Transcript: Nightly Business Report — May 11, 2015

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

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Saudi snub. The new king says he won’t attend a White House summit, as global investors keep a close eye on the U.S./Saudi relationships, long connected by oil and security.

Bold prediction. Why OPEC says we could be in for a decade of cheap oil.

And record breaker. Will an art auction make history tonight?

All that and more this evening on NIGHTLY BUSINESS REPORT for Monday, May 11th.

Good evening, everyone, and welcome. I’m Tyler Mathisen. Sue Herera is on assignment tonight.

Stocks fell after Friday’s big rally, as bond yields rose. More on that in just a moment.

But we begin tonight with hotspots all across the globe. Investors are closely watching developments out of Riyadh, Athens and Beijing, three separate stories, all of which could affect the direction of stocks and bonds over the months to come both here and overseas, and by extension, the value of your portfolio.

In Saudi Arabia, the king has said he will not attend President Obama’s summit of Gulf Arab states at Camp David later this week. This is yet another sign that the alliance between the two countries faces new strains. And it’s a relationship bound not just by politics but also by economics.

Hadley Gamble has more now from London.

(BEGIN VIDEOTAPE)

HADLEY GAMBLE, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): With a deadline for a nuclear agreement with Tehran just weeks away, President Obama’s bid to bring Gulf Arab allies on board is floundering. Saudi Arabia’s King Salman was the first but not the last Gulf Arab monarch to decline a White House invite this week for a regional security summit.

Dubbed the Saudi snub, U.S. officials were quick to push back.

JOSH EARNEST, WHITE HOUSE PRESS SECRETARY: I know that there have been some speculations that this change in travel plans was an attempt to send the message to the United States. If so, that message was not received.

MARIE HARF, U.S. STATE DEPARTMENT SPOKESWOMAN: Nothing could be further from the truth there was some snub.

GAMBLE: Billed as an opportunity for Arab leaders to air their concerns about the P5-plus-1 talks with Tehran, the Obama administration had planned to sweeten the deal for the Saudis and their allies with promises of more weapons and military cooperation, but stopping short of what Arab leaders were hoping for.

ROBERT JORDAN, FORMER U.S. AMBASSADOR TO SAUDI ARABIA: This has been a slow moving train wreck over several years. The president is trying to reassure at these Gulf States that if we do reach a deal with Iran, we still have their back from a security standpoint. This is a very difficult assurance to provide since we have not delivered very much on other assurances we have provided in the past. And so, I think our credibility is really at stake here.

GAMBLE: The move comes just days after U.S. Secretary of State John Kerry’s latest trip to the kingdom, and what U.S. diplomats described as tough negotiations over the Saudi-led coalition’s activities in Yemen. With no long term or binding security commitment from the U.S. on the table, the Saudis and their allies are worried. And they say the Washington summit is not offering anything new.

And while both sides deny that there’s any rift in the relationship, there’s no getting around that there’s a disconnect between what Gulf Arab allies want and what the U.S. is willing to give.

(on camera): Now, the fact that disconnect, the fact remains that the United States just can’t afford another failed state, which could become a breeding ground for terrorists, and at the same time as a U.S. diplomat told me, they’re still committed to securing global shipping lanes, and that means gulf oil exports will continue to flow.

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

(END VIDEOTAPE)

MATHISEN: What Hadley just reported, the administration made it clear it does not consider the missed meeting a number by the Saudi king.

John Harwood has been watching the developments from Washington.

John, good evening. How important is the relationship between the two countries both politically and economically? And is it cooling?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: It’s a critical relationship and has been for sometime. The moderate Arab states are vital allies for the United States. And, of course, the oil relationship has very robust over many years.

I think that this is a strain. I don’t think the White House denials were overly persuasive in terms of the idea that a visit that was announced on Friday, but now on Sunday was said not to be taking place — it indicates a rough patch.

Now, it’s the flip side of what we’ve experienced with Israel, another ally in the region. They are uncomfortable with the deal, and Bibi Netanyahu has made that more than clear, that we are trying to reach with Iran, and the Sunni Arab states like Saudi Arabia look at Shiite Iran and worry about a rapprochement with the United States and say, hey, what does that mean for us? They’re clearly worried.

I don’t think it’s a rupture or anything like that. But it’s a matter of strain at the moment.

MATHISEN: And it is a question, I guess, John, as you point out there as to whether Iran becomes ascendant as a regional counterweight to Saudi Arabia, Shiite versus Sunni.

Let’s move to another topic that’s going to be very hot tomorrow. There’s likely to be a critical vote Tuesday, affecting what some people call the president’s biggest legislative item since the Affordable Care Act, namely, this big trade partnership called the Trans Pacific Partnership. This time, John, the president’s foes on this or many of them are in his own party.

What’s happening and what’s likely to happen?

HARWOOD: Well, this is an example of what happens with trade bills. We saw it with Bill Clinton, where he had a lot of Democratic resistance to NAFTA, to letting China into the World Trade Organization. And he made common cause with Republicans then. That’s what President Obama is doing now.

They’re trying to clear a filibuster in the Senate tomorrow to get to try to consideration of Trade Promotion Authority, which is accelerated what they call, used to call fast track, to let U.S. negotiators strike a deal, knowing that Congress won’t later change it. I do expect that they will get the 60 votes they need to clear that filibuster, and then begin debate on the bill, but their strong Democratic opposition led by Elizabeth Warren, the very influential liberal senator from Massachusetts.

MATHISEN: All right. John, thank you very much. We’ll be watching tomorrow.

John Harwood reporting from Washington tonight.

Well, Saudi Arabia is the world’s biggest crude exporting nation and OPEC’s most powerful member. Today, a report from the Organization of the Petroleum Exporting Countries was leaked and what the group sees for oil prices over the next decade is surprising to say the least.

Jackie DeAngelis has more.

(BEGIN VIDEOTAPE)

JACKIE DEANGELIS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): A market moving headline from “The Wall Street Journal” today saying OPEC doesn’t see oil prices consistently trading at $100 a barrel again in the next decade. “The Journal” citing a draft of OPEC’s latest strategy report which is due out tomorrow.

In its most optimistic scenario, OPEC sees oil prices at $76 a barrel in 2025. The cartel appears to be getting concerned that American producers will continue to pump product and cope with low prices.

How are traders interpreting this?

MICHAEL MCPARTLAND, MCNAMARA OPTIONS: Their overall strategy really hasn’t worked because there’s so much oil out there and so much refining capacity in the United States, and, frankly, there’s alternative energy out there that’s coming on line in the next 10 years. So, their report is a reflection of that.

DEANGELIS: But remember, U.S. production is still at record levels, over 9.3 million barrels a day, and OPEC hasn’t made production cuts. So, does that mean the cartel will slash output at its June meeting? That remains to be seen.

(on camera): Still, while prices were lower today, WTI was supported at $59 a barrel and Brent at $65. These are crucial levels traders say. They’re not just digesting today’s headlines, but a plethora of factors right now as they determine which direction this trade will take.

For NIGHTLY BUSINESS REPORT, I’m Jackie DeAngelis.

(END VIDEOTAPE)

MATHISEN: As for oil prices, they did edge lower today, after rising for eight straight weeks. West Texas Intermediate finished the session down 14 cents a barrel to $59.25.

Separately, the Obama administration granted conditional approval for Royal Dutch Shell to drill in the Arctic. The company has already spent $6 billion on exploration in the region. That’s estimated to contain 20 percent of the world’s undiscovered oil and natural gas. The government says drilling activities will be subject to rigorous safety standards.

Well, China has overtaken the United States as the world’s biggest buyer of crude oil. Purchases by that country are expected to remain strong despite a slowing economy. According to “Reuters”, China’s crude oil import hit a record of almost 7 1/2 million barrels a day last month, and that puts it ahead of estimated imports for the United States. China is already the number one purchaser of other commodities like coal and iron ore.

Meanwhile, China’s central bank made another big move overnight, as that country tries to ratchet up support for its slowing economy and its stimulus efforts aren’t expected to end there.

Eunice Yoon has more for us from Beijing.

(BEGIN VIDEOTAPE)

EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: China cut interest rates for the third time in six months. And most economists believe that we’re going to see more. The economy is slowing down and many people here believe it’s rapidly losing momentum.

The April data so far has been disappointing for trade as well as inflation, and that bodes poorly for the other data that’s out later this week as well as for the second quarter.

The central bank over the weekend decided to cut interest rates by 25 basis points to help shore up the economy. The one year lending rate now stands at 5.1 percent, and the deposit rate is at 2.25 percent. The idea is to try to ease the debt burden on companies as well as government.

Now, as much as the central bank would like to shore up the economy, it also says it wants to deepen structural reforms, with allowing more flexibility for banks to set their own interest rates on deposits. The idea, of course, is to create more competition in the financial industry.

For NIGHTLY BUSINESS REPORT, I’m Eunice Yoon.

(END VIDEOTAPE)

MATHISEN: Now, to Europe where the focus is on Greece. According to “Reuters”, the indebted country eased more immediate concerns by making payment a day at the Internal Monetary Fund a day early. Now, Greece’s finance minister said his country’s liquidity situation was, quote, “urgent” and that further funds are needed.

Well, the unresolved situation in Greece, along with concerns about China’s economy and rising treasury yields here weighed on the U.S. stock markets. By the close, the Dow Industrials were 86 points, 85 or thereabouts, to 18,105. NASDAQ was off about 10, and so was the S&P 500.

The yield on the ten-year, well, it was back above two and a quarter percent. Quite a move there.

Well, the president of the San Francisco Fed says he’s optimistic about the U.S. economy and expects to see further improvement in the labor market. As for when the central bank will hike rates, the Fed official argued that the move should not be telegraphed.

(BEGIN VIDEO CLIP)

JOHN WILLIAMS, FEDERAL RESERVE BANK OF SAN FRANCISCO PRESIDENT: My personal preference is that we don’t have the most telegraphed policy decisions in history, like we did in 2004. I do believe that the data dependence is what we should be doing. We should be coming together every six weeks, discussing what the outlook looks like, and what the right appropriate policy decisions at that meeting are, and in adjusting policy going forward.

(END VIDEO CLIP)

MATHISEN: Williams, by the way, is a voting member of the federal open market committee.

Well, Citigroup (NYSE:C) has confirmed that it could plead guilty as part of a settlement with the Department of Justice. The plea would resolve an antitrust charge over the banks dealings in the foreign exchange markets. Citi and other big banks have been accused of manipulating the currency market to their own advantage, sometimes at the expense of clients.

And still ahead, it has been a great year for travel-related stocks. But there’s one group that’s lagging, and in need of a jump-start. That story, next.

(MUSIC)

MATHISEN: Uber could be worth $50 billion, you heard me right, $50 billion. The ride hailing company is reportedly in discussions to raise roughly $ 1.5 billion in financing. According to “The Wall Street Journal”, that would value the company at $50 billion or higher, possibly making it the most valuable venture backed start-up of all time.

Well, as Uber disrupts the taxi business, it’s also creating a headache rental companies that are reeling from a host of other issues as well. Companies like Avis and Hertz are both down more than 15 percent this year. And as more Americans start making vacation plans, this summer could put the entire car rental industry to the test.

Phil LeBeau has more.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Plan on renting a car this summer? Be prepared for a hit or miss experience.

UNIDENTIFIED FEMALE: The last time I rented a car was in this area, was in Las Vegas, and the service was not good.

UNIDENTIFIED MALE: It’s not perfect. Few airports are tougher than others.

LEBEAU: Rental car companies are trying to reinvent themselves while getting more profit for vehicle. But here’s the problem, just as travelers want to move through airports faster, they also want to spend less time picking up and dropping off rental cars. But less time at the rental car counter makes it tougher for these companies to generate bigger profits.

BRIAN JOHNSON, BARCLAYS: They want to sell you, they want the insurance. They want you to buy and come out with a bigger car. They’d like you to get some prepaid gas.

LEBEAU: Hertz, Avis and Enterprise dominate an industry that consolidated over the last decade, much like airlines. But unlike airlines, which now limit seats and charge customers more, rental car companies struggle with too many vehicles, spending too many days each month not being rented. Meanwhile, ride share apps like Uber are cutting into one day rentals and increasingly, technology is changing the way people travel, a challenge for rental car companies.

JOHNSON: They probably have 10 years or so of rolling out technology, maybe five years to make the experience better.

LEBEAU (on camera): If the rental car companies are able to transform their businesses much as the airlines have, then perhaps the industry could be in for a long successful run, and that could change the experience for many who are renting a car.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

(END VIDEOTAPE)

MATHISEN: Car rental companies are, of course, not the only ones trying to transform their business. The U.S. Postal Service is doing the same. Independent agency recently reported a net loss of $1.5 billion during the first three months of year, and it has a multibillion dollar plan now to get back on track.

Morgan Brennan reports.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): The U.S. Postal Service is testing out new mailboxes, big enough to fit packages.

SHAWNETTE FLEMING, BROOMFIELD, CO. RESIDENT: We do a lot of online shopping, probably 90 percent of my packages can fit in this mailbox. I think that’s great. I don’t have to worry about someone stealing or it getting wet on the porch.

BRENNAN: The boxes are part of a six-month trial and in a handful of urban and rural markets, including here in Broomfield, Colorado.

EDWARD PHELAN, U.S. POSTAL SERVICE: With the change in mail mix, and the change in how the package business has grown, we decided that there was a need for a box that would actually fit the mail of today.

BRENNAN: This is just one example of the U.S. Postal Service’s massive multibillion dollar push into package delivery. It’s no secret the agency, which is not taxpayer-funded, has been struggling for years, including a $1.5 billion net loss in its most recent quarter.

Mandated retiree funding laws aside, the Postal Services’ most profitable business, first class mail, has plunged, with volumes dropping more than 30 percent over the past five years. But its ecommerce has surged, package volumes have jumped over the same period.

JAMIE OSBORNE, BROOMFIELD, CO. POSTMASTER: Packages are our future. They’re just continuing to grow exponentially. It’s — every week, we see more and more packages.

BRENNAN (on camera): More packages means more capacity. This machine can sort 6,000 parcels an hour, recently installed in an area at this Queens facility, once dedicated to mail. The U.S. Postal Service has plans to roll out 20 of these across the country.

(voice-over): One of the fastest growing parts of the agency’s package segment is partial select service, which provides last mile delivery for companies like Amazon (NASDAQ:AMZN), FedEx (NYSE:FDX) and UPS.

SATISH JINDEL, SHIPMATRIX PRESIDENT: You can see with the result of UPS and FedEx (NYSE:FDX), their volume in the pure post and smart post is growing at a small rate than post office’s boxes collect (ph), which means more and more shippers like Amazon (NASDAQ:AMZN), like Macy’s and others are delivering to the post offices for the last mile service.

BRENNAN: Other initiatives included a design competition for a bigger, more fuel efficient fleet, expected to cost $7 billion and begin rolling out in early 2018. Also, same day delivery in certain areas, including groceries for Amazon (NASDAQ:AMZN) in California.

And while UPS and FedEx (NYSE:FDX) have implemented new pricing initiatives, the USPS has been slashing rates for large priority mail customers, in an effort to attract more business from its private sector counterparts. But will it all be enough to put the postal service back on the path to profitability? We’ll have some answer only time can deliver.

For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan, in Flushing, New York.

(END VIDEOTAPE)

MATHISEN: A $2 billion shale oil mergers where we begin tonight’s “Market Focus”.

Noble (NYSE:NE) Energy will acquire Rosetta Resources (NASDAQ:ROSE), marking the first big deal among U.S. shale producers following the steep drop in crude prices. The deal gives Noble (NYSE:NE) access to two massive Texas shale formations. Shares of Noble (NYSE:NE) Energy were down more than 6 percent to $46.07. Rosetta surged 27 percent to $24.58.

Shares of Zulily spiking today on news that Alibaba bought a more than 9 percent stake in the company, this according to a recent filing. The investment adds up to more than $50 million in the online children’s retailer. Alibaba was off a fraction to $86.72. Zulily, though, popped 5 percent to $13.98.

Lower milk costs helped Dean Foods (NYSE:DF) deliver better-than-expected earnings. Revenues did come in lighter than expected, but investors did seem to overlook that. The stock was up 6.5 percent to $17.33.

McDonald’s is supersizing its turnaround plan. We told you last week a few of the changes the Dow component will make, but today, there’s more. According to Dow Jones, the chain plans to shake off years of sliding sales by adding mid-price sandwiches, expanding all-day breakfast, simplifying its drive-thru menu boards and selling lemonade in the summer. Shares fell a fraction to $97.51.

The first ever real estate project financed through crowd funding is now open for business. Not only are investors already seeing returns, but the project itself is transforming both the neighborhood and the real estate landscape.

Diana Olick reports.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): We met Ben Miller a year and a half ago in a dicey D.C. neighborhood, at the shelf an old building he claimed would make history.

Today, Maketto is open for business, the first ever crowd funded real estate project of floor plans for the future.

BEN MILLER, FUNDRISE: We raised $350,000 from 175 people at $100 a share.

OLICK: Miller’s platform Fundrise, allows investors to buy shares in commercial real estate projects. In return, investors get rental streams, property appreciation, and they get to be a part of something bigger.

MILLER: We start a Fundrise with an idea that’s like, why can’t everybody be a part of investing and building in the neighborhood.

OLICK: Gina Schaffer, who owns 10 area hardware stores but leases all her spaces, bought into the Fundrise project to the tune of $10,000.

GINA SCHAEFER, FUNDRISE INVESTOR: For us, it was part of the sharing community and the movement, and being able to — even if it was just a piece, to say that we at least owned something.

OLICK: This area called Eighth Street is still in transition, but Maketto is a solid anchor. In just one month, a thriving market that embodies the crowd even in its structure. It houses a retail store, a bar, a bakery, a coffee company, and a high end Asian fusion restaurant.

CHRISTOPHER VIGILANTE, VIGILANTE COFFEE: I think when you have the synergy of all these businesses, you get that lifestyle brand.

OLICK: Christopher Vigilante saw an opportunity not only to house his coffee business but to profit from a new model.

VIGILANTE: Folks that simply want to drink a high end coffee can understand what really fine cuisine can be like. It can also appreciate fine clothing.

OLICK (on camera): The vendors here literally feed off each other, with retail pulling patrons in for their morning coffee and then keeping them here right up to dinner and after hours at the bar. Its shared space from floor plan to financing is attractive to the social generation, and now, crowdfunding is ever more attractive to investors.

MILLER: We did probably $150 million of real estate in the last month. And we are doing a project a week to underwrite and fund a project a week. It blew our minds.

OLICK (voice-over): Miller estimates the value of this property alone is up 50 to 100 percent, and Maketto has outperformed all projections. He calls its cash flow just a bonus, compared to the contribution it’s making to both the community and the concept of real estate crowdfunding.

For NIGHTLY BUSINESS REPORT, I’m Diana Olick in Washington.

(END VIDEOTAPE)

MATHISEN: To read more about how crowd funding real estate is paying off, head to our Web site, NBR.com.

Coming up, the Picasso painting up for auction that’s expected to break records.

(MUSIC)

MATHISEN: Here’s what to watch tomorrow: the Treasury Department releases its budget for April, that’s the biggest tax month on the calendar. Lots of revenues coming in. We’ll have employment data with the jobs opening and labor turnover survey, and a new report on small business optimism. That folks is what’s on the agenda for Tuesday.

Five companies are reportedly sitting on nearly a half trillion dollars in cash overseas. The five are Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG), Pfizer (NYSE:PFE) and Cisco (NASDAQ:CSCO). “The Financial Times” citing a report by Moody’s, says America’s tax code and mediocre growth around the globe is keeping the cash cows from spending any of their hoard.

Well, Sotheby’s swings to a first quarter profit as cost there fall. The art auctioneer topped both earnings and revenue estimates, and its new CEO says the company’s results were helped by strong sales of impressionists and contemporary art. Shares were up today about 1 1/2 percent.

And later tonight, rival auctioneer Christie’s is hoping to make history when it auctions off a piece by Pablo Picasso. Expectations are very high, with some referring to this auction as a sale to remember.

Robert Frank has more on the spring auction season.

(BEGIN VIDEOTAPE)

ROBERT FRANK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Nearly $2 billion worth of art is expected to sell at the spring sales at Sotheby’s and Christie’s. A combination of rare masterpieces coming up for sale, and a growing demand by rich collectors for fine art is expected to keep breaking sales report. The star of the sale is this painting by Pablo Picasso called Les Femmes d’Alger, which is likely to become the most expensive painting ever sold at auction tonight.

The piece was one of a series of 15 paintings by Picasso, this one called Version O is considered one of the greatest Picasso masterpieces still in private hands.

TODD LEVIN, LEVIN ART GROUP: By the ‘50s when he was starting to create the suite in ’54, ‘55, around that time, it was as if he was revisiting his youth to a certain extent, and the works again began to become more punchy and angular again.

FRANK: Christie’s has put an estimate of $140 million on the painting, meaning it’s likely to shatter the current record holder, a Francis Bacon triptych that sold in 2013 for $142.2 million.

(on camera): Now, as an investment, Les Femmes d’Alger has actually done better than the stock market. The famed collector Victor Ganz bought the entire series of 15 pieces in 1956 for $212,000. Version O was sold in 1997 for $48.4 million, including auction fees. So, it’s tripled in value, while the S&P 500 has roughly doubled.

(voice-over): Another piece that’s likely to break a record is this sculpture by Alberto Giacometti called “Man Pointing”. Giacometti created the piece during a single night of feverish work in 1947. If it sells for an estimate of $137 million, it will be the most expensive sculpture ever auction. Whether “Man Pointing” points to a bubble in the art market, or continued rising prices, will depend largely on financial markets.

LEVIN: I think it would be impossible to do anything but look at these sales and say, we certainly have a frothy market at the time. There’s a tremendous of excess capital out there that’s bottlenecked in the hands of a relatively small amount of people. And they’re going to have to find some place to put those assets.

FRANK: And more and more of those assets are hanging on investors walls.

For NIGHTLY BUSINESS REPORT, I’m Robert Frank.

(END VIDEOTAPE)

MATHISEN: Hold the Bacon Francis (ph), just give me the Picasso.

That’s it for NIGHTLY BUSINESS REPORT for this evening, I’m Tyler Mathisen. Thanks for watching, everybody. Have a great evening. We’ll see you back here tomorrow night.

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) 2015 CNBC, Inc.

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