Apple Pay will only become more apparent over time.

And you`ll probably find that the margins on those revenues will higher than what they`re actually making on the hardware itself. So, in this respect, you have a business model that`s making a transition towards a higher margin model, which at the end of the day also serves to be support of stocks.

MATHISEN: That helps a lot. If you got a little revenue growth, and you increased your margins, it usually ends up meaning better profits and maybe a higher stock price.

David, thank you very much. David Garrity GVA Research, and Channing Smith with Capital Advisors.

GHARIB: On Wall Street today, cautious trading sent stocks falling on disappointing news about sinking sales at McDonald`s last month. And a security breach at Home Depot also impacting the markets, renewed worries about when the Federal Reserve might raise interest rates.

By the close, the Dow was down 97 points, the NASDAQ lost 40 —

(AUDIO GAP)

MATHISEN: Investors lost a taste for the company today, sending shares down 1 1/2 percent. The chain got slammed by a food safety scare in China, and Japan. Shares there fell steeper than expected 14.5 percent as it battles tougher competition, and also changing tastes here in the United States.

Well, markets in the U.S. were not exactly cheered today, when Steve Liesman of NBR and its producer CNBC reported that the Federal Reserve may change its policy statement language in a significant way at its meeting next week. Liesman says that the odds have gone up that the Fed will dropped the phrase considerable time to describe the lag between the end of the Fed`s bond buying stimulus program, and when it might raise interest rates.

Considerable time was usually meant to mean at least six months. If that language goes, Liesman says that the market is likely to read that as opening the door to an earlier start to rate hikes.

GHARIB: Among the hardest hit sectors in the markets today, banks, shares of all the big banks ending lower. This comes on the Federal Reserve and Senate Banking Committee considers tougher rules to shore up the financial system in the event of another economic downturn.

Hampton Pearson takes a look at what the nation`s biggest banks could be facing.

(BEGIN VIDEOTAPE)

HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
Concerns that six years after the big financial crisis, some American mega banks remain too big to fail, now has the Federal Reserve targeting those firms with costly new regulations.

At the top of the list, capital surcharges, much higher than what nearly 30 global banks, including eight U.S. firms are now paying based on rules adopted by the international regulators in Basel, Switzerland, a few years ago. Federal Reserve Governor Daniel Tarullo outlined the Fed`s plans for the Senate Banking Committee.

DANIEL TARULLO, FEDERAL RESERVE GOVERNOR: By increasing the Basel III levels, the amount of common equity required to be held by these firms, we look to improve their resiliency to take account to the impact their failure would have on the financial system.

PEARSON: Another Fed proposal potentially penalizing big banks use of short term funding, including overnight loans could impact broker dealer operations, at the likes of Goldman Sachs and Morgan Stanley. The Fed governor told lawmakers regulators want to avoid the kind of short terms funding collapse that led to the demise of Lehman Brothers in 2008.

TARULLO: The surcharge formula will directly take into account each U.S. GSIB`s reliance on short-term wholesale funding, which we believe to be a very important indicator of systemic importance because of the potential for funding runs and contagion under stress.

PEARSON: Since the financial crisis, U.S. banks have increased capital by nearly $30 billion to cushion the shock from a future meltdown.

The financial industries is concerned this latest proposal from the Fed could put major U.S. banks at a competitive disadvantage.

FRANCIS CREIGHTON: The Basel process is designed to make it possible for all the banks across the world to be working off of one set of standards. And when you change the standards for U.S. banks necessarily, that means that they have a higher standard that they have to stand up to than their foreign competitors.

PEARSON (on camera): Today here on Capitol Hill, we got a preview of what to expect, once the Federal Reserve makes a formal rule proposal incorporating those new capital banking surcharges.

For NIGHTLY BUSINESS REPORT, I`m Hampton Pearson in Washington.

(END VIDEOTAPE)

MATHISEN: And also in Washington, an update on the future of the federally run Export-Import Bank, which helps finance foreign purchases of U.S. made goods. Exports, after threats to end funding for the bank from the chairman of the House Financial Services Committee, House Speaker John Boehner said the House will instead extend the bank`s authority.

(BEGIN VIDEO CLIP)

REP. JOHN BOEHNER (R-OH), SPEAKER OF THE HOUSE: I`m working with Chairman Hensarling. He thinks that a temporary extension of the Export- Import Bank is in order. Whether it`s a separate issue or it`s in the C.R.
is yet to be decided.

(END VIDEO CLIP)

MATHISEN: That C.R. or continuing resolution bill is needed to prevent a government shutdown at the end of the month.

GHARIB: Still ahead on the program, could Home Depot`s data breach be the biggest yet? We`ll hear from a security expert next.

(MUSIC)

GHARIB: News if you`re looking for a job. The number of advertised job openings in July more than 4.5 million, marking a 13-year high. The Labor Department`s so-called jolts survey showed companies stepped up their hiring in July, the fastest phase in nearly seven years. But the report also showed a sharp drop in government job postings.

MATHISEN: A mixed outlook from small business owners. The latest survey from the National Federation of Independent Business shows that small business owner optimism edge a little bit higher in August, more owners expect business conditions to improve in the coming months and they plan to increase capital spending. But fewer owners say they plan on hiring more workers in the future.

GHARIB: Salesforce.com, the Cloud computing giant, said that a program design to steal users` log-in credentials may have targeted some of its software users and could lead to theft of user log-in credentials.
Salesforce says the malware known as Dyreza infiltrated systems last week, and it`s the same kind of software that usually target large financial firms.

MATHISEN: As we told you last night, Home Depot finally confirmed that it was the victim of a large data breach and that the hacking may have happened as early as last April, threatening millions of customers and rivaling if not exceeding last year`s cyber attack on Target shoppers.

Today, we learned that the attorneys general of Connecticut, Illinois, California, they`re going to take the lead in a multistate probe into the attack. New York and Iowa officials will also participate in the investigation.

GHARIB: Well, Home Depot is the latest victim of recent big data breaches. So, why does this keep happening and is the problem fixable?

Joining us now, Alan Brill. He`s senior managing director of cyber security at Kroll, the risk advisory firm.

Allen, nice to have you with us.

ALAN BRILL, KROLL: Thank you.

GHARIB: Every day, there`s a new headline. So, Home Depot, Target, Apple to some extent, why does this keep happening?

BRILL: You`re right, it`s very much the victim of the day, and it keeps happening because ultimately, we`re not taking steps to make it stop happening.

Very simply, look at what`s happening — this is not a case in which somebody breaks into a computer and an hour later, they find out and they start to fix it. These are cases in which the break-in and the theft of data has lasted for days or weeks or in the latest days apparently since April. That`s a long time to have malware running in your system and not notice it.

So, what we need to do is to get the motivation whether it`s from the board or senior management to get folks to get the help if they need it to look at their systems and find out what`s really running on their POS systems.

MATHISEN: How can it be you wouldn`t notice something like that for four or five months?

BRILL: You have to understand that the folks that write the malware are very good at this.

MATHISEN: Who are they? Where are they?

BRILL: They are in Eastern Europe. They are in Asia. They are all over.

This is big business. This is not a kid who has nothing better to do in their basement.

MATHISEN: Organized crime?

BRILL: Organized crime with a digital outlook.

And like everything else, they keep making their product better — more stealthy, harder to find, memory resident, so that when you look on the disk, you don`t actually see anything.

GHARIB: You know, you heard our story in our coverage about what Apple is announcing, this Apple Pay, mobile payment system, a lot of companies trying to do some thing with this.

Is this going to be the new way around all of this? You know, you don`t use a credit card. You don`t have that magnetic strip that you swipe in that can be hacked into.

What do you think is going to happen?

BRILL: I think that what we`re seeing with Apple Pay is the start of a new paradigm in the way we pay for things. Remember, Apple didn`t just come up with this by themselves. They are dealing with some of the largest banks in the country and the world, some of the largest retailers with the card brands, so that you now will have a way to pay for something at a point of sale where you`re not exposing your actual credit card number but rather a credential that can be turned into your account, but very securely.

And —

GHARIB: Is it safe?

BRILL: You know, we`re going to have to wait until the specific system is tested.

MATHISEN: That`s a careful answer.

BRILL: It`s the right answer.

But I think it`s really something that`s on the right track. I don`t think that the brands and the banks and the retailers would be working together if they didn`t have some indication that this was being done right. It will be tested because you know that some of the first people on line after the people have been there for a week to buy this new stuff are going to be the hackers, they`re going to take it to understand the software, to reverse-engineer, the software.

MATHISEN: Very quickly, all of these big companies, Home Depot, Target, they must invest millions in their own computer security, but it hasn`t worked.

BRILL: Yes.

MATHISEN: Are there companies, security companies out there that do it better than others?

BRILL: There are companies that look at things a little differently.
For example, one of the things that we learned in looking at hundreds and hundreds of breaches is that ultimately, you have to figure out what it is that went wrong, where that bad software is, and if you have the tools that go into a network, lock onto computers and tell you what`s actually running, you can differentiate between those machines that have malware and those that don`t and you can stop it.

GHARIB: You make it sound very easy but I know it`s a lot more complicated than that.

Thank you so much, Alan, for coming by. We really appreciate it.

BRILL: Thanks for having me.

GHARIB: Alan Brill with Kroll.

Barnes & Noble lost less money than expected in its first quarter and that`s where we begin tonight`s “Market Focus”.

Promotions and new products drove up traffic at the bookseller. But sales still declines at Barnes & Noble, with revenue coming in below expectations. Despite that, investors were pleased with the better than expected performance. Shares rose about 3 percent to $24.09.

Burlington Stores also reported a loss that was much less than expected. The off-price clothing retailer posted revenue that topped estimates and it upped its outlook for the year as its sales continue to rise. That pushed shares up 3 percent to $37.18.

American Airlines said its traffic was flat in August compared to a year ago and its load factor, or the percentage of seats it filled, also fell. Shares slipped to $37.96.

MATHISEN: Sony, Disney, DreamWorks all being accused in a federal lawsuit of conspiring to suppress wages in the special effects and animation business. The suit alleges that the companies agreed not to poach employees from one another and outbid pay offers. The three companies were down today with DreamWorks falling the most. It was off 3
1/2 percent.

Royal Caribbean upped its quarterly dividend. The new payout is 30 cents a share, up from 25 cents. That`s going to be payable to shareholders in October. Despite the news, shares fell a fraction to $66.07.

GHARIB: And more bad news for Atlantic City — the struggling gambling Mecca will likely see a fifth casino shutdown this year.

Trump Entertainment Resorts filed for bankruptcy protection today, saying it had liabilities of more than $100 million. The firm runs two casinos in Atlantic City. The Trump Plaza is already slated to close down next week. The other is the Trump Taj Mahal, which the company says it`s now expected to close in November.

Donald Trump founded but no longer controls Trump Entertainment.

MATHISEN: Coming up, what a father is doing to find a treatment for his son`s rare disease the traditional drug companies sometimes won`t.

(MUSIC)

MATHISEN: Americans are saving more than ever for college but the amounts people are putting away is not nearly enough. Not even enough to cover one year at a public university. Thanks to the rising value of stocks that college saving plan network reports that the average 529 college plan is now worth just over $20,000, double what it was back in 2008, but not enough to cover even a year`s tuition at a big four-year school.

GHARIB: And finally tonight, rare diseases affect very few patients, and often that means treatment comes with too great a cost and too small a payoff for big pharmaceutical companies. That is why one former banker quit his job, starting his own biotech firm and launched a campaign to raise millions of dollars after his son was diagnosed with a rare muscular disorder.

Meg Tirrell has our story.

(BEGIN VIDEOTAPE)

MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Ilan Ganot never planned a career in drug development. But two years ago, Ilan and his wife, Annie, got the news that changed their lives.

ANNIE GANOT, MOTHER: Even looking at Wikipedia, you see the news that the wheelchair by 10, 11, 12, and that most of the boys, you know, are — don`t make it past their early 20s. And it was devastating. I mean, words can`t describe, as a parent how you feel.

TIRRELL: Their son Eytani was diagnosed with Duchenne muscular dystrophy, a rare genetic disease, there are no treatments for the form Eytani has. Ilan decided to change that. He left his job working with hedge funds at JPMorgan, moved his family to Boston from London and raised
$17 million. With two partners, he`s founded Solid Ventures, a for-profit company to develop drugs for his son`s disease.

ILAN GANOT, FATHER: (INAUDIBLE) there are thousands of them. We find it difficult sometimes to substantiate the economic value to justify for big companies to (INAUDIBLE) and jump right in.

TIRRELL: That`s where Solids focuses, to advance therapies that may be trapped in what the drug industry knows as the valley of death — a point where potentially promising medicines get stuck due to lack of funding and resources.

ILAN GANOT: What we are left with is a lot of patients left without drugs and a lot of science that is not getting developed. We feel like in Duchenne, it`s part of our responsibility to marry the two, and that`s what Solid is all about.

TIRRELL: Time is precious, Eytani is an energetic 4-year-old now.
But over time his disease will worsen. Ilan and Annie are convinced they`ll make a difference.

ILAN GANOT: We`re aggressive. We raise enough money to do what we need to do. We have the right people, and very soon will have the right treatment.

TIRRELL (on camera): Ilan`s company, Solid Ventures, has just signed its first deal, including with a collaboration with drug giant Pfizer in efforts (INAUDIBLE) therapy. It`s another example of the measures parents take under extreme circumstances to help their kids.

For NIGHTLY BUSINESS REPORT, I`m Meg Tirrell.

(END VIDEOTAPE)

GHARIB: And that is NIGHTLY BUSINESS REPORT for tonight.

I`m Susie Gharib. Thanks for watching.

MATHISEN: And I`m Tyler Mathisen. Have a great evening, everybody.
We hope to see you back here tomorrow night.

END

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

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