Transcript: Nightly Business Report – April 17, 2017

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Surprise rise. Stocks took off despite rising tensions overseas. But how long will the buying mood last?

Unexpected rejection. Eli Lilly’s arthritis medicine was supposed to be a blockbuster, but the FDA said not so fast.

Mountain of debt. Americans owe a lot of money: $1 trillion on their credit cards to be exact. And that is raising some concern.

Those stories, and tomorrow, tonight on NIGHTLY BUSINESS REPORT for Monday, April 17th.

Good evening, everyone, and welcome. I’m Sue Herera. Tyler Mathisen is off tonight.

A surprise rally to start the week. Given the increase in geopolitical tensions and soft economic data, not many thoughts the Dow would rise by triple digits, but it did, and the bulls remained in control until the closing bell. The Dow Jones Industrial Average gained 183 points to 20,636, snapping a three-day losing streak, to notch its biggest gain since early March. The NASDAQ added 51, and the S&P 500 was up 20.

But given all the negative factors swirling around, why were investors in a buying mood?

Bob Pisani explains.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Stocks rose today. The big question is, why? We opened weak with good reason. The economic data on Friday and this morning was poor. If you look at it, you might scratch your head and wonder what happened.

For example, retail sales fell for the second straight month. Consumer prices dropped for the first time in a year and producing prices were down for the time in seven months. It sounds like the move toward growth is on life support.

But the markets turned around shortly after the open, because the market has became oversold and bounced the most oversold sector, banks, are the ones that bounced the most. So, this makes sense. Other sectors that have been trending down is semiconductors, industrials and materials, they also performed better today.

Now, geopolitical jitters resurfaced last week after being dormant for a very long time. Now, you can see this to the performance of the so-called fear gauge. What does that mean? It means trade brought a lot of protection ahead of the three-day Easter holiday. And since nothing happened over the holiday, that trade was being unwound somewhat today.

There’s one final potential catalyst, tax day. It’s ending tomorrow and the weeks leading into Tax Day have been down modestly for the market, with the modest rally in the weeks after that. That seems to be playing out as well, at least for today.

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

(END VIDEOTAPE)

HERERA: Comments from treasury secretary also propelled the stock market late today. In an interview with “The Financial Times,” Steve Mnuchin said the original August timeline for tax reform was no longer realistic and that the delay was caused by failure of health care reform. And while that may seem like a negative for the stock market, it was what he said about the controversial border adjustment tax that got investors excited. Secretary Mnuchin said it was just a one of a number of options the government was considering to raise $1 trillion. That tax has split the business community with exports wanting it and retailers opposing it.

Mnuchin still believes the tax reform will be signed into law at some point this year.

Mark Luschini joins us more to talk about what drove today’s rally and whether or not it might last, he is the chief investment strategist at Janney Montgomery Scott.

Welcome back, Mark. Nice to have you here.

MARK LUSCHINI, JANNEY MONTGOMERY SCOTT CHIEF INVESTMENT STRATEGIST: Thank you, Sue.

HERERA: So, what did you make of today’s action? I mean, if this was a couple of weeks ago, and these geopolitical concerns were surfacing, we probably would have seen a sell-off in the market. Not so today.

LUSCHINI: Yes, interesting. And again, as was said by Bob earlier, surprising, I think, given the fact that going into the weekend on Friday’s close, of course, we have a couple of reports on CPI and retail sales that were a little bit disturbing, taken at face value. I think we have to pull back a little bit and get some context for the pattern to determine whether it’s just noise or in fact signal.

But, you know, we had obviously a marked turn-around today with a case of one day’s trading, we’ve recovered nearly all of what was given up over the entirety of last week. I still think investors, though, are still going to be somewhat trepidatious with what’s forthcoming not just on earnings season, of course, which is a front and center this week and the week subsequent, but rather to geopolitical sense. I mean, while we’ve seen some recession in that threat, it’s likely to resurface before all is said and done.

HERERA: And does that reinforce your view from the last time you were with us, that risk assets will resume their advance?

LUSCHINI: I do. We haven’t wavered from that. The market is overdue for a correction of some sort. And maybe before this move is all said and done, we’ll see we’re in the midst of that as we speak.

We’re down about 3 percent from the high on March 1st going into today. We’ve got some of that back. But it’s going to take some backing and filling I think before the investors are satisfied that the drawdown we’ve seen so far is over.

But whether it occurs now or maybe before this move is all said and done, we’ll see we’re in the midst of that as we speak. We’ve got some back. But it’s going to take some backing and filling before the investors are satisfied that the drawdown we’ve seen so far is over. But whether it occurs now or later on, I think still out nine to 12 months, you’re going to see equities advancing on sturdy if not improving economic data that’s occurring not just here in the U.S. but on a global basis.

HERERA: Yes, we’re going to talk a little bit about the data in just a second. But you’ve mentioned to us in the past that some of the economic data is not reflective, the softer economic data is not reflective of what we’re seeing in other parts of the economy.

LUSCHINI: Absolutely true. There’s been a lot of attention brought to this notion that the so-called soft data, which are surveys of sentiment readings and how you feel about things are, you know, topping the charts. Whether you’re talking about business leaders or you’re talking about consumers, both are reporting numbers that had been consistently a decade plus highs.

The hard data is corroborating that by virtue of it indicating expansionary conditions, but nonetheless, not the same level of robustness by way of some of the manufacturing, retail sales data obviously, even labor market conditions that necessarily support the soft data at this point. So, there has to be some compression one moving toward the other at some point either by way of validating through the hard data, that the soft data, the sentiment surveys are right and businesses and consumers are going to continue to feed this economic expansion, or conversely, we have recession in some of those sentiment readings and, of course, the worry is, is that would actually spill into hard economic activity.

HERERA: Right. So, if you’re a long-term investor, Mark, given what you just laid out for us, are there areas of the market where you think there is still value to be found?

LUSCHINI: I do. I’ll just name three. I think the consumer’s in great shape by the way of the recovery that’s occurred on their balance sheets and income states alike. And so, we like housing related industries, not just home builders, but the do-it-yourselfers, the Home Depots, the Lowe’s, anything that feeds in the marketplace, given a still a very accommodative mortgage rate environment, and as well — again, the strength of the consumer.

In addition to that, we like energy. But more specifically, oil services companies, particularly those that are positioned to take advantage of the uptick in activity here in North America, shale drilling. So, names like Schlumberger or Halliburton or an ETF like OIH, might complement that view.

And lastly, health care, which has a long runway, of course, demographically speaking, not just in the U.S., but around the world. And within health care, biotechnology stocks, continued stocks for the big pharma companies, R&D.

HERERA: Thank you for the ideas, Mark, as always.

LUSCHINI: You’re welcome, Sue.

HERERA: Mark Luschini with Janney Montgomery Scott.

And now to today’s softer economic data, we start with manufacturing activity in the New York region which grew at a slower pace than April. Orders were not as strong as they had been, despite six straight months of factory activity expansion. But the New York Fed report also showed that hiring remains strong and that New York area manufacturers are still optimistic about future conditions.

Home builder sentiment also cooled. But despite the drop, confidence among American homebuilders remains near record levels. The National Association of Homebuilders Survey shows the industry is optimistic heading into the spring selling season. The group is also confident that the president’s promise of looser regulation and faster growth will offset challenges like higher costs.

As we’ve been reporting, there is a divide in the economic data. Some of the so-called softer data, which we just talked about, like sentiment is very strong, while other harder data like retail sales is weak. And usually, when consumer confidence rises, so does spending.

But that’s not happening this time around and that has some economists scratching their heads.

Steve Liesman has more.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: An exuberant consumer is your best customer, that’s at least what the conventional wisdom has been. So, how is it consumer confidence surged but retail sales are declining? All the major indicators of consumer confidence have taken off since the election, hitting levels not seen in more than 15 years. But after a strong January, retail sales have now fallen two months in a row, giving back most of January’s gains.

So, consumers are upbeat, but their spending looks to be in conflict with their emotion. It’s part of a broader split in the economy, between the strong soft data and that measures how people and the weaker hard data that measures what they actually do with their money.

DAVID NELSON, BELPOINTE ASSET MANAGEMENT: You can drive a truck through it, OK? The consumer sentiment is through the roof. The hard data is lower. You talk to somebody, how thing’s going? It’s great. How are your retail sales? Not so great, you know? That’s the problem in the nut shell.

LIESMAN: Some of the reasons offered by economists, sentiment is up on the elections. And while people may feel upbeat, that doesn’t mean they’re going to spend because Donald Trump is in the White House.

Economists have long debated just how much sentiment really matters. In the wake of 9/11, sentiment plunged, for example. But sales remained high.

Now, it’s the reverse and it’s perplexing because job growth is strong and unemployment is low. That means more Americans with more money in their pockets would simply goes along with stronger consumer spending.

Other reason offered by economists, many tax refunds were delayed this year, which could have reduced spending. Whatever the reason, most economists see under 1 percent growth in the just finished first quarter. But they believe spending and growth will rebound in the second quarter. And really, however they feel, a spending consumer is everyone’s best customer.

For NIGHTLY BUSINESS REPORT, I’m Steve Liesman.

(END VIDEOTAPE)

HERERA: China’s economy is gaining steam. The world’s second largest economy grew in the second quarter at its fastest pace since 2015. But some warning signs persist.

Eunice Yoon reports tonight from Shanghai.

(BEGIN VIDEOTAPE)

EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: China posted strong growth in the first quarter. Q1 GDP came in at 6.9 percent from a year ago, beating expectations. But the concern remains that the solid headline number was due to Beijing stimulating the old economy in China, steel mills and property developers, instead of shifting to new types of growth, such as consumption. Retail sales for March jumped by 10.9 percent, much healthier than the previous two months.

Yet, there’s still a lot of uncertainty about whether consumer spending is picking up to a meaningful degree. This is what the CEO of Yum China told me about how big a role he thinks the consumer is playing in the economy today.

MICKY PANT, YUM CHINA, SHANGHAI CEO: There are key measures to how consumers are responding. The first is the number of restaurants that you build. And the second is the existing restaurants, what are sales looking like. So, I think on both those metrics, we’ve been encouraged.

YOON: Industrial output for March accelerated to 7.6 percent on year growth, from 6.3 percent in the first two months. Fixed asset investment expanded 9.2 percent.

The economy is still reliant on FAI, and that’s raising concerns about rising debt, excess capacity and just how long this uptick can last.

On top of that, uncertainty in the China-U.S. relationship has weighed on growth prospects here. Though the presidents of the American Chamber of Commerce in Shanghai told me he’s encouraged after the Trump administration decided to refrain from labeling China a currency manipulator.

KENNETH JARRETT, AMERICAN CHAMBER OF COMMERCE SHANGHAI PRES.: If you look strictly speaking at the Treasury Department’s criteria for labeling a country a currency manipulator, China doesn’t satisfy the three that the Treasury Department has stated. I mean, the one that they just satisfy is China does have a large trade surplus with the United States.

YOON: He said fears of a trade war have subsided among American businesses here, though many still expect to see trade skirmishes.

For NIGHTLY BUSINESS REPORT, I’m Eunice Yoon in Shanghai.

(END VIDEOTAPE)

HERERA: Still ahead, Eli Lilly’s much anticipated arthritis drug is stopped in its tracks. And now, investors want to know, what’s next.

(MUSIC)

HERERA: Netflix isn’t signing up as many new users as expected. Subscriber growth in the U.S. and abroad slowed in the fourth quarter even as profit grew. The company reported earnings of 40 cents a share, 3 cents better than forecast. Revenue grew nearly 35 percent to more than $2.6 billion in line with expectations. And after an initial dip, shares of Netflix moved back higher.

Julia Boorstin has more on Netflix’s quarter and its subscribers.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Netflix continues to grow its subscriber base, saying the company is on track to hit 100 million members this weekend. The growth came in a bit slower than expected this past quarter, adding a total of 4.95 million net subscribers, which is about a quarter million fewer than the company projected.

Well, that weighed on the stock. The company subscriber outlook for this quarter was more bullish. Netflix projecting the addition of 3.2 million new subscribers, which is more than expected. Netflix says its customers are getting more valuable, seeing a small, but steady migration of users to its for stream highest quality video tier, which is its most expensive plan. That will keep revenue growth above membership growth.

For NIGHTLY BUSINESS REPORT, Julia Boorstin in Los Angeles.

(END VIDEOTAPE)

HERERA: United Airlines under fire for forcibly removing a passenger from a flight last week reported better than expected quarterly earnings. The airline earned 41 cents a share, 3 cents better than estimates. Revenue was up slightly from a year ago to nearly $8.5 billion.

The report along with an upbeat outlook was enough to lift shares initially in after-hours trading. But given the ongoing controversy around that airline, the CEO again addressed the passenger incident, apologized, and said the company must do a better job serving its customers.

Susan Li has more.

(BEGIN VIDEOTAPE)

SUSAN LI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Despite the controversy over the forcible removal of a passenger last week, United Airlines is guiding for a strong quarter this quarter, predicting the first quarter of net revenue growth in two years, and that’s despite the public relations stain and international outrage after the violent removal of a passenger from an overbooked flight. The CEO Oscar Munoz addressing the incident in the earnings release saying that “it is obvious from recent experiences that we need to do a better job serving our customers.”

This incident has been a humbling experience, and Munoz goes on to say that he takes full responsibility and this will prove to be a watershed moment for the airline.

Now, as for the first quarter, higher fuel costs cut down on profits. But still, United beat estimates. That’s five straight quarters they have beaten and they have only missed twice in 13 quarters. United shares are up some 25 percent of the past year, and continuing to outperform the rest of the airline sector.

We’ll get some more clarity and hopefully some more answers when united hosts their conference call tomorrow morning.

For NIGHTLY BUSINESS REPORT, I’m Susan Li.

(END VIDEOTAPE)

HERERA: Rival Delta said it will now offer up to roughly $10,000 in some cases to fliers on overbooked flights who agree to give up their seats. Delta’s new cap is roughly seven times higher than its previous limit and applies to passengers who voluntarily give up the seat. The decision comes in the wake of that removal of the United passenger last week who was dragged off the plane last week, as we just mentioned.

Eli Lilly’s experimental rheumatoid arthritis drug was expected to reach blockbuster status. But the Food and Drug Administration rejected its application, saying it needed more clinical data. That sent shares lower by more than 4 percent. And Eli Lilly’s partner on the drug Incyte was off 10 percent.

Meg Tirrell takes a look at the setback and what Eli Lilly may do next.

(BEGIN VIDEOTAPE)

MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT: Wall Street expected an approval for Eli Lilly and partner Incyte. The rheumatoid arthritis drug called Baricitinib has already been approved in Europe and analysts pointed to favorable data from clinical trials on both the drug safety and how well it works.

DAMIEN CONOVER, MORNINGSTAR: The clinical data for this drug has been very strong. You know, very good efficacy, very good side-effect profile.

TIRRELL: The FDA said Friday it wants to see more data on both dosing and safety of the drug. Both companies’ shares took a hit as a result, as analysts speculated the drug may not be approved for a year or two.

It would enter a big market. Rheumatoid arthritis affects more than 1 million Americans. It’s an auto immune condition causing pain and stiffness in the wrists, hands and feet. But it’s also a crowded and pricey class of drugs. With many blockbusters are already on the market, from AbbVie’s $16 billion a year Humira, to Johnson and Johnson’s $7 billion Remicade.

LES FUNTLEYDER, E SQUARED ASSET MANAGEMENT: The prices that have been charged for these drugs, particularly the biologics have been off the charts. So, between the large number of patients and the large price, you get a very large market.

TIRRELL: So, how would Lilly and Incyte’s drug have a chance? Well, for one thing, it’s a pill taken once a day, versus injections for many of the other drugs on the market. The only other pill approved for the condition is Pfizer’s Xeljanz, which due just shy of a billion dollars in 2016 revenue.

For Lilly, this setback follows a decline in its shares late last year, after a major Alzheimer’s drug failed in a late-stage clinical trial. Lilly’s stock was downgraded by both BMO Capital Markets and Morgan Stanley today.

The Morningstar’s Damien Conover sees bright spots in the Indianapolis drugmaker’s portfolio.

CONOVER: While this is a setback, one thing we keep in mind they’ve got a lot of other drugs that are recently approved that looked like they’re doing extremely well and we have projections for very strong growth for these products.

TIRRELL: He pointed to a recently approved psoriasis drug called Taltz as one example. Incyte, the smaller of the two partners, took a harder hit today. Analysts said the rejection puts more pressure on its experimental immunotherapy for cancer. Both Lilly and Incyte will have closely watched updates on their cancer drugs at the ASCO Research Conference in early June.

As for the rheumatoid arthritis drug, most on the street expect it to be approved. The question is, how long will it take to prove to the FDA it’s both safe and effective enough to enter the market?

For NIGHTLY BUSINESS REPORT, I’m Meg Tirrell.

(END VIDEOTAPE)

HERERA: Arconic CEO steps down and that’s where we begin tonight’s “Market Focus”.

Klaus Kleinfeld resigned from his position at the specialty metal’s maker after the board of directors said he showed, quote, “poor judgment” when he contacted activist investor Elliott Management without the board’s consent. Elliott Management has been pushing for changes at the company, including calling for Kleinfeld’s ouster as well as several board members. Arconic shares rose 3 percent to $26.69.

The CEO of snack giant Snyder Lance is also leaving the top role. The maker of Cape Cod potato chips said chief executive Carl Lee was retiring. And would be replaced by interim CEO and current board member Brian Driscoll. The company also warned earnings for the current quarter would likely miss expectations, partly due to increased promotional spending. Shares plunged 15 percent to $33.76.

And China-based Ant Financial outbid a rival offer to a financial payment company MoneyGram. Ant affiliate, which is an affiliate of ecommerce giant Alibaba, raised its takeover price for MoneyGram by nearly 40 percent, valuing that revised deal at more than $1 billion. MoneyGram shares popped more than 7 percent to $17.79.

And the hospital operator HCA Holdings issued a bleak outlook for the current quarter, warning profit and sales would miss estimates. The company cited fewer hospital admissions and more patients on less profitable government issued plans. Shares fell more than 2 percent to $85.65.

Boeing meantime is planning more job cuts. In a memo to employees, the aircraft maker said that it would lay off hundreds of engineers in its commercial airplanes division. The latest cuts are expected to take place in June. Shares of Boeing rose nearly 2 percent on the news to $179.02.

And the retail giant Walmart is reportedly close to buying the men’s online clothing company Bonobos. According to reports, the two companies have settled on a takeover price and they’re finalizing the deal. The latest move represents Walmart’s desire to expand its ecommerce business. Walmart shares rose 34 cents to $73.49.

Coming up, Americans are giving their credit cards quite a workout. But should investors be concerned about the mountain of debt that’s piling up.

(MUSIC)

HERERA: Here’s what to watch for tomorrow. A number of Dow components report earnings including Goldman Sachs, Johnson & Johnson, United Health Care and IBM. Health insurers will meet with President Trump’s administration to discuss the future of the insurance exchanges. And with housing inventory tight, investors will pay attention to the March housing starts report. And that’s what to watch for on Tuesday.

Consumer credit card debt is rising. According to the Federal Reserve, Americans owe more than $1 trillion in credit card debt. That’s up more than 6 percent from a year ago. But what could that mean for the economy and for you?

Scott Hoyt joins us. He’s the senior director of Consumer Economics at Moody’s Analytics.

Welcome. Nice to have you here, Scott.

SCOTT HOYT, MOODY’S ANALYTICS SR. DIR OF CONSUMER ECONOMICS: Nice to be here.

HERERA: So, put this in perspective. That’s a big round number, $1 trillion. But how does it compare to the overall debt load that the consumer carries in the economy?

HOYT: Well, actually, consumer debt loads are quite low right now. Credit card debt makes up less than 10 percent of overall outstandings. Mortgages obviously are the big piece at over 70 percent. And there’s not a lot of mortgage debt out there right now.

In addition, interest rates are low, so payment burden on consumers is relatively low.

HERERA: For the mortgage, but credit card debt tends to carry a very high interest rate. Is that not worrisome?

HOYT: Well, it can be. But right now, total consumer debt payments on all forms of debt relative to their income is at historic lows. So, even though credit card debt fairly high with interest rates low and other forms of debt low, consumers are not overly burdened by their debts right now.

HERERA: So, what should we be watching for in terms of possible hits to the economy? Does this number, this $1 trillion number have to get significantly higher for it to be an issue for the economy, or do interest rates have to go significantly higher, or maybe both?

HOYT: I was going to say, I think you probably need both. But I think the other thing to watch is other forms of borrowing. As I said before, particularly mortgages.

Right now, debt payments as a share of disposable income are low. That’s the number that we focus on. When debt payments as a share of disposable income start rising, in particular when they rise more than a little bit, that’s when we might start worrying about the consumer’s ability to pay back their debts.

HERERA: You know, we always think of the financial crisis, the 2008 financial crisis and debt issues that occurred out of that. But this seems to be a very different time, would you agree with that?

HOYT: Yes, this is a totally different time. As I said before, debt burdens are lower than they were, even in the early late 1980s when you think of it as payments of a share of income. Whereas, prior to the financial crisis, debt burdens were at record highs.

HERERA: All right. On that note, thank you so much, Scott. Scott Hoyt with Moody’s Analytics.

HOYT: My pleasure.

Before we go, another look at the day on Wall Street. The Dow Jones Industrial Average gained triple digits, 183 points, to 20,636. That snapped a three-day losing streak. Surprised a lot of people on the street as well today. The NASDAQ added about 51 points, and the S&P 500 was up about 20. We’ll see whether or not it continues into tomorrow’s trading session.

On that note, that is NIGHTLY BUSINESS REPORT for tonight. I’m Sue Herera. Thanks for joining us. Have a great evening, everybody, and we’ll see you right back here tomorrow.

END

Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by ASC Services II Media, 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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