Transcript: Monday, November 3, 2014

NBR ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Susie Gharib, brought to you in part by —

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SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: November to remember? The month may have started with a thud, but it historically kicks off a strong six-month run for the stock market. Will things be different this time around? >

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Your money and the midterms. How tomorrow’s elections could move the markets and shape the business environment.

GHARIB: On the home front. The housing market is experiencing something it hasn’t in almost 30 years.

We have all that and more tonight on NIGHTLY BUSINESS REPORT for Monday, November 3rd.

MATHISEN: Good evening, everyone, and welcome.

November, it is a month most investors embrace because it’s famous for starting what historically has been the most bullish six-month period for stocks dating back to 1950. But fresh off Friday’s record high closes for the Dow and the S&P 500, the markets began this November with a whimper.

Early in the day, stocks did rise on favorable data about U.S. manufacturing. At one point, in fact, both the Dow and the S&P 500 set fresh intraday highs. But then came a sharp sell-off in the price of oil and that drove energy stocks down. The broader market followed suit. We’ll have more on why oil dipped in just a moment.

Here’s how things looked at the closing bell. The Dow down 24 points, the NASDAQ added eight, just enough to close at a fresh 14 1/2-year high and the S&P was fractionally lower, as you there. So, despite today’s uninspiring start, will this be a November to remember in the markets?

Dominic Chu takes a look.

(BEGIN VIDEOTAPE)

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): There’s a reason why so many investors are optimistic when it comes to the holiday season. The end of the year typically comes with a nice rally for the stock market.

According to analysts at Bespoke Investment Group, that’s been the case over the course of the last century. They looked at the performance of the Dow Jones industrial average and found that November delivers an average gain of close to three-quarters of 1 percent and is positive 60 percent of the time.

December is even better. Up and average of almost 1 1/2 percent with positive returns 75 percent of the time.

This time around, there are a number of positive drivers for markets and that’s leading some experts to forecast a happy holiday season.

JORDAN WAXMAN, HSW: I do believe that you’re going to get a Santa Claus rally this year. These GDP numbers, pretty good confidence in the market, pretty good confidence in manufacturing, and I think that consumers will spend this year.

CHU: Of course, just because things in the past have generally been bullish for the stock market during the final two months of the year doesn’t mean they are necessarily going to be the same this time around.

There are those who believe that investors still have to be aware of the many risks that still linger.

BURT WHITE, LPL FINANCIAL: The real risk is that growth doesn’t materialize, that you get Europe or you get a geopolitical event or even Japan that ends up to create a real concern and begins to create a true growth concern for the market. And, if that happens, and growth doesn’t materialize, that’s certainly a risk to our prospects of a very good close to the year.

CHU (on camera): Those are just a few of the market and economic variables to contend with. And let’s forget that we’re just a day away from midterm elections, which could be another market catalyst.

So, as you’re getting ready to carve up a few turkeys and your hams, make sure you know what could carve up your portfolio returns.

For NIGHTLY BUSINESS REPORT, I’m Dominic Chu.

(END VIDEOTAPE)

GHARIB: Well, as Dominic just said, there’s one day to go before the midterm elections and the results could affect the political balance of the U.S. Senate, and potentially the business environment and the market.

John Harwood joins us now with more on tomorrow’s big races.

So, nice to have you here on set with us, John, a day before the elections.

So, as you look over these races that you’ve been covering, to what extent has the economy been the theme?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, not as much as you’d think and certainly not as much as Democrats would have hoped, because remember, we’ve had an unemployment rate that’s come down two full percentage points since the president’s second term began. Stock market’s up more than 25 percent we just completed the fastest six-month period of growth since 2003. And yet, President Obama’s ratings are down and Democrats are poised to lose in the election.

That’s partly, Susie, because the nature of the modern economy is such that when it’s going well, the benefits tend to afford a relatively small number of people and not to the vast majority of voters.

MATHISEN: Democrats poised to lose, which means you think that the Republicans will take control of the U.S. Senate giving them full control of both houses of Congress. Why should business care about a result like that?

HARWOOD: Well, a few reasons. First of all, there are several elements of the legislative agenda that are important to business. Trade deals somewhat more likely with a Republican Senate than a Democratic Senate. You’ve got the prospect of tax reform not likely to be completed in the next two years but certainly that discussion is going to continue.

Republicans have different visions of how they would do that, somewhat more business friendly than Democrats. And you’ve also got the question of energy policy. Remember, this president has proposed very far reaching changes in the amount of carbon emissions that many in the oil and gas industry are hostile to, and that’s one of the reasons why they’re such a big contributor in these elections.

GHARIB: You said just a moment ago you were talking about how the stock market has done so far in the Obama administration, but what about if the Republicans take the Senate? Will that move the markets? Will that make a big difference?

HARWOOD: Well, you’re going into a natural period where, as you all were just discussing, the market tends to do well, but interestingly, if you look back at the history of American government in recent decades, you find that the strongest S&P performance has been when you had a Democratic president and an all-Republican Congress, not very many cases there. So it’s kind of a small sample, but certainly nothing for business to worry about in particular the prospect of gridlock between the two chambers.

GHARIB: All right. John, thank you so much. And I know you’re going to be covering gavel to gavel, so to speak, of all these elections tomorrow.

HARWOOD: You bet.

MATHISEN: Well, as we told you earlier oil prices initially edged higher today then they reversed course and fell hard. Domestic crude was down almost $2 a barrel. It closed at $78.78. That’s the lowest since June of 2012. Benchmark Brent crude was down another buck a barrel.

So, what caused the oil prices to suddenly change course and head lower?

Jackie DeAngelis has the details.

(BEGIN VIDEOTAPE)

JACKIE DEANGELIS, NIGHTLY BUSINESS REPORT CORRESPONDENT: The story in the commodities pits today was crude oil, a very volatile day of trade with prices hovering around the $80 a barrel mark, moving back and forth between positive and negative territory. Traders telling me the most significant impact today was the dollar index strength that we saw and $87 handle very significant. And most traders think we are going to go higher from there. That could put more pressure on crude.

But the key factor was in the afternoon when reports came out that Saudi Arabia was cutting its price of oil to the U.S. by 45 cents. Instead of driving prices higher, it actually drove prices lower because it’s indicating that Saudi Arabia’s conceding there may be a supply issue on the table. And, of course, that’s when we took out some key technical levels. Traders looking at $79.44 which was the intra-day low last week, and then $79.05 which was the intra-day low the week before.

Once they broke through both of those all bets were off. Crude oil sliding $79 a barrel, to finish at $78.78. That was a 2 1/2-year low. By all accounts, traders were saying that they do expect these prices to go lower from here. Technically, the area you should be watching $77.95. If we do break through that level, 75 bucks is the next stop.

For NIGHTLY BUSINESS REPORT, I’m Jackie DeAngelis.

(END VIDEOTAPE)

GHARIB: And Jonathan Golub joins now to talk more about oil, the markets and his investment strategy for the rest of the year. He’s chief U.S. market strategist at RBC Capital Markets.

Jonathan, before we get into how November’s going to be and the rest of the year, I want to talk to you about oil prices that Jackie was just reporting on. How does that change maybe your investment strategy going forward? How might lower prices impact the market?

JONATHAN GOLUB, RBC CAPITAL MARKETS: Well, what most people think is that lower oil prices are good because it means gasoline prices are down and that’s good for consumers and industrial companies get to produce at lower prices for manufactured products.

The problem is, though, is that the energy sector is a huge part of the S&P 500. So, in fact, it really is a drag on the market’s returns when you think about the size of energy. Not in the economy, but in the markets. The other thing is when investors see oil down as severely as it’s been in the last few months, they really start asking, are we seeing economic weakness? And that makes them somewhat concerned.

So, this is probably not a healthy thing for markets going forward. There are a lot of good things but right now, lower oil is probably not one of them.

MATHISEN: So, really, you think falling oil prices — the market has more to lose from falling oil prices than it has — than the economy has to gain from them?

GOLUB: That’s — you know, Tyler, that’s probably, you know, the case. It’s obviously there’s different parts of the market that are winners and losers on this. But also it matters how precipitously it is falling. It’s been somewhat disruptive, including today when oil was down, you know, quite a bit. So what I’d love to see is stability even if it’s at lower levels. I’d really like to see this falling oil price stop, you know, stop the slide.

GHARIB: All right. So, we have two months left to the year. How do — you think that stocks are going to be up between now and the end of the year. What’s your investment strategy? And what are your investment themes?

GOLUB: Right, so first, we think that the S&P 500 will probably be up something like 2 percent to 4 percent over the next couple of months, probably even a little bit stronger than what Dominic Chu was talking about earlier. We think we’re probably in a 10 percent to 15 percent kind of environment for stock market returns, not only for the year ahead, but probably for the next several years. So, we think things will be pretty healthy.

First, we really like the U.S. stock market compared to other markets around the world. The U.S. economy is actually quite healthy. In the near term and now, I’m talking about the next several months, we think that small cap companies, those that are a bit riskier will probably do quite well and outperform the broad markets.

GHARIB: Explain why you feel that way — small caps over big blue chips.

GOLUB: Right. Well, first of all, the earnings expectations for smaller companies are substantially higher. They’re expected to grow at something like 20 percent as opposed to large caps which are expected to grow less than 10. These are companies that very often are in faster growing parts of the market whether it be biotech or Internet or other areas, so they have a lot more juice there.

Yet the pricing on these companies are reasonably similar to what you’d have on large cap stocks. So, on a growth versus value opportunity, they really look quite attractive. Also, in the last several months, small companies have really gotten beaten up. And in a lot of cases, they’re great opportunities.

GHARIB: OK. And this Friday, as you know, the monthly employment report comes out. That’s always something that investors are watching very carefully. Do you think that the news is going to be such that it’s going to lead to stock market gains or just the opposite?

GOLUB: Well, no, I think we’re probably going to see something similar to what we’ve seen for the last six or eight months which is modest, steady job growth. We’ve had about 200,000 jobs added each month for the last eight months or so. That’s good. It’s not — it’s the sign of a fantastic economy, but very solid and supportive.

Probably to me, as a strategist, the most important news for this week and maybe for the month was the ISM report which really showed how strong the domestic economy is and really highlights a lot of good news on a variety of fronts.

GHARIB: All right. We’re going to have to leave it there.

Jonathan, thank you so much for coming on the program. Jonathan Golub with RBC Capital Markets.

MATHISEN: A couple of big acquisitions on this merger Monday. The world’s third largest advertising agency, France’s Publicis is snapping up U.S.-based digital ads specialist Sapient (NASDAQ:SAPE) for $3.7 billion in cash. Shares of sapient shot up 42 percent today on that news.

GHARIB: In another merger announced today, LabCorp — it’s a major provider of health care diagnostic services — is buying Covance (NYSE:CVD), which conducts clinical drug trials. It’s a cash and stock deal valued at more than $6 billion. LabCorp shares fell 7 percent on the news, but Covance (NYSE:CVD) shot up 26 percent.

MATHISEN: A massive find today for two automakers. The U.S. says fudged gas mileage numbers after a two-year probe by the U.S. Justice Department and the EPA. South Korean carmakers Hyundai and Kia agreed to pay a combined $300 million in penalties, a record amount, for overstating the fuel efficiency for more than a million vehicles.

GHARIB: Honda might be in trouble. The automaker is being investigated by U.S. federal safety officials about whether it’s failed to report deaths and injuries related to faulty air bags made by Japan’s Takata Corporation. Million of defective Takata air bags have been recalled by several top automakers and now, including Honda.

MATHISEN: Falling gas prices and rising consumer confidence are the key reasons sales of cars and trucks revved higher in October. Chrysler was the big winner. Sales up 22 percent in the same month a year ago. At Ford, sales fell slight, and GM sales basically flat.

As for the stocks, Fiat Chrysler off 2 percent today. Shares of GM and Ford both down slightly.

Phil LeBeau has more on the October numbers.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Another strong month for automakers with industry sales coming in for October at a pace of 16.46 million vehicles, roughly in line with Wall Street expectations.

Taking a look at the big four automakers in the U.S., Chrysler had the best month with an increase of more than 21 percent but Toyota (NYSE:TM) and GM were also up. Ford a slight decline although that was a little better than expectations.

The pickup battle is getting a lot of attention. Ram had a sensational summer, that continued in October with gains in sales of greater than 30 percent. Chevy also taking advantage of the F-Series being phased out by Ford, the current F-Series. That’s why Ford reported a slight decrease in sales last month.

Meanwhile, a huge month for Jeep. Sales jumped more than 50 percent, all SUVs are hot right now. Heavy demand continues in part because gas prices are plunging.

And that’s why when you look at hybrids right now, they’re struggling.
The Toyota (NYSE:TM) Prius saw a decline, greater than 13 percent last month. The Chevy Volt was down almost 30 percent. The one exception is the Nissan Leaf, thanks to zero percent financing, a new 2015 model, and some leases going for 199 a month, it had a strong month of October.

(on camera): With ten months now in the books for the auto industry, it looks like U.S. auto sales for the year 2014 will finish at about 16.4 million vehicles. That compares with 15.6 for last year and sets the industry up for the possibility of annual sales topping 17 million in 2015.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

(END VIDEOTAPE)

MATHISEN: Still ahead, did intense price competition eat into Sprint’s bottom line? Details on its after-the-bell quarterlies and the investor reaction.

(MUSIC)

MATHISEN: Here’s a first. Just today, Federal Reserve Chair Janet Yellen had her first one-on-one meeting with President Obama since she took over the nation’s central bank back in February. The White House says the two discussed the state of the U.S. and global economies, financial reform and the ongoing implementation of the Dodd/Frank law, which overhauls the rules governing Wall Street and the nation’s biggest banks.

GHARIB: It was a big day in the Big Apple (NASDAQ:AAPL). Thirteen years after the terrorist attack that took down the Twin Towers, the newly rebuilt World Trade Center opened for business, welcoming its newest tenants. Hundreds of employees of publishing giant Conde Nast began moving into their new offices today at the 104-story, $3.9 billion skyscraper.

MATHISEN: Well, the economy is improving, employment is gaining and home prices are still rising, albeit a little more slowly. But the first-time home buyer is not coming back to the market. That share is now down to its lowest level in nearly three decades.

Diana Olick explains why.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): In the housing market, having a baby is one of the top reasons renters become buyers.

But new mom Jade Rabino is still waiting.

JADE RABINO, NEW MOM: There’s a lot of money to live around here.

OLICK: Sticker shock is sidelining first-time buyers like Jade. The share of first timers dropped to 33 percent this year, down from 38 percent a year ago according to the realtor’s annual profile of home buyers. That’s the lowest in nearly three decades. The long-term average is around 40 percent.

RABINO: Around here the square footage that you get for the amount of money that you put down is not great.

OLICK: While renting is a necessity for some, it is a choice for more and more young Americans. Like 30-year-old Marcus (NYSE:MCS) Magwood who is getting married next year but won’t buy a home right away.

MARCUS MAGWOOD: I’m still undecided where I want to live.

OLICK (on camera): Renting has not just lost its stigma, it has gained significant prestige. You can see that in the new slew of high end rentals like this one in upscale residential neighborhoods.

STEPHANIE WILLIAMS, BOZZUTO GROUP: In a neighborhood like this you’ll pay a premium for what you’re getting but the reality is what we see here in D.C. is that the renters can afford to do that.

OLICK (voice-over): We spoke with Bozzuto Group’s Stephanie Williams last winter when this project was in its early stages. Today, she says they’ve been surprised at how many young millennials are looking to lease here.

WILLIAMS: They’re opting for a location that looks like they could purchase a home where there’s scale and there’s walkability.

OLICK: But there’s still flexibility. No mortgage, no maintenance and no fears should the housing market take yet another turn for the worse.

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

(END VIDEOTAPE)

MATHISEN: To read more about what’s holding back first-time home buyers, head to our Web site, NBR.com.

GHARIB: AIG reported a rise in profits and increases its buyback plan. And that is where we begin tonight’s “Market Focus”.

The insurance giant’s results were helped by strength in its life insurance business. The company will also up its share repurchase program by $1.5 billion. After hours, shares were initially higher. During the regular trading day, the stock was slightly higher, closing at $53.80.

It was the opposite story for Sprint. It lost more money than analysts expected and revenue missed estimates. The company also announced that it will slash 2,000 jobs as part of an effort to cut spending. That sent shares lower right after the report. Before the close shares popped 4.5 percent to $6.20.

Herbalife (NYSE:HLF) followed suit with disappointing after the bell results. The nutrition supplement company posted sales and earnings that came in below expectations. It also offered a sales outlook that was well below Wall Street forecasts. Shares were sharply lower initially after hours. During the regular session, shares rose 6.5 percent to $55.90.

MATHISEN: Earnings at Church & Dwight (NYSE:CHD) rose 7 percent on higher sales. The maker of Arm & Hammer baking soda and other product says new product introductions helped the company bolster its results, but its outlook for the current quarter disappointed investors. Shares were down just a little bit, to $72.11.

Amerisource Bergen hiked its quarterly dividend. The pharmaceutical distributor has increased the payout by 23 percent to 29 cents a share. Last week, the company reported better than expected fourth quarter numbers. That all sent shares nearly 2 percent higher at $86.90.

Allergan (NYSE:AGN) saw its shares move higher after it said in an SEC filing that it had been approached by another party regarding a potential transaction. Although reports said the company involved there was Actavis. This comes as Allergan (NYSE:AGN), the maker of Botox, has been trying to fend off a hostile takeover by Valeant Pharmaceuticals and Bill Ackman’s Pershing Square Fund. Allergan (NYSE:AGN) and Actavis rose more than 1 1/2 percent. Valeant off just slightly.

GHARIB: And Apple (NASDAQ:AAPL) is looking to put up some corporate bonds for sale but not where you think. “The Wall Street Journal” says the world’s most valuable company spoke with investors today about issuing new corporate debt in euros. Apparently, it’s an effort to diversify its funding sources. The bonds could be issued as early as tomorrow and Goldman Sachs (NYSE:GS) and Deutsche Bank are reported to be arranging the debt sale.

And coming up on the program, Activision’s big gamble. How big of a risk is the video game-maker taking with its most valuable “Call of Duty” franchise?

(MUSIC)

MATHISEN: JPMorgan (NYSE:JPM) has disclosed a criminal investigation by the Department of Justice into its foreign exchange trading business. The bank says losses from legal proceedings could total about $6 billion. JPMorgan (NYSE:JPM) says it is cooperating with the investigation.

GHARIB: Virgin America is going public, on the same day that privately owned airline reported third quarter profits rose 24 percent, it also announced that it’s planning on an initial public stock offering, selling more than 13 million shares for upwards of $24 apiece. That would value the carrier at about a billion dollars.

MATHISEN: And switching now to video games and the latest installment in Activision’s “Call of Duty” franchise called “Advanced Warfare”. It is now hitting stores, but can it reverse the big brand sales slump?

Julia Boorstin has more.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Die-hard fans turned out at Walmart for exclusive early access to “Call of Duty: Advanced Warfare,” Day Zero Edition. That’s before it’s available everywhere else Tuesday morning at 12:01.

“Advanced Warfare” has been called the most ambitious game in the franchise yet. Set in the sci-fi future with Kevin Spacey playing a role.

UNIDENTIFIED MALE: The journalist ought to be able to disagree with the president.

UNIDENTIFIED MALE: Wipe that off your face and put this on.

BOORSTIN: Activision is working to build buzz for the game with a global ad campaign, including a live action trailer that debuted on Thursday Night Football.

ERIC HANDLER, MKM PARTNERS: Like we see with movie sequels, this is a new story. It’s a three-year development cycle. First time, it’s been on the three-year development cycle. There’s a lot of interesting little new tweaks to it. And particularly, this is the first game that’s specifically made for the next gen systems, the Xbox One and the PS4.

BOORSTIN (on camera): Sales have topped 1 billion for the game. But the pressure is on for Activision to reverse “Call of Duty’s” sales slump, declining from 30 million copies sold in 2011, to 27 million two years ago, and 24 million copies last year.

Analysts project sales to be flat or down from last year with a total of about $1.25 billion worth in sales.

But it’s not just about sales of the game, which retails for $60. The title is also huge for driving Activision’s higher margin digital revenues, which can compensate for physical game sales decline.

HANDLER: The online element is a very big part of call of duty. It by far gets the most — the largest number of people playing online. And that’s one of the biggest perks of the game.

BOORSTIN: Some users have reported problems downloading preordered copies. Microsoft (NASDAQ:MSFT) saying it’s fixed a glitch for its Xbox live system.

We’ll see whether sales this holiday season lays the groundwork for “Call of Duty’s” next generation or if they mark a decline.

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

(END VIDEOTAPE)

MATHISEN: And Activision is scheduled to report its quarterly earnings tomorrow after the closing bell.

GHARIB: And finally tonight, you could be a lottery winner and not even know it. The creator of a new smartphone app that alerts lottery players if they won says that state lottery officials around the country confirmed to him that since last year, there are more than $2 billion in unclaimed lottery winnings in the U.S. — most are only worth a few dollar, but many more winning tickets are worth thousands and there’s one worth more than a million dollars that has never been turned in, Tyler.

So, check your wallet, check through the sofa —

MATHISEN: There really should be an app for this that tells you whether you have won or not. That’s what I want.

GHARIB: OK. We’ll try to get it for you.

MATHISEN: Thank you.

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

MATHISEN: And thanks for me as well. I’m Tyler Mathisen.

Have a great evening, everybody. Bundle up. We’ll see everybody back here 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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