Transcript: Nightly Business Report – December 31, 2018

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

BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Year of surprises. The
major averages have their 12 months in a decade after the market fell apart
late in the year.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Shutdown stress. Ten days
into the partial government shutdown and some furloughed workers are
feeling anxious.

GRIFFETH: Modern medicine. An experimental treatment for hemophiliac is
giving a grandfather hope not only for himself but his grandson.

Those stories and much more tonight on NIGHTLY BUSINESS REPORT for this
Monday, December 31st, the last day of 2018.

HERERA: Unbelievable.

Good evening, everyone, and welcome. 2018 is in the books and for some
investors, it couldn’t end soon enough. The year ended quite a bit
differently that it started.

Remember all those record closes? There were 14 of them in January alone,
but that seems like ages ago. The last all-time high came in September and
soon after that, volatility picked up and so did the losses, bruising
losses that dominated December. Investors grew anxious about the global
economy, trade and the unwinding of the Fed’s easies money policies.

Here’s 2018 finished. The Dow fell its first decline in three years,
Nasdaq down more than 3 percent, snapping a six-year win streak and S&P 500
dropped 6 percent.

GRIFFETH: Now, a sizeable chunk of the losses came just this month. In
fact, you probably heard the Dow and S&P posted their worst December since
1931. As for today, the major indexes all rose on the hope that the U.S.
and China can make progress on trade. The Dow was up 265 points to 23,237,
the Nasdaq added 50, S&P was up 21.

But some market watchers are concerned that 2019 may be in for a rough
start, similar to the way 2018 ended.

Mike Santoli starts us off tonight.

(BEGIN VIDEOTAPE)

MIKE SANTOLI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Even with a New
Year’s Eve rally, stocks finished 2018 on a defensive, as the most volatile
December in more than a decade left investors with losses for the year and
confusion about mixed signals on global growth, interest rates and trade
policy. And don’t expect the New Year to bring much of a break from the
high-stakes market moving event. Friday brings a crucial U.S. jobs report
that will offer a hint about whether a feared U.S. slowdown is under way.
The same day Federal Reserve Chairman Jay Powell will speak publicly with
his predecessors and any clues on his intention for further rate hikes in
2019 will be seized upon by investors.

A fear that the Fed has pushed rates up already too much given a softer
global economy has been a major factor in stocks’ brutal 15 percent tumble
of S&P 500 from its September high. The Fed has been focused on very
strong trends as it pencils in perhaps two more increases next year but the
bond market has already priced out the likelihood of any further hikes.
Then on January 7th, formal talks between the U.S. and China begin on
potential trade agreement to avert further rounds of new tariffs on Chinese
imports by a March 1st deadline.

Fear of trade disruptions and Chinese economic stumble have been another
driver of recent market weakness, which at one point last week nearly
dropped the S&P 500 from a 20 percent loss from its high. That’s a loose
definition of a bear market.

In the backdrop, at the stock market, the looks substantially cheaper than
it did a year ago, assuming corporate earnings don’t turn negative. The
S&P’s price to forecast earnings multiple is just about 14 times right now,
down from above 18 times a year ago. The busy January economic and policy
calendar will help determine whether this represents a great buying
opportunity to pick up stocks at their lowest valuation in three years or
the market’s way of bracing for a much tougher year for the economy and
corporate results.

For NIGHTLY BUSINESS REPORT, I’m Mike Santoli.

(END VIDEOTAPE)

GRIFFETH: Health care stocks turned out to be the only bright spot in the
market in 2018. In fact, the sector was the best performer in the market
up nearly 4 percent. Energy, on the other hand, was the worst performing
sector, down roughly 20 percent.

So, what will the New Year holds for these two sectors? Which one presents
the better opportunity?

Joining us tonight is Jimmy Lee. He’s CEO of the Wealth Consulting Group.

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

JIMMY LEE, WEALTH CONSULTING GROUP CEO: Happy New Year, Bill and Sue.

GRIFFETH: I think you’re leaning toward the health sector, aren’t you?

LEE: We are. Investors have gravitated towards the sectors that perform
better in the last business cycle. While I’m still a bull, we think health
care has demand there and we like that sector and think it will continue in
2019.

HERERA: You’re also expecting volatility to continue. It has been a rough
end of the year. What other areas do you think are going to do well in
2019?

LEE: Well, I think that a good way to play in 2019 again might be to
invest in those sectors, such as health care and consumer staples invest in
those sectors, such as health care and consumer staples but having
satellite and opportunities for growth. I still think we get a bounce back
in some areas in technology for example. I would be worried of the high-
flying names and look for quality earnings and growth there and also
biotech within that health care sector.

GRIFFETH: And what about energy? I mean, we mentioned the sector itself,
the stock down 20 percent this year. Don’t you expect a bounce back of
some kind?

LEE: You know, I think the Fed is going to be more cautious with potential
rate hikes. And if we get a pause, I think we do get a blip in oil, which
will help energy prices. But I think there’s a little bit too much
uncertainty about a potential global slowdown. So, I think it’s going to
be tough for energy in 2019.

HERERA: You also think, very quickly, Jimmy, the biggest challenge is how
companies around the world are going to perform with liquidity being taken
out by the Feds.

LEE: Yes. I mean, the biggest decisions that we’ve seen is that we’ve
gone from a world where central banks were infusing liquidity into the
markets, the opposite now. But I do want to remind our viewers that these
bear markets are the times where there’s a lot of opportunity for investors
and as a reporter announced earlier, valuations are much better now. So, I
think you should be looking for those opportunities and think about
allocating potentially more into the equities for your long-term plans.

GRIFFETH: If you can’t spend New Year’s Eve in New York, you want to spend
it in Las Vegas. That’s where Jimmy Lee is, with the Wealth Consulting
Group.

Happy New Year, Jimmy. Thanks.

LEE: Happy New Year.

HERERA: Well, some of the most recent volatility in this market may be due
to, get this, pension funds.

Leslie Picker explains why.

(BEGIN VIDEOTAPE)

LESLIE PICKER, NIGHTLY BUSINESS REPORT CORRESPONDENT: During what’s normal
a sleepy week on Wall Street, one behemoth is said to have taken the
markets by storm. That is the pension funds. Pension funds rebalance
monthly and quarterly. Meaning today is a critical one for them to get
their portfolios in order. As long term investors, pension funds pay
particular attention to asset allocation, the weightings of equities, bonds
and alternatives like private equity and hedge funds. But because domestic
equity has declined so dramatically relative to bonds, pension funds
exposure to equities shrank as well. Therefore, they needed to be big
buyers before the end of the year to rebalance their portfolios in
accordance with their targets.

Wells Fargo (NYSE:WFC) puts the target at $60 billion. That’s how much
capital pension funds took out of bonds and put into equities, the firm
estimates. Wells Fargo (NYSE:WFC) called this rebalancing unprecedented
and historic and says that it may be responsible for the large swings we
saw last week and potentially this week.

For NIGHTLY BUSINESS REPORT, I’m Leslie Picker.

(END VIDEOTAPE)

GRIFFETH: Now, we mentioned earlier that oil stocks were the worst
performers in the market this year. That is because oil prices had their
worst year since 2015, which was not something many had expected. Remember
2018 started with some forecasters calling for $100 crude. But the economy
did a sudden about-face in the summertime, losing more of a third of its
value in the fourth quarter alone as demand forecasts softened and
geopolitics roiled the energy markets.

When all was said and done, domestic crude closed the year with a decline
of about 25 percent.

HERERA: And global markets also had a tough time. London, Germany and
Japan were all down double digits while China’s Shanghai slid about 24
percent, its worst yearly performance since 2008.

And just today, the world’s second biggest economy reported that its
manufacturing sector contracted for the first time in more than two years
this month. This all comes amid the ongoing trade dispute with the U.S.

GRIFFETH: And so-called FAANG stocks got a lot of attention in 2018, not
all of it positive. Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Apple
(NASDAQ:AAPL), Netflix (NASDAQ:NFLX), Google (NASDAQ:GOOG) parent Alphabet
led the market early in the year, but they also led the charge lower during
the recent sell-off. According to Arthur Cashin, the longest serving floor
trader at the New York Stock Exchange, these stocks will have to do one
thing if the market is to head higher in the New Year.

(BEGIN VIDEO CLIP)

ART CASHIN, UBS FLOOR OPERATIONS DIRECTOR: You need them to be unified and
consistent. A couple will always look a little bit better but if they
start to fray around the edges, if Facebook (NASDAQ:FB) starts to get hit
again and fall apart, then I think you want to see if they can all
demonstrate unified strength.

(END VIDEO CLIP)

HERERA: And that group of tech stocks isn’t the thing investors need to
watch in the New Year. Earnings will be crucial as well.

Here’s Bob Pisani.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: So, what about
earnings? Up, down or flat in 2019?

What happens to markets may depend on your outlook for earnings. 2019
estimates are coming down slowly but surely, from 10 percent the start of
this quarter to a little better than 7 percent in the S&P for 2019. That’s
the estimate.

Now, 17 companies have reported earnings so far. The numbers have been
good. First quarter estimates have generally been coming down particularly
after comments from Micron and Federal Express (NYSE:EXPR), who noted that
while the U.S. was still strong, international trends were slowing down.

Unfortunately, the state of earnings may be in the hands of very large
macro issues that are notoriously difficult to model. Traders are weighing
several big issues. Number one, can the Fed avoid making what some call a
policy error, that is hiking in a slowing environment with low inflation.
The other issues are global rate risks. The European Central Bank is
ending stimulus. What impact will that have on European profits? And
third, will there be clear progress on trade attacks? And fourth
independently of the trade talks, how much is China slowing, with or
without tariffs imposed on them?

Now, how strategists and analysts interpret the impact on earnings
determines how they feel about the markets in 2019. So, for example, if
you think earnings growth is going to be zero in 2019 — not 7 percent but
zero, markets will be dead money to a lot of investors. Now, if you think
earnings will be negative, even worse, many think the markets will have
further to drop from here. But if you think earnings will be in the mid
single digits, four, five, or six percent, which is where the majority of
analysts and strategists are right now, then most feel the markets have
room to rally.

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

(END VIDEOTAPE)

GRIFFETH: There are new developments today on the partial government
shutdown, but not a lot of progress to tell you about. House Democrats
have reportedly prepared two separate bills designed to end the spending
standoff. As first reported by CNBC, one bill would fund the Department of
Homeland Security at least through February 8th. The other would fund the
remaining government agencies affected by the shutdown through the rest of
this fiscal year.

The funding bill for homeland security, by the way, does not include the $5
billion that President Trump wants for his border wall. A vote is
scheduled for Thursday.

HERERA: The Democratic proposal is likely to face strong opposition from
the president, and as Ylan Mui reports, the longer the partial government
shutdown goes on, the more stress it creates for some furloughed workers.

(BEGIN VIDEOTAPE)

YLAN MUI, NIGHTLY BUSINESS REPORT CORRESPONDENT: It’s day 10 of the
government shutdown in D.C. And in Dallas, David Arvelo is feeling the
squeeze. He works for the Food and Drug Administration and now, he is one
of the 800,000 federal employees not getting paid.

DAVID ARVELO, FURLOUGHED FEDERAL EMPLOYEE: These things happen so we try
to prepare.

MUI: He’s trying to save money, cooking at home instead of eating out,
deciding which cable and TV subscriptions to cut. He even considered
returning some of presents that he bought for his family.

ARVELO: Some of them I felt were a little too costly for me to have spent
the money knowing that this might happen. But I decided to hope for the
best and, yes, I’ve been tempted to return them but now I don’t have the
heart to do it.

MUI: Some of the country’s biggest banks are stepping in to lend a hand to
federal workers. Wells Fargo (NYSE:WFC) is considering reversing any
overdraft or services fees for federal employees. Chase said it would
automatically waive or refund them and even set up a dedicated hotline.
Some local credit unions here in Washington are promising zero interest
loans. Navy Federal says thousands of its members have signed up.

TYNIKA WILSON, NAVY FEDERAL SENIOR VICE PRESIDENT: Helping them through
this time, especially through the holidays and going into the New Year. We
wanted to give them that level of comfort.

MUI: Meanwhile, a shutdown showdown rages on in Washington, President
Trump still calling for a concrete wall over Twitter, saying he will get it
build and fast. And Democrats planning a vote in the House on Thursday to
reopen the government without one penny for the wall.

In Dallas, Arvelo has a message for lawmakers as they prepare for a new
session of Congress.

ARVELO: We didn’t call out for this shutdown. We don’t have a bone in
this argument that they’re having. We just want to do our jobs.

MUI: Arvelo has been a government employee for 27 years and he said he’s
not ready to give up just yet.

For NIGHTLY BUSINESS REPORT, I’m Ylan Mui in Washington.

(END VIDEOTAPE)

GRIFFETH: Still ahead, 2018 was a turning point for the housing market and
there could be more twists and turns in the New Year.

(MUSIC)

HERERA: After several years of frenzied home buying, 2018 was a turning
point for the housing market. Rising home prices and higher mortgage rates
took a toll on the housing industry. So what will this mean for buyers and
sellers in 2019?

We’re joined now by Cheryl Young, senior economist at Trulia.

Cheryl, welcome back. Nice to have you here. Happy New Year.

CHERYL YOUNG, TRULIA SENIOR ECONOMIST: Happy New Year. Thanks for having
me.

HERERA: You say we’re entering that transitional period in the market and
it may favor either buyers or sellers at some point, but it is going to be
a little more difficult to navigate?

YOUNG: That’s right. It’s going to be a little bit of a mixed bag in
2019. I think sellers previously had seen selling as a no brainer as we
saw prices track upwards.

Now, prices are starting to slowdown a little bit. They haven’t declined
quite yet, but we’re starting to see a slowdown. Buyers on the other hand,
they’re also facing a lot of headwinds. Affordability is still a major
problem for them. Inventory remains low. But at the same time, perhaps
there’s a little bit of an edge off competition.

So, 2019 looks like an interesting year for home buying and selling.

GRIFFETH: So, inventory levels have been coming down a few years now. But
more millennials will be wanting to get into the housing market. Will that
be enough demand to soak up some of that inventory or not?

YOUNG: Well, inventory isn’t quite tracking up yet. We’ve seen it sort of
flat right now, or declining still in some markets. In those really
expensive markets, we’re starting to see inventory bounce back and we’re
starting to see millennials like you said also drive that home ownership
rate back up again since the recession. And so, we do see millennials as
they’re aging into home ownership, which is a little bit later than people
had expected. They’re starting to enter the market and, like you said,
absorb some of that inventory that we’re starting to see.

HERERA: They’re also entering a market where interest rates are headed
higher. How much of an influence will that be?

YOUNG: Yes. So, mortgage rates this past year went up to a seven-year
high. We saw just under 5 percent. We expect mortgage rates to stay up
there, probably not to back down again. And that really — what that does
is take a big bite out of affordability. That means less affordability in
terms of mortgage payments. So, it does make it much more difficult for
people, especially first-time home buyers.

HERERA: Cheryl Young of Trulia, thanks so much for joining us today.

YOUNG: Thanks so much.

GRIFFETH: Verizon (NYSE:VZ) and Disney (NYSE:DIS) reach deal, and that is
where we begin tonight’s “Market Focus”.

Verizon (NYSE:VZ) Fios customers will be able to watch college football
after all tomorrow on Disney’s ABC and ESPN after the two companies came to
an agreement on programming fees, heading off a threatened programming
blackout. Now, without a deal, Verizon’s Fios network would have to stop
carrying all Disney (NYSE:DIS) channels.

Verizon (NYSE:VZ) was up more than 1.5 percent today, with Disney
(NYSE:DIS) advancing by 2 percent.

Amazon (NASDAQ:AMZN) is reportedly planning to expand a number of its Whole
Foods grocery stores. According to “The Wall Street Journal”, Amazon
(NASDAQ:AMZN) is looking for new locations in more suburbs and in areas
where Whole Foods is already growing in popularity. Amazon (NASDAQ:AMZN)
rose more than 1.5 percent today to $1,501.97.

HERERA: “Tribune” was hit by a cyber attack over the weekend. The
intrusion caused printing and delivery disruptions for major newspapers
like “The Chicago Tribune” and “The Baltimore Sun”. According to “The Wall
Street Journal”, Tribune found a workaround, but it’s still purging its
system of that virus. The stock rose about 1 percent to $11.34.

Pacific Gas & Electric (NYSE:PCG) could face charges as serious as murder
if investigators find that various deadly California wildfires over the
past two years were caused by the reckless operation of power equipment.
The legal brief was submitted by California’s attorney general and is
considered advisory. If criminal charges are filed, they would be launched
by the county district attorneys, not the state. Shares fell to $23.75.

GRIFFETH: As you may know, sports betting took a major league forward last
May following that Supreme Court ruling to open the door for states to
legalize it. The decision had huge implications not only for casinos but
also for daily fantasy sports companies like Draft Kings and Fan Duel.
Both of them have been struggling with state regulations for years. And
now, with the college bowl games, the super bowl, March Madness all coming
up, sports betting is expected to grow even more.

Eric Chemi is with us now for a look at what’s ahead for 2019.

I think it was eight states have legalized gambling at this point.

ERIC CHEMI, NIGHTLY BUSINESS REPORT CORRESPONDENT: That’s right.

GRIFFETH: What’s the outlook for next year in terms of states —

CHEMI: More states definitely will legalize, one by one. You could see
about five to ten states, another eight next year. But again, we know how
dysfunctional D.C. is. Now think how dysfunctional every single capital
state is. So, you’ve got to work to all of those to get it done.

HERERA: But we’re talking about an awful lot of money, aren’t we?

CHEMI: It’s interesting. The number seems really big on a growth space.

So, take, for example, New Jersey. So far this year, about a billion has
been bet in sports betting alone. But the revenues to the sports books,
only about $70 million. Then the tax number going to the state of New
Jersey, only about $8 million. So, a $1 billion bet will become only about
$80 million in taxes.

GRIFFETH: But now, Pennsylvania has done this licensing fee. Is that a
way around that?

CHEMI: That is one easy way around it, because they’re charging $10
million for anybody that wants to do sports betting in the state. So, all
of a sudden, if few people have paid it, now you’re making $10 million, $20
million, $30 million before anyone even places a bet. Good for the tax
base,

HERERA: What about on the federal level, are we going to be looking at
regulation?

CHEMI: They are trying to do regulation on the federal level. There are
bills that are getting pushed around or talked about. But like you said,
it’s not a top ten priority for them. They’re not even in session right
now. So, getting down the sports betting is way down on their list.

GRIFFETH: What does it do in sports books like Las Vegas? Does it
cannibalize it or not?

CHEMI: It is competition. But if you’re a big company like an MGM, for
example. They’re doing deals across the country so they can be involved in
these local markets, through an online book, physical casino, it depends.
Every state has got a different groups and constituencies for how they run
their casinos.

GRIFFETH: Very interesting.

Eric, thanks for staying late tonight. See you later.

HERERA: Appreciate it.

Well, coming up, modern medicine and a grandfather’s hope for a cure.

(MUSIC)

HERERA: Companies sent home more than half a million in cash they held
overseas this year. The repatriation took advantage of changes to the tax
law. It’s believed that U.S. firms held about $3 trillion in jurisdictions
that range from Ireland to Switzerland. But recent data shows the pace of
dollar repatriation is now slowing.

GRIFFETH: As we mentioned early, the health care sector was the best
performing group in 2018, and this year, the industry witnessed a number of
medical breakthroughs, including treatments for hemophilia, the inherited
bleeding disorder.

Meg Tirrell has our latest installment of “Modern Medicine.”

(BEGIN VIDEOTAPE)

MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT: James Addie has lived
his whole life with hemophilia, an inherited bleeding disorder that causes
severe joint damage.

JAMES ADDIE, HEMOPHILIA PATIENT: It got so bad that my left knee wouldn’t
hold my weight anymore. I’ve had that and both hips replaced.

TIRRELL: Early treatment with contaminated blood products left him with
HIV, common among those his age with hemophilia. Newer treatments helped
prevent leads that must be taken by infusion every few days.

DR. CATHERINE MCGUINN, WEILL CORNELL DIRECTOR OF HEMOPHILIA TREATMENT
CENTER: It is pretty onerous to think about. Sort of finding a vein and
doing this as part of your routine a couple of times a week.

TIRRELL: Four months ago, Addie got a chance to try something potentially
life changing, clinical trial for gene therapy for hemophilia. The
treatment uses a virus to deliver a healthy copy of a gene to make up for
the one that causes the bleeding disorder. The goal: fix the problem with
just one treatment.

Gene therapies are in development for hemophilia and biotech companies
BioMarin and Spark Therapeutics, Sangamo, uniQure and drug giant Pfizer
(NYSE:PFE). Addie flew to the University of Michigan for the therapy,
which is being developed by BioMarin. He says his goal is to help more
than just himself.

UNIDENTIFIED FEMALE: This is Andrew Michael. He is 2 months old.

TIRRELL: Addie’s grandson also has hemophilia. His daughter was pregnant
when Addie joined the trial.

ADDIE: She says, well, daddy, you may actually be the cure for your
grandson, you know? So, she goes, that’s pretty cool.

TIRRELL: A month after his treatment, Addie says his level of clotting
factor, a key measure of the disease, rose to 10 to 12 percent of normal
from close to zero. A few weeks later, it was up to 50 percent.

ADDIE: It’s actually got up to 147 at one point.

TIRRELL: He no longer has to have infusion treatment.

SANDY ADDIE, JAMES ADDIE’S WIFE: We’re just tinkled pink. So happy and so
happy for him that he doesn’t have to take shots anymore.

TIRRELL: For Dr. Catherine McGuinn, director of the hemophilia treatment
center at Weill Cornell, gene therapies could mark a transformation in how
to treat the disease.

MCGUINN: The hope is with gene therapy that we can get people to that
place where hemophilia s not something they wake up in the morning and
think about first thing. There are still questions, how long will the
treatment last and how much will it cost?

PHIL NADEAU, COWEN MANAGING DIRECTOR AND SENIOR BIOTECH ANALYST: Gene
therapy is a one-time treatment. All of the cost of the therapy has to be
paid upon that treatment. It’s a different paradigm than what is typically
seen in the pharmaceutical industry today.

TIRRELL: Current treatment could range from $100,000 to more than $1
million for each patient per year.

NADEAU: The company is trying to figure out how to capture that value in
the price of the gene therapies, prices that we typically hear on the order
of about $1 million for a patient.

TIRRELL: A million dollar drug might raise eyebrows and political backlash
but to James Addie, it’s reasonable.

ADDIE: Looking at it as an insurance company, I would think it would be a
good deal for them.

TIRRELL: And if it results in a better life for his grandson, it’s hard to
put a price on that.

For NIGHTLY BUSINESS REPORT, I’m Meg Tirrell.

(END VIDEOTAPE)

HERERA: Before we go, here’s another look at the final trading day for
2018. The Dow was up 265 points, the Nasdaq added 50 and the S&P 500 was
up 21. But for the year, the averages turned in their worst annual
performance in a decade. What a year.

That will do it for us tonight on NIGHTLY BUSINESS REPORT. I’m Sue Herera.
Thank you so much for watching, and happy New Year.

GRIFFETH: I’m Bill Griffeth. On behalf of the whole NBR team, we do look
forward to seeing you in 2019. We leave you, though, with a look at some
of the New Year’s celebrations around the globe in the last 24 hours.
Happy New Year, everybody.

END

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