Transcript: Nightly Business Report – October 26, 2017

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Tech`s big night. The
industry was put to the test and passed with flying colors, as Alphabet,
Amazon, Microsoft, and Intel blew past earnings estimates.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Blockbuster deal. CVS
Health is reportedly in talks to buy Aetna in what could be a
transformative deal for the health care industry.

HERERA: The fault in our stars. Why your highly-rated mutual fund may not
be all it`s cracked up to be?

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Thursday,
October 26th.

MATHISEN: Good evening, everyone, and welcome.

Lots to tell you about tonight. A possible major deal in health care, a
presidential push against opioid addiction, and a report that questions how
you probably pick mutual funds.

We begin with major news about profits in tech land. And they were good.
Expectations were high, and big tech did not disappoint. Four major
companies reported quarterlies that were much stronger than anyone
expected.

Let`s start with Amazon. The story here, simple: revenue, up. Profit, up.
The stock, up.

The company earned 52 cents a share. Expectations were for three pennies.
Sales jumped more than 30 percent to about $43 billion year over year.
Investors, well, they`re giddy, sending Amazon shares initially higher and
through the thousand dollar mark.

Jackie DeAngelis zeroes in on the biggest surprise in Amazon`s report.

(BEGIN VIDEOTAPE)

JACKIE DEANGELIS, NIGHTLY BUSINESS REPORT CORRESPONDENT: One of the key
points of interest for Amazon`s third quarter earnings with how its web
services division did. The company delivered. That segment bringing in
revenue $4.58 billion, handily topping analysts` expectations.

Amazon`s Web Services or AWS is Amazon`s version of the cloud. It`s an
emerging space where many companies are competing for share, and Amazon
appears to be one of the winners. As business in the divisions grows, the
high bar will be more difficult to top. But for this quarter, it was
certainly a standout.

For NIGHTLY BUSINESS REPORT, I`m Jackie DeAngelis.

(END VIDEOTAPE)

HERERA: Up next, Google`s parent Alphabet. It has a similar story and one
that any company would envy. Alphabet`s profit grew more than 30 percent.
Revenue jumped more than 20 percent. Its stock got an initial lift from
upbeat shareholders after the bell.

And Josh Lipton explains why.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: It wasn`t just a beat
on earnings and revenue. It was also because Google is showing better
profitability. Aaron Kessler of Raymond James says operating income came
in at $7.8 billion and that was better than what he expected. Kessler
pointing out that a concern for investors has been declining margins for
Google. They want to see better operating leverage for some time. Now
with this report they got it.

For NIGHTLY BUSINESS REPORT, I`m Josh Lipton, San Francisco.

(END VIDEOTAPE)

MATHISEN: Now to Microsoft. It did report a better than expected profit.
Its demand for its fast-growing cloud computing services rose. It also saw
its personal computer software business stabilize. Revenue rose double
digits, and that sent shares of the Dow component up initially in after-
hours trading, you say see there.

HERERA: One more to tell you about: Intel. It too was helped by growth in
its cloud computing business. The world`s largest computer chip maker
topped earnings and revenue expectations and raised its full year revenue
and profit forecast. Revenue from its higher margin data center business
was up as well. And that helped the stock in initial late day trading.

MATHISEN: Well, even before all of those results, the busiest day of
earnings season helped drive things today on Wall Street. Better than
expected results from the likes of Twitter and Ford early set the tone.
More on those in a little bit.

As for the major indexes, the Dow rose 71 points to 23400, but the Nasdaq
lost seven, and the S&P 500 added three.

HERERA: Health care was all abuzz late today on a report that took most by
surprise. CVS Health is reportedly in talks to buy Aetna. As first
reported by “The Wall Street Journal,” the takeout price is said to be
about $200 a share, much higher than Aetna`s current share price. That
would put the deal`s price tag at $66 billion, in what could be the largest
health insurance deal on record. That sent shares of Aetna higher, much
higher in fact. CVS shares finished the day lower.

But this stock and other drugstores and pharmacy benefit managers` stocks
were pressured by reports that Amazon obtained its pharmacy license in a
number of sets.

Meg Tirrell joins us here on set to talk about it.

And there is an awful lot to talk about tonight, Meg.

MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT: Yes.

HERERA: Where do we really start with this story?

TIRRELL: Well, let`s start with this report from “The Wall Street Journal”
that CVS is looking at buying Aetna. This would be just a gigantic deal,
$200 a share. And we`ll note that Aetna`s stock didn`t trade up that high.
So, it implies the market might not believe this yet. That would be a 25
percent premium to where the stock was trading before this report came out.

And thinking about what this means for CVS, they already are both a
pharmacy benefits manager, so managing drug benefits for employers and
insurers, and they`re a retail pharmacy, of course. So, this would make
them yet another thing, giving them more power to potentially offer to
employers when trying to do services with them.

We`ve seen this kind of bulking up in other companies. UnitedHealth, for
example, which is the biggest health insurer in the United States, also has
a PBM in-house in Optum. So, these companies are getting bigger and
bigger, you know, trying to get more sort of ability to offer things to
their customers.

MATHISEN: You know, there has been sort of a lot of sort of subcontracting
of various services in health care. The insurer does your major medical,
but then somebody else handles your drugs and somebody else may handle your
mental health.

Are we about to see a consolidation, or maybe even a situation where not
only do insurers merge with the pharmacy benefit managers, but they may
merge with medical systems, health care companies, hospital companies,
health care delivery companies, a Kaiser model?

TIRRELL: All of that is probably in the air right now, especially because,
going to our second story of the night, there is the threat of Amazon
coming in and disrupting everything. If a big player like that comes in,
the existing players, a lot of analysts are saying, are going to do
whatever they can to get more power in the market. And that might mean
conglomeration.

HERERA: Amazon has gotten licenses in a number of states. Do you view
that as more of a test as to how successful they could be, and then maybe
try and get licenses all across the country? Or is there something else to
it?

TIRRELL: It`s not totally clear what these licenses mean. This is
reported today by “The St. Louis Post Dispatch.” You know, it could just
mean it sort of supports existing things that Amazon already does.

But a lot of people are very excited about seeing Amazon get into this
space, so interpret it as an initial move to get bigger into perhaps drug
distribution. We don`t know yet, the company hasn`t said. But CNBC.com`s
Christine Farr has been reporting a lot on Amazon`s moves here, implying
that they are probably are looking very closely at this.

HERERA: Thank you, Meg, as always. Great to have you with us.

TIRRELL: Thank you.

HERERA: Meg Tirrell.

MATHISEN: All right. The health care industry paying close attention
today to the president, who declared the opioid crisis a public health
emergency. By doing so, the government will waive some regulations and
give states more flexibility in how they use federal funds. President
Trump stopped short of declaring a national state of emergency, but he said
he was going to go after bad actors.

(BEGIN VIDEO CLIP)

DONALD TRUMP, PRESIDENT OF THE UNITED STATES: I will be looking at the
potential of the federal government bringing major lawsuits against bad
actors, what they have and what they`re doing to our people is unheard of.
We will be bringing some very major lawsuits against people and against
companies that are hurting our people. And that will start taking place
pretty soon.

(APPLAUSE)

(END VIDEO CLIP)

MATHISEN: Meantime, the Fed chief, Janet Yellen, recently said the opioid
epidemic may be tied to declining labor force participation.

HERERA: The billionaire founder of Insys Therapeutics was arrested today
in an opioid-related case. John Kapoor was charged with racketeering,
conspiracy and fraud. The scheme alleges that he bribed doctors to
prescribe a powerful opioid to patients who didn`t need it. As we`ve
reported, Insys has been in settlement talks with the Justice Department in
connection with the probe. Last December, six other executives were
indicted on federal charges. Shares of Insys fell today by 22 2/3 percent.

MATHISEN: Still ahead, written in the stars, or is it? A new report says
Morningstar`s familiar mutual fund star ratings aren`t as predictive as you
may think.

(MUSIC)

MATHISEN: The economy now in the housing market pending home sales which
account for homes under contract but not yet sold sank to the lowest level
in three years, but it`s not for a lack of buyers.

Diana Olick explains what`s behind the slump in the fall market.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): A heavy
hurricane season in the South may have kept homebuyers there out of the
market last month. But in the rest of the nation, home sales are being hit
by other headwinds — high prices and little for sale.

NELA RICHARDSON, REDFIN CHIEF ECONOMIST: The tight inventory conditions
that we`ve been talking about pretty much ad nauseam all year finally came
to a head in September. We saw the third consecutive month of year over
year declines. Look, the tightness in inventory, the lack of affordable
housing and huge increases in prices are really tamping down sales.

OLICK: An index of pending home sales which measures signed contracts
during the month sat at the lowest level in nearly three years in
September. While part of that may have been due to the heavy hurricane
season, sales have been lower annually for five of the past six months and
prices just continue to rise.

RICHARDSON: The only way out is to build more. And right now, we are not
nearly keeping up with the demand for home ownership or for the rental part
of the market.

OLICK: Maryland real estate agent Eric Murtagh specializes in selling
newly built homes and says there is definitely high demand.

ERIC MURTAGH, EVERS & COMPANY REAL ESTATE: You have people who want the
space. They want the more input on the finishes. We sell properties when
they`re under construction like this, and so if a buyer comes along and
wants to pick their kitchen, their bathrooms, or do other options like an
elevator, we`re set up to really help them with that.

OLICK: The trouble is a lack of labor. Subcontractors are heading south
to rebuild after the hurricanes. That makes building everywhere else more
expensive.

MURTAGH: That really comes into play when we`re bidding out jobs, and you
only have one contractor available to do the work, it`s not a competitive
environment. And so, they`re dictating what the cost of the project will
be.

OLICK (on camera): With so little new construction nationwide and the
labor shortage only getting worse, this housing market needs more sellers.
But we`re heading into the slow season for that. Winter usually puts a
chill on home sales. But this year, they could be downright frozen.

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

(END VIDEOTAPE)

HERERA: The House of Representatives narrowly cleared a budget blueprint
that will allow a tax bill to pass Congress without any Democratic votes.
The final tally for the budget vote was a tight 216-212, in part because a
number of Republicans from states with high state taxes voted against the
measure. The current tax outline calls for the elimination of a popular
deduction for state and local taxes to help pay for other tax cuts.

(BEGIN VIDEO CLIP)

REP. PAUL RYAN (R-WI), SPEAKER OF THE HOUSE: The Ways and Means Committee
will be putting out the specific plan very shortly. And they`re going to
work with all of our members to look at and consider and address their
concerns. I believe that the Ways and Means Committee will be working with
these members in particular to find a solution.

(END VIDEO CLIP)

HERERA: The chairman of the House Ways and Means Committee says he will
introduce a bill on November 1st and begin deliberations on the 6th.

MATHISEN: So, how would a reduction in corporate taxes affect the stock
market?

Steve Liesman did some digging.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: It would make sense
that with all the talk and all the apparent momentum towards cutting
corporate taxes, that the market would be pricing in at least some
possibility of it actually happening. Corporate tax cuts will flow right
to the bottom line of companies, especially the high tax companies. But
CNBC looked at three different baskets of high tax stocks. The result: all
three are substantially underperforming the broader market.

S&P Global divided up into three different categories. The top 100
taxpayers, they`ve returned 4.8 percent year to date. The bottom 100
taxpayers returned 11 percent. And then, you take out those companies that
are paying no tax. They could be potentially troubled companies. They`re
up 24 percent year to date.

Here`s a basket of high tax stocks from Strategas and its performance
relative to the S&P 500. If it were 100, it would equal the broader market
performance. Instead, it`s been underperforming most of the year. Now, it
topped last month when the tax outline was announced from the big six. But
it seems to have come off again with the spat between Senator Corker and
President Trump. That potentially diminishes the chance of passing the tax
cut package.

Three reasons have been offered for this divergence. First, the market may
not be appropriately pricing in the chance of a tax cut. Second, it
doesn`t believe these tax cuts are good for the economy or earnings since
they could accelerate rate hikes. Third, the market just doesn`t think tax
cuts will happen. Dan Clifton of Strategas thinks the market is
underestimating the chance of passage and thinks there`s money on the table
for investors.

Michael Thompson, president of S&P Global, points out the market is focused
on growth stocks, many of which don`t pay high taxes, so it hasn`t really
put a value on high tax companies.

The right answer, the market can sometimes be inefficient, especially when
it comes to discounting political outcomes.

For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.

(END VIDEOTAPE)

HERERA: Four million users flocked to Twitter, and that`s where we begin
tonight`s “Market Focus”.

The social media company added 4 million new users, reported its lowest net
loss in several quarters, and also topped Wall Street`s revenue
expectations. Twitter did say it overstated its monthly active user
numbers since the end of 2014, but investors turned their focus to the
company`s upbeat guidance, which was that it may turn its first ever profit
next quarter. Shares rose 18 percent to $20.31.

Cost cuts and strong demand in North America helped lift sales above
expectations at Ford. The automaker also over-delivered on profits. Ford
says while it still has work to do, it`s improving its financial health as
the industry moves into autonomous technology.

(BEGIN VIDEO CLIP)

BOB SHANKS, FORD CFO: What we are working to do is improve the fitness of
the business better, as a really strong foundation as we enter a really
important transitional period for the whole sector, not only the company,
as we take advantage of new emerging technologies such as AVs and EVs and
so forth.

(END VIDEO CLIP)

HERERA: Shares were up just about 2 percent to $12.27.

MATHISEN: Celgene slashes its long term outlook. The biotech said
difficult market conditions and some disappointments in its drug pipeline
would cause earnings and sales in 2020 to be lower than initially expected.
Celgene did beat estimates in its latest quarter but shares touched their
lowest level in 17 years, finishing down 16 percent at $99.99.

Tenet Health Care may no longer be for sale. “Reuters” says the hospital
operator has scrapped plans to sell itself following the earlier than
expected departure of its CEO this month. But according to CNBC, a
strategic review is ongoing at the company and no options have been taken
off the table. Still, shares down 9 percent to $12.87.

And after the bell, Mattel, ouch, disappointing results, hurt by weak
demand and the bankruptcy of Toys “R” Us. The toy maker said it would
suspend its quarterly dividend so it could strengthen its balance sheet and
increase financial flexibility. Shares, as you see there, got crushed in
after-hours trading. They finished the regular session down just a
fraction at $15.37.

HERERA: Profits came under pressure at UPS amid expanded Saturday delivery
and recent natural disasters. But revenue climbed and the company issued
an upbeat outlook for the key holiday shipping season.

Morgan Brennan has more.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: UPS expects to
deliver a staggering number of packages this holiday season — 750 million.
It would be another record, a nearly 6 percent increase compared to last
year. The delivery giant expects to handle at least 30 million packages or
double average daily volume on 17 out of the 21 shipping days that would
make up peak season.

UPS`s CFO Richard Peretz says it`s crucial the company get the right return
on all of the investments it`s making to keep up.

RICHARD PERETZ, UPS CFO: We keep getting asked to do different solutions
for our customers during peak. And as we do that, we`re putting new
resources in, creating temporary capacity. There are very few businesses
in the world that can flex 100 percent of their average daily business for
a four to six-week period.

BRENNAN: According to a recent Deloitte Survey, for the first time ever,
more people will buy things online this holiday season than in stores.
Companies like UPS and FedEx have been pouring billions into their next to
expand capacity. A year-round process that will be put to the ultimate
test in the month of December.

To prepare, UPS is hiring 95,000 workers, opening more facilities, putting
three new Boeing-made jumbo jets into the air, and ramping up Saturday
delivery. It`s also slapping new quality surcharge on some packages
destined for door steps, a move analysts are watching closely, since rising
costs have been an issue during previous holiday season.

DAVID VERNON, SANFORD C. BERNSTEIN & CO.: From an investment standpoint, I
think the market is looking to see if UPS can handle the scaling of its
network to the degree that they have to scale it every fourth quarter.
Every year, e-commerce becomes bigger, every year, UPS has to do more to
make sure that Christmas gifts are delivered on time. And I think the
market is still trying to make sure that UPS can do that and do that
profitably.

BRENNAN: And UPS isn`t alone. FedEx is hiring 50,000 additional workers
to handle its own record volumes. The U.S. Postal Service has said it too
plans for a record, 850 million packages between Thanksgiving and New
Year`s Eve.

For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan.

(END VIDEOTAPE)

MATHISEN: Well, a five-star rating from the investment research firm
Morningstar has always meant a seal of approval for mutual funds. Implicit
in its, the idea that the fund would remain a top performer. Well, an
article in “The Wall Street Journal” today questions that premise and the
Morningstar methodology, saying that a five-star rating isn`t what you may
think it is.

One of the articles` authors is with us tonight to discuss her findings.
She`s Sarah Krouse, a reporter with “The Wall Street Journal”.

Sarah, welcome. Good to have you with us.

SARAH KROUSE, THE WALL STREET JOURNAL REPORTER: Thank you for having me.

MATHISEN: Why don`t you sort of tell us what you found? But as I boil it
down, it is that once a fund becomes a five-star fund at Morningstar, not
always a five-star fund in the ensuing one, three, five, 10 years. Boil it
down to me.

KROUSE: Sure. So, we spent a year going through Morningstar`s data. And
one of the things that we found, the most striking, was five-star funds did
attract the vast majority of investor flows. But very few of them failed
to outperform longer term. So, for example, a five-star fund, take any
five-star fund, only 12 percent five years later had performed well enough
to earn that same top mark.

HERERA: So —

KROUSE: And a lot of investors rely heavily on those stars, some entirely,
to make their decisions.

HERERA: Morningstar I think would argue that they`re constantly looking at
their data and their star system, and they`ve said they view it as somewhat
predictive. Is that correct? What response did you get from them?

KROUSE: Well, I would say that they`ve said a lot of things but the
predictive powers of the stars. They`ve said that they`re not predictive.
They`ve said that higher rated funds are more likely to outperform longer
term, that they have moderate predictive powers. So, they`ve said a number
of things on that present.

MATHISEN: I want to play a sound bite from an interview I did early today
with Jeffrey Ptak. He`s the head of global manager research at
Morningstar. It challenges some of the premises of your article. So,
listen, and I`ll get your reaction.

KROUSE: Sure.

(BEGIN VIDEO CLIP)

JEFF PTAK, MORNINGSTAR HEAD OF RESEARCH: We strongly disagree with her
conclusions. If you take a look at some of the findings that they
themselves reported in exhibit to the study, what you find is that highly
rated funds, five-star funds are about seven times more likely to succeed
than low-rated funds, one-star funds, over a future 10-year horizon. To
me, that doesn`t look like failure. That looks like a measure that`s
tilting the odds of success in the investor`s favor.

(END VIDEO CLIP)

MATHISEN: So, Jeffrey says he disputes the conclusion, and he cites his
data that the five-star funds are seven times more likely to be better
performers down the road than the one-star funds. Is it possible that you
both are right?

KROUSE: Yes. And we noted in the article that that was the case. But
better is nearly average. That the five-star funds we tracked over the 14
years in our study went on to become three-star performers. So, that`s —
it`s — one of the things that I think is important to keep in mind as we
talk about this is the way the star ratings are used.

Morningstar licenses the ratings to fund firms who then include them in
their advertisements. The implicit suggestion is that this five-star fund
will go on to outperform, and that`s what our analysis showed was not the
case.

HERERA: So, how is an investor, given what you found out and researched,
how is an individual investor to use this data to the best of their
advantage?

KROUSE: Yes, it`s a really important question. And the premise on all of
this and why it`s worth having this conversation is that investing in the
markets is difficult. It`s fraught with risk. I would say that yes, a
rating and some of the metrics that Morningstar provides can be used as a
starting point.

But what we found throughout our research and talking to investors is they
rely very heavily on it. And Morningstar knows they rely heavily on it.
And in fact, in our piece, an executive that focuses on behavioral finance
at Morningstar stated that they know that investors misuse it and even he
questioned, you know, whether they need to do something about that.

MATHISEN: It was really an amazing piece of work, Sarah. Whether you
agree with it or not, it was hard, hard work. I recommend your article to
everybody.

KROUSE: Thank you.

MATHISEN: Thanks very much. Thanks for being with us.

KROUSE: Thanks for having me.

MATHISEN: Sarah Krouse of “The Wall Street Journal”.

HERERA: Coming up, the first glimpse of what a towering border wall might
look like.

(MUSIC)

MATHISEN: President Trump`s border wall may be taking another step
forward. Today was the deadline for six companies to finish building
prototypes.

Aditi Roy reports from the border in Otay Mesa, California.

(BEGIN VIDEOTAPE)

ADITI ROY, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): For the
last 30 days, construction trucks have been humming. The cranes have
soared. And workers have been buzzing around this otherwise desolate,
dusty part of Otay Mesa, California. It`s two miles from the border
crossing with Mexico. And the project they`ve been working on, building
eight versions of the border wall of the future.

TRUMP: We will build a great wall along the southern border.

ROY: One that fulfills President Trump`s vision. He spoke so frequently
about it on the campaign trail.

The six construction companies behind these eight prototypes are W.G. Yates
and Sons, Elta North America, Caddell, Texas Sterling, KWR Construction and
Fisher Sands & Gravel Company. They were awarded contracts between
$300,000 and $500,000 and were chosen among hundreds of applicants.

U.S. Customs and Border Patrol spokesman Carlos Diaz says the rules were
pretty simple.

CARLOS DIAZ, U.S. CUSTOMS AND BORDER PATROL SPOKESPERSON: They had to have
anti-dig, anti-climb capabilities, they had anti-breach capabilities and
other number of capabilities that included being able to see through.

ROY: The reason? As of two months ago, there were nearly 290,000 Border
Patrol apprehensions nationwide so far this year. Last year, there were
more than 415,000. We got an up close look at the current border wall with
holes in places it had been breached. Those visible marks now guiding
enforcement agents as they get ready to test the prototypes.

DIAZ: We`re going to be looking at the type of breaches that we see
throughout the southwest border. We`re going to be looking at techniques.

ROY (on camera): The prototypes are between 18 and 30 feet high, compare
to the existing wall back there. That`s between eight to 10 feet high.

(voice-over): Ultimately, it`s about making the most secure wall possible.

DIAZ: We`re always trying to find ways to defeat and to deter those folks
from crossing to this side.

ROY (on camera): Border Patrol officials say they have no deadline for
making a decision. They could choose one of these prototypes or aspects of
all eight. The big question that remains is whether or not Congress will
foot the heavy price tag with some estimates put at more than $20 billion.

For NIGHTLY BUSINESS REPORT, I`m Aditi Roy, Otay Mesa, California.

(END VIDEOTAPE)

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

MATHISEN: And I`m Tyler Mathisen. Thanks from me as well. Have a great
evening, everybody and we will see you back here tomorrow night.

END

Nightly Business Report transcripts and video are available on-line post
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and commentators are their own and do not necessarily represent the views
of Nightly Business Report, or CNBC, Inc. Information presented on Nightly
Business Report is not and should not be considered as investment advice.
(c) 2017 CNBC, Inc.

 

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