Transcript: Nightly Business Report – October 23, 2018

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Hang on tight. The markets
tank and then climbs back, and it may be because stocks no longer react to
earnings and forecasts the way they once did.

BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Sounding the alarm.
Bellwethers Caterpillar and 3M warn of rising costs and issue weaker
outlooks unnerving shareholders.

HERERA: Pockets of strength. The areas of market that are making money
even amid this volatile streak.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Tuesday,
October 23rd.

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

So what a ride, again. Investors nerves were frayed at the open this
morning when the Dow plunge more than 500 points after some very big blue
chip companies reported quarterly results. For the most part, the earnings
were good. It`s what the CEOs had to say about the future that the market
didn`t like.

And some important levels were tested during the day. The Dow traded below
25,000 for part of the session. The S&P 500 cracked 2,700 for a time. And
that was for the first time since July. And the Nasdaq flirted with
correction territory.

But then a rebound. It wasn`t sharp but slow and gradual and the Dow
actually came within a few points of breaking even. And when the closing
bell rang this afternoon, the Dow was down 125 points to 25,191. The
Nasdaq fell by 31. The S&P 500 slipped by 15.

Now, this latest bout of selling and volatility comes during the busiest
week of earnings season.

And as Bob Pisani reports, so far there has been a different response to
the results this time around.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Earnings season is in
full swing but right now, the market has a problem. Many stocks are no
longer rising on good earnings or even good guidance. The market typically
rewards companies that raise guidance and punish those that don`t.

But something different is happening this quarter. Companies that have
raised fourth quarter forecasts or analysts who have raised the forecasts
on their own are not being rewarded with higher prices. Take CSX, United
Rentals, Citigroup, VF Corp, all posted earnings beats. They saw fourth
quarter estimates raised but they`re all trading down since their reports.

What`s going on? The market is trying to figure out if the positives
outweigh the negatives right now and some are worried that the positive
momentum from the tax cuts are waning a bit.

Remember what the stock market has been rising on all throughout the year,
strong economy, higher revenues, tax cuts and partially reduced
regulations. But new headwinds have emerged in the last several months,
tariffs higher rates, higher commodity costs and now we`ve got to country
specific issues that are weighing, concerns over China slowing, Italian
policies and Saudi Arabia, which is important since Saudi Arabia is a major
investor in technology funds.

Goldman Sachs noted that 56 percent of companies who have beaten earnings
expectations as of Friday`s closed underperformed the S&P. Normally we
would see outperformance of better than 1 percent. Not happening. So far,
companies that are missed on earnings underperformed the S&P by 3 percent
and that`s worse than the historic averages.

So, what do we make of the market when those that do well underperform the
market and those that don`t do well, they sell off even more? It`s hard to
decide, but maybe not much yet. But the fact that stocks are not rising on
positive earnings is certainly worth keeping an eye on.

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

(END VIDEOTAPE)

HERERA: The early rout started when Caterpillar and 3M reported results.
Industrial companies were already in focus given their international reach
and exposure to China. The disappointing comments raised fears of slowing
economic growth. And that sent shares of both Caterpillar and 3M lower.

Morgan Brennan has the details.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: 3M`s disappointing
results rippled through the industrial sector. The company reported
slowing sales across the board in health care and consumer segment for
which sliding consumer products sales in China was mentioned on the call.
Currency is a headwind so are rising costs. The reason the maker of Post-
It notes and industrial coatings now expects a roughly $100 million
headwinds from tariffs. Still, 3M does expect to offset those cost.

NICHOLAS GANGESTAD, CFO, 3M: Our view is we have approximately $100
million headwind from tariffs and that our price will go more than offset
that and raw material prices increases into 2019.

BRENNAN: That`s really the theme for industrials so far this season —
higher costs, versus higher pricing. And what that means for margins.

Take Caterpillar which did beat and also reaffirmed this outlook. The
stock still tumbled in trading today. Why? It`s become more expensive to
manufacture those earth-moving machines it makes.

But management did say costs headwinds will come in the lower end of
previous guidance and higher prices from tariffs are already baked in.

JIM UMPLEBY, CEO, CATERPILLAR: We have been on managed distribution.
Still, we don`t expect a major impact process. Quite frankly, we were
already hit with the earlier tariffs. So, we don`t think a later change
will have an impact on us. It was already baked in for us.

BRENNAN: Cat like 3M plans to raise prices on the products it sells to
make up for those higher costs. Analysts say economic growth is still
solid but that investors are taking a trade related risk into further
accounts.

ROB WERTHEIMER, MELIUS RESEARCH: Cat has really executed quite well. So,
the surprise to the upside as you mentioned for quarter after quarter after
quarter, and that`s not always, you know, easy to do. So, kudos to them
for doing it.

I think that tariffs have introduced some uncertainty into the market, and
they are managing through that. So, as we kind of understand what that
risk is, then we can sort of price that in better and make the risk comes
down.

BRENNAN: A similar story for United Technologies as well, as the
industrial conglomerate sad it too will hike prices across its portfolio as
long as tariffs are in place.

For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan at the New York Stock
Exchange.

(END VIDEOTAPE)

GRIFFETH: Now, investors did have a few things to cheer, most notably
McDonald`s quarter. In fact the fast food chain stock was the best
performing blue chip after the company topped expectations and reported its
13th straight quarter of same store sales growth.

And as Kate Rogers tells us now, the earnings beat comes as the company
makes global business changes.

(BEGIN VIDEOTAPE)

KATE ROGERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Customers are loving
it overseas. Sales were better than expected in McDonald`s international
market. Growth was bolstered by restaurant renovations designed to
modernize the Golden Arches, including self-order kiosks, delivering and
even table service.

While business was strong overseas thanks, to those modernization efforts
it was weaker than expected in the U.S. as the competitive landscape in the
fast foods space remains stiff. McDonald`s is also aggressively renovating
its U.S. locations, updating about 1,000 restaurants per quarter and will
invest about $6 billion to modernize most of its units by 2020.

R.J. HOTTOVY, MORNINGSTAR: I think we`re seeing the benefits of the
experience of the future and the companies other velocity accelerators such
as delivery and mobile order. Not only in international markets but also
in the U.S. There`s been some disruption as I rolled it out, but I think
if you take away and look at the high level, I think that they are seeing
benefits from that and that`s helping to offset some of the promotional
activity within the category.

ROGERS: But those changes have come with pushback from U.S. franchisees,
hundreds of whom recently met in Florida, claiming the changes coupled with
menu innovations aren`t paying off quickly enough.

CEO Steve Easterbrook acknowledged on the earnings conference call that
franchisees are taking on a lot at once but reaffirmed the company`s vision
for change.

STEVE EASTERBROOK, MCDONALD`S CEO: At our current pace by the end of 2019,
expect to complete over 12,000 restaurants with our future initiative
making this the largest construction projects in our history. We still
have hard work ahead, but we are seeing encouraging response from customers
in restaurants where many of these improvements are already completed

ROGERS: Easterbrook also said the company is looking to refocus on
breakfast and will roll out more deals to help bring diners back to
restaurants as the value wars continue.

For NIGHTLY BUSINESS REPORT, I`m Kate Rogers in New York City.

(END VIDEOTAPE)

HERERA: And fellow Dow component Verizon topped Wall Street`s profit
expectations. The telecom giant added subscribers at a quicker than
expected rate as it presses ahead with its plan to offer a faster 5G
network. Verizon did report a revenue decline in its wire line business
and said it is struggling to meet financial targets in its Oath media and
advertising unit. Nonetheless, the shares were up 4 percent to close at an
18-year high.

GRIFFETH: Well, we have invited a couple of pretty smart market watchers
to talk about why stocks have been acting the way they have during this
very volatile month.

Joining us tonight is Jeff Kleintop. He`s chief global investment
strategist at Charles Schwab. And Peter Boockvar, he`s chief investment
officer with Bleakly Advisory Group.

Good to see you both. Thank you for joining us tonight.

PETER BOOCKVAR, BLEAKLEY ADVISORY GROUP CIO: Thanks.

JEFF KLEINTOP, CHARLES SCHWAB CHIEF GLOBAL INVESTMENT STRATEGIST: Thanks.

GRIFFETH: Jeffrey, it seems as soon as we turn the calendar over to
October more than three weeks ago that the markets suddenly went into
volatility mode. What`s your version of what`s going on right now?

KLEINTOP: Well, I think there is two things behind this, Bill. One is we
have known about the risks of slowing revenue growth for some time. That`s
not new news in October. But rising costs are. We just talked about it
earlier in the show, rising costs, whether it`s caterpillar, even
McDonald`s.

But take a look at the difference there. McDonald`s was able to pass on
some of that, whereas some of the others were not. So, the combination of
slower revenue growth but now new discussion of rising prices, rising
inflation of materials and labor, that`s new and potentially a weaker
outlook for profits.

The second thing is the buyback story. Every time we get to this point of
the earnings season in October, corporations do less. They limit the
number of their corporate share buybacks. This time however, it`s joined
by individual investors who have turned into net sellers in the second half
of this year based on industry data. So, with no buyers, institutions not
buying and individual investors selling, we`re seeing much more of a
downdraft this earning season.

HERERA: So, Peter, you think the higher rates, the tightening central
banks makes this market more vulnerable to some of the other issues, some
of which are geopolitical out there. Correct?

BOOCKVAR: It happens every time. And the deeper you get into a tightening
cycle, accidents begin to happen. Now the accidents started overseas with
— well, you have the short VIX trade blow-up Turkey, Argentina, Italy and
it`s now beginning causing issues obviously in other parts of Asia with
China and the U.S. So when the liquidity spigot starts to turn off, when
rates start to go up, it starts to impact not only valuations but starts to
impact economic activity.

You look at housing and autos, obviously, the two sensitive interest rate
areas of the economy are already slowing down. Now, the offset up to this
point has been a strong earnings story.

GRIFFETH: Right.

BOOCKVAR: But now, there`s some holes in that in terms of the profit
margins. So, you have a tightening the monetary policy and rising interest
rates with maybe a peak in profit margins and I think that confluence of
events is causing this volatility in the market.

GRIFFETH: So, that`s why you think — and we saw this from the very
beginning of earnings season when the banks reported blowout numbers and
the stocks went down you think that`s going on here.

BOOCKVAR: Yes, and you even saw it in — look at Netflix, for example.
Great quarter, big upside in their subscriber numbers. The stock had one
good day and gave it all back. And I think that`s an important thing
because up to this point, it`s been earnings strength that has offset the
monetary drag. And now, maybe we`re losing some of that support.

HERERA: You know, Jeff, talk to me about the recession indicators that
you`re looking at. I mean, the economy — to people on Main Street and
elsewhere — seems to be really chewing along quite nicely. Why are you
worried about a possible recession?

KLEINTOP: You know, there is good and maybe there`s too good. One of the
things I like to watch is the difference between the unemployment rate and
the inflation rate. You know, historically, those two are usually pretty
far apart. The unemployment rate is much higher than the inflation rate,
but when they come together and become they have about a year before each
of the last three U.S. recessions, it tells you that the economy is
overheating and likely to experience a recession in about a year.

We`re not there yet. Still about 1 percent apart in the U.S. and the
Japan, and the U.K., Germany, other places, but we`re getting close. I
think in the next six to eighteen months, the could cross over and that
combined with the increasing rates from the Fed suggests we might be seeing
a peak in the global economic cycle sometime in 2019 and investors might be
beginning to brace for that.

GRIFFETH: So, what do you do? Is this why, Jeff, the market has become as
defensive as it has? We`re seeing these defensive sectors outperform this
market lately. Is that what`s going on?

KLEINTOP: I think it is, Bill. I think investors are beginning to
position for that end of cycle. It might be a little early still. But
certainly looking out again six to eighteen months, it could be there.

I think looking at your portfolio, trimming the more volatile areas like
emerging markets, over even like tech stocks if you are overweight there,
that`s certainly a volatile area to take a look at. And secondly, you
know, think about bonds here. You know, the five-year treasury now at 3
percent, that`s not a bad entry point for longer term investors to manage
some of the volatility in your portfolio.

No one is comfortable with perfectly comfortable with losses but if you are
losing sleep over your portfolio, it may have a bit too much in stock.

HERERA: Very quickly, Peter, where would you put money to work today?

BOOCKVAR: Well, I think that the international markets that sold off so
much start to nibble there. The U.S. market is still very expensive. And
short-term bonds are an attractive place, and I particularly like gold and
silver.

HERERA: All right.

GRIFFETH: Short and sweet. Always smart people that we like to talk, Jeff
Kleintop from Charles Schwab, Peter Boockvar from Bleakley Advisory Group,
thank you both for joining us tonight.

KLEINTOP: It`s a pleasure.

HERERA: And it is time for a look at some of today`s upgrades and
downgrades.

Lowe`s was upgraded to buy from neutral at Citi. The analyst cites Lowe`s
turnaround plan and the strength of its management team. The price target
is $112. The stock rose just a fraction to $98.12.

VF Corp. was upgraded to outperform from neutral at Wedbush. The analyst
does not share Wall Street`s concern over growth and margins. The price
target is $94. The stock was up a fraction to $77.71.

GRIFFETH: Viacom was upgraded to in line from underperform at Imperial
Capital with the analyst citing factors including the market rotation from
growth to value in the media sector. Price target now, $29. That stock
fell to $32.71 today.

And NXP Semiconductor was upgraded to overweight from equal weight at
Barclay`s. The analyst cited the recent pullback in this stock and sees
the company`s earnings moving higher. So, the price target is now $95.
That stock was up more than 1.5 percent today to $77.72.

HERERA: Still ahead, crude craters after a Saudi official makes a pledge.

(MUSIC)

HERERA: A Federal Reserve official favors more interest rate hikes.
Atlanta Fed President Raphael Bostic offered an upbeat outlook on the
economy. He says he believes the central bank should continue on its path
of gradual increases citing the risk of economy overheating. He explained
that there is little reason to keep the Fed`s foot on the gas pedal.

GRIFFETH: President Trump is pushing the idea of a middle class tax cut.
He floated the idea again today during a photo opportunity in the Oval
Office.

(BEGIN VIDEO CLIP)

DONALD TRUMP, PRESIDENT OF THE UNITED STATES: We`re putting in a tax
reduction of 10 percent, which I think will be a net neutral because we are
doing other things which I don`t have to explain now. But it will be
pretty much of a net neutral. But it will be great for the middle class.

It`s going to be a tax reduction of 10 percent for the middle class.
Business will not enter into it. And this will be on top of the tax
reduction that the middle class has already gotten.

And we`re putting in a resolution probably this week. I think you folks
know about it. And Kevin Brady has been working on it hard a couple of
months. We will put that in and start the work sometime after the
midterms.

(END VIDEO CLIP)

GRIFFETH: Congressman Brady chairs the tax writing House Ways and Means
Committee and he said the measure would be crafted in the coming weeks.

HERERA: President Trump will meet with China`s President Xi Jinping at the
G20 next month. According to White House economic adviser Larry Kudlow,
the two will, quote, meet for a bit but Kudlow did not provide any other
details. The meeting comes at a time of escalating tensions over trade.

The Trump administration recently put tariffs on $200 billion worth of
Chinese imports. And Beijing immediately retaliated. The two countries
remain far apart on some key trade related issues such as intellectual
property rights and technology transfers.

GRIFFETH: The European Union today formally rejected Italy`s budget, an
unusual but not unexpected move that puts Brussels and Rome on a collision
course. The budget proposed by the Italian government increase both
Italy`s overall government debt and its deficit in the short run, both
violations of E.U. rules. And officials said today the E.U. was given no
alternative but to reject the proposal which caused Italian bond yields to
rise.

Italy now has three weeks to make changes.

HERERA: Oil prices tumble today after Saudi Arabia pledged to increase
output. Saudi`s energy minister said for a second straight day that the
kingdom will keep the world adequately supplied with crude. Add to that,
recent for example forecasts that global demand for oil is slowing and you
have a down day for domestic crude which fell 4 percent. Recall that U.S.
sanctions on Iranian oil begin November 4th. And Washington says it wants
to stop all of the Tehran`s fuel export.

GRIFFETH: Harley-Davidson faces weakening demand in its largest market,
and that`s where we begin tonight`s “Market Focus”.

The motorcycle maker reported its h biggest decline in domestic sales in
eight years as it struggles to attract younger customers. The company had
better luck with its international markets, specifically in Europe where
sales rose and helped overall results edged past expectations. Harley also
warned that tariff-related costs would cause shipments for the year to come
in at the low end of guidance. Shares were down 2 percent today to $37.87.

Pulte Group sold more homes at higher prices this past quarter, and that
help the home builder beat earnings expectations. Revenue also rose. In
addition, the company said that it expects average selling prices to
continue to climb this quarter. Shares rose by 7 percent today to $22.40.

And Jet Blue reported earnings that edged past Wall Street`s estimates.
Even as a rise in fuel costs hurt the results. The airline said it has a
plan in place to improve margins and offset higher costs, adding that fare
increasing wills part of the strategy. Shares were up a fraction to
$16.63.

HERERA: Lockheed Martin said a rise in revenue in all of its units helped
overall earnings soar past estimates. The aerospace and defense contractor
raised its profit outlook for the year and forecast revenue above Wall
Street targets. The company also said sales could rise as much as 6
percent in 2019, as long as key programs continue to receive funding from
the government. Lockheed shares were off more than 1.5 percent to $321.35.

Biogen said improved sales for its multiple sclerosis treatment led to an
overall earnings beat. Separately, the drug maker said its experimental
lupus drug failed to meet goals in the study trial. But shares still
finished up a tick to $316.15.

And the known short seller Andrew Left says he now has a long position on
Tesla`s stock, after shorting it for more than two years. The reason for
his change of heart, Left says Tesla is destroying the competition and
pulling customers away from a number of car makers including Mercedes and
Honda. Shares of Tesla popped more than 12 percent to $294.14.

And the aluminum products maker Arconic is reportedly considering a $11
billion acquisition offer from the buyout firm Apollo Global Management.
“Reuters” says that offer values Arconic between $23 and $24 a share. The
company hopes to make a decision on whether to sell itself before it holds
the investor day next month. Arconic shares fell more than 3 percent to
$20.65.

GRIFFETH: Coming up, we are looking for pockets of strength in this
otherwise head spinning market day.

(MUSIC)

HERERA: It is no secret that October has been volatile. But even with the
broader market down more than 5 percent, there are sectors that are higher
since October 1st, namely utilities and consumer staples.

So, let`s talk more about the pockets of strength with Mike Bailey,
director of research at FBB Capital Partners.

Nice to see you. Welcome back, Mike.

MIKE BAILEY, DIRECTOR OF RESEARCH, FBB CAPITAL PARTNERS: Thanks for having
me back.

HERERA: We are getting to specific picks in a minute, but I guess I
shouldn`t be surprised at the strength in the utilities sector and consumer
staples, right?

BAILEY: Absolutely. So, yes if you are in a risk off moment, it does seem
like that`s kind of where we are. Maybe you look for the most attractive
areas or the safest plays, if you will. Utilities are at the top there.

So, I think what we are seeing ass investors are really worried about, for
example, tariffs, what are those doing? Rising interest rates, stronger
dollar. If you sort of think about the parts of the market are sort of
immune to the utilities is definitely at the top of the list.

So, they`re mostly domestic. So, no tariffs impact. There`s not a lot of
currency impact. There is a little bit of risk around interest rates.

GRIFFETH: Right.

BAILEY: But I think investors are not too worried about that at this
point.

GRIFFETH: Well, I was going to ask you about that because so many viewers
invest for dividends. And utilities are a typical case to invest for
dividends. How will they perform though as rates rise? They usually don`t
do well.

BAILEY: That`s right, that`s right. So, we are seeing kind of a
counterargument if you will to that. I think part of it may be just
looking at what are investors really worried about. I think the flavor of
the moment is probably tariffs, and perhaps currencies and any company
doing business outside the U.S., if there`s some kind of global slowdown.

So, if that`s the fear, then maybe utilities are sort of the perfect setup
there. But you`re right, in general, if we do see interest rates continue
to creep up, that`s going to make other investments such as safer bonds
maybe more attractive than sort of a safer utility stock.

HERERA: So, let`s get to some names. You gave us three names in the time
we have remaining.

CME Group is one that you favor at this point. Why is that?

BAILEY: So, CME in some ways is sort of taking advantage of the drama, you
know, what we`re seeing really this month. So, the company is an exchange
as investors are trading. They basically take a small fee there as an
exchange. They are sort of a toll taker.

And the drama we have seen this month is a lot more trading, a lot more
volatility. They participate in that. They really benefit there.

So, we do think that between now and you`re heading into next year, you may
see concern base when is the recession coming, when does the equity market
slowdown. That will probably translate into a lot trading. So, CME really
participates there.

They are also doing an acquisition and there is some upside there. So, we
do like that one. It does also pay a fairly attractive dividend.

GRIFFETH: And just as we go here, we saw on the graphic as well, you also
like Honeywell and Net Era Energy.

BAILEY: NextEra.

GRIFFETH: Thanks. Thanks for joining us tonight, Mike Bailey with FBB
Capital Partners.

BAILEY: Thanks for having me.

GRIFFETH: And finally tonight the country is obsessed with Mega Millions.
And so are some of us at least.

The jackpot as you know is $1.6 billion. And people spent the day dreaming
about all of that green.

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: I would buy a 747 jet, OK? A retired one, have it
gutted out, renovate it, and have it converted into a home.

UNIDENTIFIED MALE: Probably, buy a couple of houses, travel the world.
Probably, you know, just enjoy life.

UNIDENTIFIED FEMALE: First of all, I`d help my family, and my best
friends.

UNIDENTIFIED MALE: I think I`d buy the New Orleans Saints. I`m a big fan
of the Saints. So, I think I would go down there and buy that franchise.

UNIDENTIFIED MALE: A mansion and I`d get my own room and my sister get
horse own room. And a PS4 and big screen TV.

(END VIDEO CLIP)

GRIFFETH: But allow me to be the voice of reason. In the end, the game
comes down to simple math and very, very long odds. According a
statistician from Columbia University, to convert the odds of 302 million
to one into something tangible, it would be like laying 3,820 miles of
pennies edge to edge in a line that would extend west from New York City to
Los Angeles and then another thousand miles into the Pacific Ocean. Or to
reverse that east to — from New York City, you`d have to go Paris France.

Obviously, the odds of winning are equivalent of picking out the jackpot
penny from that line. Good luck.

HERERA: What`s wrong with that?

Before we go, here`s a look at the numbers on Wall Street today. The Dow
is down 125 points. It was down more than 500 points midday. The Nasdaq
fell 31, and the S&P 500 slipped 15.

That does it for us tonight. Good luck. I`m Sue Herera.

GRIFFETH: I`m Bill Griffeth. We`ll see you tomorrow.

END

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