Transcript: Nightly Business Report – February 12, 2018

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Wall Street rallies. Stocks
recover almost half of their losses from the recent sell-off. But
questions remain about the health of this bull market.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Mounting debt. The White
House proposes a nearly 4.5 trillion budget that calls for more spending
and widens the deficit.

HERERA: The big fix. Can $200 billion be turned into $1.5 trillion to
improve the country`s infrastructure?

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Monday,
February 12th.

MATHISEN: Good evening, everyone, and welcome.

Stocks soared to start the week, staging a powerful comeback following the
worst week for equities in two years. The rally today was broad with 11 of
the 12 sectors in the S&P higher on the day and it came even as treasury
yields move back towards four-year highs. The Dow Jones Industrial Average
advanced 410 points to 24,601, capping its strongest two-day surge since
mid-2015. The NASDAQ added 107 and the S&P was up 36.

Now, the gains follow a heavy bout of selling that dominated Wall Street
over the past two weeks and there are still a lot of questions about the
health of the Wall Street bull.

Mike Santoli picks it up from there.

(BEGIN VIDEOTAPE)

MIKE SANTOLI, NIGHTLY BUSINESS REPORT CORRESPONDENT: One of the sharpest
market drops in years has stirred up a new debate on Wall Street. This is
simply a needed pullback for stocks or a sign that the bull market might
end before its ninth birthday next month?

And falling more than 10 percent of a less than two weeks as of last week`s
low point, the major indexes suffered the fastest double digit decline from
a record high in 80 years. While jarring, the swiftness of the move
actually supports the idea that this is likely a painful correction rather
than the start of a more prolonged bear market that would send stocks down
20 percent or more.

Typically, a bear market doesn`t begin so suddenly from a point of broad
strength but develops over the course of months as the market slows down
and is supported by fewer and fewer stocks and sees a buildup in
volatility. The fact that economic signals outside of stocks have remained
subdued is another hint that a bear market has not begun. Corporate
earnings forecast, leading economic indicators and credit conditions have
held up well since equities peaked in late January. Bear market outside of
recessions have happened in the past, but not too often.

This makes the market weakness look more like a quick adjustment in an
expensive high momentum stock market to somewhat higher interest rates and
rising inflation expectations. How long such an adjustment might take and
where it might take stock prices is hard to tell. Some traders took heart
in last week`s strong rebound which had some features of a pretty good
short-term base for stocks.

Still, corrections tend to play out over a longer period than just a few
weeks. And often, they revisit their lows to check whether long-term
investors will step in to buy at those depressed prices. At this point,
the key indexes had simply slid back to levels since Thanksgiving and are
nearly flat for 2018.

Taken together, the weight of the evidence suggests for now that this bull
market is not broken but just bent.

For NIGHTLY BUSINESS REPORT, I`m Mike Santoli.

(END VIDEOTAPE)

HERERA: Joining us to talk more about what might be in store for this
market is Michael Farr. He is CEO and founder of Farr, Miller and
Washington.

Good to see you, Michael.

MICHAEL FARR, CEO AND FOUNDER, FARR, MILLER AND WASHINGTON: Thank you,
Sue. Nice to see you.

HERERA: Let`s start with where mike left off. Is the bull market broken
or just bent in your opinion?

FARR: Well, it`s certainly bent for now, and I don`t — I don`t have a
sense that it`s broken, though this has the stuff that could get us there.
Certainly, the volatility that we`ve seen, right, the algorithms that have
had these really sharp swings, but I think what we`re seeing, you know, is
this really change of menu for stocks. We have been feasting on low-
interest rates for years. Now, the Fed is changing rates and we`re now
finding our nourishment from Capitol Hill, from tax cuts and from a whole
lot more spending.

So, it makes sense that this change of diet would be rough for stocks. It
could get, I think, probably a little bit rougher still. You know, this
volatility today, upside volatility, 400 points, nobody minds up side
volatility. It`s down side volatility and breaking that 200-day moving
average on Friday, last Friday, means that we probably go back and test it
and we still got some red ink in our future.

MATHISEN: How does Jerome Powell, the new Fed chief, thread this needle?

FARR: He`s got a very tough job, Tyler. You know, Jay Powell`s a very
thoughtful guy. I think he has to stick to his guns. I think he can`t
flinch, because, previously, over the last number of years, when stocks
would go down, the Fed, some Fed governor would step up and say, oh, well,
the Fed will be there or we`re going to ease rates or do something.

The Fed has reversed their position. So, he needs to stand firm here. And
I expect a rate hike at the next meeting. If we have three rate hikes this
year or four rate hikes, that takes mortgages over 5 percent. I think we
really have a lot that we need to focus on particularly on the interest
rate side of the picture.

HERERA: Are you doing some buying in here on these wild market days where
we`re down dramatically, Michael?

FARR: Not a lot, no. We tend to get — as far as we`re concerned, you
know, the time to really get your house in order is before the hurricane
hits. So, we had most everything we wanted in place where we wanted it.

I have a shopping list, and I certainly have a couple of names I`d like to
pick up on a little more weakness. I think we`re going to have time.

MATHISEN: So, what are the next numbers, economic numbers that you`re
going to have your eye on to tell you which way this tide turns?

FARR: Well, I think, you know, the biggest is going to be what the Fed
does if they continue to hike rates. I think, you know, we were talking,
Tyler, you and I, with Ron Insana. He said pretty much we`ve seen the
market pull back every time that 10-year treasury has gotten to 290. So, I
think that`s another good bellwether.

This week coming up, I think you`ve got to be watching CNBC and the NIGHTLY
BUSINESS REPORT for the CPI (NYSE:CPY) data. Is the consumer seeing any
inflation? Are we going to see that creep in? That comes out Wednesday.

HERERA: You know, Michael, it`s not very often that we have rising —
especially recently, that we have rates but also increasing stimulus in a
big fashion. How does that typically play out or is there a typical play-
out for that scenario?

FARR: I`m not sure. Yes, you know, Sue, I don`t know that we have this
playbook exactly. Interest rates going up and then throwing more gasoline
kind of on the fire from the fiscal side of the house in tax cuts and
spending programs.

So, it`s going to be tough, I think, to keep inflation in a bottle. I know
that a lot of people aren`t looking for it, but I really can`t see with
this much debt how we get around inflation. I think we have to start
seeing it. The real key for me is that we do begin to see earnings go up
and some continued wage inflation.

So the average American worker has some more money in their pockets to
spend. American workers, middle class, haven`t seen wage inflation much
since 1997. It`s important we have a healthy consumer if the GDP is two-
thirds based on that consumer.

HERERA: Michael Farr, thank you so much, Michael.

FARR: Thank you, guys.

HERERA: Michael is with Farr, Miller and Washington.

MATHISEN: Well, in Washington, the Trump administration proposed a $4.4
trillion budget for fiscal year 2019. The spending blueprint would widen
the federal deficit, would not balance the budget over the next decade.

Ylan Mui has more on the White House`s fiscal priority.

(BEGIN VIDEOTAPE)

YLAN MUI, NIGHTLY BUSINESS REPORT CORRESPONDENT: The White House is
calling for big spending cuts down the road as part of the budget proposal
released today. The plan would reduce deficits by roughly $3 trillion over
the next decade and just over half of that money, $1.8 trillion comes from
changes to entitlement programs, Medicare and Medicaid, Social Security
Disability Insurance and food stamps. The rest comes from cutting funds
for discretionary programs by 2 percent a year across the board,
effectively rolling back that massive spending deal that Congress just
passed after it expires at the end of 2019.

SARAH HUCKABEE SANDERS, WHITE HOUSE PRESS SECRETARY: At the same time the
budget reduces the deficit by over $3 trillion. This budget not only funds
the president`s priorities but puts the country on a path to restoring
fiscal discipline.

MUI: The president`s budget is not a binding document but a vision
statement of the administration`s priorities. There`s $18 billion over two
years to build the border wall, $17 billion to fight the opioid epidemic
and even a paid parental leave program.

The White House says its policies will juice economic growth to about 3
percent over the next decade and that the ten-year treasury yield will top
out at 3.7 percent. Already, Democrats are slamming this proposal. Bernie
Sanders, the ranking member of the Senate Budget Committee called it,
quote, morally bankrupt and a transfer of wealth from the middle class to
the 1 percent.

Meanwhile, fiscal hawks are worried that this doesn`t go far enough. The
deficit would still be $363 billion in 2028. And that means even with big
spending cuts and a rosy growth forecast, this budget still doesn`t
balance.

For NIGHTLY BUSINESS REPORT, I`m Ylan Mui in Washington.

(END VIDEOTAPE)

HERERA: The White House is also turning its attention to infrastructure.
Today, the president outlined a proposal to fix the nation`s bridges, roads
and rails. That blueprint targets $1.5 trillion in investment, much of
that coming from the private sector and cash-strapped state and local
governments.

Kayla Tausche has the details.

(BEGIN VIDEOTAPE)

KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT: With tax reform and
a bipartisan budget deal behind him, President Trump moved on Monday to his
next priority, infrastructure.

DONALD TRUMP, PRESIDENT OF THE UNITED STATES: To me, this is a very, very
sexy subject. The media doesn`t find it sexy. I find it sexy because I
was always a builder. I always knew how to build on time, on budget.

TAUSCHE: The president discussing the plan with 24 governors and mayors on
Monday at the White House.

TRUMP: The states will have to do it themselves if we don`t do it. But I
would like to help the states out, and we`re doing that with a very big
investment.

TAUSCHE: The proposal calls for $200 billion in federal contributions.
Already, it faces diverging views in Congress on how to pay for it.
Democrats think the government should shoulder more of the 14 percent share
of the bill.

SEN. CHUCK SCHUMER (D), NEW YORK: Trump`s infrastructure plan relies on
private parties or state and localities to put up the lion share of the
money. In turn, those entities would either have to charge local
taxpayers, new tolls or raise taxes and other fees to pay for the new
infrastructure.

TAUSCHE: Meanwhile, Republicans, wary of increasing the deficit further,
want less.

SEN. DAN SULLIVAN (R), ALASKA: I`m about 200 billion or less. I actually
think — but I actually think, again, the vast majority of this is going to
be coming from the private sector. If we reform our permitting system that
can ensure investors that costs will go down.

TAUSCHE: Environmental groups worry streamlining the permitting process
will mean steamrolling environmental regulations. Business groups support
the bill. And according to one estimate, private equity firms are sitting
on $70 billion in unspent funds just for infrastructure.

But one key stakeholder is on the fence. White House officials say
President Trump questions whether the private sector is a productive
partner, citing his time as a developer, his complaint is, all you do is
end up in court.

For NIGHTLY BUSINESS REPORT, I`m Kayla Tausche in Washington.

(END VIDEOTAPE)

MATHISEN: Meanwhile, infrastructure ETFs rose after the president unveiled
his plan, though the gains did lag the broader market because of questions
about that program`s financing.

HERERA: OPEC says demand for oil will grow faster than expected this year,
but it also sees supplies surging driven by an increase in U.S. production.
American drillers began pumping more than 10 million barrels of crude oil
daily in November. That`s more than Saudi Arabia which is OPEC`s top
producer. The price of crude sits below $60 a barrel and is off more than
7 percent over the past week, but gas prices, they`re higher. They`re up 7
cents on average to $2.65 for a gallon of regular gas.

MATHISEN: Time to take a look at tonight`s upgrades and downgrades.

Cisco`s rating raised to buy from neural at Instinet. The firm expects
Cisco (NASDAQ:CSCO) to report prior than expected profit this year. The
company reports quarterly results on Wednesday. Analysts there raised the
price target to $46 from $33. Meantime, shares of Cisco (NASDAQ:CSCO) rose
2.7 percent to $40.60.

General Electric (NYSE:GE) saw its price target cut at JPMorgan (NYSE:JPM)
to $14 a share. The firm cites challenges to GE`s businesses and continued
underperformance. The analyst reiterated his underweight rating on the
stock which he`s had since 2016. Shares of GE fell nearly 1 percent to
$14.82.

HERERA: VF Corp was upgraded to buy at Stifel. The analysts cites
improving trends, rise in consume sentiment, and expects that company to
report solid quarterly results later this week. The price target raised to
$91 a share. The stock gained more than 1.5 percent to $80.70.

Lumber Liquidators saw its rating cut to neutral from outperform at
Wedbush. The firm cites slowing sales growth an increased margin
pressures. The price target was cut by 30 percent to $28 a share. Share
of Lumber Liquidators nearly fell 9 percent to $24.49.

MATHISEN: Coming up new proposals to lower drug prices, but will they
work?

(MUSIC)

MATHISEN: The drugmaker Purdue Pharma will stop marketing its prescription
painkiller to doctors. The painkiller OxyContin is at the center, of
course, of the opioid crisis. The company is cutting its sales staff in
half, leaving about 200 representatives in the U.S. who will no longer
visit doctors to discuss and pitch opioid products. The decision to stop
marketing the drug comes amid a number of lawsuits that blame the company
for contributing to the opioid epidemic.

HERERA: The president has complained many times about sky-high drug
prices, and in his budget proposal released today he offered some specifics
on how to get those cuts down.

Meg Tirrell has more.

(BEGIN VIDEOTAPE)

MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT: The price of
prescription drugs was a popular campaign issue.

HILLARY CLINTON (D), FORMER PRESIDENTIAL CANDIDATE: If you get
prescriptions for medicines that really help you, it doesn`t do you any
good if you can`t afford to fill them.

SEN. BERNIE SANDERS (I), VERMONT: Stand up to the greed of the
pharmaceutical industry.

TRUMP: They`re getting away with murder. Pharma.

TIRRELL: And President Trump has embraced it since he was elected saying
in his State of the Union Address that injustices of high drug prices would
be a top issue for his administration this year.

TRUMP: Prices will come down substantially. Watch.

TIRRELL: Until now, though, Trump`s plans have been short on details, but
in his 2019 budget request, some specifics, mainly involving changes to the
way Medicare and Medicaid, the government insurance programs, pay for
drugs. The plan seeks to encourage use of less expensive generic medicine
including eliminating out of pocket expenses for generic drugs for low
income Medicare beneficiaries.

It also aims to eliminate incentives for doctors to use higher-priced drugs
under Medicare Part B, which covers medicines administered in the doctor`s
office, where the plan stopped short is recommending that Medicare gets the
ability to negotiate prices directly with drug makers. That`s something
Trump seemed to endorse on the campaign trail, but which his new health
secretary, Alex Azar, hasn`t supported. That would align Azar, a former
executive at drug maker Eli Lilly (NYSE:LLY) more with Republicans on the
issue.

Healthcare investors fear direct Medicare negotiation would impose price
controls, knocking stock prices of pharmaceutical companies, because that`s
not included in Trump`s plan and because many of these proposals would need
to go through Congress to take effect. Analysts say it is unlikely to have
a major impact on drug companies or on the rising prices of drugs.

So, unless both parties in Congress also take action, lowering drug costs
may remain a campaign promise.

For NIGHTLY BUSINESS REPORT, I`m Meg Tirrell.

(END VIDEOTAPE)

MATHISEN: So, will Washington be able to do something about the high cost
of prescription drugs?

Here to talk about that is Geoffrey Porges. He`s director of therapeutics
and senior biotech analysts at Leerink Partners.

Geoffrey, welcome. Good to have you here.

You heard Meg Tirrell`s report, I presume, that ended on a rather down note
of sort of frustration at whether Washington will be able to come to any
agreement on ways to lower drug prices. Are you as bleak as she sounded?
Or are you more optimistic?

GEOFFREY PORGES, LEERINK PARTNERS SENIOR BIOTECH ANALYST: It depends on —
it depends on one`s perspective. But certainly, Investors are going to be
quite relieved about what`s come out of Washington. We`ve had three major
documents come out in the last three days or so. We have the budget last
Friday for 2018. We had a Council of Economic Advisers report that came
out also on Friday with similar recommendation, then we had the budget
proposal for 2019 that came out today.

And there are some consistent themes coming through which the drug
industry`s going to be fairly relieved about. You know, there`s a real
recognition of the value of innovation. The same time, a recognition of
the burden of that innovation on consumers and there`s certainly
discussions on some ways to relieve that burden but there`s not really
anything that`s terribly concrete in the future proposal that would allow
investors in drug stocks, which is probably why we`re seeing a little bit
of relief there today.

HERERA: Jeffrey, do you think that the ultimate solution comes from the
government through legislation, through changing laws or does it come from
the private sector? I`m thinking of that unique group of Bezos, Gates and
Buffett who announced a couple weeks ago that they`re going to get together
and use technology to try and lower prices. Which one do you think will
win out, private sector versus government?

PORGES: Well, certainly, the policy of this administration is very much to
favor the private sector initiative and it`s probably 18 months since we`ve
heard serious discussion of overregulation, federal government regulation
of drug prices.

And the truth is we`re seeing change. We`re seeing manufacturers take
small price increases, we`re seeing more manufacturers launch products at
competitive prices that undercut the existing products in the category.
Those are encouraging signs and that`s coming through the private sector.
And the FDA is in some ways acting as an agent of the administration`s
perspective by approving new drugs faster, but encourage competition and
bring prices down.

So, the market is applying a fair amount of discipline to drug
manufacturers. If that trend continues what`s probably a 1 percent to 2
percent rate of growth in drug spent in the U.S. could even become flat to
negative in the next couple of years.

MATHISEN: Are these companies doing this because they fear government
regulation or they fear that the government will green-light the ability of
Medicare to negotiate prices?

PORGES: There`s a certain amount of not wanting to provoke the tiger in
the actions of the industry, but with such a large and fragmented industry,
there are always going to be individual companies that break ranks and take
excessive price increases. And they tend to attract all the attention.

MATHISEN: Right.

PORGES: But for the really huge products, $10 billion, $15 billion, $20
billion products, those price increases are slowing because of competition.
They`re not slowing because of fear about regulation.

MATHISEN: All right. Geoffrey, thank you very much for your analysis.

PORGES: My pleasure.

MATHISEN: We appreciate it. Geoffrey Porges with Leerink Partners.

PORGES: Thank you for having me.

HERERA: General Dynamics (NYSE:GD) beefs up its IT business in a nearly $7
billion deal. That`s where we begin tonight`s “Market Focus”.

The defense contractor said it was buying government contractor CSRA for
just under $7 billion as it looks to grow its information technology
business. General Dynamics (NYSE:GD) said that deal will allow it to
provide more cost effective services to the various government agencies it
serves. Shares of General Dynamics (NYSE:GD) were off 1 percent to
$209.53. CSRA soared 31 percent to $40.39.

Broadcom (NASDAQ:BRCM) has lined up $100 billion in debt financing to pay
for its hostile takeover bid for Qualcomm (NASDAQ:QCOM). That ratchets ups
the pressure on Qualcomm`s board, ahead of a meeting between the companies
this week.

Broadcom`s CEO called his offer for Qualcomm (NASDAQ:QCOM) compelling.

(BEGIN VIDEO CLIP)

HOCK TAN, BROADCOM CEO: Qualcomm (NASDAQ:QCOM) shareholders better today
than they were four years ago? Answer, no. They`re 11 percent lower. Ask
the same of Broadcom (NASDAQ:BRCM) shareholders. They`re 500 percent
richer. We are very good at creating, building sustainable businesses and
employment and innovation on businesses we acquire.

(END VIDEO CLIP)

HERERA: Shares of Qualcomm (NASDAQ:QCOM) rose about 2-1/2 percent to
$65.66. Broadcom (NASDAQ:BRCM) was up nearly 4 percent for $244.40.

And apparently, people were eating up those value meals and new menu items
at Burger King. The parent company Restaurant Brands reported higher
sales. The company reported better than expected earnings and more than
doubled its quarterly dividend 45 cents a share. The shares rose 6 percent
to $59.95.

MATHISEN: It just got a little more expensive to visit Disney (NYSE:DIS)
theme parks. The media giant said it will raise ticket prices for its
parks in Florida and California during peak times. A family of four with
two children can now expect to pay just under $530 for a single day of
activities. Now, Disney (NYSE:DIS) said the price hikes are meant to
spread out the number of visitors it sees throughout the year and not have
them concentrated at the peak. Disney (NYSE:DIS) shares rose 30 cents to,
$103.39.

Ulta is the subject of a class-action lawsuit. The lawsuit alleges that
company sold used cosmetics and sold them alongside never-opened
merchandise. Ulta has responded saying the health and safety of its
customers top priority and it plans to vigorously defend itself against the
allegations. Ulta shares were off 4 percent to $209.48 in today`s trade.

And the railroad operator CSX (NYSE:CSX) raised its quarterly dividend 10
percent to 22 cents a share. The company also lifted its share buy-back
program to $5 billion. CSX (NYSE:CSX) shares finished up 4 percent at
$53.16.

HERERA: Coming up, how a 5 percent mortgage rate could roil the housing
market.

(MUSIC)

MATHISEN: Amazon (NASDAQ:AMZN) is reportedly laying off hundreds. As
first reported by “The Seattle Times”, the cuts are focused on its Seattle
headquarters and are meant to reduce layers of management there. The
layoffs will allow resources to be shifted to fast-growing businesses.
Amazon (NASDAQ:AMZN) says this is all part of its annual planning process.

HERERA: One of the world`s biggest advertisers is threatening to pull its
money from online platforms. Unilever (NYSE:UN) is calling on companies
like Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG) to do more to combat the
spread of hate and divisive content. The company says it will only invest
in responsible platforms that are committed to creating a positive impact
on society. Unilever (NYSE:UN), which owns brands like Dove and Lipton as
well as Ben & Jerry`s has an annual marketing budget of about $9.5 billion.

MATHISEN: Well, the housing market may be in for another surprise.
Perspective homeowners are already dealing with a low number of homes for
sale. Now, mortgage rates are rising. And some say they could hit 5
percent in the not too distant future.

Diana Olick has more.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Mortgage rates are now
at their highest level n four years and poised to move even higher. They
loosely follow the yield on the ten-year treasury which is up again today.

The timing couldn`t be worse. The spring market really jump-started early
this year because of strong competition for a record low supply of homes
for sale. The average rate on the popular 30-year fixed is now right
around 4.5 percent, still low historically, but buyers over the past six
years have gotten more used to rates in the 3 percent range.

Mortgage rates have not been at 5 percent since 2011. A 5 percent rate
would cause more than a quarter of today`s home buyers to slow their plans,
according to a Redfin survey of 4,000 consumers at the end of last year.
Just 6 percent said they would drop their plans to buy altogether. About
one-fifth of consumers said 5 percent rates would cause them to move with
more urgency to purchase a home fearing rates would rise even further.

Another fifth said they`d consider more affordable areas or just buy a
smaller home. Rates have been very volatile so they could drop again. But
the trajectory for the year is definitely higher.

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

(END VIDEOTAPE)

MATHISEN: And to read more about what a 5 percent mortgage rate could do
to the housing market, head to our Website NBR.com.

HERERA: Well, before we go, here`s a look at the rally that`s starting
this week out on Wall Street. The Dow advanced 410, to 24,601, capping its
strongest two-day surge since mid-2015. The Nasdaq added 107. S&P 500 was
up 36.

And on that note, that does it for us tonight. I`m Sue Herera. Thanks for
joining us.

MATHISEN: And thanks for me as well. I`m Tyler Mathisen. Have a great
evening, everybody. And we will see you back here tomorrow night.

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.
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