Transcript: Tuesday, January 27, 2015

NBR ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: A blowout quarter. Record iPhone sales help Apple (NASDAQ:AAPL) break company records, beat earnings estimates across the board and send the stock on a late-day run.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Dollar drag. The strengthening greenback hits the bottom lines of a handful of blue chip companies, igniting a steep and sharp sell off in the Dow Jones Industrial average.

MATHISEN: Fed conundrum. The Central Bank begins its two-day meeting, but its decision when to raise interest rates may be getting even more complicated.

All that and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, January 27th.

HERERA: Good evening, everyone.

As the Northeast cleans up from the first big snowstorm of the year, another mess was made on Wall Street as stocks took a tumble today.

But we begin with blowout earnings after the closing bell from Apple (NASDAQ:AAPL). A huge earnings beat which could help set the tone for a turnaround on Wall Street tomorrow. Apple (NASDAQ:AAPL) took in $3.06 per share excluding certain items, far more than $2.60 Wall Street expected. Revenue approached $75 billion, anchored by sales of nearly 75 million iPhones, far more than expected, along with 21 million iPads and 5.5 million Mac computers.

Investors liked what they saw sending shares initially higher by more than 5 percent in late trading.

Josh Lipton joins us now from Silicon Valley with his one big takeaway from Apple’s results.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: The big number from Apple’s latest earnings report, 74.5 million. That’s the number of iPhones Apple (NASDAQ:AAPL) shipped in its latest quarter. And that’s way more than analysts have predicted. Wall Street had forecast around 66 million.

Now, CEO Tim Cook told me iPhone was a standout, that Apple (NASDAQ:AAPL) was selling those iPhones in his words as fast as they can make them. And the streak (ph) was really around the world, the U.S. up 26 percent, mainland China up 100 percent. IPhone still accounts for about 50 percent of the company’s revenue and estimated two-thirds of the company’s gross profits.

For NIGHTLY BUSINESS REPORT, Josh Lipton in Cupertino, California.

(END VIDEOTAPE)

MATHISEN: More now on the rough day on Wall Street. Stocks plunged following some big earnings misses fro big blue chip companies and worries that a stronger dollar and tumbling oil prices will dampen future sales and profits in many sectors.

On the worst day on the markets in three weeks, the Dow fell 291 points. And that’s the good news. At one point today, the blue chip index was off close to 400 points.

United Technologies (NYSE:UTX), the only gainer in the index today. The NASDAQ snapped a six-day winning streak, it fell 90. That’s its worst day since back in October and the S&P was down 27.

Dominic Chu now with a look at some of the Dow components having a big impact on the overall markets today.

(BEGIN VIDEOTAPE)

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): There are a couple of big headaches that are showing up in big cap earnings reports — the weakness in the oil and gas business, and the strength of the U.S. dollar. The latest examples come from big Dow components, like Caterpillar (NYSE:CAT). The heavy equipment maker fell sharply after cutting its full year profit forecast because of falling oil prices.

DOUG OBERHELMAN, CATERPILLAR CEO: Oil is a piece of our energy and transportation business. It’s worth about oil and gas is about a third of that business. Actually, the natural gas piece of that business is doing pretty well and so far, holding up. The oil piece though is what we’re taking down, and that’s the primary number for a reduction in 2015.

CHU: Investors will also be hearing much more about the effects of the U.S. dollar on disappointing quarterly results. Stronger dollars mean companies that do a lot of business outside the U.S. lose some of their profits when they have to convert them from foreign currencies back to the more expensive dollar.

Chemical company DuPont, drug company Pfizer (NYSE:PFE), industrial company United Technologies (NYSE:UTX), and consumer products company Procter & Gamble (NYSE:PG) all made mention of the negative effects of a strong dollar.

In the case of Procter & Gamble (NYSE:PG), makes everything from Tide laundry detergent to Pampers diapers, it said it experienced the biggest currency impact it’s ever had this past fiscal year.

JON MOELLER, PROCTER & GAMBLE: There were definitely challenges and FX was the prime one. Virtually, every currency about 14 points on the quarter. Now, we were able to accelerate an increase, some savings to offset part of that. But we continue to invest as well in our business, our brands, products, capabilities and people because it’s the right thing to do.

CHU (on camera): According to Thomson Reuters (NYSE:TRI) of the 18 S&P 500 companies that have offered profit guidance for the current quarter, none have managed to meet or beat average Wall Street estimates. The dollar and oil could continue to be an issue as we head deeper into earnings season.

For NIGHTLY BUSINESS REPORT, I’m Dominic Chu.

(END VIDEOTAPE)

MATHISEN: And here is how those Dow components finished the day. It was not pretty. All of them closing lower. Caterpillar (NYSE:CAT) off 7 percent, P&G down 3 1/2, DuPont off about 1 percent, Pfizer (NYSE:PFE) down just a fraction.

HERERA: Another member of the Dow out with earnings after the bell, telecom giant AT&T (NYSE:T). Despite topping Wall Street’s forecast by adding 2 million more wireless and broadband subscribers, the company actually lost $4 billion on pension-related costs. Earnings of 55 cents a share excluding items was a penny better than expected. Revenues also beat forecast topping $34 billion, up about 4 percent from a year ago. Shares were initially higher in after-hours trading.

MATHISEN: Also out tonight, results from Yahoo (NASDAQ:YHOO), which is planning now to spin-off the last of its stake in Alibaba, the Chinese online marketplace currently worth about $39 billion. The new company will be called Spin Co, and would help Yahoo (NASDAQ:YHOO) avoid paying billions in taxes if it simply sold its Alibaba Holdings. Sales surged initially after that report, as you see on that graphic. Before the close, the stock was off about 3 percent.

HERERA: And now to the economy and a rather mixed bag of data that was out today. Orders for long lasting durable goods in December took a nose dive, down nearly 3.5 percent, mostly on a steep drop-off in demand for new aircraft.

But consumer confidence for this month is sitting at a seven-year high. Lower gasoline prices and strong job market getting credit for that, Ty.

MATHISEN: Well, the day come, Sue, just as the Federal Reserve kicked off its first policy meeting of the year today. So, is the Fed any closer to raising interest rates?

Steve Liesman looks for answers.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Wall Street still sees 2015 as the momentous year when the Federal Reserve hikes interest rates for the first time in nine years.

But the latest CNBC Fed survey shows Wall Street pushing those expectations ahead to the point where it’s running out of months in the year in which to hike. The survey showed that on average, respondents see the Fed notching that first rate hike in September. That compares with July in the prior survey, and forecasts for the level of the Fed’s benchmark interest rate which underpins a lot of rates consumers ultimately pay have come down to just 0.07 of a percentage point for the end of the year.

IAN WINER, WEDBUSH SECURITIES: I also think the Fed is in a real conundrum now, because, you know, if the dollar keeps strengthening, it’s clearly impacting all of our multinationals and it’s going to be very difficult for them to raise rates at all this year.

LIESMAN: The Fed concludes its two-day January meeting tomorrow. And little change is expected in the all-important policy statement. The Fed should still say it remains, quote, “patient before raising interest rates.”

Fed Chair Janet Yellen has said that means at least two meetings for rate hikes. The Fed faces not only global uncertainty but also declining inflation, spurred by lower oil prices and weak overseas growth. There’s also no hint of wage inflation.

So, while some are sticking to their prior calls that the Fed will hike this summer, they still believe the Fed will move very cautiously once it starts.

MOHAMED EL-ERIAN, ALLIANZ: I think it is facing this uncertainty between a healing U.S. economy and a weakening global economy. And let’s not forget that also the geopolitical factor, I still think they’ll hike in the summer, they’ll go very slowly.

LIESMAN (on camera): What’s clear is that the majority of the Fed had a plan to raise interest rates this year, that could still happen. But the data that would support a hike, stable to rising inflation and rising wages is so far failing to cooperate.

For NIGHTLY BUSINESS REPORT, I’m Steve Liesman.

(END VIDEOTAPE)

HERERA: So, let’s turn now to our two experts for more on the Fed, the markets and the economy.

John Manley, chief equity strategist with Wells Fargo (NYSE:WFC) Funds Management, joins us, and Bob Brusca, chief economist at Fact and Opinion Economics.

Welcome gentlemen. Pleasure to have you here.

ROBERT BRUSCA, FACT AND OPINION ECONOMICS: Thank you, Sue.

HERERA: John, let me start with you. The market sold off sharply today. We finished off our worst levels certainly, but it seems though the dollar and oil prices are really affecting earnings not to mention data. How worried are you about both oil and the strengthening dollar?

JOHN MANLEY, WELLS FARGO FUNDS MANAGEMENT: Well, I’m worried tonight, but I don’t think I’m going to be worried in a couple weeks. I mean, those are ephemeral things.

The oil thing is with us for a while, I’ll admit that. But eventually, it helps the rest of the economy.

As for the dollar, the dollar goes up and down. I think we may be in for a period where we sort of test the deflationary notion being gone, but I think that test is successful. I’m still a buyer on weakness.

MATHISEN: All right. Bob, what do you think about the economy overall? And how much of a headwind a stronger dollar presents for it?

BRUSCA: Well, I don’t think the economy has strengthened as much as people were thinking at the end of the year. I think we do have this hit on the energy side. I think it’s bigger than people anticipated. It spreads into the steel industry and machine industry as we’re seeing in some earnings reports today.

And then there’s the stronger dollar to have to cope with later on. I think there’s enough slack in the world economy that we’re not going to see wage pressure through job market or global market.

And so, wage pressure isn’t going to emerge. It’s not about the U.S. unemployment rate, it’s about the global job market. So, I think the economy’s not going to go ahead of steam as people expected and the Fed may actually wind up postponing that rate hike to 2016.

HERERA: John, do you agree with the rate hike moved to 2016? And if so, what does that mean for the market?

MANLEY: I think that’s probably a pretty good way to look at it. The Fed will do it when it’s time to do it. The Fed will do it as on as they can do it and not have an adverse effect on the economy. That looks more and more like 2016.

The Fed will also support the economy if it needs helping. Don’t forget, it can go both ways. And the ECB, the JCB, they’re still moving in that direction. So, expect the money to be flowing and flowing towards the economy through the capital markets.

MATHISEN: John, let’s talk a little bit about stocks and what the earnings are telling us about them as Dom Chu said in his report, of the S&P 500 companies that have issued forward guidance, most of them have not measured up to what Wall Street was looking for in terms of that guidance. That’s not a good sign, is it?

MANLEY: No, it’s not, but it’s not the worst sign in the world either. I mean, this has been going on really since November. We’ve started to see the expectations decline a little bit.

I think it may go on for a while, but I think it’s more of a reset down than it is a change in direction. I still tend to think that corporations can still use technology to improve earnings. And I think the economy comes back. I think the American consumer’s the most important person here. And I don’t see that American consumer going away. Once they get ahead of steam, once their blood’s up, we’re pretty hard to stop.

HERERA: Bob, talk to me about Europe and the problems that seem to be accelerating a bit there, not to mention Greece. Can our economy as it still continues its recovery mode really kind of isolate itself from the problems in Europe?

BRUSCA: Well, I think Europe is separate. We do have some multinational operations there. We send some exports there. There’s some air capital flows within the U.S. and Europe that are important.

I don’t think Europe really drags us down. I think the problem is really a domestic problem where we just can’t get our own head of steam going. And Europe isn’t any help. They’re not going to create a lot of demand for our exports.

And instead they’re going to be very competitive. And they’re going to keep our exports from going where we’d like to send them.

MATHISEN: John, back to you on stocks. Today was certainly an indication, and this month really has been, that volatility is back. Do you see that being one of the hallmarks of 2015? And what’s the advice to individual investors?

MANLEY: I don’t think it ever really went away. I think in a strange way it’s reassuring. It tells me that we don’t have minds made up. It tells me that people are not deeply confident, one way or the other. And that means in my opinion, that there’s room for improvement.

So, expect it. It’s part of the territory. I think it’s something you have to deal with. I think there’s still enough potential to offset that volatility and make it worthwhile being there.

HERERA: All right. On that optimistic note, gentlemen, thank you very much.

Don Manley with Wells Fargo (NYSE:WFC) Funds Management, and Bob Brusca with Fact and Opinion Economics.

BRUSCA: Thank you.

MATHISEN: Still ahead, mixed signals. What today’s housing reports really say about the health of the real estate market?

(MUSIC)

HERERA: Last week, we told you about a controversial proposal by President Obama to end the tax benefit of the popular 529 college saving plan. Well, now, the president plans to drop that issue after a backlash from angry lawmakers and parents. The White House says it will push forward with its broader package of education tax relief.

MATHISEN: Energy companies may soon be drilling for oil off the outer banks of Carolina, and a big defeat for environmental groups. The Obama administration is reportedly close to proposing opening up Atlantic coastal waters from Georgia all the way up to the capes of Virginia for oil and natural gas drilling. It would start in 2021.

Today, oil prices were a little bit higher with domestic crude up a dollar a barrel. Brent closed back in the near $50 a barrel area.

HERERA: Some encouraging numbers related to the Affordable Care Act. The Obama administration says that nationwide, 9.5 million people have now signed up for a health insurance plan through the federal online marketplace, and the 14 states that have their own signup programs.

MATHISEN: U.S. home prices rose again in November, but the increase was smaller than before. The latest S&P Case Shiller home price index out just today shows that home prices in the nation’s 20 largest cities rose 4.3 percent in November year over year. That was below forecast and much lower than the double digit gains we saw for several months in 2014. San Francisco and Miami logged the biggest gains in prices, each up nearly 9 percent. Cleveland the smallest, just a half percent higher.

HERERA: And a big jump in sales of newly built homes in December, up 9 percent from a year ago despite significantly higher prices. All of this leading to very mixed signals for housing at the start of 2015.

So, Diana Olick is in Washington. She’s going to make sense of it all for us.

Hi, Diana. And why price gains in new construction but then smaller gains on existing homes?

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, Sue, it’s really where the market is right now, the supply and demand. There’s a much greater supply of newly built homes than there are of existing homes. And there are many more buyers of the newly built homes. These are higher end buyers. We’ve been talking about how that first time home buyer who’s not going to buy the more expensive newly built home has really been sidelined in this recovery.

So, the activity we’re seeing on the higher end all sort of skews to that newly built home and keeps existing home sales pretty low.

MATHISEN: Let’s talk about conflicting reports, S&P’s David Blitzer saying 2015 isn’t going to be a home run for housing, but Redfin says there’s been a huge jump in buyer traffic in just the past couple weeks.

Why the disconnect?

OLICK: Well, that to me was very interesting today in seeing those two reports. Blitzer was talking about prices. He was seeing the weakness in prices and thought that would persist through 2015, and mean that everything would be weaker.

But lower prices probably mean more home buyers and that’s what Redfin is talking about. You know, it was just in the past two weeks that we learned FHA was going to be lowering its mortgage insurance premiums, making mortgages cheaper for those entry level buyers. That went into effect just yesterday. And so, that may have built up a lot of that excitement among potential buyers to at least go out and shop for a home which Redfin was reporting.

HERERA: You know, maybe it’s the bad weather back here, Diana, but I’m thinking of spring. So, what should we be watching for as the best indicator for what the health of the housing market is going to be like in spring?

OLICK: One word, supply. That’s what all of this is based on. We’ve got very low supply, as I said, in that existing home market. We want to see people putting their homes up for sale, so we get the buyer traffic in and they have something to buy. That was the trouble last year at the beginning of 2014, there just wasn’t enough out there to buy.

So, hopefully, the higher prices and more excitement in the market will add to that inventory. Perhaps more housing starts as well would help. And that would really juice the market for spring. Watch the supply.

HERERA: OK, we will. Thanks, Diana. Diana Olick in Washington.

OLICK: Thank you.

HERERA: Ty?

MATHISEN: U.S. Steel reports earnings well above street estimates. That is where we begin tonight’s “Market Focus”.

Company’s strong results come even as its profit was hurt by falling steel prices and a strong U.S. dollar.

For the rest of the year, the company expects to face the same challenges. Still, shares spiked right after the bell. Before the close, shares were off slightly. They finished at $21.27. But you see the jump there after 4:00.

Plummeting commodity prices are weighing on Freeport McMoRan. The mining company slashed its capital budget and is searching for outside funding for its oil and gas business. This as it swung to a heavy loss in its fourth quarter because of costs related to its oil and gas segment. Shares tumbled there 6 percent to $18.38.

HERERA: Peabody Energy (NYSE:BTU) managed to cut its quarterly loss on lower operating costs in Australia and the U.S. But the coal miner’s loss was still much greater than expected and it slashed its quarterly dividend to less than one cent a share. Shares were off about 6.5 percent to $6.24
.
Dover (NYSE:DOV) Corp. slashed its outlook for the year, citing the recent sharp decline in oil prices. For its most recent quarter, its profit topped estimates, but then revenue fell short. Shares of Dover (NYSE:DOV) were off slightly to $70.65.

Strong sales of cancer drugs helped Bristol-Myers Squibb (NYSE:BMY) report results that beat on both the top and bottom lines. But the drug maker did say the stronger U.S. dollar is a drag on its revenue and earnings outlook for the year, which disappointed investors. Shares were off just a fraction nonetheless to $61.99.

And American Airlines’ results were kind of mixed. The carrier is forecasting $5 billion in savings because of those lower fuel costs this year. But the company also said revenue for each seat flown would decline in the first quarter, in part because of currency headwinds that are pinching foreign travelers’ pockets. Shares slumped about 5 percent to $52.69.

MATHISEN: Forty-two million Americans smoke cigarettes, which is far fewer than just a few years ago. But even though there are less smokers, shares of tobacco companies have been smoking hot. So, what’s igniting their success?

Morgan Brennan has more.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Cigarettes may be bad for your health, but not necessarily bad for your portfolio. Tobacco stocks have surged since the start of the year, up more than 6 percent versus the Dow’s loss. Why? For the same reasons other consumer staples and utilities have also rallied. These are safe haven stocks, noncyclical in nature with hefty dividends that look very attractive compared to U.S. treasuries.

But analysts say big tobacco’s also benefitting from a few unique trends.

PHILIP CORHAM, MORNINGSTAR: Consumption is falling about 3 percent to 4 percent a year, they can raise prices at a rate over and above that rate of decline in a good year. So, looking to see them being able to raise prices in the mid single digit range.

BRENNAN: That as disposable income rises. E-cigarettes are starting to take off as well and could begin to pay off for the industry, which has been investing heavily in these new products. And here in the U.S., a federal law that had required payments to tobacco growers has expired, a scenario likely to boost profits. For all these reasons analysts expect 9 percent earnings growth for U.S. tobacco stocks this year.

And Wells Fargo (NYSE:WFC) says it’s, quote, “the place to be within the consumer space”, especially Altria Group (NYSE:MO) and Reynolds American (NYSE:RAI), which is buying Lorillard (NYSE:LO) for $25 billion.

(on camera): But there are risks. Federal regulations can be a headwind particularly increase to excise taxes and companies with big overseas exposure like Philip Morris International (NYSE:PM) could feel the effects of global growth woes and currency headwinds. Nevertheless, with dividend yields as high as 5 percent, these stocks are lighting up.

For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan.

(END VIDEOTAPE)

HERERA: Coming up, why executives from a very important sector of the economy are very optimistic about the future.

(MUSIC)

HERERA: There may be progress being made at the West Coast port impasse. Negotiators for major shipping lines and the dock workers union which represents 20,000 workers have cleared a major hurdle in those talks. The two sides reached a tentative agreement on the maintenance of cargo chassis, an area seen as crucial to resolving that standoff.

MATHISEN: The Northeast got walloped from Long Island, up to Massachusetts, all the way up into Maine, millions digging out of two feet of snow or more fell in some areas. Now, Philadelphia, New Jersey and New York were spared the worst of it as the storm strayed well east of its expected track.

As for the economic impact, it could be sizable according to Eric Gold of Planalytics, which measures the effects of weather on business.

(BEGIN VIDEO CLIP)

EVAN GOLD, PLANALYTICS: We think the economic impact of the storm is going to be relatively small. We’re estimating at about $500 million, and that’s simply based on the duration of the storm, the timing of the storm, the population centers that are impacted. The economic impact of last winter was anywhere from $15 billion to $50 billion. So, this is a relatively small event.

(END VIDEO CLIP)

MATHISEN: And one big reason for that half-billion price tag was that the major airlines canceled more than 7,000 flights Monday and Tuesday.

HERERA: And finally tonight, it may have been a rough day on Wall Street, but it was a different story a few thousand miles west at the America’s lodging investment summit in sunny Los Angeles, California, where hotel owners convened to talk price hikes and an upbeat outlook for that industry.

Simon Hobbs has more from Los Angeles.

(BEGIN VIDEOTAPE)

SIMON HOBBS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): L.A.’s sun and temperatures in the 70s greeted 3,000 travel owners and CEOs arriving for ALIS. But it was the Northeast chaos and cancellations that occupied many.

(on camera): If you cancel them, can you reinstate them now that the New York airports aren’t that bad?

DAVID CUSH: Well, you actually can reinstate them. That’s one of the great things about the technology available now in terms of getting in touch with customers is that if we actually could operate into the airport this evening, for example, we could reinstate a flight and get people on that flight.

The biggest issue we have with the airport right now is actually getting ground workers there.

HOBBS: But away from the weather-related headaches, this hotel industry is very confident. CEOs believe that strong industry fundamentals will lead to record levels of occupancy this year and will be able to raise room prices.

WAYNE GOLDBERG, LA QUINTA HOLDING CEO: We have an improving economy, the outlook for travel domestic and international is positive. Demand continues to outpace supply, which is significant. We see the ability to raise rate, pricing power has returned to our industry and our segment.

HOBBS (voice-over): Prices will rise by up to 10 percent in San Francisco, Oakland and Santa Cruz, according to PKF forecaster Mark Woodworth, Denver will take a 9 percent rise, Nashville over 8 percent with the national average at 5.4 percent.

Although Woodwork warns travelers will start to react negatively to higher prices over the next couple of years.

MARK WOODWORTH, PKF: There are situations where that traveler will say, I can’t go, I can’t afford to go. Or again it could be that I was going to stay more than one night or two nights or three nights and I’m going to cut back because I just don’t have the travel budget.

HOBS: But for now, the price increases are expected to boost U.S. hotel profitability by 13 percent this year to a new record dollar high and another double-digit percentage increase next year in profitability. No wonder this is the conference mascot. The message is: don’t worry, be happy.

For NIGHTLY BUSINESS REPORT, in Los Angeles, I’m Simon Hobbs.

(END VIDEOTAPE)

HERERA: And he looks very happy.

MATHISEN: Simon wears it well, doesn’t he?

HERERA: He does. He looks so comfortable.

MATHISEN: What a quarter for Apple (NASDAQ:AAPL).

HERERA: I think it’s going to be the story for tomorrow’s market. We had a rough day today. I think it might be a lot better tomorrow: 75 million iPhones sold, 21 million iPads. That’s phenomenal.

MATHISEN: And $75 billion in revenues for that one company. An amazing story there.

HERERA: It sure is.

All right. That’s NIGHTLY BUSINESS REPORT for tonight. I’m Sue Herera.

Thanks for watching.

MATHISEN: And I’m Tyler Mathisen. Thanks for watching from me as well. Have a great evening, everybody. We hope to see you right 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) 2015 CNBC, Inc.

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