Transcript: Nightly Business Report — March 11, 2015

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

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Stress relief. The Federal Reserve releases the final results of the bank stress test. And now, the big financials are giving back in the form of buybacks and dividends.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Emerging concerns. As the dollar strengthens, emerging markets are feeling the strain. And it’s something with exposure to the region should pay very close attention to.

MATHISEN: And the ties that bind. Why the Federal Reserve may have a big dollar dilemma on its hands.

All that and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, March 11th.

HERERA: Good evening, everyone, and welcome.

Stocks failed to hold their gains, extending yesterday’s big slide as the dollar continued to climb. But we begin tonight with the final results of the bank’s stress test: 28 of 31 large banks received the go-ahead from the Federal Reserve to return capital to shareholders. Bank of America (NYSE:BAC) has been given conditional approval and will have to resubmit its capital plan while the U.S. unit of Deutsche Bank and Banco Santander (NYSE:STD) has their plans rejected.

But the big winner may be Citigroup (NYSE:C), which saw its stock initially rise in after hours trading after its capital plan was approved, a big change from a year ago when it failed the annual test.

Kayla Tausche joins us now with more on that.

It is a big win for Citi, Kayla.

KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT: It is. Of course, you remember last year when Citigroup (NYSE:C) was rejected by the Federal Reserve on qualitative issues and CEO Mike Corbat said, instead of resubmitting the plan, he wanted to take the entirety of 2014 to fix those issues and Citigroup (NYSE:C), by many measures was best in class when its capital levels came through in the stress test. And the bank was rewarded for that in the form of being able to raise its dividends to 5 cents a share and $7.8 billion buyback.

Previous year, it’s only done $1.2 billion. So, this is multiple of what been doing before.

MATHISEN: Let’s talk about the banks that didn’t so well. That would be Deutsche Bank and Santander, as well as Bank of America (NYSE:BAC), which kind of got a conditional approval.

What was wrong there and do depositors or investors in those banks have anything to really worry about?

TAUSCHE: Well, the capital levels, Tyler, on the whole looked OK. Meaning that in a crisis-like scenario, if they sustained very deep losses, they would have enough cushion on hand to pay for those losses without taking taxpayer money.

But where the Fed raise concerns is how the bank plans, how their risk management processes work.

And in the case of Santander, governance over the U.S. unit did oversee the stress test. So, there were some intangibles, some would say vagaries around why exactly those banks did not receive full approval or in some cases were rejected. Senior Fed officials this afternoon said that next month, examiners that live inside each of these banks will be sending letters to the executives, telling them exactly what they need to fix, exactly what went wrong. Some of these are not issues that can’t be fixed in a matter of months, but at least they can get the ball rolling.

HERERA: Every year, they change the test for reasons that probably are obvious. But this time around, you said they made it kind of extra tough on some of the big investment banks.

TAUSCHE: They did. You know, Fed officials would say, we don’t want people to be teaching to the exam. They don’t want it to be something that only goes so far as to prevent what contributed to the last crisis. They want banks here in the U.S. to be so safe that they prevent a coming crisis. And one of the ways that they did that this year is estimating or hypothetically proposing that we saw a larger number of corporate bankruptcies.

That’s an issue that’s going to hit the banks with investment banks, capital markets and trading activity when those assets get marked lower. So, what you saw was actually Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM) and Morgan Stanley (NYSE:MS) actually with their capital plans come in below the Fed’s minimal level and the Fed said, all right, take a week after last week’s results came out, take a week, resubmit your capital plan and in many of those cases, they came back with a less aggressive buyback or dividend, and they were able to clear the bar.

HERERA: Wow. Kayla, thank you very much. Appreciate it — Kayla Tausche.

TAUSCHE: Well, Citigroup (NYSE:C) resurgence goes beyond just passing the Fed’s stress test, important, though, that is. Several of its business units are really clicking again.

Gerard Cassidy joins us now to tell us if investors can bank on Citi. He’s a banking analyst with RBC Capital Markets.

Gerard, welcome. Good to have you with us.

Bottom line me here: is Citi stock a buy in your universe?

GERARD CASSIDY, RBC CAPITAL MARKETS BANKING ANALYST: Yes, it is. We believe Citi is a very attractive investment for all type of investors because of its valuations. But more importantly, the company has real momentum in its recovery and tonight’s CCAR test is another piece of evidence of that recovery.

HERERA: What are the risks that are perhaps still inherent in Citi or are they now taken care of given it did pass this test with flying colors?

CASSIDY: I think there’s risks in all banks. You never immunize yourself from all risks.

But the risks have been greatly reduced for Citi and the U.S. banking system. So, when investors look at Citi, there’s a real value here because over time, the profitability will rise as they continue to simplify their business model and as the global economy continues to recover, especially here in the United States.

MATHISEN: They strip down, they sold off units. I believe they sold a prime brokerage unit, a prime finance unit not long ago.

In today’s “New York Times (NYSE:NYT),” there was an article that pointed to the strength of its derivatives operations. Some people might see that as a little bit worrisome because it was derivatives that were blamed for so many of the problems during the financial crisis. Why is Citi different on this score? And why, if it doesn’t, why doesn’t it worry you?

CASSIDY: I think when you look at the derivatives business for any company that’s in that market, as well as Citi of JPMorgan (NYSE:JPM) Chase and Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), it’s all about management of risk. And if you manage the risk properly, it can be a very profitable business. That’s what Citi has done.

Now granted, they have learned some very hard lessons during the financial crisis that almost brought them to their knees and as a result of that, that unit now is managed much more conservatively than it was back then.

HERERA: What other banks do you like in this sector? You know, a number of them did very well, 28 out of 31 passed. Would you buy any of the others?

CASSIDY: Yes. We see there are a number of banks that would be returning enormous amounts of capital over the next few years.

PNC financial is one of these banks well managed out of Pittsburgh, Pennsylvania, positioned in the Southeast now to grow even faster and they also had a big win today.

KeyCorp (NYSE:KEY) out of Cleveland, Ohio, another well-managed bank. They’ve done a great job in managing their capital, and these are regional banks that people can buy, as well as JPMorgan (NYSE:JPM). We think JPMorgan (NYSE:JPM) over the long run is another investment people can own.

MATHISEN: Very quickly, basically yes or no, will rising interest rates help these banks?

CASSIDY: Over the near term, absolutely, yes. You want to own the banks going into the first Fed fund’s rate increase.

MATHISEN: Gerard, crisp answer. Thanks.

CASSIDY: You’re welcome.

MATHISEN: Gerard Cassidy with RBC Capital Markets.

HERERA: Well, 2014 was a good year on Wall Street. The average bonus rose to nearly $173,000, according to New York’s comptroller’s office, as the securities industry added new jobs for the first time since 2011. The increase came even though financial industry profits fell slightly. The overall bonus pool, almost $29 billion.

MATHISEN: Back to stocks now, which were lower for the second straight session. The concerns are familiar ones. The dollar’s strength and the outlook for a possible Fed tightening and by the close, the Dow Industrials were off by 27 points to 17,635, NASDAQ down about 10 and the S&P 500 off almost 4.

As for oil, West Texas Intermediate moved lower after inventories hit a new record high but Brent saw its first gain after five days of losses.

HERERA: More signs of weakness out of China. China, the world’s second largest economy, reported growth rates for industrial production, retail sales and factory investments below economists’ expectations in January and February. That country is also experiencing a slowdown in real estate and sluggish exports.

MATHISEN: Thailand, which conducts a lot of trade with China, is joining the growing number of central banks across the globe cutting rates now. It’s the first time in a year that country has lowered its benchmark interest rate. The surprise move was made to bolster lackluster economic growth and to increase exports.

HERERA: And emerging markets losing some of the luster due to the strong dollar. The emerging market’s ETF which tracks that region has been lower 8 of the last 9 sessions. But what about the big U.S. multinationals with exposure, perhaps, in some of those regions? How is the stronger dollar impacting these U.S. companies?

Lauren Goodwin is director at Frontier Strategy Group and she joins us now.

Lauren, welcome. Nice to have you here.

LAUREN GOODWIN, FRONTIER STRATEGY GROUP: Thank you. Nice to be here.

HERERA: Let’s start, first of all, with that strong dollar and how it might be impacting the U.S. multinationals. What do you think?

GOODWIN: I think that the dollar will remain strong, and will strengthen throughout the rest of the year. So, looking to in the second half of 2015, we do believe that when the Federal Reserve raises interest rates that the dollar will strengthen even further. And for, when it comes to U.S. companies, dollar’s strength isn’t necessarily a bad thing, but the unpredictability of currencies globally can be difficult to plan for.

MATHISEN: What does the strong dollar mean for the economies of the emerging market? Some of which are heavily commodity dependent.

GOODWIN: Sure. Well, when it comes to simply the strong dollar, local currencies being more weakly valued makes the input to production that tend to come from abroad more expensive. So, all of your sugar or your glass might be more expensive coming from other places. And particularly, commodity-dependent markets still have to purchase that oil in dollars which makes it more expensive locally.

HERERA: So, which emerging markets do you think look like they’re in the best shape given everything that we’ve discussed?

GOODWIN: Most emerging markets that are energy importers are being helped by this strong dollar and low energy price environment. We tend to like developing Asia as well as some countries in sub-Saharan Africa in this environment. So, to give a couple of examples, we see the Philippines and Vietnam being boosted by this environment.

MATHISEN: A lot of people are saying, watch out. Obviously, Russia has been heavily impacted by the fallen energy prices, the sanctions there. Brazil, the BRICs, you know, Brazil, India, China, and Russia. Three of those BRICs, China, Russia, and Brazil, seem to be struggling.

GOODWIN: As it pertains to Russia and Brazil, we do see, broadly speaking, that where financial markets don’t trust the government to be doing the business-friendly thing. Those countries seeing further currency depreciations against the dollar than in other places where the government seems to be a little bit more stable.

China’s slowdown is a structured slowdown which we still see as being in pace for now, but certainly, where we see governmental or political issues, Russia and Brazil, as you mentioned. Some of the other markets that our clients tend to watch like Nigeria, for example, we do see struggling.

HERERA: We mentioned a little bit about U.S. companies being impacted by the U.S. dollar. But what about companies that have a lot of exposure to some of those emerging markets?

GOODWIN: Sure. The — when it comes to U.S. companies’ exposure, companies that are exporting to the emerging markets for sale will have a harder time in this environment. Those that are able to produce locally and already have those local production facilities intact will do a little bit better. Speaking in terms of industries, we see health care being more resilient because it’s typically government-funded in emerging markets and more resilient to the market impacts. But consumer discretionary and consumer durable goods, as well as, of course, energy companies are struggling.

HERERA: Lauren, thank you. We’ll leave it there.

GOODWIN: Thank you.

HERERA: Lauren Goodwin with Frontier Strategy Group.

Ty?

MATHISEN: Well, as the world looks to the Federal Reserve and when it will start hiking rates, the dramatic climb in the dollar is already impacting the U.S. economy in much the same way a rate hike would.

Steve Liesman explains the link between the strong greenback and the Central Bank’s decision to tighten.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): The 22 percent rise of the dollar against the euro over the past year means the French bottle of wine at a local liquor store just got cheaper, but for a California winery, it means it might have to lower its prices to stay competitive.

The same is true for U.S.-based car manufacturer competing with a European importer. Its cars are now less competitive.

That’s the way that a stronger dollar ends up importing lower inflation or disinflation into the U.S. economy. Overseas goods get cheaper. U.S. exports more expensive and U.S. prices have to adjust — in this case, downward. And this is now a problem for a Federal Reserve that’s scheduled to meet next week and possibly signal rate hikes ahead this summer.

Inflation is already running below the Fed’s 2 percent target. Lower oil prices and a stronger dollar which is importing disinflation, meaning in the months ahead, inflation will lose even more ground relative to the Fed’s goal. The way economists look at this, it’s almost the same as an interest rate hike from the Fed.

(on camera): Here’s why: Central Bankers believe what’s important to the economy are real interest rates or what you pay for your loan after adjusting for inflation. So, if your mortgage rate is 5 percent and inflation is 2 percent, the real rate on your mortgage is 5 minus 2 or 3. But let’s say the inflation rate falls to 1 percent and interest rates stay the same at 5 percent. Then, the real rate rises to 4 percent. That’s the same effect that the Fed would have if it tightened policy.

(voice-over): And if the Fed does raise rates anyway, the dollar would strengthen further. That’s because the U.S. is attracting capital from savers in countries with lower rates. They’re putting their money where rates are higher, selling their home currency and buying higher yielding assets like U.S. treasuries.

It’s a tough call for the Fed. Raise rates to head off possible inflation, but risk, at the same time, moving even further away from its 2 percent inflation target.

It’s enough to make you reach for one of those bottles of wine, French or Californian, depending on the price.

For NIGHTLY BUSINESS REPORT, I’m Steve Liesman.

(END VIDEOTAPE)

HERERA: All right. Still ahead, moving America — the fastest growing business in transports and how it’s helping drive economy activity.

(MUSIC)

HERERA: Poultry producers saw their shares slump today on news of a bird flu outbreak. There are confirmed cases in Missouri and Arkansas. The government said this strain poses no health risk to humans but that’s not stopping investors from selling. Shares of Tyson, Pilgrim’s Pride (NYSE:PPC) and Sanderson Farms (NASDAQ:SAFM) all closed 7 percent lower.

MATHISEN: A takeover battle for Salix Pharmaceuticals (NASDAQ:SLXP) is where we begin tonight’s “Market Focus”.

Endo International making an offer to buy Salix as it seeks to upend Valeant Pharmaceuticals, $10 billion agreement to buy that Endo topped that with a nearly $12 billion bid for the company. Shares of Endo off more than 1 percent. Salix popping 7 percent. Valeant tumbled about 4 percent.

Well, the retailer Express (NYSE:EXPR) posting results that beat estimates. Its current outlook for current quarter profit also topped the consensus. One thing that helped quarterlies was less promotional activity. Shares there up 3.5 percent to $53.47.

General Electric (NYSE:GE) reportedly weighing deeper cuts to its commercial lending business, GE Capital. The Dow Jones says the company could even part with the unit amid pressure from investors to exit that business. Shares rose a fraction at GE today to $25.19.

HERERA: And shares of Lumber Liquidators spiked today on news of an activist investor has taken a 15 percent position in the recently battered stock. This comes after a report on CBS’ “60 Minutes” that alleged some of the company’s flooring products contain higher than expected levels of a known carcinogen, a charge that the company disputes. The stocks surge more than 10 percent to $72.73.

Acadia Pharmaceuticals took a big hit after hours. The company saying it’s delaying submitting a marketing application for a Parkinson’s disease drug. It also its chief executive will retire. Shares plunged as much as 22 percent in after-hours trading. Before the close, the stock was off about 2 1/2 percent to $44.76.

And Shake Shack out with its first earnings report since going public and the investors were not pleased with the results. The burger chain reported a loss. Sale did jump and they topped estimates. Still after the bill, shares fell initially. Before the close, though, the stock was up 2.5 percent to $46.90.

MATHISEN: U.S. airlines are planning for a busy spring expected to carry more passengers than they have in seven years. The trade group Airlines for America says the number of people traveling this March and April will be about 2 percent from last year and to meet demand, carriers are going to increase the number of seats available.

HERERA: Economic activity is dependent on transporting goods from point A to point B, and there’s one mode of transportation used by a wide variety of industries and companies that’s growing at a faster pace than all others.

Morgan Brennan has more from Kansas City, Missouri.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is intermodal. And so, is this, and these are containers used to ship anything you’d expect to find on a Walmart shelf.

As the name suggests, intermodal refers to freight that’s moved using several modes of transport, truck, rail and for international cargo, ocean liner. The concept has been around for decades but it’s really taken off since the downturn, becoming the fastest growing business within freight transport.

(on camera): So, how important is intermodal to Kansas City?

MICHAEL COLLINS, PORT AUTHORITY OF KANSAS CITY PRESIDENT: Intermodal is very important to Kansas City.

BRENNAN (voice-over): Michael Collins is the CEO of Port Authority of Kansas City, one of the largest freight transportation hubs in the country.

COLLINS: When we look at the market analysis, the industry analysis, one thing we do know is that intermodal connectivity is the growth for freight.

BRENNAN: And it’s growing in Kansas City because of accessibility.

CHRIS GUTIERREZ, KANSAS CITY SMARTPORT PRESIDENT: But the fact that Kansas City is centrally located with the infrastructure rail and highway, we can reach 85 percent of the country in two days and all of the country in three days on ecommerce deliveries.

BRENNAN: But the scenario isn’t just playing out here. Across the country, companies are building out their infrastructure to handle more intermodal cargo, with the southeastern U.S. growing the fastest. It’s been especially beneficial for the railroads like Union Pacific (NYSE:UNP), BNSF, Norfolk Southern (NYSE:SO), CSX (NYSE:CSX) and Kansas City Southern (NYSE:SO) (NYSE:KSU).

ERIK HANSEN, KANSAS CITY SOUTHERN VP: It’s one of our strategic and it has been for a number of years. We tried to leverage growth of this particular segment in order to grow the company overall.

BRENNAN: Rail has been taking market share from trucks that used to move freight exclusively over the road. That’s because more can move by train and when energy prices are high, it’s much cheaper, more fuel efficient to ship this way for the majority of the haul.

But as crude oil has fallen, diesel prices lower than six months ago. Analysts say it makes the cost of trucking over a long distance begin to look more attractive, especially in light of the congestion at the West Coast ports, where trucks can turn containers faster.

(on camera): Still, this business is growing and growing fast, with the industry’s trade association forecasting another year of forward of 6 percent growth, as more of these containers move across America.

For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan in Kansas City, Missouri.

(END VIDEOTAPE)

MATHISEN: Coming up, what’s hurting small business owners in many U.S. cities and how they’re fighting back.

(MUSIC)

MATHISEN: It’s one of the biggest issues facing small business owners: rising rents. A growing number are being forced to close up shop, unable to afford the increasing costs.

And as Kate Rogers (NYSE:ROG) tells us, it’s happening in cities across America.

(BEGIN VIDEOTAPE)

UNIDENTIFIED MALE: Avignone, how can I help you?

KATE ROGERS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Many consider Avignone Bleecker an institution in New York’s West Village after opening in the 1830s.

Its current owner, Abe Lerner, has been there for three decades. But by next month, he’ll close his doors for good. He says his building was sold to a hedge fund who then tripled his rent from $20,000 per month.

ABE LERNER, AVIGNONE ON BLEECKER OWNER: We have a thriving business here. I mean, business went up every year. It’s, you know, with all the chain store, with all the chain pharmacies around, we still were able to increase business because we just provided a service here.

ROGERS: But steady business isn’t enough in the face of soaring rent from coast to coast. Office space and store front rentals in New York City have increased by more than 20 percent in the past five years and in San Francisco, the problem is even worse, with store front rentals up over 30 percent and office space up more than 65 percent since 2010.

A new social media campaign called Save NYC is hoping to change that. The effort was launched by blogger, Jeremiah Moss, who’s been chronicling the demise of mom and pops facing higher rent.

(on camera): The Save NYC campaign is modeled off of another recent initiative called Save Soho out of London. That’s aimed to protecting local art venues within the city. And in San Francisco, city officials have recently set up their efforts to shield mom and pops from commercial rent hikes there.

(voice-over): But there are outliers like Joe Rocco, third generation owner of shoe repair on the Upper East Side. He wound up settling out of court with landlord SL Green when Dwayne Reed wanted to expand into his store.

A customer took his case pro bono.

JOE ROCCO, JIM’S SHOE REPAIR OWNER: I feel good about New York City having an old business staying here and hopefully we can start a trend where landlords say, hey, we need to keep old New York, some of these old businesses alive to keep the character of New York. It’s better than becoming a cement city.

ROGERS: Rocco realizes he’s a rarity, an old-school shoe shine shop in a city where chain retail stores have increased by nearly 2.5 percent in the last year according to the Center for an Urban Future.

For NIGHTLY BUSINESS REPORT, I’m Kate Rogers (NYSE:ROG).

(END VIDEOTAPE)

MATHISEN: And now, what to watch tomorrow on the economic front, a fresh read will come out on the jobs market, the weekly jobless claims report. Retail sales numbers also come out. Those will be from February. Wall Street expecting an increase there following a dip in January. This is partly because gasoline prices came back last month.

And Greece’s new prime minister will meet with the head of the Organization for Economic Cooperation and Development to discuss reforms. Wouldn’t you like to be the fly on the wall?

HERERA: Yes, I really would. There will be some good headlines out of that, I think.

All right. That’s NIGHTLY BUSINESS REPORT for tonight. I’m Sue Herera, and we want to remind you, this is the time of year your public television station seeks your support.

MATHISEN: And I’m Tyler Mathisen. On behalf of your public TV station, thanks for your support and we will see you 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) 2015 CNBC, Inc.

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