Transcript: Nightly Business Report – July 28, 2017

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Tweeted, and out. White House
Chief of Staff Reince Priebus is out with a tweet. In his place, General
John F. Kelly, the homeland security secretary.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Focus on fundamentals.
The Dow closes at a record, despite all the chaos in the capital. But at
what point will Washington start to really matter to investors?

HERERA: Up in smoke. The FDA wants to make cigarettes less addictive, and
that burned a hole in a handful of tobacco stocks.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Friday, July
28th.

MATHISEN: Good evening, everyone, and welcome.

Developments out of Washington late this afternoon. President Trump`s
chief of staff, Reince Priebus, is out.

The president broke the news in his favorite way, over Twitter, writing,
quote: I am pleased to inform you that I have just named General/Secretary
John F. Kelly as White House chief of staff. He is a great American, and a
great leader. John has also done a spectacular job at Homeland Security.
He`s been a true star of my administration.

Mr. Priebus is the former Republican Party chairman, and he clashed with
other officials in the White House, including the new director of
communications, Anthony Scaramucci.

John Harwood joins us tonight on the phone from Washington.

John, welcome, good to be with you.

How big a surprise, John, is Priebus` departure? And how big a surprise is
the appointment of Kelly as chief of staff?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT (via telephone): Well,
I think the departure of Reince Priebus wasn`t a surprise. The timing was
a surprise. I had been talking to people during the day who were saying,
you know, sometime in the next couple of weeks, certainly by Labor Day, so,
that wasn`t unexpected.

John Kelly had been rumored as a candidate for the job. So had other
people, including Gary Cohn, the former Goldman Sachs (NYSE:GS) executive.
Deena Powell, also formerly from Goldman Sachs (NYSE:GS).

And the real question is what does this mean? How does it change the
functioning of the White House? Most things from the Trump administration
have revolved around the president personally, not his aides, but we`ll see
whether General Kelly can bring a greater amount of discipline.

HERERA: What more — what changes, other changes, might be possible? For
instance, Mr. Bannon was targeted recently by Mr. Scaramucci. What do you
see ahead, John?

HARWOOD: It is very difficult to predict this administration to say the
least. The most conspicuous potential change that has been signaled is the
departure of the Attorney General Jeff Sessions. Now I don`t know if
that`s actually going to happen. The president has suggested as much.

I had a — someone close to Trump tell me today they expected Bannon to
stay. But I don`t think you could make a heavy bet on any of this.

One thing I think is interesting, though, I was talking to an ally of Paul
Ryan, the House speaker, who said that the departure of Priebus is
essentially un-tethering the Trump White House from the Republican party
and, in fact, predicted that the next phase of the Trump presidency may be
to go to war against the Republican Congress and blame them for his
problems.

HERERA: Well, he was Mr. Priebus, certainly, part of the Republican Party
establishment, former chairman of the party. So what could this change
mean, not only for the operation of the White House, John, but for the
president`s policy agenda?

HARWOOD: Well, if General Kelly can bring a greater amount of focus and
discipline to the White House, and to the president, for that matter, it is
possible that they could have a better experience with tax reform, which is
the next big reform than they have had with health care reform. Obviously,
a lot of the problems on health care were inherent to that issue, and I
think a lot of the responsibility lies with the Congress, and not with
President Trump.

But, General Kelly is not experienced in politics. And one of the
advantages of having Reince Priebus there was, in fact, you`re trying to
get an agenda through with Republicans on Capitol Hill. And, General Kelly
does not have any track record of doing that.

MATHISEN: All right, John Harwood, thanks very much, working late on the
weekend night. John Harwood in Washington.

HERERA: Well, while the drama in Washington continues, Wall Street is
blocking out the noise and staying squarely focused on the fundamentals.
Earnings and global growth are all supporting stocks, which saw the Dow
Jones Industrial Average close at a new high. The blue chip Dow index
advanced 33 points to 21830, the Nasdaq lost seven and the S&P 500 fell
three. For the week, the Dow was the big winner.

Bob Pisani has more on what`s driving the market.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: The stock market has a
high class problem right now. An awful lot is going right.

First and foremost, earnings have been strong. We`re past the halfway
mark. Earnings are up more than 10 percent year over year. Revenues are
up 5 percent.

Estimates are strong for the third quarter, as well. Valuations are
higher, all right. But the margins are comfortable as long as there is
earnings growth and the economy is improving.

And the global economy has been improving. Money is flowing into European
stocks this year. The credit markets are in great shape. Defaults are
low. And a recession, nowhere on the horizon.

Next, the dollar`s been dropping, providing a tailwind for exporters. And
rates are low. And the Fed`s reiterated this week that rates will stay low
for a long time and nobody`s expecting a rate hike until December.

All right. What could go wrong with this? Yes, Washington`s a mess. But
the markets don`t care as long as tax cuts are somewhere on the horizon.
In 2018 has proven good enough so far. There`s definitely some kind of
premium in the market for a tax cut but we don`t know how big this premium
is.

Another issue that is sort of puzzling market watchers is geopolitical
risk. Today, the North Koreans fired a missile into the Sea of Japan but
the markets shrugged it off. Janus`s Bill Gross said earlier this week
that a significant geopolitical event like North Korea would usually carry
a higher risk premium. But so far, that hasn`t been the case.

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

(END VIDEOTAPE)

MATHISEN: So what, if anything, will it take for the market to turn its
attention to Washington in a more focused way?

Jeff Moore is senior analyst at Global Risk Insights and he joins us now to
discuss.

Jeff, how can the stock market and bond markets be so Zen when Washington
is so not?

JEFF MOORE, SENIOR ANALYST, GLOBAL RISK INSIGHTS: Well, I think that the
precedent was set a long time ago as far as the character of this
administration, and the interplay between the White House and Congress, so
there`s a little bit of a de-sensitivity issue as far as how that
translates into market risk. But I think it`s going to take something
substantial and maybe some outside the domestic scene to actually introduce
some of that volatility.

HERERA: Would that be — or might that be North Korea?

MOORE: I think so. But more than North Korea`s actions, I think more
importantly, judged by the market is going to be the reactions of the Trump
administration. Any escalation as far as military action on the Korean
peninsula will be something that introduces a spike in volatility, that
could really unravel a lot of the complacency that`s been going on in the
market so far.

MATHISEN: Spike in volatility would be the most favorable outcome it might
well seem, if something big happens on the Korean peninsula.

Let`s talk a little bit about the GOP agenda. I don`t want to just call it
the Trump agenda. A big part of it seems to have, for now, gone down in
flames on health care. It is no easy push to push tax reform through.
Infrastructure, immigration, there are a lot of things standing out there
which of those has the potential to move the needle marketwise one way or
another? Or the most potential, I should say.

MOORE: Yes, I think tax reform probably has the most potential of actually
following through, because you probably have a high level of consensus
among Congress and the White House of getting some tax reform policies
pushed through and signed into law. But the question is, how they`re able
to do that, when they`ve got a second or third on the list behind health
care, which so far has been a debacle?

HERERA: You know, Jeff, we just had John Harwood on the phone, and he
mentioned that he was hearing from sources that the next move by the White
House may be to go after Congress, because of the lack of movement on
things like health care. If we start to get mutiny between Congress and
the administration, what do you think Wall Street`s reaction would be to
that sort of a development? Hypothetical at this point, certainly.

MOORE: Yes. I think outside of some foreign policy issue that creeps up
and escalates, that open mutiny between Congress and the Trump
administration, if the Trump administration were to go after the Republican
Party, and the Republican majorities in Congress, that could really
escalate to the point of investors really coming to terms with some of
these agenda items, there are possibilities of actually getting passed
really, really sinking.

And to this point, none of that has actually been passed through Congress,
and you would think the markets would have reacted negatively to that
already. But, this kind of open political warfare between the White House,
and Congress, being of the same political party, would be really something
that causes investors to question where this is going as far as economic
policy standpoint.

MATHISEN: All right, Jeff. Have a nice weekend. Jeff Moore with Global
Risk Insights.

HERERA: To the economy now, which rebounded this spring after a weak start
to the year. Gross domestic product for the second quarter was 2.6
percent. And while that was more than double the revised economic output
of the first three months of the year, it was slightly below expectations.
Consumers ramped up their spending, and businesses invested more on
equipment. Inflation, though, retreated and wage growth decelerated,
despite an economy that`s considered to be at or near full employment.

MATHISEN: It was the best week of the year for oil prices, after rising
today for a fifth straight session. Domestic crude up more than 8 percent
this week, as crude and gasoline inventories fell more than expected and
Saudi Arabia said it would reduce future oil output. That alleviated some
oversupply concerns.

But the price of oil varied widely in the second quarter. That hurt
ExxonMobil`s results but not doing much damage really to Chevron`s quarter.
Shares of the country`s two oil producers moved in opposite direction.
Chevron (NYSE:CVX) the best performing Dow stock today, Exxon the worst.

Jackie DeAngelis has more.

(BEGIN VIDEOTAPE)

JACKIE DEANGELIS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Investors weren`t
expecting much from ExxonMobil (NYSE:XOM). That`s why this earnings miss
really stings. The wide range in crude prices is partially to blame even
though they were higher than they were a year ago.

The other reason is weak performance from Exxon`s exploration and
production business. The downstream business, that`s refining, was
stronger but weak here in the United States.

CEO Darren Woods said the company`s job is, quote, to grow long-term value
by investing in our integrated portfolio of opportunities that succeed
regardless of market conditions. Since Woods took over on January 1st,
succeeding Rex Tillerson, who is now secretary of state, Exxon has faced
accusations of sanction violations, probes into whether the company hid
data on climate change and questions of how it would grow oil output.

It`s a slightly different story for rival Chevron (NYSE:CVX), the second
largest U.S. driller behind Exxon. It`s swung to a profit thanks to higher
expected output from its wells even as returns from its refining business
shrank.

What will be key for both companies is how they proceed going forward with
oil just under $50 a barrel, do they keep drilling or do they pare back and
allow prices to stabilize?

The U.S. is the swing producer right now.

For NIGHTLY BUSINESS REPORT, I`m Jackie DeAngelis.

(END VIDEOTAPE)

HERERA: Still ahead, profit and performance should mean fewer headaches
for American airlines, right? Well, that`s not really the case.

(MUSIC)

HERERA: Billions of dollars in market cap went up in smoke. Shares of the
big tobacco companies fell after the FDA said it wants to cut nicotine and
cigarettes to non-addictive levels. Such a move would represent a sweeping
federal effort to reduce smoking since Congress required cigarette packages
to carry health warnings. Altria and British American Tobacco were hit
hard.

Aditi Roy has the details.

(BEGIN VIDEOTAPE)

ADITI ROY, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Nearly 90
percent of all adult smokers started the habit before they were 18. And
then became hooked.

That`s the premise of the Food and Drug Administration`s sweeping new plan
to regulate tobacco and nicotine.

DR. SCOTT GOTTLIEB, FDA COMMISSIONER: We need to take a fresh look at
nicotine itself.

ROY: The goal is to save lives. In a statement announcing the news, the
agency said: Unless we change course, 5.6 million young people alive today
will die prematurely later in life from tobacco use. The agency also
reports a direct health care and lost productivity costs stemming from
tobacco use, add up to nearly $300 billion.

To meet its goal, the FDA wants to lower nicotine levels in cigarettes to
non-addictive levels and will take measures that will, quote, make tobacco
products less toxic, appealing and addictive.

GOTTLIEB: But if the other chemical compounds in tobacco and in the smoke
created by setting tobacco on fire that directly and primarily cause the
illness and death, not the nicotine.

ROY: In other words, the FDA commissioner says by curbing the nicotine,
more people will quit smoking and won`t be exposed to the more harmful
elements of cigarettes. Upon the news, shares of cigarette stocks like
Altria and British American Tobacco plummeted.

But some analysts say the regulations could help the market for cigarette
alternatives. Some tobacco companies like Altria are developing less
harmful products like smokeless tobacco and e-cigarettes.

JOE AGNESE, CFRA ANALYST: I think the economics aren`t as good right now,
but as the market develops, and perhaps with these changes, there will be a
greater push and acceleration of growth in electronic cigarettes that
longer-term the economics could improve.

ROY (on camera): He adds companies have some time before the regulations
would take effect. Before the plan can go into motion, the FDA will have a
public comment period. It`s unclear when that will start or how long that
will take. Then the agency will evaluate the comments before finalizing
the plan.

For NIGHTLY BUSINESS REPORT, I`m Aditi Roy, San Francisco.

(END VIDEOTAPE)

MATHISEN: American Airlines reported better than expected earnings for the
second quarter. Like other carriers, demand is strong at the world`s
biggest airline and that is pushing up average fares, fees and overall
revenue. Meanwhile, the company`s CEO says American is not backing off its
fight to stop the growth of Persian Gulf carriers in the U.S.

Phil LeBeau reports from Fort Worth, Texas, where American is
headquartered.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): For
American airlines business is taking off, thanks to strong demand and a
industry leading ability to drive greater passenger revenue. In fact,
revenue per available seat mile is up almost 6 percent. In part because
about half of the American passengers who buy a basic economy ticket are
paying more to upgrade to a main cabin seat where they have more options to
choose from.

DOUG PARKER, CHAIRMAN AND CEO, AMERICAN AIRLINES: We had revenue growth,
unit revenue growth of almost 6 percent. More than the industry is up.
It`s evidence to us that the investments we`re making in our product and
our people are working.

LEBEAU: For Parker, the profit and performance his team posted last
quarter should mean fewer headaches for American. But that`s not happening
thanks to Qatar Airways. The Middle East carrier wants to buy up to 10
percent of American, even though Parker has repeatedly criticized Qatar for
using government subsidies to expand flights to the U.S., a practice that
Parker says has hurt American and other U.S. carriers

PARKER: We`ll see where this all ends up, but the reality is, those three
carriers are subsidized by their governments, and they`re competing against
American Airlines, and other U.S. carriers, in an unfair way and it
shouldn`t be allowed.

LEBEAU: While American pushes back against Qatar, its core business
remains strong, with a healthy economy driving demand, and international
travel not slowing down.

(on camera): And even as costs rise due in part to new labor contracts,
Doug Parker believes American is poised to fly even higher as it heads into
the remainder of this year.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Fort Worth, Texas.

(END VIDEOTAPE)

HERERA: Merck (NYSE:MRK) tops expectations, and that`s where we begin
tonight`s “Market Focus”.

The pharmaceutical company said cost cuts and strong demand for its top
selling cancer drug Keytruda led to the higher than expected earnings.
Merck (NYSE:MRK) also said the international cyber attack back in June
which disrupted its manufacturing operations would, indeed, cut into
profits for the remainder of this year. The company did, however, raise
its sales outlook. Shares rose slightly to $64.11.

Goodyear said higher raw material costs and weaker demand for tires hurt
results in the latest quarter. Despite seeing a drop in profit, the
company reported earnings that were in line with estimates. But sales
missed the mark. The company also cut its outlook for the entire unit
sales, and segment operating income. Shares fell more than 8 percent to
$32.51.

The furniture and electronics rental company Aaron`s (NYSE:AAN) reported a
better than expected rise in sales as the company kept a tight lid on cost
and benefited from growth in its progressive leasing division. Earnings
also beat analyst expectations and shares took off, rising 17 percent to
$47.54.

MATHISEN: Magellan Health missed estimates as the health care company said
it experienced pricing pressure in two of its commercial accounts. Revenue
however edged higher and was stronger than expected. Shares of Magellan
Health off more than 3.5 percent on the session at $75.90.

And the online real estate broker Redfin went public on the Nasdaq today.
The company offered more than 9 million shares at $15 apiece. Redfin
shares — look what they did? — soaring 44 percent in their debut. They
closed the day at $21.70.

HERERA: A quarter of the S&P 500`s climb this year is due to five stocks –
– Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX),
Google`s parent Alphabet, and Apple (NASDAQ:AAPL). Our market monitor says
some of those big tech names are ones you may want to own. This is his
first appearance as our market monitor guest, though he has been on the
program before.

We welcome back, Ernesto Ramos, portfolio manager that BMO Global Asset
Management.

Ernesto, nice to see you again. Welcome.

ERNESTO RAMOS, PORTFOLIO MANAGER, BMO GLOBAL ASSET MANAGEMENT: Thank you.

HERERA: Let`s get right to your picks. You pick Apple (NASDAQ:AAPL). You
say they have yet to enter the hot new markets such as virtual reality,
original content, and things like that.

RAMOS: Yes, indeed. Apple (NASDAQ:AAPL) is essentially an iPhone maker,
and they are tapping that market very well. But, they`ve not yet really
realized the full potential of other areas of the market that they have
products that they`re bringing to market.

So, we think they have potential for growth in new areas, and they still
have a magnificent cash cow in their iPhone, and the new iPhone 8 release
in September will be a pretty big event similar to what the iPhone 6
release was a couple of years ago. So, we think the stock is trading at
below market valuation is a very good pick for both its valuation, and its
growth characteristics.

MATHISEN: Ernesto, your second choice is another tiny little company that
nobody`s heard of that also begins with the letter A.

RAMOS: That`s the flip to Apple (NASDAQ:AAPL) is Amazon (NASDAQ:AMZN), I`m
sure you`re talking about.

MATHISEN: You bet.

RAMOS: And that stock is valued through the roof but it`s growth is just
incredible. They`ve posted, I can`t remember off the top of my head, how
many consecutive quarters of 20-plus percent sales growth and the earnings
fluctuate simply as a function of how much they`re investing back into
their business on any given quarter. So —

MATHISEN: So, that number last night didn`t bother you at all?

RAMOS: No. What we`re looking at is the top line growth, and the
disruption that Amazon (NASDAQ:AMZN) is bringing to markets, you know, they
started as an online book seller, or actually online book seller but
selling physical books, then they went into other areas of the market, and
now, they`re basically trying to enter any area where the consumer might
want to spend money, they want to be present there.

HERERA: Right.

RAMOS: And Jeff Bezos is succeeding pretty much at anything he tries. So,
we`re excited about this company, despite the very rich valuation.

HERERA: OK. Let`s quickly move on to Microsoft (NASDAQ:MSFT), now a major
player in cloud. They`ve really shifted their business model consistently.

RAMOS: Well, Microsoft (NASDAQ:MSFT) is sort of a hybrid between Apple
(NASDAQ:AAPL) and Amazon (NASDAQ:AMZN). They`re disruptors in the sense
that they`re adapting their business out of the legacy software and
computers into the iCloud, and in particular the hybrid iCloud where users
cannot only tap into the iCloud but leverage their existing infrastructures
to combine the both, which is most of the companies in the U.S., such as
our own company —

HERERA: OK.

RAMOS: — still in Microsoft (NASDAQ:MSFT) world and now we have access
to iCloud and that is a new area and they`re doing it very well.

HERERA: On that note, Ernesto, thank you. Ernesto Ramos with BMO Global
Asset Management.

MATHISEN: Coming up, they`re young, they`re hip and they`re fuelling the
growth of, would you believe it, the RV market.

(MUSIC)

MATHISEN: The treasury secretary tonight sent an update as to when the
country will reach its debt limit. That new date is September 29th. Steve
Mnuchin says the nation will run out of cash to meet its obligations on
that date.

HERERA: Wells Fargo (NYSE:WFC) improperly charged more than 570,000 auto
loan customers for auto insurance they did not need or were not told about.
The bank debited the borrower`s bank accounts for that coverage. Members
of the military on active duty were among those harmed. The bank will make
$80 million in payments to compensate customers.

Wells Fargo (NYSE:WFC) was fined $180 million last year for opening as many
as 2 million accounts without customers` permission.

MATHISEN: Get your motor running. More RVs are heading out on the highway
these days. But it`s not retirees who are looking for adventure.

Landon Dowdy tells us about the new crop of drivers hitting the road from
Petaluma, California.

(BEGIN VIDEOTAPE)

LANDON DOWDY, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Kyle
Miller is 32 years old and is on his second RV. He grew up camping and
takes his young family on the road every month in the summertime.

KYLE MILLARD, MILLENNIAL RV OWNER: We picked this one because it has a
bunk house system in the back as well as the outside kitchen. So, it`s
something we can grow family-wise.

DOWDY: A record 9 million U.S. households now own an RV according to the
recreation vehicle industry association. The industry has traditionally
relied on retirees to drive growth. But now, younger buyers are getting
behind the wheel.

NICOLE WALSH, RV OWNER: It just allows us to come together in a different
way in sort of this, as you can see, see how we are in a fun way. But we
also save money, so we can do some things that we might not otherwise get
to do if we stayed in a hotel.

KRISTIN BETTENCOURT, RV OWNER: When we come for Thanksgiving,
specifically, we have probably four to five trailers that come. And we all
book spots right by each other. And then we have a couple family members
who like to come but don`t have trailers, so they get cabins so that they
can still be with us and enjoy the trip, too.

DOWDY (on camera): Younger buyers are opting more for towable trailers and
come to camp grounds like this one here in California, wine country, to
really experience the outdoor lifestyle trend.

(voice-over): And that has campground owners like Chris Wood investing in
things like Wi-Fi and communal areas for millennials to mingle.

CHRIS WOOD, CAMPGROUND OWNER: For the millennial generation, you know,
we`re looking at space here on the campground which was set up for pot
lucks and bingo halls 30 years ago. And we`re setting it up for what we
call third spaces, something kind of like your Starbuckses and stuff.

DOWDY: New data shows June towable shipments topped 20 percent year over
year, while motor homes were up a more modest 6 percent.

RV makers like Thor Industries (NYSE:THO) are taking note of the towable
takeover, offering new models tailored to entry level buyers and updated
with new technology.

BOB MARTIN, CEO, THOR: It`s upgrading the electronics. It`s just adding
the features that they`re used to. So a lot of the RVs are compatible to,
you know, an iPhone. You know, a lot of the app-based things that run your
AC, your awning, your jacks when you get there. Just makes it easier to
camp.

DOWDY: Martin telling me that once buyers get RV-ing in their blood, they
get hooked. Still analysts warn that while millennials are showing
interest in RV-ing, it`s too early to know if those young buyers will drive
the industry like the boomers did.

For NIGHTLY BUSINESS REPORT, I`m Landon Dowdy, Petaluma, California.

(END VIDEOTAPE)

HERERA: And that is NIGHTLY BUSINESS REPORT tonight. I`m Sue Herera.
Thanks for joining us.

MATHISEN: And I`m Tyler Mathisen. Thanks from me, as well. Have a great
weekend, everybody. We`ll see you back here Monday.

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.

 

This entry was posted in Transcripts. Bookmark the permalink.

Leave a Reply