Transcript: Nightly Business Report – October 3, 2016

NBR-ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: October surprise? The year`s tenth month is off in a doozy for investors, and this time around, a volatile presidential race could spawn some scary ups and downs. We`ll tell you how to prepare your portfolio.

On the rebound. Three years after bankruptcy, Detroit is showing signs of life. We`ll take you there.

And taking a chance. How one company gambled on a health insurance startup and turns its employees from skeptics into believers.

All that and more for Monday, October 3rd.

Good evening, everyone. And welcome. I`m Tyler Mathisen. Sue Herera has the evening off.

October, it conjures images of changing leaf colors, fall sweaters, and some scary moments occasional for investors. After all, October has brought frightful events, like the 1929 stock market crash, Black Monday in 1987, and a 500-point drop on the Dow, thanks to the so-called Asian contagion in 1997.

Well, today brought none of those but the month did start out on a down note as investors digest some economic in news showing that construction spending fell for a second straight month, tepid manufacturing numbers and oil prices hit a three-month high on renewed optimism OPEC may reach a deal to cut production. So, all in, the Dow Jones Industrial Average fell 54 points to 18,253. NASDAQ was off a modest 11, and the S&P 500 off 7.

David Kelly joins us now to talk more about the markets in October and whether or not the upcoming presidential election will have any meaningful impact on trading this month. He is the chief global strategist at J.P.
Morgan Funds.

David, always great to see you.

So, how about the election? Do you think that it has the potential to unsettle the markets?

DAVID KELLY, J.P. MORGAN FUNDS CHIEF GLOBAL STRATEGIST: Well, it could. I mean, we`ve looked at the data going back to 1990, and October is on average more volatile. That really has a lot to do with October of 2008, really extraordinary month. Other than that, actually election year October is — don`t tend to be that volatile, relative to, you know, the rest of the year, because usually, you know, people want to keep their powder dry until after the election. And also, usually, we`re dealing with two relative conventional candidates.

I think this time around, it`s a little bit different, because if Secretary Clinton wins, then it will seem much more like a continuation of the status quo. I don`t think you get much volatility out of that. If Donald Trump wins, though, there`d be a lot of uncertainty about exactly what this all means. And, of course, markets hate uncertainty. So, I think we`ll have to watch these poll numbers. If the race tightens up, or if it looks like Donald Trump is going to win, then I think you could probably see more volatility, just because of that increase in uncertainty.

MATHISEN: You know, you point out in your note today that you really can`t get prosperous by saving anymore. That`s a loser`s game. So, you`ve got to put a stake in the ground and do something. What are the somethings I ought to be considering now with my portfolio?

KELLY: Well, I think the first point is really important. That traditionally, you made about 2 percent over the rate of inflation, jus by keeping money in a savings account, or in a CD. Now, you make about 2 percent below that. So, you`re actually losing money every day you wait to decide.

In terms of best long term opportunity, we think the U.S. stocks have some potential to run. We like those, particularly as some of the economic numbers overall are actually getting better, and earnings are doing better.
So I think that looks good. But also, long-term, we really like international stocks and emerging markets. They have been held back. But if you look at the global PMI data that came out today, we have numbers from a lot of different of different countries.

Overall, the global economy does seem to be waking up a little bit here.
So, I think there`s a lot of international stocks that have lagged behind in recent years.

MATHISEN: Where internationally? I mean, you can make a distinction between developed markets and emerging markets.

KELLY: Sure.

MATHISEN: Which would you tilt toward?

KELLY: I think in the long run, probably a little bit towards emerging markets, because frankly, they`re cheaper and more beaten down. And within developed markets, we really like the European story still, despite the problems of the banking sector there is having. Eventually, European Central Bank is going to have to help the European banking system back to health. And when it gets back to health, that will help the European markets a lot.

I`m not quite so positive about Japan. They`ve got a long-term, very significant structural problems.

MATHISEN: Give me 30-second thought on where fixed income sits.

KELLY: Well, I think you have to have fixed income portfolio because something could go wrong. I think you have to be pretty pragmatic now, because if things calm down and the stock starts moving up, we could have a little bit more inflation. So, I`d be a little bit underweight fixed income. But things like emerging market bonds, high-yield bonds, I`d be a little overweight those within the fixed income, what I think is an improving global economy.

MATHISEN: David, great advice. Thanks very much. David Kelly with J.P.
Morgan Funds.

Well, auto sales in September fell, despite big discounts from Labor Day sales. Detroit automakers, General Motors (NYSE:GM), Ford and Fiat Chrysler, all posted sales declined year over year. But Toyota (NYSE:TM) showed a rise of 1 1/2 percent. Nissan had a 5 percent sales gain for the month. The research firm Auto Data says overall sales came in at a seasonally adjusted rate of nearly 7.8 million, down from just over 18 million last September.

Well, the fake accounts scandal continues to plague Wells Fargo (NYSE:WFC).
Today, the state of Illinois says it will suspend $30 billion worth of investing business with the bank for one year. Last week, California also suspended its relationship with the bank for a year. The Illinois treasurer says Wells Fargo (NYSE:WFC) stands to lose millions from the move and he said this might not be the end.

(BEGIN VIDEO CLIP)

MIKE FRERICHS, ILLINOIS STATE TREASURER: Next up, we`re looking at is sending in our people to look at their books, to make sure they`re compliant with the Illinois law. And if not, we`ll have real problems.

(END VIDEO CLIP)

MATSHISEN: Shares of Wells briefly 52-week low, closing down 1 percent at $43.83.

Well, shares of Deutsche Bank took a breather after a furious rally last week when news leaked that a possible settlement between the bank and U.S.
Justice Department were close. Some of that enthusiasm faded over the weekend, and, in fact, accusations flew at the U.S. from German politicians.

Julia Chatterley has more from Frankfurt.

(BEGIN VIDEOTAPE)

JULIA CHATTERLEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Deutsche Bank stocks under pressure once again in the U.S. trading session today, after markets which were shot today from a holiday in Germany. I think this is optimism leaking away after the rally that we saw on Friday amid reports we could see some kind of quick settlement between Deutsche Bank and Department of Justice. It looks now like it`s just going to take a bit more time.

There is a silver lining, though, and I think that is that after all the rumors that have been swirling, the bar now for investors to be satisfied with a number here is higher. Even if it wipes out more than $6 billion worth of cash reserves that Deutsche Bank has set aside. Now, Deutsche Bank execs have traveled to Washington this week, which is also important.
Even the geography could play a part in facilitating talks between the two sides.

Here in Frankfurt, I can tell you the accusations flying thick and fast.
The main one being that this is the United States waging economic war on Germany. And I can tell you, a big fine here will be seen as politically toxic for Angela Merkel.

Get this, from her deputy this weekend, he said, “I don`t know whether to laugh or be furious that a bank whose turned speculation into a business model is now complaining that it`s now the victim of speculation.”

The message here — zero sympathy for Deutsche Bank and “help this bank, Angela Merkel, at your peril.”

The bottom line, guys, is that ultimately, we need to see what the settlement sum is. And for that, we just have to wait.

For NIGHTLY BUSINESS REPORT, I`m Julia Chatterly in Frankfurt.

(END VIDEOTAPE)

MATHISEN: And today on CNBC, J.P. Morgan Chase CEO Jamie Dimon says he thinks Deutsche Bank will be fine.

(BEGIN AUDIO CLIP)

JAMIE DIMON, J.P. MORGAN CHASE CEO: There is no reason they shouldn`t get over its problems. They have plenty of capital, plenty of liquidity. And, you know, we want all these banks to get through because it`s better for everybody that we kind of move on and just help do our jobs in the society.

(END VIDEO CLIP)

MATHISEN: The British pound sent reeling today, sliding to a near 31-year low against the dollar and hitting its lowest against the euro in three years after Prime Minister Theresa May said over the weekend that the process to withdraw from the European Union will start in the first quarter of next year. That means Britain will be out of the E.U. by mid-2019.

Well, the Supreme Court is back for its fall term, and has plenty of big business cases on its docket. Hampton Pearson takes a look.

(BEGIN VIDEOTAPE)

HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: A still shorthanded Supreme Court begins the fall term with about 40 cases on the docket, and more on the way. Two high-profile business cases involving insider trading and the long-running patent dispute between Samsung and Apple (NASDAQ:AAPL) will be heard in the first two weeks of the new term.

First up, insider trading. In Salman versus United States, the high court must decide, does a person who leaks inside information have to receive a tangible personal benefit for someone who trades on the tip to be liable for insider trading? The justices must resolve conflicting rulings from lower courts.

GLENN LAMMI, WASHINGTON LEGAL FOUNDATION: In the U.S. v. Salman case, the major issue there is, what is considered to be a benefit in the sort of framework of insider trading.

PEARSON: On October 11th, the Samsung-Apple (NASDAQ:AAPL) battle over smartphone patent comes to the Supreme Court. Just how much should Samsung pay Apple (NASDAQ:AAPL) for infringing on iPhone patents used in Samsung smartphones? Samsung wants those damages limited to the value of the three components. Apple (NASDAQ:AAPL) says it`s the whole design of the product that counts. The design patent law dates back to the 19th century, a decision by the Supreme Court that has a ripple effect across the technology industry.

JULIAN SANCHEZ, CATO INSTITUTE: The danger is, in a world of complex products with many different components, you could create a situation where, you know, a company is effectively terrified that it`s going to be hit for all of its profits — even one of those components is later held to be infringing on a design.

PEARSON: In recent days, the high court added a trademark free speech case involving racial slurs that could involve the ongoing battle over the name of the NFL Washington Redskins to its calendar. The court public session lasted just a few minutes today.

Chief Justice John Roberts announcing the beginning of the new term, and the court issuing orders declining to take up the issue of pay for college athletes.

And the high court also turned down the Obama administration`s request to rehear the president` plan to spare deportation of millions of immigrants in the country illegally.

Court observers say the ideological split among the eight justices and the need to find consensus could lead to cases being decided on very narrow legal grounds.

For NIGHTLY BUSINESS REPORT, I`m Hampton Pearson at the Supreme Court.

(END VIDEOTAPE)

MATHISEN: Coming up, Hillary Clinton takes on big corporate names, behaving badly, she says.

(MUSIC)

MATHISEN: New York`s attorney general has ordered the Trump Charitable Foundation to stop fund raising in the state immediately. The A.G.`s office says the foundation is not properly register to do so and has 15 days to supply the delinquent paperwork. The Trump campaign says it is concerned about the political motivation behind the investigation, but the foundation will fully cooperate.

Well, over the weekend, a “New York Times (NYSE:NYT)” report said Republican presidential nominee, Donald Trump, claimed a tax loss of nearly
$1 billion back in 1995. “The Times” said that loss could mean he paid zero federal income tax for nearly two decades. The move is legal, and eye-opening.

Robert Frank explains how the tax code can turn losses into gains.

(BEGIN VIDEOTAPE)

ROBERT FRANK, NIGHTLY BUSINESS REPORT CORRESPONDENT: When most taxpayers lose money or income, they never get it back. But Donald Trump`s latest tax controversy shows that for certain wealthy taxpayers, a loss can actually be a gain. “The New York Times (NYSE:NYT)” reporting over the weekend that Trump reported a net operating loss of $916 million in 1995, which he could then use to erase income taxes on up to $916 million in earnings over 18 years, and it`s all perfectly legal.

And it`s thanks to a little-known but very lucrative part of the Tax Code called the net operating loss, or NOLs. Now, NOLs were first enacted in
1918 and it only applied to two years of income at that time. The idea was to allow businesses to report a loss in one part of the calendar year they could then make up in the next part of the calendar year. So, NOLs allowed them to smooth over their tax payments.

But over the years, it`s expanded and exploded in size. In 1995, taxpayers could deduct losses for 18 years. Now, it`s more than 20 years. Taxpayers claimed about $50 billion in NOLs in 1996. In 2014, that number had ballooned to nearly $200 billion.

The losses are helpful to the wealthy and wealthy business owners like Trump whose company and income taxes flow through their personal income tax returns. Taxpayers can only apply these losses to companies they own or control like LLCs, S-Corps and C-Corps, and this is not to be confused with investment losses, which can only be used to offset capital gains, but only reduce your personal income tax by a maximum of $3,000.

But real estate developers like Trump have found ways to turbo-charge the NOL provision. Designated real estate professionals like Trump can deduct multimillion dollar interest payments on their building loans and depreciation of their real estate so they can report large paper losses while making huge incomes. While use of NOLs is not uncommon among the wealthy, the magnitude of Trump`s losses are almost unheard.

Now, accountants I talk to say the biggest NOL they`ve ever heard was well under $100 million.

The Trump campaign saying, quote, “Mr. Trump is a highly skilled businessman who has a fiduciary responsibility to his business, his family and his employees to pay no more tax than legally required.

Now, we still don`t know exactly how Trump generated the loss, and given that he has refused to release his returns, we may never have an answer to that question.

For NIGHTLY BUSINESS REPORT, I`m Robert Frank.

(END VIDEOTAPE)

MATHISEN: Democratic nominee Hillary Clinton took on what the campaign calls bad actors, companies like Mylan (NASDAQ:MYL) with its EpiPen price increases and, of course, Wells Fargo (NYSE:WFC).

(BEGIN VIDEO CLIP)

HILLARY CLINTON (D), PRESIDENTIAL CANDIDATE: Look at Wells Fargo (NYSE:WFC). Really shocking, isn`t it? One of the nation`s biggest banks bullying thousands of employees into committing fraud against unsuspecting customers. It is outrageous that eight years after a cowboy culture on Wall Street wrecked our economy, we are still seeing powerful bankers playing fast and loose with the law.

(END VIDEO CLIP)

MATHISEN: Eamon Javers joins us now from Washington.

Eamon, what specifically did Ms. Clinton propose today?

EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, she did a couple of things, Tyler. One is by bringing up Wells Fargo (NYSE:WFC), which is a scandal that`s been in the news recently, but that a lot of Americans won`t have heard of, she was able to tie that back to 2008, which is a scandal that a lot of Americans will definitely have heard of and are still feeling some pain from and really hammer home that point politically.

But in terms of the specifics, she raised a number of the specific ideas that she would like to see, including getting companies to do more profit sharing with their employees, and also taking on this idea that companies are able to force employees and customers into arbitration instead of into the courts. That`s something she would like to change.

We have a sound bite of what she said on that point, and here it is.

(BEGIN VIDEO CLIP)

CLINTON: We are not going to let corporations like Wells Fargo (NYSE:WFC) use these fine-print gotchas to escape accountability. And, in fact —

(APPLAUSE)

This is now common practice across a lot of industries.

(END VIDEO CLIP)

JAVERS: She also said she would like an exit tax for companies that leave the country, and she`d like to do something about companies offshoring jobs, as well, Tyler.

MATHISEN: Did she pick up on the tax business involving Mr. Trump at all in her speech?

JAVERS: She sure did. She said this is Donald Trump to a T.

Obviously, this is a huge boon for the Clinton campaign. It allow them to portray Donald Trump as a wealthy, out of touch plutocrat and that`s exactly what she did on the campaign trail today.

MATHISEN: Mr. Trump firing back in his way, saying he has no obligation to pay more than the tax laws insist that he do.

JAVERS: Yes. Trump today said something interest on this point. He said, yes, the Tax Code is unfair, and I know, because I`m a beneficiary of that unfair Tax Code. And that`s why I`m the guy to fix it.

Contrasting himself with Hillary Clinton, who he says has worked in government her whole life, and has never created a job in the public — in the private sector.

MATHISEN: All right. Eamon Javers, thanks very much. We appreciate it.

JAVERS: You bet.

MATHISEN: Well, Bass Pro shops hooks rival Cabela`s, and that is where we begin tonight`s “Market Focus”.

Bass will pay $5.5 billion for the sporting goods chain Cabela`s, which have been struggling with falling sales and had been under pressure to put itself up for sale from the activist hedge fund Elliot Management. It bought an 11 percent stake in the company last year. Shares of Cabela`s up more than 15 percent on a day to close at $63.18.

Speaking of deals, the asset managers Henderson Group and Janus Capital will combine a merger of equals, the firms announced today. The British- based Henderson will buy its U.S. rival, Janus, in a $2.5 billion all-stock deal, a move that will help both firms cut costs. The combined firm will have $320 billion in assets under management. Janus shares surged more than 12 percent to close at $15.70.

Facebook`s dipped into the e-commerce world with the launch of Marketplace, a platform that let`s users buy and sell goods with other nearby users.
Marketplace, a feature available only on smartphones for now, will provide a more formal space for user-to-user exchange, similar to eBay
(NASDAQ:EBAY) and Craigslist. Shares of Facebook (NASDAQ:FB) up 50 cents to $128.77, while shares of eBay (NASDAQ:EBAY) fell 1 percent to $32.56.

The European union`s antitrust authority said today pick up the investigation into the $130 billion merger between Dow Chemical (NYSE:DOW) and Du Pont after the companies provided the missing information requested by the commission. The E.U. regulators said it will decide whether to approve the deal by February 6th. Shares of Dow rose 59 cents to $52.42, while shares of Du Pont up 87 cents to $67.84.

Well, after filing for bankruptcy several years ago, the city of Detroit is now undergoing a massive revitalization.

And as Brian Sullivan tells us, Detroit is rebuilding and on the comeback trail, thanks to the help of the city`s public and private leaders.

(BEGIN VIDEOTAPE)

BRIAN SULLIVAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Detroit filed for bankruptcy three years ago. But given all the growth, it feels a lot longer ago than that. Companies and their workers are once again moving downtown, and restaurant and retailer are popping up everywhere.

Quicken Loans founder, Dan Gilbert, is the man behind much of the rebirth.
He had been buying and rebuilding millions of square feet downtown and his Greektown Casino and Hotel complex has become the centerpiece of the action.

We asked Gilbert how much more still needs to be done.

DAN GILBERT, QUICKEN LOANS FOUNDER: We always try and prove, no matter who you are, New York City, I`m sure. You know, they always trying to prove things and get things better. So, here, certainly downtown, we have made substantial progress downtown, midtown. But the neighborhoods are just a huge part, if not the majority part of Detroit.

And so, you know, you have to have jobs in the central core, because whether you live here or you live in the neighborhoods, these are where the jobs are. Even jobs in those neighborhoods are great, but we have blight coming down in the neighborhoods and we have new residential neighbors actually going up for the first time in decades here.

SULLIVAN: For the first time in 60 years, Detroit may have stopped shrinking. The population is holding steady. And local college graduates are sticking around, instead of leaving the state to find opportunities elsewhere.

The Ilitch family is another reason why. They founded Little Caesars Pizza and own both the Detroit Tigers and the Red Wings hockey team. Their District Detroit Program has committed more than $1 billion to build apartments, office space, retail and a new hockey arena. And Ilitch says there`s a chance the Detroit Pistons basketball team could also be moving downtown.

CHRIS ILITCH, ILITCH HOLDING PRES. & CEO: I hope it happens and hope to, you know — I hope he`s got something to announce before long.

SULLIVAN: But all this development hasn`t come without criticism. While downtown takes off, some complain that the poorer areas are, again, being forgotten. Gilbert says that criticism is unfounded.

GILBERT: It`s all connected. I mean, the only difference between the neighborhoods and downtown is, you know, people`s — when you look at a map and say here`s the neighbor that`s — here`s downtown. But basically, it`s one city.

The mayor has done a great job of getting that blight down. To me, that was the number-one thing that had to happen, almost 11,000 homes taken down the last few years, two or three years. That needed to come down. There is a lot more to go.

SULLIVAN: It`s obvious there is still work to be done. Nobody is saying Detroit`s comeback is complete — far from it.

But for the first time in a long time, it`s beginning to feel like Detroit`s economic engine is once again firing on all cylinders.

For NIGHTLY BUSINESS REPORT, in Detroit, Michigan, I`m Brian Sullivan.

(END VIDEOTAPE)

MATHISEN: And up next, we`ll show you how one startup is trying to make it easier for employees and employers to navigate company health plans.

(MUSIC)

MATHISEN: Finally tonight, it is open enrolment time for many companies, so what would you think if your company said it was dropping one of the big firms to go with an insurance tech startup?

As Bertha Coombs tells us, one video game-maker did just that and loved it.

(BEGIN VIDEOTAPE)

GINA HOPE, ACTIVISION SENIOR DIRECTOR OF MARKETING TECHNOLOGY: Only thing I would change there, actually is —

BERTHA COOMBS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Gina Hope loves her job, marketing games, like “Call of Duty.” Her health insurance was another thing. Her child`s provider was out of network.

HOPE: I have a son with special needs. It`s a learning process every time somebody new comes into the picture.

COOMBS: When Activision Blizzard (NASDAQ:ATVI) switched to a new insurer, she mentioned to HR that once again the provider was not covered.

HOPE: Next thing I know, I get an e-mail back that they had signed up my son`s provider and brought them in network for me, without me even asking, without me making a phone call. And this year, it saved us $17,000.

COOMBS: That kind of service is why Activision`s HR chief took a chance on startup insurer collective health.

MILT EZZARD, ACTIVISION SENIOR DIRECTOR OF GLOBAL BENEFIT: We don`t have all of the muscle power like a Microsoft (NASDAQ:MSFT) would have to push a carrier around to push them to do things. That makes sense to us. But I have the mentality that we deserve that kind of treatment.

COOMBS: Launched in 2015, the San Francisco-based benefits manager uses a data-driven platform to make managing health benefits easier for both employees and hr departments.

DR. RAJAIE BATNIJI, COLLECTIE HEALTH CO-FOUNDER: We have the luxury of starting from scratch, and we can create a system that`s built on modern software that allows us to create that member experience that feels like the best of consumer tech products.

COOMBS: They also have the luxury of just focusing on benefits, because they pay larger insurers, like Blue Cross, to use their medical networks.

That allows Collective Health to focus on using its data to help its clients better understand what`s happening with their health and wellness benefits. Like a lot of self-insured companies, Activision Blizzard
(NASDAQ:ATVI) offers its employees dozens of wellness programs. Collective Health helps them weave them all together in order to make them more effective.

BATNIJI: So, if we get somebody who we recognize from our claims data, looks like they`re going to have a major surgery coming up, we can direct them to get a second opinion.

COOMBS: Their old insurer was not as proactive.

EZZARD: Our healthy pregnancy utilization is triple what it was under our conventional carriers` watch. I know the cost of members that are continuously engaged is actually lower per year about $800 per member that`s continuously enrolled in our healthy incentive program.

COOMBS: But maybe the biggest payoff?

HOPE: I`ve never raved about my insurance previously. But just — that they treated me like a person, and that my situation was unique and special

COOMBS: For NIGHTLY BUSINESS REPORT, I`m Bertha Coombs.

(END VIDEOTAPE)

MATHISEN: And that is NIGHTLY BUSINESS REPORT for tonight. Thanks for being with us. I`m Tyler Mathisen. We appreciate your viewing. We`ll see you back here tomorrow.

END

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) 2016 CNBC, Inc.

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