SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: One beat, one miss. Earnings season is here and late today, two Dow components reported results that could impact trading tomorrow.
TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: It’s the economy. Where the Democratic presidential hopefuls stand on issues important to your money.
HERERA: The smart money. But how much of an advantage do investors really have by putting their cash with hedge funds?
All that and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, October 13th.
MATHISEN: Good evening, everyone, and welcome. Glad you could join us.
Ready or not, folks, it is earnings season big-time. It’s the time of the year when companies tell investors how much money they made or didn’t. The two Dow components that reported today after the bell, two of the biggest, JPMorgan (NYSE:JPM) and Intel (NASDAQ:INTC).
And we begin with JPMorgan (NYSE:JPM), which saw its quarterly profit jump more than 20 percent. That’s the good news.
But the biggest bank in the U.S. by assets missed Wall Street’s earnings estimates by comparatively five cents. Reporting profits of $1.32 a share. Revenues also 6 percent lower than a year ago at $23.5 billion hit by volatile markets and continued low interest rates. They missed estimates, too. Shares were initially lower after the report as you see right there on that graphic.
Kayla Tausche takes a look now at some of the big issues the country’s biggest banks are facing this quarter.
KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT: JPMorgan (NYSE:JPM), the first of the financials to report and with a miss to beat not a way to kick off a busy week of earnings as Bank of America (NYSE:BAC), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC) and Goldman Sachs (NYSE:GS) out with their earnings in the coming days.
All banks are likely to feel the effects of the macro headwinds we saw in the third quarter and those that affected JPMorgan (NYSE:JPM), as well. First low rates, likely to squeeze margins even if they cause a short term uptick in loans like mortgages. Then, there’s low oil prices, meaning that there could be more money reserved for potential energy loan losses. JPMorgan (NYSE:JPM) saw credit costs in its investment bank go up $232 million largely reserving for oil and gas loans.
And then there’s volatile markets, meaning lower trading revenues overall. JPMorgan’s fixed income trading revenues fell 11 percent.
Because Wells Fargo (NYSE:WFC) has the least exposure to trading, it’s the only bank that Wall Street analysts expect to see overall revenues rise. To combat that revenue weakness, cost cuts will be front and center. JPMorgan (NYSE:JPM) has cut 5,000 people from its headcount this year. It’s cut real estate, it’s even cut employees’ voice mail lines.
Bank of America (NYSE:BAC) has been in a year’s long process of getting rid of bad loans and the workers that have been servicing them.
The question now is where organic growth will come from with the economy growing only moderately. The big boon to be banks was supposed to be that ever elusive rise in interest rates. But yet again, the banks will have to show investors their big supermarket business models are working even without it.
For NIGHTLY BUSINESS REPORT, I’m Kayla Tausche.
HERERA: And now to Intel (NASDAQ:INTC), which beat expectations despite a 6 percent fall in quarterly profits, dragged down by weak demand for personal computer chips.
The world’s largest chipmaker earned 64 cents per share, 5 cents better than estimates. Revenue decreased slightly to $14.5 billon. Now, shares initially popped after those results and then they fell back a bit.
And that weak demand for PC chips was offset by sales growth of 8 percent at Intel’s data center business. That segment has been growing faster than revenue overall for the chipmaker, a trend many expect will continue.
And as Josh Lipton explains, it’s now the key metric that Wall Street uses when evaluating this company.
JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: The PC industry was always Intel’s bread and butter. But now, the company sees that changing.
In fact, CEO Brian Krzanich says he’s not expecting that much from that part of his business. In fact, he has said his strategy is to try and hold sales in that business as flat as possible. So, instead, investors and financial analysts are now more focused on the company’s other big business, chips for data centers.
DOUG FREEDMAN, RBC CAPITAL MARKETS: We’re very focused on the data center market because of the profitability that it can drive which is able to offset the declines that we’re seeing in pc. So we look at the data center business as being the real engine of profit growth for Intel (NASDAQ:INTC).
LIPTON: Chips in data centers handle the work loads for mobile apps. In other words, when users open a Facebook (NASDAQ:FB) app, it’s likely that Intel (NASDAQ:INTC) is providing the processing power displaying all those pictures and videos.
And Intel (NASDAQ:INTC) is doubling down on this technology. The company announced a deal to buy Altera (NASDAQ:ALTR) for $17 billion, which could provide the company with moral specialized chips for data centers. That data center the business now accounts for some 30 percent of Intel’s revenue and Freedman argues that the business should keep growing strongly, though he also acknowledges the risks such as competition from rivals like arm holdings.
As for the PC industry, it remains under real pressure as consumers make the switch to mobile devices such as smartphones and tablets. There’s some hope that the PC market could get a much needed boost from Windows 10, Microsoft’s new operating system, as well as Intel’s new Sky Lake chip, which is thinner and triples the battery life of a PC.
However, for now, times are tough in the PC industry. Research firm IDC says that PC shipments in the third quarter fell 11 percent. Investors though are well aware of those headwinds. The challenges plaguing PCs have been going on for some time.
Intel (NASDAQ:INTC) is a $55 billion powerhouse so these big trends in personal computers and data centers will take quarters, even years to play out. The debate now between the bulls and bears the trajectory of the PC market and momentum in that increasingly critical data center business.
For NIGHTLY BUSINESS REPORT, I’m Josh Lipton in San Francisco.
MATHISEN: Johnson & Johnson’s results were hit by the stronger dollar. The company beat earnings expectations but missed its revenue forecasts because those currency headwinds, the company says, and plunging sales of its hepatitis medicine, hepatitis C that is.
Johnson and Johnson announced it will buy back up to $10 billion in stock and on the conference call, the chief financial officer said the company was looking at potential acquisition. Shares of Johnson and Johnson fell fractionally today.
HERERA: Anheuser Busch InBev has agreed to buy its rival SABMiller, making this the biggest beer deal ever with a price tag of more than $100 billion. Yesterday, we told you AB InBev sweetened its offer for the company and overnight, that bid was accepted. The combined company will own nine of the world’s top 20 beers.
But now, that deal must be approved by regulators.
MATHISEN: On Wall Street, the Dow Jones industrial average snapped its seven-day win streak because of a slight decline in oil prices and weakness out of China overnight. The blue chip Dow index off 49 to the 17,081. NASDAQ dropped 42 and S&P 500 lost 13. And oil prices closed lower after the international energy agency raised supply concerns by saying a lot of crude remain on the market.
HERERA: A prominent Federal Reserve official said he does not think a rate hike should come this year. In an exclusive interview with Steve Liesman, Fed Governor Daniel Tarullo said the economy may not be strong enough to handle it.
(BEGIN VIDEO CLIP)
DANIEL TARULLO, FED GOVERNOR: Right now, my expectation is given where I think the economy would go, I wouldn’t expect it would be appropriate to raise rates. But I would hasten to add that that is an outlook that changes based on developments in the economy and our being forward looking about it.
I do think there’s been too much focus on a particular meeting and a particular date and not enough on the overall conditions of the economy.
(END VIDEO CLIP)
HERERA: Mr. Tarullo acknowledged that the economy has made progress but that there’s a lot of — not a lot of momentum.
MATHISEN: Tonight, the Democratic presidential candidates will get their chance to tell the American public where they stand on important economic issues during the first Democratic debate tonight in Las Vegas.
John Harwood is there.
So, John, what does Hillary Clinton need to do tonight and what might she say about the economy?
JOHN HARWOOD, NIGHTLY BUSINESS REPORT: Tyler, we know that the Clinton brand in Democratic politics is pretty strong. A lot of Democrats have gotten nervous about the state of her campaign, the struggles with the e-mail, questions about her trustworthiness. So, what the burden really on Hillary Clinton tonight is not to go after any opponent, not even necessarily to go after Republicans, but to look commanding, to look fluid, to look even tempered on the stage, not testy, lay out her plans for helping everyday day Americans as she calls them.
If she can do that, she’s fundamentally in good shape in this race.
HERERA: What about Bernie Sanders? Is she expected to attack her positions?
HARWOOD: He says he won’t. Bernie Sanders has been disciplined about not going after Hillary Clinton, relying on the contrast that is always out there. He says he is a political revolutionary. He wants a revolution. He’s a Democratic socialist, not a traditional Democrat. So, he’s going to offer the straight up solutions that he’s been advocating, count on that.
But he does need to try to show people, since he’s done unexpectedly well so far, that he could be a potential president. So, a little changing in bearing perhaps from Bernie Sanders.
MATHISEN: What about the other three candidates on the stage? Start by telling us who they are and where is the latest thinking on Joe Biden?
HARWOOD: That totally your question, Tyler, shows the predicament for Martin O’Malley, Jim Webb, Lincoln Chafee. They’re all pretty much nowhere in the race.
O’Malley is the closest thing to a conventional candidate. He had a solid run as governor of Maryland. Hasn’t made an impact financially or in the polls so far.
Lincoln Chafee and Jim Webb are both former Republicans. Lincoln Chafee as governor and senator from Rhode Island. Jim Webb as the senator from Virginia. They’re both to the left of Hillary Clinton on foreign policy. They oppose the intervention in Iraq. They’re going to try to make an impression on people but don’t seem to have too much potential for winning the nomination.
Joe Biden, on the other hand, would be a serious challenge to Hillary Clinton. I still think in the end that Joe Biden who, of course, has not declared so far, and time is running out, I don’t expect him to enter this race.
MATHISEN: All right, John. Thank you very much. John Harwood in Las Vegas.
HERERA: And now to Russia where President Vladimir Putin said the economy is stabilizing. The Russian economy has been wrestling with the sharp fall in oil prices. Of course, that’s their main export.
Geoff Cutmore was at Putin’s speech in Moscow.
GEOFF CUTMORE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The message from President Putin, the west doesn’t have a clear idea of exactly what is going on inside Syria. I asked Mr. Putin to respond to President Obama’s remarks over the weekend saying, Mr. Putin lacks leadership.
Mr. President, over the weekend, U.S. President Obama called into question your leadership over Syria. He said that you are propping up an ally rather than going after ISIS. He also said you’re running down the economy here.
Can I ask you, how do you respond to President Obama’s comments? And what would you say to international investors who are dissuaded from putting money into the Russian economy because of such remarks? Thank you.
VLADIMIR PUTIN, RUSSIAN PRESIDENT (through translator): As we say, you’ve mixed apples and oranges together. At the military level, we asked them to give us the information regarding the target they believe are 100 percent belonging to terrorists and what we received as an answer was that they weren’t to do that. Then, the second question was asked, please tell us which targets should not be attacked by us? No answer received. What should we do then?
CUTMORE: This latest row with Washington over Syria comes as the Russian economy is still grappling with sanctions as a result of the campaign. Ukraine. I spoke to Mr. Siluanov, the finance minister, and asked him whether he thought the Russian economy was now turning a corner.
ANTON SILUANOV, RUSSIAN FINANCE MINISTER (through translator): We experienced a slowdown in growth this year. We estimate it to be minus 3.8 percent in 2015, but the third quarter and the end of the year are proof that we are turning the corner.
In 2016, we expect positive growth of around 0.7 percent. The economy has started to adapt to the conditions, new economic conditions.
CUTMORE: That view on the economy was also shared bid President Putin who feels that the bottom may now be in here in Russia.
This is Geoff Cutmore, the NIGHTLY BUSINESS REPORT in Moscow.
MATHISEN: Still ahead, just how smart is the so-called smart money? We’ll talk about that coming up.
MATTHEWS: Volkswagen plans to cut its annual investment by more than $1 billion following the emissions scandal. The automaker will step up cost cutting as its VW division, which is its largest by revenue, and change its diesel engine technology. The changes are part of the company’s strategic overhaul.
HERERA: Car sales in China climbed for the first time in six months in September. That’s prompted China’s main auto association to reiterate its earlier forecast of 3 percent growth this year, an about face from last month when if warned slowing economic growth meant annual sales could decline.
And during an interview from “Fortune’s” most powerful women’s summit, GM CEO Mary Barra talked about that key market for the auto market.
(BEGIN VIDEO CLIP)
MARY BARRA, GENERAL MOTORS CEO: China, we’ve had record years of growth and driving growth for the globe. But now, we still think there will be significant growth over the next 10 to 15 years. We think it will be about 10 million units when you put that on top of already large market of 24, 24.5 units, global volume — China volume, it’s very important that we have the right product portfolio, but we also have a business that can respond quickly from — you know, taking the ups and the downs and still driving the right margin.
HERERA: Shares of GM rose slightly today.
MATHISEN: CSX (NYSE:CSX) posts late results that beat estimates, and that is where we begin tonight’s “Market Focus”.
The railroad company said profit fell slightly on slumping coal volumes and warned that coal headwinds will continue into 2016. Still, earnings did beat those forecasts, while revenue came in just short of consensus. Shares popped in initial after-hours trading. During the regular session, the stock was off more than 2 percent at $27.71.
Meantime, Twitter says it will lay off up to eight percent of its work force. The move is part of a restructuring plan that CEO Jack Dorsey says will put the company on a stronger path to growth. The stock rose 1 percent to $29.05.
PepsiCo and Coca-Cola (NYSE:KO) are reportedly in talks to buy a stake in the Greek yogurt company Chobani. Nice to be Chobani. According to Reuters, the potential deals could value the firm as high as $3 billion. PepsiCo fell 1 percent to $97.92. Coca-Cola (NYSE:KO) off a fraction. It finished at $41.65.
HERERA: FMC (NYSE:FMC) Corporation saw its shares fall after lowering its outlook and announcing layoffs. The chemical manufacturing company cited the devaluation of the Brazilian real. Shares tumbled 3 percent to $36.35.
SanDisk (NASDAQ:SNDK) saw its shares pop right after the close on reports that the company is exploring a sale. According to Bloomberg, the computer memory firm is working with a banker on a possible deal, and both Micron and Western Digital (NYSE:WDC) have expressed interest. Shares rose initially after the close. During the regular session, the stock was off nearly 2 percent to $61.77.
MATHISEN: Fortress Investment Group plans to wind down its flagship hedge fund. The firm will return capital to investors by the end of the year. The move comes after a challenging two-year stretch which resulted in heavy losses and redemptions. Michael Novogratz, who run the firm’s global macro hedge fund, will leave at the end of the year. Shares of Fortress today on that news moving higher by 7.5 percent.
HERERA: And Fortress is just the latest example of hedge fund pain. According to data from Hedge Fund Research and Morningstar (NASDAQ:MORN), since 2009, hedge funds are up an annualized 7 percent while actively managed U.S. stock funds are up an annualized 14 percent, prompting us to ask the question, are hedge funds worth the high fees they charge?
Here to discuss this and more is Greg Zuckerman. He writes about hedge fund for “The Wall Street Journal” and also a noted author of several books.
Greg, good to see you.
GREG ZUCKERMAN, THE WALL STREET JOURNAL: Great to be here.
HERERA: Let’s start first of all with that fundamental question. Given the fact that hedge funds have underperformed for the last few years, can they really justify the types of fees that they’re charging?
ZUCKERMAN: It’s much harder than ever. You know, for a long time, sue the average investor started himself or herself, I wish I could be in a hedge fund. But over the past decade, hedge funds have really underperformed. And it’s not just stocks. They’ve underperformed I like to look at it a 60/40 balance fund like Vanguard fund, and they’ve underperformed that as well.
MATHISEN: So, I think a lot of us are prone to what I would call financial envy from time to time. His money manager is better than my money manager. His house went up in value more than mine did.
You seem to be saying the smart money — the so-called smart money ain’t all that smart after all.
ZUCKERMAN: Yes, it’s ironic. A lot of big pension funds, institutions, they all piled into hedge funds in 2009 and in subsequent years. And that was exactly the wrong time to be in hedge funds. You want to be in hedge funds when the stock market is expensive. So, that was the time to get out of hedge funds and into the stocks.
Now, you could argue that stocks are a little more expensive. It’s not a bad idea to have some alternatives as they call them, hedge funds, private equity, that kind of thing. But, yes, the smart money has looked pretty dumb the last few years.
HERERA: But how much of that has to do with the fact that, in some cases, not all funds do this, but in some cases, they take outside positions either in a deal or in a commodity, for instance, you know, if you were on the wrong side of oil for the last year, it’s been very painful.
They tend to place larger bets and therefore, when they win, they win really big but when they lose, they lose really big.
ZUCKERMAN: So, I’m going to make a counterintuitive argument, Sue. I would argue that hedge funds don’t take enough risks today. They’re very much like mutual funds. They manage so much money their goal is not to blow up, not to close down, because they make so much. They charge so much.
So, as a result, they’re not taking these big positions. Of course, there are some, we write about them. But the average hedge fund is more boring than ever and doesn’t really do a great job of investing like it used to. You have some outliers, of course, but the average guy is much more boring and isn’t performing quite as well.
MATHISEN: Boring, expensive and they underperform. That’s a real strong sales pitch, Greg.
ZUCKERMAN: Well —
MATHISEN: I thought hedge funds the appeal of them was that because of their flexibility and because of the genius of the managers, they were supposed to be able to make money by hedging and other things. No matter the market condition.
ZUCKERMAN: Yes, that is the goal. And let’s be clear. These are the best and the brightest of Wall Street because they charge the most. They can recruit. They can lure the best and the brightest.
So, these are the smartest individual traders, investors, portfolio managers, et cetera. But it’s just hard to beat the market. It’s a relatively efficient market. You have inefficiencies. There are some that do a great job. I can name a few.
But the average fund has had problems for several years. But their clients don’t mind actually. Their clients are institutions, pension funds. If they get them 7 percent to 8 percent with very low volatility, they’re pretty happy. It’s just that they haven’t been able to do that so much the last few years.
HERERA: Yes, very quickly, Greg. So, if you’re the average investor who is in an actively managed mutual fund and you’re doing OK, it sounds like stick to your knitting and that’s the way to go.
ZUCKERMAN: Or explore sort of a cheaper index type fund like a Vanguard 60/40. I don’t want to do an advertisement for them. But the cheaper the funds, the better the long-term performance. Yes.
HERERA: Good to see you again, Greg.
ZUCKERMAN: Great seeing you.
HERERA: Thank you so much. Greg Zuckerman with “The Wall Street Journal.”
And coming up, the big challenges and opportunities for the Internet industry as seen through the eyes of those trying to shape it.
HERERA: Here’s what to watch for tomorrow. The producer price index is out, an important read on inflation. Retail sales numbers are also out with a look at how consumers are faring. And the Fed releases its beige book, a report of economic conditions that the central bank uses at its policy meetings. And that is what to watch for Wednesday.
MATHISEN: Some of the nation’s biggest Internet companies are meeting today to discuss policy issues and new regulations that could shape the future of the industry.
Julia Boorstin was at the gathering of the Internet Association in Menlo Park, California.
JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB), Twitter, they’re among the 36 Internet giants represented by the Internet Association, gathering here in Menlo Park to talk about their biggest challenges and how to tackle them, like the EU’s ruling on safe harbor, raising questions about the new lack of protection for small and medium sized companies send data.
REID HOFFMAN, INTERNET ENTREPRENEUR: I think the biggest issue in terms of global scale is the possible threat of fragmentation on the Internet. And so, I think it’s extremely important the U.S., you know, do such things as judicial act. And other things to say look, for example, Europeans have key privacy and other kinds of protections under U.S. law. Just like U.S. citizens. I think that’s important in order to have a global Internet.
JULIA BRILL, FTC: I’m very hopeful that a new mechanism will be put in place that will allow the FTC, the Federal Trade Commission, to engage in strong enforcement that will be a transparent mechanism, so everyone can see which companies are claiming to abide by it and which ones are not in it. And I think those are goals that we need to achieve.
BOORSTIN: Another big topic front and center here is the sharing economy and how workers should be categorized as employees or contractors. That regulatory uncertainty raising big questions for many of the startups here and investors in the sector.
MICHAEL BECKERMAN: The thing that regulators and policymakers is need to recognize, there’s incredible flexibility. It’s nothing new with Uber or Lyft or any of the other companies. This has been going on for a long time when you had like in the yellow pages and you could call it driver and these independent contractors and it’s creating flexibility. People want to work for themselves and that’s what they’re doing.
BOORSTIN: And Beckerman says he’s focused on making sure that regulators understand the value that the companies he represents are creating. That companies like Uber and Airbnb are creating jobs not just here in the U.S. but all over the world.
For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin in Menlo Park.
HERERA: And just today, three media titans discussed the future of the industry, one that’s undergoing tremendous change at a very fast pace. In an interview on CNBC, CBS (NYSE:CBS) CEO Les Moonves, Discovery CEO David Zaslav, and Barry Diller, chairman of IAC/InterActive shared their vision of the future.
(BEGIN VIDEO CLIPS)
LES MOONVES, CBS (NYSE:CBS) CEO: At the end of the day, it is still about the content. The content is still the thing. Obviously, there’s been great changes in how people receive their content, how this watch their content.
There’s going to be a box in a room. It’s going to be a large box. It’s going to be very efficient. You can receive your content in a variety of different ways.
But essentially, content’s not going to look that different than it looked 20 years ago.
BARRY DILLER, IAC/INTERACTIVE CHAIRMAN: The words we use now, broadcast, cable programming, over the top, they’ll all be gone. Because now, where everything is going to be distributed without question through essentially a data pipe — not a broadcast pipe, not a cable pipe, but a data pipe.
So, over time, these definitions will no longer be in use. I don’t think there will be anything called broadcast television or cable television. They’ll be brands if people are good enough to have as much differentiation as they can conceive, or they’ll be programs.
DAVID ZASLAV, DISCOVERY CEO: We need to focus on how is our content shown. If you go to Netflix (NASDAQ:NFLX), there’s no brands, there’s no commercials. That may be a good thing. But the question is, is that a sustainable business model for content.
(END VIDEO CLIPS)
HERERA: And despite all the changes, Les Moonves says he thinks this is the golden age of television in the sense that there are great shows available to watch.
MATHISEN: And finally, one more look at the day on Wall Street. The Dow dropped 49 points to 17,081, NASDAQ down 42, and the S&P 500 was off 13.
HERERA: And that is NIGHTLY BUSINESS REPORT for tonight. I’m Sue Herera. Thanks for joining us.
MATHISEN: And thanks from me, as well. I’m Tyler Mathisen. Have a great evening, everybody. And we will see you 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) 2015 CNBC, Inc.