Transcript: Nightly Business Report – October 20, 2016

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: The clouds lift. Microsoft`s
cloud business shows growth offsetting a weak PC market and helping to prop up revenue for the                                                                                 quarter and its stock after hours.

(BEGIN VIDEO CLIP)

DONALD TRUMP (R), PRESIDENTIAL CANDIDATE: We`re bringing it from 1 percent
to 4 percent. I actually think we can go higher than 4 percent.

(END VIDEO CLIP)

HERERA: Trump wants the economy to return to the good old days of 4
percent growth. Why has it been so hard to achieve?

Hot topic. The presidential candidates are not the only ones who don`t
like the Pacific Rim trade deal. China doesn`t either.

Those stories and more on tonight on NIGHTLY BUSINESS REPORT for Thursday,
October 20th.

Good everyone, and welcome. I`m Sue Herera. Tyler Mathisen is on
assignment tonight.

We begin with a surprise from Microsoft (NASDAQ:MSFT). The world`s largest
software company reported earnings that were much stronger than expected.
And a large part of that is due to gains in its cloud computing unit, which
helps businesses store their data on the internet. Microsoft (NASDAQ:MSFT)
earned 76 cents per share, blowing past projections of 68 cents a share.
Revenue grew 3 percent from last year to more than $22 billion.

And investors liked what they saw, sending shares initially to an all-time
high in after hours trading.

Josh Lipton has the one key takeaway on Microsoft`s quarter.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: $6.4 billion, that was
a big number in Microsoft (NASDAQ:MSFT) report, and it refers the company`s
revenue in its so-called intelligent cloud division. And that result was
better than the street expected. Within that division, all eyes were on
Azure. Remember, that`s Microsoft`s cloud platform which competes with
Amazon`s cloud business.

And RBC`s Ross MacMillan points out that Azure`s revenue grew 121 percent.
MacMillan saying that cloud grow is better than the street anticipated, and
the profitability of that business, he notes, is improving faster than
expected. And that`s all good news for Microsoft (NASDAQ:MSFT) bulls.

For NIGHTLY BUSINESS REPORT, I`m Josh Lipton, San Francisco.

(END VIDEOTAPE)

HERERA: Timothy Lesko joins us now to talk more about Microsoft`s better
than expected results. He is principal portfolio manager at Granite
Investment Advisers and he owns the stock.

Welcome, Timothy. Nice to have you here.

TIMOTHY LESKO, GRANITE INVESTMENT ADVISORS PORTFOLIO MANAGER: Thanks for
having me.

HERERA: The street obviously missed it with this one. It frequently
happens that way. You own the stock.

Tell me what you saw in te highlights in the report. Josh mentioned the
cloud computing, but what else did you see in that report that you liked?

LESKO: Well, I think Josh kind of hit the nail on the head with it. We
somewhat knew that PC sales were going to be light. That`s been about 40
to 45 percent of Microsoft`s business for a while. And by blowing out on
the intelligent cloud portion of their business, they really show the
street that they have a growth engine again, which they really haven`t had
for years.

And it`s hard for big old companies to change from being pretty much a
stodgy operating system company and Windows tools company really into a
competitive and growing cloud player.

So, it`s really nice to see them do that. That puts the intelligent cloud
portion of their business above 30 percent of revenue and makes people
really pay more attention.

HERERA: Can they continue to grow it, do you think?

LESKO: Well, I think you`re seeing more and more businesses move into
cloud and more specifically move into private clouds and intelligent
clouds. And as they`re plenty of commoditized cloud business out there,
the real stuff where that they can bring some, call it intellectual capital
to the table that only they have, makes it obviously a more profitable
business. You saw margin in that business go from the low 40s to the high
40s. So, there` really nothing better for a business when you can have
better margins in a growing business.

HERERA: What about the LinkedIn (NYSE:LNKD) acquisition? Did we get more
clarity on when that exactly that will close and what it`s going to mean to
the company?

LESKO: Well, the conference call started about two minutes ago, so I don`t
think we`ve gotten any more clarity so far. And I think it will be an
interesting one. It`s really on the heels of their Skype acquisition,
wondering if they`re going to take these Internet-based technologies and
apply them to help grow their other businesses.

Otherwise, it could be a distraction or an asset that they write off, like
they had to do with the Nokia (NYSE:NOK) acquisition.

So, you know, we`re guardedly optimistic that they can add LinkedIn
(NYSE:LNKD) to the suite of business products that they offer. But so far,
I don`t think anybody knows really what that path is.

HERERA: All right. Timothy Lesko, thank you, Timothy.

LESKO: Thank you.

HERERA: Timothy is with Granite Investment Advisers.

Two other Dow components reported earnings, Verizon (NYSE:VZ) and
Travelers.

Verizon (NYSE:VZ) saw revenue fall, along with a number of subscribers.
The company added far fewer wireless customers in the third quarter than
expected. Part of the reason is heightened competition among all of the
carriers. Meantime, the company says it`s assessing whether it will need
to renegotiate its acquisition of Yahoo (NASDAQ:YHOO) after that company
disclosed a major data breach.

As for Travelers, the property and casualty insurer reported a 23 percent
fall in profit as gains from underwriting declined.

Travelers and Verizon (NYSE:VZ) were the two worst performing stocks in the
Dow today.

And that decline in the shares of Verizon (NYSE:VZ) and Travelers weighed
on the broader market today. Not even a 9 percent gain in American s was
enough to lift the blue chip index. American Express (NYSE:EXPR)
(NYSE:AXP) reported a strong quarter, which we told you about last night.

So, today, the Dow Jones Industrial Average lost 40 points to 18,162. The
NASDAQ dropped 4 1/2 and the S&P 500 was off nearly 3.

Sales of existing homes rebounded in September despite a persistent
shortage of properties to choose from. The National Association of
Realtors says that sales rose more than 3 percent to its highest level
since June. The report also showed that first homebuyers accounted for 34
percent of September sales, matching the highest level in more than four
years. Separately, Freddie Mac reports that mortgage rates have hit their
highest level in four months.

And the number of Americans filing for unemployment benefits rose more than
expected last week. The Labor Department reports initial claims for
unemployment benefits increased 13,000 to a seasonally adjusted 216,000.
Part of the reason for the increase in claims could be related to the
effects of Hurricane Matthew, which left some people temporarily out of
work. Claims for North Carolina in particular increased by more than 2,500
last week.

And the economy was a big focus of the debate last night, from national
debt to taxes to economic growth.

Steve Liesman takes a look at what both candidates said and where they
stand on the issues important to your money.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: An economic forecast
is neither fact nor fiction, it`s jus more or less possible. We`ll get to
Donald Trump`s big, interesting and debatable claim his plan can achieve 4
percent growth in a second, but first, here`s a debatable point from
Hillary Clinton.

HILLARY CLINTON (D), PRESIDENTIAL CANDIDATE: I also will not add a penny
to the debt. I have costed out what I`m going to do. He will through his
massive tax cuts add $20 trillion to the debt.

LIESMAN: Clinton`s tax and spending plans, according to the committee for
Responsible Federal Budget would add $200 billion to the budget over ten
years.

Now, by contrast Trump`s plan would add more than $6 trillion. Clinton
tries to pay for his spending by raising taxes. Trump pays for his tax
cuts by cutting spending and through what he believes will be strong
growth.

TRUMP: I`m going to create tremendous jobs. And we`re bringing GDP from
really 1 percent, which is what it is now, and if she got in, it would be
less than zero. But we`re bringing it from 1 percent up to 4 percent. I
actually think we can go higher than 4 percent. I think you can go to 5 or
6 percent.

LIESMAN: The 4 percent number has raised a lot of skepticism. 2000 was
the last year we grew that much. And only from 1997 to 2000 did we have a
long sustained period of 4 percent growth.

Fifteen is the number of the past 50 we were at or above 4 percent. But 20
would be a more realistic number, the number of years that we were at/or
above 3.5 percent.

Growth is ultimately determined by two things, hours work or growth of the
working age population, and productivity, or how efficient those workers
are.

Now, population has been trending down since `92. And productivity has
been mostly trending down since 2002. That means the components of grow
have mostly been trending down, leading to expectation of slower growth.

But most economists agree, lower taxes can help growth. But they warn the
positive effects can be outweighed if Donald Trump runs up the deficit.

For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.

(END VIDEOTAPE)

HERERA: Craig Dismuke joins us now to discuss the issues that he says are
preventing the U.S. economy from reaching that 4 percent growth rate. He
is chief economist at Vining Sparks.

Nice to have you back, Craig. Welcome.

CRAIG DISMUKE, VINING SPARKS CHIEF ECONOMIST: Good evening, Sue.

HERERA: Let`s put the politics aside and focus on the economics. You say
that there are three reasons that we have not been able to back to that 4
percent level. They are structural. They are policy and there`s the
global malaise to deal with.

Let`s start with structural problems. What are the biggest issues?

DISMUKE: Well, the biggest issue structurally is that we have an aging
population. This is something that monetary policy doesn`t address.
Fiscal policies don`t address.

When you have an aging population, then you tend to see economic growth
slow down. We`ve seen this play out in Japan. It`s playing out in Europe
to a degree and it`s playing out in the U.S. Now, our problem isn`t as big
as Japan`s.

But as you have an aging population, remember that when people get over 65,
you have a declining labor force as Steve referenced. Secondly, they spend
differently, so they don`t spend as much, they save more. And third, you
have — they borrow less. So, there`s leverage in the system and you have
weaker growth.

So, that`s the biggest structurally challenge. In monetary policy, fiscal
policy, neither of those things can address that.

HERERA: Policy obstacles, let`s move to that. You say the regulatory
environment is holding back growth.

DISMUKE: Absolutely. Almost every industry that we talk to, business
leaders talk about the regulatory environment, whether it`s environment
policies or Dodd/Frank, every sector has some type of regulatory policy
obstacle that they`re dealing with today. So, it`s really hurting business
confidence. When you look at business confidence today, while it`s
rebounded from the recession, it`s still at a level that is consistent with
previous recessions.

The business outlook isn`t very bright right now, number one for sales, but
also because of the regulatory burden that they`re dealing with and trying
to — and all of those things, you know, it hurts productivity, because
they have to hire more and more workers to deal with the regulations rather
than actually producing goods and services.

HERERA: Now we go to global malaise, I kind of know what that is. But
you`re talking the downturn in many economies around the globe.

DISMUKE: Right. And, y we don`t ha to have growth be too fast globally
for the U.S. to grow. Certainly, we could be the engine of growth
globally. But it`s nice when you have Europe, Japan, other developed
nations growing alongside you, it just helps with U.S. growth. Today, we
don`t have that.

And so, it`s not a prerequisite to have faster U.S. growth, but it
certainly helps. Today, we don`t — the European economy is growing very
slowly, the Japanese economy is stagnant still. And so, they`re not the
tailwind that they could be.

HERERA: All right. On that note, Craig, we`ll leave it there. Thanks for
joining us.

DISMUKE: Thank you.

HERERA: Craig Dismuke with Vining Sparks.

Still ahead, what the leaked e-mails reveal about the Clinton camp`s
reveals with the biggest firms in Silicon Valley.

(MUSIC)

HERERA: One of the most controversial topics of this presidential election
is trade, and more specifically, the Trans Pacific Partnership or the TPP.
It is a sweeping 12-nation Pacific Rim trade deal championed by President
Obama. But both Hillary Clinton and Donald Trump oppose it, and so does
China.

Eunice Yoon has more from Beijing.

(BEGIN VIDEOTAPE)

EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Trade is a touchy
subject in the presidential election, any proposal that even suggests that
Americans could lose jobs is heavily criticized. The TPP or Trans Pacific
Partnership is one such proposal. The trade deal is part of President
Obama`s pivot to Asia, his efforts to strengthen America`s role in the Asia
Pacific region.

Both presidential candidates have rejected it, and they`re in unusual
company. China is wary too.

China is not one of the 12 countries that signed onto the TPP. And it
stands to lose out. The TPP isn`t the classic trade deal like NAFTA. It`s
not so much about tariffs but standards of corporate behavior on workers`
rights, environmental protection, and how much a government can grant a
company financial support. The proponents of the TPP say it will help
level the playing field for companies operating in Asia, including American
ones. That would likely pressure China to adhere to these newly-defined
U.S. standards.

The TPP is meant to help tie the region`s economies to Washington.
American workers fear the preferential treatment under the TPP for
countries such as Vietnam would hurt U.S. factories. In fact, the deal
would likely threaten China`s manufacturing might.

China is already losing fact to cheaper nations like Vietnam. And the TPP
would only give international companies extra incentives to move their
production away from here.

China has expressed concern about the U.S.`s presence in Asia and, in fact,
Beijing has drawn up plans to create its own Asia-wide free trade pact.

U.S. allies like Japan have expended great political capital to sign on to
the American deal. And the danger for Washington now is if the TPP isn`t
delivered, the U.S.`s credibility in Asia as well as emerging world could
be damage, and that would only bolster China`s political standing in the
region. The TPP could still be ratified in a lame duck session of Congress
after the November election. And Asia will be watching.

For NIGHTLY BUSINESS REPORT, I`m Eunice Yoon, in Beijing.

(END VIDEOTAPE)

HERERA: The stolen Hillary Clinton e-mails obtained and released by
WikiLeaks revealed new details on her position on encryption which as we`ve
been reporting is a divisive issue between Silicon Valley and law
enforcement. And it pits privacy interests against national security.

Eamon Javers has been looking into the story for us.

Good evening, Eamon.

EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Yes, hi, Sue.

This is a relationship that came under intense scrutiny last year. And
now, newly released Clinton insider e-mails show just how cozy the Clinton
camp was with some executives at the world`s two biggest companies.

(BEGIN VIDEOTAPE)

JAVERS: With less than 20 days left until the presidential election, newly
leaked emails putting the Clinton campaign on the defensive, focusing on
Clinton`s stance on the issue of encryption. She spoke about it just days
after the San Bernardino attacks during a primary debate on ABC.

CLINTON: Maybe the backdoor is the wrong door, and I understand what Apple
(NASDAQ:AAPL) and others are saying about that. But I also understand when
a law enforcement official charged with the responsibility of preventing
attacks, to go back to our early question, how do we prevent attacks?

JAVERS: A Clinton campaign staffer Sara Solow told other campaign aides
she had circulated Clinton`s comments about encryption to a contact at
Apple (NASDAQ:AAPL). Her e-mail reads, “From my contact Nick at Apple
(NASDAQ:AAPL), looks good, just heard that Google (NASDAQ:GOOG) is good
too.” The Apple (NASDAQ:AAPL) insider believed to be Nick Ammann, the
company`s director of global government operations, writes, “Hi Sara. Yes,
this was great, I got the clip to Tim last night. Definitely struck the
right tone.”

The e-mails seem to suggest that Clinton camp was seeking approval and
validation from the company about her message on encryption. Apple
(NASDAQ:AAPL) had no comment. Neither the Clinton campaign nor Google
(NASDAQ:GOOG) responded to requests for comments.

Apple`s dispute with the FBI became a public battle in early 2016 when a
judge ordered Apple (NASDAQ:AAPL) to help the FBI unlock the San Bernardino
shooter`s phone.

(END VIDEOTAPE)

JAVERS: Now, Sue, the leaked e-mails, which the Clinton`s campaign have
never confirmed were legitimate, also show that Congresswoman Zoe Lofgren
sought to keep Clinton from siding with the FBI on the encryption, writing
to Clinton`s top adviser John Podesta, quote, “I hope that our candidate
does not leap on the side of the FBI on the encryption ruling. If she is
leaning that way, can I talk to her?” Podesta responded that Clinton was
inclined to stay out of it altogether, Sue.

So, a lot of insider back and forth over Apple (NASDAQ:AAPL) at encryption.

HERERA: Absolutely.

So, what might this tell us about Apple`s possible influence in Washington
if there is a Clinton administration?

JAVERS: Well, it`s hard to say, but clearly from the tone and tenor of the
e-mails there, Sue, you get the sense that the Clinton was looking to sort
of run Hillary Clinton`s public statements by executives at Apple
(NASDAQ:AAPL) in order to see whether they got buy-in from those executives
at Apple (NASDAQ:AAPL) over what she was saying. That indicates to me
anyway that Apple (NASDAQ:AAPL) will have a lot of influence if there is a
Clinton administration here in Washington next year, at least sort of a
friendly relationship between the two sides with the Clinton administration
realizing in many ways politically, it needs Apple (NASDAQ:AAPL) and it
needs Silicon Valley.

HERERA: Eamon Javers in Washington — Eamon, thanks, as always.

JAVERS: You bet.

HERERA: And to read more about the e-mails released by WikiLeaks and the
Clinton encryption position, you can head to our website, which as you know
is NBR.com.

Falling demand hurts results at Union Pacific (NYSE:UNP), and that`s where
we begin tonight`s “Market Focus”. The railroad operator said a drop in
freight volume for coal and other communities cost profit and sales to
fall. The company also warned results for the current quarter will
continue to slip as currency headwinds and weak demand for consumer good
remain a challenge. Shares fell more than 6 1/2 percent to $90.64.

American Airlines warned a rise in employee wages will hurt that company`s
profit margins this quarter. The nation`s largest airline also posted a
drop in profit and sales but still beat expectations. CEO Doug Parker,
though, sees a silver lining.

(BEGIN VIDEO CLIP)

DOUG PARKER, AMERICAN AIRLINES CHAIRMAN & CEO: We were happy with today`s
result. We`re seeing revenues, well, they`re down year over year, as all
airlines are, they`re down less for us than others, and they`re down less
than other quarters. So, we`re starting to see a rebound in revenue
environment.

(END VIDEO CLIP)

HERERA: Shares were down 4 cents to $40.59.

Walgreens Boots Alliance reported a higher than expected profit, even
though sales were shy of estimates. The pharmacy operator said it expects
its $9 billion acquisition of Rite Aid (NYSE:RAD) to close three months
later than planned, amid delays in selling some stores. Shares rose nearly
5 percent to $81.02.

New home orders lifted results at Pulte Group, but the company said an
increase in land and labor costs would cause gross margins to be lower than
previously announced. Pulte Group shares were off 3 percent to $19.20.

And AT&T (NYSE:T) and Time Warner (NYSE:TWX) have reportedly entered into
talks that could result in a potential tie up between the two industry
giants. Bloomberg says the talks are informal and focused on building
relations instead of laying out terms of a specific transaction. AT&T
(NYSE:T) ended the day down almost 2 percent to $38.65. Time Warner
(NYSE:TWX) shares were up more than 4 percent to $82.99.

And online payments operator PayPal saw revenue rise as an uptick in
customer additions and transactions helped results topped estimates.
Profits also increased, and the company raised the lower end of its full
year sales guidance. Shares rose initially in after-hours trading but
ended the regular session down 15 cents to $40.09.

Coming up, words of wisdom. Business advice from some of the country`s
fastest growing private companies.

(MUSIC)

HERERA: Biotech firm Alkermes (NASDAQ:ALKS) reported positive data on its
leading depression treatment. The drug trial significantly reduced
symptoms of depression in patients suffering from major depressive
disorder. That`s compared with a placebo. That sent shares spiking by
more than 40 percent in afterhours trading.

Shares of Ariad Pharmaceuticals also on move after two top Democratic
lawmakers demanded pricing information on its leukemia drug. Senator
Bernie Sanders and Congressman Elijah Cummings sent Ariad a letter today
asking to explain why it raised the cost of the drug four times this year
to almost $200,000 annually. You could see the drop-off in the stock
midday when that letter was released.

They are the fastest growing private companies in America. Many of them
are gathered at Inc. Magazine`s 5,000 conference, which just released its
annual list. Their growth rates are something many only dream of. And
tonight, they`re sharing some their best business advice.

Kate Rogers (NYSE:ROG) reports from San Antonio.

(BEGIN VIDEOTAPE)

KATE ROGERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: In 2008, stay at home
mom Stacy Brown, all of a sudden, found herself a single mom, trying to
figure how to support her three kids. She was obsessed with chicken salad
and started a quest in her own kitchen to perfect a recipe.

Brown began selling her chicken salad door to door and saw her little bus
take off.

STACY BROWN, FOUNDER, CHICKEN SALAD CHICK: The phone was ringing off the
hook. And then, one day, the Health Department called. And they let me
know that it was illegal to sell anything that you have cooked in your
home. And I had to make the decision whether I was going to go in a
different direction or take the leap of faith and open a restaurant that
only served chicken salad.

ROGERS: She took the plunge, opening her first Chicken Salad Chick
restaurant in Auburn, Alabama. From there, she quickly grew into three
locations and requests for franchises began to pour in.

Today, Brown had 62 locations across eight states, selling her 15 different
styles of chicken salad fresh daily. The company has grown at an eye-
popping rate with more than $90 million in sales to date restaurant-wise
since 2014 and a three-year growth rate of more than 6,000 percent, landing
at number 37 on the Inc. Magazine Inc. 5,000 list of the fastest growing
companies in America.

Summerville, Massachusetts-based Paint Nite is growing even faster, placing
second on this year`s list. The company`s online platform arranges parties
at local bars where attendees learn to paint a piece of art over the course
of the evening. It`s grown more than 36,000 percent in the past three
years with $55 million in revenue in 2015. The company has hosted 4
million customers in thousands of cities across globe.

SEAN MCGRAIL, PRESIDENT AND CO-FOUNDER, PAINT NITE: Week three, we had
posted a lot of events and we sold 350 tickets in like 11 hours. And we
realized that this wasn`t just going to be sort of an occasional once a
month thing, that this was going to be something we could host every single
day in Boston, and then when we expand to New York City, and saw the same
success, we knew we were onto something and basically we were just trying
to scale as quickly as possible.

ROGERS: The leaders of both startups attribute their success to embracing
challenges and not waiting for perfection before trying new things.

MCGRAIL: Perfect is the enemy of good enough. And to scale as rapidly as
we did, I think it was a wise choice, if trying to sure everything was
exactly perfect and not launching until.

BROWN: Do not be scared of change. Depend on it. So when things are
good, don`t take them for granted, because things will change. And when
things are bad, don`t dwell on that, because things will change. And it
helps me keep everything in perspective.

ROGERS: Overall, Inc. 5,000 companies have grown at an average of 90
percent over the past three years, creating 640,000 jobs, proving that
small business really are the backbone of the American economy.

For NIGHTLY BUSINESS REPORT, I`m Kate Rogers (NYSE:ROG) in San Antonio,
Texas.

(END VIDEOTAPE)

HERERA: And finally tonight, Snoopy is joining the ranks of the
unemployed. After appearing for more than 30 years in print ads and TV
commercials for MetLife (NYSE:MET), the insurance company is retiring the
popular character. MetLife (NYSE:MET) started using Snoopy back in 1985 to
make the company seem more friendly and approachable. Snoopy will be
replace by a big letter “M” in blue and green colors. The decision comes
as MetLife (NYSE:MET) gets ready to spin off most of its U.S. life
insurance business.

Good grief, Charlie Brown!

That does it for NIGHTLY BUSINESS REPORT tonight, I`m Sue Herera. Thanks
for joining us. Have a great evening. We`ll see you 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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