Transcript: Nightly Business Report – July 12, 2017

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

(BEGIN VIDEO CLIP)

JANET YELLEN, FEDERAL RESERVE CHAIR: One further increase in the federal
funds rate would likely be appropriate this year.

(END VIDEO CLIP)

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: The Fed chair tells
investors to get ready for at least one more rate hike, maybe that`s all.
And the Dow rallies to a record.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: The new Buffett way. Warren
Buffett wants to buy a utility. A hedge fund is standing in the way. Now,
the billionaire investor may do something he usually doesn`t do.

MATHISEN: Bottom of the list. Yesterday, we revealed America`s best state
for business. Tonight, the worst.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Wednesday,
July 12th.

HERERA: Good evening, everybody, and welcome.

A record finish for the Dow. The world`s most recognizable index rallied
after the chair of the Federal Reserve said the central bank plans to
increase interest rates, but perhaps not as often as some had thought.
Janet Yellen used the word “gradual” to describe the pace of increases, a
word which she`s used before, but today, the lack of the tough talk was
enough to send stocks higher.

The Dow Jones Industrial Average advanced 123 points to a record 21532.
The Nasdaq added 67, and the S&P 500 was up 17.

Steve Liesman has more on why investors liked what they heard.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Three hours of
testimony and as far as the markets were concerned, it all boil down to one
dovish comment from Fed Chair Janet Yellen about interest rates.

YELLEN: Because the neutral rate is currently quite low by historical
standards, the federal funds rate would not have to rise all that much
further to get to a neutral policy stance.

LIESMAN: That comment had been echoed by the Fed Governor Lael Brainard
suggesting more than one key central banker embraces the idea that the Fed
doesn`t really have very far to go when it comes to raising interest rates.
And the Fed chair added that the next rate hike is contingent on the
inflation data heading back towards the Fed`s 2 percent target.

YELLEN: Monetary policy is not on a preset course. We`re watching this
very closely and stand ready to adjust our policy if it appears that the
inflation undershoot will be persistent.

LIESMAN: All of that prompted markets to start baking out the possibility
of a third rate hike this year is now well below 50 percent. Bond yields
fell and stocks rallied.

Yellen also sees global growth helping the U.S. economy this year. She
opposes the efforts to audit monetary policy put forward by some
Republicans in Congress and she made no comment about whether she`d serve a
second term if nominated by President Trump.

REP. CAROLYN MALONEY (D), NEW YORK: Your term as Fed chair ends in 2018.
And there`s a long history of presidents renominating Fed chairs. Are you
open to serving another four years as Fed chair?

YELLEN: What I previously said is that I absolutely intend to serve out my
term. I`m very focused on trying to achieve our congressionally mandated
objectives and I really haven`t had to give further thought at this point
to this question.

LIESMAN: The Fed chair also insisted balance sheet reduction could begin
soon, but didn`t give a month. Many in the markets saying it could happen
as soon as September, but it remains possible to be announced at that
meeting this month.

For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.

(END VIDEOTAPE)

MATHISEN: A separate report from the Federal Reserve shows the labor
markets are getting tighter. According to the so-called Beige Book, an
anecdotal look at economic conditions across the country, the job market is
strengthening, for both low and higher skilled positions, particularly in
the construction and I.T. sectors.

But a drop in gasoline prices has kept the lid on inflation, something the
federal reserve would like to see pick up just a bit. Overall, the central
bank reported modest to moderate economic growth or really kind of beige.

HERERA: Despite expectations for modest economic growth, historically, the
economy tends to cool after series of interest hikes which the Fed chair
alluded to today. But are things different this time around?

Peter Boockvar is the chief market analyst at the Lindsey Group, and Jack
McIntyre is the portfolio manager with Brandywine Global Investment
Management, and both gentlemen join us to talk about that.

Welcome.

Peter, I`m going to start with you. You don`t think it`s different this
time around. And if the tightening continues, we may very well see a
recession.

PETER BOOCKVAR, CHIEF MARKET ANALYST, THE LINDSEY GROUP: So, since World
War II, there`s been 13 rate hike cycles, 10 have put into recession. And
considering how extreme the easing was, it`s not going to take much of a
rate of change and rise in interest rates to have what I believe is a more
pronounced effect on asset prices and the economy. Particularly in the
economy, we saw a 60 basis point increase year over year, and mortgage
rates and refis fell 60 percent. So, we`re very sensitive to changes in
interest rates because we are in credit cycles now, not necessarily
economic cycles.

MATHISEN: So, Jack, answer Peter here. We have certainly been a long time
since the last recession. What, basically ten years or thereabouts. Nine
years or so since the last one began. What do you say?

JACK MCINTYRE, PORTFOLIO MANAGER, BRANDYWINE GLOBAL INVESTMENT: Yes, I
think the way I think about this economic expansion, it`s not strong. But
it can be long. There`s not a lot of excesses. We`re in an environment
where the growth really isn`t inflationary and I just don`t think that the
Fed has to tighten that much. That — therefore, I think we`d continue to
see this noninflationary growth environment unfold for the next couple of
years.

HERERA: You know, Peter, what about that, because the Fed chief seemed to
back off of multiple increases this year. One, do you agree with that,
with that theory? And, two, if they just hike a little bit and take away
some accommodation, why couldn`t it be long in terms of the expansion but
not necessarily all that strong?

BOOCKVAR: Right, that would be ideal, but the shrinking of the balance
sheet, where I call quantitative tightening, to me, is a big part of this,
because if quantitative easing caused so much euphoria in markets, why
should I believe the quantitative tightening is not going to have the next
series effect. And I agree that they`re not necessarily excesses in the
economy, but there are excesses with Central Bank balance sheets, there are
excesses with interest rates, and we have a global bond bubble.

So, what`s going to pop up a global bond bubble, it`s going to be a removal
of accommodation. Whether it`s raising interest rates or shrinking balance
sheets, and at the same time, we have the ECB that`s likely going to be
shrinking their balance sheet as well come September. So, in the fall, one
of the two major central banks that are quantitatively tightening in a
sense and I think it`s the — a decline in asset prices that will lead us
into a recession, rather than a recession leading into a decline in asset
prices.

MATHISEN: So, it would be that, would be the mechanism, Peter says, Jack,
not necessarily a slowing of the business cycle per se. I take your point
that economic growth is very slow right now any way. And the Fed has
certainly promised to be very gradual in whatever it does, but as Peter
points out, if — not just the U.S. Central Bank but the European Central
Bank are taking the lubricant out of the system, could that tip us?

MCINTYRE: No, and I agree. So, I make two quick points. One is that I
don`t think bonds are in a bubble because I think we`ve got secular
disinflationary pressure that is keeping yields lower. I do agree with
Peter in a sense, though, that if the Fed is worried more about acid
inflation and regular inflation, then they run a risk of creating some
wealth destruction and that certainly could have a negative impact.

But I also think though, this Fed is pragmatic enough to know that if that
does create financial angst in the markets, then they`re going to back away
from the quantitative tightening.

HERERA: Peter, is it the right time for the Fed to raise interest rates?
I mean, if the economy is slowing a little bit —

MATHISEN: Or should they have done it earlier?

HERERA: Yes. Well, that`s a whole another — yes, that`s kind of the
elephant in the room. Should they wait?

BOOCKVAR: They should have done earlier, and they`re being forced to
tighten at the wrong time from an economic standpoint. But these are rear-
view mirror type economists. They see the unemployment rate at 4.4
percent. And they see they have emergency sides balance sheet and a Fed
funds rate that`s barely above 1 percent, and they`re saying oh, my, we`re
kind of stuck here, because what happens if the labor market continues to
tight.

Now, we can get slower growth in a tighter labor market because it`s the
supply of labor that`s shrinking, while the demand is still pretty steady.
So, it`s the lack of supply that actually can continue to slow growth, but
then cause inflation, wage wise, so, sort of disinflationary type situation
that the Fed is kind of stuck in. So, not a good situation but they put
themselves in this.

HERERA: On that note, Peter, thank you very much. Jack, thank you as well
for joining us.

Peter Boockvar with the Lindsey Group and Jack McIntyre with Brandywine
Global Investments.

MATHISEN: And Royal Bank of Scotland will pay $5.5 billion to settle
claims related to its sale of toxic mortgage securities ahead of the
financial crisis. The settlement is with the agency that regulates
mortgage firms Fannie Mae and Freddie Mac. The bank says it continues to
cooperate with other investigations that could lead to further settlements
or fines.

HERERA: The Federal Communications Commission is the target of an online
protest by some big Internet companies, Facebook, Google, Netflix and
others opposed the regulator`s decision to reverse a rule that would
require Internet service providers to treat all Internet content equally,
treating all content equally means companies like Comcast, Charter and AT&T
would not be allowed to block content, or speed up or slow down data from
certain Websites. The FCC argues that reversing the rule would decrease
regulations and help increase investment in new technology.

MATHISEN: Well, the biggest names in technology and media are out in Sun
Valley, Idaho, attending Allen & Company`s exclusive annual conference.
And while that lovely mountain retreat doesn`t seem on its face like a
place where power deals get done, that is exactly what it turns into this
time of year.

Julia Boorstin reports.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): In
beautiful Sun Valley, it`s a who`s who of media, tech and investing.
People like Warren Buffett, Shari Redstone, Jeffrey Katzenberg, Reid
Hoffman, Bill Gates, and the king of Jordan.

Here, they listen to speakers and hear panels in the morning. In the
afternoon, they bike and go horseback riding, and behind closed doors make
deals.

Discovery CEO David Zaslav said he expects many more media deals.

DAVID ZASLAV, DISCOVERY CEO: It feels like there`s more pressure on the
cable players around the world, satellite and mobile players to merge or to
figure out how to offer all those together.

BOORSTIN: With the merger speculation about their companies, Verizon CEO
Lowell McAdam said Verizon`s not merging with Disney, and CBS CEO Les
Moonves said CBS is not buying Lionsgate.

(on camera): The other topic dominating this conference, politics, with
Jared Kushner and Ivanka Trump on the guest list and panels, including one
hosted by Tom Brokaw on a nation divided, and an interview with CIA
Director Mike Pompeo.

(voice-over): The CEOs here discussing what impact President Trump`s
policies will have on their bottom lines.

SIR MARTIN SORRELL, WPP CEO: If President Trump can implement his agenda
if structure spending, of less regulation and low attacks, if he can,
that`s a boost to the U.S. economy, at a time probably that he needs it.

BOORSTIN: But others including media mogul Barry Diller criticized
President Trump`s policies on immigration, net neutrality and the
environment.

BARRY DILLAR, IAC CHAIRMAN: I think it`s just a joke, and hopefully, it
will be over relatively soon. It inexplicably began and it will
inexplicably end.

BOORSTIN: But Diller agreed we`ll see more media deals. We`ll see if any
big ones come from the conversations here in Sun Valley.

For NIGHTLY BUSINESS REPORT, I`m Julia Boorstin in Sun Valley, Idaho.

(END VIDEOTAPE)

HERERA: Still ahead, it is a label no state wants.

(BEGIN VIDEO CLIP)

SCOTT COHN, NIGHTLY BUSINESS REPORT CORRESPONDENT: I`m Scott Cohn, you
know now that America`s top state for business is Washington. But what`s
the bottom state? We`ll tell you coming up on NIGHTLY BUSINESS REPORT.

(END VIDEO CLIP)

HERERA: Warren Buffett is in the middle of battle for a bankrupt utility.
Buffett`s Berkshire Hathaway is pushing for fast regulatory action on its
takeover of Oncor, one of the largest power transmission systems in the
country. But it is battling Elliot Management, Oncor`s largest creditor,
who also wants to buy the company.

In court today, an attorney for Elliott Management complained that Oncor
did not provide the information it needed to line up financing for its
takeover bid. Oncor instead struck a deal to sell to Berkshire Hathaway.
The hearing is set on Berkshire`s plan for later this month.

MATHISEN: Sometimes, Warren Buffett lays low. He can afford to. His
Berkshire Hathaway has $100 billion of cash. But lately, the Oracle of
Omaha has been as active as a bear in summer. He sold some IBM, become the
biggest shareholder in two of the nation`s largest banks, Wells Fargo and B
of A, and he launched that now challenged bid for Oncor.

Here to discuss what Buffett`s moves say about the market if anything is
Thomas Russo, managing member of Gardner Russo and Gardner. His firm
overseas $10 billion, and Berkshire Hathaway is its biggest holding at 12
percent of assets.

Mr. Russo, welcome.

THOMAS RUSSO, MANAGING MEMBER, GARDNER, RUSSO & GARDNER: Well, thank you,
Tyler. Glad to be here.

MATHISEN: Well, we`re happy to have you.

You have a big bet on Berkshire and you`re watching Mr. Buffett take some
very big stakes and this latest one that some people interpret as a
defensive stake because it`s in a utility business. What do you make of
Mr. Buffett`s activities lately?

RUSSO: Well, he`s been known for years as having I think the most valuable
asset of all as an investor, which is the capacity to do absolutely
nothing. He prices that ability and he`ll lay low for months if not years
before deploying capital. There`s a lot to deploy and there`s a lot of
cash that comes in everyday at Berkshire.

So, it`s good to fine some place to deploy money and the utility business
has been very good to Berkshire over time.

The beauty about it is that if you play a relatively attractive modest
entry multiple and consumer in this case, almost $20 billion in cash to
acquire the business, what you then get, which is extremely valuable, is
the ability to reinvest even more and the regulated utility business. At
fixed rates of return. So imagine, he paid ten times cash earnings at the
moment if this deal goes through. And then subsequently, on top for the
$20 billion that he`ll invest here, he`ll be able to invest tens of
billions of dollars over time at high rates return, which is part of the
regulatory landscape. It`s a predictable business.

HERERA: It`s a predictable business, but he is going up against Elliot
Management, which is a tactic that he very and frequently employs. So,
there are those out there who are interpreting that as a change in strategy
for Buffett and for Berkshire Hathaway. It does not sound to me as though
you feel it is a change in strategy.

RUSSO: I don`t. No, I really don`t. I don`t think it even expresses a
new found since of urgency. It`s just one of the many cards in Warren`s
deck that he gets to play, and he`ll play it on this particular investment,
so long as the terms are attracted, and if they`re no longer attractive, he
has absolute ability to walk away.

By being judicious and allocating and acting only when the terms are most
favorable is where we`ve made so much money with Berkshire over the years.
For instance, one example came to fruit last week when he exercised the
warrants to buy 700 million option, call options, on Bank of America for 7
billion, $7 a share. And today, the shares are $24 per share. So, he
really made $15 billion as a result of —

MATHISEN: That`s how the rich get richer, Thomas, isn`t it? That`s how
the rich get richer.

(CROSSTALK)

RUSSO: Yes.

MATHISEN: Quick thought on why you think he likes the banks so much right
now? Quick.

RUSSO: Well, in the case of — yes, I say that they`re very reasonably
priced. That`s as simple as that. They`re high single digit, maybe low
double digit multiples. There`s a huge wall of worry over them as to what
the regulations about capital requirements will do to future returns, but
they`re very, very attractively valued, if you believe that the business
will resemble anything like it has going forward over time.

MATHISEN: Right. OK.

RUSSO: The past is a good example of Berkshire will do well in those bank
stocks.

MATHISEN: All right. Mr. Russo, we wish you well. You got 12 percent in
Berkshire. Thomas Russo with Gardner, Russo and Gardner.

RUSSO: Thank you.

HERERA: MSC Industrial suffers its worst day in nearly 15 years. That`s
where we begin tonight`s “Market Focus”.

Sales of the industrial equipment distributor rose last quarter, but much
of those games came from low margin products and the results weren`t good
enough to analysts` estimates. Earnings matched expectations, but the
company sees profit for the current quarter coming up short. Shares
dropped 14 percent to $74.78.

Fastenal said growth in its industrial vending machine business helped that
company beat sales expectations. Profit at the industrial and construction
supplies maker was also ahead of street target, but the shares still fell 2
percent to $42.72.

Barnes and Noble Education saw revenue rise while same store sales at the
bookstore operator also edged higher. But earnings missed estimates. The
company said it expects sales to be flat in fiscal 2018 and it sees same
store sales falling in the low to mid-single signature percentage point
range. Shares were slammed. They lost 11-1/2 percent to $8.89.

MATHISEN: You can now use PayPal to make purchases in the Apple App store.
The two companies entered into a partnership that lets customers link their
PayPal and Apple accounts to buy music, movies and books. Shares of PayPal
up 3 percent at $56.55.

American Airlines said it expects unit revenue to rise as much as 6 percent
in the second quarter. That`s better than what the company estimated.
Separately, American Airlines said it is ending code share agreements with
Qatar Airways and Etihad, as it believes state-owned Gulf airlines are
unfairly subsidized by their governments. Qatar recently was seeking a 10
percent stake in American Airlines. Shares of American rose 4 percent to
$53.80.

An experimental cancer drug made by Novartis is one step closer to winning
regulatory approval. A Food and Drug Administration panel voted in favor
of recommending the novel treatment that is intended to treat a form
leukemia. The FDA is not obligated to follow the panel`s recommendation
but it often does. Novartis shares rose 1-1/2 percent to $83.21.

HERERA: Economists at West Virginia University said the economy in that
troubled state is starting to grow again. And that is the good news. The
bad news is that the growth is moderate and it comes years of after the
national economy began to recovery. Little wonder then that West Virginia
finished dead last in CNBC`s annual list of the top states for business.

Scott Cohn reports the Mountain State`s long climb ahead.

(BEGIN VIDEOTAPE)

COHN (voice-over): West Virginians have heard more than their share of
promises.

DONALD TRUMP, PRESIDENT OF THE UNITED STATES: We`re going to put the
miners back to work. We`re going to put the miners back to work.

COHN: This is coal country, or was. In the last five years, mining
employment is down nearly 43 percent. Lately, production has began to come
back, but barely a flip in the decline that dates back to the 1940s, and
not nearly enough to lift West Virginia from the depths of this year`s top
states of business rankings. Fiftieth place, its worst finish since the
study began.

But West Virginians are growing accustomed to finishing last.

GOV. JIM JUSTICE (D), WEST VIRGINIA: There`s no question we`ve been 50th
forever more. We`re better than that. Now, like it or not like it, we`re
dying 50th.

COHN: The 50th ranked economy with anemic growth, a depressed housing
market and a state starved for resources. West Virginia has the least
educated workforce in the country. Fewer than 12 percent of adult worker
have a bachelor`s degree at a time when companies are clamoring for skilled
employees. And it ranks 49th for business friendliness, with regulations
in courts that some would say are stuck in the past.

The state budget battle in Charleston, so fierce that first term Governor
Jim Justice went to extremes to describe it earlier this year.

JUSTICE: We all should take ownership for this, but what we have is
nothing more than a bunch political bull you-know-what.

COHN: The substance on the plate is exactly what you think it is. At
issue: budget cuts favored by Republicans versus targeted tax and fee hikes
proposed by the Democratic governor. But nearly everyone agrees that until
West Virginia can transform its workforce, the Mountain State will remain
in a deep hole.

(on camera): Of course, budget battles are not unique to bottom states.
Here in the top state, Washington, it took three special sessions of the
legislature before they finally came to a deal. In West Virginia,
ultimately, Governor Jim Justice refused to sign the budget that the
legislature passed, but didn`t veto it either, so it became law.

The other bottom states for business, number 46, Maine, number 47, Alaska,
followed by Mississippi and Hawaii.

In Seattle, I`m Scott Cohn for NIGHTLY BUSINESS REPORT.

HERERA: And to read more about West Virginia`s ranking as the worst state
for business, you can head to our Website, NBR.com.

MATHISEN: Coming up, watch this. How a luxury watch maker is going all
out to wow customers in a slowing market.

(MUSIC)

MATHISEN: Amazon`s prime day sales set a record. The company`s third
annual event saw sales climb more than 60 percent, compared with last year.
They were higher than both Black Friday and Cyber Monday combined. It also
added more prime members in one day than ever before. The most popular
item sold was an Amazon product — its smaller sized Echo dot smart
speaker. Shares of Amazon — sort of does — Amazon rose today to close
above $1,000 a share.

HERERA: Well, did you buy a watch during Amazon prime day? Most probably
did not. In fact, if you look around you, a lot of people just don`t wear
watches anymore. Some say there`s no need to now that smartphones are
ubiquitous and smartphones and even wearables like smart watches are giving
traditional watch manufacturers a headache. Even the high-end luxury
watchmakers have to go to great lengths to generate attention.

Robert Frank has our story.

(BEGIN VIDEOTAPE)

ROBERT FRANK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): The
luxury watch wars have reached a whole new level. Swiss watchmaker Patek
Philippe is spending millions to rent the famed Cipriani`s event space in
Midtown Manhattan for an entire month for a pop up temple to time called
the Art of Watches. They built a two-story replica of the Swiss
headquarters of Patek and it`s filled with some of the rarest and most
expensive watches in the world going back 400 years.

(on camera): Now, this display is the latest effort by the industry to
stop slowing sales, as demand from China weakens and younger consumers are
turning to their phones and their smart watches to tell the time rather
than the old style mechanical watches.

(voice-over): Swiss watch exports totaled $20 billion last year, down for
the second year in a row. Only the high-end is doing well. Watches priced
at more than $3,000 saw sales surge 13 percent in May, making it the
fastest growing segment while watches priced under $200 fell. Now, Patek
hopes that the Art of the Watch will help lure millennials and strengthen
its position in the U.S., its top market.

LARRY PETTINELLI, PATEK PHILIPPE USA PRESIDENT: What we`re trying to do is
expose people to Swiss watch-making and also the brand. But we want to
capture that elusive 20 to 30-year-old next generation client and teach
them a little bit about fine Swiss watches.

FRANK: Among the historical items on display here, John F. Kennedy`s desk
clock made by Patek and given to him during his famous speech in Berlin in
1963. Joe DiMaggio`s watch is here, worth over $300,000.

The most complicated watch in the world for decades, known as the Caliber
89, is also here, worth $7.5 million. It has a mechanism to offset leap
century, which is once every 400 years. Now, for young consumers, Patek,
considered the most prestigious watch brand, is introducing a starter watch
in stainless steel for only $20,000. The company has been owned by the
same family for four generations and says the secret to keeping quality
high and production low is thinking long term.

THIERRY STERN, PRESIDENT, PATEK PHILIPPE: And, you know, when you have
shareholder, of course, you have to be quick, you have to make money very
fast. But that`s not the point for Patek. My only objective is to make
something beautiful.

FRANK: And no one understands the value of time better than Patek
Philippe.

For NIGHTLY BUSINESS REPORT, I`m Robert Frank, in Manhattan.

(END VIDEOTAPE)

MATHISEN: If you`re thinking about leap century every 400 years, you`re
thinking long-term.

HERERA: You`re thinking long, long-term.

All right. That does it for us tonight. I`m Sue Herera. Thanks for join
us.

MATHISEN: It`s a half hour has gone by. I`m Tyler Mathisen. Have a great
evening, everybody. We`ll see you tomorrow.

END

END

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