Transcript: Nightly Business Report – October 11, 2016

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Not much green. The Dow tumbles 200 points as investors find little to get excited about.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Ouch, Alcoa. Earnings season starts on a sour note, dashing some hope that the profit recession is coming to an end.

HERERA: Lasting damage? From the Pinto to Tylenol, we’ve seen some big recalls before. But is this different for Samsung?

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, October 11th.

MATHISEN: Good evening, everyone. And welcome.

It was one of those days on Wall Street. Oil fell, rates rose, the dollar climbed, health care, which had been a market leader, retreated. And the earnings reporting season got off to a lousy start. Taken together, it was a recipe for a down day, and that is exactly what we got.

The major indexes all falling 1 percent or more. The Dow Jones Industrial Average off 200 points to 18,128. The NASDAQ declined 81, and the S&P 500 was off 26.

HERERA: A shadow was cast over the broader market when Alcoa reported weaker than expected results to kick off earnings season. The stock fell 11 percent, its worst day in more than seven years. And this was the last report for Alcoa before it splits into two.

Morgan Brennan dives deeper into the metal company’s results.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: While Alcoa reported higher quarterly profits, revenue slipped as the commodity business continued to face pricing headwinds. But the higher-performing value-added segments that supply the aerospace and automotive industries also came under pressure.

KLAUS KLEINFELD, ALCOA CHAIRMAN & CEO: We have to admit that we are seeing in some of the markets some new challenges. On the aerospace side, I mean, we’re seeing there is huge demand there, and there are problems on the engine side, particularly, and some destocking on the aero structures.

BRENNAN: This morning’s report is Alcoa’s last as a single company. On November 1st, the 128-year-old metals giant will split into two. A mining and smelting operation that will keep the Alcoa name and Arconic, which will claim the more profitable value-added businesses that supply manufacturers with aluminum and titanium alloys.

Analysts say while earnings weren’t that big of a miss, it’s the results in those Arconic segments concerning investors the most today. Since 2016 revenue targets were lowered for all three. Thanks to challenges in aerospace and weakness in commercial transportation.

JOSH SULLIVAN, SEAPORT GLOBAL DIRECTOR, SR. EQUITY RESEARCH ANALYST: You think about what we traditionally think of Alcoa with commodities and alumina and aluminum. You know, the deficit outlook that Alcoa put out there actually assumes that there could be a little pricing support in those markets.

The real problem, as you pointed out, was on Arconic, and that’s where, again, the aerospace businesses which is where the value resides in the split. So, if there is going to be softness there and you have new industrial investors coming to the name, they’re going to be a little concerned is what that 2017 outlook looks like.

BRENNAN: Seaport Global Josh Sullivan has a neutral rating on the stock. But as earning gets under way, Alcoa’s results set the stage for a potentially bumpy hide, for many of the industrial giants it supplies, including United Technologies, which already warrants that its engine product target for Pratt and Whitney won’t get met. And Honeywell, which reports on Friday, also warned of lower sales due largely to weakness in business jet engines.

For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan.

(END VIDEOTAPE)

MATHISEN: Many had hoped this would be the quarter that saw the end of the so-called profit recession.

Bob Pisani takes a look at now at whether that’s likely to happen.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Earnings season is upon us and there is a lot the stake. This is the quarter we’re supposed to kill the earnings recession, supposed to reverse five straight quarters of earnings decline and we’re supposed to do it because top line growth revenues are improving. Revenues are expected to increase 2.5 percent. That would be the first increase in revenues in the last six quarters, and the fourth quarter is supposed to be even better.

But several big names have warned that full-year earnings will not be as strong as expected, including Honeywell and Dover. And today, Alcoa said revenues in its growing aerospace and automotive division will not be as strong as expected in the fourth quarter.

Low global growth is definitely a problem, but it’s not clear it will derail earnings improvement. That’s because several sectors are expected to increase earnings.

So, for example, tech stocks are strong, because of strong demand for chips and cell phones and other persona devices. Health care is expected to do well, because earnings for drug stocks and HMOs are stronger. Financials are also expected to do better, particularly in the fourth quarter as interest rates have been rising. And finally, even energy companies are also finally expected to do better in the fourth quarter, with oil over $50.

You put it all together, analysts are still fairly optimistic. We’ll see if that optimism is justified as we get more guidance.

For NIGHTLY BUSINESS REPORT, I’m Bob Pisani at the New York Stock Exchange.

(END VIDEOTAPE)

HERERA: Christine Short joins us now to talk more about what to expect this earnings season. She’s an earnings expert and senior vice president at Estimize.

It’s nice to have you here, Christine. Welcome back.

CHRISTINE SHORT, ESTIMIZE SR. VICE PRESIDENT: Thank you. Great to be here.

HERERA: Let’s start first of all of what kind — it’s not starting that well certainly. But what kind of a season are you expecting?

SHORT: You know, I think the overall theme for the third quarter’s earning season is more of the same. Expect to see the same low but steady growth rates that you’ve seen during the first half of the year. Also expect to see some of the same concerns crop up this quarter.

So, slow and global growth — you know, strengthening dollar, issues with energy prices. All of these themes are going to resurface again when we start to get more of these earnings press releases coming out in the next few weeks.

But overall, I think the bright spot and Bob Pisani just mentioned this in his piece, is the fact that revenue growth is set to come back. So, after six consecutive quarters of S&P 500 sales growth on the decline, we are expecting 2.5 percent growth to return, and yes, bottom line growth is still under pressure.

We’re expecting about negative 1 percent for earnings growth. However, we have actually seen that improve just over the last week, as more companies have reported. So, it’s potentially that that number is going to get better as we get more of these earnings reports.

MATHISEN: Obviously, the different sectors will perform differently, who are the likely winners going to be in this new sort of sector whirl where there is an 11th sector called real estate or REITs, basically?

SHORT: Well, it’s not going to be the REITs. It’s not going to be the real estate sector, but it is nice to see that broken out. And it’s not going to be the financials either, which is where the REITs were formerly integrated with.

It’s going to be two of the same sectors we have seen strength for over the last, I’d say, six quarters, and that’s health and consumer discretionary. The difference is, it’s not for the same reasons that we have seen for the last several quarters. And what I mean by that is health care, for instance, has been driven by the biotechnology name really for the last year-and-a half.

This quarter, biotech is actually the laggard within that sector. They’re expecting only about 4 percent earnings growth. It’s really going to be driven by the health care providers and pharma. And when you look at why that is, well, we have a larger insured population, thanks to the Affordable Care Act. We also have an aging U.S. population. So, those are two of the big reaches you’re seeing those names come to the forefront now.

And within consumer discretion, autos had a great run, Ford is really killing that in the third quarter, because they are expecting year over year declines.

So, I would be looking at the internet retailers, auto components, as well as household durables.

HERERA: On that note, Christine, thank you.

SHORT: Thank you very much.

HERERA: Christine Short has been our guest tonight, with Estimize.

MATHISEN: The decline today in the price of oil may have also played a role in the broader stock market decline. Domestic crude was off more than 1 percent, but it did stay above $50 a barrel and that may be because of skepticism around a possible deal that cut production. In other words, that little slide there today.

Steve Sedgwick reports tonight from a major meeting of oil exporters in Istanbul.

(BEGIN VIDEOTAPE)

STEVE SEDGWICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Another fascinating day at the World Energy Congress in Istanbul, Turkey, on Tuesday. A whole host of contributions, sending the oil price one way and then the other, as well. First of all, I was speaking to the secretary general of OPEC, who said to me that actually any skepticism about a deal coming from Algiers to cut production from within OPEC is misplaced, and that all members of OPEC, all 14 members, we on board.

Listen to go what he had to say about the all-important contribution from Iran.

MOHAMMED BARKINDO, OPEC SECRETARY GENERAL: After meeting with Minister Bijan Zanganeh, as well the president of Iran, President Hassan Rouhani, all assured me that at the end of the day, despite the fact that every member country is there to protect each national sovereign rights, but Iran will join in a consensus to re-establishing market balance on a sustainable basis.

SEDGWICK: That was Mohammed Barkindo, the secretary general of OPEC, just confirming to me that all members of OPEC, all 14, are on board for potential cuts leading up to all the important OPEC meeting in November in Vienna.

But there is skepticism on this deal and that’s been sending markets easier on the oil price on Tuesday. We saw skepticism from the likes of Goldman Sachs who said actually they didn’t believe that Saudi could push through cuts across all members of the group.

And skepticism perhaps as well from the Igor Sechin. He’s a very important man. He’s the boss of Rosneft in Russia. Russia, of course, the worlds biggest oil producer. He represents Rosneft, which is 40 percent of that country’s production, and he said his company would not be taking part in any production cuts. And, of course, that’s a very important contribution, especially given the fact that Mr. Putin, the president has said Russia may freeze and get involved in conduct price action — of course, which would lead to a non-OPEC and OPEC agreement.

So, a lot of interesting headlines coming out from the major players here at the World Energy Congress in Istanbul.

For NIGHTLY BUSINESS REPORT, I’m Steve Sedgwick.

(END VIDEOTAPE)

HERERA: Still ahead, are consumers thinking twice before buying a Samsung product?

(MUSIC)

HERERA: Samsung is halting production of its Galaxy Note 7 smartphone after reports the device and its replacement device caught fire. This follows safety warnings from both the Consumer Product Safety Commission and the Federal Aviation Administration about the use of that smartphone.

But is all of this making consumer have second thoughts about buying a Samsung product? We took our cameras out to find

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: Doesn’t discredit the brand at all.

UNIDENTIFIED FEMALE: OK.

UNIDENTIFIED MALE: Things happen.

UNIDENTIFIED MALE: Not going to say problems with the device. Samsung is the best.

UNIDENTIFIED FEMALE: I just actually ordered the new Pixel, you know, just having too many issues with Samsung. I can’t risk it.

UNIDENTIFIED MALE: I think this could be a serious marketing problem for them. I mean, especially the more publicity it gets.

(END VIDEO CLIP)

MATHISEN: Some Samsung consumers are sticking by the brand. Others are not. But will the botched recall of the company’s exploding flagship phone have any long-lasting impact on the company?

Let’s turn to Bill George, former CEO of Medtronic and now a professor of management at the Harvard Business School to discuss whether he thinks the company can recover.

You know, Bill, I heard an interesting comment today from a Dartmouth Business School professor who said that perhaps the culture at Samsung, it being a South Korean company, very deliberate, they like to study before they move, slowed down their response to this, which seemed very slow.

BILL GEORGE, HARVARD BUSINESS SCHOOL PROF. OF MANAGEMENT: Well, Tyler, I think they have just committed the cardinal sin for placing one defective product with another defective product. I mean, come on. They have not gotten to the root cause of the problem, so they took a very superficial solution and didn’t really fix the problem, just replaced one with another. And I don’t consumers are going to forgive them very soon.

I’m not sure it’s a culture so slow, it’s an engineer culture. It’s quality culture. They have don really well until this.

But I think what it is, Tyler, is they’re out of touch with the U.S. market. It’s run entirely by people from Korea. Do they have enough Americans in Korea that really understand what this means to U.S. consumers, 300 million people?

They have been extremely successful here. And they’re risking their entire franchise. I have a huge big-box TV from Samsung. Are people going to start to question with a lot of their Samsung products?

I think they’re risking a great deal by inaction. I have not seen the CEO of Samsung from Korea on the U.S. Airways, on your show, or flying over here to apologize and get engaged and talk to the folks about this crisis. And they’re in a huge crisis at putting the entire Samsung brand at risk.

HERERA: You’ve given us a couple points that you think, Bill, Samsung needs to do. One, make sure no one uses the Note 7, and consumers get 100 percent refunds. But also, strengthen the internal quality controls.

GEORGE: Well, obviously, you need to do that. And they started to blame it on the supplier, which, by the way, is a Samsung subsidiary that makes batteries. They don’t have internal quality control. They’re not testing.

Actually, when Lowell McAdam of Verizon said that he’s not seeing a recall like this in a very long time, he’s a very conservative man. For him to speak out at a major conference — and they do their own testing at Verizon. Why should they have to?

Samsung has got to ensure us of the quality of that product coming in. How would you feel next to somebody on the plane next to you has a Samsung Note 7 and they’re using it and it could catch on fire? I mean, it wouldn’t make you feel very good.

MATHISEN: No, certainly calls into question. But you’re concerned that not just their cell phone business is at risk here. But that Americans’ acceptance of their other products — I have Samsung — televisions. You ask people about the TVs and people say Samsung is the best. I have Samsung appliances.

You say the whole portfolio could be at risk?

GEORGE: Yes. One brand name, and when you tarnish brand name, you could tarnish across the board. I worry about this in Medtronic when I was there. One product that as a recall — if you don’t handle that well and the CEO doesn’t jump in and get personally on the line and apologize to people who have been harmed and do the right thing, Tyler, and you know, we have seen CEOs do that and seen them fail.

But I think it could hurt their entire — they have a great franchise, by the way. It’s a great company. But they — I’m not sure they know how to handle the consumer in the United States when they have a crisis.

MATHISEN: Very interesting how much emphasis you — we have to leave it there, Bill — but how much emphasis you put on the personal involvement of CEO, and we remember Mr. Burke at J&J who did just that, and successfully in the Tylenol case.

Bill, thanks.

GEORGE: Exactly. Thanks, Tyler.

MATHISEN: Bill George with Harvard Business School, former Medtronic CEO.

HERERA: And Samsung is also having its day in court. The smartphone maker and Apple squared off at the Supreme Court. The issue? Patents and how much Samsung should pay Apple after jurors found Samsung infringed a patented iPhone design.

Hampton Pearson reports.

(BEGIN VIDEOTAPE)

HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Samsung has been ordered to pay all the profits earned from 11 older smartphone models for illegally copying patented designs from Apple’s iPhone. $399 million so far, a judgment it wants the Supreme Court to overturn. And 1887 law requires patent infringe to pay total profit. Apple believes the law is on their side.

SETH WAXMAN, APPLE ATTORNEY: The legislative history shows Congress wanted above all else to deter copyists and knockoff artists by requiring them to discourage what Congress called the total profit from the article of manufacturer that is sold.

PEARSON: It’s the first time in more than 120 years the high court has taken up a product design with the majority of the justices willing to consider limits on profits tied to specific components — a potential win for Samsung.

KATHLEEN SULLIVAN, SAMSUNG ATTORNEY: We think the court gave a very careful and serious hearing to Samsung’s argument that a rule that gives all the profits on a product for a design patent on a narrow portion of the appearance of the product is bad for business, devalues the other patents in the product and is bad for consumers.

PEARSON: A high court ruling expected next spring could have ripple effects across high-tech. Justices must balance protection for lucrative design patents while not stifling innovation, as smartphones become almost indispensable worldwide, generating enormous profits for their manufacturers.

Even if Samsung gets a win from the high court, in a dispute over patent profits from previous products, it pales in comparison to Samsung’s current problems with this generation of smartphones.

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

(END VIDEOTAPE)

MATHISEN: Yum Brands unveils plans to expand its business worldwide and that is where we begin tonight’s “Market Focus”.

The fast food operator said the spinoff of its China division later this month will allow the company to add more restaurants around the world with a goal to increase franchise ownership to 98 percent by 2018. The owner of the restaurants KFC and Taco Bell also said it expects to return up to $13.5 billion to shareholders by 2019. Shares of Yum Brands up nearly 1 percent on this otherwise soggy day. They finished at $88.25.

St. Jude Medical says it will recall some of its implanted defibrillators because their batteries could run out early and cause the device to stop working. The battery depletion issue affects about 400,000 devices and has been linked to two deaths. St. Jude is currently in the process of being taken over by Abbott Laboratories in a $25 billion deal. The news sent shares down 3.5 percent to $78.41.

HERERA: Rent-A-Center said third quarter profit will fall below estimate while same store sales are expected to be down. An unsuccessful transition to a new sales operating system impacted its results. They punished the shares today. They fell nearly 29 percent to $9.18.

LPL Financial may be considering a potential sale. Reuters says the broker dealer is in talks with Goldman Sachs regarding a sales process that has garnered interest from other companies and private equity firms. Shares popped nearly 7 percent to $33.01.

MATHISEN: Some of the biggest names in the internet sector are at the Internet Association’s annual conference in Silicon Valley, and there’s one topic in particular that’s top of mind for industry execs.

Julia Boorstin is in Menlo Park, California.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: With less than a month before the election, the executive representing the 40 companies in the Internet Association are talking about which candidate would be better for their business. The CEO of the organization saying Hillary Clinton is clearly better for the internet industry.

MICHAEL BECKERMAN, INTERNET ASSOCIATION CEO: I think certainly the platform that Hillary Clinton has put out is a lot more comprehensive and speaks to our issues in a very thoughtful way. We have not seen that from the Trump campaign.

BOORSTIN: Verizon CEO Lowell McAdam agreed that a Clinton presidency would offer more stability for Internet giants.

LOWELL MCADAM, VERIZON CEO: I think the way most business leaders think about this at this point is Secretary Clinton will be more of a continuous of the last eight years. And it’s hard to know what a Trump presidency would look like at this point. So, you know, I’ve had many friends say that they’re trying to take steps to keep their business from being impacted by an election of Donald Trump, because it could be very unpredictable.

BOORSTIN: McAdam says he see the uncertainty of this intense political cycle slowing down decision-making of other businesses, as they wait to see what happens. Taking a harsher tone, IAC and Expedia chairman Barry Diller, a Hillary n supporter, saying the fact that Donald Trump won the nomination is a, quote, “evil miracle”.

BARRY DILLER, IAC & EXPEDIA CHAIRMAN: This is the thing that just astounds me is the idea that that clown, bad clown, could actually be president of the United States. It’s so insulting to all of us. So, yes. She will win.

BOORSTIN: Pandora CEO Tim Westergren wouldn’t weigh in on the two campaigns, but he did say the heated contest is drawing a surge in ad dollars to his platform.

TIM WESTERGREN, PANDORA CEO: We see a lot of this firsthand. We’ talking about not just presidential advertising, but all the way down ticket to local county supervisor elections. So, we see it on the platform. The Internet is clearly playing a role in this election that it never has before, with millions of people streaming the debates online. We’ll have to see how that impacts turnout next month.

For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin in Menlo Park, California.

(END VIDEOTAPE)

HERERA: Coming up, what small business think of a key talking point on the campaign trail — wages.

(MUSIC)

HERERA: Hedge billionaire Leon Cooperman defended himself against SEC charges of insider trading. As we reported, the SEC alleges Cooperman and his hedge fund made trades in a company called Atlas Pipeline with nonpublic information.

Today, in an interview, Cooperman called those charges unjustified.

(BEGIN VIDEO CLIP)

LEON COOPERMAN, OMEGA ADVISORS CHAIRMAN & CEO: Omega and I have always followed the law. Anyone who has done their homework would understand that Omega was built on doing detailed fundamental research and complying with the law. We could have settled with the SEC for an amount that is far less, far less than I donate to charity on an annual basis. But I refuse to do so, because I know that we acted appropriately and lawfully.

(END VIDEO CLIP)

HERERA: Cooperman also said the amount of money the government is wasting, prosecuting his firm is shocking.

MATHISEN: Small business confidence dipped in September. This according to the National Federation of Independent Business.

Entrepreneurs are unlikely to hire employees in part because of the presidential campaign. It is so divisive that the top issues for business owners are not being addressed.

And as Kate Rogers reports, one of those issues is wages.

(BEGIN VIDEOTAPE)

KATE ROGERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Small business owners like Sherry Wuebben are grappling with the idea of higher wages. Woven owns St. Joseph Equipment in Lacrosse, Wisconsin, and pays workers well above minimum wage at between $14 and $15 an hour. But a hike in the federal minimum wage, which has been stagnant at $7.25 an hour since 2009 would pressure her to increase pay even more to remain competitive.

SHERRY WUEBBEN, ST. JOSEPH EQUIPMENT: Living here in western Wisconsin and in the Midwest, our costs of living is much lower. Housing is lower. Education is lower. Gas is lower. Child care is lower. Education, all these things are lower.

So, we’ not on par with the different coasts that we have both on the West and East. We are Middle America and anything that you do on West Coast and try to bring here to the Midwest, we have to scale up.

ROGERS: It’s not just the wages. The cost of health care has increased each year, she says, nearly 30 percent in 2015 and 11 percent this year. A wage hike on top of the burden she’s facing under the Affordable Care Act would be damaging.

WUEBBEN: It greatly increases our cost of doing business.

ROGERS: In Boulder, Colorado, Judy Amabile is hoping for wage increases at both the federal level and in her own state, which is one of four nationally voting on ballot initiatives to increase the minimum wage to $12 and beyond. Amabile’s Product Architects Inc. instated a higher pay several years ago and found it was good for business.

JUDY AMABILE, PRODUCT ARCHITECTS, INC: We found that all of a sudden people could get their car fixed when it broke down. They could get to work better. They could get daycare when their kid was sick. So, we had employees who were a lot more productive. And our turnover pretty much disappeared.

ROGERS: Right now, 29 states and Washington, D.C., have wages above the federal floor of $7.25 an hour and momentum has steadily built for an increase in the years to come. Major cities from New York to Los Angeles and Seattle have taken matters into their own hand in the face of a stagnant federal wage, hiking local pay to $15 an hour over the course of several years.

One thing is for sure. Businesses should be bracing for higher wages. Both major party candidates have spoken out in support of higher pay. Democratic nominee, Hillary Clinton, favors $12 an hour at the federal level, and higher in states and cities where $15 an hour is feasible.

Meanwhile, Republican nominee Donald Trump has said he supports a $10 an hour federal wage. What happens post-election remains to be seen.

For NIGHTLY BUSINESS REPORT, I’m Kate Rogers.

(END VIDEOTAPE)

HERERA: And that is NIGHTLY BUSINESS REPORT for tonight. I’m Sue Herera. Thanks for watching.

MATHISEN: And thanks from me, as well. I’m Tyler Mathisen. Have a great evening, everybody. And we’ll see you back here tomorrow night.

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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