Transcript: Nightly Business Report – December 19, 2018

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

(BEGIN VIDEO CLIP)

JEROME POWELL, FEDERAL RESERVE CHAIRMAN: It is more likely that the
economy will grow in way that will call for two interest rate increases
over the course of next year.

(END VIDEO CLIP)

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Fed up. The central bank
hikes interest rates and lowers the forecast for fewer increases, but that
did not alleviate investor angst.

Stocks sink. The Dow closes at a new low. So, does the transportation
index. And some say that is a red flag.

Mega-deal. Pfizer (NYSE:PFE) and GlaxoSmithKline joined forces to create
the world`s largest seller of over-the-counter medicines.

Those stories and much more tonight on NIGHTLY BUSINESS REPORT for
Wednesday, December 19th.

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

It felt like a Wall Street revolt. Investors did not react kindly to the
Federal Reserve`s outlook on interest rates. The Central Bank today raised
rates as expected. It also signaled that it would likely not hike as many
times next year as previously thought.

But the market wanted more than it got. So, volatility set in and stocks
took a dive. The Dow Jones Industrial Average dropped 351 points to
23,323. That`s a new low for the year. The Nasdaq was down 147 points or
more than 2 percent. And the S&P fell 39.

We have two reports tonight. Steve Liesman is covering the Fed`s decision
from Washington. But we begin with Bob Pisani at the New York Stock
Exchange.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Stocks rallied ahead of
the Federal Reserve decision today but sold off in a rather notable way,
once the announcement was actually made. Now, the Fed raised interest
rates by a quarter point. That was pretty much anticipated by the markets.
But the Fed trimmed its rate hike forecast for 2019 from three to two. The
market found it tough to swallow.

Investors were hoping for the Fed to signal just one rate hike, if any at
all next year, and for the Fed to assure everyone that they were flexible.

But why was the selloff so severe? A lot of this damage is technical now.
The Dow closed at a new low for the year, below the March lows, at the same
time as the Dow Transports also closed at a new low. This is a red flag
for those who follow Dow Theory which looks for one of the Dow indicators
to confirm a trend in the other. And when both indicators hit a new low,
it`s considered a negative trend by some technical experts.

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

(END VIDEOTAPE)

HERERA: Today`s Federal Reserve meeting had been called one of the most
controversial in recent memory. And as Steve Liesman reports, it lived up
to that description.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: A negative reaction
in markets to the decision by the Federal Reserve to raise interest rates
and signal further rates ahead. It seemed like the market wanted the Fed
to back off entirely from plans to raise rates next year. Instead, it got
only a partial backing off at best.

Here is Federal Reserve Chairman Jerome Powell explaining the change from
forecasting three rate hikes to now forecasting two quarter-point rate
hikes.

POWELL: Many FOMC participants had expected that economic conditions would
likely call for about three more rate increases in 2019. We have brought
that down a bit and think it`s more likely that the economy will grow in a
way that would call for two interest rate increases over the course of next
year. We always emphasized that our policy decisions are not on a preset
course and will change if incoming data materially change the outlook.

LIESMAN: Here is a look at what the market wanted and what it got. The
market had wanted just one or no rate hikes forecast for next year.
Instead, it got those two hikes, down from the previously forecast three.

The market wanted flexibility on the Fed`s plans to reduce the balance
sheet by $600 billion next year. Fed Chairman Jay Powell said we are going
ahead with reducing the balance sheet.

Finally, they seemed more concern about the economy. Instead, the Fed put
a line in the statement saying they are monitoring financial developments
but not necessarily acting on anything yet as far as the market concern.
Now there may have been a little bit more dovishness in the Federal Reserve
chairman statement than maybe the market gave it credit for.

Here is him talking about the how the data are going to dictate what the
Fed does next year.

POWELL: I think from this point forward, we are going to be letting the
data speak to us and inform the outlook and inform our understanding of
what would be appropriate policy. So, there is a fairly high degree of
uncertainty about both the path and the ultimate destination of any further
increases.

LIESMAN: Maybe one of the biggest disappointments for the market was they
wanted the phrase that further gradual increases are needed removed
entirely from the statement. Instead, it got a watered down one where they
said that some further increases will be needed.

So, overall, the market wanted a Fed that was completely dovish for next
year in the wake of the market selloff. Instead, it got one sticking to
guns that there will be additional growth next year, that they`ll be low
unemployment, and that that will all require further rate hikes.

For NIGHTLY BUSINESS REPORT, I`m Steve Liesman in Washington.

(END VIDEOTAPE)

HERERA: Joining us now to talk about the rate hike and what it means for
the broader economy and markets is Mark Zandi, Moody`s (NYSE:MCO) Analytics
chief economist. And Brett Ewing, chief market strategist at First
Franklin (NASDAQ:FFHS) Financial.

Gentlemen, welcome. Nice to have you here.

Mark, I`m going to start with you if I will.

Given what you know about the economy and as you see the economy, did the
Fed chief do the right thing?

MARK ZANDI, MOODY`S ANALYTICS CHIEF ECONOMIST: Yes, I think he nailed it.
I think he scaled back great hike expectations for next year from three to
two. That seems very consistent with the message the Fed has been sending
markets all along.

You know, I think markets had very high expectations here, overly high
expectations and were disappointed. But the reality is the economy is
still growing strongly. Probably it will continue to grow strongly enough
next year that unemployment will continue to decline. So, I think the
Federal Reserve has it exactly right.

HERERA: So, Brett, you know, I feel like we`ve been talking about this Fed
meeting for some time now. And the market according to a lot of the
analysts we talk to had factored in a rate hike here. So, why the vehement
reaction by the market today?

BRETT EWING, FIRST FRANKLIN FINANCIAL CHIEF MARKET STRATEGIST: Well, I
think today is going to be a historic day. I think it`s a day where the
Fed looked down at the market and they said, look, you`re grown up, you
need to stand on your own two feet and we`re not going to be there for you.
The market really didn`t know how to take it. And it will be interesting
the next few weeks how the market reacts.

HERERA: And what do you expect?

EWING: I expect that these conditions are really oversold in my opinion.
And I do believe that we`ll get a little lift going into the end of the
year.

HERERA: Mark, let me turn to you the global economy, because that was
mentioned by the Fed chief. If our economy is growing strongly, the global
economy in many sectors is struggling. We still have Brexit to go in the
U.K. And Italy has its own financial issues. The Fed seems to be looking
at that and factoring it all in.

Is that appropriate?

ZANDI: Yes, I think so. I mean, I think the key thing overseas dead ahead
is Brexit. There is a M 29th, 2019 deadline. And I do think there is
going to be a lot of uncertainty, market tumult approaching the deadline.
I suspect the British aren`t nailing it down until the last minute.

So, you know, if you think out the next year and when the hikes will occur,
probably won`t be at the first March meeting that — when they normally
would rate hike — raise interest rates. So, you know, I think global
conditions matter. Brexit matters a lot.

Having said that, you know the U.S. economy is very relatively insulated
from the rest of the world. And we can grow strongly even if the rest of
the world isn`t up to par. I would expect that in 2019. There is a lot of
fiscal stimulus still coming, increases in government spending.

We`re in a virtuous cycle — low unemployment, wage growth, and higher
spending. I think next year will be strong enough for at least two hikes.

HERERA: But we`re also starting to see the impact of the trade war with
China specifically was mentioned and we`ll get to this later by FedEx
(NYSE:FDX) as one of the issues they`ve been dealing with. Is that a
danger for this economy?

ZANDI: Yes, absolutely. I mean, I`m making the assumption that President
Trump doesn`t escalate the trade war, that he figures out a way to come to
a face-saving agreement and the trade war fades away. But if that`s not
the case, if he escalates the war, then positively, the Fed is not going to
be able to raise rates next year.

HERERA: Brett, I`ll give you the final word here. What do you do in this
market if you are a longer term investor? If you feel we are oversold, do
you anticipate a bounce in this market? Would you be buying at these
levels?

EWING: I would. I would — I would certainly take a look at some of the
equity markets. I really feel there is some interest-sensitive areas
within the economy that were just completely oversold. We`re seeing some
of the mortgage REITs just trading at valuations that I think that we would
take a look at them. So —

HERERA: All right. On that note, gentleman, thank you. Mark Zandi with
Moody`s Analytics and Brett Ewing with First Franklin (NASDAQ:FFHS)
Financial Services.

Well, Bob Pisani mentioned the transportation index, and it was driven
lower today, in large part because of FedEx (NYSE:FDX) which I mentioned.
We told you about that last night. The company slashed its 2019 outlook
citing an international slowdown and the CEOI Fred Smith on the company`s
earnings call said the weakness was largely due to politics.

(BEGIN VIDEO CLIP)

FREDERICK SMITH, FEDEX CEO: Most of the issues that we`re dealing with
today are induced by bad political choices. I mean, making a bad decision
about a new tax, creating a tremendously difficult situation with Brexit,
the immigration crisis in Germany, the mercantilism and state-owned
enterprise initiatives in China, the tariffs the United States put it
unilaterally.

(END VIDEO CLIP)

HERERA: FedEx (NYSE:FDX) shares finished down 12 percent to $162.51. And
that also caused the Dow Jones Transport Index to fall more than 3 percent
to $9,147 pushing into bear market. Now, the age old Dow Theory suggests
that is when this index isn`t doing well, it could foreshadow a drop in the
broader market.

Joining us to talk about what might lie ahead on that front is Matt Maley,
managing director at Miller Tabak.

Welcome back, Matt. Nice to see you again.

MATT MALEY, MILLER TABAK & CO. MANAGING DIRECTOR: Good to see you, Sue.
Happy holidays.

HERERA: Yes, you too. Do you adhere to the Dow Theory? Do you think that
this does portend new lows in some of these markets.

MALEY: I think it will eventually. The market is getting washed out on a
near-term basis, maybe not the major capitulation that we have seen at
major bottoms, but we should get a bounce here. But, you know, I do worry
about this. The Federal Express (NYSE:EXPR) blamed political issues but
they must think that there they will last longer because they did initiate
a fairly decent size cost cutting program.

Also, when you look at the transportation index, it`s not just the Federal
Express (NYSE:EXPR) and UPS or some of the other airlines. We also see
some weakness in the railroad stocks. And, of course, they are important.
They move billions of dollars of goods around the country. And those
stocks have been moving down as well.

So, it kind of tells me that, yes, we are going to see a little bit of
slowdown which is what we usually see when the Fed engages in a tightening
program. And, you know, it doesn`t mean we go into recession, but we
should see lower some lows I think the — you know, at some point next
year.

HERERA: But it`s interesting, is it not? If the economy is doing well, we
have unemployment that is expected to still tick to the downside, companies
say that their sales are robust, the things that ship those things that
they make like the railroads are going down. And oil prices are lower.

MALEY: Right. And that kind of — that kind of tells you that you know
going forward even though consumer confidence is good, and that the — you
know as you mentioned that employment seems to be quite good, some of the
things are telling you that this is going to roll over as we move into next
year. Again, it doesn`t necessarily mean we move to recession. But what
the stock market was pricing in that perfection back in September, we are
not getting that anymore. And not like we no longer have the global growth
going on, now it looks like we have weakness in the U.S. as well.

HERERA: And you say to raise cash if we get a bounce in this market, where
would you put? Would you stay in cash? Or does the bond market as
interest rates go up look more attractive?

MALEY: I think the best way to — I mean, yes, raise a little bit of cash.
That`s always great because when — if they throw the baby out with the
bath water, it creates some great opportunities.

But also you want to look at stocks paying a good dividend but not just a
good dividend. Look at stocks or companies that have a history of
increasing their dividend every single year. And if you don`t need the
money right away, it`s even better.

You can get involved in the dividend reinvestment program. And that way
you can get some — pick up some good shares at lower price with no
commission. So I think that`s a good way to kind of get paid while you
wait for things to turn around.

HERERA: On that note, Matt, thanks so much.

MALEY: Thank you, Sue.

HERERA: Matt Maley with Miller Tabak.

Well, investors got a new batch of economic data today. And let`s start
out with existing home sales which unexpectedly rose in November, according
to the National Association of Realtors, sales of previously owned homes
were up 1.9 percent from the prior month. But compared to last year, sales
are down 7 percent which is the largest year over year drop since May of
2011.

The median sales price in November, however, was more than 4 percent higher
than a year ago to about $257,000, a rate that outpaces wage growth.

And the current account deficit widened to a 10-year high in the third
quarter. Exports fell, imports continued to rise. The report which
measures the nation`s trade and financial flows with other countries also
showed a 50 percent decline in companies bringing their foreign earnings
back to the U.S.

It is time to take a look at some of today`s “Upgrades and Downgrades”.

American Express (NYSE:EXPR) (NYSE:AXP) was downgraded to neutral from buy
at Bank of America (NYSE:BAC) Merrill Lynch. The analyst says
macroeconomic uncertainty will result in weaker sentiment for the stock.
The price target is $115. The shares fell 2 percent to $98.77.

Under Armour (NYSE:UA) was downgraded to underweight from neutral at
Atlantic Equities. The analyst cites the potential for slower growth. The
price target is $14. Shares fell more than 3.5 percent to $18.10.

Best Buy (NYSE:BBY) was upgraded to neutral from sell at MoffettNathanson.
The analyst there cites as strong holiday season and the stocks valuation
after a recent decline. The price target is $52. The shares fell along
with the broader market to finish at $50.96.

Still ahead, a tie up that could create a health care powerhouse.

(MUSIC)

HERERA: Johnson & Johnson (NYSE:JNJ) lost its motion to reverse a jury
verdict that awarded billions of dollars to women who blamed their ovarian
cancer on asbestos in the company`s baby powder. The legal decision comes
days after “Reuters” reported that J&J knew for decades that cancer causing
asbestos was in its baby powder. J&J calls those claims false. The pushed
shares lower in trading today.

Pfizer (NYSE:PFE) has long been trying to decide what to do with its
consumer health business. And today, investors got a surprising answer.
Pfizer (NYSE:PFE) and GlaxoSmithKline, two of the world`s biggest drug
companies, are teaming up to create an over-the-counter powerhouse that
will dominate the market for every day drug story items. Investors had
kind of a mix reaction, sending Pfizer (NYSE:PFE) lower and Glaxo higher.

Frank Holland has the details.

(BEGIN VIDEOTAPE)

FRANK HOLLAND, NIGHTLY BUSINESS REPORT CORRESPONDENT: The makers of Advil
and Excedrin announcing a merger that will create the biggest consumer
health company in the world. GlaxoSmithKline and Pfizer (NYSE:PFE)
announced that deal on Wednesday. Combined, the two generate $12.7 billion
in revenue last year.

EMMA WALMSLEY, GLAXOSMITHKLINE CEO: We are announcing a deal that
strengthens two businesses and creates significant value for shareholders.

HOLLAND: This joint venture will sell some of the best known brands in the
segment. GlaxoSmithKline will own 68 percent, Pfizer (NYSE:PFE) the rest.

Morningstar (NASDAQ:MORN) Investment analyst Damien Conover says this
merger will make this new company the industry leader with about 7 percent
of the overall global market.

WALMSLEY: This new consumer business is going to have such significant
scale. We will be number one in pain relief, number one in respiratory,
number one in vitamins, minerals and supplements, leader in over-the-
counter skin health and top one or two player in 10 of the 15 biggest
markets in the world, including by the way, the U.S.

HOLLAND: The CEO of GlaxoSmithKline, Emma Walmsley emphasized the merger
will allow the U.K.-based drug maker to fund and focus on drug research.

WALMSLEY: It also allows us to strengthen on the number one priority of
pharma pipeline by the incremental cash flows over the next few years,
thereby creating two focused U.K.-based global companies, one, a pharma and
vaccines company based on the science of immunology, genetics and new
technologies, and one that`s new global leader in consumer health care.

HOLLAND: The deal is expected to be completed in the second half of 2019.
The companies are expected to spin off this joint venture within three
years.

For NIGHTLY BUSINESS REPORT, I`m Frank Holland.

(END VIDEOTAPE)

HERERA: Higher prices help General Mills (NYSE:GIS), and that`s where we
begin tonight`s “Market Focus”.

The packaged food company has been charging more for some of its products
and that helped improve its profits and offset higher freight costs.
General Mills (NYSE:GIS) is working to get rid of older food brands but it
has not specified which ones. The stock rose 5 percent to $38.55.

Winnebago reported better than expected earnings in the most recent
quarter. The company cited higher sales in its North American recreational
vehicle business. Winnebago also raised its quarterly dividend. That sent
the stock 13 percent higher to $22.67.

Eli Lilly (NYSE:LLY) raised its quarterly dividend and issued a stronger
than expected profit forecast for the next year. The drug maker cites
demand for new medicines and its existing diabetes drug franchise. The
stock rose more than 2 percent to $109.11.

Allergan (NYSE:AGN) will pull breast implants from the European market.
The move follows a mandatory request from regulators. The implants have
been linked to a rare form of lymphoma in some women. Analysts say
potential liabilities are a concern. As a result, shares were lower by
nearly 7 percent to $136.56.

Japan`s biggest ever initial public offering made its debut, and it
flopped. SoftBank shares started trading in Tokyo today. Investors
watched closely in part of the SoftBank`s reach into Silicon Valley and
around the world.

Akiko Fujita is in Tokyo tonight.

(BEGIN VIDEOTAPE)

AKIKO FUJITA, NIGHTLY BUSINESS REPORT CORRESPONDENT: Concerns about
saturation in the domestic telco market and softening global exposure to
Huawei really dampened the mood for the company`s big debut here at the
Tokyo Stock Exchange. This is Japan`s biggest IPO and with more than $23
billion raised, it was right up there with the biggest IPO, Alibaba back in
2014. Ninety percent of the 160 million shares that were allotted is he
set aside for retail investors.

First time mom and pop buyers who are looking to invest in a national
champion like SoftBank and the indication was that the uptick was strong
initially. But SoftBank was hit with a number of negative headlines in the
lead up to the IPO. Earlier this month, a software glitch left more than
140 million of SoftBank subscribers without access to mobile data and
voice, angering users.

And there was the issue of Huawei CFO being detained over in Canada. The
Japanese government came out after that, saying they would no longer be
using Chinese teleco equipment and encouraged private companies here in
Japan to do the same.

That left SoftBank in a bit of a bind. SoftBank is the only mobile carrier
using Huawei equipment. We did hear from executives at press conference
this afternoon saying that they had invested about 10 percent in Huawei
equipment. They are now looking to switch over their 4G equipment, and
speaking to suppliers not just in Europe but in the U.S. as well.

They put the cost of that as a few hundred million yen. That`s going to be
a big concern for investors moving forward as well.

Now, one of the things that has made this IPO attractive is the big
dividend payout, 85 percent. A 5 percent yield for shareholders. SoftBank
executives have said that they are confident they can deliver on that. But
given just how mature this market already is and given the performance of
the stock at least in its initial day, there certainly will be concerns
about whether Masayoshi Son can sustain that.

For NIGHTLY BUSINESS REPORT, I`m Akiko Fujita in Tokyo.

(END VIDEOTAPE)

HERERA: Coming up, Elon Musk`s tunnel vision.

(BEGIN VIDEO CLIP)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Elon Musk says this
tunnel is the key to helping defeat soul destroying traffic. The light
says green which means it`s time to go for a ride through the first Boring
Company tunnel.

(END VIDEO CLIP)

(MUSIC)

HERERA: Prison stocks moved lower after the Senate passed legislation late
yesterday that overhauls the criminal justice system. That bill allows
some prisoners to win early release to halfway houses or home confinement.
But the idea that sentences could be reduced for certain inmates sent the
shares of two prison operators, Geo Group (NYSE:GEO) and Corecivic, lower.

Facebook (NASDAQ:FB) finds itself at the center of yet another privacy
controversy. “The New York Times (NYSE:NYT)” reports that the social media
company let firms like Netflix (NASDAQ:NFLX) and Spotify read member`s
private messages. In all, the data sharing arrangements benefitted more
than 150 companies, including Amazon (NASDAQ:AMZN), Yahoo (NASDAQ:YHOO) and
Microsoft (NASDAQ:MSFT).

In a blog post, Facebook (NASDAQ:FB) denied it allowed the actions without
user consent. But the stock fell 7 percent in trading today.

Elon Musk is at it again. He set his sights on revolutionizing the auto
appear space industries. Now, he is targeting traffic congestion. Musk
just completed his first high-speed tunnel outside Los Angeles.

Phil LeBeau takes us for a ride in Hawthorne, California.

(BEGIN VIDEOTAPE)

LEBEAU: Zipping along at 49-mile-per-hour, this is Elon Musk`s vision of
how we could be moving through and under cities in the future. So, we are
rarely stuck in traffic jams.

ELON MUSK, THE BORING CO. FOUNDER: Traffic has gone from like — just like
seventh level of hell to like the eighth level of hell. You know, it`s
terrible. So this is — this is I think finally — finally there is
something — something that I think can solve the (EXPLETIVE DELETED)
traffic problem.

LEBEAU: Musk envisions a network of elevators raising or lower electric
cars into high-speed tunnels running under cities.

This is the entrance to Elon Musk`s high-speed loop tunnel. Now, this is a
modified Model X. They were gifting demonstration rides. Look at these
alignment wheels down here on the front. They`re attached to the two front
wheels on the Model X. They run along track walls inside the tunnel. That
keeps the model on course.

Deployable tracking wheels would add $200 or $300 to the cost of a car,
according to Musk. But they would not change how the cars handle on
surface roads. Still in a country where cities and states struggle to pay
for roads and bridges, do governments want to invest time and money to dig
high-speed tunnels?

Chicago wants Musk`s Boring Company to build high-speed transit loops
between its downtown and O`Hare Airport but they have yet to break ground.
Despite the doubts, Musk believes the promise of high-speed tunnels easing
congestions will convince governments they need to go underground.

MUSK: The system is designed to do over 150 miles an hour through the
tunnel. And I mean, wouldn`t it be incredible if you could travel around
L.A., New York, D.C., Chicago, Paris, London, anywhere at 150 miles an
hour.

LEBEAU: A new way to speed ahead and beat the traffic.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Hawthorne, California.

(END VIDEOTAPE)

HERERA: And to read more about Elon Musk`s high-speed tunnel, you can
always head to our website, NBR.com.

And finally tonight, the best countries for doing business. Forbes is out
with its 13th annual look at the places most hospitable to capital
investment.

Topping the list for the second straight year, the United Kingdom. The
magazine cites its globalized economy and open trade.

Sweden moved up two notches to second place. Forbes cites its innovation
and calls it one of Europe`s leading tech setup hubs.

Rounding out the top three is Hong Kong.

Before we go, here`s another look at the day on Wall Street. The Dow
dropped 351 points to a low for the year. The Nasdaq was down 147. The
S&P 500 fell 39.

And that will do it for NIGHTLY BUSINESS REPORT tonight. I`m Sue Herera.
Thanks for joining us. Have a great evening. We`ll see you tomorrow.

END

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Business Report is not and should not be considered as investment advice.
(c) 2018 CNBC, Inc.

 

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