Transcript: Monday, February 23, 2015

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

BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Word games. Investors are ready and waiting for Fed Chair Yellen’s testimony on Capitol Hill tomorrow. And there are certain words you need to pay close attention to.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Up and running. The West Coast ports are back to full force, after both sides reached a temporary deal. But it will be months before things are back to normal.

GRIFFETH: And retirement rules. President Obama backs tougher regulations for brokers. It’s a topic we discussed last week. And tonight, we will have more details.

All that, and more, tonight on NIGHTLY BUSINESS REPORT for this Monday, February the 23rd.

And good evening, everybody. Welcome. I’m Bill Griffeth, in tonight for Tyler Mathisen.

HERERA: And I’m Sue Herera.

Good to have you here, Bill.

GRIFFETH: It’s good to be here.

HERERA: All right. Investors tonight were watching and waiting. Watching oil prices and developments in Greece, but they’re waiting to hear what Federal Reserve Chair Yellen has to say when she testifies in front of Congress tomorrow. Ms. Yellen is scheduled to give her semi-annual report on the economy Tuesday. She’ll face the Senate Banking Committee. Wednesday, the House Financial Services Committee.

But investors will be looking for clarity and any hints of when the Central Bank will hike interest rates, its first hike since 2006. Every phrase will be sliced and dissected.

And as Steve Liesman tells us, there are key words the markets we’ll be watching for.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Washington is playing a game of words with Feds tomorrow when Central Bank chair Janet Yellen heads to the Senate for semiannual testimony. The first word the street we’ll be listening for Yellen’s play to say is, patience. The word the Fed has used to tell markets it will be at least two meetings before it raises rates. If she doesn’t use it, markets will believe that rate hikes could come sooner.

That’s what makes the next word or phrase so important. Does Yellen say mid-year to connote when the time would be right for the Fed to be thinking about rate hikes?

JANET YELLEN, FEDERAL RESERVE CHAIR: A number of committee participants have indicated that in their view, conditions could be appropriate by the middle of next year.

LIESMAN: All of that is dependent not on whether Yellen plays the “inflation” word, she will, but how she plays it. A word cloud of Yellen’s press conference in December shows inflation was by far the most used worth.

But Yellen used it two ways. First to say it was running below the Feds’ 2 percent target, and second to say it’s expected to move back towards the target. If Yellen says she’s not worried about inflation below the target, that would get the market’s attention.

PAUL HICKEY, BESPOKE INVESTMENT GROUP CO-FOUNDER: So, if Yellen comes out tomorrow and is more hawkish, you will start to see expectations by the market that the Feds is going to hike rates sooner, it’s going to be a rough for equities.

LIESMAN (on camera): Like a good game of words with friends, words with Feds goes on and on. Yellen hits the Hill again will talk to the House, then there’s copious speak this week at a New York monetary policy conference. All of this in route to the March Fed meeting in which we’ll go back to square one and find out if the Fed plays the word patience, drops it or uses the considerable stockpile of tiles to come up with another word.

For NIGHTLY BUSINESS REPORT, I’m Steve Liesman.

(END VIDEOTAPE)

GRIFFETH: William Lee joins us now to talk more about the Fed and what he would like to hear from Fed Chair Yellen tomorrow. And he’s head of North American Economics at Citi.

Bill, so good to see you. Thanks for joining us tonight.

WILLIAM LEE, CITI HEAD OF NORTH AMERICAN ECONOMICS: Thanks a lot.

GRIFFETH: What do you want to hear? What do you think we’ll hear tomorrow?

LEE: The key word I’ll be listening for is data dependence. Data dependent means that the Fed is going to change its policy stance away from the calendar, so that we’re not going to be counting months, we’re not going to be counting minutes, we’re going to be counting the data. What are the data telling us?

And that is something the Fed’s already told us about. The minutes have confirmed that the one place they’re not sure about is where is inflation? Where are the inflation pressures building? And how long will it take to build to the point where inflation projections are rising?

So, I’m looking for how strong is the economy, and how dependent are the data in confirming whether it was strong or really far away from any kind of inflation increase.

HERERA: But, Bill, you know how the markets work, even though we should be looking at the data, they tend to look at the calendar more than the data. They want to know, not that they’ll get the answer, but they want to know how many meetings before she moves. Over at Citi, what are your expectations on the calendar side of things?

LEE: I’m telling our clients that it’s better in this world of uncertainty that the Fed moves later. So for me, it’s probably late in the year, probably December is my best guess. So, I’m later than the consensus as it were, and the reason for that is because the Fed has confirmed for us in their minutes, they’re not sure where the inflation is. They’re not sure how strong the economy is. There’s a lot of debate not only where the inflation is, but the underlying model with the inflation. A lot of commentary was that the links between wage pressure and inflation are really quite weak in the data.

GRIFFETH: So, I was just going to ask you, inflation is one thing, but the job growth is very key for them as well. Is job growth where you think it should be and where you think Janet Yellen wants it to be right now?

LEE: I think the word “full employment” is not the same as reaching 5 percent or 5.5 percent unemployment. It’s not the same as reaching 200,000 or 300,000 payroll employment. The word “full employment” is a much more complex set of circumstances. You know, if you look at gross employment, the amount of job openings and amount of turnover in the market, we’re barely back to pre-crisis levels.

So, with the efficiency of the markets are really not there. The dynamism of the market is not there, and that’s why the Fed is not sure we’re anywhere near full employment.

HERERA: She’s also mentioned, Ms. Yellen has, of the participation rate and that that’s been a concern, because just a few months ago, it was almost at record lows. Is it a concern to you, and how does it influence her view of the employment situation?

LEE: It’s absolutely a concern, because the one model is inflation forecast, the for instance Phillips Curve. The Phillips Curve is based upon the game between the unemployment rate, the natural rate, and the unemployment rate, and that is a broken indicator because the participation rate has changed over time because of demographics and other sorts of reasons.

GRIFFETH: Nothing happens in a vacuum. And we are mindful of what’s happening in Europe and in Asia right now, where they’re not getting ready to raise rates, they’re lowering rates. They’re going through what we went through five or six years ago by adding more liquidity to the markets through their own quantitative easing.

How does that affect what Janet Yellen has to tell Congress at the same time?

LEE: That’s absolutely critical. That’s the news piece of information about Fed decision-making we’ve had since the beginning of the year, when they told us they put the international developments on their watch list of developments. And for us, what it means is the strong dollar is contributing to the deflationary forces, but not the same way oil is. Oil is just a transitory thing that hit the headlines in inflation. The appreciating dollar is getting to the core inflation, because holding down import prices, that feeds straight to the core inflation.

So, as long as the stance of monetary policy is different between the U.S. and the rest of the world, we’re going to have a strong appreciating dollar, and that will continue to put downward pressure on inflation —

GRIFFETH: William Lee at Citi, good to see you tonight. Thanks for joining us tonight. Appreciate it.

LEE: Thanks a lot.

HERERA: And now to an important pillar of the economy. And it is housing. Sales of previously owned homes slowed in January to the slowest pace in nine months. The National Association of Realtors says sales of existing homes dropped nearly 5 percent from the month before. The Northeast and the West saw the largest decrease, that decline being attributed to the rise in home prices and tight supplies.

GRIFFETH: Meantime, stocks fell back from the record highs of Friday, way down today by a drop in oil prices and shares of energy companies. Investors were also reluctant to make big bets ahead of that testimony before Congress by Janet Yellen tomorrow.

So, by the close, the Dow Jones Industrial Average dropped nearly 24 points, close at 18,116. The NASDAQ actually finished higher for the ninth consecutive day, this time with a gain of five points. And the S&P 500 fell less than one point to close at 2,109.

HERERA: And those crude prices the builders refer to went on a bit of a wild ride today. Prices were lower most of the session, and then spiked mid-afternoon on a “Financial Times” report that OPEC might call for an extraordinary meeting if the commodity fell further. But those gains were fleeting. By session’s end, West Texas Intermediate dropped $1.36 to just below $50 a barrel. Brent also fell more than $1.

But even as oil prices fall back below $50 a barrel, gas prices are going in the other direction.

Jackie DeAngelis explains why.

(BEGIN VIDEOTAPE)

JACKIE DEANGELIS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Crude prices are back under $50. But retail gas prices are on the rise. The national average, up 26 cents in one month to $2.30 according to AAA. It’s true that crude prices and prices at the pump generally move together. Take, for instance, what we’ve seen over the last year, crude falling 50 percent and gas prices down $1.11. But the two don’t always go hand in hand. Several factors can cause oil and gas to decouple.

MICHAEL MCPARTLAND, MACNAMARA OPTIONS TRADER: You’ve got the driving season coming up. The price of the product and the crude is kind of diverge from one another, basically for the seasonal turnover from summer to winter gasoline and product demand.

DEANGELIS: Seasonality is one issue. This is the time of year that refineries go offline for maintenance. So, run rates decline and so does output. What it also means is that crude inventories will build, because refineries use oil to make their products.

In addition, while it’s difficult to imagine at this point spring is around the corner, so time for the switch from winter to summer blends of gas, which tend to be more expensive.

Add to this the fact that the refinery strikes are becoming more pervasive, and there have been some accidents like the one at the Exxon facility last week. It’s the perfect storm to send gas prices higher.

MCPARTLAND: I think you’ll see summer gas prices between $2.65 to the $2.80 range. That’s my opinion. I mean, it’s anybody’s guess. But base on where those cracks are, it could go even higher.

DEANGELIS (on camera): Many consumers are waiting for the average price of a gallon of regular to dip under $2 a gallon. It never happened, although it’s still relatively low in some parts of the country. Consumers are also saying that the prices are inching back up. While low crude prices are thought to be good for the economy, and they will be for corporations, it could be that the party’s over for consumers who could be paying close to $3 for gas this summer.

For NIGHTLY BUSINESS REPORT, I’m Jackie DeAngelis.

(END VIDEOTAPE)

HERERA: And now to those developments in Greece. The indebted country will present its economic reform plan to the Eurozone tomorrow, missing today’s deadline. The list of reforms was demanded by Greece’s creditors in exchange for continuing to fund the country for a few months.

Julia Chatterly is in Athens with a look at what might be included in those proposals.

(BEGIN VIDEOTAPE)

JULIA CHATTERLY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, it tends to be quite a lot of waiting where Greece is concerned. And today’s been no different. We’re waiting for the government and the Europeans to put together a proposal that this country needs to do in order to get the green light to see an extension of the bailout deal.

But what will be contained in that proposal, the rumors are, they’re going to talk tax evasion, smuggling in fuel and cigarettes, too, also taxing some of the oligarchs and the wealthier Greeks that have so far missed a lot of the tax measures and austerity that this country suffers.

The question is, will Alexis Tsipras, the prime minister, be able to include some of the more popular reforms he talked about in the last week. What we’re hearing here in Greece is that Berlin and Angela Merkel doesn’t want to sign off on that. So, agreement from the Euro group of finance ministers could even get pushed back for some more days. Still, with distance as far as the Greek government is concerned, a very delicate balancing act between keeping the European leaders happy, but also keeping the Greek voters happy right now, and, of course, the negative forces within their own party.

What we heard over the weekend is that those are pushing back on what the government achieve, saying that based on this field, they’re not going to be able to fulfill their promises made during the election time. Those voices are very powerful within the Syriza Party, creating problems.

But what we haven’t seen is pushback from the Greek people. All the conversations that I’ve had is that the Greeks achieved what they could under very difficult circumstances this weekend, overwhelmingly supportive of the government here. The question is, will they continue to do so? And can the Greek government come up with the reforms that are going to keep both the people and European leaders? We wait for that later.

For NIGHTLY BUSINESS REPORT, I’m Julia Chatterly, in Athens.

(END VIDEOTAPE)

GRIFFETH: Back here in the U.S., the West Coast ports back up and running after dock workers and shippers temporarily resolved that nine-month labor standoff. But even though cargo ships are being loaded and unloaded again, a very big backlog remains.

Jane Wells has more.

(BEGIN VIDEOTAPE)

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Back to full force, but not yet back to normal here at the ports of Los Angeles and Long Beach and all up and down the west coast. They started unloading ships at 8:00 a.m. local today.

But take a look at what it’s like out on the water. You’ll still see what’s like an armada waiting off shore, more than 30 ships by my count this morning. One person compared the view to D-Day. If you line up all the ships up ands down the coast, the line would stretch 579 miles. Stack them up and they would reach the International Space Station.

But trucks were moving, finally. Employers say it could take six weeks to three months to unclog the ports, and it could take until April for all the union locals and employers to ratify the proposed five-year deal for a situation which the labor secretary said was causing too much collateral damage.

TOM PEREZ, U.S. LABOR SECRETARY: It was being felt by farmers in the Midwest, by small business owners, large business owners, retailers and others with whom I spoke, who were trying to do their jobs. And take advantage of this tailwind that is the U.S. economy.

WELLS: The GPS map shows the work ahead. The green squares are container ships. And this is what it looked like at the L.A. Long Beach Port last Wednesday. Here it was this morning, a few more ships it appears. But the work will now proceed even as rank-and-file voting takes place.

Secretary Perez is confident of approval since all 25 people in the negotiating room unanimously gave thumbs up to a deal after nine months of deadlock.

PEREZ: I have all the confidence in the world that when the rank-and-file take a look at this, they will see that this is a good package for them, and that they should move forward.

WELLS: This new package replaces the lone arbitrator with an arbitration panel. It also raises wages which employers say now average about $50 an hour. So, those are going to go up. It also raises the pension, and it continues to provide dock workers with health care that costs them nothing.

Assuming this deal is approved, unions on both coasts now have contracts which provide some stability through at least 2018.

For NIGHTLY BUSINESS REPORT, I’m Jane Wells in the port of Los Angeles.

(END VIDEOTAPE)

HERERA: And still ahead, President Obama wants to hold brokers who manage your retirement savings to a higher standard. But some are wary of the proposal. Details, next.

(MUSIC)

HERERA: The White House today wants tougher restrictions on brokers who manage retirement accounts. It’s an issue we discussed here on NIGHTLY BUSINESS REPORT last week.

And today, the president gave a bit more detail.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: There are a lot of very fine financial advisers out there, but there are also financial advisers who receive back door payments, or hidden fees. For steering people in the bad retirement investments that have high fees and low returns. So, what happens is, these payments, these inducements incentivize the broker to make recommendations that generate the best returns for them but not necessarily the best returns for you.

(END VIDEO CLIP)

HERERA: The new rules would seek to reduce those conflicts of interest.

John Harwood joins us now from Washington with more.

And, exactly, what does the president want financial advisers to be required to do, John?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, in some, sue, he wants them to meet the standard of fiduciary duty to their clients, not just putting them in investments that are considered suitable. That’s a legal term for investment advice. But rather meet the highest fiduciary obligations to the clients.

But we don’t know all the details because this was a proposed rule that the Department of Labor sent to the budget office, we’ll find out in a couple of months what exactly all of the details are, and then there’s going to be a comment period. So, we await (ph) until this gets fully implemented.

GRIFFETH: John, is this the new initiative? Or have we seen this before?

HARWOOD: 2010, Bill, the administration tried to do something similar. There was a lot of blowback from Wall Street. They dropped the idea. Now, they’ve refined it with some distinctions in the previous effort, for example, in a conference call yesterday. Administration officials said, we’re not going to ban commissions. We’re also going to provide certain exception that Wall Street may find less restrictive.

HERERA: So, what are we hearing if anything yet from Wall Street?

HARWOOD: Well, Wall Street is varied, of course. John Bogle of Vanguard, one of the titans in the mutual fund industry, was on the call with the administration yesterday. He said, I applaud this effort. He said it’s not about fraud or corruption by salesmen, but there’s a culture of salesmanship and financial advice that we’ve got to push back against that. Others say it could restrict the range of advice that investors could get.

So, there’s going to be a big fight, and the question is, can this get implemented before President Obama leaves office less than two years to go?

GRIFFETH: We should point out, this is designed to steer people away from necessarily higher fee investments that they might be steered toward by these brokers, but the performance may not be that much better?

HARWOOD: Exactly. And there’s no guarantee, of course, on anybody’s performance. But the argument from the administration is that these fees develop a long tail over time, and end up costing thousands of dollars. They came up with an estimate that’s $17 billion is what is cost investors by what they call conflicted advice.

HERERA: John Harwood, thanks so much.

HARWOOD: You bet.

HERERA: Bill?

GRIFFETH: Elsewhere, a new survey is painting a rather sobering picture of Americans’ finances right now. According to bank rate, nearly one-quarter of all Americans owe more money on their credit cards than they have in emergency funds. And a study also shows that 13 percent of Americans have no emergency savings, despite having no credit card debt. The group in the worst financial shape right now is the 30 to 49-year-old period, those raising families, paying down mortgages and car payments all at the same time.

HERERA: Shares of Boeing (NYSE:BA) dragged down the Dow, and that’s where we begin tonight’s “Market Focus”.

The airplane manufacturer was downgraded by Goldman Sachs (NYSE:GS) to sell from neutral. The firm says the company is the most exposed in the industry to aircraft demand risk. Shares fell 2 percent to finish at $154.74.

Valeant will buy drugmaker Salix Pharmaceuticals (NASDAQ:SLXP) in a deal valued at about $10 billion. Salix is known for its irritable bowel syndrome drug. Valeant’s CEO explains how the acquisition will create value.

(BEGIN VIDEO CLIP)

J. MICHAEL PEARSON, VALEANT PHARMACEUTICALS CEO: The GI space is quite attractive. These guys are clearly the market leaders. The actual business is performing very well, if you look at the script trends (ph) and how the parts are growing. We’ll continue to do what’s right for shareholders, continue to focus on creating value for them. And hopefully, we’ll continue to grow.

(END VIDEO CLIP)

MATHISEN: And shares of Valeant popped almost 15 percent to $198.75. Salix was off 1 percent to $155.80.

Well, the happiest place on earth just got a little more expensive. Disney (NYSE:DIS) is hiking its theme park prices, effective Sunday, with some tickets costing more than 100 bucks. This as the company has continued to see strong attendance growth at its parks. I was there last week. Shares were up a fraction to $104.99.

Some executive changes to tell you about at Dish Network. The company’s CEO is retiring at the end of March. He’ll be succeeded by the company’s chairman and co-founder Charles Ergen. Shares fell more than 1 percent to $77.39.

GRIFFETH: Ocwen Financial (NYSE:OCN) saw its shares rise after it agreed to sell about $10 billion in servicing rights to Nationstar Mortgage Holdings. This comes as the mortgage servicing company is trying to overhaul its business because of recent regulatory penalties. Shares of the company rose 8 percent today to $10.40.

Express (NYSE:EXPR) Scripts reported earnings and revenue after the close that beat Wall Street’s estimates. The pharmacy benefits manager gave earnings guidance for the first quarter and the full year that was a little light. That cost some volatility initially in after-hours trade. But before the close, the stock was up a fraction to $86.72.

Meanwhile, hospital operator Tenet Healthcare (NYSE:THC) swung to a profit, helped by higher admissions and revenue. Earnings did fall short of estimates, though, while overall revenue was better than expected. Shares of Tenet were volatile after hours. Before the close, though, up more than 1.5 percent to $45.58.

And Stifel Financial (NYSE:SF) has announced after the bell that it’s going to buy rival firm Stern Agee. The move is going to combine two of the largest U.S. brokerages located outside of New York. Shares of Stifel popped initially in after-hours trading on the news. Before the close, though, it was 1 percent to $52.09.

Coming up, shareholders are agitating for change at some of the nation’s biggest companies. And ahead of proxy season, some of the battles with the boards are already becoming very public.

(MUSIC)

HERERA: Goldman Sachs (NYSE:GS) could face a lawsuit related to the sale of mortgage bonds. In a regulatory filing, the bank says federal litigators informed the firm in December that it may face a civil suit. The bonds in question were sold during the period leading up to the financial crisis. And as a result, Goldman Sachs (NYSE:GS) listed the top end of its legal losses range to about $3 billion.

GRIFFETH: It’s that time of year again, over the next several months, public companies will be holding their annual shareholders meetings to elect directors, vote on governance issues and to hear from shareholders. And as Mary Thompson tells us now, the issues that will be front and center this time are currently being hashed out behind the scenes, and in the headlines.

(BEGIN VIDEOTAPE)

MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): A public event, the annual meeting can provide a flash point or turning point for shareholders. This year, three issues seem dominating proxy season. Campaigns by activist investors like Nelson Peltz, board refreshment are shaking up current boards, and proposals asking for proxy access, which would give certain shareholders not just a company a chance to nominate directors.

SCOTT STRINGER, NEW YORK CITY COMPTROLLER: This is our right as share owners.

THOMPSON: It’s big shareholders like Peltz, though, that are grabbing early headlines. Peltz started (INAUDIBLE) Du Pont which he wants to split up. It’s part of a trend by activists that proxy adviser ISS called merge or purge, where the activists push firms to look for a buyer, or to sell or spin off assets.

At GM, an activist wants a seat on the board and wants the automaker to buy back stock, and another activist is bidding hard to get the auction house Sotheby’s to buy back shares as well.

As for small investors, they’ll vote on proxy access at over 100 meetings this year.

(on camera): A number of public pension funds including New York City want the companies they own to allow investors who owned a combined 3 percent of the company stock for three years to have the chance to nominate up to a quarter of the directors to the board. New York City comptroller Scott Stringer filed 25 proxy access proposals, saying a seat on the board will give investors a bigger voice on three key issues.

STRINGER: Concerned about energy companies that are not focusing on climate change. We’re very concerned about CEO compensation, excess CEO compensation. We’re also very concerned about corporate diversity.

THOMPSON (voice-over): Behind closed doors, a quiet movement to shake up boards is taking place. Investors talking with firms to replace long-serving directors, feeling their tenure increases their independence, while replacing them gives the opportunity to create more diversity on the board. Private talks looking to avoid a public fight in a season that’s marked by them.

For NIGHTLY BUSINESS REPORT, I’m Mary Thompson.

(END VIDEOTAPE)

HERERA: And finally tonight, kids are benefiting from the economic recovery as well. According to a new survey from Delta Dental, losing baby teeth has gotten much more lucrative. The tooth fairy paid a children a staggering total of about $250 million for lost teeth last year. That’s a record high. The average gift was over 4 bucks a pop, up 25 percent from 2013.

GRIFFETH: Wow.

HERERA: I got a quarter.

GRIFFETH: Me, too.

HERERA: That’s what I got.

GRIFFETH: That’s exactly what I got back in the day. I’m sure that’s what you got, too.

HERERA: It’s good to be a kid today.

GRIFFETH: Ah, 4 bucks.

HERERA: That does it for NIGHTLY BUSINESS REPORT. I’m Sue Herera. Thanks for joining us.

GRIFFETH: And I’m Bill Griffeth. I still have all my teeth, by the way. Have a good evening. We’ll see you tomorrow.

HERERA: So do I.

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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