Transcript: Nightly Business Report – February 14, 2018

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Surprise. Prices are rising.
Inflation is here. But investors shrug it off, sending the Dow up more
than 250 points.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Hunting for yield, as
inflation ticks higher. Not all of dividend stocks are created equal. And
it may be time to get more selective.

HERERA: Behind the wheel. Are you driving one of the most dependable cars
on the road?

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Wednesday,
February 14th.

MATHISEN: Good evening, everyone, and welcome.

Now, if you do not understand this stock market, join the club. I don`t
either. Two weeks ago, one of the most violent selloffs in years was
triggered or so the swamis say when the monthly jobs report suggested that
inflation would rise.

Well, today we learned that inflation did rise. So what did stocks do?
They went up.

Maybe, it`s all just a case of turning that market adage inside out. In
this case, sell the rumor, buy the news. After a stumble out of the gate
tonight, equities rallied, and strongly, for a fourth straight session.
The Dow Jones Industrial Average advanced 253 points to 24,893. The Nasdaq
added 130 and the S&P 500 was up 35.

Bob Pisani mightily tries to explain why stocks went up today when most
thought they`d go down.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Is the market worried
about inflation or not?

Stocks took a nose dive on February 2nd when the jobs report pointed to
stronger wage growth. It fell early today when a read on consumer
inflation came in stronger than expected. But by late morning, the market
had recouped all of its loses and it moved higher.

Now, what happened?

Well, first, volatility has been a big worry recently. And today, the main
measure of volatility, the CBOE volatility index or VIX dropped
dramatically, indicating that traders who make bets on volatility were
betting that volatility would be lower in the next month. That relieved a
lot of people. That`s one.

Second, if you look the composition of the rally, there is a pattern.
First, because interest rates are up, bank stocks which would benefit from
higher rates have outperformed recently while interest rates sensitive
groups like utilities and real estate have been down.

This all makes some sense. And while the markets are down this month,
growth stocks like technology and industrials are not down as much and
outperformed today. That`s good news because the growth story is intact.
It means traders believe that the global economy is expanding and earnings
will be holding up that`s the growth story.

And indeed, earnings are holding up. In fact, they`re not just going up,
they are going up for the first quarter, second, third, and fourth quarters
of 2018. The bottom line, ten-year yield going up from two and a half to
2.9 percent in a few weeks, that`s been a bit of shock to everyone.

But it may not be enough to derail the growth story that is the true of the
markets.

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

(END VIDEOTAPE)

HERERA: So, what was it about that inflation number that caught the market
and investors off guard?

Steve Liesman digs deeper into the report.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Markets were gripped
by a sudden inflation panic this morning when the government reported that
the consumer price index leapt by 0.5 percent, even taking away volatile
food and energy prices, it rose 0.3 percent, both more than expected by
Wall Street. The fit of panic sent Dow Jones futures down nearly 500
points in three minutes. But then Wall Street seemed to take a breath and
reconsider.

Maybe it was the benign year over year inflation rate, just 2.1 percent or
the same as last month. Or maybe it was the idea that one time items like
a strange 1.7 percent rise in apparel costs in the I think a cell month
were unlikely the repeat. Whatever the reason, markets collected
themselves and collectively ignored the inflation threat to urge surge as
much as 200 points during the day.

So, who had it right, the morning inflation Cassandras or the later day
Pollyannas?

BEN MANDEL, JP MORGAN GLOBAL STRATEGIST: It`s important to keep in mine
that nothing over the past two weeks, the elevated volatility, signs of
inflation creeping back in, none of those represent existential threats to
this economic expansion and to this bull market. What you have had is a
series of growing pains, growing pains from real interest rates coming off
of their — coming off of historical lows. Growing pains associated with
inflation expectations reviving after a period of also, you know, very low
levels.

LIESMAN: Inflation does seem to be firming with low unemployment, higher
wages and plenty of stimulus from tax cuts, it`s likely that inflation will
grow higher from here. But if you see runaway inflation or a Fed that will
hike rates much more than three or four times this year?

JAN HATZIUS, GOLDMAN SACHS CHIEF ECONOMIST: We are closer to the target
and the economy is still growing very strongly from the starting point of
full employment or maybe a little bit beyond full employment. So, in that
environment, I think the Fed is going the keep doing what they have been
doing, which is tightened once a quarter.

LIESMAN: That`s different from a fed that raises rates by 3/4 of a point
or a full percentage points. That`s maybe why cooler heads prevail, it`s
something to be worried about but may be not for a full pledged panic.

For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.

(END VIDEOTAPE)

MATHISEN: A number of key sectors across the economy are feeling the
impact of rising prices.

Morgan Brennan with a look now at where inflation is hitting hardest.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: If you are
wondering whether inflation is picking up, look no further than recent
earnings. From construction equipment to food to travel, companies across
industries are reporting higher costs both for materials and for labor.

Take Whirlpool, which recently warned higher commodity costs to make home
appliances will shave hundreds of millions off profits this year.

MARC BITZER, CEO, WHIRLPOOL: We are seeing inflation trend creeping in on
many parts of the value chain.

BRENNAN: And Whirlpool isn`t alone. Caterpillar, Ford, Harley Davidson
and Sherwin Williams are just a few of the manufacturers grappling with a
tighter labor market, and more expensive materials, as economic growth
ratchets up. After years of concern that stagnant wages and cheap
commodities could trigger deflation, the recent increases may be welcome
since some inflation is good thing. The risk however is if it rises too
fast.

CHRIS CORDARO, REGENTATLANTIC CIO: It looks like it`s accelerating. At
the very least, all those Fed members who talked and warned about the
worries of deflation, all of those ideas about deflation in the middle of
last year, forget about it. It`s gone. Inflation is headed back to the 2
percent target.

BRENNAN: One area to watch, transportation, especially for freight. The
price to move goods by truck has spiked, in some cases by more than 30
percent over the past year. A better economy, a driver shortage, new
regulations are all to blame. But those aren`t expected to let up any time
soon.

While that`s good news for truckers, it`s bad news for companies like
Tyson, which now predicts higher meat price this is year.

But perhaps the biggest signal it`s merging lies in telecom. After years
of wireless price wars, Sprint and T-Mobile are both considering moves to
dial back discounts, a big potential shift for an industry who is falling
costs have helped tamp down inflation for years.

For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan.

(END VIDEOTAPE)

HERERA: And the head of Goldman Sachs says the risk of the economy
overheating is rising. He cited the combination of tax cuts and the
potential for an increase in spending at a time when the economy is
strengthening and people and companies are feeling pretty good. He made
the comments on MSNBC`s “Morning Joe”.

(BEGIN VIDEO CLIP)

LLOYD BLANKFEIN, CEO AND CHAIRMAN, GOLDMAN SACHS: Obviously, the supply
side view is we`re not — it wasn`t at full capacity, and so, they are
putting a little bit more on. I would say from my point of view that
wouldn`t be the move I would take, you know, if the fire is roaring and the
coals have caught. I don`t know that I would be spraying lighter fluid on
it —

UNIDENTIFIED MALE: Yes, exactly.

BLANKFEIN: Especially if I might need that it lighter fluid later —

UNIDENTIFIED MALE: That`s the thing.

BLANKFEIN: — when the coals started to die out because at some point,
you`re not going to take rates much lower than where they are now. They
are not necessarily with these deficits going to come up with later if you
ever need it, another stimulus plan. You would like to have some things in
reserve.

(END VIDEO CLIP)

MATHISEN: So, does the economy have the potential to overheat?

Joining us to talk about that is Russell Price, senior at Ameriprise
Financial.

Mr. Price, welcome. Good to have you with us.

What do you think? I mean, there was one of the most respected names in
American finance, Lloyd Blankfein saying he is a little worried about all
of the stimulus that is in the system. Are you?

RUSSELL PRICE, AMERIPRISE FINANCIAL SENIOR ECONOMIST: You know, I do think
that the stimulus that we`ve seen does stand the potential to add a little
bit more inflation to the economy and at that will shave off some of the
consumer purchasing power. And it does comes at an unusual time when the
economy has been doing quite well. You know, over the last several years,
people have been complaining about the economy being frustratingly slow.

And it`s been still strong enough for the unemployment rate to come down at
a steady pace and inflation to remain in check. Now, this year, if we do
see it exceed maybe the 3 percent level, if inflation takes off some of
that purchasing power from consumers and businesses, you know, there is
some argument to be made that maybe we wasted a little bit of the stimulus
that we may see this year and next year.

HERERA: But if the inflation rate hits that 2 percent target, isn`t that
what we`ve wanted it to do? We`ve been waiting a long time for it to do
just that. I mean, it would seem as though that would be a good thing.

PRICE: Yes, and 2 percent on the core rate I think is our standard
outlook. We think it might be a little bit more than that by 2019.
Generally, we do think that that is the pace. So, we are not exactly in
the camp where we think that inflation is going to overheat over any time
soon. We think that some of the fears and concerns may be a little bit
ahead of themselves. But, certainly, we are seeing wage inflation.

But there is one big difference today than historically when we`ve seen
wage inflation, particularly since the 1970s. And that is usually
companies have to pass those higher wages on to customers in order to
maintain their margins. This time around, they just got a big — a very
sizable tax cut, so they have plenty of ability to pass on higher wages and
still maintain their prices and still should end up with higher profit
margins.

MATHISEN: Is there anything that consumers or investors should be doing?
Because many of them have never lived through an era where interest rates
were rising in any kind of a sustained way, not that they are going to get
really way out of hand or that inflation has been a factor at all.

PRICE: Right. I think generally speak there are still an awful lot of
dynamics in the economy that are very likely to contain inflation not just
over the next few years but for the foreseeable future, things like
demographics and slower population growth and aging societies, and
technology, the ability of technology to keep prices in check. Those are
very powerful dynamics.

MATHSEN: Right.

PRICE: I think what consumers basically can do is not really worry about
it all that much. There is going to be an adjustment phase for financial
markets as they evaluate the data as it comes forth like we`ve seen. But
other than that, I don`t think that — this too shall pass and should move
on.

MATHISEN: You are going to let me sleep tonight, Russell. Thank you.

Russell Price with Ameriprise Financial.

HERERA: A number of stocks tend to rise when inflation runs hot.
According to one study that examined date back to 2001, the top performers
in the Dow one week after a stronger than expected report on consumer
prices include the following, you United Technologies, Apple, United
Health, and Boeing. On the flip side, Du Pont, Procter and Gamble tend to
fall one week after an inflation report tops expectations.

MATHISEN: Time to look at some of today`s upgrades and downgrades. Target
was raised to outperform from neutral at Baird Equity. The firm says
Target stands to benefit from remodeled stores and its acquisition of
Shipt, a same day delivery company. The stock`s price target was increased
to $85 from $75. And share rose 2 percent to $75.35.

Avis Budget Group saw its rating cut to sell from neutral by Goldman Sachs.
The firm cites mounting headwinds like increased competition from ride
sharing companies and rising interest rates. Price target cut to $33 a
share. Shares fell more than 3 percent to $38.73.

HERERA: MKM Partners raise its forecast for Facebook. The analyst is
urging investigators to be aggressive buyers of the stock. It reiterated
its buy rating and also its $240 price target. Shares rose 3.5 percent to
$179.52.

Fossil Group saw its price target raised to $25 at KeyBanc. The analyst
says Fossil`s focus on wearable technology will lead to higher margin.
Fossil reported better than expected earnings late yesterday. The earning
reports helped fuel today`s 87 percent rally in that stock.

MATHISEN: And still ahead, Cisco`s streak is over, and investors are
cheering.

(MUSIC)

HERERA: Cisco is seeing a return to growth. It ended two straight years
of revenue declines. The Dow component reported earnings and revenue that
topped expectations. It also hiked its quarterly dividend and authorized a
share buyback. Investors like the results, sending the stock initially
higher in after-hours trading.

Josh Lipton has more on Cisco`s quarter.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: A positive report from
Cisco across the board. It wasn`t just the beat on the top and bottom.
Also, gross margins came in better than expected at nearly 65 percent.
Infrastructure platforms, the company`s bread and butter core networking
offerings related to switching and routing grew 2 percent.

Michael Genovese of MKM Partners also highlights the board`s decision to
approve a $25 billion increase to its stock buyback program enabled by the
company`s huge cash pile parked overseas which it can bring back thanks to
recent U.S. tax reform. Genovese says that means Cisco is buying back lots
of shares which will drive earnings estimates dramatically higher.

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

(END VIDEOTAPE)

MATHISEN: AT&T reportedly wants a top antitrust official at the Justice
Department to testify during its merger trial. As first reported by “The
Wall Street Journal”, the move is designed to challenge the legitimacy of
the government`s lawsuit. The government sued AT&T to block the telecom
company`s $85 billion merger with Time Warner. AT&T has previously
questioned the department`s motives. The trial is expected to start mid-
March and represents one of the biggest antitrust cases in a generation.

HERERA: Fannie Mae may require a taxpayer funded bailout. This after the
mortgage finance company reported a loss of $6.5 billion in the fourth
quarter of last year. That loss could trigger the first cash infusion into
the company in six years. Fannie Mae has been under government
conservatorship since the financial crisis.

MATHISEN: The Trump administration has proposed reducing the time it takes
to permit infrastructure projects and has pointed to a bridge that connects
New York and New Jersey as an example of red tape and bureaucracy run
amuck.

Kayla Tausche reports tonight from Bayonne, New Jersey.

(BEGIN VIDEOTAPE)

KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Two hundred feet
above the Kill Van Kull Strait, construction continues to expand the
Bayonne Bridge. The project raised the bridge by 64 feet to let bigger
cargo ships pass. It won`t be fully completed until 2019.

At that point, the $1.6 billion project will have taken nearly a decade.
Some blame the permitting process and say speeding that up would get
businesses to invest.

SCOTT SLESINGER, NATURAL RESOURCES DEFENSE COUNCIL: The bottom line is,
right now, it`s taking too long. And it`s not getting — 20 percent of the
costs for the project is now in the plan approval process and not actually
investing in the infrastructure itself.

TAUSCHE: The White House this week released a two-part blue print for
infrastructure, $200 billion in funding, coupled with goals to simplify
permitting.

DONALD TRUMP, PRESIDENT OF THE UNITED STATES: This framework will lead to
a $1.5 trillion investment in American infrastructure, a faster permitting
process that takes two years instead of 10 years and maybe less. We`re
looking to get it down to one year.

TAUSCHE: In practice, it`s more complicated. The Bayonne Bridge review
was conducted by one federal agency, the Coast Guard, which completed its
permit in 26 months. Its construction and engineering took six years
because of heavy traffic and harsh northeast winters.

The median time to permit the country`s largest infrastructure project is
three and a half years according to the Department of Transportation.
That`s nearly cut in half since 2011.

Amy Goldsmith, the New Jersey director of Clean Water Action says further
shortening the review time would hurt local communities.

AMY GOLDSMITH, CLEAN WATER ACTION: There would be little to no mechanism
for the public to be engaged because these are complicated projects that
require scrutiny.

TAUSCHE: Others say permits are meaningless if there is no money to pay
for the projects. The White House proposed steep budget cuts in divisions
building structure like the Army Corps of Engineers.

UNIDENTIFIED MALE: All they need is the money. And the Army Corps has $5
billion year. So, the problem isn`t the permits or the environmental
reviews. It`s where is the $85 billion?

TAUSCHE: In just the first year with larger ships passing under the
bridge, the busiest ports on the eastern aboard had a record year,
processing 5 percent more cargo with future growth expected to climb.

For NIGHTLY BUSINESS REPORT, I`m Kayla Tausche, Bayonne, New Jersey.

(END VIDEOTAPE)

MATHISEN: And to read more about the infrastructure permitting maze, head
to our Website, NBR.com.

HERERA: Bristol-Myers Squibb enters into one of the largest drug
collaboration deals ever. That`s where we begin tonight`s “Market Focus”.

Bristol-Myers said it will pay Nektar Therapeutics nearly $2 billion in
cash and stock for the right to its experimental cancer treatment.
Depending on the drug`s success, Nektar could also receive an additional $2
billion from Bristol-Myers. Shares of Bristol-Myers Squibb climbed 2
percent to $65.35. Shares of Nektar popped 11 percent to $84 even.

The advertising firm Interpublic Group reported revenue growth in its
latest quarter that easily surpassed expectations. That company faced
weaker client spending for much of 2017 but expects that trend to reverse
course this year. Interpublic which also topped earnings estimates
forecast organic revenue to rise as much as 3 percent this year. The share
rose 10 percent to $27.49.

Increased marketing and a growing user base translated into higher profits
over at Groupon. But they weren`t high enough and they missed analyst`s
estimates. Groupon also continued to scale back its presence in some
international markets and it issued a disappointing forecast. The shares
plunged 9 percent to $4.71.

MATHISEN: Hotel operator Hilton said an increase in overall bookings and
strong growth in its international business helped quarterly profits
outpace forecasts. Sales were also better than expected. Hilton shares
were up 3 percent. They finished the session at $85.97.

After the bell, Marriott reported stronger than expected revenue as the
hotel operator said results were helped by an increase in more expensive
bookings. Profits though slipped from year earlier. Marriott shares
initially lower in the extended session but they did end the regular day up
3 percent at $145.24.

And according to a regulatory filing, Warren Buffett`s Berkshire Hathaway
took a new stake in Teva Pharmaceuticals valued at more than $350 million.
Shares of Teva initially rose in the afterhours trade, adding to a 4
percent gain during the regular session when shares closed at $19.33.

HERERA: As we discussed earlier, inflation is inching higher, and when
that happens, dividend stocks are less attractive to investors. So, what
should you keep in mind when investing in dividend paying companies?

Here to walk us through that is Teague Sanders, senior vice president and
senior portfolio manager over Whittier Trust.

Nice to have you here, Teague. Welcome.

TEAGUE SANDERS, WHITTIER TRUST SENIOR PORTFOLIO MANAGER: Thanks for having
me.

HERERA: What are some of the basics that you should look at in the
environment that we find ourselves in now when you`re considering whether
to add a dividend-paying stock to your portfolio?

SANDERS: One thing I think to remember that`s important is you want to
focus still on the fundamentals of the company, right? The dividend should
be ancillary to what it is you are investing in. So, there are a few
things that we do look at though. We want to focus on low payout ratios.
So, the percentage on that income has been utilized for dividends. We want
to look at coverage ratio, right? So, how much cash flow is available to
pay out the dividend.

We also want to be mindful of leverage ratios. That companies that are
highly indebted would tend to have higher debt service costs as interests
do rise. And, finally, dividend growers. So, companies that grow
dividends over time will likely continue to do that in the future.

MATHISEN: All right. You used some technical terms there. Let`s cut to
the chase. I don`t blame you for it because that`s what you do for a
living.

Tell me where I find companies that have these particular attributes today,
and by comparison, describe some of the companies where the dividend or the
fundamentals aren`t as healthy in a rising interest rate, rising inflation
environment.

SANDERS: Absolutely. So in this type of environment as we saw earlier in
the show, we want to focus on financials, banks specifically. So, interest
margins basically compressed to zero since 2008. And as rates do rise, it
means banks will be more profitable overtime. Additionally, financial
institutions like Prudential should benefit because insurers have long
related assets and long related liabilities. So, they should benefit as
well.

Additionally, we`re seeing deregulation in the space. And so, as more
capital becomes available for share repurchases and dividends as
regulations come off, we should see that come back to shareholders as well.

HERERA: We showed some of the stocks you like. Let`s start with
McDonald`s. You don`t own it directly but why would that make the list?

SANDERS: Well, McDonald`s is a great story about being able to take
advantage of changes in consumer behavior. They have done very, very well
when it comes to taking advantage of food delivery. The diner portion of
that delivery has really increased.

What is funny is that people order more deserts at dinner time when they
have it delivered. McDonald also said they have figured out fresh French
fry delivery. So, stay tuned on that.

And then, again, Prudential is the other one that we`re looking at closely
for the reasons we talked about, deregulation, they are currently labeled a
systemically important financial institution, if that designation comes
off, it will free up a lot of capital to come back to shareholders in the
form of dividends and share repurchases.

HERERA: All right. Teague, thank you very much. A pleasure.

SANDERS: Thank you.

HERERA: Teague Sanders with Whittier Trust.

And coming up, the most dependable cars on the road today.

(MUSIC)

MATHISEN: A new study shows that cars and trucks are more dependable than
ever. JD Powers` annual survey of people who own three-year-old models
also points to an interesting trend. Mass market brands are closing the
quality gap with luxury ones.

Phil LeBeau has the details.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: reporter: it may be
the most important question people buying a car or truck will ask
themselves in a showroom, how reliable is this model?

JD Power`s annual survey on vehicle dependability shows three yearly models
are holding up better than ever. The brand with the fewest problems,
Lexus, Porsche, and Buick, which is the highest rated mass marketed brand
in the survey of over 30,000 owners.

Overall mass market brands including Chevrolet, Toyota and Hyundai are
closing the quality gap with luxury lineups.

So, while Porsche owners still report fewer problems than those driving
other more common models, the difference between the two is shrinking.
What`s not changing is the frustration owners are experiencing with in-car
infotainment systems and features like voice recognition. This remains the
top complaint according to JD Power.

The bottom three brands in this year`s survey, Fiat, Land Rover, and
Chrysler, which declined to comment on the results.

So, if an automaker struggles or does well in a survey like this, does it
hurt or help sales? Well, maybe not immediately, but JD Power points out
that vehicle dependability is becoming more important than ever for those
looking to buy a new vehicle.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

(END VIDEOTAPE)

MATHISEN: And before we go on this Valentine`s Day, Americans are expected
to spend a near record amount. The National Retail Federation puts
spending at close to $20 billion.

Much of that will be on jewelry, yes. Followed by a night out at diner.
No. Flowers, yes. Candy, eh. And get this — more than $00 million will
be spent on gifts for coworkers.

HERERA: Hmm.

MATHISEN: Hmm.

HERERA: Hmm.

Here`s one more look at the gains in stocks today. The Dow advanced 253
points to 24,893. The Nasdaq added 130. And the S&P 500 was up 35.

You are always so good on holidays to your lovely wife.

MATHISEN: Happy Valentine`s Day.

HERERA: Happy Valentine`s Day to you and to all of you.

That does it for us. I`m Sue Herera. Thanks for joining us.

MATHISEN: I`m Tyler Mathisen. Have a great Valentine`s evening,
everybody, dinner or not. We`ll see you tomorrow.

END

Nightly Business Report transcripts and video are available on-line post
broadcast at http://nbr.com. The program is transcribed by ASC Services II
Media, LLC. Updates may be posted at a later date. The views of our guests
and commentators are their own and do not necessarily represent the views
of Nightly Business Report, or CNBC, Inc. Information presented on Nightly
Business Report is not and should not be considered as investment advice.
(c) 2018 CNBC, Inc.

 

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