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118> <Type: SHOW> <Head: NIGHTLY BUSINESS REPORT for May 28, 2013, PBS> <Sect: News; Domestic> <Byline: Susie Gharib, Tyler Mathisen, Diana Olick, Mary Thompson, Scott Cohn> <Guest: Mohamed El-Erian, Steve Tanger> <Spec: Business; Economy; Stock Markets; Housing; Real Estate; California; Budget; Government; Policies> <Time: 18:30:00>
ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Susie Gharib, brought to you by --
TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Super Tuesday, the 20th straight Tuesday gain propelled the Dow into record territory.
SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Hot houses. Home prices spiked the most in seven years. Has housing become the driver of the economy?
MATHISEN: And back in black. Once broke, California is now sitting on a pile of cash and it`s not alone. The stunning turnaround in state coffers.
All this and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, May 28th.
GHARIB: One way up. That was the direction of the stock market today. The markets bounced back from last week`s losses with the Dow settling in record territory. The catalyst: housing and the consumer. Home prices jumped almost 11 percent in March compared to a year earlier and that`s according to the S&P Case Shiller. We`ll have more on that in just a moment.
And the survey from the conference board shows that Americans are feeling more confident about the outlook for the economy, the highest confidence level in five years.
All in, the Dow rose 106 points to 15,409. That`s the first time the Dow has closed above the 15,400 level. The NASDAQ was up 29. The S&P 500 added 10 points.
It was a bullish way to kick off the holiday-shortened week.
GHARIB (voice-over): Optimism was the word of the day in stock markets around the world. The buying started even before the opening bell rang on Wall Street. Stocks rallied from Japan and China to London and Frankfurt, as central bankers promised to continue pumping money into their economies and to keep interest rates low in order to promote global growth.
Here in the U.S., investors were encouraged by that report showing home prices are red hot, and consumers are more upbeat about the economy. For today, investors shrugged off worries that the Federal Reserve will begin to taper its stimulus program, something that spooked the markets last week when Fed Chief Ben Bernanke testified on Capitol Hill.
The Dow surged as much as 200 points in the first hour of trading and then closed at a new record high, making this the 20th Tuesday in a row that the blue chip average crossed into record territory.
PETER COSTA, EMPIRE EXECUTIONS PRESIDENT: I think they`re all interrelated, and the market being up where it is and consumer confidence getting better and the housing market improving vastly. They`re all interrelated. When one person feels comfortable about their condition, they`re more apt to go out and spend money, more apt to go out and buy houses, and more apt to invest in the market.
GHARIB: So how much higher do stocks go from here? Many market pros say the major averages are due for a correction and say that would be healthy for even more rallies.
JOE QUINLAN. U.S. TRUST CHIEF MARKET STRATEGIST: I don`t think the tapering talk would have done it, but when it does come they would put more money to work in equities.
GHARIB: Well, while stocks climbed, bond prices didn`t. In fact, the yield the 10-year hit 2.17 percent. That`s the highest level so far this year.
MATHISEN: But with that spike in home prices we talked about just a moment ago, best in seven years, some are wondering if the rebound in housing can drive the overall economy higher, where others are concerned about prices rising too high, too fast and warning of some housing headwinds on the horizon.
Diana Olick now digs in to the details.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Weak supply and strong demand are pushing home prices higher at a rate not seen since the height of the housing boom.
DAVID BLITZER, CHAIRMAN, S&P 500 INDEX COMMITTEE: Right now, they`re healthy. If we go far beyond it so we`re talking in six months or a year from now about 20 percent gains, then I think we get worried about bubbles again.
OLICK: Home prices are still nearly 30 percent below where they were in 2006 and lending conditions today are nothing like they were back then.
STAN HUMPHRIES, CHIEF ECONOMIST, ZILLOW: Without the mortgage rates, you know, the housing market would not have had near the recovery that it`s had. So, it`s really been the real combination, you know, and in a sense a potent brew of very low mortgage rates which has helped keep demand high and that`s meeting constraint supply.
OLICK (on camera): During the housing boom, easy credit allowed homeowners to cash out equity and pump it out into the economy. No such luck today. And housing starts which usually drive the economy are still well below historical norms, never mind where they were during the boom.
BLITZER: When you look at this, buying and selling existing home is very nice, we all feel good, the prices are going up. It doesn`t add anything to GDP.
OLICK (voice-over): The recovery is, however, fueling the stock market. The homebuilders are already expensive so investors are now turning to alternatives, like the bank, mortgage insurance, even truck makers like Ford and G.M. thanks to contractor demand.
Investors are also going back to an old game, flipping.
LINDSEY PIEGZA, FINANCIAL ECONOMIST: When we talk about some of the speculative market, again, that`s going to be those hardest-hit areas and that`s where the speculators are going to come in, the home flippers. And that`s what`s going to really drive those bargain lookers, those deal lookers.
OLICK: The difference today is these flippers can only use cash, which thankfully take the bank and the broader economic risk out of the equation.
For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Washington.
GHARIB: Joining us now with more analysis on all of today`s economic and market development, Mohamed El-Erian. He is CEO and co-chief investment officer at PIMCO. It`s the world`s largest bond fund company.
Mohamed, great to have you with us.
You heard our report, you know, that investors are buying stocks on reassurances from central banks pumping money into their economy. So, is this stock market rally healthy and what are investors in for when things reverse?
MOHAMED EL-ERIAN, PIMCO CEO AND CO-CIO: So, this rally, which has been a wonderful rally, has been driven by three factors.
One, you`re absolutely right, a ton of liquidity being injected by central banks.
Two, technicals have been into the asset class, people that were underinvested. That has boosted prices.
And three, and much weaker, the fundamentals. Today, finally, we got good news. Last week, unfortunately, the news was less good.
So we`ve come so far based mainly on central banks. In order for us to stay here and go further, we need the fundamentals to pick up. We need the economic conditions to validate the high prices, otherwise, this wedge that the central banks have created between fundamentals and prices will be very difficult to maintain.
MATHISEN: So what we`ve got, Mohamed, if I`m understanding you, we`ve got lots of liquidity, but we have a deficit of real economic growth.
Why hasn`t the extraordinary sort of experimental policies that have been undertaken by central banks around the world, why hasn`t it produced growth? Can it? And what happens if it doesn`t?
EL-ERIAN: So, three reasons why it hasn`t, Tyler.
One is called the liquidity gap, that you`re in a situation where you need to put a ton of liquidity in there in order to trigger response.
Two, which we will have structural impediments, so we emerge from the crisis healthier. We can walk as an economy at about 2 percent, but we can`t sprint because of a structural impediment.
And then, third, there are genuine question marks about what will the tax system look like in two to three years? So, companies are holding back.
If this continues and if we don`t get the response that allows companies to drive up their revenues and maintain their profits, then we will have an issue because prices would have disconnected too far from fundamentals.
GHARIB: All right. So, what does all of this mean for investors and what they should be doing?
Number one, you run the world`s largest bond fund. I want to know what you`re doing with the clients that have bond portfolios. What should individuals do with their bonds? And I know you run stocks, too. So what`s your advice on stocks? What should investors be doing to position themselves right now?
EL-ERIAN: So at these levels and given that we`re starting overweight risk so we`ve been benefiting our clients and benefiting from this rally, at this level of prices, we are walking away from risk. We`re not running away, we`re not sprinting away, because central banks are committed. But we are walking.
So, we are taking money off the table because we think there may be better opportunities. We also are keeping an eye, and this is very important, on the liquidity conditions. We saw some very strange behavior in the markets in the last few days that raise questions about the functioning of the markets.
So, we think that this is a good time to walk away from risk, not run. Walk away, especially if you started with an overweight position in risk assets.
MATHISEN: What was the unconventional behavior that you saw? Elaborate on that. That sounds interesting, Mohamed.
EL-ERIAN: So, we saw liquid the break down in certain segments of the market and you know, Tyler, we pay very close attention to the functioning of the market, and we`re seeing a liquidity desire that`s cascading across different segments as putting certain --
MATHISEN: Where? Where, precisely?
EL-ERIAN: So, for the high yield market, for example, today. That was an issue, that there wasn`t as much liquidity as you would normally expect.
So, we`re keeping a very close eye. Now, a lot of people would say that`s normal because after all, when central banks are no longer just the referees of markets but also playing on the field, they`re going to change the functioning of markets.
GHARIB: Mohamed, I just want to follow up on what you said, walking away from risk assets. What do you put in that category? Like, is gold in that category or some stocks in that category? What do you mean?
EL-ERIAN: So, mainly stocks, high-yield bonds. You know, if you look at the absolute level of yield, Susie, as opposed to the spread, the absolute level of yield. There`s a real question in the markets whether that compensate you now for the risk.
You know, it`s funny, but if you watch people when they are proposing, suggesting you should buy things, it`s no longer about the fundamental value. It`s only that it`s cheaper than something else.
EL-ERIAN: Right? But at some point cheaper than has to be supported by fundamental value. And we`re a little bit worried that the disconnect is getting too big.
GHARIB: OK. All right. We`re going to have to leave it there.
Thank you so much, Mohamed. It`s always a pleasure to have you on the program.
EL-ERIAN: Thank you.
GHARIB: Mohamed El-Erian of PIMCO.
MATHISEN: Well, last week, we told you about a huge deal in the works in the health care business and today, it became official. Generic drugmaker Valeant is going to pay $8.7 billion cash to a private equity firm for the eye care giant Bausch & Lomb. Shares of Valeant soared when rumors started to surface last Friday. Shares closed 9 percent higher today and they`re up nearly 20 percent since word of that deal surfaced
GHARIB: A pleasure cruise turned into a nightmare for thousands of passengers aboard Royal Caribbean`s Grandeur of the Seas, after an early morning fire broke out on the rear of the ship on Monday, as it headed from Baltimore to the Bahamas. Luckily, no one was injured and the cruise line chartered flights to take passengers back to Maryland fully reimbursing them for their trip. Shares of Royal Caribbean fell 1 percent today.
MATHISEN: From the near disaster on the seas, to more trouble on the nation`s railways. A CSX (NYSE:CSX) freight train derailed in a Baltimore today sparking a fire and the collapse of several nearby buildings. Fire officials evacuated anyone within a 20-block radius of the incident and videos posted on Facebook (NASDAQ:FB) showed a devastating explosion after at least three-rail cars overturned. Hazardous material teams are on-site now trying to determine whether residents are in any danger. Shares of CSX (NYSE:CSX) closed down a fraction today.
GHARIB: And coming up on the program, call it a rags to riches story. Near broke state turning it around and now flush with money. We`ll look at what it all mean.
But first, here`s a look at companies hitting 52-week highs.
MATHISEN: Wal-Mart (NYSE:WMT) will pay $81 million after pleading guilty to charges the company dumped hazardous waste in California. The plea settles misdemeanor charges of negligently dumping pollutants into sanitation drains across the state. Part of the fine will also cover charges in Missouri. Wal-Mart (NYSE:WMT) settled similar charges in California three years ago and agreed then to pay $27 million.
GHARIB: California is golden again, just three years after California`s budget deficit hit $60 billion. The state is on track to post a surplus this year, and it`s not the only state that`s flush.
Mary Thompson has more.
MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voiceover): California is regaining its golden globe. Budget cuts and higher taxes putting it on firmer fiscal footing with this year state budget surplus now estimated at $1.2 billion to $4.4 billion.
And California`s not alone. The National Association of State Budget Officers or NASBO projects a significant majority of states will report bigger-than-expected surpluses, spending cuts, a better economy, a stronger stock market, an income pushed forward into 2012 in order to avoid paying higher taxes in 2013, all behind these larger-than-expected windfalls. Windfalls anticipated by municipal strategist Peter Hayes.
PETER HAYES, MUNICIPAL BOND PRO: We`ve had 12 consecutive quarters now of better revenue growth. It`s been slowing a bit, but we`ve seen this coming for some time.
THOMPSON: The extra cash triggering sparring within state legislatures. In Ohio, Iowa and Indiana, among other states, governors want tax cuts. Tennessee looking at boosting spending on health care and prisons. And in Florida, Governor Rick Scott wants to increase teachers` pay. It`s a far cry from late 2010.
With the national economy slumping and federal aid drying up, noted analyst Meredith (NYSE:MDP) Whitney told CBS` "60 Minutes" that you could see 50 sizable defaults, 50 to 100 sizeable defaults, amounting to hundreds of billions of dollars.
The sell-off triggered by those comments a distant memory from the muni bond markets.
HAYES: In general, the muni markets reflecting better state budgets.
THOMPSON (on camera): The risk now, will states spend widely so they don`t come up short again? NASBO recommends the extra cash go toward a rainy day fund, capital improvements toward underfunded pensions. That may not seem sexy for voters, so it could prove better for the state`s fiscal future.
For NIGHTLY BUSINESS REPORT, I`m Mary Thompson.
MATHISEN: And in today`s market focus, the spotlight is on the winners.
Let`s begin with Dow component Merck (NYSE:MRK). It led the pharma higher as Jefferies upgraded the company to buy from hold. It describes Merck (NYSE:MRK) as among, quote, "the best restructuring plays in the pharma group." It`s kind of a backhanded compliment, it might say. But investors weren`t questioning. They pushed Merck (NYSE:MRK) up almost 1 percent before it fell back to close at $47.62.
Well, UnitedHealthcare, another Dow component, and Humana (NYSE:HUM), announcing they will offer small employers a self-insurance option later this year as companies try to mitigate the 2014 cost of the Affordable Care Act.
UnitedHealthcare led the Dow 30, up 2 percent. It closed at $63.34. Humana (NYSE:HUM) up similarly. And it closed $80.55.
Moody`s (NYSE:MCO) raised its outlook on the U.S. banking system from negative to stable. That and the housing news made financials attractive today and State Street (NYSE:STT), the big trust bank, was the leader of the pack. State Street (NYSE:STT) shares rose more than 4 percent to $67.15.
GHARIB: Ford zoomed to a 52-week high today after "Kelley Blue Book" predicted sales rise by 8.7 percent in May. Ford boosted by a "Barron`s" report suggesting that Europe`s demand for new vehicles is bottoming and that Ford`s profit is likely to accelerate as the European economy improves. Ford shares up $15.28. That`s an increase of more than 3 percent.
NetApp (NASDAQ:NTAP), this is the data storage company, announced it has certified Cisco`s new storage switches and would begin reselling them in its systems. That sent shares of both companies higher, with NetApp (NASDAQ:NTAP) leading the NASDAQ 100. NetApp (NASDAQ:NTAP) closed at $37.71, up almost 3.5 percent. While Dow component Cisco (NASDAQ:CSCO) rose 1 1/2 percent to $23.89.
And from Tiffany (NYSE:TIF), sterling quarterly results, earnings and revenues came in better than expected as business improved in all regions. Tiffany (NYSE:TIF) reported store sales up 8 percent for the quarter and reaffirmed its outlook for the year. Shares of Tiffany (NYSE:TIF) soared to a new high before closing up at $79.22, almost 4 percent.
MATHISEN: Meanwhile, outlet malls are also seeing stronger sales, according to our next guest.
Steve Tanger is the president and CEO of Tanger Factory Outlet Centers (NYSE:SKT). Today, it celebrated the 20th anniversary of its big board debut and there is our next guest ringing the bell.
Steve, welcome. Good to have you back.
STEVE TANGER, TANGER FACTORY OUTLETS PRES. & CEO: Thank you, Tyler.
MATHISEN: Let`s talk about what the consumer is doing today. The report is consumer confidence is the highest in something like five years.
Tell me about your customer traffic over this past weekend and how it compares to a year ago. Are there more of them? Are they spending more? What happened?
TANGER: Well, initial reports from our 43 shopping centers in 26 states and Canada are that traffic was up slightly 2 percent to 3 percent, and we anticipate sales will be up by a similar amount. So in spite of the weather and all of the other issues that led to this, we are looking forward to a very positive Memorial Day weekend.
MATHISEN: And tell us, Steve, a little bit about the retailers. What are you hearing from them? I know you talk to them a lot and you`re dealing with a broad section of retailers. Are they as optimistic?
TANGER: Our retailers are optimistic. They come through the recession as have other businesses, focused on their merchandising, their pricing and this inventory and display is the best I`ve seen it in close to 30 years. So, our retailers have done a fabulous job and the consumers are responding. They`re coming to our Tanger outlets around the country in greater numbers and our sales are up.
MATHISEN: Tell me a little bit about two things that I notice in the outlet business, and I go out to your one in Riverhead on Long Island from time to time.
But I notice two things. One, it would seem that there are more companies trying to compete in your space. That`s number one.
And number two, it seems like the outlet malls which you`re a pioneer of have come closer to the metropolitan areas.
What kind of change in the dynamic or danger risk does that pose to you?
TANGER: Well, let me take it in reverse order, Tyler. We`ve been doing this for 32 years, and yes, outlet centers are closer to the metropolitan area or the tourist location of that choice. We are very fortunate to have led the way and created that is a true distribution channel today.
So, we are looking forward to many years of continued growth. We welcome competition. This is America. This is the capitalist environment. Success breeds competition.
And our sector, which is a unique sector, it`s easy to announce a project and it`s very difficult to get one built. But there`s a long runway to grow in the United States and in Canada for outlet centers, new outlet centers. We anticipate in the next 10 years, as many as 100 new outlet centers can be built on an existing base of about 150.
So we are small niche, but a high growth company and a high growth industry.
GHARIB: We have half a minute left and I do want to ask you about what the market for commercial real estate is like. We`ve been reporting a lot about housing. We heard our report about how prices are going up and a lot more buyers. What about in the commercial space?
TANGER: Well, we`re in the retail space and the outlets do not trade very often and they trade at low cap rates or high valuations because these are not replaceable assets. They are world-class assets and when they come on the market, there is a feeding frenzy to buy them.
MATHISEN: Steve, thank you very much for being with us and congratulations again on the 20th anniversary if you`re listing.
TANGER: Thank you, Tyler.
MATHISEN: And coming up, you`ve heard of the friendly skies. But those skies, are they safe from computer hackers. We`ll take a look.
But, first, a look at today`s most actively traded shares.
GHARIB: The designs of more than two dozen top U.S. weapons systems have been compromised by Chinese cyber spies. That`s according to a military report obtained by "The Washington Post (NYSE:WPO)". On the list the F-35 Joint Strike Fighter, this is the most expensive weapons system ever built with a cost expected around $1.5 trillion.
The White House says cyber security will be discussed next week when President Obama meets with China`s president.
MATHISEN: And with all of the talk of hacking lately, it makes people wonder what`s the next target? Critical infrastructure like our energy grid, financial institutions and the telecom system all get special attention. Transportation also falls into that category.
And although there have been no cyber threats toward the airlines, at least none that we know of, Scott Cohn tells us there is one person who thinks this is a real safety concern.
SCOTT COHN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Brad Haines was born a hacker.
BRAD "RENDERMAN" HAINES, ETHICAL HACKER: I was one of those kids that was always curious, always liked science and took apart the vacuum cleaner as a kid, always wanted to know how things worked.
COHN: Haines who goes by the hacker alias "Renderman" does IT support for a small company in Canada by day. Sometimes, by night, he wows his friends as an escape artist.
But his real passion is beating something tougher than handcuffs, high-tech security systems.
HAINES: Security system is supposed to keep people out. Finding ways to bypass that is kind of neat.
COHN: His late of the target, the FAA`s next generation traffic control system, which when it`s fully in place by the end of this decade, is supposed to make flying more convenient and dependable. Renderman says what it really does is to make the whole system vulnerable to hackers.
HAINES: No good will come of this.
COHN: The problem, he says, is that the system uses GPS data instead of just radar.
HAINES: The problem with this is that the signals that they`re using are unencrypted and unauthenticated. Because it`s unauthenticated, you can`t prove that this actually came from the real plane.
COHN: In theory, that means hackers could mess up the system by generating flights that don`t exist.
HAINES: You could theoretically ground everybody.
COHN: Or they could target a real flight with frightening precision.
HAINES: Anyone can now generate that same kind of data and inject it into the system for whatever nefarious purpose that you can imagine.
COHN: Renderman and a fellow hacker put data that would be used in the FAA system known as Next Gen into a flight simulator to show what could happen if the system is hacked.
HAINES: We are able to create a flight, we are able to take off from San Francisco airport, circle over the bay, come back and buzz the tower.
COHN: The consequence of putting a ghost flight on the air traffic controller`s panel could be disastrous.
HAINES: The air traffic controller is one of the most stressful jobs out there. Now, if I suddenly injected 50 extra flights on to the radar screen and they hadn`t expected, they`re going to be panicking trying to figure out what`s going on.
COHN: University of Texas professor Todd Humphreys, an expert on navigation systems, believes Renderman is on to something upon, a potentially catastrophic flaw that could put all of us at risk.
TODD HUMPHREYS, UNIVERSITY OF TEXAS PROFESSOR: It ought to be obvious with the FAA. This is an obvious problem. This is something that is using antiquated technology from the 1980s.
COHN (on camera): Renderman says he brought his evidence to the FAA, but claims they ignored him.
We asked the FAA about that and a spokesman defended the system, saying the agency has a thorough process in place to identify and mitigate risks. The process is ongoing and there are backups to ensure safe operations.
In a statement, the FAA declines to say just what the risks are that are identified, saying that information is security sensitive.
I`m Scott Cohn for THE NIGHTLY BUSINESS REPORT."
GHARIB: And finally, tonight, with summer just around the corner and a lot of us making vacation plans, a new report says the U.S. is the only advanced economy, Tyler, that doesn`t require paid vacation days or holidays. Several European nations allow 20 a year. Norway and France allow 30. That`s why you see all the French in the south of France for the whole month of August.
MATHISEN: For the whole of August, come -- or high water because they don`t care whether the economy is good or not.
My country, I`m from Norway, in part. So, I`m very happy to see Norway at the top of the list.
GHARIB: But you`re living here in the United States.
MATHISEN: But I`m living here. Maybe I`ll get my Norwegian citizenship spruced up.
GHARIB: That`s it for us, NIGHTLY BUSINESS REPORT for tonight.
I`m Susie Gharib, thanks so much for joining us.
MATHISEN: And I`m Tyler Mathisen, deeply in need of a vacation -- have a great evening, everybody. We`ll see you back here tomorrow night.
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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