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118> <Type: SHOW> <Head: Nightly Business Report> <Sect: Business> <Byline: Susie Gharib, Tyler Mathisen, Diana Olick, Courtney Reagan, Phil LeBeau, Sharon Epperson, Jane Wells, Eunice Yoon, Julia Boorstin, Jon Fortt, Simon Hobbs> <Guest: Millan Mulraine, Hugh Johnson> <Spec: Business; Consumers; Defense; Economy; Energy; Housing; Stock Markets> <Time: 18:30>
ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Susie Gharib, brought to you by --
SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Good evening, everyone. And welcome to a special Fourth of July edition of NIGHTLY
Well, Wall Street has had plenty of its own fireworks this year with the S&P 500 gaining a hefty 12 1/2 percent in the first half of 2013, its best showing in 15 years. And since World War II, big increases in the first six months of the year usually lead to gains in the second half, Tyler.
TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Indeed, they do.
So, tonight, it`s time to look ahead. What to expect in the next three months and then the next three months after that?
We`ll examine some of the top sectors from housing to the consumer, to energy, to defense, and what other ramifications for the economy and, of course, for stocks.
And we start with one of the pillars of the economy: housing. Fuelled by the comeback in the housing market, homebuilder stocks had a very nice run of their own in the first half of the year. Now, as you can see here, the home builders essentially kept pace with the broader market, packing on a double digit gain.
As for the housing market this quarter, Diana Olick tells us two words will likely hold the key: interest rates.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Here is what to watch for in real estate in the quarter ahead:
Rising interest rates are the wild card for buyers, sellers, builders, ritz and the big banks. Home prices are up over 12 percent from a year ago according to Core Logic, but the average rate on the 30-year fixed is up nearly a full percentage point in Q2. That will put added pressure on the home prices and on the builders who have been raising prices even more aggressively.
Rising rates have already hit refis, which could mean more layoffs at the backs and could also trickle down to the home improvement sector in Q3. Real investment trusts have also felt the pain already and could fall even more out of favor as rates rise.
For NIGHTLY BUSINESS REPORT, I`m Diana Olick.
GHARIB: They say the consumer is the backbone of the economy and while the consumer has been buying, it seems the rate at which the consumer has been spending has been relatively stagnant.
Now, one good thing: confidence in the economy has been on the rise.
So, will the consumer keep the wallet open or tighten the purse strings? And what else can we expect at the stores this quarter.
Courtney Reagan has the retail round up.
COURTNEW REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Here`s what to watch for in the retail sector in the quarter ahead:
It`s retail second biggest season back to school. Every year, kids out grow clothing and needs new pencils but the fight to win those shoppers is as competitive as ever. Retailers have expressed worry about the lowend consumers look for big promotions in marketing tactics from heavyweights like Walmart and Target (NYSE:TGT).
JCPenney CEO Mike Ullman will be under the microscope as he tries to win back sales with the struggling retailer where children`s apparel makes up 12 percent of total sales.
And looking to sell laptops, Best Buy (NYSE:BBY) will roll out its new Window stores in 500 locations by the end of summer just as students go
back to class.
For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan.
MATHISEN: Well, one place consumers are putting their money these days is their vehicles. It`s been a particularly strong first half for the auto market and that has most experts projecting more than 15.5 million cars and trucks will be sold this year.
And things full throttle in the air as the airlines ride a jet stream of strong profits.
Phil LeBeau takes a look what lies ahead this quarter on the roads and in the skies.
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Here is what to watch for in the quarter ahead from the auto and airline industries:
For the auto industry, it`s all about the truck market and whether or not it remains red hot. As the housing market has recovered, there`s been greater demand from construction firms and small business operators to
renew their fleet of pickup trucks. That`s especially good news for the Big Three. They have long dominated the pickup market in North America and if demand remains strong this summer, look for the big three to not only pick up market share but to also report a very profitable third quarter.
As for the airline industry, it`s all about what happens with jet fuel prices. Jet fuel prices have been moderate so far this year and that`s allowed the airlines to post relatively strong profits. That is expected to continue in the third quarter, provided jet fuel does not spike higher.
Also, remember, the third quarter is among the busiest quarters of the year for the airline industry. As a result, those packed planes mean the airlines will have an opportunity to rack up strong ancillary revenue numbers.
That`s a look at what to expect from the auto and airline industry in the next quarter.
For NIGHTLY BUSINESS REPORT, I`m Phil LeBeau.
GHARIB: So, what do these sectors tell us about the outlook for the U.S. economy?
Joining us now to connect the dots, Millan Mulraine. He`s an economist at TD Securities. And welcome to NIGHTLY BUSINESS REPORT.
MILLAN MULRAINE, ECONOMIST: Thanks --
GHARIB: So, housing, retail, auto sales -- they`ve been strong for the first six months of the year. Do you see that trend continuing for the rest of the year, or is the second half going to be different?
MULRAINE: Well, I think it`s going to be different. It`s going to be better.
I`m really encouraged by what I`ve seen in the first half this year. I think that`s every indication from what we`ve seen so far that the pieces are in place, the fundamentals are in place for us to have a more sustained recovery in the second half of this year.
Keep in mind: what we`re seeing in the first half, the tepid recovery is a function of the significant fiscal austerity that we`ve seen. We`ve seen the biggest drag from fiscal austerity since the peace war period. And that`s happening at a time when the economy is still growing at 1.5 with fiscal drag of 1.5.
So, the economy or the fundamentals of the economy are showing that
we have an economy that`s greater than 3 percent rate. And with that in place as the drag disappeared in the second half of this year, you`re going to see the private sector fundamental start reasserting themselves and then we can see growth north of 2.5 percent in the second half of this year.
MATHISEN: If you get -- if that prediction comes true and growth accelerates to 2 1/2 percent, maybe even more as we get into the fourth quarter, what is the implication for interest rates and Federal Reserve`s policy?
MULRAINE: Well, that`s a very interesting question. I think at this point what the Fed has signaled that their intent is to reduce the level of stimulus and I think they are looking at three things. For one, they want to see the confirmation in the economy that we are making a turn for the better and the pace of the recovery is accelerating. I think they will get confirmation for that.
And that certainly means that the September time in the market seemed to have price it, seemed appropriate at this time. So at that point, I think the Fed will get the indication that the economy needs less support and they would start reducing the level of stimulus they provide into the economy.
GHARIB: So how does all of this translate for people who are out of work and looking for a job? Do you think the job market is going to be
MULRAINE: Yes, absolutely I think so. And there are a number of reasons for that. One, is I think the problems that we see and the tepid phase of recovery we see in the labor market more generally has a lot to do with uncertainty, political uncertainly, global uncertainty and at this point I think it`s uncertainty about the nature of the recovery and demand.
When businesses get more confirmation that there is a more sustained upward trajectory for consumer demand, then they will be more willing to hire on a permanent basis and I think they would also be more willing to invest in capital equipment and we would like to see that starting in the second half of next year.
MATHISEN: That`s been a notable weak spot, hasn`t it, investment in capital equipment recently?
MULRAINE: Absolutely, it has been. And, again, I think kind of go hand and hand employment and capital investment. And to the extent that we`ve had some clarity on the political front, the next big step is to have that confirmation of sustained growth.
MATHISEN: You think that the Fed may begin to withdraw some of the stimulus at its September meeting, or at least that they`re going to dial it back from, what is it, $85 billion a month now to something lower than
that, the housing market has been dependent in part on very, very low interest rates. They`ve already ticked up.
What do you expect that`s going to do to the rate of growth in house prices?
MULRAINE: Well, I think it would slow the rate of growth, but we still have growth. I think the problem with the housing sector, and the initial problem wasn`t necessarily the fact that rates were high. The problem was the flow of credit. Banks were unwilling to lend, and people that were sitting on the sidelines were willing to engage in a sector where they think that over the next year or so, they would have capital losses.
That has changed. The dynamics in the housing sector has changed and with prices at a more sustained upward trajectory, I think that would encourage potential home buyers to move into the market and encourage financial institution to extent mortgages.
GHARIB: Well, Millan, you`ve been giving us a pretty much an upbeat report card for the rest of the year. Anything that worries you that could go wrong in the economy?
MULRAINE: Well, I think the big factor for me is political risk. And as much as we`ve seen a lot of clarity on the political front with the tax deal that we had earlier this year and we know for sure that
sequestration has gone through, I think the next big thing for the markets and for the economy more generally is what happens in September, October, when we have to get the budget deal done. If there`s a risk of a government shut down, then I think that would possibly delay investment and hiring decision.
Similarly, if we do have the government breach it`s limit, that ceiling -- hit the debt ceiling without it being raised, I think that would also increase some volatility in the market.
GHARIB: All right. Lots of good information. So good of you to come by. Have a happy Fourth of July.
MULRAINE: Thanks for having me.
MATHISEN: Thank you very much.
GHARIB: And that`s Millan Mulraine, economist at TD Securities.
MATHISEN: And one thing many feared would hurt the economy was the government`s automatic budget cuts, better known as that sequester. And while the sequester hasn`t had the dire impact so far that many had predicted, one thing has become clear, the defense sector is starting to feel the pinch.
Jane Wells has more.
JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Here is what to watch for in the defense sector in the quarter ahead:
Pentagon cuts are slowly nipping away at contracts, so expect companies to update international plans. Raytheon (NYSE:RTN) has said it thinks exports can reach 30 percent of total sales. United Technology Sikorsky says it could account for half.
Boeing (NYSE:BA), Lockheed and BAE are competing for multi billiondollar jet fighter contracts in Brazil and South Korea.
But Deloitte says, globally, defense budgets are transitioning to more affordable high tech, software and sensors rather than ships and tanks. Even so, beware of the naysayers. The last quarter, nearly every major defense company beat expectations and some even raised guidance.
For NIGHTLY BUSINESS REPORT, I`m Jane Wells.
GHARIB: And coming up on the program, we`re going to check out what
might be in store for stocks and bonds.
But, first, oil right at the psychological $100 level. Will it be an expensive quarter in the oil business (ph) and what could it mean at the gas pump?
The outlook coming up next.
GHARIB: Oil prices have been hovering right around $100 a barrel for sometime now and gasoline prices are around $3.50. But with summer driving and hurricane season upon us, and tensions rising in the Middle East, it`s worth watching the energy patch in this quarter.
Sharron Epperson explains.
SHARON EPPERSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Where is what to watch for in the energy sector in the quarter ahead: the fundamentals for oil are bearish. The U.S. has a record level of supply and that supply may only grow as global demand for oil and refined product slows. With oil prices under pressure, gasoline price fears may fall by the wayside over the next month, only to perhaps reappear as we head into
the middle of hurricane season.
But drivers should be wary that prices can vary widely depending on where you live.
Meanwhile, natural gas prices could slide if temperatures are below normal this summer, reducing air conditioning usage and therefore cooling demand. Energy prices can be just as fickle as the weather.
For NIGHTLY BUSINESS REPORT, I`m Sharon Epperson.
MATHISEN: Our next guest expects high oil prices this quarter and then maybe a turn for the better as the year draws to a close.
He`s John Kilduff, founding partner and oil analyst of Again Capital.
John, welcome. Good to have you here.
JOHN KILDUFF, AGAIN CAPITAL: Good evening.
MATHISEN: We`ve seen turmoil in the Middle East this past week. We have concerns about China`s slowing economy -- those things ultimately might push oil in opposite directions. Higher in the case of Middle East
turmoil, lower in the case of a Chinese economy. So, what am I to think?
KILDUFF: You`ve got the horns of the dilemma really right there before you. And I think what`s very frustrating for U.S. consumers is -as Sharon Epperson referenced -- the high level of inventories here in the United States and the absolute shale boom that we`re seeing, so much that we`re pushing African barrels that used to come here out to Asia, out to the very soft market that you referenced.
So, my thesis is that we are nearing a tipping point where the supply situation will, in fact, overwhelm the worries of the Middle East and other concerns that have been out there. But it`s not here yet, and it`s down the road, but I can see a future maybe towards the end of the year, beginning of next, where that`s the new paradigm, that`s the new dynamic for the oil market.
GHARIB: But in the near term, this situation in Egypt, what could it do to supplies and the supplies going through the Suez Canal and all of that? I mean, what -- how worried should we be about that and what could it mean for prices?
KILDUFF: More so than we otherwise would because we had outages persisting now in Libya. The Arab Spring hasn`t gone away. It hasn`t turned into an Arab summer or fall as we`re seeing in Egypt, as we`re seeing in Libya and Iraq for that matter. There was a significant bombing
on Tuesday in Baghdad that reminds us that that production there is very much hanging in the balance.
So that security premium that we talked about so much over the years, very much holding up the price in the 90s towards 100 whereas, otherwise just in the pure fundamentals, particularly with our eye on China, it should be much lower, in the low 80s, maybe 70s.
MATHISEN: Let`s talk about two oil types of product that are or basically petroleum product, that are very important to us. Number one is gasoline and what your forecast is this quarter and as we move towards the end of the year for the price of gas and then also for natural gas, which is the main heating fuel in so much of the country.
KILDUFF: Right. Well, since we`re in the heart of driving season right now, this is the big day. This is where we turn the corner, and peak gasoline demand is here right now. But I think we`ve paid the high price point for gasoline. Despite what crude oil is doing right now in its volatility, gasoline is coming down.
We`re seeing more and more refiners come on line. There was a major amount of European refinery maintenance that was undertaken. They`re coming back online. A big refinery in Indiana, Whiting, Indiana, BP poured billions of dollars into this thing. It`s coming back online. They`re finally going to see relief in the Midwest.
And similarly, too, the cheap shale oil that`s been coming out of the ground all over the place, is getting out to the coast via rail, to California, to New York, New Jersey refining centers down South. These barrels are being liberated via rail to the tune of about 1 million barrels a day by the year.
So, those prices are coming down. I see a national average of as low as $2.75, maybe $2.50 if we`re lucky come the fall.
MATHISEN: A lot of drivers being happy about that. What about nat gas?
KILDUFF: We`re not going to see the low price that we saw last year. The shift away from coal to natural gas is sticking and as we saw last winter, we have an abundance of natural gas, so much so we didn`t know where we were going to put it at one point. But just a normal winter really chewed through those inventories and got them down low.
MATHISEN: Really quickly, what`s the wild card in your forecast?
KILDUFF: The wild card in my forecast has to be -- still the Middle East. If we lose the Iraqi production, if Libya turns back into a full on civil war, very, very high oil prices will be with us again, $120 a barrel.
MATHISEN: John Kilduff, thanks very much. Have a great Fourth.
KILDUFF: You, too.
MATHISEN: Appreciate you being with us.
GHARIB: Well, one country that uses a lot of energy, as we`ve just been talking about, China and that demand is expected to increase in the years ahead. But the world`s second largest economy which was at one time growing at break neck speed now has hit the brakes.
With that in mind, Eunice Yoon tells what to watch for this quarter in China.
EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Here`s what to watch for in China in the quarter ahead:
After slow down in the past few months, everyone is waiting to see if the economy will weaken further and by how much. People are growing
increasingly concerned about a credit crunch here. Many are wondering if China`s financial sector will come under greater strain if the Federal Reserve tapers its stimulus.
And the U.S. and China are going to be meeting in July. Will the two large economies be able to reset their frosty relationship?
For NIGHTLY BUSINESS REPORT, I`m Eunice Yoon, in Beijing.
MATHISEN: And coming up, with interest rates on everybody`s mind, what`s the outlook for stocks and bonds this quarter? That`s next.
GHARIB: Billion-dollar deals bound in the entertainment and social media spaces and Hollywood is betting big again this year. Will the buying continue over the next three months and will the box office break records?
Julia Boorstin takes a look.
JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Here is what
to watch for in the media and social sectors in the quarter ahead:
Expect Hulu to sell for about $1 billion. Whether parent companies Disney (NYSE:DIS) and News Corp (NASDAQ:NWS) pick the likes of Direct TV or Peter Tormin will determine who takes on rival Netflix (NASDAQ:NFLX).
With the slew of big budget bets, the box office is on track to rebound from winter decline, putting studios on track to beat last year`s box office record.
And at Facebook (NASDAQ:FB) watch, Instagram on the heels of its video launch. The big question is when ads will launch?
And expect more social acquisition after Yahoo`s billion-dollar purchase of Tumblr and Google (NASDAQ:GOOG) of WAZE, Foursquare and What`s App are in the spotlight.
For NIGHTLY BUSINESS REPORT, I`m Julia Boorstin.
MATHISEN: And that is the perfect pivot point for us to go to Jon Fortt, to give us his outlook for technology this quarter.
JON FORTT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Here is what to look for in the tech sector in the quarter ahead:
First of all, supply chain. Expect lots of rumors to move stocks with large screens from the likes of Sharp or Samsung, that could be heading to Apple (NASDAQ:AAPL) or others in the TV space.
Also, look for back-to-school numbers particularly in PCs. This is a chance for Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT) to show that the initial poor numbers this year can be turned around.
And, finally, we have tablets and the like for the holiday season. Expecting in September, new iPads, iPhones and Kindles.
For NIGHTLY BUSINESS REPORT, I`m Jon Fortt.
GHARIB: Well, it`s been an excellent year so far for stock investors. Can they count on a strong second half?
Hugh Johnson joins us now. He`s the chairman and chief investment officer at Hugh Johnson Advisors.
Hugh, great to see you.
So, straight to the main question. Is the second half going to be as good as the first?
HUGH JOHNSON, CHAIRMAN & CHIEF INVESTMENT OFFICER: It`s hard to imagine that you could get another half in the same year that was as good as the first year, first part of this year. Obviously, we had a rise in stock prices, that`s not a big surprise. A rise in interest rates, that`s not a big surprise.
But the magnitude in the first half was really spectacular. No, I think the trade off unfortunately is that we`ve got a big move in the stock market. It`s become a little bit overvalued. So, in the second half of the year, although stocks could continue to rise, you`re not going to get anything that looks like the first half.
So, let`s call it good but not great and maybe even a modest correction as we move through the third -- the third quarter of this year.
MATHISEN: If I generally have a 50/50 stock bond mix in my portfolio, Hugh, where should I be now? Should I be at 50/50, a little over weight stocks? Or what?
JOHNSON: I think one of the most important points, Tyler, now is
that the bull market in bonds is behind us. We`ve probably started a bear market in bonds. Bonds are not the place to be. We`re still in a bull market in stocks. So, stocks are going to be the place to be. Bonds are not going to be the place to be if you have 50/50 portfolio.
I would have at least 57.5 or 60, something like that percent of your portfolio in stocks and the balance and bonds. And in the bond part of the portfolio, make sure you keep the duration short. The stock part of the portfolio is going to perform the best between now and the end of the year and particularly between now and the end of 2014.
Look for the returns from the stock market to be roughly the 6 percent level through 2014 and maybe minus 1.5 percent in the bond market as a guest.
GHARIB: OK. So, let`s talk a little bit about strategy, Hugh. You said that there still could be a correction in this third quarter.
GHARIB: So should investors buy when those corrections are happening and scaled back in the rallies? What are you telling investors to do?
JOHNSON: Well, you know, I don`t like to call it a short-term swing, Susie, but I think that the market is about 2 percent to 4 percent
overvalued. What I`d like to do as I`d like to as an entry point, I`d like to be buying at a lower level, a cheaper, better undervalued level.
So, I`m saying yes, you want to have that 57.5 percent in the stock market, but drag your feet if you`re going to be adding to the equity component of your portfolio simply because one were overvalued. And common sense alone says after the first half of this year, you`re bound to get a correction and maybe even a sharp correction along the way.
My guess is in the current quarter of the third quarter. So, I`m saying, buy but drag your feet before you enter.
MATHISEN: You know, Hugh, I have a vision with a lot of viewer sitting at home with a hot dog in one hand and a pencil in the other, and they`re going to want to use that pencil to write down some stock choices that you`d be comfortable with owning in the second half of the year. Give me a couple names.
JOHNSON: Well, you want to go with what`s been working. Consumer discretionary stocks have been working, couple of names that I own and all our clients own, Coach (NYSE:COH) (ph), Disney (NYSE:DIS), in that sector, the financial sector has been on fire. I think their margins are going to expand. First Republic, Fifth Third, two good financial names.
And the healthcare sector has been doing extraordinarily well. A
good place to buy, price earnings ratio is low, good dividend yields, safe place to play the healthcare sector and drugs. Take a look at pharma, Merck (NYSE:MRK) and Pfizer (NYSE:PFE), in that sector.
So, those are some names. But there are a lot of names out there. And again, drag your feet. Buy a little now and wait for that so-called correction that I think will be coming and then buy some more.
GHARIB: Real quickly, on Friday, that important jobs report comes out, what do you think that`s going to do for the market?
JOHNSON: Well, that`s pretty important, because that`s going to get everybody talking about what`s going to be the impact of jobs numbers on Federal Reserve policy. At what point does the Federal Reserve begin to taper?
I think the numbers are going to be about 165,000. I don`t think that`s going to be enough to inspire or encourager the Federal Reserve to even talk or think about tapering or reducing their quantitative buying or stimulus at this juncture. It`s when we get in the fall, when we get in September, October, November, December, time period that I think you`re going to see numbers around 200,000 plus in job growth. And that`s when the Federal Reserve is going to be seriously considering reducing their buying or their stimulus.
JOHNSON: And, of course, it depends on the inflation numbers, as you know.
GHARIB: Hugh, great to see you. Thank you so much. Enjoy the holiday.
JOHNSON: My pleasure.
GHARIB: Hugh Johnson, chairman and chief investment officer at Hugh Johnson Advisors.
MATHISEN: And finally tonight, it is the Fourth of July and many people plan to get away and made it a long weekend. But although AAA expects fewer cars on the road this weekend, it still sees nearly 41 million people traveling. That`s a good start to the summer season for the travel business.
And Simon Hobbs tells us what else to expect for hotels, cruises and the like.
SIMON HOBBS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Here is what to
watch for in the travel and leisure sector in the quarter ahead:
Watch if hotels are able to achieve not just the near record 70 percent occupancy that`s being forecast, but if they are also able to raise prices and therefore be substantially more profitable.
For hotel owners, (INAUDIBLE), watch for short interest and sharp share price moves on changes to Fed policy and yields in the bond markets.
Cruise lines are likely continue to slash prices in order to fill ships in response to their spring of mishaps.
And, finally, watch the advertising war between the online travel agencies like Expedia (NASDAQ:EXPE) and Priceline for both the cost and the payoffs, especially with the recent big meta search takeovers, mainly Kayak.
For NIGHTLY BUSINESS REPORT, I`m Simon Hobbs.
GHARIB: And that is NIGHTLY BUSINESS REPORT for us. Have a great Fourth of July. I`m Susie Gharib. Thanks for watching.
MATHISEN: And thanks from me as well. I`m Tyler Mathisen. Have a
great Fourth of July. We`ll see you here tomorrow for the big jobs report.
Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by CQRC Transcriptions, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2013 CNBC, Inc.
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