Transcript: Nightly Business Report – February 27, 2017

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

Funded in part by —

(COMMERCIAL AD)

(BEGIN VIDEO CLIP)

WARREN BUFFETT, BILLIONAIRE INVESTOR: We bought a lot more Apple after year end.

(END VIDEO CLIP)

BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Doubling down. Warren Buffett loads up on shares of the world’s most valuable company and that’s not all he’s buying.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Budget blueprint. The president is calling for an historic increase of some spending and potentially cuts in others.

GRIFFETH: Open house. They’re packed, they’re competitive and they maybe a sign of things to come for housing’s spring selling season.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for this Monday, February 27th.

Good evening, everybody. I’m Bill Griffeth, in tonight for Tyler Mathisen.

HERERA: And I’m Sue Herera.

We start with the world’s most recognizable start market index closing at a record for the 12th straight session. The Dow Jones Industrial Average notched another all time high, and the last time it did that, 12 straight, was in 1987. The gains, though, muted were led by energy and financial shares as investors want to see more policy details out of Washington.

Today, the blue chip Dow index rose 15 points to 20,837. The NASDAQ added 16 and the S&P 500 gained two.

GRIFFETH: Meanwhile, investors are getting a better idea of what the president’s first budget proposal was going to look like. It is expected to include an historic increase in military spending.

And as Eamon Javers reports for us tonight, it will likely also include a lot of spending cuts.

(BEGIN VIDEOTAPE)

EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: A surprise visitor to the press briefing room today. It was OMB Director Mick Mulvaney, Donald Trump’s man who’s going to be in charge of slashing the federal budget for non-defense discretionary spending. Mick Mulvaney explained that a lot of the cuts that we’re going to see coming from the Trump administration are going to come right from his speeches from and his campaign rhetoric.

MICK MULVANEY, OFFICE OF MANAGEMENT & BUDGET DIRECTOR: When you see these reductions, you’ll be able to tie it back to a speech the president gave or something the president has said previously. He’s simply going to — we are taking his words and turning them into policies and dollars. So, we will be spending less overseas and spending more back home.

JAVERS: So, here’s the spending that Mick Mulvaney laid out. He said in defense spending, they’re going to have about $603 billion. That will be a $54 billion increase over the previous year. No specifics on what exactly they’re going to spend that money on. And in terms of nondefense discretionary spending, $462 billion, that’s a $54 billion cut.

And, of course, the devil is going to be in the details here of what exactly this administration wants to cut. Each of these spending programs, guys, got an adamant defender up there, someone who really loves that program up on the Capitol Hill or out in the public. All of them will fight to preserve those particular programs.

So, once the Trump administration signs off on this budget releases the detail here, it’s not necessarily a guarantee that the president is going to get everything that he wants.

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

(END VIDEOTAPE)

HERERA: President Trump met with health insurance executives this morning at the White House. Before the closed door meeting, he told the CEOs that their help was needed to make sure the transition to a new health care system was smooth. The president said Obamacare will implode on its own unless it’s fixed.

(BEGIN VIDEO CLIP)

DONALD TRUMP, PRESIDENT OF THE UNITED STATES: We must work together to save Americans from Obamacare — and people know that and everyone knows that at this point — to create more competition and to bring down the prices substantially.

(END VIDEO CLIP)

HERERA: That meeting included leaders from Blue Cross Blue Shield, Cigna, Humana, United Healthcare and others. Twenty million Americans gained coverage under the Affordable Care Act.

GRIFFETH: And certainly, health care is a big issue for our nation’s governors. Some changes could potentially blow big holes in their state budgets and they were at the White House this morning and on Capitol Hill this afternoon talking about all of that.

Ylan Mui is covering that story for us from Washington.

And what was the message from the governors to the White House regarding Obamacare, Ylan?

YLAN MUI, NIGHTLY BUSINESS REPORT CORRESPONDENT: There are still some deep divisions within the Republican Party over the path forward for repealing and replacing Obamacare. About a dozen Republican governors have expanded Medicaid in their states and they’re worried now that any changes to the Affordable Care Act could lead them without federal funding and could also lead their constituents without health insurance.

One big thing that was talked about at this meeting was a report that was leaked by some reporters that found that repealing and replacing Obamacare according to the plan proposed by House Republicans could reduce federal funding by $1.5 trillion over the next decade. States have to balance their budgets and they’re worried without that money, they won’t be able to do it.

HERERA: Right. They’re also worried about infrastructure. What did they have to say about that and the possible infrastructure projects?

MUI: I talked to Colorado Governor John Hickenlooper about this and he said that President Trump’s method that infrastructure spending should rely on public-private partnership may not go far enough in order to address the needs in his state.

Here’s what he told me.

(BEGIN VIDEO CLIP)

GOV. JOHN HICKENLOOER (D), COLORADO: You need revenue to pay off those bonds that are at the heart of most public private partnership, sort of — you know, the private partner puts in a lot of capital, they’ve got to get repaid. And, you know, they generally want to make 10 percent, or 12 percent or 14 percent interest to compensate them for the risk they take. And that’s, you know, that’s capitals, and that’s not a bad thing.

I’m hopeful that the president will identify some sources of revenue or some opportunities by which states can get a partner in working on these public-private partnerships.

(END VIDEO CLIP)

MUI: You know, President Trump did hint that a big announcement is coming on infrastructure tomorrow. That’s when he’s going to be addressing Congress. We’ll have to watch and see what he says.

Back to you, guys.

GRIFFETH: Yes, we will all wait for that. Ylan Mui in Washington — thank you, ma’am.

MUI: Thank you.

HERERA: Speaking of which, investors want to hear more details on potential policy from the president tomorrow night when he does address that joint session of Congress. If he doesn’t deliver, the markets could react.

But as Bob Pisani reports, that’s not the only big event this week.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Traders are trying hard to figure out not just how the Trump agenda is playing out, but also how it collides with another very large object in Washington, the Federal Reserve.

And what Trump is saying or what Trump’s associates are leaking out can’t help but make the Fed worried. First, a sharp increase in defense spending. Second, leading entitlement unchanged. Third, a big statement, as he said, on infrastructure spending.

It sounds to many like there may be a big increase in deficit spending coming. So, suddenly, we have a large tax cut with additional spending hikes in the form of defense spending and infrastructure. It’s likely the Fed will view that as a notable risk to their inflation outlook, just as it looks like they’re finally getting to that 2 percent elusive target.

Now, that means it’s far more likely the Fed might get more aggressive on raising rates and that’s what’s worrying the markets.

It brings me now to Janet Yellen. She’s speaking at the Executives Club of Chicago on Friday. It will be one day before the Fed enters a blackout period, meaning all Fed officials will be quiet after that date leading up to the next Fed meeting on March 14th and so, this will be the last shot she has its summing up the state of the economy.

Now, here’s the issue, Trump is proposing spending programs that seem to apply the economy’s weekend in need of help, but Yellen doesn’t necessarily see it that way. The economy is clearly in a recovery mode, she’s been arguing and she seems very ambivalent about how much additional fiscal stimulus the economy might need.

So, what’s going to happen? Despite the pressure, most traders expect the president to again be short on specifics. This, of course, makes the training community completely crazy. It was widely noted on trading this morning that two year yields were up sharply and one measure of the Fed’s likelihood to raise rates in March is now over 50 percent probability. One catalyst, Fed voting member Robert Kaplan saying sooner rather than later means in the near future, in response to a question.

Now, that tells me that markets are convinced that could be spark coming very soon between the president and the Federal Reserve.

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

(END VIDEOTAPE)

Still ahead, what Warren Buffett is buying, what he’s not, and whether he thinks all those investment fees are worth it.

(MUSIC)

HERERA: It’s an annual event investors mark on their calendars — the release of Berkshire Hathaway’s letter to shareholders. This year, it did not disappoint. Warren Buffett stuck to business and said the country’s best days are ahead of it.

The billionaire investor touched on the investment climate and his eagerness to do deals. But the most interesting revelation may have come during an interview today with Becky Quick in Omaha when he said he’s been on an Apple stock buying spree.

(BEGIN VIDEOTAPE)

BECKY QUICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: You say you’re not a technology investor but you’re buying shares of Apple, which is now Berkshire’s fifth or maybe even larger than that based on how many that you’ve put in since then.

BUFFETT: I think we had 59 million at year-end.

QUICK: So, you have more than doubled it since that time.

BUFFETT: It’s correct. We act — it’s amazing how much you can buy of some of these things. So, we have bought that, the added 70 million plus, we’ve got that all by the time they reported their earnings. So, that it was done probably in 20 business days.

QUICK: And their earnings were better than people had expected, and the stock jumped as a result.

BUFFETT: Yes, I don’t think they were that much better than people expect. I mean, the company —

QUICK: The stock was up after the earnings report.

BUFFETT: Yes, they did jump and that’s what we quit buying. We would probably want more.

QUICK: You have had times where you thought stocks were incredibly cheap, like in 2008-2009, when you talk about that. You thought that there were times that stocks were greatly overvalued, where you said, forget it, don’t do it.

Are we near an inflection point right now, as best as you can tell?

BUFFETT: Measured against interest rates, stocks actually are on the cheap side compared to historic valuations. But the risk always is, is that that interest rates go up a lot and that brings stocks down.

But I would say this, if at the 10 years, say, it’s at 230 and would say there for 10 years, you would regret very much not having one stock now.

QUICK: We haven’t got the chance to sit down and talk to you since everything happened with Wells Fargo, and we had some viewer emails that came in. “Given your ownership of Wells Fargo, please explain your criticism of management, why it’s been muted for Wells Fargo versus the Salomon Brothers incident?”

BUFFETT: Well, I just keep preaching to our guys that if you see a problem, attack it. It’s not going to get better. And I’m just — a huge mistake was made at Wells, not in cooking up the incentive plans. Cross-selling is fine. I mean, you want to have incentives for people to do it. But you don’t want to leave separately the crazy behavior which you did, and the big mistake was when they find out about it, they didn’t do anything about it.

(END VIDEOTAPE)

GRIFFETH: Warren Buffett.

Well, “Fortune’s” Susan Gharib, certainly a familiar face to all of us around here, has been covering Mr. Buffett and Berkshire Hathaway for years. She joins us now to talk further about the Oracle of Omaha.

Welcome back.

SUSIE GHARIB, FORTUNE: Thank you. Great to see both of you.

(CROSSTALK)

GRIFFETH: Yes. Now, we all know he’s a buy-and-hold kind of guy. But once in awhile, he sells, and we did get news of the unloaded one long time holding, didn’t he?

GHARIB: That’s right. Wal-Mart, really surprising because he held for 12 years and at one point, just recently, it was a $3 dollar holding, and he’s unloaded 90 percent of it. So, he still has a big chunk, but not as before.

And it seems like that he’s trying to say is that, I am not a buy-and-hold investor forever. And so, he buys stocks and he sells stocks. And it seems like he’s also saying that of the retailers, traditional ones like Wal-Mart, are having a tougher time competing with online retailers like Amazon.

And he’s also saying that he’s going to shake up his portfolio. So, any stock that Berkshire Hathaway owns could be sold tomorrow.

HERERA: That’s true. You know, he also weighed in on index funds, passive versus active management —

GHARIB: Right.

HERERA: — and fees associated with whatever type of management you choose for your portfolio. What did he say?

GHARIB: And, you know, you guys debate this all every now and then this comes up as a debate on NIGHTLY BUSINESS REPORT, and this has been a mantra with Warren Buffett.

But I think this time, it was interesting, Sue, was that he devoted almost five pages in his 29-page letter to this topic, saying that these hedge funds are charging very high fees for subpar returns. And he’s encouraging his investors to put your money in an ultra-low-cost fund, and he has proof this time. He back to his claim. He’s this $1 million bet with an asset manager saying, let’s see how the S&P 500 index does over a -year period compared to a basket of hedge funds and nine years in, the S&P 500 up 85 percent and the other 22 percent.

HERERA: I aspire to be able to make a million-dollar bet with anybody.

(LAUGHTER)

GRIFFETH: Right.

Did he offer any new insights, “I’m backing away from the Kraft Heinz offer for Unilever”? It would have been a $143 billion deal, but they just pulled it out.

GHARIB: Bill, you know that Warren Buffett doesn’t like to do a hostile deal. He only does the friendly deals, and that’s why this was kind of so swift. Unilever said no and they pulled out.

So, he hasn’t said that he has anything with back pocket, but he is actively looking. They got — Berkshire Hathaway has $86 billion in cash and here’s the company that has $200 billion in revenues, has a lot of firepower.

HERERA: Right.

GHARIB: And I’m sure we’re going to see something. That’s how Berkshire Hathaway has to grow. We’ll probably hear more about all of this at the main shareholder meeting, that big extravaganza in Omaha, if not sooner.

GRIFFETH: If not sooner. You got your plane ticket to Omaha already?

GHARIB: Yes, I’m all set to go. I’ll be back to report if you’re interested.

GRIFFETH: Absolutely.

HERERA: Absolutely.

GRIFFETH: Always good to see, Susie. Thank you.

HERERA: Same here.

GRIFFETH: “Fortune’s” Susie Gharib joining us tonight.

HERERA: Well, Sotheby’s turns a profit and that’s where we begin tonight’s “Market Focus”.

The auction house said strong demand for art pieces made by David Bowie garnered strong sales, helping that company top both profit and revenue expectations. Sotheby has also said its share repurchases made in 2016 helped its overall results. The shares soared 15 percent to $46.39.

Photo and video companies Shutterstock said an increase in paid downloads led to a rise in profit and sales. However, that strength was offset by currency headwinds and higher marketing costs, causing results to miss street estimates. The shares plunged. they were down more than 16 percent to $43.02.

La Jolla Pharmaceuticals said its experimental drugs for treating low blood pressure delivered some promising results during a late-stage study. The company said it plans to meet with the Food and Drug Administration to discuss submitting a new drug application later this year. Shares skyrocketed 76 percent to the upside to $35.12.

GRIFFETH: Meanwhile, in flight internet provider Gogo reported a loss in its latest quarter, but those results were still better than expected as the company benefited from higher customer usage. Revenue did rise and that also surpassed analyst expectations. Maybe that’s why the stock was up 15 percent today to $10.49.

And, Armstrong World Industries said that lower-cost help the floor and ceiling maker post a profit that beat street expectations. Revenue did come in a little light, but the company forecast earnings and sales for the year above analysts’ estimates, and that sent the shares higher by nearly 12 percent today to $44.85.

HERERA: Orders for durable goods rebounded in January. According to the Commerce Department, bookings for long-lasting products rose 1.8 percent, that’s the biggest gain in three months and it follows two months of declines. The strength stems from big surge in demand for commercial and military aircraft.

GRIFFETH: Contracts to buy previously owned homes dropped last month to the lowest level in a year. The so-called pending home sales fell nearly 3 percent. They are basically flat compared to a year ago.

And as Diana Olick report for us now, the problem is simple: buyers are outnumbering sellers in many areas across the country.

(BEGIN VIDEOTAPE)

UNIDENTIFEID MALE: He looks like your single pane windows.

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: At this Sunday open house in Los Angeles, Michelle and Derrick Jacob are hoping six months is the charm. That’s how long they’ve been competing for a home.

DERRICK JACOB, HOUSE HUNTER: For once, we want them to be purchased in the snap.

MICHELLE JACOB, HOUSE HUNTER: Yes, over asking price.

D. JACOB: Asking price, well over asking price.

OLICK: They’ll be up against Emily Leach, who in just a few months of looking for an affordable urban home, feels like she’s seen at all.

EMILY LEACH, HOUSE HUNTER: We actually had a house that we saw that we really like in south-central Los Angeles, and we try to make a move on that and we got outbid, in south central.

OLICK: With the supply of listings, especially moderately-priced listings like this one at near historic lows, the stories are getting crazier by the showing.

FABRIZZIA PERRI, REDFIN AGENT: Recently added a similar listings that had 66 offers on it. Of course, only one person wins, so 65 home buyers have to restart their home search.

OLICK: It’s not just here in L.A. Supply is low across the nation, pushing prices beyond what more and more buyers can afford, home builders are still operating well below historical averages and what they are building is not entry level which is where all the demand is.

Close to a million entry-level homes were scooped up by investors during the housing crisis and turned into rental with rents very strong, most investors are not selling.

So, buyers today have to be creative and differentiate themselves not just by price but by personality. Of course, that only works if the seller really cares.

LEACH: You have to kind of make an introductory letter that all like story about yourself and you just hope that the home that you’re buying is not being sold by a slippers because they’ve hired (ph) much more neutral.

OLICK: Even agents are stretched. This is a line of them waiting to submit offers last week. The house ended up getting over 30.

PERRI: Persistence is key.

OLICK: And patience, lots of patience.

M. JACOB: I think we just have to look in and everything will — the right one will come.

OLICK: For NIGHTLY BUSINESS REPORT, I’m Diana Olick in Washington.

(END VIDEOTAPE)

HERERA: So, what does all of this mean for housing and the spring selling season, which is upon us?

Ralph McLaughlin is the chief economist at Trulia and he joins us now to discuss how things are shaping up.

Good to see you again, Ralph. Welcome back.

RALPH MCLAUGHLIN, TRULIA CHIEF ECONOMIST: Good to see you, too, Sue.

HERERA: So, we saw that drop in pending home sales, but apparently that doesn’t worry you. Why?

MCLAUGHLIN: Well, you know, it doesn’t really mean much for a couple different reasons.

First, you know January was a pretty bad month for weather, you know, especially out in the west, and that’s where we saw home sales drop most.

Two, mortgage rates, you know, spiked a little bit that month and so, home buyers may be pulling back a little bit because of, you know, high rates.

But third and the thing that I am concerned about is inventory. I mean, inventory is really the elephant in the room when we’re talking about what’s driving lower home sales. And so, that’s going to be the theme again of this year’s spring home buying season just like it was last year, but the bad news is that interest even lower now than it was 12 months ago. And so, that’s the challenge that homebuyers are going to face.

GRIFFETH: And they’re in a bit of a catch-22 right now. To get more inventory, you need more sellers obviously, unless you get builders out there. But from the seller standpoint, they want to see higher prices and if prices go up when they come on the market, that means they’re less affordable for those buyers who are looking at the same time, right?

MCLAUGHLIN: That’s exactly right. You know, we’re really seeing housing market gridlock here because of that. You know, when inventory is low, that’s great for sellers, right? Prices are high. You got more equity in your house and it’s a competitive market.

But at the same time, most sellers also need to buy a house. And so, if they are worried about finding another house to buy, they may choose to not sell their home and instead renovate it, and, you know, we are starting to see numbers that renovations are up. And so, this is really one of the fundamental problems with the housing market is this gridlock that there really is a first-mover problem and inputting your home on the market because you can’t find another one to buy.

HERERA: So, what do you think will break the gridlock or put the market more in balance?

MCLAUGHLIN: Well, three things that were hoping for the spring buying season.

First is that we hope new construction continues to build up because that is really the only relief valve for the housing market when supply is low and building now is near historic lows. We’re not building as many homes we used to. We need that to go up.

Second, we’re hoping that investors actually start to put their house on the market, many of them bought starter homes during the recession, and that’s where we’re seeing, you know, the least inventory so that they can put their homes on the market. You know, that’s the way that we could see more inventory.

And third, and I really hate to say this, is prices need to go up more. I mean, the more that prices go up, the more that will entice sellers to buy. It’s not good for buyers, but rising prices should entice, you know, more sellers to put their home on the market.

GRIFFETH: We all know real estates local. Very quickly, the hottest markets that you’re seeing right now, where are they?

MCLAUGHLIN: We’re seeing double-digit price gains in places like Portland and Seattle. We’re also seeing upticks in price games in places like Atlanta and Tampa. But in other very costly markets such as San Francisco, we’re actually seeing, you know, price gains, you know, that are low, that are near five-year lows.

So, really, Northwest and Southeast are where the action is at.

HERERA: Well, given the beautiful shot behind you, I can understand why everybody wants to live out there. Thanks, Ralph. Good to see you again.

MCLAUGHLIN: You too, Sue. Thanks.

HERERA: Ralph McLaughlin with Trulia.

Coming up, the key ingredient that wireless companies need to make money and it’s not new devices.

(MUSIC)

GRIFFETH: The world’s biggest showcase for mobile devices and wireless technology is underway. And this year, some big ships are taking place at the Mobile World Congress.

Jon Fortt reports for us tonight from Barcelona, Spain.

(BEGIN VIDEOTAPE)

JON FORTT, NIGHTLY BUSINESS REPORT CORRESPONDENT: This week, as the technology world gathers here in Barcelona for Mobile World Congress, it feels a bit like a rebuilding year.

The two biggest themes: first, premium content. It’s the king now, not the user-generated stuff and not the messaging apps. And second, faster 5G networks. They’re now just two years away.

Sitting at the intersection of those two are companies like Netflix. CEO Reed Hastings talk here about adjustments they’re making for mobile, like recently enabling downloads.

REED HASTINGS, NETFLIX FOUNDER & CEO: We’re big believers in streaming and the Internet, but sometimes, you’re out a range or on the subway. Your — you know, somewhere where either mobile bandwidth is very expensive. And so, downloading is great. You know, the airplanes and other scenario for all of you, where it’s great just to download some shows and watch them on the plane.

FORTT: There are new smartphones hear from Sony and Motorola, for example, but they’re not to focus this year. Virtual reality is here too, but it doesn’t have the buzz it once did.

It doesn’t help that Samsung, the biggest brand in the mobile world, is having an off year. Instead of its usual annual presentation Sunday night to launch a new phone, it showed off a tablet and a PC.

Let’s face it, this is what we’ve come to expect from Samsung, the biggest smartphone and TV maker in the world. Arguably, the most exciting part of the presentation for the beginning where they apologized for last year’s phone and the end where they promised that this year’s innovation, this coming next month.

Another reason the focus is turning to movies and shows, it seems everyone, including the wireless carriers view them as a key ingredient for making money.

JOHN STANKEY, AT&T ENTERTAINMENT GROUP: Content models are changing so rapidly you need to own content to be able to innovate, innovate and advertising, innovate and monetization, and innovate the types of content, the forms of content you bring to an end user.

FORTT: That’s important no matter what the size of the screen you’re watching.

For NIGHTLY BUSINESS REPORT, I’m Jon Fortt in Barcelona.

(END VIDEOTAPE)

GRIFFETH: Oddly, I didn’t hear anything about my BlackBerry.

(LAUGHTER)

HERERA: No, funny.

GRIFFETH: I don’t believe for a second that BlackBerry has a zero percent market share in the world. I have one, still.

HERERA: All right. That will do it for NIGHTLY BUSINESS REPORT tonight. I’m Sue Herera, thanks for joining us.

GRIFFETH: I’m Bill Griffeth, have a great evening everybody. We will see you tomorrow. Good 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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