Transcript: Nightly Business Report – January 2, 2017

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

Funded in part by HSS.


Happy New Year and welcome to this special holiday edition of NIGHTLY BUSINESS REPORT. I`m Tyler Mathisen. Sue Herera is off tonight.

Well, 2017 is here. With the fresh calendar, of course, comes renewal and resolutions. And while we can`t help you fulfill your promises to work out more and lose that five or ten pounds, we can help you get your finances in shape by shedding light on what may happen in the coming months.

And we begin, as we often do, with the markets. Stocks are coming off a powerful year-end rally. But there are questions now about how much gas is left in the market`s tank.

Bob Pisani takes a look at what may shape equities in the year ahead.


Everyone`s bullish right now. But that`s going to get tougher in 2017.

Here`s three predictions. First, the stock rally will continue but will hit major headwinds. The S&P 500 will hit a series of historic highs again within Donald Trump`s first 100 days but that will be it. The problem?
Market participants are anticipating higher revenues and earnings due to tax cuts and fiscal stimulus but the actual company guidance will not match those high expectations.

Second, the oil rally will be a bust. As oil heads towards $60, American producers will ramp up production. That will keep prices down and the much-discussed agreement between OPEC and non-OPEC members to cut oil production will collapse among charges of widespread cheating.

Finally, 2017 will be the year stock ownership expands. The American public has seen declining levels of stock ownership for years. Only 52 percent of households own stocks and most stock is own by the top 10 percent of households. But rising GDP and greater optimism on the economy will finally reverse those trends in 2017 and folks who abandoned the market after the financial crisis in 2008 will return and start buying stocks once again.

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


MATHISEN: Technology, financials, and health care are three sectors that could majorly influence your portfolio this year. And that`s because they are the largest groups in the S&P 500.

Bertha Coombs has the outlook for healthcare, Wilfred Frost for financials, but we begin with Josh Lipton on technology.


JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: The NASDAQ surged to new highs this year and 2017 promises more fireworks. With dynamic gadgets, services, and the ongoing cloud wars.

First, Google`s head is in the cloud.

The search giant controls just 5 percent of the cloud infrastructure market. In 2017, Google (NASDAQ:GOOG) will double that, putting pressure on industry leaders like Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT).

Second, Trump doesn`t scare Cook.

On the campaign trail, Donald Trump went after Apple (NASDAQ:AAPL) for manufacturing overseas, saying he wants apple to bring iPhone production home to the U.S. That`s not going to happen. The economics of bringing large scale, low-skill assembly line work back here don`t make sense. Tim Cook will counter that he already directly employs some 80,000 people.

Third, the tech IPO pipeline heats up for enterprise.

Snap makes its public debut next year. But it`s the smaller, enterprise- focused startups that will dominate the IPO market in 2017. Okta, MuleSoft and App Dynamics will go public.

Big established companies want to see the financials of their vendors before opening up their wallets.




WILFRED FROST, NIGHTLY BUSINESS REPORT CORRESPONDENT: Coming in to perform not just for 2016 but most of the last decade, banks have taken off in the fourth quarter, not least because of the election. As we head into 2017, here are the things to watch:

The year curve will be key. Of all the fourth quarter factors that have driven the bank`s rally, the most important is the rise in interest rates.
Whether the yield curve maintains its recent rise and steepening will be the major factor for banks` share prices.

Bank of America (NYSE:BAC) remains the most geared toward interest rates, which is why it has performed so well since the election.

Other Trump related changes — the key thing for Trump is whether he can deliver more positive surprises as 2017 arrives.

In terms of deregulation, low corporate taxes and repatriation of cash overseas, all of which is positive for banks. But how much is already priced in? A glance at how valuations have changed in the last few months shows the improvement in investors` sentiment to the sector, but also the scope for it to improve still further based on long term averages.

Risks remain. The main outstanding risk is credit quality.

Loan growth has been fairly strong in 2016, and fears remain about how late in the cycle the economy is. A spike in provisions would derail the positive turn in sentiment we`ve seen in recent months. The improvement in oil prices in Q4 has been another short term positive in this regard.




BERTHA COOMBS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Repealing Obamacare is easy. The challenge for the Trump administration and Republicans in
2017 will be coming up with a replacement plan and pulling off a smooth transition.

Three predictions?

First, repeal and maintain Obamacare. Republicans will repeal the ACA, especially the unpopular individual mandate, early next year. But replacing it could take a couple of years.

In the meantime, they`ll keep Obamacare subsidies and to prevent a collapse of the market, they may come up with funding to offset insurers` losses, funding they opposed under Obama as a bailout.

Second, M&A on pause. With uncertainty surrounding changes to the Medicaid and Medicare government health programs, which are driving growth and health care.

Insurers and hospitals will refrain from big mergers in 2017 and instead work on partnerships aim at bringing down costs.

Which brings us to more pay for value. Hospitals are already feeling the pressure.

Next year, drug makers, distributors, and pharmacy benefit firms will be on the hot seat to deliver lower prices too.



MATHISEN: Let`s turn now to Mark Luschini for his outlook on the U.S.
stock market. He`s chief investment strategist at Janney Montgomery Scott.

Happy New Year, Mark. Good to have you with us.


MATHISEN: You know, who can forget last year when the stock market for the six weeks had about as rocky a start as I remember, and I`ve been following this a long time. There are a lot of — there are some similarities. One would be a December interest rate hike, both years that happened, but a lot of differences.

What are the odds that we get off to a rocky start in 2017?

LUSCHINI: Tyler, my judgment, those odds are pretty low. The dissimilarities I think outweigh the similarities by some order of magnitude, particularly since a lot of it was concerned about the fact that we did get a rate hike, but it was the first one in almost a decade. And so, while it took quite a while, a year, in fact, to get the second one, I think it was so widely anticipated, and the Fed has nurtured along a certain narrative with regard to how delicate they`re going to be in subsequent rate hikes, that the market is prepared for that.

Secondly, we`re not seeing the exogenous issues lurking quite to the same order of magnitude as we had last year, particularly as it relates to China, a lot of questions about exactly what the pace of Chinese economic growth is. But nonetheless, while it`s decelerated, the worry last year at this time was that it was decelerating towards something like a hard landing and it was going to suck in with it all of the emerging market complex that rely on Chinese growth for exporting commodity related goods and services.

That`s not the case this time around. And, therefore, I have a more sanguine view about how we start the year, even if we have to overcome some correction here in the meantime, simply to work off some of the euphoria in equity markets.

MATHISEN: How can I make money this year? What sectors, what individual names do you pinpoint for 2017?

LUSCHINI: Sure. Well, giving the aforementioned with regard to one of the sectors that was mentioned, financials, I agree that`s a sector that I think is likely to prosper. A steeper yield curve ought to help net interest margins, banks are still from evaluation standpoint, attractive.
Stronger, certainly steadier economic growth ought to bode well for lending activity. And at the end of the day, if we see any kind of deregulation regarding Dodd/Frank, that ought to boost the ability to put capital reserves to work.


MATHISEN: Do you love the money center banks that have multiple platforms and big trading operations? Or do you like banks that do banking?

LUSCHINI: I like banks that do banking more so than the former, Tyler. An example would be PNC Bank (NYSE:PNC) on their front, kind of a super regional, if you will.


MATHISEN: Yes, (INAUDIBLE) play there.

LUSCHINI: Well, I`ll eat my own cooking on that one as well. But nonetheless, yes, I think it has a great footprint up and down the East Coast, and a great franchise and one in which, again, should benefit from all to things I`d mentioned, economically and/or structurally.

MATHISEN: A lot of the defense sectors led the way in the first half of 2016. Is this a year to get defensive on the defensives?

LUSCHINI: I don`t think so. I think, though, that the prospects for interest rates moving measurably higher from here, which is to say something with a 3 1/2 to 4 handle seems unlikely. But I think directionally, that`s going to be the way prices work. And so, that`s going to be a bit of a headwind into those classic interest rate sensitive sectors, the so-called defensives. And therefore, I think what you want to be poised to do is take advantage of this pullback particularly, to walk into the some of the economically sensitive sectors like financials, like energy and some of the consumer discretionary basing industries.

MATHISEN: Got to leave it there. Mark, thanks, and happy New Year again.
Mark Luschini with Janney Montgomery Scott.

LUSCHINI: You`re welcome.

MATHISEN: Now to the economy. More broadly, it hit a number of milestones, of course, back in 2016. The Federal Reserve did raise interest rates, as we were just discussing. Growth accelerated, especially toward the end of the year. The unemployment rate continued to drop.

And the housing market saw prices hit a new peak. So, what should you watch over the next 12 months?

Diana Olick has a look at housing. But, first, Steve Liesman with an outlook for the broader economy.


STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Predictions for the economy in 2017 depend chiefly on how much a President-elect Donald Trump`s ambitious agenda gets through the new Republican Congress. All of that leads to one easy prediction for 2017, we`re about to see a whole lot more stock and bond market volatility when it comes to the making of economic policy than we`ve seen in the past.

Congress leaks like a sieve and everyone likes to talk. So, the chance of one proposal or another becoming law will go and up down with each newsflash. It goes without saying that Congress will become at least as important as the Fed at moving if not the whole market, and certain parts of it, like banking stocks when it comes to reforming or repealing Dodd/Frank or health care when it comes to Obamacare.

Second prediction, the Fed will hike twice, but likely three times, depending upon how quickly new fiscal programs get put in place.

And the final prediction, growth will accelerate to the 2.5 to 3 percent range sustained growth north of 3 percent will likely elude the next president, at least for next year.




DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: The housing market was on a tear this year. Sales and construction surging ahead. But 2017 will see big changes.

Home sales will slow. Don`t get me wrong, there is plenty of demand for homes. But listings continue to drop and mortgage rates are starting to rise. Younger potential buyers may want to get out of those pricey rentals. But with affordability weakening, they may just not have the means.

Mortgage rates will rise. Mortgage rates spiked after the presidential election and the gains will continue, albeit at a more moderate pace. A potentially stronger economy and job growth are fueling the rates, but will not be enough to counter the higher cost, especially for first time buyers of getting a loan.

On the other hand, if the president-elect does make a big move into banking deregulation, it could get easier to get a mortgage. Mortgages more expensive but more available.

Home prices will cool. The spike in mortgage rates has already made homes for expensive for buyers. So, sellers may have to come down a bit if they want to get that fast offer. Tight supply has been pushing prices higher far faster than income growth and in a lot of markets, prices are becoming unsustainable.

They`re unlikely to drop, but the gains should shrink, if only that were true for rents, which continue to push through the roof.

For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Washington.


MATHISEN: Still ahead, the one prediction many are making for 2017 is that Washington will be — unpredictable.


MATHISEN: One of 2016`s biggest surprises, of course, was perhaps Donald Trump`s White House win. And later this month, he`ll be sworn in as the 45th president of the U.S.

So, what can investors expect from a Trump administration?

John Harwood takes a look.


JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: If the 2016 campaign taught us anything, it is the unpredictability of everything about Donald J. Trump. So, anyone making predictions about his first year in the White House, not to mention those of us who thought he would never get there in the first place, better do it with a lot of humility.

So, here goes. In 2017, President Donald Trump will sign tax reform into law. But it won`t be comprehensive tax reform of both the individual and corporate systems. He`ll focus on international tax reform with the goal of returning corporate profits to the U.S. and raising money to finance his infrastructure spending plans.

At least one of President Trump`s cabinet picks will be defeated by the Senate. Even though Republicans control more than enough votes, opposition Democrats will look for opportunities to peel off a few moderate Republicans to block Trump picks they consider too far out of the mainstream. Target (NYSE:TGT) number one: Health and Human Services Secretary Designee Tom Price who favors big changes to Medicare and Medicaid.

And finally, the incoming president will not rip up the nuclear deal the outgoing president struck with Iran, even though Donald Trump criticized it during the campaign. U.S. allies Britain and France were part of that deal and so was Russia, the U.S. adversary Mr. Trump wants better relations with. The new president may embrace stricter monitoring of the deal, but getting rid of it altogether is just not worth the trouble and the risk.



MATHISEN: An across the board tax cuts is what President-elect Trump has promised from the wealthy down through the middle class and below. But how could his proposed tax cuts impact you?

Patrick Chovanec is chief strategist at Silver Crest Asset Management.

Patrick, welcome. Good to have you with us.

John Harwood just said that he expects that the focus in tax reform will be on international corporate taxation and repatriation of monies held overseas and maybe not so much on individual tax reform. Do you agree with that?

PATRICK CHOVANEC, SILVER CREST ASSET MANAGEMENT CHIEF STRATEGIST: I think we have to see. You know, the Congress wants to move forward with tax cuts, both personal and corporate. There is certainly a windfall to be gained from bringing back profits from overseas.

But, you know, I think you`re hearing a lot of different things from a lot of different people in the Trump administration and from Congress about what the priorities are going to be.

MATHISEN: I remember writing a cover story for my former employer, the last time there was tax reform, 1986, and I basically led by saying tax reform equals lower rates plus less deductions. Is that the same formula this time around?

CHOVANEC: The question is whether they intend for tax reform to be revenue neutral or not. If it`s revenue neutral, you have to — if you lower rates, you have to broaden the base. You have to get it back through getting rid of exclusions, deductions, credits. If they just want cuts, well then, they`re going to have to deal with the consequences of a much larger deficit.

MATHISEN: A lot of people watching this program are active investors.
Will capital gains rates go down next year?

CHOVANEC: I think they will. But again, this is the thing. A lot of people are all excited about tax cuts. And they need to look at the other side of the equation, which is how are they going to pay for these tax cuts. There`s the —

MATHISEN: How is the government going to pay for those tax cuts?

CHOVANEC: How is the government going to pay for the tax cuts, especially if they want it to be not ballooning the deficit? So, you have a situation
— people are saying, for instance, Wall Street analysts are saying, 35 percent corporate taxes go down to 15 percent or 20 percent, that`s a big windfall for companies, but not if they lose a lot of the deductions.

MATHISEN: Lose the ability to deduct interest, for example.

CHOVANEC: Exactly.

MATHISEN: Or they don`t have as rapid depreciation as some have been saying. Which deduction on the individual side of the ledger is the one that you think is the most vulnerable in the sort of game-playing situation here that`s going to go on on Capitol Hill?

CHOVANEC: Well, the think that they`re talking about is the deductibility of state and local taxes.


CHOVANEC: Which is —

MATHISEN: In a high tax state, that`s a big matter.

CHOVANEC: Exactly. And that`s why in 1986, when that was put on the table, that was immediately shot down by representatives from high tax states like California and New York. The question is whether they`ll have the same firepower in a Republican Congress to block it.

MATHISEN: Those were not Trump states, New York, California, New Jersey —

CHOVANEC: They were not. But there are Republican congressmen from those states. And for many of the people in those states, that would turn a tax cut potentially into a tax hike.

MATHISEN: It is going to be a fascinating year to watch taxes.


MATHISEN: Patrick, thank you. Happy New Year.

Patrick Chovanec with Silver Crest Asset Management.

All right. The defense sector could see big changes in the year ahead.
President-elect Trump has pledged to increase military spending. And he has already focused attention on some of the biggest companies in the industry.

Morgan Brennan looks at what`s ahead for defense.


MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: In 2016, Syria`s civil war escalated. North Korea tested more nukes. And U.S. agencies linked Russia to election-related hacks.

In 2017, Russian tensions will mount. The Iranian nuclear deal will be questioned, and China will further flex its muscle in the South China Sea.

First, it`s all about the budget. And the budget will increase, despite sequestration. Details will be key with more focus on cost efficiencies, when President-elect Trump releases the proposal this spring.

Second, the nuclear triad could become a diad as contractors jockey for the new Minutemen 3 contract. Under the new administration, the fate of the land-based leg of the nuclear arsenal could come into question, even as modernization moves forward for the Navy`s Ohio class replacement subs built by General Dynamics (NYSE:GD) and the Air Force`s B-21 stealth bomber from Northrop Grumman (NYSE:NOC).

Third, the race to secure space will take off. Call this the other infrastructure plan. As the Pentagon fortifies a satellite system that China and Russia have been developing weaponry to be able to disable.
Expect more contracts, more launches, more potential business for Boeing (NYSE:BA), Lockheed, Raytheon (NYSE:RTN) and others.

One wild card? SpaceX, which finally landed a big military contract for a
2018 launch. But on the heels of a Falcon rocket explosion, first, it`s got to get back into space.



MATHISEN: Coming up, will Americans hit the road and head to showrooms to buy a record number of cars this year?


MATHISEN: Changes may be in store for the biotech and pharmaceutical industries this year. The sectors garnered a lot of attention last year from both Congress and the president-elect for the high price of medicine.
So, what`s ahead for 2017?

Meg Tirrell takes a look.


MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT: If investors expected smooth sailing for drug company stocks after Republican swept the U.S.
election, they were in for a surprise. Uncertainty in the drug industry is as high as ever. And the focus for 2017 will continue to be on drug prices, the FDA, and M&A.

Here is what to expect:

First, pricing pressure. Donald Trump says he`s going to bring drug prices down. He could look to legislation to do it but most likely, it will be continued public pressure on drug companies. Expect also increasing scrutiny of the rest of the health care system with mounting pressure on middlemen like drug distributors and pharmacy benefits managers.

Next, an eye on FDA. After two years of historic highs on new drug approvals, medicine cleared in the U.S. sank to six-year lows in 2016.
2017 brings multiple pieces of legislation affecting how we regulate drugs, both branded and generic.

Finally, M&A hope or hype? Investors` hopes for a biotech rebound rest on a Trump tax holiday boosting buying. Big pharma and biotech companies hold billions in cash overseas. And the expectation is that if they bring it back at a lower tax rate, they`ll gobble up smaller companies.

On buyers` wish list, companies working on drugs for cancer and rare diseases, seen as more insulated from pricing pressure.



MATHISEN: A recent report by the International Air Transport Association shows the airlines sector is poised to pose a record profit in 2016, helped largely by low fuel prices. Another group that also benefitted from cheaper gas was, of course, autos. That industry on pace to deliver record sales for 2017.

But as Phil LeBeau reports, 2017 may paint a different picture for both sectors.


PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Pardon the pun, but in 2017, airlines are trying to fly through the type of turbulence that could keep profits and airline stocks from flying higher.

First, the battle of basic airfares raises the question of whether airlines can finally grow passenger revenue.

In the fight to keep from losing passengers to low cost carriers, larger airlines like Delta have rolled out basic fares. They may be filling seats, but those cheap seats and that competition is keeping airfares down.
Good for travelers. Not for the bottom line of airlines.

Second, congestion at America`s biggest airports is not going away.

For all the talk about fixing America`s airports, it`s the air traffic control system that needs to be upgraded. The FAA has made progress.
Still, at the largest airports, you can expect some rough days in the next year. The good news? The TSA security lines that we saw in 2016 are unlikely to return due to greater staffing by airlines and airports.

Finally, some fliers could be in store for a better experience in the air.

United`s new Polaris brand is a major upgrade of its business class service. Meanwhile, American is adding premium economy to more international routes. And Delta is experimenting with bringing back complimentary meals on some of its transcontinental flights. Overall, if you`re flying in the U.S. next year, be prepared for packed planes.

Buckle (NYSE:BKE) up and get ready for the auto industry to hit the gas on new technology in the next year. That will drive three big stories behind the wheel in 2017.

First, new autonomous drive systems will mean more of us taking our hands off the wheel.

Tesla, GM and other automakers will roll out features next year where more cars will do the driving for short periods of time. But automakers will stress drivers remain in control. A fully autonomous drive car, we`re still years from seeing that expand beyond limited testing.

Second, in 2017, we`ll find out if America embraces lower-priced electric cars.

The Chevy Bolt with a range over 200 miles will be sold all of next year, starting on the West Coast. Meanwhile, Tesla`s model 3 is scheduled to be delivered late in 2017. Let`s see if there are strong sales for two models that will be priced under $40,000.

Third, America`s love affair with trucks and SUVs will stay red-hot in 2017.

Right now, almost 60 percent of the vehicles sold are trucks and SUVs.
That will continue next year, especially if gas prices stay in check. And if the economy remains strong, we could see record auto sales next year.



MATHISEN: Thank you all so much for watching this special holiday edition of NIGHTLY BUSINESS REPORT. I`m Tyler Mathisen. Happy New Year to everybody. We`ll see you right back here tomorrow night.


Nightly Business Report transcripts and video are available on-line post broadcast at 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) 2017 CNBC, Inc.


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