Transcript: Nightly Business Report – January 17, 2017

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

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Hang on tight. Earnings start the week, the presidential inauguration closes it. And what happens in between could have a big impact on your money.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Upside down. China calls for globalization, while doubts about trade in the U.S. grow. And it’s happening as the world’s business and political leaders descend on Davos.

MATHISEN: Shifting cash. Baby boomers will start pulling trillions of dollars from their retirement accounts and the impact could move the market and shape the economy.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, January 17th.

HERERA: Good evening, everyone, and welcome.

It is shaping up to be a potentially defining week for investors, corporate America starts reporting its earnings and the bar is pretty high.

At the World Economic Forum, there are questions about China, Russia and America’s position on the world stage. And it all culminates with an historic power shift on Friday. The 45th president of the United States will be sworn in at a time when many investors and Americans are trying to figure out what policies the new administration will usher in.

We begin with Bob Pisani and the critical week for earnings.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: The first wave of fourth quarter earnings, including that of Morgan Stanley’s which reported today has generally been above expectations. That’s good news. But as we digest the results, it’s worth noting that 2016 was not a banner year for earnings. The S&P 500 earnings are projected to be up a measly 0.9 percent last year. That’s according to Thomson Reuters.

Now, much of the pain comes from this catastrophic 77 percent decline in energy earnings and the market is anticipating, this will reverse in 2017. Right now, earnings are expected to rise 12 percent. But most analysts have not changed their 2017 estimates to reflect the Trump agenda. Some strategist believes 20 percent growth could be possible.

That’s why the markets are like a tightly coiled spring right now. There’s a lot of pressure to perform big in 2017. Energy in particular is expected to rise a whopping 366 percent this year. In fact, analysts have factored in a 100 percent increase just for ExxonMobil. That’s the biggest energy name out there.

Is any of this remotely possible? Some believe it really is. Rich Bernstein, for example, he’s the CEO of Richard Bernstein Advisers, is in the camp that earnings are going to expand for several different reasons.

First, Trump may not get everything he wants but he is not going to come away empty handed. There will be a reduction in corporate taxes, and there will be some kind reduction in regulations. Second, we’re also going to get some kind of stimulus program. It’s unusual to get a stimulus program when the economy is improving, but it’s definitely going to help earnings, certainly for industrials and materials. Third, the global economy is improving and we are no longer in a global deflationary environment.

Now, with this kind of data, Bernstein says it’s rational to believe that stocks will rally and bonds will not.

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

(END VIDEOTAPE)

MATHISEN: It is a big week for the market, but stocks have been idle for weeks despite the recent spike in that uncertainty that Bob was talking about. But is this lull in volatility a sign that maybe the market is too quiet or that investors are confused?

Michael Jones, chairman and chief investment officer at Riverfront Investment group joins us now.

Mr. Jones, welcome. Good to have you with us.

I heard a statistic earlier today that it’s been very rare that we’ve had such a prolonged period where there has been such few daily 1 percent daily moves up or down with the major indexes.

What does this suggest to you is going on?

MICHAEL JONES, RIVRFRONT INVESTMENT GROUP CHARIMAN & CIO: I think what we’re seeing is a transition in the markets between the euphoria that characterized the markets right after Trump’s election to reality slowly setting in. I think what investors are recognizing is that there are the prospects for those earnings gains that Bob Pisani was talking about earlier, but that they require legislation and legislation is more complicated than just sending out a few tweets.

And it’s looking like unlike, say, FDR or Ronald Reagan or even Obama, there is more division between the president-elect and his Congress on some of the major legislative initiatives that are necessary for some of the reforms Bob mentioned.

HERERA: Now, you were aggressive in the market earlier on, and congratulations because, obviously, we’ve had a big run up. What are you doing right now as the market starts to slow down a little bit and starts to really pay closer attention, not to the rhetoric but to perhaps what might actually be accomplished?

JONES: Well, the huge run-up in equity markets and interest rates and the dollar that we saw right after the Trump election, and pretty much through the end of 2016 — look, we agree with everything that gets people excited about what could come from the Trump administration. But we also think it’s going to be a much longer and more complicated process that maybe people were initially hoping. And that means that we may have to wait a little longer for the earnings gains that Bob was mentioning.

That suggested to us that we take money off the table as we came into 2017. Not because we’re getting bearish but we were pretty over our skis. We had a fairly aggressive portfolio posture. We want to pull back more towards a neutral stance, so if the market did consolidate, if it did get back those gains, we have some dry powder to put to work.

MATHISEN: What do you like internationally, Michael?

JONES: Internationally, we think the best position country is probably Japan. Last year, Japan really made some major mistakes in moving to negative interest rates. They surprised the markets with it. They found out that a lot of their banks and trading companies couldn’t use the negative interest rate in their computer system. That caused a big rally in the yen. It slowed their economy.

They got policy back on track as we moved into September. And we need to recognize that now that monetary policy is a little more on a stable footing, you have government that is committed to reform and one of the few governments out there with a huge majority and a reform commitment. We think all that is real positive for Japanese equities.

MATHISEN: All right. Michael, thanks very much. Michael Jones, Riverfront Investment Group in Richmond.

HERERA: The president of China defended international trade and globalization in his first ever speech at the World Economic Forum. President Xi Jinping said economic integration has improved the lives of millions of people. His comments come at a time when western powers are questioning the benefits of global trade and promoting more protectionist ideas.

(BEGIN VIDEO CLIP)

XI JINPING, CHINESE PRESIDENT (through translator): There is no point in blaming economic globalization for the world’s problems, and that is simply not the case. And it will not help solve the problems.

From the historical perspective, economic globalization results from growing social productivity and is the natural outcome of scientific and technological advances. It is not something created by any individuals or any countries.

(END VIDEO CLIP)

HERERA: President Xi is the first Chinese president to attend the annual gathering of political and business leaders. And added that when it comes to a trade war, there are no winners.

MATHISEN: Well, as Beijing uses the beautiful snowy back drop of Davos, Switzerland, to position itself as the global leader, many of the world’s richest and most influential people are using to the form to discuss the massive changes underway across the globe.

Andrew Ross Sorkin reports tonight from Davos, Switzerland.

(BEGIN VIDEOTAPE)

ANDREW ROSS SORKIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: I’m Andrew Ross Sorkin at the World Economic Forum in Davos, Switzerland, where the top issues are globalization, China, after President Xi’s historic visit here. The continuing impact of Brexit and some comments by the Prime Minister Theresa May, and, of course, the rise of populism and Donald Trump.

Top CEOs like AT&T’s Randall Stephenson and Brian Moynihan of Bank of America are here, along with activists and actor Matt Damon all weighing in on the issues.

RANDALL STEPHENSON, AT&T CHAIRMAN & CEO: We’ve all consistently said, you fix this regulatory environment and you get tax reform. That is the stimulus. That’s the catalyst for higher growth. So, President-elect Trump comes in, what’s he talking about? Tax reform and regulatory reform.

BRIAN MOYNIHAN, BANK OF AMERICA CHAIRMAN & CEO: Some pretty interesting (VIDEO GAP) to the people, so — and we just had a lunch with him and he is very much concerned that there’ll be a retraction from for trade and the ability of trade to help the world grow and the ability of rebalance the imbalance in the economy and stuff. I think that’s the fear out there. I think we’ve just got to let it play out for a while.

MATT DAMON, OSCAR-WINNING ACTOR: Every 90 seconds a child tunneled age of 5 is dying because they lack clean water and sanitation. That’s a fact. But it’s also the outcomes people can expect. If you’re scavenging for water, you’re not in school, right, which is a huge problem for girls. So, if they don’t to scavenge for that water and they’re in school, they can expect an entirely different life outcome.

SORKIN: And it’s just getting started.

For NIGHTLY BUSINESS WORLD, I’m Andrew Ross Sorkin in Davos Switzerland.

(END VIDEOTAPE)

HERERA: The World Economic Forum which in years past has promoted ideas like free trade is happening as the prime minister (AUDIO GAP)

(BEGIN VIDEOTAPE)

NANCY HUNGERFORD, NIGHTLY BUSINESS REPORT CORRESPONDENT: The U.K. will be leaving the European Union but not Europe. That was a message made loud and clear by Prime Minister Theresa May in her most important speech since taking the office in the wake of the shocked Brexit vote.

In a 12-point ambitious plan, the prime minister set out for goals for exiting the European Union stating that yes, Britain will have to leave the single market which does allow free trade across the European Union. However, she sounded confident that Britain will remain a formidable trading partner on the global stage.

THERESA MAY, BRITISH PRIME MINISTER: A global Britain must be free to strike trade agreements with countries outside the European Union, too. Because important though our trade with the E.U. is and will remain, it is clear that the U.K. needs to increase significantly its trade with the fastest growing export markets in the world.

HUNGERFORD: In addition to leading the single market, Prime Minister May admitted for the first time that a final Brexit deal will be taken for a vote in both houses of parliament. That announcement, along with the greater certainty that the prime minister pledged to give both voters and investors going forward helped boost the pound sterling against the green buck, in fact, rallying sharply ever since she took the stage for the big speech.

The big questions now remain, exactly what these trade deals will look like once Britain is outside of that crucial single market and what will the trade deals be like outside of Europe? The prime minister made a big push with global trade partners, mentioning specifically U.S. President-elect Donald Trump.

With just days to go before his inauguration, Prime Minister May said very clear she was confident that the U.S. would now put Britain at the front of the line rather than the back of the queue.

For NIGHTLY BUSINESS REPORT, I’m Nancy Hungerford, in London.

(END VIDEOTAPE)

HERERA: In an interview with “The Wall Street Journal”, President-elect Donald Trump said the dollar was, quote, “too strong” in part because China holds its currency down. Mr. Trump added that our companies are having a hard time competing because a stronger makes U.S. products more expensive overseas. The green buck slid on those comments.

MATHISEN: That fall in the dollar may have contributed to the down day for stocks, along with the steep decline in the financial sector. The Dow fell 58 to 19,826, NASDAQ dropped 35 and the S&P 500 was off 6.

HERERA: On Wall Street, there are also growing concerns about Donald Trump’s policies, as investors try to figure out what might come next. The president-elect called one policy idea circulating through Congress as too complicated to enact. It is the border adjustment tax, a cornerstone of House Republicans tax plans. As we reported last week, this tax would generate a lot of revenue which could be used to pay for other reforms.

Just days before the presidential inauguration, a number of companies highlighted their U.S. hiring plans. Walmart said it will create 10,000 new retail jobs this year. The jobs will come from the opening of 59 new expanded or relocated stores which were previously announced. General Motors will invest $1 billion in its U.S. factories, adding or retaining a combination of 1,500 jobs at plants. And Bayer and Monsanto which emerging plan to make half of its research and development investments in the U.S.

MATHISEN: Well, here’s an incredible statistic: the world’s eight richest people, all of them, have a net worth of $426 billion. That’s equivalent to (VIDEO GAP) half of the world’s population.

(VIDEO GAP)

Inditex founder Amancio Ortega, he runs Zara, the billionaire investor, Warren Buffett, Mexico’s Carlos Slim, followed by Jeff Bezos of Amazon, Facebook’s Mark Zuckerberg, Oracle’s Larry Ellison, and former New York City Mayor Michael Bloomberg.

HERERA: Coming up, the oldest boomers have to start taking money out of their 401(k)s, whether they want to or not. The economic ripples that that might cause.

(MUSIC)

MATHISEN: The nation’s third largest railroad, CSX, reported a slight dip in earnings, the first of the major rails to report. The railroads drive billions of dollars in economic activity, of course. But will the rest the sector deliver when they report earnings?

Morgan Brennan takes look.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Rail results just got rolling. In total, four railroads will release number this week, including the Union Pacific, Canadian Pacific and Kansas City Southern. The stocks have ridden the stock rally. CSX Union Pacific and Norfolk Southern have gained double digits since the election, thanks to improving industrial production and prospects for tax reform infrastructure spending and deregulation.

The outlier, Kansas City Southern, which has fallen 9 percent on President-elect Trump’s tough trade rhetoric regarding Mexico, which is half that company’s business. Analysts say they’ll be watching outlooks on pricing and volumes, which for the first time in nearly two years, are growing.

JASON SEIDL, COWEN & CO: The shippers now expect pricing increase 2.7 percent over the next six to 12 months. But it’s up 60 basis points from a third quarter survey. But more importantly, it marks the first time since the fourth quarter of 2014 that we’ve seen a sequential increase.

Also, when surveyed, the shippers said that 77 percent of them were more favorable about the economy. Now, that’s up from just 22 percent in the third quarter survey. So, clearly, we’re seeing more than just green shoots out there. I think people are feeling a little bit better about things.

BRENNAN: After years of decline, coal could actually be a bright spot, since pricier natural gas has made it more cost competitive for power generation. But stock valuations have already barreled toward the high end, and some experts say investors aren’t fully weighing the risks, including stronger dollar.

The reason Avondale Partners raised the sector underweight.

DONALD BROUGHTON, AVONDALE PARTNERS: The recent strength in the dollar is just very, very bad for exports. It’s very bad for onshoring, domestic manufacturing, domestic assembly. I don’t care how many CEOs you tweet about, the economics of the stronger dollars are real headwind to domestic manufacturing and exports. And that’s what railroads move.

BRENNAN: And at least some investors agree. Shares of CSX and other transportation stocks stumbled today ahead of those quarterly results.

For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan.

(END VIDEOTAPE)

HERERA: More customers helped Dow component UnitedHealth Group to top expectations, and that’s where we begin tonight’s “Market Focus.”

The nation’s largest health insurer said strength in its pharmacy benefit management business also caused the company to post higher profit and revenue. UnitedHealth Group also reaffirmed its guidance for 2017. Still, shares fell a fraction to $160.66.

Morgan Stanley saw its profit double and sales rise last quarter as higher trading activity them bank top estimates. The company also said it benefited from strong performance in its wealth management operations. Morgan Stanley said it is optimistic about opportunities in 2017 and beyond. Still, shares were hit hard. Morgan Stanley was off nearly 4 percent to $42.15.

And British American Tobacco said it will buy the rest of Reynolds American that it doesn’t already own for nearly $50 billion. Last year, Reynolds rejected British American’s initial takeover bid. Reynolds shares rose 3 percent to $57.68. While British American shares fell 1 percent to $113.10.

Tiffany said its flagship store in New York City which sits right next to the president-elect’s office suffered a 14 percent drop in sales during holiday season because of disruptions related to post-election traffic. The luxury jeweler also said overall sales during the period were down. Shares were off 2 percent to $79.90.

MATHISEN: The hedge fund Elliott Management and private investment firm Bluescape Energy Partners working together now for change at NRG Energy. The two companies which combined have a more than 9 percent stake in the electric power provider called NRG shares deeply undervalued and believe there are opportunities for operational and financial improvements. NRG shares up 5 percent to $15.34.

And Greenlight Capital founder David Einhorn is betting against the equipment maker Caterpillar and other industrial cyclicals under a Trump presidency. Despite the president-elect’s proposed plan to increase infrastructure spending, the hedge fund manager said Caterpillar’s machinery division is only a small part of its business. Cats shares off almost 1 percent at $93.57. And another equipment maker, Deere, also fell more than 1 percent on that news.

United Continental reported a drop in profits but the results were still good enough to beat estimates. The airline did see a rise in sales. That topped expectations. But shares of United initially fell in afterhours on weak guidance. They also finished the regular session down a fraction at $73.74.

HERERA: Some of the nation’s oldest baby boomers will start mandatory withdrawals from their retirement accounts this year. Withdrawals of hundreds of billions of dollars that could create economic ripples for decades to come.

Vipal Monga wrote about this topic for “The Wall Street Journal” today and he joins us now to talk about that.

Welcome. Nice to have you here.

VIPAL MONGA, WALL STREET JOURNAL REPORTER: Thank you.

HERERA: You know, it seems to me there are really — there’s impact on two fronts. One, certainly, the money management business, but also the baby boomer who may not realize that it’s a mandatory and that it’s a taxable event.

MONGA: It’s true. A lot of baby boomers just think of them as 401(k)s or IRAs. They are tax deferred plans. That deferred means that tax bill is going to come due, so the million dollars or hundred thousand dollars, or whatever, that you think you have in your nest egg might actually be quite a bit smaller.

MATHISEN: So how much do people who hit that age of 70 1/2 for an IRA, an inherited IRA or a 401k, how much do they have on withdraw every year and will you be told that you have to do it?

MONGA: Well, your financial adviser should be telling you. The formula is based on IRS calculations. They base it on life expectations. At this point, anyone who reaches 70 1/2 has to withdraw about 3.65 percent of their assets in the 401(k)s or IRAs. That increases in increments the older you get. For those lucky enough to live to 90, it gets closer to 9 percent.

HERERA: Do you think that most baby boomers are aware of the implications of this? And if they don’t take withdrawal, I think in your article, you pointed out, it’s a 50 percent taxable withdrawal?

MONGA: It is a big penalty. Many of them are, but I’ve gotten a surprising amount of e-mails from people who are surprised by that and I think that — especially for the younger boomers, the ones born in ’64, I think, is the back end of that generation, they just haven’t thought about it. And it’s going to be a big bill.

MATHISEN: Is the tax withheld from your withdrawal or do you have to direct that it’d be withheld? In other words, let’s say I want a clear $50,000, do I tell them I want to take out 75 grand and they withhold, or do you know?

MONGA: Well, I don’t really know. But I think the way it works simply is you declare it in your income tax return and then that will sort of be calculated, with that mechanism.

HERERA: What are the implications for the industry, for the financial services industry? Because people will be taking their money out of the 401(k), I assume that they’re going to encourage them to reinvest them this time.

MONGA: They will. I mean, you have to remember the boomers were in many ways a 401(k) generation. The first generation that really started using the tax deferred funds en masse, and they saved a lot of money, earned a lot. And over the years, that’s really helped the asset management companies with income and what-have-you.

In any given year, right now, about 10 percent of 401(k) assets will shift around either by —

MATHISEN: Very quickly, Vipal, why do they have this rule?

MONGA: They have rule because at some point, the tax man wants his money.

MATHISEN: Wants the money.

MONGA: Yes, wants the money. I mean, the money was never men to be tax-free. It was meant to afford people an opportunity to save money and, you know, sort of avoid the tax bill right away.

HERERA: All right. Well, they should — everybody should check their 401(k) and make sure you know exactly how much you’re going to have.

Vipal Monga, thank you.

MONGA: Thank you.

Vipal is with the “Wall Street Journal.”

MATHISEN: And coming up, Instagram doubles down on ads to give rival Snapchat a little run for its money, just as it prepares to one of the biggest IPOs of the year.

(MUSIC)

MATHISEN: Twitter is officially shutting down Vine, the six-second video service will be replaced by a camera application instead. The new camera will let users create a short looping video and then share directly on Twitter.

HERERA: Facebook CEO was in court today. Mark Zuckerberg arrived at a Dallas courthouse in a suit. Not his usual, to defend his company against claims that it stole virtual reality company when it purchased Oculus. Facebook says the claims are without merit.

MATHISEN: Facebook’s Instagram is turning up the heat on rival Snapchat, going after its advertising revenue. And it comes as Snapchat, the popular app with teens and millennials, prepares to go public in what’s expected to be one of the biggest public offering this year.

Julia Boorstin has more.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: As Snapchat prepares to go public, expect to it file for an IPO as soon as March, a valuation of around $25 billion. Its much larger rival Facebook’s Instagram is launching ads in stories, a format that looks just like Snapchat stories, announcing that Instagram has 150 million daily users that story’s product after launching just five months ago.

VICTOR ANTHONY, AEGIS CAPITAL MANAGING DIRECTOR: It puts tremendous pressure on Snap to show number one, fast user growth. And number two, fast revenue growth. And so, you know, they’re direct competitors. They’re slightly different use cases. I think, you know, Snap is more video centric, I think, more so than Instagram is, but Instagram is moving in that direction quite rapidly.

BOORSTIN: And Instagram which already tested the new ad format with thrive advertisers, has an advantage being part of the behemoth parent Facebook which has more than 4 million active advertisers. Facebook makes it easy for marketers to buy and target ads across the two platforms.

While Instagram’s latest ad product sets the bar higher than ever for Snapchat to show growth, demands for snapping shares is still expected to be significant as investors and advertisers look for alternatives. The duopoly that control so much of the ad market, Facebook and Google parent alphabet.

ANTHONY: Advertisers are definitely looking for other avenues to where they could allocate their dollars. And the second part to that is really, you know, the audience for Snapchat is extremely younger than what you would find on a Google or on Facebook. So that’s appealing to advertisers as well.

BOORSTIN: And with digital ads compromising just 30 percent of worldwide ad sales last year, according to IHS Markit, analysts say there’s plenty of room for a arrange digital platforms to grow.

For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin in Los Angeles.

(END VIDEOTAPE)

MATHISEN: And as Snapchat gets ready to sell shares to the public, there are reports today that the founders of the company are structuring the IPO in such a way that they will retain control over the company.

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

MATHISEN: I’m Tyler Mathisen. Thanks for me as well. Have a great evening, everybody. And we will 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) 2017 CNBC, Inc.

 

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