Transcript: Nightly Business Report – May 9, 2016

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

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR:  Saudi shakeup.  The most powerful man in the oil industry is out.  What the change means for the already volatile oil market.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR:  Big stumble.  Shares of the company that set out to disrupt the lending industry fall more than 30 percent, raising new questions about its business model.

MATHISEN:  In demand.  The sector that’s growing fast by cleaning up and is creating jobs, lots of jobs along the way.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Monday, May 9th.

HERERA:  Good evening.  And welcome.

The oil industry in focus tonight.  The advance of the massive Canadian wildfire traveling through the oil sands region appears to have slowed.  But we begin halfway around the globe with a changing of the guard in Saudi Arabia.

The man who for decades has been in charge of the largest proven crude reserves in the world has been replaced.  The oil minister of Saudi Arabia, Ali al-Naimi, he was the de facto leader of OPEC and when he spoke, others followed.  Now, there’s a new man in that role and he could usher in long-term change for the sector that’s been the touch point for the market.

Hadley Gamble reports from Riyadh.

(BEGIN VIDEOTAPE)

HADLEY GAMBLE, NIGHTLY BUSINESS REPORT CORRESPONDENT:  After 23 years on the job, veteran oil minister Ali al-Naimi thanked colleagues for their support on Sunday, moving into a new position as adviser to the royal court and making way for a new generation of Saudi leaders.

Known as the super team, 24 ministers passed revamping the Saudi state, including a new minister of oil, the former chairman and CEO of Aramco, Khalid Al Falih.  Now, while the new appointment doesn’t seem to signal a change in government policy, the reshuffle is in line with moves by the deputy crown prince to consolidate power behind the royal court.  All ahead of the lifting of 5 percent of Saudi Aramco next year.

Details of the lifting have yet to be disclosed but a report out earlier today in “The Telegraph” newspaper suggesting that it would be a tri-listing in New York, in Hong Kong, as well as in London.  But the CEO of the Tadawul, the Saudi exchange, telling me last week it would definitely be listing here in Riyadh.

The report even suggested the possibility of oil giants like BP, Exxon and Sinopec taking strategic states in Aramco.  And the oil ministry wasn’t the only area to see a reshuffle or get a new name.  The governor of the central bank, the Saudi monetary agency, was replaced, and a total of five other ministries were restructured.

For NIGHTLY BUSINESS REPORT in Riyadh, I’m Hadley Gamble.

(END VIDEOTAPE)

MATHISEN:  And now to Canada where firefighters and oil producers may have caught a break combating that fire in the country’s oil sands region.  That helped send oil prices a little bit oil lower today, settling down more than 2.5 percent despite the loss of supply from up there in Alberta.

Deirdre Bosa has more on the blaze and its potential cost from Edmonton.

(BEGIN VIDEOTAPE)

DEIRDRE BOSA, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Cooler weather and light rain.  Some respite for the fire officials battling what’s been nicknamed simply “The Beast.”

But Canada’s wildfire blazes on and officials don’t yet know the extent of the damage.

ROB BREKKE, EDMONTON EVACUATION CENTER MANAGER:  We’re waiting for information from the province.  They’re in there right now.  And the last I heard, a lot of the infrastructure is still being looked at.  And apparently, the integrity of it is good.

BOSA:  One thing is certain — the wildfire is expected to be the costliest disaster in Canada’s history.  The Bank of Montreal estimates that insurance losses could top US$7 billion.

For the nearly 100,000 evacuees, uncertainty is building into frustration.  And they’re already meeting with insurance companies who are trying to expedite claims.

BILL ADAMS, INSURANCE BUREAU OF CANADA REGIONAL VP:  The industry is deployed.  They’re active.  Every insurance company has their own catastrophic response plan.

BOSA:  Uncertainty as well for Canada’s oil industry.  One-third of country’s total daily crude output has been taken offline due to the wildfire.  The question now is, when can production be brought online?  They just don’t know.

Sun Corps, Canada’s biggest oil producer, says in a statement, “We will begin to return to operations when the infrastructure in the region can support our startup. and we are confident it is safe to do so.  Right now, we don’t know how long that will be.”

Today, officials got their first good look at the damage in Fort McMurray and hopefully some answers for the thousands of displaced residents at evacuation centers like the one behind me.

For NIGHTLY BUSINESS REPORT, I’m Deirdre Bosa in Edmonton, Alberta.

(END VIDEOTAPE)

HERERA:  So, let’s turn to John Kilduff to talk about what the Canadian wildfires and also the Saudi shakeup means for the oil industry.  He’s founding partner of Again Capital.

Good to see you, as always, John.

JOHN KILDUFF, AGAIN CAPITAL:  Good evening.

HERERA:  We just left off with Deirdre.  So, I’ll start there.

KILDUFF:  Sure.

HERERA:  Then, we kind of back in to the Saudi story.

What long-term impact do you think this is going to have?

KILDUFF:  I think this should be fairly transitory, fairly temporary, maybe no more than a couple of weeks.  We kind of got lucky as consumers in terms of the way this fire ended up going and how far away the actual oil sands fields are from the actual damage.  We’re worried about now really the pipelines and other generation or pumping stations that might have been damaged.

But so far, so good, depending that we’re hearing from the reports right now.

MATHISEN:  Let’s pivot over to Saudi Arabia.  New man in charge there of the oil ministry, basically, and production there.  Do you expect the policies to change as a result of this?

KILDUFF:  Very much so.  This was an unceremonious dumping of Ali al-Naimi, he really deserved better in my view.  They could have retired the guy.  Instead, they basically fired him along with a bunch of other folks.

We saw the preview of this, Tyler, at the Doha meeting last month when they were going to get together and have a freeze deal that was going to allow Iran to continue to up their production until they got back to the pre-sanction levels.  Al Naimi got a phone call from Riyadh that morning that was not going to happen, they were not going to give Iran a pass, and the meeting fell apart as we know.

HERERA:  So, what do we know about the new guy in charge and what his policies are and how well-accepted he is by the rest of OPEC?

KILDUFF:  Well, the new oil minister is a highly regarded technocrat.  A really smart genius-type guy who rivals some of the best CEOs of the oil companies around the world, whether ExxonMobil (NYSE:XOM), or BP, or what have you.

What’s more intriguing is the deputy crown prince Bin Salman who installed this gentleman.  He’s the real aggressive agent here.  He’s the one changing Saudi’s posture and policy within the region.  You’re going to see a more interventionist, a more active Saudi Arabia, a Saudi Arabia that carries its own water more and more in terms of the regional conflicts.

What we’ve seen happening in Yemen and what we’ve seen happening in Syria this past year is a preview of what this new leadership intends on doing in the region.

MATHISEN:  So, a stronger, harder line against Iran?

KILDUFF:  For sure, Tyler, for sure.  And the point on that is going to be made in the oil market this summer when the Saudis are going to ramp up their production to over 11 million barrels a day.  People thought they couldn’t do it, people thought they wouldn’t do it.  They’re going to do it to supply their own direct crude burn to make electricity for the AC they need, while they don’t — make sure they don’t lose a single barrel of market share at the same time.

HERERA:  Wow, high-stakes chess game.

KILDUFF:  Very much so.

HERERA:  OK, thanks, John.

KILDUFF:  Yes.

HERERA:  John Kilduff.

MATHISEN:  All righty.  Despite the day’s decline in oil prices, they’ve been moving higher the past couple of months.  In fact, they’re up 70 percent since mid-February.  And that rise, of course, is being reflected in the price of gasoline, which over the past weeks alone, is up about 9 cents.  The average price for a gallon of regular now $2.27 nationwide.  Prices have risen 50 cents the past 12 weeks.

HERERA:  On Wall Street, investors were closely watching oil prices which pushed energy stocks lower.  Disappointing trade data out of China also weighed on the markets.  By the closing bell, the Dow Jones Industrial Average lost 34 points to 17,705.  The NASDAQ added 14.  The S&P 500 rose 1.5 points.

MATHISEN:  To the economy now, where a Fed official said he agrees with the current cautious and patient approach to raising interest rates.  The president of the Minneapolis Fed, Neel Kashkari, explained why the focus needs to be on long-term economic issues.

(BEGIN VIDEO CLIP)

NEEL KASHKARI, FEDERAL RESERVE BANK OF MINNEAPOLIS PRESIDENT:  We’re coming up short on inflation and I think there’s slack in the labor market.  But, importantly, you look at what’s happening in productivity.  The job market is creating a lot of jobs but economic growth is slow.  That suggests productivity growth is slow.  We don’t even fully understand why that’s taking place.

And so, my message is to the markets, to investors, and to the country, let’s focus on these issues that can really drive long-term performance.  It’s simply not just going to be the Fed.

(END VIDEO CLIP)

HERERA:  Kashkari’s colleague, Charles Evans of the Chicago Fed, agrees with the current wait-and-see approach to raising interest rates.  At a conference in London, Evans commented on the divisive political environment and he said there has been less fiscal policy support for the economy than he would have liked.

When asked about the presumptive Republican presidential nominee’s comments on debt, Evans said maintaining the full faith and confidence in the U.S.’s ability to service its debts was, quote, “unbelievably important.”

MATHISEN:  And today, Donald Trump said the U.S. will never default on debt, quote, “because you print the money.”  The comments came as he tried to clarify his strategy for managing the national debt, which seemed to suggest over the weekend that the government might not pay all of what it owes.

John Harwood is in Washington following all of this for us.

John, Mr. Trump seems to be doing a lot of clarifying lately.

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT:  He is.  And those comments about getting a discount on U.S. debt reflect the lexicon of a businessman who’s used bankruptcy law, who’s negotiated deals.  It simply doesn’t apply in a government setting.  And you heard a lot of people come down very quickly, including the Clinton campaign, on those comments.  And I would expect that Donald Trump is going to decline to repeat that objective of providing a haircut to U.S. debtors.

HERERA:  He’s also —

HARWOOD:  Creditors, I mean.

HERERA:  Creditors.

We’ve also seen him walk back his comments on taxes, on raising taxes on the rich.  Where does he stand on that right now?  And what about this upcoming meeting with Paul Ryan?

HARWOOD:  Well, it’s a challenge to interpret things that Donald Trump said.  He’s not somebody who has a deep attachment to ideas or policy proposals.  He’s a very transactional politician.

What he did was in the campaign, he proposed a very deep tax cut, much larger than the Bush tax cuts in the first term of George W. Bush.  He then said, after wrapping up the nomination, that they were a starting point for negotiations.  And that some of those rates would go up.

That was heard by many people as him saying he wanted to raise the top rate from the existing 39.6 level.  He clarified today that that’s not what he meant, that he meant that the rates in his plan, the top rate is 25 percent in what he’s proposed, that might come up in negotiations with Congress, but it would still be a tax cut for everyone.  Needless to say, that has alarmed both Republicans who are worried about him backing away and Democrats who say, yes, you see, after all, he does want to cut taxes on the rich.

MATHISEN:  All right.  John, thank you very much.  And every day, a new little surprise.  John Harwood in Washington.

HERERA:  Well, from politics to the labor market, and a sector that’s cleaning up when it comes to job growth.

Demand for environmental engineers is on the rise.  They’re needed to rid all industrial sites of contaminants to make them functional again.  And to make sure our water, soil and air all stay within state and federal guidelines.

Mary Thompson has more from East Providence, Rhode Island, on where the jobs are.

(BEGIN VIDEOTAPE)

MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Over 150 years old are, the global engineering and consulting firm Arcadis finding lot of new business cleaning up the past.

UNIDENTIFIED MALE:  Our environmental business is the biggest.

THOMPSON:  Years after Love Canal, cleaning up toxic sites and making sure others comply with state and federal regulations is a growing business, expanding the market for environmental engineers.

FRANK DE SAFEY, SEQUENCE STAFFING PRESIDENT:  Contaminating cleanup is a huge sector.

THOMPSON:  Frank de Safey runs Sequence Staff, an environmental recruiting firm.  Along with regulation, he says generational turnover means these workers who plan and oversee cleanup sites are in high demand.

DE SAFEY:  If I can get some genetic material and shoot it into individuals, I can create myself a five to seven-year professional environmental engineer, I would be a very wealthy man.

THOMPSON:  The government estimates environmental engineering jobs will grow by a higher than average 12 percent by 2024 and Arcadis is one firm that will be adding those jobs.

JOHN JASTREM, ARCADIS NORTH AMERICA CEO:  We’re looking to hire approximately 400 engineers and scientists this year.

THOMPSON:  And that’s not the end of it.  John Jastrem, the firm’s North American CEO sees payrolls growing 10 percent to 15 percent the next five years.  With an eye on the future, Arcadis brings in STEM high schoolers to be engineers for a day and recruits in-demand talent coming right out of college, paying starting salaries between $50,000 to $75,000 a year.

They also have an internship program and that’s how Chelsea Francis was brought into the fold.  She caught the engineering bug in eighth grade, winning a contest for building the best bridge out of dry spaghetti.

CHELSEA FRANCIS, ARCADIS WATER RESOURCE ENGINEER:  The triangle is the strongest structure.  We just built as many triangles into my design as possible.

THOMPSON:  Now 26, she’s a water resource engineer for Arcadis, and for the last three months she’s been helping build a waste water treatment plan for two small towns in Arizona.  A project she likes for its complexity and its impact on the community.

FRANCIS:  I felt like I needed to be part of that.

THOMPSON:  Arcadis looks for that kind of passion when they hire, believing their work is about cleaning up the past to build a safer future.

JASTREM:  We really look for people who are on a lifetime mission to make the world a better place to live and have that desire to learn and innovate and to make some changes.

THOMPSON:  For NIGHTLY BUSINESS REPORT, I’m Mary Thompson in East Providence, Rhode Island.

(END VIDEOTAPE)

MATHISEN:  Still ahead, is the business model that some said would shape the future of lending starting to stumble?

(MUSIC)

MATHISEN:  The Sumner Redstone lawsuit has been dismissed.  It abruptly ended today when a California judge rejected the media mogul’s former girlfriend’s claim that Redstone did not have the mental competence to remove her as his health care agent.  The judge said Redstone’s testimony ultimately defeated her case.

As we reported for you on Friday, the case was being closely watched by shareholders of Viacom (NYSE:VIA) and CBS (NYSE:CBS) and the dismissal keeps Redstone in charge of his controlling stakes in both of those big media companies.

HERERA:  The Panama papers can now be searched by the public for the first time.  The 11 million leaked documents that have cast a light into the world of offshore finance are now in a database available to all.  It includes nearly 214,000 entries and spans about 40 years.  The papers contain basic corporate information about companies and trusts set up in 21 jurisdictions.

MATHISEN:  Krispy Kreme donuts is going private.  That’s a good thing because I only eat them in private.  And that is where we begin tonight’s “Market Focus.”

The German investment firm JAV holding will buy the donut maker in a deal valued at just over $1.3 billion.  In March, JAV led a buyout of the coffee pod maker Keurig for about $14 billion.  Shares of Krispy Kreme up more than 24 percent to $20.96.

Tribune Publishing, which owns “The Chicago Tribune,” “The Los Angeles Times,” among other properties, has adopted a shareholder rights plan in an effort to prevent rival Gannett (NYSE:GCI) from acquiring all of its shares.  The plan, which is also referred to as a poison pill, allows Tribune’s shareholders to buy additional shares at a discount if Gannett (NYSE:GCI) buys 20 percent or more of the company.

Shares of Tribune finished down nearly 2 percent to $37.75.  Gwinnett down almost 2 percent at $15.83.

Medivation (NASDAQ:MDVN) has signed nondisclosure agreements with Pfizer (NYSE:PFE) and Amgen (NASDAQ:AMGN).  The news comes after the drugmaker rejected a better than $9 billion takeover offer last month from the pharmaceutical company Sanofi.  Shares of Medivation (NASDAQ:MDVN) up 4 percent to $62.54.

HERERA:  Valeant Pharmaceuticals plans to file its first quarter financial report by June 10th — well in advance of a July 31st deadline.  This is in contrast to last quarter when the company delayed its filing to review its accounting practices.  The drugmaker also reaffirmed its outlook for the quarter and said it will file its second quarter results on a timely basis.  Valeant shares fell 6 percent to $28.07.

Despite reporting a wider than expected loss for the quarter, Wayfair saw its revenue soar 76 percent, topping estimates.  The online furniture retailer attributed the results to strong growth in of active customers and an increase in advertiser spending.  Shares soared 10 percent to $39.65.

Tyson Foods (NYSE:TSN) raised its profit outlook for the year.  The meat producer also issued better than expected quarterly results which were driven in part by reduced feed and animal costs.  Tyson also expressed the interest in buying chicken or prepared food businesses abroad to expand its presence.  Shares rose nearly 1.5 percent to $68.24.

MATHISEN:  Shares of Lending Club plummeted today.  The founder and CEO of the online lender resigned after an internal investigation found that the company sold a single investor more than $20 million of loans that the investor did not want.  Three other senior managers also resigned or were fired.  Shares of the biggest player in the industry off 34 percent on the day, almost 35 percent, and it comes as questions rise about the business model of peer to peer lenders.

Here’s how they work.

(BEGIN VIDEOTAPE)

MATHISEN:  You join a peer to peer lending site.  The biggest ones are Lending Club and Prosper.com.  If you need a loan, you fill out an online application.  Depending on the vendor, you can apply for up to $40,000 in personal loans.  Business loans could be even larger.

You can take out a loan for debt consolidation, home improvement, a business, even a vacation.  The site then checks your credit worthiness and grades or rates you according to your risk.  The higher your FICO credit score, the lower a risk you are and the lower the interest rate you’ll pay.  A lower credit score means your interest rate will be higher.

The amount of the loan will also factor in your interest rate and the site may or may not approve you for the full amount you asked for.

Meanwhile on the other side, investors look at all the borrowers and decide who they want to lend their money to.  They can choose individuals or limit their risk by investing in a basket of loans.

(END VIDEOTAPE)

HERERA:  So just how viable is the online peer to peer lending business model?

Marty Mosby, director of banking and equity strategy at Vining Sparks, joins us now.

Welcome, Marty.  Nice to have you here.

MARTY MOSBY, VINING SPARKS DIR. BANKING & EQUITY STRATEGY:  Nice to be here.  Thanks for having me.

HERERA:  I guess that is the main question.  I mean, what does today’s news out of Lending Club say about the viability of that kind of a model?

MOSBY:  Well, I don’t think it really addresses the viability of the model at all.  It really is addressing the operational risk of any consumer lender outside of the traditional banks which is operationally you have to be short and sweet.  You have to make sure everything’s working.  And any trust or a break of that trust really will create some jeopardy for the company.  So that’s really what we’re looking at here.  A very special circumstance for one company.

MATHISEN:  So, these companies are actually go-betweens who put together people with money and people who want money.  My assumption is that the people who want money are underserved or just not happy with the service they get at traditional banks.  Maybe they’re less creditworthy, maybe they just don’t like dealing with banks.  Tell me about who’s getting the money and whether this business model can actually scale up big.

MOSBY:  Well, I think scale up big is really an overstatement.  It’s not a threat to the traditional banking.  This is very special-burn type of lending to borrow who wants to get money fast, doesn’t want to go through the paperwork a bank would have to go through from a regulatory standpoint.  So, it is something that’s a special need that they are addressing.  But it isn’t big enough at this point to be really threatening the overall traditional banking model.

HERERA:  Is the advantage the lack of regulation that this particular arm of lending falls under?

MOSBY:  It is.  Consumer finance is all driven by the regulation that when that box gets so tight for traditional banks, that these lenders can kind of get away with less paperwork or a little less stringent in the sense of an operation model capital or liquidity that the banks just can’t do.  That’s why you end up having these conduits to investors that can look at these yields as attractive investments.  But it’s all about the regulatory environment that can have an advantage there.

HERERA:  All right, M, thank.  Marty Mosby with Vining Sparks.

MOSBY:  Thank you.

HERERA:  And coming up, why $40 million is the new $100 million.  At least in the fine art market.

(MUSIC)

HERERA:  A 15.3 karat pink pear-shaped diamond was shown off in Geneva one week before it will be put up for auction at Sotheby’s.  It’s one of the rarest diamonds in the world.  It’s expected to fetch between $28 million and $38 million and will be auctioned on May 17th.

MATHISEN:  I’ll get it for you, Sue.

HERERA:  Oh, thank you, Ty.

MATHISEN:  All right.  Sotheby’s most recent quarter didn’t live up to expectations.  The auction house reported a deeper than expected loss in the first quarter and a 35 percent decline in net auction sales.  Shares however rose after Sotheby’s disclosed that an outside investor, unnamed so far, has expressed interest in buying 10 percent of the company.

As Robert Frank reports, the health of the art market will be tested over the coming weeks.

(BEGIN VIDEOTAPE)

ROBERT FRANK, NIGHTLY BUSINESS REPORT CORRESPONDENT:  The spring auction season kicked off in New York last night with all signs pointing to an art market that’s contracting but not quite collapsing.  Christie’s got things started with a sale titled “Bound to Fail” but it was a modest success with sales topping $78 million at the high end of the estimate.

The top seller was Maurizio Cattelan’s 2001 sculpture of a praying Hitler called “Him”, sold above the estimate of $50 million.  Cattelan once said he considered destroying the controversial piece several times, but decided it was an important symbol of, quote, “True Fear.”

A Jeff Koons floating basketball called “One Ball (NYSE:BLL) Total Equilibrium Tank” went for a little over $15 million, also above the estimate.

A crucified frog called “Feet First” by Martin Kippenberger went for over a million.

If the bar has been set lower this spring as the art market adjusts to volatile stock markets and weakness overseas.

WENDY CROMWELL, CROMWELL ART LLC, ART ADVISORS:  It’s no surprise to industry experts that the sales are smaller, the estimates are more conservative, and the masterpieces are fewer and far between.

FRANK:  Sotheby’s and Christie’s expected to sell over $1 billion word of art in the next four days, less than half their total from last May.  The two most expensive lots are estimated to sell for $40 million, that’s well below a year ago when a single Picasso sold for $179 million.  And eight works sold for over $50 million.

There are no nine-figure block busters expected this year.  This 1982 untitled painting by Jean Michel Basquiat is a top lot at Christie’s expected to hit $40 million.  And the blackboard piece offered by Sotheby’s is expected to top $40 million.

While the lower values may be bad news for sellers, they could be good news for auction houses and collectors.

CROMWELL:  I do think that the silver lining here is that these sales might actually be more profitable for the auction houses.  For collectors, this is an opportunity to get back in after being priced out in the past few years.  And I think smart buyers will be able to buy works at fair prices.

FRANK:  In other words, $40 million is the new $100 million in the fine art market.

Robert Frank, NIGHTLY BUSINESS REPORT.

(END VIDEOTAPE)

HERERA:  I have a lot of original artwork on my walls.

MATHISEN:  But no crucified frogs?

HERERA:  No.  It is all crayons from the kids.

That does it for NIGHTLY BUSINESS REPORT for tonight.  I’m Sue Herera.  Thanks for joining us.

MATHISEN:  And I’m Tyler Mathisen.  Thanks from me as well.  Have a great evening, everybody, and we’ll see you back here tomorrow.

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) 2016 CNBC, Inc.

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