NIGHTLY BUSINESS REPORT for May 20, 2016, PBS - Part 1

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Caught off guard. Investors were reminded this week that things may not be what they seem. And you need to pay attention.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Sticker shock. Why consumers on the health exchanges could be in for a big expensive surprise.

HERERA: Recipe for success. One entrepreneur`s old-fashioned strategy that helped him build his business and make him millions.

All that and more tonight on NIGHTLY BUSINESS REPORT for Friday, May 20th.

MATHISEN: Good evening, everyone, and welcome.

Stocks finished the week on an up-note ending several weeks of declines for two of the major indexes. Today`s gains were modest and largely lacked a specific catalyst, but gains they were.

Here are the numbers. For the day, the Dow Jones Industrial Average rose 65 points to 17,500. NASDAQ jumped 57, and the S&P 500 was up 12.

For the week, the Dow was the outlier, down fractionally and posting its four-week losing streak since 2014, its first one. NASDAQ did just the opposite, snapping its own four-week losing streak and scoring the biggest weekly index gains. And the S&P 500 broke its own skid, up after three weeks of losses.

All in all, it was an eventful week, chock a block with reminders for investors as we turn toward summer.

(BEGIN VIDEOTAPE)

MATHISEN: Reminder number one: the Fed matters. And it may raise interest rates this summer. The minutes from the April meeting released Wednesday all but said so. Not a promise, but lots of hints. And it wasn`t just hints in the minutes. It was Fed speak.

Listen to Bill Dudley of the New York Fed.

WILLIAM DUDLEY, FEDERAL RESERVE BANK OF NEW YORK PRESIDENT: The economy looks like it`s growing above trend and inflation is stabling, the labor market is tightening.

MATHISEN: All that chatter caused Fed fund futures used by investors to bet on Central Bank policy to spike. They now price in a 30 percent chance of a rate hike in June, up from just 4 percent last week.

Reminder number two: consumers are spending, but spending selectively. Cars are hot. So are home improvement outlays. Discounters are doing OK. Even Walmart is humming for a change.

But roaring is what Amazon (NASDAQ:AMZN) and other online retailers are doing, and that spells trouble for old line department stores like Macy`s (NYSE:M) and Nordstrom (NYSE:JWN). Their numbers were shabby, not chic.

JAN KNIFFEN, J. ROGERS KNIFFEN WORLDWIDE ENTERPRISES: We`re certainly going to see half of the business go online over the next 13, 14 years. If I`m right about that and it`s going to go up from the 7.5 percent to 10 percent penetration now. There`s going to be a lot of stores have to go away.

MATHISEN: One thing that isn`t going away, we found this week, is the presidential race. That`s reminder number three. And it`s a tightening race, by the way, one that will surely hang over the markets between now and November.

Trump is a presump. So is Hillary. But she hasn`t closed the deal just yet. And two polls this week show Trump leading Clinton among likely voters in November. He`s closing the gap in two other surveys.

Investors, get ready for an interesting summer.

(END VIDEOTAPE)

HERERA: Rod Smyth joins us now to talk more about the markets. He is chief investment strategist at Riverfront Investments.

Good to see you again, Rod. Welcome back.

ROD SMYTH, RIVERFRONT INVESTMNETS: Yes, Sue. Thank you. Nice to be here.

HERERA: Let`s start, first of all, with reminder number one, which is the Fed, the Federal Reserve. As Tyler pointed out in that piece, the Fed matters. What did you glean from the minutes this week about what we should expect from the Fed?

SMYTH: I gleaned two things. The first one is they are acknowledging, which I think is fair, that the U.S.`s economy continues to chug along, continues to create jobs. The second thing they`re acknowledging is that if they`re going to do anything this year, it needs to be in June. September is way too close to the elections.

But I think the third thing is, and this is where the market`s got it wrong, is, you know, I would say the Fed itself doesn`t know itself what it`s going to do in June. The Fed is data-dependent, but not just U.S. data-dependent but globally data-dependent, and I think they`ve come to an important understanding with China, which is, after all, currency pegged to the dollar.

But in the absence of an improving China economy, while you might get one rate hike, which I think is unlikely, you`re not going to get significant rate hikes.

MATHISEN: Can I make money in the stock market this summer, and if so how and where?

SMYTH: Yes, you can, Tyler. Not only you but all of your viewers, I believe. But you have to be, you know, realistic about your expectations if you`re looking at the U.S. stock market especially and if you`re looking at, you know, the overall averages because earnings growth is not going to be that strong and as you guys mentioned, it`s an election year.

But you have to be, you know, realistic about your expectations if you`re looking at the U.S. stock market especially and if you`re looking at, you know, the overall averages because earnings growth is not going to be that strong and as you guys mentioned, it`s an election year.

But as long as the economy continues to grind higher, the stock market`s going to do the same. Interestingly, though, we`ve got a new bull market emerging in something that`s been a bear market for two years and that`s energy and material stocks. That`s where I`d be putting money at the margin to make money.

HERERA: You know, Rod, as we look at what`s going on in the economy, though, we`re also seeing some very interesting shifts -- the consumers spending but not in the same places and retail struggling. Where do you see strength in the economy and is it enough strength to keep the economy and the markets moving forward?

SMYTH: Well, I think it`s -- here we are three baby boomers talking about the new economy, but my guess is that your home is the same as mine and that the FedEx (NYSE:FDX) and UPS person turns up now three day as week, whereas five years ago they barely showed up at all. So, I think we`ve all moved in to this digital world that earlier guest talked about, that is not going to change. I think retail always has dynamics and changes, that`s a big one.

As far as the overall economy, people keep predicting its demise but there`s something wonderful about a slow and steady economy, and that is absent the big shot, it just keeps chugging along.

HERERA: How did you know the FedEx (NYSE:FDX) guy shows up at the house all the time?

(LAUGHTER)

HERERA: How did you know that? Right you are.

Rod, we`ll leave it there. Thank you so much. Rod Smyth with Riverfront Investments.

SMYTH: All right.

MATHISEN: So, what exactly will it take for the Federal Reserve to raise interest rates this summer? Central bankers may say one thing. The markets another when it comes to one important part of the economy.

Steve Liesman explains why.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Investors were caught by surprise this week by increasing talk from the Fed of a possible June rate hike.

One reason for the surprise? The April jobs report had been weakened and wouldn`t seem to be enough to justify a hike. But the Fed, they had a different take. Payroll gains of $160,000 were just fine for them. That`s because Fed officials appear to have a lower standard for job growth than the markets.

For the markets 200,000 has become the mark of a healthy payroll report. For the Fed, it may be as low as half of that.

ERIC ROSENGREN, BOSTON FED PRESIDENT: The kind of growth that we`d be expecting would be 80,000 to 100,000 jobs per month. So while 160,000 is not as good as what we were seeing in the first three months of the year, it is probably good enough to continue to get labor markets to tighten up a little bit more to get a little bit closer to my own viewable employment.

LIESMAN: What the Fed looks at is the level of job growth needed to take care of the increase in the work force. In other words, what keeps the unemployment rate roughly unchanged around 5 percent or lowers it just a bit? With immigration down and baby boomers retiring, the economy`s got less job growth than it used to.

Fed Chair Janet Yellen has put the number just around under 100,000 jobs per month. San Francisco Fed President John Williams says it`s as low as 80,000. All of that raises the question, what happens when the jobs report comes out two weeks from now? The market could be disappointed but the Fed with its lower standard could still hike.

MICHAEL FEROLI, JPMORGAN CHIEF U.S. ECONOMIST: If we`ve got a 160,000 number for example, the market may view that as a disappointment whereas I think many on the Fed may view that as well in excess of what is sustainable on the long-run basis. So, I think right now, there is a gap between what the market and the Fed think are good jobs numbers.

LIESMAN: The best bet for investors? Hope for a lot of job growth, because that`s good for profits and it`s good for the economy. But be prepared. What`s disappointing for markets could be just fine for a Fed that has lower standards.

For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.

(END VIDEOTAPE)

HERERA: And now to housing. Sales of existing homes rose 1.7 percent in April. That was the second straight month of increases. The growth was driven mostly by the Midwest, which is the region considered the most affordable.

MATHISEN: It appears that a bank in Ecuador was the victim of a cyber attack similar to the ones that hit Bangladesh and Vietnam. As first reported by "The Wall Street Journal", the heist ended with thieves transferring $12 million to accounts around the world. The discovery comes one week after SWIFT, the global bank system that was breached, told its clients to secure their local computer networks.

HERERA: But it`s not just the global banking network that`s vulnerable. Your bank account is as well. There`s new malware that infects your computer and sits like a serpent waiting to strike.

And as Andrea Day reports, you can`t just rely on your bank`s Internet security measures anymore.

(BEGIN VIDEOTAPE)

ETAY MAOR, IBM SECURITY EXECUTIVE ADVISOR: You are a target all the time.

ANDREA DAY, NIGHTLY BUSINESS REPORT CORRESPONDENT: When one of the top security advisers at IBM has a warning, you might want to listen.

MAOR: When we first saw it, we were looking at, wait, something bad is happening here, but we`ve never seen it before.

DAY: It`s called GozNym. Etay Maor and his team in Israel discovered the new malware. He said it`s already hit banks in the U.S., Canada, and Europe.

MAOR: It`s very hard for anti-viruses and other software to actually detect it.

DAY: That`s because he says GozNym is a highly sophisticated combination of two different tools, a financial malware that infects your computer and a tool that secretly waits to steal your information.

MAOR: It stays dormant until you to a financial website of interest and only then does it pop up and starts stealing data.

DAY: Like your username and password from bank accounts and more.

MAOR: The criminal is sitting on the other end obtaining that information in realtime and using that to log onto your account.

DAY: How much do we think could be at risk?

MAOR: We already know of $4 million that were stole bin this malware. The potential is much bigger.

DAY: The hackers behind it even leaving top researchers bewildered.

MAOR: We`re up against professionals and we believe they`re located somewhere in Eastern Europe.

DAY: According to Maor, the malware typically gets in through an e-mail sending you a link and clicking that link will infect your computer.

It may seem obvious but don`t click on the link. Make sure your operating system is up to date and don`t use the same password for every account. And those paper statements you used to get in the mail, well, they may not be such a bad idea after all. Maor says the malware can actually change what you`re seeing on the screen. So, if they steal money, they can make it look like the cash is still there.

We reached out to the American Bankers Association and they tell us that financial institutions have tools to GozNym and authenticate customers. But that cyber security is a shared responsibility between consumers and banks.

We also contacted the Financial Services Information Sharing and Analysis Center, a group set up by the industry to share threat information. They say U.S. banking Trojans and malware attacks, quote, "continue to be a concern that the financial services industry takes very seriously and we`ve alerted our nearly 7,000 institutions to these types of threats."

And how serious is this? Well, according to Maor, just last year, 20 million financial records were stolen by malware. As for what`s being done, according to the experts, banks are working to reduce vulnerabilities and the FBI tells us that it will continue to combat cyber crimes.

I`m Andrea Day for NIGHTLY BUSINESS REPORT.

(END VIDEOTAPE)

MATHISEN: Coming up. Shopping for business stocks? The picks one portfolio manager says will grow 20 percent within a year.

(MUSIC)

HERERA: Something curious happened today at Chicago`s O`Hare Airport when the head of the TSA arrived, the security lines were miraculously shorter, hmm. Much shorter than the long ones that have plagued that airport all week. Today, the head of the agency along with Illinois Senator Dick Durbin and Chicago Mayor Rahm Emanuel promised shorter wait time.

(BEGIN VIDEO CLIP)

PETER NEFFENGER, TSA ADMINISTRATOR: We had a breakdown here in Chicago. That was unacceptable. The long lines and wait times caused quite a few people to miss their flights. As I said earlier this week at a previous talk, I`m very sorry for those people who did that, and we`re working hard to make sure that doesn`t happen again.

(END VIDEO CLIP)

HERERA: The TSA administrator also acknowledged that the summer will be challenging.

Companies are sitting on a lot of cash, and one third of it is owned by just five U.S. companies. According to Moody`s (NYSE:MCO), Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Google`s parent company Alphabet and Cisco (NASDAQ:CSCO) and Oracle (NASDAQ:ORCL) have more than $500 billion in cash and cash equivalence.

Cash holdings are becoming even more concentrated as well. In 2013, those same five companies held 25 percent of the total.

MATHISEN: A key part of the Affordable Care Act may slowly be caring away. Bronze plans, which tend to have the lowest premiums of all the tiers also incur the biggest losses for insurers. So, what`s going to happen?

Some of those insurers don`t want to carry them anymore, and as Bertha Coombs reports that could have implications for those who get their health insurance on the exchanges.

(BEGIN VIDEOTAPE)

BERTHA COOMBS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Judging from initial 2016 rate requests, customers on Affordable Care Act health exchanges could be in for major sticker shock next fall and fewer lower cost options. Insurers are asking for sharp price increases after seeing big losses on exchanges the last two years.

In Washington state, the average increase request is 13.5 percent. In Oregon, the two biggest insurers want 30 percent increases. In New York on average, it`s 17 percent, and in Virginia, 23 percent.

Leerink analyst Ana Gupte says insurers are being more cautious for 2017 because some ACA reinsurance provisions for backed up losses will expire.

ANA GUPTE, LEERINK PARTNERS HEALTH CARE MANAGING DIR: The health risk on exchange has not been very good. There has been a lot of adverse selection. Some of the sickest members are buying insurance, if you will, on the way to the hospital and after paying premiums only for one to three months, they then dis-enroll off of the exchanges, and that creates very heavy pressure and losses.

COOMBS: For many insurers, the biggest losses have come with the lowest cost bronze tier. A unit of Virginia`s CareFirst BlueCross said in its 2017 filing that it will stop selling bronze plans, which means that those customers would face a 70 percent increase next year because they`ll have to shift to silver plans.

The problem is that lower cost bronze plans tend to see more turnover, according to fund manager Les Funtleyder.

LES FUNTLEYDER, E SQUARED HEALTH CARE PORTFOLIO MANAGER: You have the unhealthy people signing up when they need something and hopping off when they don`t. So what you have is a bad case of adverse selection which means that you`re only insuring basically the sick.

COOMBS: But opting out of bronze plans also carries risks. Non-profit coop insurer New Mexico Health Connections is asking for 30 percent increase overall and its CEO told me they`re considering opting out of bronze plans but he worries that will only drive away more young healthy enrollees. Insurers have until late summer to submit their final plan offerings and one insurance regulator cautions there will be a lot more discussion with plans in the next few months.

For NIGHTLY BUSINESS REPORT, I`m Bertha Coombs.

(END VIDEOTAPE)

MATHISEN: Deere cuts its earnings forecast for the second time in the year and that`s where we begin tonight`s "Market Focus".

Despite posting a drop in both revenue and profit, the maker of farm tractors did manage to beat estimates, but the company`s CEO said the results were hurt by the global farming recession and weakness in the construction equipment sector. As a result, the company lowered its profit guidance for the full year but it expects sales to fall less than previously estimated. Shares fell 5.5 percent, $77.74.

Foot Locker saw its revenue climb but revenue was mixed. Profit fell, in line with estimates, while sales failed to meet targets. The shoe retailer also reported worse than expected same store sales growth and cited lower demand in its basketball shoe category. Foot Locker sales fell more than 6 percent to $54.77.

And Campbell`s Soup posted revenue that missed street estimates, thanks in part to a weak soup season in the U.S. challenges in itself V8 beverages and a weather related disruption to is carrot supply, that was the problem there. The carrots were the problem. Profit did rise, however, and came in above target. Campbell`s also raised its earnings outlook for the year. It`s looking better for carrots. Shares fell more than 6 percent to $59.90.

HERERA: Oil and gas producer Oil Search will buy rival InterOil in a deal valued at more than $2 billion. French energy company Total will also help fund that acquisition. Together, the companies will create a gas field in Papua New Guinea to take advantage of that country`s low cost. Shares of InterOil gushed 30 percent higher to $43.57. Oil Search trades in Australia.

And Yahoo (NASDAQ:YHOO) could get much less for its core business than it was hoping. "The Wall Street Journal" says bids are expected to come in the $2 billion to $3 billion range. Analysts had forecast between $5 billion and $8 billion. Shares fell more than a percent to $36.50.

MATHISEN: And now to our market monitor, who has a list of stocks he says will rise at least 20 percent in less than a year. It`s his first time joining us on the program. Michael Yoshikami, founder and CEO of Destination Wealth Management.

This is the first time you`ve been on the program. It`s the first maybe you`ve been in the market monitor hot seat. Let`s turn up the heat, Michael.

Disney (NYSE:DIS) is your first pick. Why do you like it?

MICHAEL YOSHIKAMI, DESTIONATION WEALTH MANAGEMENT FOUNDER & CEO: I like Disney (NYSE:DIS), good management, great brand, great digital content that`s going to play around the world. It`s 15 percent off its 52-week high and we think the recent earning miss was really more of an anomaly than anything else. Disney (NYSE:DIS) has many great things going for it. I think it`s a great company.

HERERA: Costco (NASDAQ:COST), a place that I end up going to an awful lot is also --

MATHISEN: You do to Disney (NYSE:DIS) too.

HERERA: I go to Disney (NYSE:DIS) too. I go all over the place.

YOSHIKAMI: I thought you were at home waiting for your FedEx (NYSE:FDX) package.

(CROSSTALK)

So, Costco (NASDAQ:COST) -- so, Costco (NASDAQ:COST) is going to be the beneficiary of that dislocation you`re hearing so much about in retail. The earnings problems we`re seeing for the retailers, the Nordstrom`s numbers, yes, Amazon (NASDAQ:AMZN) is going continue to grow. But there`s always going to be a place for brick and mortar.

I think Costco (NASDAQ:COST) has a reasonable strategy to expand on a more methodical basis. Great management, great brand, incredible customer loyalty.

MATHISEN: And number three is Vodafone. Tell me the narrative behind it.

YOSHIKAMI: So, Vodafone really is all about the wireless space and increasing traction in places like India and China and emerging markets. I know emerging markets is a scary world for folks. This is not an emerging market stock.

This is a stock that pays a healthy dividend that`s going to give you the tuned to participate in the wireless growth that`s happening in countries such as India. That`s why Tim Cook is there right now from Apple (NASDAQ:AAPL). That`s why Vodafone is going to have a huge presence in these developing markets.

HERERA: Michael, let`s broaden it out a little bit. How do you feel about the market overall? What kind of a year do you think we`re going to have?

YOSHIKAMI: You know, I think when it`s all said and done, our view for the year is that it`s probably from January 1st to December 31, probably a 5 percent to 7 percent year, which means it`s got a ways go since it`s basically at a six-week low right now.

You know, I think that the economy is not great, but it`s not as bad as everyone is saying. I think that the Federal Reserve probably will raise interest rates maybe a quarter percent. I`d be shocked if they went half a percent. If they only go a quarter percent, we`re still talking about incredibly low cost financing for companies as well as individuals.

We have oil companies starting to rebound a bit. So, I think the outlook for equities is cautiously optimistic. I`m not one of these doom and gloom folks like you hear on the radio where the whole world is going to collapse in the next three months. I just don`t see it.

MATHISEN: Let`s hope it doesn`t.

Michael Yoshikami, thank you very much. Great as always to see you.

YOSHIKAMI: Thank you.

MATHISEN: Michael is with Destination Wealth Management.

HERERA: Coming up, sizzling success. How one entrepreneur`s strategy to keep things simple helped him win over finicky customers and helped him make his millions.

(MUSIC)

HERERA: Here`s a look at what to watch for next week. On Tuesday, we get more information on the spring selling season when new home sales are out. On Thursday, the FDA is due to decide whether to approve a controversial muscular dystrophy drug made by Sarepta Therapeutics. And on Friday, Fed Chair Janet Yellen is scheduled to appear at a panel hosted by Harvard University. That`s what to watch for next week.

MATHISEN: So how do you make millions in an industry where 60 percent of new businesses fail within the first year. For one restaurant chain founder, the answer was literally location, location, location. He had to close three of his first steakhouse joints because of poor placement and since then, he has personally and methodically scouted every single spot. Nearly 500 locations and more than a billion dollars in sales later, he`s figured how to beef up business.

His story in tonight`s "How I Made My Millions."

(BEGIN VIDEOTAPE)

MATHISEN: Party steaks, killer ribs, ice cold beer. It`s a winning formula for Texas Roadhouse (NASDAQ:TXRH), the lively restaurant chain with $1.9 billion in annual sales that`s been serving up food and fun for more than 20 years.

UNIDENTIFIED FEMALE: How would you like your sirloin steak cut?

MATHISEN: And the man who created it all from scratch is Kent Taylor, whose introduction to the food industry happened 40 years ago in his hometown of Louisville, Kentucky.

UNIDENTIFIED MALE: That`s looking good.

KENT TAYLOR, TEXAAS ROADHOUSE FOUNDER AND CEO: I started working in the restaurant business in high school as a busboy, so a long time, since I was 18.

MATHISEN: Taylor worked his way up to a waiter, a bartender, and eventually held management positions at chains like TGI Fridays, Bennigan`s and KFC.

TAYLOR: I learned that food quality matters. In the early days, I won`t say which concepts I worked for, but the food maybe wasn`t so good.

MATHISEN: So he began cooking up plans for his own place. He sketched out early ideas, where else, on a cocktail napkin in 1992 and then went looking for investors.

There`s a story you approached some big investors like John Y. Brown of KFC.

TAYLOR: Absolutely.

MATHISEN: What did he tell you?

TAYLOR: No. I would say all told I got turned down over 100 times. I ended up getting three doctors to start me out at Texas Roadhouse (NASDAQ:TXRH).

MATHISEN: In February of 1993, Taylor opened the first Texas Roadhouse (NASDAQ:TXRH) in Clarksville, Indiana, with others following soon after. By the end of the first year, Texas Roadhouse (NASDAQ:TXRH) had served more than a quarter of a million guests.

TAYLOR: I like about a six-second read from an interstate or a main drag.

MATHISEN: Six-second read, meaning you can see the establishment for six seconds.

On a scouting trip in Newburg, New York, Taylor looks for a location with just the right ingredients for success.

TAYLOR: A medium size city that has a university, a military base, we`re on the interstate and all the stores that we would compete with are doing above the national average.

MATHISEN: Who gives you the best inform?

TAYLOR: Bartenders.

MATHISEN: Bartenders will tell you whether the location is doing well or not.

TAYLOR: Typically, yes. If you give them a big tip, no telling what comes out of their mouth.

MATHISEN: On average, each Texas Roadhouse (NASDAQ:TXRH) feeds between 5,000 to 6,000 customers as week with an average ticket price of more than $15. That places the restaurant price-wise right in between Applebee`s and Outback Steakhouse.

What are the details that make you different, better, more successful?

TAYLOR: I would say that number one thing is we cut our own meat in-house, we make our own dressings from scratch. We even grate our own cheese.

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