TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: No growth. The economy shrank significantly in the first quarter. Is it cause for concern? And what does it mean for the Federal Reserve and interest rates?
Curing cancer. The names to watch as some of the biggest drug and biotech companies attempt to change the way the disease is treated.
Back in business. An iconic U.S. airline takes flight once again nearly 25 years after it shut down.
All that and more tonight on NIGHTLY BUSINESS REPORT for Friday, May 29th.
Good evening, everyone, and welcome. I`m Tyler Mathisen. Sue Herera is off tonight.
Well, it`s a triple-digit decline for the blue chip Dow index to end the month. More on that in a moment.
But we begin tonight with the economy`s ugly first quarter. The government reports that the economy shrank by a decent amount during the first three months of the year. Gross domestic product, which is the broadest measure of goods and services produced across the country, contracted by a significant 0.7 percent. As we`ve been reporting, there are a lot of questions surrounding the accuracy of first quarter GDP data historically.
But regardless of whether the economy shank 0.7 percent or a little less, or whether it even grew a smidge, the bottom line is this — the economy is weak and investors want to see more growth.
Steve Liesman has more now on the first quarter, what`s ahead in the second and beyond.
STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
Today`s GDP number was ugly, but the street is already moving on. The government reported the U.S. economy contracted by 0.7 percent in the first quarter. That`s revised down from the initial read of 0.2 percent to the upside. A higher trade deficit and lower inventories played the biggest role in the contraction.
On the positive side, the data showed some signs of a pick up in business investment and housing. Consumer spending remained about the same compared to the previous report. Many economists are looking past the first quarter weakness to a bouncer back in the second quarter and to overall growth in the economy.
MICHAEL GAPEN, BARCLAYS CHIEF U.S. ECONOMIST: We`re roughly at 2.5 percent economy. You have to look at through some of the noise in the GPD, let`s wait for July to see what the fix is, and you need to complement GDP with what we`re seeing on employment, what we`re seeing in the unemployment rate, what the ISMs are doing.
LIESMAN: The data presents a dilemma for the Fed. It doesn`t want to hike rates into a contracting economy, but it also has to take account of strong job growth.
RUSS KOESTERICH, BLACKROCK GLOBAL CHIEF INVESTMENT STRATEGIST: If you put into context of we`re still creating the fastest — jobs at the fastest pace since the late 1990s and at that point in time, short term rates around 6 percent, it`s very hard to justify keeping the possible rate at zero when the economy is still growing 2 percent to 2.5 percent.
LIESMAN (on camera): Because of confusion over GDP, labor market data becomes even more important next week. Economists expect 220 jobs to be created in May, and the unemployment rate to be unchanged at 5.4 percent and showing still pretty strong growth.
For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.
MATHISEN: David Kelly joins us now to talk more about what lies ahead for the economy and the market. He`s chief local strategist at J.P.
David, always great to see you.
These numbers on the GDP today, head snapper or head fake?
DAVID KELLY, J.P. MORGAN FUNDS CHIEF GLOBAL STRATEGIST: Head fake, I think. As Steve said in his reports, there`s a lot of variability in the first quarter numbers and special factors but the main thing is if you look at other data, pending home sales, strongest level since 2006. And next week, we`re going to get light vehicles which looks at about 17 million units in annualized rates.
So, there`s plenty of signs that the economy is coming back, and I think, you know, yet again we`re being faked out by one weak quarter when the economy is actually motoring ahead.
MATHISEN: So, what does this mean for the second quarter growth, and growth for the rest of the year? Where do you have it tracking?
KELLY: Well, we think that growth is going to bounce back. I`m coming up with about 3 percent growth for the second quarter. A lot of that bouncing back from the special factors here. And then about 2 percent to 2.5 percent growth for the rest of the year.
That doesn`t sound like a lot but it`s plenty for this economy to cope with. I think it`s going to push the unemployment rate down toward 5 percent by the end of the year and really the Federal Reserve needs to get going here.
MATHISEN: Obviously, the GDP is a backward looking number. The Fed will think about it, and look at it, probably say, done with that, OK, we get it. They say they are data dependent.
What do you think the data is that they`ll be watching closest and when do you think they`ll start to move on interest rates? You`ve been calling them, as you just did, for them to move sooner rather than later.
KELLY: Well, you know, this economy is a bit like game of red light and green light. I mean, every year, we get a red light and everybody freaked out, including the Federal Reserve, and they freeze and they don`t do anything. And then, for the rest of the year, we sort of quietly sneak up on full employment.
I think, finally, this year, they`re going to realize that they just can`t freak out too much about one weak quarter. So, I do think they`ll do something by September, a first rate hike. I think they`ll see the unemployment rate close to 5 percent at that stage, and wages beginning to pick up. And I think they`ll put in one more rate hike in 2015 and then they`ll have to get going in 2016 because they are way away from normal given where this economy is right now.
MATHISEN: Let`s pin this scenario to where our viewers care most, and that is their portfolio. What are the implications for what you see for stocks and bonds for the rest of the year?
KELLY: Well, I think it`s still positive for equities because I think what`s going to happen is as the economy picks up, I think earnings will do a bit better. They`ve got a lot of headwinds from oil and the dollar, but I think that will gradually ease. And meanwhile, as short-term that it`s go up, I think it`s going to put upward pressure on long-term interest rate and so, people will be to some extent transferring from the bond market into equity.
So, I still think there is reason to be positive in U.S. equities. I do think in the long-term, though, people need to look for overseas equities also because I think there will be better long-term growth prospects overseas.
MATHISEN: All right. David, thank you very much. Have a great weekend. Thanks as always for joining us.
David Kelly with J.P. Morgan Funds.
Well, the GDP report, along with weak data on factory activity in the Midwest and soggy consumer sentiment for May weighed on stocks today, pushing the major indexes lower on the last trading day of May. The Dow industrials dropped to 115 points to 18,010, NASDAQ fell nearly 28 points, and the S&P 500 finished the session lower by 13.
For the month, though, all three indexes were higher. The NASDAQ rose the most as you see there. Better than 2.5 percent.
As for oil, crude prizes jump nearly 5 percent as the number of rigs used in oil fields decline for the 25th consecutive week.
Greece was a concern for investors today. And today, U.S. Treasury Secretary Jack Lew issued a stern warning to debt ridden country, and its creditors get a deal done. The comments were made as the group of seven conference wrapped up in Dresden, Germany.
Our Steve Sedgwick has more.
STEVE SEDGWICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Here in Dresden at the end of the G-7 finance ministers and central bankers conference, it was the unofficial agenda that was making all of the headlines. I went to a press conference with Treasury Secretary Jack Lew where he talked officially, of course, about the agenda and saying it was important to not rest on our laurel, that we had low growth globally and it was important to as much as possible to get that growth up, talking about the need for surplus countries such as Germany to spend more on investment and infrastructure.
The unofficial agenda, though, front and foremost once again, and I spoke to Jack Lew about the issues and asked him whether it was the creditors of Greece, or indeed, Greece itself that had to move.
JACK LEW, U.S. TREASURY SECRETARY: All parties need to move. There needs to be some flexibility on the part of the institutions. There needs to be some tough policy commitment implemented in Greece. One won`t happen without the other. They have to happen at the same time.
It can only happen when you go from the high level of generalities to the very specific levels of what actions you are prepared to take.
SEDGWICK: Of course, Jack Lew has been very worried coming into the conference that the affairs of contagion has been underplayed. He was saying we would be in unchartered waters if indeed we did not get a deal and Greece was not to stay in the Eurozone.
Steve Sedgwick, for NIGHTLY BUSINESS REPORT, in Dresden.
MATHISEN: Intel (NASDAQ:INTC) has reportedly resumed negotiations to buy the smaller chipmaker Altera (NASDAQ:ALTR) and the two are closing in now on a $15 billion deal. According to reports, if the deal gets done, it would be the biggest acquisition ever for Intel (NASDAQ:INTC) and would be at another tie-up in the fast consolidating chip industry.
Yesterday, we reported that Avago had agreed to buy the semiconductor maker Broadcom (NASDAQ:BRCM) for even a higher price, $37 billion. Shares of Altera (NASDAQ:ALTR) meanwhile up 4 percent today. The Dow component Intel (NASDAQ:INTC) was up more than 1 percent.
The health insurer Humana (NYSE:HUM) is reportedly exploring a sale of the company. As first reported by “The Wall Street Journal,” Humana
(NYSE:HUM) has received takeover interest from Aetna (NYSE:AET) and Cigna and is working with advisers now. Humana (NYSE:HUM) gets the bulk of its revenue from the patients who use Medicare. Shares surged 20 percent, easily making Humana (NYSE:HUM) the best performer today in the S&P 500, and you can see where it jumped when that report came out.
The report sent shares of other health insurers like Wellcare Health, Cigna, Aetna (NYSE:AET), UnitedHealth higher in today`s session on the prospects of consolidations.
One of the most important cancer drug development conferences of the year is under way now in Chicago. A cutting-edge data will be presented and the focus will be on some big-name companies and their work in the fight against cancer.
Our Meg Tirrell has more.
MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
It`s the biggest event in cancer research of the year. More than 30,000 doctors, researchers, investors and analysts travel to Chicago today for the annual American Society of Clinical Oncology meeting or ASCO, to get a sense for the latest progress in the fight against cancer.
A top focus will be medicines known as immunotherapies, being developed by Bristol-Myers, Merck (NYSE:MRK), AstraZeneca, Roche and others.
DR. STEPHEN SHERWIN, SF GENERAL HOSPITAL ONCOLOGIST: When a cancer grows, the immune system is failing. So, the immunotherapy treatments that we are developing today attempt to unblock, if you will or activate the body`s immune system to begin to fight off the cancer again.
TIRRELL: Bristol Myers and Merck (NYSE:MRK) already have two of the newest immunotherapies, Opdivo and Keytruda, on the market. They`re both approved for the skin cancer melanoma, and Opdivo is approved for lung cancer as well. Analysts are anticipating more data on how these drugs and others work for different cancers, as well as how they fair in combination with other medicines.
BRIAN SKORNEY, BAIRD BIOTECH SR. RESEARCH ANALYST: While Merck
(NYSE:MRK) and Bristol Myers are the leaders of the two approved drugs, Roche and AstraZeneca have very similar drugs that are not far behind at all. I think the debate within the sector really is right now is, (a), how differentiated are these drugs, is there any difference, or are they all essentially showing the same data?
TIRRELL (on camera): Analysts are also watching on updates for drugs for breast cancer, including one already on the market from Pfizer
(NYSE:PFE) called Ibrance, an experimental drug called Neratinib from Puma Biotechnology.
(voice-over): Puma stock sank earlier this month, when initial data were released ahead of the conference, and analysts say the company will seek to change investors` minds about the drug`s prospects at ASCO.
Analysts are also closely watching a race in lung cancer, between British drug two giant AstraZeneca and smaller biotech Clovis Oncology.
SKORNEY: We`ve seen multiple situations where there`s two biotech companies or two pharma companies who are developing very similar targeted therapies. And an example of that is biotech company Clovis, who has a very similar lung cancer drug in late stage development, AstraZeneca, and part of the debate there is, are these drugs any different and does one have an edge over the other?
TIRRELL: Oncologist Steven Sherwin said that while there is unlikely to be a single cure for cancer, progress is being made on multiple fronts.
SHERWIN: I`m more optimistic than I have ever been that immunotherapies will help at least some patients rebalance their immune systems and maybe if not eliminate the cancer, and quote, “cure it”, turn it into a harmless chronic condition that really doesn`t affect longevity or the quality of life.
TIRRELL: This weekend will give us the latest on where we stand.
For NIGHTLY BUSINESS REPORT, I`m Meg Tirrell.
MATHISEN: This afternoon, Bristol Myers released data on a drug Meg just mentioned, Opdivo, improved survival for patients with the most common form of lung cancer, but the drug`s effectiveness was tied to whether the tumors had high levels of a specific protein. That could potentially limit the market for the treatment and shares came under pressure as you see on that graphic, dropping 6.5 percent.
Still ahead, looking for some cheap stocks? Our market monitor will take us bargain hunting.
MATHISEN: The U.S. moving one step closer to normalizing relations with Cuba today. The Obama administration removed the island nation from a list of state sponsors of terrorism. This was a key Cuba demand as they want to conduct banking in the U.S., among other activities.
Well, amid increasing pressure from corporate sponsors, FIFA, soccer`s top governing body engulfed in a massive scandal, went ahead with the elections and it was not without drama.
Wilfred Frost has more now from Zurich.
WILFRED FROST, NIGHTLY BUSINESS REPORT CORRESPONDENT: President Sepp Blatter of FIFA has been reelected for an unprecedented fifth term in office as the head of soccer`s governing body. In what has been a yo-yo afternoon, he failed to secure a two-thirds majority needed in the first round of the vote. Just as we were heading for a second round vote, Prince Ali of Jordan decided the gap was too large to close and he conceded defeat, leading to President Blatter`s re-election.
JOSEPH SEPP BLATTER, FIFA PRESIDENT: I thank that you accepted me, that for the next four years, I will be in command of this boat called FIFA, and we will bring it back, where finally football can be played.
FROST: At the end of what has been a torrid week for the world of soccer, we hope this election result can lead to a new corruption-free era for soccer and for FIFA.
For NIGHTLY BUSINESS REPORT, I`m Wilfred Frost in Zurich.
MATHISEN: Rosetta Stone (NYSE:RST) pops on buyout interest, and that is where we begin tonight`s “Market Focus”.
The language products company is evaluating an expression of interest that it received from the investment firm RDG Capital Fund Management. The company has been working to cut costs and simplify its business as its revenue has slipped in recent years. Shares jumped 18.5 percent on the news. They finished at $7.62.
Weak guidance weighed on shares of Big Lots (NYSE:BIG) today. The discount retailer saw its profit rise, as same-store sales increased. For the year, it lifted the lower end of its outlook, but the company issued soft guidance for the current quarter. Shares were 2.5 percent lower to $43.90.
Genesco (NYSE:GCO) posted results that missed estimates. The footwear and hats retailer blamed port delays and gross margin pressure.
The firm said its current quarter is off to a good start, but it cut its full-year earnings forecast nonetheless. Shares tumbled more than 2 percent to $66.19.
Apple (NASDAQ:AAPL) has bought a German augmented reality firm called Metaio. The company develops technology that combines real-world imagery and computer generated elements to making moving video, so consumers can do things like view the inside of a car before purchasing. The terms of the deal were not disclosed. Shares of Apple (NASDAQ:AAPL) off today by $1.50 to $130.28.
And Amazon (NASDAQ:AMZN) is planning to expand its line of privately- branded food and household products. This according to “The Wall Street Journal”. This would mirror the private label strategy, other large retailers follow. Shares were a fraction higher, and Amazon (NASDAQ:AMZN), it finished $429.23.
Our market monitor likes mid cap stocks and has some names that are cheap and you should buy right now — so he said. He is Brian Peery, portfolio manager of the Hennessey Cornerstone Mid-Cap 30 Fund.
Mr. Peery, welcome, first of all.
Mid-cap 30 — do you keep only 30 shares in the fund most of the time?
BRIAN PEERY, HENNESSY CORNERSTONE MID-CAP 30 FUND PORTFOLIO MGR:
Yes. What we do is, you know, we try and get a diversification across all the different sectors to make sure that we are well-covered in that respect. But, you know, we want a slightly concentrated portfolio so that the names that work out in the portfolio have a more meaningful impact on the shareholder`s performance.
MATHISEN: Why does a small portfolio work for you as compared to other funds that have hundreds of stocks in them?
PEERY: You know, I think that when we looked at it, we thought that there was some really exceptional names in that mid-cap space and we would do better by keeping a concentrated portfolio. I mean, nobody really wants a portfolio manager`s 585th best pick.
MATHISEN: No, exactly. Very good point.
General thought about the economy and the numbers we got today. Are you worried about the economy or not?
PEERY: No. I think the economy is in pretty decent shape. I think the numbers we saw today from GDP were even better than we expected. We expected it to be worse than it came in. You know, the port closures on the West Coast and the weather on the East Coast, I think we are past all of that and it gets better going into the rest of the year.
MATHISEN: Let`s get on to some of your stock picks beginning with JetBlue. Why do you like it?
PEERY: You know, I really like the airline sector in whole. I think that they`ve done exceptionally well. It`s bit of an oligopoly at this point. I think that JetBlue`s perfectly positioned. They`ve got a great management team in place who`s, you know, building this profitable and defensible networks and they`re really starting to kind of branch out to the upper level consumer by instituting their mint strategy, which has been going exceptionally well.
So, I mean, I think it is a great airline and a great time. They had a pull back in the last week or so. Right now, it looks to me like a great entry point for the stock.
MATHISEN: Let`s talk a little bit about JCPenney. Why do you like it? It has been a troubled stock, but the new management seems to have things moving in a better direction?
PEERY: You know, I think that that`s the key element, Tyler. When you look at the company, they have had some concerns and their strategy obviously didn`t work out for a couple of years there, but I think the new management team in place has turned the ship around and they are getting it going in the right direction. Whether it is teaming up with the likes of Disney (NYSE:DIS) and Sephora to put those stores in their stores and bringing consumers back into JCPenney and really focusing on their core business — which is, you know, providing value to consumers in their fashion lines.
MATHISEN: Let`s go to your final choice which is Pilgrim`s Pride.
People would be worried that that company might be affected by the massive outbreak of bird flu.
Should they be?
PEERY: You know, so far, Pilgrim`s Pride (NYSE:PPC) hasn`t been affected by it thankfully. I think that is really a great catalyst for why you want to own the stock at this point. You know, when you look back at say if you can get a discount in the market for some reason, in this case avian flu, you know, the chickens` price is going to stay high, and I think the feed cost is going to stay relatively low. So, I think that over all, you know, PPC actually looks like a great stock to own for the next 12 to
MATHISEN: All right. Brian, thanks very much. We appreciate it.
PEERY: Thanks, Tyler. Have a great day.
MATHISEN: You too. Great weekend to you.
Brian Peery with the Hennessey Cornerstone Mid-Cap 30 Fund.
And coming up, an airline that`s once again taking flight nearly 25 years after it went out of business. Yes, your eyes do not deceive.
MATHISEN: Here is what to watch next week: data on manufacturing sentiment, an important economic indicator. Also, car sales, a read on consumer spending. And Friday, of course, jobs day. We will have the employment report from May. And that is what is on a very full agenda next week.
Snapchat, the app that lets users send vanishing messages isn`t disappearing any time soon. According to reports, the app is valued at $16 billion. The details come from a filing that indicated the company is in the process of raising $650 million in equity.
Event spaces, co-working offices, they don`t sound like things you typically see at a shopping mall. But they very well may help keep malls relevant amid the rise of online retail.
Courtney Reagan has more from San Francisco.
COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: The idea of the death of the mall gets a lot of attention. But the truth is, as retailers like Sears (NASDAQ:SHLD), RadioShack and Delia`s close stores, many malls are morphing what fills the space. The smart malls are going after experiences online-only retailers like Amazon (NASDAQ:AMZN) can`t deliver — restaurants, salons, fitness and more. Mall operator Westfield wants to lead the way, by launching Bespoke on the fourth floor at the San Francisco Center Mall.
(on camera): The 37,000 square foot space has a little bit of everything. It`s a first ever co-working space in a U.S. mall. Plus, there`s pop-up shop, demo and events space, all available for short-term rental.
(voice-over): It`s a physical home for innovative companies from start-ups to large brands, most of which have a focus on the intersection of retail and technology.
STEVEN LOWY, WESTFIELD CORP. CO-CEO: You can get seats or desks or officers or couches or bean bags and can you get them for days or weeks or months. It`s short-term in nature because it`s innovative in nature. It`s designed for fast growth (ph) and high turnover, for innovation, for adaptation and it is designed for companies to test the relevancy of their products. So, by nature, it`s designed to be quick and fast.
REAGAN: Shoppers can design custom shoes with Shoes of Prey, or custom t-shirts at Bow and Drape. Five designers with fashion (INAUDIBLE) from San Francisco will be here for a month. Even Angry Birds creator Rovio is debuting its new virtual reality game.
UNIDENTIFIED MALE: It will definitely draw me back to the store. I think like, every time I`ll stop by the mall, I`ll come up here and see what new pop up shops are here.
REAGAN: Westfield co-CEO Steve Lowy doesn`t believe every mall is dead, but he also thinks Darwin`s Theory is playing out in retail.
LOWY: And those that come to death and (INAUDIBLE) are dying or will die. Malls like these that are located in unbelievable cities, great locations, have great retailers — those malls are actually growing and growing really well.
COURTNEY: While this mall is one of the heavily trafficked mall in the U.S., a little traffic driving excitement can`t hurt.
For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan in San Francisco.
And finally tonight, something I thought I`d never see. Eastern Airlines is now back. The once muscular brand under new owners now has started charter flights out of Miami. But can the new Eastern stay airborne this time?
Phil LeBeau has more.
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): It looks like vintage Eastern Airlines, but this Boeing (NYSE:BA) 737 is new and the start of a new life for Eastern.
ED WEGEL, EASTERN AIRLINES CEO: You know, we like to say Eastern is in the DNA of Miami. So, it was logical and natural for us to put the airline back here in Miami.
LEBEAU: Eastern flew its new plane over Miami in announcing its return late last year. For now, Eastern is a charter airline, making daily flights into Havana. And eventually other cities in Cuba.
Over the next couple of years, Wegel plans to have a fleet of 20 planes as Eastern branches out into commercial service throughout Florida and along the East Coast.
But re-establishing Eastern won`t be easy, especially with the biggest airlines adding capacity and making it tougher for niche carriers to break into key cities.
Still, Wegel thinks he can attract fliers.
WEGEL: We think a combination of the fact that we`ve got newer airlines, the next generation Boeing (NYSE:BA) 737, plus the name on the side of the airplane that many of the passengers and the tour operators and others who charter our aircraft will recognize, and that gives them a level of comfort.
FRANK BORMAN, THEN-PRESIDENT EASTERN: I`m Frank Borman, the president of the Eastern.
LEBEAU: It`s been more than 30 years since Frank Borman piloted Eastern to new heights when the airline industry first deregulated. Those were heady days in the mid-`70s. But by 1991, Eastern went out ever business due to labor struggles and poor management decisions.
It`s a legacy leaders of the new Eastern vow not to repeat as it takes off in South Florida.
Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.
MATHISEN: And that is NIGHTLY BUSINESS REPORT for tonight. For Sue Herera, I`m Tyler Mathisen. Thanks for watching. Have a great weekend, everybody. We hope to see you right here Monday.
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