Transcript: Nightly Business Report — July 21, 2015

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

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Tech wreck. Dow components Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) fall sharply after reporting late-day profits, potentially extending today’s deep selloff in stocks.

SHARON EPPERSON, NIGHTLY BUSINESS REPORT ANCHOR: New hope and a new generation of potential drugs that can treat a growing disease with no cure — Alzheimer’s.

MATHISEN: And not so fast. The one thing that could prevent the Federal Reserve from raising interest rates.

All that and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, July 21st.

EPPERSON: Good evening, everyone. I’m Sharon Epperson, in tonight for Sue Herera.

MATHISEN: And I’m Tyler Mathisen. Welcome, everybody.

Sharon, it was a blue chip wreck on Wall Street today. More on that in a moment.

But we begin tonight with earnings from Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT), two bellwether companies of the new economy, and two dominant players in the tech sector, of course. The tech sector makes up 20 percent of the S&P 500, by the way.

And, tonight, both companies, which you likely own through your mutual funds and 401(k)s, well, they failed to wow investors.

First, Apple (NASDAQ:AAPL). The world’s most valuable company reported earnings of $1.85 a share. That was 4 cents better than the consensus forecast. Revenue was also slightly better at $49.6 billion.

So, what’s the problem? Well, despite selling more than 47 million iPhones in the quarter, yes, you heard me right, it was the company’s weak outlook that sent shares initially lower. A lot lower after that report.

Josh Lipton has the key takeaway from Apple’s results.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: The big number in Apple’s latest earnings report, 47.5 million. That is the number of iPhones Apple (NASDAQ:AAPL) said it shipped in the quarter. Now, that was up 35 percent year over year, but was also basically in line with what Wall Street expected. Analysts had forecasted that Apple (NASDAQ:AAPL) would ship some 47.3 million iPhones.

In a conversation with Apple’s CEO Tim Cook, he told me that only 27 percent of the company’s install base had moved those newer 6 and 6-Plus models. That suggests plenty of upgrade headroom ahead. But at least in the after-hours, investors seem to be focused on that in-line number.

For NIGHTLY BUSINESS REPORT, I’m Josh Lipton in Cupertino, California.

(END VIDEOTAPE)

EPPERSON: Now to Microsoft (NASDAQ:MSFT), which reported better than expected earnings in revenue, but took a hit from restructuring charges and soft demand from some of its products. The world’s largest software company reported earnings of 62 cents a share, 6 cents better than estimates. The company reported revenue that was slightly more than $22 billion.

But investors wanted more, sending shares initially lower after the report.

Kayla Tausche digs deeper into the results.

(BEGIN VIDEOTAPE)

KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT: From the face of it, Microsoft’s fiscal fourth quarter looks like a beat all around, the problem was, that the company’s quarter was marred by a massive write-down of its Nokia (NYSE:NOK) acquisition that happened just a few years ago. It was forecast to be a $7.6 billion write-down. It came in $8.4 billion.

When you peel away what the revenue story told us, it did look a little weaker, Microsoft (NASDAQ:MSFT) falling prey again to a stronger dollar, and some currency head winds, especially in its overseas business, namely for Japan.

When you look at its licensing, there was an expectation that as P.C. shipments declined, that installs of Windows and Office would decline as well. They declined more than the PC shipments fell by. That’s leading people to wonder what exactly is going on there.

Kayla Tausche, NIGHTLY BUSINESS REPORT, New York.

(END VIDEOTAPE)

MATHISEN: Yahoo (NASDAQ:YHOO) missed second quarter earnings estimates, those sales narrowly beat those forecasts. The Internet media company’s results were way down by higher spending to attract users to its Web sites in order to better compete with Google (NASDAQ:GOOG) and Facebook (NASDAQ:FB) and others. Part of Yahoo’s strategy has been to invest for its mobile platform, as a way to drive ad sales. Shares of Yahoo (NASDAQ:YHOO) fell initially after the report as you see there.

EPPERSON: Let’s turn to David Garrity now for more discussion about what’s happening in the tech sector and what it may mean for you and your money. He’s principle at GVA Research.

David, thank you for joining us.

So many people have some of these big tech names in their portfolio, either in their IRA or perhaps in the mutual funds they have in their 401k. But when we’re talking about names as big as Apple (NASDAQ:AAPL), is there really growth in some of these big stocks over the long term, over the next five, 10 years?

DAVID GARRITY, GVA RESEARCH: Well, Sharon, certainly, looking at Apple (NASDAQ:AAPL), we’re in a situation here where the expectations for smartphone growth over the next five years probably better than 15 percent on a secular rate, and we’re in a situation where Apple (NASDAQ:AAPL) is gaining share. And as we know from the standpoint of the price points that Apple (NASDAQ:AAPL) products are being sold at, they occupy the top of the market.

And so, from that standpoint, we think Apple (NASDAQ:AAPL) remains the dominant player in a high growth segment, if we look at the valuation on the stock, whether we back the $200 billion in cash out or not, we’re still looking at a valuation which is below an overall market multiple. And so, from that stand point, we think that Apple (NASDAQ:AAPL) in terms of what you’re paying for its growth remains quite attractive, might have been somewhat disappointing in the quarter that we didn’t see the announcement coming out with respect to the dividend. But the company certainly has the funds available to do that.

On the product innovation side, we would say that, you know, the iPhone 6 upgrade cycle still remains strong. It might have been disappointing in terms of the quarter, and there may some concerns about the September quarter’s guidance. But we would say, overall, the opportunity to buy Apple (NASDAQ:AAPL) shares on this pull back remains attractive.

MATHISEN: As a long term bet, and that is two-thumbs up for Apple (NASDAQ:AAPL). You can use both thumbs there, David.

How about Microsoft (NASDAQ:MSFT)? As a long term play, how does it look to you?

GARRITY: Microsoft (NASDAQ:MSFT) is a little bit trickier because certainly, Microsoft (NASDAQ:MSFT) is a company which was successful in earlier generations of technology, namely around PCs. But if we look at the shift over to mobile devices, Microsoft (NASDAQ:MSFT) is a far distant third behind Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) in terms of the operating system software that’s being provided.

And, obviously, Microsoft’s predicaments are somewhat underscored by the fact that we’re going to be giving away their Window’s 10 operating system software to consumers. Something they wouldn’t have done in the past.

Clearly, in the case of Microsoft (NASDAQ:MSFT), a company that has substantial resources both financial and technical, but nevertheless, somewhat disconcerting to see a company go out and spend approximately $9 billion to buy a company, and then within approximately a year and a half later, write off the full value of that, as well as also fire the substantial number of employees related to that business.

So, certainly, the hope here is under new CEO, Satya Nadella, the company will find a better direction going more towards Cloud computing that will help to reignite the growth for the company, Microsoft (NASDAQ:MSFT), a name that we like, might not be so aggressive on a pull back here as we might be with Apple (NASDAQ:AAPL).

EPPERSON: All right. So, a like, not a love, on Microsoft (NASDAQ:MSFT) from you, David.

Thank you for joining us. David Garrity with GVA Research.

GARRITY: Thank you, Sharon.

MATHISEN: And Sharon was just mentioning how many mutual funds own either Apple (NASDAQ:AAPL) or Microsoft (NASDAQ:MSFT).

According to Morningstar (NASDAQ:MORN), the top three mutual fund holders of Apple (NASDAQ:AAPL), include the Vanguard 500 Index Fund, a lot of people have that. The Vanguard Institutional Index Fund, it’s in a lot of 401(k)s, and the Fidelity ContraFund.

As for Microsoft (NASDAQ:MSFT), the Vanguard 500 Index Fund, and the Institutional Index Fund are two of the biggest holders as is the American funds group, Washington Mutual Fund.

EPPERSON: Tyler, those weak after the bell results could extend today’s deep losses, disappointing results from a handful of Dow components before the open weighed on the blue chip index.

United Technologies (NYSE:UTX) fell 7 percent. IBM, which we told you about last night, was off nearly 6 percent. Verizon (NYSE:VZ) dropped more than 2 percent. Travelers was one of the bright spots after it reported results this morning, that dragged down the Dow, though, overall, which fell 181 points to 17,9119. The NASDAQ was off 10 points and the S&P 500 fell 9 points.

Dominic Chu has more on today’s earnings.

(BEGIN VIDEOTAPE)

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT: The dive in the Dow today was the result of a broader base selloff among 30 component stocks, the vast majority of which finished the day lower, and the stock that really drove much of the weakness was United Technologies (NYSE:UTX) — the diversified industrial company behind brands like Pratt & Whitney Aircraft Engines and Carrier Air-conditioning Systems reported earnings that beat Wall Street forecasts.

Overall sales, however, fell shy of expectations. The company said that orders from China for its Otis elevators and escalators business fell. As a result of that and other signs of softer customer demand, it cut its full year forecast.

Now, remember, the company also recently announced the sale of its Sikorsky helicopter business to defense contractor Lockheed Martin (NYSE:LMT). Another decliner on the day was Verizon (NYSE:VZ) Communications, America’s biggest telecom company by market value. It reported profits that beat Wall Street estimates, but it too reported sales that missed. While Verizon (NYSE:VZ) did manage to add more wireless phone customers and boosted revenues for its FiOS high speed internet phone and TV service, average sales generated per user fell, thanks to increased competition and promotions. That was one of the reasons it lowered expectations for full year sales growth.

One of the modest bright spots came by insurance giant travelers. It too reported profits that beat analyst estimates on sales that fell slightly below forecast. The company was aided by fewer losses tied to catastrophes that the company insures against and settlement of a prior tax issue. Shares were among just a handful on the Dow that rose on the day.

With less than a fifth of companies in the S&P 500 having reported their quarterly results, a big focus will be on whether the rest of corporate America can help drive earnings growth. We’re still very early in earnings season.

For NIGHTLY BUSINESS REPORT, I’m Dominic Chu.

(END VIDEOTAPE)

MATHISEN: Late today, Dow Jones reports that federal regulators are close to approving AT&T’s $49 billion acquisition of DirecTV. That would clear the way for the biggest media deal of the past year. The Justice Department has already signed off on that deal.

Now, Citigroup (NYSE:C) is being ordered to pay about $700 million to customers for deceptive marketing and billing tactics. The refund will go to more than 8 1/2 million credit card customers. The Consumer Financial Protection Bureau says Citi’s violations took place from 2003 to 2012, and include misrepresenting the cost and benefits of certain add-on products like identity theft monitoring and debt protection services.

EPPERSON: Some big banks are setting aside more money to cover bad loans to energy companies, after oil prices dropped over the past year. According to “Reuters”, which cited analysts reports, that raises the possibility that deteriorating loans could start to hurt bank earnings.

Last week, executives from JPMorgan (NYSE:JPM) and Wells Fargo (NYSE:WFC) told investors that they are increasingly concerned about loans to oil and gas companies. Today, oil prices settled around $50 a barrel.

MATHISEN: One Wall Street strategist says the Federal Reserve had never hiked rates when commodities had been in a pronounced downtrend. He’s Larry McDonald, head of U.S. Micro Strategy at Societe Generale.

Larry, welcome. Good to have you with us.

Is it as simple as history? If it is, the CRB, which is the leading commodities index, I think is down about a third over the past year, that would say the Fed ain’t going to do anything this year.

LARRY MCDONALD, SOCIETE GENERALE: That’s the thing, Tyler. I mean, the CRB is right on the 2009 recession lows, and it’s very close to the 2002 recession lows.

So, the commodity index is right on recession levels, and you have to remember, the United States in the ’80s and ‘90s was about 55 percent to 60 percent of global GDP. Today, we’re 24, 25 percent.

So, the Fed has to look at the global economy, much more so than he did in years past.

EPPERSON: That’s not the first thing, Larry, that the Fed will say they’re going to look at when it comes to what they’re going to do with interest rates. How important do you think are commodity prices to their next move, and when do you think they’re going to make that move?

MCDONALD: Well, remember, they have a dual mandate, which was established — think about how long the dual mandate, they have to look at unemployment and inflation. And 10 years ago, Chinese GDP would say $2 trillion. Now, we’re up around $10 trillion or $11 trillion.

The dual mandate around inflation, if China’s slowing and that’s hurting commodity prices, that’s going to leak over eventually to core inflation, which is part of the Fed’s dual mandate, which doesn’t give them a reason to hike. On unemployment level does, but the inflation level, if it’s ticking down a notch, certainly doesn’t.

MATHISEN: Very interesting point. Larry McDonald, haven’t heard it made. We appreciate it.

MCDONALD: Thanks, Tyler. Thanks, Sharon.

MATHISEN: Larry McDonald of Societe Generale.

EPPERSON: And still ahead, the big hope, big opportunity and big risks associated with developing new Alzheimer’s drugs.

(MUSIC)

MATHISEN: Alzheimer’s, it affects more than 5 million Americans today. It is the country’s sixth most deadly disease. And yet finding a cure or a treatment that slows the progression of the ailment has proved illusive.

But now, as Meg Tirrell reports, there appears to be new hope.

(BEGIN VIDEOTAPE)

MEG TIRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT: The quest to develop a drug that actually slows the course of Alzheimer’s disease has been a long one, marked by failure. Since 1998, 123 drugs have failed in development. Just four were approved. None slowed the declines in memory loss and sinking clearly that characterized Alzheimer’s.

This year, though, new hope has bloomed.

DR. MARIA CARRILLO: The scientific community has really been given a boost by some recent positive news of different drugs. So, we are all very hopeful at this time, more hopeful than we have been before.

TIRRELL: Experimental medicines from Biogen and Eli Lilly (NYSE:LLY) are under the spotlight this week, with new data coming Wednesday at the Alzheimer’s Association International Conference in Washington, D.C.

They work to remove the plaque buildups in the brain known as beta amyloid, thought to be toxic to neurons. Evidence from early studies shows that removing the plaques may help steam declines in cognition, results that still need to be supported by larger studies.

A successful drug could mean big business. More than 5 million Americans have Alzheimer’s today, a number that could triple by 2050. Some analysts estimate the market for an Alzheimer’s drug could be $20 billion a year.

CARRILLO: This disease is urgent and we need answers now. Baby boomers cost us about 2 percent of Medicare overall spending today. That number will increase almost 25 percent by 2040 if we don’t stop this disease.

TIRRELL: The National Institutes of Health spent about $560 million of its $30 billion budget on Alzheimer’s disease last year, an amount some say isn’t enough to address the size of the problem. It allocated more than a billion and a half to heart disease, and $5 billion to cancer.

FRED HASSAN, WARBURG PINCUS: We need to have a war on Alzheimer’s mentality here, a sense of urgency.

TIRRELL: Fred Hassan led pharmaceutical companies including Schering Plough, which developed an Alzheimer’s drug now owned by Merck (NYSE:MRK). He calls the disease the biggest long term tsunami facing many countries

HASSAN: It’s a moral imperative because the patients can’t speak for themselves. That’s why we as a society need to speak for the patients here and do more. Half a billion is not much.

TIRREL: The results tomorrow could spur not just hope for medicine, but big moves in drug maker stock prices as well.

Cowen estimates Biogen shares could swing $50 in either direction, representing as much as $10 billion in market value.

For NIGHTLY BUSINESS REPORT, I’m Meg Tirrell.

(END VIDEOTAPE)

EPPERSON: Chipotle beats estimates but misses on one key metric. That’s where we begin tonight’s “Market Focus”.

The burrito chain said same store sales rose less than analysts were expecting, still, it managed to top consensus on the top and bottom lines. After the bell, shares were initially lower, but managed to turn around. During the regular session, shares were off a fraction to $673.07.

GoPro saw its revenues surge by more than 70 percent, helped by growing demand for its action cameras overseas. Earnings in revenue topped the street’s consensus. Shares were volatile initially in after-hours trading. Before the close, though, the stock was 2 percent higher to $62.04.

Novartis saw its shares after reporting a decline in profits. This was drug giant was hit by the effects of a strong U.S. dollar and weak results from its eye care treatment business. Yet, the CEO says he’s optimistic about the company’s pipeline.

(BEGIN VIDEO CLIP)

JOE JIMENEZ, NOVARTIS CEO: When you look at our results, the best part about the quarter was the innovation. You know, we just got approval to launch our new heart failure drug called Entresto. This is a drug that’s proven to reduce cardiovascular death by 20 percent. We think this is going to be a multimillion dollar drug for the company.

(END VIDEO CLIP)

EPPERSON: Still, shares slipped more than 2 percent to $103.71.

Baker Hughes (NYSE:BHI) swung to a loss in its most recent quarter. The oil field services company saw revenue dropped more than 30 percent, saying it expects tumbling oil prices will persist for the rest of the year. Still, sales weren’t as weak as expected. Shares rose about 2 percent to $60.64.

MATHISEN: And an increase in trading activity helped TD Ameritrade (NASDAQ:AMTD) post an increase in profit. Revenue also coming in better than expected. Still, shares flipped on this down day by more than 1 1/2 percent. They close at $37.73.

Harley-Davidson (NYSE:HOG) also reporting mixed quarterlies, the strong greenback weighed on its international sales. But the cycle maker refused to keep pace with rivals’ steep discounts. Shares revved up a little bit, about 5 percent to $57.67.

LifeLock shares were halted at one point in today’s session, after the Federal Trade Commission charged the identity theft monitoring company, saying it failed to protect its consumers’ data. The charges say the firm is violating the terms of a previous settlement with the agency. LifeLock could disagree saying it’s prepared to take the case to court.

When shares continue trading they plunged, plunging almost 50 percent lower on the day at $8.15.

CIT Group (NYSE:CIT) won a key approval for its pending deal to buy the parent company of One West Bank. The Office of the Comptroller Currency gave the OK. The Federal Reserve now has to approve the agreement, which was announced way back in last July. Shares were more than 2 percent higher, they finished at $48.18.

EPPERSON: Toshiba finds itself at the center of one of Japan’s biggest accounting scandals. The CEO and other executives resigned after taking responsibility for inflating profits by more than $1 billion over several years. At a press conference today, the executives were seen vowing, a gesture meant to convey deep shame.

The company will have to restate profits back to 2008 when the cover-up began.

MATHISEN: Uber, the fast growing, ride hailing app start-up held a jobs tour for drivers today in New York City. The jobs tour comes as New York tries to crackdown on the company’s expansion. The city council is expected to vote on a bill that would cap Uber’s growth while the city studies its impact on traffic congestion. Uber executives say the measure threatens its business model in one of its largest markets.

And Uber now valued at around $40 billion, is fast becoming a political lightning rod. Not just in New York, but also on the national stage. Republicans generally have embraced it as a symbol of disruptive progress. Democrats say it represents a new era of job insecurity, the temping of America.

John Harwood joins us from Washington.

John, Uber’s not only changing the business world, but also the political world. Why have so many politicians not just Mayor de Blasio here in New York, latched on to it and made it the target of political warfare?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: What do they say about economics? It’s about creative destruction. And when you have creative destruction, some things get destroyed — old models, old incumbent firms, and in the case of Bill de Blasio in New York, yes, he is raising the issue of traffic congestion, but the rise of Uber is also threatening the incumbent taxi drivers who have relationships, financial relationships with the city, with its politicians. And so, that’s not an insignificant item.

Secondly, Uber represents broader changes in the national economy, that’s what Hillary Clinton and some Democrats have pointed to, although they are not — to be fair to Democrats — they are not saying Uber is bad in and of itself. They’re saying it raises some problems and underscores some problems in the economy that we have to deal with.

EPPERSON: What about the Republicans, what are they saying in terms of how Uber or companies like that are changing the economy, changing the way people are working today?

HARWOOD: Well, Republicans are casting Uber as a symbol of the 21st century economy, and say when Democrats raise questions about it, they’re looking backwards, they’re representing the past.

For example, last week, Hillary Clinton gave a speech reflecting her economic view in which she talked about the issue of classification, should workers be described as contractors or as employees of firms like Uber?

Well, as it happened, this is a big issue with Uber, many other firms too. FedEx (NYSE:FDX) just paid a big settlement on that issue as well. And Jeb Bush attacked her for being stuck in the last century. That’s a future past debate that Republicans think they’re on the right side of.

MATHISEN: All right. John Harwood, thanks very much — John Harwood reporting tonight from Washington.

And coming up, one sector of the real estate market that has been red-hot for investors. We’ll tell you what it is. You may be surprised, next.

(MUSIC)

EPPERSON: Here’s what to watch tomorrow: earnings from Dow components American Express (NYSE:EXPR) (NYSE:AXP), Boeing (NYSE:BA), Coca-Cola (NYSE:KO) and more. Housing data, including existing home sales and weekly mortgage applications. And that’s what to watch Wednesday.

MATHISEN: It’s a little known sector of real estate investment, but it is growing exponentially — data centers that serve the Cloud. Sounds pretty dull, right? Well, not if you look at the product potential involved.

Diana Olick has. And she’s got more on this red hot sector.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Most people think the Cloud lives in the sky. But it really lives here, in data centers in downtown buildings and suburban warehouses. As data booms, so too does the value of all that real estate, and the REITs that own it.

GARY WOJTASZEK, CYRUSONE PRESIDENT & CEO: Our focus is serving the needs of the Fortune 1,000. That comprises about 75 percent of our business, including nine of the Fortune 20. So, these are the largest companies in the world that have chosen to store their computers in our data centers.

OLICK: CyrusOne is one of five data center REITs which own two types of property. One is basically a big power station for servers like this one in Sterling, Virginia. The other is an Internet hub where the tenants exchange data. These are more valuable because they’re generally located in urban areas.

WOJTASZEK: We’re structured as a real estate investment trust. So, we’re predominantly just a real estate company, but we are a derivative of what’s going on in all the growth and technology space. So, everything you hear about Google (NASDAQ:GOOG) and Netflix (NASDAQ:NFLX) and Rackspace and Amazon (NASDAQ:AMZN), and all those new technologies that are going on, ultimately reside in the data center.

OLICK: Data center REIT returns have been robust to say the least. CyrusOne, Coresite, Digital Realty, Equinix (NASDAQ:EQIX), and QTS, in particular, up 46 percent in the past year.

They can, however, be a tough sell because they are at the crossroads of real estate and technology, which investors value differently.

JOHN BEJJANI, GREEN STREET ADVISORS: Because data centers are subject to all this technology risk, potential technology risk, because there’s so much more to understanding the sector than simply knowing where the real estate is located, some investors opt not to take on the brain damage of understanding these various risks.

OLICK: And then there’s demand. Technology changes moment to moment, and forecasting that change in terms of real estate, for both tenants and landlords is tricky. Developers want to capture this demand immediately. But too much speculation could lead to too much supply.

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

(END VIDEOTAPE)

EPPERSON: That’s a really nice investment. Interesting investment to think about when you want that debate, but you’re afraid of the risks coming to the technology sector.

MATHISEN: And the capital returns were huge as Diana just showed out over the past year.

EPPERSON: Absolutely.

MATHISEN: Quite amazing.

EPPERSON: Really good.

That’s NIGHTLY BUSINESS REPORT for tonight. I’m Sharon Epperson. Thanks for watching.

MATHISEN: And thanks from me as well. I’m Tyler Mathisen. Have a great evening, everybody. 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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