Transcript: Nightly Business Report – January 27, 2017

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

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: World stage. President
Trump meets with Britain`s prime minister, cheering Brexit, and talks by
phone with Mexico`s president. The key topic: building a bridge about that
wall.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Paying the price. The
president has floated raising taxes on Mexican imports. But who really
picks up the tab? The economics of a border tax.

MATHISEN: And going private. A pledge to spur a trillion dollars in
infrastructure spending is on the table. Are public/private partnerships
the way to get more done quicker and cheaper?

All that and more tonight on NIGHTLY BUSINESS REPORT for Friday, January
27th.

HERERA: Good evening, everyone. And welcome.

President Trump capped his first week in office by welcoming his first
foreign leader visit to the Oval Office, U.K. Prime Minister Theresa May.
At a press conference, the two leaders said the two countries had a special
relationship. They emphasized their close ties and discussed Russian
sanctions, the future of the NATO military alliance and trade.

(BEGIN VIDEO CLIP)

DONALD TRUMP, PRESIDENT OF THE UNITED STATES: I think Brexit will be a
wonderful thing for your country. I think when it irons out, you`re going
to have your own identity and you`re going to have the people that you want
in your country and you`re going to be able to make free trade deals
without having somebody watching you.

(END VIDEO CLIP)

HERERA: But focus quickly turned to Mexico and the relationship between
the two countries. Today, President Trump and Mexican President Enrique
Pena Nieto spoke by phone for about an hour. The conversation described as
friendly, just one day after the tensions over the building of a border
wall escalated.

Michelle Caruso-Cabrera reports from the White House.

(BEGIN VIDEOTAPE)

MICHELLE CARUSO-CABRERA, NIGHTLY BUSINESS REPORT CORRESPONDENT: It was a
day of twists and turns in the relationship between the president of the
United States, Donald Trump, and the president of Mexico. We learned that
they both had an hour-long phone call to discuss what`s happened over the
last couple of days.

Here`s how President Trump described that phone call in his news conference
today with the U.K. Prime Minister Theresa May.

TRUMP: We have a really, I think, a very good relationship, the president
and I. And we had a talk that lasted for about an hour this morning. And
we are going to be working on a fair relationship and a new relationship.

But the United States cannot continue to lose vast amounts of business,
vast amounts of companies, and millions and millions of people losing their
jobs. That won`t happen with me. We`re no longer be the country that
doesn`t know what it`s doing.

CARUSO-CABRERA: However, even though President Trump says they have a
great relationship, he then went on to criticize Mexico.

TRUMP: Mexico with the United States has out-negotiated us and beat us to
a pulp through our past leaders. They have made us look foolish. We have
a trade deficit of $60 billion with Mexico. On top of that, the border is
soft and weak, drugs are pouring in, and I`m not going to let that happen.

CARUSO-CABRERA: Both the White House and the Mexican government put out a
joint statement later in the day echoing the relationship is important.
One difference between two statements? The statement from the Mexican
government was much more explicit in saying that two presidents had agreed
not to speak publicly about who was going to pay for the wall.

For NIGHTLY BUSINESS REPORT, Michelle Caruso, at the White House.

(END VIDEOTAPE)

MATHISEN: And as Michelle just said, getting Mexico to pay for a border
wall remains a source of serious friction between Washington and Mexico`s
President Pena Nieto. One idea is a 20 percent border tax on Mexican
products entering the U.S.

And as you might expect, former Mexican President Vicente Fox thinks that`s
a bad idea.

(BEGIN VIDEO CLIP)

VICENTE FOX, FORMER PRESIDENT OF MEXICO: You don`t play around with
Mexico. If you want to tax 20 percent, you are really taxing corporation
importing cars from Mexico. That`s what you say that you`re getting the
money to pay the wall. You`re getting it from the pockets of U.S.
citizens, pockets of U.S. workers, from the pockets of U.S. taxpayers.

(END VIDEO CLIP)

MATHISEN: So what are the economics of a border tax?

Mauro Guillen is global economics professor at the University of
Pennsylvania here to shed some light.

Professor Guillen, welcome. Good to have you with us.

So, is Mr. Fox right? How is Mexico paying for a wall via a border tax if
that tax is paid by U.S. importers and ultimately passed on to U.S.
consumers?

MAURO GUILLEN, UNIVERSITY OF PENNSYLVANIA ECONOMIST: Well, essentially
yes. The former President Fox was correct in that the first this effect
here is that ultimately the U.S. consumer will be paying for it.

But there will be, of course, some substitution. That is to say some U.S.
consumers who would say, well, we had a 20 percent increase because of
tariff, I`m no longer going to buy this car or this TV set from Mexico.
I`m going to buy from somewhere else.

But there is no guarantee that that somewhere else will be an American
producer. It could be a Chinese company or it could be a South Korean
firm, or something else. So, you know, the effects of a across the board
tariff would be so complicated and I don`t think anybody right now, today,
is in a position to say exactly where they would be.

HERERA: Professor, there are other companies who have a similar, maybe not
exactly structured the same way that is being proposed or as high as being
proposed. Do we have any sense of how that has played out in those other
companies and whether ultimately consumers ended up paying the price for
it?

GUILLEN: Well, the immediate impact is to create a lot of confusion, a lot
of uncertainty. Remember that a lot of American firms have created jobs,
both in the United States and Mexico, assuming free trade between two
countries. So, in the short return, the effect would be confusion, it
would be uncertainty, it would be disruption.

Over the long run, of course, you can imagine some American firms and some
American workers would benefit from protection, right? Because a tariff is
protection. But that tax could be a great benefit for some but a big harm
to most. People here in the United States.

And, by the way, protection encourages laziness, that is to say people and
companies in the United States, if they`re protected, they`re not going to
work as hard, they`re not going to be as productive, they`re not going to
be as innovative.

So, I think we here in the United States by imposing a tariff on a
developing country, really an emerging market like Mexico, we would be
shooting ourselves in the foot in the long run.

MATHISEN: You can say that the fact that American automobiles have had to
compete with imported automobiles has made those automobiles better in
terms of quality than they were.

Let`s take it away from the context of U.S. putting a 20 percent tax, or
tariffs, or border adjustment on Mexico and talk more broadly about the
idea that is the floating around Capitol Hill of a kind of global border
adjustment tax. It would not merely target Mexico but everyone.

And a lot of countries have this. I was speaking earlier today to
Professor Navarro, who`s now on the White House staff, and he cited the
example of Germany. When a U.S. car is brought into Germany, they put a 20
percent VAT on that American car. Well, they also have a 20 percent VAT on
German-made cars. The difference is we don`t have a 20 percent vat on an
incoming Audi or Mercedes-Benz made in Germany.

How would all this shake out?

GUILLEN: Well, the vat is a value added tax. And we don`t have a value
added tax in the United States. But as you know, every state with a few
exceptions charges a sales tax. So, there is a tax that gets charged on
both U.S.-made cars and imported vehicles, right?

But the problem here once again is that is one moving part, is what taxes
you impose. But the other is currencies, right? So one thing from the
Trump administration has achieved over the last few days is to prop up the
value of the dollar, right? I mean, really, given since the election, and
Mexican peso has lost value.

But you see, the Mexican peso has lost, let`s say, 16 or 18 percent of its
value since Trump was elected. That means everything made by Mexico
suddenly has become so much more attractive to the U.S. consumer. So, this
is one of the ironies of this whole situation, that even imposing a 20
percent tariff right now would only serve to level the playing field
relative to where the peso-dollar exchange rate was a few weeks ago.

So, what I`m trying to say that there are so many moving parts here. This
is so complicated. And I think we are over-simplifying things. And in
particular, I think this proposal by the administration, you know, with no
provocation on the Mexican side whatsoever, I think, you know, are not
conducive to the supporting or promoting the best interests of the United
States.

MATHISEN: Professor Guillen, thank you so much for e enlightening us
tonight. Professor Mauro Guillen with the University of Pennsylvania.

HERERA: Economic growth stumbled in the fourth quarter. Gross domestic
product expanded at 1.9 first for the last three months of 2016. That was
below expectations and well off the 3.5 percent growth rate in the third
quarter. A sharp decline in exports and slower consumer spending
contributed to the lackluster growth. Overall, 2016 was the weakest year
for growth since 2011.

MATHISEN: Consumer confidence soared to its highest level in 12 years.
The increase reflects ongoing optimism about policies out of Washington and
their potential impact on growth. According to those who compile the
University of Michigan index, consumers also feel more confident about
their own financial situations.

HERERA: On Wall Street, that disappointing GDP number put a damper on
things, as did poor results from Dow component Chevron (NYSE:CVX). We`ll
have more on that in a minute.

All in all, the stocks ended the day on the mixed side. The Dow fell seven
points to 20,093. The NASDAQ rose 5. And the S&P 500 was off just about
2. But for the week, all three indexes were up better than 1 percent.

MATHISEN: The Dow component Chevron (NYSE:CVX) reported disappointing
quarterly results. The company swung to a profit, thanks to rising
commodity prices and cost cuts. But it`s still fell way short of
expectations. Revenue below what analysts were expecting. The CEO at
Chevron (NYSE:CVX) says the company`s well-positioned to improve earnings
and that the dividend remains a top priority. Shares dropped more than 2
percent on the session at $113.79.

HERERA: General Dynamics (NYSE:GD) reported a better than expected
quarterly profit. The defense company says it expects sales growth to
accelerate towards the end of the decade. Also, a lead contractor on the
Navy`s new $125 billion nuclear missile submarine program. Yesterday, the
president said that the country needs more submarines but he wants to buy
them at a lower cost.

MATHISEN: Defense Secretary James Mattis ordered reviews of both Lockheed
Martin`s F-35 program and Boeing`s Air Force One project. He wants to
identify areas where costs can be reduced and those may not be the only
changes ahead for the industry during the Trump administration`s first 100
days.

Morgan Brennan has our report.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Trump
administration will certainly shake up the defense industry, bringing
bigger opportunities and bigger risk. The opportunities President Trump
promises to rebuild America`s military, scrap the budget caps imposed on
defense spending, and develop a, quote, “state-of-the-art missile defense
system.”

The risk? A tweet from the president saying your weapons system is too
expensive. Analysts say it will come down to the budget and the budget is
still far from decided.

CARTER COPELAND, BARCLAY`S MANAGING DIR., AEROSPACE & DEFENSE: I think the
interesting question would be, how much of a push will be, will it be from
the administration to see how much they can get out of each and every
dollar spent toward that military. The trend here is one that says higher
spending probably benefits most if not all of the military accounts, and
benefits most if not all of the contractors.

BRENNAN: Expected incoming weeks, the 2017 defense appropriations bill
which will reflect how much lawmakers are willing to spend this year and
set the stage for the president`s 2018 proposal expected in spring. But
while experts do anticipate more defense dollars, how they`re spent will be
scrutinized. As defense hawks like Senator John McCain square off with
fiscal ones, including OMB designate Mick Mulvaney.

That`s already affected Lockheed Martin (NYSE:LMT). Trump`s criticism of
the cost of the F-35 Joint Strike Fighter Program was front and center on a
call with investors today — as CEO Marillyn Hewson stressed the jet`s
falling price and the job opportunities the program is creating.

MARILLYN A. HEWSON, LOCKHEED MARTIN CHMN. & CEO: The meetings have been
very productive, very good dialogue. He asks excellent questions and he is
really focused on making sure that the cost comes down on the program. And
it`s not about slashing our profit, it`s not about our margins when we have
those discussion. It`s about how do we get the cost of the aircraft down
today and in the future.

BRENNAN: And that will be key, especially since the Pentagon is launching
revenues to find ways to save money on the program and seeing if a
competing plane from Boeing (NYSE:BA) could, with improvement, potentially
be used as an alternative. All of this amid a busy week for defense
earnings.

COPELAND: There are some open questions in terms of how large will the
budget be, what are the risks in terms of, you know, program costs and
reforms and whatnot. But I think it`s too early to answer a lot of those
questions. And so, we`re expecting earnings to have a quiet and calm feel
in the defense space. But by no means do we have that will persist by the
remainder of the year.

BRENNAN: And if President Trump`s first week in office is any indicator,
it could be a very busy year.

For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan.

(END VIDEOTAPE)

HERERA: Coming up, this week`s market monitor has a couple big name for
your portfolio and he says it`s all about the balance sheet.

(MUSIC)

HERERA: Miami-Dade has become the first metropolitan area to comply with
President Trump`s call for an end to sanctuary cities. Miami-Dade Mayor
Carlos Jimenez ordered county jails to fully cooperate with federal
immigration officials. That decision comes after President Trump signed an
executive order that could result in the elimination of federal funding for
local government that do not comply.

The sanctuary city designation is an informal one. Governments are
generally considered sanctuaries if local officials refuse to hold on to
suspected undocumented immigrants while federal agents figure out their
status.

MATHISEN: Los Angeles is also considered a sanctuary city. The mayor of
the country`s second largest metro area has sharply criticized President
Trump in the past. But now, he says there may be some areas where the two
can find common ground.

Julia Boorstin spoke to L.A. Mayor Eric Garcetti.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Los Angeles Mayor
Eric Garcetti is working to expand the city`s economy and a key part of
that is his commitment to immigrants. Garcetti saying that 61 percent of
the new businesses in the city are started by immigrants and he knows
firsthand how immigration policies are key to helping a city grow.

MAYOR ERIC GARCETTI (D), LOS ANGELES: Here in Los Angeles, if it was so
bad, we would be so affected, we would be the first to say, please keep
them out. But on the contrary, we`ve seen a huge economic boom in large
part linked to those activities.

BOORSTIN: Garcetti says he was hopeful after a conversation with the
president.

GARCETTI: He said he was keeping a very open minded. He wanted to fix a
large system that he also acknowledged was broken. So, there`s room for
common ground.

BOORSTIN: The question now, what happens if President Trump follows
through on his threat to withdraw half a billion dollars in federal funding
from the city?

Though Los Angeles is not technically a sanctuary city, Mayor Garcetti
won`t use city officials to enforce a federal immigration crackdown.

Mayor Garcetti says he is confident in his position defending immigrants,
not just ethically and practically, but also legally, and he is willing to
take action.

GARCETTI: Well, I think we`re on very secure ground. The United States
Constitution says you can`t put a federal financial gun to the head of
states and tell them what to do in exchange for funding. That was
established by Justice Roberts just last year in the Supreme Court case on
the Affordable Care Act.

BOORSTIN: Garcetti is also watching President Trump`s proposal of a tax on
Mexican goods, saying it would absolutely have a negative impact on the
city`s port.

GARCETTI: One out of nine jobs depends on the port of Los Angeles and the
port of Long Beach here in the L.A. region. We can even point globally,
more than one out of every 200 jobs in this nation comes from the port of
L.A. So, we want to make sure that that is a great gateway for trade not
just into the country, but also out of the country.

BOORSTIN: Now, we`ll see if President Trump comes to agree with Garcetti
on the value that immigrants and free trade bring to the economy.

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

(END VIDEOTAPE)

HERERA: American Airlines hits its targets and that`s where we begin
“Market Focus”.

Earnings at the airline are matched Wall Street estimates but net income
plunged because of a $3 billion tax benefit the company booked last year.
American did report better than expected sales, as well as higher unit
revenue and said that it expects the key metric will remain positive
through this year. But American did say labor costs had spike due to new
contracts and warned that those costs will rise sharply again in the
current quarter. Shares fell 5 percent to $46.95.

Honeywell said weakness in its aerospace business caused earnings to fall
more than expected. But earnings matched estimates and the company
reaffirmed its guidance for the year. Shares rose a fraction to $118.42.

Colgate-Palmolive (NYSE:CL) said the strong dollar hurt its results. The
consumer products giants saw sale fell more than analysts were expecting,
while its lower profits came in in line with estimates. Shares were off 5
percent to $64.68.

MATHISEN: After the bell, the home improvement retailer Lowe`s said it
authorized a new $5 billion share buyback program. The company said the
new amount would be tacked on to the previous program`s existing balance.
Shares initially rose after the news, finished the regular session up 2
cents at $73.25.

The industrial gases company Air Products said strength in its Asia market
and higher volumes helped lift sales. But profit fell and the company cuts
its full year earning forecast. Air Products also raised its quarterly
dividend by more than 10 percent to 95 cents a share. Nevertheless, shares
fell nearly 5 percent to $142.01.

And shares of Wynn Resorts (NASDAQ:WYNN) continued to rise after the casino
operator said late yesterday that strong results in its new Macao property
led to higher than expected sales and today, Instinet upgraded Wynn to
neutral from reduce and also raised its price target to $99 up from $79.
Wynn Resort shares rose almost 8 percent to $103.08

HERERA: Our market monitor likes health care and energy stocks. Two
sectors he says have underperformed in the last two to three years but
that`s apparently about to challenge. This is his first time joining us on
the program.

Let`s welcome Michael Liss, senior portfolio manager at American Century
Investments.

Michael, nice to have you with us. Welcome.

MICHAEL LISS, AMERICAN CENTURY INVESTMENT SR. PORTFOLIO MGR: Well, good
evening. It is great to be here and thanks for the opportunity to join you
on your show.

HERERA: Excellent. Well, you`ve given us some very interesting picks.
So, let`s get right to it.

The first one is Zimmer Biomet holdings, obviously, in the health care
sector. But what in particular does this company do and why do you like
it?

LISS: Sure. So, Zimmer is a manufacturer of artificial hip and knee
implant. And the company has got high returns on capital. We think those
returns on capital are sustainable. Because there are high barriers to
entry to keep out competitors.

The company bought Biomet in June of 2015, and we think they have a great
opportunity to take costs out of the system and take already high returns
on capital modestly higher from here. Their priority with their free cash
flow is to pay down the debt from that acquisition. We think that`s the
right thing to do.

So, you`ve got a company with high returns on capital. We think they`re
sustainable and a very good valuation — achieved valuation so we think
it`s a good risk/reward for our clients.

MATHISEN: Let`s move on to pick number two, which couldn`t be about as far
from artificial hips and knees as you can get.

LISS: That`s true.

MATHISEN: And that would be Total, the big oil — integrated oil company.
Tell me why.

LISS: Sure, Tyler. So, Total is relative to other energy-related
companies. It`s less cyclical and it`s got a good mix of upstream and
downstream businesses. So, between 2010 and 2014, the company engaged in a
major investment cycle, developing additional oil and gas properties. As
those assets continue to come on stream, we think that their buy-ins will
be able to grow in the mid to low single digits the next several years.

And so, their cash flow from operation can start to accelerate. And since
they`ve hit the peak of their investment cycle, capex requirement should
fall pretty precipitously from here. So, you`ve got a situation where cash
flow from operations is accelerating. Capex is falling. And it should
result in accelerated free cash flow for shareholders. If you combine that
with a very good balance sheet able to withstand the rigors of the energy
cycle and a dividend yield north of 5 percent, we think it`s a pretty good
risk/reward for our clients.

HERERA: And finally, Pfizer (NYSE:PFE).

LISS: Sure. So, Pfizer (NYSE:PFE) has high returns on capital and we
think that they`re stable and sustainable because they have a broad variety
of branded drug products. The company has a very good pipeline and they
generate a lot of free cash flow and that free cash flow really allows them
to enhance shareholder value to increasing dividends, stock buybacks and
engaging in strategic acquisitions.

In addition, they`ve got a very good balance sheet, and that balance sheet
allows them the optionality to engage in strategic acquisitions to enhance
shareholder values. So, again, here`s a company with high returns on
capital that we think are very stable, trading at a very cheap valuation
and a dividend yield just north of 4 percent. We think that`s also a
pretty good risk/reward for our clients.

HERERA: All right. On that note, Mike, I want to note that you and your
team were recently nominated for Morningstar`s 2016 Domestic Stock Fund
Manager of the Year Award. So, congratulations. Thanks for joining us and
have a great weekend.

LISS: Thanks, Sue. You too.

HERERA: Michael Liss.

MATHISEN: And coming up, what can jumpstart President Trump`s
infrastructure plan? One possible answer to that trillion dollar question
is next.

(MUSIC)

HERERA: And here`s a look at what to watch for next week. ExxonMobil
(NYSE:XOM), Pfizer (NYSE:PFE), Apple (NASDAQ:AAPL) and Visa (NYSE:V), just
a few of the Dow components scheduled to report their earnings. Federal
Reserve policy makers meet next week to discuss the direction of interest
rates and the Labor Department will release its monthly employment report
for January, and that`s what to watch for next week.

MATHISEN: Union membership has fallen to its lowest level on record.
According to the Labor Department, the share of American workers in unions
fell for both private and public sector employees last year. That`s the
first overall decline in four years, part of the decline due to the
decrease in manufacturing jobs.

HERERA: A major focus in the White House is to fix the nation`s
infrastructure. To do that, President Trump has proposed spending $1
trillion. But the question is, how will that get paid for?

Jane Wells is in Long Beach, California, with one possible idea.

(BEGIN VIDEOTAPE)

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT: This half billion
dollar Civic Center being built for the city of Long Beach is not being
funded by a big bond. It`s not taking a decade to decide, permit and
build. It`s being done in three years and not costing taxpayers much of
anything.

MAYOR ROBERT GARCIA (D), LONG BEACH, CA (NASDAQ:CA): There`s risk in any
project. So, there`s always some level of risk. But the benefit
dramatically outweighs any sort of risk that we could take on a project
like this.

WELLS: Long Beach is getting its city hall through a public/private
partnership, or a so=-called P3. A private company called Plenary
Concessions is building the facility and essentially leasing it back to the
city for the next 40 years for about the same cost as running and
maintaining the old city hall. Oh, and the company is getting the old city
hall as part of the deal which it will tear town and redevelop.

Public/private partnerships are popular outside the United States, but
they`re relatively new here, mostly because we`ve also had a strong
municipal bond market. But now, some governments are coming up against
their bond limits and President Trump wants to provide federal tax
incentives to spur more P3 projects.

P3s have an uneven record. For example, this toll road in Indiana went
bankrupt, continuing to operate until it was bought by an Australian group.
But Plenary Concession is having success with dozens of projects around the
world, like rebuilding hundreds of bridges in Pennsylvania, and the Long
Beach project.

DALE BONNER, PLENARY CONCESSIONS EXECUTIVE CHAIRMAN: Some of the projects
that were delivered earlier in this format were what you might think of as
aspirational. That some city leaders or government leaders thought if you
built something, that it might generate growth or economic activity in a
certain region and when the economy changes or things developing patterns
change, it doesn`t always work out that way.

WELLS: But Bonner says Long Beach will always need a city hall and P3s are
attracting investments from public pension funds. PWC says nine projects
totaling billions of dollars closed in the first three quarters of last
year. And if the president comes through on tax incentives for
infrastructure, Moody says the United States could become the P3 capital of
the world.

For NIGHTLY BUSINESS REPORT, Jane Wells, Long Beach, California.

(END VIDEOTAPE)

HERERA: And that will do it for NIGHTLY BUSINESS REPORT tonight. I`m Sue
Herera. Thanks for joining us.

MATHISEN: Thanks from me as well. I`m Tyler Mathisen. Have a great
weekend, everybody.

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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