Transcript: Tuesday, February 17, 2015

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

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Record setter. New highs for the S&P 500 and the Russell 2000. Why stocks shrugged off global worries and powered higher.

Yield spike. What’s happening in one of the biggest markets in the world, treasuries? What it could mean for your investment.

Danger on the rails. Two rains carrying crude run off the tracks. West Virginia’s governor declares a state of emergency in two counties. Tonight, the growing risk as America ships more and more oil in tanker cars.

All that and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, February 17th.

Good evening, everyone. I’m Tyler Mathisen. Sue Herera is off tonight.

Well, put it in the record books. The S&P 500 hit 2,100 on the nose for the first time ever on speculation of a bailout extension for Greece. According to reports, that country will ask for an extension of the country’s loan agreement tomorrow. But there is no official word, no confirmation just yet.

The extension, according to multiple reports, would prevent the country’s current agreement from expiring at the end of the month. That prospect has worried investors for months since it could lead to a spiral of events from a default to a Greek from the euro.

By the close, the Dow Jones Industrial Average was up 28 points to finish at 18,047. Close to an all-time high there. NASDAQ up 5, and the S&P 500 closed 3 points higher, but that was good enough for the fresh record, 2,100 on the button.

A lot of action today was in the bond market, as the yield on the ten-year approached a 2015 high. Here, too, analysts pointed to the prospect of a debt extension for Greece, as one reason why prices fell and yields rose.

But as Michelle Caruso-Cabrera reports, there’s one major difference now that stands between Greece and its creditors.

(BEGIN VIDEOTAPE)

MICHELLE CARUSO-CABRERA, NIGHTLY BUSINESS REPORT CORRESPONDENT: The difference between the two signs of the Greek negotiation come down to both sides having very different visions of just how important Greece is to the Eurozone.

So listen to the Greek finance, he said Europe is a house of cards. He uses this imagery all the time. He says, if you let Greece go, Europe comes tumbling down, that investors will start to think that Italy and Spain are next.

In Germany, they have a very different image. They see the situation as 19 people climbing up a mountain together. They’re all connected by the same rope and they have one very weak climber at the bottom, that would be Greece.

And what do they do about that weak climber? Do they all keep struggling together? Do they risk the fact Greece may bring them all down the mountain or do they just let Greece go?

What actually happens in coming days is going to determine which side is right. Already, we’re not seeing very many signs of stress in the world finance markets. We’re not seeing Spanish interest rates rise. We’re not seeing Italian yields rise, at least not sharply.

So, so far, Greeks appear to be losing some type of leverage. We’ll see if that brings them any closer to the negotiating table. At the same time, if we start to see contagion in the markets, then you may very well see the other Eurozone finance ministers start to give in to some of Greece’s demands.

For NIGHTLY BUSINESS REPORT, Michelle Caruso-Cabrera.

(END VIDEOTAPE)

MATHISEN: Back now to that big move in the bond market and the 10-year which is seen its yield hit a low last month of 1.68 percent back above 1.2 percent today. Is this the start of an even bigger move up?

Let’s bring in Jack McIntyre, portfolio manager with Brandywine Global, an investment management firm with $63 billion under management.

Welcome, Jack. Good to have you with us.

JACK MCINTYRE, BRANDYWINE GLOBAL: Good to be here, Tyler.

MATHISEN: Was today’s move a sign of something to come or a technical move of some sort or the building of a range? What do you think?

MCINTYRE: Yes. I think it’s probably the latter. But you have to remember. So, January was equally as good an environment for bonds as February setting out to be kind of a negative environment. I think typically when you see that kind of price action, the market’s kind of going through sort of a digestion period, and ultimately, I think we’re just kind of forming a rage.

MATHISEN: You might have thought today, after those Greek talks seemed to run into snags over the weekend after the horrible news of out of Libya involving those Christians who were executed by ISIS, and the renewal of fighting in the Ukraine, that money would have gone into U.S. treasuries today, but no.

MCINTYRE: Yes. You would have thought that. And again, I don’t want to be that bearish in treasuries because I think we’re still globally in a growth-challenged environment, but we are starting to see some better data points. Not necessarily the U.S. but away from the U.S., particularly in Europe. And that’s something we haven’t seen in a while.

So maybe, just maybe, the bond markets are kind of focusing on the improving business cycle in Europe and if that’s the case, then you’re going to see yields move up a little bit higher.

MATHISEN: So, where and how can I make money in bonds this year?

MCINTYRE: Well, that’s the ultimate question because it’s not just about trying to forecast where yields are going to go and how do you make money in fixed income and your viewers have a lot of exposure to fixed income.

So, the way that we are anticipating making money for our clients in outperforming is not being invested in German bonds and Japanese government bonds and U.S. treasuries, but there are still some bond markets out there that still have what we think too much inflation expectations getting priced into them. It’s the Mexicos, the Indonesias, the Indias, the South Africas and even Brazil.

There’s going to be a little bit more volatility in some of those markets, but ultimately, if you’re telling me how you’re going to make money in 2015, you’ve got to be invested in some of those bond markets.

MATHISEN: For individual investors, picking Mexican bonds, feels like doing your own brain surgery. This is something to leave for guys like you and professional fund managers, right?

MCINTYRE: Yes. That’s an excellent point, because I don’t want anybody to go out and start trading in BONOs. But I think you need to start broadening out your sort of universe of fixed income and put some of that money to work in — you know, in diversified global bond-oriented funds.

MATHISEN: Jack, thank you very much. Appreciate your insight.

Jack McIntyre with Brandywine Global Investment Management.

MCINTYRE: My pleasure.

MATHISEN: Investors, as we mentioned there, are also watching another part of the world that does tend to move markets, at least recently. That is Ukraine. That country’s army and Russian-backed rebels are ignoring that ceasefire agreement between Russia and Ukraine that was supposed to start on Sunday. Now, fighting has eased in some areas, but troops refuse to pull back their heavy weapons as a battle for a railroad town in Eastern Ukraine escalated today.

Well, now to Washington where the government is trying to identify individuals to prosecute for their role in the financial crisis. Attorney General Eric Holder today asked U.S. attorneys who brought cases against institutions related to the mortgage crisis to identify individual employees to prosecute as well.

(BEGIN VIDEO CLIP)

ERIC HOLDER, ATTORNEY GENERAL: I’ve asked the U.S. attorneys who have made those cases and are still involved in these RMBS cases over the next 90 days to look at their cases and to try to develop cases against individuals and to report back in 90 days with regard to whether or not they think they’re going to be able to successfully bring criminal or civil cases against those individuals.

(END VIDEO CLIP)

MATHISEN: The ultimate decision to prosecute however will be up to Loretta Lynch, that administration’s nominee to replace Holder if and when she is confirmed.

Well, the Justice Department will also appeal a legal ruling on immigration, an issue important to many businesses, after a Texas judge temporarily blocked President Obama’s immigration orders.

You’ll probably recall late last year, the president announced executive actions aimed at protecting millions of undocumented immigrants from the threat of being deported. The judge’s ruling backs 26 states that argue the president had overstepped his legal authority.

Well, Brent crude rose to a 2015 high. It was another strong day in the oil pit. Worries about instability and Libya and Iraq, two significant producers, overshadowed concerns about too much supply hitting the market. West Texas Intermediate crude up 75 cents, $53.53, and Brent climbed to almost $63 a barrel.

But it was the massive fire from a derailed train carrying crude that got people talking once again about how to safely transport the commodity.

Jackie DeAngelis has more.

(BEGIN VIDEOTAPE)

JACKIE DEANGELIS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Two more big accidents involving trains carrying oil over the holiday weekend. The first occurring in Canada’s Alberta oil sands, the second derailment taking place in West Virginia yesterday. No serious injuries have been reported but in the second accident, 25 cars derailed, 20 burst into flames.

That CSX (NYSE:CSX) train was carrying crude fro North Dakota, that’s the heavier, more flammable type of crude that sparked a debate and action by the National Transportation Safety Board to propose new rules to overhaul crude by rail safety standards, including heavier duty cars and slower travel speeds.

And while the new safety rules are still being discussed and await approval, the industry is preparing for them already beginning to overhaul older rail cars but that CSX (NYSE:CSX) train involved in the accident was actually a newer model car, leaving some with raised eyebrows.

It’s not a new debate but reemphasizes some old questions. One being, are pipelines like the Keystone pipeline safer to transport crude. And as these accidents continue, many people asking if the NTSB is doing enough, fast enough to prevent these incidents.

For NIGHTLY BUSINESS REPORT, I’m Jackie DeAngelis.

(END VIDEOTAPE)

MATHISEN: And joining us now to talk more about rail safety is Peter Goelz. He’s senior vice president at O’Neill and Associates, and former managing director of the National Transportation Safety Board.

Peter, welcome. Good to have you with us.

I don’t want to wade into the question because I think it’s been conflated about whether the Keystone would avoid some of the accidents we have seen on the rails including the one yesterday in West Virginia for a variety of reasons, I don’t think that argument holds water, if you will.

But let me put the question to you. Per volume of crude, is it safer to transport via a pipeline or safer to transport via a rail?

PETER GOELZ, O’NEILL AND ASSOCIATES: You know, both methods of transporting oil are extremely safe. I mean, 99.995 percent of all oil tank cars reach their destination safely. That’s a pretty good record. And pipelines also do a good job.

So, I mean, this debate, as you pointed out earlier, between which is safer, really, really is not the debate. I mean, we need both. We can’t move the Bakken oil out simply by pipeline. You’ve got to have rail. Rail can deliver the tank cars to refineries other than in the Gulf Coast. So, we need a mix of both.

MATHISEN: Because most of the — most of the pipeline carried oil, pipelines basically run down the center of the country north and south, not to the East Coast refineries, not to the West Coast refineries. The increased volumes that have been carried by rail have been well-documented. We’ve gone from — I forget what it is — 50,000 barrels to 450 or whatever it is. It’s huge volumes going by rail.

But has the industry and the government kept pace in terms of safety? Are the cars able to withstand derailments? Are they up to standard?

GOELZ: Well, you know, the railcars — the railroads have been proposing stronger railcars since 2011. PHMSA has not issued the final rules yet and I think they’re a little slow on that.

I mean, the cars can be made safer but, you know, it’s a matter of physics. These — you cannot make armored cars that will not — that will be absolutely indestructible and move them in a timely manner.

So, there’s a certain amount of risk. It’s very low. You want to mitigate it.

In very cold weather as in very warm weather, it presents challenges sometimes to railroads. And you need more inspection. They’re doing it. But, you know, the end result is —

MATHISEN: But you do seem to feel as though the government has not come forward quick enough in mandating stronger — with thicker steel insulation, if you will, of the cars, correct?

GOELZ: I think PHMSA could have acted quicker on this. They could have put the rules in place in a more timely manner.

MATHISEN: One more quick one. Is there — obviously, pipelines have accidents too. There are several hundred a year here. Many of them are small. Is it fair to say that a pipeline accident doesn’t maybe get as much play as a rail accident because those accidents are unseen in remote areas and less likely to combust?

GOELZ: Well, absolutely. You know, a rail car carries about 28,000 gallons of crude, and when it’s involved in an accident and it ignites, it’s a wonderful visual. In pipelines, when one lets go, you talk about barrels, thousands and thousands of barrels of oil. And it’s a far more damaging event often to the environment.

MATHISEN: All right, Peter. Thank you very much. We appreciate your help tonight. Peter Goelz of O’Neill and Associates.

And still ahead, it is the unofficial start to the spring house selling season. But will the coming spring thaw be enough to heat up the housing?

(MUSIC)

MATHISEN: Student loan delinquencies increased at the end of last year. A new report from the Federal Reserve Bank of New York shows that 11 percent of student loans were delinquent in the final three months of 2014. That’s up from the prior quarter. Total student borrowing stands at $1.16 trillion, and according to that same report, younger Americans with student loan debt are less likely to buy homes and take out mortgages than those who don’t have it.

Well, confidence among U.S. home builders slipped in February, down to the lowest level since October. This as builders used the Presidents Day weekend for special sales to kick off the historically robust spring selling season.

So, what is standing in the way of more hope for housing?

Diana Olick has our report.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): The home builders association is blaming the drop in its monthly sentiment survey on this, just as they did last year, frigid cold and snow weighing heavy on the housing market.

But Gary Chandler, K. Hovnanian division president in northern Virginia, points to cold hard fundamentals.

GARY CHANDLER, K. HOVNANIAN DIVISION PRES.: The job growth has been sluggish and people just don’t seem to have the urgency that they had a year or two ago. And so, that’s really what we need to see back is the urgency.

OLICK: Overall, builders’ sentiment slipped in February, but it’s still positive and well above where it was last year. The biggest drop in the survey was the component measuring buyer traffic through model.

And that was pretty clear this past Saturday at a K. Hovnanian community in Maryland — just one looker in five hours and she didn’t want to be on camera.

The problem is high prices. Builders have been focusing on higher end homes because entry level buyers either can’t save for the down payment or can’t qualify for a loan at the lowest rate.

MARK HANSON: So, you have prices going one way and the demand going another way that creates the divergence that we last saw in 2007.

OLICK: The median price tag of a newly built home in January was $298,100. That’s 43 percent higher than the median price tag for an existing home.

CHANDLER: Everybody is looking for value, and — so we strategically try to place incentives in every community that really maximizes square foot value to our customers.

OLICK (on camera): But incentives may not be enough, especially now as interest rates are moving higher. Just today, in response to the jump in bond yields, mortgage rates added an eighth of a point. We’re just halfway through February, and so far, we’ve seen the biggest monthly rate bounce in six years.

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

(END VIDEOTAPE)

MATHISEN: One city that has a red hot residential real estate market is San Francisco.

As our Josh Lipton reports, the commercial real estate market in the city is also booming big time.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: The red hot residential real estate market in Silicon Valley might attract all the headlines, but the commercial real estate market in San Francisco also is booming. Just take a look at the city’s skyline, which is now dotted with cranes. Between 2009 and 2011, the city issued just 13 permits. Between 2012 and today, the count’s back to 87.

Those cranes are used to develop office buildings where asking rents now average $63 per square foot. More than double the national average according to Jones Lang LaSalle (NYSE:JLL), a real estate services company.

Since the trough at the beginning of 2010, commercial real estate prices have skyrocketed nearly 90 percent. When prices surge that quickly, some might worry that a bubble is developing in this market, but real estate developers in San Francisco strongly disagree.

MICHAEL COVARRUBIAS: We believe in this market having long, long-term legs. We don’t believe Silicon Valley is going away or San Francisco is going away. If an adjustment occurs, ironically, it’s good for our business because that means prices will come down. We can go do more transaction.

LIPTON: One industry is driving demand for office space in the City by the Bay: tech. Salesforce is the leader with more than 1.5 million square feet. Twitter comes in second and Google (NASDAQ:GOOG) follows closely behind.

High-flying start-ups also control a lot of office space. For example, Uber plans to move into a 420,000 square foot campus in the Mission Bay Area of San Francisco.

Right now, there’s more than 3.5 million square feet of office space under construction and nearly 60 percent of that space is already leased.

Real estate analysts contend that one potential concern is that the commercial market is so dependent on the health of tech, but the momentum and commercial real estate prices, they say, remain very strong — at least for the foreseeable future.

For NIGHTLY BUSINESS REPORT, I’m Josh Lipton in Silicon Valley.

(END VIDEOTAPE)

MATHISEN: “Market Focus” time.

And we begin tonight with Verizon (NYSE:VZ). It says it has no need to make large spectrum purchases in the near term. This comes after the company won more than $10 billion of wireless licenses at a recent auction. Verizon (NYSE:VZ) says it’s going to focus on technology that makes use of its current spectrum holdings, given the high cost. Shares fell a fraction today to $49.18.

A big beat on the top and bottom lines for Medtronic (NYSE:MDT). The medical device maker delivered for investors as it had strong sales of its cardiovascular devices, most notably. The stock, one of the best performers in the S&P 500, up nearly 4 percent to $78.07. That is a new 52-week high.

CVS (NYSE:CVS) Health raising concerns about the possible impact of a new class of specialty cholesterol drugs. The company, which negotiates drug prices for millions, warned specifically that the new cholesterol drugs could eventually cost the health care system as much as $150 billion a year. Shares were up a fraction to $103.55.

Fossil (NASDAQ:FOSL) announced fourth quarter results that missed the Street’s estimates, sending shares way down initially after-hours. The watch and accessories maker blamed currency headwinds. It also announced a 10-year licensing agreement with Kate Spade. Still, as you can see the stock plunged after the close. Look at fall off the shelves there. Before the closing bell, the stock was up a fraction to $99.32.

It was the opposite story for Boston Scientific (NYSE:BSX). The company announced news investors liked. It has reached a $600 million settlement with Johnson & Johnson (NYSE:JNJ) over a breach of merger. The lawsuit was brought by J&J against Guidant, which Boston Scientific (NYSE:BSX) acquired. Shares popped initially in after-hours trading. Before the market closed, shares were off slightly to $14.84.

And coming up, from toys to cars — why some consumers may soon be in the crosshairs of that West Coast port labor dispute.

(MUSIC)

MATHISEN: The West Coast ports have reopened after being shut down over the holiday weekend. Labor Secretary Tom Perez is in San Francisco meeting with both sides to try and resolve the dispute that has disrupted billions of dollars in international trade, at 29 seaports from Seattle to southern California.

Well, several automakers are starting to adjust their operations as a result of the port’s labor dispute. Honda said it will slow productions in its plants in Ohio, Indiana and Canada because of shortage of critical parts. Toyota (NYSE:TM) says it reduced some overtime.

And here in the U.S., the head of the group that represents the motor vehicle supplier industry said if the disputes drag on much longer, the consumers will feel the impact.

(BEGIN VIDEO CLIP)

STEVE HANDSCHUH, MOTOR & EQUIPMENT MANUFACTURERS ASSOCIATION It’s not purely an issue of imports because our industry, motor vehicle suppliers, actually export over $60 billion a year to Pacific countries. And so, it’s not going either way. So, it’s having a significant impact on the industry and if it’s not resolved soon, that impact is going to be felt very acutely at the consumer level.

(END VIDEO CLIP)

MATHISEN: If the ports were to shut down, some estimates say it could cost the economy $2 billion a day.

Well, the port dispute is one of the hot topics at the North American International Toy Fair. That’s the biggest toy convention of the year.

And Morgan Brennan got the assignment.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Frigid temperatures didn’t stop more than 30,000 toy enthusiasts from checking out the latest must-have toys and trends at North America’s biggest toy fair of the year.

(on camera): Hello, Barbie. Welcome to New York.

VOICE: I love New York. Don’t you?

BRENNAN (voice-over): Everything from talking Barbies to autonomous toy cars were on display. U.S. toy sales grew 4 percent in 2014 to $18 billion. That was driven by blockbuster films like “Frozen”, “The Lego Movie”, “Teenage Mutant Ninja Turtles” and “Transformers”.

2015 is off to a solid start was well, as building blocks and drones take a center stage at the fair.

JULI LENNETT: For January for the toy industry, NPD grew 10 percent, which is huge. We don’t typically see that kind of growth in the industry. So, we’re off to a really great start.

BRENNAN: High-tech toys continue to gain ground. One of the hottest trends is the so-called maker movement or do-it-yourself toys.

ADRIENNE APPELL: Those are toys that really empowering kids to create, whether they’re into science, whether they’re into baking, or is in arts and crafts, building. So the industry has seen a lot of success over the past couple of years in the building category specifically, showing double-digit growth from 2013 to 2014.

BRENNAN: Licensed properties like Disney’s “Frozen”, “Star Wars”, and Paddington Bear were the fastest growing portion of the industry last year, totaling $2.6 billion in royalty revenues. That trend is expected to continue this year as well.

MARTY BROCHSTEIN: Licensing right now in the toy industry is very strong. So, we’re looking at a pretty healthy base and as we move in to 2015 and look toward summer and the holiday, the number of big movies, the number of TV shows, a lot of other things are really contributing to a really good outlook.

BRENNAN: But it’s not all fun and games. A court stoppage meant new challenges for toy makers including the U.S. licensee for Paddington Bear.

KATE CLARK: It affected our bottom line. You can’t move Christmas Day. We had to have product to get to the retailers by cancel dates, and it cost us tens and tens and tens of thousands of dollars.

BRENNAN (on camera): But when it comes down to it, America still loves the classics — whether it’s Paddington Bear or Lego, which is now the biggest toy maker in the world.

For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan in New York City.

(END VIDEOTAPE)

MATHISEN: And finally tonight, Lego has been named the most powerful brand in the world. A new study by the consulting firm Brands Finance based rankings on things like familiarity, loyalty, corporate reputation. The study said “The Lego Movie” helped move the toy company into the top spot. Apple (NASDAQ:AAPL), by the way, topped the list of the most valuable brands.

And that’s NIGHTLY BUSINESS REPORT for tonight. I’m Tyler Mathisen. Thanks for watching. Have a great evening, everybody, and we hope you’ll join us 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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