SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Goldman`s golden report.
What fueled the company`s best quarterly results in years?
Market debut. IPOs are back but there are three things investors need to know before buying into them.
Industry aftershocks. Why Oklahoma finds itself at the epicenter of a debate over fracking and earthquakes.
All of that and more tonight on NIGHTLY BUSINESS REPORT for Thursday, April 16th.
Good evening, everyone. And welcome. I`m Sue Herera. Tyler Mathisen, my partner, is off tonight.
It was all green for some of America`s bluest blue chip companies, delivering better than expected earnings. And in the case of Goldman Sachs (NYSE:GS), the numbers were blowout, smashing through estimates, echoing the strong results earlier this week by other big banks. In Goldman`s case, a strong performance by its trading arm fueled its best quarterly numbers in years, confirming management strategy of maintaining a business model critics said was too risky in the wake of the financial crisis.
Investors, however, were expecting those strong numbers and after a recent run-up in the stocks, they sold shares, sending the stocks slightly lower.
Mary Thompson reports.
MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
While still below at the record results, caught up in the midst of the financial crisis, Goldman Sachs (NYSE:GS) first quarter numbers packed a punch.
STEVEN CHUBAK, NOMURA SECURITIES: I actually thought that the results were quite impressive.
THOMPSON: The New York-based bank posting its highest quarterly revenue in four years, its highest quarterly profit in five, thanks to strong performance in its trading businesses, which generated half of the bank`s more than $10 billion in revenue.
On a call, CFO Harvey Swartz said expectations for higher rates in the U.S. and lower rates in Europe spurred clients to take action.
HARVEY SCHWARTZ, GOLDMAN SACHS CFO: The prospect of two of the world`s largest economies implementing divergent monetary policies had a significant impact.
THOMPSON: All of the Goldman businesses, investment banking, asset management, and the firm`s investment and lending portfolio contributed to the more than $2.8 billion Goldman earned in the first quarter, as the bank held the line on pay and benefitted from the lower tax rate. The result, an industry-leading measure of profitability known as ROE, it almost hit 15 percent, prompting praise from analyst Steven Chubak who rated Goldman a neutral.
CHUBAK: I thought it was higher quality beat than we`ve seen from Goldman this go around versus more recent quarters.
THOMPSON: Now, many thought this quarter is vindicating management`s decision after the financial crisis, to basically stick to its meeting (ph). Unlike other rivals, Goldman didn`t abandon riskier, core trading business, and bulk up on steadier businesses like asset managements, something some critics believe they had to do. However, as Chubak told CNBC, one quarter does not make a trend, and Goldman`s earnings, while strong in the first quarter, could still make be volatile because of those business.
HERERA: Absolutely. Stay right there, Mary, because we want to talk to you about American Express (NYSE:EXPR) (NYSE:AXP) results which were out right after the closing bell.
So, the world`s largest credit card issuer reported a 6 percent rise in profit to $1.48 a share. That beat estimates. Revenues, however, were light at $7.159 billion, a nearly 3 percent decline from a year ago. The reaction in the stock was pretty choppy.
So, as you can see from the charts, we did see some gains but the volatility was there.
So, Mary, what did you make of the quarter? What was — you know this company so well. What was the big takeaway that you had?
THOMPSON: Well, the company continues to be helped by its expense management. That helped in the first quarter, along with fairly strong spending by its customers, but it faces head winds, in the year, and had the continuation of the strong dollar, weaker gas prices, and, of course, the expiration of that explosive deal it has with U.S. Costco (NASDAQ:COST).
THOMPSON: The company has to invest in new growth initiatives going forward so it might have a little less leverage on the expense side, meaning that I think investors will have less to look forward to this quarter or this year, the company did say the company will he earning flat to lower as expected. But again, it`s leverage.
The tools that it`s used to boost those earnings in the past may not be quite as available as it invests in those growth businesses.
HERERA: Mary, thank you. As always, appreciate it — Mary Thompson.
And sticking with the financials, Citi reported its highest quarterly profit in nearly eight years as its cost fell. The bank has been cutting cost to simplify its structure and selling off noncore businesses. One analyst calls Citi, quote, “The big turnaround story for the large cap bank”, end quote. And shares rose 1 1/2 percent.
On Wall Street, stocks attempted to rally, but they stalled out despite the positive earning news, and a number of initial public offerings hitting the market. We`ll have more on that in just a moment.
At the close, the Dow Jones Industrial Average fell nearly 7 points to 18,105, the NASDAQ gave back three, and the S&P 500 dropped about one point.
The nation`s largest health insurer, UnitedHealth, also reported better than expected first quarter results. And the Dow component raised its full-year guidance. That made the stock the top performer on the Dow today with a gain of more than 3.5 percent.
Bertha Coombs has more on what`s driving this health care bellwether.
BERTHA COOMBS, NIGHTLY BUSINES REPORT CORRESPONDENT (voice-over):
UnitedHealth Group (NYSE:UNH) expected to see higher medical costs this winter after adding half a million new public health exchange customers, with people using more service and big demands for hepatitis C drugs.
Instead, United`s overall medical costs fell.
ANA GUPTE, LEERINK ANALYST: They`ve got well-controlled hospital costs, particularly on the in-patient side. They`re seeing some relief from the hepatitis C pressures that they saw last year.
COOMBS: United raised its earnings outlook, confident its $12.8 billion acquisition of pharmacy benefits firm Catamaran will be a strong boost to its fast growing health IT unit. The insurer says it can continue to manage cost, even as Americans have more access to medical care and hospitals are reporting stronger patient volumes.
Leerink analyst Ana Gupte says the Affordable Care Act is benefiting the industry as a whole.
GUPTE: I`m a firm believer in the goldilocks investment thesis. I think that the environment is right for both payers and providers. On the payers side, they are not seeing an uptick and elevation. On the provider`s side, they are seeing the benefits of the tailwinds from the Affordable Care Act.
COOMBS: Analysts say United diverse health care business position the insurer well if medical costs rise. The large scale makes it a force in health care and helps sets the tone in an industry that is focused on managing costs.
CECI CONNOLLY, PWC: But this is the start of a really encouraging transformation and an industry that through a variety of carrots and sticks that have been brought to bear, an industry that is performing more efficiently.
COOMBS (on camera): One potential setback for United and the insurance industry is the case now before the court involving subsidies on the federal exchange, ruling over turning those subsidies is likely to weigh heavily on the sector.
Bertha Coombs, “NIGHTLY BUSINESS REPORT,” New York.
HERERA: The CEO of the world`s biggest drug companies met in Washington, D.C. for the industry`s annual board meeting. One big top of
discussion: deal making. And Merck`s chief said he`s on the hunt for an acquisition.
(BEGIN VIDEO CLIP)
KENNETH FRAZIER, MERCK CEO: I want to do deals for one of two reasons, either because we want to get the next wave of science or we want to build on areas where we have a leadership role right now, like diabetes, like vaccines, like infectious diseases. So — like cancers. So, you will see us do both on acquisitions, aimed at those phases where we are either leading or where we aspire to lead going forward, not interested in the very large consolidation-type deals.
(END VIDEO CLIP)
HERERA: The CEO of rival drug maker Pfizer (NYSE:PFE) also said he`s interested in expansion.
Investors were paying attention to the Fed speak out there today as the market looks for clues as to when and by how much the Central Bank may hike rates. Atlanta Fed President Dennis Lockhart said he favors a rate hike later in the year rather than in June. Boston Fed President Eric Rosengren said the criteria for rate hikes have not been met. And Cleveland Fed President Loretta Mester says that any rate likes should follow a gradual path.
And then there`s the vice chair of central, Stanley Fischer, who told Sara Eisen that he is watching the economy closely.
(BEGIN VIDEO CLIP)
STANLEY FISCHER, FEDERAL RESERVE VICE CHAIRMAN: Where most people think it will happen this year, but you don`t want to get more definite than that. It depends on how the economy develops. We`ll try to do it at the best possible time and we`d like to see the economy beginning to grow again and grow at a decent rate.
(END VIDEO CLIP)
HERERA: Fischer also said an economic rebound is under way following the weak first quarter.
OPEC, the Organization of Petroleum Exporting Countries, reporting a sudden surge in March oil production. That extra supply being added to an already oversaturated market weighed on the commodity earlier on the session, but then unrest in Yemen prompted prices to reverse course. And by the settlement, West Texas Intermediate closed at another high for the year, at $56.71, its sixth straight session higher.
Oil and gas production has quickly become Oklahoma`s largest industry, but now, some scientists are questioning whether the increase in earthquake activity is related to part of the fracking process.
Morgan Brennan reports from Prague, Oklahoma.
MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
Struck Prague, Oklahoma, was the largest in history.
UNIDENTIFIED FEMALE: Everything just started shaking. So, it was really scary.
BRENNAN: And though highly debated, many point to the energy industry as the culprit. That`s because its oil and gas production has doubled over the past five years, the number of earthquakes rattling Oklahoma has urged.
Until 2008, the state averaged one to two quakes magnitude 3 or greater per year. In 2015, its average, two per day. And scientists say it`s not just here.
BILL LEITH, USGS: They increased throughout the central U.S. in about 2009. But primarily in just a few states and a few places within states like Southern (NYSE:SO) Colorado, Arkansas, Texas and Oklahoma.
BRENNAN: The U.S. Geological Survey says most of it can be linked to oil and gas production. But not fracking itself, rather, the disposal of wastewater, the salty toxic byproduct that`s disposed deep in the ground, in wells far away from the drinking water supplies.
LEITH: And this water is re-injected, and it has been done for years and years, but that changes the fluid balance at depth in the geologic formation and that`s what has happened potential for triggering earthquakes.
BRENNAN: Oklahoma has been hit the hardest, thanks to its geological formation, and the fact that billions of barrels of wastewater have been pumped down more than 4,000 wells.
The oil and gas industry, the biggest business in Oklahoma, doesn`t deny the possibility of a link, at least for some possibility.
But Kim Hatfield at the Oklahoma Independent Petroleum Association says what is lacking is specificity, being able to locate the exact wells that could actually be triggering these quakes.
KIM HATFIELD, OKLAHOMA INDEPENDENT PETROLEUM ASSOCIATION: That is an issue. We need to get that right. We don`t want to paint everybody with the same tar brush.
BRENNAN: It`s an issue resource-strapped regulators in many states are scrambling to address. In Oklahoma, the Corporation Commission recently released an updated directive that requires proof that wells haven`t been drilled into fault riddled bedrock.
MATT SKINNER, OCC: The onus is now on the operators, to prove that they`re not below the Arbuckle and too deep, and they have until April 18th to prove that.
BRENNAN (on camera): And what happens if they are too deep.
SKINNER: Then they have to do what`s called the flood back, and that`s basically making the hole shallower, bringing it back into the formation in question, which would be the Arbuckle. The cost can be
$100,000 or more.
BRENNAN (voice-over): The OCC is also reviewing new applications more carefully.
(on camera): How many are there?
SKINNER: We have approximately 80 that are backlogged.
BRENNAN: Do you think that has an effect on production right now in the state, the fact that this on hold?
SKINNER: It probably does.
BRENNAN (voice-over): And that`s one of the many questions remaining, what this means for oil and gas production, which is still a biggest provider of jobs in this state.
(on camera): Meantime, some residents have filed lawsuits against energy companies for personal damages, including one here in Prague following that 2011 earthquake. It is a highly contested case and when it could go before the Supreme Court this year have a big impact on this entire debate.
For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan in Prague, Oklahoma.
HERERA: And still ahead tonight, a handful of companies making their Wall Street debut today, but there are three things investors need to know before buying an IPO.
HERERA: Congressional leaders unveiling a bipartisan trade bill that could have big economic implications. The deal reached today gives the president fast track authority to negotiate the ambitious trade pack with
11 other Pacific nations.
PIMCO`s flagship total return fund is outpacing most of its rivals nearly six months after Bill Gross`s surprise departure from the firm.
According to Morningstar (NASDAQ:MORN), the world`s biggest fund returned
3.7 percent from the start of October. That`s head of 92 percent of its peers and its benchmark.
And tomorrow on NIGHTLY BUSINESS REPORT, we`ll speak with Scott Mather, the man who runs PIMCO`s total return fund.
Well, it looks like the IPO market has been jolted back to life.
After a slow start to the year, last night we told you that was all about to change — and it did. Shares of Etsy, which is the online marketplace for handmade goods, surged on its debut, more than doubling at one point.
And in an interview, the CEO said the company is focused on growing globally.
(BEGIN VIDEO CLIP)
CHAD DICKERSON, ETSY CEO: It`s important to understand that 30 percent of the sales on Etsy are international. We`re really focused today on a few key set of countries and our strategy is to build local marketplaces globally. The countries are balanced buyer and seller ecosystems — so, Canada, U.K., Australia, Western Europe. We are really focused on those countries.
(END VIDEO CLIP)
HERERA: Etsy closed up 87 percent to $30 a share.
Party City, the discount supply store, certainly took party to Wall Street today. Investors embraced the shares and the CEO said what makes that retailer attractive is the unique structure.
(BEGIN VIDEO CLIP)
JAMES HARRISON, PARTY CITY CEO: We really are the traditional retailer. We have three legs to the stool. We have the manufacturing operation, a wholesale operation and the retail operation. And that`s a rather unique paradigm because for our manufacturing operation, it is the largest customer is the wholesale customer, for the wholesale operation the retail business is the biggest customer but not the only customer.
(END VIDEO CLIP)
HERERA: Shares rose nearly 22 percent to $22.77.
And one of the biggest trading firms, Virtu Financial, saw its shares jump after postponing its IPO a year ago following the release of Michael Lewis` book “Flash Boys”. Investors brushed off any concerns over high frequency trading however, sending the shares higher by 16 percent.
So now that the IPO market is heating up, investors are itching to get in on the action. But our guest tonight says that there are three things to consider first.
Joining us is Kathleen Smith, principal at Renaissance Capital, a manager of IPO focus exchange traded funds.
Good to see you, Kathleen. Welcome.
KATHLEEN SMITH, RENAISSANCE CAPITAL PRINCIPAL: Thank you.
HERERA: So, let`s start with your thumbnail sketch of the IPO market so far this year. Last year, it was so hot, but it seems like it`s heating up a little bit more.
SMITH: It is heating up and I guess investors don`t have to wait for Uber and Airbnb to get some excitement in the IPO market. We certainly had it today. And after starting out the year on a slow foot, those investors that have owned a basket of IPOs that are already trading, we have an index, the renaissance IPO index, those investors are up 10 percent so far this year.
So, that means that they are feeling pretty good about what is coming up in the IPO market. So, we saw some very good results today. Etsy, just incredible. I think it did help to have a very loyal set of community that was involved in purchasing shares in the IPO. Virtu, as you mentioned, will pay a big percent. And Party City, I think investors were impressed by the expected growth there.
HERERA: So, let`s talk a little bit about, if you want — if you are the average retail investors out there with a longer time horizon, and you want to get into these IPOs, you`ve given us three bullet points before you take that leap. First of all, you take a look at revenue and earnings, correct.
SMITH: Certainly. And now we`re talking about an individual stock.
So, here you have to be very careful. And I would say the first thing is, you know, be careful about story stocks. Look at the company and make sure it has revenues and if no earnings, at least some clear path to earnings.
So, we`d start out by saying avoid story stocks and look for the earnings.
HERERA: And how much of the portfolio you put into an IPO can be critical, correct?
SMITH: Yes. We would highlight that you should not bet the ranch on any individual stock. Certainly should have a diverse potential of stocks if you are going to choose to go one by one.
HERERA: You know, the last point I think is one that probably will be hardest for most investors because some of these IPOs are so talked up and talked about and for instance, let`s take Etsy. It has a very loyal following. So, you say don`t get caught up in the hype. But it would seem to me that would be extremely hard to do?
SMITH: That`s really the challenge for investors, to take one big deep breath and take a look at it without all of the media attention and the first day of trading, especially on one that has risen so much as Etsy.
Give it time because Etsy is going to have to show, particularly this company, through quarterly results that it can continue its strong path of growth.
HERERA: So, you would not necessarily recommend that an investor, if they could get in on the first day, do so?
SMITH: We would not on a stock that has such a big jump. We would be looking at taking a step back and waiting for it to trade a little bit.
The ones that have traded more recently, maybe 13 percent or so increase, you might take a look at that and if you felt it was appropriately valued –
– really, there is no formula. If there were, we would all be following it.
HERERA: Right. Kathleen, thank you. Always a pleasure. Kathleen Smith with Renaissance Capital.
Microsoft (NASDAQ:MSFT) and Yahoo (NASDAQ:YHOO) are teaming up on search and that is where we begin tonight`s “Market Focus.”
The companies are redoing the search partnership with some changes.
The new agreement allows more flexibility in how the results are presented and how ads are managed. Shares of Microsoft (NASDAQ:MSFT) fell a fraction to $42.16. Yahoo (NASDAQ:YHOO) rose a nickel to $45.78.
BlackRock (NYSE:BLK) saw its earnings rise as the investment firm said cash flows were strong across all asset classes during the quarter.
Revenue did fall short of estimates though because of weaker fees tied to the stronger dollar. Shares were off about 1 percent to $372.18.
Philip Morris posted a beat on both the top and bottom lines, sending the stock to multi-year highs. The seller of Marlboro and other cigarette brands did see its profits fall from last year as it was pressured by that stronger dollar. Still, the stock popped almost 9 percent to $84.96.
Mattel`s loss widened in the first quarter as the toy maker recorded higher costs. A stronger dollar also weighed on its sales. The company has been trying to revamp as sales for some of its toys, like the iconic Barbie doll, have slowed. Shares were volatile in after-hours trading.
The stock was off slightly to $25.27 during the regular session.
On the economic front, the number of Americans filing applications for unemployment benefits rose slightly last week, but remained below a seasonally adjusted 300,000. But we got a sluggish read on the housing market, as ground breaking on new homes known as housing starts rose far less than expected in March, up to just 2 percent from a month earlier.
But one region where the housing market is red hot and getting hotter is San Francisco. And today, a new report shows the median price of a home in that city topped $1 million.
Josh Lipton has more.
JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: If you want to buy a home in the San Francisco Bay Area, you better move fast and have cash in hand. The median sales price in the San Francisco metropolitan area which includes San Francisco, San Mateo and Marin County has topped $1 million for the first time, a nearly 20 percent jump year over year.
That`s according to a new report from Redfin, a real estate brokerage.
LANDON NASH, REAL ESTATE AGENT: You know, we`ve been dealing with this market since the beginning of 2012 and seeing this rise year over year over year and for someone in the business all day, every day, I`m not terribly shocked. But just to say a $1 million median price in the San Francisco metro area is a little bit shocking to say.
LIPTON: The seller of this $1 million house actually bought another home before putting this one up for sale. How come? Because the market is now so competitive that she was afraid she won`t be able to find a new place to live.
In March, nearly 50 percent of homes sold in 14 days or less. And buyers were willing to pay up for their dream homes. More than 70 percent sold above the listing price. That`s in part due to the lack of inventory with a number of new listings down 12 percent year over year. And real estate agents attribute the sky-high prices to demand from a thriving tech industry.
Unless there is an increase in inventory, real estate experts don`t see this trend changing. If anything, it is spreading with nearby San Jose, California, nearing the million dollar mark as well.
For NIGHTLY BUSINESS REPORT, I`m Josh Lipton in San Francisco.
HERERA: Still ahead, the big money behind the movie that revolutionized Hollywood decade ago and remains a multi-billion dollar empire today.
HERERA: And here is what to watch tomorrow. General Electric (NYSE:GE), one of the most widely held stocks will report its earning. And we`ll have the Consumer Price Index report, an inflation indicator. And also, the latest read on consumer sentiment. And that`s what`s on the agenda for Friday.
Ben Bernanke is taking on a new role. As first reported by “The New York Times (NYSE:NYT)”, the former Federal Reserve chair will advise the
$25 billion hedge fund Citadel. Bernanke will offer advice on global, economic and financial issues, and meet with the fund`s investors.
And finally tonight, the force is with the thousands of fans descending on Anaheim, California, for the “Star Wars” celebration convention. The movie franchise is one of the most lucrative in Hollywood history.
And as Julia Boorstin tell us, decades after the first film was released, there is still big money behind the famous series.
JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESONDENT (voice-over):
“Star Wars” celebration drawing 40,000 fans for panels, autographs, exclusive merchandise, even a Jedi training session.
UNIDENTIFIED MALE: Who wants to see a new teaser?
BOORSTIN: The main attraction, the future of the franchise. Director JJ Abrams unveiling a new teaser for “The Force Awakens”, which hit theaters December 18th.
JJ ABRAMS, DIRECTOR: I`ve never had more fun in my life working on anything and the opportunity far outweighs the risk of this and I can`t wait for you to see it.
BOORSTIN: And fans were excited by what they saw.
UNIDENTIFIED MALE: It was loud. Everyone was super excited, cheering and standing and yelling, all of it. It was really saw some.
UNIDENTIFIED FEMALLE: Just complete craziness, mayhem. It is amazing how many people are here.
UNIDENTIFIED MALE: You want to see more and more and they end it showing Han and Chewy together.
BOB IGER, DISNEY CHAIRMAN & CEO: The movie-going audience in the world is much larger than it ever was. There are markets that weren`t existent before in terms of movie going, China being a great example of that. So, we`re fairly confident that this film is going to do quite well, but way too soon to make predictions and probably not making any in public.
BOORSTIN (on camera): Disney (NYSE:DIS) has been working hard to reassure die-hard fans like the one here that the nearly 40-year-old franchise is in good hands under its new ownership. Based on the reaction so far, the Disney (NYSE:DIS) CEO Bob Iger says that he is confident that the $4 billion acquisition of Lucas Film will pay off.
IGER: I think in the end, the shareholders of the Walt Disney
(NYSE:DIS) Company, including George Lucas, will be quite happy about the investment that was made.
BOORSTIN (voice-over): With devoted fans like the ones here, Disney
(NYSE:DIS) is working to build the “Star Wars” presence in its parks, to grow a consumer products revenue and there`s potential to expand the star wars university to TV.
For NIGHTLY BUSINESS REPORT, I`m Julia Boorstin in Anaheim, California.
HERERA: And that is NIGHTLY BUSINESS REPORT. I`m Sue Herera. Thanks for joining us. We`ll see you tomorrow.
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