Full Episode Transcript – Tuesday, Jan 17, 2012

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR:  Disappointing profits from Citigroup (NYSE:C) cast a shadow over the financial sector, but there is a glimmer of hope in the numbers.

JOHN BUTTERS, SR. EARNINGS ANALYST, FACTSET:  On the positive side, some of these companies are saying they`re seeing growth in deposits and growth in loans.

TOM HUDSON, NIGHTLY BUSINESS REPORT ANCHOR:  From Citi to Wells Fargo (NYSE:WFC) and other big banks, we talk with a top banking analyst about the best stocks to buy now. It`s NIGHTLY BUSINESS REPORT for Tuesday, January 17.

Big Banks Report 4th Quarter Earnings

GHARIB:   Good evening, everyone. A tale of two banks today — Citigroup`s quarterly profits tumbled, but Wells Fargo (NYSE:WFC) posted a record fourth quarter. And Tom, this is a key week for earnings with lots of reports from the financials.

HUDSON:   Very, very busy week for earnings parade here Susie and between today`s results and JPMorgan`s disappointing numbers that we saw back on Friday, this is kind of a shaky start to the earnings season certainly for banks. Looking at those numbers from Citi, the banking giant earned $0.38 per share.  That`s an 11 percent drop from a year ago and way below what analysts were expecting in the past quarter.  Revenues fell to $17 billion. Even though Citi made more loans, its investment banking business did not do well in the fourth quarter. But at Wells Fargo
(NYSE:WFC) however, profits jumped to $0.73 per share.  That`s a penny better than estimates, better news here, even though revenues slipped, but were still higher than what Wall Street was expecting.

GHARIB:   Wells Fargo (NYSE:WFC) shares rose today, but most other bank stocks were down. Still, the major averages managed to end higher.  By the closing bell, the Dow gained 60 points, the NASDAQ added 17, the S&P up
4.5 points.  Erika Miller reports on how financial firms are likely to perform this earnings season.

ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: If there`s one sector that`s struggling these days, it`s financials.

JOHN BUTTERS, SR. EARNINGS ANALYST, FACTSET:  Where some of these companies are seeing weakness, generally speaking, is in anything related to capital markets, so revenues from M&A activity, IPOs and so forth, trading revenues, and then mortgage activity.

MILLER:   So why in the world are financials expected to post the biggest earnings increase of any sector with a whopping 70 percent gain?  The answer, a quirk in the data. It turns out, the financial sector`s strength is due almost entirely to gains at one firm, AIG.

BUTTERS:  The company reported a huge loss a year ago. It was $16 per share. They had some charges.  And a s a result, because they are expecting a profit this quarter, plus their overall weighting in the index, it`s just having an unusually large effect in this particular quarter.

MILLER:  Take out AIG and earnings for the group are expected to be flat. But they may be worse than flat.  Estimates for financials have been falling steadily since the start of the quarter, and many analysts think big banks will continue to struggle.

ERIK OJA, BANK ANALYST, STANDARD & POOR`S:  The two biggest headwinds are the Dodd-Frank financial regulatory reform act and what`s going on in Europe right now. There`s less visibility on what`s going on in Europe and we have a pending possible default in Greece happening in March.

MILLER:   Still, Oja believes now is a good time for patient investors to buy shares of regional banks, as well as one large bank.

OJA:  We like Wells Fargo (NYSE:WFC). We have a “buy” recommendation on them because we think they have less of the legacy issues that affect Bank of America (NYSE:BAC) and Citigroup (NYSE:C).

MILLER:   But others recommend steering clear of the entire sector.

MARK LAMKIN, CEO, LAMKIN WEALTH MANAGEMENT:  By and large, you don`t know what`s in those balance sheets. I would not get tempted with financial yields. In fact, that`s a sector that we are avoiding and I have vetoed at my firm, not to be in my models.

MILLER:   The performance of financials and AIG specifically will have a big impact on overall S&P 500 earnings. With AIG, earnings for the index are expected to rise 10 percent; without AIG, profits at the remaining 499 firms are forecast up just 3 percent. The ability of a single company to skew the data is not just a fluke this quarter.  In the second quarter, the situation is likely to occur again.  The difference is it will be a turnaround at Bank of America (NYSE:BAC) boosting returns instead of AIG.  Erika Miller, NIGHTLY BUSINESS REPORT, New York.

Bank Stock Buys in a Challenging Year

GHARIB:   Joining us now with more analysis on bank earnings, we have with us Fred Cannon.  He`s co-director of research at KBW (NYSE:KBW). Fred, happy New Year. Nice to have you with us.

FRED CANNON, CO-DIRECTOR RESEARCH, KBW (NYSE:KBW): Thank you, Susie, great to be here. Happy New Year.

GHARIB:   Same to you. So a lot of people have been predicting for this new year 2012, that this will be the turn around year for the bank. Others are saying it`s going to be a challenging year. How do you see it?

CANNON:  We`re in the challenging year camp. Especially we saw coming into this new year it was a happy new year. We saw a pretty big stock rally in the banks about 10 percent with some of the big losers last year, Bank of America (NYSE:BAC) and Citi up almost 20 percent. The problem is now we face the music with the earnings reports and they`re coming in pretty tough.

GHARIB:   What is your take so far on earnings? We had JPMorgan on Friday, Citi and Wells Fargo (NYSE:WFC) today. What`s your take away?

CANNON:  As was just mentioned, the capital markets business and what that means is it means trading, foreign exchange, investment banking. That entire part of bank earning stream is under a lot of pressure. The volatility that we saw last year and the problems in Europe are just weighing on that part of the business and that`s what`s really keeping Citi and a lot of JPMorgan activity down.  On the other hand, domestic basic banking is doing all right. It`s not a great environment, but it`s doing all right.  We saw that at Wells Fargo (NYSE:WFC) where we see them continuing to make progress quarter in quarter out.

GHARIB:   What are you expecting then from Goldman Sachs that reports tomorrow and Bank of America (NYSE:BAC) on Thursday and then in between that a lot of regionals?

CANNON:  On Goldman Sachs they face a lot of the same pressures that we saw the problems with Citi. The only real question is did we get earnings estimates down low enough to hit, reduce expectations. That`s true in Morgan Stanley (NASDAQ:NBXH) (NYSE:MS) too. So I think those are going to be tough stocks as we go into the next couple days. Bank of America (NYSE:BAC) also continues to face issues. While Wells posted a great mortgage quarter, it`s hard to expect that out of Bank of America (NYSE:BAC).

GHARIB:   And yet you are still recommending some banks. Let`s take a look at what your recommendations are for long-term shareholders. Among the big banks you like JPMorgan and Goldman Sachs.  And looking at this next graphic coming up here among the regional banks you have a Sun Trust, U.S. Bank Corp. and Capital One. Why these?

CANNON:  That`s right. Primarily what we want to recommend to investors is the domestic banks that can make good profits in this environment.  Particularly U.S. Bank and Capital One are top of the list on that score.  We also think if you`re looking for a recovery story, Sun Trust is one. It`s a solid southeast bank that we think can make good progress this year. We generally want to avoid those big global players.  We think if investors want to play that and want to be invested there JPMorgan and Goldman Sachs is the place to be.

GHARIB:   On the other end of spectrum, you like some of the small banks. These are banks that have assets under $50 million. Let`s look at the list. Not too many familiar names maybe for our viewers. CVB Financial (NASDAQ:CVBF), Columbia Banking System (NASDAQ:COLB), FNB Corp., PacWest Bank Corp. What`s the scene here and why do you like the small ones?

CANNON:  The theme is the world has changed from the past relative to banking. It used to be the small banks were at a big disadvantage to those big players. They had to carry a lot more capital which reduced the ability to earn money on the investment. That`s all changed. Those big banks are now required to carry a lot more capital, a lot more regulated.  Because these smaller banks are under the radar screen, they`re not too big to stay up. They`re able to gain market share. They`re able to take advantage of the situation and we think companies like those you just mentioned don`t hear those names, they`re not household names but PacWest is a good example in southern California, able to do a lot of things with their capital that the other big players can`t.

GHARIB:   OK.  We have to leave it there. Any disclosures, do you own any of these stocks or does your firm do business with them?

CANNON:  I don`t. We do business with a number of financials and that`s in our disclosure. Thank you Susie.

GHARIB:   Fred, thank you for coming to the program, appreciate it.

CANNON:  Thank you.

GHARIB:   My guest tonight, Fred Cannon.  He`s co-director of research at KBW (NYSE:KBW).

DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT:  I`m Diane Eastabrook in Detroit. I`ll tell you how businesses here are getting behind a city that faces potential bankruptcy.

Both Sides of SOPA and PIPA Anti-Piracy Legislation

HUDSON:  If you`re doing any online research soon like a term paper this week, or you just wanted to know all the names of all the Hawaiian volcanoes, be warned. Wikipedia, the popular online user- generated encyclopedia, is going to be closed.  It`s blacking out tomorrow its English language website in protest over anti-piracy legislation under consideration on Capitol Hill.  Darren Gersh tonight explains why this battle has drawn in some of the biggest names on the web.

DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT:  “Flatland:   The Movie” is a drama about geometry set in two dimensions. When director/animator Dano Johnson tried to find out what people were saying about his educational film, he received an array of emails offering him a free download of his own movie.

DANO JOHNSON, DIR. & ANIMATOR, “FLATLAND: THE MOVIE”:  It was a bit alarming. We worked hard on this film and we wanted to pay everybody who was involved in the creation of it. I really hate online piracy. It definitely affects my income.

GERSH:   To make it easier to block foreign web sites that pirate movies and music and software, many content creators are now pushing Congress to pass legislation called the “Stop Online Piracy Act” or “SOPA,”
and the related “Protect IP” or “PIPA” act. Network security analyst Daniel Castro says tougher anti-piracy rules would benefit artists and software engineers working in the United States.

DANIEL CASTRO, SR. ANALYST, INFORMATION TECHNOLOGY& INNOVATION FOUND.:
If you have however millions of Chinese that are simply downloading pirated DVDs, pirated movies, they`re buying pirated DVDs in the street, they`re not paying for any of that. Those could be funding American jobs.  Those could be lowering the average cost of these products for Americans.

GERSH:   But critics of SOPA and PIPA say the legislation will force companies like Google (NASDAQ:GOOG) to censor the Internet. The search giant is fighting back, along with allies like Delphine Halgand at Reporters Without Borders. The human rights group says SOPA and PIPA send a terrible message to repressive regimes like China and Syria.

DELPHINE HALGAND, WASHINGTON DIR., REPORTERS WITHOUT BORDERS:  It will just encourage repressive regimes to continue to silence their citizens.

GERSH:   Even Dano Johnson is concerned the government won`t be very good at picking the right sites to block. He worries Congress will do more to harm to the Internet than good in protecting him from sales lost to online piracy.

JOHNSON:   We want to innovate with our business model. I don`t think we are going to recoup any of that money through legislation.

GERSH:   The Motion Picture Association of America calls tomorrow`s blackout day protest irresponsible. But Wikipedia founder Jimmy Wales says he and other protesters can`t ignore what they see as a threat to free speech.  Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.

GHARIB:   Shares of Carnival (NYSE:CCL) Cruise Lines moved sharply lower today. The stock tumbled almost $5, or 14 percent, in its first day of trading since one of Carnival`s ships ran aground off the coast of Italy, killing 11 people. While analysts believe Carnival (NYSE:CCL) can absorb the immediate financial impact of the crash, they`re worried about future bookings.  Carnival (NYSE:CCL) books almost half of its sales for the year between January and March.

JAIME KATZ, CRUISE INDUSTRY ANALYST, MORNINGSTAR:  Most cruises are booked currently now and in February, in the wave season for that big third quarter season and the pricing on that could be kind of severely marked down if this problem stays in the front of the news.

GHARIB:   Carnival (NYSE:CCL) shares were the second worst performer on the S&P today Tom.  The worst one, you probably know it, RR Donnelley, the printing company, down 16 percent.

Market Focus

HUDSON:  We`ll tell you why coming up in a moment. Royal Caribbean shares were down in sympathy with Carnival (NYSE:CCL) as well here Susie. Let`s go ahead and roll with tonight`s “Market Focus.”  This morning we saw some nice stock gains.  They were cut in half though by the closing bell as the crush of corporate earnings reports began as we mentioned earlier. Buyers started off strong, off the strong regional manufacturing data in the United States in the northeast and a better than expected fourth quarter report for the Chinese economy.  Those gains as you can see on the intra-day chart were trimmed in the last two hours of trading however.

No surprise on a day with two big banks reporting earnings, the financial sector was the biggest drag. This exchange-traded fund follows the S&P financial sector. It slipped almost 1 percent, led by Citigroup (NYSE:C), down 8 percent, lots of selling pressure here. We mentioned those disappointing earnings at the beginning of the program. Shares are down more than 35 percent since the one-for-10 reverse stock split that Citi underwent back in the spring time.

What did work for investors today included energy, technology and health care sectors, each moving up by 0.7 of a percent. After the closing bell tonight, the news about Yahoo (NASDAQ:YHOO)!, co-founder of that company severed his ties with the company. Jerry Yang resigned from the Yahoo (NASDAQ:YHOO)! board of directors, as well as the boards of Yahoo (NASDAQ:YHOO)! Japan and Alibaba, which is partially owned by Yahoo (NASDAQ:YHOO)! Yang co-founded Yahoo (NASDAQ:YHOO)! back in 1995. The company has come under increasing pressure as of late to turn itself around. Yang said tonight it was time to quote, pursue other interests, end quote.  Shares of Yahoo (NASDAQ:YHOO)! meantime closed down a fraction ahead of the news.  They rallied more than 3 percent after the closing bell, up close to $16 per share.  Just last week, Yahoo (NASDAQ:YHOO)! named a new CEO, Scott Thompson from Paypal. The changes at Yahoo (NASDAQ:YHOO)! come as the company may lose its lead against Google (NASDAQ:GOOG) in online display advertising. Research firm Greenlight today predicted that Google (NASDAQ:GOOG) will overtake Yahoo`s display ad business sometime this year. Google (NASDAQ:GOOG) shares as you can see were up a fraction.

Research in Motion (NASDAQ:RIMM) continues seeing some buying over all the market speculation going on about a possible sale. Shares jumped another 8 percent today, again heavy volume, taking the stock up to its highest price since December.  Shares up 40 percent from its low last month as market rumors about a potential buyout have circulated, all of them unconfirmed however.

As more and more of us use smart phones to read magazines, printing company RR Donnelley`s outlook for the year-end revenues and margins were disappointing.  Susie mentioned it was the worst in the S&P 500 falling almost 16 percent today. Volume 10 times its usual pace, shares sinking to a new 52-week low. More digital media has hurt its magazine printing business.  That accounts for one-fifth of RR Donnelley`s sales.

It`s a different kind of warning from gold and copper miner Newmont rather. The company expects mining costs to increase this year and predicts it will mine less copper. Shares slid almost 4 percent. And also in commodities, nat gas continues dropping, down for the sixth straight session, falling to a new 28-month low.  Warm winter weather and record supplies are behind the price plunge.  And that is tonight`s “Market Focus.”

Downtown Detroit Revitalization by Businesses Willing to Relocate

GHARIB:   The motor city could be headed down the same road as General Motors (NYSE:GM) and Chrysler took recently.  Detroit is teetering on bankruptcy. Right now, a 10-member board appointed by Michigan`s governor is deciding if the state should appoint an emergency manager to help run the city.  But in the face of Detroit`s financial crisis, something just short of amazing is happening. Young people and businesses are moving to the city`s downtown.  As Diane Eastabrook reports, it`s an effort to revitalize a city that has been in decline for decades.

EASTABROOK:  Craig Steiner now has time each morning to enjoy breakfast, instead sitting in his car for a half-hour commute to work.
Last fall, the 30-year-old moved from the suburbs to this loft in downtown Detroit, minutes from his job.

CRAIG STEINER, LOFT OWNER:  I can walk to work now, I can ride a bike. During the winter, I`m driving my car just because it can get kind of cold.

EASTABROOK:   Steiner used a $20,000 stipend from his employer, Blue Cross/Blue Shield of Michigan to buy his $60,000 loft.

DANIEL LOEPP, PRES. & CEO, BCBS OF MICHIGAN:  That was crucial. Otherwise, I wouldn`t have been able to do it.

EASTABROOK:   Blue Cross is among a handful of companies, including Quicken loans and Strategic Staffing Solutions, moving jobs into Detroit and offering up to $4 million in housing stipends to employees who relocate there, too.  Blue Cross is moving 3,000 employees from suburban Southfield to offices downtown.  It`s getting $30 million in incentives from the city to do so, but President and CEO Daniel Loepp says that`s not what motivated the move or the stipends.

LOEPP:   I`ve got two 20-somethings. They are not overly interested in living out in the country. They want to go where the action is.  And I think if we can make that interesting and happening, you are going to attract people who will be interested in coming.  Businesses are going to be interested in relocating, and that`s going to make for a better economy.

EASTABROOK:   Dave Mansini is already seeing a difference. His Supino`s pizzeria, located just across the highway from downtown, is always bustling.

DAVE MANSINI, SUPINO PIZZA OWNER:  We`ve been pretty busy, to the point that I have a hard time keeping up with business sometimes.

EASTABROOK:    “Live Downtown” is trying to reverse the near half century trend here in Detroit.  Back in the 1950s, as many as two million people called the motor city home. But many residents and businesses fled to the suburbs in the 1960s following the race riots.  Today, only about 700,000 people live here.  Population loss has contributed to Detroit`s highly public financial woes. With fewer people, businesses have gone under.  The city has been forced to shutter schools and abandoned homes pockmark neighborhood after neighborhood. While downtown Detroit has seen some revitalization with a new ballpark, theaters and other activities, the area is still short of the kind of housing that appeals to young urban dwellers.

DAVID DI RITA, PRINCIPAL, THE ROXBURY GROUP:  It`s obviously very bright. It gives you some nice views into the city.

EASTABROOK:   That`s where developer David di Rita comes in. His company has acquired the 100-year-old David Whitney building and plans to convert it into a 134-room hotel with 108 condominiums and retail space. Di Rita`s still trying to get financing for the project.

DI RITA:   I think people seem to understand that the city is going through a difficult transition, a transition not unlike what our largest employers went through a few years ago and I believe the market understands that it`s going to come the other end of that.

EASTABROOK:   Irvin Reid is president emeritus of Wayne State University and part of the state board appointed to review Detroit`s finances. He says business investment in the city and the “Live Downtown” project will be considered as the group assesses Detroit`s fiscal health.

IRVIN REID, PRES. EMERITUS, WAYNE STATE UNIV.: We`re going to rebuild the city of Detroit — its finances, its financial foundation — on the basis of how much activities are going on here, how much business is going on here, how much employment is going on here, what are the prospects for the future.

EASTABROOK:   Since “Live Downtown” started last year, Blue Cross has helped roughly 100 employees buy or rent in Detroit.  Two hundreds more applications are in the pipeline. The company admits the project isn`t a cure-all for Detroit, but it could project commitment to a community that desperately needs it.  Diane Eastabrook, NIGHTLY BUSINESS REPORT, Detroit.

HUDSON:   Here`s what we`re watching for tomorrow, another busy day.  We`ll get a check on inflation at the wholesale level with December`s producer price index due in, also a fresh look at manufacturing with last month`s industrial production data.  Tomorrow, from Google (NASDAQ:GOOG) to Intel (NASDAQ:INTC) and IBM, we look at what to expect from some of the biggest names in technology as they begin to report their quarterly results.

GHARIB:   Kraft (NYSE:KFT) Foods announced plans to cut 1,600 jobs as it prepares to split its businesses. The maker of Oreo cookies, Kraft (NYSE:KFT) mac & cheese and Cadbury chocolates says the cuts will impact mostly corporate and sales positions in the U.S. and Canada, not manufacturing jobs. Later this year, Kraft (NYSE:KFT) will split into two companies — one focused on its grocery business, the other on its global snack brands.

HUDSON:   The AFL/CIO is turning to a new recruiting tool — television. The union has launched a new series of ads targeting people it thinks may want to join the organization.  The ads began airing today in Pittsburgh and Austin, Texas.  Other cities will see the ads in coming months. Unions currently represent about 12 percent of workers in the United States.  That`s down from 20 percent back in the early 1980s.

Housing Recovery Optimism from Economist Richard Dekaser

GHARIB:   It`s a big week for housing data. We`ll see the latest on housing starts, December sales and get the outlook from the nation`s home builders. Commentator Richard Dekaser is optimistic that the housing recovery is gaining traction.  He`s deputy chief economist at the Parthenon Group.

RICHARD DEKASER, ECONOMIST, THE PARTHENON GROUP:  After three years best described as bouncing along the bottom, the housing market ended last year on an encouraging note — sales, construction and homebuilder sentiment all improved markedly. And as we turn the page on 2011, there are reasons to be optimistic about the outlook for 2012. First, the overhang of unsold homes has fallen sharply. The glut of existing homes for sale is down 30 percent since its 2007 peak and the supply of new homes is at an all-time low.

New foreclosure activity is also falling, down about 25 percent over the past three years. And with recent declines in unemployment, that downtrend is almost sure to continue. As for the demand side of the housing market, the tailwinds are only getting stronger. It now takes just 15 percent of the typical family`s income to finance a home purchase. That`s half of what was required during the boom and the most affordable things have been in half a century.

Demographics are also looking up. Labor market improvements have enabled more and more folks who`ve been co-habitating out of necessity or living with their parents, to move out on their own. The first nine months of last year, for example, witnessed as much household formation as during the previous three years combined. So with less supply and more demand in store for 2012, conditions are ripe for a housing market improvement as the year unfolds. I`m Richard Dekaser.

HUDSON:   The NFL is consistently one of the hottest commodities for television and advertisers. But if your home team does not sell enough tickets, you`re in the dark. In tonight`s “Beyond the Scoreboard,” Rick Horrow on the business behind re-thinking the blackout rule.

RICK HORROW, CEO, HORROW SPORTS VENTURES:  The NFL`s blackout policy is under fire as Federal regulators look into sacking the unpopular rule. The NFL blacked out 16 games on local TV this past season, but the total could have been significantly higher had businesses in Charlotte, Jacksonville and Miami not stepped up to buy unsold game tickets. Football`s current blackout policy dates back to 1973. It prevents games from being shown on local TV if tickets aren`t sold out 72 hours prior to kickoff.

Almost every team has faced a Sunday match without its local TV audience. And the FCC`s decision to seek public comment on the issue comes as the cost of NFL rights skyrockets.  CBS (NYSE:CBS), Fox and NBC are spending a combined $27 billion over nine years for NFL games.  And Disney`s ESPN is spending $15 billion for eight year`s worth of Monday night football. Those costs are passed on to consumers, who in some cases, don`t get to watch their home team play.

Some point to these ever escalating deals, which threaten to exclude local consumers, for rising ticket costs. If the blackout rule is changed, it could lead to lower ticket prices in markets having trouble selling out.
For a league that makes the bulk of its money from TV rights in the first place, letting all fans watch is worthy of further review. I`m Rick Horrow.

HUDSON:   That`s it from us tonight on this January 17th. I`m Tom
Hudson. Have a great evening Susie.

GHARIB:   Same to you, Tom. I`m Susie Gharib.  Hope to see all of you
again tomorrow night.


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