SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Steep selloff. Stocks and commodities tumble, and odds are the Federal Reserve, which begins a two-day policy meeting tomorrow is taking notice.
TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Drug powerhouse. Teva buys Allergan’s generic drug unit as health care companies continue to get bigger and more powerful.
HERERA: Sales speed bump. Chrysler gets hit with a massive fine and is forced to buy back hundreds of thousands of vehicles. But will buyers care?
All that and more tonight on NIGHTLY BUSINESS REPORT for Monday, July 27th.
MATHISEN: Good morning, everyone.
A global selloff, what started in China spread to Europe and landed here with a thump in the U.S. Stocks tumbled across the world after China’s Shanghai composite swooned 8 1/2 percent, its biggest one day dive in more than eight years.
And while you may not own any Chinese stocks, the continued volatility does matter to investors like you, because it’s reigniting fears of a deepening slow down in the world’s second largest economy. As we reported last week, a number of big U.S. companies from Caterpillar (NYSE:CAT) to Whirlpool (NYSE:WHR) express concern about the slowdown in change in China. And now, there are new worries about the effectiveness of Beijing’s efforts to prop up the market.
By the close, the Dow Jones Industrial Average suffered its first five-day losing streak since January, falling 127 points to 17,440. The NASDAQ dropped 48 and the S&P 500 sank 12.
Sharid Derajadrai (ph) explains what triggered the big global selloff.
REPORTER: Volatility returning with a vengeance to the mainland China stock markets. Equities plunged more than 8 percent, the biggest one day drop in more than eight years. That’s on signs that Beijing may be backing away from supporting the market while concerns over economic health, that soured sentiments even further.
CSI 300 Index is the largest list of companies in Shanghai Shenzhen, They fell 8.6 percent. While the Shanghai Composite lost 8 1/2 percent as you see here. The drops were the biggest since February 27th, 2007.
Investors sentiment hit by the data, showing up profit, China’s industrial firms dropped 3/10 of a percent from a year earlier, reversing a 6/10 of a percent expansion in May.
Index heavyweights including China Unicom (NYSE:CHU), Bank of communications, Petro China, they all slumped to their daily downward limits of 10 percent. That’s where we stand, back to you.
HERERA: Thank you very much.
The route in China also knocked the price of some key commodities today, oil already under pressure from supply concerns and a strong dollar fell to a four-month low, settling down about 1 1/2 percent to $47.39. Copper which relies on China to drive demand fell to a 6-year low. But gold rose as investors sought a safe haven.
MATHISEN: The Federal Reserve is watching China and commodity prices very closely as it considers when and whether to hike interest rates in more than a decade. Policy makers can’t ignore what’s happening in the world’s second largest economy.
MATHISEN: Most Fed watchers think the three biggest factors are the unemployment rate, which at 5.3 percent is at or very near where the Fed wants it to be. Inflation, which is still well below the fed’s 2 percent target rate, and the health of the global economy, specifically and most critically China.
So, how much of a fed factor is China? In a word, big. It is after all the world’s second largest economy, and home to one of its most volatile closely watched stock markets. A market that took its biggest drop in eight years Monday. That 8 1/2 percent slide has some analysts worried.
PETER NAVARRO, UNIV. OF CALIFORNIA-IRVINE: This is not a good situation. The markets are reflecting the fact that we’re in a global economic slowdown, and any hope that China was going to lead us out is gone.
MATHISEN: Others say don’t read too much into the stock market action.
DAVID RIEDEL, RIEDEL RESEARCH GROUP PRESIDENT AND FOUNDER: The Chinese market underperformed global economic recovery, for years and years and years. While their economy is going very well, they’re stock market did nothing. And their economy starts slowing down in percentage terms, and the stock market takes off, which tells you something — it’s completely divorced from fundamentals. It’s all driven by policy out of Beijing.
MATHISEN: The frisky Chinese market aside, the Feds policy makers can’t ignore the economic impact of that huge country. It affects every market sector. The S&P 500 companies with the highest revenue exposure to China are Skyworks Solutions (NASDAQ:SWKS), semiconductors, which does two thirds of its business in China. Yum Brands (NYSE:YUM), restaurants, more than half. Qualcomm (NASDAQ:QCOM), almost half.
Broaden things out to Greater Asia, and beyond the tech sector, say, and look at energy. Schlumberger (NYSE:SLB) and ConocoPhillips (NYSE:COP) both do more than 20 percent of their business in Asia.
Industrials? Well, Boeing (NYSE:BA) logs a quarter of their sales there. And 3M (NYSE:MMM), almost a third.
How about health care? Abbott Labs does more than 30 percent of its sales in Asia.
Get the picture? It’s hard to ignore. China, that is. And Fed Chair Janet Yellen has acknowledged in the careful phrasing of a central banker, that developments overseas will affect the timing of any decision by the Federal Reserve to raise interest rates here at home.
JANET YELLEN, FEDERAL RESERVE CHAIRMAN: Were we to judge that these developments did create substantial risks or weren’t changing the outlook in some notable way. Then, a change in the outlook is something that would affect monetary policy.
MATHISEN: What she said.
All right. So, when will the Fed begin to raise rates? Few believe it’s going to happen at the meeting this week, since there’s no post-meeting press conference, we won’t know the tenor of the discussion until the minutes are released in three weeks.
HERERA: Global growth concerns overshadowed positive economic data here. Orders of durable goods, things like toasters and jetliners that are designed to last three years or more jumped to better than expected 3.4 percent in June from a month earlier. Now, much of that increase was due to aircraft orders at last month’s Paris air show. The report prompted JPMorgan (NYSE:JPM) to raise its second quarter GDP estimate to 2.4 percent. The government releases its second read on GDP on Thursday.
MATHISEN: Well, another massive health care deal to tell you about. Teva Pharmaceuticals has agreed to buy Allergan’s generic’s unit for more than $40 billion in cash and stock. The deal will make Teva one of the top ranked drug makers globally, generic, branded, whatever. Shares of Allergan (NYSE:AGN) rose 6 percent. Teva up 16 percent.
Meg Tirrell takes a look at what drove the tie-up and why there could be more in the works.
MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT: Drug deals are continuing at their record clip, today’s purchase by Teva of Allergan’s generic medicines unit marks a rapid pivot by the Israeli drug maker which had been pursuing unsolicited bids for competitor Mylan (NASDAQ:MYL). The deal puts Teva in the top ten pharmaceutical companies worldwide and frees Allergan (NYSE:AGN), a serial acquirer itself to pursue more purchases.
Allergan (NYSE:AGN) CEO Brent Saunders said consolidation among health insurers and pharmacies in part shows a reasoning for the sale.
BRENT SAUNDERS, ALLERGAN CEO: You look at how dynamic this industry is, how quickly it’s changing, we want to lead that change. I don’t want to follow that change. I think a lot of that will impact the generics business. I think what it does for the branded business, it says innovate, because if you innovate, then you’re going to get reimbursed.
TIRRELL: Saunders has been referred to as the Chuck Norris of Pharma M&A. In the last two years, he sold Bausch and Lomb to Valeant, Forest Labs to Actavis, purchased Allergen and changes his company’s name, all amounting to more than $100 billion of deal activity.
Now, investors wonder whether his next move is as buyer or target.
RONNY GAL, SANFORD C. BERNSTEIN ANALYST: If you listen to his conference call, he said the word “acquisition” and transformational about half a dozen times in the period of a half hour, which basically is telling everybody, look, I’m going out in the hunting.
TIRRELL: What big targets could be next for Allergan (NYSE:AGN), Bernstein analyst says Ronny Gal says AbbVie, Amgen (NASDAQ:AMGN) and Biogen may all be on the list. Each has a market valuation of more than $70 billion. Others think Allergen sells to a bigger company like Pfizer (NYSE:PFE), which was unsuccessful last year in its more than $120 billion bid to buy British drug makers AstraZeneca.
And where does this leave Mylan (NASDAQ:MYL), no longer a target for Teva. Analysts say it only intensifies the pressure to buy rival Perrigo (NASDAQ:PRGO), a deal that so far Perrigo (NASDAQ:PRGO) has rebuffed.
Analysts say the consolidation frenzy is partially a result of rising health of costs. Insurers are banding together themselves, giving them more power to fight high drug prices, meaning that drug companies in turn must buy in order to get a bigger piece of the pie.
For NIGHTLY BUSINESS REPORT, I’m Meg Tirrell.
MATHISEN: A record fine for Fiat Chrysler over mishandling safety recalls. It’s part of a settlement with the federal government which has been highly critical of how the automaker handled defects, impacting millions of vehicles. That pressured the stock which fell nearly 5 percent.
And the agreement comes just days after Chrysler, in a separate case recalled more than a million cars to block hackers from taking control of the vehicles. But will that recall impact sales?
Phil LeBeau has the surprising answer.
MATHISEN: It’s a whopper of a penalty for Fiat Chrysler, the automaker will pay $105 million to the federal government for mishandling recalls of more than $11 million vehicles, including $70 million in cash, $20 million to improve how it handles future recalls, and $15 million if there are future violations. An independent auditor will monitor how FDA handles safety issues over the next three years.
But what really stands out is Fiat/Chrysler, must offer to buy back almost 200,000 Ram trucks with faulty suspensions, while owners of more than 1 million Jeeps prone to catching fire will get offers to trade in their vehicles for above the market value or get an incentive to get the model fixed with a protective trailer hitch.
ANTHONY FOXX, U.S. TRANSPORTATION SECRETARY: I think it is the right type of penalty, and it’s the right type of rehabilitation that’s being used by our team at NHTSA.
LEBEAU: Fiat/Chrysler is paying the price for years of fighting the federal government over whether or not to recall vehicles for a variety of issues, tired of pushing the automaker to do more, the National Highway Traffic Safety Administration recently took the unusual step of holding a public hearing about Fiat Chrysler being slow to act, within the last few weeks.
Chrysler CEO Sergio Marchionne said it’s time for the automaker to change its attitude.
SERGIO MARCHIONNE, FIAT CHRYSLER CEO: I totally acknowledge that we’re not perfect. I think we need to continue to work with the agency to sort of put us on the right path.
LEBEAU: While Fiat/Chrysler’s quality is being slammed, buyers don’t seem to care.
This year, Fiat Chrysler sales are going faster than the industry overall. And the Jeep brand, its sales are up 20 percent this year.
Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.
MATHISEN: Still ahead, place your bets, the very real money behind the growing business of fantasy sports.
MATHISEN: More trouble for Puerto Rico, the commonwealth just doesn’t have enough cash to make an August first payment. The government looking to raise as much as $500 million by a financing deal backed by petroleum products, because there’s no longer a market to raise the 3 billion that was originally planned.
HERERA: With Congress’s long August recess within reach, lawmakers still have a number of issues to tackle before that break starts. On the agenda, funding for the Highway Trust Fund and reauthorization of the Import-Export Bank which guarantees loans for U.S. companies that do business abroad.
Eamon Javers joins us now from Washington.
Eamon, why has this battle to reauthorize the import export bank really split Republicans so dramatically on Capitol Hill?
EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESOPONDENT: Yes, Sue. There are two factions at play here. One is a group of Republicans you can call Chamber of Commerce Republicans, that’s the group that really supports reauthorizing the Export-Import Bank, which has been around for 81 years. But there’s another group of Republicans who you can think of as the Club for Growth group. Those guys think the Export-Import Bank is a New Deal relic, it’s all about crony capitalism, and they say if these projects are worthwhile at all, private banks, not the government can step in and finance them.
MATHISEN: Where are the Democrats on this, are they all for it?
JAVERS: Democrats, for the most part, are for it, yes, and you see a lot of big companies that benefit from Export-Import Bank loans, including big names like Boeing (NYSE:BA) and Caterpillar (NYSE:CAT), they’re for it, and they’ve got a pretty big lobbying effort for it to get reauthorized. But the state now is really hanging by a string here in Washington.
HERERA: What about the battle about overseas lending and how it’s connected to funding here for the highway bill?
JAVERS: Yes. One of the interesting maneuvers we’ve seen over the recent days is this connection of the Export-Import Bank to the highway bill. That was a maneuver done in the Senate, it’s classic Washington, right? If you got a controversial measure, you attach it to a must pass bill, and the highway bill definitely is popular in a lot of congressional districts across the country. That’s what they’ve done in the Senate.
But in the House side, Republicans say they’re not moved by what the senators did, they’re not necessarily going to take up that bill. Instead, they’re proposing a short term extension to the highway bill just for a couple of months, maybe to the end of the year. That would not include an extension of the Export-Import bank. So, at this point, it’s very unlikely the Export-Import Bank will be reauthorized this week.
But we’ll have to see where this one goes. We’ve got a real stand-off here now between House Republicans and Senate Republican leaders.
MATHISEN: All right. Thank you very much. Eamon Javers on the case in Washington.
JAVERS: You bet.
MATHISEN: Well, two of the biggest names in social media post their quarterly results this week. Twitter reports tomorrow, Facebook (NASDAQ:FB) on Wednesday. And the companies seem to be going in very different directions.
Julia Boorstin explains why.
JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: It’s a tale of two very different social stocks. Facebook (NASDAQ:FB) shares up about 16 percent in the past three months, while Twitter has lost 34 percent.
Facebook (NASDAQ:FB) soaring to around an all time high as the company continues to grow users and ad revenue. And on optimism about the potential to make money from the company’s other fast growing apps, Messenger, Instagram and WhatsApp. Plus, their new video ads.
GENE MUNSTER, PIPER JAFFRAY: One of the things, importantly, I thought the story is, the sense is that Facebook (NASDAQ:FB) is slowly grabbing attention from advertisers away from Google (NASDAQ:GOOG) in video in particular.
BOORSTIN: But in contrast, Twitter is in the midst of an awkward transition, on the hunt for a new permanent CEO and working on a product makeover called Project Lightning which won’t launch until this fall.
While investors are bullish in the potential to better organize Twitter content using human curators, we won’t see the impact for several quarters.
ED LEE, RECODE: It’s a project that twitter sorely needs. It’s one that’s supposed to make it easier for new users to come in and understand what the damn thing is. I think for a lot of regular folks, they still don’t get what Twitter is or what the purpose of it is. So, I think that’s important for them.
BOORSTIN: One other challenge for Twitter, two areas where it used to dominate, sharing news and following public figures, Facebook (NASDAQ:FB) has been investing heavily, to keep users within its ecosystem rather than swiping over to Twitter.
For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin in Los Angeles.
HERERA: We begin “Market Focus” with some merger activity.
McGraw Hill Financial, the parent of Standard and Poor’s, announced a deal to buy SNL Financial for more than $2 billion. SNL specializes in data and analytic services for the financial industry, which will expand McGraw’s offerings. McGraw tumbled almost 6 percent today to $99.59.
Norfolk Southern (NYSE:SO) reported a big plunge in second-quarter profit. The railroad said declining revenue from coal and crude oil and fuel surcharges will pressure results for the rest of the year. Like other major railroads, the firm has seen coal shipments drop off as power plants shift to burning cheaper natural gas because of low energy prices. Shares were off slightly to $82.80.
Delta will pay nearly half a billion dollars to buy a stake in China Eastern Airlines (NYSE:CEA). This as the airline looks to expand into China’s rapidly expanding travel industry. The boards of both firms still need to give the OK on the deal. Delta was off a fraction to $43.93. China Eastern slid 6.5 percent to $44.34.
MATHISEN: Restaurant Brands International posted a stronger-than-expected second quarter profit. The company behind the fast food chains Burger King and Tim Horton’s said both of those eateries recorded same-store sales growth because of new product launches. Shares popped 3.5 percent to $41.50.
Meantime, Wendy’s is testing antibiotic-free chicken items in a handful of markets. The fast-food chain is evaluating a big move away from antibiotics in meat as consumers are growing more concerned about ingredients and how food is produced. Shares at Wendy’s, though, off slightly to $10.06.
Baidu (NASDAQ:BIDU), China’s internet search company, reported earnings and revenue that topped consensus late today. But weak revenue guidance disappointed investors. Shares dropped off initially after the close. Before the bell, the stock was off by 4 percent to $197.68.
HERERA: Two companies are steps closer to becoming public companies. Budget fitness chain Planet Fitness said its looking to raise more than $200 million in its initial public offering, which would then value that company at $1.5 billion.
Separately, television maker Vizio filed preliminary documents for an IPO. The company is known for its low priced televisions and it plans to raise about $170 million.
MATHISEN: Money is pouring in to legal online sports betting. Fantasy sports site DraftKings, which lets users bet on actual professional and college sports is getting another $300 million round of funding. The latest round is being led by FOX Networks Group. Both DraftKings and its main rival FanDuel are valued at a billion dollars a piece.
So, just how much are people spending on fantasy sports? According to the Fantasy Sports Trade Association, who knew there was such a thing, in the last year, the average fantasy player spent roughly $465, compared to just $95 a couple years ago.
Adam Krejcik is managing director of digital and interactive gaming at Eilers Research firm and he joins us now.
Adam, welcome. Good to have you with us.
Do either of these dominant players, DraftKings or FanDuel make any money? And if not, why not?
ADAM KREJCIK, EILERS RESEARCH MANAGING DIRECTOR GAMING: Yes, hi. Thanks for having me on.
Right now, neither FanDuel or DraftKings are profitable. But they are experiencing tremendous revenue in top line growth.
MATHISEN: So, at this point, what kind of percentage of user do they have? In other words, how big is their, quote-unquote, “audience”? Is it a large percentage of people that are using it? Or is there a lot of room for growth there?
KREJCIK: Sure, so the daily market is fairly nascent right now, there’s a lot of sports fans notice U.S. And in terms of traditional or season long fantasy, the sports trade association has that at over 50 million season long players.
But in the daily space last year, at its peak, there was just around 1.5 million unique daily players. So, on that basis, you know, we’re still very early in terms of the user base and the market opportunity.
MATHISEN: So, they don’t make any money. How would they propose that they will make money when they start to make money? And where’s all this revenue going?
KREJCIK: Sure, so the biggest cost and expense for the major players is customer acquisition, and they’re spending very aggressively right now to acquire players and users, it’s essentially a land grab. And they’re spending more on the customer acquisition side than they’re obviously bringing in.
KREJCIK: Advertising, exactly.
So, the biggest winners present day are the media companies, the ESPNs, the FOX, of the world, that being said, the individual lifetime value of the players, the players itself, if they were to cut advertising today, FanDuel would certainly be profitable and DraftKings would be as well this year, it’s really — it’s on the advertising spin that is causing the cash burn.
HERERA: What about the regulatory issues if there are any. Some people liken it to gambling. Other people say it’s harmless, it’s just fun.
KREJCIK: Sure. It’s a complex and highly contentious issue right now. We would say, you know, the positives that this industry has going-forward right now is some of the strategic investors that are — you know, have participated in this latest rounds, for example, FOX into draft kings, you had Turner and Google (NASDAQ:GOOG) into FanDuel. And so, you have major media corporations as well as the sports leagues themselves, the NBA as an investor in FanDuel. MLB as an investor in DraftKings.
And to have their support we think is a big vote of confidence and endorsement, not to say there won’t be regulatory risks or challenges.
KREJCIK: But certainly, we feel better having the support of some of these major entities and powerful allies.
MATHISEN: All righty. We’ll see how it all plays out as the saying goes.
Adam Krejcik with Eilers Research, thank you very much.
HERERA: Coming up, the Pentagon is about to award a massive government contract. But not to any of the companies that you might think.
MATHISEN: Here’s what to watch tomorrow. Earnings from Dow component DuPont, Merck (NYSE:MRK) and Pfizer (NYSE:PFE) on the data front. A report on consumer confidence will come out. And the big S&P Case Shiller home price index is also out.
And that’s what to watch tomorrow.
HERERA: Some big name corporations are backing President Obama’s climate change goals. The White House announced today that 13 major companies from Alcoa (NYSE:AA) to Walmart made anti-pollution commitments adding up to more than $140 billion. That money will be spent on investing and low carbon and renewal energy.
MATHISEN: The Pentagon is planning to reward a highly coveted multibillion dollar contract to modernize the military’s electronic health records in what will be the biggest upgrade of health records in this country.
And as Bertha Coombs reports, winning would be a big deal for some very big companies.
BERTHA COOMBS, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Defense Department wants to overhaul its health records so doctors treating a serviceman or woman on the front lines or at home will have a full picture of their medical history.
DR. PETER LEVIN, AMEDA CEO: Instead of literally taping paper records to the gurneys as our heroes are being brought back from the theaters of war to receive medical care in Germany, or back here in the United States, that this will all be conveyed electronically.
COOMBS: It’s called the Defense Healthcare Management Modernization Project nicknamed DHMSM for short. It’s more like a big enchilada. Contracts involved building and maintaining records for nearly 10 million military records and 1,200 medical facilities around the world.
MICHAEL CHERNY, EVERCORE ANALYST: It’s going to be a nice keynote win for whoever becomes the HR vendor of choice for this system.
BOORSTIN: Three teams are vying for the contract. Privately held Epic, which has provided electronic records for the Kaiser Health System along with IBM. Hospital record giant Cerner (NASDAQ:CERN), which has teamed with Accenture and defense contractor Leidos, and much smaller rival Allscripts, aligned with HP and computer sciences seen as a long shot.
Analyst Michael Cherny thinks Epic will win, but Cerner (NASDAQ:CERN) could rip the spoils.
CHERNY: There will be a host of other replacement opportunities that are coming up in the market where Cerner (NASDAQ:CERN) will be viewed as the best provider to capitalize on those replacements because Epic, if they were to win this contract, would be viewed as, quote-unquote, “distracted”.
BOORSTIN: Whichever team wins, the former technology chief of the V.A. worries that the DOD’s new records won’t be compatible with the V.A. system or other civilian records.
LEVIN: Many of these systems are proprietary, the vendors kept that data siloed and segregated and even sometimes charged their hospital clients or charged their provider clinician clients money to get access to the data.
BOORSTIN: All three vendors have pledged to make their systems interoperable. The Defense Department expected to announce the contract winner later this week.
Bertha Coombs, NIGHTLY BUSINESS REPORT, New York.
MATHISEN: And to learn more about this multibillion dollar defense contract and what it could mean for the company lands it, head to our website NBR.com.
HERERA: And that does it for NIGHTLY BUSINESS REPORT for tonight. I’m Sue Herera. Thanks for joining us.
MATHISEN: And thanks from me as well. I’m Tyler Mathisen. Have a great evening, everybody, and we’ll see you back here tomorrow.
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