SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Setting the stage. Can the Federal Reserve get investors ready for a rate hike without rattling the market?
BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Cutting the fat. The FDA bans the use of trans fats. But is the agency just playing catch up to what major food companies already doing?
HERERA: Paying out of pocket. Insurers want to merge and hospitals are getting bigger. But in the end, what does that mean for the cost of your care?
All that and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, June 16th.
Good evening, everybody. I’m Sue Herera.
GRIFFETH: And I’m Bill Griffeth, in for Tyler Mathisen, once again tonight.
Well, it is here. The June meeting of the Federal Reserve is upon us, monetary policymakers began their two-day meeting today. And while most do not expect the central bank to announce a move on rates tomorrow, many are expecting the Fed to signal very clearly that a historic rate hike will occur and maybe soon.
And Fed Chair Janet Yellen is going to have to choose her words carefully so as not to surprise investors and jar the market at the same time.
Steve Liesman takes a look now at what some of the top money managers, strategists and economists are expecting.
STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: As the Federal Reserve began a two-day meeting, a new survey showed Wall Street firmly believing the Central Bank would hike rate this year, not just tomorrow or next month or the month after.
Ninety-two percent of respondents to the CNBC fed survey see a hike coming in 2015, but not until on average, September. Even when the Fed starts hiking, the 38 respondents, including economists, fund managers and analysts see the Fed increasing short term interest rates only modestly in the next several years.
SCOTT WREN, WELLS FARGO: I think they’re going to start to hint, it’s going to be in September. It’s going to be a very small increase. We’re going to skip a bunch of meetings potentially between hikes and this is a multiyear process.
LIESMAN: That means the Fed funds rate and rates in the broader economy should rise for the next 18 months. The survey suggests the 10-year yield will increase to about 3.25 percent. But stocks are faring relatively well, rising almost 10 percent over the period. The reason, a lot of folks on Wall Street think the market has already priced in Fed rate hikes, so the actual rise in rates once the Fed does it is not expected to be much of a big deal.
DAVID BLANCO: Typically, the market does dip almost every year, and especially around Fed hikes. But corrections usually don’t occur when inflation is low. And economic prospects are still pretty encouraging.
So, look, I do think we’re going to get turbulence. I do think it’s likely to be a dip to buy.
LIESMAN: The challenge for the U.S. economy is the dollar. Higher rates usually cause more flows in to dollar-based assets and strengthen the green back. A stronger dollar can then hurt exports. And many economists worry not so much about the effects of higher interest rates from the Fed, but about the effect of a stronger dollar from those higher interest rates.
For NIGHTLY BUSINESS REPORT, I’m Steve Liesman.
HERERA: Well, stocks rebounded ahead of that Fed meeting, as investors put growing concerns about the Greek debt crisis on the back burner, at least for now. The Dow Jones Industrial Average was about 113 points higher, to close to 17,904. The NASDAQ notched to 25-point gain, and the S&P 500 rose 11 points.
GRIFFETH: In economic news, a sharp drop in housing starts in May after that big surge we saw in April. According to the Commerce Department, builders broke ground last month on almost 1 million privately owned homes. But that was down about 11 percent from the prior month. There were some encouraging signs though, applications for new building permits rose by 11 percent. That was better than estimates.
HERERA: U.S. government debt held by the public is expected to rise to more than 100 percent of the economy by 2040. The Congressional Budget Office says that’s up from 74 percent this year. The CBO says the trend could be harmful to economic growth and that lawmakers should make major changes to tax policies and spending.
GRIFFETH: Also on Capitol Hill, the House of Representatives voted today to extend the deadline on a key trade related vote. The House lawmakers now have until July 30th to reconsider the part of that trade package that supports workers that are hurt by trade. This is the same bill that failed dramatically last week.
HERERA: The Food and Drug Administration today moved to ban trans fat from foods. The FDA calls it an important step forward for public health and it’s part of a broader trend towards eating.
Sara Eisen has more.
SARA EISEN, NIGHTHLY BUSINESS REPORT CORRESPONDENT: The healthy movement is picking up steam. The FDA today ordering food manufacturers to phase out their use of trans fats over the next three years. You find them in foods like margarine and bake and fried items, and they have been linked to heart disease.
But the FDA is playing catch up to companies in the food industry like Panera, which banned trans fats back in 2006.
RONALD SHAICH, PANERA BREAD: We’ve been on this journey for two decades. Eleven years ago, we were the first national restaurant operation to serve chicken raised without antibiotics. Today, you have people like McDonald’s following us.
I mean, with seven or six years ago, we were the first people to pull non-naturally presenting itself trans fats from the menu. Today, you have the U.S. government literally today announcing all restaurant chains and all the food must do it. We did the same thing with caloric information five years ago.
EISEN: Panera is pushing the healthy food angle even harder, announcing a new ad campaign today, and opening a pop-up store in Lower Manhattan to highlight some of its menu changes, emphasizing fresh, natural ingredients, with no artificial flavors.
The head chef Dan Kish is in charge of an ambitious change that affects the company’s 2,000 stores nationwide.
DAN KISH, HEAD CHEF: The tomato mozzarella flat bread, you know, a year ago it was a big heavy panini. And we said, well, you know, it’s meatless. It’s sort of right for the time. But how do we lighten it up and make it a little more contemporary?
So, flat breads came on this time last year, as a way to make sandwiches a little lighter and healthier.
EISEN: Chipotle has recently gone a step further, removing all genetically modified organisms or GMOs from its restaurants. And companies like McDonald’s, Costco (NASDAQ:COST) and Taco Bell have recently pledged to cut the use of antibiotics in their meats and chickens.
KISH: We really do believe in raising serving and eating good food that’s both good and good for you — food as it should be.
EISEN: The risk here is changing ingredient and processes can be complicated and costly for big companies with deeply supply chains. And if those changes lead to higher consumer prices, it could hurt sales in an effort to drive growth. For now, consumers say they want healthier choices and companies like Panera are hoping that big marketing and advertising campaigns can help attract consumers, health conscious, young millennials.
For now, we’ll have to see whether those consumers are willing to put their money where their mouths are.
For NIGHTLY BUSINESS REPORT, I’m Sara Eisen.
GRIFFETH: Well, a possible wave of consolidation in the insurance industry may impact consumers’ pockets. Big players like United Health and Anthem are reportedly looking to merge with smaller rivals. But what will less competition mean for consumers?
Let’s find out from Leemore Dafny. She’s director of health enterprise management and professor strategy at Kellogg (NYSE:K) School of Management.
Good to see you. Thanks for joining us tonight.
LEEMORE DAFNY, KELLOGG SCHOOL OF MANAGEMENT: It’s a pleasure.
GRIFFETH: You know, those who are in the managed care business, the stocks have been rising sharply on talk of possible mergers in that sector. So, Wall Street is excited. How do you think antitrust regulators feel about this?
DAFNY: I think the antitrust regulators are going to look very closely at these transactions. The best available economic evidence out there suggests that when insurers consolidate, premiums go up and the antitrust enforces have to look closely at what happens to consumers.
HERERA: And it’s not only the costs go up to consumers but providers technically or usually get paid a little bit less. They don’t as much clout.
DAFNY: There is some evidence that providers do get paid less and interestingly, no evidence that to the extent that there are price decreases to providers, that these get passed on to consumers.
So, I would expect regulators to ask some really hard-hitting questions, particularly in those geographic markets and product segments where the combining firms would have significant market share.
GRIFFETH: So, I’m confused. If they are merging to achieve scales so that they can bring costs down, if it means, though — you’re saying premiums are going to go up, and they get paid less. Then, why merge in the first place?
DAFNY: The providers might get paid less. That doesn’t mean that the insurers would pocket less. The real question is, if these insurers can reduce cost through scale and that’s a big if, why if they have less competition in the marketplace would they pass on any of those reductions in costs? What is the market imperative to price competitively when you swallowed some of your rivals?
HERERA: What about the quality of care? Is there any indication that the quality of care changes when you have fewer insurers really looking at that landscape?
DAFNY: It’s a fantastic question, one that we don’t know the answer to. We just know that when there is less competition in a marketplace, there tend to be premium increases. And we would naturally expect that there would be potentially a reduction in quality of plan as well, simply because you don’t have to compete as hard to gain business.
So, the real question is, with these transactions, are any of them motivated by the potential to really bring down cost and improve quality and what mechanisms are in place to make sure that some of those benefits accrue to consumers?
GRIFFETH: Well, it is clear that they are talking. We’ll find out if these mergers happen and what regulators about it. Leemore Dafny with Kelloggs —
GRIFFETH: Kirk Kerkorian who built some of Las Vegas’ biggest hotels has died. The billionaire investor was 98 years old. Mr. Kerkorian was an eighth grade dropout. He eventually became the largest shareholder in MGM Resorts (NYSE:MGM) International which he founded in the 1990s. Three times during his career, he built what were the largest hotel casinos at the time. He also famously tried to take over but failed to take over Chrysler.
HERERA: There is some big money in video games, and it’s all on display at E3, that industry’s biggest trade show. This year, the big topic of discussion isn’t just the new games themselves, but also the technology behind them.
Julia Boorstin has more from Los Angeles.
JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Big game names are in focus here at E3, like highly anticipated “Star Wars” battlefront, expected to sell well across the platforms. But both Microsoft (NASDAQ:MSFT), Xbox and Sony’s PlayStation 4 are highlighting exclusive deals to try to lure gamers.
Microsoft’s Xbox has Halo 5, Guardians and Sony’s PS4 promoted exclusive content for blockbuster franchises, including “Call of Duty: Black Ops 3”.
Microsoft (NASDAQ:MSFT) announcing it will make older Xbox 360 games work on its new Xbox One by the holidays, to help it catch up with Sony’s PlayStation 4, which has sold about twice as many consoles.
YUSUF MEHDI, MICROSOFT: I think it’s going to be a big deal. I think we were right on the edge of people who are waiting, and this will be the thing that will flip over.
BOORSTIN: Sony (NYSE:SNE) talking up PS4 as a media hub, announcing its PlayStation view streaming TV service will soon allow customers to buy some individual channels, rather than just bundled subscriptions.
SHAWN LAYDEN, SONY: We understand that when people aren’t playing games, they maybe doing things like watching TV. So we want to have that opportunity for them across the PlayStation platform.
BOORSTIN: Gaming’s next frontier, virtual reality, expected to be a multibillion dollar business. We still don’t have a price tags or launch dates for the headsets coming up from Oculus, owned by Facebook (NASDAQ:FB), or Sony’s Morpheus, but those platforms are drawing big crowds here at E3.
Sony (NYSE:SNE) showing off its Morpheus virtual reality headset with a multiplayer mode, also announcing a half dozen titles that work with the headset.
LAYDEN: Morpheus brings to video gaming kind of what the smartphone brought to the cell phone business. It’s a complete step change. It’s something entirely new.
BOORSTIN: And Microsoft (NASDAQ:MSFT) showcasing its HoloLens augmented reality goggles, projecting an interactive “Minecraft” game onto the world around you. Xbox also partnering with Facebook’s Oculus Rift, here showcasing new hand controls.
BRENDAN IRIBE, OCULUS VR: We’ve really focused on trying to make this an extension of your actual hand, your arms, and make it really feel like this is your hand inside of the arm, and hands presence is something that really, really believe in.
BOORSTIN: But some game makers really caution not to expect a virtual reality revolution overnight.
Electronic Arts (NASDAQ:ERTS) CEO says it will be years not months before VR impacts EA’s bottom line.
For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin, in Los Angeles.
GRIFFETH: Box and Microsoft (NASDAQ:MSFT) are teaming up. And that’s where we begin tonight’s “Market Focus”.
The cloud storage provider is integrating with Microsoft (NASDAQ:MSFT) Office, enabling users to browse and open and edit Office files directly on its service. Box says the deal will drive business productivity. Shares rose today, up 36 cents. While Box was up 4 1/2 percent today to $17.90.
Meanwhile, shares of Oshkosh took a big hit in today’s session. The specially truck maker cut its profit forecast for the full year, saying that sales and profit were hurt by bad weather in the third quarter, and because of a delay in launching a product. Oshkosh tumbled by 8 percent as a result to $46.26.
And Coty is close to a deal to buy three businesses from Procter and Gamble for as much as $12 billion. That according to reports. The deal would make the cosmetic company the world leader in perfume and hair care. Shares of Coty surged by 19 percent to $31.08. Proctor & Gamble was up by one cent to $79.10.
HERERA: But wait, there’s more deal speculation. Blackstone and Carlyle Group are making a joint bid for MCR. The leveraged buyout of the computer company would reportedly be the year’s biggest at more than $10 billion. Shares rose almost 11 percent to $34.73.
And as we told you last night, Gap (NYSE:GPS) is closing 175 stores and eliminating 250 positions.
Today, the company’s CEO explained the thinking behind the move.
(BEGIN VIDEO CLIP)
ARTHUR PECK, GAP: By these decisions today, I think we streamline the organization and we frankly eliminated some of the complexity and the fleet that wasn’t giving us very far to get back to a fleet that we’re proud of and we can do business in front of our customers.
(END VIDEO CLIP)
HERERA: The stock closed at $38.75, a gain of 55 cents.
Adobe reporting an increase in profit and revenue as more customers subscribed to its Cloud services. But the maker of Photoshop issued an earnings outlook for the second quarter that was below estimates. So, shares drop off initially after the close. Before the bell though, shares were up almost 1 percent, or a little bit more than 1 percent to $79.94.
GRIFFETH: Federal Express (NYSE:EXPR) is scheduled to release its fiscal third quarter results tomorrow. Declining fuel prices are expected to help its bottom line and so are some recent changes to its pricing strategy.
And it’s not just FedEx (NYSE:FDX) that’s focusing on shipping rates, but also rival UPS.
Morgan Brennan has more.
MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: This holiday season, UPS will do away with discounted offer to customers on some oversized packages. That according to “The Wall Street Journal”. Changes in shipping rates that could mean higher prices for consumers.
UPS is not confirming that plan, but the company does say it’s looking to meet customers’ needs while, quote, “also ensuring UPS is appropriately compensated for the valuable services we provide.”
It all shed light on a strategy shift underway at the delivery giant. One much more focused on pricing.
CHRISTIAN WETHERBEE, CITI: It seems to be it’s initiating more of a pricing strategy where it’s going after some of its retail customers and looking to price up some business, particularly e-commerce business, which has been in a bit of a headwind to it.
BRENNAN: Since the start of the year, both UPS and FedEx (NYSE:FDX) have raised rates and introduced pricing formulas for ground packages, based on a combination of size and weight.
UPS has also said it’s considering shipping surcharges for the upcoming holiday season. Coupled that with a growing focus on multichannel retailing or delivering packages to local stores for consumers to pick up, a process that’s three times less costly than home delivery and analysts say partial carriers, particularly UPS are looking to maximize their shipping capacity and boost margins, even if it means turning down some business.
And that may sound obvious, but it represents a big challenge, given how tight capacity has been and how narrow returns typically are on e-commerce shipments. The new strategy is already beginning play out with UPS, but also with FedEx (NYSE:FDX), which experts say has been taking the lead on higher pricing.
WETHERBEE: Our expectations are that FedEx (NYSE:FDX) will continue to push on pricing, throughout the rest of this calendar year and into the holiday season as well. With UPS now supporting those pricing initiatives, we actually think there’s a lot more momentum for both of the small package carriers and ultimately retailers are going to bear more of the cost of shipping as we move towards the holidays.
BRENNAN: UPS also announced the acquisition of Parcel Pro, a logistics company specializing in shipments of valuable jewelry and collectibles, another move to help manage growing ecommerce demand.
But as parcel carriers attempt to realize higher returns, other companies are upping the competition. For example, Amazon (NASDAQ:AMZN) which has reportedly considering paying ordinary people rather than the carriers to drop off packages on route to other destinations.
For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan.
HERERA: Wall Street bank Goldman Sachs (NYSE:GS) is reportedly making a push on to Main Street. As first reported by “The New York Times (NYSE:NYT)”, Goldman Sachs (NYSE:GS) will soon offer loans online to both consumers and to small businesses. But its plans are still in the early stages. The move is part of a broader shift towards consumer and business lending.
GRIFFETH: Well, there’s also a shift happening in the retirement industry. Get this — withdrawals from 401k plans are now exceeding new contributions. According to BrightScope, investors pulled $11 billion from tax deferred savings plans in 2013 and the trend out of 401(k)s is expected to accelerate as more baby boomers retire.
HERERA: The cost of higher education is only getting higher. Tuition and fees at a four-year public college topped $9,100 on average for the 2014-2015 academic year, nearly triple what the cost was 25 years ago. Over the same period of time, tuition and fees at a four-year private university, they’ve doubled to almost $31,000.
But how did college so expensive?
Sharon Epperson knows. She joins us.
And, Sharon, the numbers really are pretty alarming. Is there — is the cost of higher education basically outpacing other goods and services? It seems to be when you look at it.
SHARON EPPERSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: It certainly is. If you look at the cost — if you look at the CPI (NYSE:CPY) over the last, say, 20 years, it’s increased about 60 percent. You look at the cost of a four-year public education, tuition and fees alone has more than doubled, up 110 percent.
So, we’re right when we think that cost of college is getting more expensive.
HERERA: That’s outrageous.
EPPERSON: It definitely is getting much higher and outpacing inflation.
GRIFFETH: What’s your version of why? Why this enormous costs increase in college the last several years?
EPPERSON: Well, there are two things that researchers look at. First, they look at the cost of the education that they’re delivering. And they’re saying, well, we’re offering more amenities and special services from high-speed internet access all over the campus to rock climbing walls in some special locations, maybe driving up the cost. That’s certainly happening, but teaching salaries are basically flat.
So, overall, the cost of delivering education has been pretty stable over the last several years. There’s another factor and that, of course, is the price that you pay. That has a lot to do with subsidies and both private and public subsidies. If you look at what’s happening in terms of private colleges and the median endowment that they’re receiving, it’s about $113 million. Harvard, $36 billion.
So, this is huge wealth gap within those private colleges, and that is causing many of those colleges to have to say, our funds have to come from tuition.
HERERA: Tuition, right. OK. So, you’ve kind of highlighted why things are going up. But, you know, is there a way to cap some of those costs? Some of these universities and colleges are also very competitive. They want the students and if they want the students, they have to keep upping those amenities that you talked about.
EPPERSON: Exactly. Well, some of the — the public colleges are saying, well, look, we’re also seeing spending cuts. So, that’s impacting and that’s throwing some of the costs on the students.
EPPERSON: I think what’s happening is that they’re just having to borrow more, the students and their families, and what is having to happen is they’re going to have be educated on how much they can really afford to borrow and whether it’s worth to pay those high prices, whether the return on investment is really going to be worth it.
GRIFETH: Yes, I’m glad I don’t have to worry about it.
EPPERSON: Don’t say that.
HERERA: You’re done.
EPPERSON: Those of us who have to worry about it.
HERERA: You’re done, aren’t you glad?
Sharon and I, we’re going to form a support group.
HERERA: Thanks, Sharon.
GRIFFETH: Thanks, Sharon, very much.
Well, coming up, imagine going where no man has gone before — even if you’re just going to work. We’ll explain, head to China, coming up.
HERERA: And here’s what to watch tomorrow. In addition to the Federal Reserve statement, we’ll also get a read on the housing market with the report on mortgage applications. Oracle (NASDAQ:ORCL) will announce its earnings after the bell. And that is what to watch for Wednesday.
GRIFFETH: Meantime, Honda has added more than a million cars to that massive recall involving those potentially faulty Takata air bags. Today’s announcement includes Accord and Civic sedans, and it comes as regulators have expanded their own recall. Several car makers are fixing these air bags in nearly 43 million vehicles and as the auto part can violently explode.
HERERA: A Chinese CEO is exploring new frontiers. He is taking his love of “Star Trek” and millions of dollars to build his company’s headquarters in the shape of the legendary space ship.
Eunice Yoon has more now from Fuzhou, China.
EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Starship Enterprise, its mission: to explore the final frontier — or in this case, the city of Fuzhou in eastern China. That’s no trekkie fantasy there. It’s actually the corporate headquarters for Internet pioneer DJ Liu.
DEJIAN LIU, NETDRAGON: This is actually my office.
YOON: From his office, Liu captains his online gaming company, NetDragon.
So, why did you want to design the building to look like the Starship Enterprise?
LIU: I love the idea of boldly go where nowhere has gone before.
YOON: The entrepreneur got hooked on science fiction while studying at the University of Kansas.
LIU: Star Trek is a very important teacher to me. I love the idea that space is sort of final frontier. You know, people want to go there and (INAUDIBLE) and it’s sort of becoming my way of understanding life.
YOON: The $100 million headquarters can sometimes feel like the inside of a starship, where sliding doors open to the United Federation of Planet.
So, what’s this?
LIU: Oh, it’s actually a bathroom.
YOON: Liu has invited other famous space invaders to take up residence as well.
Do you have a favorite character for the Star Strek?
LIU: I have to say Captain Picard.
YOON: Do you see yourself as Captain Picard?
LIU: I try to see myself as someone trying to figure out what’s right in the world and stick to it. In that sense, I hope I can be someone like Captain Picard.
YOON: Liu has been leading NetDragon ever since he founded it in 1999. He and his staff focused on online games, releasing hits like this one, generating revenues in the hundreds of millions of dollars for the Hong Kong listed company. Now, Liu wants to branch out to online education and robots and push further overseas.
Liu’s creation is more than an expensive tribute to a TV show. It’s meant to inspire his staff.
LIU: The most important thing is that we have to think a little bit ahead of us, try to accomplish something seemingly impossible.
YOON: A dream come true that could take his company into warp speed.
Eunice Yoon, CNBC, beaming up from Fuzhou, China.
HERERA: And to read more about the Star Trek-like headquarters, head to our Web site, NBR.com.
GRIFFETH: Finally tonight, the 25 richest self-made billionaires are out, according to a survey by Wealth X. Their combined wealth is larger than Norway’s GDP, believe it or not.
Third on the list, Amancio Ortega. He’s the cofounder of the clothing store Zara. His estimated net worth, $65 billion.
Second as you see, Berkshire Hathaway’s Warren Buffett, who’s worth $70 billion.
And topping the list, Bill Gates. His net worth now, something around $86 billion. Not bad for a Harvard dropout.
HERERA: That’s NIGHTLY BUSINESS REPORT for tonight. I’m Sue Herera.
GRIFFETH: I’m Bill Griffeth. Have a great evening. We’ll see you 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) 2015 CNBC, Inc.