Transcript: Nightly Business Report – February 10, 2017

ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue
Herera.

Funded in part by —

(COMMERCIAL AD)

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Up, up and away. With the
major averages and new highs, should investors start picking stocks for the
best returns?

Trade talks. Japan`s prime minister heads to the White House as the
world`s first and third largest economies had try to forge a new economic
relationship.

Oil rush. Prices have more than doubled in a year. But what happens next
is a little less clear.

Those stories and more tonight on NIGHTLY BUSINESS REPORT, for Friday,
February 10th.

Good evening, everyone. I`m Sue Herera. Tyler Mathisen is off tonight.

Investors end the week on a high note. The three major averages push
further into record territory. The climb started yesterday with talk of
tax cuts and continued today when president Trump mentioned infrastructure
investment during a visit with the Japanese prime minister. The Dow Jones
Industrial Average added 96 points to 20,269. The NASDAQ added 18 and the
S&P 500 was up 8. For the week, stocks were higher across the board.

And as Morgan Brennan reports, the focus is squarely on Washington.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Trump reflation
trade is alive and well. That is investors are betting that President
Donald Trump`s policies will lift inflation and growth. It was evident
today during a meeting at the White House between the president and the
Japanese President Shinzo Abe. The two discussed plans for infrastructure
spending and investments spurring U.S. manufacturing.

But that gave materials to defense and aerospace and other industrial
stocks a boost, lifting names like Freeport McMoRan and Vulcan Materials
(NYSE:VMC) to new highs. Lately, the markets have risen on just the mere
mention of tax reform or infrastructure spending. But when issues like
immigration and trade wars are on the table, they tend on drift slightly
lower, suggesting the path of least resistance for stocks is higher, at
least for right now.

Today, Trump seemed to alleviate investors concerns of any tensions with
either China or Japan. The world`s second and third largest economies,
saying he had great respect for both countries and, quote, “very warm
conversations with both nations` leaders.”

Another issue for the markets: earnings. And next week will bring a lot
more of them and that along with Washington could determine the direction
of stocks.

For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan at the New York Stock
Exchange.

(END VIDEOTAPE)

HERERA: And as Morgan just reported, the U.S.-Japan economic relationship
was indeed on display today at the White House. Trade between the two
countries is worth nearly $270 billion. So, there`s a lot at stake for
both sides.

Eamon Javers reports.

(BEGIN VIDEOTAPE)

EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: With a handshake and
a hug, President Trump welcomed Japanese Prime Minister Shinzo Abe to the
White House today, kicking off a weekend of diplomacy.

DONALD TRUMP, PRESIDENT OF THE UNITED STATES: We faced numerous challenges
and bilateral cooperation is essential. Our country is committed to being
an active and fully engaged partner.

JAVERS: The backdrop to this session was the relationship that both
countries have with China. Although Donald Trump`s phone call with Chinese
President Xi Jinping last night seems to have smoothed things over for now.

TRUMP: I had a very, very good conversation, as most of you know,
yesterday with the president of China. It was a very, very warm
conversation. I think we are on the process of getting along very well and
I think that will also be very much of a benefit to Japan.

JAVERS: While Prime Minister Abe did not directly address China in his
East Room remarks, he did allude to global trade frustrations in his speech
before the Chamber of Commerce earlier today.

SHINZO ABE, JAPANESE PRIME MINISTER (through translator): Look at steel.
Overproduction in a certain country has not ceased. And as a consequence,
increased in export results in a depressed price for steel worldwide.

JAVERS: Meanwhile, the president seemed to offer a prediction of sorts for
global currency markets.

TRUMP: As far as the currency devaluations, I`ve been complaining about
that for a long time and I believe that we will eventually and probably
very much sooner than a lot of people understand or think, we will be all
at a level playing field. But it has to be fair. And we will make it
fair.

JAVERS: The two leaders departed for a weekend at Mar-a-Lago dubbed the
winter White House where they are expected to continue their discussions.

The president will be personally paying for this trip to Florida. It is
being described as gift from the president to the prime minister and his
wife.

For NIGHTLY BUSINESS REPORT, I`m Eamon Javers at the White House.

(END VIDEOTAPE)

HERERA: One specific conversation between President Trump and Japan`s
prime minister was trade. For the two countries, that means discussing
Japanese automakers and their role in the U.S. economy. Today, Japan`s Abe
said that the auto industry and other Japanese companies are looking to
invest in the U.S.

Phil LeBeau has more.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: When Japan`s Prime
Minister Shinzo Abe and President Donald Trump talk business, the question
of how much Japanese automakers impact the U.S. economy will focus on where
Japanese branded cars, SUVs and trucks built.

Last year, more than two-thirds of the vehicles Honda sold in America were
built in America. A far greater percentage than Nissan and Toyota
(NYSE:TM). Why does that matter? Because Donald Trump wants all
automakers to build more of their vehicles in the U.S. That includes the
Japanese who sold 6.6 million vehicles in America last year.

Meeting with reporters, Trump and Abe did not specifically talk about
Japanese automakers, while pledging to work on trade deals between the two
countries.

TRUMP: On the economy, we will seek a trading relationship that is free,
fair and had reciprocal, benefiting both of our countries.

LEBEAU: While Shinzo Abe realizes President Trump wants more jobs in the
U.S., that doesn`t necessarily mean Japan will export fewer vehicles to
America. But it could mean Japanese automakers will open more plants in
the U.S. where they have more than 25 manufacturing sites.

At the same time, Japanese automakers have been expanding in Mexico, where
many of the vehicles made ultimately are shipped up to the U.S. And Donald
Trump has made it clear: he wants the vehicles sold in the U.S. to be made
in the U.S.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

(END VIDEOTAPE)

HERERA: Think back about one year ago. The markets were pretty much a
mess. But some well-known businessmen had the foresight and the stomach to
buy shares as their company stocks tumbled.

And as Eric Chemi tells us, their bets paid off.

(BEGIN VIDEOTAPE)

ERIC CHEMI, NIGHTLY BUSINESS REPORT CORRESPONDENT: One year ago, JPMorgan
(NYSE:JPM) Chase CEO Jamie Dimon famously bought half a million shares in
JPMorgan (NYSE:JPM) stock. With shares up 60 percent, he`s made $16
million on that investment so far.

But Dimon wasn`t alone in buying shares at the bottom. We looked at the
transaction filings and found a few other heavy hitters were also buying.
Namely, Treasury Secretary nominee Steve Mnuchin and Warren Buffett.
Mnuchin loaded up on shares at CIT Group (NYSE:CIT), where he was a vice
chairman. Three separate trades in early February are now worth $5 million
more today.

The biggest buyer in total dollars was Buffett`s Berkshire Hathaway
(NYSE:BRK.A). It bought $78 million worth of Phillip 66, part of a larger
accumulation of a company. The key thing, though, is Buffett did not panic
when markets dropped. Instead, continuing to buy more. Just that one
February purchase has earned more than $6 million.

We found a couple of more big name buyers that actually earned a higher
return than Dimon. Steve Wynn`s $50 million purchase of his own company is
up 67 percent. Not bad for one trade a year later.

And then, there`s Elon Musk who may have had the best trade of them all.
He bought SolarCity a year ago. Sold it for Tesla stock in August, and
then saw Tesla shares rise even more. In total, that original purchase has
made him $7 million, or nearly a 70 percent gain.

For NIGHTLY BUSINESS REPORT, I`m Eric Chemi.

(END VIDEOTAPE)

HERERA: And it`s not just the insiders seeing gains. With the major
averages at new highs, there`s growing belief that active fund managers
could have a good year and there is some early indications that January was
indeed pretty good for them.

So, is stock picking making a comeback?

Jen Wieczner is a writer at “Fortune Magazine” and joins us now to talk
about.

Jen, welcome. Nice to have you here.

JEN WIECZNER, FORTUNE MAGAZINE: Thank you. Nice to be here.

HERERA: What are you hearing from the managers that you`re talking to?

WIECZNER: Well, the first thing, it is really important to say that active
managers have been so excited to say how well they are doing and to make
their case for active management after having a really bad, more than ten
years, when he they haven`t beat the market. So, they`ll be the first ones
to tell that, actually, active management is making a comeback.

HERERA: But they`re choosier in this case, because as we know, the
administration has kind of singled out certain industries that it wants
some big changes in. So, what are they looking at favorably given the run-
up we`ve had? And what are they avoiding?

WIECZNER: Yes, what really been fitted them is they have tilted really
heavily toward financial stocks, bank stocks and technology, which have
done really, really well, in part because the Fed has now raised interest
rates. There`s expectations that rates will continue to go up.

So, those sectors have done much better than, you know, certain defensive
sectors like utilities, high dividend stocks. Retail has not done very
well.

So, the benefit there is that if they`d been tilted heavily to banks and
technology, they`ve been able to actually beat the market or the broad
based indexes where they`re actually just investing in everything. So, it
helps to be choosier.

HERERA: Yes. Health care — with the repeal and presumably the
replacement of Obamacare has been extremely volatile, do many of them favor
the health care sector in the anticipation that the new plan will be
released?

WIECZNER: You know, they`ve actually been just wading very lightly into
health care and pharma too, because there`s still some uncertainty over
whether the Trump administration will try to enact some price regulation as
far as drug prices go. People really don`t know what`s going to happen to
Obamacare right now and what that will look like for hospitals and medical
devices stock.

So, people are very, very reluctantly wading into health care.

HERERA: Right.

WIECZNER: Sort of just tiptoeing there.

HERERA: But this is not to say that ETFs have not done well, correct?
There is still money flowing into those.

WIECZNER: Oh, yes. You just had Blackrock, which is the largest ETF
provider, hit the one trillion dollars in assets for the time last month.
So, and that`s the tide that people don`t expect to it stop any time soon.
There`s lower fees. Warren Buffett endorsed index fund investing. So,
it`s probably going to be the wave of the future, so to speak.

HERERA: All right. Jen, thank you so much for your perspective on that.

WIECZNER: Thank you very much.

HERERA: Jen Wieczner joining us tonight with “Fortune Magazine”.

To the energy sector, where oil output is plunging. That`s the result of
steep cuts made by oil producers to help alleviate one of the largest oil
gluts in a generation. Today, the price of domestic crude did rise by more
than 1 1/2 percent to more than $53.

But as Jackie DeAngelis reports, it was much different story just one year
ago.

(BEGIN VIDEOTAPE)

JACKIE DEANGELIS, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Dimon bottom
for stock also happened to be a bottom for crude oil. This time a year
ago, oil prices saw a low near $26 a barrel. Since then, prices have more
than doubled.

What drove prices higher? Well, lower prices closed down a lot of shale
production which cut the buy and pushed prices up. And OPEC finally
announced a 1.8 million barrel production cut late last year. There were
also doubts as to whether members of the cartel would cheat.

That doesn`t seem to be the case. The International Energy Agency says
that OPEC has carried out 90 percent of its promised supply reduction.

So, OPEC supporting prices and there are concerned that escalating tensions
between President Trump and Iran could as well. Combine that with optimism
over Trump`s energy policies and a possible border adjustment tax, it all
may be enough to keep crude where it is and slowly take it higher.

But the shale threat remains real. Higher prices means that more of that
production will come back online. U.S. recounts were up almost 10 percent
in January alone. Production in the U.S. has bounced around and the
numbers are now creeping up.

IAN BREMMER, EURASIA GROUP PRESIDENT: OPEC can`t do very much more for
much longer. There`s not a lot of coordination. The Saudis are taking
much of the pain and they`re going to have to continue to do that.
Meanwhile, the prices go up a little bit more. Shale snaps back in a big
way.

The swing producers here are the United States ultimately. Not the Saudis,
not the OPEC states anymore. And Trump`s policies are clearly favorable
for cheaper production costs and therefore, more production gains out of
the United States.

So, on balance, despite all the geopolitical tensions in the world, I still
think that energy looks more bearish than bullish.

DEANGELIS: If the shale players don`t exercise caution, they could tip the
market lower again.

For NIGHTLY BUSINESS REPORT, I`m Jackie DeAngelis.

(END VIDEOTAPE)

HERERA: The Federal Reserve official in charge of regulation will resign
this spring. Daniel Tarullo who has worked at the Central Bank since 2009
did not give a reason for his departure. The decision gives the president
the ability to reshape the Fed`s board, just as he begins to revamp the
rules governing Wall Street.

And there are reports late today that the White House is not planning on
taking its immigration order to the Supreme Court. Last night, we told
that you an appeals court upheld the block on the president`s travel ban.

Still ahead, is there potential trouble brewing in Europe that
investigators need to pay attention to.

(MUSIC)

HERERA: The Food and Drug Administration approved a treatment for Duchenne
muscular dystrophy. It`s a rare type of that disease that we`ve been
reporting on.

The drug is made by Marathon Pharmaceuticals and is the first to win formal
FDA approval, even though it`s long been available outside the U.S. The
new list price for the drug is $89,000. That is 70 times higher than its
price overseas. The drug is not a cure but it has been shown to improve
muscle strength compared with a placebo.

President Trump`s proposed wall along the U.S./Mexico border could costly
nearly $22 billion. As first reported by “Reuters”, it could take about
three and a half years to build. The president`s executive order also
includes plans to hire more border agents, but that`s proved difficult to
do, as Kate Rogers (NYSE:ROG) reported for us from New Mexico last month.

But now, one high ranking union official says the administration`s focus on
the border could make recruiting a little easier.

Kate is back with the details.

(BEGIN VIDEOTAPE)

KATE ROGERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: President Trump`s plan
to build a wall along the U.S./Mexico border may be controversial. But one
group is feeling optimistic about the new administration — the National
Border Patrol Council representing some 16,500 Border Patrol agents.

The union, which is traditionally not endorsed the presidential candidate,
threw its weight behind Trump in the election. The president`s executive
order to build the wall also included plans to hire an additional 5,000
agents, which may prove to be a challenge for the U.S. Customs and Border
Patrol Agency, which is already had working to fill some 1,700 agent
positions.

The union`s vice president said policies including catch-and-release and
the Deferred Action for Childhoods Arrivals or DACA have prohibited the
agency`s enforcement abilities.

SHAWN MORAN, NATIONAL BORDER PATROL COUNCIL VP: Many of the people that
have left the agency have left because they got sold a false bill of goods.
They were told they were going to be doing this high speed tactical job and
it turned out to be anything but that. I believe agents will get back to
enforcing the law and that I think will help to retain people might be
thinking about retiring early, or going to a local or state law enforcement
job, or another federal agency.

ROGERS: While he stopped short of a full on endorsement of the wall, Moran
said each Border Patrol sector and station`s individual needs should be
considered.

MORAN: I think you need some kind of a physical barrier. It`s been shown
throughout our history and especially since we started Operation Gatekeeper
that barriers work.

ROGERS: Regarding reports on the wall`s price tag, the Department of
Homeland Security said in a statement, quote, “as a matter of policy, we do
not comment or confirm the potential existence of pre-decisional
deliberative documents.”

The White House and U.S. Customs and Border Patrol did not immediately
respond to request for comment.

For NIGHTLY BUSINESS REPORT, I`m Kate Rogers (NYSE:ROG).

(END VIDEOTAPE)

HERERA: Sears (NASDAQ:SHLD) is cutting costs by at least $1 billion, and
that`s where we begin tonight`s “Market Focus”.

After reporting a more than 10 percent drop in same store sales for the
holidays, the retailer unveiled a restructuring plan. Sears (NASDAQ:SHLD)
says it will achieve the cost savings by reducing corporate overhead and
improving inventory management. The company also will cut debt and pension
obligations by $1.5 billion. Shares of Sears (NASDAQ:SHLD) popped 25
percent to $6.96.

The advertising agency Interpublic Group said its higher than expected
profit and revenue was helped by an increase in ad sales and lower taxes.
The company also raised its quarterly dividend 20 percent to 18 cents a
share, including its annualized yield at about 3 percent. Shares rose 4
percent to $24.23.

Shares of Skechers continue to rise today after that company said late
yesterday that international growth drove its better than expected revenue.
The footwear maker saw earnings missed but it did report surprise growth in
same store sales. Analysts were expecting those to remain flat. The
company also gave upbeat revenue guidance for the current quarter. Shares
surged 19 percent to $27.78.

And Allstate (NYSE:ALL) raised its quarterly dividend 12 percent to 37
cents a share. That`s up from 33 cents. The annual yield is now nearly 2
percent. Shares rose marginally to $78.88.

From Greece to France to Italy, is there potential trouble brewing in
Europe that investors need to be aware of?

Seema Mody is following the events overseas and she joins us now.

Good to see you, Seema, as always.

SEEMA MODY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Great to be here.

HERERA: So, let`s start basically with Greece. There is a large debt
payment. And we`ve seen this movie before.

MODY: We certainly have.

HERERA: Are we going to see a repeat, do you think?

MODY: That`s the concern, because we`ve seen what has happened in the
past, this specific debt decision has prompted a lot of concern.

Here`s the update. So far, Greece and its creditors have not been able to
see eye to eye on the bailout deal. Creditors are demanding stricter rules
and stipulations. And Greece, the government there, is coming back saying,
we want to step away from austerity in order to see an economic revival.

All this is happening before the summer where one of the biggest debt
payments is due, about 7 billion euros. And as we`ve seen in the past, a
lot of times, these negotiations take place until very last second and
that`s a big concern for investors.

HERERA: Exactly.

MODY: That that will be the case once again.

HERERA: All right. A little further north to France. We`ve heard about
Brexit. There`s some talk in the market about a Frexit. I mean, could
that actually happen?

MODY: That`s the key word now being used, after those two political
surprises, Brexit in 2016, followed by Trump`s victory. The question is
whether France there, populist leader, Marine Le Pen, National Front Party,
who has been campaigning for a Frexit, for France to leave the E.U. and the
Eurozone, that`s the big concern.

She officially announced her candidacy over the weekend. Markets open on
Monday, and we are starting to see concerns of this leader gaining traction
in the polls and her ability to win in the upcoming French election.
That`s why we saw a bit of movement in the bond market.

HERERA: Not to be left out, Italy, where the banks have been having
trouble for a long time.

MODY: Right.

HERERA: But debt is the key issue.

MODY: Absolutely. It`s a combination of high debt, low growth, and a lot
of dysfunctional in its banking sector. And a lot of this having to do
also with the political system, the fact that we can see a lot of reforms
get through, that means you`re seeing a lot of stress being put on the
banking system with no end in sight.

HERERA: Seema, thank you, I think.

MODY: Yes.

HERERA: Given all the trouble around the globe.

MODY: Let`s see what happens.

HERERA: But we appreciate it. Seema Mody.

MODY: Yes.

HERERA: All right. Coming up, which stocks records, can big returns be
found in the small cap? Our market monitor is next.

(MUSIC)

HERERA: Here`s a look at what to watch for.

On Monday, President Trump meets with Canadian Prime Minister Justin
Trudeau. Canada is a major trading partner with the U.S.

On Tuesday, Fed Chair Janet Yellen faces the Republican Congress for the
first time as she testifies on the economy. It is the first of two days of
testimony.

On Wednesday, Dow component Cisco (NASDAQ:CSCO) is scheduled to release
earnings.

And that`s what to watch for next week.

Time for our market monitor, who has the names of some small cap stocks
that he says are poised to see above average earnings growth this year.
The last time he was on, about two years ago, he recommended stocks that
are both up and down double digits.

He is Eric Marshall, co-portfolio manager of the Hodges Small Cap Fund.

Eric, welcome back. Nice to have you here.

ERIC MARSHALL, HODGES SMALL CAP FUND CO-PORTFOLIO MANAGER: It`s great to
be here. Thanks for having me.

HERERA: And you — you do expect some pretty good returns and some of that
is based on what the Trump administration has promised, which is regulatory
reform.

MARSHALL: Yes, you know, we`re just paying attention to what`s going on
out there, within the prevailing business conditions, and I think within
the small cap stocks, you can always see they`re finding areas that are
being overlooked or somewhat misunderstood, and where we can find above
average earnings growth in those areas and the market hasn`t fully priced
them in. That`s where we`re finding the greatest opportunities.

HERERA: Let`s start with your first pick, Tower Semiconductor
(NASDAQ:TSEM). It`s small and independent.

MARSHALL: Yes. This is a small semiconductor specialty fab. And so,
they`re in a position to see significant operating leverage in their
business as they ramp the volume, as you see improvement in the
semiconductor industry in general. And they`ll come out with earnings next
week. We expect them to have a relatively good quarter, but give a
relatively positive outlook for 2017.

So, that`s a name that you don`t hear a lot about. But we think it is one
that is underneath the radar and undervalued relative to the earnings
expectations of the next couple of years.

HERERA: Next on the list is Kansas City Southern (NYSE:SO) (NYSE:KSU).
You says it`s been unfairly punished and maybe misunderstood.

MARSHALL: Yes. We really like their business long term. We think that
they should grow above average relative to the other class one railroads
out there like Union Pacific (NYSE:UNP). But right now, they`re trading at
a discount to the group because of their exposure to Mexico.

And we think over time, the trade concerns with Mexico will be resolved.
And we think sometime in the next 12 to 18 months, you will see Kansas City
Southern (NYSE:SO) (NYSE:KSU) trade at or above the market multiple for the
rail roads.

HERERA: And finally, Eagle Materials (NYSE:EXP), cement and wallboard
manufacturer.

MARSHALL: Yes, both of these, cement and wallboard, aren`t exactly
exciting areas to invest in. But they`re areas right now that are seeing
good pricing power. We think they`re in the early stages of an earnings
recovery in that business. They should do well as infrastructure spending
ramps up. And we continue to like the name here.

We think it is very much under the radar and underappreciated.

HERERA: You say there`s been a recent price increase in the price of
cement and wall board. That works for them or works a little bit against
them?

MARSHALL: Yes, that`s a positive. So, we`d like to look — at the Hodges
Fund, we`d like to find companies who sell products that are exhibiting
pricing power. And when you`re able to raise the price of your product, it
allows to you expand your profit margins and see hire earnings and
ultimately earnings drive stock prices.

HERERA: All right. On that note, Eric, thanks for joining us.

MARSHALL: Thank you.

HERERA: Eric Marshall with the Hodges Small Cap Fund.

And that will do it for NIGHTLY BUSINESS REPORT for tonight. I`m Sue
Herera. Thanks for joining this week. Have a great weekend, everybody.
And we`ll see you coming up on Monday.

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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