TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Plan C. Senate Republicans plot their next move after their bill to repeal and replace Obamacare fails. But their latest plan, repeal now replace later, may be DOA. So, what’s next?
Flying high. Nasdaq and S&P closed at records. But some investors worry that the market is topping. Others say full steam ahead. Who’s right?
Big Blue bruised. IBM reports its 21st straight quarter of declining sales. Have shareholders had enough?
Those stories and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, July 18th.
Good evening, everyone, and welcome. I’m Tyler Mathisen. Sue Herera has the evening off.
Well, drama in D.C. The Republican effort to repeal and replace Obamacare is dead. So, it seems is a plan to repeal it now and replace it later. Three moderate GOP senators, Susan Collins, Shelley Moore Capito and Lisa Murkowski said they would oppose any vote to proceed with an immediate repeal of the law. And the president is not happy.
(BEGIN VIDEO CLIP)
DONALD TRUMP, PRESIDENT OF THE UNITED STATES: I’m certainly disappointed. For seven years, I’ve been hearing repeal and replace from Congress and I’ve been hearing it loud and strong. And then when we finally get a chance to repeal and replace, they don’t take advantage of it. So, that’s disappointing.
So, I’m very, I would say, I’m disappointed in what took place. It will go on and we’ll win. We’re going to win on taxes. We’re going to win on infrastructure and lots of other things.
(END VIDEO CLIP)
MATHISEN: Health insurance stocks were mostly lower on this new wave of uncertainty. UnitedHealthcare reported however a strong quarter and bucked the trend. And with health care an ever growing part of the U.S. economy, the collapse of the health care bill was felt in the currency markets overnight when it became clear that the latest version of the bill to repeal and replace the ACA would not move forward, investors in Asia moved quickly to dump the U.S. dollar.
John Harwood is following the story from Washington.
John, what does the failure tell us about Obamacare, about the president, about congressional Republicans?
JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, first of all, about Obamacare it says it’s not easy to take away benefits to 20 million people have gained under a law. When people get subsidies to buy health insurance, they like it. About President Trump, it shows his strategy of being disconnected from the issue, not having a grasp of the details, watch, standing by, by watching Congress wasn’t effective.
And for Republicans in Congress, it shows they’ve got a big split between the interest of their more affluent constituents who want lower taxes and smaller government, and many of the working class voters that Donald Trump relied upon to win who like government benefits, like Medicaid, like insurance subsidies.
MATHISEN: So, what is the next move for the GOP here? Do they just let the issue die? Do they table it and the move on to tax reform? What?
HARWOOD: It’s unclear whether they’re going to try to make a motion to take up a straight repeal. It’s not going to succeed. Aside from other senators that you mentioned, Rob Portman of Ohio came out today against a straight repeal. So, that’s simply not going to happen.
The only question is how quickly Mitch McConnell moves to plan C, which is what he described over the July 4th break, which is working with Democrats to try to fix the insurance marketplaces. Some members of the House are interested in doing that too, especially in rural areas where there’s limited competition. So, that’s a place where the president might be able to get bipartisan cooperation.
MATHISEN: The president said he had a very busy six months, signed a lot of bills. That’s somewhat under dispute. He needs a win.
How big a danger sign is this for the rest of his agenda?
HARWOOD: It’s a big danger sign because, Tyler, Republicans have not displayed an ability to govern and do the things the give and take that are required to do major reforms. You need presidential leadership, President Trump is weak. And if Republicans are going to pass a tax reform plan that does not explode the deficit, while they cut taxes, they’re going have to figure out who they’re going to raise taxes on to make it come out even in the end.
That’s not going to be easy. And from the difficulty of the House border adjustment tax, we can see that they’re struggling.
MATHISEN: All right. John, thank you very much. John Harwood in Washington tonight.
On Wall Street, meantime, the S&P 500 and Nasdaq hit as we mentioned earlier, new highs today, thanks in part the strong quarter from Netflix, which we told you about here last night. But it wasn’t all positive. Bank shares slumped because of weak trading volumes reported by both Bank of America and Dow component Goldman Sachs.
Shares of Goldman weighed on the blue chip Dow index which fell about 55 points to 21,574. Nasdaq rose 29 to that fresh record. It is the eighth straight day of gains and marks its longest win streak in more than two years. The S&P 500 added one, but it was good enough for a record.
So, what should investors make of the market that sits at this lofty levels?
Bob Pisani takes a look.
BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: There is a growing chorus of voices insisting that the market is somehow topping out? Why? Well, some say the Federal Reserve will have a hard time reducing its balance sheet and raising rates. Some argue that political gridlock in Washington and the lack of progress on health care and tax cuts will catch up with the market.
But the biggest argument is how the market is overpriced. The worry warts should calm down. Stocks are at historic highs because earnings are historic highs. And the global economy is improving. Really, it’s that simple.
But is the market overpriced? Well, the most important determinant of stock prices is earnings estimates. Right now, the S&P 500 is slightly above its historic average but not dramatically so. Even the complaint the technology stocks are too expensive doesn’t really ring true. Most tech stocks are below their historic norms.
Still, there are pockets of the market that seem expensive, for example, Apple. It’s trading near its highest valuation in nearly seven years. It’s up 30 percent this year, because analysts had convinced everyone the iPhone 8 will be a huge hit when it’s introduced later this year. Well, maybe, but that success is partly embedded in the stock already.
Another example is energy stocks, which are way above historic values because everyone has gotten the price of oil wrong this year. They jacked up earnings estimates because they assumed oil would be $60 by now, but it’s stuck in the low $40s.
So, the bottom line is this, there are pockets of the market that are arguably overvalued. But the S&P 500 itself is only moderately stretched. As for the so-called imminent end of the bull market, Goldman Sachs says as long as global growth remains above trend and is little risk of recession, they’re not worried just yet.
For NIGHTLY BUSINESS REPORT, I’m Bob Pisani at the New York Stock Exchange.
MATHISEN: Nobody is worried until — not worried until they are worried. So, what should you make of this market?
Here to put it in context is veteran financial journalist and author, Ron Insana, among the many things he does.
You’re also a historian of the market.
RON INSANA, VETERAN FINANCIAL JOURNALIST: Of sorts.
MATHISEN: When you’ve seen — well, you certainly know the history of the market. When we’ve seen this kind of record breaking performance week after week after week after week, hitting new highs, new highs, new highs, what does it generally foretell if anything?
INSANA: I’m not sure that we’ve seen it quite this way, Tyler. I mean, we’ve had very low volatility.
MATHISEN: It does feel different.
INSANA: We’ve seen, you know, volatility, a measure of how the market moves up and down on a given day, really tamp down over an extraordinary long period of time. Something we don’t get to see too often. And we’ve seen nominal new highs.
Since March when we really hit kind of the peak momentum of this market, we seen a couple percent added to the Dow. Five or six added to the NASDAQ. And a lot of that’s come from a handful of stocks. Like you said, it was Netflix, Facebook, Amazon and the like.
So, we do have a relatively narrow market. It still looks OK. As Bob Pisani said, it looks reasonably valued. I think what’s happening here and I’ll agree with Bob, is global growth is picking up the slack for slightly lower U.S. growth. Technology stocks offset banks, some days that they’re weak and vice versa.
And then we have the diminishing likelihood that the Federal Reserve will get more aggressive with its interest hikes given some of the low inflation data we have seen. And I think the stock market has begun to reprice in or refactor in the notion that rates aren’t going to go up as dramatically as some feared just a couple of weeks ago.
MATHISEN: And if that’s the case, where else are you going to put your money?
INSANA: That’s right. We’re getting 2.26 percent on a 10-year treasury. You can get a 3-1/2 percent dividend yield on a lot of high quality stocks and outperform in that regard.
And again, the only place you would put your money is in other markets outside the United States which have been on fire.
MATHISEN: And they’ve been going up.
MATHISEN: Every market practically in the world. I can’t — maybe Venezuela hasn’t. But lots of markets fortunately they’ve all been going up.
In an era when so much of the money at play in the market is coming in through ETFs, do records matter as much as they once did? Do you worry about vulnerability because so many people are playing through ETFs?
INSANA: It’s a double edged sword. On the one hand, you see this flood of money coming into ETFs, exchanged traded funds, that have to buy baskets of stocks at any given time. So, that’s an embedded floor under the market. It’s actually keeping the market from going down.
I do worry about market structure insofar as there are more ETFs than there are individual stocks. So, if you ever get some reason some headline that forces people to dump ETFs, that will unduly pressure the stocks that are in the baskets that they buy.
So, you could have one of those kind of shocking days that comes out of the blue, but right now, Wall Street is shrugging off headlines out of Washington. They’re not worried about geopolitical risks. Earnings as Bob said are doing pretty well as they did in the first quarter.
So, you have a variety of supports for this market. I don’t love the market in this environment, but it’s also hard to fight it given that it continues to win.
MATHISEN: And so, quickly, what would turn you against this market? Is there any —
INSANA: Everything that’s happened in Washington thus far would have turned me under any other scenario in my experience.
INSANA: The headlines that we’ve seen from Washington would have caused 10 percent, 15 percent, 20 percent correction. It hasn’t. You never sell a dull market short, they say. I’m still cautious, but if you pick the right stocks —
MATHISEN: Go ahead.
INSANA: — you’re winning.
MATHISEN: Ron, thanks. Ron Insana —
INSANA: Thank you very much.
MATHISEN: — great to see you.
As we mentioned, Goldman Sachs was the worst performing stock on the Dow today. Johnson & Johnson, the best. And somewhere in the middle was UnitedHealthcare. All three reported earnings today and all three had a different message for investors.
Dominic Chu wraps up the result.
DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Despite the earnings beat and solid returns on equity investing and equity trading, Goldman Sachs suffered a second straights quarter of subpar results in fixed income, currencies and commodities. Revenues there were down 40 percent from a year earlier, Goldman cites low levels of volatility, low client activity and generally difficult market making conditions.
Even when you fold in equity revenues, Goldman’s overall trading number is down 18 percent from a year ago, putting it at the top of a list it doesn’t want to be leading, worse than J.P. Morgan, dropped twice as steep as Bank of America’s and more than double the fall at Citi. The nation’s biggest health care insurer, UnitedHealth Group posted a beat on earnings and raised its outlook for the rest of the year.
UnitedHealth is almost nonexistent in the Affordable Care Act marketplaces this year, which is holding down revenues, but is also holding down its cost. It’s also serving to shield UNH from ongoing uncertainty in Washington that we just talked about. UNH is seeing growth not as an insurer but as a health care provider. Its pharmacy benefit management and ambulatory care offerings drove growth in its Optum health services group with earnings up 21 percent to $1.5 billion.
Johnson & Johnson also beat earnings forecast and it too is raising the bar on sales and profit expectations for the rest of the year at the world’s largest health product company. Even as competition dented its drug sales, last month, J&J closed on its biggest deal ever, the $30 billion purchase of Swiss drug maker Actelion, which the company says will provide a sales boost during the second half of the year.
For NIGHTLY BUSINESS REPORT, I’m Dominic Chu.
MATHISEN: IBM’s revenue fell for 21st straight quarter. Not a trend the Big Blue wanted to see continue. The company saw slowing growth in its higher margin businesses, including cloud and artificial intelligence services.
For the quarter, IBM did beat Wall Street estimates with earnings of $2.97 a share. Revenue, though, fell about 5 percent to a roughly $19 billion level. Following the report, the stock was volatile.
Deirdre Bosa has more on IBM’s quarter.
DEIRDRE BOSA, NIGHTLY BUSINESS REPORT CORRESPONDENT: The big takeaway for IBM is that the company continues to struggle to transform itself. Its legacy business is still slowing while the company is still trying to grow its higher margin next gen tech like cloud computing, artificial intelligence and data analytics. These businesses, which the company calls strategic imperative now makes up about 43 percent of IBM’s total revenue, though it grew at a slower pace this previous quarter than the one before it, and it has not been enough to make up for its older slowing divisions.
Big Blue has seen more than five years of declining revenue growth. A bright spot, though, IBM reaffirming its full year guidance despite some analysts calling for the company to cut it.
For NIGHTLY BUSINESS REPORT, I’m Deirdre Bosa, San Francisco.
MATHISEN: And joining us now to talk a little bit more about IBM is Chris Magoon. He is the CEO of Amplify ETFs. And he owns the stock in his funds.
Chris, welcome. Good to have you with us.
My notes say, quote, we are not bullish on IBM due to monumental transformation they are trying to go through I can’t remember a time when IBM wasn’t going through some transformation, Chris. When are they going to be transformed?
CHRIS MAGOON, CEO, AMPLIFY ETFS: Yes, that’s a good question, Tyler. It’s been forever. It’s like living in a house that you’re trying to remodel and it’s not done yet. And I think that’s what investors are tired about, five years worth of transformation talk and here, we get results today that still aren’t that promising. I think there’s building concern here. And IBM really needs to execute quickly.
MATHISEN: It’s not they’re not making money. They’re making nice profits. But their sales keep inching lower and lower and lower and lower.
They’ve got a lot — they’ve got a very nicely product called Watson. But is Watson delivering the goods here? Is it making money? Are they banking too much on Watson?
MAGOON: Well, it’s not yet. I mean, I think it’s helping their cyber security and their cloud computing offerings because unlike maybe Amazon with AWS, if you as a company use their offerings, you get access to Watson.
So, IBM successfully dangling it as an incentive. But I think we’re going to see the true results of Watson in the coming quarters. But, you know, again, time is not on their side here. They’re a solid company financially. But if you’re thinking about a technology stock with growth prospects, right now, IBM doesn’t fit that mold.
MATHISEN: So, I can get my IBM if I wanted through an ETF like yours, through an index fund, any number of ways. But if I’m tempted to buy the individual stock, is it basically a dividend play or is it a growth play in any sense? My sense is, you’re going to tell me buy it for the yield.
MAGOON: That’s right, Tyler. Buy it for the yield. About 3.9 percent dividend yield, about double the S&P 500. Hey, there is the upside that they could get this transformation going and the stock could be, you know, 20 percent, 30 percent gainer. But if they don’t, you’ll still clip that coupon and hopefully wait for it to rally.
MATHISEN: Yes. What about other areas in technology that speak growth to you? Where is that sweet spot?
MAGOON: Well, I think besides cyber security, artificial intelligence, you have to look at social and mobile computing, a lot of opportunities there. And that advantage IBM has is they have this brand. They can bring that brand to these new technologies. They have an advantage versus these startups that may not have the financial resources or the existing relationships and that’s what IBM really needs to put together to be successful.
MATHISEN: All right. Chris, thanks very much. Chris Magoon with Amplify ETFs.
Well, still ahead, the housing market is hot, but home builders are less optimistic. There’s an interesting reason why. We’ll tell you about it.
MATHISEN: Home prices are up, and there’s demand for new homes. Seems like the perfect environment for home builders. But a new report shows the industry is not as optimistic as one would think.
Diana Olick explains.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Trump administration’s Canadian lumber tariff sent home builder sentiments sliding again, now down considerably from its last high in March. The National Association of Home Builders monthly index fell in July and June’s reading was revised down to lowest level since last November, just before the presidential election.
Sentiment had shot up after the election on the hope of deregulation in the market. It rose even further when the Trump administration rolled back some environmental policies involving water, but then it took a U-turn on Canadian lumber tariffs and builders are now worried more Trump trade policies will just add to their cost.
NAHB chairman Granger McDonald wrote: This is hurting housing affordability even as consumer interest in the new home market remains strong.
Current sales, sales expectations and buyer traffic all fell with that last one still stuck in negative territory.
For NIGHTLY BUSINESS REPORT, I’m Diana Olick in Washington.
MATHISEN: Another health scare sadly enough for Chipotle, and that is where we begin tonight’s “Market Focus”.
The burrito chain said it temporarily shut down a restaurant in northern Virginia after a number of customers got sick there after eating at the location. The company said symptoms were consistent with norovirus, but the virus did not come from Chipotle’s food supply, and that the store has since been sanitized. The news comes as Chipotle still works to recover from a string of food safety issues back in 2015. Shares fell 4 percent on the scare to $374.98.
Harley Davidson cut its full year shipment forecast after reporting a drop in sales that missed expectations. Earnings came in ahead of estimates, but the company lowered its profit margin guidance for 2017 as it faces weakening demand from aging baby boomers and fewer millennials riding those big hogs. Shares were off nearly 6 percent to $48.95.
And Lockheed Martin said an increase in sales of its F35 fighters helped drive profit higher. Those results along with revenue better than expected. The company also lifted its sales and earnings forecast for the year. Still, shares fell a fraction to $286.79.
And the networking giant Ericsson swung to a greater than expected loss and posted sales that missed estimates. The company lowered its forecast, citing ongoing low investment by telecom companies. Ericsson also said it would speed up cost cutting initiatives. Shares down a big 16 percent to $6.07.
And after the bell, Vertex Pharmaceuticals said three of its experimental drugs to treat cystic fibrosis improved lung function in patients by nearly 10 percent. The results were better than anticipated. Vertex said it is testing various drug combinations to determine which one turns outs to be most effective. Shares initially skyrocketed following the news, ended the regular session up 2 percent at $132.16.
Coming up: while other stores close locations, Kohl’s has a different strategy. And the CEO says it will the company steal customers from its struggling rivals.
MATHISEN: As much $5 billion owed on private student loans could be erased due to lost paperwork. According to “The New York Times”, one of the largest owners of private student loans has tried to collect from borrowers, but has had cases dismissed because of a lack of documentation. The National Collegiate holds as many as 800,000 private students, and of those, about 160,000 are in default. The loans were originally issued by banks and then purchased by National Collegiate. But during the process, ownership records were lost.
Dick’s Sporting Goods is shutting its boutique women’s fitness stores called Chelsea Collective. The store was launched two years ago and just in two cities. They will close early next month. The company plans to direct women back to major Dick’s Stores for apparel and fashion needs.
Closing stores is not however part of Kohl’s strategy. Unlike many of its department store rivals, it is all part of the retailers plan to stay competitive in an ever-changing industry.
Courtney Reagan at a Kohl’s store in Clifton, New Jersey.
COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Department stores are not having a good year. Sales continue to fall for the group and Macy’s, JCPenney and Sears are closing hundreds of unprofitable locations. While Kohl’s sales have fallen for five straight quarters, it isn’t adding to department store closures. Instead, Kohl’s is investing more than half a billion dollars and opening a handful of new locations.
Despite its falling sales, CEO Kevin Mansell says Kohl’s gets lumped into the department store doldrums, but argues Kohl’s is different.
KEVIN MANSELL, CEO, KOHL’S: We’re part of this generalized brick and mortar, department store, apparel retailing. I think that, you know, the practical matter is the facts are that we’re not the same. Whether it’s the position we have on balance sheet and therefore the flexibility that we have to act, whether it’s the store portfolio being newer and off mall, whether it’s technology investment, which has been massive. Most of our competitors will not be able to do that because they’re cash-constrained.
REAGAN: Mansell says his stores are the retailer’s biggest assets and says Kohl’s is benefitting from all the specialty and department store closings, and plans to go after that opportunity more aggressively.
MANSELL: There’s a strategic plan in place beginning with this back to school for the company to go after those sales in a really meaningful way. Now, we’ll get our share anyway. Market shares shift as a result of those closures. But really, our objective is to get more than our fair share. So, we’re pretty optimistic on that. We’re already kind of seeing that.
REAGAN (on camera): Kohl’s has also added new shoppers with a spring launch of its Under Armour merchandise. So far, sales of the brand have exceeded expectations and the CEO expects that sale strength to continue throughout the year.
(voice-over): While Kohl’s has a strong loyalty program with 70 million members, there’s no doubt Amazon’s prime program is eating into department store sales. Some estimates say Amazon has 85 million U.S. prime members and growing.
But Kohl’s CEO is up for the challenge.
MANSELL: I think we’re really well-positioned there. Our focus: best in class omni channel. We have a physical presence. They don’t. We have to leverage it. We have to do a better job of earning that customer dollar.
REAGAN: For NIGHTLY BUSINESS REPORT, I’m Courtney Reagan in Clifton, New Jersey.
MATHISEN: And finally tonight, when you go shopping, do you look specifically for goods made in the USA? As we mentioned last night, the White House has dubbed this Made in America Week, with a focus on promoting American manufacturing and the president’s push to bring back jobs.
But how important is it to you to buy U.S. made goods? We tried to find out.
(BEGIN VIDEO CLIP)
UNIDENTIFIED FEMALE: I think it’s good to support what we have here.
UNIDENTIFIED MALE: If a product is made in the United States, of course, it’s going to cost more because of the laws that we have here, like minimum wage and things like that.
UNIDENTIFIED MALE: Domestic goods that are made usually — might cost a little more for us to make. However, you know, in the long-term, it’s kind of paying into some security to always ensure that there’s some stability economically down the line and potential jobs for future people down the line.
UNIDENTIFIED MALE: Definitely conscious of trying to buy domestic products. But it’s not to make it or break it deal.
(END VIDEO CLIP)
MATHISEN: A new “Reuters”/IPSOS poll shows that 70 percent of Americans think it’s very important or somewhat important to buy U.S. made goods, but not everyone is willing to pay a premium for them. Thirty-seven percent say they don’t want to pay more.
And that is NIGHTLY BUSINESS REPORT for tonight. I’m Tyler Mathisen. Thanks for watching. Have a great evening everybody. We’ll see you back here tomorrow.
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