NIGHTLY BUSINESS REPORT for April 11, 2016, PBS - Part 1



Diana Olick>

ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Big surprise. Not many are expecting it, but will earnings be the trigger for a rally in the worst performing sector this year.

Bitter standoff. Why investors are closely watching the ugly and very public fight between the founder and CEO of one of this country`s largest home builders.

Small spaces. The big trend in ultra tiny homes.

All that and more tonight on NIGHTLY BUSINESS REPORT for Monday, April 11th.

Good evening, everyone. Welcome. I`m Sue Herera. Tyler Mathisen is off this evening.

Buckle (NYSE:BKE) up. Earning season has arrived and it`s shaping up to be a doozy. Expectations are for the worst crop of report since the Great Depression. The week`s most anticipated releases will come from the nation`s biggest banks and with the economy meandering and interest rates lows, it`s no surprise that the financials have been the worst performing sector this year.

But the unofficial start to earning season kicked off late today with aluminum make Alcoa (NYSE:AA). The former Dow component beat Wall Street`s profit estimates, earning 7 cent a share. Expectations were for 2 cents. Revenues, though, were light, coming in at $4.95 billion, down 15 percent from a year ago.

Now, that pressured shares in initial afterhours trading. But CEO Klaus Kleinfeld said the company, which was planning to split, is on track to meet its targets.


KLAUS KLEINFELD, ALCOA CHAIRMAN & CEO: If you look at this quarter, you really see profits are up in all of the iconic segments. Iconic is the name we have given to the value at company that we would soon launch. At the same time, you also see on the upstream side, one the commodity side, the two segments are holding up and are profitable in spite of the very strong pressure on the market side with low prices.


HERERA: Susan Li has more on Alcoa`s quarter.


SUSAN LI, NIGHTLY BUSINESS REPORT CORRESPONDENT: The main take away from Alcoa`s earnings was miss in revenue for the quarter, which means when it comes to profit owes more to cost cutting than higher sales in the quarter, and part of Alcoa`s cost cutting has been layoffs, confirming that they reduced their work force by 600 in first quarter and planning of further reduction of 400 and considering laying off another 1,000 in the year.

Now, when it comes to global demand, Alcoa (NYSE:AA) is revising down demand from the aerospace industry and also heavy truck production. Alcoa`s CEO Klaus Kleinfeld re-affirming that Alcoa (NYSE:AA) will still split off into two companies in the second half of this year, but still not confirming a specific day for the split. Alcoa (NYSE:AA) shares have been down this year in 2016, but rebounding from close to seven-year lows in January.



HERERA: Despite the expected profit pain, is it still possible for the recent market rally to continue?

Mike Santoli takes a look.


MIKE SANTOLI, NIGHTLY BUSINESS REPORT CORRESPONDENT: As companies prepare a third straight quarter of profit declines, investors are struggling to figure out if stocks have already braced for the bad news. Earnings for the S&P 500 companies fell 9 percent last quarter, according to the consensus forecast. The S&P 500 index itself, though, is down about 4 percent from the all time high in May 2015. This implies that stocks haven`t fully priced in the pain. If the sectors with the ugliest profit picture, financials, energy and basic materials have dropped between 9 percent and 20 percent in the past 12 months.

Meantime, some of the markets stronger performers lately such as consumer staples and utilities might have trouble shrugging off but are expected to be mediocre results.

Broadly speaking, the indexes have stalled for more than a year, as earnings have slipped, leaving stocks no cheaper than when the market peaked. Market strategists point to a couple of ways they count weather a tough season and extend their recent rebound. The corporate profit cycles could be bottoming right now, leading to a revival in the second half of the year.

This is already baked into Wall Street estimates. And the U.S. dollar could drop still more as the Federal Reserve proceeds cautiously on interest rates easing pressure on multinationals profits. Before we find out if these trends take hold, hundreds of big companies will report the results and offer clues about whether this earnings recession might soon end.

For NIGHTLY BUSINESS REPORT, I`m Mike Santoli at the New York Stock Exchange.


HERERA: As we mentioned a bit earlier, the financial sector is the worst performing group this year. But could things in this earning season finally bring some much needed relief to the bank and the shareholders and perhaps jump start those stocks?

Michael Farr joins us. He`s president of a money management firm Farr, Miller, and Washington, and he joins us.

Good to see you as always.

MICHAEL FARR, PRESIDENT, FARR, MILLER WASHINGTON: Thank you, Sue. Great to be with you.

HERERA: So, where do you think we are in the cycle for the big banks? Are we near the bottom, do you think as we go into these earnings season, Michael?

FARR: I think the valuations are now getting compelling. You listen to Mike Santoli said that a lot of stock prices had stayed pretty much the same and were near highs, not true for the bank stocks. And since July, where the bank stocks kind of peaked, we`re down 22 percent, 23 percent, 24 percent for a lot of those companies.

People don`t like the bank stocks right now. The bank stocks have lots of -- really, they have a lot of headwinds, but the valuations are showing it. So, it`s a little bit like when I was on the program and you asked me about oil at $28 a barrel and I said, I think you buy it when it`s low. These things are low. And while they may go a little bit lower, at 1.3 times tangible booked for a lot of larger banks, with a 2.5 percent, 2.6 percent dividend, I think there`s money to be made here, Sue.

HERERA: You point out the dividend yield, but also, you use it as portfolio insurance, which I found interesting. We don`t usually hear the big banks used in that particular way.

FARR: Well, if you think about portfolio insurance particularly against inflation or higher rates, I think that`s where they work. If interest rates go up, and we thought -- one, look, one of the reasons bank stocks are down is because the Fed moved back from that four interest rate hike that they promised earlier and now, it looks like we`ll just have two hikes.

Higher interest rates and a steeper yield curve are really good for the banks earnings with these low interest rates. It`s hard for them to earn money. So, if rates go up, therefore, banks ought to do better. A little more inflation might not be good for some other asset classes, but it could be good for the banks. If you`re getting paid the dividends, your portfolio could see some share prices increases and get paid while waiting.

HERERA: All right. You gave us a few names here, Michael, PNC, JPMorgan (NYSE:JPM) and Goldman.

Let`s start with PNC. Why do you like it?

FARR: Well, I like PNC. I think the valuation is very good. I don`t think they are particularly exposed to the mortgage market that a lot of other big banks are. You can see that the stock price has suffered. At 2.5 percent dividend relative to the treasure market I think is attractive.

HERERA: And JPMorgan (NYSE:JPM), you like the diversification of its business but you also point out management. You like management.

FARR: I think Jamie Dimond is probably the best bank manager in the world. I think he`s been much vilified. I think he was manhandled by the government through 2008 and 2009. I`ve talked with him about it. He thinks he was manhandled too. I think the bank`s balance sheet is exceptionally solid. And to buy a bank like JPMorgan (NYSE:JPM) at this price with a 3 percent dividend.

Now, the ten-year treasury is paying 1.7-something percent and I can own JPMorgan (NYSE:JPM) at a real, I think what I considered to be a discount and a 3 percent dividend. That`s compelling.

HERERA: All right, Michael. We`ll leave it there. The third pick was Goldman.

Appreciate it very much, Michael. Good to see you.

FARR: Thank you.

HERERA: Michael Farr with Farr, Miller, and Washington.

On Wall Street today, stocks gave up their gains on this unofficial start to earning season. Dow Jones Industrial Average which has been up as much as 154 points finished down 20 to 17,556. The NASDAQ dropped 17. The S&P 500 was off five and it`s now lower for the year.

Oil prices climbed back above $40 a barrel for the first time in nearly three weeks as hopes rose between for an agreement among producers that would produce global supply.

And as oil price rise, so did the gas prices, of course. The average cost to fill up your tank nationwide climbed 8 cents in the past three weeks. According to Lundberg Survey, a gallon of regular grade now costs $2.10 a gallon. That`s an increase of 33 cents from mid-February.

Part of the reason, though, is because U.S. refiners are converting to summer grade gasoline and that costs more to make. If you`re in Tulsa, Oklahoma, you`re in luck. That`s where you can find the cheapest gas at $1.67. The highest, as usual, in Los Angeles, at $2.80.

That broader decline in commodity prices is what prompted the proposed merger between Canadian Pacific and Norfolk Southern (NYSE:SO), since they depend heavily on moving energy-related materials. But today, that deal ended abruptly. Canadian Pacific said it would no longer pursue that takeover. Throughout the months-long back and forth, Norfolk Southern (NYSE:SO) repeatedly said such a merger would draw intense regulatory scrutiny.

Late last week, we reported that the U.S. military had raised concerns that that deal could adversely affect the country`s national defense.

In Washington, Federal Reserve chief Janet Yellen had a rear meeting scheduled with President Obama. According to the White House, the two met in the Oval Office. They discussed the risks to the economy, the job market, inequality and progress being made on reforming in Wall Street.

Goldman Sachs (NYSE:GS) has agreed to pay more than 5 billion dollar to settle federal charges of deceptive mortgage practices leading up to the federal crisis -- federal financial crisis, I should say. Similar to other deals, no individual bank employee is being held responsible. This is the fifth agreement reached by a panel put together by President Obama. JPMorgan (NYSE:JPM), Bank of America (NYSE:BAC), Citibank and Morgan Stanley (NYSE:MS) have already reached settlements.

To London now, where British Prime Minister David Cameron has faced a barrage of criticism from the House of Commons over Panamanian offshore trusts set up by his father. Today, he once again faced a grilling.


DAVID CAMERON, BRITISH PRIME MINISTER: Some people have asked, if this trust was legitimate, why did you sell your shares in January 2010? Mr. Speaker, I sold all the shares in my portfolio that year because I didn`t want any issues about conflicts of interest. I did not want anyone to be able to suggest that as prime minister, I had any other agendas or vested interest. Selling all my shares was the simplest and clearest way that I could do that. Now, there are strict rules in this House for the registration of shareholdings. I followed them in full.


HERERA: Cameron has come under intense pressure since his father was identified as a client of the Panamanian law firm that is at the center of the so-called Panama Papers.

And the Panama Papers is also exposing some secrets of a thinly regulated industry where a lot of money changes hands and unanimity is common, and that is the art world.

Robert Frank joins us to discuss what he has learned.

It`s good to see you, Robert. Thanks for joining us.


HERERA: There`s one painting in particular that has come in focus. Which one is it and what`s the history behind it?

FRANK: This is a 1918 painting by Amedeo Modigliani. It`s called "Seated Man with a Cane". And it was owned by a Parisian art dealer.

In World War II, it was stolen by the Nazis, according to the family, and hadn`t turned up since. Well, the family is suing one of the royal families of the art world, Nahmad family, they have galleries in London and in New York, alleging that the Nahmad family is actually the owner.

HERERA: So, what is the history behind the Nahmads? Obviously, they are very influential in the art world. You mentioned where they have various galleries. I`ve heard the name before. But continue a little bit more.

FRANK: Right. Well, the Nahmads are a multibillion dollar family. They own hundreds of the most important works of Picasso and other artists. Helly Nahmad was charged with a gambling ring a couple of years ago.

But we have learned from the Panama Papers, that they also owned an offshore company called International Art Center which it turns out is the owner of this Modigliani. So, there were questions throughout this court case of who was the owner. The Nahmad said, "We don`t own it." Well, it turns out they own the company that does own it.

HERERA: Right. OK. I think I`ve got that.


HERERA: And it`s complicated though, right?

FRANK: It is a little complicated. And so, what you have is the family of the previous owner saying we now have proof the Nahmads own this picture. The Nahmads` attorney telling me, look, it`s irrelevant who owns it. What you have to prove is that your family owned it back in the 1930s --

HERERA: Right, right.

FRANK: -- and that it was stolen from you by the Nazis. That`s a hard thing to prove.

HERERA: Is that where this is going? Is this the tip of iceberg as we get more releases from the Panama Papers? Do you expect to see more of this?

FRANK: Absolutely. I mean, we`re already learning that it`s not just this $25 million painting, but it`s billions of dollars worth of art that was bought, sold, currently owned through these secret offshore companies. So, a lot more to come.

HERERA: Which means you`re going to be really busy.

FRANK: I`m going to be busy. Exactly.

HERERA: Thank you, Robert.

FRANK: Thank you, Sue. HERERA: Really appreciate it.

All right. Still ahead, pay cut? CEO compensation may have shrunk the most since the financial crisis, but there`s a catch.


HERERA: Unions representing about 40,000 Verizon (NYSE:VZ) employees say they are ready to strike if a new contract isn`t reached by Wednesday, they will walk off the job. The employees, most of whom work on landline phones and Internet operations along the East Coast have been without a contract since August. Verizon (NYSE:VZ) has trained non-union employees to cover their jobs. In 2011, a strike lasted two weeks before a new contract was negotiated.

A very public battle inside Pulte Homes is heating up. The hiring of the CEO Richard Dugas was perhaps, quote, "the biggest mistake of my career," end quote. Last week he said he would resign but in May of 2017.

But for the founding family, that`s not enough. In a letter to the company`s board of directors, Pulte wrote to consider letting Richard Dugas stay another year as lame duck CEO puts the personal interest of Richard Dugas ahead of the interest of the company.

It continued, "With Richard`s uniquely disastrous track record of cumulatively losing so much money, the board is telling shareholders just how out of touch they are." Pretty tough words.

What should you do when the infighting happens at a company that you might own or have in your investment portfolio?

John Petrides is the portfolio manager with Point View Wealth Management.

And it is good to see you once again. Welcome.


HERERA: Those were very caustic reports.


HERERA: Sometimes it doesn`t get quite this bad, but that`s a good example of how bad things can get.


HERERA: What do you know if you hold that stock or it`s a widely held stock, it could very easily be in your mutual fund.

PETRIDES: Well, I think if investors own shares of company, in this case, say, Pulte, you always have to ask yourself this one question, if I didn`t own the stock now, would I buy it? And most people are probably not going to own Pulte Homes for Richard Dugas. You`re going to own a home builder for exposure to the housing market because you think interest rates are low, the economy is strong, or the supply demand situation of the housing market is healthy, not because of the CEO.

HERERA: But the board seems to be siding with Mr. Dugas. So, that`s more than just the CEO.


HERERA: Does that change the dynamic a little bit?

PETRIDES: It`s true. This is a really unique situation, because we`re in a world of activist investors where you have people like Bill Ackman and Elliott Management that are going -- and value -- going into boards and shaking it up.

And here you have the owner shaking up his own CEO. You know, it`s really unique situation. And I -- we`re not owners of the Pulte Homes, but in this case, investors should look at what`s the business model that you`re buying it, what the future tax flows of the company. And if you think the stock has upside before you owned it and it`s trading at a discount now, that would be a time to add to your disposition.

HERERA: Right. And also, it`s a very competitive market space that Pulte Homes occupies.

PETRIDES: Of course.

HERERA: So, do you look at the competitors and see how those stocks are doing compared to Pulte, given the circumstances that Pulte finds itself in?

PETRIDES: Absolutely. There`s so many ways to play the housing market, whether it`s on the supply side, through the parts of a company like a USG (NYSE:USG), US Gypsum, or it`s a home builder like D.R. Horton (NYSE:DHI) or Toll Brothers (NYSE:TOL). So, you clearly have to compare the valuation of Pulte versus the peers.

HERERA: What do you make of the fact that activist investing is gaining so much traction? It`s one of the major stories for the last two years.

PETRIDES: It`s true.

HERERA: As an investor who manages other people`s moneys, do you find it works as an advantage because you get movement in the stocks, or is it a net-net negative?

PETRIDES: Well, I think it`s a double edged sword, because an activist investor will keep the board on its toes. It will make sure that the board`s first priority is to return cash to shareholders or manage for shareholders and the growth of the business. Because once a board falls asleep at the wheel for too long, you know now that a Carl Icahn or someone like that can come knocking on the door and most boards don`t want to deal with a headache like that.

HERERA: I can understand.

Thank you so much. Good to see you, John.

PETRIDES: Thank you.

HERERA: Thank you very much.

All right. John Petrides with Point View Wealth Management.

Hertz Global lowers its revenue guidance for the year and that`s where we begin tonight`s "Market Focus".

The car rental company also cut its earnings and its revenue forecast for the current quarter, sliding slow demand and excess capacity. The company`s CEO says pricing pressures late last year further intensified this year. Shares of Hertz dropped more than 11 percent to $8.59.

Tesla is recalling its Model X SUV after finding that the vehicle`s third row backseats could fail in a car crash. A recent test performed by the company revealed a defective latch that may cause the seats to fall forward. The voluntary recall only applies to Model X that were built before March 26th. Shares of Tesla fell a fraction to $249.92.

Another bidder lines up for Yahoo (NASDAQ:YHOO). The parent company of British newspaper "The Daily Mail" is interested in making an offer for the tech giant`s core business. As we reported last week, Verizon (NYSE:VZ) Communications is expected to submit a bid for Yahoo (NASDAQ:YHOO) by the April 18th deadline. Shares of Yahoo (NASDAQ:YHOO) rose a percent to $36.48.

In an effort to deal with low commodity prices, National Oilwell Varco cut its quarterly dividend nearly 90 percent to 5 cents per share, down from 46 cents. The oil field services provider also expects its revenue for the first quarter to fall about 20 percent. Shares fell 6 percent to $27.32.

And shares of Under Armor took a beating after golfing star Jordan Spieth which Under Armour (NYSE:UA) sponsors suffered a blistering defeat at the Masters tournament. Morgan Stanley (NYSE:MS) also cut its price target on the stock to $32 from $64. Shares of Under Armour (NYSE:UA) down more than 5 percent to $41.15.

A widely cited report shows America`s top CEOs saw their pay shrink by the most since the financial crisis. But as Mary Thompson reports, there`s a lot more to it than that.


MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, pay for top executives fell 4 percent in 2015 from 2014. This according to a review of proxies and annual reports of 350 S&P companies by "The Wall Street Journal" and Mylogic (ph).

But before anyone thinks this reflects the market`s flat performance through the single digit declines in S&P profits and revenue last year, keep this mind that much of the pull back and CEO pay is linked to a drop in the value of their pensions. The pensions saw outsize gains in 2014 because of adjustments for longer life spans. This is why median pay fell to $10.8 million last year. And while the decline is the largest since the financial crisis, CEO pay at this level is still the second highest since 2007.

CEOs did get a nice boost in the stock component of their pay. This is their long term incentive bonus, while their short term or cash compensation rose 2 percent. Small gain here reflecting 2015`s middling performance.

The median pay for a CEO in 2015 over 290 times that of the average hourly worker. So, who earned the most? Well, CEOs new to the job are excluded here. So, there were some familiar names at the top of the list. The top three earning more than $53 million each.

Viacom`s Philippe Dauman saw a 22 percent increase this pay even as the firm`s total shareholder declined. Much of his pay increase is linked to a retention bonus.

Pay for Oracle`s co-CEOs Mark Hurd and Safra Catz rose over 40 percent. And Bob Iger of Disney (NYSE:DIS) took the fourth spot. His pay cut by $2 million despite a good performance by the House of Mouse.

Who were paid the least? Google`s Larry Page and Whole Foods` John Mackey, both of whom taking home a buck.



HERERA: Coming up, think small. Very, very small. Why the U.S. finds itself in the throes of a big boom in tiny houses.


HERERA: The first vaccine candidate for the Zika virus should be available in September. In a White House briefing, health officials said the impact of the Zika virus is wider than initially anticipated and that funding for more research is sorely needed.


ANTHONY FAUCI, NIAID DIRECTOR: We really don`t have what we need. But we`re still going full blast by drawing money from other areas. And that`s how we started. The money that`s been transported over from Ebola accounts will help bring us a little bit further, but it`s still not what we want. When the president asks for $1.9 billion, we needed $1.9 billion.


HERERA: Officials also say that the type of mosquito in which the virus is carried is present in more states than first thought.

United Healthcare will not offer any health plans on Georgia`s state health exchange next year. UnitedHealth is currently the only insurer that has notified the state of its plan not to participate. You might recall last month, we told you about a report that concluded patients on the exchanges were sicker than others and questioned whether insurers would be part of the Affordable Care Act long term.

Mortgage investor Annaly Capital is buying Hatteras Financial (NYSE:HTS) for about $1.5 billion. That deal will expand its adjustable rates holding. Both of the companies are structured as real estate investment trusts. Shares of Hatteras soared better than 10 percent, close to 11 actually. Annaly Capital up about a quarter of a percent.

Now, this next story takes the concept of downsizing to a whole new level. Some homeowners aren`t just going smaller, they`re going tiny. It is all part of a new movement in housing that`s gaining in popularity even in parts of the country where home prices aren`t all that steep.

Diana Olick has the story.


DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Even when you`re talking tiny, size matters, because while tiny home owners share some similar values, the very design of their tiny structures are all their own.

Ryan Mitchell owns a tiny house in Charlotte, North Carolina and touted tiny living at a conference he organized recently in Asheville.

RYAN MITCHELL, TINY HOUSE CONFERENCE: People are very skeptical. But when you step into somebody`s house like we have here at the conference, things just kind of click.

ALICIA KATHLEEN MATHIAS, TINY HOME OWNER: I have lived here for four years. I built it myself.

OLICK: Alicia Kathleen Mathias built her 24 square foot home for just $200. There`s no room for a fridge so she uses a clay pot to school her food.

MATHIAS: So, it`s just my plate, and then inside, I have some yogurt and cheese right now.

OLICK: Mathias saved her earnings to pay off student loans but the inspiration behind the house was growing up with hoarders. That made her think small.

MATHIAS: Stuff doesn`t necessarily make your life happy. And for me, happiness is the freedom to be able to go where I want and do what I want and be able to help people because I`m not attached.

OLICK: If that`s too tiny for you, a 200-square-foot bus might seem homier.

UNIDENTIFIED FEMALE: It`s a 110-gallon horse trough that we got from the seed depot.

OLICK: Kelly Roth and Chris Childs converted this 1991 school bus into their home for about $17,000. It is one-eighth the size of their last home.

CHRIS CHILDS, CONVERTED BUS TO HOME: The effort and time it took to maintain a large house and the fact that we had it filled with a lot of things that we didn`t necessarily need.