TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Rising rates. As treasury
yields move higher, will the red-hot bull run in the stock market start to
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: And then there were two.
Eighty-seven-year-old Warren Buffett is one step closer to naming his
successor after elevating two key figures at his sprawling conglomerate.
MATHISEN: Newman`s Own tax trouble. The well-known brand faces a 200
percent tax hike and a lot of questions now about its future.
Those stories and more tonight on NIGHTLY BUSINESS REPORT for Wednesday,
HERERA: Good evening, everyone, and welcome.
Stocks faltered a bit today after a strong start to the year. The S&P 500
and the NASDAQ closed lower for the first time in 2018. Now, some are
attributing the decline to good old fashioned profit-taking. Others,
though, pointed to nervousness that higher inflation could force the Fed to
be more aggressive when it comes to hiking interest rates.
The result was a drop in stocks. The Dow fell 16 points to 25,369. The
NASDAQ was off ten. And the S&P was down three.
Investors are also paying more attention to the bond market these days.
Yields have been rising. And that could usher in big changes for stocks
and the economy.
Steve Liesman explains.
STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Interest rates are
rising, presenting a challenge to economic growth and to the stock market.
But some look at the recent rise and ask, what took so long?
The Fed hiked interest rates three times last year. And the ten-year bond
yield barely budged. If fell through much of 2017.
The recent rise comes amid a report that China, a big buyer of U.S. bonds,
is rethinking how much it buys. It comes amid better growth, rising
expectations, and a coming boost to the deficit from the tax cut bill. All
those factors have many thinking that rates should really be higher, not
TOM MANNING, F.L. PUTNAM INVESTMENT: Yields are low. They are rising.
They should be higher. They`re nowhere near where they ought to be given
the economic environment, given the global central bank pressure on keeping
LIESMAN: The rate increase represents a modest problem for companies.
Corporate bond yields have risen so some of the tax cut benefits could be
reduced by higher rates paid by corporations.
Mortgage rates have also ticked up, but the gains have been modest and
rates still seem to be available around the 4 percent rate for would-be
homeowners. For the problem for the market, some investors think a 10-year
yield of around 2.6 percent is a better bet than buying stocks, meaning
they pull money out of the equities.
But this does solve a problem for the Federal Reserve. Some officials were
starting to be concerned that rates in the broader economy were failing to
respond while it was hiking the short term funds rate and reducing its
balance sheet. A higher a long term yield should give the Fed some comfort
that as rate hikes are filtering in to the economy and it`s still in the
For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.
MATHISEN: Well, the great bond bull market that began 25 years ago may,
may, be coming to an end, so says Janus Henderson`s Bill Gross, who is
often referred to as the Bond King.
(BEGIN VIDEO CLIP)
BILL GROSS, JANUS HENDERSON: It`s not a strong Colombian bear market.
It`s a decaffeinated bear market where yields on a 10-year probably rise 25
to 30 basis points for the year. But nonetheless, it means that yields are
probably moving higher as opposed to lower.
(END VIDEO CLIP)
MATHISEN: But rising rates don`t necessarily mean falling stocks, at least
not according to Bill Miller who is known for beating the market 15 years
in a row when he worked at Legg Mason (NYSE:LM).
(BEGIN VIDEO CLPI)
BILL MILLER, MILLER VALUE PARTNERS: If those 10-year yields go through
2.60 and head towards 3, I think we could have the kind of melt up we had
in 2013, when the market was up, you know, 30 percent.
(END VIDEO CLIP)
HERERA: Well, rising interest rates are sure to be a theme this year. But
what impact might that have on companies and their stock price? That`s up
One of our guests says rising rates pressures stock valuations. The other
says it`s a win for certain sectors of the market.
Here with us to talk about how rising rates might hurt stocks is Kristina
Hooper, global market strategist at Invesco. And Steve Dudash is president
of IHT Wealth Management, joining us to take the other side of that debate.
Welcome to both of you. Pleasure to have both of you here.
KRISTINA HOOPER, GLOBAL MARKET STRATEGIST, INVESCO: Thank you.
STEVEN DUDASH, PRESIDENT, IHT WEALTH MANAGEMENT: Thanks.
HERERA: Christina, I`m going to start with you.
You think it might put pressure on profit margins. At current interest
rate levels, or if they move decidedly higher?
HOOPER: If they move decidedly higher, borrowing costs are going to
increase and that will definitely put pressure on profit margins, in
addition to other precious we`re likely to see like an increase in wages.
MATHISEN: All right. Let me turn to you, Steve. You say among other
things that on the whole, rising rates are going to be a net positive for
equities. I can see where it`s going to help financial companies, their
net interest margins will expand as they`re able to charge more because, by
the way, they usually charge more for loans than they pay you in deposit
But how else is it going to help stocks?
DUDASH: Well, OK, let me take a slightly different approach. If we`re not
going to raise interest rates, when are we? We just came off a year when
the market is up 20 percent, 3 percent GDP, unemployment, you know, very,
very low right now. What else do we need to do in this goldilocks period
to make people comfortable with a rate hike?
Our economy is better off if we rise our rates just a little bit. You
know, I`m not talking a where they are in the `70s or `80s. But raise
rates a little bit, and give us that ammo and the gun for when the next
recession comes or the world event, or whatever. We all know that`s going
to happen sooner or later. It gives us some protection knowing that we
have ammo for it when that takes place.
If something bad happened today, we don`t have a lot of wiggle room to
protect us or to help out on that. So, get rates up there. I mean, again,
we`re at 500-year lows in rates right now, a little bit more of a rate hike
isn`t going to really hurt things in the long term that much.
HERERA: All right. Christina, why don`t — let`s talk about the point
that Steve just made about the fact that if indeed we do have a market
event, that it gives the Fed a little more wiggle room. Others say rising
rates complicates it for the Fed.
What do you think?
HOOPER: Well, I think he`s absolutely right, that certainly you get some
dry powder by raising rates. But that doesn`t dismiss the fact that it
does put pressure on valuations.
When you think of major valuation models for stocks, the inputs are
earnings or expected earnings, and interest rates. And you`re discounting
the earnings by the interest rate. So, if interest rates are higher,
typically, that will put pressure on valuations.
Now, if you have modest rate increases, it won`t have a very material
impact. But it does have some, and it certainly has an impact on the bond
market as well.
Having said all that, it doesn`t mean that it`s not healthy to have a few
rate hikes. We just have to be prepared for the fact that we could see
some valuation compression if earnings don`t deliver.
MATHISEN: Address that, Steven. I take your point —
MATHISEN: — the idea that if not now, when are we going to raise interest
rates with them this low.
MATHISEN: But my initial question was explain to me how these higher rates
are not going to hurt stocks but in your view may indeed actually help them
DUDASH: OK. Your guess is 100 percent right. You know, it`s going to
hurt valuations a little bit. There`s no doubt about it. But we don`t
need another 20 percent market returns.
I mean, don`t get me wrong, everyone is happy when the markets are up 20
percent. But that`s not healthy. Bottom line profits didn`t go up enough
to justify what just took place. If it happens again next year, we
probably have an issue.
So, yes, rate hikes might hurt valuations a little bit. She`s right on the
math on that. It might bring down what the total returns might be in the
market. But, from the grand scheme of things, if we`re trying to do this
long term, if we`re trying to grow this economy and add stability and do it
the right way, we don`t want 20 percent returns over and over again.
If this hurts valuation, fine, who cares? We`re better off in the long
term through it if we have a single digit year.
And she`s right, it`s going to hurt bonds. But that actually ends up
helping the stock market because people aren`t making money on bonds or
losing money on bonds are going to rotate into the stock market more, which
props returns on the stocks a little bit more than probably should take
HERERA: All right. Well, the conversation is not over yet, certainly. It
Thanks so much for joining us, Kristina Hooper with Invesco, Steve Dudash
with IHT Wealth Management.
MATHISEN: Well, the Federal Reserve delivered more than $80 billion to the
Treasury Department. The central bank remits its profits to the treasury
every year. And while $80 billion sounds like a lot, it was the second
straight year of profit declines primarily due to rising short term
HERERA: And speaking of billions, Warren Buffett`s succession plan is
getting a bit clearer. For years, many wondered who d fill the billionaire
investor`s shoes and leave Berkshire Hathaway (NYSE:BRK.A). But now, it`s
down to two men.
Becky Quick is in Omaha for us tonight.
BECKY QUICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: The news today is the
closest we`ve ever gotten from Berkshire Hathaway (NYSE:BRK.A) in terms of
a succession announcement of who would take over when chairman and CEO
Warren Buffett leaves. The news is that Greg Abel, who has been running
Berkshire Hathaway (NYSE:BRK.A) and Energy, and Ajit Jain, who`s been
running Berkshire Hathaway (NYSE:BRK.A) Reinsurance will each be taking
over as vice chairman of the company. They will be promoted.
That would be in addition to the existing vice chairman, Charlie Munger,
who at 94 years old is going nowhere. He will still be staying there at
the company. This will just be a promotion to put both Able and Jain into
They will also be joining the board of Berkshire Hathaway (NYSE:BRK.A).
That moves the number of directors there to 14 from 12. And that`s
something that Warren Buffett tells us that will be very good for each of
them to have to get that experience.
WARREN BUFFETT, BERKSHIRE HATHAWAY CEO: They`re both have Berkshire in
their blood. They love the company. They know their operations like the
back of their hand. So, it`s very good for Berkshire and it`s even better
QUICK: We also got the chance to ask Buffett about some of the individual
holdings that Berkshire has, some of the major stock holdings and right
now, they don`t have to tell us anything. They don`t have to file with the
SEC what they`ve been doing in the fourth quarter until February 15th. He
was coy on what he thought about Apple (NASDAQ:AAPL).
BUFFETT: We`ve added to our holdings consistently up through all the
published reports. And we`ll publish some more on — see, the market does
not get saturated for iPhones. I just want to point that out. When Tim
Cook sent me a Christmas card again this year say he`s going to sell me
iPhone this year, when I actually buy it, it`s all over, folks.
QUICK: As you can see, Buffett still has a flip phone that`s made by
Samsung that he keeps with him at all times. So, we`ll see if he ever
actually does buy an iPhone.
The other stock we asked him about was shares of General Electric
(NYSE:GE). Berkshire is not a shareholder in shares of General Electric
(NYSE:GE), but the question has been brought up, would it be something he
would see or like at some price? Now, the answer is yes, at some price.
The question is, what?
BUFFETT: Different people have different views on what that price would
be. But, I mean, if you came to me and said, we`ll sell you the whole
General Electric (NYSE:GE) Company at X and X was the right number, we`d
like to buy it. And if we buy little pieces in the market, that`s the way
we think about it.
QUICK: He did however say that he thinks GE is a big, strong economy.
For NIGHTLY BUSINESS REPORT, I`m Becky Quick in Omaha, Nebraska.
MATHISEN: Concerns about the future of NAFTA reverberated through parts of
the stock market today. “Reuters” reported that Canada is becoming, quote,
increasingly convinced that the U.S. will exit that long standing trade
agreement. And that sent shares of a Canadian and Mexican ETF lower. GM
also under pressure as you see there, since it imports from Mexico some
full size pickup trucks, which are among its most profitable products.
And Kansas City Southern (NYSE:SO) (NYSE:KSU), which has an extensive
network in Mexico, was off 3.5 percent.
HERERA: The clock is ticking for the Trump administration to take action
on one of its key campaign promises, defending American manufacturers
priced out of the Chinese market.
And as Kayla Tausche reports, that action could possibly include some
KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT: In his first 100
days, President Trump launched an investigation into steel and aluminum
dumping under a rarely used national security statute. The hypothesis,
Chinese state-owned companies with no penchant for profit flood the market
with cheap commodities and put American companies out of business.
Commerce Secretary Wilbur Ross must now decide whether such actions imperil
American industries needed for war, and if so, how to penalize them. In
the last nine months, the issue caused friction among advisers with varying
viewpoints, some whom have now left the White House.
TOM CONWAY, UNITED STEEL WORKERS UNION: I think there`s a great struggle
with what`s going on inside this administration.
TAUSCHE: Tom Conway represents the United Steel Workers Union.
CONWAY: We`re going to rely on the president to do what he said, because
we don`t who`s working there anymore.
TAUSCHE: The president has 90 days after the commerce reports are due this
month to make a decision. Industry observers expect it to be a tough one,
citing his ramped-up criticism of China following his November visit.
DONALD TRUMP, PRESIDENT OF THE UNITED STATES: We will not remain silent as
American companies are targeted by state affiliated actors for economic
TAUSCHE: In a December national security strategy describing China as a
dangerous competitor, companies like Century Aluminum (NASDAQ:CENX) want to
fight the imbalance with tariffs. CEO Mike Bless supports a levy up 20
MICHAEL BLESS, CENTURY ALUMINUM CEO: There`s a million tons, a million
tons of U.S. capacity representing thousands of jobs that`s ready to
restart as soon as a comprehensive relief is granted in the playing field
and it`s made level.
TAUSCHE: Relief may have its limits. U.S. allies would likely be excluded
from tariffs and it may be temporary in nature. So, experts warned
leveling the playing field for steel and aluminum could cause China to
retaliate against U.S. farmers, throwing another industry off balance.
For NIGHTLY BUSINESS REPORT, I`m Kayla Tausche in Washington.
MATHISEN: Still ahead, more issues for Apple (NASDAQ:AAPL) over its older,
slower iPhones and their batteries.
HERERA: Two Japanese automakers will build a $1.5 billion plant in
Alabama. Toyota (NYSE:TM) and Mazda will together build a factory that`s
expected to employ about 4,000 people, producing 300,000 cars each year.
That plant could make Alabama the fourth biggest state in the U.S. when it
comes to auto manufacturing.
MATHISEN: Well, get this. The lights went out at the world`s largest
consumer electronics show. Literally, they went out! The conference at
the Las Vegas Convention Center`s main hall was dark for about — who
plugged in the hair dryer?
The outage impacted hundreds of companies including Samsung, Sony
(NYSE:SNE), and LG, and it came just one day after it rained in the desert
city, flooding the streets. The cause of the outage was a faulty
HERERA: Apple (NASDAQ:AAPL) last month admitted to deliberately slowing
down iPhones with older batteries. That resulted in lawsuits, customer
complaints, and now some questions from a U.S. senator.
Josh Lipton has our story.
JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Apple`s CEO Tim Cook
made a decision last year that is now attracting a lot of attention. His
company introduced new software which can slow the performance of iPhones
with older declining batteries.
Apple (NASDAQ:AAPL) says that was necessary because of a very real
technical challenge. Batteries decline over time. As they age, they can
have a tougher time handling the power demands of devices, and can
unexpectedly shut down.
But Cook now finds himself fielding questions about his decision from
powerful politicians on Capitol Hill, including Senator John Thune,
chairman of the Senate Commerce Committee.
Senator Thune questions whether Apple (NASDAQ:AAPL) has been as forthcoming
as it could have been regarding this issue.
SEN. JOHN THUNE (R), SOUTH DAKOTA: Part of the thing that we want to get
at is the transparency issue. If they deny that they`re engaging in
planned obsolescence, in others trying to force people to buy the next
phone. But we want to make sure through our role as oversight that that`s
LIPTON: Senator Thune sent Cook a letter demanding to know whether Apple
(NASDAQ:AAPL) tracks consumer complaints about processing performance, and
whether the company is exploring whether paid full price for a replacement
battery before a recent price cut should now receive a rebate.
What happens if Apple`s answers aren`t satisfactory? Senator Thune says he
could call a hearing and in his words elevate this further.
For each part, Apple (NASDAQ:AAPL) counters that its critics are wrong,
saying first and foremost, we have never and would never do anything to
intentionally shorten the life of any Apple (NASDAQ:AAPL) product or
degrade the user experience to drive customer upgrades. Our goal has
always been to create products that our customers love and making iPhones
last as long as possible is an important part of that.
Apple`s point is that it`s not trying to force consumers to buy new iPhones
by crippling older ones. It`s just the opposite. It`s taking steps to
make those older iPhones last longer.
Still, Cooke`s company finds itself facing questions on both sides of the
Atlantic. In France, the Paris prosecutor`s office has also reportedly
opened an investigation into issue.
For NIGHTLY BUSINESS REPORT, I`m Josh Lipton, San Francisco.
HERERA: Lennar (NYSE:LEN) says demand is strong, and that is where we
begin tonight`s “Market Focus”.
The nation`s second largest homebuilder said buyers were eager to purchase
new homes in the latest period at hire price points. The company beat
revenue expectations but it missed the mark when it came to profit, saying
the delay of a strategic transaction caused that miss.
Still, shares finished the day up 2 percent at $68.26.
MATHISEN: And after the bell, rival KB Homes reported results that
outpaced expectations. The company said profits were helped by an increase
in average selling prices and an uptick in deliveries. Shares initially
rose after hours and finished the day up a fraction to $34.35.
Medical device maker Intuitive Surgical (NASDAQ:ISRG) excited Wall Street
today with the release of its fourth quarter preliminary results. The
company expects to report revenue that tops its own guidance as well as
analysts` expectations. Shares up 6 percent to finish the day at $423.76.
HERERA: The software company SS&C Technologies (NASDAQ:SSNC) is reportedly
in talks to buy DST Systems (NYSE:DST) for more than $500 billion.
“Reuters” says SS&C is interested in a potential deal so it can expand its
reach and enter the health care information technology market, which is a
familiar space to DST. Shares of DST Systems (NYSE:DST) popped 22 percent
to $79.89. SS&C shares rose nearly 13 percent to $47.69.
Twenty-First Century Fox is reportedly close to finalizing a deal that will
give it ownership of ten TV stations operated by Sinclair Broadcast Group
(NASDAQ:SBGI). According to “Reuters”, Sinclair made the move to win
regulatory approval for its nearly $4 million acquisition of Tribune Media.
The deal gives Fox more markets potentially giving it more revenue. Shares
of Fox fell more than 2 percent to $35.60. Meanwhile, shares of Sinclair
jumped almost 9 percent to $38.75.
MATHISEN: Well, banks have always been wary of working with the legal
marijuana business, mostly because it is still illegal federally. Now, one
week after the attorney general announced a bit of a crackdown, that
problem could be worsening.
Kate Rogers (NYSE:ROG) reports.
KATE ROGERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Reaction to the
crackdown has been mixed. Some in the pot industry have been fearful. For
others, it`s been business as usual. One thing seems certain, the
industry`s already strained relationship with banks will become even more
A recent report estimates that just 5 percent of all financial institutions
are working with cannabis businesses but only 1 percent are actually
servicing them. That means that pot businesses can`t easily deposit money
MATT KARNES, GREENWAVE ADVISORS FOUNDER: Before, banks were very reluctant
to do any business based upon the loosely defined guidance. Now it just
raises more uncertainty.
ROGERS: That Cole memo was issued by the Obama administration to ease some
of the stress between banks and the pot dispensaries. Banks were wary then
but now could be even more so.
Uncertainty could create an opportunity for the security industry. More
cash not in banks requires more protection.
Tony Gallo`s Sapphire Risk Advisory Group in Dallas offers developing and
security consulting. He`s received calls from clients old and new in the
past week seeking advice and new business.
TONY GALLO, SAPPHIRE RISK ADVISORY GROUP: A lot of our clients are
concerned about whether their security is adequate at this time in their
locations, whether it`s a growth facility or a dispensary. And then new
clients that are looking to come on board wanted to know what kind of
security are they going to be required to have going forward.
ROGERS: One thing Sessions` action didn`t alter, growth projections for
the industry. Industry watcher Marijuana Business Daily project sales will
hit $6 billion this year with growth tripling over the next four to five
years. And some say those numbers are conservative.
CHRIS WALSH, MARIJUANA BUSINESS DAILY VP OF EDITORIAL: Basically, you have
a freight train moving at 200 miles an hour. And Jeff Sessions is, you
know, jumping out a bush, trying to stick his leg in the way to slow this
down. It`s just going to run him over.
So, I think it might have some type of chilling effect in certain areas.
But in general, I mean, the industry is going to continue moving and
growing quickly and moving forward.
ROGERS: Despite new challenges, advocates, analysts, and entrepreneurs are
moving ahead with plans in this budding industry.
For NIGHTLY BUSINESS REPORT, I`m Kate Rogers (NYSE:ROG).
HERERA: Coming up, Newman`s Own faces a massive tax bill and possibly an
MATHISEN: Newman`s Own is a different kind of company. It gives away 100
percent of its after-tax profits through a foundation started by the late
actor Paul Newman. But that uniqueness is now getting complicated. And
the company faces a massive tax bill. It`s complicated.
Ylan Mui explains.
YLAN MUI, NIGHTLY BUSINESS REPORT CORRESPONDENT: One of America`s favorite
makers of pasta sauce is now finding itself in hot water. Newman`s Own is
facing a crushing tax penalty this year. The company executives say it
will force them to put the business up for sale unless Congress can come up
with a solution.
BOB FORRESTER, NEWMAN`S OWN CEO: It`s a way they can force you to break up
the company. I use those terms deliberately. The only alternative to
getting this legislative support, and again, for us and for these other
companies, is that we would have to divest Newman`s Own.
MUI: Hollywood star Paul Newman established his namesake company more than
35 years ago. It`s best known for make marinara sauce. It also makes
salad dressings, lemonade, and hundreds of other pantry products.
It`s now worth $500 million. And it`s technically considered a for-profit
company, even though all its earnings are funneled into Newman`s private
foundation which then uses the money to fund charities around the world.
That model worked well while Paul Newman was alive, but after he died in
2008, an obscure provision of the tax cut kicked in, prohibiting his
private foundation from owning more than 20 percent of a for-profit
Now, if the foundation doesn`t give up control of the business, it will get
hit with a fine worth 200 percent of the value of the company.
The executives say there`s no promising buyer yet.
FORRESTER: The equity of the brand is about our social purpose, our 100
percent of profit charity. So, anybody trying to buy Newman`s Own has to
deal with that particular issue. What will be the consumer`s reaction if
that company is not giving 100 percent of its profits to charity? It`s
hard to figure.
MIKE PENCE, VICE PRESIDENT OF THE UNITED STATES: The tax cuts and jobs act
MUI: Congress tried to tuck some legislative relief for Newman`s own into
the sweeping tax plan that passed late last year. But it was struck at the
last minute for procedural reasons.
So, today, top officials from Newman`s own came to Washington in hopes of
finding an alternative, and fast. Executives say they need an answer by
the end of the first quarter or the credits could roll on Newman`s Own.
For NIGHTLY BUSINESS REPORT, I`m Ylan Mui in Washington.
MATHISEN: To read more about Newman`s own tax issue, head to our Website,
HERERA: We`re going to keep track of that story.
MATHISEN: It`s a good story.
HERERA: That is NIGHTLY BUSINESS REPORT for tonight. I`m Sue Herera.
Thanks for joining us.
MATHISEN: Thanks from me as well. I`m Tyler Mathisen. Have a great
evening, everybody. And we`ll see you right back here tomorrow night.
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