<Show: NIGHTLY BUSINESS REPORT> <Date: May 16, 2013> <Time: 18:30:00> <Tran: 051601cb.

118> <Type: SHOW> <Head: NIGHTLY BUSINESS REPORT for May 16, 2013, PBS> <Sect: News; Domestic> <Byline: Susie Gharib, Tyler Mathisen, Mary Thompson, John Harwood, Jane Wells> <Guest: Mark Zandi, Kevin Caron, Budd Bugatch> <Spec: Consumers; Economy; Federal Reserve; Retail Industry; Business; Wal- Mart (NYSE:WMT); Krispy Kreme; Products; Policies> <Time: 18:30:00>

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

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SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Falling prices. You`re paying less for just about everything. That may be good for your wallet, but is it a bad sign for the economy?

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Retail bellwether. Sales at the world`s largest retailer are slumping. What results from Wal- Mart (NYSE:WMT) say about the American consumer?

GHARIB: And rolling in dough. Krispy Kreme, a one-time Wall Street darling, fell on hard times. Then, it cuts the fat and made a comeback.

We have all that and more tonight on NIGHTLY BUSINESS REPORT for this Thursday, May 16th.

Good evening, everyone.

Well, Tyler, a lot of talk today about prices. What we pay for all sorts of stuff.

MATHISEN: And we`re paying less it appears for lots of things, it may not feel like that, it may feel like you`re spending more. But according to the latest government numbers, you`re not.

Consumer prices fell 0.4 of a percent in April, slightly lower than expectations. Couple that with the report on producer prices, that`s the wholesale level and that came out yesterday, and that showed the biggest drop in producer prices in three years.

You got to wonder, what happened to inflation? It`s one of the key things the Federal Reserve looks for and right now it`s nowhere to be found just yet.

(BEGIN VIDEOTAPE)

MATHISEN (voice-over): Inflation is low, very low. So what does that mean for you?

Well, obviously it means prices are going up slowly. Gas prices were down more than 8 percent in April. Food prices were up, but only slightly. And other core costs -- medical care, education and clothing -- showed little if any movement.

Take out energy and food, and those core costs rose a meager one tenth of a percent last month. For the year ending in April, they`re up only 1.7 percent.

So, for now, low inflation. It`s good for your wallet, right? Well, not so fast. The Federal Reserve wants inflation ideally to be rising at roughly 2 percent a year. That`s its target. If prices aren`t rising, that means demand is low. Why is demand low? Well, it means your wages are going up slowly too, if they`re going up at all. And that could be a sign that overall economic growth is weak.

Until the employment picture improves, wages probably won`t pick up.

So, should we welcome or fear low inflation and what it signals? That`s what everyone wants to know.

(END VIDEOTAPE)

GHARIB: So, let`s get some answers to all of that.

Joining us now, Mark Zandi. He`s chief economist at Moody`s Analytics. And Kevin Caron, market strategist at Stifel Private Client Group.

Gentlemen, thank you so much for joining us.

Let me begin with you, Mark. Your heard Tyler`s report. So is this inflation at these levels good for us or bad for us?

MARK ZANDI, MOODY`S ANALYTICS CHIEF ECONOMIST: I think good, Susie. You know, I think it means more purchasing power, so, you know, if you have to spend less to fill your gas tank, you have more to spend on everything else. That`s a big plus for the economy.

And I think it gives a green light to the Federal Reserve. The Fed can continue to be aggressive with monetary policy and that`s very important to stock prices, house prices, and it allows to refinance mortgages.

So, net-net, I think it`s a plus for the economy.

MATHISEN: Kevin, lots of people are not worried about consumer price inflation, but some investors are quite worried about asset inflation. Are you?

KEVIN CARON, STIFEL PRIVATE CLIENT GROUP: I`m not worried about asset price inflation in certain areas. For example, if you look at where the stock market is, you`re looking at the market that`s trading at a very reasonable multiple, compared to underlying earnings power. There are markets such as treasuries where you`ve seen yields held down, prices held up, and that is directly due in part to what the Federal Reserve is doing in terms of buying assets, effectively printing money and putting it into the system.

So, at any point in time, you`re going to have markets that are going to be affected by Federal Reserve policy, and at some point, for example, a bond market where yields are held down too low too long, you could have a painful reversion of that. But we don`t see anything meaningful coming in that regard for quite a while.

GHARIB: Mark, what about you? Is there a point that the stock market gets out of whack and that it was threatened financial stability and worry the Federal Reserve?

ZANDI: Yes, sure. I mean, we`ve had a couple stock market bubbles.

I mean, think back to 2000 and think back to 2007. So, yes, there`s reasons to be concerned if stock prices get too high. But I think we`re a long way from that.

You know, Susie, the tried and true measures of valuation work from the beginning of time is the price multiple. That`s looking at stock prices relative to corporate earnings, and that`s about 15 on the S&P 500, and that`s about average since World War II. So, I don`t have any concern about valuation in the equity market. I think the market is appropriately valued at this point.

MATHISEN: Well, then, you agree with Kevin basically so.

So, Kevin, in this low inflation environment, with relatively slow economic growth. If I`m looking at domestic stocks, where should I be putting my money?

CARON: I think you have to look for consistency, because ultimately, what you`re going to be -- what you`re going to be looking for is a company that can perhaps deliver earnings consistently overtime, when you do have a very low kind of inflationary environment, it is sometimes more difficult for companies to generate high levels of earnings growth. So, therefore, I`d be willing to pay a premium for consistency over, for example, very rapid growth.

So, stable balance sheet, very good liquidity on the balance sheet, consistent earnings, maybe a little bit of a dividend, I think all of those things make sense.

GHARIB: Mark, let me ask you about another word we haven`t heard in a long time -deflation. This is falling prices, just the opposite of inflation.

Do we need to worry about that? Could that creep into the economy?

ZANDI: Well, it`s always a risk. But no, I`m not concerned about it, for that to happen, we`d have to go back and do a full blown economic recession with the falling employment rising, rising unemployment. But, you know, you can`t rule out. There`s a lot of risk out there, but I think the probabilities of that are very low.

The other thing to consider is that inflation expectations, they`re rock solid and they`re right about where the Fed wants them to be, about 2 percent. So, that`s a good sign that inflation is not at a significant risk, at least not at this point.

MATHISEN: Kevin, I get two questions for the price of one here, what kinds or categories of stocks do you find have the attributes you just described? That`s the kinds of places where you want to put your money. That`s question one.

And question two, one of the Federal Reserve governors or bank presidents, I can`t remember which, out in San Francisco, today said that potentially the Fed might pull back on its bond purchases as early as this summer given economic conditions.

Does that alarm you?

CARON: Well, I take the first question. I think that if you`re looking for stability and consistency, you can find that in places like consumer staples, maybe a little rich right now, but on a pull back, I`ll be interested there. Health care, I think, has an interesting attributes to it.

I think if you look at technology. Technology has underperformed the last year or so, very good balance sheets. There`s opportunity there.

I`m not particularly concerned about the Fed pulling back in terms of their asset purchases. In fact, if anything, I would expect to see them doing more, because when you look around the world, what do you have? You have a stronger dollar recently, you have inflation expectations priced into the bond market looking out maybe 10 years, coming down somewhat, you do have relatively soft underlying inflation.

And with other nations around the world engaging in asset purchases now, in a significant way, for example, Japan, their recent announcement of asset purchases and the stepped up program, that actually would encourage the Fed to do more, not less.

GHARIB: All right. Gentlemen, thank you so much for coming on the program. We really appreciate it. Mark Zandi of Moody`s Analytics, Kevin Caron at the Stifel Private Client Group.

MATHISEN: Well, stocks retreated from record highs today, and they ended lower. They are pressured by some iffy economic data and comments from a Federal Reserve official, as I just mentioned, saying that the Central Bank could begin easing up on its monetary stimulus sometime this summer.

On the housing front, construction of new homes fell sharply last month, down 16.5 percent. It was the weakest reading since November in a part of the economy that`s actually been in recovery mode.

On the jobs front, the number of workers seeking new unemployment benefits rose last week by 32,000, reversing a recent trend there. The bright spot in the market today was Cisco (NASDAQ:CSCO), which helped cap some of those losses. It closed up more than 12 percent on strong earnings, a dividend hike and a share of buy back.

In the end, the Dow finished lower by 42 points, to 15,233. The S&P lost eight to 1,650 and the NASDAQ was down six at 3,465.

GHARIB: Two retailers in the news today, let`s begin with JCPenney. It missed Wall Street estimates for both earnings and sales. The struggling retailer lost $1.31 a share, even worse than the 89 cent loss that was expected.

Revenue fell 18 percent to $2.6 billion. That too missed the mark. Shares were off about 1 percent during the day, but actually erased that loss after the numbers came out.

And then there`s Wal-Mart (NYSE:WMT). Wal-Mart (NYSE:WMT) surprised investors today, but not in a good way. The world`s largest retailer posted weaker-than-expected earnings and said things aren`t looking much better in the current quarter.

Mary Thompson takes a look at what`s going on inside this retail bellwether and what it says about the American consumer.

(BEGIN VIDEOTAPE)

MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voiceover): For the world`s largest retailer, the first quarter was better than last year`s, but more difficult than expected. On a taped call, CEO Mike Duke saying higher income taxes and smaller increases in food prices were other reasons Wal-Mart`s earnings came in a penny below estimates at $1.14 a share.

MIKE DUKE, WAL-MART CEO: Sales were pressured primarily by delayed tax refunds, which caused customers to put off discretionary purchases. And though no one likes to talk about weather, it was a real factor across the United States.

THOMPSON: Total sales also light. Same store sales, stores open for more than a year, fell an unexpected 1.4 percent, the first decline in seven quarters. Wal-Mart (NYSE:WMT) saying its budget driven clients top concerns remain the economy, along with food, gas and energy prices, and to a lesser degree taxes.

Still, they`re spending steadies and remains steady after a weak start to the first quarter. Wal-Mart`s forecasting, same store sales will be unchanged up 2/10 of a percent.

A good sign to analyst Joe Feldman.

JOE FELDMAN, TELSEY ADVISORY GROUP: Given the fact that sales trends are doing a little bit better right now, they actually sounded like they`re getting things back in order. There`s going to be some expansion issues in the second quarter. But they should be able to continue that productivity loop and drive solid earnings for the full year.

THOMPSON: Earnings for the current quarter, though, forecast to miss Wall Street estimates.

(on camera): The ongoing calls to a probe into whether or not Wal- Mart (NYSE:WMT) violated the Foreign Corrupt Practices Act, as well as an expansion of its international online business seen cutting into Wal-Mart`s profits.

For NIGHTLY BUSINESS REPORT, I`m Mary Thompson.

(END VIDEOTAPE)

MATHISEN: And here now with his outlook for Wal-Mart (NYSE:WMT) is Budd Bugatch. He`s a retail analyst at Raymond James.

Mr. Bugatch, welcome. Good to have you with us.

Your report just out within the last couple of hours, you call Wal- Mart (NYSE:WMT) a market performed stock. I guess that means you`re neutral on it, you`re basically are comfortable if you own it, but you`re not urging people to go in and buy hand over fist.

What do you see here?

BUDD BUGATCH, RAYMOND JAMES RETAIL ANALYST: Well, that`s correct. We see, obviously, a terrific retailer and certainly an important company for consumers and for investors alike. But we think the valuation is such that it will perform at a market level.

The valuation today is around 15 times our estimate going-forward. And that`s actually above the five-year median right in line with the 10- year median.

So, on that basis, we find the stock as a market perform.

GHARIB: So, if you look at the earnings that came out today and also the outlook goingforward, what`s the issue here for Wal-Mart (NYSE:WMT)? Is it specific to Wal-Mart (NYSE:WMT) or is it something that has to do with the economy and what`s going on in Washington?

BUGATCH: Well, I mean the old joke as Mary Thompson said, while retail is detail, there are only two problems in the quarter, revenues and expenses. But when you look at the detail, which you really have to do in Wal-Mart (NYSE:WMT), because there are lots of moving pieces, there were bright spots in the report, and there were some challenges in the report.

Among the bright spots in the report was the expense leverage at Wal- Mart (NYSE:WMT) U.S. But yet on the negative side, the sales were light. They were down 1.4 percent on a comp basis, and that was a bit of a disappointment, certainly below our expectations of negative 5/10 of a point.

So, there are lots of other issues that are going on. In international, you`ve got much higher expenses, and the company is working on that. Obviously, FCPA was larger than expected. And that`s going to continue for an undetermined period of time.

There are other corporate expenses that were also cutting into profits. Yet there are other areas that are positive.

So, there are lots and puts and takes on Wal-Mart (NYSE:WMT), as you would expect with a company of this size and this importance.

MATHISEN: Two questions. Does it concern you that their outlook for the current quarter is a little more tepid than the street consensus in terms of the earnings per share? That`s number one.

And, number two, as you talk about international expenses, one of the things that was way bigger than the things they expected, with the cost associated with that Mexican bribery scandal, and now -- even though it`s really a rounding error in terms of their total revenues -- and now, we also have the issues of the Bangladesh clothing factories which Wal-Mart (NYSE:WMT) is going into and investigating very closely.

Are these issues important to you?

BUGATCH: Well, certainly, they`re important. The FCPA issue has been important since the spring of last year, and the company is working, I think pretty hard to try to get their arms around it, but that`s an investigation that includes some agencies of the federal government. So it`s going to go on for a while.

And the $73 million they spent this quarter was certainly much more than they forecast, I think that was about $40 million or $45 million. So, that`s a lot more. The next quarter, it looks like $60 million to $65 million.

I did ask the company offline about the 14 different categories that they are looking at for compliance criteria, I think that`s actually -- it would set up a pretty interesting scorecard, they`re not going to disclose all of those publicly, but I think Wal-Mart (NYSE:WMT) is to be credited with trying to get their arms around it. And I think it could be a model for many companies.

Obviously, a bellwether corporation, it`s a lightning rods for a lot of criticism, and a lot of scrutiny, and the company takes that seriously. So, I`m actually impressed with what they`re trying to do. It costs us some money to do that in the near term. But I think the company`s to be credited with that.

MATHISEN: All right.

BUGATCH: But I think the company`s to be credited with that. They have some issues with suppliers overseas that Bangladesh issues not just the first, but they take these very seriously, they set up some zero tolerance policies to really combat those kinds of misdeeds that might be going on offshore.

MATHISEN: All right. Budd Bugatch, thank you very much -- retail analyst with Raymond James.

GHARIB: And still tonight on the program: reaction to the scandal at the IRS from the chairman of the House tax-writing committee.

But, first, let`s take a look at some of the stocks hitting 52-week highs today.

(MUSIC)

MATHISEN: In Washington, President Obama chose Danny Werfel, a White House budget official, to temporarily lead the Internal Revenue Service. And the president vowed that the agency will not target groups based on political beliefs.

John Harwood has been following the story for us and joins us from the White House with more -- John.

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: Tyler, the president continued today to try to tamp down this scandal, bring it to a conclusion as much as he can. It`s not easy. Yesterday, he fired the acting IRS commissioner who he replaced with Danny Werfel, as you mentioned, today.

Today, he came out at a news conference with a Turkish prime minister and said, we don`t need a special counsel to investigate this. In light of everything that the Treasury, inspector generals look into, all the congressional committees. So, we`ve got plenty of investigations.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UINITED STATES: The I.G. has done an audit. It`s my understanding it`s going to be recommending an investigation. And, you know, Attorney General Holder also announced a criminal investigation of what happened.

Between those investigations, I think we`re going to be able to figure out exactly what happened, who was involved, what went wrong, and we`re going to be able to implement steps to fix it.

(END VIDEO CLIP)

HARWOOD: But, of course, it`s going to start right up again tomorrow because Dave Camp, the chairman of the Ways and Means Committee, who I interviewed this morning, is having a hearing on this. He told me he was not satisfied with the inspector general`s report, and he wants answers from Steve Miller, even though he was fired yesterday, including about what was the political motivation behind what the IRS did.

(BEGIN VIDEO CLIP)

REP. DAVE CAMP (R-MI), WAYS AND MEANS COMMITTEE CHAIRMAN: Well, he`s still the acting commissioner until June. So, he`s still the guy. We have a lot of questions to answer.

HARWOOD: Do you personally have any reason to believe or do you believe that the White House was involved in this?

CAMP: Again, I don`t know the answers. We need to get answers. And we`re going to follow this where it goes.

(END VIDEO CLIP)

HARWOOD: And that`s, of course a key question to how long this goes on. Yes, Dave Camp will have a hearing in Ways and Means tomorrow. Max Baucus who I also interviewed is going to have a hearing as well, other congressional committees as well.

But if they don`t connect this to the White House at some point in a more significant way than it`s happened so far, ultimately, this thing may run out of steam, guys.

GHARIB: So, John, there`s a new acting commissioner. You think he`s up to the task of handling all this?

HARWOOD: Well, it`s a temporary employment. He`s going to serve through the end of the fiscal year. This is someone who`s been working in the budget office.

And the president still has got to appoint a successor to Doug Shulman, who was the last IRS commissioner who was actually on his watch that these abuses occurred. And whenever that happens, that is going to trigger a confirmation process that will be a challenge and drag out discussions as even more.

MATHISEN: So, what happens next? We know about the Ways and Means Committee hearings that begin tomorrow.

HARWOOD: We`ve got the Ways and Means committee hearing. We`re going to watch for more personnel fallout. We`ve got word late today that a second official who had headed the division of IRS that oversaw the questionable screening activity is leaving his job, is choosing to retire. So that`s one issue.

Then the question is going to be, how do they staff the agency? What reforms got implemented? And what does Congress do? Do they pass legislation for example to overhaul the way the tax-exempt organizations are regulated? That`s one of the big questions for Congress.

GHARIB: A lot of questions and a lot of big issues.

Thank you so much, John. John Harwood at the White House.

Turning now to our "Market Focus".

We turn and we begin with big name tech out with earnings after the bell. Dell (NASDAQ:DELL), which is in the middle of a takeover battle, said it`s earnings fell as PC sales continue to decline. The world`s third largest PC maker made $130 million in its latest quarter. That`s down from nearly 80 percent from a year ago.

Sales also fell off more than 2 percent to $14 billion. But that was actually ahead of estimates. Chairman Michael Dell (NASDAQ:DELL) wants to take the company private for about $24 billion, but activist investor Carl Icahn and another major shareholder say that`s too low and they want new leadership. Shares were flat today to close at $13.43 but are up about 32 percent this year.

Shares of NetApp (NASDAQ:NTAP) spiked today after reports that activist investor Elliott Management has taken a stake and will push for changes on the company`s board of directors. The storage equipment maker closed up 6 percent to $38.46, making it the second best performer on the S&P 500 today.

MATHISEN: Profits of a department operator Kohl`s (NYSE:KSS) fell more than 4 percent as sales drop slightly. But the earnings results still managed to beat Wall Street expectations. The company said its first quarter started slowly, but sales improved in April as the weather got better.

Its growth in its second quarter expects between 1 percent and 3 percent. Shares finished up nearly 5 percent today, to $52.03.

And at the other end of the retail food chain, Tiffany (NYSE:TIF) has a gift for its shareholders, albeit not in one of the trademark blue boxes. The jewelry store chain is raising its quarterly dividend by 6 percent, to 34 cents a share. It`s the company`s 12th dividend hike in the past 11 years.

Shares of Tiffany (NYSE:TIF) off a tick today, but are up more than 30 percent so far this year.

GHARIB: And the biggest loser on the S&P today, Advanced Micro Devices (NYSE:AMD). Goldman Sachs (NYSE:GS) cutting the semiconductor maker to sell, saying the stock is too expensive. Investors took Goldman`s advice. Shares tumbled more than 12 percent to $3.83. But they have doubled in the past six months.

MATHISEN: And coming up, a sweet comeback. How Krispy Kreme went from fast food favorite to flameout and back on top again.

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

(MUSIC)

GHARIB: Krispy Kreme was one of the hottest brands in America just over a decade ago. For its loyal consumers, the doughnuts were mouth- watering. For investors, the stock price kept getting sweeter. But then it all sizzled.

And as Jane Wells tell us, the company`s comeback was anything but easy.

(BEGIN VIDEOTAPE)

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Forget the dot-com bubble.

VOICE: The horror.

WELLS: Back in 2000, there was also a donut bubble as yours truly reported after Krispy Kreme went public in a frenzied IPO.

(on camera): The stock is trading at more than 70 times next year`s estimated earnings and that`s pretty pricey for a donut.

(voice-over): Krispy Kreme shares eventually topped $100, then the company nearly fell down a donut hole, expanding too fast, angering franchisees. The stock plummeted and management had to go.

(on camera): Now, the company has reported 17 straight quarters of same store sales growth. Shares on the stock market have outperformed rivals like Dunkin Donuts, and the CEO promises to go from 540 to 900 stores by January 2017.

JAMES MORGAN, KRISPY KREME CHAIRMAN & CEO: I don`t know the right number for the domestic stores. But it`s certainly in the thousands.

UNIDENTIFIED MALE: They got good ingredients.

UNIDENTIFIED MALE: What can you say? They`re good.

UNIDENTIFIED MALE: It`s like (INAUDIBLE). They just make it with less.

CONRAD LYON, B. RILEY: Krispy Kreme, for a lack of a better analogy, it`s probably the In-N-Out -- for those that know In-N-Out -- of donuts.

WELLS (voice-over): But there`s still a hole in this donut story. Coffee, a high margin product. Coffee only represents 5 percent of Krispy Kreme`s revenues, compared to 60 percent for Dunkin.

MORGAN: The truth is that the best model that Krispy Kreme has is very different than a Dunkin Donut or Starbucks (NASDAQ:SBUX). And I`ve got great respect for both of their business models. But they are largely beverage companies, and we`re a donut company.

WELLS: That said, growing coffee is part of the plan.

MORGAN: I think the company can be a lot better, a lot more successful, and a lot smarter year by year. And I`m not sure everybody fully realizes that. I think sometimes they think it`s just a donut. It`s not just a donut.

WELLS: The hope is this time around, Krispy Kreme`s financial prospects won`t be filled with empty calories.

For NIGHTLY BUSINESS REPORT, Jane Wells, Burbank, California.

(END VIDEOTAPE)

GHARIB: And tomorrow, we wrap up our series with a look at how one company was riding high, then fell into bankruptcy and now is taking investors on a thrill ride.

MATHISEN: An update now on two stories we brought you last night.

First, it was a record setting night at Christie`s. The contemporary art auction raked in -are you ready for this? -- $495 million, making it the biggest auction in history. The top seller, Jackson Pollock`s "No. 19" -- we saw it here last night -- went for $58.3 million. Jean-Michel Basquiat`s "Dustheads" sold for $48.8 million, above the estimate.

And second story, the Powerball jackpot, now, $550 million. No tickets matched all six numbers in last night`s drawing. But not everyone was a loser. Tickets in Delaware and Pennsylvania won $5 million. And 16 states had million dollar winners. The next drawing, Susie, get your tickets, is Saturday night.

GHARIB: Did you get your tickets?

MATHISEN: I didn`t. I didn`t have time to stop on my way home. But now maybe I`ll have some time.

GHARIB: I will, too. Very tempting.

That`s NIGHTLY BUSINESS REPORT for us. I`m Susie Gharib. Thanks for joining us.

MATHISEN: And I`m Tyler Mathisen. Thanks very much for being with us. Have a great evening, everybody. We`ll see you back 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) 2013 CNBC, Inc.

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