TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Merger mania. A trillion dollars in deals so far this year. Could this be a record year? And is it a bullish sign for investors?
On second thought. Conventional wisdom says pay off your mortgage before you retire. We’ll give you some reasons tonight why that might not be the best idea.
And, making the grade. Winter is never a great time for the airlines and this year was challenging to say the least. Which ones performed well? Which didn’t? The carriers get their report card. We got it for you.
All that and more for Thursday, April 9th.
Good evening, everyone. Sue has the night off.
Well, yesterday, we told you about the $100 billion worth of deals on the table. That helped push the total value of announced deals so far this year to more than a trillion dollars.
Well, today, there was more deal talk, a lot of it. First, a deal rejected. The chip maker Altera reportedly said no to an Intel offer of $50 a share or so. That would have been a better than 40 percent premium to Altera’s stock price when dl talks revved up a few weeks ago.
Now, Altera makes programmable chips, which is what attracts Intel. Had the deal gone through, it would have been Intel’s biggest acquisition ever. Shares of Altera jumped 3 percent while Intel was off fractionally today.
Now to a deal accepted. LinkedIn is snapping up the online career skills site, Lynda.com, for $1.5 billion, its biggest purchase ever. Lynda.com is privately held and offers courses in business for professionals and organizations. LinkedIn likes it because Lynda will bulk up the social services, from connecting professionals, to teaching them skills. Shares of LinkedIn up 1 1/2 percent today.
With all the announced deals in M&A so far this year, 2015 is running at record or near record levels. If the pace continues, our guest says the price tag for the year could exceed $3 trillion in activity worldwide. That would make 2015 the second biggest year in history for deal-making.
Welcome to Rich Peterson. Good to see you, Rich. Senior director with Standard & Poor’s Capital IQ.
Why so many deals this year, Rich?
RICH PETERSON, S&P CAPITAL IQ SENIOR DIRECTOR: Well, Tyler, there’s a variety of deals. The first comes to mind is the growing level of cash on corporate balance sheet. If you look at S&P Capital IQ companies, or S&P 500 companies, including financials, there’s probably over $2.1 trillion at their — at their availability. Also, lower borrowing costs. Interest rates are low and even with the expected Fed hike, maybe this year early next year, rates attractive to borrow.
I think third factor is that you have high stock prices. Stocks given to levels they are now, they can be used as currency or consideration to make deals, given the high value of transaction.
MATHISEN: So, what had been the busiest sectors for M&A activity so far year and what will be for the remaining for the year?
PETERSON: Well, if you look at just the United States, 40 percent of the $430 billion in U.S. deals have come from two sectors, health care and financials. Conversely, if you look at activity in Europe, there’s about $230 billion in European M&A. About a third of that comes from the energy sector.
Conversely if you look in Asia, Asia has about $200 billion in deals. Their biggest sector is the real estate. So, it depends on the region you look at but most active sector. But really, M&A is a global phenomenon. In terms of the growth rates, we’re seeing double digit growth rates throughout all regions throughout the globe.
MATHISEN: So, you see basically the trends sector-wise continuing through 2015, could be more health care and pharma. They have been big ones there. Energy, we had the big one earlier this week and several others, real estate, as you mentioned, including word today that General Electric may be wanting to sell off some of its real estate holdings. We’ll have more on that a little bit later.
Does the strong dollar, Rich, argue that U.S. companies may be going in and buying up companies in Europe more? We saw some activity along those lines recently.
PETERSON: Well, I think it’s less the dollars affected. Many companies have resources in terms of cash abroad. Now, the $2.1 trillion I mentioned, probably — I mean, worth about a third to about a quarter held overseas. So, in technology companies especially and drug companies have those resources available to make deals abroad.
MATHISEN: We compared this year with the last sort of high water mark year which was 2007. We all know what happened in 2008. Is this wave of deals different or should we be a little bit wary for what it might auger for the future?
PETERSON: Well, there’s different benchmarks. If you look at the average valuation based on cash flow for deals last year, it’s about 13 times even cash flow. Deals this year on average are about 16 to 17 times EBITDA. Premiums are a little bit more pricey this year than last.
Again, you look at sectors in the health care companies willing to pay up. In retailing, there are more conservative.
MATHISEN: All right, Rich. Thank you very much — Rich Peterson with Standard and Poor’s Capital IQ.
Well, stocks seem to be searching for a little bit of direction today. Investigators began sifting through early earnings report and a rise in oil prices help lift the energy sector, which in turn helped boost the overall market. The Dow rose 56 points to 17,958. NASDAQ added nearly 24 and S&P 500 tacked on 9.
One thing the market was taking in today, a report on weekly jobless claims showing signs of a strengthening labor market. That had many wondering if the weak monthly employment number from last week was a fluke.
Hampton Pearson reports.
HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Despite much weaker than expected job growth in March, unemployment claims at post-recession lows. Weekly first time claims rose slightly last week but the key barometer, before with moving average stands at just over 282,000, the lowest in nearly 15 years.
The news comes one day after job openings, top 5 million in February, the first time that’s happened in more than a decade according to the Labor Department. Reasons why the managing director of the International Monetary Fund, Christine Lagarde, is among the leading economists who see March as a momentary pause for the U.S. economy.
CHRISTINE LAGARDE, IMF MANAGING DIRECTOR: I don’t think that’s one lower number should gray the whole picture, which is otherwise quite rosy for the U.S. economy.
So, I think that if you combine the bad weather, the strike and the harbors on the West Coast, you have a few ingredients to have low growth in the first quarter.
PEARSON: More evidence of that first quarter, American energy companies announcing plans for more than 47,000 oil industry layoffs. In March, previous engines of job growth like construction, manufacturing and transportation had no growth or cut payrolls. Also contributing to a weak first quarter, professional and business services, are averaging 30,000 jobs per month so far this year, versus 59,000 last year.
That mixed data complicating efforts by the Federal Reserve to reach its full employment mandate.
JARED BERNSTEIN, CENTER ON BUDGET AND POLICY PRIORITIES ECONOMIST: They’re asking themselves is this economy really at full employment yet where there’s really tight match-up between the number of people looking for jobs and the number of jobs? And on that latter question, the answer is still no. We’re not at a full employment economy yet, but we’re moving in that direction.
PEARSON (on camera): The just released minutes from the March Federal Reserve meeting show even before the disappointing jobs report, monetary policy makers wanted to see further improvement in the job market before determining the timetable for raising interest rates.
For NIGHTLY BUSINESS REPORT, I’m Hampton Pearson in Washington.
MATHISEN: A sigh of relief in Europe as Greece made a critical half billion dollar loan payment to the International Monetary Fund. There had been concern the country would not meet the loan deadline. Greece has another billion dollar payment due next month, and the IMF managing director, Christine Lagarde, whom we just saw in Hampton’s piece, says that the payment was a good first step but there is more work to be done.
(BEGIN VIDEO CLIP)
LAGARDE: What really matters now is for the Greek authorities and the three institutions, the IMF, the ECB, and the European Commission, to get on with the work, and to really see how we can, together, identify the measures that will take Greece out of the very bad economic situation it could be in if those measures were not taken.
(END VIDEO CLIP)
MATHISEN: Iran’s supreme ruler says no final nuclear deal done until all economic sanctions from all countries are lifted on day one. Last week, Iran reached a tentative deal framework with six world powers agreeing to limit Iran’s nuclear program in exchange for relief from the sanctions.
At the same time, nations in the Middle East aren’t waiting around and are looking to increase their inventory of conventional military weapons, potentially creating an arms race. And that is being watched very closely by U.S. defense companies.
Hadley Gamble has more from London.
HADLEY GAMBLE, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): With just months to go before a final deal could be reached with Tehran over its nuclear program, U.S. officials now say they plan to bolster defenses for Sunni Arab allies in the Gulf including a possible nuclear commitment.
BEN MOORES, IHS: Saudi Arabia has a range of threats and has for a long time.
GAMBLE: The U.S. led invasion of Iraq in 2003, the perceived abandonment of the Egyptian President Hosni Mubarak, America’s so-called pivot to Asia and behind the scenes negotiations with regional rival Iran left the kingdom feeling vulnerable. And with the United States moving ever closer to rapprochement in Iran, a new generation of Saudi leaders is taking charge.
OLIVIER GUTTA, MD, GLOBALSTRAT: Usually when you want to know what’s going on in Saudi, you call up Washington. This is over. You have to call Riyadh, because Riyadh is not going through Washington to do what they have to do.
GAMBLE: Saudi Arabia looks to project its influence further afield in Yemen and beyond. The kingdom is finally making use of a multibillion dollar weapon cache source mainly from American and British suppliers. And all those orders mean big business to some of America’s top defense contractors.
(on camera): Last year, Saudi Arabia was the world’s biggest buyer of high-tech weaponry, spending a record $6.4 billion and beating out India to become United States’ largest export market.
(voice-over): And the kingdom isn’t the only country stocking up. Total sales of weapons to the Gulf States are up 70 percent over the last five years, with U.S. accounting for half of all arms sales to the regions.
MOORES: Saudi Arabia certainly has a very, very strong conventional military capability. They are becoming more and more capable. They’re better able to absorb the advance weaponry they’re now buying.
Iranian capability is nowhere near as strong.
GAMBLE: Tehran’s treasury crippled by years of heavy sanctions has left the country’s regular armed forces ill-prepared to meet the challenge of a joint Arab force kidded out in the latest and high-tech military gear.
And that’s good news for a White House that’s clearly unwilling to let a regional rivalry derail historic nuclear deal.
For NIGHTLY BUSINESS REPORT, Hadley Gamble, London.
MATHISEN: Coming up, you’re going to get rid of your biggest expense before you retire? We’ll tell you why you probably shouldn’t pay off your mortgage before your golden years.
MATHISEN: Well, if you’re looking for something to watch, you have more options than ever and forget about old fashion ad-supported TV. Now everyone seems to be in the business of selling subscription content.
Julia Boorstin breaks down the changing landscape.
JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Even advertising giant Google is working on an ad-free subscription model for YouTube, reaching out to some of its YouTube stars to say it’s having an ad-free option, which would enable subscribers to access content even when they’re offline.
BTIG analyst Rich Greenfield says the YouTube’s latest video move makes sense. Quote, “Consumers all around the globe are learning to live an ad-free life, thanks to DVRs, Netflix, et cetera. In turn, it feels like a natural progression for YouTube to launch an ad-free option, especially when it will be bundled with offline access.”
YouTube’s moving forward with the subscription option. No word on pricing yet, as HBO offers its first subscription outside the TV bundle, taking HBO Now straight to consumers.
HBO’s timed the app launch to a new season of “Game of Thrones” debuting Sunday. It’s also target millennials who are less likely to pay for cable. HBO is giving away an episode of “Silicon Valley” on Twitch, Amazon’s live streaming video game platform ahead of its season 2 premiere Sunday.
The question is whether hit shows like “Game of Thrones,” sampling of younger ones like “Silicon Valley”, plus a free first month would draw subscribers for the new $15 a month service.
Netflix cost $9 a month.
ANTHONY DICLEMENTE, NOMURA: I think HBO Now’s strategy is different than Netflix, right, because HBO still has — they’re still tethered to the traditional cable ecosystem and ensure they’re not cannibalizing those existing subs. Netflix’s strategy has just always been stand-alone.
BOORSTIN: Netflix’s strategy to add and keep subscribers in the face of all these new options is increasingly about original content, like Marvel’s “Daredevil” which debuts tonight. It’s a first of a five series partnership with Marvel, the show designed to appeal not just to comic book fans but also to Marvel’s broader audience that makes is films blockbusters.
So, which company will win the content face-off? Netflix’s content chief Ted Sarandos called HBO Now a validation of the Internet TV model, and says it’s not a win or take all situation. He predicts consumers will subscribe to multiple services.
For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin in Los Angeles.
MATHISEN: We begin “Market Focus” tonight with a big move in one of the most widely held of all stocks.
General Electric close to selling all or part of its $30 billion real estate portfolio, according to reports. This as the conglomerate moves to shrink its finance business. The company’s real estate portfolio includes office buildings, apartment complexes and other commercial property. Shares popped almost 3 percent to $25.73.
Walgreen Boots Alliance reported earnings that topped estimates, but revenue lagged. As part of a plan now to save $1.5 billion dollars a year by the end of 2017, the drug store chain will shutter 200 locations. The company’s forecast for full-year profit was largely short of estimates. Still, shares rose more than 5.5 percent to $92.62. Go figure.
Costco reporting a big drop in March same-store sales. The wholesale retailer was hurt by the timing of an earlier Easter, which cut the selling period short compared with last year. The stock fell 2 percent to $148.81.
A big profit beat from Constellation Brands. The maker of Corona beer among other things also unveiling its first quarterly dividend ever, 31 cents a share for its class A stock, 28 cents a share for class B. It will pay it in May.
The CEO says he plans to return cash to shareholders.
(BEGIN VIDEO CLIP)
ROBERT SANDS, CONSTELLATION BRANDS CEO: We have the confidence to, number one, both continue to invest in the company and continue to grow, and to return cash flow to our shareholders. So, you know, we find ourselves in that really enviable position. We should be able to grow the dividends as our net income grows and we also have a range from a percentage point of view of 25 percent to 30 percent of net income to return to shareholders.
(END VIDEO CLIP)
MATHISEN: Dividend payable from his wine cellar.
Class A shares were up a fraction to $120.06, as you see there.
Investors getting a chance today to react to yesterday’s numbers from Bed Bath and Beyond, and they weren’t pleased. The retailer’s profit slumped and it issued earnings guidance for the current quarter that was below estimates. The company saying bad weather and the West Coast port slowdown weighed on its results. The stock down more than 5 percent, $73.46 is the close there. And Bed Bath and Beyond, the worst performer in the S&P 500 today.
Pacific Gas & Electric hit with a huge fine. California regulators charged the utility company with a $1.5 billion dollar fee over a pipeline explosion that killed eight people back in 2010. The fine is for violating state and federal pipeline safety standards. The company’s CEO says he does not expect to appeal the ruling. PG&E fell 1.5 percent to $52.78.
Well, fixed mortgage rates fell following Friday’s disappointing jobs report. The average rate on a 30-year mortgage was 3.66 percent, down from last week, and that is according to the mortgage giant, Freddie Mac.
Many baby boomers are determined to get rid of big debts before they retire, but rushing to pay off your mortgage as many do, may not always be such a great strategy.
CNBC’s senior personal finance correspondent Sharon Epperson joins us now with more.
This has been sort of a — welcome, Sharon — this has been sort of a sacred wisdom here, that you should pay down your mortgage and go into retirement debt-free. You say no. Why?
SHARON EPPERSON, CNBC SENIOR PERSONAL FINANCE CORRESPONDENT: No one wants a big debt as they go into retirement, but the question is liquidity. The question is, are you going to be held poor by paying off your mortgage and rushing to do so? Do you have enough retirement savings? Do you have an emergency savings account and have you paid off higher interest debt like credit card debt?
If you haven’t done those three things, then rushing to pay off your mortgage probably doesn’t make sense.
MATHISEN: So, start there, paying down high interest debt that’s not deductible in all but a very few cases, like credit cards, like auto loans and so forth. And then flood the zone with 401(k), IRA, Roth deposits.
EPPERSON: Particularly because as you’re nearing retirement, you could put even more money into those accounts.
MATHISEN: So, there’s some catch-up provisions, right?
EPPERSON: There’s a catch-up provisions that you can do with the 401(k). You can put up to $24,000 in a 401(k) this year, if you’re 50 or older. And you can put $6,500 into an IRA if you’re 50 or older.
So, that’s a lot of money you can stash away for retirement.
MATHISEN: And yet, mortgage debt has risen dramatically over the past 20 years, presumably because loans have been easier to get for much of that period.
MATHISEN: And house prices more expensive.
EPPERSON: Exactly. People add to their mortgage debt, taking out home equity lines and credit home loans and such. So, for other purposes, not just because they need —
MATHISEN: So, the good news here is that while baby boomers carry heavier mortgage debt into retirement, you’re here to say don’t sweat it so much.
EPPERSON: Don’t sweat it so much. Look at your interest rate. If your interest rate is between 3.5 percent and 4 percent like we were talking about, that’s most of the mortgage is out there, and you’re able to get 7 percent to 8 percent on a well-diversified portfolio, for your retirement savings, for your investment portfolio. You know, stick with putting money there where it gets the greater return. You’re not really suffering that much paying much into that.
MATHISEN: And to the extent that you pour money into building equity in your house, you’re building equity, you sure are, but you’re not building liquidity. You’re in an illiquid asset there that you can’t tap as easily.
EPPERSON: You can’t use that — the money from your house to then pay off bills. You have to be able to access that money quickly and better to do that in an emergency savings account. But even if you had to dip into some retirement savings, that is still more liquid than it would be if it was just tied up in your house.
MATHISEN: A fresh way to think about debt that doesn’t sound like scolding. Sharon, thank you very much. Great as always to see you.
All right. Coming up, wicked winter weather is over. They say. They promise. But how did the airlines fare during the harshest of times? A look at which ones made the grade, which fly.
MATHISEN: Here’s a look at what to watch tomorrow. And there’s a lot.
On the data front, import and export prices set to be released. That is a key inflation indicator.
President Obama and Cuba’s Raul Castro will have a historic face to face meeting as both countries move to normalize relations. Will they shake hands?
And Apple will begin taking preorders for the Apple Watch.
And that folks, is what to watch for Friday.
But it is that time of year, the time when forecasters try to predict the hurricane season. The first one is out and forecasters of Colorado State University say it’s going to be below average season this year. They see just seven tropical storms and only three will become hurricanes. A typical year has about seven hurricanes.
Well, after this year’s harsh winter weather, it was anything but a below average year for potholes. And now repairs are under way in the east and Midwest and so many craters on the road, states and municipalities are finding out that it is a pricey fix.
MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): If you have a car, you’ve probably encountered them — potholes. As spring sets in, they’re everywhere, wreaking havoc on people’s cars.
STEVE FENG, IVY LANE AUTO SERVICE OWNER: It sits right on the driver’s side front and the damage — I can’t see the mirror because the steering is just like totally off set.
BRENNAN (on camera): Here in New York City, nearly 205,000 potholes like this have been reported since the start of year. Officials are busy having them patched up across. It’s expected to cost $15 million. But the problem goes far beyond this area.
(voice-over): Streets and highways throughout the Northeast and Midwest are riddled with craters. AAA estimates potholes will cost drivers $6 billion in damages this season, and similar to 2014 and about 20 percent more than in 2010.
JOHN NIELSEN, AAA MANAGING DIRECTOR: This winter has been pretty cold and what we see is the cold weather followed by a thaw and a refreeze. This is going to be a bad winter. We expect this will be close to last year.
BRENNAN: According to the Independent Insurance Agents and Brokers of America, half of all drivers experienced pothole damage to their cars at some point in the last five years, costing U.S. consumers and the insurance industry a combined $27 billion during that time frame.
And not just dented wheels and busted shocks. Drivers who file claims for this kind of damage for auto insurance carriers also run the risk of incurring higher premiums.
SPENCER HOULDIN, INDEPENDENT INS. AGENTS & BROKERS: Thirty-one percent of those respondents actually put a claim through their insurance company for the damage to their vehicle. Well, I’m not sure all consumers realize is that many insurance companies treat a claim for pothole damage as a chargeable accident on their automobile insurance.
BRENNAN: For that reason, a driver may be better off submitting a claim to the government agency responsible for road’s maintenance, if it can proven the agency knew of the pothole’s existence. Otherwise, consider paying out of pocket.
But potholes haven’t just gotten more troublesome. Auto repair experts say cars have also become more susceptible to damage.
FENG: The newer car has a more component involved, of course, more electronic involved. So when you hit the potholes, that most likely the easier tool to get damage.
BRENNAN: Still, roadways have not changed, with many aging and falling into disrepair. Transportation trip estimates more than a quarter of U.S. urban roads are in substandard conditions. And with a May deadline fast approaching for lawmakers to enact a plan to better fund the country’s transportation infrastructure, expect to be dodging more of these, at least this spring.
For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan in New York City.
MATHISEN: And finally, if you don’t want to drive, you might want to fly and the Department of Transportation is out with how well the airlines did during the heart of the brutal winter.
Phil LeBeau has our report.
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Remember the series of winter storms that battered the East Coast in February and made traveling around the country a real nightmare? Well, now we know just how damaging those were for people who were flying.
The Department of Transportation report card on airline performance in February shows that the airlines delivered 72 percent of their flights on time. That was a decline compared to January where it was 76 percent. The top three airlines in the month of February, Alaska, Hawaiian Airlines and Delta Airlines.
On the flip side, Envoy Air had the worst performance with just over half of flights arriving on time. Frontier was a little bit better. And JetBlue Airways had just 59.7 percent of flights landing on time in February. Not surprising given the fact that JetBlue’s hub in Boston was hit particularly hard with storm after storm.
The DOT said there were 16 flights that had tarmac delays of at least three hours and eight flights that had tarmac delays of four hours. The worst flight in the month of February, a flight between JFK and Frankfurt that sat on the tarmac for seven hours.
(on camera): Finally, despite all of the delays and cancellations, the airlines actually did a better job it comes to handling our baggage. In fact, the DOT says the number of complaints regarding mishandled baggage actually dropped in January compared to the same month a year ago.
Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.
MATHISEN: Seven hours on the tarmac or going to the fabric store. You can’t decide.
All right. The NIGHTLY BUSINESS REPORT, that will do it for tonight. I’m Tyler Mathisen. Thanks for watching. Have a great evening, everybody. We’ll see you right back here tomorrow night.