Transcript: Nightly Business Report — May 19, 2015

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Walmart whiffs. The world`s largest retailer reports a big earnings miss and says it has a lot working against it.

BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Total recall. Takata nearly doubled the size of its already massive airbag recall, making it now one of the largest consumer product recalls ever.

HERERA: Cleaning up Wall Street. After the great recession, new legislation and billions of dollars in fines — a new study shows little has changed.

All that and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, May 19th.

Good evening, everyone. I`m Sue Herera.

GRIFFETH: And I`m Bill Griffeth. Tyler Mathisen is on assignment right now. In fact, he`ll be with us with a report a little bit later in the program.

But we begin tonight with the results from Walmart and Home Depot (NYSE:HD). Both, of course, barometers of consumer spending, which is a key engine of economic growth, and while the world`s largest retailer reported sluggish sales, a drop in first quarter earnings, and a profit outlook for the current quarter below expectations, Home Depot (NYSE:HD) had a solid quarter. The world`s largest home improvement chain even raised its full year forecast as a matter of fact.

Investors took notice on both, sending shares of Walmart lower by more than 4 percent, making it the worse performing stock inside the Dow Jones Industrial Average. Home Depot (NYSE:HD) shares also fell despite the rise in its profits.

Courtney Reagan has more tonight.

(BEGIN VIDEOTAPE)

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
The world`s largest retailer didn`t have the world`s greatest quarter.
Walmart`s first quarter profit fell slightly shy of analyst estimates, so did revenue and sales at U.S. locations open more than a year. The stronger dollar, higher wages, and job programs for employees, as well as investments in ecommerce cut into Walmart`s quarterly profit.

However, that same store sales metric is still growing and traffic also came in positive for the second straight quarter. Still, analysts say Walmart has work to do within the company, as well as balancing external factors.

PATRICK MCKEEVER, MKM PARTNERS: When your business is driven by grocery more than anything else, if grocery is more than 50 percent of the business now, you have to lead with a very compelling assortment of fresh food, and I don`t think they`re doing that as well as they could or should be doing and others are.

REAGAN: But even if Walmart gets grocery right, there are bigger issues that Walmart and other retailers have to contend with.

MCKEEVER: There are have been some structural changes in the way consumer spends money over the past year or two and they are putting it putting more of their disposal dollars into those other areas and spending less of traditional retail.

REAGAN (on camera): April`s retail sales reports and various earnings reports are showing consumers are spending, but on services and goods outside of apparel retail, like dining out, digital downloads, auto- related sales and home improvement, which helps to explain Home Depot`s strong results.

(voice-over): In contrast to Walmart, the world`s largest home improvement retailer turned in a strong spring quarter, its most important season. Home Depot`s profit, revenue and sales at stores open at least a year exceeded expectations.

CEO Craig Menear says a more normal spring across much of the U.S.
and a continued housing market recovery are behind the successful quarter.

BRIAN NAGEL: There`s very much a macro piece to it. Housing is improving, that`s driving better results at Home Depot (NYSE:HD). But Home Depot (NYSE:HD) has been executing perfectly. So, it`s both internal and external.

REAGAN: Just as Walmart problems are both internal and external.

For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan.

(END VIDEOTAPE)

HERERA: As the weather warm up, so did home building. Housing starts rose to a 7-year high in April, a gain of about 20 percent from a month earlier, and that is the highest reading since November of 2007. The Commerce Department also reported that new applications for building permits, an indicator of construction in the coming months, increased about
10 percent. A bit later in the program, we`ll take a look at the new technology that`s getting home builders excited in drought stricken California.

GRIFFETH: And that robust housing data are offering hope now for over all economic growth in the second quarter, following that weak start to the year — as Steve Liesman first pointed out — there may be a big problem with the way government has been calculating first quarter growth and now, more and more economists are agreeing.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): A big debate has erupted in the economic world over U.S. GDP is reported correctly. It`s been sparked by a CNBC report in April, showing first quarter growth has been persistently weaker than the other quarters over a span of three decades. The San Francisco Federal Reserve, which cites CNBC in its research, has taken a step further, and says a correct seasonal adjustment of the data would put current first quarter growth at 1.8 percent, not the government`s already reported 0.2 percent. The uncertainly over the first quarter numbers is prompting many economists to downplay the recent weakness and focus on other key economic data.

JOE LAVORGNA: The unemployment data which do not seem to have this residual seasonality to me are sending us the right message. In other words, the economy is a lot better than the GDP numbers suggest.

LIESMAN: Barclays also finds growth near 2 percent on the first quarter by using alternative seasonal adjustments. They say factors like fears over Europe or severe weather can explain some of the first quarter weakness, but they concluded that the first quarter shortfall, quote, “is more systematic”. Other economists blamed residual seasonality for the weakness.

Simply put, this means seasonal patterns that remain even after adjusting for seasonal patterns which the government does when it reports GDP.

In response to the CNBC story in April, the Bureau of Economic Analysis, which compiles the GDP report, said it`s studying the issue and hopes to announce changes in July.

MICHELLE MEYER: If the seasonal adjustment process is inappropriate, which it seems to be, then we`re reacting to data that`s actually not really capturing the true underlying economy.

LIESMAN: Meanwhile, economists at the Federal Reserve board of governors found weakness in the first quarter, but no evidence of residual seasonality. However, they only went back 10 years.

(on camera): Now, it could be that the first quarter is really weak.
But the mounting evidence is that the weakness is overstated at least somewhat by something that`s wrong in the government`s data.

For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.

(END VIDEOTAPE)

HERERA: Well, that puzzling first quarter data was one of the topics being discussed at the iCONIC conference, which brings together influential entrepreneurs and put together by CNBC which produces this program and Inc.
Media.

And Tyler Mathisen was there.

(BEGIN VIDEOTAPE)

TYLER MATHISEN, NIGHTLY BUSINESS REPORT: Among the entrepreneurs I talked to was Mark Cuban. And I asked him about the controversy involving the GDP numbers and whether where he sits atop many businesses he sees the economy as weak as the number portray it to be.

MAK CUBAN, DALLAS MAVERICKS OWNER: Well, when it`s not so great, you look at your own numbers and compare them to what the macro numbers are.
So, you know, you have to take into consideration that the GDP`s macro and whatever is happening there, hopefully, we can counterbalance it with effort on our side.

But when you see the number, it kind of sets expectations. So, when we saw the .02, it was like, well, wait, are things slowing down? Does that affect other investment?

So, the “Shark Tank” companies, I just want them to sell more. The Mavs, I just want them to sell more. But knowing now that the number reflects what it felt like, I think it doesn`t so much change what the companies do, but it changes some investments thesis (ph), perspectives that I have.

MATHISEN: Later this year, if interest rates go up, how will you react to that? Does that make a difference to you?

CUBAN: No. You know, it`s not going to bounce them 5 percent, right?

MATHISEN: Right.

CUBAN: You know, a quarter percent, 1 percent, the marginal cost to any of my companies, the marginal cost of the companies I`ve invested in, the stocks (INAUDIBLE) irrelevant.

MATHISEN: And a lot of your businesses are not really capital intensive in that sense.

CUBAN: Well, even the ones that are, right? So, the arena or whatever it may be.

MATHISEN: Right.

CUBAN: The 1 percent isn`t going to change how I do business. The 1 percent isn`t gong to change what do I invest in and they`re probably not going to move 1 percent.

MATHISEN: One of the real sub-plots of the conference today were the questions about whether the tech market most specifically was overvalued with NASDAQ at levels not seen basically since the year 2000 and we all remember what happened then.

The general consensus is that this time it is different, that the businesses that are trading on the market on NASDAQ and elsewhere actually are real businesses with real revenues and real profits and that is why many of them believe this time it is different.

Back to you.

(END VIDEOTAPE)

HERERA: Thank you, Ty.

Kate Rogers (NYSE:ROG) spoke to small business owners at the iCONIC conference about the challenges that they are facing and she`ll bring us that story a little bit later in the broadcast.

GRIFFETH: Meantime to Wall Street, investors didn`t make big moves today, perhaps as they await the minutes of the Federal Reserve`s last meeting. Those are due tomorrow. But today, the Dow Jones Industrial Average finished with a gain of 13 points to 18,312. That`s another record. The NASDAQ fell by eight after coming within 10 points of its closing high. And the S&P fell by a point. So, no closing high there today.

HERERA: Despite stocks sitting at or near all-time highs, global investors are cutting their exposure to U.S. equities, to a level not seen since 2008. According to a Bank of America (NYSE:BAC) Merrill Lynch survey, more fund managers trim their equity holdings this month. The big
reason: less confidence in corporate profits. The survey also said investors are lowering their risk following the bond market selloff and increasing their cash positions.

GRIFFETH: Well, the long awaited settlement between banks and regulators over currency manipulation is expected to come tomorrow.
According to reports, banks will plead guilty to charges that they manipulated the multitrillion dollar currency markets and paid billions to settle the matter.

HERERA: Three Chinese professors are among a handful of Chinese nationals accused of economic espionage. The Justice Department accused six individuals of conspiring to steal sensitive wireless technology from U.S. companies namely Avago and Skyworks Solutions (NASDAQ:SWKS). The companies developed technology often use by the military as well as consumer applications.

GRIFFETH: Airbag maker Takata has declared airbags it made they made in 34 million vehicles and as a result, it`s announcing the largest auto- related recall ever. The faulty airbags have been associated with at least five deaths.

Phil LeBeau has more on the story tonight.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): It is a massive recall designed to fix defective airbags linked to five deaths and more than 100 injuries. Takata, a Japanese auto parts maker and one of the largest airbag suppliers in the world, has agreed to replace 33.8 millionaire airbag inflators. The repairs will involve numerous models from 11 automakers. Most of them built between 2002 and 2008.

ANTHONY FOXX, DOT SECRETARY: Lives are at stake. It`s our job to protect them and so, that`s why we`re doing what we are doing today.

LEBEAU: The airbags being replaced could potentially shoot shards of metal when deployed. Exactly why that happens is still unclear. Humidity is believed to be a factor. Takata says repairs will initially focus on older vehicles in states with high humidity, but making millions of replacement airbag inflators and getting them into vehicles will likely take many years.

MARK ROSEKIND, NHTSA: I think the big question is how long is this going to take? Nobody knows that yet it. There is no question, it could be some years.

LEBEAU (on camera): By agreeing to a nationwide recall, Takata ends a long and costly battle with the Department of Transportation, but its legal problems are far from over. The U.S. Department of Justice is currently conducting a criminal investigation looking into how Takata has handled these airbag recalls.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

(END VIDEOTAPE)

HERERA: And still ahead, what has changed? After record fines and stringent new rules for Wall Street, a new report says not as much as you would think.

(MUSIC)

HERERA: A Tennessee man and his family raised almost $200 million for a cancer charity and then allegedly spent the money on themselves. A lawsuit was filed by a Federal Trade Commission and attorneys general in all 50 states and the District of Columbia against four cancer charities run by the members of the same family.

(BEGIN VIDEO CLIP)

JESSICA RICH, FTC: Insisting of supporting patients battling with the ravages of cancer, the overwhelming majority of donations benefited the individual defendants, their family and friends, and the fundraisers they hired to solicit contributions. Defendants spent consumer donations on cars, on vacations, cruises, college tuition, gym membership, jet ski outings and sporting events and concert tickets and dating site memberships among other things.

(END VIDEO CLIP)

HERERA: The lawsuit alleges that charities violated both federal and state regulations.

GRIFFETH: Package delivery company UPS is going to pay $25 million to settle some allegations that it submitted false claims to the U.S.
government. According to the court documents released by the Department of Justice, UPS covered up reports that it was late to deliver packages, keeping customers from being eligible for refunds.

HERERA: And PayPal will also pay $25 million to resolve allegations it illegally signed up customers for unwanted credit products. The Consumer Protection Bureau says PayPal made customers use its product instead of the payment method that they preferred. PayPal is a payments unit of eBay (NASDAQ:EBAY).

GRIFFETH: So, a new study has found that bad behavior still exists on Wall Street. And according to “The New York Times (NYSE:NYT)”, 34 percent of Wall Street professionals earning over half a million dollars a year have witnessed or have firsthand knowledge of wrongdoing in the workplace.

The co-author of this study joins us now to discuss the findings.
He`s Jordan Thomas, chair of the whistleblower practice at Labaton Sucharow law firm, and a former assistant director with the SEC enforcement division.

Good to see. Thanks for joining us tonight.

JORDAN THOMAS, LABATON SUCHAROW: Thanks for having me.

GRIFFETH: What kind of activity are we talking about here?

THOMAS: Well, the survey looks at all forms of wrongdoing within the financial services industry and our survey findings are particularly troubling. What we see is that Wall Street and Fleet Street appear to have lost their moral campus and aren`t looking very hard for it.

HERERA: You know, Jordan, after the `08 financial crisis, there were regulations put in place. Supposedly, there were a lot of watch dogs and whistleblowers started to come forward a little bit. But you think there is confidentiality issues that are preventing people from reporting wrongdoing, is that correct?

THOMAS: That`s correct. One of the big surprises of the survey was that large percentages of the financial service professionals have been asked to sign secrecy policies and secrecy agreements that expressly prohibit them from reporting wrongdoing to law enforcement authorities.

These agreements are particularly insidious because they keep state, federal and local law enforcement in the dark about all forms of misconduct, whether it`s corporate fraud, environmental crimes, or public safety issues. This is something that affects, when you`re looking at over
$500,000 income, people more than 25 percent of financial service professionals. So, this is a significant law enforcement problem and one that the SEC and other domestic and international authorities are likely to be concerned about and wish to address.

GRIFFETH: Why do you think this is? I mean, I`ve been covering Wall Street for many years and this has been a chronic problem for years. Even now in the post-Dodd/Frank era which admittedly contained a number of regulations. Now, you`re fighting with the survey that they are still having problems trying to contain this kind of behavior. Why does this happen on Wall Street, do you think?

THOMAS: I believe at its core Wall Street and Fleet Street have not established a culture integrity. We`re doing the right thing and speaking about the wrong thing is a norm. People have reported in our survey that they feel pressure to engage in illegal and unethical behavior, and they talk about their compensation plans incentivizing and engaging in illegal behavior, and a surprising 25 percent admit that they would engage in illegal insider training if they could make $10 million and get away with it.

GRIFFETH: All right. Troubling numbers tonight from Jordan Thomas of Labaton Sucharow. Thanks for joining us tonight.

THOMAS: Thanks for having me.

HERERA: On a lighter note, the bargain hungry consumer helped TJX companies post strong results, and that is where we begin tonight`s “Market Focus”.

The parent of chains like T.J. Maxx and Marshalls reported a rise in quarterly sales as more customers visited its stores and the company expanded offerings. TJX also hiked its full-year profit and same-store sales forecast. Shares rose almost 3 percent to $69.19.

Red Robin also impressing investors with its results. The burger chain saw earnings rise almost 40 percent. On that, the company raised the lower end of its guidance for sales. Shares surged more than 15 percent to $84.14.

Dick`s Sporting Goods posted earnings that beat estimates, while revenue was just in line. But same-store sales rose less than expected.
The athletic gear seller did hike the lower end of its full year earnings guidance. Still, the stock was off five percent to $53.43.

GRIFFETH: Etsy delivered a big loss in its first report since going public. The online craft marketplace`s bottom line results were well below estimates, while revenue was in line with consensus. Shares were down as much as 19 percent in after-hours trading. But before the close, shares were up 2 percent to $21 per share.

And the Food and Drug Administration approved Johnson & Johnson`s latest schizophrenia treatment. The drug maker says the medication is the longest dosing interval available for patients with the condition. Shares were a fraction higher to close the day at $103.96.

And Computer Sciences (NYSE:CSC) announced plans to split into two.
The company says it will separate its government-focused business from its commercial-information technology unit into two publicly traded firms. It also reported earnings that slipped in its most recent quarter. Shares popped, though, on the split following the closing bell. The stock was off slightly on the earning news, regular trading, it closed at $67.66.

HERERA: The California drought is giving way to new technology for the home and home builders are all over it. But will it be enough to keep the housing recovery rolling in that state that desperately needs some more homes?

Diana Olick has some answers from Lancaster, California.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
They look like two man hole covers on the side of a house, but what`s going on underneath, a in-home recycling system could be an answer to how to save water in drought stricken California.

BOB HITCHNER: Our mission is really to raise the water efficiency at homes to a whole new level. And there`s really no way that you can do it the way we do it, and I think it`s just as important as solar panels, or maybe it even more important than solar panels because there`s really no substitute for water.

OLICK: It is brand new technology from Australia based Nexus E Water.

(on camera): The system pulled in used soapy water from the house, like from the shower or the dishwasher, the laundry, not toilet water. It then pulls it through the system, cleans it and the result is water that can be used for irrigation for flushing toilets. The company claims it can recycle two-thirds of all of the water used in your home.

(voice-over): KB Home (NYSE:KBH) just announced the technology will be standard in about 50 new homes in its new San Diego community.
Developers like Emile Haddad say new technology like this will soon make drought a nonissue for housing.

EMILE HADDAD, DEVELOPER: We`re going to see much more surgical approach, and we`re going to put together a plan that deals with water, hopefully once and forever. And, you know, we`re going to see in 20 years that we`re going to be talking about drought as something that we all can live through.

OLICK: Haddad is behind a huge development in Irvine. The Irvine water district actually recycled its own water through purple pipes in the ground.

HADDAD: Irvine has been way ahead in its thinking.

OLICK: But there are 400 water districts in the state and not all are so fortunate. With another year of drought predicted, builders are concerned the state will restrict new construction.

JOHN BURNS: It is hard to get your approvals in California already because of the traffic and the schools. And now, there are no-growthers
(ph) are going to add water to the mix and make it more difficult to get approvals.

OLICK: That could lead to even higher home prices in the priciest state for housing.

For NIGHTLY BUSINESS REPORT, I`m Diana Olick, in Lancaster, California.

(END VIDEOTAPE)

GRIFFETH: Coming up, where small business owners find the secret to success.

(MUSIC)

HERERA: Here is what to watch for tomorrow. Minutes from the Federal Reserve April`s meetings are out. Lots of earnings, including results from Target (NYSE:TGT), Salesforce and Lowe`s. And that`s what`s on the agenda for Wednesday.

GRIFFETH: And as the trade bill continues to make its way through Congress, the treasury secretary has a message for lawmakers. Jack Lew says he would advise the president to veto any trade bill that contains enforceable rules against currency manipulation. His comments, of course, pushed back against lawmakers who are intent on putting such rules in that legislation.

HERERA: When it comes to starting a small business, it takes a bright idea and a lot of hard work. And many small business owners face a number of big challenges before they find success.

Kate Rogers (NYSE:ROG) has more from the iCONIC conference in Chicago.

(BEGIN VIDEOTAPE)

RAHM EMANUEL, CHICAGO MAYOR: One of the things that we`ve been working on is the relationship between research entrepreneurs, talent, money and creating an environment in the city of Chicago.

KATE ROGERS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
From Silicon Valley to Main Street America, entrepreneurs are feeling decidedly more optimistic, but launching a business comes with some big challenges, including funding, growth and acquiring talent.

UNIDENTIFIED MALE: Finding the right sales people because for sales that can be very, very challenging.

UNIDENTIFIED FEMALE: Biggest challenge is actually bad for the right partnership for the next step.

ROGERS: At the first ever iCONIC conference from Inc. and CNBC, entrepreneurs from the around the country gathered in Chicago to hear from those who have taken the leap and made it big.

(on camera): Even the most successful entrepreneurs faced headwinds when launching, because having a great idea is one thing, but bringing that idea to light is an entirely different challenge.

(voice-over): Mark Lawrence is a co-founder of Chicago-based startup Spot Hero. It`s an app that lets users reserve parking spots in advance in cities across the country. Lawrence says he was surprised how long it took to launch.

MARK LAWRENCE, SPOT HERO: When we first started, we had this idea that everything was going to happen so much faster than it actually did.
We thought we were going to launch the website and the app, and it took a long time to do both. And I`d say the biggest challenge was how long it actually took to get going.

ROGERS: Sharon Schneider is the co-founder of Chicago-based Moxie Jean. The company resells gently used children`s clothing online.
Schneider says her original business model couldn`t get off the ground.

SHARON SCHNEIDER: We had originally as a little bit different business model, which was a subscription service. We got rid of the subscription service and went to straight resale, and within six weeks, we had five times as many customers as the old model ever did in nine months.
And so, that`s when we said, uh-huh, I think we`re on to something.

ROGERS: Just like Schneider, entrepreneurs here are also hoping for that aha-moment.

For NIGHTLY BUSINESS REPORT, I`m Kate Rogers (NYSE:ROG) in Chicago.

(END VIDEOTAPE)

HERERA: Good for them.

GRIFFETH: Let`s face it, small business, that`s where the job growth is in the economy right now.

HERERA: Absolutely. It really, really is. And I give them a lot of credit because it is tough. Good luck.

That does it for NIGHTLY BUSINESS REPORT for tonight. I`m Sue Herera. Thanks for joining us.

GRIFFETH: I`m Bill Griffeth. Have a great evening, everybody.
We`ll see you 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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