Transcript: Nightly Business Report – December 18, 2017

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Lucky sevens. The Dow has its
70th record close of the year, the Nasdaq clears 7,000 for the first time
ever. But what will drive the bull markets next chapter?

New approach. The president puts trade and the economy at the center of
his national security strategy, and he puts China and Russia on notice.

Turning the page. Why retailers are returning to old-school mail-order
catalogs even in the digital age.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Monday,
December 18th.

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

It feels like a holiday gift for investors. The major indexes climbed
further into record territory. The Dow closing in on 25,000.

The optimism comes ahead of a vote on the tax bill that would be an
historic overhaul of the U.S. tax system. It would cut the corporate rates
and result in likely increases in profits. A number of corporate deals
also help lift sentiment and we`ll have more on that a bit later in our
program.

But, first, here`s a look at the closing numbers: the Dow Jones Industrial
Average advanced 140 points to 24,792, its 70th record close, the highest
number in a calendar year ever. The Nasdaq was up 58 and the S&P 500 added
14.

With the steady climb in stocks all year and the tax bill vote near, what
will drive the next leg of growth?

Mike Santoli took a look for answers.

(BEGIN VIDEOTAPE)

MIKE SANTOLI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Every bull market
needs a good story line and the one that started nearly nine years ago has
followed several along the way. Near the depths of the bear market in
early 2009, the bullish story was simply that stocks were simply too
depressed, trading at a 12-year low and the economy would eventually
recover.

As the years went on, the narrative shifted to central banks are supporting
the market to stocks look cheap versus bonds two companies have record
profits and are buying back lots of stock.

Since the 2016 election, the happy story has centered around a global
economic expansion and deregulation and corporate tax cuts under President
Trump this combination has helped carry the major indexes to their best
year since 2013, with the S&P 500 up 20 percent and the Dow adding more
than 25 percent to come within a whisper of the 25,000 mark.

So, how might the story shift again as 2018 arrives?

Well, analysts are suggesting the corporate tax cut is rapidly getting
priced into stocks by a market that constantly looks ahead. Corporate
earnings should continue to grow next year, helped by those lower tax
rates, but the benefits will be unevenly shared. Tech companies, for
example, have been market leaders all year, but are not among those most
helped by the tax plan. The theme for next year might be how the markets
in the economy can withstand the heat generated by a nicely growing
economy, tight labor market and fresh tax stimulus, at a time when the
federal reserve is looking to push interest rates higher three more times.

One result of all this could well be a belated and unexpected pickup in
inflation, which would get the fed to be more aggressive and challenge the
fortitude of the bulls. And stocks are already quite expensive by
historical standards while ordinary investors have finally grown quite
optimistic toward the market. These are all common features of a mature
bull market but one fortified by enough good news that it shows few signs
of expiring suddenly any time very soon.

For NIGHTLY BUSINESS REPORT, I`m Mike Santoli.

(END VIDEOTAPE)

HERERA: And joining us now to discuss what 2018 may have in store for the
markets is Andres Garcia-Amaya. He is the founder and CEO of Zoe
Financial.

Welcome. Nice to have you here.

ANDRES GARCIA-AMAYA, ZOE FINANCIAL FOUNDER & CEO: Thanks for having me.

HERERA: You know, I was looking at my notes and I`m fascinated by how you
think an individual investor should address this market. You say, first of
all, hope for the best, prepare for the worst. But you should absolutely
know what your required return is.

How does that play out for the individual investor? How do you do that?

GARCIA-AMAYA: I think you set it up nicely that the best way to think
about this is you have to take a step back and instead of trying to predict
what the next year will give you when it comes to market returns which it
all honesty data tells you when you look months out, it`s a lot of noise,
you have to do you have to ask yourself what are my goals, right, 10 years
out. Are you trying to retire? Are you trying to plan for your kids
college education? What — it`s not only what expected returns do I need?
What required returns do I need to accomplish those goal? And then work
your way backwards.

And if those require returns are more than say 8 percent to 10 percent,
then you need to basically take a step back and look at those goals again
because the old days of 10 percent, 12 percent, 14 percent returns are
unlikely, not necessarily not impossible but unlikely. So, you have to
understand what you`re required expectation — what required market reach
as you need to accomplish those goals.

HERERA: What do you think would be an adequate return based on where the
market stands now, and as we mentioned, the 70th record today? So, it`s a
banner day to have you on with us tonight. But what do you think an
average return will be in this market as we go into this new year?

GARCIA-AMAYA: That — that is the question the way that I would look at it
is what range of returns are most probable, right, because to give you one
number is very difficult, and the way that I would look at it is somewhere
between 2 percent to 8 percent, which is very wide. You might say, hey,
you`re not — you`re giving yourself a lot of wiggle room. Well, the
markets are very hard to predict, but the reason that I give that range is
if you`re required return say is 10 percent, you`re putting yourself in a
tough situation to have to readjust that goal down the line.

HERERA: What about valuations?

Given the fact that we are at — in this record-setting market and have
been for most of the year, do you still find value in the U.S. market or if
indeed you`re required return is outside of 2 percent to 4 percent, do you
look offshore?

GARCIA-AMAYA: Yes, that is — that`s a really important question to ask
yourself, which is great. So, evaluations here in the United States are
very high. It doesn`t mean they can go higher, but it lowers the chances
of the type of returns we`ve seen where do you go?

You have to look abroad. There are for instance if you look at the
emerging markets. Valuations are much lower than the U.S., not necessarily
dirt-cheap but they`re lower than the U.S. and the profile for growth for
those economies look fairly favorable.

So, you need to have some component of your portfolio looking outside of
the U.S. if you actually need returns a little bit higher than say 2
percent to 4 percent.

HERERA: We`ll leave it there. Andres, thanks so much for joining us
tonight.

GARCIA-AMAYA: Thanks for having me.

HERERA: Andres Garcia-Amaya with Zoe Financial.

Confidence among the nation`s homebuilders is the highest it`s been in 18
years. Builders see the business incentives in the Republican tax plan as
outweighing changes to both the mortgage interest and property tax
deductions. The report shows that buyer traffic is up likely because of
the shortage of existing homes and that builders are upbeat about future
sales. And it`s not just the builders, Americans optimism on the economy
is also on the rise. For the first time in 11 years, more than half of
respondents to the CNBC all-America survey rated the economy as good or
excellent.

A record number expect the economy to improve next year and many expect
wages to rise and home values to increase. Eight hundred adults were
surveyed nationwide.

President Trump today outlined his national security strategy which centers
around his America first ideology, and it puts economic issues like trade
and energy at the center of his vision.

Eamon Javers is at the White House tonight.

(BEGIN VIDEOTAPE)

EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: President Trump today
laid out his first national security strategy document, a distillation of
the president`s foreign policy views and how he sees America`s place in the
world. The document included what they`re calling four pillars, defending
the homeland, American prosperity, advancing American influence and peace
through strength.

In the remarks today, the president specifically called out Russia and
China.

DONALD TRUMP, PRESIDENT OF THE UNITED STATES: We also face rival powers,
Russia and China, that seek to challenge American influence, values and
wealth. We will attempt to build a great partnership with those and other
countries, but in a manner that always protects our national interest.

JAVERS: And the president also said that economic power is a key part of
national power.

TRUMP: For the first time, American strategy recognizes that economic
security is national security. Economic vitality, growth and prosperity at
home is absolutely necessary for American power and influence abroad. Any
nation that trades away its prosperity for security will end up losing
both.

JAVERS: And for all the criticism of Russia in the national security
document, President Trump also found a way to spotlight some cooperation
between the United States and Russia, citing an incident over the weekend
in which the CIA had provided valuable intelligence to the Russian
government that stopped a terrorist attack.

For NIGHTLY BUSINESS REPORT, I`m Eamon Javers at the White House.

(END VIDEOTAPE)

HERERA: The House is expected to vote on the tax bill tomorrow followed by
the Senate. But there`s another issue that`s not getting quite as much
attention and it is the budget, and if lawmakers don`t agree to one before
Friday, the government could shut down.

John Harwood is following the story for us from Washington.

John, good to see you as always.

So, what`s the status of the negotiations at this point?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, the
negotiations haven`t gone all that far along, Sue, because the Republicans
have been completely preoccupied with getting their tax bill through. So,
the possibility is that we will get to the end of the week and rather than
have the big showdown then, that the Democrats and Republicans will agree
to kick it over until January and defer that showdown.

Democrats have a lot of leverage, but they also have a lot of things
they`re seeking in this debate and they want to be careful not to push it
too far. And Republicans, once they get that tax bill, they`re going to be
in the mood to talk.

HERERA: And what are — are their any big sticking points at this point on
in the budget or not?

HARWOOD: Well, the big sticking points are these first of all the
Republicans and the Trump administration want a very large increase in
defense. But to get that increase, they have to have votes from Democrats
— at least eight Democrats to make that happen and Democrats are insisting
in return for those votes that domestic spending program also — spending
programs also be increased in a comparable amount.

Democrats also want to have the so-called DREAMers, the Deferred Action
Program that President Obama implemented, they want to have that codified
into law. President Trump has said provisionally that he will revoke it.
And they also want to have the children`s health insurance program
extended, which has been expired for several weeks now.

HERERA: Of those that you named, which one do you think is going to be the
toughest battle?

I think the hardest one is getting the protection for the DREAMers. I
think Republicans will compromise on domestic spending levels to match
those of the Defense Department. But it`s more difficult given how
volatile the immigration is on the Republican side, more difficult for them
to make a deal. That doesn`t mean they won`t do it but that`s going to be
the harder one.

All right. We will leave it there, John. Thanks so much.

HARWOOD: You bet.

HERERA: John Harwood in Washington for us tonight.

Still ahead, the big food companies get the munchies and they buy up their
smaller rivals.

(MUSIC)

HERERA: Health insurer Humana (NYSE:HUM) is reportedly in advance talks to
acquire acute care provider Kindred Healthcare (NYSE:KND). According to
“The Wall Street Journal”, the deal would be a partnership with private
equity firms. Such a deal would be the latest convergence of health care
companies. Most recently, CVS (NYSE:CVS) agreed to acquire Aetna
(NYSE:AET) for $69 billion. Shares of Kindred rose more than 10 percent on
that report, while Humana`s stock fell.

There is also merger and acquisition talk in the food sector. Hershey will
acquire Amplify, the maker of Skinny Pop, while Campbell Soup (NYSE:CPB
(NYSE:CPF)) will buy snack makers Snyder`s Lance (NASDAQ:LNCE). All four
stocks traded higher, with Amplify soaring more than 70 percent.

Kate Rogers (NYSE:ROG) takes a look at this appetite for deals.

(BEGIN VIDEOTAPE)

KATE ROGERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Americans love to
snack and food companies are taking notice. Campbell`s Soups acquisition of
Snyder`s Lands for nearly $5 billion in cash is the largest deal ever in
the soup company`s history. Snyder`s owns snacking brands like Diamond
Foods (NASDAQ:DMND) and Pop Secret Popcorn.

Separately, Hershey is spending more than one-and-a-half billion dollars to
acquire Amplify, the maker of Skinny Pop Popcorn. The deal signified big
food companies like Hershey`s and Campbell are looking to move beyond their
traditional offerings of chocolate and soup, panelists say, and more people
are snacking on foods like pretzels and popcorn as they spend more time
eating on the go.

JONATHAN FEENEY, CONSUMER EDGE RESEARCH: Everything you can do on your
phone it`s a tremendous imposition to spend time at meals. I think there`s
some changes to household composition that have made, you know, traditional
sit-down meal eating less common and snacking more common.

ROGERS: Less time and money are being spent on the so called center of the
store items like soup pasta and rice. Shoppers are migrating more to the
perimeter of the store where these snacks are located. That`s why big food
brands are buying up smaller ones.

Other deals this year include Kellogg (NYSE:K) buying RX Bar, Mars
Investing in Kind Bars parent company, and ConAgra buying the parent
company of Angie`s Boom Chicka Pop Popcorn.

ERIN LASH, MORNINGSTAR: One of the factors that has been plaguing firms
across the packaged food landscape is their inability to respond to
evolving consumer trends in a timely fashion, and we`ve seen some of these
smaller niche operators proved to be much more agile.

ROGERS: One more thing analysts say to keep in mind is that this trend
will likely continue into 2018 for two key reasons, big food companies are
continuing to struggle and interest rates remain low, making this a perfect
storm for more M&A activity.

For NIGHTLY BUSINESS REPORT, I`m Kate Rogers (NYSE:ROG) in New York City.

(END VIDEOTAPE)

HERERA: The railroad industry is dealing with the sudden death of an
industry turnaround expert. CSX (NYSE:CSX) CEO Hunter Harrison died
unexpectedly over the weekend. Harrison was in the process of trying to
overhaul the freight train operator, and now, his death has left investors
wondering what comes next.

Here`s Morgan Brennan.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Hunter Harrison`s
death coming just days after CSX (NYSE:CSX) announced the 70-year-old
executive would be taking medical leave after suffering complications from
an undisclosed illness.

DONALD BROUGHTON, BROUGHTON CAPITAL MANAGING PARTNER: Hunter was one of
the greatest railroad executives of the generation and anyone who knew him
is just saddened by his loss. He brought in one of his chief disciples
from the CN, the Canadian National days, Jim Foote.

He`s brought in too many of his other disciples who understand precision
railroading, understand his philosophy and his legacy will live on.

BRENNAN: Harrison is the father of precision scheduled railroading, a
strategy that streamlines operations to improve service while cutting
costs. Harrison literally wrote the book on it and used the method to
remake both the Canadian National and Canadian Pacific Railroad.

In March, he sought to do it again, joining CSX (NYSE:CSX) amid activist
investor pressure, a move that sent the stock soaring 60 percent. Even a
speculation about his health swirled.

In October, Harrison hired Jim Foote who has since taken over as acting
CEO, but following summertime service problems that have drawn the ire of
regulators and with no succession plan officially in place, Harrison`s
passing leaves investors asking what`s next.

BROUGHTON: Many of the hard decisions, much of that had been done already
and I`m sure that Jim Foote is more than capable of following through with
the ideology and the principles of precision railroading.

BRENNAN: Foote has said the big changes have already taken place and the
turnaround well underway. But with few details and lots of unanswered
questions, investors may have to wait until earnings, which come out next
month.

For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan.

(END VIDEOTAPE)

HERERA: The casino operator Penn National strikes the deal with its rival.
That`s where we begin tonight`s “Market Focus”.

Penn National said it was buying Pinnacle Entertainment (NYSE:PNK) for
about $3 billion. The acquisition combines the two largest casino
operators in the U.S., outside of companies operating in Las Vegas. In an
effort to appease regulatory concerns, Penn will sell some of Pinnacles
operations to buoyed gaming for more than $500 million. Penn National
shares fell 2 percent to $29.03, while shares of Pinnacle Entertainment
(NYSE:PNK) rose almost 1 percent to $31.19.

Pfizer (NYSE:PFE) is launching a new $10 billion share buyback program.
The repurchase is in addition to the $6 billion remaining under the drug
maker`s existing program. The Dow component is also hiking its quarterly
dividend by 6 percent to 34 cents a share. Pfizer`s shares were off just a
tick to $37.13.

A milestone today for shares of Warren Buffett`s Berkshire Hathaway
(NYSE:BRK.A). The company saw it`s more expensive A class shares hit
$300,000 for the first time. That class of shares, which is also not
surprisingly the world`s priciest stock, has outperformed the S&P 500 index
this year, rising 22 percent. Class A shares finished the day of 1 percent
to $299,360.

Spectrum Pharma announced a management shakeup today. The drug makers said
its board terminated the CEO without cause. The company said its current
president will take on the chief executive position immediately. Investors
applauded the move, sending shares up nearly 5 percent to $19.95.

And after the bell, the engineering and construction company McDermott said
it was merging with Chicago Bridge and Iron in an all-stock deal. The
combined company has an enterprise value of about $6 billion. McDermott
shares were volatile in the extended session but they ended the regular day
up 2 percent to $7.59. Chicago Bridge and Iron shares were also initially
higher in after hours, but they finished the day up a fraction to $17.92.

The president of ESPN has resigned effective immediately. In a statement,
John Skipper cited substance abuse, something he has struggled with for
years. Skipper was considered one of the most powerful people in both
media and sports, and the announcement comes as ESPN`s parent company
Disney (NYSE:DIS) makes a big bet on TV sports with the recent acquisition
of most of 21st Century Fox, which includes 22 regional sports networks.

As we`ve been reporting, the deal between Disney (NYSE:DIS) and Fox is
emblematic of the rapid change happening in the media industry. And today,
we learned that people are canceling their paid TV packages at a faster
clip.

Julia Boorstin takes a look at the move to cut the cord.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Cord cutting and
cord trimming have more momentum than ever. A new report from PWC finds
that the number of respondents that subscribe to pay TV is 73 percent.
That`s down from 76 percent last year and 79 percent the year before.

ANTHONY DICLEMENTE, EVERCORE ISI: The fact that you`re worried about cord
cutting and the affiliate fee stream that you have on this side of the
ledger is really hurting your ability to go to market quickly, to innovate,
and I think that that puts you on your heels instead of on your front foot.

BOORSTIN: And a remarkable sign of the rise of streaming TV alternatives
the very same number of paid TV subscribers, 73 percent of respondents
subscribed to Netflix (NASDAQ:NFLX).

Another trend to watch: cord-trimming, people switching to smaller lower-
cost bundles, such as those offered by DirecTV, Hulu, YouTube and even the
cable giants. Twenty-seven percent say that their cord trimmers that`s
dramatically up from just 18 percent two years ago.

But for now, the pay TV bundle appears to be protected by sports. Eighty-
two percent of sports fans tell PWC they would end or trim their pay TV
subscription if they no longer needed to access live sports.

ARYEH BOURKOFF, LIONTREE FOUNDER & CEO: We all thought about cord cutting
and streaming and that is clearly the trend. But as much of a statement
was made on Disney (NYSE:DIS) and Fox on solidifying the bundle, right,
because you`re not breaking up ESPN, you`re not breaking up the RSNs,
you`re going deeper into the existing bundle.

BOORSTIN: But the question is, what happens once major sports rights
contracts with broadcasters expire in 2021, and if Internet giants such as
Amazon (NASDAQ:AMZN) or Facebook`s snap up those rights. We`ll also be
watching to see if there`s an impact from ESPN launching its direct-to-
consumer app next year and growing the library of sports it offers as part
of that service.

PWC reports that the average sports fan would pay around $23 a month for
unlimited access to live sports on any platform. That explains why sports
rights are so valuable both to traditional giants working to maintain
demand for their bundles and for new players looking to draw subscribers
and ad dollars.

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

(END VIDEOTAPE)

HERERA: The latest installment of Disney`s “Star Wars” franchise was
expected to have a big opening weekend, and it certainly did not
disappoint. “The Last Jedi” raked in $220 million at the North American
box office. That is the second best opening ever, falling only behind its
predecessor “The Force Awakens”, which saw initial ticket sales of more
than $245 million in 2015.

Coming up, in with the old. Why mail-order catalogs, perhaps the original
form of virtual shopping, are making a comeback.

(MUSIC)

HERERA: Here`s a quick look at what to watch for tomorrow. House
Republicans will vote on the proposed tax bill, the Senate will follow suit
either voting later in the day or on Wednesday. New housing data will tell
us how many new residential homes went under construction in November, and
the delivery giant FedEx (NYSE:FDX) will report earnings and give an update
on how business is faring this holiday season.

While power has finally been restored to the world`s busiest airport,
Georgia Power (NYSE:GAR) set a fire in an underground electrical facility
put Atlanta`s Hartsfield-Jackson Airport in the dark yesterday. Hundreds
of flights were canceled just days before the holiday travel rush.
Airlines spent today rebooking their passengers and getting back on
schedule.

The good news, Delta, which has its headquarters in Atlanta, has more spare
planes and crews in that city than anywhere else.

It is the pre-Christmas rush for the Postal Service. This week is expected
to be the busiest one of the holiday season for the package delivery
companies. The Postal Service expects to exceed its initial forecast of
nearly 850 million packages between Thanksgiving and New Year`s Day. The
USPS makes more deliveries to homes than its two commercial rivals FedEx
(NYSE:FDX) and UPS.

And the increase in package deliveries is directly tied to the rise in
online shopping. So, it might seem odd that an old-school more traditional
way of browsing for items is making a comeback, the snail mail catalog.

Courtney Reagan has our story.

(BEGIN VIDEOTAPE)

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Catalogs may seem
like an outdated marketing method. But then again, you might have noticed
a catalog surge in your mail box this time of year. Retailers are getting
better at targeting customers. Catalogs are good at peaking interest.
That combination could lead to more sales, which is why the push to send
them spikes during the holidays and other big spending events like moving
or having children.

Williams-Sonoma (NYSE:WSM) chief marketing officer likens catalogs to
delivering inspiration to one`s doorstep.

NEIL O`KEEFE, DATA & MARKETING SSASOC., SVP CONTENT & MARKETING: The
ability to deliver basically your full store direct to somebody`s doorstep
holds a lot of value.

REAGAN: But catalogs have to be targeted. If done right, AlixPartners
consultants estimated average return of $3 for every $1 spent, and $9 for
every $1 spent on top customers, putting catalogs above paid search but
below email and social media for marketing spend effectiveness. Even those
companies that started out purely online are turning to more traditional
catalogs.

Arandell says its business is growing as much as 10 percent this year,
thanks to e-commerce only players.

HAMILTON DAVISON, AMERICAN CATALOG MAILERS ASSOCIATION PRESIDENT:
Companies that have started off as ecommerce pure plays find increasingly
that publishing a catalog gets them known, gets them trusted, allows them
to get new product offerings out that they might not otherwise have as
visible for the consumer.

REAGAN: And it`s not just your grandmother ordering. Thirty-eight percent
of millennials and Gen-Xers say a catalog has driven them to shop. That`s
more than the average population.

O`KEEFE: Millennials are very engaged by imagery and the catalog really
allows that to stand out.

REAGAN: Total catalog circulation is about half its peak of a decade ago
and the biggest headwind to the industry could be the price of postage, now
making up half the cost of the catalog.

For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan.

(END VIDEOTAPE)

HERERA: And that`s it for a NIGHTLY BUSINESS REPORT for tonight, I`m Sue
Herrera. 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
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.

 

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