Transcript: Nightly Business Report – December 20, 2016

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

Funded in part by HSS.

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SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: In sight. Dow 20,000 is oh so close! But as attention focuses on the rip-roaring rally here, is the big opportunity for investors overseas?

BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Just do it. And that’s what Nike did. The world’s largest sportswear maker cited strong demand in its key North American business, even in the face of increased competition.

HERERA: Russian ring? Did hackers trick advertisers and steal millions of dollars a day with bots and fake websites?

Those stories and much more tonight on NIGHTLY BUSINESS REPORT for Tuesday, December 20th.

Good evening, everybody. I’m Sue Herera.

GRIFFETH: And I’m Bill Griffeth, in tonight again for Tyler Mathisen. Good to be back.

The blue chip average did it again today, spent the day in record territory and flirted with that 20,000 level. The Dow Industrial Average, arguably the world’s most recognizable market index, came within a few points of the magic number. Early today, the market rally since the election has been powerful and broad, and has been driven by the expectation that the incoming administration is going to cut taxes, roll back regulations and spend heavily on infrastructure.

And today, the Dow notched its 17th record close since the election. It rose another 91 points to 19,974. It’s a record, as I mentioned. The NASDAQ advanced by 26 to its own all-time high. The S&P was up 8, just shy of its own record.

But how much longer can the bulls remain in control?

Bob Pisani reports on the mood of the market from the New York Stock Exchange tonight.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Close but not quite. The Dow got within 13 points of Dow 20,000, but then fell back. Financial stocks like J.P. Morgan and Goldman Sachs led the charge, but weakness in consumer names like Procter & Gamble and Johnson & Johnson halted the advance.

No matter, the trend in the market is up for two reasons, these powerful seasonal forces and this momentum. Seasonal forces because the last two weeks of the year, the market tends to rise. Momentum because the market has been moving since the election on hopes that a combination of tax cuts and fewer regulations and massive stimulus program will improve the economy and particularly translate into higher earnings for U.S. corporations.

These two factors mean traders have been reluctant to sell stocks, so instead of selling and getting out, they sell one sector like bank stocks and then they just go and buy another one like technology stocks. This is called rotation. And while the market may just move sideways for a few days, it doesn’t sell off to any appreciable expense, at least not so far.

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

(END VIDEOTAPE)

HERERA: But not every stock has contributed to the rally. Some have been left behind.

Dominic Chu explains why and what it might mean for investors.

(BEGIN VIDEOTAPE)

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT: With stocks still trying to punch through that Dow 20,000 level, there are a number of places in the markets that have been left behind in the rally towards record highs. Currently around 20 stocks in the large cap S&P 500 index are at least 15 percent below their average price over the last 200 days. Think of them as some of the most beaten up stocks on a relative basis.

Included on that list are stocks like generic drug maker Perrigo, athletic apparel maker Under Armour, health and products company Coty, and solar energy company, First Solar, among others.

Money managers are constantly on the hunt for their own list of stocks that appear to be beaten up or at least trading at an attractive valuation.

JERRY CASTELLINI, CASTLEARK MANAGEMENT: One of the most beaten down and prominent areas has been health care. A lot of cross currents there about what the changes are going to be and yet we think the stocks are — have fully priced in any particularly downside risk. UnitedHealth is an example and one of the names that we think is going to be a winner here, under most every condition that all the proposals have. And that’s one we’ve been buying.

CHU: But it’s not just about individual stocks. And the experts are looking at investing themes, given the current environment. And economic optimism plays a big part in the story.

JONATHAN GOLUB, RBC CAPITAL MARKETS: If you have an environment where you have inflation going up, consumer confidence going up, interest rates going up, where you want to be investing is the banks. And when you’re done investing the banks, you want to buy more banks.

But beyond that, you want to buy companies that are benefit for improving economy. It’s energy, it’s materials, it’s industrials. And the consumer really looks like they’re picking up in an environment like this. So, the consumer discretionary stocks, brick and mortar retailing, another place you want to be.

CHU: Overall, there is a lot of debate on just how much higher the market can run after what’s been a very sharp rally over the last month and a half or so. But markets don’t always go up in a straight line, and that’s something to keep in mind in the coming weeks and months.

For NIGHTLY BUSINESS REPORT, I’m Dominic Chu.

(END VIDEOTAPE)

GRIFFETH: So with the U.S. stock market on the cusp of hitting Dow 20,000 and investors focused on the record-setting market here, could they be missing out on other investment opportunities elsewhere around the world.

Joining us tonight, David Kelly. He’s chief global strategist at J.P. Morgan Funds, and he joins us to talk about, you know, our own market, which has clearly been on a tear.

But the dollar has also been on a tear, and there are those who feel that could cap our own earnings capabilities here in the United States.

What about overseas? What do you think?

DAVID KELLY, J.P. MORGAN FUNDS CHIEF GLOBAL STRATEGIST: Well, yes. I think a rising dollar does hurt earnings a bit. But to me, the more important point is, make sure you’re invested around the world. You know, this — it looks like this is going to be the fourth straight year in which the U.S. stock market has beaten emerging markets and beaten other developed countries. And a lot of people have felt, why should I invest abroad overall?

But, in fact, I think a lot of positive have been built into the U.S. market and a lot of negatives have been built into foreign markets. I mean, foreign markets are cheaper. Foreign markets have in case of Europe and emerging markets, more potential to grow in the long run.

And then that dollar — I think the dollar is too high and as it comes down over the long run, I think it will actually amplify the return of international investments. So, you know, it’s great to pop open the champagne cork, you know, uncork the champagne with this move to 20,000 on the Dow. But don’t just say domestic. Make sure you’re diversified around the world.

HERERA: Why do you think investors are so reluctant to do that, David?

KELLY: Well, I think there’s — first of all, I think there is a lot of optimism here at home. And some of this is a little bit artificial, because nobody wants to get out in December, because — I mean, first of all, you don’t want to realize the capital gains, anyway, and then you certainly don’t want to realize the capital gains. You think you’re going to have a lower tax rate next year.

So, in some ways, the exit door is jammed here. The only people coming in the entrance, and that’s helping push up the U.S. market.

But the other thing is that, you know, people have got quite a negative view about the rest of the world. We only see, you know, bombs and terrorist attacks, and the negative news about the rest of the world. And I think we miss out on the fact that Europe really is recovering. Emerging markets are getting beyond this commodity slump.

So, I just don’t think people have a broad enough view about what the world economy is doing right now. Just one thing, if you look at the PMI index, the whole manufacturing sector around the world. It looks like December is going to be the strongest month in over five years. So, it’s not just the U.S. is doing better, the world is actually doing better.

GRIFFETH: So, where do you make the money then? I mean, do you pick it by countries, do you pick it by individual companies? What do you do here?

KELLY: Well, I think — I’d say two things. One, I’d overweight Europe and the Eurozone in particular for the long run, over the next five years. The other thing I think you use a good manager to pick those emerging market countries that can avoid the normal potholes and crises in emerging markets and take advantage of, you know, cheap valuations in a lot of emerging markets and a lot of growth potential.

So I do think at this time, you do need to think carefully about asset allocation. You know, overall, equity markets around the world aren’t that cheap. But I do think there is more opportunity overseas if you look carefully.

GRIFFETH: David Kelly with J.P. Morgan Funds — always good to see you. Thanks for joining us.

KELLY: Anytime.

HERERA: One Dow stock that has not rallied, along with the broader market is Nike, and the company is hoping its late-day earnings report will reverse that trend. The world’s number one footwear maker reported better than expected quarterly revenue, helped by strong demand in some of its most important markets.

Nike earned 50 cents a share. That was 7 cents better than estimates. Revenue climbed 6 percent to more than $8 billion. That sent shares of the company initially higher in after-hours trading. Something shareholders are probably pretty glad to see, given the 15 percent decline that stock has seen this year.

Sara Eisen has more on Nike’s quarter.

(BEGIN VIDEOTAPE)

SARA EISEN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Expectations were low going in, and Nike managed to surpass them. Part of the story, sales growth. The company grew revenues overall 6 percent, not bad in its tough retail environment, fueled by double digit growth in places like China.

Still, it is a marked deterioration from the kind of growth we were seeing from Nike around this time last year. The strong dollar is still hurting. This is a company that gets more than half of its business overseas. And that continues to chip away at overall sales, especially with the dollar marching higher day by day here, it’s a concern going forward.

And competition. Nike’s stock performance has lagged that of its competitors. The trend in retail is still pointing to ath-leisure and a healthier lifestyle. The companies like Adidas and Lululemon have been careful to pick up on the high-fashion retro style ath-leisure trend working among millennials. One reason why Nike’s stock has gone from the best performing Dow component last year to the worst so far this year.

For NIGHTLY BUSINESS REPORT, I’m Sara Eisen.

(END VIDEOTAPE)

GRIFFETH: FedEx was also out with the quarterly results late today and that report comes during, of course, its busiest time of the year. The package delivery company earned $2.80 a share, not quite as good as what analysts have been looking for. Revenues, though, were sharply higher, up nearly 20 percent from a year ago. But FedEx did see its operating margins slide, and that weighed on shares in initial after-hours trading tonight.

Morgan Brennan has the one key take-away for us now from those company’s results.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: FedEx reporting mixed earnings as profit grew last quarter, but not as much as analysts had hoped. As consumers increasingly turn to the Internet to do their shopping, FedEx is welcoming more business, with average daily package volumes soaring 5 percent in its ground segment. Thanks in large part to that e-commerce boom.

But more business has also meant more spending, as the company scrambles to expand its network to handle the surge. That once again pressured ground margins, which fell last quarter as FedEx brought new facilities online ahead of the holiday season. So, the final days to Christmas do count down. FedEx chairman and CEO Fred Smith saying, quote, “We are in the home stretch of our peak shipping season and service levels are high thanks to the outstanding efforts of our hundreds of thousands of team members around the world.”

The big question for investors, especially in light of today’s results, high service levels at what cost.

For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan.

(END VIDEOTAPE)

HERERA: Disney is making box office history. The Dow component is the first studio to grow $7 billion worldwide in a single year. The release of its latest “Star Wars” movie, “Rogue One,” helped propel past that number. The studio is home to some of Hollywood’s most powerful brands, including Lucas Film, Marvel Studios and Pixar. The previous record set last year by Universal Records.

GRIFFETH: Still ahead, digital ad crooks? Did a Russian cyber gang conduct a large and very profitable front operation on one of the fastest-growing industries?

(MUSIC)

HERERA: The White House has permanently banned new oil and gas drilling in federal waters in the Atlantic and the Arctic Oceans. President Obama used a 1950s law that allows the president to limit areas from drilling. The ban affects waters off Alaska, including the entire Chukchi Sea and most of the Beaufort Sea. The ban is also in effect in the Atlantic from New England to Chesapeake Bay.

President-elect Donald Trump has pledged to make the country energy-independent, but the ban may be difficult for him to roll back.

GRIFFETH: Meanwhile, the European Commission is looking into whether Facebook gave misleading information about its takeover of WhatsApp, the mobile messaging service. The antitrust watchdog is concerned that Facebook can match people’s social networking accounts to their mobile phone numbers using WhatsApp’s data. In 2014, though, Facebook said it could not do that. Facebook has until the end of January to respond and it could face a hefty fine.

HERERA: Facebook is a big player in the Internet advertising market, and today, a cyber security firm issued a warning for the fast-growing digit al ad industry about a potential massive online scam.

Eamon Javers is covering that story for us.

Good to see you as always, Eamon.

So, what exactly was uncovered?

EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Yes, hi, Sue. The firm here is called White Ops. What they said they found here is a massive Russian hacking ring that they’re calling Net Bot, and they say that’s targeting the digital video advertising industry by getting right in the middle of the digital exchange in which buyers and sellers buy and sell digital video ads.

So, they’re saying they’re creating fake impressions of digital video ads and then getting unsuspecting advertisers to pay for those up to 300 million of them every single day. They say they’re generating as much as $3 million to $5 million a day by the scam.

GRIFFETH: What kind of impact are we talking about on the digital ad industry? I mean, how much money are we talking about here?

JAVERS: Well, this is the biggest scam that’s been found so far. And what people in the industry have said today, as I’ve been talking to them, is that they recognize the digital video advertising stereo industry does have a problem with fraud. There are a lot of bots out there.

I talked to one of these exchanges, which says it removes 1 million bots a week from the system. That’s a lot of people trying to commit a lot of fraud. They feel they have got to get their arms around that. They have started a number of industry-wide initiatives in order to do that.

But, ultimately, this is a result of the fact that online buying and selling of ads has been disintermediated. Buyers and sellers no longer know each other or even know who is buying and selling what. All of that’s become anonymous over the Internet.

They’re looking for ways now to change some of that and make sure buyers know exactly what they’re buying and know that it’s real. They’re not buying a video ad that is just playing for a robot. Not for an actual person.

HERERA: You kind of answered my question. I was going to say, they have removed the bots. They know how to find them, certainly. But is there anything they can do short-term until they set up that face-to-face networking?

JAVERS: Well, the company that released this report today said one of the things they’re doing is releasing all of the IP addresses that they feel have been associated with this scam, so that people throughout the industry can block those IP addresses and at least remove that in the short-term. And they think ultimately if law enforcement gets involved, they might be able to find the people in Russia doing this and put a stop to it.

They think whoever is doing this is a very sophisticated industry insider, somebody with experience who knew exactly how these ads are bought and sold, because they created software that faked out this exact system. Very few people would have known how to do it.

HERERA: Yes, very sophisticated.

All right, Eamon. Thanks so much, as always.

JAVERS: You bet.

HERERA: Eamon Javers in Washington.

And to read more about the reported Russian cyber ring, head to our website, NBR.com.

GRIFFETH: Rite Aid sells hundreds of stores to Fred’s Pharmacy, and that’s where we begin tonight’s “Market Focus”.

As U.S. regulators begin to scrutinize the proposed merger between Rite Aid and Walgreens, those two pharmacy chains have agreed to divest 865 stores in an effort to appease antitrust concerns. Fred’s Pharmacy will purchase those stores, among other assets for nearly $1 billion. Shares of Fred’s soared by 81 percent. Rite Aid and Walgreens were also higher following the news.

General Mills posted a worse than expected decline in sales as weak demand for the company’s Yoplait Yogurt and Progresso brands hurt results. The food giant also saw earnings come in below estimates. And shares fell about 2.5 percent today to $61.45.

Meanwhile, a restaurant chain operator Darden Restaurants posted earnings and revenue that were in line with expectations. The owner of Longhorn Steakhouse reported better than expected same-store sales as the company said it benefited from the strong performance of its Olive Garden brand. Shares rose by 6 cents to $75.74.

HERERA: Auto retailer, CarMax, posted higher property and sales in the latest quarter. The company also saw improvements in its used car business, thanks to an uptick in store traffic. CarMax shares surged 6 percent to $66.06.

Linde and Praxair have officially to become the world’s largest industrial gas company worth more than $65 billion. The newly combined company will take on the name Linde and will be run out of the U.S., while tax headquarters are expected to be shifted to Europe. Praxair shares fell more than 3 percent to $118.39.

And BlackBerry raised its profit forecast for the full year after beating analysts’ quarterly earnings expectations. The software and device maker did report worse than expected sales as demand for headsets continues to fall. Shares were off more than 2.5 percent to $7.50.

GRIFFETH: A group of Democratic senators has sent a letter to President-elect Trump on the issue of drug prices. The senators led by Sherrod Brown and Al Franken said there is the potential for bipartisan reform. The letter outlines areas of possible cooperation, including allowing Medicare to negotiate prescription drug prices, stopping abusive pricing practices and supporting generic competition for branded drugs.

HERERA: Since the election, health care industry has been hit with an awful lot of uncertainty surrounding the fate of the Affordable Care Act. The sector has only risen 1 percent since the election, much less than the broader market. It is down nearly 4 percent for the year.

So, will 2017 bring clarity in investing opportunity perhaps for you in the health care sector?

Joining us now to talk about is Ipsita Smolinski, health care policy expert at Capital Street.

Good to see you again, Ipsita. Nice to have you back.

IPSITA SMOLINSKI, CAPITAL STREET HEALTH CARE POLICY EXPERT: Thank you.

HERERA: Let’s start — first of all, last time you joined us, you said it was about a lack of clarity which I think is still present, certainly. But are you at all a little more confident that 2017 might be a better year for the health care sector?

SMOLINSKI: Health care sentiment has not been terrific since the election, simply because of uncertainty. Like you mentioned, we have got a new president and a Congress that want to repeal and replace the Affordable Care Act. So, I think what you’re going to have at the beginning of next year is some certainty in terms of the ACA being gutted, Obamacare going away. Big portions of it, like the taxes and subsidies, et cetera.

And then the real choppiness will probably come later in the year, as Republicans try to coalesce around this replace option. And honestly, I don’t even think a new program will come into play for a couple of years, past the mid-term election. So, there is going to be, I think, a period of uncertainty before we really know what the new replace will be.

GRIFFETH: In the meantime, how are you going to make money in health care overall? And let’s focus it down a little bit. The hospital companies have suffered mightily since the election. Is that a sector you would look at as a value right now or do you need more clarity on what the new system is going to look like?

SMOLINSKI: Agreed. Hospitals have taken a beating. I think that that — there are opportunities there as the stocks, certain of them, HCA pull back a little bit more. But yes, you’ve got to know what the new program is going to look like. It’s not just the individual market going away. It’s also reforming Medicaid, where a lot of hospitals have seen volumes, lower bad debt and uncompensated care issues.

So, I would say hospitals could be an opportunity maybe mid to late next year. I think there are other pluses and minuses. Some sectors that I think would be attractive are bio pharmaceuticals. A President Trump is going to be far more friendly towards the sector than a President Clinton ever would have been.

So, you could see some reforms for sure since drug prices are concerning to Americans.

HERERA: What about health insurers?

SMOLINSKI: Insurers, I think, could win as far as Medicare advantage. These are companies like United, Aetna, Humana. These are companies that help the federal government run the Medicare Part C program. These are the PPO type products that Medicare beneficiaries can buy.

So I think if you’re an M.A., that’s a good place to be.

HERERA: All right. Ipsita, thank you so much. Good to see you again.

Ipsita Smolinski with Capital Street.

Coming up with Dow 20,000 kind of within reach, we’re almost there. Should investors be concerned about the so-called curse of the round numbers?

(MUSIC)

GRIFFETH: Volkswagen has reached an agreement to fix and/or buy back about 80 polluting diesel vehicles. A federal judge said that the owners of those vehicles would receive substantial compensation for getting their cars repaired. The court said there were some remaining issues that still need to be addressed. The settlement is the next step in resolving the German automaker’s diesel emissions cheating scandal.

HERERA: Auto safety regulators have opened an investigation into a potential defect in some Fiat Chrysler vehicles that causes cars to roll away after being put in park. The 2013 to 2016 Ram 1500 pickup trucks are being looked at along with the 2014 to 2016 Dodge Durangos. Both models have transmissions shifted electronically. The investigation centers on reports of nine injuries and 25 crashes.

Fiat Chrysler says it’s cooperating with that investigation.

GRIFFETH: Uber reportedly lost hundreds of millions of dollars in the most recent quarter. According to reports, the fast-growing on-demand ride-hailing company shed at least $800 million while growing sales at the same time. Now, those losses are due in part to heavy spending on promotions to recruit new drivers and investment in the self-driving car unit. Uber is closely held company that is valued around $68 billion and many say Uber will have to pare those losses before an eventual IPO.

HERERA: Well, as we reported, the Dow got close, oh so very close. But it failed to hit 20,000 today. But landmark levels like that one get people’s attention.

And as Mike Santoli reports, there may also be reason to worry about the curse of the round number.

(BEGIN VIDEOTAPE)

MIKE SANTOLI, NIGHTLY BUSINESS REPORT CORRESPONDENT: While there is no fundamental significance to the Dow hitting such an eye-catching level, markets sometimes have trouble moving past such landmarks. The Dow itself, for instance, struggled to get beyond the 100, 1,000 and 10,000 thresholds in years’ past. The NASDAQ composite peaked just about 5,000 in the year 2000 and didn’t make it its way back to that level for another 15 years.

It’s not clear exactly why such round numbers should halt or reverse a market trend. Crowd psychology could be part of it. Catchy figures with plenty of zeros capture plenty of public attention, possibly reminding investors how far prices have traveled. Of course, it could be the case that such numbers seem cursed when they happen to cap a market rally. For instance, the Dow had little difficulty pushing up through 15,000 a few years ago.

After all, the value of the 30 world class companies in the Dow should certainly not be altered in any lasting life, because the index math produced a new landmark level. Ultimately, though, there is no way to know where the Dow 20,000 will exert a gravitational pull for years to come the way some earlier round numbers did.

For NIGHTLY BUSINESS REPORT, I’m Mike Santoli.

(END VIDEOTAPE)

HERERA: And before we go, here is another look at where the market stands. The Dow notched its 17th record close since the election, rising 91 points to 19,974. The NASDAQ advanced 26 to an all-time high. The S&P 500 was up eight, just shy of its own record.

GRIFFETH: It will be inching across the finish line someway.

HERERA: Or limping. One of the two.

GRIFFETH: Yes, exactly.

HERERA: That’s NIGHTLY BUSINESS REPORT for tonight. I’m Sue Herera. Thanks for joining us.

GRIFFETH: I’m Bill Griffeth. Have a great evening, everybody. 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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