Transcript: Tuesday, July 1, 2014

NBR ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Susie Gharib.

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Early fireworks. The Dow pushes towards 17,000 on the first day of the trading of the second half. With that milestone within reach, what will the rest of the year bring?

BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Defying predictions. People flocked auto showrooms it turns out and drove off with more vehicles than expected last month, despite the rush of recalls.

GHARIB: And behind closed doors. A look inside the room where Google (NASDAQ:GOOG) is quietly trying to take on Twitter.

We have all that and more tonight on NIGHTLY BUSINESS REPORT for this Tuesday, July 1st.

Good evening, everyone. I’m Susie Gharib.

GRIFFETH: And I’m Bill Griffeth, in for Tyler Mathisen again this evening.

Wall Street kicked off the third quarter with a bang today, a record-breaking session that saw the Dow come within a couple points of 17,000. The blue chip average, the S&P and the Dow transports closed at historic highs on the heels of strong manufacturing activity data that we saw both in the U.S. and in China. The rally was led by gains in health care, technology and consumer discretionary stocks, which had lagged recently.

Here is how the major averages ended this day with Dow up 129 points, making its biggest one day point gain since May 21st and it came within two points of the 17,000 mark around midday before giving up some of those early gains. The NASDAQ was the strongest of the major averages, up 50 points, reaching a fresh 14-year high and the S&P was up 13, notching its 23rd record close of the year.

So, with the Dow at 17,000 now in the crosshairs and the markets at new highs at the midpoint of this year, a lot of traders are now thinking about re-jiggering their portfolios looking to maximize profits ahead of the second half of the year.

Dominic Chu has more.

(BEGIN VIDEOTAPE)

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Many traders are taking advantage of this half time to make adjustments to portfolios. Certain parts of the stock market have fueled the ride, especially in the second half of each year. Since 2009, the best performing second half sector each year has been consumer discretionary. It’s been up an average of over 16 percent during the last six months of each year.

Part of the reason might be the increased spotlight these stocks get because of the holiday shopping season. It’s noteworthy that consumer discretionary stocks are among the biggest laggers in the S&P 500, so far, this year.

As for the worst performing sector in the second half of the year, over the last five years, it’s been utilities, up only an average of 5 percent. Ironically, utility stocks are the best performers in the S&P 500 so far this year.

But knowing the past doesn’t always help predict the future. Some experts are looking for profits elsewhere in the market.

JOE TERRANOVA: The energy sector is the sector investors should focus on, first half of the year, it clearly had very low expectations but the reality of pure performance, the energy sector in the first half of the year is one of the best-performing sectors.

CHU: And it’s not always about what you’re buying but also what to avoid.

BRENT SCHUTTE: We believe a lot of sectors that have been pushed higher by lower interest rates will see subpar returns during the second half of the year. Recent utility haves done very well and therefore, we would continue to look under weight those asset classes.

CHU: After a big run for stocks last year, many traders were looking for fewer gains this time around.

(on camera): But with stocks making fresh record highs and the S&P 500 already up 7 percent so far this year, reassessing your second half playbook might be the prudent course of action.

For NIGHTLY BUSINESS REPORT, I’m Dominic Chu.

(END VIDEOTAPE)

GHARIB: Joining us to talk more about this big trading day and your investment strategy, Patricia Edwards, managing director at U.S. Bank Wealth Management.

So, Patty, what a day. I mean, a lot of people tuning in are wondering what happened all of a sudden. The stock market has been going up slowly, slowly, all year long, and this big rally, talk of 17,000.

What would you say? What happened? What changed?

PATRICIA EDEWARDS, US BANK WEALTH MANAGEMENT: There’s a couple of things. You know, fireworks are always nice this week. We like that. But beyond that, it’s the beginning of a fresh quarter. So, have a couple of things going.

You got retirement plans, they are making their contributions, either for the month or for the quarter. That starts to push things higher. We have economic data that’s coming in that is just a little better each time. It’s not anything earth-shattering but it’s continuing to build that confidence.

And then, on top of that, what you saw in the rally is you saw things rally that we have not seen rally over the past quarter.

MATHISEN: Right.

EDWARDS: So small caps, things like that. And so, you’ve seen, I think, a lot of mutual funds that they have to report as of June 30th what they are holding. Now, they can rejigger their portfolio for performance and pick up some of the steps that’s lagged.

GRIFFETH: Yes, that was interesting, Patty. I mean, the defensive stocks for the most part led the way for the second quarter. You know, those — I don’t want to say safe haven plays, but they’re cautious plays that paid dividends that people run to when they’re not sure growth is going to be all that strong.

That wasn’t the case today. A lot of those laggers were leaders today. Do you think that’s going to be the theme for this quarter?

EDWARDS: Well, the theme for this quarter is really going to be completely data dependant we think. What we’re latching on is the earnings. If the earnings are there, then I think you’re going to start to see a little more growth. You’re going to start to see some purchasing not only in the energy sector, which we like, but also things like manufacturing because energy costs should be coming down rather than up with the natural gas that we’ve got coming in to the pools here.

So, there is a lot of things that could start to go well that will actually drive the entire economy rather than just the stock market.

GHARIB: Patty, are you concerned that we haven’t had a serious correction in a long, long time? I mean, a lot of market strategists say it’s healthy to have a correction and we haven’t had one. Should we be concerned about that?

EDWARDS: You know, it is healthy to have market correction and healthy to look where you’re trading versus earnings and what performance you have. So, I’ll have clients that will say geez, we’re up 180 percent or so off of the bottom in 2009. You know, shouldn’t we be selling our equities?

We look at it and if you graph the equities versus the earnings that those companies have had, we’re just barely slightly over valued. We’re a little more cautious because we are slightly over-valued but where by no means in record territory. And on top of that, you got companies that have a boatload of cash on their balance sheets. We’re back at levels that we haven’t seen since the 1960s. And we’re going to start to see more dividends paid. We’re going to start to see more stock buybacks and we’re going to continue to see mergers and acquisition.

GRIFFETH: We’re taking note of the Dow at 17,000. Certainly, it’s a benchmark that we need to keep an eye on. But, you know, technology stocks, the NASDAQ has had an even better run lately. It was up 6 percent in the second quarter, where the Dow was up only 2 percent. Today, it was up 50 percent, 1 1/4 percent, where the Dow was up less than 1 percent.

Do you like technology here?

EDWARDS: We do like technology. And part of the reason is that these companies throughout the market, actually, are going to have to continue to grow their earnings. Part of the way you grow them is spend on technology. You get greater productivity out of the people there and then you start to add head count. We think that’s actually been going on for awhile but there is more to come.

GHARIB: We would like to get your thoughts on what individual investors should do. As you know, a lot have been sitting out. They are sitting on a lot of cash. You know, is it too late to get in at this point? Is it ever too late?

EDWARDS: Well, frankly, I think for a well allocated portfolio, it’s never too late. That being said, I think you need to take into consideration a few things. First of all, in terms of world equity, the U.S. is only 48 percent of world equity. That means that 52 percent of the equities, stocks, that trade in this world aren’t here.

So, if you don’t have exposure to international, both developed international markets, as well as emerging markets, you might want to start to look at that. If you’re going to be trading in the U.S., you might want to start looking more toward the small caps and the mid cap stocks because if there is going to be M&A, those are going to be the folks that are going to be taken out.

GHARIB: OK.

GRIFFETH: Joining the conversation right now is Jonathan Golub. He’s chief U.S. market strategist at RBC Capital Markets.

Thanks for joining us, Jonathan.

Do you see this continuing? Is this kind of trading that we saw today, this rally, could this set the tone for the third quarter or do you see us going into the summer doldrums as sometimes happens?

JONATHAN GOLUB, RBC CAPITAL MARKETS: You know, a day where the market is up between a half and 1 percent, you want to be careful to not project that that’s what we’re going to see. But I think that we’re going to see a continued very strong run in the market, very similar to what we had in the last several months. And the key is, a lot of this is driven by better economic news and corporate profits.

GHARIB: And what about what Patty was talking about, IPOs and M&A? Do you see that theme continuing? And we’ve got this big IPO everybody is talking about, Alibaba. Is that going to feed the momentum?

GOLUB: No. I mean, at the end of the day, IPOs are not going to be the thing that drives the market. And some of the M&A that you’ve seen is actually not driven by corporate excitement about the economy as much as moving some of the businesses offshore and doing things to enhance the earnings by cutting some of these tax burdens.

But the reality is, is that we have an economy, which is on solid footing. It’s getting better and that really is the fuel for the market.

GHARIB: All right. Terrific. Jonathan, thank you so much. Jonathan Golub from RBC Capital Markets and Patricia Edwards with U.S. Bank Wealth Management — thanks to both of you.

GRIFFETH: Well, it was another sign of strengthening U.S. economy when auto sales for June were released today. They did five predictions of a slowdown in big ticket consumer spending and instead, saw sales accelerate to an annualized pace of nearly 17 million units sold.

Ford sales, though, did fall last month. That sent the stock a bit lower today. But otherwise, shares of other auto makers saw modest gains on Wall Street.

Phil LeBeau has more on June’s surprisingly strong auto sales and which automaker stood out.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: A surprising day for automakers as they reported June sales that were better than expected. You can credit that to a relatively healthy economy and continued pent up demand for new vehicles.

Take a look at the Big Three. Of these numbers, the one that stands out here, General Motors (NYSE:GM). Sales increased 1 percent last month. Many were expecting sales to drop 8.5 percent.

Chrysler, another strong month. This brand has been on a role. Jeep in particular is red hot, up 28 percent last month.

As for General Motors (NYSE:GM), we mentioned how sales were up last month, that’s despite the fact the automaker is recalling 28.96 million vehicles worldwide and almost 12 million recalls were announced last month in the U.S. Still, June sales up 1 percent.

That’s a reason why a number of the auto stocks all got a bit of a bounce today as many people are looking at the industry and saying, if June sales pace is on par with a strong May, what can we expect from the rest of this year? We’ll have to wait and see.

That’s the story regarding June auto sales.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Baltimore.

(END VIDEOTAPE)

GHARIB: Well, General Motors (NYSE:GM) isn’t the only automaker plagued by defective ignition switches. Chrysler said today that it’s expanding its own ignition switch recall. It’s calling back another 700,000 vehicles that have ignition switches that can be shut off. This includes older models of previously recalled Dodge Caravan and Chrysler Town and Country minivans, as well as the Dodge Journey crossover vehicles from the years 2008 and 2009.

GRIFFETH: Well, talks are still ongoing, continuing past various deadlines as negotiators look to seal the deal finally on a new contract at those 29 ports along the West Coast. A new six-year deal would cover 20,000 dock workers from California to Washington state, including the major ports of Los Angeles, Long Beach, and Seattle Tacoma.

GHARIB: Well, the threat of West Coast ports shutting down isn’t the nation’s only transportation crisis. The White House is warning gridlock in Congress will lead too gridlock on the nation’s roadways if lawmakers can’t agree on how much to pay for much needed federal highway and transit repair program. And President Obama warned that unless money is found, hundreds of thousands of jobs could be lost.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: If this Congress does not act by the end of the summer, the highway trust fund will run out. There won’t be any money there. All told, nearly 700,000 jobs could be at risk next year. That would be like Congress threatening to lay off the entire population of Denver or Seattle or Boston.

(END VIDEO CLIP)

GHARIB: U.S. Transportation Secretary Anthony Foxx says states will begin feeling the pain of cut backs in the highway programs as early as the first week in August.

And still ahead, Google’s latest expert the how it’s trying to take on Twitter with the World Cup and the war room. We’ll explain.

(MUSIC)

GHARIB: Southwest Airlines (NYSE:LUV) is cleared for international take off and that’s where we begin tonight’s “Market Focus”.

The carrier is launching flights to destinations outside the U.S. for the first time ever. New destinations will include Jamaica, the Bahamas and Aruba. But Southwest will extend its service to other locations over the next few months. The airline is taking over routes flown by AirTran Airways which it bought in 2011 and plans to eliminate by the end of the year. The stock rose more than 3 percent to $27.73.

T-Mobile has been accused by federal regulators for adding bogus charges on customers’ accounts without their consent. The Federal Trade Commission says the wireless carrier tacked fees on to customer bills totaling hundreds of millions of dollars, labeling them as third-party charges. T-Mobile’s CEO says the complaint is unfounded. Shares fell a fraction to $33.41.

Shares of Regeneron popped on news the French drug maker Sanofi will increase its stake in the company to 22 1/2 percent. The move is part of an agreement between the two companies allowing Sanofi to buy up to 30 percent. Regeneron rose more than seven percent to $303.39, making it the best-performing stock in S&P 500 index today.

The second-best performer in the S&P, Netflix (NASDAQ:NFLX). Its shares were higher on an analyst upgrade. Goldman Sachs (NYSE:GS) rates the stock a “buy”. That’s up from “neutral.” The firm cited the video-streaming company’s international expansion and the opportunity to increase profit margins as its customer base grows larger. The stock jumped more than 7 percent to $473.10.

GRIFFETH: Hormel Foods (NYSE:HRL) is buying Cytosport. They are the maker of Muscle Milk for nearly a half billion dollars. That move is an effort by the Spam maker to expand outside of its meat products and diversifying its offerings into protein drinks. Shares of Hormel fell a fraction to $49.19 today.

Aerospace and defense products makers, Lockheed Martin (NYSE:LMT), is freezing its pension plan and instead is transitioning its employees to a defined contribution plan. That new plan will go into effect in 2016, to help the company manage the long-term costs of its retirement programs. Shares of Lockheed Martin (NYSE:LMT) down a fraction today just above $160.60 per share.

And Twitter has a new chief financial officer. The social media company has tapped Anthony Noto, a former Goldman Sachs (NYSE:GS) executive, who was instrumental in helping Goldman with the lead underwriter role on Twitter’s IPO last fall. Shares were up more than 2 1/2 percent on Twitter, to close at $42 and a nickel.

GHARIB: Google (NASDAQ:GOOG) did some shopping today, buying Songza. It’s a streaming music service with 5.5 million users. All 40 of Songza’s employees will be joining the search giant but no word on the price tag.

GRIFFETH: World Cup play continued today with the U.S. taking on Belgium, but there is another big rivalry taking place between Google (NASDAQ:GOOG) and Twitter, over which company can provide users and advertisers with the best real-time trending.

Well, the information during World Cup matches and other major events has been a big sticking point for these two companies and Josh Lipton has more.

(BEGIN VIDEOTAPE)

CROWD: USA, USA!

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Soccer fans gathered today in bars, homes and officers to cheer on their teams during the World Cup.

The loss in San Francisco, a group of Google (NASDAQ:GOOG) employees were also watching the game, only they were watching for work.

UNIDENTIFIED MALE: If the U.S. cannot stop talking —

LIPTON: Welcome to Google’s World Cup war room. Fans all over the world use Google (NASDAQ:GOOG) to search for information during the World Cup. So far, Google (NASDAQ:GOOG) says there have been 1.5 billion searches.

ROYA SOLEIMANI, GOOGLE: In 2010, there World Cup had more interest in the Olympic, the Tour de France, and Super Bowl and more. Other big sporting events generally are in the hundreds of millions.

LIPTON: A group of Googlers meet in this office every day during the World Cup to mine the searches for information. Data analysts first identified the most popular topics in these Google (NASDAQ:GOOG) searches, designers then created info graphics which are posted on Google’s Web site, as well shared on social media and with broadcasters such as ESPN.

SOLEIMANI: Google (NASDAQ:GOOG) is part of this conversation on the World Cup not just for the first time but really in a new way.

LIPTON: For example, as Colombia made it into the quarter finals, James Rodriguez became the most searched for player on the planet. So, the Google (NASDAQ:GOOG) team produced this info graphic to showcase that trend.

Financial analysts who cover Google (NASDAQ:GOOG) say that the search giant is taking on Twitter with the project. Twitter breaks down millions of tweets for trends and information that can be useful for advertisers. Google (NASDAQ:GOOG) is trying to show advertisers that it can be every bit as capable as Twitter when providing real-time events.

Google (NASDAQ:GOOG) has engaged in these kinds of projects in the past, for events such as the Super Bowl or the Oscars. But the company says that it has never conducted one on this global scale.

At the end of the day, it’s all about generating more advertising dollars for Google (NASDAQ:GOOG). Neil Doshi of CRT Capital says Google (NASDAQ:GOOG) is trying to prove there are vast amounts of data that are not fully being utilized. If Google (NASDAQ:GOOG) can start to present interesting ways of packaging this data, that could be very compelling to advertisers.

(on camera): Now, we’ll wait and see whether advertisers are impressed by these real-time snapshots of what fans are thinking as players take the field to battle for that World Cup trophy.

Josh Lipton, NIGHTLY BUSINESS REPORT, San Francisco.

(END VIDEOTAPE)

GRIFFETH: Well, coming up, it’s General Motors (NYSE:GM) versus Toyota (NYSE:TM), two of the world’s most recognizable brands competing in countries across the globe. And tonight, the two go head-to-head in NBR’s ultimate stock cup.

(MUSIC)

GRIFFETH: The World Cup as you may know is in the knockout round, with teams hoping to reach the tournament’s quarterfinals. And in the latest round of NBR’s own ultimate stock cup, we pit the world’s two largest automakers head-to-head to see who comes out on top in the local marketplace. It’s the U.S.’s General Motors (NYSE:GM) and Japan’s Toyota (NYSE:TM).

(BEGIN VIDEOTAPE)

GRIFFETH (voice-over): General Motors (NYSE:GM), GM, the world leader in auto sales every year from 1931 to 2007, founded in 1908. GM is headquartered in Detroit. 2013 revenue: more than $155 billion.

And the list of past and present GM brands is a who’s who of American automobile history. Icons like Buick, Oldsmobile, Cadillac, Pontiac, GMC and Chevrolet.

And it almost came to an end with a bankruptcy filing in 2009, but GM was bailed out by the federal government. And last year, it sold more than 9.7 million automobiles trailing only Toyota (NYSE:TM), which sold more than 9.9 million. But GM out-sales Toyota (NYSE:TM) in both China and the United States, the two largest markets.

Japan’s biggest company by market cap, it was founded in 1937 and it’s headquartered in Japan’s Toyota (NYSE:TM) City. 2013 revenues were more than $222 billion.

GM may outsell Toyota (NYSE:TM) here in the U.S., but the Toyota (NYSE:TM) flagship Camry sedan has been the bestselling passenger car here in the States for 15 of the past 16 years.

Also notable, the Toyota (NYSE:TM) Prius became the world’s first mass produced hybrid in 1997. Its other brands include Scion and Lexus.

(END VIDEOTAPE)

GHARIB: Well, let’s turn now to Efraim Levy to weigh in on this rivalry. He favors Toyota (NYSE:TM) and joins us now. He’s with S&P Capital IQ.

Why Toyota (NYSE:TM) over GM? What are the strengths?

EFRAIM LEVY, S&P CAPITAL IQ: Well, we don’t differentiate between two companies that we have a strong buy, which is the case for General Motors (NYSE:GM) and Toyota (NYSE:TM). But if you take the market close relative to our target prices, the edge is Toyota (NYSE:TM), which has 30 percent upside versus 28 percent upside to General Motors (NYSE:GM). That’s pretty close.

Both of these companies are benefitting from rising global demand. It’s a favorable industry trend. You have a lot of emerging markets. People are buying cars for the first time and back home in America, you have a rising market with a strong economy. You have a lot of new features, technology and the average age of a vehicle is over 11 years old. So, you have people coming into the dealership to buy cars and that helps both of these companies.

GRIFFETH: No question, Efraim, the GM recalls have been a disaster for that company from a public relations standpoint. Do you think it dents their sales? Does it tarnish their brand? What do you think about that, especially when you’re comparing to Toyota (NYSE:TM) here?

LEVY: Sure, it’s something you don’t want to have. It’s something that weighs on the brand image to certain extent, but we don’t think that it will make a major difference in terms of the company’s sales, which is something we’ve seen in the past two months for May and June where sales were pretty good for a company that has a lot of recalls.

And the reason we think this is because that recall is a part of doing business in the automobile industry. You’re going to always have recall. Some will be smaller. Some will be larger.

You want to keep it as the headlines, and if you have a situation where people are dying from it, like the ignition recall, that’s going to hurt mostly people who have been involved with accidents and know the people but overall, they are a broad enough brand that they can be disciplined and people will stick with them and expect them to do better.

GRIFFETH: You know, Efraim, you say that the auto industry always has recalls but in this case of Toyota (NYSE:TM) and General Motors (NYSE:GM), they both had or are going through a very high-profile credibility issue with their recalls. When you look at it from a crisis management point of view and how these two companies have handled it, in case of Toyota (NYSE:TM), in the past and GM currently, who is doing a better job?

LEVY: I’d say the edge for this goes towards General Motors (NYSE:GM). In part, they learned a little from Toyota’s experience. Toyota (NYSE:TM) had a problem that they were not acknowledging once the news was out and they did a bad job with their public relations. GM, obviously, this is old news that should have been disclosed a long time ago, but once it was out, they went to the forefront, they had the advantage of a new CEO who is not involved, and she is showing that this is a new GM, not the old GM, this is not going to be stood for in the future.

GRIFFETH: Very quickly, alternative fuel sources, do you give Toyota (NYSE:TM) points because of the Prius, the hybrid that has reached mass appeal at this point? Or, what do you think about the comparison there?

LEVY: Absolutely. Toyota (NYSE:TM) has a clear advantage. The Prius and the Prius family is the number one selling hybrid vehicle. If you’re buying one, you’re most likely going to buy a hybrid. Obviously, there’s other — I mean, a Prius. Obviously, there are other choices out there, but they are number one in the mindset of the customer.

GHARIB: All right. Efraim, thank you so much for joining us. Efraim Levy with S&P Capital IQ.

And so, you just heard what our guest thinks. Now, we want to hear from you, which stock do you prefer? General Motors (NYSE:GM) or Toyota (NYSE:TM)? Go vote on our Web site, NBR.com.

GRIFFETH: And now, the results from last week’s global rivals challenge where we asked you to choose between General Electric (NYSE:GE) and Siemens of Germany. You picked GE. It’s a clear victory, by the way, with 64 percent of you voting for the U.S. based conglomerate.

GHARIB: I think so far, there have been mostly votes for the U.S. companies. Do you think there is a bias there?

GRIFFETH: I wonder why that would be. Good job.

GHARIB: That’s NIGHTLY BUSINESS REPORT for tonight. I’m Susie Gharib, thanks so much for watching.

GRIFFETH: I’m Bill Griffeth. Have a great evening. We’ll see you 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) 2014 CNBC, Inc.

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