TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Feeling blue. IBM tops earnings expectations, but misses on the revenue side. And that is enough for investors to send the stock lower after the close.
SHARON EPPERSON, NIGHTLY BUSINESS REPORT ANCHOR: Sign of concern? The NASDAQ sits at an all time high. But under the surface, a trend is emerging that could cause some waves.
MATHISEN: And finding a fit. Where annuities may belong in your retirement portfolio.
All that and more tonight on NIGHTLY BUSINESS REPORT for Monday, July 20th.
EPPERSON: Good evening, everyone. I’m Sharon Epperson, in tonight for Sue Herera.
MATHISEN: And I’m Tyler Mathisen. Welcome, everyone.
Well, it was a positive day on Wall Street, but mixed results from Dow component IBM could initially set the tone for tomorrow. The company did earn $3.84 a share. That topped estimates by a full six cents. That was the positive.
But revenue came in a bit shy of expectations. Still, Big Blue brought in nearly $21 billion in the quarter. So, if that’s shy, I’d like to be shy.
Investors were not pleased, though, they sent shares lower right off the bat in extended trading today.
Jon Fortt has the one takeaway you should focus on.
JON FORTT, NIGHTLY BUSINESS REPORT CORRESPONDENT: One takeaway from the IBM call is that the downturn in growth markets was not enough to make up for stabilization in the services business. Brazil, Russia and China, and particularly down double-digits. Those were markets that IBM was looking forward to grow. India was up partially.
And services actually had some positive aspects to it. The services backlog was up to $122 billion. The first time that’s seen positive growth in a couple years. But that wasn’t enough to make up for the trouble in growth markets and the stock was down after hours.
For NIGHTLY BUSINESS REPORT, I’m Jon Fortt.
EPPERSON: While the street will be focused on IBM’s earnings, there will be plenty of big name tech companies announcing their results this week. Tomorrow, it’s Dow components Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT), as well as Yahoo (NASDAQ:YHOO). Wednesday, Qualcomm (NASDAQ:QCOM) and Texas Instruments (NYSE:TXN) will report. And Thursday, Amazon (NASDAQ:AMZN) and Juniper Networks (NYSE:JNPR) will announce.
MATHISEN: So, with all of those powerhouse names coming out, and the NASDAQ sitting at an all time high, tech investors should have a lot to smile about, right?
Well, as Bob Pisani tells us, a worrisome trend is starting to reveal itself.
BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: There is a big problem in tech right now. The NASDAQ 100 is up 6 percent this month to a 15-year high. But the leadership is very narrow. Right now, there’s really four technology stocks that matter — Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB) and Apple (NASDAQ:AAPL). And that’s it.
Google’s up 20 percent in July. Amazon (NASDAQ:AMZN) is up 11 percent. Facebook (NASDAQ:FB) is up 10 percent. And Apple (NASDAQ:AAPL) is up 3 percent. This is just for the month of July. It’s an amazing run.
The problem is the market capitalization of these companies are so big, they’re distorting the indexes which are weighted by market capitalization. Together, the four companies have a market cap of $1.7 trillion.
Now, the NASDAQ’s 100 market cap is $5.4 trillion. So, the math, these four stocks account for 31 percent of the value of the NASDAQ 100 — four stocks.
Is there a tech bubble going on? It’s not really. Most stocks have not had huge run-ups this year, even tech. And most are not overly expensive. Apple (NASDAQ:AAPL), for example, is only 15 times forward earnings, Google (NASDAQ:GOOG) 23 times, that’s not really expensive.
The problem is there’s no growth in the world. So, everyone is crowded into very few names like those big four I mentioned that have any kind of growth.
But those stocks keep getting bigger and bigger at the expense of everybody else.
For NIGHTLY BUSINESS REPORT, I’m Bob Pisani at the New York Stock Exchange.
EPPERSON: Scott Kessler joins us now to talk more about the tech sector and what this narrow leadership we’re seeing means for the NASDAQ.
Scott taking a look at these four stocks, Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) — are there some stocks that are more fully valued or overvalued than others? Which do you prefer of the four?
SCOTT KESSLER, S&P CAPITAL IQ: Right. Well, Sharon, what’s important to keep in mind is that these stocks are up anywhere between 20 to 50 percent year to date.
And there are definitely some stocks that we like better than others. For example, we have a buy opinion on Facebook (NASDAQ:FB). But the other three that Bob mentioned, we have hold opinions on. And so, the way we think about it is, the tech sector is for the most part attractively valued. But that doesn’t mean every single company within the sector is appealing to us right now.
MATHISEN: You know, Scott, should investors worry that the last time we had a situation sort of like this, they had the four horsemen of the NASDAQ. It was Oracle (NASDAQ:ORCL), Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC) Cisco (NASDAQ:CSCO). And it didn’t exactly end well that time.
Should we be similarly worried know?
KESSLER: So, I remember those days, Tyler. And what I can tell you is that it’s a very, very different period right now. And the reason to that is if you look to those four names — sure, one could argue that the valuation for Amazon (NASDAQ:AMZN) is stretched at best. But the other three names seem somewhat reasonable.
And if you look at the rest of the top ten holdings of the, say, the QQQ ETF, we frankly see a number of names that look attractive. Look at Intel (NASDAQ:INTC), look at Comcast (NASDAQ:CMCSA) (NYSE:CCS), look at Gilead. And that’s another thing to keep in mind, is that back in the day, the NASDAQ was the tech-laden or tech heavy NASDAQ. Now, only 50 percent or so of the NASDAQ 100 QQQ ETF at least is from the technology sector. The rest is from health care, consumer discretion or even consumer staple, as well as technology.
EPPERSON: So, Scott, if I’m an investor looking at my 401(k), my IRA, my 529 plan, a number of these four tech names are in some of those fidelity or vanguard funds that are in my plan. Should I be concerned or is it as you say, if you’re looking at a broader index, you have consumer discretionary, you have some of these health care names that may also help your portfolio?
KESSLER: Right. So, Sharon, the way we think about it, we actually have not only equity research, but ETF research as well, and we have an overweight opinion on the QQQ. So, that indicates obviously that we see some value there. Obviously, there is some concern when you see a heavyweighting towards four names.
But keep in mind that we have hold recommendations on three of those four names. We’re not saying sell or anything like that. So, if you have exposure, it seems like people could take stock of what they own, it’s really important to understand the ETF they own, as well as the underlying holding.
In this case, we see appropriate valuation. But people have to be mindful of the appreciation we’ve seen, which is I think around 10 percent year-to-date for this particular ETF.
MATHISEN: Let me ask you one quick question if I might. You mentioned a couple names in the top 10 of the NASDAQ 100, that you thought were attractively priced. Just give me one of those potato chips.
KESSLER: Yes. So, one name that comes to mind for example is Intel (NASDAQ:INTC). Their reported results recently and we thought they were pretty good. It’s just that the street didn’t necessarily agree and the stocks sold off. The stock is trading at what we see is an attractive P/E, and it has a nice dividend yield, which is an increasing them for the technology sector, we think.
EPPERSON: Good point to keep in mind. Scott Kessler, thank you very much.
Scott Kessler with S&P Capital IQ.
MATHISEN: Well, the NASDAQ, Sharon, continued to rally today, hitting an all time, solid earnings helped all three averages close modestly higher. By the close, the Dow Jones Industrials up nearly 14 points to 18,100, the NASDAQ almost 9 points higher as you see there, and the S&P 500 was up one point.
Oil prices briefly dipped below $50 a barrel. They closed at $50.15 for West Texas. That’s the lowest level since back at the beginning of April.
And take a look at gold prices. Falling below $1,100 an ounce at one point during trading today. That folks is the lowest point in five years.
EPPERSON: And, Tyler, in addition to tech heavyweights reporting earnings tomorrow, Dow component Verizon (NYSE:VZ) is also out. Verizon (NYSE:VZ) isn’t just a telecom company anymore. It’s increasingly becoming a big player in the media space.
Julia Boorstin takes a look at the company’s transformation.
JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: With the price war to bring down your monthly phone bill, Verizon (NYSE:VZ) is taking a new strategy to differentiate its service for consumers and its company for investors.
Verizon’s $4 billion acquisition of AOL (NYSE:AOL) was a key step to build Verizon (NYSE:VZ) into more of a media company.
JENNIFER FRITZCHE, WELLS FARGO: As you look at the evolution of wireless, it’s gone certainly beyond voice and data, and really video is the driving factor. Many say that video is the killer app of 5G, which standards are now being produced. And Verizon (NYSE:VZ) believes that getting ahead of this is a very good way to position themselves longer term.
BOORSTIN: Verizon (NYSE:VZ) is working on a new direct-to-consumer, over-the-top video service for its mobile subscribers, planning to leverage AOL’s ad technology and to launch later this year. Verizon’s responding to millennials’ 21 percent leap in digital video viewing last year.
To populate this new service in the works, Verizon (NYSE:VZ) is signing a number of content deals, including HGTV and Food Network owner Scripps, which will offer 45 series for streaming. Plus Awesomeness TV, producer of hit YouTube videos targeting millennials, and Vice Media, which is focused on the younger audience that Verizon (NYSE:VZ) is also targeting with this new service.
FRITZCHE: A large driver of this growth that’s of the next leg of global data growth, is going to be video. They want to touch that, and they want to have that relationship with those content players, to be able to offer that service to their customers. So, as they face pricing competition from — on the consumer, you know, all paying our bills, this is another source of revenue.
BOORSTIN: When Verizon (NYSE:VZ) reports Tuesday morning, investors will be looking for details on Verizon’s growing content play, and when it will start boosting the telco’s bottom line.
For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin in Los Angeles.
MATHISEN: They’re back — interest-only mortgage loans, one of the scourges of the last housing boom, they’ve returned. But this time, things might be different. We’ll tell you how and why.
MATHISEN: President Obama plans to nominate Katherine Dominguez to the Federal Reserve board of governors. Dominguez, who is an economics and public policy professor at the University of Michigan, would represent the board’s Chicago region.
EPPERSON: After three weeks, Greek banks have reopened their doors. The step toward returning to normalcy comes as Greece paid two pressing bills, about 4 billion euros to the European Central Bank, and 2 billion euros to the International Monetary Fund. Most capital controls, including limits on cash withdrawals, as well as money transfers still remain in place.
MATHISEN: To another country now seeking to get back to the way things sort of once were. Cuba, it was a historic day in relations between the U.S. and that island nation, as embassies were officially reopened in D.C. and Havana. It is a big step after more than a half century of hostility.
But as Michelle Caruso-Cabrera reports, there’s still a long road ahead.
MICHELLE CARUSO-CABRERA, NIGHTLY BUSINESS REPORT CORRESPONDENT: As the protesters and VIPs gathered outside, the Cuban flag was raised in front of what used to be the Intersection, but is now as of today, that country’s embassy, marking the official re-establishment of diplomatic relations between the United States and Cuba for the first time since 1961.
JOHN KERRY, SECRETARY OF STATE: This milestone does not signify an end to differences that still separate our governments. But it does reflect the reality that the Cold War ended long ago. And that the interests of both countries are better served by engagement than by estrangement.
CARUSO-CABRERA: The U.S. government marked the day with far less pomp and circumstance. The Cuban flag in the lobby of the State Department went up at 4:00 a.m. with no onlookers. Ninety miles off the coast of Florida, at what was the U.S. Intersection in Havana, no flag raising, no visible sign that this is now an embassy.
Later this summer, however, Secretary of State John Kerry will make a long awaited and historic trip to Cuba, to officially raise the U.S. flag.
It’s a dramatic shift in the decade’s long estrangement between the two countries, one that pollster Fernand Amandi says demonstrates the changing opinions of Cuban-Americans.
FERNAND AMANDI, POLLSTER: I think the fact that an embassy is opening makes this even more symbolic in a physical sign of a change — I mean, something that would have been anathema frankly. That embassy would have been here in the late ‘70s, it would have been bombed out of existence. The action would have been so violently against it.
CARUSO-CABRERA: Despite the raising of the Cuban flag here in the United States, there’s still a long way to go before true normalization between the two countries. Just down the street sit thousands of old documents — documents that represent claims against the Cuban government for U.S. properties seized in the early 1960s.
Properties like this old soda factory owned by Coca-Cola (NYSE:KO). A bank branch belonging to Chase Manhattan, and this department store formerly Woolworths.
In total, outstanding U.S. claims are estimated to be worth more than $7 billion today. And according to U.S. law, these claims must be settled before the embargo can be lifted — just one of many challenges, Secretary Kerry and his Cuban counterpart, Foreign Minister Bruno Rodriguez, still needs to work out.
In Washington, D.C., for NIGHTLY BUSINESS REPORT, Michelle Caruso-Cabrera.
EPPERSON: We begin tonight’s “Market Focus” with Morgan Stanley (NYSE:MS), reporting a beat on the top and bottom lines.
Strong growth in bond and equity trading revenue helped the bank pull off better-than-expected results. Profit rose despite an environment of deal-making and volatile markets. Despite that, shares were actually off a fraction to $40.04.
Hasbro (NYSE:HAS) was the best performer in the S&P 500 today after posting results that topped estimates. The toy maker benefited from strong demand for its boys and preschool division products, particularly because of popularity for its Jurassic World and Star Wars themed toys. Shares popped 6 percent to $83.15.
And Halliburton’s second-quarter earnings plunged more than 90 percent as the oil-services giant’s revenue fell on soft demand. Despite that, earnings and revenue topped analyst estimates. Shares were almost 2 percent higher to $40.72.
Higher egg prices failed to help Cal-Maine Foods (NASDAQ:CALM) report blowout results. In fact, the egg producer missed on both the top and bottom lines. But still, shares rose slightly to $54.10.
MATHISEN: And Lockheed sealing a deal to buy United Technologies (NYSE:UTX) Sikorsky unit for $9 billion. The purchase of the company that makes Black Hawk helicopters will cement Lockheed’s dominance in weapons making. Lockheed will also sell or spin off of $6 billion in other information technology and services businesses.
Lockheed up almost 2 percent today to $205.13. UT was off a fraction at $110.48.
PayPal saw its shares jump in the company’s return to the NASDAQ as a publicly traded firm. The payment service began trading as a separate firm following its spinoff from eBay (NASDAQ:EBAY), and the sale valued PayPal at more than $50 billion. Shares up almost 5 1/2 percent today to $40.47.
SunEdison and its spinoff Terraform Power are buying Vivint Solar, a residential solar-system company for nearly $2 billion. Separately, another one of SunEdison’s spinoffs Terraform Global plans to raise more than $1 billion in its initial public offering.
SunEdison was up slightly today to $31.66, Terraform Power fell 6 percent to $34.19. How about Vivint? Well, it surged 45 percent to $15.75.
And Shake Shack announcing plans for a secondary share offering. Stockholders will sell up to 4 million shares of the burger chain and the company won’t receive any proceeds from the sale. Shares tumbled initially in after-hours trading, as you see there. At the end of the regular session the stock was 3 1/2 percent higher to $54.79.
EPPERSON: Tyler, they were the villains of the last housing boom, even deemed toxic by the Consumer Financial Protection Bureau. Now, as Diana Olick tells us, interest-only mortgages are making a comeback. But these are not your father’s loans.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is what happened to millions of borrowers who took out no money down, interest only loans during the last housing boom. Those loans all but disappeared in the years that followed, given only to very wealthy customers by big banks.
Now, they are returning to the masses in a slightly different form. Michigan-based United Wholesale mortgage, the second largest mortgage originator through brokers announced today it will start offering an interest-only non-jumbo loan product.
MAT ISHBIA, UNITED SHORE: I think it’s opening the door back to, hopefully it’s responsible lending giving people choices. I think a lot of the rules have changed, where people are scared of lending in some respects. I don’t really think that that’s the right way of doing it. I think that this is bringing it back to the masses, giving it to mortgage brokers who can actually give borrowers options.
OLICK: But there are strict qualifications. Borrows must put 20 percent down, definitely skin the game. They must have at least a 720 FICO score, which is above the national median. They must pay no more than 42 percent of their income on debt. And after 10 years, they must start paying principle.
Perhaps most important, they must be qualified to pay not at the starting rate, but at the monthly payment the loans will carry when they adjust higher. The rate to start is the same as the 30 year fixed but no principle added.
ISHBIA: So, the difference would be $300 to $400 a month, literally in their pocket, they don’t have to pay.
OLICK: Critics are concerned these loans will largely be used for refinances, in which case, the borrower would not have to put 20 percent down, only prove that the home had 20 percent equity in it at the time.
MITRIA WILSON, CENTER FOR RESPONSIBLE LENDING: Home prices fluctuate. And so, it might be true that a consumer that finds themselves in the loan and they’re using equity to refinance the mortgage. In reality, in subsequent years, during the interest period, they find that the value of their home is not as high anymore. So, they’re under water.
OLICK: While it is likely home prices will crash that much again.
WILSON: Never say never.
OLICK: Like she said.
For NIGHTLY BUSINESS REPORT, I’m Diana Olick in Washington.
MATHISEN: Good advice there, never say never.
All right. Our next guest says annuities are the only way to assure you won’t outlive your retirement savings. But what are annuities and are they the right investment for you and your portfolio?
Our guest tonight is Roger Ferguson, president and CEO of TIAA-CREF. And he’s with us now from New York City.
Roger, good as always to have you with us. We appreciate it.
Let’s go and talk a little bit about annuities and whether today’s annuities are better than yesterday’s annuities, because when I grew up covering this business, annuities were high cost, low return and usually not recommended for those reasons.
ROGER FERGUSON, TIAA-CREF CEO: Well, the answer is that there are some annuities that still fit that classification. There are some that are probably too high cost for sure, some that are relatively opaque.
The good news is my company, TIAA-CREF, we try to do lower cost annuities, simpler annuities, that are probably more appropriate for many of your listeners. So, the real message here, Tyler, I think is, yes, the annuities may well be the right answer for many middle income Americans as they try to look for guaranteed income for life. But they have to choose ones that have properties that are what I would describe as consumer friendly. Lower cost, relatively simple and backed by a really strong balance sheet, such as the one that we have at TIAA-CREF right now.
EPPERSON: Roger, does it matter whether they are fixed or variable annuities, whether they are immediate annuities or deferred annuities? Which ones should people be looking at for their portfolio?
FERGUSON: Well, the answer is, there’s room for each one of those, OK. So, a fixed annuity is what one would select if you’re trying to think about, how you’re going to get guaranteed income for life. To deal with those fixed predictable expenses that no one can avoid.
The basic food and shelter, for example, a variable annuity might be the right answer, if you’re prepared to have your monthly income fluctuate up and down. You wouldn’t use that for food and shelter kinds of expenses. But you might choose a variable annuity for those things that you can either choose to have or forgo, such as the family vacation.
And then in the immediate versus deferred, room for both, all right? If you’re interested in income day one, after you retire, you want to go with something more immediate. If you think you’ve got enough of a nest egg, but you’re worried about out in the future what your income might look like, then you may want to defer annuity payments until you’re 65, 70, 75, 80 years old.
So, the answer is again, know your risk tolerance, know your individual needs and then select your product based on what’s right for you and your family’s needs.
EPPERSON: And how much of your portfolio would you devote to annuities? Some financial advisors I’ve talked to say, no more than 25 to 30 percent. But now, they’re perhaps even being offered in your 401(k) plan, the Treasury Department has made that announcement last fall to expand the exposure in 401(k) plans, allow consumers to have annuities there.
So, how much is enough? How much is too much.
FERGUSON: Well, first, I think it’s absolutely right to have an annuity as an option in the plan. All of the data show that if there’s an annuity option in the plan that people are saving for and thinking about as they’re saving for retirement. They’re much more likely to choose the annuity option when they get to retirement.
The answer of how much you should annuitize again variable depends on individual circumstances. Rarely the case that you want to annuitize all of your savings? That seems like for most people not the right answer.
So, the amount that you want to annuitize depends on what you need again to take care of those fixed demands that you’re going to have through retirement.
FERGUSON: So, numbers like 25, 30, 35 percent may be in the ballpark for many people.
MATHISEN: Very quickly, if I buy an annuity for you or another provider at age 55, I give you that money hoping it’s going to be there when I’m 75, but I pass away at age 70, what happens to that money?
FERGUSON: It depends on what you do with the annuity. So, there are some that are called two life annuities, allows you to save for yourself and an heir, maybe a spouse, maybe a child, et cetera. And all that is built into the annuitization.
FERGUSON: And so, there’s no reason to fear if you choose that kind of annuity that your life savings will suddenly disappear if you should have an untimely death.
MATHISEN: All right. Mr. Ferguson, thank you as always for being with us. Roger Ferguson of TIAA-CREF.
FERGUSON: Thank you very much.
EPPERSON: The new city that could pave the road for the future of the auto industry. That’s next.
EPPERSON: The great Atlantic and Pacific Tea Company which controls the A&P supermarket chain has filed for Chapter 11 bankruptcy. This is the grocery chain’s second filing in less than five years.
MATHISEN: And finally tonight, a look inside a city where the only cars on the road are self-driving. And where else would a place like this be but in Michigan, the epicenter of the auto biz.
Phil LeBeau has our story tonight from Ann Arbor.
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: It looks like a Hollywood set, but this is not a movie. It’s M City, a new research site where auto companies will test and refine self-driving cars. And the technology that goes into them.
PETER SWEATMAN, UMTRI: We want to make this as realistic as we can, especially for a dense complex urban environment where lots of things are happening, and the sensors on the vehicles have to recognize the situation straightaway.
LEBEAU: No hands? And we’re still driving.
Partial or autonomous drive features should be offered by several automakers within two years, with Audi, Mercedes Benz and GM among many building vehicles that will steer, accelerate and brake on their own.
But Google (NASDAQ:GOOG) and its self-driving prototypes have made the Silicon Valley a hotbed for autonomous drive technology, sobering thought for auto executives in southeastern Michigan.
JESSICA CALDWELL: It is important what’s happening in Silicon Valley, because I think it is bringing this to the table in terms of, you know, people are interested in this, I think certainly that’s the case.
SWEATMAN: I’m really pleased that Silicon Valley is pushing so hard, because it’s really making — what it’s done is to really wake up the industry here in Michigan.
LEBEAU: Initially, the auto company’s and tech firms doing research here at M City will be focusing on self-driving cars and vehicles talking to each other. But they’re also working on developing smarter infrastructure, using radar like this in order to develop smarter street signs so that the roads are safer.
Smarter cars for a new era in autos, coming from a part of the country that put America on wheels.
Phil LeBeau, NIGHTLY BUSINESS REPORT, Ann Arbor, Michigan.
Well, that is NIGHTLY BUSINESS REPORT for tonight. I’m Sharon Epperson. Thanks for watching.
MATHISEN: And I’m Tyler Mathisen. Thanks for me as well. And we will see you back here tomorrow night.
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