Transcript: Nightly Business Report – July 13, 2017

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Show me the money. The Dow
closes at a record and expectations are high that earnings season will be
strong, but there`s a lot of think.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Warning from Washington.
Medicare and Social Security face financial challenges, and a new report
has new dates on when the programs will be depleted.

HERERA: Cash is king. Why Americans are filing money into their checking
accounts.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Thursday,
July 13th.

MATHISEN: Good evening, everyone, and welcome.

It is the eve of earnings season. The report card on corporate America`s
health comes at an interesting time. Stocks are at or near record levels.
And investors are looking for evidence that the high prices are justified
by profits. That`s a big request.

Strong results could send the market even higher. Poor ones could have the
opposite effect. And yes, we`ve gotten some guidance already. In fact, an
upbeat outlook today came from a surprising place — retail.

Target (NYSE:TGT) said more customers were coming to its stores and it
expects sales to be up and it`s raised its profit forecast. Tomorrow, we
hear from three of the biggest banks in America — J.P. Morgan, Wells Fargo
(NYSE:WFC) and Citigroup (NYSE:C), and expectations are high and growing.

Bob Pisani reports.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Stocks are holding up
well because earnings have been improving since the earnings recession
ended last year. We`re expecting 7 percent growth in earnings for the
second quarter and revenue growth has returned, expected to be up almost 5
percent this quarter. The markets are relying on significant growth for
its two biggest sectors, that`s technology and financials. So, tech`s
worrying on big revenue growth from semiconductors and names like Facebook
(NASDAQ:FB) as well as Google (NASDAQ:GOOG).

The biggest banks are expected to report good numbers because trading
profits for the stocks and bonds have improved, and while long-term rates
are not up much, shorter term rates have moved up on the second quarter,
and that will also be a positive for the sector. We`re also expecting
modest loan growth as well.

Oil stocks taking a big boost because profits fell apart in the second
quarter of last year, but with no rally in oil, earnings estimates have
actually been coming down for all the big oil companies. That`s why oil
stocks keep declining.

Besides oil, there are several issues that could impact earnings in the
second half. First, a rally in the dollar would make exports more
expensive. That would be a problem. Second, higher wages, Janet Yellen in
her congressional testimony today noted again today that the labor market
was tight and that this might lead to upward pressure on wages.

Finally, there`s tax cuts. This is the big one. Analysts are expecting a
cut in profits to improve earnings by 8 percent to 10 percent in 2018.
Now, the Trump administration knows this. That`s why they said earlier
this week that they were committed to getting tax reform completed sooner
rather than later. That means this summer.

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

(END VIDEOTAPE)

HERERA: So, joining us now with his predictions for second quarter
earnings is Mike Thompson. He is managing director at S&P Global Market
Intelligence.

Mike, welcome. Nice to have you here.

MIKE THOMPSON, MANAGING DIRECTOR, S & P GLOBAL MARKET INTELLIGENCE: Good
to see you, Sue.

HERERA: Let`s start, first of all, with the key sectors that you`re going
to be following. We have some of the big banks tomorrow. How important
are financials?

THOMPSON: They`re very important. Second strongest group of all the
sectors, expecting about 7 percent. But more importantly, Sue, right, the
financials offer leadership in terms of earnings growth and they`re a
harbinger of good things to come. Typically, when we see strong earnings,
you see it consistent with strong earnings from this particular sector.

MATHISEN: I think your overall prediction is that overall corporate
profits will grow 9 percent to 10 percent, but a lot is it not true, Mike,
comes from energy, where the comparisons are so easy. You`ve got energy
going up 364 percent. If I strip out energy, are profits as healthy as 9
percent to 10 percent?

THOMPSON: Well, just to, you know, kind of right set, currently, the
consensus for the S&P 500 is about 6 percent. But what happens is analysts
tend to guide low. Companies guide typically lower generally, and analysts
take their numbers lower. Fear of under promising, and, you know, that`s
something that they have to watch out for.

The key thing here is that energy is a small sector, all right? And even
if the earnings growth is big, it shaves away 1 percent or 2 percent. So,
with the surprise factor, right, if you go from six to eight, and you take
away a point to two points because basically, you`re netting out the
effects, the positive effect of energy, you`re still in very good
territory.

You know, anything 6 percent to 7 percent with an economy that`s growing
like this is very good, Tyler. It`s OK.

HERERA: All right. Technology has been a leading sector in terms of
equity performance, so I would assume that might translate. You have about
11 percent. That would translate to Q2 earnings that are strong.

THOMPSON: Yes. And again, another good harbinger is that when you have
both energy — I mean, I`m sorry, technology and financials working
together, they`re very big components of the S&P 500 constituency. And
that`s again, another very good sign that earnings will be strong.

So, you got to feel pretty good about this. We don`t have any real, real
trouble spots. Obviously, we have the little bit of concern around the
consumer discretionary. Down almost 3 percent, but I wouldn`t read into
that too much because that is more of a function not about the health for
example of the economy, because it`s divergent from, for example, the
strong in your opinions numbers you see in retail sales.

HERERA: Right.

THOMPSON: But broadly speaking, we actually think these earnings look
good. And now, let me just go a little further here. If you look for the
next three quarter, you have very strong expectations for earnings coming
from the analysts. And that`s, you know, ultimately, driven by what
companies are talking about their near term outlook. So —

HERERA: OK.

THOMPSON: — this earnings cycle looks like it should for the kind of
economic situation we have.

HERERA: Excellent. Thank you, Mike. Appreciate it.

Mike Thompson, S & P Global Market Intelligence, and we`re going to have
him back at the end of earnings season to see how things fared.

MATHISEN: And maybe in anticipation of some of those earnings, Wall Street
today, stocks ground higher ahead of those bank earnings. Shares of
financials were up, helping push the blue chip Dow index to a record. Here
are the numbers: the Dow Jones Industrial Average gained 20 points to
21553, Nasdaq up 13, S&P 500 higher by four.

HERERA: In Washington, a warning about the financial health of the
nation`s two largest entitlement programs. The annual report card on the
finances of Medicare and Social Security show that the trust fund that pays
Medicare`s hospital expenses will run out of money in 2029, a year later
than thought. The Social Security program will remain solvent until 2034,
unchanged from last year.

Treasury Secretary Mnuchin says reform and economic growth will help shore
up those programs.

(BEGIN VIDEO CLIP)

STEVEN MNUCHIN, TREASURY SECRETARY: A return to normalized level of 3
percent or higher GDP growth means trillions of dollars into the economy
and additional revenue to meet our obligations. Persistent and strong
economic growth can help bring these programs to sustainable solvency.

(END VIDEO CLIP)

HERERA: Ylan Mui is in Washington for us tonight.

Ylan, where`s this conversation over how to fix Social Security and
Medicare? What where does it stand right now?

YLAN MUI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, the administration
is really in a tough place right now. On the campaign trail, President
Trump had promised he would not touch those two very popular entitlement
programs.

However, what you`re hearing from conservative Republicans in Congress is
that the budget they`re expected to introduce next week will likely include
some changes to those Social Security and Medicare. They say that`s needed
in order to keep them solvent in the long run, to keep them secure in the
long run. So, there is an interesting dynamic there and an interesting
conflict setting up between what the administration wants to do and what
lawmakers in Capitol Hill want to do.

I tried to press Treasury Secretary Mnuchin on this point during the press
conference earlier today and he declined to answer what the president might
do if Congress sent him any legislation that made changes to those
programs, whether the president would even veto them. But certainly, it
will be interesting to see how the dynamic plays out.

MATHISEN: When we talk, Ylan, about those dates, 2029 for the depletion of
Medicare, 2034 I believe it was for Social Security, does that mean that
the programs literally run out of money or do they begin spending more than
they`re taking in, in that year? In other words, they begin working off
gnawing down at whatever trust fund there is.

MUI: Right. So, it`s a little bit of a misleading term there. What it
really means is that those are the years in which those funds will no
longer be able to take full benefits. So, the report actually estimates
that the Social Security trust fund, for example, will still be able to pay
out about 75 percent of benefits up through I believe it is 2090. So, for
many decades to come, you`ll still get something, just not the full amount
that you were promised previously.

HERERA: On that note, Ylan, thank you so much. Ylan Mui in Washington.

MATHISEN: Well, a new analysis of the White House`s budget shows it would
not eliminate the deficit over 10 years, though the deficit would be
reduced. The nonpartisan Congressional Budget Office says the deficit
would be around $720 billion in 2027. This contrasts with Trump
administration estimates that say cutting taxes and spending would grow the
economy and largely solve the country`s budget issues.

HERERA: On Capitol Hill, Senate Republican leaders unveiled a new version
of their health care bill in an effort to garner more support. But as
Kayla Tausche reports, division still remains.

(BEGIN VIDEOTAPE)

KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): After
weeks behind closed door, Mitch McConnell took the wrap off a new health
care bill, urging colleagues to submit changes to make it better soon.

SEN. MITCH MCCONNELL (R), KENTUCKY: So, it`s time to rise to the occasion.
The American people deserve better than the pain of Obamacare. They
deserve better care, and the time to deliver that to them is next week.

TAUSCHE: The bill is a balancing act of proposals meant to bring together
disparate wings of the Republican Party. It adds $45 billion in funding
for opioid treatment to win over senators from Ohio and West Virginia.
Seventy billion dollars more to stabilize insurance markets at the state
level and the ability for insurers to offer lower cost plans. That
allowance was stopped by senators who wanted to nix mandatory coverage
areas to lower premiums. Insurers warn that would destabilize the market
for higher risk customers. The industry`s lobbying group in a memo saying
the proposal would fracture and segment insurance markets. That would lead
to widespread adverse selection.

Senators Ted Cruz and Mike Lee pressed for the change. Cruz says he`ll
vote for the bill to proceed, but Lee and half a dozen of his colleagues
are still undecided, and two senators have said their firm noes, leaving no
room for error.

Moderate Republican Susan Collins of Maine —

SEN. SUSAN COLLINS (R), MAINE: Most troubling to me is that the rewrite of
the Affordable Care Act is being used to totally revamp a vital entitlement
program.

TAUSCHE: And a more conservative Rand Paul of Kentucky.

SEN. RAND PAUL (R), KENTUCKY: We were elected on a message of repeal, and
this bill doesn`t repeal Obamacare.

TAUSCHE (on camera): Early next week, the Congressional Budget Office will
be releasing its score of the economic impact of the bill. Majority Leader
McConnell leading the meeting with moderate Republicans told reporters we
will be voting on this next week.

For NIGHTLY BUSINESS REPORT, I`m Kayla Tausche, Washington.

(END VIDEOTAPE)

MATHISEN: Still ahead, can a German grocer shake up the American
supermarket business?

(BEGIN VIDEO CLIP)

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: I`m Courtney
Reagan in Chesapeake, Virginia. I`m at the opening of a brand new grocery
store that could bring pressure to lower grocery prices across the board.
I`ll tell you where I am and why coming up on NIGHTLY BUSINESS REPORT.

(END VIDEO CLIP)

(MUSIC)

MATHISEN: President Trump said he`s considering quotas and tariffs to deal
with the problem of steel dumping by China. He made the comments while on
Air Force One today. He said there were two ways to stop what he describes
as dumping, quotas and tariffs, and added that maybe he`ll do both. That
sent shares of U.S. steel companies higher today.

HERERA: The Federal Reserve chair was back on Capitol Hill. This time, in
front of a Senate committee testifying on the economy. Today, Janet Yellen
was pressed on how to increase economic growth. Now, recall that 3 percent
growth target set by the current administration, well, he told lawmakers it
would be a challenge to reach.

(BEGIN VIDEO CLIP)

JANET YELLEN, FEDERAL RESERVE CHAIR: We have an economy that is grown over
the last number of years by about 2 percent per year. And 2 percent has
been sufficient to create a very large number of jobs and a tighter labor
market. Of course, it`s good to have more jobs and a tighter labor market,
but the fact that that could be accomplished with 2 percent economic growth
points to what is very disappointing namely, the potential of the U.S.
economy to grow is very low.

(END VIDEO CLIP)

HERERA: And she added that achieving 3 percent growth would require broad
changes, such as tax reform and an improved education system which would
add to labor productivity.

MATHISEN: The Fed chair also said it was premature to conclude inflation
would continue to fall below the Fed`s 2 percent target. Today, we learned
producer prices rose slightly last month. The producer price index for
June gained 0.1 percent. Economists thought it would be flat. Well, the
Federal Reserve likes the idea of seeing slightly higher inflation,
especially given the slowdown recently in price gains.

HERERA: And food prices have also been falling. You might have noticed
that drop at the check outline at the grocery store. Good news for
shoppers, but a thorn in the side of traditional grocers. And now, there`s
a new low price store that`s quickly expanding and could be a new threat to
the industry.

Courtney Reagan reports from Chesapeake, Virginia.

(BEGIN VIDEOTAPE)

REAGAN (voice-over): There`s a growing food fight in the grocery aisle.
German grocer Lidl opened its 14th of 100 currently planned U.S. stores
today in Chesapeake, Virginia, with hundreds of excited shoppers lining up
hours before doors opened.

UNIDENTIFIED FEMALE: The way the prices are, I won`t be shopping in other
places.

UNIDENTIFIED FEMALE: A lot more economical.

REAGAN (on camera): Lidl`s U.S. stores are about the tenth of size of an
average U.S. grocery store. There`s only six aisles. There`s a big
emphasis on organic produce, meat, fresh bakery and there`s a very
impressive wine selection. In fact, Lidl has its own master sommelier who
handpicks about 120 different wines.

(voice-over): The no frills store still has a premium feel. Lidl says it
intends to be half the price of competitors, though it seems to vary by
product, store location and special sales. Still, 89 cents for Dole
pineapples and $2.89 for Lidl`s award winning private label wine are eye-
catching. A quick comparison with a Walmart store less than a mile away
shows Lidl wins on eggs, bread and ties on milk pricing.

Lidl also has nonfood surprises, replenishing twice a week. The grocer
keeps prices low in a variety ways. Nine out of ten products are its owned
private labels. So, it has more control over production costs.

Lidl has paperless corporate office, uses more natural light in stores to
lower electric bills and has shoppers weigh their own produce and bring or
buy their own bags. Experts expect the competitive pressure to push
grocery prices lower across the board.

JAN KNIFFEN, J. ROGERS KNIFFEN WWE: We`ll see deflation in grocery and
we`ll see some grocers who you happen to like or be in your neighborhood go
broke, but whatever you pay for grocery, you`ll get a good deal. And so,
the consumers are going to like it and the people who compete with these
guys are going to hate it.

REAGAN: Competitors are already on edge. Walmart says it`s, quote, very
mindful of Lidl. It competes with it already in Europe. Kroger (NYSE:KR)
has filed a lawsuit alleging Lidl`s private label preferred selection is
too close to Kroger`s 20-year-old private selection and says the German
grocer is purposefully confusing shoppers in order to take advantage of
Kroger`s brand history.

While Lidl`s 100 planned stores are just a fraction of the number, Kroger
(NYSE:KR), Walmart and fellow German grocer Aldi have in U.S., the
competitive heat in the kitchen is turned up.

For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan in Chesapeake, Virginia.

(END VIDEOTAPE)

MATHISEN: Higher costs hurt Delta`s profit and that is where we begin
tonight`s “Market Focus”.

The airline reported a worse than expected drop in earnings, thanks to
higher operating expenses. But revenue was in line with estimates. The
company also said passenger unit revenue rose and expects that to increase
as much as 4-1/2 percent this quarter. But shares were grounded, down
nearly 2 percent to $54.50.

JCPenney betting big on toys. They`re opening toy shops with play areas in
all of its stores in an effort to drive more traffic and sales. The
company also said it plans to expand its current online toy selection.
Shares of Penney up almost 8 percent to $4.98.

Occidental Petroleum (NYSE:OXY) hiking its dividend by a penny to 77 cents
a share. The yield on the stock now more than 5 percent. Shares were
higher by a fraction, ending the day at $59.50.

HERERA: In a bid to reinvigorate sales, luxury jeweler Tiffany (NYSE:TIF)
has made the new CEO who has roots in the jewelry industry. Former Bulgari
executive, Alessandro Bogliolo, will take over the top position at Tiffany
(NYSE:TIF) in early October. Tiffany (NYSE:TIF) shares were up more 1-1/2
percent to $94.04.

And after the bell, security software company CyberArk cut its revenue and
profit guidance for the current quarter. CyberArk said sales will come in
lower than previously expected due to the company`s performance in Africa
and also the Middle East. Shares initially fell 20 percent after hours,
but ended the regular session up 1 percent to $51 even.

MATHISEN: Middle class Americans are making cash king again, sort of.
According to the FDIC, which regulate banks, total deposits rose more than
6 percent last year to about $10 trillion. So, why are Americans hoarding
cash right now?

Brian Levitt is senior investment strategist at Oppenheimer Funds, joins us
now to discuss.

Brian, welcome. Good to have you with us.

BRIAN LEVITT, SENIOR INVESTMENT STRATEGIST, OPPENHEIMER FUNDS: Thank you.

MATHISEN: So, why are Americans putting money in checking and other cash
accounts that pay so little?

LEVITT: Well, there`s an irony in all of this. Eight years ago, we were
worried about the amount of debt that households had built up. And now,
we`re having a conversation about the level of cash that they`ve built up.
So, this is a better place to be.

Remember, we`ve had a economic environment where the economy`s grown about
2 percent per year. That`s been very good for corporate profitability and
good for the market, not fantastic for wages. And I think investors are
being cautious as a result.

HERERA: We`re looking at some of the notes that you gave us. And one of
the things that you say is that they`re fearful for their employment. It
may be tenuous. Yet, we have a pretty tight labor market.

LEVITT: We do have a pretty tight labor market. My comments around that
is not that the U.S. economy`s about to roll over and the unemployment
rate`s about to go up substantially. Remember though, we tend as human
beings to have a recency bias and a lot of us remember a recession in 2001
and a financial crisis in 2008 and 2009. And that does lead to us to
change our behavior as a result of it.

So, it`s not that people necessarily believe that the unemployment rate`s
going to skyrocket or the economy`s going to roll over. The reality is,
we`re just being more cautious as our wages don`t grow, substantially, and
we`re building up our savings rate as a result.

MATHISEN: Most of the cash accounts as we began this segment pay very,
very little, pennies, per year basically. Is — do you see that changing
anytime soon? I mean, CD rates, or savings rate?

LEVITT: Well, the Federal Reserve would like to raise interest rates.
They`ve normalized — well, begun to normalize rates from zero to 1.25 and
expectation is the economy continues to modestly grow, they may raise rates
a little bit from here. But given that the ten-year rate is at 2.30 or
2.40, it`s tough for the Federal Reserve to be significantly tighter. So,
short terms are unlikely to go up substantially.

Now, the good news is, even as we talked about investor caution and what`s
going on in checking accounts, we are seeing money come back into the
equity markets. Some 300 billion in positive flows this year. So,
investors are taking on risk.

In this type of an environment, you know, what are the alternatives?

MATHISEN: Right.

LEVITT: As you say, pennies on cash or growth in equities?

MATHISEN: All right. Brian, thanks very much. We appreciate your insight
tonight. Brian Levitt with Oppenheimer Funds.

LEVITT: Thank you.

HERERA: Coming up, bots mean business and they`re becoming more and more
human like.

(MUSIC)

HERERA: Uber, the fast growing ride hailing company, has formed a
partnership with its rival in Russia. Uber and Yandex will combine their
businesses and form a new company which does not yet have a name. The deal
must first receive regulatory approval, and it reflects some of the intense
competition Uber has faced in its aggressive push overseas.

MATHISEN: A French court has thrown out Google`s more than $1 billion tax
bill. French tax authorities unsuccessfully argued that Google
(NASDAQ:GOOG) should pay taxes on advertising, which was displayed in
France, but booked through its offices in Ireland, which has a low
corporate tax rate. The court ruled that Google`s operations in France are
set up in such a way that allows it to be exempt from those taxes.

HERERA: There is a revolution underway in artificial intelligence. Think
driverless cars and increased factory automation. But one thing critics
have long argued is that robots lack that human touch. Well, a San
Francisco start up has created bots to work in sales department and the
messages the bots send seem so real that people think they`re human.

Eric Chemi has our story.

(BEGIN VIDEOTAPE)

ERIC CHEMI, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): You sound
cut, got a picture? Nicole, you`re beautiful, are you single? I love you,
Jen. They may sound like messages on a dating app, but they`re real e-
mails people have sent to sales reps at places like car dealerships,
insurance companies and education firms.

The problem, the sales rep is not human. They`re artificial intelligence
bots offered by A.I. company Conversica.

ALEX TERRY, CONVERSICA CEO: She has a name. She has a title, an e-mail
address, a phone numbers. And she reads and writes emails.

CHEMI: Alex Terry is the CEO of Conversica.

TERRY: We have over 1,000 companies that use Conversica. They get to
choose the name.

CHEMI (on camera): But it sounds like some names are better than others.

TERRY: What we tend to find is female names outperform male names in
general, not always, but in general, and most commonly names that were
popular, 24, 25 years ago tend to do pretty well.

CHEMI (voice-over): The most popular names for the bots are Jenny, Ashley
and Jessica.

Jeff Ditri heads business development at Curry Toyota (NYSE:TM) in
Watertown, Connecticut, where they use Conversica`s technology for a bot
named Holly (NYSE:HOC).

JEFF DITRI, CURRY TOYOTA BDC MANAGER: She will respond right after an
opportunity comes in. Within four minutes, no vacations, no days off,
she`s going.

CHEMI (on camera): So, she`s probably your hardest worker, right?

DITRI: That may cause an argument, (INAUDIBLE) but she works pretty hard.

CHEMI (voice-over): Ditri says all that work costs much less than a full
time employee. Getting your own bot starts at just $3,000 per month, and
usually brings in a double digit return on investment.

(on camera): Is there ever a situation where we`ve heard this at other
places, for example, competitors want to hire her away.

DITRI: They can`t her. She`s ours. She`s not going anywhere.

CHEMI (voice-over): Making the bots seem that life like is what Conversica
strives for.

TERRY: The personality of the assistant is very friendly, conversational.
We even make grammar mistakes on purpose.

CHEMI: That helpfulness means customers sometimes want to meet Holly
(NYSE:HOC).

MARK FINCH, CURRY TOYOTA GENERAL MANAGER: Every once in a while, you`ll
have someone came in, I just spoke with her, you know? You can`t tell me
she`s not here, I just got off the phone with her. Nine times out of 10,
this is Jeff, Holly`s supervisor and it`s fine from there.

CHEMI: And that brings us back to asking the bots out to dinner.

TERRY: We don`t, continues to engage —

CHEMI (on camera): Can you say, sorry, you were suckered into talking into
a robot?

TERRY: She just stops.

CHEMI: And Conversica says because the technology is so good, the bots`
emails get more responsive than those from humans, but don`t worry, humans
will still have jobs. Curry says because the bots can help figure out
who`s actually interested, sales often increase, leading to more job
openings.

For NIGHTLY BUSINESS REPORT, I`m Eric Chemi.

(END VIDEOTAPE)

MATHISEN: Nicole, I love you, Jen, you look beautiful. Those bots are
going to fight. They are going to fight.

HERERA: It will be a bot fight.

All right. That`s NIGHTLY BUSINESS REPORT. I`m Sue Herera. Thanks for
joining us.

MATHISEN: I`m Tyler Mathisen. Have a great evening, everyone. Watch your
bot. See you tomorrow.

END

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