Transcript: Nightly Business Report – January 12, 2018

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

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Up, up, and away! Stocks
have their best start to a year since 2003. And our market monitor says
small caps are on track to see big gains now.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Focus on financials. Earnings
are under way. So far, they`re strong. And this critical sector is the
reason why.

MATHISEN: No steering wheel? No problem. GM envisions the car of the
future. But will you get in one?

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Friday,
January 12th.

HERERA: Good evening, everyone, and welcome.

Two weeks into this New Year, the bulls are running on Wall Street. Stocks
surged to close at records again. In fact, the Dow had its third 200-point
gain in 2018. That compares to only six during all of last year.

Today, financial stocks rose after some of the country`s biggest banks
reported their quarterly results.

So, here are the closing numbers. The Dow Jones Industrial Average
advanced 228 points to 25,803. The Nasdaq added 49. The S&P 500 was up
18. And it was a strong week for all three.

So, how does this start to a year compare to others? What might happen
next?

Mike Santoli set out to find some answers.

(BEGIN VIDEOTAPE)

MIKE SANTOLI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Stocks have
accelerated into 2018 with a burst of fresh energy, making for the market`s
hottest start in 15 years. The S&P 500 index has already gained 4 percent
in 2018. The best return over a similar span since 2003 when it was up 5.8
percent. 2003 turned out great for investors with a 12-month rise up 26
percent. That year, stocks were just emerging from a nasty two-year
downturn that followed the tech bubble. Not exactly a similar setup for
this year, which begins nearly nine years into a bull market.

Before 2003, the best two weeks of the year was in 1987, a year known for a
stupendous 40 percent surge into the summer before an eventual October
crash. As is the case today, the economy in 1987 was humming, interest
rates beginning to rise and public excitement over stocks starting to boil
over.

While it`s hard to generalize about what a year`s start means for market
performance to come, in general, a strong gain in early January has led to
better than average returns.

With growing confidence in the economic picture today and few signs of
recession on the horizon, investors are focused more on grabbing a piece of
further upside than on worrying about potential losses. Stock funds pulled
in $24 billion in new money in the latest week, according to Bank of
America (NYSE:BAC)/Merrill Lynch, sixth highest ever.

This is leading some strategists to say the bull market has entered a new
phase that occurs later in a cycle, when investor euphoria builds and risk
is embraced. Yet the rapid pace of gains and rush of new money into stock
funds so far this year also hint that we could be in for a more jumpy
market.

At last year`s impressive 19 percent climb was among the calmest in history
with tiny daily moves and minimal pullbacks. That market is year is making
jumpier moves as investors eagerly chase stocks higher, this will typically
make for wider swings in both directions, even if the market`s uptrend does
continue.

For NIGHTLY BUSINESS REPORT, I`m Mike Santoli.

(END VIDEOTAPE)

MATHISEN: Well, it`s not just the market but the economy that is also
picking up steam, and today, we learned that spending is up a lot, adding
to a string of strong economic reports. But as Steve Liesman tells us,
that could mean an even more aggressive Fed.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: For retailers, it
was a very, very merry Christmas. Based on government data reported
Friday, the National Retail Federation estimates that holiday spending
surged 5.5 percent for the best season since 2010.

MATTHEW SHAY, NATIONAL RETAIL FEDERATION: We saw from the Thanksgiving
weekend, it was very clear the consumer was back and retailers were in a
good place to respond to the consumer demand and I think that is carried
through most of the season.

LIESMAN: Online sales showed the strongest growth with combined November
and December revenue in the category that includes e-retailers hitting a
record $110 billion. That`s up almost $13 billion from last year.

With consumers leading the charge, economists now believe that the U.S.
registered another 3 percent quarter growth in the fourth quarter. That`s
the third three in a row. The U.S. is not only benefiting from domestic
growth but overseas economies are helping as well.

RANDALL KROSZNER, UNIVERSITY OF CHICAGO BOOTH: We are seeing synchronized
global growth period which is really quite rare. I think that`s one of the
key offsets of why both the market in the U.S. and markets globally are
doing so well.

LIESMAN: The one downside, the markets now are beginning to believe the
Federal Reserve may hike rates three times this year. And Dallas Fed
president Robert Kaplan perhaps more than three.

ROBERT KAPLAN, DALLAS FED PRESIDENT: My base case is still that we should
increase rates three times this year. I probably have a little more
stronger conviction that three times, not less than three times, is
appropriate. It`s possible it could be more than three times. But that`s
still the base case.

LIESMAN: But it seems as long as the economic data and the earnings are
strong, the market will remain untroubled by those rate hike clouds on the
horizon.

For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.

(END VIDEOTAPE)

HERERA: And now to those bank earnings we mentioned a bit earlier.
JPMorgan`s results were stronger than expected, despite a one-time hit from
the new tax law. The biggest U.S. bank by assets reported decent loan
growth and got some help from higher interest rates. That sent shares of
the Dow component higher.

MATHISEN: Well, Blackrock also topped analysts` estimates and raised its
quarterly cash dividend. The world`s largest asset manager now has a
record, sit down for this, $6 trillion in assets under management, as
investors flock to low cost funds. The company raked in the equivalent of
a billion dollars of new client money every day last year. On the flip
side is Wells Fargo (NYSE:WFC), which saw total loans decline and was not
able to benefit from rising interest rates, at least not so far.

In trading today, shares did what you might expect them to do. Blackrock
went up. Wells Fargo (NYSE:WFC) went the other way.

HERERA: Here to dig a little bit deeper into today`s earnings and what we
might expect to see from other banks reporting next week is Marty Mosby.
He`s the director of bank and equity strategists at Vining Sparks.

Nice to have you here, Marty. Welcome.

MARTY MOSBY, DIRECTOR OF BANK & EQUITY STRATEGIST, VINING SPARKS: Well,
thanks for having me this afternoon.

HERERA: Let`s talk about — you say there`s basically four catalysts that
you think are going to continue to push this particular sector of the
market forward. It sounds as though you think they`re really in the sweet
spot.

MOSBY: We are. This is the last half of the normalization that we started
coming out of the recession and financial crisis. Unfortunately, we had
four years from 2012 to 2015 when we kind of just stalled out and we didn`t
get any of this improvement that we should have had five to seven years
ago.

But those four things are very easy. It`s low credit cost. Number two is
it`s rising interest rates. So, that continues to push margins wider.
It`s the deployment of capital.

We built up a lot of excess capital that now needs to be pushed back and
used more prudently and being productive. And then lastly, you get some
operating leverage, expense savings, synergies from acquisitions. And all
four of those things are coming together right now to produce growth and
profitability.

MATHISEN: A couple of the biggest banks reported their profits today.
Obviously, each bank has its own individual circumstances. Would you
compare and contrast the reports from JPMorgan (NYSE:JPM) on the one hand
and Wells Fargo (NYSE:WFC) on the other for us?

MOSBY: Sure. I mean, JPMorgan (NYSE:JPM) and the money center banks are
having some pressure from the capital markets. They`re not hitting on all
cylinders. But even with that, they`re being able to grow earnings per
share from those catalysts at around 10 percent.

Wells Fargo (NYSE:WFC) is an outlier in the sense that it has pressure from
the reputational crisis it`s dealing with. That`s caused it to get
increased expenses to make sure they`re taking care of their employees and
their customers as much as possible. It`s also caused them to de-risk
their business, to make sure there`s no more hiccups down the road. That`s
created some revenue headwind.

Except for Wells Fargo (NYSE:WFC), just one last thing —

HERERA: Sure.

MOSBY: — super regional banks are the ones that really will benefit the
most from this environment.

HERERA: You really think that we`re going to see a considerable earnings
per share growth, 30 percent. So, if you`re not in these stocks, it sounds
like perhaps they are not overpriced yet, and have more room to run. Would
that be a correct assessment?

MOSBY: It would be. As returns will go up three full percentage points
this year, we think price to tangible book values that are averaging two
times average book value could round up to somewhere 2-1/4 to 2-1/2. So
there is earnings momentum to still come and get the outperformance, that
the banks can still perform as further upside is realized with the
profitability improvements that we`ll see.

HERERA: All right. Marty, thank you so much for joining us. Have a great
long weekend.

MOSBY: You too. Thank you.

HERERA: Marty Mosby with Vining Sparks.

MATHISEN: In Washington, the Trump administration kept alive the Iran
nuclear deal for now. The president waived sanctions for the third time
but said it will not do so again unless the agreement is amended. The
White House`s statement appears to set a mid-May deadline to make whatever
changes it desires.

HERERA: The Supreme Court will hear an Internet sales tax case. That
decision could force consumers to pay more for certain purchases and allow
states to recoup what they say is billions in lost revenue annually. The
case was brought by South Dakota, which has no state income tax and relies
in large part on retail sales taxes for revenue.

MATHISEN: Kentucky has become the first U.S. state to implement Medicaid
work requirements for able-bodied adults on the program. The approval
comes one day after the government, federal government, issued guidance
that lets states test programs that require jobs or work training as a
condition of receiving benefits. Conditions have never been attached to
Medicaid before.

HERERA: Still ahead, food fight. Why you may want the German grocer Lidl
to set up shops in your hometown.

(MUSIC)

HERERA: Have you heard of Lidl? Well, if the German grocery store opened
in your town, you probably have. And your wallets may have felt the
impact.

Courtney Reagan explains.

(BEGIN VIDEOTAPE)

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: When low priced
German grocer Lidl opens a new store, it brings a food fight. And
consumers are the ultimate winners. The University of North Carolina
looked at prices at 48 grocery items at Walmart, Kroger (NYSE:KR), Aldi,
Publix, and Food Lion, in towns that also have a competing Lidl grocery
store and in towns that didn`t have one.

The study shows on average competing retailers near Lidl stores set their
prices more than 9 percent lower than in markets where Lidl isn`t present.
The German grocer entered the U.S. seven months ago and has less than 50
stores so far. More than 50 are planned.

While nearly all products it sells are brands only found at Lidl, Lidl says
its prices are as much as 50 percent lower than rival stores. It wanted to
see how its entrance to a new area impacted competitors` pricing, which is
why Lidl paid the university to do the study.

The professors that set the parameters and conducted the study found a half
gallon of milk can be priced as much as 55 percent lower at competing
grocers in towns with a Lidl compared to towns without. Avocados and bread
are 30 percent lower. Ice cream, bananas, and cheese are 15 percent less
in Lidl markets than non-Lidl markets.

That means Kroger (NYSE:KR) shoppers save $22 on their total in markets
where Lidl is present compared to markets where there is no competing Lidl
store, $17 savings at Food Lion, $14 at Aldi, $7 at Publix, and $3 at
Walmart.

Longtime retail analyst Dana Telsey says Lidl`s entrance into a new area
does push grocery prices lower at other stores, but Lidl hasn`t been as
strong out of the gate as first expected.

DANA TELSEY, TELSEY ADVISORY GROUP CEO: They haven`t gained the share I
think that originally was expected. But you are seeing U.S. retailers come
down, and they`ll match those prices. I don`t know for how long, though.
The pricing power of Walmart, of Costco (NASDAQ:COST), is extensive, that
getting consumers to recognize the brand name of Lidl takes time.

REAGAN: Walmart declined to comment on the study itself or its pricing
plan but pointed to its ongoing mission to lower costs and prices in
certain unspecified categories.

The other grocers didn`t respond to our request for comment. But the study
tells the story, and there is a different ending if your town has a Lidl
than if it doesn`t.

For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan.

(END VIDEOTAPE)

MATHISEN: Every Lidl bit helps, I suppose.

Facebook (NASDAQ:FB) shares get hit after changing the company`s news feed.
And that`s where we begin tonight`s “Market Focus”.

Yesterday, the social media giant says it wants its users to interact with
each other more often, so it`s making changes to its news feed algorithm
that will result with more updates from family and friends and fewer or
less content from brands and media. Facebook (NASDAQ:FB) says it is
confident about the change even if it means people will spend less time on
the platform. Shares fell, though, 4.5 percent to $179.37.

GameStop reported same-store s for the holiday period that topped
expectations. But shares came under pressure when the company said it
expects to record a charge of as much as $400 million at the end of the
quarter. GameStop owns more than 1,400 branded and AT&T (NYSE:T) stores
and said sales fell in its technology division as more consumers hold off
on upgrading their smart phones. Shares plunged 11 percent to $17.76.

The Nordstrom (NYSE:JWN) family reportedly still interested in taking the
retailer private. CNBC says one hurdle standing in the family`s way is
securing the necessary financing for a potential deal. Last year, the
family`s efforts to take the retailer private were stalled by lack of
financing and investors` uncertainty around retail`s future. Shares rose
3.5 percent to $51.82.

HERERA: Aflac (NYSE:AFL) is under fire after new site “The Intercept”
alleged the insurance giant exploited its workers and deceived shareholders
and customers. The allegations were based off of conversations with
several former employees who have sued Aflac (NYSE:AFL). Aflac (NYSE:AFL)
said the allegations are baseless and it plans to file for a dismissal of
the suit. Shares were off about 7.5 percent to $84.94.

Liberty oil field services began trading on the New York Stock Exchange
today. The company raised more than $200 million by offering nearly 13
million shares at $17 apiece, which above the expected range. Liberty said
it will use the proceeds from that offering to pay down debt. Shares rose
28 percent in their debut to close at $21.75.

And the activist hedge fund D.E. Shaw has reportedly built up a stake in a
home improvement chain, Lowe`s. Reports say that the hedge fund is worried
about Lowe`s performance when compared to its peers and it`s planning to
seek changes at that company. Lowe`s shares jumped more than 5 percent to
$100.86.

And several reports says CBS (NYSE:CBS) vice chairwoman Shari Redstone is
seeking to combine Viacom (NYSE:VIA) and CBS (NYSE:CBS), more than a decade
after the two companies split. But subsequent reports said Viacom
(NYSE:VIA) is not in any active talks with CBS (NYSE:CBS) regarding a
potential merger. Viacom (NYSE:VIA) shares ended the day up more than 9
percent to $33.76. CBS (NYSE:CBS) shares rose nearly 2 percent to $58.83.

MATHISEN: And time now for our weekly market monitor segment. This week`s
monitor has three small cap picks, he says, capitalizing on growing demand
among consumers for experiences and services. The small cap index Russell
2000 hit a new high today, up more than 80 percent over a five-year period.

We welcome Teague Sanders, senior vice president and portfolio manager at
Whittier Trust.

Teague, welcome. Good to have you with us.

Let`s get straight to a couple of your stock picks, because we`re a little
pressed for time, beginning with Monarch Casino and Resort. It`s not a
name I know, which doesn`t say much at all, but where do they do business
and why do you like them?

TEAGUE SANDERS, WHITTIER TRUST SENIOR VICE PRESIDENT: Yes, sure. So,
Monarch Casino and Resort is a regional dominant player in the Reno, Nevada
space. And we really like this particularly because of the management team
and the way they`ve been able to utilize data analytics to better segregate
the market and get a better overall customer experience for the user base.

The other thing we really like about them is they`re doing a really
intelligent expansion into the Black Hawk Region which is outside Denver,
Colorado, which is a lot of similar characters to the Reno, Nevada area.

HERERA: You also like Winnebago, the customer service experience. But
they also have, you say, a lot of RVs that they rent out. So they`ve got a
couple of different income streams.

SANDERS: Yes. So, I mean, what this is really capitalizing on is our
thesis that we`re going from, you know, we`re going more towards everything
as a service, right? And so, you talk about experience versus things,
everything is a service. What they`re really providing is vacation as a
service. So, if you think about the millennials and younger generation
buying RVs and turbos and air streams, then there`s companies that buy
those RVs and allow people to come in and rent them, which is essentially
vacation service. So, Winnebago is very well-positioned to take advantage
of this everything as a service movement, away from just experience versus
things.

MATHISEN: And your third one is Bright Horizons Family Solutions. They`re
a childcare center provider, correct?

SANDERS: That`s correct. So what this is, this is on-demand childcare as
a service. Again, the service is childcare.

You know, what they do is they go right into large corporations and
corporate headquarters, and set up shop actually inside of that facility.
So, what this provides is childcare on demand. So, in this busy life where
we have dual earner households, people coming back to work sooner, it
allows for parents to be able to bring their children in, in the work
place, an environment that they`re comfortable with and a group they
understand. So, you can think of an on-demand child care as a service. It
really fits into this movement of everything is a service.

HERERA: How do you feel about the market overall? We`ve had such a strong
run for the last year. And even just since the beginning of 2018, you gave
us three stock picks, but in general, are you still finding value out
there?

SANDERS: Well, finding value versus recognizing that growth is going to be
the driver are two different things. So, I agree with you, it`s difficult
to find value in the classical sense. But we don`t see anything on the
horizon that`s going to cause a major recess or a major deceleration in
growth. In fact we didn`t see much earnings growth at all in the last two
years, and this year, we were expecting to see that. So, if we get that
and see some multiple compression, we still think we`ll see some positive
upside in 2018.

MATHISEN: Teague, thank you very much. Teague Sanders at Whittier Trust.
We appreciate it.

You can read more about our market monitor`s stock picks on our Website.
That would be NBR.com.

Coming up, no hands and no steering wheel, and no pedals. But GM thinks
that`s exactly the kind of car drivers are going to want in the not-so-
distant future.

(MUSIC)

MATHISEN: A titan of energy investing is getting out of the industry he
helped to shape. Eighty-nine-year-old T. Boone Pickens closing his energy-
focused hedge fund, citing deteriorating health and poor returns. Pickens
started out as a geologist, eventually founding Mesa Petroleum. He made a
name for himself as a wildcatter corporate raider, then a successful
investor in both oil, natural gas, and clean energy. The decision to close
his fund brings an end to a nearly seven-decade career.

HERERA: A new passenger rail service is open for business in Florida. But
what makes this one different is that it`s the nation`s first privately
funded passenger train.

Morgan Brennan takes on a trade.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: It`s taken seven
years, but Brightline`s fleet of colorful trains are finally barreling full
steam ahead, carrying passenger along Florida`s east coast, starting this
weekend.

MIKE REININGER, FLORIDA EAST COAST INDUSTRIES EXECUTIVE DIRECTOR: So far
in this first phase of our business, which is between downtown Miami and
downtown West Palm Beach, we`ve invested about $1.8 billion in total in
trains, and stations, infrastructure upgrades, and everything that was
necessary in order for us to launch this new private business.

BRENNAN: Brightline is the first and only privately-funded passenger
railroad in the U.S., owned by Florida East Coast Industries, which in turn
is owned by private equity firm Fortress Investment Group.

Well, it`s not technical high speed service, but Fortress`s billionaire co-
chairman Wesley Edens says it will eventually be profitable.

WESLEY EDENS, FORTRESS INVESTMENT GROUP (NYSE:FIG): These rail lines that
are behind me are rail lines that were put in place here when Henry Flagler
built the railway originally. You can go at grade a maximum of 135 miles
an hour. If you want to go true high speed, over 200 miles an hour, you
basically have to build a bridge for 250 miles that you then put a train
on. That sounds hard and it sounds expensive and it`s both of those
things.

It will take us about three hours to go from Miami to Orlando. A high
speed train might be two hours 20 minutes, two hours and 30 minutes. So, a
huge difference in cost, a huge difference in time to build, and not that
much of a reduction in service.

BRENNAN: Fortress also owns 1.5 million square feet of mixed use real
estate along the line. And Edens says, he`s already identified another
eight to 10 corridors across the country where a project like this will
make sense.

The first leg of Brightline service will run between West Palm Beach and
Ft. Lauderdale, with service to Miami coming online this spring.

And government officials are betting it will boost intercity travel for
tourism, but also for business.

MAYOR JACK SEILER (D), FT. LAUDERDALE: This is a long term project that is
going to be immensely successful and really create a lot more economic
prosperity for south Florida.

BRENNAN: Tickets will be $10 to $15 with the equivalent of toll costs to
drive the same distance. Brightline hopes it will drum up demand.

Eventually that will shift to a dynamic pricing model. But work isn`t done
yet. Fortress expects to spend another $2 billion to extend service to
Orlando, work expected to be complete in two years.

And while it`s too soon to know how all of this will turn out, the project
comes online at a key moment, just as lawmakers once again turn to
infrastructure, hoping to enlist the private sector to rebuild America.

For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan.

(END VIDEOTAPE)

MATHISEN: Ford and federal regulators are telling nearly 3,000 owners of
certain 2006 Ford Rangers to stop driving them. That`s because of the
vehicle`s Takata made airbag inflaters. Regulators say these high risk
airbags need to be replaced immediately. Do not drive the cars. The
inflaters can explode and spew shrapnel.

HERERA: Are you ready to ride in a car with no driver, no steering wheel,
and no pedals? I`m not sure if I am. But General Motors (NYSE:GM) thinks
we are. The automaker has asked the government for permission to build and
test drive an autonomous drive car, stripped of the controls that we`ve
used for decades.

Phil LeBeau has our story.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is the future,
according to General Motors (NYSE:GM), a self-driving car without a
steering wheel and pedals. Driving round cities, giving people rides in
robo taxis.

DAN AMMANN, GENERAL MOTORS PRESIDENT: Obviously there will be an adoption
curve. And it will take some time for people to get used to the idea. But
everything we`re doing is all about safety in the approach. We want people
to feel comfortable with technology right from the outset.

LEBEAU: GM is asking the federal government to waive vehicle rules that
have been in place for decades so it can put self-driving cars on the road
without steering wheels and other controls. It`s a radical departure.
Going back to the days of Henry Ford, steering wheels and gas pedals have
been at the heart of every car and truck. But GM and other automakers
believe there`s no need for a steering wheel if there`s no driver.

AMMANN: We see these vehicles getting deployed in a ride share environment
and that`s what we`re aiming to do in 2019. Obviously having maximum space
inside the vehicle available for passengers as customers is a benefit of
what we`re doing here.

LEBEAU: Other companies like Waymo are also developing self-driving cars
without steering wheels. And late last year, an autonomous drive shuttle
without a driver hit the Strip in Las Vegas, and almost immediately was hit
by another vehicle, which raises the question — will the public feel
comfortable in a car where there`s no way to take over steering if there`s
an emergency?

UNIDENTIFIED FEMALE: Sounds really dangerous to me.

UNIDENTIFIED MALE: I would feel pretty safe, I think. I think I would
feel pretty safe with that.

UNIDENTIFIED MALE: I would prefer if there was an option where you could
take control over the vehicle and remove it from automation. But I think
hopefully that the company put their time and effort and tried to protect
the users.

LEBEAU: GM`s steering-wheel free car does have an emergency button riders
can push if they need to stop the car immediately. But otherwise, General
Motors (NYSE:GM) says these cars will know where to go without a driver or
a steering wheel.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

(END VIDEOTAPE)

MATHISEN: And before we go, let`s take another look at today`s record day
on Wall Street. The Dow advanced 228 points. Nasdaq added 49. And the
S&P 500 up 18.

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

MATHISEN: I`m Tyler Mathisen. Thanks from me as well. Have a great
weekend, everybody, a long weekend. We`ll see you Monday for a special
edition of NBR.

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) 2018 CNBC, Inc.

 

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