Transcript: Nightly Business Report — May 15, 2015

NBR-ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Tug-of-war. With stocks sitting near record levels, will the bulls stay in control or will the bears take over?

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Red hot. The hottest stock in the S&P 500 just passed another milestone. Is there anything that can stop Netflix`s climb?

HERERA: Fooling the SEC. Why it`s very easy to pull one over on the agency that is supposed to protect investors.

All that and more tonight on NIGHTLY BUSINESS REPORT for Friday, May 15th.

MATHISEN: Good evening, everyone, and welcome.

For every buyer in the market, there must be a seller. And for every seller, a buyer. It`s that push and pull, that yin and yang, that literally makes a market. And now, as stocks sit at or tantalizingly close to record highs, the battle of buyers and sellers, bulls and bears is joined.

Today`s economic report bolsters the bears. Industrial production declined 0.3 percent in April, its fifth straight monthly decline.
Consumer sentiment also fell sharply, and following a raft of weak data, economists lower their outlook for economic growth, not just for the second quarter, but for the full year, according to a survey released today by the Federal Reserve Bank of Philadelphia.

But bulls do point to this — despite the news, the Dow Jones Industrial Average rose 20 points to 18,272 and now rests nine one hundredths of a percent of its all-time high. NASDAQ fell a modest two points. It`s just 1.4 percent below its record high. And the S&P 500 was higher by a point, finishing at another record close.

For the week, all the major indexes are higher. So, take that bears.

Dominic Chu now with a look at what`s working and what`s not for stocks.

(BEGIN VIDEOTAPE)

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): If you hadn`t notice, the stock market is back to near record highs again.
After all the ups and downs over the last month or so, we are less than half a percent away from those levels.

So, what are the experts saying about whether the current rally in stocks can continue, or not?

Bad news first. What could derail the rally? Analysts are watching weakness in corporate profits and that could take some of the air out of the market.

They are also keeping a close eye on the strength of the U.S.
economy. Some strategists also worried about the Fed and how rising interest rates might shake things up. So, that`s the bad.

What about the good news? The pros say lower levels of market volatility could help stocks move higher, and that the drag on oil company earnings could reverse if oil prices stabilize.

Some of the smart people believe that we could see the market takeoff if everyone starts believing in the rally. If they get off the side lines and start to put money into the market, we could see a more sustained move upward.

(on camera): So, there you have it — a few of the pros and the cons, just to think about as we head toward the summer.

For NIGHTLY BUSINESS REPORT, I`m Dominic Chu.

(END VIDEOTAPE)

HERERA: So let`s turn to our two market guests here on to weigh in on that debate. We have Jonathan Golub, chief U.S. market strategist at RBC Capital Markets who is bullish, and our bear is James Abate, he is chief investment officer with Centre Funds.

Welcome, gentlemen. Nice to have you here.

JONATHAN GOLUB, RBC CAPITAL MARKETS CHIEF U.S. MARKET STRATEGIST:
Good to be here.

HERERA: So, Jonathan, I`m going to start with you. You know, we`re sitting near at all time highs in many of these major indices. Make the case for the continuation of the bull run.

GOLUB: Well, you know, it is important to separate GDP from S&P, and I don`t believe that we`re seeing a economy that`s going to be really robust. However, what I do believe you`re going to see is this slower economic cycle extend for longer than normal and that will draw investors into the market. It will push P/Es or market valuations higher and I think that`s going to be very important.

The second thing and as we saw this in the second quarter, in a slower economic environment, companies are doing a brilliant job of pushing harder on margins and driving margins even higher and they`re also buying back shares which means EPS is on a terrific trajectory.

MATHISEN: Mr. Abate, you are worried. You think the market is vulnerable. Why?

JAMES ABATE, CENTRE FUNDS CHIEF INVESTMENT OFFICER: Yes, I think that`s current. I think the market is susceptible to a 15, 20 percent connection akin to what happened in 1987, 2011, or even back in 1998 during the Thailand and the LTCM crisis.

The reason is simple, if you look at the drivers of stock market returns, it`s a combination of earnings and price to earnings multiple changes. Now, clearly, the decision to be bullish on stocks in early 2009 was driven by the efficacy of the corporate restructuring that was going on, big expansion of profit margins by a lot of companies. And that carried us through 2012.

Since 2012 through 2014, it`s been a market which has been driven mostly by price to earnings multiple expansion, mostly like a baton relay which has been passed on from one driver to the other.

As we stand here today, I have a very hard time looking at profit growth and saying that profit growth is going to be the new driver for market concerns, and I have a very hard time thinking that the price to earnings multiple is going to expand further given where interest rates are and where investor perception of risks are.

HERERA: OK. Jonathan, I think those are interesting points. You probably don`t agree with all of them. But, you know, the price to earnings ratio is one thing that a lot of people watch.

GOLUB: It is. And right now, there is no question that stocks are incrementally more expensive than they would normally be, but the range of valuations is quite wide. So, it`s not concerning.

What`s really important to me, though, is if you look at stock drawdowns of something let`s say 20 percent, they happen almost exclusively when you have your next recession. So, a 3 percent or a 5 percent market correction, sure, that can happen and that wouldn`t be particularly concerning to me.

But if you ask, what would cause a 10 percent or a 20 percent correction, you really need to have either a real recession or a risk of one, and I don`t believe that that`s on the table at this point.

MATHISEN: How about you, Mr. Abate, do you believe we could lapse into a recession? That`s one question. And number two, briefly, I look at where revenue growth stands and it is not all that good at all. In fact, it may be negative when all it said and done, and yet, because of stock buybacks and other corporate alchemy, corporations keep growing profits.

ABATE: You raise a couple of good points, and so do, Jonathan. Let me talk about stock buybacks and the companies` capability to squeeze a little bit more juice out of the lemon, i.e. restructuring efforts. I think one of the problems that you look, net profit margins have actually plateaud here.

But if you look further up on the income statement, gross margins, that`s just simply the profit the companies have by selling more stuff or by selling at a higher price. We`ve actually started to see those roll over and that started in the fourth quarter of last year. And the further you move down the income statement, things where you don`t have the benefit of share repurchase and lower interest charges and other things, you know, that tends to mitigate the concerns that we see.

Now, the other point about the Federal Reserve, which is typically the one that catalyzes a recession, I think is very much in play if this was a normal business cycle and that is the thing that I think about every single night, we`re in a very different environment than we`ve been historically. Interest rates are at all time lows. We have not seen the transition of monetary to the policy to the real economy, and that`s what causes the concern and leads me to believe that we are susceptible to a correction due to these problems.

HERERA: All right. We have to leave it there, gentlemen. Thank you, Jonathan Golub and James Abate. Appreciate it very much.

MATHISEN: Interesting conversation.

Netflix (NASDAQ:NFLX), Sue, the hottest stock in the S&P 500 this year, guess how much it is up, 80 percent or so in 2015. And today, the company zoomed through a key milestone, $600 a share just a month after it cracked $500. What why are investors piling into this stock and what could cause the run to cool off?

Our Julia Boorstin takes a look.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
China is driving Netflix (NASDAQ:NFLX) to new highs. There are reports that the company is in early talks with Chinese media companies, including Jack Ma-controlled Wasu media, and BesTV New Media.

BARTON CROCKETT, FBR CAPITAL MARKETS: The China market opportunity is huge. There are 200 million broadband homes in China. There`s 100 million in the U.S. So, there is say middle class that can afford to subscribe to things like Netflix (NASDAQ:NFLX). So, you know, I would think that there could be tremendous opportunity there over time if they split with a local partner.

BOORSTIN: Though Netflix (NASDAQ:NFLX) won`t comment on the latest reports, the company wrote to shareholders in January that in China, it is, quote, “exploring options, all of them modest. We`ll learn a great deal if we can successfully operate a small service in China centered on our original and other globally licensed content.”

(on camera): In addition to regulatory challenges, including restrictions on foreign online content, there is also the issue of China potentially censoring what it considers objectionable consent. Plus, high levels of piracy.

(voice-over): With Netflix (NASDAQ:NFLX) shares up some 80 percent so far this year on the company`s user growth, to 60 million subscribers worldwide, some may wonder if its stock have gone too far too fast.

But analyst Crockett projects the company will triple its subscribers by 2020.

CROCKETT: Each million subscribers they add drops $100 million to the bottom line.

I think after building up scale, you kind of see this company go vertical in earnings and you want to own that, you know? This company is at the forefront in home entertainment. People want on-demand content.
Netflix (NASDAQ:NFLX) is leading that. I think there`s tons of value creation to come from that.

BOORSTIN: Netflix (NASDAQ:NFLX) original “House of Cards” is already popular in China. The first two seasons on the Chinese streaming site and it`s also widely pirated there.

For NIGHTLY BUSINESS REPORT, I`m Julia Boorstin in Los Angeles.

(END VIDEOTAPE)

HERERA: Avon has reportedly discussed its bogus takeover with the FBI. As we reported yesterday, a fake filing was made with the Securities and Exchange Commission, offering to buy Avon for nearly triple the stock`s price. But how did that bogus filing happen in the first place?

Eamon Javers has been looking into it and he joins us from Washington.

Good evening, Eamon.

EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Good evening, Sue.

Well, it turns out that just about anybody can post documents to the SEC`s online database known as EDGAR.

(BEGIN VIDEOTAPE)

JAVERS (voice-over): EDGAR is where investors and journalists and the general public go to find up-to-the-minute disclosures from public companies and large shareholders. But because so many people need to file documents with the SEC, it`s relatively easy to get access to the system.
All you need to do is fill out a two page SEC form ID. Experts tell us that the SEC does not check these forms to ensure that the filers are actually real.

DAVID KOTZ, FORMER SEC INSPECTOR GENERAL: Basically, you put in your information, you have to notarize it, but you can notarize whatever information you put in, you sent it in, they give you the code and you are good to go. And from the SEC`s comments, we understand that the SEC essentially doing nothing at all to vet or authenticate this information.

JAVERS: And yesterday, an apparently fake company used that access to EDGAR to file an apparently fake document, a form disclosing a bogus tender offer for Avon. And that spark a wave of volatility on Avon stock, which even after the hoax was debunked, ended higher.

(END VIDEOTAPE)

JAVERS: Guys, the SEC tells us it`s not responsible for the truthfulness of the documents that are filed on its EDGAR system. The filers are responsible for that and they can be subjected to penalties for lying or filing inaccurate information. That is, of course, if they can be caught, Sue.

HERERA: If they can be caught. It does, though, begs the question why the SEC doesn`t check the accuracy of the filing, given the fact that they can be market moving as we saw in the case of Avon.

JAVERS: Yes, absolutely. And there`s two reasons for that. One is logistical, right, because you got thousands of filings ever single day over at the SEC. The manpower and the resources that you`d have to do, and the expense that that will cause is enormous.

And the other one is getting into policing what`s true and what`s not true in every corporate document that`s filed out of thousands of documents. You know, the line between where corporate spin ends and a lie begins is kind of a fine one and you get into fine judgment calls. The SEC clearly doesn`t want to get into that business.

MATHISEN: If I read between the lines here, the answer to my next question is, yes, could this happen again? But let me also ask you, what more do we know about who may have perpetrated this?

JAVERS: Well, we don`t know much. And you`re right, the answer is this could happen again. It could happen on Monday because this process is still in place. As far as who did it, this is a classic whodunit? And we don`t know.

The SEC will have some information forensically to just kind of start with here, including they probably have the IP address of the computer that uploaded the bogus form, and they`ll probably the e-mail address that they sent the EDGAR credentials to in the first place when they filed a fake company name with the SEC. They sent that information to an email address.
It might be a one-time only e-mail. It might be in Lithuania or some other non-extradition area around the world. But that would be a point for investigators to start as well.

HERERA: All right. It`s not over yet, obviously. Eamon, thank you so much. Eamon Javers in Washington.

MATHISEN: And still ahead, can you say road trip? Why gas prices this summer could be cheaper than they`ve been in years.

(MUSIC)

HERERA: The number of U.S. oil rigs in use fell for the 23rd straight week. According to Baker Hughes (NYSE:BHI), the current number sits at about 60 percent below the peak of October 2014. The report is closely watched and viewed by some as a proxy for activity in the oil industry. Oil prices today fell slightly to $59.69.

MATHISEN: Gas prices have been rising in recent weeks, but don`t worry if you are planning a road trip this summer. Experts say you`ll almost certainly pay less to fill up in the coming months than you have in quite a while.

Jackie DeAngelis has the details.

(BEGIN VIDEOTAPE)

JACKIE DEANGELIS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Next weekend is the official kickoff to summer, Memorial Day. AAA forecast suggests that more than 37 million Americans will hit the road next weekend. That`s up about 5 percent from last year. The reason — cheap gas. The national average for a gallon of regular is now $2.69 a gallon.
While that`s up 30 cents from a month ago, it`s still almost a dollar cheaper than a year ago at the same time.

In fact, Gas Buddy said this is the cheapest driving season since
2009 right after the financial crisis.

And there`s more good news. While we tend to see a seasonal boost in prices because of the summer driving season, the demand falls off in the fall. And that`s when prices drop. That`s why the Energy Department is forecasting the national average for this year will be $2.43 a gallon. For next year, $2.69.

With the U.S. household spending about $675 this year less on gas than last year, more consumers will hit the road. The bad news there, more traffic.

For NIGHTLY BUSINESS REPORT, I`m Jackie DeAngelis.

(END VIDEOTAPE)

HERERA: And if you`re planning to hit the road, you may be thinking about buying a car. This year, more than 40 million used vehicles will be bought and sold in the U.S., most after lots of haggling and some awkward test drives.

But a start-up is changing all of that. Meet beepi.

Phil LeBeau has more.

(BEGIN VIDEOTAPE)

MILES JOHNSON, BEEPI CUSTOMER: So this is the new Civic.

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Miles Johnson from Mountain View, California, just bought a 2012 Honda Civic for $16,000.
He ordered it through the used car Web site, beepi. Like anything bought online, it`s being delivered to his house where he`s seeing it in person for the first time.

JOHNSON: It is a little bit weird, but I have a feeling it will all work out.

LEBEAU: Beepi was created by Owen Savir and a friend who figured there has to be a better way to buy and sell used cars.

OWEN SAVIR, BEEPI: In today`s age, where you buy everything online, you can buy on Amazon (NASDAQ:AMZN), you can buy on Zappos, really, I buy everything online, it just didn`t make sense to go to a physical lot to buy a car.

LEBEAU: For decades, dealers or classified ads have been the way most of us bought or sold a pre-owned car. But beepi is changing that. It only buys or sells used models less than six years old with no more than two owners. They have fewer than 60,000 miles, have never been in a crash, and must look and run in excellent shape.

Beepi inspect every vehicle and if everything is OK, beepi quotes you a guaranteed price. That`s it. No haggling or negotiating.

SAVIR: We scan market prices in your area. We`ll look at publicly available sources such as KBB and Edmunds to see what dealers and others are paying for the car, and we give you a seller price that`s guaranteed to be higher than any other offer that you`ll receive.

JOHNSON: Great looking car.

LEBEAU: Beepi says it sells cars with a price inline with the market, but with profit margins cap at 9 percent. Meanwhile, sellers are likely to get slightly more than they would at a dealership or if they sold their car on their own.

Dan Delima of Millbury, California, sold his 2013 Nissan Leaf for 20 grand. Beepi cut him a check and hauled away the Leaf and convinced Delima this is a better way to sell a car.

DAN DELIMA: Just meeting one set of people to inspect my car and take the photos was way worth it than finding five prospective buyers.

LEBEAU: A new way to shop for used cars in a world that is doing more and more online.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Millbury, California.

(END VIDEOTAPE)

MATHISEN: Investors give Keurig`s new cold drink system an icy reception, and that is where we begin tonight`s “Market Focus”.

The company known for its single-serve coffee makers revealed its latest gadget, a cold beverage maker. It won`t be widely available until next year, holiday time in fact, and it will cost around 300 bucks. So that`s later than what analysts expected and costlier. Shares tumbled 8
1/2 percent to $94.26. It was the worst performing stock in the S&P 500 today, by the way.

Some top hedge funds are dumping Apple (NASDAQ:AAPL). This according to regulatory filings out today. Leon Cooperman`s Omega Advisors and Philippe Laffont`s Coatue Management reduced or slashed stakes in the iPhone maker during the first quarter. Shares off a fraction today. They finished to $128.77.

HERERA: Sysco (NYSE:SYY) has a lot riding on its planned merger with U.S. Foods. If the deal falls apart because of regulators, Sysco
(NYSE:SYY) will be left with a $1 billion bill. That`s according to some new filings. This is because it has already spent money on the potential combination.

Shares of Sysco (NYSE:SYY) were off a fraction to $37.27. U.S. Foods is privately owned.

J.P. Morgan downgrades Deere, the farming equipment maker, to its lowest underweight rating, which is a rare call, citing a potential cash crunch for U.S. farmers. Shares fell more than 3 percent to $89.13.

MATHISEN: Our market monitor is betting on the consumer and has stocks she said will rise 10 percent over the next year. She is Margie Patel, portfolio manager of Wells Fargo (NYSE:WFC) Funds Management.

Margie, welcome. Good to have you with us.

You are banking on the consumer, you say, but today`s news on consumer sentiment was dour really, relatively. Why do you think the consumer is going to do something they haven`t really shown the predilection to do and that is depart with their cash.

MARGIE PATEL, WELLS FARGO FUNDS MANAGEMENT PORTFOLIO MANAGER: Well, consumers have shown steady improvement in their finances. And we have the unemployment numbers improving, here and there, improvement in wages. They benefited I think and will continue to benefit from energy prices being low, from the dollar being strong. They`ll help to a lid on imported goods.

So, I think they`re in pretty good shape and I think will continue to see their incomes grow and will have the money to spend.

HERERA: What about the stock market itself? We came into the year with increased volatility. You think that is passed us and the volatility is lower. What kind of market do we have as we go into the second half of the year?

PATEL: I think it`s going to be more of the same. I think we`ll have relatively low volatility, low growth, low inflation, nothing unexpected from the feds and more of the same. But I think the economy is gradually improving. So, I think we will see stocks finish higher. And if in the second half of the year, we acceleration, then I think we have the potential of double digit returns from the equity market. So, in other words, a year that might be surprisingly good.

MATHISEN: And our views really want to hear what stocks you recommend and they really do all come from the consumer stream I guess I would say. Home Depot (NYSE:HD) is number one. Why do you like it?

PATEL: Well, I think home depot benefits for a number of reasons.
First of all, we do have a new home cycle that`s gradually taking off. So, we have new building construction for professionals. We have a lot of people remodeling and so that will be another big source.

And in addition, they sell a lot of products that consumers use, lighting, carpets, outdoor products and things like that. So, I think they will benefit. They`ve been a very good conserver of their cash. They pay a very good dividend, about 2.1 percent. They have not expanded and used up all of the cash. They bought back shares and they are mostly U.S.- centric. So, I think they`ll benefit from the trends that are doing well here.

HERERA: You also like stock with a symbol JAH, Jarden (NYSE:JAH) Corporation. They make products I use all the time, the crock pot, but they make other things as well.

PATEL: It`s a company that`s a household — they make household products, but the name itself, the company is not very well-known as a household name. They have many good products that consumers use and have very strong brand recognition. Crock pot, Mr. Coffee, Grill Master, things like that, Coleman camping products that everybody uses and knows, priced as relatively modest prices so all consumers at income levels can afford to buy these products.

They`ve added new products within the brands and have strong recognition. They`ve added extensions of those brands. And although they don`t pay a dividend, they have pretty good growth in the sales.

MATHISEN: And we`ve got about 30 seconds for your final pick. That CVS (NYSE:CVS) Health, which is not a double parley on the consumer and health care.

PATEL: Yes. They made a lot of great choices. In the pharmacy side, they stopped selling cigarettes, which I think adds credibility on their health care activities. They have growth in the pharmacy benefit management. And in the front of the store, the health and beauty aids, I think again, reasonably prices that appeal to a lot of consumers. So, I expect that to grow also.

MATHISEN: Margie, have a great weekend. Thanks for joining us.

PATEL: Thank you.

MATHISEN: Margie Patel, Wells Fargo (NYSE:WFC) Fund Management.

HERERA: Still ahead, what`s he worth? Why thoroughbred American Pharoah earned a lot more than the title Kentucky Derby winner when he crossed that finish line.

(MUSIC)

HERERA: Here is what to watch next week. On Tuesday, Dow components Walmart and Home Depot (NYSE:HD) report earnings. On Wednesday, Federal Reserve release the minutes of the last meeting. And housing data is due out, including existing home sales, housing starts and home builder sentiment. And that`s what`s on the agenda for next week.

MATHISEN: The activist investor Carl Icahn took a $100 million stake in the ride sharing startup Lyft. Icahn is wildly known for taking stakes in large publicly traded companies. In this case, he is taking a position in a young company with an unproven business model. Lyft currently valued at $2.5 million. Rival Uber was most recently valued at $41 billion.

HERERA: An update now on a story we told you about back in November.
The nation`s largest peach farm was locked in a standoff with the United Farm Workers, which returned to the farm after 20 years demanding a new union contract. An appeals court ruled today in favor of Gerawan Farms, saying that a state cannot force a contract on a farmer if both sides do not come to terms.

MATHISEN: And finally tonight, chasing the Triple Crown, the 140 Preakness Stakes will be run tomorrow in Baltimore and favorite to win is American Pharoah.

Now, we introduced you to this thoroughbred before he won the Kentucky Derby and since then, his value has only gone up.

Robert Frank talks some horse sense.

(BEGIN VIDEOTAPE)

ROBERT FRANK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
Two years before American Pharoah took first place at the derby, before he`d run even a single race, he hit the auction block in Saratoga Springs, New York, selling for $300,000.

Over the next year, he won five races, purses totaling $1.4 million.
Before setting the foot in the run for the roses derby, experts pegged his value at around $10 million.

This big derby finish at Churchill Downs (NASDAQ:CHDN) made him worth much more. Some of the top thoroughbred blood stock agents now estimate his value between $15 million and $20 million. That`s based on racing performance, physical shape, and most importantly, his potential to breed another champion.

He is now the favorite at Preakness. If he goes on to take the Triple Crown, experts expect him to rule the thoroughbred world value north of $30 million.

For NIGHTLY BUSINESS REPORT, I`m Robert Frank.

(END VIDEOTAPE)

HERERA: They are such beautiful horses.

MATHISEN: They are really good. I think he has the number one pose position, so that often is helpful.

HERERA: Is it? I don`t know that much about racing. But I love to watch it.

All right. That`s it for NIGHTLY BUSINESS REPORT for tonight. Have a great weekend.

MATHISEN: Enjoy the Preakness, folks.

I`m Tyler Mathisen. Have a great weekend. We`ll see you here on Monday.

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) 2015 CNBC, Inc.

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