Transcript: Nightly Business Report — May 22, 2015

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

(BEGIN VIDEO CLIP)

JANET YELLEN, FEDERAL RESERVE CHAIR: I think it would be appropriate at some point this year to take the initial step to raise the federal funds rate target.

(END VIDEO CLIP)

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Ready or not. The chair of the Federal Reserve makes it clear that rate hikes are coming if the economy continues to improve.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Sky`s the limit — not with interest rates, but with the drone company that wants to help other companies make money.

HERERA: Double digit returns. Our market monitor has a list of stocks he says could pay off big for investors.

All that and more tonight on NIGHTLY BUSINESS REPORT for Friday, May 22nd.

MATHISEN: Good evening, everyone. Thanks for joining us.

The message for the market is this, Federal Reserve Chair Janet Yellen made a clear and direct statement on the one thing virtually all investors are focused on, the timing and speed of rate hikes. The central banks benchmark short-term rate which affects everything from mortgage rate to auto loans has been near zero since December 2008 and since they`ve been so low for so long, a lot of anticipation about when liftoff might occur.

Yellen`s comments come weeks before the next meeting and despite the concerns the economy may be slowing. Steve Liesman has the details.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Fed Chair Janet Yellen saying in a speech of Providence, Rhode Island, today that she believes the rate hike will be appropriate this year if the economy improves as she expects.

YELLEN: I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy. To support taking this step, though, I will need to see continued improvement in labor market conditions, and I will need to be reasonably confident that inflation will move back to 2 percent over the medium term.

LIESMAN: Yellen was clear expectation is for growth to improve, seeing much of the weakness as temporary.

YELLEN: This apparent slowdown was largely the result of a variety of transitory factors that occurred at the same time, including the unusually cold and snowy winter and the labor disputes at ports on the West Coast, both of which likely disrupted some economy activity.

LIESMAN: And the Fed chair seemed reasonably confident to rise back towards the Fed`s 2 percent target as the economy gets better, particularly the job market is approaching full strength but not there yet.

WARD MCCARTHY, JEFFERIES & COMPANY CHIEF FINANCIAL ECONOMIST: As far as the labor market is concerned, it`s come a lot farther, and I think it`s a lot closer to what she would like it to be, that inflation is. Inflation right now is pretty much dead in the water and it will take a number of months, I think, before we`ll see a different picture as far as inflation is concerned.

LIESMAN (on camera): Yellen also cited forces holding back U.S. growth, including global economic weakness and muted business investment. Those factors will give her caution in raising rates, but so far don`t seem extreme enough to keep the Fed from hiking this year.

For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.

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HERERA: As mentioned, the Federal Reserve is watching consumer inflation closely and today, we learned that prices increased slightly in April. The consumer price index rose 0.1 percent, in line with economic forecasts. It was the third straight monthly increase for the index. The core rate which includes volatile food and energy prices increased 0.3 percent in April, the largest rise since January of 2013.

MATHISEN: Jeffrey Cleveland joins us now to talk more about the Fed and economy. He`s chief economist at Payden & Rygel.

Jeffrey, good to have you with us.

Are the markets reading —

JEFFREY CLEVELAND, PAYDEN & RYGEL, CHIEF ECONOMIST: Nice to see you, Tyler.

MATHISEN: Good to have you with us, are the markets reading the interest rate map correctly as far as when and how fast?

CLEVELAND: Probably not, Tyler, in our opinion. Bond investors in particular, they`ve been telling the story, this narrative, that there isn`t any inflation, there`s not much growth, and, therefore, the Fed may or may not hike this year and if they do it will be slow and very gradual.
And when I look at the data, I see plenty of growth, job market looks good and this morning, as pointed out, we did see a bit of inflation, so that`s a little bit different than the narrative that bond investors have been spinning. So I think there`s some — sorry, go ahead.

HERERA: Well, given that then, when do you expect to make their first move on interest rates and how fast will subsequent moves be?

CLEVELAND: Well, she said this year, so we`ve got that. I think pretty good confidence there. Apart from it, it`s difficult to say, Sue, because they haven`t given us clear guidance as to what exactly they are looking for. She said further progress in the labor market.

We`re at 5.4 percent on the unemployment rate. Are they looking for 5.2, 5.1? It`s an open question.

She said she wants to be reasonably confident. CPI (NYSE:CPY) goes back towards 2 percent. Year on year basis, we`re right there. We`re 1.8 percent year over year.

So, in our minds, there`s not much further to go, so I think all meetings are live through June, July, or September, so some time this summer, it could be a very exciting summer the first rate hike in perhaps nine years.

MATHISEN: Eight, nine years. So, Jeff, are stocks and bonds reasonably priced given what you think will happen with respect to interest rate?

CLEVELAND: Probably upside risk, Tyler, to short-term interest rates and longer term interest rates. So, a two-year yield, 0.6 percentage points.
That probably goes higher over the balance of the year, if we`re right in our outlook. Ten-year yields, right around 220 right now. Those probably go a bit higher, as well.

I don`t think the bond market has the story. When I talked to bond investors, they tell me there isn`t any inflation, that growth was stagnant in Q1. I just don`t think that`s true, but that`s what`s priced in.

If you look at the equity market, you know, to me, the equity market reaches peak levels in any cycle towards the end of the cycle, Tyler.
We`re not there yet. I think we`re a couple years away from that.

So, I might be willing to stick my neck out, we could very well go higher as the economy continues to improve here.

MATHISEN: All right. Jeff, got to leave it there. Jeffrey Cleveland with Payden and Rygel. Have a great weekend.

CLEVALAND: Nice to see you.

HERERA: As the stock markets moved today, it declined following the comments by the Federal Reserve chair, failing to hold on to highs touched during the session. By the close, the Dow Jones Industrial Average fell 53 points to 18,332, the NASDAQ dropped one point and S&P 500 about four.

For the week, the results were mix. The blue chip Dow index fell fractionally while the NASDAQ and S&P 500 rose slightly.

MATHISEN: Confirmation today that the suitor for Salesforce was Microsoft (NASDAQ:MSFT). According to reports by CNBC`s David Faber, the two companies held, quote, “significant” talks this spring about a business combination but the companies couldn`t agree on a price. Faber says Microsoft (NASDAQ:MSFT) was willing to offer about $55 billion, but Salesforce founder and CEO Marc Benioff was looking for more, as much as
$70 billion. Talks broke off and have not resumed.

Microsoft (NASDAQ:MSFT) was off about 1 percent today. Salesforce, though, popped almost 3 percent.

HERERA: Deere raised its full year outlook and reported higher than expected quarterly profits, cost cuts and solid sales of its construction equipment helped to offset weakening global demand for its farm equipment and that helped send shares higher by 4 percent.

Mary Thompson has more from a lawn equipment supplier in Whitehouse Station, New Jersey.

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MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): John Deere delivering plenty of green in its second quarter, overcoming the negative effects of the stronger dollar and continued weakness in demand for its biggest big ticket items, farm equipment like tractors and combines. The performance earning management a nod from analysts.

VISHAL SHAH, DEUTSCHE BANK MANAGING DIRECTOR: The bottom line is the companies managing the downturn extremely well, much better than the prior cycle.

THOMPSON: Keeping a tight rein on expenses and helped by a lower tax rate, the Moline, Illinois-based firm posting stronger than expected earnings of more than $2 a share. Sales of $7.4 billion missing estimates as lower prices for commodities like corn and soybeans hit sales of farm equipment in key markets like the U.S. and Canada. Adding to the pain, slower growth in the Chinese, Russian and Brazilian markets.

(on camera): What did work for Deere in the quarter is construction and forestry business.

(voice-over): An improving U.S. economy and strong housing starts behind that division`s improved performance and while sales of big farm equipment fell, sales of its smaller machines like mowers sold at the Power Place in Whitehouse Station, New Jersey, were steady.

And that`s good news for owner Gus Ottoson.

GUS OTTOSON, POWER PLACE OWNER: I`ve been through down years, so flat is always better than a down year.

THOMPSON: As for Deere, it sees sales falling 19 percent this year, more than previously expected. But it did raise its profit outlook, expecting to harvest more earnings from fewer sales by holding the line on costs.

From Whitehouse Station, New Jersey, I`m Mary Thompson for NIGHTLY BUSINESS REPORT.

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MATHISEN: Some construction companies have also found a new way to help make sure projects get done on time, by using drones. All of the drone industry is still relatively new and regulations are still being developed, one company sees big opportunity in the drone economy.

Jane Wells has more now from San Francisco.

(BEGIN VIDEOTAPE)

UNIDENTIFIED MALE: So I`m going to arm the machine, arming.

JANE WELLS, NIGHTLY BUSINESS REPORT: While the FAA figures out what to do about drones, the number of businesses wanting to use them is exploding, matched by the number of pilots able to fly them.

UNIDENTIFIED MALE: I`m probably 50 feet above the roof.

WELLS: Now, a company called SkyCatch matches the two with Work Mode, a sort of Uber for drones. Need a drone for a job? Put out the call on Work Mode and a pilot will respond.

CHRISTIAN SANZ, SKYCATCHER CEO: This is the opportunity for you to get in and start creating their own business.

WELLS: SkyCatch trains pilots and already certified nearly 1,000 of them, including Tom Waclo.

TOM WACLO, DRONE PILOT: It`s still a very new industry, there`s not that many people who realize what the capabilities are, so it`s been great to have them help me find work.

WELLS: For companies like Air Systems, regular monitoring of construction sites let`s them compare progress against plans. Each flight costs from
$400 to $1,000.

KEVIN SOOHOO, AIR SYSTEMS CIO: If we didn`t have Work Mode, we would have had to buy our own drone, train our own pilot, and potentially carry a little bit more liability insurance.

UNIDENTIFIED MALE: This heat maps actually show where there was activity on the site yesterday.

WELLS: Where SkyCatch really hopes to make money is analyzing and processing data. It can even measure things like how much dirt has been removed to let you know how fast crews are working. And with backing from investors, Google (NASDAQ:GOOG) Ventures, SkyCatch is growing in other countries and other industries. And for drones, the sky really is the limit.

SANZ: A year from now, we`re probably going to be doing things we don`t even know today.

WELLS: The company has received FAA exemption to use its own drones to things like construction and agriculture, and many of its certified pilots that it`s done match-making with have extensions, as well. Others are applying for it.

But the drone business in the U.S. is starting in fits and starts. It`s very different overseas. In fact, SkyCatch`s largest customer is the construction and mining giant in Japan.

For NIGHTLY BUSINESS REPORT, Jane Wells, San Francisco.

(END VIDEOTAPE)

HERERA: Still ahead, a five-star fund manager tells us which stocks he`s betting on to produce some big returns.

(MUSIC)

MATHISEN: The Senate has a full plate of issues to deal with ahead of their Memorial Day recess. On the agenda, the Patriot Act, the highway bill, and President Obama`s top legislative priority, the trade bill.

John Harwood has more from Washington.

John, let`s start with the trade bill. Where does it stand, what`s likely to happen?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, we expect tonight the Senate will pass a version of Trade Promotion Authority, that`s the negotiating rights that allow the administration to complete the big Trans Pacific Partnership trade deal. So, last minute flurry of amendments about currency manipulation, the Republican strategy backed by the White House is to try to have a separate vote on that so it`s not included here.
They are reasonably optimistic they can prevail on that.

HERERA: Let`s turn to the highway bill. You know, in light of some recent studies on infrastructure, there`s a lot of pressure to get that through.
But what is the reality of it, John?

HARWOOD: Well, a short-term extension is likely to pass this evening before Congress leaves for that one-week recess. We still don`t have a solution long term, though, Sue, to how to make the highway trust fund solvent. It`s run short because gas prices are down, people — cars are more fuel efficient.

So, the amount of money that you need to do highway projects, build new highways, repair old ones, is simply not coming in. We`re not sure that Congress is ready yet to do the things like raising the gas tax that might close that financial gap.

MATHISEN: And where do we stand on the Patriot Act?

HARWOOD: Patriot Act is subject to an agreement tonight to have a short- term extension. Mitch McConnell, the Senate Republican leader, strongly against the House version of the bill, which curtails the NSA`s surveillance program. McConnell thinks it`s important for national security reasons given the threat from ISIS, that argument is getting stronger now. So, he`s trying to have a temporary extension to carry through for the fact that the authority for those programs lapses at the end of this month and try to work out a deal with the House.

MATHISEN: All right. John, thanks very much. Have a good long weekend.
John Harwood in Washington.

HARWOOD: You too.

HERERA: Charter Communications (NASDAQ:CHTR) and Time Warner (NYSE:TWX) Cable both moving on more deal speculations and that`s why we begin tonight`s “Market Focus”.

Charter is in talks with Time Warner (NYSE:TWX) Cable about a bid that`s likely to be well above $170 a share, that`s according to “The Wall Street Journal.” Last year, Charter originally offered around $132 a share, until Comcast (NASDAQ:CMCSA) (NYSE:CCS) beat that offer before abandoning its bid. Charter was off almost 2 percent to $175.29. Time Warner (NYSE:TWX) Cable was 3.5 percent higher to close at $171.18.

Shares of Quest Diagnostics (NYSE:DGX) spiked after a brief trading halt.
Some reports say the stock moved on talks of a buyout of the diagnostic testing and information service provider. Shares popped almost eight percent to $79.60.

A proposed $19 million settlement between MasterCard (NYSE:MA) and Target
(NYSE:TGT) over the retailer`s 2013 data breach fell through today. This as not enough banks accepted the deal, that would have paid the banks to cover fraud-related losses. Both stocks were off a fraction. Target
(NYSE:TGT) closed at $79.29. MasterCard (NYSE:MA) ended the day at $92.69.

Ann Inc. reported a moderate rise in first quarter sales as strong performance at its loft stores made up for sluggish returns from its namesake chain. Still, the retailer is struggling with weak traffic and competition. Shares were off just slightly to $46.97.

Campbell`s Soup reported earnings that easily topped estimates, but revenue fell short because of currency effects. The company also said full-year sales would fall towards the lower end of estimates, but earnings would be at the upper end of its projected range. Go figure. Shares popped 2 percent to $47.91.

Foot Locker says its last quarter was its most profitable in history.
Earnings, revenue and same-store sales all topped consensus. Despite that, shares were off a fraction to $63.46.

And today, a court ruled that Actavis cannot pull its top-selling Alzheimer drug from the market in favor of a more expensive extended release version.
Lawyers for the drug maker say it would suffer $200 million in lost sales if it couldn`t withdraw the older drug version. The stock was up a little.
It finished at $301.35.

HERERA: Our market monitor sees consumer spending picking up later this year and has stocks he says will grow 15 percent over the next one to two years. He is Gary Bradshaw, portfolio manager of Hodges Capital Management, the Dallas-based fund group that runs more than $2 billion in assets.

Welcome. Nice to have you here, Gary.

GARY BRADSHAW, HODGES CAPITAL MANAGEMENT CO-PORTFOLIO MANAGEMENT: Glad to be here, Sue. Thank you.

HERERA: I assume that that means that we`re going to see more spending, that you really do see the economy continuing to recover and grow near term.

BRADSHAW: Sue, we really do. At the Hodges Fund, we think the economy will continue to grow, get stronger through the last half of the year, and we think the consumer will benefit from that. The consumer`s not been spending a lot of late, but we believe old prices will stay down lower for longer and put more money in the consumer`s pocket.

MATHISEN: I know, Gary, you guys, the Hodges Fund, are stock pickers, stock pickers, and all your three choices tonight all have one thing in common, food.

And the first`s one`s ticket symbol is EAT, eat. Tell me about it.

BRADSHAW: Well, you`re right, Tyler. EAT is the ticker for Brinker International (NYSE:EAT), which owns the Chili`s chains based right here in Dallas. There`s 1,300 Chili`s across the country and they have remodeled their store, they revamped their menu, their same store sales are improving, and we think with lower gas prices, a consumer will continue to go out to casual dining.

And Chili`s or Brinker is a cheap stock at the Hodges small cap fund, in our opinion. We think earnings will grow about 15 percent a year for the next three years. It trades at 15 times earnings and we really like the stock here.

HERERA: All right. If you can`t cook your own at home, go out for some good old fashioned home cooking, right, country cooking. And you like Cracker Barrel for that reason.

BRADSHAW: Sue, we do. And we believe Cracker Barrel will be a long core holding in the Hodges small cap fund, as well. They have 635 restaurants, all along the Interstate Highway System, and when we`re out driving more because of these lower gas prices, we`re going to stop more at the Cracker Barrel.

They, too, are very well managed. They are improving their restaurant margins. Same store sales last quarter were over 7 percent and we think that`s going to continue and that`s going to drive Cracker Barrel`s earnings 16 percent or 17 percent, as well. They pay a nice 2.85 percent dividend.

MATHISEN: And they`ve got the rocking chairs on the front porch, Gary, that`s the thing that I like.

HERERA: That`s the thing.

MATHISEN: Your third choice, Casey`s General Stores, you fill up, you buy the food. Talk to me about Casey`s very quickly, but also tell me how you stay thin eating — if you eat at all these places.

BRADSHAW: Well, Tyler, Casey`s is a great business. They own all their real estate under those 1,850 stores. As gas prices are down, people have more money to go in and buy.

We may not stay thin, but we think Casey`s margins will stay fat, very, very well run business, they`ll grow their store base 100 stores a year and all three companies will remain core holdings.

HERERA: OK.

BRADSHAW: They`ll grow 15 percent a year and we like them all.

HERERA: All right. Gary, thanks so much for joining us. Have a great long Memorial Day weekend. Gary Bradshaw with Hodges Capital Management.

Ty?

MATHISEN: Coming up, investment slam dunk. The venture capitalist seeing big returns on the swish, Steph Curry.

(MUSIC)

MATHISEN: Uber is reportedly seeking a $1 billion credit line from banks.
According to “The Wall Street Journal”, the ride sharing company has contacted a number of banks asking them what terms they would offer. The move could signal an eventual initial public offering.

HERERA: Facebook (NASDAQ:FB), one of the biggest employers in Silicon Valley, made a big investment in a new building. The goal is in part to top retail talent to attract them and its new home stands in stark contrast to the college dorm where the company was actually created.

Julia Boorstin with exclusive access takes us inside Facebook`s new headquarters.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): With Facebook (NASDAQ:FB) just passing the 10,000 employee mark and with Apple
(NASDAQ:AAPL) stealing the design headlines with its new spaceship shaped headquarters, Mark Zuckerberg needed a new building. He partnered with world renowned architect Frank Gary, best known for sculptural structures, such as the Disney (NYSE:DIS) Concert Hall in Los Angeles, and the Guggenheim`s fame, to design MPK-20 for Menlo Park building number 20.

The goal, to be eco-friendly and reflect Facebook`s mission to connect people. Gary created the largest open floor plan in the world, and Facebook (NASDAQ:FB) commissioned local artists to decorate it.

The 430,000-square-foot space fits 2,800 employees. Zuckerberg usually works right in the middle.

LORI GOLER, FACEBOOK CHIEF PEOPLE OFFICER: Despite the very open floor plan and the large size, sort of broken out into neighborhoods and communities with walkways that go down each side and throw and around and throughout, so you really can`t walk through the space without bumping into people.

BOORSTIN: It`s a massive space with lots of natural light, but the biggest draw may be the roof.

(on camera): This nine-acre green roof has 400 full grown trees and a half mile walking loop. It`s also designed to inflate the building below us to cut down on heating and cooling costs.

(voice-over): Plus, there are white boards, Wi-Fi and plenty of places to sit and work. As Facebook (NASDAQ:FB) looks for the best talent in a competitive hiring market, Goler says Facebook`s investment says it prioritizes employees.

GOLER: It really creates an environment where people can collaborate, they can kind of innovate together, a lot of spontaneity in the way people bumped into each other. It`s just a great, fun, collaborative, creative space.

BOORSTIN: Facebook (NASDAQ:FB) won`t say how much the building cost, just that it came in under budget and faster expected, built in 18 months.

For NIGHTLY BUSINESS REPORT, I`m Julian Boorstin, in Menlo Park, California.

(END VIDEOTAPE)

MATHISEN: A top venture capitalist is also a prominent co-owner of an NBA team. And not just any team, but the one with the best record in the league this year, the Golden State Warriors. And his investment on the court is paying off handsomely.

Josh Lipton has more now from Oakland, California.

(BEGIN VIDEOTAPE)

SPORTS ANCHOR: There goes Curry. Curry fakes, pulls back, puts it up, puts it in!

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): The Golden State Warriors are on a roll. The team is back in the Western Conference Finals for the first time since 1976. That`s good news for the players, fans, and the owners.

Joe Lacob, a long time venture capitalist with Kleiner Perkins bought the team in 2010 for $450 million. Now, it`s worth more than $1 billion, according to Forbes.

UNIDENTIFIED MALE: We make our run right now. Let`s go.

LIPTON: Lacob says building an NBA powerhouse isn`t all that different from creating a successful start up. It comes down to one thing.

JOE LACOB, GOLDEN STATE WARRIORS OWNER: The people, the people, the people. That`s what matters. You have to have great management and the management have to hire great people underneath them and you have to build a team and an organization and culture.

And yes, the specifics of how you turn your organization around are important, but actually, it`s the people that do it.

LIPTON: Lacob isn`t the only professional investor and tech veteran who owns an NBA team. There`s Mark Cuban, Paul Allen, Vivek Ranadive and Steve Ballmer.

But Lacob has a message for Ballmer: running an NBA team is a lot harder than it looks.

LACOB: Ballmer was at Microsoft (NASDAQ:MSFT) for a lot of years. I think he`ll find this to be more challenging than he thinks. It`s not easy.

This is a very complicated, though not the largest business that maybe some of us have been associated with, it`s very, very complicated in terms of the media, in terms of the business, the sales aspect, in terms of — you know, so many things, the basketball side. It`s really a multidisciplinary type of activity.

SPORTS ANCHOR: Harden tied up, knocked loose, picked up, and the game is over! Golden State hangs on!

LIPTON: Lacob says he doesn`t care about the team`s evaluation, what he does care about deeply is winning championships. Game three with Houston is tomorrow night.

For NIGHTLY BUSINESS REPORT, I`m Josh Lipton in Oakland, California.

(END VIDEOTAPE)

HERERA: Good luck to everybody in that.

MATHISEN: All right. Thrilling game last night.

HERERA: That`s NIGHTLY BUSINESS REPORT for tonight. I`m Sue Herera.
Thanks for joining us.

MATHISEN: And I`m Tyler Mathisen. Please enjoy the holiday weekend and join us for a special edition of NIGHTLY BUSINESS REPORT on Monday evening.

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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