Transcript: Nightly Business Report – May 16, 2017

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

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Amazon-proof? Can the largest home improvement chain stand up to the one company that others cannot, the world’s largest online retailer?

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Courting millennials. The largest generation is finally starting to buy homes. But it’s proving difficult for the homebuilders to build them what they want.

MATHISEN: And uncharted territory. Is the Federal Reserve about to boldly go where no central bank has gone before?

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, May 16th.

HERERA: Good evening, everybody. Welcome.

The retail slump isn’t letting up. It’s been one of the defining trends of the market this year. And today, the turmoil was evident, though there was a bright spot.

First, the retail rout. Not even off-price retailer TJX was immune from the downswing. The parent company of Home Goods and T.J.Maxx reported weaker than expected revenue and issued soft guidance for the current quarter.

Next, Dick’s Sporting Goods saw sluggish same store sales in the most recent quarter and said its revenue outlook remains week.

Staples? No better. The office supply store missed estimates because of weak demand for technology products, ink, and toner.

And teen retailer Rue 21, it filed for Chapter 11 bankruptcy protection. The privately held company plans to close about a third of its 1,200 stores, many of them in shopping malls.

As for the shares of these retailers — well, they all fell in trading today.

After the closing bell, teen retailer Urban Outfitter missed earnings and revenue estimates, citing high markdowns and its shares were volatile in afterhours trading.

MATHISEN: We had to wait a long time for the bright spot Sue promised, but here it is. Home Depot was able to do something that many retailers were not, and that is report better than expected profits and revenue. It even blew past some same-store sales forecasts and raised, raised its profit outlook for the year.

That sent shares higher in trading. And Courtney Reagan takes a look now at what’s working for the big box in orange.

(BEGIN VIDEOTAPE)

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Home Depot continues to be a rare bright spot in retail. The world’s largest home improvement retailer is in a sector that continues to grow, thanks to a strong U.S. housing market.

MICHAEL LASSER, UBS: In 2007, the median age of a house in the U.S. was 31 years old. Today it’s about 39. And the value of the housing stock is a lot higher than it was back then. So, consumers are reengaging in this category. And Home Depot is picking up their fair share.

REAGAN: Home Depot says it watches how much people spend on average for signs of weakness in housing and home improvement trends that aren’t explained by weather, currency, or other negative factors. Right now, spending trends are strong.

BRIAN NAGEL, OPPENHEIMER & CO.: What could derail Home Depot would be a weak housing market. If interest rates were to rise dramatically, that could be a problem. But, again, I don’t see that happening either.

REAGAN: Home Depot customers are a mix of professionals like contractors or plumbers, and do it yourselfers. Home Depot says professionals bought more and spent more than the DIY-ers again this quarter.

JAN KNIFFEN, J. ROGERS KNIFFEN CEO: The professional shop at Home Depot, not at Lowe’s. So, that’s been a big benefit to them across the board. But they also just execute about as well as any retailer ever has.

REAGAN: Home Depot’s CFO Carol Tome told me the retailer also got a sales lift at its locations near competitor that’s closing stores, even though the prices are better at the liquidation sales, shoppers are choosing to buy from Home Depot, likely because it’s not going anywhere if they need support for their purchases down the road.

And Amazon may be grabbing market share from many other retailers but Tome says she thinks Home Depot is more Amazon-proof, because purchases are project-oriented rather than just one-off items. It’s a sentiment analysts agree with. Shoppers may look online in advance, but ultimately buy the paint in-store after speaking with an employee, for example. Plus, nearly half of all online orders are picked up in its stores, and Amazon doesn’t have that option.

DAVID SCHICK, CONSUMER EDGE RESARCH: This morning on Amazon.com, a Rubbermaid Brute 15-gallon wheeled trash began was about 12, 12.5 percent more expensive than Home Depot. Why? There are very hard to shift from a cubic and value perspective. There are some embedded advantages to taking a pallet of that product and are bringing it closer to customers.

REAGAN: Well, bad weather led to lower sales early in the quarter. April sales were very strong. Home Depot says sales so far in May have been very good.

For NIGHTLY BUSINESS REPORT, I’m Courtney Reagan.

(END VIDEOTAPE)

HERERA: Construction for new homes fell for a second straight month in April. The Commerce Department reports a decline of more than 2.5 percent. That was weaker than expected, and it is the lowest point in five months. And it comes as homebuilders try and court millennials with lower priced homes. It hasn’t been easy, though.

Diana Olick has our report.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: The nation’s homebuilders are still not putting up enough homes to meet demand, especially demand from younger first time buyers with lower budgets. The cost of construction is just too high.

NELA RICHARDSON: Land is incredibly expensive, especially where consumers, millennials, are demanding it the most. And that’s really put the brakes on what should be a win/win for the housing market with more construction and higher demand.

OLICK: Housing starts for April fell more than expected and single family permits, which are an indicator of future construction, were down even more sharply for the month. This as demand is starting to surge from millennials.

Builders claim they are now turning to lower-priced products, new brands from the likes of Tri-Pointe, NVR, Lennar and Meritage, even luxury homebuilder Toll Brothers. But analysts are quick to point out these are lower priced, not the true starter priced homes that are sorely needed. Only D.R. Horton and LJI are in that space. The problem for the others is cheaper homes really hit the margin.

MEGAN MCGRATH, MKM PARTNERS: You can have some gross margin deterioration, as long as you have a coincident rise in order growth. You need order growth to accelerate. Right now, we’re probably on average in the high single digits for most homebuilders.

If you’re going to see more gross margin deterioration, I think the market is going to want to see that rise into the — at least the low double digits going forward.

OLICK: That’s why you’re seeing the builders make a small shift to lower priced homes, but definitely not an aggressive one. They would have to sell significantly more homes to make the move to true starter homes. And while millennials are starting to buy, the numbers just aren’t there yet.

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

(END VIDEOTAPE)

MATHISEN: The percentage of mortgages in the foreclosure process fell to the lowest level in a decade. The mortgage bankers association says that nearly all states saw a decline in the first quarter. And that other measures of homeowners’ creditworthiness generally improved in the first three months of the year.

HERERA: On Wall Street, the NASDAQ notched a three-day winning streak but otherwise it was a pretty indecisive day as investors continue to shrug off news out of Washington. The Dow Jones Industrial Average two points to 20,979. The NASDAQ rose 20. And the S&P 500 dropped one and change.

MATHISEN: Boy, the market has been an unusual one. Equities at or near record levels, but volatility is measured by the so-called fear gauge or VIX is at multi-decade lows. Is all we have to fear in the market the lack of fear itself?

Jack Ablin is chief investment officer at BMO Private Bank and he joins us to discuss.

Does it unnerve you, Jack, that everything seems so calm?

JACK ABLIN, BMO PRIVATE BANK CIO: It is pretty interesting, Tyler. It’s certainly not in my — certainly in recent experience have I seen volatilities so low while we’re seeing headlines, you know, continuing to cross the screen.

HERERA: You know, you’ve been cautious for a little bit, jack. Tell me what does have you concerned about this market.

ABLIN: Well, I mean, you know, even if you strip away, Sue, all of the potential risks that are out there, either headline risks, tweet risks, global geopolitical risks, the fact remains the U.S. stock market is expensive when you look at it through the lens of earnings and revenues. Add to that, a U.S. dollar that’s probably overvalued relative to several of our trading partners.

So, we have found better deals overseas. So, we’ve tended to underweight the U.S. this year, overweight U.S. — I’m sorry, international large caps and emerging market equities.

MATHISEN: Are there particular regions in the international marketplace that you’ve found the best values?

ABLIN: Yes, we think Europe certainly is a great place to be. We all along felt that the geopolitical risks surrounding populism was probably overdone, certainly one more reason why investors didn’t participate in that market.

Japan also is sporting a currency that arguably 20 to 30 percent cheap on a fundamental basis to the U.S. and then look at Mexico. The fact is you’ve got a cheap currency, a cheap market, and, you know, unless you believe President Trump is going to rip up NAFTA and impose punitive tariffs on our neighbor to the South, you know, Mexico should do fine. In fact, year to date is doing great. It’s one of the best performing markets.

HERERA: And you’re not worried about Washington and the fact that perhaps some of the administration’s agenda might not be achieved as quickly as Wall Street originally thought it was going to be? If at all?

ABLIN: Well, if you look at — if you look at how investors are behaving, the sense I’m getting is, most investors believe that a policy isn’t coming through. Look, for example, at municipal bonds relative to taxable bonds. If investors truly believed that we were going to get across the board personal tax rate cuts, I would expect municipal bond to underperform taxable bonds. They haven’t.

Look at mid-cap and small cap stocks. If you believe that we would have a lower corporate tax rate and a more — and a fairer policy with lower regulations here at home, then mid-cap and small caps should outperform large cap, which large cap companies typically have most of their profits overseas. That has not happened.

MATHISEN: Right.

ABLIN: And then as I said, with Mexico, if you believe that, you know, we’re going to build a wall and impose tariffs, then Mexico shouldn’t be doing so well. Well, it’s up nearly 20 percent year to date.

MATHISEN: Well, a lot of skepticism out there. Jack, thanks very much for your time tonight. Always great to see you. Jack Ablin with BMO Private Bank.

HERERA: Wall Street has not been all that focused on the political rumblings out of Washington, even as the rumblings grow louder, and tonight, they are indeed growing louder.

NBC News has confirmed a report by “The New York Times” that the president asked former FBI Director James Comey to end the investigation into Michael Flynn.

John Harwood is covering all of these late breaking developments out of our nation’s capital.

John, what more can you tell us? And is this a very significant development?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: It’s extremely significant, Sue. Remember, we had the president firing the FBI Director James Comey last week and saying in the interview with Lester Holt that he was thinking about the Russia probe being fake news, that probe, of course, was being led by the FBI.

Now, we have “The New York Times” reporting that in the dinner that the president had with James Comey, according to a memo that Comey wrote after that dinner, the president asked him to curtail his investigation of Michael Flynn.

Keep in mind, we also had testimony last week from Sally Yates who had been the acting attorney general who testified to Congress that on the day before this dinner with Comey, she had told the White House counsel that Michael Flynn, the national security adviser, had been compromised by the Russians. That means that — or that suggests, if this account by James Comey is true, that President Trump acted a day later to try not to discharge Mr. Flynn but to shut down that investigation.

Now, the White House has put out a statement saying that it was — the memo is an inaccurate reflection of their conversation, that he never asked James Comey to shut down that or any other investigation, but that he simply said he thought Michael Flynn was a good man. But the problem with a White House that has weak credibility is that someone, when they bump up against someone like James Comey who has strong credibility, it becomes very difficult to win that argument.

MATHISEN: And today, of course, John, the White House was eagerly trying to make disappear last night’s story in which “The Washington Post” initially reported and other news organizations followed, that the president may have disclosed some classified information in his conversation with Sergey Lavrov, the foreign minister with Russia, and the Russian ambassador.

What does that one stand today?

HARWOOD: Well, that one is not going away either. Remember, last night, H.R. McMaster who replaced Michael Flynn as national security adviser, came out after “The Washington Post” reported that story and said it was false, that the president had shared that classified information. OK?

This morning, the president of the United States put out tweets that did not deny that he had shared classified information but said he had an absolute right to do that as president, which as a legal matter, is correct, and said that he did it for humanitarian reasons. Then they sent out McMaster a second time, and today at the podium, he did not deny that the president had shared classified information, he said he wouldn’t discuss what’s classified, but he said it was wholly appropriate under the circumstances of what he was trying to get out of the Russians.

The White House is having difficulty keeping their story straight and they are losing patience amongst Republicans in the House and Senate whose support they need to stay in office, as well as get his legislation passed.

HERERA: You’re going to be a busy man, John. Thank you so much.

HARWOOD: I guess I am.

HERERA: We really appreciate it, though, as always. John Harwood in Washington.

MATHISEN: And now an update to a story we’ve been reporting on. Researchers say the WannaCry ransomware attack that spread globally over the weekend could be linked to North Korea. The researcher pointed to similarities between this latest attack and the one that breached Sony Pictures a few years ago.

HERERA: Still ahead, Ford’s latest signal that it’s willing to change in order to jump-start its stalled stock price.

(MUSIC)

MATHISEN: A New York county is suing Johnson & Johnson, Perdue pharma and other companies. The lawsuit accuses them of engaging in fraudulent marketing that downplayed the risks of opioid painkillers. The suit also alleges that the drug makers misrepresented the long term use to doctors, to pharmacists, and to patients. The county claims that those misrepresentations led to an increase in costs to things like health care and criminal justice, costs the lawsuit says are directly related to opioid addiction. J&J calls the allegations unfounded and noted its drugs carried FDA warnings.

HERERA: UnitedHealthcare was the worst performing stock on the blue chip Dow index. This follows a “New York Times” interview with a former united health care employee, now a whistleblower, who asserts that big insurance companies overcharge Medicare to the tune of billions of taxpayer dollars. Fast-growing Medicare Advantage if a form of Medicare that insurance sold privately. Shares of UnitedHealthcare were off nearly 2 percent. The company says it rejects those allegations.

MATHISEN: Less than one week after Ford executives were grilled about the lackluster performance of the company’s stock, the automaker is making a big move. It is cutting up to 10 percent of its global workforce. Investors hope the step could jump-start shares of Ford, which were flat today, down nearly 9 percent so far this year.

Phil LeBeau has more on Ford’s latest move.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Despite having its second most profitable year ever in 2016, Ford is preparing to slash up to 10 percent of its global workforce, primarily salaried workers. The cuts should have a limited impact on assembly line workers, since Ford continues to see strong demand for its vehicles, especially when it comes to trucks and SUVs.

While Ford is not denying the plan to eliminate thousands of jobs, it has issued a statement saying: We have not announced any new people efficiency actions nor do we comment on speculation.

CEO Mark Fields is targeting $3 billion in cost cuts, even as he invests heavily in autonomous drive and electric vehicles, as well as future mobility programs. Like most in the auto industry, Fields believes self-driving cars are the wave of the future. And when they hit the street, he thinks Ford will profit from them.

Perhaps, but investors remain skeptical about Ford. The stock is down 36 percent under Fields, while the market is up 22 percent over that same period of time.

Chairman Bill Ford knows how disappointed investors are with Ford’s shares.

BILL FORD: We’re as frustrated as you are by the stock price. You know, a couple of people have said, does the Ford family care about the stock price? The short answer is, yes, a lot.

LEBEAU: Bill Ford and his family have seen the automaker go through major restructurings a number of times over the years. But unlike past job cuts, this time, the automaker is profitable. And the market remains relatively healthy.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

(END VIDEOTAPE)

HERERA: Two private equity firms push for change at Etsy. And that’s where we begin tonight’s “Market Focus”.

After disclosing separate stakes in the homemade products website, TGP Holdings and Dragoneer Investment Group requested that the company engage in talks to explore strategic alternatives. Etsy responded, saying that it will carefully consider all options to enhance shareholder value. Etsy’s shares rose more than 21 percent to $13.73.

Mobile phone operator Vodafone reported an annual loss as that company suffered from a write-down in the value of its India unit. But Vodafone is forecasting stronger results ahead. The company sees earnings for the year above street estimates and said it also expects its cash flow to improve. Shares of Vodafone rose more than 4 percent to $28.69.

And H&R Block’s CEO is retiring this July. The tax preparation services firm said it is considering both internal and external candidates to fill that role. But the announcement was taxing for investors. Shares of H&R Block fell 6 percent to $25.18.

MATHISEN: One executive leaving, another returning. Twitter’s co-founder Biz Stone is coming back to the company full-time. The tech entrepreneur said his top focus will be the company’s culture, energy and feeling. The title is to be determined, but I suggest CFO, chief feeling officer. Shares of Twitter rose a quarter and $19.49.

Late today, the fast food company was in focus. That company being Jack in the Box. Quarterly results topped Wall Street estimates. The same was true for Red Robin Gourmet Burger, which reported better than expected earnings and revenue. And the company said it gained market share against its rivals. Shares of Jack in the Box up as much as 9 percent in initial after-hour trading. Look at Red Robin, spiking as much as 15 percent late today.

HERERA: The Federal Reserve not only has to decide when to next raise interest rates, it also has to decide how and when to trim its $4.5 trillion balance sheet. As we’ve reported, any move the Fed makes to shrink it could have the same impact as a rate hike.

And as Steve Liesman reports now, whatever the Fed decides will take it into uncharted territory.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Federal Reserve is about to boldly go where no central bank has gone before. In order to bring monetary policy back to normal, it will unload trillions of dollars of assets it bought during the financial crisis.

THOMAS SIMONS, JEFFERIES: This is totally an unknown process. The process of expanding the balance sheet throughout the crisis was an experiment in monetary policy, one that had not been done on the scale that it was performed at during the crisis, and also not one that had been done in an economy and a financial system as large as the U.S. So, the wind-down process is also going to be an experiment. And it’s going to be a learning experience as well.

LIESMAN: In the financial panic, the Fed lowered rates to zero and was seemingly out of ammunition to help the economy. So, it bought U.S. treasuries and mortgage bonds, trillions of worth. And those purchases helped drive down interest rates further.

With the crisis over, the Fed now sits on a pile of securities that it needs to unload if it wants to get back to normal. And no one knows what impact this will have on the market or the economy if the Fed gets it wrong.

MICHAEL FEROLI, JPMORGAN CHIEF U.S. ECONOMIST: Well, I think the impact would be that you could see a more abrupt adjustment in interest rates, particularly long term interest rates, which could harm the housing market, could harm auto sales.

LIESMAN: So, Fed officials are currently debating when to start getting rid of some of these assets, how quickly to get rid of them and how much to unload. That is they’re trying to answer the question, in the post-crisis world, what’s the new normal?

FEROLI: Not only in the U.S. but around the world, you’re seeing large balance sheets and a different set of tools for controlling interest rates being employed. So, normal I think for central banks in the U.S. and around the world is going to look different going forward than it did before 2007.

LIESMAN: In 2007, the balance sheet was around $800 billion. Now, it’s $4.5 trillion. Fed officials have indicated that somewhere around $2.5 trillion to $3 trillion is the right number.

Is it the right number? No one knows. It’s never been done before.

For NIGHTLY BUSINESS REPORT, I’m Steve Liesman.

(END VIDEOTAPE)

MATHISEN: Coming up, meet this year’s top disrupters, companies that have remade entire businesses. The top three have something in common — they love sharing.

(MUSIC)

MATHISEN: Hackers are reportedly demanding ransom for a stolen Disney movie. Disney’s CEO Bob Iger said hackers claimed to have access to an unnamed upcoming movie. According to reports, Disney does not plan on giving into demands and the company is working with federal investigators. Disney’s two big upcoming movies are “Pirates of the Caribbean” and “Cars 3.”

HERERA: As you know, we report on a lot of companies that are disrupting the status quo. They tend to be fast-growing startups that are revolutionizing entire industries and attempting to unseat the corporate giants.

Today, CNBC is out with its fifth annual disrupter list. The companies topping the list may be familiar to some. Number three, We Work. It provides shared work spaces for entrepreneurs and freelancer. Number two is Lyft, a ride sharing company that’s competing with the larger rival, Uber. And topping the list is the home-sharing firm, Airbnb.

Julia Boorstin tells us why Airbnb is this year’s most disruptive company.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Airbnb has transformed the way people travel and created a whole new category of accommodation. The service has over 3 million listings in 65,000 cities and 191 countries. And despite the hotel industry putting up regulatory roadblocks, the company has grown to a $31 billion valuation.

NATHAN BLECHARCZYK, AIRBNB CO-FOUNCDER: This is the 21st century. I think consumers have spoken. 160 million people have used Airbnb and had a positive experience. And so, I think hotels should recognize what are the lessons to be learned from our success.

BOORSTIN: Here at Airbnb’s San Francisco headquarters, they’re looking to shake up more than just the hotel industry as they roll out a whole new series of experiences around the world, to transform everything about the way you travel.

From surf lessons to cooking classes to coffee and art tours, Airbnb wants to give you new ways to experience the city you already live in or anywhere you visit around the world.

BLECHARCZYK: We see a lot of opportunities in the specific verticals of family travel, and business travel, and luxury. So, these are all kind of growth opportunities that we’re just beginning to tap. But beyond accommodation, we’re thinking about the travel experience end to end. So, our most recent launch has been something we called experiences, basically allowing travelers to connect with local people to do activities when they’re visiting.

BOORSTIN: As for reports that Airbnb is profitable and ready to go public, Blecharczyk says they have no need for capital right now, with a few billion dollars in the bank. And in the meantime, they’re focused on partnering with cities and local governments to help collect local taxes and overcome those potential regulatory roadblocks.

For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin in San Francisco.

(END VIDEOTAPE)

HERERA: Cool looking space, isn’t it?

MATHISEN: Yes.

HERERA: All right. That does it for us on NIGHTLY BUSINESS REPORT tonight. I’m Sue Herera. Thanks for joining us.

MATHISEN: I’m Tyler Mathisen. Thanks from me as well. Have a great evening, everybody. We will see you back here on a busy 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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