Transcript: Nightly Business Report – October 26, 2018


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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Buckle (NYSE:BKE) up. The
slump in tech stocks accelerates. Now, investors want to know if the
market can move higher without them.

Protect your portfolio. Simple ways can you smooth out this rocky market
and keep your money working for you.

Trading places. China and Japan tighten their trade ties as both face
tough negotiations with the U.S.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Friday,
October 26th.

Good evening, everyone, and welcome. Bill Griffeth is off tonight.

Well, the week on Wall Street ended the way is began with wild swings and
intense bouts of volatility. It was driven by earnings, anxiety over
global growth and concerns of higher interest rates. In fact, by some
estimates, the global selloff has erased $5 trillion from stock and bond
markets so far in October.

Today, all 11 sectors of the S&P fell. The S&P 500 briefly fell into
correction territory, meaning it is down more than 10 percent or more from
the most recent high.

And within the S&P 500 more than 75 percent of its components are in
correction. The Dow Jones Industrial Average fell 296 points to 24,688.
The Nasdaq was off 151, and the S&P 500 was down 46. The Nasdaq is down
for four straight weeks. The Dow and S&P are down the fourth time in five
weeks.

Bob Pisani has more on all of the stock market angst.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: It was another volatile
day with a morning selloff, a big late morning rally and a drift lower into
the close. Stocks are resetting 2019 earnings and revenue expectations.
That`s what`s going on, particularly after some high profile misses on
revenue from Amazon (NASDAQ:AMZN) and Alphabet today.

The forward P/E multiple on the S&P 500, it`s below 15. It was 16.5 a
month ago. A lower multiple means market participants think expected
earnings growth of 10 percent is in some doubt. Now, we`ve got good news
here, which is moderate inflation declining unemployment.

The market however has come to believe that a slowing China, tariffs, maybe
an overly aggressive Fed collectively constitute at least a modest threat
to top and bottom line growth in 2019. Political issues in Washington may
also be playing into the volatility stew. President Trump`s unusually
aggressive attacks on the Fed chairman is generating a lot of debate, with
some arguing that the Fed cannot now back down on a December rate hike
without looking weak.

If 2019 earning were only an issue with high multiple tech and internet
stocks, so, the market would not be that worried. These Internet names,
the Amazons, the Facebook (NASDAQ:FB), the Alphabet. They tend be classic
momentum names that would be sold immediately with even the hint of a
slowdown. But the selloff is broader than that. Semiconductors, for
example, are down on what appears to be a cyclical downturn in demand.
That`s taking hardware and software demands down with it. That`s a lot
more serious.

Finally, the elections are another whole wild card for the markets in the
next week. The assumption is that even if the Democrats retake the House,
the corporate tax cuts will not be imperiled. But the likely prospect of
endless political fights after that may only serve to undermine confidence.

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

(END VIDEOTAPE)

HERERA: Bob just mentioned tech and Internet stocks. And as you know,
that group helped lead the market higher most of the year. But they`ve
taken a tumble in October. Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN),
Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG) are all down sharply. And
now it seems that the higher you climb, the faster you fall.

Dominic Chu has more on tech`s sharp and steep decline

(BEGIN VIDEOTAPE)

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT: One of the most
concerning aspects of the recent downtrend is the underperformance of
certain key technology and communications services stocks, namely the
FANGs. That is to say Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix
(NASDAQ:NFLX) and Google (NASDAQ:GOOG) parent company Alphabet.

As the major U.S. indices have their worst October since 2008, these are
among the stocks moving markets the most. Each of them is underperforming
the broader S&P 500 so far this month. They also happen to be some of the
most valuable companies in the market, which means they have a lot more
influence on market value weighted indexes like the S&P 500 and Nasdaq
composite.

Over the course of the last few years, these stocks have led the market
higher, pushing not just the values to high levels but the valuations as
well. The overall S&P 500 trades at 19 times earnings, meaning an investor
pays $19 in stock price for every $1 of earnings it generates. In
contrast, alphabet currently trades at around 46 times earnings, Netflix
(NASDAQ:NFLX) trades at 109 times earnings, and Amazon (NASDAQ:AMZN) trades
at a whopping 130 times earnings. Facebook (NASDAQ:FB) had traded at a
bigger premium to the market before investors sold shares off in the past
few months as the company was embroiled in a data privacy scandal and now
trades asset just 22 times earnings.

The issue is whether or not the valuations for many of the companies is
justified given the outlook for profits and the overall economy. And the
current selling pressure in the markets is the manifestation of the
revaluation process taking place.

For NIGHTLY BUSINESS REPORT, I`m Dominic Chu.

(END VIDEOTAPE)

HERERA: So, can the market turnaround and turn higher without the help of
those big tech stocks?

Saira Malik is head of the global equities division at Nuveen, the
investment management arm of TIAA.

Welcome, Saira. Nice to have you here.

SAIRA MALIK, NUVEEN HEAD OF GLOBAL EQUITIES: Hi. Thanks for having me.

HERERA: I guess that is the question. Can the market turn higher and
continue to move higher without the participation of some of those tech
stocks?

MALIK: We think that it can, because some of the technology stocks are
actually priced for perfection. And when they report earnings that aren`t
perfect, you`re going to see these kinds of declines, especially when
investors are nervous about other items such as trade, interest rates and
inflation.

But if you take a step back, economic data remains strong. Manufacturing
numbers look good. The employment numbers look good. And if you look at
valuations, the market is starting to look pretty compelling. On next
year`s earnings for the S&P 500, the market is now trading at under 15
times earnings.

So, what we think will work from here is what we call quality growth
stocks. These are companies that are growing sustainably but they have
reasonable valuations in areas such as health care, consumer staples and
even in some beaten down areas that have gotten hit this month like
financials where you have strong balance sheets and cash returned to
shareholders.

HERERA: So I`m hearing from you that you think the bull market is still
intact. Although maybe a little wobbly near-term.

MALIK: Yes, I mean investors — it is intact, but investors have had a lot
of reasons to be pessimistic this month. We`re worried about trade. We
saw third quarter earnings come in and they were kind of sloppy.

And what is making people wonder is, is this cycle really going to last as
long as we hoped? Can earnings continue to grow through 2019?

We think earnings can grow at double digit rates, and this will be
supported by the strong economic data that we`re seeing that won`t change
on a dime. It remains very strong. And that really, plus earnings growth,
is going to be driving the market higher from here.

HERERA: So, the — I assume that you are one who expects as many do, the
volatility to continue. And in addition to the growth stocks, if we
continue to see further weakness in tech, if you are a long-term investor,
would you add to positions in that area?

MALIK: So we would be looking for those technologies that fit that quality
growth, that reasonable valuation type of mantra. So, look for those
companies that have sustainable growth rates, strong free cash flows,
structurally growing businesses but make sure the valuations look
promising. And if you can find that, you should be adding to any sector,
including technology. We just wouldn`t overpay when you are late in the
cycle like we are now, you don`t want to overpay for companies.

HERERA: All right. On that note, Saira, thank you. Saira Malik with
Nuveen.

MALIK: Thank you.

HERERA: And a bit later in our program, our market monitor will explain
why big tech companies are on his buy list.

Now to the economy that grew at a faster than expected pace last quarter.
The Commerce Department said GDP expanded by 3.5 percent during the third
quarter. That was less than the previous period but still stronger than
what economists forecasted. Strong consumer pending and rise in business
inventories helped results.

Well, before the release of that economic growth report, the head of the
Cleveland Fed said that the central bank`s economic forecast suggests
gradual interest rate hikes are appropriate.

(BEGIN VIDEO CLIP)

LORETTA MESTER, FEDERAL RESERVE BANK OF CLEVELAND PRESIDENT: Financial
conditions are still accommodative. I think that the economy is still
growing above trend. I think the unemployment rate is at the lowest level
since the late `60s and I think inflation is at our target. So, that`s a
strong outlook and suggests we probably need to be gradually thinking more
about taking back some of the accommodation.

(END VIDEO CLIP)

HERERA: Mester is a voting member this year on the fed`s policy making
committee and said the wild swings in the stock market are a risk to the
outlook but they are not impacting her view at this point.

Consumer sentiment remains near historic highs despite a slight pullback in
October. A survey from the University of Michigan says stock price
declines, rising inflation and interest rates have not, so far, undermined
consumer confidence. Those who answered the survey remain optimistic in
particular about job growth.

It is time to look at some of today`s upgrades and downgrades. Twitter was
upgraded to outperform from perform at Oppenheimer. The analyst says the
stock is reasonably valued and has less execution risk than other social
media companies. The price target is $37. The stock rose more than 1.5
percent to $32.36.

Snap, the parent company of Snapchat, was downgraded to underweight from
neutral at J.P. Morgan. The analyst cites the decline in daily active
users. The price target is $6. The stock fell 10 percent to 6.28.

The Gilead`s rating was cut to neutral from overweight at Piper Jaffray.
The analyst cites the company`s outlook for revenue growth. The price
target is $75, the stock was up 1.5 percent to $69.74.

Still ahead, getting to work. Manufacturing jobs are being created but not
necessarily by American companies.

(MUSIC)

HERERA: The FBI is reportedly intensifying the criminal investigation into
whether Tesla misstated model 3 production figures. The “Wall Street
Journal” reports that the electric auto maker is facing a deepening
criminal probe about those projections. But Tesla says it has not received
a subpoena or a request for documents in months.

The company is cooperating with a voluntary request for documents it
received from the DOJ in September. The Trump administration as you
probably know has made a push to bring more manufacturing jobs back to the
U.S. by the way of tariffs and trade wars.

But as Ylan Mui reports from Gibsonton, Florida, it`s actually investments
from foreign company that are generating a lot of the new job growth.

(BEGIN VIDEOTAPE)

YLAN MUI, NIGHTLY BUSINESS REPORT CORRESPONDENT: This brand-new factory
outside of Tampa, Florida, makes parts for gas turbines. It officially
opened today, a $140 million facility that will employ 350 workers, exactly
the kind of manufacturing that the Trump administration wants to bring back
to America.

The only catch: the company is Siemens, and its headquarters are in
Germany.

LISA DAVIS, SIEMENS ENERGY CEO: We are a global company. So, at Siemens,
we do business in 190 countries around the world. But our customers, it`s
important for us customers to have that we have a local presence.

MUI: Foreign firms are some of the biggest investors in American
manufacturing, piling an estimated $1.6 trillion into the sector. And in
recent years, they generated more than half of new manufacturing jobs.

SARAH BLANCHARD, SIEMENS EMPLOYEE: The pay was very competitive. The
vacation was great. Everyone seemed to be really flexible with your work
life balance here. So, that was what initially attracted me.

MUI: But now, Siemens and other multinationals are getting squeezed as
tariffs drive up costs.

DAVIS: We`re seeing that show at our business really in the pricing that
we have, both from our third party suppliers and where we buy our raw
materials and our supply chains. But what we`re doing to combat that is
facilities like this, where we`re investing in technology and innovation
that helps us bring our costs down, it helps us make our business more
robust.

MUI: That means shortening the supply chain. Many of the parts made here
will be shipped to Siemens factory in Charlotte, North Carolina.

DAVIS: Not so much to be protectionist versus not protectionist. It`s in
our view in Siemens, it`s the right thing to do as we create economic
prosperity around the world being able to give back to the local community.

MUI: The U.S. is Siemens` biggest mechanic. The company`s fortunes tide
to the American economy.

For NIGHTLY BUSINESS REPORT, I`m Ylan Mui outside of Tampa, Florida.

(END VIDEOTAPE)

HERERA: The ongoing trade war with Washington is creating an unlikely
alliance between China and Japan, a nation the world`s second largest
economy has often been at odds with.

Eunice Yoon explains from Beijing.

(BEGIN VIDEOTAPE)

EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Japanese Prime
Minister Shinzo Abe has declared that his country`s relations with China
are at a historic turning point. Abe is in Beijing for a three-day trip, a
first for a Japanese prime minister since 2011. He traveled here with a
500-person business delegation and met with both the Chinese premiere and
the president.

The two sides signed multiple agreements to cooperate on infrastructure
projects in third countries and to expand a currency swap line to $30
billion to help safeguard against a financial crisis.

Abe`s visit is a big break from the past. The two countries have a lot of
historical baggage and relations turned sour in 2012 over a territorial
dispute in the East China Sea.

Prime Minister Abe has come to China at a time when Beijing is in a trade
war with Washington. The Chinese have been trying to paint the U.S. as the
bad guy and get more countries on their side. Japan, a traditional U.S.
ally, has been criticized by the White House but Abe has been very wary of
China. He`s been a big proponent of regional trade pact once backed by the
U.S., the TPP.

On this trip, Abe refrained from making any pro-globalization statements or
other comments that could have been perceived as anti-U.S., likely to the
disappointment of Beijing.

For NIGHTLY BUSINESS REPORT, I`m Eunice Yoon in Beijing.

(END VIDEOTAPE)

HERERA: Colgate-Palmolive (NYSE:CL) warns of weakness ahead, and that`s
where we begin tonight`s “Market Focus”.

The consumer products company expects its emerging markets business to
remain challenged. In the most recent quarter, Colgate-Palmolive (NYSE:CL)
reported weaker than expected revenue and said it`s facing higher costs.
Colgate shares fell more than 6 percent to $59.58.

Charter Communications (NASDAQ:CHTR) added more than Internet subscribers
than Wall Street expected in the third quarter. That made up for a drop in
video subscriptions. But it was not enough to offset weaker than expected
revenue for the quarter. And that pressured the stock, which fell more
than 6 percent to $295.01.

Phillips 66 benefitted from higher refining margins and topped earnings
estimates. The company`s pipeline business also turned in a strong quarter
with earnings at that unit more than doubling. Shares rose nearly 1
percent to $99.45.

Autoliv (NYSE:ALV-Z) (NYSE:ALV), the world`s largest maker of air bags and
seat belt, cut its full year sales growth forecast due to lower demand in
China and the impact of tougher emissions test in Europe. The company said
it`s managing those changes and it cited growth in its North American
operations. The shares rose 2 percent to $81.77.

Biopharmaceutical company Ultragenyx reported disappointing results for its
experimental treatment targeting a rare genetic metabolic disorder. The
company said it would discontinue testing the drug for this specific cause
but it intends developing it to for another disease. Nonetheless, the
shares plunged 18 percent to $18.62.

And now to our weekly market monitor who is sticking with some of the
biggest names in tech, despite this week`s selloff. He is betting on the
cloud. He is Mark Tepper, president and CEO of Strategic Wealth Partners.

Welcome. It`s nice to have you here.

MARK TEPPER, STRATEGIC WEALTH PARTNERS PRESIDENT & CEO: Thanks for having
me.

HERERA: So, you`re a brave guy. You`re stepping into the names that
gotten hit quite hard this week.

TEPPER: Yes.

HERERA: So, let`s talk about why. You are picking Amazon (NASDAQ:AMZN),
which had its worst day since 2014 today.

TEPPER: Right.

HERERA: But you are looking longer term. Why do you like it?

TEPPER: Perfect timing, right? I mean, so yes, Amazon (NASDAQ:AMZN) —
they`re just an absolute disrupter. I mean, they enter an industry and
another industry and another industry. And they own every industry that
they enter. They have an addictive product with Amazon (NASDAQ:AMZN)
Prime.

Literally, anything I want to buy, I can pull out the iPhone and have it
delivered to my doorstep within two days. So, it`s a great business model.
And we are really bullish on the cloud right now and when you look at
Amazon`s cloud and advertising, I mean, those are really the high margin
businesses. And those two specific businesses are just growing like crazy,
and margins are expanding like crazy.

So, we really think if they continue to focus on the areas in addition to
e-commerce, we think they can really just eventually move to an even higher
level, which is, you know, that would be tough for a company like Amazon
(NASDAQ:AMZN).

HERERA: Right. Google (NASDAQ:GOOG) is your next pick. It also had a
rough week certainly. But —

TEPPER: Yes.

HERERA: It has had a lot of success in the area that you are focusing on.

TEPPER: Yes. So, they are — they are great when it comes to the cloud.
But probably the most important thing about Google (NASDAQ:GOOG) is they
are just the king of online advertising. I mean, you look at Facebook
(NASDAQ:FB) as an example. So, Facebook (NASDAQ:FB) was really trying to
compete with the ads, they still are. But their platform wasn`t as good as
Google`s a year ago.

And now, what you see with Facebook (NASDAQ:FB) is they no longer give
their advertisers the ability to use demographics to really zero in on the
people that they are trying to advertise to. So, it makes Facebook`s
advertising even less effective.

So what we think is going to happen we think a lot of the Facebook
(NASDAQ:FB) advertising dollars are going to move over towards Google
(NASDAQ:GOOG).

HERERA: And Microsoft (NASDAQ:MSFT) rounds out the three that you are
looking at. Why do you like it?

TEPPER: Microsoft (NASDAQ:MSFT) is good in both the cloud and gaming. And
we are bullish on both of them. So, I`ve talked about a little bit about
the cloud. We see that over the course of the next two to three years, we
think cloud usage is going to double.

Microsoft (NASDAQ:MSFT) is in a unique position because they offer a hybrid
solution that`s really good for those bigger companies who have invested
internally to grow their I.T. because they might not want to switch
abruptly to the cloud. So, they`re doing really well there.

And then on the gaming side of things, gaming is just — it`s a high-growth
industry. You know, e-sports in particular have seen 40 percent of
viewership growth over the course of the last year. Major league sports in
general have seen declining viewers. So, you know, we think with them
being in both the cloud and gaming, the potential is huge for them.

HERERA: On that note, Mark, thank you. Mark Tepper with Strategic Wealth
Partners.

To read more about his picks, head to our Website, NBR.com.

Coming up, a strategy for long-term investors as market volatility picks
up.

(MUSIC)

HERERA: Here`s a look at what`s to watch for next we can. Key earnings
reports will be released from Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL),
Coke, Pfizer (NYSE:PFE) and General Electric (NYSE:GE). We`ll see if
consumers are still shelling out record amounts for cars. With the release
of October auto sales.

And the week ends with government`s monthly employment report. And that`s
what to watch for next week.

With stocks down today and volatile for the week, we decided to see how all
the ups and downs are affecting individual investors.

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: I have some money in like mutual funds. I`m afraid
it`s going down and sort of it`s about money — you know, it`s about money
that`s been in savings. So, I`m afraid I`ll be losing money.

UNIDENTIFIED MALE: As soon as the market gets volatile, everybody gets
scared and creates more volatility.

UNIDENTIFIED MALE: It did drop not too long ago, I understand, and it
jumped back. If we keep going where we`re going now, I don`t we have too
much problem in the near future.

UNIDENTIFIED MALE: Institutions get nervous, people get nervous, and then
it bounces back.

UNIDENTIFIED MALE: Markets go up and down. I got a long view of it all.

(END VIDEO CLIP)

HERERA: So what should the individual investor make of the recent market
rout?

We are joined tonight by J.J. Kinahan. He`s the chief strategist at T.D.
Ameritrade.

Always great to have you with us, J.J.

J.J. KINAHAN, TD AMERITRADE CHIEF STRATEGIST: Thanks for having me, Sue.

HERERA: Those sentiments from the individual investors, is that what
you`re hearing from your investors as well?

KINAHAN: We are. I particularly like the last gentleman on there whom he
knew what his time frame was. And I think for the folks watching your show
tonight, that`s actually the key.

If you are someone who happens to be more of a trader and you are in and
out a lot, great, good for you. Volatility is high. You are happy.

But for most of your audience, they are taking a longer view. So, they
have to keep that in mind. And they have to say, okay, I`m in this stock
for three months, six months, a couple of years.

Whatever the time frame may be, knowing yourself and knowing your time
frame when you get into the stock will make a big difference in your
investment success because otherwise weeks like this, you are driving
yourself crazy. There`s been a lot of movement. That said, Sue, you know,
outside the knowing your time frame.

HERERA: Um-hum.

KINAHAN: It`s — there is something going on right now that`s really
important. And that`s there is a repricing of what these stocks are worth.
You got to remember — and I think sometimes people forget that the stock
market is a forward-looking device.

What they are saying is in six months we don`t know if we valued the stocks
right now for that time frame. There is a lot of macro economic things
going on, the election, possible higher tariffs, et cetera.

HERERA: Exactly.

KINAHAN: So, it may mean that we price stocks too high. Not the end of
the world. It`s just a shifting of the ground underneath us a little bit.
And it usually takes a few weeks and in this case, it may take a month or
so for things to settle back down and people to be comfortable with where
valuations are.

HERERA: And you make the point in one of your — the pieces of literature
you put out to clients and traders and investors today. You have to take
at a that broader outlook and couple that with what CEOs are saying about
their own view for their company and factor all of that in.

KINAHAN: And you — absolutely. You see that with Amazon (NASDAQ:AMZN)
and Google (NASDAQ:GOOG) last night, the guidance was lower. The numbers
weren`t — that he weren`t bad, they were pretty good actually. And this
earnings season we are in right now, it`s all about what the CEOs see for
the future.

And if you think the last two earnings seasons, the CEOs talked about great
growth not only in the U.S. but worldwide. In this earnings season, many
CEOs are saying, we can still grow, maybe not at the pace we thought we
could three or six months ago. It`s not the worst thing in the world.
And, you know, if people keep the longer term perspective and mind where we
have come from, it`s OK. Take a breath.

And it`s all about buying company that are good companies. That`s not to
say that because companies got hammered on earnings which, you know, Amazon
(NASDAQ:AMZN) and Google (NASDAQ:GOOG) did, they are not bad companies.

HERERA: Right.

KINAHAN: They still make a ton of money. But if you still believe in them
long-term, it`s, you know, a way that you can buy them a little bit lower
right now.

HERERA: And very quickly J.J., do you believe we still have more room in
the bull market for those who might want to use this weakness to their
long-term advantage.

KINAHAN: I do, Sue. But I will say this we are not getting there smoothly
it`s a volatile period the next few weeks. So, if you go in and buy now,
you may want to — if you have 200 shares to buy, maybe you buy a hundred
now because you might be able to get 100 cheaper in a week or so.

HERERA: Very good advice. As always, J.J., nice to have you with us.

KINAHAN: Always a pleasure, Sue. Thank you.

HERERA: J.J. Kinahan with TD Ameritrade (NASDAQ:AMTD).

So on that note, let`s take a look at the final numbers from the day on
Wall Street. The Dow fell 296 points. The Nasdaq was off 151. And the
S&P 500 was down 46. The Nasdaq is now down for four straight weeks. The
Dow and S&P are down for the fourth time in five weeks.

And if these markets weren`t this week enough to scare you, maybe this will
— Halloween candy is getting more expensive. According to IHS (NYSE:IHS)
market, candy prices are up half a percent this year after the two years of
price drops. Total spending on all of that sweet stuff is expected to
total $2.5 billion, the most ever. And that is roughly $20 per household.

And on that note that does it for us tonight process. I`m Sue Herera.
Thanks for joining us. Have a great weekend. We`ll see you on Monday.

END

Nightly Business Report transcripts and video are available on-line post
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and commentators are their own and do not necessarily represent the views
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Business Report is not and should not be considered as investment advice.
(c) 2018 CNBC, Inc.

 

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