Transcript: Nightly Business Report – January 26, 2017

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

extends its record gains, but it may be earnings that decide which way
stocks go next.

White House says a new border tax is one way to fund the project and it
could be aimed at all Mexican imports.

HERERA: Training your replacement. It`s not something anyone wants to go
through, but it`s happening at an American university.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Thursday,
January 26th.

MATHISEN: Good evening, everyone, and welcome.

The Dow pushed further into record territory today, but to keep stock
prices high or moving even higher, it will almost surely take rising
corporate earnings and that`s where we begin tonight with a number of late
day profit reports.

First up, alphabet. Earnings at the parent of Google (NASDAQ:GOOG) grew
from a year ago but were not as strong as analysts had hoped. The company
earned $9.36 a share. That was below expectations of $9.64. Revenue up 22
percent to more than $26 billion as advertisers spent more to reach users.
Shares however were down initially in after-hours trading as you see on
that graph and our Deirdre Bossa has more on Alphabet`s closure.

Hi, Deirdre.


Well, that`s right. You ran through the numbers. But here`s what it comes
down to — ad dollars are still Alphabet`s bread and butter, but perhaps a
little bit less so as the company, you know, transitions from modern
business era. Over the last quarter, Google`s other revenue which includes
things like its Cloud business, as well as hardware, as well as Google
(NASDAQ:GOOG) Play, its operating system, jumped more than 62 percent.

The takeaway is that Google (NASDAQ:GOOG) continues to make a lot of money
from online advertising, but it`s also investing in future businesses as
well on the earnings call. Google (NASDAQ:GOOG) CEO said that they`re now
focusing away from mogul into artificial intelligence. That is the focus.
Back over to you, guys.

MATHISEN: Deirdre report from a beautiful San Francisco. Thanks again.

HERERA: Meantime, Dow component Microsoft (NASDAQ:MSFT) reported a rise in
quarter profit driven by demand for its cloud business. The world`s
largest software company earned 83 cents a share, 4 cents better than
estimates. Revenue grew by a little bit more than 1 percent. Shares were
volatile in after-hours trading.

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


dollars, that was a big number in Microsoft`s latest report and that is the
company`s annualized revenue now for its commercial cloud business, and
that`s a jump from the last time it reported results.

Kirk Materne, an analyst at Evercore ISI, says that number shows that the
commercial cloud business is showing strong growth. He also points to its
profitability with gross margins for the business up 48 percent. Now, that
is a slight acceleration from the previous quarter when they came in at 49
percent and a bit below at least what some analysts had expected. Still,
Materne says this report shows that Microsoft (NASDAQ:MSFT) pivot back to
an earnings growth story remains on track.

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


MATHISEN: A stabilizing PC market helped Intel`s quarter, the world`s
largest chip maker, also saw an increase in demand for its data center
services. Earnings came in better than expected in the Dow component
reported a 9 percent rise in revenue to boot. Shares dipped and then rose
in extended hours trading.

HERERA: It was a weak quarter for Dow component Caterpillar (NYSE:CAT).
That company trimmed its sales outlook for 2017, potentially extending a
four-year decline. The heavy equipment maker said one reason for the soft
outlook was because of the strengthening dollar. Shares dropped almost 1

Morgan Brennan has more on Caterpillar`s quarter.


it wasn`t an earth moving quarter for Caterpillar (NYSE:CAT). The maker of
mining and construction equipment said sales are poised to fall for the
fifth straight year as sluggish global growth and falling commodities
prices have depressed demand for machinery.

In his first earnings call with investors, new CEO Jim Umpleby noted the
economic environment is still challenging and that President Trump`s
perspective policy changes won`t boost business until 2018.

JIM UMPLEBY, CATERPILLAR CEO: We continue to closely manage costs. We`re
also preserving capacity for a potential increase in business whenever that
comes. There are positive signs in many of our markets but we are not
anticipating an impact in 2017.

BRENNAN: But with commodity prices making a comeback, Wall Street`s raring
for a turnaround and with Trump ordering a border wall, green-lighting
pipeline projects and promising a trillion dollar infrastructure overhaul,
the stock has soared. Shares of Cat posted the biggest gains of the Dow
last year and the continued increase has helped catapult to the industrial
average above 20,000 this week. Analysts say today`s result show the hard
hit machinery market is stabilizing but there`s still a long way to go.

to get better, it`s going to get stronger and the outlook is far better.
It`s just doesn`t happen overnight.

So, when the stock markets been very aggressive in driving up stocks that
will probably benefit from policy changes and clearly, Caterpillar
(NYSE:CAT) is a bellwether. It just will take time to happen. So, right
now, investors clearly are paying for improvement in 2018-2020. Not what`s
going to happen in 2017.

BRENNAN: In other words, shares of Caterpillar (NYSE:CAT) may have gotten
ahead of themselves and while proposed policy changes could benefit the
company longer term, the Trump rally has also spurred strength in the
dollar, and that could be a headwind — pressuring commodity prices and
export sales.



MATHISEN: So far, about 146 companies in the S&P 500 have reported
quarterly results with profits and revenue on track to reach their highest
level in eight quarters a number of companies are also warning about future
earnings growth. So, how will earnings affect the market?

Brad McMillan is chief investment officer at Commonwealth Financial
Network, and he joins us now.

Mr. McMillan, Brad, good to have you with us.

So, how are we doing?

to be here.

MATHISEN: How are we doing? And are earnings good enough to support stock
prices where they are today at records?

MCMILLAN: We`re doing really well. We`re actually seeing earnings growth,
we`re seeing fast earnings growth as the quarters go on and there`s good
reason to believe it`ll be faster yet.

HERERA: And what is behind that? Because a number of companies I think
kind of softened their guidance perhaps worried about the strengthening
U.S. dollar or perhaps what the election might do to the economy, and some
of that has not played out very well?

MCMILLAN: I think part of this is the classic expectations management
game. What you have is the market is pricing in a lot of good news as just
said for Caterpillar (NYSE:CAT) and executives are trying to walk that back
to keep the expectations reasonable. They want it to be good, but it may
not be as good as people expect so they`ll trying to manage that.

MATHISEN: So, what are the standout sectors, Brad? And are they worth my
money right now?

MCMILLAN: Well, I think financials are the one thing that everybody`s
talking about and that`s absolutely justified when everybody knows it, how
much more surprise is there. The one thing I`m looking at is consumer
discretionary. I think that`s the one area that could really do much
better than people think.

HERERA: And you also like energy.

MCMILLAN: I do, but that`s a more of a longer term play, simply because
companies are still fighting to accommodate it. But the turnaround is
almost done and we`re just about there.

MATHISEN: Let`s cast out over the course of this whole year. We`re
looking — we`re sort of tracking for 6 percent earnings growth in the
recently closed quarter. What are you looking for in 2017 and might 2018
be even better if some of the employer corporate tax rates kick in by then?

MCMILLAN: I think 2017 is likely to be better. We`re probably looking at
earnings growth at least in the 10 percent to 15 percent range, maybe
better. I think the corporate tax is going to be a big part of that. That
could be the upside surprise that really helps matters along even further.

HERERA: Now, you also say utilities and industrials very quickly, might be
the laggards in this, why?

MCMILLAN: I think they`ve gotten ahead of themselves. I think there`s
been a lot of expectations built in and as we shift to more of a growth
type of market, they`re simply not going to show the growth that the
market`s going to want to see.

MATHISEN: All right, Brad. Thanks very much. Brad McMillan with
Commonwealth Financial Network.

MCMILLAN: Thank you.

HERERA: The Dow continues its rise one day after hitting 20,000 as
investors size up the latest rounds of earnings reports. Consumer stocks
climbed while health care and utilities lagged today. The blue chip index
added 32 points to 20,100. The NASDAQ and the S&P 500 were both off about
one point.

MATHISEN: New home sales drop sharply in December. The Commerce
Department reports that purchased of newly built single family houses fell
more than 10 percent last month. That was the steepest one month decline
since February. The decrease maybe an indication that rising prices are
keeping some potential buyers out of the housing market.

New home sales make a very small percentage of the overall housing market.

HERERA: The number of Americans filing for first time unemployment
benefits rose last week. According to the Labor Department, initially
jobless claims which is a proxy for layoffs across the country, increased
by 22,000 to 259,000. Despite the increase though, the overall level
remains near historic lows.

MATHISEN: Tomorrow, investors will get the first look in economic growth
in the first quarter of last year. President Trump said he wants to get
the economy going more than it is now, but he may have his work cut out for

Steve Liesman explains.


have the secret sauce to make the economy boom? CNBC took a detailed look
at times of the economy has grown more than 3 percent since 1990 and found
that Trump has the ingredients about half right.

First thing, the economy`s only grown more than 3 percent about a third of
the time since 1990. So, it`s pretty rare. Trump`s promise 4 percent,
even rarer.

The analysis shows that boom like growth requires an economy firing on all
cylinders. Consumer spending, which accounts for 65 percent of the economy
needs to support annual gains of 3.5 percent or better. But that`s not
even enough.

Productivity has to surge. It`s averaged 1 percent average since 2010. It
averages 2.7 percent during the boom years. But that`s also not enough.

Business spending and exports have to play vital role in getting the best
growth. Now, these are two areas where Trump has promised a focus with tax
cuts and deregulation.

he`s talking about doing speaks exactly what the economy needs. I think
certainly corporate tax reform is going to be very important to getting
business investment cranked off. I think businesses have been kind of
sitting and waiting to see.

LIESMAN: But Trump`s plan may be weaker in other areas. The analysis
shows government spending and imports also surge when the economy booms and
Trump`s policies may depress these areas, possibly limiting growth.

STANLEY: Obviously, there are other aspects that we have to watch out for.
Let`s see if he has success on the trade front. You know, that could be
very good or it could be very bad depending on how other country`s respond
to a — what I will call a more aggressive poster to trade negotiations.

LIESMAN: For investors the correct bid on strong growth can be lucrative.
During the nine years when the economy grew north of 3 percent, stocks
returned an average of 16 percent. So there`s reason to hope Donald Trump
gets the secret sauce right.



HERERA: Still ahead, why the rift between the U.S. and it`s southern
neighbor seems to be deepening.


MATHISEN: Ford Motor (NYSE:F) took a $200 million charge connecting to
closing its plant in Mexico. The cancellation contributed to a quarterly
net loss first since 2009. But if you exclude that charge, Ford recorded a
profit that matched analysts` estimates. Ford CEO met twice this week with
President Trump who praised Ford for abandoning its factory in Mexico.


MARK FIELDS, FORD CEO: I think we have the appropriate amount of assembly
plants here in the U.S. Of course, we`re always looking to grow our
business and use the assets that we have here even more. And, you know, we
had a very positive meeting with the president.

I mean, think about it, in the president`s literally first couple days in
office, he has said that he`s going to focus on the economy and both
manufacturing and automotive have been some of his first meetings. So, I
view that as very, very positive for the industry and the economy going


MATHISEN: Shares of Ford fell about 3 percent today.

HERERA: President Trump`s planned meeting with the president of Mexico has
been cancelled as tensions rise between the two countries.


myself have agreed to cancel our planned meeting scheduled for next week.
Unless Mexico is going to treat the United States fairly, with respect,
such a meeting would be fruitless and I want to go a different route. We
have no choice.


HERERA: The rift follows President Trump signing an executive order to
construct a border wall. And the White House press secretary says a new
perhaps 20 percent tax on all imports from Mexico would be one way to pay
for the wall, but that the financing is a work in progress.


SEAN SPICER, WHITE HOUSE PRESS SECRETARY: If you tax that 50 percent, $50
billion at 20 percent of imports which is, by the way, a practice that 160
other countries do right now, our country`s policy is to tax exports and
let imports, quote, “freely” in which is ridiculous. But by doing it that
way, we can do $10 billion a year and easily pay for the wall just through
that mechanism alone.


HERERA: The president and leaders from the Republican Party are at a
retreat in Philadelphia and that is where John Harwood is as well as

So, John, let`s start with the cancelled meeting. How damaging might be
this be to U.S./Mexico relations?

trade war. You heard the president in the byte you just played signaling
that we`re trying to cast it as a mutual decision, but this is clearly a —
something that is become a point of pride for Mexico to resist his
statement that Mexico`s going to pay for the wall.

And you just don`t know where that`s going to lead and what effect it might
have on the U.S. economy. Mexico`s a major trading partner of the United
States, and key part of the supply chain for American corporations and
we`re going to have to watch how this develops, whether it`s gets patched
over and what the effect are going to be on the potential renegotiation of
NAFTA which President Trump says he wants to do.

MATHISEN: Let`s talk about this import tax because it`s hard to get my
head around at the very least, John. Who actually pays it? Is it the
Mexican company that is sending the goods into this country or is it the
American consumer who`s going to pay higher prices because there`s a tax
built in to the product from Mexico that they buy?

HARWOOD: According to economic advisors that I talk to today, Tyler, from
both Republican and Democratic administrations, it would be substantially
the American consumer who would pay that fee. Nevertheless I did talk to
Republican member of Congress late in the day who said he thought the votes
would be there if, in fact, that`s what Mr. Trump wants to do.

The House Republicans are eager to cast this as consistent with their
border adjustment tax, but there`s a complication there. There`s a
question of ever whether the World Trade Organization would include this
border adjustment tax as compliant with our trade commitments and casting
it as a means of extracting money from Mexico would complicate that case.

HERERA: Yes. What if anything was said today about tax reform and perhaps
the move to repeal and replace Obamacare?

HARWOOD: Well, these are really key subjects of division within the
Republican caucus, Sue. They`ve got to agree on, is there going to be a
full replacement for Obamacare, how quickly is that going to come? Are we
going to have a reform of the individual tax code, as well as the corporate
code or only corporate? Are either of these things going to be deficit
neutral? Are they going to expand the deficit?

I talked to a Republican member of Congress afterwards who said even in a
closed door meeting, not a lot of new ground, not a lot of details. So,
Republican lawmakers who were expecting clues from the president today did
not get them.

HERERA: On that note, John Harwood in Philadelphia — John, thank you as

MATHISEN: Well, Johnson and Johnson plans to buy a Swiss biotech company
for $30 billion and that`s where we begin tonight`s “Market Focus”.

The health care giant said it will acquire Actelion in a deal; that will
add to J&J`s rare disease drug portfolio and potentially strengthen sales.
As part of the merger, Actelion will spin off its research and development
unit. J&J shares were off a fraction on the session at $111.84.

Well, “The Wall Street Journal” says that the telecom giant Verizon
(NYSE:VZ) approached cable provider Charter Communications (NASDAQ:CHTR)
about a potential tie-up. But CNBC citing sources the two companies are
not in significant talks. Verizon (NYSE:VZ) and Charter have not commented
on the news. Charter shares up 7 percent at $333.15. Verizon`s down about
1 percent at $49.12.

And Mattel (NASDAQ:MAT) shares continued to dive after the toymaker said
late yesterday that the difficult holiday season caused results to miss
estimates. Today, MKM Partners downgraded Matte`s stock to neutral, and
cut it`s price target to 27 bucks, down from 36. The firm cited a slowing
turn around, rising input costs, and the company`s unfavorable product mix.
Mattel (NASDAQ:MAT) shares plunged 17 percent to $25.99.

Meantime, Southwest Airlines (NYSE:LUV) said higher fuel and labor costs
caused its profit to fall, but results were still good enough to beat
expectations. Company also posted better than expected sales and CEO Gary
Kelly said several factors contributed there.


GARY KELLY, SOUTHEAST CHAIRMAN & CEO: We had strong traffic, a strong load
factor, and then also a strengthening affairs, especially in December. So,
the combination was an improvement of about a percentage point in revenues.
So, it was very meaningful.


MATHISEN: Shares rose 9 percent to $53.92.

HERERA: Northrop Grumman (NYSE:NOC) said higher volumes of it`s F-35
fighter jets and other aircraft helped sales rise and beat estimates. The
defense contractor also posted better than expected profit, but gave weak
earning guidance for the year. The shares fell more than 1.5 percent to

And increase in home sales and higher average selling price have Pulte
Group topped expectations. The home builder also said it expects to see
continued growth despite rising interest rates. The shares were up more
than 3 percent to $21.18.

And Whirlpool (NYSE:WHR) posted flat quarterly profit as the maker of home
appliances said the worse than expected results were hurt by currency
headwinds, particularly a falling British pound, as well as weakness in
overseas market. But overall, sales did grow and came in above
expectations. Whirlpool (NYSE:WHR) shares fell more than 8 percent though
to finish out at $173.94.

Starbucks (NASDAQ:SBUX) saw same store sales rise both domestically and
globally in its latest quarter, but both results fell short of analysts
expectations. The coffee chain also missed revenue estimates while its
earnings were pretty much in line. Shares initially fell after hours and
ended the regular session down a fraction to $58.46.

MATHISEN: Coming up, the growing backlash at a California university over
its decision to offshore jobs.


HERERA: Here`s a look at what to watch for tomorrow. Dow component
Chevron (NYSE:CVX) reports earnings. Investors will be looking to see if
the company is ramping up major projects and what that means for production
growth. And the first read on fourth quarter economic growth is due out,
and President Trump welcomes his first foreign leader to the White House,
UK Prime Minister Theresa May. A bilateral trade deal is expected to top
the agenda. And that`s what to watch for on Friday.

MATHISEN: Securities and Exchange Commission fines Citigroup (NYSE:C) $18
million for overbilling investment advisory clients. The agency says the
bank overcharged at least 60,000 customers over a 15-year period. Citi has
agreed to improve it`s fee billing and books and record practices. Those
affected have been reimbursed.

HERERA: Investors pulled the most cash from U.S. stocks fund since the
election. According to the Investment Company Institute, withdrawals
totaled more than $3.5 billion during the latest week. That`s the largest
outflow since early November. Meantime, taxable fund bonds added more than
$3.5 million. That`s it seventh straight week of gains.

MATHISEN: Imagine your high paying job is being outsourced to a lower
paying country. Now imagine you have to train your replacement. It`s
something the president has railed against and something that`s currently
happening at a well-known American university.

Aditi Roy has our story from San Francisco.


Robert Harrison, a 57-year-old senior telecom energy at UCSF, will be out
of a job. He will be replaced by an offshore worker.

ROBERT HARRISON, UCSF EMPLOYEE: It`s been a very demoralizing position to
be in, to know that we`re coming to work to a company that`s going to ship
our jobs out to people in India.

ROY: Harrison who`s worked at the university for two and a half years is
one of 49 career employees and 30 contractors who are being replaced by
offshore workers. The UC system signed a contract with HCL, an Indian
outsourcing company, to fill the positions. The employees spoke out this
morning during a regularly scheduled UC board of regents meeting.

The cuts are part of a cost cutting program that UC officials say will save
UCSF $30 million over five years. It`s an issue that is made national
headlines. It once again brings to the spotlight the H-1B visa program, an
issue President Trump has spoken out about and the need to reform it.

The program brings 85,000 workers to the U.S. It`s designed to attract
highly skilled foreign workers for jobs there aren`t enough qualified
American workers to fill. But critics of the program argued since it
doesn`t require firms to recruit American workers first, it makes it easier
for them to replace those workers with cheaper foreign counterparts.

Officials say while several workers on H1B visas were brought in to help
with the transition right after the cuts were announced, officials say they
have since not used H1B workers and have no plans to do so. “The L.A.
Times” says the program has been co-opted by outsourcing firms that use the
visas to import workers mostly from India to replace Americas in middle
level IT jobs and many outsourcing firms, including HCL, grab about half of
all the H1Bs issued every year.

Adding more volatility to the politically charged issue, the cuts were
approved by UC President Janet Napolitano, the former secretary of the
Department of Homeland Security. But under a loophole in the visa law,
displaced UCSF tech workers like Kurt Ho are training their replacements.

KURT HO, UCSF EMPLOYEE: It`s very uncomfortable. We`re essentially
training this person to replace us and you`re going to take over our jobs.

ROY: It`s just the latest high profile case of American workers training
their off shore replacements.

In 2015, Disney (NYSE:DIS) reportedly laid off workers and required some of
them to train their replacements. And PG&E just announced it is cutting
180 jobs and the company`s offshoring 70 of those jobs. One hundred and 10
displaced workers have also been asked to train their replacements.
Meanwhile, workers like Harrison are speaking out and worrying.

HARRISON: What am I going to do? I lay awake at night wondering, what the
heck am I going to do?

ROY: The workers last day is February 28th. UC officials say the other
nine UC campuses also have the option of using the same outsourcing firm to
cut costs. However, at this point, none of the other campuses have
exercised that option.

For NIGHTLY BUSINESS REPORT, I`m Aditi Roy, San Francisco.


HERERA: Something to keep our eye on. We`ll be following that story.

MATHISEN: Absolutely.

HERERA: All right. On that note, that is NIGHTLY BUSINESS REPORT for
tonight. I`m Sue Herera. Thanks for joining us.

MATHISEN: I`m Tyler Mathisen. Thanks from me as well. Have a great
evening, everybody. We`ll see you 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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