Nightly Business Report - Wednesday July 24 2013

7/27/2019 Nightly Business Report - Wednesday July 24 2013

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

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SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Saving Face. Facebook(NASDAQ:FB) surprises Wall Street with a strong quarter, and investors are hitting the "like"button. But with the stocks still well below its IPO price, is there any reason to buy?


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TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Tourre, aka FabulousFab, takes the stand. The former Goldman Sachs (NYSE:GS) trader who has become the symbolof Wall Street greed during the financial crisis breaks his silence in court.

GHARIB: And a new retirement playbook. With interest rates near historic lows, safeinvestments are delivering lousy returns. So, tonight, find out if alternative strategies are rightfor you -- as we continue our series, "How to Not Outlive Your Money."

We have all that and more on NIGHTLY BUSINESS REPORT for Wednesday, July 24th.

MATHISEN: Good evening, everyone, and welcome.

Earnings jumped, revenues spiked and Facebook (NASDAQ:FB) investors are friending thestock late in the day, sending it up almost 20 percent. The social networking company reported aprofit of 19 cents a share, excluding accounting charges. That easily beat expectations of 14cents. Revenues up 53 percent over last year and the closely watched mobile slice of its businessboomed.

Kayla Tausche here now with a deeper look at what`s driving the numbers -- Kayla.

KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Tyler, what isdriving Facebook`s popularity this quarter is once its biggest worry. That`s your mobile device.A year ago when Facebook (NASDAQ:FB) went public, it warned it didn`t know how muchmoney it could make off mobile advertising, even as its users went mobile in droves.

This quarter is affirmation whatever they are doing is working. Mobile revenue was zero this

time last year. Now, it`s 41 percent of Facebook`s $1.81 billion in revenue. It`s true, more andmore people are using phones to Facebook (NASDAQ:FB). In the second quarter, 819 millionactive users were on the site. That`s up 51 percent.

CEO Mark Zuckerberg said on the company`s conference call, quote, "Soon, we`ll havemore revenues on mobile than desktop." Whatever the platform, advertisers like Facebook


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(NASDAQ:FB) and find their ads to be effective. More than 1 million companies currently takeout ads on the social network. The biggest growth there is for small and local businesses.

MATHISEN: A million companies have ads?

TAUSCHE: One million companies are advertising on the network. You would never thinkthat, 1 million companies.

MATHISEN: Stunning.

Kayla Tausche, thanks very much.

GHARIB: Well, our next guest says this is a break out quarter for Facebook (NASDAQ:FB).He`s David Garrity, a principal at GVA Research.

So, David, how do you feel about Facebook (NASDAQ:FB) tonight? Is this a stock that youwould buy, sell, or hold?

DAVID GARRITY, GVA RESEARCH PRINCIPAL: I think if the stock stays up 20percent as it is, as we go into market tomorrow, target price at 12 months is about $35 a share.The stocks are trading at $31. Certainly, continue to be attractive but I think there are some othernames that might be even more so.

MATHISEN: How surprised were you, David, at the numbers they posted today?

GARRITY: Very positively surprised. The biggest surprise was the percentage ofadvertising revenue that was coming from mobile. Expectations it would be 33 percent and tohave it come in at 41 percent certainly shows a very significant adoption over the last threemonths.


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Obviously, we have to be concerned what extent we see that number moving higher than 50percent and what does that mean in terms of the company getting less per ad than they wouldtraditionally off of their desktop product.

GHARIB: All right. So, it looks like things were working in this quarter. What does MarkZuckerberg and the company have to do now?

GARRITY: All the company has to do is, one -- I mean, they spent a lot of money in termsof buying this company Instagram, which they paid about a billion dollars for and is a companythat didn`t have any revenue. Clearly, they have to show shareholders that they can successfullymonetize this billion-dollar investment in this company. How they plan to do that clearly is avery open question and something I think that investors are going to want to hear more aboutfrom management not just in terms of today`s conference call but going forward.

MATHISEN: If I were sort of surmise from what you said a moment ago, you like Facebook(NASDAQ:FB), you don`t love it. There are other companies that you like more, and maybelove. Why is that? What is -- what is holding you back on Facebook (NASDAQ:FB)? Andwhat makes you like some others more?

GARRITY: Overall, first and foremost, looking at the evaluation. I mean, we`ve had a verynice acceleration here in terms of this revenue growth. We are seeing some of that pass throughthe bottom line. Arguably, EPS, though, isn`t growing at the same rate year over year, therevenues are.

But the valuation on the stocks is still fairly stretched. If we look at some other largetechnology-oriented names, whether it`s in Apple (NASDAQ:AAPL) or Google(NASDAQ:GOOG), growth rates aren`t too much less than they are Facebook (NASDAQ:FB)but the multiples are much less demanding.

GHARIB: David, I know you`re bullish on Apple (NASDAQ:AAPL). If you had to choseone, Apple (NASDAQ:AAPL) or Facebook (NASDAQ:FB), which would it be?

GARRITY: I would take Apple (NASDAQ:AAPL) over the next six months.


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MATHISEN: But Apple`s profits were down year over year yesterday, David. So, it reallyisn`t growing, is it?

GARRITY: Well, what we`re looking at now is going into the second half of the year,you`re going into a period of time where Apple (NASDAQ:AAPL) is going to be introducingnew products, margins are going to expand. Obviously, prior year comparisons are going to beeasier. So, you`re going to see return in terms of profit growth.

The other advantage we`re getting in terms of Apple (NASDAQ:AAPL) is just, you know, amuch less demanding valuation. Also at the same time, with respect to Apple(NASDAQ:AAPL), you`re also getting not insignificant dividend, whereas you don`t get that

with Facebook (NASDAQ:FB).

GHARIB: OK. Great stuff, David, as always. Thank you so much. David Garrity of GVAResearch.

MATHISEN: And on Wall Street today, the Dow and S&P pulling back from record highs,dragged down by weak earnings results from the Dow component Caterpillar (NYSE:CAT) andAT&T (NYSE:T) after the bill yesterday. But a strong performance from Apple(NASDAQ:AAPL) as they exceeded expectations kept NASDAQ in the black, but just barely.The Dow is shedding 25 1/2 points, to close at 15,542; the NASDAQ added a fraction of a point,3,579, the close there; and the S&P 500 fell nearly 6 1/2 to 1,685.

GHARIB: President Obama focused in on the economy and jobs today. Speaking inGalesville, Illinois, he defended his administration`s policies, criticized Wall Street`sirresponsibility, Washington policies, and emphasized the need to grow the middle class.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: This growing inequality,not just a result, inequality of opportunity -- this growing inequality, it`s not just morally wrong,it`s bad economics, because when middle class families have less to spend, guess what?


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Businesses have fewer consumers. When wealth concentrates at the very top, it can inflateunstable bubbles that threaten the economy.

(END VIDEO CLIP)

GHARIB: This is a first in a series of economic speeches the president will be making abouthis vision for the economy, and leading up to what some expect will be a major politicalshowdown over the debt ceiling debate this fall.

And Republicans are paying attention.

(BEGIN VIDEO CLIP)

REP. JOHN BOEHNER (R-OH), SPEAKER OF THE HOUSE: Because Americans aren`tasking the question, "Where are the speeches?" They are asking, "Where are the jobs?"

(END VIDEO CLIP)

MATHISEN: Well, one area of the economy that has been helping create jobs is housing.And a new report suggests the pace of the housing recovery is strong. Sales of newly buildhomes rose 8.3 percent last month. That`s the fastest rate in five years.

And for the first time in two and a half months, the rate of a 30-year fixed rate mortgage fellaveraging 4.58 percent, that according to the Mortgage Bankers Association.

But last week`s rate decline, however modest, did not boost demand for mortgages asapplications fell.


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GHARIB: For all those troubled homeowners who received help through the government`sforeclosure prevention program, many are defaulting again. A report from the program`swatchdog says 46 percent of homeowners who received loan modifications are unable to maketheir current payment. The program was launched in 2009 in response to the housing crisis.

MATHISEN: A mortgage investment is at the center of a closely watched fraud trial of aformer Goldman Sachs (NYSE:GS) trader. You may not know the name but too many, FabriceTourre has become the symbol of Wall Street greed that defined the financial crisis.

Tourre is accused of misleading investors and secretly helping hedge fund manager JohnPaulson construct the mortgage security he could then bet against. It`s the highest profile trial tocome out of the financial crisis, investigations by the Securities and Exchange Commission. Thecivil case is also getting a lot of attention because the government is basing its case on many e-

mails sent by Tourre.

Back in 2007, he referred to the financial markets as the whole building is about to collapseany time now. Today, in a Manhattan courthouse, he took the stand to testify in trial.

Our Mary Thompson was inside the courtroom and joins us now.

Mary, what stood out? What did Tourre say?

MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well,Tourre was very energetic, very confident on the stand today. In fact, he was so energetic heactually at one point knocked a container of water from the stand. It was covered, so nothingwas spilled.

But he was responding to the SEC, which came out swinging today, Tyler, immediatelygoing to emails that he wrote, suggesting that Paulson`s hedge fund actually had a long positionin the security in question, this being a synthetic CDO called Abacus. Now, Tourre admitting onthe stand that those emails were both inaccurate and misleading, or I should say, inaccurate aboutPaulson`s position. He said, "I wasn`t trying to confuse anyone."


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But again, the SEC pounds, because as you suggested, the SEC is trying to convince jurorsthat Tourre deliberately misled investors that Paulson fund had an equity or long position in thefund, something that would make them more confident, when indeed, Paulson actually had ashort position, which allowed him to profit considerably, basically to the tune of a billion dollars.

GHARIB: Mary, let`s fast-forward a little bit. What`s at stake for Tourre if he losses thiscase?

THOMPSON: Well, again, this is a civil trial, so he won`t be going to jail but he will likelyface fines and penalties if found guilty. He also could face possible bans from the securitiesindustry. Keep in mind that Mr. Tourre has left Goldman Sachs (NYSE:GS) and is currently in aPhD program in economics at the University of Chicago.

MATHISEN: Mary Thompson, thank you very much.

GHARIB: And now to another courthouse, this one in Detroit, where a judge cleared theway for the bankruptcy case to go forward without legal challenges in other courts. This was thefirst hearing related to the city`s bankruptcy and Scott Cohn was there -- Scott.

SCOTT COHN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Susie, the city ofDetroit was founded 312 years ago today and for those who believe that what this city needs is aquick and thorough restructuring, this may have been quite a birthday present.

At least, that`s what U.S. bankruptcy Judge Steven Rhodes said. And he believed thatclearing the way for a court case in his court, doing away with other challenges in state court isin the public interest. A spokesperson for the state, the bankruptcy expert appointed by thegovernor to oversee this restructuring says the ruling by the judge is an important first step.

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: This allows us to move forward. What we really can`t have areweeks and weeks and weeks of delays because it runs up the cost. Everyone in that room isbeing paid. It runs up the lost the longer we`re in court and the longer this is unresolved.


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(END VIDEO CLIP)

COHN: But the unions who have been pressing those challenges in the state court say theirfight will go on, even if it is in federal court. They say the bankruptcy filing is actually anattempt by Republican Governor Rick Scott to do an end run around the citizens of Detroit andaround a provision in the state constitution that protects employee pensions.

(BEGIN VIDEO CLIP)

EDWARD MCNEIL, AFSCME: We got a governor, we got a lieutenant governor, andwe`ve got a party that just says we don`t care about folks. We care about our own agenda,agendas is in not what we`re about. In America, we re about people`s rights. That`s what we`refighting for.

(END VIDEO CLIP)

COHN: That fight, though, now will be squarely here in federal court. Another hearing in

the case is scheduled for next week -- Tyler.

MATHISEN: Scott Cohn, thank you very much. Scott Cohn reporting live from Detroit.

Well, federal authorities are reportedly preparing to bring criminal charges against SACCapital. That`s the hedge fund run by the billionaire investor Steven Cohen. The expectedcharges against the company but not again Cohen himself could be announced as early as thisweek. According to "The Wall Street Journal", no major financial firm has survived a criminalindictment.

Cohen is already facing civil allegations from the Securities and Exchange Commission,accusing him of failing to supervise his firm properly. SAC has been a target of a multi-yearinsider trading investigation.


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Ford, by the way, up more than 90 percent in a year.

On the other way, Caterpillar (NYSE:CAT) dragged down the Dow as profits dropped 43percent on a sharp decline in revenue. Jim Chanos, the noted short seller, told an investmentconference last week that this Cat may not have nine lives.

(BEGIN VIDEO CLIP)

JIM CHANOS, KYNIKOS ASSOCIATES FOUNDER: We are short Caterpillar(NYSE:CAT) Inc. Iconic American company, leader in its class, but tied to the wrong products,at the wrong time in the cycle.

(END VIDEO CLIP)

MATHISEN: Cat CEO Douglas Oberhelman acknowledged the headwinds as investorsdropped the stock about 2.5 percent on more than double the normal volume. Cat closed at$83.44.

And Visa`s profit jumped 16 percent as payments and card transactions increase, the boardgreen-lighted a new $1.5 billion share buyback and the guidance for the rest of the year. And2014 shares of Visa (NYSE:V) had been down during the regular session, closing at $186.75, butthey popped on the profit news after the bell.

GHARIB: Baby boomers and retirees are laser focused on their investments these days. Oneof the big worries, they will outlive their savings. With interest rates at historic lows, so-calledsafe investments had had dismal returns.

And as Sharon Epperson reports, in the third part of our series, "How to Not Outlive YourMoney," some investors are considering less conventional retirement strategies.

(BEGIN VIDEOTAPE)


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GILMAN: If you put money up at the time you retire, maybe at 55, 60, 65, but you don`ttake the income out as an annuity until you`re much older, 80 or 85, you get a much higherannuity or pension doing it that way than if you just bought an annuity right at the time youretired.

EPPERSON: If the stocks in your portfolio sink, this insurance will provide a steadyincome. But longevity insurance is not an investment. It`s for investment protection. If youdon`t reach age 80 or 85, you won t get the money. That`s another risk.

But Dr. Singer believes this strategy may be worth a shot. Just to make sure he doesn`toutlive his savings.

For NIGHTLY BUSINESS REPORT, I`m Sharon Epperson.

(END VIDEOTAPE)

MATHISEN: All right. Let`s turn to a financial adviser for his thoughts on this strategy andmore. And he is James Shagawat, a wealth management principal at the Baron Financial Group.

James, welcome.

JAMES SHAGAWAT, BARON FINANCIAL GROUP: Thank you.

MATHISEN: What do you think of longevity insurance, good idea or bad idea?

SHAGAWAT: It depends really. It might be appropriate --

MATHISEN: I was afraid you were going to say that.


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SHAGAWAT: That`s the answer, right? Yes.

There are risks to it. You`re betting -- you`re putting down a big lump sum of money notcollect it until you`re 80 or 85 --

MATHISEN: Would you tell your mother to do it?

SHAGAWAT: You know, I probably wouldn`t. I probably advice a more diversifiedstrategy and not take the risk of, you know, what if something happens? This is --

MATHISEN: What if you don`t reach that 80 or 85, you collect nothing for the money youput in.

SHAGAWAT: That`s right.

MATHISEN: That`s the risk.

SHAGAWAT: That`s the risk.

GHARIB: So what would you tell your mother to do? What are alternatives to sleep at nightand still have money to last you through your retirement?

SHAGAWAT: I mean, that`s first. We have to make (AUDIO GAP) has peace of mind. So,as -- what we would diversify across many asset classes.

So, stocks are risky. Bonds are not paying a great return right now. How you balance that toget a better return? There are alternative investments.


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And, two we like a lot are real estate, which are real estate investment trusts through a mutualfund, and another is natural resources, which are commodities like oil and gas and timber.

What they do is they don`t act the way the market does. So let`s say the market is on a tear,these might not be. But if the market corrects, this might help things --

GHARIB: But they seem like volatile investments. They`re not exactly sleep well at nighttype of alternatives, right?

SHAGAWAT: You`re correct about that. And it`s very important to keep them with bondsand stocks, never on their own. You don`t want a big concentration. At our firm, maybe 25percent of client`s money is in alternatives, but they do work.

MATHISEN: So if I`m let`s say in my mid 60s or maybe even a little older than that, and Iwant the kind of balance -- well, here we go, a sample portfolio. You got 25 percent inalternatives, 25 percent in international stocks and bonds.

SHAGAWAT: Right.

MATHISEN: Twenty-five percent in domestic stocks and 25 percent in standard fixedincome. So, that kind of 25/25 -- is the mix that you would argue is a good benchmark?

SHAGAWAT: That`s right. That`s a good mix that we use for a client.

MATHISEN: Now, when you say timber. Timber, when you say -- you`re not telling me togo out a buy a forest, are you?

SHAGAWAT: No, a very small sliver of your portfolio would actually be in timber.


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MATHISEN: How do I get it? How do I buy it? I don`t go through a lumber yard?

SHAGAWAT: That`s right. Through mutual funds or exchange-traded funds. They are apool of different commodities. So, yes, they are very volatile.

GHARIB: And real else state, too, you`re thinking RETS, the same thing? Mutual funds?

SHAGAWAT: Not direct RETS, but mutual funds, exactly. Now, this is geographicallydiversified and not single family homes where you think of real estate. These are storage

facilities and assisted living, and not just concentrated on one part of the country but across thecountry.

We put generally about 5 percent of our clients in real estate, and over the last three years,it`s the best performing asset class.

MATHISEN: When you say international stocks and bonds, you got 25 percent in thatcategory. Again, I assuming you`re thinking of mutual funds or ETFs that do this. Are you

talking about a broad international fund, an index fund or one that concentrates in a particularregion?

SHAGAWAT: A combination. We do like index. We do like actively managed. But forinternational, we`re concerned about exchange rate risk.

So mutual funds are the perfect vehicle for those. Very diversified, low cost and exchangetraded funds. We`ve been using more of those. It`s been working and helping portfolios grow,which is the goal.

MATHISEN: Yes.


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SHAGAWAT: Just like the client there, protect their money and have it grow and make sureit`s there for life.

MATHISEN: James, I like how you looked at the camera when you said my mother s peaceof mind is critical. You were talking right to her.

James Shagawat, thank you very much. He`s from Baron Financial Group.

SHAGAWAT: OK.

GHARIB: All right. Well, for more on the story, you can log on to our Web site NBR.com.And tomorrow, we`ll continue our special series on "How to Not Outlive Your Money." A look,this time, it`s going to be on the benefits of downsizing as a way to stretch your retirementbudget.

Still ahead on the program, team Starbucks (NASDAQ:SBUX) or team Dunkin? Americansare loyal to their coffee brands, but which company is winning over caffeine craver?

But, first, let`s take a look at how commodities, treasuries, and currencies performed today.

(MUSIC)

GHARIB: A natural gas rig continues to burn in the Gulf of Mexico. A blowout occurredlast night, all 44 workers were evacuated before the fire started. The owner of the well,Hercules, said that stopping the flow of natural gas could require drilling a relief well. Officialssay the blowout is not expected to be as damaging as the BP oil spill two years ago.

MATHISEN: Well, from one commodity to another, this one, coffee, Starbucks(NASDAQ:SBUX) and Dunkin Donuts both report their earnings tomorrow. The competition isfierce and their results come in a time when the world a wash in a coffee glut.


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Jane Wells goes inside the java wars.

(BEGIN VIDEOTAPE)

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):Americans take their cup of Joe seriously.

UNIDENTIFIED FEMALE: I prefer Dunkin Donuts because the price is reasonable and thetaste of the coffee is great.

UNIDENTIFIED MALE: I don`t like Dunkin Donuts at all. I like Starbucks(NASDAQ:SBUX). It`s a better coffee.

WELLS: When it comes to coffee, there is usually no middle ground.

UNIDENTIFIED MALE: Starbucks (NASDAQ:SBUX) just taste better.

UNIDENTIFIED MALE: Starbucks (NASDAQ:SBUX) is too expensive and I can`tpronounce anything on their menu.

WELLS: The good news is that global leader is a glut of coffee. Goldman Sachs(NYSE:GS) says inventories are at the five-year high.

(on camera): But while big picture, the world is swimming in java, when you get to the littlepicture, it`s not so good in a small state where coffee is a big deal. Hawaii`s Kona coffeeindustry is being destroyed by a small pest called the Coffee Berry Borer, infesting as many as80 percent of farms and some are being abandoned. So, the USDA is spending a million dollarsto try to fight the pest.


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Still, consumers should not see much impact in pricing and a lot of attention is being paid towhat`s happening with coffee in the grocery store. Jefferies reports K-Cup sales are up 20percent from a year ago as prices fall, and bagged coffee sales are seeing lower pricedcompetition.

UNIDENTIFIED MALE: A rich, never bitter taste cup after cup.

WELLS: Gevalia, owned by Kraft (NYSE:KFT) Foods, has seen grocery store sales morethan double, according to Jefferies, perhaps helped by a sexy new ad campaign. But as all themajor retailers report earnings this week, analysts say all of them will show double digit growth.Maybe when it comes to coffee wars, everybody wins.

UNIDENTIFIED FEMALE: All coffee is good coffee.

WELLS: For NIGHTLY BUSINESS REPORT, I`m Jane Wells.

(END VIDEOTAPE)

GHARIB: All good coffee. Good coffee. Do you have a preference?

MATHISEN: I like that Gevalia guy. That`s pretty good.

(LAUGHTER)

GHARIB: Well, that`s NIGHTLY BUSINESS REPORT for us tonight. I`m Susie Gharib.Thanks so much for joining us.


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MATHISEN: And I m Tyler Mathisen. Have a great evening, everybody. We`ll see youright back here tomorrow night.

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 July 24 2013