TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Stocks fly. The S&P 500 closes at record, the Dow within a percent of one as earnings season gets underway. And those profits need to start growing again to keep the market’s mojo moving on up.
SHARON EPPERSON, NIGHTLY BUSINESS REPORT ANCHOR: New competition. Can Boeing (NYSE:BA) and Airbus shift their business plans and fend off a potential threat to their dominance?
MATHISEN: What’s old is new again. It was a ’90s game. Now, it’s one of the hottest apps out there. But can Pokemon Go usher in the big turnaround Nintendo shareholders have been looking for?
All that and more tonight on NIGHTLY BUSINESS REPORT for Monday, July 11th.
EPPERSON: Good evening, everyone. I’m Sharon Epperson, in tonight for Sue Herera.
MATHISEN: And I’m Tyler Mathisen. Welcome, everyone.
Well, the Wall Street bull is alive and kicking. The S&P 500 closed at new high today, something it hadn’t done in more than a year investors still giddy after that blockbuster June jobs report on Friday that seemingly put a lid on fears that the U.S. economy is slowing down.
Some say investors want to buy U.S. equities simply because there’s so much global uncertainty and so few investing alternatives out there.
And today, buy, they did. The Dow Jones Industrial Average climbed 80 points to 18,226, the S&P 500 rose seven to that record close, and the NASDAQ which had crossed the 5,000 mark earlier in the day settled just a smidge below.
EPPERSON: Earnings season is officially underway. Alcoa (NYSE:AA) topped earnings expectations after profit from its car and jet parts businesses offset weaker results in its other units due to declines in metals prices. The company that will be splitting into two later this year earned 15 cents a share. Estimates were for 9 cents. Revenues were slightly better than estimates, though 10 percent employee lower from a year ago. Those better than expected results helped gives shares a boost in initial after hours trading.
Susan Li has more on Alcoa’s quarterly results.
SUSAN LI, NIGHTLY BUSINESS REPORT CORRESPONDENT: For Alcoa (NYSE:AA), a much better quarter than estimates. The bar was set pretty low, though, for the quarter, with expectations of a big earnings and revenue drop from a year ago. Lower aluminum and aluminum pricing continuing to drag but then recent acquisitions in organic growth helping to lift revenue in the quarter.
Alcoa (NYSE:AA) also reassuring the market that is the company is still on track to separate into two separate entities, Alcoa (NYSE:AA) housing, its commodities business in the future, and Arconic, its manufacturing business. And we’re looking for this split to happen in the back half of this year. Now, the analysts that I spoke to say that aerospace, the key for Alcoa (NYSE:AA) going forward with Airbus and Boeing (NYSE:BA) both raising production targets next year, which should help to drive Alcoa’s value-added business.
Here’s CEO Klaus Kleinfeld on the aerospace demand.
KLAUS KLEINFELD, ALCOA CHAIRMAN & CEO: We predict for the second half, a growth of 6 percent and we actually see in 2017, the double digit growth in this market, and when you look at fundamentals, the fundamentals are very, very strong.
LI: Now, analysts expect the company, the aerospace exposure, to really be a key driver of its business going forward, especially for the Arconic division, when the split does happen sometime later on in 2016.
For NIGHTLY BUSINESS REPORT, I’m Susan Li.
MATHISEN: As the profit reporting season gets rolling, investors will watch to see if quarterly results improve, and whether the earnings recession is ending.
But as Bob Pisani explains, that could be a lot easier said than done.
BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Another earning season is starting in the red. The second quarter would be the fifth consecutive quarter of negative earnings growth, the worst showing since 2008 to 2009. But don’t worry, analysts are expecting earnings to turn positive in the third and especially in the fourth quarter.
Here’s the problem, a lot has to go right to get rid of the earnings recession that we’ve been experiencing. That’s because analysts are expecting earnings to improve in the second half of the year, and most of the largest S&P 500 sectors, including technology, industrial, health care, financials and even energy.
But a strong dollar could negatively influence earnings at many multinationals and continuing low interest rates could be an issue for some financials. And the price of oil companies is very closely correlated to the price of oil, so improving earnings there depends on oil going up or at the very least stabilizing.
Now, all of this could happen, but getting it all right on top of an improving economy is a lot to ask. One final point, it’s true that prices in the stock markets do not always correlates to earnings growth. It isn’t now largely because of outsize stimulus measures. But don’t kid yourself, in the long run, the trajectory of earnings has always mattered in the evaluation of stocks.
For NIGHTLY BUSINESS REPORT, I’m Bob Pisani at the New York Stock Exchange.
EPPERSON: Well, it hasn’t been a straight line for the financial markets so far this year. In fact, it’s been a pretty bumpy ride. Raising the age old question, do you need to be an active or passive investor to make money in this market?
Matt Maley is equity strategist at Miller Tabak. He joins us now to discuss.
And, Matt, as well, it’s an interesting statistic earlier today from S&P Global, saying that about two-thirds of stock in S&P 500 have moved about 10 percent since the May 2015 high in the market, and about 40 percent have moved 20 percent or more. What that means is that it’s a stock picker’s market and so does mean one needs to be an active investor as an individual investor?
MATT MALEY, MILLER TABAK EQUITY STRAGETEGIST: Well, I think it does. The one thing where people say — first of all, I don’t think we should go back to day traders, the days of the 1990 when people were day trading, because some of these websites like you’ve talked about, around trippers and people can get slammed very easily.
But the thing is, when you get a market to a position where it’s as expensive as it is today, I can do that on the CAPE Ratio, the P/E Ratio, which is above 25 again. And we saw that in 2000 and 2008. The market tends to stall out and if the people are — can move around a little bit into specific stocks and groups, that way they can do a little bit better than the market. I guess my point is, people say, geez, if you just sit, you can time the market, just sit in an index fund, and let it right it out.
Well, that’s fine. If you did that from 1995 until today, you made a nice profit. But when the CAPE Ratio got above 25 in those two instances, and you pulled back a little bit and moved around, you actually did a lot better. So, I think that could be the same thing that happened this time around.
MATHISEN: I beg to differ a little bit, Matt. I am a big believer in the efficiency of passive investing, the economical qualities that it has. But I’ll grant you the idea that that doesn’t mean you can just said it and let it go. There are times when you need to heavy up and times where you want to take profits.
So, what you’re suggesting here is not active market timing, is it?
MALEY: No, not at all. It’s very good point, Tyler. I mean, again, you don’t want to become a day trader. You know, Brexit vote happens one day.
MALEY: And then we get the Fed speaking the next day. But you can — when the risk reward changes for specific groups of specific stocks, you can move your portfolio around. And I’m talking months apart rather than days apart. But a great instance is when we’re here on the defensive side of things. Utility index, utility side, I’m sorry.
They had a great run. We were lucky enough to be early on this group. But the groups of 27 percent since we started pushing the group. And it’s got you know, it’s P/E Ratio is well above 20 now. It’s gotten very expensive.
One group that’s been lagged that is traditionally a defensive group has been the health care stocks. They’re flat on the year. Now, there are some minefields in health care. You have to be discriminate there. But suddenly, we’re seeing that when you’ve got group that’s well off — sorry, very expensive, versus the group that’s been lagging, but it’s also in a technical basis breaking out, you can shift around a little bit and make some money.
EPPERSON: The bottom line of that, though, as you point out, is that you really need to do your homework here. Whether looking at individual stocks or you’re moving between different types of mutual funds, you really want to know which one had a long track record even if you are deciding not to stick with it for a very long time like you would in index fund. You make some very good here, Matt.
Matt Maley with Miller Tabak — thanks so much.
MATHISEN: Well, the head of the Kansas City Federal Reserve says interest rates are just too low. Long time critic of low interest rates, Esther George, believes the rebound in hiring in June is reason enough to push interest rates higher. During a speech today in Missouri, she said rates this low can create economic risk, especially with the economy at or near full employment.
EPPERSON: Now to China are an international tribunal is set to issue a long awaited ruling that challenges China’s territorial claims in the South China Sea. The area represents $5 trillion in trade and it pits the interest of the world’s second largest economy against those of the first.
Eunice Yoon reports tonight from Beijing.
EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Ahead of The Hague ruling, China’s propaganda machine is on full throttle, asserting what Beijing sees as its rights in the South China Sea. The communist party papers have been painted as a victim of a Washington-led attempt to control China’s rising power.
Meanwhile, official state TV has been running stories all day saying that nearly 70 countries have voice their support for Beijing’s position in the disputed waters. China claims almost all of the South China Sea, but its neighbors don’t accept that position. They have their own claims, including the Philippines, which has taken its case to the tribunal, arguing China is violating international law.
Chinese officials have said they will ignore what the court says and over the weekend, China held military exercises in the disputed waters.
For the U.S., the issue is vitally important. Beijing is seen as challenging Washington’s role in Asia, as well as the American-led security system which has been at the foundation of Asia’s economic rise, $5 trillion worth of trade is shipped through these waters.
The U.S. has repeatedly challenged China’s rights to the sea and has increased naval patrols. It says that it’s doing that to support allies and uphold international law.
The fear now is that if the court rules against China, Beijing could take more aggressive action, which could potentially lead to even greater conflict.
For NIGHTLY BUSINESS REPORT, I’m Eunice Yoon in Beijing.
MATHISEN: The United Kingdom will have a new prime minister and soon. Theresa May will become the next occupant of 10 Downing Street. Current Prime Minister David Cameron says he will resign Wednesday. May will take over at a time of great economic and political uncertainty for the country, after the vote couple of weeks ago to leave the European Union. May will become the U.K.’s second female minister. Margaret Thatcher, of course, was the first.
EPPERSON: New planes and new challenges are dominating this year’s Farnborough air show in London. For industry titans, Boeing (NYSE:BA) and Airbus, the big question is, how do they manage a massive backlog of orders as new companies enter the mix?
Phil LeBeau has more from Farnborough, England.
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: After years of soaring higher with huge orders for new planes, Boeing (NYSE:BA) and Airbus are shifting their flight plans. The focus now: delivering more planes and cutting into a massive backlog of orders.
DENNIS MUILENBURG, BOEING CEO: We get about 5,700 commercial planes in our backlog today. We still expect to build of about one this year, so a steady orders flow, so not as great as previous years. Stronger and narrow bodies than wide bodies, but this is about execution now, and successfully delivering on that backlog.
LEBEAU: Boeing (NYSE:BA) and Airbus have increased their annual deliveries and their latest models which are more fuel efficient are in demand. But new commercial planes like the CS100 from Canadian plane maker Bombardier is an option for airlines. In this case, offering a plane with a wider al and seats than those found on most planes in service.
ALAIN BELLEMARE, BOMBARDIER CEO: We believe we have a very unique solution and the customer likes that.
LEBEAU: Is this new plane coming from a company based in Canada a long-term threat to the dominance of Boeing (NYSE:BA) and Airbus?
KEN HERBERT, CANACCORD GENUITY MANAGING DIRECTOR: You’ve got a better experience, in-flight entertainment perhaps. The whole experience has the potential to be better than what you might get on other planes today.
LEBEAU: Perhaps the best news for plane-makers is that over all demand shows no sign of slowing down, particularly in Asia, where a rising middle class is taking more flights to more cities.
Phil LeBeau, NIGHTLY BUSINESS REPORT, Farnborough, England.
MATHISEN: Still ahead, a billion dollar lawsuit and a lot of questions about social media’s role when its platform is used by terrorists.
Summer driving is a little less expensive. The average price of a gallon of regular gasoline down seven cents over the past three weeks, now at $2.29 nationally. According to the Lundberg Survey, the current price is 54 cents less than a year ago and that is because of a drop in oil prices and an abundant supply of gasoline. The highest average price in the Lower 48 was in San Francisco, at $2.90 a gallon. The lowest down in Charleston, South Carolina, $1.91.
EPPERSON: To politics now, Donald Trump says he will decide on his vice presidential pick in the few days and that he’s leaning toward a political pick rather than a military one.
John Harwood is following the veepstakes from Washington.
John, the conventions are coming up. Both sides are going to soon pick running mates. What’s happening on the front with Donald Trump?
JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: What’s happening is a bit of a bachelor reality show. Donald Trump is appearing with — serially with potential choices. He campaigned in recent days with Newt Gingrich. Today, he was with Chris Christie. Tomorrow, he’s going to be with Mike Pence, the governor of Indiana. He is somebody a lot of people think is at the top of that list, and trying to suss out how he campaigns alongside them, what the personal vibe is.
And as Donald Trump said, we’ll get the decision by the end of the week.
MATHISEN: And how about Hillary Clinton?
Well, Hillary Clinton is doing something of the same thing. She has campaigned or used as a surrogate, Cory Booker, the senator from New Jersey. She recently went out with Elizabeth Warren, the populist fiery senator from Massachusetts. And later this week, she’s going to campaign with Tim Kaine, the senator from Virginia, who is seen by many as the front runner for that vice presidential slot.
So, again, you test your personal chemistry. Your campaign dais chemistry with that person and then make your decision.
EPPERSON: Meanwhile, the nation remains riveted, John, on the recent violence in Dallas, in Minneapolis, Baton Rouge, and this afternoon, in southwest Michigan.
What did the candidates have to say today?
HARWOOD: Well, Hillary Clinton did not have a public event, so she was silent apart from a few tweets. But Donald Trump notably gave a speech on veterans. And at the beginning of his speech, he had a passage where he said, “I am the law and order candidate”. He talked about standing with police officers, he also said he was going to be the candidate of compassion.
But that is a memorable phrase in American politics, “law and order candidate”. That sent a message that he was standing with the police in the disputes and protests that are going on across the country.
EPPERSON: All right. There you have it.
John Harwood in Washington — thanks.
MATHISEN: Microsoft (NASDAQ:MSFT) and General Electric (NYSE:GE) ink a deal in the cloud and that’s where we begin tonight’s “Market Focus”. General Electric’s software platform called Predix will be available on Microsoft’s cloud platform beginning next year. Through Predix, industrial companies connect machines and devices to the cloud to gather data and under the transaction, current Predix customers will get access to Microsoft (NASDAQ:MSFT) cloud offerings.
Shares of Microsoft (NASDAQ:MSFT) up half a percent to $52.59. GE fluttered up one cent to $32.21.
Starbucks (NASDAQ:SBUX) will raise the base pay of its U.S. employees by at least 5 percent starting in October. The coffee chain will also double the amount of stock reward for employees who worked at least two years at the company. As a result, employees can expect their compensation to rise between 5 and 15 percent. Starbucks (NASDAQ:SBUX) shares off a little bit at 56.32.
EPPERSON: Tyler, Kimberly Clark now is halting operations in Venezuela. The maker of Clinique tissues and Huggies diaper said a shortage of primary materials and rising inflation has made it impossible to continue business in the South American country. Shares did not react much to the news. They rose to $136.14.
Shares of Alliance Data Systems (NYSE:ADS) got a lift today after activists hedge funds ValueAct Capital disclosed it had a nearly 7 percent stake in the provider of credit card loyalty programs. Alliance shares rose 4.5 percent to $210.39.
The Securities and Exchange Commission is reportedly investigating Tesla to determine if the automaker violated a securities law by not reporting a fatal crash in self-driving vehicles back in May. This is according to “The Wall Street Journal.” Tesla says it has not received any communications from the SEC regarding the possible investigation. The SEC had no comment. Shares of Tesla fell in afterhours trading following the news, but finished the regulation session up more than 3 percent to $224.78.
MATHISEN: U.S. terror victims are suing Facebook (NASDAQ:FB) for a billion dollars. The lawsuit filed in New York federal court alleges the social media giant, quote, “knowingly provided support and resources for the Gaza terror group, Hamas.”
Now, will this impact Facebook (NASDAQ:FB) and other social media companies?
John Browning is a partner at Passman and Jones law firm. He’s professor of law at Southern (NYSE:SO) Methodist University Dedman School. His firm nor he is a party to this lawsuit.
Professor, welcome. Good to have you with us.
JOHN BROWNING, PASSMAN & JONES PARTNER: Thank you for having me.
MATHISEN: Is this suit likely to move forward or do you think it will be thrown out of court?
BROWNING: Well, I think ultimately, it’s going to be thrown out of court because there’s — while there’s a federal statute that allows victims of terrorism to bring civil suits such as this, there’s also a federal statute that’s been cited in numerous cases to shield social media companies like Facebook (NASDAQ:FB) and Twitter from civil liability.
EPPERSON: This is not the first time that a social media company has been, has had a lawsuit against this for terrorism. What does this mean for the Facebooks, the Twitters, the other social media sites in terms of what the future may be for the legal proceedings against them?
BROWNING: Well, there are other cases currently pending. There are two in California. One in San Francisco, federal court and another. One was filed against Twitter. Another was filed against other social media companies by victims of terrorism overseas.
Ultimately, the legal defense the social media companies like Facebook (NASDAQ:FB) and Twitter are likely to assert or have already asserted is likely to be granted. But in the meantime, the very fact these lawsuits are being brought certainly will heighten awareness to this issue and underscores the fact that social media companies which have been doing a number — have taken a number of steps to address terrorist activity on their sites, need to continue doing more.
MATHISEN: Do the social media companies have an obligation under the law to police their sites to remove inflammatory or inciteful material that could be seen as glorifying violence, glorifying terror, calling individuals to join terror groups? What’s the obligation under the law?
BROWNING: Well, there’s really no legal obligation. They have a legal shield, in fact, under a federal statute called the Communications Decency Act, but they have their own internal policies. And Facebook (NASDAQ:FB) certainly has this, Twitter as well, that states that they will police their sites and take down content that is advocating violence, supporting terrorism and so forth. And in fact, earlier this year, Twitter announced it had disabled or taken down over 125,000 accounts with ties to or supportive of terrorists.
MATHISEN: What if they miss something? Could they be — could someone allege negligence?
BROWNING: Really, there’s no legal basis for it. We’ve allowed social media companies to have this wide latitude so that, as not to discourage free expression. Of course, it has its downsides as we see here. But we’ve left it up to the social media companies themselves to police themselves and they have enacted their own policy. They claim to be doing more.
And we’ll see how that shakes out.
MATHISEN: Professor, thank you very much. John Browning with Passman and Jones law firm.
BROWNING: Thank you.
EPPERSON: Coming up, a smart phone, an app and a surprise hit that could bring in a new era for mobile gaming and trigger a turn around for Nintendo.
MATHISEN: The biggest sale ever in sports history. It is not a baseball team, an NFL franchise, but it is a mixed martial arts league. Ultimate Fighting Championship, UFC, sold for $4 billion after being purchased back in 2000 by its principals for just $2 million. That’s a return with a punch, folks.
The buyer is a group led by a Hollywood talent agency that includes private equity firm Silver Lake and Colberg Kravez Roberts. Here’s how the sale compares to other recent sports purchases. In 2012, the L.A. Dodgers bought out a bankruptcy for a little more than $2 billion. The L.A. Clippers for the $2 billion in 2014. The sport combines different types of fighting, including boxing, kickboxing, wrestling. Since 2000, UFC has gone mainstream, drawing stadium crowds up to 70,000. Also have big name sponsors, as well as large broadcast and pay-per-view audiences.
EPPERSON: Tyler, I’m not sure if you know this, but there is a new craze that is sweeping the nation. And to understand it, you have to think back to the late 1990s. When Pokemon was all the buzz. Today, you can still catch him, but there’s a modern twist, a smart phone, a mobile game and augmented reality.
The new game, Pokemon Go, has gone viral and shares of Nintendo have soared since the game was released last Thursday.
And as Julia Boorstin reports, this could be a start of something much, much bigger.
JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Pokemon Go is a new free augmented really Nintendo app which uses smartphone’s GPS and cameras to bring Pokemon characters into the real world on your phone’s screen. Players chase the characters through the real streets.
CHARLIE WARZEL, BUZZFEED NEWS: This is big for augmented reality of always been this thing in your minds that we don’t, you know, really know how to translate when you put it out there in people’s hand.
BOORSTIN: Its popularity sending Nintendo shares surging 25 percent in Tokyo trading Monday, following a 10 percent jump on Friday when the game hit the top of the iTunes up chart for the most downloaded and the highest grossing up in the countries where it’s available. This as people pay for in-game add-ons.
Pokemon Go helping Nintendo recover after the disappointing and delayed launch of its first mobile game last October.
Even Microsoft’s CEO Satya Nadella weighing in, saying the game’s popularity bodes well for Microsoft’s HoloLens augmented reality in the works.
SATYA NADELLA, MICROSOFT CEO: I think I these augmented reality applications getting built because the best thing that can happen in creates a new category is for applications, that are these killer apps, whether it’d be game or in the industrial scenario to get invested in.
So, Pokemon interest hopefully will translates into a lot of interest even in HoloLens.
BOORSTIN: Analysts reaction is mixed. Jefferies has a buy rating on the stock is bullish, saying this game is the tip of the iceberg for Nintendo’s move into mobile, while Namura warns the rally looks excessive. Nintendo does not get to keep all that revenue, sharing it with developer Niantic among others.
FARHAD MANJOO, NEW YORK TIMES: One of the things that I’m skeptical about is Nintendo didn’t develop this. Like, this is a licensing deal, the company that kind of built which spun out of Google (NASDAQ:GOOG). So, I’m not sure it tells us anything about Nintendo sort of long term like innovation. But, you know, it’s good for them in the short run.
BOORSTIN: But for now at least, the game which looks like this, is such a huge hit that servers have crashed and people have crashed into things as they walk around looking at their phones and looking at this augmented reality world, trying to find characters like this one.
The NYPD even tweeting to warn people not to play the game while driving.
For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin in Los Angeles.
EPPERSON: And to read more about Pokemon go, and you know you want to now, head to our website at NBR.com.
MATHISEN: I think Pokemon Go is coming to a house near me very soon.
EPPERSON: Mine, too. Yes. Maybe my phone. That’s I know lt.
That’s NIGHTLY BUSINESS REPORT for tonight. I’m Sharon Epperson. Thanks for watching.
MATHISEN: I’m Tyler Mathisen. Thanks from me as well. Have great evening, everybody, and we will 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) 2016 CNBC, Inc.