SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Market milestone. The S&P 500 crosses 2,000 for the first time ever, a key level for investor psychology. Which sectors got up here and which will drive the next leg?
A whopper of a deal? All-American Burger King is in talks to merge with Canada’s Tim Horton’s. And if approved, send its corporate headquarters north of the border.
And new heights. An original Superman comic book sold for a record price on eBay (NASDAQ:EBAY). But the real winner might be eBay (NASDAQ:EBAY) itself.
We have all that and more tonight on NIGHTLY BUSINESS REPORT for Monday, August 25th.
Good evening, everyone. I’m Susie Gharib. Tyler is off tonight.
Topping our news: uncharted territory. That’s where the S&P 500 index went today, crossing 2,000 for the first time ever in intraday trading and marking the latest milestone in the stock market’s historic bull run. Corporate takeovers, which we’ll have more on in just a moment. And hints of more stimulus from the European Central Bank help stocks hit that psychologically important number.
Now, adding to the enthusiasm, a report from the Chicago Federal Reserve, which shows economic activity expanding at a rate above its historical trend. By the closing bell, the Dow rose 75 points. The NASDAQ added almost 19 and the S&P 500 was up nine and a half points, closing at 1,997.92.
Dominic Chu has more on the 16-year journey for the S&P 500 to cross that 2,000 mark.
DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): February 2nd, 1998. Remember what it was like back then?
The average price of gasoline was $1.06 a gallon. Today, it’s $3.47.
The S&P 500 large cap stock index crossed 1,000 for the first time. Today, it crossed the 2,000 mark.
The mid to late 1990s were all about tech companies. But today, it’s more balanced.
SANDY VILLERE, VILLERE BALANCED FUND: It’s interesting. If you look back into the 1990s, when it was kind of a dotcom era, if you will, a lot of — a lot o high-tech companies, a lot of high multiple companies, I think the market is probably more spread out amongst other sectors. And I don’t see that true leadership in any one particular sector right now.
CHU: Since the S&P 1,000 mark, the best-performing sector has been energy. That stock like ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX). As a group, they nearly quadrupled in value.
As for the worst performing sector, it’s telecom stocks like AT&T (NYSE:T) and Verizon (NYSE:VZ). As a group, they have lost a fifth of their value. Telecom is also the only sector that has lost value since February of 1998.
Now, when it comes to individual stocks, take a look at beverage makers like Keurig Green Mountain or Monster Beverage. Back then, worth they were worth just pennies per share and today, they’re among the largest companies in America.
Meanwhile, bank stocks like Citigroup (NYSE:C) and insurance stocks like AIG have been the worst performers. Over the next few months, some experts believe that the market can continue higher if you pick the right places to invest.
VILLERE: I think it’s really going to be consumer discretionary, and information technology that’s really going to propel this market higher towards the end of the year — more offensive sectors rather than the defensive sectors and something like utilities or telecom.
CHU (on camera): Of course, there is a large concern that a stock market at record highs is ripe for a pullback. Still, though, S&P 2,000 is a nice way to benchmark for many investors a big moment in the stock market.
For NIGHTLY BUSINESS REPORT, I’m Dominic Chu.
GHARIB: With us now, we’re happy to have Mohamed El-Erian. He’s chief economic adviser at Allianz.
So nice to see you, Mohamed.
MOHAMED EL-ERIAN, ALLIANZ CHIEF ECONOMIC ADVISOR: Thank you, Susie.
GHARIB: So, we have to start with the S&P at 2,000. It’s a nice round number. It’s a milestone, and a lot of investors talking about it.
And the one question that kept coming up today is, is this the top? Should we start preparing ourselves for a correction? Is that the next thing that we’re going to be worrying about? What are your thoughts on that?
EL-ERIAN: So, it’s a big moment. And we need to understand why we’re here. It’s interesting, because we had a record high for the S&P. We had the NASDAQ at a 14-year high, despite geopolitics getting more complicated in Ukraine and in the Middle East, and despite weak data out of Europe.
And the reason why we’re here — you said in the beginning, central banks are very supportive. The ECB has signaled that it intends to be even more accommodating. And there is a ton of cash coming in from the balance sheet of corporations and M&A activities that is giving the market an extra lift. So, as long as these two elements continue, the market is in a good place.
The problem is, that they cannot continue forever. We need the real economy to pick up. We need earnings growth to get a boost from the top line.
GHARIB: You know, you wrote an op-ed piece this week, and one of the conclusions was you said this summer we have seen the markets have been extremely resilient in the face of these geopolitical shocking headlines.
Do you think that investors and the markets will continue to brush off these headlines, these nasty headlines, going into the last quarter of the year, and back to that correctional question, might we see a correction?
EL-ERIAN: So they will brush them off, as long as the geopolitics does not tip into recession. And this can happen because Europe and Russia are in a game now of sanctions and counter sanctions and they weaken both economies. So, as long as that doesn’t get to a tipping point, then the market will brush off. If it gets to a tipping point and Russia and Europe goes into a recession, companies sell a lot to Europe and they will feel it.
So, that’s something to keep an eye on. And it’s critical, because it really is a tipping point dynamic.
GHARIB: So, historically, we all know Wall Street history has shown that September is a tricky month. We have a lot of market meltdowns in the month of September. You know, what do you think will be the key issues for stocks and bonds once it’s back to business next week?
EL-ERIAN: So geopolitics remaining just noisy and not impacting growth, that’s the first thing. Second, central banks remain accommodating. And then thirdly, money continuing to come in.
So big question is, will S&P 2000 pull in more money into the market? Will it encourage more companies to use the cash they have on their balance sheet to do M&A activity. And remember, some of these M&A activities people pay more for the company, because they’re doing it for other reasons. They’re doing it for tax reasons or they’re doing it for defensive reasons. So they end up overpaying.
So, these are the issues to look at, Susie.
GHARIB: And we have two big things on the calendar that everybody are looking at. Next week on Friday, an important employment report and everybody is going to be watching that, given the conversations the Federal Reserve has been talking about or looking at new data. And then there is an important Federal Reserve meeting in mid-September.
At the end of the day, what do you think is going to — those data points are going to tell us, and should investors and business owners be fearful of higher interest rates, or should they actually welcome it?
EL-ERIAN: So first, on the data point, what the market is looking for is solid job growth and critically wages that are not too — that are not increasing too quickly, because that is what would push the fed into being more aggressive in terms of lifting its foot off the accelerator. So the employment report, look at the wage number. That’s a critical number.
In terms of the Fed, the Fed will signal that it’s looking — that things are a little bit confusing. That it’s data-dependent, but I don’t think it will tell as much in September. In terms of interest rates, the hope is interest rates will go up for the right reason. And the right reason, the economy is getting close to liftoff. That is what the stock market needs. We need a handoff from policy-induced growth to genuine growth.
GHARIB: All right. Well, you’ve given us a lot to think about going into September. Thank you so much. We always love having you on the program.
EL-ERIAN: Thank you, Susie.
GHARIB: Mohamed El-Erian at Allianz.
Well, two iconic brands, two countries, one merged tax strategy. Burger King is in talks to buy Tim Horton. This is the Canadian coffee and donut chain. If the deal goes through, the combined company would be headquartered in Canada, another one of those so-called tax inversions, which could lower Burger King’s tax bill. Both companies trade in the U.S. and both surged on the news of a possible deal. Burger King shares rose 19.5 percent. Tim Horton’s jumped about 19 percent.
But Sara Eisen reports there may be more to this proposed merger than just lower taxes.
SARA EISEN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): It doesn’t get more all-American than the Whopper, or maybe not. Burger King may soon become Canadian. The company confirming it’s in talks to buy Tim Horton’s, a Canadian coffee and donut chain.
If the deal goes through, Burger King would move its headquarters from Miami to Ontario, adding fuel to the inversion debate in Washington where companies, mostly in the health care sector, have been pursuing mergers and acquisitions outside the U.S. to take advantage of lower corporate taxes overseas. Canada has a 15 percent corporate tax rate, much higher than the 35 percent rate in the U.S.
WILL SLABAUGH, STEPHEN’S ANALYST: If you look at the effective tax rate from last year, they were both roughly 27 percent. Overtime, the statutory rate for Burger King should move toward 35 percent and the statutory rate in Ontario is 26 1/2 percent. So, it’s more of a long-term tax saving. In the near-term it wouldn’t matter that much. But longer term, yes, they should.
EISEN: Beyond the tax advantages, analysts say there are other reasons for Burger King to do this deal. Like international expansion. Tim Horton’s has nearly 80 percent of its business in Canada. Burger King’s wide global reach, with outlets in Africa, Asia and the Middle East, could help fuel growth.
Analysts also point to Tim Horton’s attractive product lineup, coffee and donuts. Breakfast is a growth area for fast food. We have seen Taco Bell, for instance, launch the breakfast waffle tacos to go after a piece of McDonald’s (NYSE:MCD) breakfast business. Tim Horton could help Burger King compete. Coffee is also a high-margin attractive business and Tim Horton’s is a cult favorite.
STEPHEN ANDERSON, MILLER TABAK RESTAURANT ANALYST: Top line growth at Tim Horton’s U.S. grew more than 15 percent, driven by a mix of strong new (ph) growth, as well as strong same restaurant sales growth. That’s the kind of growth you really don’t see in the quick service category. I think having that would be a key advantage for Burger King.
EISEN (on camera): No question. Relocating because of tax advantages is a big part of this story, especially with Walgreens opting out of an inversion to relocate to Europe, because of political pressure. Walgreens staying in the United States, treasury secretary, Jack Lew, has called these deals unpatriotic. President Obama has called the companies corporate deserters.
That’s why if the deal does go through with Burger King, it could add further urgency and speed up reform on Capitol Hill to do something about it.
For NIGHTLY BUSINESS REPORT, I’m Sara Eisen.
GHARIB: Here’s another big deal today to tell you about. Roche, the Swiss drug company, is paying nearly $8.5 billion in cash for U.S. biotech company, InterMune (NASDAQ:ITMN). The acquisition will help the world’s leading maker of cancer drugs expand into lucrative rare disease treatments. InterMune (NASDAQ:ITMN) has a promising new drug to treat a lung condition. InterMune (NASDAQ:ITMN) shares surged 35 percent today.
Meg Tirrell has more on what’s driving this merger.
MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Health care companies have been on a buying spree. From Pfizer’s attempted deal to buy AstraZeneca for almost $120 billion, to Abbvie’s successful purchase of Shire (NASDAQ:SHPGY) for $54 billion. Mergers and acquisitions in the industry are at a record high.
But the traditional targets, biotech companies, haven’t been the main event this year. As companies pursue M&A for tax reasons.
LIISA BAYKO, JMP SECURITIES MANAGING DIRECTOR: There has been an increased number of these transactions that are tax inversions. So, you know, kind of inverting into a non-U.S. corporation to, you know, really lower overall tax rates.
TIRRELL: That may be changing, JMP analyst Liisa Bayko says. Roche’s purchase of InterMune (NASDAQ:ITMN) yesterday signals big pharma’s appetite for potential biotech blockbusters is still healthy.
BAYKO: This transaction is the ilk of a traditional biotech, bio pharma M&A agreement where it’s really about the pipelines, the assets between the two companies.
TIRRELL: So, for $8.3 billion, what does Roche get? InterMune (NASDAQ:ITMN) makes a drug for a fatal drug disease called idiopathic pulmonary fibrosis. It’s approved in Europe and Canada, and is currently under review in the United States.
And the disease it treats is a devastating one, InterMune’s CEO Dan Welch said today.
DANIEL WELCH, INTERMUNE CHAIRMAN, CEO & PRESIDENT: This is a terrible disease. It affects at least 100,000 patients, probably more. The patients die very quickly. They have very bad time breathing. And today, there is not one drug approved at all. So, it’s as if a cancer patient would be told today, you have cancer, and you have no therapy.
TIRRELL: Analysts expect the drug called Esbriet will be approved by the end of this year in the United States and could bring in more than $1 billion in peak annual sales.
The deal comes amid a run up in biotech valuation that even Roche CEO Severin Schwan said had him puzzled.
SEVERIN SCHWAN, ROCHE CEO: I think evaluations (INAUDIBLE) in the biotech industry are high and I keep scratching my head. But joining forces with InterMune (NASDAQ:ITMN) is really something special. It’s a unique opportunity where I believe we can really channel it, value for stakeholders, including shareholders.
TIRRELL (on camera): The purchase picked off speculation that other biotech names might be in play. Analysts cited names like BioMarin, Intercept, Vertex and Puma Biotech. But biotech invests is always risky. While Roche is paying $74 a share for InterMune (NASDAQ:ITMN) now, just a year ago, the stock was trading at $15.
For NIGHTLY BUSINESS REPORT, I’m Meg Tirrell.
GHARIB: We got some fresh information today about the health of the U.S. economy.
In housing, sales of newly constructed homes stalled. They fell by almost 2.5 percent last month, more than expected, and in contrast, to sales of existing homes that are revved up. Analysts blame the drop on rising prices for new homes, now averaging more than $339,000, while prices on existing homes go for almost $100,000 less on average.
A majority of economists believe the Federal Reserve is doing the right things to fix the U.S. economy. A new survey by the National Association of Business Economists shows 53 percent said the Fed stimulus programs are on the right track, but 39 percent thought the central bank is doing too much.
But the vast majority agreed, there is little risk of inflation during the coming years.
And no signs of inflation at the pump. Gasoline prices continue to fall. The Lundberg Survey says prices are down by average 4 cents in the past two weeks as oil prices keep declining. According to the survey, the average price of a gallon of regular was $3.48. Prices have been dropping for the past nine weeks the entire summer travel season.
And, of course, it’s also barbecue season and the U.S. Agriculture Department says the price of meat — this is both beef and pork — will continue to hit new highs. Look for a total increase of as much as 7 1/2 percent for the year, because of the drought and disease. But food price hikes are still near long-term averages. Prices are expected to rise by 2 1/2 percent to 3 1/2 percent this year, and could drop a bit in the year 2015.
Still ahead on the program, the financial aftershock many homeowners and small business owners may face following the worst earthquake to hit northern California in 25 years. That’s coming up.
GHARIB: Northern California is cleaning up from the worst earthquake in more than two decades. In Napa County, a major hub of the California wine industry, which generates thousands of jobs and by some estimates, contributes $13 billion a year for the local economy, business owners are just starting to assess the damage.
Josh Lipton has more.
JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Business owners woke up this morning in Napa, California, with some big decisions to make. Many had suffered a lot of damage because of this earthquake, especially if they were in the wine business. Of course, this area is well-known for that industry. Napa is home to 800 wineries that produce 50 million cases of wine every year.
One such winery is Silver Oak Cellars, which suffered a lot of damage. Rack after rack of broken wine bottles.
We talked to its CEO, David Duncan, about the impact of the earthquake on his business.
DAVID DUNCAN, SILVER OAK CELLARS PRES. & CEO: At Silver Oak, we make a blend, and we blend together vineyard sources so we make a beautiful, consistent wine every year. And so, these were those individual components of our blend that we bought a few bottles of just to save of them so we could taste them over time. And so, to lose those is priceless and one of a kind wines that are now gone.
LIPTON: Another business owner is Bill Hill of Henry Hill and Company, a wine warehouse, who also suffered a lot of damage because of the earthquake. He said they were waiting around in a sea of wine.
BILL HILL, EXPRESSION WINES OWNER: I mean, right now we’re trying to figure out what we have to do today to protect what’s left. And then later, I will have a chance to think about what this means for us, you know, where we go from here.
LIPTON (on camera): The estimated economic losses of this earthquake could total anywhere between $500 million and $1 billion. That’s according to a preliminary estimate from Core Logic.
Josh Lipton, NIGHTLY BUSINESS REPORT, Napa, California.
GHARIB: As Josh just reported, early estimates put the damage from the Napa earthquake as high as $1 billion. If that’s true, it could be one of the costliest earthquakes ever in the United States. But as Mary Thompson reports, millions of California homeowners don’t have earthquake insurance, putting many of them on very shaky ground.
MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): In less than a minute, the strongest earthquake to hit northern California in 25 years caused hundreds of millions, possibly billions of dollars in damages. A cost many homeowners in Napa Valley will bear themselves.
GLENN POMEROY, CALIFORNIA EARTHQUAKE AUTHORITY: It’s startling that only 10 percent, roughly, statewide, of Californians are protected against this (INAUDIBLE).
THOMPSON: The numbers are even lower in Napa. Only 6 percent of homeowners have coverage that averages about $800 a year.
LORETTA WORTERS, INSURANCE INFORMATION INSTITUTE, VP: It is an expensive coverage. It’s a high deductible. So people are more reluctant to buy the coverage. However, it is very important that they do have it.
THOMPSON: After the more than $24 billion in insured damages caused by the North Ridge, California, quake in 1994, many insurers dropped earthquake coverage for homeowners in the Golden State. So, California created the public/private California Earthquake Authority, or CEA, to fill the gap.
And while just under 900,000 homeowners buy the coverage, the CEA’s Glenn Pomeroy says it can cover the damage in Napa.
POMEROY: Our financial strength is rock-solid. We have over $10 billion in claim capacity at the ready.
THOMPSON (on camera): It’s also ready to write new policies for interested homeowners. Visits to its Web site spiked after the quake, as the CEA says they typically do after a trembler.
(voice-over): Among the businesses in the damaged region, Constellation Brands (NYSE:STZ), the owner of Robert Mondavi wines, says it sustained minimal damage. Damage or not, the Insurance Information Institute says big firms like Constellation are typically better protected than small businesses, which could take a bigger financial hit.
WORTERS: Most likely, you’ll find that the larger businesses, commercial businesses, have a risk manager in place, and they will most likely have the coverage; whereas, smaller companies, start-ups particularly, may not have any kind of earthquake coverage or very minimal amount.
THOMPSON: A lack of coverage that leaves small businesses and homeowners exposed to the financial aftershocks of a quake.
For NIGHTLY BUSINESS REPORT, I’m Mary Thompson.
GHARIB: AT&T (NYSE:T) and DirecTV might be one step closer to merging, and that’s where we begin tonight’s “Market Focus”.
According to new reports, AT&T (NYSE:T) has come to terms with the federal government on conditions that pave the way for it to buy the satellite TV company. In May, AT&T (NYSE:T) agreed to buy DirecTV for more than $48 billion. AT&T (NYSE:T) stock rose slightly to $34.51 today. DirecTV was up 1 percent to $85.47.
Shareholders of Ann Inc, the parent company of Ann Taylor, are putting pressure on the retailer to explore a sale. Activist investor Engine Capital and hedge fun Red Alder delivered a letter to the board saying the company is deeply undervalued and is urging it to explore strategic alternatives to enhance shareholder value. The stock popped about 6 1/2 percent to $39.94.
Amazon (NASDAQ:AMZN) is buying Twitch. This is a site that lets video gamers live-stream their games. It’s a $970 million deal. The online retailer expects the acquisition to close before the end of the year. Now, this comes after reports that Google (NASDAQ:GOOG) had almost sealed a deal to acquire Twitch for a billion dollars.
Amazon (NASDAQ:AMZN) rose slightly to $334 and change. Meanwhile, Class A shares of Google (NASDAQ:GOOG) fell a fraction to $590.57.
Blackberry scored another court victory against Typo Products which markets a Blackberry-like keyboard that hits on an iPhone. A U.S. court upheld a preliminary injunction that prohibited the sale of that product. Shares edged up slightly to $10.
And hares of Life Time Fitness (NYSE:LTM) had a nice run-up in today’s session. The fitness center operator says its considering converting its land holdings into a Real Estate Investment Trust or REIT. Its board also adopted a shareholder rights plan to prohibit ownership of more than 9.8 percent of its shares. The stock jumped 16 percent to $48.36.
And coming up on NIGHTLY BUSINESS REPORT, an original Superman comic book sold for a record-breaking price on eBay (NASDAQ:EBAY) and could mark the beginning of a new chapter for the online auctioneer.
GHARIB: If you stayed in a hotel this summer, you might have noticed a bunch of new fees added to your simple room charge. It looks like they are learning a lesson from airlines that are now very profitable, thanks partly to a slew of extra fees. A new study predicts hotels will take in a record $2.25 billion this year, 6 percent more than in 2013. And nearly half of that revenue is expected to come from new and higher fees.
As we reported earlier this month, a rare Superman comic book was put for auction on eBay (NASDAQ:EBAY) and it was expected to go for a record price. The auction is now over, and the results didn’t disappoint.
But as Morgan Brennan tells us, the big winner might actually be eBay (NASDAQ:EBAY) itself.
MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): How much would you pay for a vintage copy of the first comic book to ever feature Superman? How about $3.2 million?
That’s how much one collector has agreed to spend on a mint 1938 issue of the rare “Action Comics #1”. At that lofty price, it’s now the most expensive comic book ever sold, eclipsing the $2.1 million sale of another “Action #1” in 2011.
The sale is certainly a win for the book’s seller, Darren Adams of pristine comics in Washington state. But it’s also a win for eBay (NASDAQ:EBAY), which hosted a ten-day online auction for the comic. Sales like this one give the tech giant validity as a platform for higher-end collectibles.
GENE COOK, EBAY MARKETPLACES GEN. MGR. OF EMERGING VERTICALS: What we have consistently heard from buyers, they’re interested in really going up market a little bit with us. And bringing more and more special, compelling, unique inventory that they just can’t find anywhere else — still very much accessible, also slightly higher price points. This is one indication of our move in that direction.
BRENNAN: Comic books are part of that. EBay says it sold 4 million issues last year, a 14 percent increase over 2012. And now, the company is expanding into other areas, as well, like art, coins and antiques. Partnering with brick and mortar auction houses like Sotheby’s.
All of this amounted to an $8 billion business in 2013 and eBay (NASDAQ:EBAY) expects that number to grow.
But back to Superman. Comic book investors, even those not involved with this deal, say it will have exciting implications for the comic book space.
STEPHEN FISHLER, METROPOLIS COLLECTIBLES FOUNDER: Over the past 10 years, an influx of very, very hard-core determined collectors and investors, and they’re actually chasing very historic books in very high grade. And obviously given that there’s a limited quantity of that type of book, the price just goes up you and up.
BRENNAN (on camera): Metropolis Collectible set the previous price record for a comic in 2011 when it sold actor Nicolas Cage’s copy of Superman’s debut. Sunday’s sale means this issue in good condition has now appreciated 48 percent in just three years — a solid investment for the precious few lucky enough to afford one.
(voice-over): Still, for all the millions now being spent on prized comics, the majority won’t ever gain in value. But will do so at a much more minimal rate, leaving Superman to those with super bank accounts.
For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan.
GHARIB: And that is NIGHTLY BUSINESS REPORT for tonight. I’m Susie Gharib. Have a great evening, everyone. See you here tomorrow.
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) 2014 CNBC, Inc.