Transcript: Nightly Business Report – May 15, 2017

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Historic highs. What a way to start the week. Stocks closed at records, but can the quiet rally last?

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Risk protection. How the biggest ransomware attack in human history is driving demand for a product you know exists.

HERERA: Staying put. Is out-of-control competition for homes fueling the renovation boom?

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Monday, May 15th.

MATHISEN: Good evening, everyone.

Halfway through May and investors had a pretty good start to the week. The S&P 500 and the NASDAQ closed at new highs, thanks to a rally in the price of oil that lifted energy shares. Technology stocks also helped out, and the result was a record close for two of the three broad major indexes we follow. The Dow Jones Industrial Average advanced 85 points to 20,981. NASDAQ up 28 to a record, and the S&P 500 gained 11, all-time high there as well.

But volatility remains sort of suspiciously low. In fact, this is the 14th straight day the S&P 500 has failed to move more than a half a percent in either direction, and that — well, that hasn’t happened since 1995.

And as Bob Pisani reports right now, that’s working for the market.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Stocks again hit historic highs today. One of the reasons the market has remained strong is that there’s been considerable rotation among sectors in the last year. The market leaders fall back, and they’re usually replaced by market laggards.

It happened again today. What sectors have lagged the market this year? Energy stocks and bank stocks. What led today? Energy stocks and bank stocks.

Energy was particularly prominent. Oil was again back near $50 as Saudi Arabia and Russia announced yet another extension to their agreement to cut back supply and now extended it through the first quarter of 2018. Big oil stocks all traded up on that news today.

Now, stocks had been strong because risk has been lower recently. Earnings guidance, for example, for the year has been strong. That’s good news. The global economy is improving. That’s good news. And the geopolitical risk is much lower, thanks to France, also good news.

Now, the traders had been complaining about the low volatility. But that’s historically not a problem for markets. Stocks can do fine during periods of low volatility. Traders just don’t trade as much.

So, why are the markets in such a tight trading range? Well, it’s not hard to figure out. Right now, stocks are relatively pricey. Buyers are not terribly enthusiastic about buying a lot more absent some more catalysts. They would rather wait for prices to drop and buy some more. The sellers are not enthusiastic about selling because they see the better earnings and improving economy and they worry that stocks could go much higher, which is what happened today.

The result, you have a tight trading range but you are at historic highs.

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

(END VIDEOTAPE)

HERERA: So far, the markets have brushed off some of the political rumblings in Washington. Late tonight, “The Washington Post” is reporting that the president revealed highly classified information to Russian diplomats.

Let’s bring in Michael Farr. He is the president of the money management firm Farr, Miller and Washington.

Michael, it’s nice to have you with us. It’s interesting that the market has shrugged off many of the happenings in Washington. Although this latest report from the “Washington Post,” does it have the potential to unnerve the market tomorrow?

MICHAEL FARR, PRESIDENT, FARR, MILLER AND WASHINGTON: Hi, Sue. And thank you very much, as always, for having me.

Yes, I think clearly it has the potential to unnerve markets. We’ve been waiting for so many times now for this last straw that might break the market’s back of confidence, and we haven’t seen it. Whether it was the missiles launched in Syria or the mother of all bombs in Afghanistan, or U.S. troops now off the coast of North Korea, or North Korea firing a missile, or a cyber attack from WannaCry affecting 200,000 computers in an instant, and now, classified information.

The market has shrugged off all these pieces of bad news and continued to go along and upward in a complacent way. The economy’s expanding.

And so, to me, Sue, this is bull market psychology. And bull market, you embrace the good news, you discount the bad news. And we’re going to find out how thick this coat of armor perhaps on the markets really is.

MATHISEN: So, Michael, as you look at all of the things that you have to process as a money manager, and a stock selector, from the strength of the economy, to interest rates, to what the Fed may do next month, to rates of inflation, home builders, all of that stuff, where does Washington fit? Is it number one on your list of things you’re concerned about? Number five? Number ten? Where?

FARR: Washington ranks pretty high. I mean, I look at the underlying fundamentals. Underlying fundamentals are really fairly — are good. It doesn’t look like we’re going in recession. It looks like the economy is expanding, earnings are coming in. Stocks are expensive, but that part’s OK.

Washington comes into play when Washington changes the rules. In the financial crisis, all of a sudden, monetary policy got to be very important. Dodd/Frank got to be very important. These changed the rules for investors and for bank reserves and they change.

So, will Washington at this point do something to actually change the rules here again or to upset the apple cart, they can take front page, front stage news at just the worst times. We know the one thing markets don’t like, Tyler, is to be surprised. The news tonight is surprising. And it’s just a matter of at what point will the markets suddenly decide that this is troubling? They haven’t yet.

HERERA: Not yet. But given what you just laid out, Michael, what parts of the market do you feel secure in investing in?

FARR: And, Sue, I think this is a really important question, because in a market like this, particularly when a market’s making new highs and we haven’t gone down for a number of years, you have to know what you own and why you own it. And so, we choose to own companies with solid balance sheets and good cash flow and good earnings. Not the companies necessarily that are going to go up and lead the market for the next couple of percentages, that are the Teslas of the world or Netflix, or the things that are just really on a fabulous roll, but the companies that are going to take care of our clients best if and when the market drops 20 percent.

At some point, again, we’ll see stocks fall 20 percent. It’s normal. But you have to have a seat when the music stops. And this music’s been playing for a long time. These guys have got to be getting tired.

HERERA: On that note, Michael, thank you.

FARR: Thank you.

HERERA: Michael Farr with Farr, Miller and Washington.

MATHISEN: Well, cybersecurity stocks climbed following that global malware attack that Michael mentioned, the attack which we told you about on Friday, hit at least 150 countries and those 200,000 computers, many that belonged to hospitals and businesses. FedEx and Nissan were among the companies impacted.

Experts who followed the cybersecurity industry say this attack could refocus attention on updating security infrastructure and benefit providers like VMware, Palo Alto Networks, Symantec, Proofpoint and FireEye, all of which traded markedly higher today.

Now, the White House today addressed the attack, saying no federal systems have been struck so far. The president’s homeland security adviser said less than $70,000 have been paid in ransom in the wake of the global WannaCry attack. And he added that he is aware of no instances in which a payment has led to the recovery of data.

(BEGIN VIDEO CLIP)

TOM BOSSERT, HOMELAND SECURITY ADVISOR TO THE PRESIDENT: Overall, the U.S. infection rate has been lower than many parts of the world. But we may still see additional impacts on additional networks as these malware attacks morph and change.

(END VIDEO CLIP)

MATHISEN: The criminals were demanding about $300,000 in ransom to unlock infected computers.

HERERA: The malware attack is putting renewed focus on a product that few know exist, but could be the insurance industry’s next cash cow.

Morgan Brennan has that part of the story.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: It’s the biggest ransomware attack in human history, a cyber hack that’s crippling companies across the globe, and stoking fear in an even more connected world.

ALEXKSANDR YAMPOLSKIY, SECURITYSCORECARD CEO: We see millions of organizations that are potentially vulnerable to this type of attack.

ADMIRAL JAMES STAVRIDIDS, FORMER NATO COMMANDER: I’m hesitant to say, we’re seeing a nascent cyber Pearl Harbor. But we’ve got to wake up to the real potential of a devastating attack in this way.

BRENNAN: But for the economic toll and the financial cost, it’s also driving demand for an emerging business.

THOMAS REAGAN, MARSH CYBER PRACTICE LEADER: We’ve already started getting the first calls on Friday. We’ve got a lot more calls today. And I think we’ll see more through the weekends and months to come, particularly in industries that have historically have been relatively underserved for cyber insurance like manufacturing.

BRENNAN: Thomas Reagan advises clients on cyber risks for insurer Marsh. He says it’s one of the firm’s most critical areas of focus. The investment seems to be paying off. Cyber insurance purchasing grew by 25 percent last year.

And Marsh isn’t alone. Other insurance companies from AIG to Beazley have reported similar growth, as more businesses seek protection in the case of a hack.

The cyber insurance market is still relatively small. The Insurance Information Institute pegs it at just over $3 billion. But experts say it’s poised to become the next big blockbuster business for the long struggling insurance industry, with a market expected to triple by 2020.

And it’s no longer just about data breaches or theft of personal informational either. Now, the policies include physical damage as manufacturing becomes smarter and machines become more connected.

REAGAN: When a company is a victim of a cyber attack, the most important thing is to get back online, and that’s been our focus over the past couple of days, helping clients stop the immediate damage from an attack.

BRENNAN: Also included, business interruption, a necessary component when a cyber ransom like WannaCry can cost a mere $300. But the impact from a frozen network, be it a hospital or factory floor, can cost millions. For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan.

(END VIDEOTAPE)

MATHISEN: Well, computer networks and broadband are part of America’s infrastructure. And today the transportation secretary said the administration will release details on its big infrastructure plan in just a few weeks’ time.

Speaking to the U.S. Chamber of Commerce, Elaine Chao said the proposal will call for $200 billion in taxpayer money to generate about $1 trillion worth of private investment. And the projects could cover more than just roads and bridges.

(BEGIN VIDEO CLIP)

ELAINE CHAO, SECRETARY OF TRANSPORTATION: The administration’s definition of infrastructure is also broad and inclusive. It not only recognizes traditional infrastructure such as roads, bridges, railroads, airports, inland waterways and ports, it may also potentially include energy, water, broadband, veterans hospitals as well.

(END VIDEO CLIP)

MATHISEN: President Trump’s pledge to fix the nation’s infrastructure was a top campaign promise. That stimulus is also something investors have been paying a lot of attention to, of course.

HERERA: And still ahead, Amazon turns 20. It was a great investment for the past two decades. Will it be for the next two?

(MUSIC)

HERERA: The world’s second largest economy may have lost a little momentum in April. China’s factory output was up 6.5 percent. But that was below forecast. The decline is being attributed to tighter credit and weaker demand. A separate report showed retail sales fell in April from the previous month.

MATHISEN: Well, the data out of China comes as that country hosts an international summit to showcase its ambitious infrastructure project. The project includes massive spending and China hopes it will make the world’s second largest economy even more powerful and influential.

Eunice Yoon reports tonight from Beijing.

(BEGIN VIDEOTAPE)

EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: China’s first Belt and Road Forum has wrapped up. Two things were going on at the summit: what China wants everyone to know about the initiative and what people were talking about behind the scenes.

What China wants you to know is that this international diplomatic initiative aims to revive the Old Silk Road trading group. It’s meant to build infrastructure all over the world to boost the global economy and improve relations among trading partners. In fact, in his opening address, Chinese President Xi Jinping sold it as a new form of globalization and he presented himself as the international figure who would lead this fresh round of freer trade.

XI JINPING, CHINESE PRESIDENT (through translator): In a world where countries are interdependent and global challenges are frequent, no country can stay aloof and intact by relying on themselves, nor can they solve global problems. Only by aligning policies of different countries and integrating economic factors and development resources globally can we converge energy for the promotion of world peace and common development.

YOON: The numbers behind the Belt and Road are massive. It’s supposed to involve two-thirds of the world’s population, across more than 60 countries, with hundreds of billions of dollars already pledged for projects. At the summit, the Chinese said they were throwing in another $100 billion to support the program.

Then, there’s what people were talking about. There’s still lack of clarity about how all these projects will proceed, who will finance them, how they will be chosen and vetted and who will build them.

The Australian trade minister told me that he hopes to see more transparent procedures, so foreign investors can get involved.

STEVEN CIOBO, AUSTRALIAN TRADE MEMBER: I think at a time, Australian businesses would be looking at this almost a one-stop shop where they can go, they can find a development projects, and they can find out or register their interest to be involved so they can help share their experience and their track record. More clarity around how that might actually operate and what that might actually look like, I think that would be considered to be beneficial not only for Australian businesses but indeed across the board.

YOON: Trump administration official Matt Pottinger, who represented the U.S. at the talks, said American companies have much to offer, though he, too, said the success of the initiative would depend on its transparency.

The potential benefits for U.S. construction, engineering and infrastructure equipment companies could be huge. But that would mean that President Xi’s China would have to follow through on its pledge to remain open to everyone.

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

(END VIDEOTAPE)

HERERA: Scientific instrument maker Thermo Fisher strikes a $5 billion deal and that’s where we begin tonight’s “Market Focus”.

Thermo Fisher said it buy drug ingredients maker Patheon it looks to grow its development and manufacturing capabilities. Thermo Fisher also said the deal will improve earnings, and help the company better serve its pharmaceutical and biotech customers. Thermo Fisher shares rose fractionally to $172.26. Meanwhile, Patheon shares surged 33 percent to $34.60.

The hotel booking website Trivago turned a profit in the latest quarter. The results will help by improvements made to the company’s technology and algorithms. Trivago also reported higher sales that beat expectations. Its shares jumped almost 12 percent to $19.96.

Pharmaceutical company Ionis says its experimental drug for treating a rare disease that affects the nervous system met its goals during a study trial. But the company also noted that the medication caused a serious side effect in three patients, resulting in one fatality. That news concerned Ionis investors, but it was a positive for rival biotech Alnylam which is developing a similar treatment. Shares of Ionis finished down more than 6 percent to $43.90, while Alnylam shares soared 16 percent to $66 even.

MATHISEN: Water and drainage pipe maker Forterra said unfavorable weather conditions caused the company to post sales that slightly missed estimates. The company also posted a wider than expected loss. Shares crushed, down 24 percent to $14.93.

In a blog post today, Sears CEO Eddie Lampert said the retailer had seen business suffer as a result of suppliers trying to take advantage of the negative financial predictions surrounding the retailer. Lampert called out one vendor, in particular, China-based One World, which makes power tools for Sears. He said the company threatened to file a lawsuit unless Sears gives in to what Lampert calls, quote, unreasonable demands. Sears shares off 12 percent to $8.31.

The hotel operator La Quinta may soon be up for sale. Reuters says the company wants to spin off its retail assets and is preparing to speak with potential buyers. The report also noted there is no guarantee a deal will take place. Following the news, La Quinta shares rose 13 percent to 15.17 cents.

HERERA: Waymo, Alphabet’s self-driving car unit, is teaming up with the Uber rival Lyft. The two companies plan to work together to bring autonomous vehicles into the mainstream. Though details were scant, the companies plan to collaborate on pilot products and product development efforts. Lyft is Uber’s biggest rival in the U.S. and the tie-up has competitive implications for Uber, which has recently confronted workplace and legal issues.

MATHISEN: And Uber’s legal issues played out in a courtroom today where a judge issued a mixed ruling for the ride-hailing company. The court rejected Waymo’s request to prevent Uber from using allegedly stolen self-driving technology. But the court officially barred an Uber engineer from working on the company’s autonomous vehicle program, a move that could be a setback for Uber’s development efforts. Waymo had accused the engineer of stealing trade secrets.

HERERA: On this day 20 years ago, Amazon went public. It started out as a money-losing online bookstore. Its IPO valued it at little more than $400 million. Fast forward 20 years later, add some zeros to the valuation. Over the past two decades, the company did things a little differently. It’s been intensely focused on growth over profit, plowing a lot of its cash into new areas like Amazon Prime and its cloud service.

Today, it’s profitable, dominating retail, and changing the industry. Its stock has gone from under $2 split adjusted to above $955 today per share, helping make its founder and CEO, Jeff Bezos, the second richest person in the world.

MATHISEN: That looks like a 48,000 percent return.

HERERA: It is.

MATHISEN: My goodness.

All right. So, with the stock at or near an all-time high, is Amazon still a buy today?

R.J. Hottovy is consumer equity strategist at Morningstar and he joins us to discuss.

R.J., always great to see you. The stock today, as Sue pointed out, about $955 a share. Should I buy it here, expecting more profit? And if so, how much?

R.J. HOTTOVY, MORNINGSTAR CONSUMER EQUITY STRATEGIST: Yes, I think it’s still a buy here as Jeff likes to say, they’re still day one of a lot of things they’re working on. Obviously, it’s been a disrupter in the retail industry. I don’t think anybody’s come up with a better business model than Amazon Prime, really becoming the marketplace of choice for a lot of sellers.

And then, a lot of untapped potential in Amazon web services, as well as some of the voice recognition, image recognition technology they have out there. I think this company still has a lot of growth ahead of it, projecting 20 percent growth in the next five years. Plus, steady profits, a lot of it being backed by Amazon web services, but other parts of the business as well.

HERERA: So, what parts of the business do you find the most attractive? Is it Prime? Is it cloud? Is it — where do you think Amazon is executing the most effectively?

HOTTOVY: Yes, I think you hit a lot of those. I think Amazon Prime is going to go down as one of the most innovative customer facing developments in the last several decades. It’s really sticky and we retention rates extremely high in that business.

And, frankly, unless you’re getting something else better from a competitor, you’re probably not going to leave Amazon Prime. But on top of that, Amazon web services I think is one of the more misunderstood services out there. Typically, you thrown in there, just another cloud — another play in the cloud space, but there’s a lot more to Amazon web services. Amazon AWS Marketplace for example, access of marketplace for software vendors, I think, that’s really compelling.

And on top of that, too, I mean, I think, you know, what they have, with Alexa and Echo suite of products, that can be very disruptive. If you think about not only the applications, in the consumer world, think about that kind of technology being taken in the commercial world, running warehouses through this type of technology. That could be really valuable, something that may not be fully appreciated in the stock price right now.

MATHISEN: I fell in love with Alexa, R.J., and now I’ve sort of fallen out of love with her. She doesn’t understand me the way she used to, frankly.

But let me ask you — are there any weak spots that you see? And one of them that I hear a lot of my associates here say is that they were a little suspicious of having a microphone in their house that could potentially listen to everything. So, are there businesses or vulnerabilities anywhere that you see in Amazon?

HOTTOVY: Yes. I think that’s one of the first ones that you think about, that there’s potential risk with that. All it takes is one breach of data with that, and potentially that could be very disruptive for the growth plans there.

You know, this is a large company. A lot of things going on. You obviously have to look at execution risk here, too, do they have too many things going on? And every now and then, the company get ahead of himself, think back a couple of years something like Amazon Fire phone which was a flop.

You know, they can get ahead — they can get into areas that don’t exactly align with their core business. Thankfully, more recently, we’ve seen most of the investments, you know, either partnering or being more closely aligned with the marketplace or the AWS. But that’s still a risk you have to factor in with this company.

MATHISEN: All right. R.J., thanks. Great to have you with us. Again, R.J. Hottovy with Morningstar.

And coming up, renovation nation. Why homeowners are pouring big money into home improvement.

(MUSIC)

HERERA: Philadelphia is suing Wells Fargo. The city is accusing the largest U.S. mortgage lender of steering minority borrowers into higher cost home loans than it offered to white borrowers. The lawsuit accuses the bank of violating the federal Fair Housing Act and it seeks damages. The city also said the practice reflects a, quote, total breakdown of appropriate internal controls, end quote. Wells Fargo calls those accusations unsubstantiated.

MATHISEN: Home builders are optimistic, isn’t that nice? After slumping in April, sentiment is now at its second highest level since the recession. According to the National Association of Home Builders, the industry expects stronger sales ahead, even as it deals with higher building costs and shortages of land and labor.

HERERA: Which brings us to Home Depot, which reports its earnings tomorrow. Its quarterly results come as homeowners continue to sink cash into their homes again. Remodeling is booming. But it’s not just about the usual updates in the kitchen and in the bath.

Diana Olick explains.

(BEGIN VIDEOTAPE)

ANN CREHAN, HOME OWNER: They really just opened up the whole floor plan. So —

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: So, this was all closed?

CREHAN: Exactly.

OLICK: Ann Crehan adores her newly remodeled home, especially the personalized wine dispenser.

You want a wow factor?

CREHAN: A wow factor, exactly.

OLICK: But, originally, she wasn’t in the market for a fixer upper.

CREHAN: I looked for quite a time. Put contracts on other places. I had lost the contracts.

OLICK: The competition was rough and the prices kept going higher.

CREHAN: You can’t put contingencies on your contract. You can’t — you have to offer over the asking price, which is not the norm.

OLICK: So, she settled on a project and got to work. It’s a story repeated from coast to coast in one of the most competitive real estate markets ever, and it’s one of several factors driving huge gains in the home remodeling business. Not only are home owners doing more projects with growth this year, predicted to be up nearly 7 percent, according to Harvard’s Joint Center for Housing, they are spending 60 percent more on the average project than they did a year ago, according to Home Advisor.

That may be because home equity has doubled in the past four years, and homeowners are finally ready to tap into it again. Demographics are also behind the growth.

BRUCE CASE, CASE DESIGN/REMODELING PRESIDENT & CEO: The baby boomers are definitely driving our business.

OLICK: Case says he’s doing projects to help baby boomers age in place as well as to upgrade urban condos that boomers are downsizing to.

CASE: They can age in place but they don’t — they have standards. They want to move into a place that’s ready for them. So, a lot of times they’ll have us fix it up before they move in.

OLICK: So you’re fixing up condos downtown.

CASE: A lot of condos. A lot of condos.

OLICK: Perhaps the biggest driver of remodeling today, though, is the cost of moving, both financial and emotional.

Crehan is a financial planner and works the numbers with a lot of her clients who in the end decide to stay put.

CREHAN: They’re doing home renovations over moving.

OLICK: Because the competition is just too fierce?

CREHAN: The competition is — yes, it’s out of control.

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

(END VIDEOTAPE)

MATHISEN: And finally tonight, it’s a great time to be a college grad. New report says the starting average salary for class of ’17 is just under 50,000 bucks. That’s a record. My starting salary was 12 grand.

HERERA: Yes, that’s right about where mine was, too.

MATHISEN: That’s the time.

HERERA: That does it for us tonight. I’m Sue Herera. Thanks for joining us.

MATHISEN: I’m Tyler Mathisen. Thanks from me as well. Have a great evening. We’ll see you 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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