Transcript: Nightly Business Report – June 7, 2018

ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Bill Griffeth and Sue
Herera.

(BEGIN VIDEO CLIP)

WARREN BUFFETT, BERKSHIRE HATHAWAY CEO: When companies get where they`re
sort of living by so-called making the numbers, they do a lot of things
that are counter to the long-term interest of the business.

(END VIDEO CLIP)

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Warren Buffet and Jamie Dimon
join forces to change Wall Street`s short-term focus but is ending
quarterly guidance in the best interests of investors.

BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Apartment glut. There may
not be enough homes for sale but there appears to be an oversupply of new
rental units.

HERERA: Taking off. Why this summer`s must-have ticket is a flight to
Europe.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Thursday,
June 7th.

GRIFFETH: And we do bid you good evening, everybody.

We begin tonight with developments on geopolitics and trade, issues that
certainly have moved the markets over the past few weeks. First, Secretary
of State Mike Pompeo said today that North Korea has confirmed its
willingness to dismantle its nuclear arsenal. That revelation comes just
days, of course, before the scheduled summit between President Trump and
Kim Jong-un.

But before the president heads to Singapore for that, he will be meeting
with G-7 allies in Canada where contentious discussions over trade and
tariffs are expected. It certainly will be a big event for investors and
the market which today finished mixed as bond yields dip. The Dow Jones
Industrial Averages was lone gainer of the major averages advancing 95
points to 25,241. The Nasdaq cooled after a series of record closes, down
54 points today, with the S&P off about two.

HERERA: The U.S. has struck a deal with Chinese telecom company ZTE, which
has become a lynchpin in trade relations between the U.S. and China. Now,
some say this may point to progress in the high speed trade talks.

Commerce Secretary Wilbur Ross says ZTE will pay a $1 billion fine in
return for ending sanctions on the firm.

(BEGIN VIDEO CLIP)

WILBUR ROSS, SECRETARY OF STATE: It imposes the most strict compliance
that we`ve ever had on any company, American or foreign. We are literally
embedding a compliance department of our choosing into the company to
monitor it going forward.

(END VIDEO CLIP)

HERERA: In April, the U.S. banned exports to ZTE as punishment for making
sales to North Korea and Iran.

GRIFFETH: Warren Buffet and Jamie Dimon are setting out to dismantle one
of the bedrocks of Wall Street tradition. The two powerful business
leaders are urging companies to stop issuing short-term guidance and
instead focus their thinking on the long term.

Becky Quick spoke with both of them exclusively and started by asking Mr.
Dimon why he thinks this issue is so important.

(BEGIN VIDEOTAPE)

JAMIE DIMON, JPMORGAN CHASE CHAIRMAN & CEO: We all feel a tremendous
obligation to deliver in the long run, to build great companies and that,
therefore, corporate governance is important. And one important step, I
learned this by listening to Warren, is some of the ills and problems of
people making short-term forecasts, particularly quarterly forecasts,
earnings forecasts, not transparency, openness, not having quarterly
reporting. And it can often put a company in a position where management,
you know, from the CEO down feels obligated to deliver earnings and
therefore may do things that they wouldn`t otherwise have done.

So, if you have a good board, you know, the board will say if you have a
great invention opportunity, you say it`s going to cost me another couple
hundred dollars this quarter, you know, someone like Warren would say,
absolutely do it. That`s good — that`s future earnings. Don`t hurt your
company because you`re trying to meet a short-term thing.

BECKY QUICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Warren, this is
something you`ve been preaching about for a long time, too. What`s an
example of where you`ve seen it gone wrong?

BUFFETT: Well, I`ve seen — when companies get where they`re sort of
living by so-called making the numbers, they do a lot of things that really
are counter to the long-term interests of the business, and I`ve never seen
a company whose performance has been improved by having some forecast out
there by the CEO that we`re going to earn X, because it`s sending — it`s
not only sending the wrong message and delivering the wrong results to the
company and to the country, it`s also teaching the people that work under
him or her, that quarterly performance is end game.

I tell our managers, just pretend this is the only business you and your
family are going to own for 50 years and you can`t sell it and you`ll make
the right decisions.

QUICK: Have you seen this play out the wrong way either in the boards
you`ve sat in or the companies that you`ve owned, other friends that you`ve
owned?

BUFFETT: Becky, I`ve been on 20 boards of publicly owned companies not
counting Berkshire, and I have seen — I have seen managements that I
really think well of personally. I`d be glad if they married my daughter
or were named as executors of my will or moved in next door, but they get
tempted by this — the predictions that have been made. Their ego gets
involved, and when they find they can`t make the numbers, sometimes they
make up the numbers.

And it`s a — it`s a bad — it`s a very, very bad practice and once it gets
going, it feeds on it self because it`s your investors relations department
tells you, you know, that we put out you`re going to earn $1.08, and you
get this reputation for, you know, making your numbers, beating your
numbers, you`re going to do some very stupid things at some point because
business just doesn`t work that way.

(END VIDEOTAPE)

GRIFFETH: Now, this isn`t the first time that Buffett and Dimon have
criticized earnings guidance. They signed a letter back in 2016 which
addressed the issue and advocated for better corporate governance
standards.

HERERA: And it is not just Warren Buffett and Jamie Dimon who are
proponents of eliminating short-term guidance, Tesla`s CEO Elon Musk had
some thoughts on it as well recently.

(BEGIN AUDIO CLIP)

ELON MUSK, TESLA CEO: The point is people get too focused on like what`s
happening in the space of a few weeks or a few months, there`s an old maxim
of investing — you should not be focused on short-term thing.

(END AUDIO CLIP)

HERERA: And back in 2016, Blackrock CEO Larry Fink sent a letter to 500
CEOs urging them to stop providing quarterly earnings forecasts.

So, should companies provide investors with short-term guidance? We are
joined tonight by William Lee, chief economist at the Milken Institute who
says, no, not always. And Vahan Janjigian who says yes, companies should.

Gentlemen, nice to have you here. A pleasure.

Vahan, I`m going to start with you, because I think Mr. Buffett and Mr.
Dimon laid out the reasons why perhaps you should not provide as a CEO
short-term guidance. Briefly tell me why you think most companies should?

VAHAN JANJIGIAN, CIO, GREENWICH WEALTH MANAGEMENT: Well, there are a
number of reasons. You know, first of all, let me point out that most CEOs
would prefer to put out as little information as possible. They would
prefer to put out only what`s required and nothing more.

But the reason they give earnings guidance, which is not required, is
because the investors demand the information. And investors are telling
corporations that if you don`t give me earnings guidance, if you don`t
disclose the information, I may not pay as much for your stock. And that`s
the same thing as saying that the company`s cost of capital goes higher.

Now, this isn`t a key issue for a company like Berkshire Hathaway
(NYSE:BRK.A) who has a star like Warren Buffett running the company. I
mean, a Berkshire Hathaway (NYSE:BRK.A) shareholder doesn`t really care
about guidance because they really trust the CEO. This is a more important
issue for smaller companies.

Furthermore, guidance comes directly from the horse`s mouth. It comes from
the management of the company. If management stops giving guidance, Wall
Street analysts are still going to come out with their estimates, but
what`s guaranteed is that those estimates are going to be less accurate.

GRIFFETH: OK.

JANJIGIAN: Because they don`t have management guiding them.

And furthermore, the other issue is transparency and disclosure. This is
information, and we are in an era where the SEC wants more transparency and
disclosure, so why hide the information.

GRIFFETH: William Lee, so you agree with Buffett and Dimon, make the case
against short-term guidance.

WILLIAM LEE, CHIEF ECONOMIST, MILKEN INSTITUTE: The only people interested
are the investment analysts out there making their own forecasts.
Companies need to anchor those forecasts before they become too wild. As
an investor, what we`re interested in is the strategy behind the numbers.
What is it that the management is doing, planning to do and how did it do
it.

One of the risks is the narrative, the critical part that every investor
has to be interested in. The number is just a number. What we need to
know, the rationale behind the numbers. As long-term investors, you say,
well, it`s a sequence of short-term events that make up the long term.
Absolutely right.

GRIFFETH: Right.

LEE: But we do need information but information that`s relevant for the
operation of a firm and let the managers do their job. Don`t micromanage
their numbers.

GRIFFETH: Right.

LEE: One of the things that we have called up in disclosure, we need
informed disclosure. That comes with a narrative, not a number.

GRIFFETH: You know, we did a study of the S&P 500 companies. Of those,
170 don`t provide short-term guidance, but we looked at the five-year
performance comparing those companies that do provide short-term versus
those that don`t provide short term, and if you`re thinking about the
impact this has on individual investors, it`s almost a wash.

So, is there an argument then to keep the short-term guidance?

JANJIGIAN: Yes. There`s a difference between companies that don`t provide
guidance and companies that previously provided guidance and then stopped.
I mean, Berkshire Hathaway (NYSE:BRK.A), for example, has never provided
guidance.

But there are academic studies that show that companies that provided
guidance, when they stopped providing guidance, you have a negative stock
price reaction. Furthermore, fewer analysts now cover the stock and the
accuracy of the estimates deteriorates.

Another argument that`s often made, by the way, is that we want these long-
term valuations, so stop giving us guidance and give us more information
about what the company is worth over the long term. These studies show
that that does not happen and, furthermore, there`s no evidence that these
companies invest more money in things like research and development that
would increase the value over the long term.

HERERA: William, did you want to say something and respond to that?

LEE: Yes. The key is, do we induce market to market volatility into stock
prices unnecessarily? And hitting a number, focusing on a number does
exactly that. Informed guidance, absolutely, no question about it. We
need information on what the company is doing.

But we don`t need a number, we need a range of numbers and we need
management to tell us why they`re at the upside or downside or why the
environment is there and the change in strategy. That`s the kind of
information that`s relevant for markets and relevant for investors to
assess whether they want to be in that company or it`s echoed into another
company.

JANJIGIAN: But there are very few companies that give us a number. I
mean, most companies do give us a range to begin with.

LEE: It`s a narrative. I don`t care about the numbers. I want the
narrative and story behind the numbers. And that`s something that the
short-term investor community doesn`t focus on.

JANJIGIAN: But you also mentioned volatility. And that`s what people are
really most upset about. Investors get very upset when a company earns —
misses the earnings estimate by a few pennies and the stock falls 10
percent. That`s what gets them upset. But eliminating guidance is not
going to get rid of that problem.

LEE: Let me give you a metaphor. The Fed. If the Fed didn`t put a number
of dots up there, we would have much less debate and we`re focused on the
long term strategy of how the Fed is going to get rid of inflation. That`s
what`s relevant for keeping the markets calm and for guiding the economy.
The same time applies to companies.

GRIFFETH: Before we let you, William Lee, I had an example. I looked at
Kroger (NYSE:KR). You know, they recently announced that their profit
margins were going to be squeezed a bit because they were making more
investments in their ecommerce business and immediately, you know, eluding
to what Vahan was saying, that stock dropped by 11 percent.

You know, you have to think that that`s going to play with the CEO`s mind.
That might make a difference if they know the stock is going to suffer in
the short term.

LEE: Absolutely. The forward guidance incentivizes them to make short-
term conservative bets and not long term gains. Look at Amazon
(NASDAQ:AMZN). They had miserable earnings numbers for the longest time,
and yet everyone believes Amazon (NASDAQ:AMZN) is a success story.

HERERA: All right. You guys need your own cable show, or just come back
on ours, OK?

Thanks so much. William Lee with Milken Institute and Vahan Janjigian with
Greenwich Wealth Management.

GRIFFETH: Elsewhere, household wealth in the U.S. has now topped $100
trillion for the first time. According to a new report from the Federal
Reserve, rising home prices lifted wealth in the first quarter and that
offset the impact of a decline in the stock market. Meanwhile, household
debt remains stable, staying in a range that it has been in for the last
few years.

HERERA: The number of Americans filing for new unemployment benefits fell
last week. The report signals continued strength in the labor market.
Initial jobless claims also considered a proxy for layoffs fell by 1,000 to
a seasonally adjusted 222,000.

As we reported, the unemployment rate currently stands at 3.8 percent, the
lowest since April of 2000.

GRIFFETH: And as the unemployment rate continues to decline, more and more
companies struggled to find workers. Last night, we took you to
Louisville, Kentucky, to introduce you to a unique program that is
attempting to solve that problem. Well, we take you back there this
evening to see how some big companies are getting involved.

Steve Liesman once again has our story.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: It may seem strange
and a little out of the box, but a cardboard boat race in Louisville,
Kentucky, is seen as part of a solution to a national worker`s shortage
problem. It all looks like fun and games, but behind it are some serious
high school students studying computer assisted design or CAD.

KYLEAH OHLMANN, JEFFERSON TOWN HIGH SCHOOL: I never knew I was in
engineering. I was good at math. I like drawing and all that. But once I
got to the CAD, I was like, wow, I really like this. I could do this. I`m
really good at it.

LIESMAN: The cardboard boat regatta is the capstone event for students who
spent the year studying sophisticated auto CAD and CNC machines to prepare
for careers in commercial design and engineering. Their task, float a boat
using nothing but cardboard and duct tape.

Kyleah and her classmates are a handful of the more than 17,000 students
pursuing career specific education through the innovative academies of
Louisville program, the city`s answer to the economic challenges it faces
with a low 3.4 percent unemployment rate. It`s not far off the national
rate at 3.8 percent, near a two-decade low.

MAYOR GRG FISCHER (D), LOUISVILLE, KY: Business is used to having labor
show up at the door ready to go. And there was more availability of labor,
but then also business wasn`t as complicated.

LIESMAN: So far, 85 businesses, including UPS, General Electric (NYSE:GE)
and Norton Healthcare partnered with the public school system.

LARRY PARKER, UPS AVIATION CAPTAIN: It`s one of the best-kept secrets that
we have here for Louisville is that we have an aviation program. An
aviation program that`s very rare. I think it`s probably if not the only
one but the very few that`s in the country, where a young person can come
as a middle school student, go all the way through high school and obtain
their license.

MARTY POLLIO, JCPS SUPERINTENDENT: We provide that specialized training
but also those other skills that we want kids to have, the communications
skills, the collaboration skills, the persistence.

LIESMAN: Skills you might learn in a cardboard boat race, where some of
the boats sank and others go on to win, but the kids learning a little
something along the way about computer designs, the limitations and
possibilities of duct tape, the job market and life.

For NIGHTLY BUSINESS REPORT, from Louisville, Kentucky, I`m Steve Liesman.

(END VIDEOTAPE)

GRIFFETH: And still ahead, we hear a lot about the shortage of homes on
the market, but could there actually a glut of apartments?

(MUSIC)

HERERA: Mortgage rates moved lower again this week for the second week in
a row. This is only the second time this year that rates have fallen in
back-to-back weeks. Freddie Mac reports that the 30-year fixed rate
averaged slipped to about 4.54 percent. But economists say the pullback
may be short lived, since interest rates are expected to resume their march
higher.

GRIFFETH: We have been telling you lately about the shortage of skilled
workers in the labor market. The construction industry in particular is
feeling the effects of that, but it`s having a strange impact on the
nation`s apartment market. It`s causing an over supply. How is that
possible?

Diana Olick explains.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Across America, single
family homes and apartment buildings are going up, but the process is slow
and expensive because of a severe shortage of skilled construction labor.

Developers small and large are feeling the pain, even Warren Buffett.

BUFFETT: We have six or so home building operations in various places,
Kansas City and Denver and Austin, Texas, and there is a shortage of the
labor required in home building throughout the country.

OLICK: In the apartment market, the shortage is actually causing an over
supply of new building. That may sound backwards, but here`s why. First,
the construction industry lost over a million skilled workers during the
housing crash and most never returned. Then, after the crash when
homeownership was at a record low, developers tried to meet the high demand
for rental apartments, but it took them a really long time to build what
they started because they didn`t have enough labor. So, a lot of the new
buildings that were supposed to be finished when demand was high were not.

ALEXANDER GOLDFARB, SANDLER O`NEILL SENIOR REIT ANALYST: So what happened,
supply that was supposed to come out in `16 what came on in `17 got pushed
into `18. What`s supposed to come this year is probably going to push to
`19. So, for apartment investors, it`s been a real challenge, because
every year, we think, aha, this is the peak supply and it`s going to
decrease from now. But, unfortunately, what`s going to happen is, it gets
bumped into the following year.

OLICK: The number of apartments completed in the U.S. hit a 30-year high
last year according to Real Page, but occupancy was still good at 95
percent.

The concern now is going forward. More apartments coming to the market
with less demand will mean concessions and lower rents, great for renters
but not for developers who are already paying top dollar for lean labor to
top off their projects.

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

(END VIDEOTAPE)

HERERA: McDonald`s (NYSE:MCD) is cutting jobs and that`s where we begin
tonight`s “Market Focus”.

The fast food chain said it would layoff an undisclosed number of workers
in an attempt to streamline operations and reduce costs by the end of 2019.
McDonald`s (NYSE:MCD) said it would offer more guidance on the number of
positions impacted during its town hall meeting which is set for June 12th.
McDonald`s (NYSE:MCD) shares rose 4 percent to $169.48.

J.M. Smucker`s said weaker demand for its peanut butter and it`s baking
products caused profit and sales to disappoint. The maker of Jiffy and
Pillsbury also said an increase in marketing and freight costs would cause
its earnings for the year to come in weaker than expected. Shares were off
5 percent to $100.80.

And Ralph Lauren is launching $1 billion share buyback and hiking its
dividends 25 percent. The retailer also expects sales to rise at a
compound annual rate in the low to mid-single digits. Operating margins
are seen growing in the mid-teens. Shares, nonetheless, were 1 percent to
the downside to $137.86.

GRIFFETH: Furniture retailer Conn`s turned a profit and saw revenues rise
above estimates. The company cited an increase in same-store sales and
improved margins. Conn`s also sees same-store sales for the current
quarter coming in better than expected as well. Shares popped more than 24
percent today to $31.95.

Vail Resorts (NYSE:MTN) sold more season passes and that helped overall
earnings rise and top expectations. The ski resort operator said that the
strong quarter gives it confidence that it can expand into more U.S.
markets and shares climbed more than 4 percent today to $270.72.

RV maker Thor Industries (NYSE:THO) reported weaker than expected earnings
and said it is concerned about the steel and aluminum tariffs that were
recently implemented by the U.S. The government — Thor said that it is
already seeing an increase in raw material costs and is taking actions to
try and offset those increases. Shares initially fell on that news but
then recovered, rising by 2 percent to $100.80.

HERERA: Coming up, globe trotting. Why airlines are ramping up service in
the busy transatlantic market.

(MUSIC)

GRIFFETH: Airlines have recently started warning passengers that fares may
soon be going up. And you can blame increasing jet fuel prices which have
risen more than 50 percent over the past year. Fuel is the single largest
expense for most airlines accounting for about a quarter of operating
costs. The potential rise in airfares comes after four years though of
declining prices.

HERERA: What is the hottest ticket for a summer vacation this year? Well,
it might be going to Europe. In fact, a number of transatlantic flights
have skyrocketed as low cost and legacy carriers add new routes to new
markets.

Phil LeBeau has more.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: When Iceland Air made
its initial flight to Dallas last month, water cannons not only signaled
the beginning of service to Reykjavik, they also marked the start of a boom
in flights from Texas to Iceland. Recently, low-cost carrier Wow, which is
also based in Iceland, started flying to Dallas.

Not to be outdone in its home market, American Airlines has added daily
flights from Dallas to Reykjavik. Is there really that much demand to
visit Iceland?

The fact is, airlines big and small are expanding service across the
Atlantic, not only to Reykjavik, but to all of Europe. In the summer of
2014, there were 168,000 transatlantic flights. It`s been steadily
increasing and this year, there will be more than 215,000, most flown by
legacy airlines like Delta or Lufthansa.

But increasingly, low-cost carriers like Wow are adding chief flights from
Europe to the U.S., some as low as $99.

HENRY HARTEVELD, ATMOSPHERE RESEARCH: We don`t know if all of these
airlines have financial staying power, so this may be a great summer.

LEBEAU: The strong economy means there`s plenty of people ready to take a
trip to Europe, but with jet fuel prices skyrocketing, it`s costing
airlines more to fly across the Atlantic and industry veterans wonder if
higher costs will force airlines to cut back.

DOUG PARKER, AMERICAN AIRLINES CEO: If, indeed, I think it becomes clear
this is a new normal, I think you would see over time less capacity growth
in the industry, therefore, higher prices, but there`s nothing — I don`t
think it`s going to happen in the very near term.

LEBEAU: So far, legacy airlines have shown they will not give up market
share flying to Europe.

And for good reason. The legacy airlines have all expanded their service
to customers willing to pay more, for things like business class. So,
flying to Europe is still a very lucrative business.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

(END VIDEOTAPE)

GRIFFETH: And before we go, another look at the day on Wall Street. Mixed
day, the Dow advanced by 95 points, still above 25,000. The Nasdaq cooled
off, down 54, with the S&P down about two points today.

HERERA: And that will do it for us tonight on NIGHTLY BUSINESS REPORT.
I`m Sue Herera. Thanks for watching.

We want to remind you this is the time of year your public stations seek
your support.

GRIFFETH: I`m Bill Griffeth and we do thank you for that great support.
Have a wonderful evening. We`ll see you tomorrow.

END

Nightly Business Report transcripts and video are available on-line post
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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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