SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Quiet as a mouse.
Disney (NYSE:DIS) hits the mark on earnings and revenue, but Wall Street does not seem impressed.
Another day, another record. The Dow and the S&P reach uncharted territory ahead of tomorrow`s key jobs report.
And, passive or active. Which type of investing works best for you?
We`ll lay out the blueprints.
We have all that and more tonight on NIGHTLY BUSINESS REPORT for Thursday, November 6th.
Good evening, everyone. Tyler is off tonight.
Topping our news: the Dow and the S&P 500 hitting new highs again on Wall Street. We`ll have more on that in just a moment.
But after the closing bell, a Dow component out with its latest results, Disney (NYSE:DIS) reported a solid quarter. It earned 89 cents a share. That was right in line with analysts` estimates, and revenues came in slightly better than expectations. Disney (NYSE:DIS) shares fell in afterhours trading, but during the regular session, they rose 1 percent.
Julia Boorstin has more on those Disney (NYSE:DIS) numbers.
JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Disney
(NYSE:DIS) earnings coming in right in line with expectations on better- than-expected revenue driven by better-than-projected results with the studio, and the parks and resorts.
One hot topic in focus on the hills of Disney (NYSE:DIS)`s rival CBS
(NYSE:CBS) announcing direct to consumer streaming services for cord cutters with Disney (NYSE:DIS)`s media networks have in the works.
Iger is saying he`s confident in the value of the cable TV bundle.
BOB IGER, DISNEY CHAIRMAN & CEO: Will there be experimentation? Yes.
Might we be part of that experimentation? I think that`s possible. We`re taking a cautious approach here because we think that the prudent thing to do is to do what we can to maintain the value of what is obviously a value- creator for this company and for a lot of other companies in the media space.
BOORSTIN: Iger noted that Disney (NYSE:DIS) is in direct to consumer business in many ways and ESPN has various streaming services, but that he is more focused on improving the value of the bundle.
For NIGHTLY BUSINESS REPORT, I`m Julia Boorstin.
GHARIB: We`ll see how Disney (NYSE:DIS)`s earnings play out tomorrow.
But today, investors were encouraged to buy stocks after Mario Draghi, Europe`s top central banker deepened his commitment to stimulating the growth in Europe.
Also boosting the markets, more good news on the U.S. job market. New claims for unemployment benefits fell more than expected last week. By end of the session, the Dow Industrials rose almost 70 points to 17,554.
That`s a new record. The NASDAQ jumped 17 and the S&P rose 7 points to its new record high of 2,031.
Well, with the indexes having set record after record, you`d think it`s an easy market to make money in. But then why are so many of the fund managers struggling?
Dominic Chu explains the difference between the active and passive funds and what that may mean for your investments.
DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): When it comes to investing there are two major schools of thoughts. The first is choosing investment managers or funds that seek to out-perform the market. The second is just finding a way to invest to match the market`s returns.
(on camera): There is a raging debate on Wall Street about which is better, those who believe management expertise can generate superior relative returns, believe in something called active management. Those who believe the market can`t be consistently beat and therefore simply investing in the market is the best way to go believe in something called passive management or indexing.
(voice-over): So far this year, indexers have been able to claim bragging rights. According to investment research firm Morningstar (NASDAQ:MORN), the average index mutual fund has gained a little over 5 percent through the end of October. Meanwhile, the average actively managed mutual fund has returned around 4 1/2 percent. The outperformance of index versus activists echoed in some of the biggest mutual funds.
Vanguard`s total stock market index fund is the biggest stock index fund in America. It`s got around $370 billion in assets, according to Morningstar (NASDAQ:MORN). It`s gained approximately 10 percent year to date. The biggest actively managed fund is the American Fund`s Growth Fund of America, with $142 billion in assets. It`s gained about 8 percent so far this year.
(on camera): Proponents of both styles in investing will point to their own stats showing their superiority but many financial advisers believe that there is a role that each can play in a well-diversified portfolio.
For NIGHTLY BUSINESS REPORT, I`m Dominic Chu.
GHARIB: Barry Glassman joins us now to talk more about active versus passive investing. He`s founder and president of his own wealth management firm, Glassman Wealth Services.
Barry, thanks for joining us on this big debate versus active versus passive investing.
Are individual investors better off with one style of investing over the other? What do you tell your clients?
BARRY GLASSMAN CFP, GLASSMAN WEALTH SERVICES FOUNDER & PRESIDENT:
Well, keep in mind that this is not a new debate. This has been going on for a long time ever since indexes were invented. But I think there is room for both. I think that there is room for indexes for certain categories of a portfolio. And then there are certain places where you can find index so passive certainly does make sense.
GHARIB: Well, there are pros and cons to both obviously. Let`s go over some of them. What would you say are the main pros for passive investing?
GLASSMAN: Well, the pros are fairly easy. They are typically low cost, they don`t try to out-perform an index. They — so they don`t actively trade. Therefore, they`re tax efficient. And then lastly, a lot of them do beat most active managers over the long-term.
GHARIB: And you don`t really have to worry much about it. You just put your money there and you`re done?
GLASSMAN: Set it and forget it, yes.
GHARIB: Set it and forget it, OK. What about on the active side?
What are the pros there?
GLASSMAN: Well, for the active side I believe that you should use active management. For example, there isn`t an index. We happened to use the strategy, for example, that is a long-short stock strategy. The manager can invest in certain investments, hoping that they go higher, some that they go lower. There is no index.
You should use active management where the index isn`t really right for you, you choose not to be in the index. And in the emerging markets, for example, during the peak of the BRIC, Brazil, Russia, India, China, those were dominating the emerging market indexes, and it wasn`t enough room for countries like Singapore and South Korea and so forth.
And, lastly, if you do believe a manager can beat the index, then you should certainly consider their active management.
GHARIB: You know, one of the reasons why a lot of investors don`t like the active investing is that they put their money in what was a “hot fund”, only to find out maybe the next year or the year after, it does poorly and they`re disappointed. What`s the advice you give to investors on how to research, whether you put your money in an active fund or not?
GLASSMAN: Sure. This is the biggest reason why people should stay away from the active management. If they`re going to make the I guess human decision, the gut decision, to sell something after it`s performed.
So, if they choose to go with a man, woman, or team, believing that they can add value that of the index, you just have to realize that there`s going to be a year or two where they absolutely will under-perform the index.
What you don`t want to do is sell out after they have under-performed and then just choose another active manager who has recently out-performed.
What you find is people just start selling low and then selling low, and then selling low again. And it`s a recipe for vast under-performance.
GHARIB: A couple of months ago, you remember that Warren Buffett disclosed that he told his wife that when he`s no longer around, she should put the money into an index fund. And that surprised a lot of people.
Under what circumstances does this advice make sense for individual investors?
GLASSMAN: I love this — thank you for bringing this up. I love this example.
Keep in mind that Warren Buffett`s wife, upon Warren`s passing, he advised her to invest in the S&P index. But keep in mind, two things:
firstly, she is not going to follow the fluctuation on a daily basis and really isn`t gong to be impacted if she sees a 40 percent loss in that.
And the second is keep in mind that for her to invest all her money or all of her inheritance in the S&P 500 actually diversifies her portfolio even more so than owning just Berkshire Hathaway (NYSE:BRK.A), which has exposure to a couple of dozen companies.
GHARIB: All right. Well, we`ll leave it there. Barry, thank you so much for all your thoughts. Barry Glassman with Glassman Wealth Services.
And after the bell today, Bank of America (NYSE:BAC) further cut its reported third quarter profit by $400 million due to higher legal costs that were associated with a multi-bank investigation into foreign currency trading. You remember last week, Citi also revised lower its quarterly numbers for the same reason.
The cyber attack on Home Depot (NYSE:HD)`s payment systems a few months ago is wider than originally thought. The home improvement chain now says 53 million more email addresses were exposed. That`s on top of the 56 million cards that were compromised. Home Depot (NYSE:HD) says that attack came through a third party vendor`s stolen username and password.
Target (NYSE:TGT) was attacked in a similar way last year.
Coming up, why one small European country is stirring up calls for reforming the tax code here in the U.S.
GHARIB: The victorious Republicans are spelling out their agenda today. House Speaker Boehner and incoming Senate Majority McConnell wrote an op-ed piece for today`s “Wall Street Journal”. They`re calling for tax code reform, moving on the Keystone Pipeline, cutting regulation on business, restoring the 40-hour definition of full-time employment, school choice and encouraging employers to hire more veterans.
Well, speaking of taxes, when you think of tax havens, what comes to mind? Ireland? The Cayman Islands? But what do you know about tiny Luxembourg?
It`s been hard to prove that Luxembourg is a tax haven, because its tax rulings have never before been made public until now. CNBC, which produces this program, partnered with the International Consortium of Investigative Journalists to produce a report on one of the biggest leaks of tax documents.
Dina Gusovsky has that story.
DINA GUSOVSKY, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
Over 500 tax rulings from 340 companies gives us an exclusive look into how multinational corporations are using Luxembourg to pay less taxes or avoid paying them altogether. Two hundred nineteen U.S. companies, including Mylan (NASDAQ:MYL), Verizon (NYSE:VZ), FedEx (NYSE:FDX) and Amazon
(NASDAQ:AMZN) have set up shop in the tiny nation.
(on camera): The way it works, accounting firms like PricewaterhouseCoopers consults with tax ministers in Luxembourg on behalf of companies. They present a structure they want to set up and most of the time they get a seal of approval. That would be akin to a foreign firm going to the IRS first to arrange (ph) its tax burden.
(voice-over): About $95 billion in profits flow through Luxembourg in
2012 alone, according to the Bureau of Economic Analysis. On that, only about $1.1 billion was paid in taxes, so about 1 percent. If that money were repatriated to the United States at our current corporate tax rate, that would amount to about a $30 billion tax bill.
Direct investment from the United States to Luxembourg in 2013 was
$416 billion. Companies are able to shave off tax bills through a variety of ways, none of which appears to be illegal.
For example, Luxembourg companies that don`t necessarily operate in the country can borrow money from tax haven entities and relend that money to subsidiaries. The result, billions are deducted as interest expense.
International tax expert and attorney Steven Plotnick gave this example.
STEVEN PLOTNICK, INTERNATIONAL TAX ATTORNEY: The Luxembourg tax for example of $50 million of interest income, that`s run through it, would be $100,000. So that`s how much you pay for the privilege —
GUSOVSKY (on camera): Which is nothing.
PLOTNICK: Nothing. And that is what you pay for the privilege of being in Luxembourg.
GUSOVSKY (voice-over): A spokesman for Luxembourg`s finance minister told CNBC that he strongly rejects the fact that Luxembourg is a tax haven, and says companies are instead entice by its favorable business climate and political stability.
But Luxembourg is feeling the heat. The European Union is currently looking into whether or not it has engaged in harmful tax practices.
And in a twist of irony, former Luxembourg Prime Minister Jean Claude Yonker often credited with setting up the very tax structure that is currently being investigated is now president of the European Commission, a branch of the same organization investigating Luxembourg`s tax practices.
For NIGHTLY BUSINESS REPORT, I`m Dina Gusovsky.
GHARIB: For its part, PricewaterhouseCoopers is the accounting firm that represented all the companies in those leaked documents told CNBC that it`s prohibited from commenting on specific client matters, but rejects any suggestion that there is anything improper about the firm`s work. They said the documents were taken unlawfully by a former Luxembourg employee who then selectively provided them to the media.
Well, if there is one thing that Democrats and Republicans agree on, it`s the need to reform the U.S. tax code and to keep tax revenues here in the U.S. But they just don`t agree on how to go about it.
Joining us now to talk about the issues, Andrew Friedman. He`s founder and principal of the Washington Update, a non-partisan think tank.
Andy, nice to have you with us.
ANDREW FRIEDMAN, THE WASHINGTON UPDATE FOUNDER & PRINCIPAL: Hi, Susie.
GHARIB: So, this is a topic people have been debating for quite a while now. What do you think the chances are that we get a reform in the U.S. tax code?
FRIEDMAN: Well, you stated it right. Both Democrats and Republicans say they want tax reform. One of the things we have in Washington is the tax stuff, complicated stuff hard to get done. You have to kind of separate both the individual side and corporate side and try to analyze each to see what the likelihood is.
GHARIB: Well, actually, I`m glad you brought that up because when people talk about tax reform, it could mean corporate tax reform, it could mean personal taxes, you know, where do you see this whole debate playing out. Which category or all of them?
FRIEDMAN: Sure, well, if you look at the individual side, you got to understand what you`re doing is dropping the tax rates precipitously. And that means you have to recoup the revenue you lost by dropping the tax rate so the government doesn`t end up worse off. And so, you have to do things like curtailing the mortgage interest rates. Everything gets put on the table to try to recoup that level. And that`s very controversial. It`s very hard to get agreement on those kinds of changes.
So, I think individual tax reform that affects you and me is probably too heavy a lift for Congress, putting inside even all that, you have to decide if you bring in individual revenue with individual tax reform, Democrats say yes, Republicans say no.
Corporate tax reform is a little more circumscribed, you`re only dealing with corporations or businesses and you`re dealing with business deductions, things like accelerated depreciation and LIFO accounting. And everybody agrees you should have revenue neutral corporate tax reform, not to try to bring in more revenue to the government. That might be more doable and that would stop, as you just pointed out in your last report, these companies moving jobs and money overseas to avoid U.S. taxes.
GHARIB: Well, how can that be avoided? I mean, is there a way to keep all the profits and taxes on the profits here in the U.S. and so that companies don`t have these tax gimmicks?
FRIEDMAN: Yes, I mean, if you want to change the system in the U.S., and now, we`re just talking about the corporate side. You want to lower the tax rate here so that companies are not seeking out lower tax rates abroad. And then you have to make it easier for companies to bring back their earnings that are overseas into the U.S.?
Your report just noted that as long as the money stayed, say, in Luxembourg, and the same would be true in France or England, there`s no U.S. tax. But when that money is brought to the U.S., there is a 35 percent tax. We`re the only developed company that imposes the tax on that repatriation. That`s why you see companies moving out.
GHARIB: And real quickly, there is a lot of debate on reducing that tax rate, what should it be? The CEOs that I talk to would like, you know,
20 percent, 25 percent, the White House wants it higher than that. Will there be meetings of the mind on that?
FRIEDMAN: Yes, I think most people would say 25 percent to 28 percent would be a reasonable rate that we keep these companies here if we make some of these other changes.
GHARIB: All right. Andy, thank you so much. Andy Friedman with the Washington Update.
FRIEDMAN: It`s my pleasure. Thank you.
GHARIB: Genworth reports a record loss, sending shares tumbling, and that`s where we begin tonight`s “Market Focus”.
The insurance company suffered a huge quarterly loss from its long- term care insurance business. The CEO says the turnaround in that division will be more difficult than expected. The stock lost more than a third of its market value, closing at $8.66, making it the biggest loser in the S&P
Analysts cut their price targets for Qualcomm (NASDAQ:QCOM) after that disappointing earnings report that we told you about last night. The chip maker missed earnings and revenue estimates, and cut its outlook.
Barclays, Canaccord and Brean (ph) all slashed their targets on the company. That sent shares down 8 1/2 percent to $70.57.
Kate Spade bucked the retail trend with its strong report today. The handbag and clothing maker met earnings forecasts and said its gross margins had expanded. Sales rose 30 percent. So, it`s upped its guidance for the year. Shares popped 18 percent to $30.96.
Orbitz shares got slammed after posting weaker than expected profits because of higher marketing costs. The travel Web site also lower the top end of its 2014 revenue forecast, blaming the stronger dollar, pressuring its international business.
But the company CEO was still happy with the results.
(BEGIN VIDEO CLIP)
BARNEY HARFORD, ORBITZ CEO: We have the strong quarter, we — we delivered guidance for the full year of 9 percent to 10 percent, just EBITDA growth, and we deliver guidance for 2015, for just the EBITDA, the mid to high single digits. So, it was a strong quarter and we deliver a good guidance. We`re a business which is generating over a $100 million of free cash flow a year, doing great in terms of key initiatives.
So I can`t really explain the reaction today. We`re pleased with the quarter.
(END VIDEO CLIP)
GHARIB: Despite those comments, shares fell 9 percent to $7.70.
Strong advertising sales helped AOL (NYSE:AOL) post an increase in quarterly sales, more advertisers upped the company`s automated platform to buy and sell digital ads. Earnings matched estimates, but investors didn`t seem impressed. Shares were off nearly 4 percent to $42.23.
AMC saw its sales increase by more than 30 percent, led by growth in its international network, even though results topped estimates, cost associated with the recent acquisition weighed on the entertainment company`s profit. Despite that, the stock was up almost 3 percent to close at $25 and change.
News about a trio of drug companies that are all working on Ebola vaccines. Sarepta`s profit topped forecast but revenue was short of estimates. Tekmira posted a wider than expected loss, but announced it will produce Ebola treatments for the Department of Defense. And BioCryst posted a wider loss on increase research and development expenses.
Shares of Sarepta shot up 7 percent. Tekmira rose 4 percent. But BioCryst down nearly 7 percent.
If you have a liver disease, the big companies are right in there with you, fighting for you for the dollars their exciting new drugs will bring in. The best known of the drugs can cure hepatitis C. They will under investor focus this weekend as researchers, companies, and Wall Street converge in Boston for the annual meeting of the American Association for the Study of Liver Diseases.
Meg Tirrell reports.
MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): It`s a battleground for hepatitis C, a chronic liver disease that affects an estimated 150 million worldwide.
Gilead Sciences (NASDAQ:GILD) has been dominating the space, with its pill Sovaldi, with the controversial price tag of $84,000 for 12 weeks of treatment, the drug set a record for sales in its first quarter on the market.
Now, Gilead got a new pill. Harvoni, a combination of Sovaldi and another drug that can cure the virus in as little as eight weeks for some patients.
BRIAN SKORNEY, BAIRD & CO. SENIOR ANALYST: With Gilead`s launch of Sovaldi, it`s actually the best pharmaceutical drug launch in history. So, given that it`s a single drug is doing, $300 billion plus in sales in a single quarter in the U.S., bigger than Lipitor ever did, you know, it certainly shows why it has become a very, very hot meeting.
TIRRELL: Analysts also expect data from competitors Abbvie and Merck (NYSE:MRK), and particularly watching an attempt by Merck (NYSE:MRK) to cut treatment times to as short as four weeks.
But hepatitis C isn`t the only focus — two other liver diseases have been capturing Wall Street`s attention — Hepatitis B and NASH, or non- alcoholic steatohepatitis.
SKORNEY: Hepatitis C I would argue remains the focus because it is so commercially near term. We`re just seeing these massive sales stickers right now. People are looking to the future to say hey is there anything else beyond hepatitis C?
TIRRELL: And those markets, analysts say, are as big or bigger than hepatitis C. But efforts to treat both NASH, a chronic disease that can lead to permanent liver scarring, and hepatitis B, are in much earlier stages of development. Companies working there include Gilead, as well as smaller bio techs like Intercept, Arrowhead and GENFIT.
(on camera): Analysts say it maybe years before we see the same progress in other diseases that we`ve seen in Hepatitis C. This weekend will give investors a closer look at where we stand.
For NIGHTLY BUSINESS REPORT, I`m Meg Tirrell.
GHARIB: Coming up next, with the holidays just around the corner, shippers are expecting a record season. But is everybody ready?
GHARIB: The U.S. Postal Service is ramping up for the holidays. It says it will add Sunday deliveries in major metropolitan areas starting November 17th and running right through Christmas day. The USPS already partners with Amazon (NASDAQ:AMZN) for Sunday delivery. It expects to ship
50 million more packages this year, in addition to handling 12 billion cards and letters.
The three major package carriers, the U.S. Postal Service, FedEx
(NYSE:FDX) and UPS all insist they`re ready for a record season of holiday business, with no repeat of last year`s disastrous trail of undelivered presents.
Morgan Brennan has more.
MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
Forty-eight days until Christmas. And shippers are bracing for their busiest holiday season yet, driven by online shopping.
Today, the U.S. postal service saying it expects to ship nearly half a billion packages by Christmas. That`s up 14 percent over last year. And on top of the 12 billion cards and letters that will also be sent. The carrier says they`re taking big steps to meet the demand and not just brand-new holiday stamps.
PATRICK R. DONAHOE, USPS POSTMASTER GENERAL & CEO: Starting on November 17th, 11 days from now, we`ll be delivering packages seven days a week in many areas of the country. You`re also going to be seeing our letter carriers out on Christmas Day.
BRENNAN (on camera): That strategy will be watched closely. Last year, when UPS and to a smaller extent, FedEx (NYSE:FDX), failed to deliver
2 million packages in time for Christmas, the Postal Service didn`t have the same problem, largely because it partnered with Amazon (NASDAQ:AMZN) for Sunday deliveries.
(voice-over): The relative success for the holiday performance has helped them better compete with UPS and FedEx (NYSE:FDX), luring hundreds of new business customers to priority mail. But while UPS and FedEx
(NYSE:FDX) have poured hundreds of millions of dollars into network upgrades, expanded capacity and workers, some question whether the USPS has done enough?
JON WINSETT, NPI CEO: They want to take a bigger piece of the e- commerce pie, and be competitive with UPS and FedEx (NYSE:FDX), but there are still grave concerns that the USPS is not built to handle this spike of shipping volumes with their current infrastructure.
BRENNAN: And it`s not just the Postal Service. Between the three carriers, a staggering 1.3 billion packages are expected to shift this season, maxing out networks vulnerable to weather conditions, trucking shortages and the very real possibility of another last-minute spike in online shocking. But all of the three insists they`re ready for peak. But until December 25th, only Santa will know for sure.
For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan.
GHARIB: And that is NIGHTLY BUSINESS REPORT for tonight. I`m Susie Gharib. Have a great evening, everyone. And we`ll see you right back here tomorrow night.
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) 2014 CNBC, Inc.