Transcript: Nightly Business Report – May 10, 2017

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Retail wreck. Will this
earnings season be the sector`s worst in nearly a decade?

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Staying focused. The
markets brushed off the firing of the FBI director, and stocks are oddly
calm. Why? And what moves if any should investors like you make?

HERERA: Modern medicine. How artificial intelligence could one day
predict what diseases we might get.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Wednesday,
May 10th.

MATHISEN: Good evening, everyone, and welcome.

The talk in Washington and on Wall Street was about yesterday`s firing of
FBI Director James Comey. More on that in a moment.

But we begin tonight with retail. Some say the industry now faces its
biggest challenge since the Great Recession. And as the sector gets set to
report earnings, investors are preparing for the worst. We`ve already seen
a growing number of retailers file for bankruptcy. And if the pace keeps
up, this year could see highest number of such filings since 2009.

And just today, the teen retailer Abercrombie and Pitch, which has seen its
stock fall more than 40 percent over the past year, is reportedly in merger
talks with at least two interested buyers. Tomorrow, we may start to see
just how much pain the retailers are in when companies like Macy`s (NYSE:M)
and Kohl`s (NYSE:KSS) report their quarterlies.

Bob Pisani takes a look at what to expect.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: The overall retail
picture is looking pretty grim right now. About 20 percent of all publicly
traded retailers are expected to lose money in the first quarter — 20
percent! Sixty percent will report lower earnings than last year. That`s
terrible. That would be the worst performance for retailers since the
Great Recession.

Retailers have reached a tipping point in the last few months, plagued by a
number of big, big problems. For example, more sales are going online, we
all know that, and there`s a shift to experiences like travel and
restaurants over buying apparel. And, of course, we have a big oversupply
of retail outlets out there.

Then, of course, there`s Amazon (NASDAQ:AMZN), that`s the big elephant.
Amazon (NASDAQ:AMZN) made up more than 60 percent of the growth in U.S.
online retail sales last year. Sixty percent of the growth. And they`re
about 27 percent of the growth in the total retail market. Think about
that.

One company with a quarter of all the growth that we saw in retail sales
last year. How do you compete with that? There is no margin for error,
because of the pressure Amazon (NASDAQ:AMZN) and even Walmart are putting
on the businesses in terms of pricing and delivery.

Still, a number of retailers are holding up, including the home improvement
group. So, Home Depot (NYSE:HD) and Lowe`s, they are doing well. And some
beauty companies are doing well. Ulta is doing well. Cody is doing well.
But that`s a pretty small group.

The typical retailer is down double digits this year. The biggest movers,
what else, Amazon (NASDAQ:AMZN) is up 26 percent. And the other behemoth,
Walmart, is up about 11 percent. Tough year.

For NIGHTLY BUSINESS REPORT, I`M Bob Pisani at the New York Stock Exchange.

(END VIDEOTAPE)

HERERA: Oliver Chen joins us now to talk more about retail earnings and
what he`s expecting from some of the big names reporting their results
tomorrow. He`s the senior retail analyst at Cowen and Company.

Oliver, welcome. Nice to have you here.

OLIVER CHEN, COWEN & COMPANY SR. RETAIL ANALYST: Thank you for having me.

HERERA: You know, Bob Pisani kind of set the stage, and it does sound like
it`s going to be a pretty difficult quarter for many of the retailers.
What are you going to be watching for?

CHEN: Yes, there is a transformation and a revolution happening in retail.
There are three main problems.

Firstly, physical store traffic. Physical store traffic is declining
anywhere from 5 percent to 6 percent.

Secondly, the rise of online and Amazon (NASDAQ:AMZN). Keep in mind —
about 80 percent of America shops at Amazon (NASDAQ:AMZN). And there`s
over 50 million prime members.

And thirdly, the consumer transformation taking place. Consumers basically
have stores in their phones. So, they have stores in their pockets.
That`s really changed a lot of behavior.

So, what I`m looking for is really more information on the reality of store
closures. At Cowen and Company, we think as many as 20 percent of these
store bases need to close their stores. And malls — there`s too many
malls in America. So, about 20 percent of malls could be repurposed.

So, that`s a very dominant theme that would pervade a lot of the conference
calls as well. Physical store traffic is an issue. And the equilibrium
point, online will probably grow 10 percent to 15 percent, to 20 or more.

MATHISEN: Is there or are there stocks in the retail space that you follow
that you like that are worth investors` money?

CHEN: Yes.

MATHISEN: Which are they?

MATHISEN: Yes. I would say you`re going to go high, go low. Go super
premium or go deep value. So, we like LVMH, Louis Vuitton. We like
Tiffany (NYSE:TIF). We like Sotheby`s.

Or you go for value. We like T.J.Maxx. We like Ross. We like Costco
(NASDAQ:COST).

So, that`s really how the shoppers shopping, high low, and you want to play
this theme about what`s un-Amazonable. That`s a theme I follow closely.

And Amazon (NASDAQ:AMZN) is an awesome convenience stores. But if you`re
going to buy a diamond or a $100,000 art piece, you`re going to go to
luxury goods. And if you want goods on sale, like a T.J.Maxx and Ross,
you`ve got to go to those stores to get that discount.

HERERA: You know, Bob said that experiences are taking the place of
regular retail shopping. But I guess you could argue that an LVMH or a
Tiffany`s, when you go into those places, it`s an experience as well as a
purchase.

CHEN: Yes, it really comes back to brands and running a great brand. And
at the pinnacle of luxury, it`s about heritage, it`s about craftsmanship.
It`s all underpinned by innovation.

So, Amazon (NASDAQ:AMZN) is a house of brands of the department store, but
if you own a great brand like a Vuitton, a Sotheby`s, a Tiffany (NYSE:TIF),
a Lululemon, that`s a powerful resource. So, thinking about that is
important.

Costco (NASDAQ:COST), another great retailer, very well-priced items, deep
value. So, customers always like a bargain. Keep in mind that`s another
name we like too —

HERERA: OK.

CHEN: — because value will always be in style.

HERERA: On that note, thank you so much, Oliver.

CHEN: Thank you.

HERERA: Oliver Chen with Cowen and Company.

MATHISEN: Investors were watching the fallout from the late day firing
yesterday of former FBI Director James Comey. The big question they have
is whether it will impact the Trump administration`s economic agenda.

John Harwood comes to us from Washington tonight.

John, if the dots can be connected, connect them for us. How could this
impact the president`s push for such things as tax cuts, infrastructure
spending, even health care?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: The furor surrounding
a decision like this, it was the only thing anybody in Washington was
paying attention to today and will be for some period of time. It prevents
Congress from focusing and making tough decisions on policy issues that are
difficult already to begin with.

Second of all, it puts more pressure on the Republican coalition behind Mr.
Trump. They only have 52 votes in the Senate. If you start getting people
nervous about associating themselves with his position, either in the House
or in the Senate, then it`s more difficult.

Let me give you one piece of sound that I just — from a conversation this
afternoon with Josh Bolten, the former Bush White House chief of staff, now
runs the Business Roundtable. It was an informal setting because I was
doing it for “Speakeasy” interview.

But here`s what he said when I asked him if he was disturbed by what
happened with James Comey.

(BEGIN VIDEO CLIP)

JOSH BOLTEN, FORMER WHITE HOUSE CHIEF OF STAFF: The president has the
right, the authority to fire the FBI director. But there will be a lot of
turbulence over the timing and the circumstances of this. And so my
concern from my vantage point at the Business Roundtable is that that will
delay or distract from what should otherwise be a very productive period
for legislating and acting on economic policy priorities. I don`t think
there`s reason to doubt about the stability of the rule of law in this
country.

(END VIDEO CLIP)

HARWOOD: So, even if there`s not a constitutional crisis, which is a
prospect being raised by some of the president`s strongest critics, this
certainly gets in the way, guys.

HERERA: You know, Mr. Comey is being asked to come testify on Capitol
Hill. So once again, that whole story will kind of be resurrected.

So, given that, how long can investors expect this distraction to last, do
you think?

HARWOOD: Well, look, I think for some time, because not only do we have an
FBI investigation, which will continue with the career professionals and
some new head of the FBI, but you`ve also got the Senate intelligence
committee investigation. One of the people who seemed particularly
disturbed on the Republican side by what happened yesterday was Richard
Burr, who co-chairs that with Mark Warner of Virginia, the Democrat. Mark
Warner said, we now have questions about the rule of law. And that is a
very major topic to occupy Washington.

MATHISEN: All right. John, thank you very much. John Harwood in
Washington tonight.

HERERA: On Wall Street, stocks were oddly calm. You might expect stocks
to move on a headline that read “White House fires FBI director,” but not
today. In fact, it was Disney`s results that we reported on yesterday that
dragged the blue chip Dow index lower.

So, here are the closing numbers: the Dow Jones Industrial Average lost 32
points to 20,943, the NASDAQ gained 8 1/2 and the S&P 500 rose more than
two.

MATHISEN: So, what should you make of today`s calm stock market reaction
and what if anything does it mean for your money?

Eric Aanes is president of Titus Wealth Management and he joins us now to
discuss.

Eric, welcome. Good to have you with us.

You saw the stock market barely budge today after the sort of bombshell
last night about the firing of FBI Director Comey. But is there the
possibility that if the Trump agenda gets stalled, that the market would
react?

ERIC AANES, TITUS WEALTH MANAGEMENT PRESIDENT: Hey, Tyler, great question.
When you look at what`s happening and the noise centered around this,
frankly, it`s just that, it`s noise at the moment. How deep it goes, we`re
going to have to wait and see.

The bigger question is, does it delay some of the tax reform? What`s going
to happen and how will that play out, and will it be delayed in some
fashion?

MATHISEN: Does the economy trump Trump?

AANES: Or does the Trump trade over?

MATHISEN: Yes.

AANES: You know, that being said, we think that earnings have been good.
Interest rates are low. Money is cheap right now. And companies are
hitting new highs every day.

So, the sentiment seems to be good. The question is, if this is delayed a
little bit or if something larger comes out of it, what happens to the
market? And basically, how much of it has been priced in?

HERERA: Exactly. Now, you like consumer staples and information
technology. On a pullback at this point, yet we also have very low
volatility. The volatility index has been almost at record lows.

AANES: Yes. So, when you look at those two — there`s two things we like
to look at. One is consumer sentiment. We see consumer sentiment in the
upper 90s and we see the volatility index sub-10. You know, we`re not
saying this is going to be a big selloff, but market corrections do happen.
And seasonally, going into May, this is summer. There`s a sell in may and
go away that comes up occasionally.

So, we do want to be aware of that. And the question is, how we become a
little bit toppy. And if the tax — if the tax trade gets stretched out,
what does that do to the markets? We really haven`t seen, when we think
about pullback, January 1 of `16, the S&P 500 was at 2,081. Five weeks
later, it was at 1,810.

MATHISEN: Yes. Eric, thanks for reminding us, we appreciate it.

Eric Aanes with Titus Wealth Management.

HERERA: Still ahead, tonight, why the pressure is mounting on a very
visible CEO.

(MUSIC)

HERERA: Boeing (NYSE:BA) has suspended flight tests of its new 737 MAX
jetliners. The aerospace company is citing engine problems. The jet has
not yet been delivered to airlines. The first delivery was expected this
month, and Boeing (NYSE:BA) says it plans to stick to that schedule.

Phil LeBeau is covering the story for us from Chicago.

Good to see you tonight, Phil.

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Hi, Sue.

HERERA: What does this mean for Boeing (NYSE:BA) and how unusual is this
type of problem so close to delivery?

LEBEAU: Whenever you stop flights, it gets a lot of attention, because it
doesn`t happen very often.

Look they`re not changing the delivery schedule, if that were to happen
then you would see stocks taking a hit. I think people are a little
cautious right now. But by all indications, we were out there for the
first flight of the 737 MAX, that was in January of last year.

By all indications, the first delivery, once they get done inspecting these
engines, will be happening next week. This is a LEAP-1B engine built by GE
and its French partner Saffron. They noticed the quality control issue.
Nothing happened during a flight, so they`re going to be inspecting these
engines.

And again, they expect the first delivery to happen next week. And also
keep in mind, Boeing (NYSE:BA) is in the midst of ramping up 737 production
later this year from 42 a month to 47 a month. So, if that were to change,
then we`d have a bigger issue.

MATHISEN: This is their key aircraft.

Let`s switch gears, Phil, and talk about another company you follow, Ford.
There are reports over the past couple of days that the CEO, Mr. Field, is
coming under pressure from the board to better explain his strategy. The
stock is slumping. What do you hear?

LEBEAU: Mark Field is facing pressure, and primarily, the pressure comes
down to this — they`re making huge investments trying to reposition the
company for autonomous drive vehicles utilizing future technologies like
artificial intelligence. These are big investments that Ford is making.
At the same time, they`re seeing lower profits.

And compounding that is the fact that they`re trying to keep up with
rivals, old rivals like GM, who are looking at record profits, and new
rivals like Tesla. To drive that point home, take a look at shares of Ford
and Tesla since Mark Field became CEO in July of 2014. I mean, you look at
this and you would say, wow, Tesla must be having great profits over that
timeframe.

Uh-huh. Ford has been profitable, very strong profits, and yet, the stock
has done nothing under Mark Fields.

HERERA: Yes. But is the gain that we`ve seen in Tesla partly because of
the CEO?

LEBEAU: Sure.

HERERA: And because of all the different and some would say very
sophisticated, very out of the box types of ideas that he has.

LEBEAU: Correct.

HERERA: Whereas Mr. Fields is running an old line company that`s
innovating, certainly, but it`s a vastly different type of company than
Tesla.

LEBEAU: Exactly. It`s also a profitable company, unlike Tesla, Sue.

HERERA: Exactly.

LEBEAU: And the problem for Mark Fields is he`s made these huge
investments that he eventually thinks will pay off, and most people believe
that they will pay off. The question is when. Will it be in two years?
Will it be in five years? Will it be in seven years?

And how patient do you have to be as an investor? That`s the pressure on
Ford.

MATHISEN: Is Ford the hot brand? Or has GM sort of surpassed it because
gm touts that they`ve got lots of models —

LEBEAU: Right.

MATHISEN: — including their trucks that are doing very well. I sense
that GM may have a little bit more of a hot factor attached to it.

LEBEAU: I would say it has more momentum, partly because it has a younger
lineup of vehicles right now. And that is helping General Motors
(NYSE:GM). But really, when you talk about the hot brands out there, look
at what`s happening in the other company in Detroit that nobody talks about
very much, Fiat Chrysler. You`ve got Jeep and you`ve got Ram. And those
are two of the hottest brands that are out there right now.

HERERA: Indeed they are. Phil, as always, thanks so much.

LEBEAU: You bet.

HERERA: Phil LeBeau in Chicago.

MATHISEN: Toyota (NYSE:TM) issued a downbeat earnings forecast, the
largest Japanese automaker said profit for the current year could slide 20
percent. The company blaming increased spending in the U.S. market and a
stronger yen. If that happens, it would be the second straight year of
profit decline for Toyota (NYSE:TM) and could crimp investments in new
technologies like artificial intelligence and autonomous driving.

HERERA: Yesterday, we talked about the airlines. And that despite all
those viral videos, customer satisfaction is rising, along with their stock
prices. Well, today, there was another survey with pretty similar
findings. According to JD Power, consumer satisfaction is up for the fifth
straight year, thanks to cheaper airfares, better on-time performance, all-
time low bump rates and less mishandled bags.

The survey collected responses from April of last year to March of this
year. But that was before the video of the passenger being dragged off
that United flight and it surfaced.

MATHISEN: Well, Time Inc. cuts its dividend. And that`s where we begin
tonight`s “Market Focus”.

Following a weak earnings report, the struggling magazine publisher said it
was lowering its quarterly dividend to four cents a share, down from 19
cents. Print ad revenue, a soft spot for the company, dragging down
overall sales more than expected. Time also saw its loss widen and it
missed estimates to boot. Shares fell a whopping 14 percent on the session
to $12.95.

Higher labor costs eat on the profit at Wendy`s. But the fast food chain
still managed to post earnings that beat expectations. Same store sales
beat estimates, thanks to the popularity of its value meals. But overall,
revenue fell because the company sold more restaurants to franchisees.
Shares rose 5 percent to $15.87.

And Charlie Brown and the gang are heading north as Canada`s DHX Media is
buying the entertainment division of Iconics Brand Group for almost $350
million. DHX will now own the rights to the Strawberry Shortcake brand and
a controlling stake in the Peanuts franchise. Shares of DHX Media were up
more than 5 percent to $4.60.

HERERA: Profit at drug maker Mylan (NASDAQ:MYL) rose and topped
expectations, thanks to strength in that company`s overseas markets.
Revenue also edged higher but came in a bit shy. The company did reaffirm
its guidance for the year. Mylan`s shares rose fractionally to $38.21.

In its first earnings report since going public, Snap posted a less than
stellar quarter. After the bell, the social media company reported slowing
user growth and revenue that was slower than estimates. Shares plummeted
in afterhours trading. They also ended the regular session down 1 percent
to $22.98.

Under pressure from its investors, Whole Foods named a new CFO and five new
members to its board of directors. The news followed the company`s latest
earnings, which were in line with estimates. Whole Foods also raised its
quarterly dividend 29 percent to 18 cents a share and said it was launching
a more than $1 billion share buyback. Shares initially rose in after-hours
but finished the regular day session down 32 cents to $36.25.

MATHISEN: The future of medicine, a term might bring up the images of
wearables or new more targeted treatments. But there`s one thing could
revolutionize health care more than any other — artificial intelligence.

Meg Tirrell has tonight`s “Modern Medicine” story.

(BEGIN VIDEOTAPE)

MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT: Already, digital ad
technology can predict what we might buy. Soon, artificial intelligence
may be able to predict what diseases we could get.

DR. ERIC TOPOL, SCRIPPS TRANSLATIONAL SCIENCE INSTITUTE DIRECTOR: The
potential is perhaps the biggest of any type of technology we`ve ever had
in the field of medicine.

TIRRELL: It`s being worked on by tech giants from Google (NASDAQ:GOOG) to
IBM to Phillips.

FRANS VAN HOUTEN, ROYAL PHILIPS CHAIRMAN & CEO: In many of the fields that
we are in, we`re using AI already. In patient monitoring, we can predict
hours in advance whether a patient will get a heart attack.

TIRRELL: Startups are proliferating as well. Researchers are training
computers to analyze information from sensors, images, and language, using
a technology known as deep learning.

ADITYA KHOSLA, PATHAL CTO: We give it the image and we tell it, OK, these
set of pixels represent cancer while, you know, these other set of pixels
are not cancer. So, can you learn how to distinguish between these two
automatically?

TIRRELL: Without human inputs and with enough data, computers may make
connections we`re not capable of.

TOPOL: Computing capability can transcend what a human being could ever do
in your lifetime, because they can be fed, you know, just millions,
hundreds of millions of whatever the topic is of interest.

TIRRELL: Joel Dudley`s team at Mt. Sinai developed a system known as Deep
Patient that mines anonymous health information on the millions of people
in the hospital`s database.

JOEL DUDLEY, INSTITUTE FOR NEXT GENERATION HEALTHCARE DIRECTOR: It takes
all of that data at a high level and starts recombining it in different
ways, and saying are there hidden connections among these data that would
allow us to better predict, for example, who is going to get type II
diabetes.

TIRRELL: And that`s something that a computer might be able to do that a
person —

DUDLEY: That a person cannot, right.

TIRRELL: Many caution, though, it`s early days. And the hype around
artificial intelligence is significant. Hurdles from access to data, to
reimbursement, to simply understanding how AI works abound.

But as investment grows, leaders in the space expect AI to influence the
way doctors and consumers think about health.

For NIGHTLY BUSINESS REPORT, I`m Meg Tirrell.

(END VIDEOTAPE)

MATHISEN: And coming up, why virtual offices are now a real player in real
estate.

(MUSIC)

HERERA: Mortgage applications are on the rise. Total volume increased
about 2.5 percent on a seasonally adjusted basis last week from the
previous week, and it comes as the buyers complain about high home prices
and limited listings. According to the Mortgage Bankers Association,
volume is still below year-ago levels because of weaker refinancing.

MATHISEN: Anyone with a computer can launch a website and start working
from basically anywhere. But for some, where you work is still important.
That`s why the boom in small business is causing yet another boom, in
offices. Not real offices, mind you, but virtual ones.

Diana Olick reports from New York.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: On the 85th floor of
One World Trade Center, there are receptionists, offices, conference rooms,
and co-working spaces. But it`s what`s not here or rather who is not here
that matters.

What is a virtual office?

MARCUS MOUFARRIGE, SERVCORP COO: Well, virtual office is really people who
are working from home.

OLICK: Australia-based Servcorp has operations in 24 countries but entered
the U.S. only recently during the recession, when real estate rents
slumped. They took space in several prime locations, including One World
Trade Center where they`re subleasing both the space and the address.

MOUFARRIGE: We now have 40,000 customers who don`t rent any space from us.
They can use our space on a casual basis. They can use the infrastructure
that we`ve got, the technology, the telecommunications technology, so their
business is really well represented.

OLICK: Starting at $250 a month, clients can get the five-star address,
the urban area code, secure e-mail, and a receptionist who answers for
their company and can accept real mail or faxes.

MOUFARRIGE: It`s absolutely marketing. I think that, you know, the aim of
marketing is to build trusting clients so you can create an environment
where they want to buy from you. And really this is, may be turbo-charging
that.

OLICK: Executive office suites have been around for decades, but
technology has caused a new boom in small business. Boutique, financial
firms, PR, marketing, tech, and information services, that`s where virtual
offices have become a real player in real estate.

Jordan Hamad is CEO of a small tech consulting firm in Oregon, just seven
employees. But you would never know that from his One World Trade address.

JORDAN HAMAD, CHAIRSEEN CEO: There`s a good deal of prestige that comes
along with being here. It`s the most recognizable address in the world.
And so, it`s great that we can attach the company name to that. And we
primarily use it as a marketing mechanism, as well as a flexible space to
work.

OLICK: Businesses can pay a little more to have access to co-working space
like this, or a lot more to rent an individual office. Competitors like
WeWork, Spacious and Regus also offer flexible work spaces but don`t go as
far with the high end virtual. Servcorp claims virtual office now accounts
for 40 percent of company revenue.

But you think co-working has peaked already?

MOUFARRIGE: I think that there`s a mix of space that you need in order to
make your business model stack up and I think it`s really about an
ecosystem. And what I`m really excited about is I think the virtual office
is the next big thing.

OLICK: The biggest expenses for small businesses are people and rent. The
longer they can put off investing in both, the more profitable they`ll be.
Now that technology allows anyone to be anywhere, at least virtually, it
makes sense that wherever you are, you should be at the top.

For NIGHTLY BUSINESS REPORT, I`m Diana Olick in New York.

(END VIDEOTAPE)

HERERA: What a view!

That does it for us tonight. I`m Sue Herera. Thanks for joining us.

MATHISEN: And I`m Tyler Mathisen. Thanks from me as well. Have a great
evening, and we`ll see you right back here tomorrow night.

END

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