Transcript: Nightly Business Report – October 4, 2018


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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Bond beating. Stocks get
trampled as the yield on the benchmark treasury hits the highest level in
seven years. And mortgage rates follow. But is there opportunity here for
investors?

BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Trojan horse. China
reportedly installed a tiny spy chip to hack on U.S. companies, including
some of the biggest technology names. Why this type of hardware hack is
potentially devastating.

HERERA: And huffing and puffing. E-cigarette maker Juul is fighting back
against copycats as the government cracks down on the company. But the big
winner could be big tobacco.

All that and more on NIGHTLY BUSINESS REPORT tonight for Thursday, October
4th.

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

You know, there is an old saying on Wall Street that the bond market is
smarter than the stock market. Now, whether or not that is true is not the
pinpoint. What is the point is whenever a $100 trillion market has
something to say investors probably should listen. And it`s talking right
now and loudly.

Bond yields have been rising anyway recently. But this week, yields have
been spiking. And today the benchmark 10-year treasury hit the highest
level since 2011.

And while rising yields can be a signal of strong economy and therefore
good for stocks, yields that rise too quickly could stoke fears that the
Fed might have to raise interest rates to cool the economy. And that isn`t
good for stocks.

And so, today, stock investors seemed to listen to the bond market. And
they were not happy. The Dow fell 200 points by the close to 26,627. It
had been down more than 350 points at the lows of the day. The Nasdaq took
the brunt of the selling, plunging by 145 points or nearly 2 percent. And
the S&P gave back 23.

Bob Pisani puts it in all into perspective for us tonight.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: For months, trade wars
have been the primary market focus but the mover today was bond yields with
rising rates, sparking some concerns in the stock market. So, what is the
deal with the rising yields we`ve been seeing?

Well, the first thing behind is it is the strong U.S. economic data. It`s
been building for a while. We have had great numbers but data on the U.S.
services sector on yesterday, coupled with today`s strong read on factory
orders caused the yield on the U.S. 10-year treasury to shoot up.

Second, the Federal Reserve is signaling higher rates. The Fed Chair Jay
Powell said accommodative policy is no longer appropriate in the current
environment. And while he advised the markets not to read too much into
that, there is no denying that the Fed is reading a stimulus.

And finally, trade war fears are subsiding a little. Bond yields have been
on a modest upswing since trade tensions begin simmering down in early
September as the investors have begin unwinding many of their big trade war
plays like buying into safe haven bonds. We have already seen stocks take
a hit from higher yields today. Interest rates sensitive sectors have been
generally down for the past month, even as the broader markets have hit new
highs. So, groups like home construction, real estate investment trusts
and utilities have all been down over the last month.

The global bond yields have also hit multiyear highs. So, this is not just
happening in the United States. The question is, how far will it go? We
don`t know, but in the past several days, volumes in widely traded bond
ETFs have been the highest we have been seeing in months.

Bottom line, when a risk-free asset like treasuries have a big move like
we`ve seen, traders sit up and they take notice.

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

(END VIDEOTAPE)

HERERA: And that big jump in the 10-year treasury yield has mortgage rates
now at the highest level in seven years. And as Diana Olick explains, that
couldn`t come at a worse time for buyers.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: If you didn`t lock in
the mortgage rate last week, you are out of luck. Rates just took the
biggest jump since November of 2016, the day after the presidential
election when bond yields surged.

In just the past two days, the average rate on the 30-year fixed is up 14
basis points to now 4.94 percent according to Mortgage News Daily. That`s
the average for borrowers with solid down payments and credit scores, so
you`re looking at 5 percent and above for the not so pristine borrowers.
Rates are now a full percentage point higher than this time last year, the
highest in more than seven years.

This comes in conjunction with still very hot home prices. The gains are
shrinking slightly as sales slow but prices are still rising faster than
incomes and in most major markets, home prices are already well above the
last peak.

So what does that mean for home buyers? About 180 bucks more on a monthly
payment for the median priced house, and it`s not just the payment but
lenders are strict on how much in debt payments you can carry versus your
income.

RICK SHARGA, CARRINGTON MORTGAGE HOLDINGS: With interest rates going up
you have more people being declined for loans because they`re not going to
be able to meet all the criteria that`s necessary. It`s a bad combination
of interest rates going up. At the same time, we`re dealing with record
high levels of home prices.

OLICK: Friday could be an even bigger day in either direction for mortgage
rates, depending on the outcome of the all important September jobs report.

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

(END VIDEOTAPE)

GRIFFETH: Now, one secretary the of the market that did well today were
the bank stocks, especially the regionals. So, what does this big jumping
in the 10-year mean for bank stocks? Is it time to own them?

Joining us tonight is John Traynor. He`s chief investment officer at
People`s United Advisors.

John, good to see you. Thanks for joining us tonight.

JOHN TRAYNOR, CHIEF INVESTMENT OFFICER, PEOPLE`S UNITED ADVISORS: Thank
you.

GRIFFETH: And you`re not exactly here to make the case for banks as a
long-term investment yet. Why?

TRAYNOR: Yes. We tend to be students of history. And if you take a look
at bank stocks, financial stocks in general, they tend to be early cycle
stocks.

The time you want to buy banks are at the bottom of the recession and you
generally want to start lightening as the fed starts raising rates. Now,
this cycle because the banks were in the eye of the storm back in 2008,
they really never had the early cycle run. So sort of been the lost decade
for financial stocks.

We think rising rates will certainly have a positive impact on bank
earnings. So, we could definitely see banks move up. But we are — and we
own them but we`re not making a big bet on financials because we just think
owning banks into a Fed increase cycle is generally a shorter term trade.

So, that 5-year hold we don`t see in financials.

HERERA: All right. So, let`s take a look at what you would be buying at
these levels, if for instance you want to hold them between three and five
years. Are there stocks that you think look attractive?

TRAYNOR: Well, the financial stocks that we own right now are the larger
stocks, the Bank of America (NYSE:BAC), and J.P. Morgan and in the regional
spates we own key. They will all be beneficiaries of higher rates. You
know, rates move up, that`s great for bank earnings.

And because we believe the economy will stay strong as the economic reports
of the last couple of days have said, credit quality should be good. So
bank earnings should be very good. We`re just not looking for the big
secular rise in financial stocks at this point in the cycle.

GRIFFETH: All right. Let me push back a little bit on that thinking,
because the banks did have something of a lost decade. They haven`t
enjoyed the rise in rates to this point, right?

TRAYNOR: Correct.

GRIFFETH: I mean, Banking 101 says when rates go up, banks make more money
off the spread between what they lend and what they borrow, right? So, why
wouldn`t they be a longer term investment if we are, in fact, heading into
a long-term trend of rising rates?

TRAYNOR: Really what impacted banks was the decade — we`ll call it free
money, where the fed had interest rates at zero. So, banks, you know, they
hit the floor on their cost for deposits. And we all saw deposit rates
move down to zero, rates came down also.

The banks could not go to a negative rate. So even though rates came down,
the economy did very well, that net interest margin, that`s really the
number that bank investors want to look at.

GRIFFETH: Right.

TRAYNOR: That net interest margin shrink dramatically for banks. And
that`s what really hold them back.

GRIFFETH: Yes.

HERERA: Very quickly, John, we only have a few seconds. Why do you think
the rate is increasing on the 10-year as quickly as it has been? Is it
inflation? Is it a good economy? Maybe a combination of both?

TRAYNOR: Well, I guess there are two reasons that you want to look at for
why rates — why the 10-year would be increasing. The bad reason would be
a real inflation shock. You know, your viewers can think back to the
1970s. That`s a bad reason for rates to go up.

The good reason which is what we`re seeing now is this strong economy. So,
we think investors will do well in the market going ahead because rates are
moving up, because the news is good.

GRIFFETH: Before we let you go, clearly, this doesn`t benefit all sectors
of the economy, those that are interest sensitive.

TRAYNOR: Yes.

GRIFFETH: And today, we saw that. I mean, utilities, that goes without
saying. But real estate investment trusts also suffered today.

TRAYNOR: Yes, we are underweight REITs. We`re underweight the interest
sensitive area and we`re also underweight emerging markets. Those are the
two areas that we think are going to come under a lot of pressure going
forward as we see rates move up. So, we would remain underweight those
areas.

GRIFFETH: And does this change the Fed at all? Very quickly, John.

TRAYNOR: Well, I think Jerome Powell came out yesterday and part of the
reason for the rates was he came out and very strongly reiterated the fact
that he thinks the economy is in good shape. So, I think if anything, the
Fed stays on course. What would scare us is if the Fed ever thought that
they were behind the curve if they got spooked and they said, boy, we need
to accelerate the rate of increase. I think he is — chairman Powell has
telegraphed very well they`re going to maintain this course and they think
they`re in a good position. So, we are pleased with that.

GRIFFETH: Very, very interesting. This is — feels like a watershed week
in some ways.

John Traynor —

TRAYNOR: Absolutely.

GRIFFETH: — of People`s United Advisors — again, thanks for joining us
tonight.

TRAYNOR: Thank you. Thank you.

HERERA: A U.S. judge found that Chinese telecom ZTE violated a probation
imposed on the company last year. As a result, the U.S. is ordering the
telecom equipment maker to undergo additional two years of monitoring that
will assess ZTE`s compliance with the U.S. export control laws. ZTE
pleaded guilty in 2017 to illegally shipping products to Iran despite U.S.
sanctions.

GRIFFETH: Elsewhere, Bloomberg is reporting that nearly 30 U.S. companies,
including Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN), may have been
secretly subjected to surveillance by the Chinese government.

Josh Lipton reports on what happened and the reaction from the potentially
targeted businesses.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: It reads like a
chapter torn out of a spy novel. Chinese government agents infiltrating
the supply chains, used by some of America`s biggest companies.

That`s what “Bloomberg Businessweek” is now alleging in an explosive
report, saying the Chinese military forced Chinese manufacturers to insert
special chips into components that ultimately went into servers assembled
by a company called Supermicro. Those sabotaged servers then made their
way into data centers operated by dozens of companies.

The apparent role of such implanted devices, opening doors that attackers
could exploit getting their hands on sensitive correspondent information.

But the supposed correspondent targets of the attack dispute it. Amazon
(NASDAQ:AMZN) saying there are so many inaccuracies in this article as it
relates to Amazon (NASDAQ:AMZN) that they`re hard to count. Apple
(NASDAQ:AAPL) saying: Each time we have conducted rigorous internal
investigations based on their inquiries, and each time we have found
absolutely no evidence to support any of them. And Supermicro emphasizing
that it has never found any malicious chips nor have been informed by any
customer that such chips have been found.

But the investors seem skeptical, sending Supermicro stock cratering. The
market cap of the company dropping below $500 million.

The story speaks to a broader issue. U.S. lawmakers have long been openly
suspicious about technology assembled in China and shipped to the U.S. for
just this reason.

SHAWN HENRY, CROWDSTRIKE PRESIDENT: This is not something that was secret.
It`s been publicized. The U.S. government put out the comprehensive
national cybersecurity initiative back in 2008. And in that initiative,
one of the tenets of that, one of the major initiatives was the integrity
of the supply chain. So, this is something that certainly that the
government was aware of, the fragility and the potential vulnerabilities of
the supply chain.

LIPTON: Today, Senator Mark Warner echoed the concern, telling CNBC this
report provides more evidence that China`s pattern of behavior is a serious
threat to national security and supply chain risk management.

Some tech analysts argue that if a security breach like this turns out to
be true or one like it, American tech companies might indeed have to
rethink how prudent it is to keep assembling their products in China.

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

(END VIDEOTAPE)

HERERA: And let`s pick up where Josh left off. Roger Cheng joins us to
talk more about China reportedly spying on some U.S. tech companies and
what the implications are for this type of hardware hack. He is the
executive editor at CNET.

Good to see you again, Roger. Welcome back.

ROGER CHENG, CNET EXECUTIVE EDITOR: Thanks.

HERERA: You know, as Josh laid out, the tech companies, some of them are
pushing back on this report. But if indeed this did happen, what are the
ramifications for these companies? And how could they fight against it?

CHENG: Yes, if this report ends up being legitimate, I mean, the
consequences here are devastating. Most attacks, most cyber-attacks are
software based, inserting bits of code, or using software different codes
to breach data systems. Having a system built around hardware — a
hardware based breach is extremely rare, very difficult to pull off. But
sort of the long-term benefits for that hacker are potentially —
potentially yielding a treasure trove of information for anyone looking to
make this kind of move.

GRIFFETH: But I was struck — I know you were too — Sue mentioned this —
the strong denials from the Amazons and the Apples, even the Supermicros?
What do you make of those?

CHENG: It`s a rare move. Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) in
particular are known for being fairly guarded when it comes to their public
comments and the fact that they came out with an official statement that
they broke down and dissected the story definitely caused me to, you know,
take a close, a closer look or second look at that Bloomberg story.

It`s important to note that, you know, Apple (NASDAQ:AAPL) kind of hedged
and they did say they did not find anything wrong with their servers. The
story itself didn`t have to say that. They never mentioned apple
discovering the chip that other parties like Amazon (NASDAQ:AMZN) — and
it`s important to note that Amazon (NASDAQ:AMZN) cut ties with Supermicro.
So, maybe they know more than they are leading on.

But it is unusual that both Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN)
came out so strongly against this article.

HERERA: So maybe the truth is somewhere in the middle there. And if it
is, do these tech companies have to rethink whether or not they produce
some of their products in China?

CHENG: I mean, whether or not this is — this is valid, I think all the
companies are looking up and down the supply chain, really seeing if there
are any issues. You know, there are I guess compliance — there are
definitely checks now process. But I think they are looking and at least
reconsidering the option of moving their supply chain elsewhere.

HERERA: On that note, Roger, thank you so much. We`ll continue to follow
the story. Roger Cheng with CNET.

GRIFFETH: Well, it`s been a swing state in presidential elections and now,
Florida may be the key for control of the Senate. And as always, it`s
about the economy. We`ll head to the Sunshine State when we come back.

(MUSIC)

HERERA: As you probably already know, health insurance is getting more and
more expensive, and also for businesses. A Kaiser Family Foundation report
shows the average costs of employer health coverage offered to workers rose
5 percent this year to nearly $20,000 for a family plan. And while
employers pick up most of that tab, workers still average $5,500 a year in
premiums. That is up 65 percent from a decade ago.

GRIFFETH: Well, Florida is always a key state during presidential
elections. And this year, the Sunshine State is a battleground for the
Senate. The so-called I-4 Corridor that runs through the central part of
Florida is the swing region right now that will likely determine this
year`s race.

John Harwood has more from Celebration, Florida.

(BEGIN VIDEOTAPE)

UNIDENTIFIED MALE: The Democrats are going to become the majority in the
House and the Senate.

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: The race here in
Florida fits Bill Nelson, the long-time Democratic incumbent who touts his
fights against Wall Street and insurance companies, against Rick Scott, the
former health care CEO who`s now Florida`s Republican governor and trumpet
the state`s job growth. In the state packed with older voters, each uses
Medicare to attack the other`s background.

AD ANNOUNCER: The career politician Bill Nelson doesn`t think the rule
applies to him. News reports reveal that Nelson doesn`t bay payroll taxes
for his employees. He doesn`t even provide them with health benefits.
It`s stealing money from Medicare, Social Security and it`s unfair.

AD ANNOUNCER: Rick Scott can`t hide from the truth. He was CEO of a
company fined $1.7 billion for Medicare fraud. He gave political donors
secret contracts after Hurricane Irma that cost taxpayers $30 million. Cut
education. He denied health care.

HARWOOD: Scott claims credit for Florida`s strong economy. And
Republicans here agree.

DAN LENHOF, WINTER SPRINGS, FLORIDA RESIDENT: We`re making good strides as
far as, you know, being able to — new jobs and being progressive and
getting back on track.

HARWOOD: But Democrats have united in opposition to Trump and against his
tax cuts.

MARCELLA BENTON, LAKELAND, FLORIDA RESIDENT: I really feel like it`s a tax
cut for the 1 percent and not for me.

JUDGE BRETT KAVANAUGH, SUPREME COURT NOMINEE: I do.

HARWOOD: Now, the battle over Trump`s Supreme Court pick is introducing a
new wild card. Anger among Republicans about attacks on Brett Kavanaugh.
Nationally, pollsters show Republican enthusiasm rising, almost on par now
with Democrats.

UNIDENTIFIED MALE: It`s such a fraud issue.

UNIDENTIFIED FEMALE: The Kavanaugh hearings are a disgrace.

UNIDENTIFIED MALE: I don`t think the — the liberal side, the Democrats
are doing themselves any favor with what`s going on right now with this
nomination, the Supreme Court nomination. I think it`s — I think it`s a
sham. I`m disgusted watching it.

HARWOOD: Here in Florida and nationally, the question is whether that new
Republican energy survives if the Senate confirms Kavanaugh to the Supreme
Court, still four weeks until election day?

For NIGHTLY BUSINESS REPORT, I`m John Harwood in Celebration, Florida.

(END VIDEOTAPE)

HERERA: Constellation Brands (NYSE:STZ) raises its earnings outlook for
the year, and that`s where we begin tonight`s “Market Focus”.

The company raised its guidance after saying steady growth in the core
beers and wines business helped quarterly reports top expectations.
Constellation said there was especially strong demand for Corona and Modelo
beers. The shares rose 5 percent to $222.10.

Arrowhead Pharmaceutics says it has entered into a nearly $4 billion
license agreement with Johnson & Johnson (NYSE:JNJ) subsidiary to develop
and market its hepatitis B treatment. Under the deal, Arrowhead will
receive $175 million up front. It could receive more than $1.5 billion in
milestone payments. Arrowhead may also be eligible to receive a separate
$2 billion in milestone payments for three additional treatments.

But that structure did not please the street. Arrowhead shares fell 17
percent to $15.33.

GRIFFETH: Oncology company Guardant Health began trading the Nasdaq today
after pricing its initial public offering at $19 a share that valued the
company at nearly $2.5 billion. Guardant has called its liquid biopsy
blood test a game changer, saying that it`s simpler and less invasive
procedure for patients with potentially cancerous tumors.

(BEGIN VIDEO CLIP)

HELMY ELTOUKHY, GUARDANT HEALTH CEO & CO-FOUNDER: The lung cancer has been
a really big application for us, but the technology is generalizing. It
really works for all cancers. Today, we`re in late stage disease. But
where we`re going is taking this technology as we make it more sensitive,
it can eventually be used for early detection for the rest of us. And
that`s really where the power and promise of this technology ultimately
lies.

(END VIDEO CLIP)

GRIFFETH: Look at shares, they popped 69 percent in the first day of
trading, closing at $32.20.

And after the bell tonight, Costco (NASDAQ:COST) matched Wall Street`s
earning expectations and reported revenue that inch past estimates but the
discount warehouse retailer also warned that it expects to report a
material weakness in internal controls relating to its I.T. systems that
support the company`s financial reporting processes. Shares initially fell
in afterhours, and also finished down about a fraction at $231.68 today.

HERERA: Coming up, why the government cracking down on e-cig maker Juul
might be lighting a fire under the big tobacco stocks.

(MUSIC)

HERERA: As we have been telling you, the popularity of e-cigarettes has
exploded among high school students. The FDA is cracking down on the
industry leader, Juul.

And as Aditi Roy tells us, that could have an unintended benefit for big
tobacco.

(BEGIN VIDEOTAPE)

ADITI ROY, NIGHTLY BUSINESS REPORT CORRESPONDENT: They`re sleek, slim and
stylish. That`s one reason Juul`s vaping devices are so popular.

UNIDENTIFIED FEMALE: It`s one of the products that just flies off the
shelf.

ROY: Juul has nearly three quarters of the e-cigarette market, and now,
it`s fighting back against copycat companies. Juul is asking regulators to
order 18 companies to stop selling lookalike e-cigarettes. The company has
filed a complaint with the U.S. International Trade Commission, alleging
these companies, quote, blatantly emulated the distinctive design of Juul`s
system.

Juul wants the agency to stop the products from being imported,
distributed, sold and marketed in the U.S. The company alleges copy cat
products include flavors by bubble bubble, apple juice, and sour gummy,
which seem to target underage user.

Juul itself is the focus of an FDA investigation into e-cigarette
manufacturers and teen use of vaping devices. Just last week, FDA
officials showed up at Juul headquarters and left with thousands of pages
of documents.

Juul CEO Kevin Burns said it provided the FDA with information about the
company`s online age verification protocols and calls its meetings with the
FDA last week, quote, a constructive and transparent dialogue, adding that
it`s released more than 50,000 pages of documents to the FDA. The number
of high school students who have used e-cigarettes in the past 30 days has
skyrocketed by about 75 percent, according to people familiar with
preliminary data from the CDC.

The FDA is investigating whether Juul sales and marketing practices have
led to the increasing use of vaping products among teenagers. Juul has
changed its ads from early days switching to a more sober tone with older
models. Juul`s runaway success could also be cutting into sales of
traditional cigarettes, Piper Jaffray points to a Juul survey of 19,000
Juul users which found 62 percent were smokers when they started using the
vaping device and about two thirds of them quit after starting to Juul.

The one-year stock chart of British American Tobacco, Phillip Morris and
Imperial Brands show shares of those companies down between 15 percent and
27 percent in the last 12 months since Juul`s rise. But since the FDA`s
investigation into e-cigarette makers like Juul, shares of those companies
appear to have been rebounded. CB Insight is reporting that tobacco
companies are talking about vaping on earnings calls with increasing
frequency, with British American Tobacco talking about vaping the most.

Some of these big cigarette companies have launched their own vaping brands
and are also part of the FDA`s investigation. But given Juul`s huge market
share in the category and the fact that the big tobacco companies make all
of their money in the higher margin cigarette business, analysts say they
don`t have as much to lose in an FDA crackdown.

For NIGHTLY BUSINESS REPORT, I`m Aditi Roy, San Francisco.

(END VIDEOTAPE)

GRIFFETH: Finally tonight, bond billionaire Bill Gross put the first part
of his U.S. stamp collection on the block last night. And the sale topped
$10 million, making it the most expensive single stamp auction ever. Some
of the highlights included the 2 cent blue Hawaiian (NASDAQ:HA) which went
for $619,500. And the famed bible block of unused 1847 stamps found that
were found in a bible in the early 1900s, going for $590,000.

The rest of his U.S. collection will be auctioned off over the next year or
so. And all proceeds will go to charity.

HERERA: Wow!

Before we go here is a look at the final numbers on Wall Street. The Dow
fell 200 points to 26,627. It had been down more than 350 at the lows of
the day. The Nasdaq took the brunt of it, plunging 145 points or nearly 2
percent. S&P 500 gave back 23.

GRIFFETH: Just thinking what happened to my stamp collection. I don`t
know.

HERERA: I never had one.

GRIFFETH: I`ll look for it.

That is NIGHTLY BUSINESS REPORT for tonight. Thanks for joining us. I`m
Bill Griffeth.

HERERA: I`m Sue Herera. Have a great evening. We`ll see you tomorrow.

END

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