Nightly Business Report – November 21, 2017

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Triple threat. The Dow,
Nasdaq, and S&P 500 all close at records. A lot has been going right for
investors. The question is, will it continue?

Paying the rent. RVs line the streets of Silicon Valley, right next to
those multimillion dollar homes. And now, some say the housing crisis in
parts of California could get even worse.

New risk. Why investors need to watch the flurry of sexual harassment
claims.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Tuesday,
November 21st.

Good evening, everyone, and welcome. I`m Sue Herera. Tyler Mathisen is
off tonight.

Recipe for a rally: profits are strong. Global growth is steady. And
inflation is low.

For investors, that means there are few alternatives to stocks. That`s
exactly where people are putting their money today, sending all three major
indexes to all time highs.

The Dow Jones Industrial Average advanced 160 points to 23590, Nasdaq
gained 71, and the S&P 500 added 16, closing just below 2,600.

But how much more is left in this stock market tank?

Mike Santoli takes a look.

(BEGIN VIDEOTAPE)

MIKE SANTOLI, NIGHTLY BUSINESS REPORT CORRESPONDENT: The economy is
humming. The Dow just touched a fresh high. And hopes are building for
progress on a tax cut after Thanksgiving.

A lot has been going right for investors. It`s worth asking if the markets
are close to using up all the good news. Stock indexes did manage to push
slightly into all-time high territory on Tuesday, but the move came after
the broad market has been stalled for nearly a month. And it`s taken quite
a lot of positive news to support the market.

A measure of how strong economic reports have been relative to forecast has
surged in recent months toward a five-year high. Corporate profits were
quite good in the third quarter. Yet on average, stocks failed to rise
notably after companies reported good results. And the government bond
market has confounded economic optimists by keeping long term treasury
yield steady, often a sign of muted expectations for future growth. None
of this argues that the stock market is at any crucial peak or is sending
scary signals about the economy.

All year, stocks have advanced in an orderly way, with periods of sideways
movement along the way. We could just be in for another of those idling
phases right now.

Yet as strategists fashion 2018 market predictions, they`re grappling with
the reality that stocks are richly valued, the indexes have grown more
dependent on a cluster of huge tech companies, and the Federal Reserve
seems determined to push interest rates higher at a quicker pace. As for
possible corporate tax cuts, they are largely viewed as a positive for
stocks should they arrive by early 2018. In fact, Goldman Sachs (NYSE:GS)
assumes such a cut will pass as the firm projects a further 9 percent gain
for stocks in 2018.

The question now is whether corporate profit forecasts and stock values
have started to price in the benefits of tax cuts already. If so, those
cuts could prove one more bit of good news the market is using up.

For NIGHTLY BUSINESS REPORT, I`m Mike Santoli at the New York Stock
Exchange.

(END VIDEOTAPE)

HERERA: Mona Mahajan joins us now to talk more about this market. She is
the U.S. investment strategist at Allianz Global Investors.

Welcome, Mona. Nice to have you here.

MONA MAHAJAN, U.S. INVESTMENT STRATEGIST, ALLIANZ GLOBAL INVESTORS: Thank
you. Thank you for having me.

HERERA: You were nodding your head in agreement during Mike`s report
there.

MAHAJAN: Yes, yes.

HERERA: The market has a lot of good news that it is looking at. How much
of it do you think really is factored in?

MAHAJAN: Yes. See, you know, Sue, I think right now, we`re at a unique
time in history when there are earnings, that`s economics, and low rates
supporting the markets, as Mike touched upon, which has led to low
inflation.

You also have this positive overhang from tax reform. Now, I think tax
reform, that question will be answered likely next week, if the Senate can
pass the tax bill, I think we`ll get strong momentum into year end.

But I do see — I`m more cautiously optimistic for 2018. There are a
couple of reasons that the markets may take a breather. One is the Fed, as
we mentioned.

HERERA: Right.

MAHAJAN: I think the Fed is going to come into play. I think they will
hike three times in 2018. They will continue balance sheet tapering. And
I think that takes liquidity out of the system. So, that`s one thing.

The second thing is the tax reform bill itself. We`re going to have to
then roll up our sleeves, parse through who are the winners, who are the
losers.

HERERA: Right.

MAHAJAN: It`s not going to be good for everyone across the board. So,
there are a couple of things coming next year that I think could pause this
market a little bit.

HERERA: And also, is this market kind of priced for perfection? Because
tax reform, which they`ve already factored that in.

MAHAJAN: Yes.

HERERA: As you mentioned, the devil is in the detail.

MAHAJAN: Yes, yes.

HERERA: Earnings, they have been good. But if 2018, are they going to
repeat?

MAHAJAN: Yes, yes.

HERERA: For a long term investor, do you just continue to do, you know,
your monthly allocation into the stock market? Or do you put in a little
protection or become a little bit more cautious?

MAHAJAN: Yes, you know, we definitely still recommend equity exposure
here. We would maybe shift it a little bit. You know, growth has had a
great run. Maybe shift a little bit into value names. We would recommend
some of the names that have maybe not performed as well, but have the
potential going forward — financials, energy sector, which has shown some
momentum here as well.

But generally we think there`s a couple of factors next year as well which
people may not see coming, which is inflation and wage growth in
particular. We see unemployment now is at the lowest rate post-crisis.
We`re at 4.1 percent unemployment rate. If that continues to fall further
downward, we don`t see how wage growth can emerge in this market. And once
wage growth emerges, the Fed is going to be on high alert, that they`re
behind the curve and we might see even, you know, rate hikes continue
further.

HERERA: Does the new composition of the Fed, you know, Janet Yellen is
going to step down as soon as Jerome Powell takes the oath to be Fed chief.

MAHAJAN: Yes.

HERERA: Does the new composition of the Fed change your projections or did
it change your projections at all in terms of the number of interest rate
hikes?

MAHAJAN: So, you know, Jerome Powell was known as the continuity
candidate. So, in terms of interest rate hikes, they`re Fed rate hikes
themselves. No real change there. The one change we did see from Powell,
from Yellen to Powell, is deregulation. So, Powell is a little bit more
favorable on deregulation, whereas Yellen was saying we really need those
post crisis regulations to remain in place.

Powell is saying, you know what, we`re way past the crisis, maybe we`ll
pull that back. That`s another supportive factor for financials, which is
why we like that sector as well.

HERERA: We will see. Have a lovely Thanksgiving.

MAHAJAN: Thank you. Thank you for having me. Appreciate it, you too.

HERERA: Mona Mahajan, joining us, with Allianz Global Investors.

Home sales in October bounced back as both Houston and Florida rebounded
faster than realtors expected. But the trouble nationally of high prices
and severe shortage of listings and it`s only getting worse. And now,
there is a new concern that the Republican tax plan might make housing more
expensive.

Our Diana Olick takes a look.

(BEGIN VIDEOTAPE)

MATT DONEGAN, REDFIN: A living room off the right.

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: In northern New
Jersey, where both home prices and property taxes are high —

DONEGAN: Go take a look.

OLICK: — realtor Matt Donegan says he`s getting an earful from buyers —
and sellers about the Republican tax plan now moving through Congress.

DONEGAN: There`s concerns about the mortgage interest deduction. There`s
concerns about the caps on some of the tax rates. There`s concerns that
because we`re in such a higher tax area, it will make a big difference for
them. There`s places here in New Jersey where the taxes are $20,000 plus
for a house that is not a mega mansion.

OLICK: All those things will make a difference in the overall cost of a
home, which continues to soar nationwide, as the supply of homes for sale,
especially starter homes, hit a record low.

First time buyers Laura Mejia and Chris Marcano want to buy soon.

LAURA MEJIA, PROSPECTIVE HOMEBUYER: I would like to say in the next two
months. But I also said that six months ago. So —

DONEGAN: This is the other bedroom.

OLICK: But the market is not cooperating.

CHRIS MARCANO, PROSPECTIVE HOMEBUYER: We`ve actually been looking in
various price ranges, in different price ranges. So, somewhere in the
upper echelon of our price range, people will completely just blind bid on
houses. They won`t even go and take a look at the house in person. And
they`ll blind bid on it before we even get there.

OLICK: Chris and Laura say they know the tax plan could take away valuable
real estate deductions. But they`re still sold on home ownership.

MEJIA: We want to go ahead and obviously invest our money to our future.
We feel purchasing a home is the best way to invest your money.

OLICK: As for the competition, they`re hoping the winter months will put a
chill on that heat. Of course, winter also means fewer listings.

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

(END VIDEOTAPE)

HERERA: Across the county, California could also get hit hard by the
proposed tax plan, given the high cost of housing.

Aditi Roy reports tonight from Mountain View, California.

(BEGIN VIDEOTAPE)

ADITI ROY, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Mountain
View, California is in the heart of Silicon Valley. Home to Google
(NASDAQ:GOOG), it`s a community where even the most modest homes along
tree-lined streets will cost you seven figures — the median price of a
home here, about $1.6 million.

But just a stone`s throw from multimillion dollar homes, on the other side
of the train tracks, you`ll find a community of RVs. The people who live
in them can`t afford renting or buying.

JOBAN PEREZ, CAR DETAILER: Even the trailer parks are so expensive, too,
though.

ROY: Joban Perez is one of those workers. He speaks little English, but
he told us through a translator he works as a car detailer, making about
$14 an hour. He rented an apartment here until two years ago, until it
became too expensive. So he moved into this RV.

PEREZ: It`s hard to live like that, though.

ROY: His story, just one example of the housing crisis in the Bay Area.
That crisis, says experts, is a result of the housing supply not keeping up
with the new jobs created by the tech boom.

NELA RICHARDSON, REDFIN CHIEF ECONOMIST: The Bay Area is ground zero for
the housing crisis.

ROY: And now, some experts believe it could get worse. The GOP tax plan
passed by the House would cut the mortgage interest deduction from $1
million to $500,000. It would also cap state and local property tax
deductions at $10,000, lower than what many homeowners pay annually.

Some believe the plan would have the worst impact on Bay Area housing than
any other part of the country because prices are already so high, and
inventory so low.

RICHARDSON: The Bay Area has a confluence of factors that really have kept
prices high and affordability low.

ROY: Redfin just put out a report saying the number of homes for sale in
San Jose tumbled nearly 52 percent. In San Francisco, that number fell 28
percent. And Santa Clara County reports between 2015 to 2017, the number
of homeless increased in Cupertino, home of Apple (NASDAQ:AAPL), by 74
percent. In Mountain View, that number went up 51 percent.

The crisis has led to clashes between local governments and residents.
Just last week, amid protests, East Palo Alto officials booted a row of RVs
parked on a city street.

Perez says he has to move his RV every 72 hours or risk expensive tickets.
He says he won`t be able to live like this much longer.

PEREZ: Maybe a year. Because it`s hard, you know.

ROY (on camera): The housing crisis has prompted the emergence of
political parties locally centered around the notion of YIMBY or yes in my
backyard. They`re aimed at pushing for more policies that increase the
housing inventory.

For NIGHTLY BUSINESS REPORT, I`m Aditi Roy, Mountain View, California.

(END VIDEOTAPE)

HERERA: Still ahead, AT&T (NYSE:T) takes out its boxing gloves. It`s
ready for a big legal fight.

(MUSIC)

HERERA: The CEO of Hewlett-Packard (NYSE:HPQ) Enterprises is stepping down
early next year. Meg Whitman sad it`s time for a new generation of leaders
to take the reins. Whitman joined the company in 2011 and recently
refocused it to better competitive with its rivals. Shares fell on that
news in initial after-hours trading.

As we reported yesterday, the Justice Department is challenging AT&T`s
proposed $85 billion takeover of Time Warner (NYSE:TWX). And now,
investors are trying to figure out what happens next to one of the largest
proposed media mergers in American history.

Julia Boorstin takes a look.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: A legal battle is
on. AT&T (NYSE:T) says it`s ready to go to trial immediately against the
Department of Justice. AT&T (NYSE:T) sharing its position on this Website,
and saying consumers will not be hurt by the deal.

DANIEL PETROCELLI, AT&T (NYSE:T) COUNSEL: If anything, this merger is
going to cause people`s cable bills or their TV bills to go down, not up.

BOORSTIN: That`s the issue under scrutiny. Is AT&T`s acquisition of Time
Warner (NYSE:TWX) anticompetitive? Most analysts weighing in today say
precedent supports AT&T`s acquisition. The Department of Justice has not
blocked a vertical merger like this one in nearly 50 years.

But analyst Craig Moffett says it`s not a slam dunk for either side,
complicated in a landscape where a merged AT&T (NYSE:T)-Time Warner
(NYSE:TWX) would be both a supplier and a rival to other media giants.

CRAIG MOFFETT, MOFFETTNATHANSON: Seventy percent of Time Warner (NYSE:TWX)
content is sold to someone other than AT&T (NYSE:T) itself. It`s sold to
Comcast (NASDAQ:CMCSA) (NYSE:CCS), to Charter, Dish Network and so on.
AT&T (NYSE:T), because they directly compete with those companies as
distributors, through DirecTV, has the incentive to raise the costs to
their competitors, and that will ultimately raise prices to consumers.
That`s argument number one.

BOORSTIN: With both Disney (NYSE:DIS) and Comcast (NASDAQ:CMCSA)
(NYSE:CCS) interested in buying Fox`s entertainment assets, what happens
next in this case will be watched closely as an indicator of whether future
media deals will be approved.

For NIGHTLY BUSINESS REPORT, I`m Julia Boorstin in Los Angeles.

(END VIDEOTAPE)

HERERA: The Federal Communications Commission unveiled plans today to
repeal Obama-era rules governing the Internet, a move that could give
Internet providers broad powers to determine what Websites and online
services their customers can see and use. The vote on new rules is
scheduled for next month.

Roger Cheng is the executive editor at CNET. He joins us to talk about why
this is important and what it could mean for you.

Good to see you, Roger. Welcome back to the program.

ROGER CHENG, CNET EXECUTIVE EDITOR: Thanks for having me.

HERERA: So, what is the big fear here with this move now?

CHENG: The big fear is that by dismantling these rules, this really opens
the door to Internet service providers blocking or slowing down traffic
they don`t want and prioritizing traffic they do, whether it`s their own
services or companies willing to pay a premium to ensure that their
services get to the customer as fast as possible.

HERERA: But what about oversight of that? Would that be allowed with this
rollback of these particular regulations?

CHENG: That is the gist of what the FCC is dismantling. Before this
happened, there were clear laws in place to keep Internet service providers
from treating Internet traffic unfairly, the ground principles of net
neutrality. And so, with this action that FCC chairman Ajit Pai took
today, and the vote coming next month, that basically means that these
companies don`t have any rule to follow. We basically have to trust these
companies to honor the principles of net neutrality.

HERERA: If you could — let`s say the vote goes through, and this rollback
occurs, what will be the impact on consumers, the biggest impact on
consumers?

CHENG: You know, it`s unclear whether there will be a lot of near-term
impact. I think over the long term, you`re going to start to see once
these companies, you know — if these companies do prioritize traffic,
theoretically, I guess the worst-case scenario, a lot of these services
will get charged and pass down those costs to consumers. Theoretically,
the fear is that customers will end up having to pay more.

One of the other bigger concerns is, while a company like Netflix
(NASDAQ:NFLX) is large enough to weather this and pay that premium, the
next Netflix (NASDAQ:NFLX), the next small startup trying to disrupt
everything with a new service might not be able to get in so easily.

HERERA: Yes. Are they looking to impose new rules or simply eliminate or
roll back the rules that are on the books now? It sounds like they`re not
looking to replace. They`re looking to just repeal.

CHENG: Yes, exactly. The rules that were put in place two years ago,
they`re dismantling them and they are not putting anything in place. All
the proposals ask for is that these Internet service providers are
transparent with what they do in terms of how they manage their network.
But again, that`s not a law, that`s not a rule that governs how these
companies can act.

HERERA: Interesting. We will wait and see.

Roger, thanks so much. Roger Cheng with CNET.

Signet Jewelers loses some luster. That`s where we begin tonight`s “Market
Focus”.

The specialty jeweler retailer cut its guidance for 2018, saying it expects
earnings and same-store sales to disappoint next year. The company`s
quarterly results were also disappointing. The owner of Kay Jewelers and
Zales reported a loss and a stepper than expected decline in same-store
sales, saying fewer customer transactions and weather related issues were
to blame. It was also hit by disruptions to the outsourcing of its credit
portfolio. Signet shares finished the day down 30 percent to $52.79.

The shoe retailer DSW (NYSE:DSW) says the severe hurricane season took a
bite out of its results. The company missed both profit and sales
estimates and also cut its profit expectations this year. DSW (NYSE:DSW)
also said it hasn`t seen demand pick up for — yet anyway — for its cold
weather products. Shares slipped 13 percent to end the day at $19.55.

And the hurricane`s actually helped Lowe`s results. The home improvement
retailer reported same-store sales that climbed more than expected as
shoppers rushed in to buy emergency supplies and products to repair their
damaged properties. The company topped revenue and earnings expectations
and said it expects sales to rise about 6 percent by the end of fiscal
2017. Nonetheless, shares fell 1 percent to $80.59.

And the medical device maker Medtronic (NYSE:MDT) blew past Wall Street`s
profit estimates, thanks to an uptick in sales of heart valve replacements.
Revenue was also ahead of estimates. That beat comes even as Medtronic
(NYSE:MDT) said its results were weakened by the hurricanes and also those
big wildfires in the U.S. The shares rose nearly 5 percent to $82.66.

A founder of Pixar is taking a leave of absence. John Lasseter said he
made missteps that made some staffers feel disrespected or uncomfortable.
Lasseter is the force behind popular franchises like “Toy Story” and “Cars”
and “Frozen”.

Also today, PBS and CBS (NYSE:CBS) fired journalist Charlie Rose after a
number of women accused him of sexual harassment.

Our next guest is here to tell us why these issues should be top of mind
for investors. She is Lauren Rublin, and she is Barron`s deputy managing
editor.

Good to see you, Lauren. Thanks so much for joining us.

LAUREN RUBLIN, BARRON`S DEPUTY MANAGING EDITOR: Thanks for having me.

HERERA: You know, obviously, this is top of mine in the headlines,
certainly. But it hasn`t always been for investors and for companies. But
what are the consequences if investors and companies don`t pay attention to
these issues?

RUBLIN: Well, I think the consequences are that you get more issues. And
companies find themselves in a lot of trouble both financially and
otherwise. And it gets harder to recruit people, to retain people, and to
interest investors in your stocks.

HERERA: Also mutual funds, I would think, especially those that are
socially conscious, would be less apt to allocate money to companies that
have had these issues or that they find are not addressing potential
issues. Is that a correct read?

RUBLIN: I think that`s absolutely correct. Mutual fund managers whom
we`ve spoken to have said they actively avoid companies that are embroiled
in sexual harassment issues, particularly lawsuits, because they feel it`s
a business risk.

HERERA: What about boards? You know, company boards at publicly traded
companies, does it really fall to them or to the CEO, perhaps, to set the
tone and the culture of a company? Or maybe both?

RUBLIN: Well, I think it falls to both. It`s not typically been an issue
that`s reached the boardroom level. But I think that is definitely going
to change, after all the revelations of recent weeks. And surveys have
been done showing that boards at least up until now have not focused on the
risk factors related to sexual harassment and sexist behavior in the
workplace. But it`s going to become a bigger issue for boards to tackle.

HERERA: So, if I`m an individual investors and I want to make sure that my
investment is, quote/unquote, safe in case there are issues at a company,
how do I do that homework? What do I look for or look at?

RUBLIN: Well, I think you want to read the news, obviously, and I think
you can go through corporate documents. Look for risk factors, look at
legal issues surrounding a company. And I think you want to make sure
you`re investing in companies that have mechanisms for employees to report
behavior that`s questionable or troublesome, and that you have companies
where there have been issues where management takes an aggressive posture
in trying to put an end to problems and reform corporate culture.

HERERA: Does gender diversity play a role in how responsive a company is
or is not to potential situations, or perhaps not?

RUBLIN: I don`t know that it plays a role. But it certainly is a factor
in dealing with things like this. One of the things investors are looking
for is more diversity throughout employment levels, and more diversity on
the board, because of the feeling that in a more diverse workplace
generally, the culture is likely to be more responsive to issues that
arise, and definitely different viewpoints and generally happier employees
when you have a much more diverse environment.

HERERA: On that note, Lauren, thank you very much.

RUBLIN: Thank you.

HERERA: Lauren Rublin with Barron`s.

Coming up, small business matters.

(BEGIN VIDEO CLIP)

KATE ROGERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: I`m Kate Rogers
(NYSE:ROG) in Edina, Minnesota. And tonight on NIGHTLY BUSINESS REPORT,
we`re going to tell you how potential changes to NAFTA could impact small
manufacturers like this one.

(END VIDEO CLIP)

(MUSIC)

HERERA: Small business plays a big role in the economy. They conduct a
lot of cross border commerce. That`s why Main Street is paying close
attention to the trade negotiations under way now between the U.S., Canada,
and Mexico.

Kate Rogers (NYSE:ROG) is in Edina, Minnesota.

(BEGIN VIDEOTAPE)

ROGERS: At PGC Solutions in Edina, Minnesota, owner Susan Cary-Hanson is
keeping a close eye on the renegotiation of NAFTA. The small manufacturer
exports custom parts for big companies like John Deere and Bobcat to both
Mexico and Canada, representing nearly 10 percent of its business.

SUSAN CARY-HANSON, PGC SOLUTIONS: My biggest concern as an owner is not
knowing the impact to us, and then how is that going to affect our end
customer. I do know that shipping to Mexico or Canada, our customers are
not going to take a price increase.

ROGERS: While President Trump has called the trade deal one of the worst
in history, promising to overhaul it, renegotiation has proven challenging.
The fifth round of talks among trade ministers from the three countries
wrapped up Tuesday with more talks scheduled early next year.

The International Trade Association says that in 2015, small manufacturers
like PGC accounted for some 98 percent of U.S. exporting companies. So,
despite being a powerful force when it comes to exporting, changes to NAFTA
could prove challenging to small companies.

Advocacy groups like the nonpartisan National Small Business Association is
supportive of free trade agreements like NAFTA and, in fact, say only 5
percent of their membership report being negatively impacted by free trade.
But not all small companies are concerned about potential changes to the
trade deal.

Barry Wood, vice president of marketing at his family business Woods Powr-
Grip in Laurel, Montana, doesn`t anticipate a trade war escalating or new
tariffs being put in place overnight. Bilateral deals, as Trump has
floated, could even work well to leverage negotiating power, he said.

BARRY WOOD, WOOD`S POWR-GRIP: I don`t think we would end up with a trade
deal with one and not the other. I think eventually we would have both
countries on board.

ROGERS: But some, like Marvin Smith, owner of Optima Products in St. Louis
Park, Minnesota, are having to entirely rethink business if NAFTA is
overhauled. Smith imports about 70 percent of his health care products
from a partner in Quebec City, Canada.

His take is simple.

MARVIN SMITH, OPTIMA PRODUCTS: I just don`t think, with the economy
buzzing and humming the way it is, you know, if it ain`t broke, don`t fix
it.

ROGERS: For NIGHTLY BUSINESS REPORT, I`m Kate Rogers (NYSE:ROG) in Edina,
Minnesota.

(END VIDEOTAPE)

HERERA: And you can read more about what NAFTA means to small business
owners on our Website, NBR.com.

And that will do it for NIGHTLY BUSINESS REPORT for tonight, I`m Sue
Herera. Thanks for joining us. Have a great evening, and we`ll see you
right back here tomorrow.

END

Nightly Business Report transcripts and video are available on-line post
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Business Report is not and should not be considered as investment advice.
(c) 2017 CNBC, Inc.

 

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