Transcript: Nightly Business Report – January 19, 2018

19ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Shrugging it off. Lawmakers wrangle in Washington over a budget deal but investors aren’t fazed, sending stocks to new records.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Open house. The housing market is tight. And the upcoming spring selling season could be more competitive than ever.

HERERA: Market monitor. Why our guest tonight says now the time to make some smart investment in smart tech.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Friday, January 19th.

MATHISEN: Good evening, everyone, and welcome.

We’ve seen this movie before. Democrats and Republicans spar in the Capitol over funding the government or partially shutting it down. We’ve come to that 11th hour again today, and even though the plot is familiar, the drama is always captivating.

Hours ahead of a midnight deadline, Senate minority leader, Chuck Schumer, met with the president at the White House. The senator said progress was made, but disagreements remain.

Well, the drama in D.C. may have been captivating. But on Wall Street, it was naptivating. Investors mostly yawned and put on a drowsy smile. The S&P 500 and the Nasdaq hit new highs. The Dow was up, so were bond yields, sending bond prices lower.

Today, the Dow Jones lost 53 points to 26,071. Nasdaq gained 40. And the S&P 500 added 12.

So, if a possible government shutdown wasn’t top of mind for investors, what the heck is?

Bob Pisani takes a look.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Stock rose fractionally today. The markets have already had a banner start to the year but many are concern had the prospects of a government shutdown could derail the rally.

Well, maybe, but based on history, it’s highly unlikely. In last few decades, stocks have barely budged in the days during a government shutdown. Beyond the shutdown, really, there is plenty of other forces that are driving the markets and may be affecting the markets this week.

Remember, we essentially went sideways. A big concern for the market right now is the bond market. The ten-year treasury yield rose to a near three-year high and it doesn’t seem to be a lot slowing it down. If rates continue to rise, that could be a major problem for stock market investors.

Also, there’s the energy market. Crude oil prices are up 10 percent over the last month, but this talk of oil beginning to up to out. So, U.S. oil output is expected to break through 10 million barrels per day and IEA said it expects U.S. production to overtake both Russian and Saudi Arabian production.

That’s good news but it’s putting a lid on the gains this year. Energy stocks, which have had been moving up, were all down this week.

For NIGHTLY BUSINESS REPORT, I’m Bob Pisani at the New York Stock Exchange.

(END VIDEOTAPE)

HERERA: The overall impact of a shutdown on the market maybe minimal, but sectors within the market respond differently, looking at data back to 1980. On average, the energy sector is up 2 percent during a shutdown, making it the best performing group. On the flip side, the information technology sector is the worst performing, falling nearly 2 percent.

But big gains come after the government reopens because two weeks after the government is back in business, the Dow and the S&P 500 have seen gains averaging more than 3 percent, with the Dow trading positively 100 percent of the time.

MATHISEN: Well, despite the back and forth in Washington, money flowed into the stock market at the fastest pace ever during the past four weeks. According to the latest survey from Bank of America Merrill Lynch, mutual funds and ETFs that focus on equity saw $58 billion of fresh money flowing in. The survey sites investor fear of missing out, a phenomenon we’ve reported on.

New money didn’t just go into exchange traded funds that passively track the market but also into actively run funds which have seen outflows over the past couple of years.

HERERA: Investor enthusiasm is indeed high. But is it too high?

And next week marks a big test for the market. Earnings come out.

Here to talk about what investors should be watching is Kevin Caron, Washington Crossing Advisers co-founder and portfolio manager.

Welcome back, Kevin. Good to see you, as always.

KEVIN CARON, PORTFOLIO MANAGER, WASHINGTON CROSSING ADVISORS: It’s good to be here. Good to be here.

HERERA: You know, the issues that may be affecting the market, Bob Pisani mentioned one, and that is rising bond yields. But they are rising from historical low levels. Are you worried about the increase in interest rates?

CARON: We are matching it, but we are not particularly worried it because if you look at where it’s coming from, it’s coming from a much better economy. We are seeing investment spending picking up very strongly. And this is a big thing because for four years before this, before let’s say the middle part of 2017, investment spending was really quite weak and the economy was weak.

We are seeing that pick up. That’s actually good for growth. And the reason that the rates are rising is because we are seeing firmer prices.

This is something that the Fed has been looking to achieve for a long time. And now, we are getting inflation back up to about 2 percent. So, everything looks fairly good. And bond yields have been very low for a long time. So, we just see this as a readjustment of those yields to place where is they maybe should have been all along.

MATHISEN: You know, Kevin, I want to talk about something else, and that is the passage of the tax bill, the biggest tax bill since 1986. We all remember what happened then a year later in 1987. There was a big crash. Tell me why you think this time may be different and we are probably to the going to have a crash. Or tell me why you might worry a little bit that things are getting a little — going too far too high too fast.

CARON: Yes. Well, although the data is signaling good things in the economy, we do have to worry about valuations. Global equities have advanced very sharply in the last year, and U.S. equities are worth about $32 trillion. And to put that in perspective, the economy is only around about $19 trillion.

So, the stock market, which tends to eventually square up with the economy, looks relatively rich compared to the underlying economy.

So, if its exuberance gets to be too much, to use Alan Greenspan’s words, that eventually could end up forcing some kind of correction. So, we do need to be mindful of that.

HERERA: Where would you put money to work in this market given the level of valuing as that you just mentioned.

CARON: Well, we do like the United States from a global perspective. We think that ultimately the dollar begins to strengthen here somewhat particularly as the Fed begins to raise interest rates or continues to raise interest rates. We think that the sectors here in the United States, thing like consumer staples, health care — staple — sectors are places that have good balance sheets are places we want to focus because we are late in this cycle and we want to own companies that have very good balance sheets at this point, very consistent cash flows and we like those companies that raising their dividend consistently. So, those are the kind of things we are always looking for.

HERERA: All right. Kevin, thank you so much. You are a trooper. You are always the last one there.

MATHISEN: Yes, turn off the lights before you leave, Kevin.

HERERA: And it’s always on Friday night. But we thank you very much. Appreciate it.

CARON: Thanks. Thank you.

MATHISEN: That’s what founders do. They’re the last one.

HERERA: That’s what they do.

MATHISEN: All right. As Bob reported a moment go, treasury yields are rising and there are no signs of them slowing down. Now, that means higher rates for those who want to borrow money. Not necessarily for those who want to deposit it. And the timing for the housing market and borrowers couldn’t be worse.

Diana Olick explains.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: There is still snow on the ground in much of the nation, but the spring housing market is right around the corner. And this year, it will be more competitive than ever. There’s already a supply crisis. Not enough homes for sale. And rising mortgage rates could make that even worse.

Rates were stuck near record lows for the bulk of last year but they are suddenly breaking out. The average rate on the 30-year fixed is up nearly a quarter point to 4.25 percent, thanks to the selloff in the bond market. Rates loosely follow the yields on the ten-year treasury.

UNIDENTIFIED MALE: So, three bedrooms, right?

UNIDENTIFIED FEMALE: Yes.

OLICK: Higher rates could keep potential move up sellers from listing their homes because they dent want to lose the rock bottom rate they locked in a couple of years ago. That reduces supply further. A rising rate environment could also cause more buyers especially those on the margins to jump in even faster now before rates rise even further and price them out.

JOHN BURNS, JOHN BURNS REAL ESTATE CONSULTING CEO: One of the things I think is going to happen, and my realtor friends tell me this too, is they are concern people are not going to sell their home and just stay in it. If there are fewer sellers are selling their home, there is going to be few homes on the market, and what does that do to home prices? They go up.

OLICK: And they’ve already been going up, accelerating their gains as demand rises and supply falls.

Higher interest rates usually cause home prices to cool off, because buyers have less purchasing power. But given how tight the market is nationwide, that is unlikely to happen this time around.

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

(END VIDEOTAPE)

MATHISEN: Switching gears now to a story that is also everywhere, the flu. The illness is widespread, stressing hospitals, impacting schools, some of which are closing and pressuring workplaces. One estimate puts the number of Americans sick at 11 million. And as we told you earlier, that could cost employers $9 billion in lost productivity.

Here to offer his comments on this flu season is Dr. William Schaffner. He is a professor of medicine at Vanderbilt University School of Medicine and one of the clearest spoken physicians I know.

Dr. Schaffner, welcome.

WILLIAM SCHAFFNER, M.D., VANDERBILT UNIVERSITY PROFESSOR OF MEDICINE: Tyler, good to be with you.

MATHISEN: How worrisome at all are what we hear are episodic shortages of Tamiflu and other antivirals?

SCHAFFNER: Well, they are providing local difficulties, which we hope are temporary because the company is trying to get that Tamiflu out. These are what we call spot shortages. But with the rapid distribution that we now have in this country of pharmaceuticals that should be solved pretty quickly.

HERERA: How do you rate this flu season, Doctor? I mean, we are hearing it’s the worst in nine or 10 years. Do you agree with that? And what are you seeing on the frontlines?

SCHAFFNER: It looks pretty darn bad, Sue. There’s no doubt about it. We are seeing hospitalized cases in abundance in our neck of the woods. And in my colleagues’ reports around the country, hospitals, doctors’ offices, minute clinics, emergency departments, are all stretched in caring for patients at the present time. And we have got a pretty serious virus out there causing you it. It’s called H3N2. Makes you very sick.

MATHISEN: So, a lot of people, or I certainly have read that the vaccine that was administered through the fall and into the winter didn’t really target H3N2. And so, I wonder if a lot of people just say, hey, if they can’t pick which flu is going to come, why should I bother getting the vaccination?

SCHAFFNER: Well, let me provide some good news. H3N2 was indeed in the vaccine. We have a good match with what is circulating out there.

However, the vaccine never works as well as we would like against H3N2, and that’s what caused the distress. But remember, even if you get flu, despite the vaccine, you are less likely to have the severe complications of pneumonia, hospitalization and dying. I’ll take that any time.

HERERA: Anytime, yes.

Do you have a sense of where we are in terms of the cycle? Have we peaked, do you think? Is it going to be a longer flu season?

SCHAFFNER: We are still going up. So I don’t know that we’ve peaked yet. So, there is lots more flu to come I’m afraid.

MATHISEN: One very quick question. I was on an airplane flight earlier this week. I saw several people wearing surgical masks. Is that a good idea? Does it protect me at all?

SCHAFFNER: No evidence that it works conclusive and that’s why it’s not universally recommended.

MATHISEN: Dr. Schaffner, always great to hear from you. Dr. Schaffner is with Vanderbilt School of Medicine.

HERERA: Still ahead, as goes Netflix so goes big tech. What to expect when the company reports earnings on Monday. But first, here’s a look at how the major indexes fared this week, all were higher.

(MUSIC)

MATHISEN: Well, it was a rough week for General Electric shareholders. You could say that again. The conglomerate, once the world’s most valuable company, stumbled for a fifth straight session, capping its biggest weekly percentage drop since the financial crisis. As we have reported, the Dow component announced a larger than expected impairment charge early in the week and the CEO suggested that he is considering a possible breakup of that once mighty company.

HERERA: Amazon is raising the price of its prime monthly membership by nearly 20 percent. That fee is increasing to $12.99 a month from $10.99. The hike comes less than two years after Amazon introduced the monthly payment option as a way to attract new members. There is no price change if you pay annually. The price of Amazon, like its monthly membership fee, rose in trading today.

MATHISEN: Netflix shares finished 2017 up more than 25 percent. The tear has continued into 2018. Since January 1, the stock has gained another 14 percent, easily outpacing the S&P 500. And on Monday, shareholders will get a sense of whether the run can continue when the streaming video company reports its profits.

Julia Boorstin tells us what to expect.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: When Netflix reports earnings, it’s the company’s subscriber number that draws the most interest, the key indicator of just how fast the Netflix is growing, with investors hoping that the company will top its own forecast of 6.3 million new subscribers in the fourth quarter, over 5 million of those from overseas.

BARTON CROCKETT, FBR CAPITAL MARKETS: We’ve thought that they would have peaked out in the United States a while ago. And they continue to grow faster than we would have anticipated. Internationally, it’s still very early days. So they are still many years from saturation internationally.

BOORSTIN: With Netflix shares up about 60 percent in the past year and up about 10 percent since the company’s last earnings report, the pressure is on for Netflix to keep up its growth. With analysts projecting revenue will grow by nearly one third from the prior year, while earnings are projected to grow by 175 percent over the same period.

On Netflix’s earnings call, investors and analysts will be looking for CEO Reed Hastings’ guidance in what to expect in terms of growth, both in users and of margins in the year to come. And whether the company plans to invest even more in content than the up to $8 billion it already announced it will spend this year.

CROCKETT: What’s happening is their originals, the Netflix originals are what are now driving the growth in the service. And that is making it such that the competition that Netflix is facing, the growing competition, isn’t really mattering.

BOORSTIN: And Netflix is facing more competition than ever as Amazon continues to investment in content, amid reports that Jeff Bezos is focused on finding the Amazon equivalent of “Game of Thrones”. And Disney is expected the ramp up investment in Hulu once it gains a majority stake through its Fox acquisition, raising the bar even higher for Netflix.

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

(END VIDEOTAPE)

HERERA: Security company ADT has an alarming Wall Street debut and that’s where we begin tonight’s “Market Focus”.

Shares of ADT opened at $12.65 and fell from there, the lowest expected open in the $17 to $19 range.

But the company’s CEO wasn’t fazed.

(BEGIN VIDEO CLIP)

TIM WHALL, ADT CEO: We had a chance the meet all of the investors, all new for me. Grew up working with my parents, so the chance to actually represent ADT is a humbling opportunity. You know, performance always matters. So, you have to put a few quarters under our belt, I think the people will like what they see.

(END VIDEO CLIP)

HERERA: Shares of ADT dropped more than 11 percent on the day, finishing at $12.39.

Wedbush Securities raised its rating on Nike to outperform. And that was enough to kick the sneaker maker’s stock into high gear. Wedbush says Nike is set to grow North American sales as it debuts new products later year, including several that are set to echo the classic Nike styles of the past. Nike shares jumped almost 5 percent on the upgrade news to $67.21.

An experimental drug aimed at treating cancer of the bile duct achieved some promising results in Scotland. And that news helped drive up shares of drug maker Nucana. The drug is still in early phase testing. Nucana is a small cap stock. It rose $6, which is more than 41 percent to $21.20.

MATHISEN: Kansas City Southern posted fourth quarter profits to beat expectations. Revenue though came up a little bit short of estimates. The news did slow the railroad stocks run. It had been up as much as 6 percent since the start of the year. But today, shares down more than 1 percent at $110 on the bottom.

And Bunge, one of the world’s biggest traders of crops like soy beans and corn, reportedly being eyed by a takeover by Archer Daniels Midland. That’s according to “The Wall Street Journal”. But “The Journal” says ADM might fine itself in a bidding war because Bunge was also approached by a mining conglomerate Glencore last May. Bunge shares were initially higher in after-hours trading. They ended the regular day up 11 percent to $77.56. ADM shares unchanged in the extended session following a percent gain today. Shares closed at $40.96.

HERERA: Tonight’s market monitor is betting on the power of smart technology. Last time he was on in August, he liked MGM Resorts, which up is 15 percent. Activision Blizzard, which is up 15 percent. And the IShares Core MSCI Emerging Markets ETF, which is up 15 percent.

Joining us is Ross Gerber. He is the president and CEO of Gerber Kawasaki.

Welcome back. Nice to have you here, Ross.

ROSS GERBER, PRESIDENT AND CEO, GERBER KAWASAKI: Thanks. Thanks for having me.

HERERA: Let’s start first of all with your first pick which his Tesla. You think they have caught up with some of the issues that were plaguing the company for a while?

GERBER: Yes, Absolutely. They had to get the Model 3s out the door. I think they pretty much dealt with the battery issues that were preventing them from reaching their goals. And we are seeing the cars coming off.

But more importantly, the car is amazing and it’s probably the best automobile ever made that combines technology, smart technology like autonomous driving as well as it willing an electric car so it doesn’t use any gas. So, the cost of operation is very, very low relative to a gas car.

So we are very bullish on the future of Tesla?

MATHISEN: Your second pick is a small cap company called Control4. What do they do and why do you like it?

GERBER: Well, it’s also — it’s a smart home product. In the higher end homes Control4 kind of dominates. So, it’s really just a combination of hardware and software in your home to run your entertainment systems, lighting, security, and everything else.

Control4 is a dominant player in the high end market and we think Google or Amazon which has been focused on the lower end of the market will want to go up market and Control4 is the player.

HERERA: And you still hold MGM, which we mentioned is up considerably. You think it has more room to run.

GERBER: Absolutely. It just recently broke out from a $34 price range here. It’s moving higher now. But they’ve got so much going for them. And their play is online gambling for sports betting being approved by the Supreme Court this year and all the sports teams coming to Vegas driving new incremental revenue in Vegas for not only online but also off line betting on sports. But also, the second side is they are opening up another casino in Macau.

China is hot. It’s growing faster than what people realize. And Macau gaming company has been a wonderful source of income for them. And we expect that to continue.

HERERA: All right. On that note, thanks, Ross. Good to see you again.

GERBER: Good to see you, too. Thanks for having me.

HERERA: Ross Gerber of Gerber Kawasaki.

And to read more about Ross’s stock picks, you can go to our Website, NBR.com.

MATHISEN: And coming up, why marijuana isn’t quite the cash crop some California business owners thought it would be.

(MUSIC)

HERERA: Here’s a look at what to watch for next week. On Tuesday, a number of Dow components report their earnings, including J&J, P&G, Travelers and Verizon. Also on Tuesday, the World Economic Forum in Davos gets underway, bringing together business leaders and heads of state to discuss the global economy.

On Wednesday, we will find out if there was a rush to buy homes at the end of the year with the release of existing home sales. And that’s what to watch for next week.

MATHISEN: Tomorrow is the one year anniversary of President Trump’s inauguration. It’s been an eventful year in Washington and, of course, on Wall Street. During the past year, the S&P 500 index has returned more than 25 percent and according to Market Watch, more than half of the index’s 500 stocks have seen gains of 20 percent or more.

HERERA: The fast growing marijuana industry is facing a growing number of challenges, even in states where recreational pot is legal. Take California for instance. Legalized creational marijuana went into effect at the start of the year. And many thought business would boom.

But as Aditi Roy reports, that’s not necessarily the case.

(BEGIN VIDEOTAPE)

ADITI ROY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Ozzie Ozkay-Villa is a 34-year-old mom of two, lives s in upscale Marin, California, owns a business, and consumes marijuana-laced products almost every day.

OZZIE OZKAY-VILLA, MARIJUANA CONSUMER: When the kids are home and we’re having maybe a little bit of a rough patch, I might use a little bit just to ground myself and I just feel like I’m a much better parent.

ROY: She’s exactly the type of customer marijuana companies like Kiva Confections, which makes cannabis-laced chocolate are going after, especially now that California’s legal marijuana market is transitioning from medical to recreational, bringing in more potential customers and revenues.

KRISTI KNOBLICH PALMER, KIVA CONFECTIONS CO-FOUNDER: The opportunity in California is huge.

ROY: Kristi Knoblich Palmer is the cofounder of Kiva, a leading producer in marijuana edibles, a segment of the marijuana industry that seems to be exploding.

One new study by marijuana delivery start-up ease reports edibles are among the most appealing cannabis products to millennials. But sales of flowers or straight up marijuana went down 45 percent during the past year. Kiva is courting new users, or ones on the fence through low dosage products like their petra mints.

KNOBLICH PALMER: It focuses on micro dosing. So, allowing people to consume the minimum amount of cannabis while feeling the benefits without any of the negative effects. Those have been nicknamed mom mints by consumers because they’re perfect for who you just described, a working mom or dad.

OZKAY-VILLA: They are also very discrete. It’s not like I’m going to bathroom and pack a pipe.

ROY: But while demand for their products might be high, Kiva says it’s facing significant regulatory hurdle in capturing those sales. As a distributor, Kiva can only supply to other recreationally licensed companies. But many cities haven’t even started issuing recreational licenses, so Kiva is only supplying to around 100 dispensaries, versus the 1,100 normally an their roster when purely medicinal.

And to meet new packaging requirements, workers have to manually re-label products. The company has doubled its packaging staff and is paying for more hours and supplies. The company says new regulations and taxes have hiked their costs 45 percent. That means higher prices for their customers.

Still, Knoblich Palmer is hopeful that once they get over the shock of new regulations, the market opportunity will worth it.

KNOBLICH PALMER: People are excited about it and curious, and interested in the benefits of cannabis and how that might help them. So the opportunity here is huge.

ROY: Palmer says it could take up to a year before the company meets the challenges of the new regulations.

For NIGHTLY BUSINESS REPORT, I’m Aditi Roy, Oakland, California.

(END VIDEOTAPE)

MATHISEN: And before we go, let’s take another look at the day and the week on Wall Street. Despite the 11th hour negotiations in Washington, to reach a budget deal, a deal that may or may not happen, stocks finished higher. The Dow rose 53 points to 26,071. Nasdaq and S&P 500, well, they both finished at fresh records. And for the week, all of the major indexes were higher by about 1 percent.

HERERA: And who knows what will happen next week?

MATHISEN: Yes.

HERERA: Because this market is surprising almost everybody.

That’s NIGHTLY BUSINESS REPORT for tonight. I’m Sue Herera. Thanks for joining us.

MATHISEN: And thanks from me as well. I’m Tyler Mathisen. Have a great weekend, everyone. And we will see you here on Monday.

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