TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Yearning for earnings. Investors get more of the profit scorecards they crave. Ford revs, Twitter glitters, Pfizer (NYSE:PFE) is a riser. But Yelp? Ouch.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: The great rate debate. Why fewer top street Wall Street strategists think the Federal Reserve will hike rates in September.
MATHISEN: Forty-eight year low. Why fewer and fewer Americans are buying their own homes.
All that and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, July 28th.
HERERA: Good evening, everyone.
A rebound on Wall Street, stocks halt their slide since January as the focused shifts to earnings in the start of a two-day Federal Reserve policy meeting and away from China, which saw a relatively mild decline. By the close, the Dow Jones Industrial Average rose 189 points to 17,630, the NASDAQ jumped 49, and the S&P 500 gained 25.
ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) were the two biggest gainers on the Dow, thanks to a 1 percent rise in the price of oil today to 47.98.
MATHISEN: And two earnings report, Sue, that helped lift the market came from Dow components Pfizer (NYSE:PFE) and Merck (NYSE:MRK), which rows after topping analyst expectations. Pfizer’s quarter was helped by strong demand for its pneumonia vaccine and its new breast cancer drug. And the company raised its full year earnings forecast. Merck (NYSE:MRK) also raised its full year profit guidance, despite getting hit by unfavorable exchange rate and weaker sales in its consumer businesses. Both stocks finished the day higher, as you see there.
HERERA: Ford reported a blowout quarter. The automaker is posting its best earnings in 15 years. North America is strong, but as Phil LeBeau reports, there is a growing concern about the world’s largest auto market, China.
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: It may sound cliche, but it’s true. Business is booming for Ford in North America, where the company just had its most profitable quarter ever, bringing in $2.6 billion, in part because of strong demand for trucks and SUVs, which allowed Ford to push higher prices.
Take the new F150 series pickup. Compared to previous model, customers are paying almost $3,800 more for the current truck. The combination of strong demand and cost being kept in check, drew Ford to post double digit operating margins, something we don’t see very often in the auto industry. With U.S. auto sales nearing a record high, many are worried the industry has peaked. But Ford’s CEO isn’t worried about Americans hitting the brakes, when it comes to buying new cars and trucks.
MARK FIELDS, CEO FORD MOTOR: There is a lot of discussion around about the market being at a peak. You know, I really term it at as a plateau, because when you look at what’s driving the market, it’s really around replacement demand.
LEBEAU: Ford is not as optimistic about China, the world’s largest auto market.
In fact, the company has cut its outlook for the industry in that country, saying full-year vehicle sales could be slightly negative as China’s economy slows down.
Ford is not cutting production or sales targets for that country, primarily because it’s strongest in smaller cities in western China where demand is still robust for cars and SUVs.
Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.
MATHISEN: Meantime, strong sales in China helped make Volkswagen the world’s biggest selling automaker. The German car company sold more cars in the first six months of the year than Toyota (NYSE:TM), for the first time ever. Volkswagen’s success has been helped by soaring demand over in China, which now accounts for a third of VW’s total sales.
HERERA: China’s stock market closed lower again today, but not as sharply as yesterday. The Shanghai composite fell 1.7 percent, now off nearly 30 percent since its mid-June peak. One respected Wall Street watcher, Tom Demark, who called the bottom of the Shanghai composite in 2013 says the move in China mirrors the U.S. crash in 1929 and he expects the index to decline even further.
MATHISEN: And speaking of China, although Chinese based stocks that trade in the U.S. aren’t widely owned, there are a lot of them, 144 to be precise. And the decline in China has hit these stocks hard, erasing some $40 billion worth of paper wealth since Shanghai’s index peak in June. Here are the companies that have lost the most market value, according to “USA Today”. Alibaba, more than $7.5 billion down, JD.com $4.5 billion lower, VIP Shop lost nearly $3 billion, and Youku almost $2 billion.
HERERA: So, as the Chinese stock market pulls back and the economy slows, Chinese consumers are spending a lot less. And as Courtney Reagan reports, many luxury retailers around the globe are growing concerned and perhaps with good reason.
COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Chinese consumers are responsible for nearly a third of all luxury sales around the world. And recent news from China has luxury brands concerned. Chinese economic growth has been slowing and its volatile stock market is causing confident shock. Plus, experts say Chinese consumers are starting to divert spending to experiences, second homes, and art work. Add in the Chinese government crackdown on corruption which has ended lavish gift-giving and luxury companies have cause for concern.
ED YRUMA, KEYBANC: The Chinese consumer has been a huge driver of luxury really over the past 10 years and, you know, I think it’s come in different waves. I think we’re now in this kind of second wave, and that’s that very high end Chinese consumer feeling less certain about their position and I think that’s why they’re traveling a little bit less and certainly spending a lot less.
REAGAN: Kering, parents of brands like Gucci, Balenciaga and Alexander McQueen, calls 2015 a year of reflection in China after years of rapid expansion. Gucci sales grew just 3 percent in Asia Pacific compared to 20 percent in Western Europe.
Kering’s CFO said trends are not encouraging in Hong Kong and Macau, warning investors not to expect any improvement soon.
De Beers’ earnings for the first half of the year have fallen 25 percent and the diamond company warns the second half of the year will remain challenging due to slowing diamond jewelry demand in China.
Prada’s leather goods sales fell more than 11 percent in Asia Pacific, in the most recent quarter, leading a number of analysts to lower earnings expectation.
YRUMA: Companies have indicated that they believe that there has been a shift away from spending to more experience goods in China. I also think certainly with the current political environment there, you know, the ostentatious display of wealth that I think was so endemic for a number of years in China is not really appropriate in this environment.
REAGAN: But there are some indication Chinese tourists are buying luxury goods outside of China, in places like Europe where the weaker euro makes high end goods less expensive. LDMH, the world’s largest luxury company, says while Louis Vuitton sales were negative in China, Macau and Hong Kong, sales shifted to other geographies, like Japan and Europe. That’s a burden on luxury brands, though, that have many stores in China with high fixed costs and lower sales.
Another concern is if Chinese consumer preferences have truly changed and they’re buying less luxury merchandise in China, it could be a warning sign of trends to come for Chinese consumers buying less everywhere.
For NIGHTLY BUSINESS REPORT, I’m Courtney Reagan.
HERERA: China has roughly 90 million retail investors and they’re bearing the brunt of that market sale off. Tomorrow, Eunice Yoon bring us the story of a Chinese farmer who invested his savings in stock and unfortunately lost it all.
MATHISEN: With China as the backdrop, the Federal Reserve began its two day policy meeting today, as Steve Liesman reports, many top strategists and economists are starting to change their timing of when the Central Bank may start hiking rates.
STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: As the Federal Reserve begins its two-day July meeting, Wall Street still looks for a rate hike in September, but its conviction is slipping. The latest CNBC Fed survey finds just over half of 35 respondents forecasting the first rate hike in nine years will come in September. But that’s down from over 60 percent in the prior survey.
The growing concerns: weak overseas growth. A U.S. job market where many still can’t find as much work as they’d like and continued low inflation in the U.S.
ALFRED BROADDUS: The key thing is that many people on the FOMC, as you well know, need to be pretty confident that the inflation rate is going to begin at some point in the not too distant future, to move back up towards the 2 percent target. So, if the wage data in the labor market reports were weak, I think that could be pushing liftoff back.
LIESMAN: To be sure, 82 percent expected a hike in 2015, but that’s down from 92 percent in the prior survey. If not in September, the second choice for a rate hike is December. And respondents still are optimistic about growth, just not as optimistic as they were. They lowered the 2016 forecast to 2.7 percent. That’s the fourth straight decline in the survey. For 2015, they edged it up just a bit to 2.4 percent.
Behind the more pessimistic outlook is concern about global economic weakness. It tops the survey for the fifth straight time as the biggest threat to the U.S. recovery, suggesting to some the Feds should delay rate hikes.
SRI KUMAR: You have a serious crisis both in China and continuing crisis in Europe and Greece, and this is no time to do that because if they did, the dollar is going to go through the roof. You’re going to see that cross parity with the euro in that case, and U.S. exports simply cannot take it.
LIESMAN: The probability of a recession in the next year rose slightly, but it’s still low by historical standards. Stock market bulls are still winning out on Wall Street, but they tampered their optimism. They now look for 3 percent gains in the S&P this year, and 9 percent in 2016, again, both down from the June survey. So, last call on zero interest rates from the Fed is still coming, but Wall Street thinks closing time could be a little later.
For NIGHTLY BUSINESS REPORT, I’m Steve Liesman in Washington.
HERERA: American investors keep roughly a quarter of all their financial assets and mutual funds, and ETFs, $18 trillion in all. And those shareholdings are subject to all of the cross currents in play in the market today, such as China, the potential for rising rates, worries about bond defaults, and a lot more, too.
Here to assess the risks that fund investors face is Brian Reid, chief economist at the mutual fund industry’s main trade group, the Investment Company Institute.
Good to see you, Brian. Welcome.
BRIAN REID, INVESTMENT COMPANY INSTITUTE: Thanks for having me on.
HERERA: So, how exposed in your opinion do you see mutual fund and ETF holders being to China?
REID: Very limited exposure directly. Of that 18 trillion that you mentioned that are in mutual funds and ETFs, only about $150 billion is sitting in Chinese stocks. So, that’s less than 1 percent. There’s a little bit more concentration obviously an emerging market fund, or a fund that specializing in the Asia region, but still, that exposure is quite limited for the typical investor.
MATHISEN: And where are those stocks held? Are they in Hong Kong? Which is the more stable market, or the stocks mostly in Shanghai — the ones that U.S. funds owned?
REID: That’s right. The ones that the U.S. funds owned are largely in Hong Kong and some of the EDRs that are here on the U.S. exchanges. Because of that connection between Shanghai and Hong Kong has been relatively new, there has not been a lot of investment directly in that Shanghai market.
HERERA: What about investors who may hold a mainstream U.S. mutual fund, but that mutual fund contains Apple (NASDAQ:AAPL), or Ford, or Boeing (NYSE:BA), or GM or Caterpillar (NYSE:CAT)? All of whom have large business interests in China. And some of them have been hit by the Chinese crisis? Does that not give them exposure indirectly to the crisis in China?
REID: Absolutely. There is this indirect exposure. Those countries — companies though are largely driven by exports. And so, again, while there is some internal Chinese demand for those products, a lot of it is exporting back to Europe and the United States. And so, that is where a lot of the demand for that product is coming from.
MATHISEN: Let’s talk about the possibly of rising rates, however those small those rate rises maybe, it will be the first time in a long, long, long time that American bond fund investors have had to experience what happens when interest rates go up. What does happen to their funds price?
REID: Well, the average bond fund has a duration of about 4 to 4.5. And what does that mean? Well, that means when the bond interest rates move up by one percentage point, you can expect your bond fund to fall by about 4 percent to 4 1/2 percent.
MATHISEN: In price?
REID: In price.
MATHISEN: In value.
REID: Now, at the same time, you continue to get interest income from that. So, that total return is actually going to be somewhat higher than that negative 4 percent, even when bond prices fall, because of that interest income coming to you.
HERERA: One of the crisis that has been a little bit on the back burner is Puerto Rico, and the bond crisis that’s going on there. How concerned are you about that and how concerned should the average investor be about it?
REID: You know, when you look at the bond funds holding Puerto Rico, there is about 50 percent of the municipal bond funds holding some of Puerto Rico bonds. The average exposure in the municipal bond fund is about 2 percent, which is about the share of Puerto Rican bonds in the overall muni market.
Now, there are some that hold more than that because of the way they specialize, but I think it’s important to keep in mind is that the price effects are already built in to the price of that mutual fund. If you get in now, you’re locking in those losses.
HERERA: All right. Brian, nice to have you here. Thanks for joining us.
REID: Thanks for having me in.
HERERA: Appreciate it. Brian Reid with the Investment Company Institute.
MATHISEN: And still ahead, a solid quarter for UPS, but the company is issuing a warning about the U.S. economy.
MATHISEN: A big surprise from Twitter sent shares initially higher after the closing bell today. The social media company easily topped profit expectations earning 7 cents a share. That was 3 cents better than estimates. Revenue were around $500 million, also better than expected, and a huge increase from last year as you see there, 60 percent. Shares rose in initial after hours trading before falling back.
So, is the company working past its recent missteps?
Julia Boorstin has the one key takeaway from Twitter’s report.
JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Twitter’s push to grow ad revenue seems to be paying off. It’s revenue beat expectations, thanks to 53 percent growth in ad engagements from a year ago, while the cost for ad engagement grew 6 percent. Twitter is growing those ad results despite slow user growth. The company just added 2 million more users of its core service, ending the quarter with 304 million monthly active users. It’s fewer than estimates.
The company did note, though, that including SMS followers, those are people who access the service only via text message, users usually in emerging markets, it ended the quarter with 316 million users.
Back over to you.
HERERA: Thank you, Julia.
UPS turned in a strong quarter. Earnings jumped and guidance for the rest of the year was revised higher. Its international operations grew as well, and that’s helped send shares higher in trading today, which helped lift the entire transport sector.
But as Morgan Brennan reports, its biggest market could be cause for concern.
MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Today, delivery giant UPS delivered an earnings feat. Revenue came in weaker than expected, thanks to currency exchange and lower fuel surcharges to customers. But the company did reiterate its full year outlook, saying it expects to come in at the higher end of its earnings guidance, on strong international growth in Europe.
But UPS is also largely viewed as a barometer of economic growth. And CEO David Abney said the company has seen a slight slow down in its biggest market.
DAVID ABNEY, UPS: We’re seeing some mixed signals in the U.S. economy. I think part of it is the U.S. dollar, the strength, part of it could be worried about what the Fed may or may not be doing in the next coming few months.
But there is a little bit of a slowing. We have even seen the pace of B to C while it’s still grow pretty rapidly, not growing quite at a pace that it was.
BRENNAN: B to C meaning business to commerce shipping, or e-commerce. On earnings call, Abney and his team saying e-commerce deliveries grew at a slower pace last quarter. But higher prices and volumes did push profitability in the international segment to a record high. Analysts say that and a lower fuel bill boosted the bottom line.
DONALD BROUGHTON, AVONDALE: One of the other things benefitting the profitability here was, of course, the lower cost of fuel. We saw their yields come down because fuel surcharges came off with the cost of fuel for them dropped every bit as much and maybe even more and that helped earnings as well.
BRENNAN: Still, despite the solid results, analysts are waiting to see how UPS performs during peak holiday season after two disappointing fourth quarters in a row.
The company is taking a variety of steps to prepare, ruling out peak prices initiatives with some retail costumers, deploying hundreds of access points, where consumers can pick up their packages and continuing to upgrade and automate the shipping network.
For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan.
MATHISEN: A disappointing outlook weighs on shares of Dow component DuPont and that is where we begin tonight’s “Market Focus”.
The firm trimmed its earnings outlook for the year on weakness and its agriculture business because of the stronger dollar. DuPont also slashed its dividend from 49 cents a share to 38 cents a share. The company does plan however to buy back $4 billion in stock over the next 18 months. Still, shares slipped to 1.5 percent to $55.90.
JetBlue bucked the industry trend with its earnings report. Quarterly profits matched estimates and the carrier, unlike other airlines, doesn’t expect passenger unit revenue to drop in July. The company says demand is strong. Shares rose 2 percent to $22.82.
BP still feeling the impact of the huge Gulf of Mexico oil spill. The firm swung to a $6 billion loss and as low oil prices and a massive charge for settling the spill slammed the company’s profit. The oil giant also announced a cut to its full-year capital spending plan. Despite all that, shares were about 3.5 percent higher as energy shares rose today. Those close at $37.29.
HERERA: Supervalu, the supermarket operator, is considering spinning off its Save-A-Lot chain into a separately publicly traded firm. This comes as the company is facing increased competition. The news came along with better than expected growth in profits and revenue. The stock was 10 percent higher to $8.14.
DR. Horton’s quarterly profit nearly doubled as they saw orders rise more than 20 percent. Revenue was also up double digits. Shares rose 3 percent to $27.59.
And Nantkwest started today in the biggest biotech initial public offering in recent memory. The firm which makes cancer immuno therapies has a market cap of more than $2.5 billion. That’s according to Renaissance Capital. It’s more than 8 million public shares were priced at $25 a piece. The stock closed at 34.64, an increase of 38 percent.
MATHISEN: Home prices continues to rise in May, but the increase fell short of analysts’ estimates. The S&P/Case Shiller home price index rose nearly 5 percent compared with a year ago, but the report went on to say that the rate of home price increases is more likely to slow now than to accelerate.
HERERA: In the meantime, Ty, the share of Americans who own their homes fell to a 48 year low in the second quarter. The latest census data extends a multiyear decline, and as Diana Olick reports, it’s a trend that could continue.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Not since 1967 when neighbors looked like this and backyard barbecues looked like this did such a small share of Americans own their own home. The U.S. home ownership rate fell to just 63.4 percent in the second quarter of this year, down from a peak of 69 percent in 2004. That was at the height of the housing boom when pretty much anyone with a pulse could get a mortgage. The reverse is true today.
Home ownership is falling due to home prices and tight lending. But household formation is actually rising. That’s when say, young adults move out of their parent’s homes or a group of roommates separating, and get their own places. That growth information is thanks to improving job. But the new households are all rental households.
And that’s what’s behind the surge in the multifamily market. Witness apartment REIT AvalonBay reporting better than expected Q2 numbers yesterday. CEO Tim Naughton said both Q2 and year-to-date results exceeded his expectations and he expects accelerating apartment demand to support stronger performance across the business.
Apartment demand is soaring as higher home prices sideline so many potential first time home buyers until one of those eases up, home ownership will continue to suffer.
For NIGHTLY BUSINESS REPORT, I’m Diana Olick in Washington.
HERERA: And coming up, the other city where start ups go to get their ideas off of the ground. It’s not where you think.
HERERA: Health care spending it on the rise. A new report shows that spending that will increase by almost 6 percent annually on average from 2014 to 2024. Some of the reasons include expanded coverage under the Affordable Care Act, stronger economic growth, expensive medications and an ageing population.
MATHISEN: Well, small businesses have been considered the engine of job creation and that’s why mayors across the country are trying to lure start-ups to their cities. Once a month, we’ll profile a region that’s doing unique things to foster entrepreneurship.
And tonight, Kate Rogers (NYSE:ROG) takes us down to Tobacco Road, Durham, North Carolina.
ADAM KLEIN, AMERICAN UNDERGROUND: We like to describe it as a place that has a Silicon Valley-like vibe but with really good barbecue.
KATE ROGERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: For entrepreneurs looking for an alternative to San Francisco or New York, Durham, North Carolina is billing itself as the new start up capital of the south. A former tobacco warehouse turned startup campus is now home to 240 early stage companies in an incubator called the American Underground.
But perhaps what’s more impressive is that after these companies get off the ground, they’re not fleeing for the coast, they’re staying put.
KLEIN: Many of those companies find the area to be relatively sticky. So, it’s an incredible asset base in Durham, and the trial with all the great universities that are here, venture capital firms and things like that. So, many of these startups when they come find that they really like it, there is a great quality of life and they end up staying.
ROGERS: Tatiana Birgisson created her energy drink brand Mati Energy while studying at Duke University. She grew out of Duke incubator and into the American Underground that her company continued to expand into stores like Whole Foods across the Southeast. She even won last year’s Google (NASDAQ:GOOG) demo day, securing $100,000 investment from AOL’s Steve Case, but she is not planning to relocate any time soon.
TATIANA BIRGISSON, MATI ENERGY: It’s where my company was born. It’s where my first customers were. It’s a great place to live. The quality of life is fantastic.
ROGERS: Durham is on the short list to receive Google (NASDAQ:GOOG) Fiber, which is Google’s high speed Internet product in the near future, and the American Underground is a Google (NASDAQ:GOOG) for entrepreneurs’ tech hub. Meaning, they receive both financing and mentorship opportunities for their startups from the Internet giant.
Kerri Patterson took advantage of those opportunities by applying to the Landing Spot, a program giving workers laid off from nearby Research Triangle Park a second chance.
KERRI PATTERSON: It meant everything to us because you have unlimited resources that you can tap into. The American Underground provided us some structure, teaching us how to do our message, teaching us what does it mean to do lean startups?
ROGERS: Patterson is living her dream now of being her own boss. She launched My Family Cloud last year. She’s reinvesting herself in a place that is reinventing itself, from Tobacco Road to an entrepreneurial hot bed.
For NIGHTLY BUSINESS REPORT in Durham, North Carolina, I’m Kate Rogers (NYSE:ROG).
MATHISEN: And to read more about the small business revival in North Carolina, head to our Web site NBR.com.
And Comcast (NASDAQ:CMCSA) (NYSE:CCS) Ventures, we should point out, a unit of Comcast (NASDAQ:CMCSA) (NYSE:CCS), is an investor in American Underground start up. Comcast (NASDAQ:CMCSA) (NYSE:CCS) is a parent of CNBC, which produces this program.
HERERA: And that is NIGHTLY BUSINESS REPORT for tonight. I’m Sue Herera. Thanks for watching.
MATHISEN: And thanks from as well. I’m Tyler Mathisen. Have a great evening, everybody. And we’ll see you back here tomorrow night.
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.