Nightly Business Report - Wednesday June 19 2013

7/28/2019 Nightly Business Report - Wednesday June 19 2013

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ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and SusieGharib, brought to you by --

(COMMERCIAL AD)

(BEGIN VIDEO CLIP)

BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: If the incoming data support theview that the economy is able to sustain a reasonable cruising speed, we will ease the pressure onthe accelerator by gradually reducing the pace of purchases. However, any need to considerapplying the brakes by raising short term rates is still far in the future.


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TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: The tail of the taper.The Federal Reserve chairman lays out a possible road map for scaling back on stimulus. Stockssink, bond yields jump, and now, we`ll see what it all means for your investments.

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Treating obesity. One thirdof American adults and 17 percent of children are now considered to have a disease and it couldhave implications for doctors, patients, insurers and the cost of care.

MATHISEN: Safety on the rails. Congress questions the effectiveness of a new safetymandate and scrutinizes the price tag.

All that and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, June 19th.

GHARIB: Ben Bernanke has spoken and now, investors all around the world have a muchbetter idea of when the Federal Reserve will start cutting back on its massive stimulus program.

The Fed chairman said that process could begin later this year and the bond purchases could endcompletely by the middle of 2014, but only if unemployment and housing continue to improve.

Wrapping up a two-day policy meeting, Ben Bernanke noted the economy is doing better,still, policymakers left the Fed`s key interest rate unchanged at zero percent. Investors didn`tlike what they heard and stocks and bonds sold off on the news.

The Dow tumbled 206 points, the NASDAQ lost almost 40 and the S&P was down about 23points. In the bond market, yields on the 10-year Treasury note shot up to 2.35 percent. That`s alevel we haven`t seen since March of last year.

Our Steve Liesman has more on Bernanke and today`s Fed news.


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(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: FederalReserve Chairman Ben Bernanke dropping something of a bombshell on markets today, sayingthat if the economy follows the path the forecast says it will, then the Fed could begin taperingits asset purchases by the end of this year, and ultimately end them in the middle of the next yearwhen the unemployment rate is around 7 percent.

Here is what he said in his opening remarks.

BERNANKE: If the incoming data are broadly consistent with this forecast, the committee

currently anticipates that it would be appropriate to moderate the monthly pace of purchases laterthis year. And if the subsequent data remain broadly aligned with our current expectations forthe economy, we will continue to reduce the pace of purchases of measured steps through thefirst half of the next year, ending purchases around mid- year.

LIESMAN: In the Fed`s open market committee statement today, there were also somesurprises. The Fed said that the risk to the labor market and the economy had diminished, so alittle bit more upbeat and the Fed also reduced its forecast for inflation by a very strong half apoint this year, all the way down to 1 percent. The Fed says it`s looking for 2 percent inflation.But, of course, the Fed continued the current purchases.

So, one of the big headlines is there was no tapering. And there were actually not one buttwo dissents in the statement today. Federal Reserve president of St. Louis Jim Bullard dissentedfor dovish reasons, he thought the Fed is not aware enough of inflation. While Esther Georgefrom Kansas City said she did not support the idea of the addition asset purchases by the Fed.

For NIGHTLY BUSINESS REPORT, Steve Liesman.

(END VIDEOTAPE)

MATHISEN: And joining us now to talk more about the Fed and economy, Mark Zandi,chief economist for Moody`s Analytics.


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Mark, good evening. What did we learn today?

MARK ZANDI, MOODY`S ANALYTICS: Well, we learned that the Fed is going totapering Q.E. at the end of the year, end Q.E. by this time next year, and start raising interestrates by the early part of 2015. Of course, that all depends on the economy and that the economysticks to the script that the Fed believes it will.

And, you know, that`s most likely economic scenario and the most likely interest rate path.

GHARIB: So, Mark, what do you think of the timetable? Do you think that the economy isready to have the training wheels come off?

ZANDI: Yes, I do. You know, I think that by late this year, the fiscal head winds, the taxincreases and spending cuts will begin to fade. That will let the better private economy shinethrough. That will be more job growth and lower unemployment. That is a long, arduousnarrative in story, but I think it is the best and most likely story.

And yes, at that point I think it makes sense to start tapering Q.E., ending it and starting toraise interest rates.

MATHISEN: If the economy is getting better which allows the tapering of the Q.E., why didthe markets react so negatively?

ZANDI: Yes, good question. You know, if you read sort of the fine print in the FOMCstatement, it was pretty hawkish. They dialed back their worries about the risks to the economy.They lowered their forecast for the unemployment rate. They even dismissed the lower inflationto be temporary.

So, I think the markets took a look at that and said, you know, maybe the risks are higher thatthey are going to end Q.E. faster than we anticipated just yesterday or the day before.


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The other thing I would point out is these markets, the bond market, stock market, all themarkets, have come a long way over a short period of time. So, they are vulnerable to any littlething that goes off script. And so, that may be also contribute to the ups and downs in the marketthan we`re seeing in the last few weeks.

GHARIB: So, investors also want a handle on where the interest rates are going both for the30-year mortgage and housing market and also on the 10-year, how much higher, is it going togo? What is your forecast and what impact is that going to have on the still fragile housingmarket?

ZANDI: Well, you know, interest rates are going higher. You know, they`re going to go up

and down and all around, that`s what interest rates do. My sense is by the end of the year,certainly by this time next year, interest rates will be higher and they`re going to move steadilyhigher over the course of the next several years. And, you know, that will be hard for theeconomy to digest.

But if they are rising because the economy is improving, because we`re creating jobs andunemployment is moving lower, then I think the recovery will remain intact and be OK andhousing will be OK, because the better job market will trump the higher interest rates and we`llbe just fine.

MATHISEN: Very interesting. Mark Zandi, always great to see you. Thank you for comingby tonight.

ZANDI: Thanks.

MATHISEN: Mark is chief economist with Moody`s Analytics.

Susie?

GHARIB: All right, Tyler.


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So, how should you be investing based on what Ben Bernanke said today?

For some answers on that, we turn now to Jim Paulsen. He`s chief investment strategist atWells Capital Management.

OK. So, we saw, Jim, how the market responded to all of this news. What should individualinvestors be doing? Should they making changes in their portfolios, whether they own stocks orbonds?

JIM PAULSEN, CHIEF INVESTMENT STRATEGIST: Well, I`ve been in the view thatwe`ve reached, the S&P will reach 1,700 this year and a month ago we did that, Susie and I`mnot inclined to raise that this year. I think the stock market has entered a broad trading range.That`s somewhere between 1,600 and 1,700 for the rest of this year perhaps.

It`s going to have to digest rising bond yields, as Mark just said. I think they`re going tocontinue to rise through the balance of this year. The 10-year yield and might end the year closerto 3 percent and it`s going to have to digest the end of quantitative easing by the Fed.

But I think the economy is going to continue to prove better than expected, keeping stocksfrom falling very much. So I would take advantage of this trade range, if you will.

Number one, make sure that you`re down not as exposed to bond prices as you`ve beenperhaps because yields are going to go higher, and bond prices are likely to fall and within thestock market, take advantage like days like today when it really comes down to maybe add alittle bit to stocks that you want to hold into 2014. And that would be to me, some more of thecyclical sectors that are more sensitive to better economic growth and when it rallies, if it rallies

over the next several months, maybe take advantage of the strength to sell off the bond-likestocks that are really sensitive to interest rates or defensive stocks, and to plow that money backinto more economic sensitivity.

I still think the bull market is intact and it`s going to go higher again next year.


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MATHISEN: So, you believe, as Mark did, that a positive economy is going to trump fromthe market`s standpoint is going to trump the effects of rising interest rates. That`s basicallyyour view here?

PAULSEN: I think so, Tyler. I really do. I really think if you go back a couple years whenthe word that the Armageddon was coming and the world was going to end, we would haveloved to have today. And someway today, to me, should be a celebrated milestone, rather thansome scary event, because really what happened today was even the Fed now, which has beenvery worried about the economy is admitting it is indeed, getting strong enough that it can startto back off from stimulating.

So, that`s a great thing. That means it can stand on it`s own two feet and that`s great longerterm for equities.

GHARIB: But as much as you`re saying all of this, investors are still scared by seeing thesetriple digit gains and losses like today, you know, Mark is selling off on what presumably is agood news day. So, is there a way that individual investors can benefit from this volatility playwith it?

PAULSEN: I think so. And I think that`s what I would look at. I`d keep your eyes on notnecessarily day in and day out or month in and month out. Look where they are from a year agoand you`re still making good progress.

And on days like this rather than fear, I`d go hunting for bargains today. I`d look at thetechnology stocks you`d been wanting to get into, or maybe some of beat up industrials, and totake advantage of people wholesale dumping those today and buying on that weakness inanticipation that maybe it will oscillate over the next several months, but a year from now, I`d behappy I bought those.

MATHISEN: So, you`ve mentioned a couple of categories of stocks where you might doingsome cautious or maybe a little incautious buying, technology, cyclical industrials, I assume youmean the big equipment makers, the Cats and so on and so forth and other industrials.


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You mentioned a moment ago, though, that you would lighten up on stocks that perform likebonds. What comes to mind there would be utilities and telecoms, am I right?

PAULSEN: Yes. That`s right, Tyler. I think both of those pay a high proportion of theirearnings out and dividends every year and they are a lot like a bond which pays a constantcoupon payment every year. So, when interest rates move, they really affect the performance ofthose stocks, and utilities and telecoms are getting hit in the last month or so as bond yields havemove up.

If bond yields continue to move higher, those stocks are going to under perform otherequities.

So, I would take advantage of days when they rally to maybe lighten up your exposure thereand to move away from there because I think over the next year or so, those are not good areas.

I think another popular index that people plowed into is the dividend aristocrats, the highest-paying dividend stocks and I would move away from that and move to more economicsensitivity.

GHARIB: All right. Lots of good information. Thank you so much, Jim, as always.

Jim Paulsen, chief investment strategies at Wells Capital Management.

MATHISEN: Well, Susie, FedEx (NYSE:FDX) might quibble just a bit with the Feds viewthat the economy is improving. CEO Fred Smith called the economic growth sluggish and saidcustomers are choosing lower-priced shipping options instead of priority services. The profits of

the big package company fell 45 percent in the last quarter and FedEx (NYSE:FDX) lowered itsgrowth forecast for the year.

Nevertheless, shares of FedEx (NYSE:FDX) rose 1 percent today in part because per shareprofits go down were better than Wall Street`s forecast.


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GHARIB: As you said earlier, one of the key areas the Fed focuses on is housing, and itmight start taking notice. The Mortgage Bankers Association says mortgage applications fellmore than 3 percent. The culprit here: mortgage rates hitting their highest levels since March oflast year.

MATHISEN: Meantime, the country`s biggest mortgage servicers have been accused offailing to live up to their end of a $25 billion national mortgage settlement to help mortgageowners stay in their houses. After

59,000 complaints the federal watchdog overseeing that settlement with banks and other lenderssays that Bank of America (NYSE:BAC), JPMorgan

(NYSE:JPM) Chase, Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) each failed to payfines levied against them or correct problems they were ordered to fix.

For more on this story, log on to our Web site, NBR.com.

GHARIB: You hear this all time, when banks, other companies or others settle charges ofwrongdoing, with Wall Street federal regulator, they are often allowed to pay fines withoutadmitting any guilt. But not anymore.

Mary Jo White, the new head of the Securities and Exchange Commission, will now requireadmissions of wrongdoing in cases involving serious fraud or harm to investors. Here`s whatWhite said about the new directive earlier today.

(BEGIN VIDEO CLIP)

MARY JO WHITE, SEC CHAIRMAN: It will be to some degree case by case but obviously

with some, you know, guidance with the staff as to what kinds of cases, and I think among thekinds of cases that you`ll look for are -- you`re going to balance everything, harm done, howegregious the conduct was, how important it is perhaps to get a quick resolution.

(END VIDEO CLIP)


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GHARIB: The new policy came out of a review that White began when she joined the SECin the spring.

And still ahead in the program, obesity is declared a disease, and it could have widespreadimplications -- doctors, insurers and people who struggle with their weight.

But, first, here`s a look at how the international market closed today.

(MUSIC)

MATHISEN: Microsoft (NASDAQ:MSFT) says it has taken down a global cyber crimering, freeing up millions of computers from an insidious virus believed to have ripped off a halfbillion dollars from infected PCs before it was discovered. Now, the company`s digital crimesunit worked with authorities in more than 80 countries to track down the so-called Citadel botnetthat affected at least 2 million units, most of them in the U.S., Europe and Hong Kong.

And just today, Microsoft (NASDAQ:MSFT) announced plans to recruit computer experts tohelp identify and fix major security flaws in its latest Windows operating software. It`s offeringrewards of up to $150,000 for these hacker whackers. To qualify, though, you got to be age 14

or older.

GHARIB: There is apparently no bonus for George Zimmer. He`s the founder, executivechairman and chief pitchman of Men s Warehouse. You know him from his commercials wherehe says, "You`re going to like the way you look, I guarantee it."

Well, after 40 years at the retailer, Zimmer was fired today by the board of directors. In a

statement, Zimmer said he and the board had been at odds for months about the direction of thecompany and that, quote, "Instead of fostering the kind of dialogue until the board room that hasin part contributed to our success, the board has inappropriately chosen to silence my concernsthrough termination."

MATHISEN: Turning to market focus on a day when the Fed was the driver, some stockshad stories quite their own, like BlackBerry downgraded by Bernstein Research to under


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perform. Bernstein says fewer than expected companies and individuals stepped up to theBlackBerry 10 smartphone.

Shares of BlackBerry up more than 30 percent in a year, dropped nearly 4.5 percent today toclose at $14.18.

And Sprint lost ground as DISH Network (NASDAQ:DISH) walked away from making anew take over bid and Macquarie downgraded Sprint to neutral, recommending that investorstake some profits there. The shares of the company dropped more than 4 percent on almost threetimes the normal volume, closing at $7 right on the nose. Sprint still up more than 120 percentover the past year.

GHARIB: And Nvidia says it will begin to license its chip technology to third parties. It`sresponding to high quality graphics on mobile devices. Shares of Nvidia gained more than 3percent today, to close at

$14.84 and it`s up more than 21 percent this year.

And Micron Technology (NASDAQ:MU) record quarterly profits above expectations onsales of $2.3 billion. Shares set a new five-year plus high before the report was released rightafter the market closed.

On the day, Micron gained 1.5 percent, closing at $13.97. The stock has more than double ina year.

MATHISEN: Some trouble ahead for one of the signature features of health care reform. Areport from the nonpartisan Government Accountability Office says that the new healthcareexchanges being set up by the federal government in more than 30 states may not be ready for

open enrollment by the October 1st deadline. The problem: key frameworks like eligibility forfederal subsidies and monitoring of insurance plans and what consumers pay, they haven`t beenworked out just yet.

GHARIB: Sugary drinks should not be purchased with food stamps, so say the mayors of 18cities, including New York, Los Angeles and Chicago.


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In a letter to congressional leaders, the mayors say it`s time to test and evaluate limits to theuse of federal subsides to purchase sweetened drinks that often led to obesity and costly weightrelated illnesses.

MATHISEN: And speaking of obesity, as municipalities fight that obesity epidemic, theAmerican Medical Association now says obesity should be classified as a disease.

Bertha Coombs has more on what that could mean for businesses, insurers, and who pays forhealth care and more.

(BEGIN VIDEOTAPE)

BERTHA COOMBS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):Obesity has long been called an epidemic, contributing to host of chronic diseases, with morethan 35 percent of Americans very or extremely over weight.

Now, the American Medical Association has decided it`s time obesity itself is classified as a

disease.

DR. PATRICE HARRIS, AMERICAN MEDICAL ASSOCIATION: We want to reduceand prevent type 2 diabetes. We want to reduce the impact of cardiovascular disease. Obesity isso interrelated to both of those.

COOMBS: The obesity society, among those who have been calling for a diseasedesignation, hailed the move.

TED KYLE, THE OBESITY SOCIETY ADVOCACY COMMITTEE CHAIR: Obesity thataffects a third of the population is something that people don`t routinely discuss with theirdoctors, until it starts resulting in things like diabetes and heart disease and joint disease.


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COOMBS: It`s because of those costly serious chronic conditions most large employershave been on the forefront of fighting obesity in the workplace. More than a third offer on-sightweight watchers programs, about one in ten offer incentive payments for reaching wellnessgoals. More than half cover lap band and bariatric obesity reduction surgery under insurancebenefits.

DR. PAUL FRONSTIN, EMPLOYEE BENEFIT RESEARCH INSTITUTE: They are goingto continue doing that because they are looking at different ways in which to manage and controlhealthcare costs and this is just one of many ways that I see them continuing to try and controltheir costs.

DR. CAROLINE APOVIAN, DIR. OF WEIGHTLOSS & NUTRITION BOSTONMEDICAL

CENTER: Yes, they cover the lap band. Most insurance companies cover bariatric surgery. Butthat`s after the patient has already gained at least 100 pounds over the course of their lives.

COOMBS: Boston University`s Caroline Apovian says calling obesity a disease will nowallow doctors to take medical steps before patients becomes drastically obese.

APOVIAN: I think this is a necessary step to prompt insurance companies to treat thisdisease earlier.

COOMBS (on camera): The AMA`s counsel on science and public health had actuallyrecommended against designating obesity as a disease, saying it`s too problematic to defineespecially when you have people who are overweight but otherwise healthy. Still, 60 percent ofdelegates decided to approve the measure.

For NIGHTLY BUSINESS REPORT, I`m Bertha Coombs.

(END VIDEOTAPE)


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MATHISEN: And coming up, how to prevent the next railroad disaster and what it couldcost. Congress is taking a look.

But, first, a look at how commodities, treasuries and currencies fared today.

(MUSIC)

MATHISEN: JD Power and associates out with its latest survey on initial quality for newcars. Topping the list again is Porsche which averaged 80 problems per 100 vehicles. GMCranked second, rising from number 12 last year. Lexus, Infinity and Chevrolet round out the topfive.

But the bottom of the list, Toyota`s Scion unit dead last, Fiat not far behind for the secondyear in the row. Mitsubishi, Nissan and Mini finished out the lowest rated name plates.

GHARIB: Electric carmaker Tesla is recalling 1,200 of its 2013 Model S cars due to a defectin the backseat. No injuries or incidents have been reported over the faulty seat latch. It`s thefirst recall ever for the carmaker, which recently received a near perfect rating from "ConsumersReports" magazine.

MATHISEN: At a Senate hearing on consolidation in the airline industry lawmakers urgedthe Obama administration to take a careful look at the proposed merger of American Airlines andrival U.S. Airways, which would create the nation`s biggest carrier. The concern is that with somany carriers combining and fewer choices, consumers may pay too much for airline tickets.

And now to concerns about the safety of the nation`s ageing railroads and rail beds. After a

series of high-profile derailments of passenger and freight trains, another group of senators helda hearing today on how to upgrade the country`s railroad infrastructure, how much it will costand who will pay for it.

Hampton Pearson has more.


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(BEGIN VIDEOTAPE)

HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Just days before two trains collided and derailed last month near Bridgeport, Connecticut,injuring at least 70 people, weakness in rail joints in the track were detected but no action wastaken. The NTSB investigation is not complete but on Capitol Hill today, Chairman DebraHersman told lawmakers how the condition of that track might have set the stage for theaccident.

DEBRA HERSMAN, NATIONAL TRANSPORTATION SAFETY BOARD CHAIR: It isthe joint bars that join those two sections of track, the hanging tie indicates that the rail and theties were unsupported.

PEARSON: Rail safety is getting lawmakers attention after three accidents last month,including a fiery crash involving a freight train carrying chemicals colliding with a garbage truckoutside Baltimore, and another Connecticut train wreck where a veteran railroad worker waskilled while working on the tracks.

A railroad spokesman talked about fatalities and their impact on the surroundingcommunities.

JAMES STEM, RAILROAD WORKERS SPOKESMAN: It`s not just for the employees.Every time we have a major collision that kills an employee, the surrounding community is alsoinvolved.

PEARSON: Meanwhile, the railroad industry and federal government are on a collisioncourse from meeting a 2015 mandate to install updated anti crash signaling technology calledpositive train control. Getting mixed signals from the industry, some want a three-year delay.

Others say it should be done on a case by case basis.

SEN. CLAIRE MCCASKILL (D), MISSOURI: I`m not sure a case by case basis is music tothe ears of anybody who is regulated by the federal government.


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SEN. JOHN THUNE (R), SOUTH DAKOTA: It strikes me at least that it would make a lotmore sense if we`re talking about doing some sort of an extension for compliance with this to doit in a way that recognizes that all the railroads are going to have to comply with that and dosome sort of a blanket extension.

PEARSON (on camera): Lawmakers and the railroad industry are also at odds over thebillions needed to pay for track improvements nationwide and railroad bridge repairs.

For NIGHTLY BUSINESS REPORT, I`m Hampton Pearson in Washington.

(END VIDEOTAPE)

GHARIB: And finally tonight, we`ve all heard the joke about someone trying to buy theBrooklyn Bridge, but how about buying the Empire State Building? That`s almost whathappened when a top New York City real estate company offered to buy the iconic skyscraperfrom $2 billion in cash from the family that now controls the building. The offer is lower thanthe tower`s appraised value, and it comes just weeks after investors improved a plan to take theEmpire State Building public, selling stock in what`s called a real estate investment trust.

So far, no comment from the building`s owner on the offer. Ty, I`d say it s priceless, huh?

MATHISEN: I think it is. I think King Kong is going to get into the bidding here prettysoon. We`ll scratch together some money, maybe we can buy it. It would be nice to own.

GHARIB: That`s NIGHTLY BUSINESS REPORT for us. I`m Susie Gharib, thanks forwatching. Have a nice night.

MATHISEN: And I`m Tyler Mathisen. Thanks from me, as well.

Read more about today`s business news on our Web site, NBR.com. And meanwhile, we`llsee you back here tomorrow.


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END

Nightly Business Report transcripts and video are available on-line post broadcast athttp://nbr.com. The program is transcribed by CQRC Transcriptions, LLC. Updates may beposted at a later date. The views of our guests and commentators are their own and do notnecessarily represent the views of Nightly Business Report, or CNBC, Inc. Informationpresented on Nightly Business Report is not and should not be considered as investment advice.(c) 2013 CNBC, Inc.

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Nightly Business Report - Wednesday June 19 2013