Nightly Business Report – January 30, 2018

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

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Sharp selloff. A second
day of triple digit declines for the Dow, marking the first time, the first
time this year, that the major indexes have fallen in back to back
sessions.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Health care tape worm. Warren
Buffett, Jeff Bezos and Jamie Dimon are joining forces to create a system
that costs less and gets better results.

MATHISEN: And State of the Union. The president addresses the nation
tonight on Capitol Hill, and the economy will be front and center.

Those stories and more on NIGHTLY BUSINESS REPORT for Tuesday, January
30th.

HERERA: Good evening, everyone, and welcome.

It was ugly. Stocks fell sharply, extending yesterday`s losses. Health
care shares took a tumble. And we`ll have more on that in just a moment.

And bond yields rose to a near four-year high and that was enough to batter
stocks, falling the most since August. The Dow Jones Industrial Average
dropped 362 points to 26,076. The Nasdaq was off 64, S&P 500 was down 31.

Bob Pisani has more on today`s selloff from the New York Stock Exchange.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: The steep selloff
continued today on Wall Street bringing the Dow down 400 points at the
session lows. We haven`t seen that for a long time.

Remember this gain, the gains with the last few months has been go long the
global economy. That`s exactly what was weak today. Energy,
semiconductors, industrials, these are key economic benchmarks — they were
all down today. What`s going on?

Well, there are several risks to the market right now. Call it a stew.
First, rising interest rates continue to be a big story. Bond yields are
hovering around four-year highs.

And with a potentially more aggressive Federal Reserve this year, investors
are starting to get a little bit nervous.

Second, there is the earnings question. Some are arguing that the
acceleration in earnings growth this year that powered the markets higher
will start to slow down next year. That might imply a lower multiple for
markets.

Finally, sentiment levels are at their highest levels in many years.
Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC), Merrill Lynch released
their market indicators, they hit their highest in at five years for
Merrill, and 10 for Goldman. That signals a possible correction could be
coming in the near future.

The global markets have enjoyed their strongest start in any year for three
decades. There is little wonder we are starting to see some pent up
selling pressure starting to appear. So far, this January has been more
volatile. We haven`t seen that in a while. The S&P has made moves of half
a percent or more about 10 times already this month. That`s a rarity in
the last couple of years.

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

(END VIDEO CLIP)

MATHISEN: Federal Reserve policymakers are making. It is Janet Yellen`s
last first time in the chair. And while no interest hike is expected to be
announced tomorrow, investors wonder what lies ahead.

Steve Liesman has the results of the latest CNBC Fed survey.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Market participants
are looking for a bit more from the Federal Reserve this year when it comes
to interest rate hikes. Ninety-five percent of our 40 respondents see no
hike coming at the meeting this week and 90 percent say the first 25 basis
point rate hike will come in March. But they are looking for three rate
hikes this year, actually 3.21. What does this mean, it means your average
person looks for three and the second most common answer is actually four.
That`s a change from the last survey.

Now that we`re adding it and starting to think about that fourth rate hike
this year, and you can see that in the outlook for rates. The 2018
average, 2.2 percent or a full percentage point and then some when it comes
to the fed rate hikes. 2019, 2.8, not much more in 2020. But the long
run, 3.2 percent, that`s also higher.

Overall looking for more in the way of interest rates. You can see that
also in the 10-year yield where the current rate is around 2.7, going to
3.0 at the end of this year and 3.4 in the end of 2019. That`s not bad.
If you think about where we were year ago, that was really the expectation
for this year at the beginning of 2017.

Higher rates may weigh on the market, 2,854 was close of the business
yesterday, 2,937. So, it just really 3 or 4 percent up from where we are
right now by the end of this year. And just 3,005 for the S&P by the end
of 2019.

But even if we get higher rates, we`ll also get may be a little bit get
more growth. Take a look at the GDP forecast. We got up, up, up in each
successive survey, adding about half a point to close this year. The
expectation is almost 3 percent, 2.7 percent for next year. These are
better numbers that we have seen in because of the tax cuts.

That`s the really expectation this year, that the tax cuts drive better
growth, at least this year and into next year.

For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.

(END VIDEOTAPE)

HERERA: As we mentioned earlier, today does mark the second down day for
the major averages. Though, is this market selloff just a blip or does it
signal the beginning of a more meaningful pullback?

Joining us on set is our bear, Peter Boockvar, chief investment officer of
Bleakley Advisory Group and editor of “The Book Report”. He thinks the
market has already seen its best days for this year.

And joining us tonight as our bull is Peter Mallouk. He`s the chief
investment officer of Creative Planning.

Gentlemen, nice to have you here. Great night to have you.

PETER MALLOUK, CREATIVE PLANNING CEO & CIO: Good to be here.

HERERA: You know, Peter Mallouk, let me start with you, if I could. It
was kind of two very rocky ugly days. What makes you think that maybe this
is the end of it and we could turn higher again?

MALLOUK: Well, I don`t know that this is the end of it, but I think it`s
way too early to call this the downfall of the markets. What isn`t
abnormal is today. What`s abnormal is the 450 days that have preceded
today where we broke a record for the most days where — with very low
volatility in a row.

Last year, the first year in history that the global markets are positive,
every single month. That`s not normal. It`s normal for the market to go
and down, to have it`s up, to absorb some less than incredibly positive
news, but there`s really not substantial no new news.

We just need to have a breather. I think it`s very positive for the market
to eventually have some minor pullbacks, maybe even somewhere along the way
get the corrections that are supposed to happen anyway, when we have to go
all the way back to the beginning of 2016 to see a correction, and that
barely qualified as one. And so, that to me is what`s abnormal is the lack
of any volatility.

MATHISEN: Peter Boockvar, you are our bear tonight. You don`t look too
frightening. You`re a nice guy. You`re not hairy. You are all good.

But you say it wouldn`t surprise you if we hit the high for the year last
Friday. Why do you feel that way?

PETER BOOCKVAR, BLEAKLEY ADVISORY GROUP CIO: I tie it to interest rates
and global monetary policy testimony world is changing. The key driver
this bull market was P/E multiple expansion via zero rates and QE. So,
now, we have on what certain metrics the most expensive market we`ve ever
seen and now we have rising interest rates and we have an intensification
of Fed tightening, via quantitative tightening and more rate banks. And we
have the ECB pulling back and the Bank of Japan, and the Bank of England
and Bank of Canada. And I`m worried that we`re going to see multiple
compression, which will be a damper on markets this year.

MATHISEN: So, the last couple of days have been a tremor. Do you see an
earthquake coming? Do you see something different than that?

BOOCKVAR: I think it will depend on the rapidity of this move higher in
interest rates. If it continues, if we do see 3 percent plus in the 10-
year, that`s going to be a really big deal because again, it happens in the
context of an extraordinarily expensive market and an economy that has
become addicted to very low interest rates.

HERERA: OK. Peter Mallouk, you made the case, though, that we have a very
healthy economy, underlying, regardless of whether it`s addicted to low
interest rates. But can you still — given the run-in this market, can you
still find value here at home if indeed you think the bull case is still
intact or do you need the look elsewhere?

MALLOUK: Well, I think — first of all, I don`t think the markets are
overvalued. If you go back to 2010, you know, everyone complained that we
had high unemployment, and corporations didn`t have enough cash, we didn`t
have good earnings growth.

And today, we have the opposite. We have exceptionally low unemployment.
We are getting into the threes now, where you see wage inflation, which is
a very good sign of economic strength. And I think that the markets are
also seeing corporations holding their record cash, and they look at more
people employed. And people will probably have more money in their
paychecks because we are going to see wage inflation.

If you have unemployment go from 7 percent to 6 percent, you want to hire
somebody, well, they`re unemployed. You go hire the unemployed person.
When it goes from 4 percent to 3 percent, you have to hire them from
somebody else and to do that, you have to pay them more.

It`s that wage inflation that starts to create real inflation, which is why
the Fed would raise rates. So, it is an interesting circle because the Fed
is only going to raise rates if they think the economy is strong enough to
hold it.

HERERA: Right.

MALLOUK: That doesn`t mean they are perfect at it. They`ll have some
false starts. I`m not saying the markets are valued but it makes sense
where it is. It makes sense that we expect greater earnings going forward
than we did five years ago when the market was at a lower price.

HERERA: All right. To be continued, gentlemen, thank you so much. Peter
Boockvar with Bleakley Advisory Group. Peter Mallouk with Creative
Planning.

MALLOUK: Thank you.

MATHISEN: As we reported, health care stocks dragged the market lower
today. Shares of insurers, drugstores, drug distributors — they all fell.
The decline was in response to new venture that could disrupt the industry.

And as Bertha Coombs reports, the venture is the brainchild of three of the
biggest names in American business.

(BEGIN VIDEOTAPE)

BERTHA COOMBS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Calling rising
health care cost a tape worm on the economy, Amazon`s Jeff Bezos, Berkshire
Hathaway`s Warren Buffett, and JPMorgan`s CEO Jamie Dimon say they are
joining forces, simplify their employee benefits using technology and to
try to drive down health costs. The news is seen as a shot across the bow
to insurers.

NIALL BRENNAN, HEALTH CARE COST INSTITUTE: With Amazon (NASDAQ:AMZN) in
play, it reflects an almost evangelical faith that people have that they
can disrupt established business patterns in the way they have done in many
other industries. I think we really need to see more details.

COOMBS: It`s still in the early planning stage but what could make this
different from other employer cost cutting initial tiffs is that the firms
are forming their own company. The question is whether they will try to
save money by knocking out the middle men who negotiate hospital networks
and prices and pharmacy benefit contracts with drug makers.

JIM KLEIN, AMERICAN BENEFITS COUNCIL: I think those who are selling their
shares in health care stocks are reading this all wrong. The middle men
here have an interest that is aligned with the employers. They are the
intermediaries with the health care providers. And the main problem with
health care these days is the fact that costs and quality are not aligned.

COOMBS: In fact, health care firms hailed the news. Aetna (NYSE:AET) and
CVS (NYSE:CVS), which want to merge their insurance and pharmacy into an
integrated health clinic service, both said they would welcome the chance
to help the firms with the new business model. Until now, the fear had
been that Amazon (NASDAQ:AMZN) would enter health care as a competitor to
existing services. But combining with other employers would still put the
tech giant in the position to exert pricing pressure on the health care
industry.

TRACY WATTS, MERCER: The best results we have seen have come from jumbo
employer efforts, from them either teaming together or doing pilot projects
on their own to prove that something is a good idea. And then everybody
else gets in line and adopts similar approaches.

COOMBS: It`s not clear how soon the new company will launch or where it
will be headquartered. But with tech giants like Apple (NASDAQ:AAPL) and
Google (NASDAQ:GOOG) also focus on health care these days, industry players
are very much bracing for continuing disruption.

Bertha Coombs, NIGHTLY BUSINESS REPORT, New York.

(END VIDEOTAPE)

MATHISEN: Let`s talk more about this very interesting partnership among
Amazon (NASDAQ:AMZN), Berkshire Hathaway (NYSE:BRK.A) and JPMorgan
(NYSE:JPM) and what it might mean for the health care industry. Joining us
to discus that is Michael Baker, he`s a health care analyst with Raymond
James.

Michael, I have to confess I am a little bit unclear on what these three
intend to do and how they intend to do it. Can you shed any light on that?

MICHAEL BAKER, RAYMOND JAMES HEALTH CARE ANALYST: Yes. I mean based on
what they said so far, I think the initial focus will be on enhanced
transparency because we as consumers are being asked to pay more, given
those high deductible plans, yet we don`t have the tools in hand to
effectively shop and balance costs and quality. So, I think that that will
be one thing.

I think also internally they will try to figure it out first before they
try and spread it out. I was also kind of interested to hear that they
planned or selected kind of a non-profit organization, because if you
really wanted to make a big bang with a new entity, you might want to start
for profit, kind of drive more capital in. So, at this point, it doesn`t
look like they are trying to build their own health care system. It looks
like they are trying to make it more fish and put, as others have said,
margin pressure on it, so to speak.

HERERA: And what do you think about their odds for success? I mean, we`ve
seen Amazon (NASDAQ:AMZN) disrupt so many different industries very
successfully. And these are three really smart men. Maybe that`s why the
stock sold off so dramatically today.

But what do you think their success might be? It`s a big undertaking.

BAKER: No, it`s a big undertaking and it is a very fragmented industry. I
mean, it`s one of the few service areas where we don`t know the costs up
front. We don`t know until after the process.

So, to date, what health care investors have kind of learned is that moves
like this tend to be more evolutionary change rather than revolutionary
change. There is actually a consortium known as the health transformation
alliance, which is a group of 40 employers, they are starting to make some
change in the pharmacy benefit area. But I would say evolutionary at this
point. Obviously, the details are scarce at this point and it remains to
be seen but that would be my bet at this point.

MATHISEN: So, quick answer here. I agree with you totally. The whole
business is so fragmented. And you have all kind of players eager for
profits and often making huge profits through this. But today, the stocks
almost across the board went down. Do you think that that stock retreat is
going to be enduring because of this? Or was it a one-day reaction?

BAKER: No. I think there will be fits and starts. I think part of the
reason we saw that, if you remember late last year, there were a lot of
concerns that it would be Amazon (NASDAQ:AMZN) coming in. They would
either buy a PBM or buy a distributor and dramatically change that. And
then it started to abate as it isn`t seem they were following through on
their licenses.

So you had an early big strong move in the health care stocks this year.
And I think you saw some pullback on that as Amazon (NASDAQ:AMZN) and its
now counter-parts raised their head again. So, you will see fits and
starts. The next big announcement will be the CEO.

MATHISEN: All righty. Thanks very much Michael Baker with Raymond James.

BAKER: Thank you.

MATHISEN: You bet.

BAKER: Take care.

HERERA: Two Dow components reported earnings that topped expectations.
Pfizer (NYSE:PFE) benefitted from the new tax law and issued upbeat
guidance. The nation`s biggest drug company plans to investment $5 billion
in capital projects over the next five years. Separately, McDonald`s
(NYSE:MCD) reported super size sales and better than expected profits. The
world`s largest hamburger chain says that cheap menu items helped its
results. Both stocks traded lower, though, because it was a downside
market.

MATHISEN: All right. Time to take a look at some of today`s upgrades and
downgrades.

JPMorgan (NYSE:JPM) increases its rating on United Continental to
overweight from underweight. The firm likes the airline`s expansion plans
and says the stock is the cheapest in the sector. The price target now,
$83 a share. The stock closed at $67.01 today, up nearly 2 percent on this
very downward day.

And Nomura downgrades Yum Brands (NYSE:YUM) to neutral from buy. The firm
sites concerns about a possible deceleration in U.S. sales at Taco Bell.
The price target stays the same at $89. The stock did drop 2 percent at
$84.59.

HERERA: CVS (NYSE:CVS) Health was upgraded from buy to strong buy at
Needham. The firm calls CVS (NYSE:CVS) its top pick for 2018. The price
target on the stock raised to $100 per share from $88. Shares closed at
$80.19, down 4 percent.

Cowen says Skechers could announce a share repurchase. That firm cites
management`s optimism in its women`s base and a favorable product cycle.
The analyst calls Skechers its best idea for 2018 and maintains an
outperform rating. However, shares fell in trading today.

MATHISEN: And still ahead, open skies. Why the U.S. airlines are
celebrating a big win, and possible future expansion in the Middle East.

(MUSIC)

MATHISEN: President Trump will deliver his first State of the Union
Address tonight, and the economy is expected to get a lot of attention.

Eamon Javers is at the White House for us.

(BEGIN VIDEOTAPE)

EAMON JAVER, NIGHTLY BUSINESS REPORT CORRESPONDENT: We are told that the
president began making edits on the speech on the plane ride over the
Davos, Switzerland, last week, but the speech writing began as far back as
December. So, there has been a lot of prep time for tonight`s State of the
Union. We also know a number of officials have been involved in giving
their two cents to the president of the United States.

The White House has given a sense of some of the topics that will be
included. Take a look at the list of those.

Topics including the economy, also infrastructure, the question about
immigration and how that will be handled, trade, national security — all
of those will be pillars of this speech tonight. Gary Cohn, one of the
economic advisors who has been helping the president on the draft said
today that the president is going to be talking about infrastructure and
give us a price point for that plan.

Here`s what he said.

GARY COHN, NATIONAL ECONOMIC COUNCIL DIRECTOR: What the president is
going to talk about tonight is he`s going to talk about two key principles
on infrastructure. He is going to talk about $1.5 trillion of investment.
But more importantly, he is going the talk about streamlining the approval
process on infrastructure.

JAVERS: And something else to watch for tonight on a day in which the Dow
has been down significantly throughout the afternoon, will the president
mention the stock market? He has been proud of stocks` performance under
his presidency. He would like to mention the stock market, we are told,
but could that be awkward given the performance today? That`s something
else to watch for tonight.

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

(END VIDEOTAPE)

HERERA: Harley-Davidson (NYSE:HOG) warns of slumping demand. That`s where
we begin tonight`s “Market Focus”.

The motorcycle maker said 2017 was particularly tough with shipments
falling to their lowest level in six years as demand among young buyers
failed to pick up. The company did report stronger than expected earnings
for the latest quarter but said it believes shipments will continue to
weaken this year. Harley Davidson said it`s responding to the challenges
by cutting some jobs and closing one of its assembly plants. Shares were
down 8 percent to $50.84.

The new tax law cut into profits of the hospital operator HCA but the
company still managed to top expectations thank to a rise in patient
admissions. The health care company also said it plans to invest more than
$10 billion over the next three years and continue looking at potential
acquisition opportunities. The shares rose nearly 4 percent to $101.45.

Higher selling prices helped revenue at the home build Pulte to rise but it
was at a slower pace than analysts were expecting. Profits came in better
than expected but the company warned that rising costs due to a labor
shortage would pressure its gross margins in 2018. And so, the shares
slipped 2 percent to $32.72.

MATHISEN: Corning (NYSE:GLW) said strong sales of its gorilla glass used
in smart phones helped overall revenue rise. Those results, along with
profits, ahead of estimates. But the company did warn upcoming investments
would hurt profits in the first half of `18. Shares off 5 percent at
$32.33.

The lawn and garden company Scotts Miracle Grow posted a worse than
expected loss in its latest quarter. The company also said a slow down in
one of its subsidiaries would cause sales for 2018 to come in lower than
initially expected. Revenue for the year now figures to grow between 2
percent and 4 percent. Shares plunged 14 percent to $91.96.

HERERA: Renault Nissan beat out Volkswagen to become the world`s top
selling automaker last year. In 2017, Renault Nissan sold 10.6 million
vehicles. Volkswagen sold a little bit less. And falling one spot to
number three is Toyota (NYSE:TM), which posted group sales of 10.2 million.

MATHISEN: Well, after years of complaining about the expansion of airlines
based in the Persian Gulf, carriers here in the U.S. are celebrating a big
win tonight. Qatar Airways has agreed to changes that could help U.S.
airlines expand in the Middle East.

Phil LeBeau has the details.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: As Persian Gulf
Airlines like Emirates and Etihad have expanded into the U.S., their growth
has been a sore spot for U.S. airlines. They claim the gulf carriers are
subsidized by their government, making it hard to compete on flights to the
Middle East and parts of Asia.

But today, the U.S. and Qatar agreed to changes that should help U.S.
Airlines. Qatar Airways will not add flights to the U.S. from places like
Europe, which could undercut transatlantic competition. In addition, Qatar
Airways will agree to accounting standards to ensure financial transparency
and limit the use of government subsidies.

REX TILLERSON, U.S. SECRETARY OF STATE: The president has made this matter
a priority, and the outcome we achieve will ensure a level playing field in
the global aviation market.

LEBEAU: Delta is one airline celebrating the victory which could
eventually lead to the airline re-establishing flights to parts of the
Middle East.

ED BASTIAN, DELTA AIRLINES CEO: We need to have a presence in the Middle
East. We need to have a presence in India and other parts of Southeast
Asia which we have been out. And by shining the light on the scope of the
subsidies and providing transparency it`s going to allow us all to make
long term investment decisions to go into markets knowing your government
is standing behind us.

LEBEAU: Almost a year ago, Bastian and other airline CEOs met with
President Trump at the White House. They raised the issue of Persian Gulf
airlines competing unfairly, a complaint they have made to other
administrations in the past, which is why U.S. airlines are celebrating a
changge that many never expected to happen.

BASTIAN: We are being heard. We appreciate it. Every time I have talked
to President Trump, is basically, what can we do to help you help America?
And this is what he has done, and we strongly, strongly applaud him on
that.

LEBEAU: Next up for the Trump administration, trying to negotiate a
similar agreement with Emirates and Etihad Airways, two airlines based in
the United Arab Emirates.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

(END VIDEOTAPE)

MATHISEN: To read more about this win for U.S. carriers, head to our
Website, NBR.com.

HERERA: Coming up, here come the tech earnings. And the bar is high.

(MUSIC)

MATHISEN: It is a big earnings week, but one of the markets` best
performing sectors. That would be technology.

Tomorrow, Microsoft (NASDAQ:MSFT) and Facebook (NASDAQ:FB) report results,
followed by Alphabet, Amazon (NASDAQ:AMZN), and Apple (NASDAQ:AAPL), the
three A`s on Thursday. The sector has performed well, which is why there
is a lot to watch in these upcoming results.

Josh Lipton has more.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: The bar is high. The
sector is expected to post earnings growth that outpaces what is expected
for the overall S&P 500. With that growth comes some well-known risks.
Lawmakers have been asking a lot of questions, specifically about how
Russian operatives used Google (NASDAQ:GOOG) and Facebook (NASDAQ:FB) to
try and influence last year`s presidential election.

European Union regulators also targeted tech, including leveling a nearly
$3 billion fine against Google (NASDAQ:GOOG). Despite those risks, some
say these companies are still smart investments, that their core
advertising businesses are strong, and valuations, they say, remains
attractive. Tech investors are also interested in the impact of new tax
law given that potentially hundreds of billions of dollars could now be
returned to the U.S. Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Cisco
(NASDAQ:CSCO), Alphabet, and Oracle (NASDAQ:ORCL) alone have nearly $600
billion stashed overseas.

How could tech companies put repatriated cash to work? Likely with stock
buy backs and dividends.

Then there is Apple (NASDAQ:AAPL), the world`s largest public company. CEO
Tim Cook is facing new questions with reports suggesting that the iPhone X
isn`t selling as well as expected. Apple (NASDAQ:AAPL) is not commenting
on these stories but even if the X isn`t living up to expectations, the new
and less expensive 8 and 8 Plus could pick up the slack and help Apple
(NASDAQ:AAPL) deliver good results on Thursday.

For NIGHTLY BUSINESS REPORT, I`m Josh Lipton, San Francisco.

(END VIDEOTAPE)

HERERA: And before we go, here`s another look at the market slide today.
The Dow dropped 362 points, and that was off the lows to 26,076. The
NASDAQ was off 64. The S&P 500 down 31.

That will do it for us tonight. I`m Sue Herera. Thanks for joining us.

MATHISEN: And for me as well. I`m Tyler Mathisen. Have a great evening,
everybody. We`ll see you tomorrow.

END

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