ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Sue Herera and Bill
Griffeth.
BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: British drama. And the
prime minister`s Brexit plan suffers a crushing defeat and the economic
consequences are anything but clear.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Shutdown effect. The White
House now estimates that the cost of the closure will be twice as steep as
originally forecast.
GRIFFETH: Pricing power. Netflix (NASDAQ:NFLX) is charging more, so are
some drug companies. And the ability to do that could separate the winners
from the losers.
Those stories and much more tonight on NIGHTLY BUSINESS REPORT for this
Tuesday, January 15th.
HERERA: Good evening, everyone, and welcome.
We usually start the show with news about the U.S. economy, American
business, or the market. Tonight we`re starting overseas in the United
Kingdom, and the biggest money story of the day. British Prime Minister
Theresa May suffered an historic defeat. Her plan to withdraw the country
from the European Union failed, and it wasn`t even close. Tomorrow, May
faces a no-confidence vote.
The deadline to leave the E.U. is the end of March, and there`s currently
no plan on how to do that. It is creating uncertainty for investors, who
fear global growth could take a hit as a result of it, and that created
volatility on Wall Street. The Dow Jones Industrial Average added 155
points to 24,065. The Nasdaq was up 117, and the S&P 500 rose 27.
We begin tonight with Willem Marx in London.
(BEGIN VIDEOTAPE)
JOHN BERCOW, BRITISH HOUSE SPEAKER: The ayes to the right, 202. The noes
to the left, 432. So, the noes have it. The noes have it.
WILLEM MARX, NIGHTLY BUSINESS REPORT CORRESPONDENT: Theresa May suffered a
major defeat tonight, one that she had warned would be cataclysmic and it
was certainly historic, the largest government defeat in the House of
Commons since 1924. Rather than wait days for her reaction to this very
but anticipated public loss, lawmakers had only to wait minutes.
THERESA MAY, BRITISH PRIME MINISTER: It is clear that the house does not
support this deal, but tonight`s vote tells us nothing about what it does
support. Nothing about how — nothing about how or even if it intends to
honor the decision the British people took in a referendum parliament
decided to hold.
MARX: Prime Minister May had for months insisted the deal her government
negotiated with the E.U. was the best option for Brexit, and ultimately,
the only game in town. But tonight, there was for the first time an
acknowledgement that she would seek advice and input from her political
enemies.
Chief among those, of course, is Jeremy Corbyn, the leader of the Labour
opposition party. He was quick to respond to the prime minister`s setback.
JEREMY CORBYN, OPPOSITION LABOUR PARTY LEADER: I have now tabled a motion
of no confidence in this government. And I`m pleased — I`m pleased that
motion will be debated tomorrow, so this house can give its verdict on the
sheer incompetence of this government.
MARX: And so, tomorrow, the U.K. will once again face a parliamentary
moment of truth. It`s clear that lawmakers across the political spectrum
are unhappy with the current set of Brexit proposals, but tomorrow, we`ll
find out if any of May`s own conservative party are so dead set against her
plan they`d vote against the conservative government and potentially open
the door to a new general election.
May had warned a defeat tonight would increase the chances of a second
referendum on E.U. membership, and after this result, there are some
opposition MPs who tell us they think she`s right and they would welcome
the chance to reverse Brexit.
For NIGHTLY BUSINESS REPORT, I`m Willem Marx in London.
(END VIDEOTAPE)
GRIFFETH: So, with that defeat today on Brexit and the unknown economic
implications, does this become a good time or not to invest in Europe?
Joining us tonight, Andres Garcia. He`s founder and CEO of Zoe Financial.
Andres, good to see you again. Welcome back.
ANDRES GARCIA, FOUNDER & CEO, ZOE FINANCIAL: Thanks for having me.
GRIFFETH: I mean, major averages in Europe have been going down for about
a year now. Now you have the chaos in the U.K. over the Brexit vote. Is
this the kind of opportunity that presents itself for investors, do you
think?
GARCIA: So the way that I would put this is, if you are trying to invest
for the long term, you`re trying to one day buy a house, or you`re trying
to save for retirement, or for your college education, you should not
dictate those type of investment decisions based on geopolitical decisions.
Why? Because we don`t have an edge on what`s going to happen and tonight
is a perfect example of that.
So, I would take a step back and say, are you globally diversified? Do you
have any exposure outside of the United States? If the answer is no, that
actually might be the wrong answer. Obviously, your risk tolerance comes
into play, but the U.S. only accounts for roughly 50 percent of the global
equity markets. So, there`s a lot of stocks out there that you need to
have some exposure to, regardless of the situation when it comes to their
politics.
HERERA: You know, but to bill`s point, this has been unfolding for more
than a year now, so it`s a longer term political event than others that we
have seen around the globe. Should you not take that into consideration
when you`re looking to divest your portfolio to European stocks?
GARCIA: Yes. So, I guess two-part answer there. One is valuations
matter, right? So, in essence, the market has been pricing European stocks
at a much lower valuation, for instance, than U.S. stocks because of a lot
of what`s going on.
But two, longer term, if we look at what`s happening in England with Brexit
and what we saw in Italy with their debt situation, a lot of that is the
result of the inability of Europe to grow at a pace of the U.S., even
though the U.S. hasn`t been growing very fast. They have been unable to
grow at a pace that they would want to, and that creates a lot of
polarization politically, so it`s almost a result of their inability to
grow.
GRIFFETH: Before you go, and I suspect I know the answer, if you decide
you do want to invest in Europe, do you pick a country, an industry, or you
just pick a mutual fund or an exchange rated fund and diversify it that
way?
GARCIA: I would say we have very little edge and tonight is a very example
of dictating what`s going to happen in U.K. versus what`s going to happen
in Italy. So I would try to be diversified if you don`t have a specific
knowledge base on that region.
GRIFFETH: Andres Garcia with Zoe Financials, always good to see you.
Again, thanks for joining us tonight.
GARCIA: Thanks for having me.
HERERA: It`s the economy in focus here at home, especially when it comes
to the impact of the partial government shutdown. Today on an earnings
conference call, JPMorgan`s CEO, Jamie Dimon, cited research that says if
the shutdown extends through the quarter, growth could go to zero.
He added that, quote: We need good government policy to help the economy
and the shutdown is not going to help the economy. We don`t know exactly
what it is going to do, but it is not a positive, end quote.
And the CEO of Delta today said his company is losing millions in revenue.
(BEGIN VIDEO CLIP)
ED BASTIAN, DELTA CEO: We`re seeing a reduction in revenues the month of
January. Not huge, but about $25 million due to the fact that government
contractors and some government officials are not traveling the way they
would anticipate because of the shutdown.
(END VIDEO CLIP)
HERERA: Now, according to CNBC, the White House is re-evaluating the
shutdown`s effect.
Here`s Steve Liesman.
(BEGIN VIDEOTAPE)
STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Trump
administration has doubled the estimated cost of the government shutdown.
An administration official tells CNBC they now believe the shutdown will
subtract 0.1 percentage points from the economy every week. It appears the
estimate, along with other economists, that the cost was 0.1 percentage
points every two weeks.
The increased estimate comes from bringing in more effects from private
contractors who will be out of work and a greater impact estimated from the
loss of other government functions. So, the administration now sees a half
point being shaved off first quarter GDP from the shutdown if it lasts
through January.
BRETT RYAN, DEUTSCHE BANK: It certainly presents a risk. I think the
White House`s numbers make sense if you assume about a million federal
contractors that are also not getting paid.
LIESMAN: The negative effects from the shutdown just adds to other worries
about trade tensions and global economic weakness and the waning effects of
stimulus. Mark Zandi from Moody`s Analytics in a research report yesterday
estimated a less severe impact. He said there could be a half point to GDP
if the shutdown lasts all the way through March.
But Ian Shepherdson from Pantheon thinks it could cause GDP to go negative
in the first quarter in part because the first quarter tends to be
seasonally weaker than the other three.
Some of the losses could be recovered next quarter when back pay is
remitted to workers, but not all of it. The irony? Economists lack some
of the data that show the shutdown`s impact because of the shutdown itself.
Several key economic indicators are not being published because the number
crunchers have been furloughed. That means no December retail sales report
for the critical Christmas holiday season and likely no GDP report for the
end of this month.
But you don`t need economic reports to know unpaid workers are bad for the
economy. They`ll just tell us eventually how bad it was. And latest
estimate is that it will be worse than originally thought.
For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.
(END VIDEOTAPE)
GRIFFETH: Elsewhere, a Federal Reserve official says now may be the time
to pause when it comes to increasing interest rates. Kansas City Fed
President Esther George said today that the central bank should proceed
with caution and be patient. She did acknowledge, though, that it`s
possible some additional rate increases might be appropriate and that the
economy is overall doing well.
GRIFFETH: A key gauge of inflation that the Federal Reserve watches
moderated in December. The producer price index, which is the measure of
the prices that businesses receive for their goods and services, fell 0.2
percent, mostly due to a steep drop in energy prices. One economist said
that faltering demand for new orders and market volatility could prevent
companies from passing along price increases.
GRIFFETH: But that is not stopping Netflix (NASDAQ:NFLX), which today did
hike prices for its streaming service by the most ever for its millions of
subscribers. Investors cheered the move, though. They sent the stock up
more than 6 percent today.
Julia Boorstin has details.
(BEGIN VIDEOTAPE)
JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Netflix
(NASDAQ:NFLX) is raising its prices by between 13 percent and 18 percent
for its 58 million streaming subscribers in the U.S. and more in Latin
America. The price increases start today for new customers and will roll
out in coming months for existing customers.
The price for the lowest cost offering will increase by $1 to $9, it`s
first-ever increase in Netflix` basic plan since launching online streaming
in 2010. The price for Netflix`s most popular plan has the biggest
percentage increase to $13 per month from $11. While the highest cost plan
is increasing by $2.
Netflix (NASDAQ:NFLX) telling us, quote: We change pricing from time to
time as we continue investing in great entertainment and improving the
overall Netflix (NASDAQ:NFLX) experience for the benefit of our members.
Last year, Netflix (NASDAQ:NFLX) spent about $8 billion on content as
rivals Amazon (NASDAQ:AMZN), Hulu and HBO ramp up their spending. Netflix
(NASDAQ:NFLX) will face new competition from Disney (NYSE:DIS) and AT&T`s
streaming services set to launch later this year. And NBCUniversal
announcing just yesterday it will introduce an ad-supported free service in
2020.
Despite the range of coming rivals, investors and analysts are so far
largely optimistic that the investment in content will pay off and the
higher prices won`t alienate subscribers.
BILL NYGREN, OAKMARK FUNDS: Their move today to increase prices again I
think shows what a value Netflix (NASDAQ:NFLX) is to the customer. And we
don`t think they`ll lose subscribers or even slow their subscriber growth,
despite having somewhat of a meaningful price increase here.
BOORSTIN: Since the last time Netflix (NASDAQ:NFLX) hiked prices October
5th, 2017, the company`s shares are up over 90 percent. Today`s price hike
speaks to the company`s confidence that hit films and shows such as “Bird
Box” and “Stranger Things” will convince consumers it`s worth paying a
little more.
For NIGHTLY BUSINESS REPORT, I`m Julia Boorstin in Los Angeles.
(END VIDEOTAPE)
HERERA: And that brings us to pricing power. What is it and why can some
companies do it while others can`t?
We`re joined right now by Nancy Tengler, chief investment strategist at
Tengler Wealth Management.
Good to see you, Nancy.
NANCY TENGLER, CHIEF INVESTMENT STRATEGIST, TENGLER WEALTH MANAGEMENT:
Thank you, Sue. You too.
HERERA: We tasked you with coming up with a couple of companies that have
that pricing power. First, you say there are two components to that, brand
and competition, correct?
TENGLER: Yes, I do. And you see it with Netflix (NASDAQ:NFLX). Brand is
driving — is driven by the content. They know they have a great lineup
right now. And competitively they were priced below their competition and
they knew that Disney (NYSE:DIS) was coming in shortly so they wanted to
get that price increase before Disney (NYSE:DIS) came in with their
service.
GRIFFETH: This is a favorite topic for Warren Buffett. I mean, he loves
to invest in companies that has pricing power. How does a company achieve
pricing power, in your view?
TENGLER: Yes. So, Bill, good to see you too. Listen, it is driven by
brand and market share, which is a form of competition. Just think back to
Coca-Cola (NYSE:KO). They were able to raise prices consistently for
decades, and then finally consumers pushed back when either the company
forgets to innovate and add value to those higher prices.
And so, Coke spent years moribund and with no growth, and then they came up
with a brilliant strategy. They shrunk packaging size and that solved
consumers` problems about not wanting to have too much sugar intake and
they raised prices per ounce by 1.5 cents per ounce. So they went from 3.5
cents to 5 and suddenly sales took off again.
So, great companies with strong balance sheets and brands are able to
figure out the pricing problem eventually, and they almost always go too
far.
HERERA: All right. Disney (NYSE:DIS) is one of your other picks. Coke
was your first. Disney (NYSE:DIS) is your second.
They certainly have — I have three kids, so I know they have pricing power
when it comes to the theme parks, but maybe not in other areas. Why do you
like Disney (NYSE:DIS)?
TENGLER: Well, and so you`re right, Sue. What they have demonstrated is
that they can pretty much with impunity raise prices at the theme park and
people just keep coming. So, they had a 17 percent increase about a year
ago and now they`re up — 17 or 18. Now they`re up 7 percent this year.
And at some point, what we`ll have to see is if consumers start to pull
back. And certainly, they will during times of recession. And that`s
usually then what brings the companies back around to innovation.
But what we don`t know is if they can stream as a competitor to Netflix
(NASDAQ:NFLX). We`ll find that out later this year.
HERERA: All right. Nancy, thank you very much.
TENGLER: Thanks for having me.
HERERA: Nancy Tengler with Tengler Wealth Management.
GRIFFETH: Time to take a look at today`s “Upgrades and Downgrades”.
Now, Oracle (NASDAQ:ORCL) was downgraded to equal weight from overweight at
Morgan Stanley (NYSE:MS). The analyst there cites a lack of catalysts
drive that stock higher this year. The price target was cut to $53. That
stock rose a fraction to $48.38 today.
Citi was upgraded to outperform from market perform at BMO Capital, with
the analyst citing the bank`s earnings that were out yesterday that we told
you about, and the stock`s valuation. The price target $92, and that stock
was up 4 percent today to $61.38.
And Viacom (NYSE:VIA) was upgraded to buy from hold at Pivotal Research.
The analyst says that the company`s film studio, Paramount Pictures, will
turn a profit this year, which in turn should lead to better overall
margins. The price target now $36 and that stock rose a fraction to
$29.99.
HERERA: Coming up, remember all of those big corporate buybacks? They`re
now showing up in profit reports, giving a boost to earnings per share.
(MUSIC)
HERERA: Two Dow components were out with earnings today.
First, United Health Group which reported better than expected results
helped by growth in its services business. But it also saw higher than
expected medical costs. That didn`t stop investors who sent the stock 3-
1/2 percent higher.
And then there was JPMorgan (NYSE:JPM) which posted quarterly profit below
analysts` expectations for the first time in 15 quarters. The biggest U.S.
bank cited softness in its bond trading operations, but its more than $7
billion in profit was a record.
And both stocks rose in today`s trading session.
GRIFFETH: It was a mixed quarter, though, for Wells Fargo (NYSE:WFC).
That company today reported better than expected earnings per share,
although its profit fell compared to a year earlier, and revenue came in a
little lighter than forecasted. The bank continues to deal with that cap
on its assets that was put in place by regulators in response to the number
of scandals that had plagued the bank. That cap is expected to remain in
place through the end of this year. And the stock fell about 1.5 percent
in today`s trade.
HERERA: Wells Fargo`s better than expected earnings per share was helped
by the bank`s stock repurchase program. Wells Fargo (NYSE:WFC) bought back
more than $7 billion worth of stock in the fourth quarter. Buybacks reduce
the company`s share count, spreading the profits across fewer shares.
And if you recall, buybacks hit a record last year of more than $1
trillion.
Rob Lambert, investment strategist at Strategic Wealth Partners, joins us
to talk about that.
Welcome, Rob. Nice to have you here.
ROB LAMBERT, STRATEGIC WEALTH PARTNERS INVESTMENT STRATEGIST: Thanks for
having me.
HERERA: Do you expect that record-breaking pace of buybacks to continue
now that we`re in a new year and a different economic environment?
LAMBERT: I do. You see a lot of those buybacks in 2018 are going to
trickle into 2019. That number was over $1 trillion in 2018, but let`s
remember, that number is approved purchases. So, a lot of that was in
2018. It was a record year for actual purchases. That`s going to continue
into 2019 because a lot of tax savings in 2018 were actually used for
bonuses and paying down debt as well.
GRIFFETH: Right.
LAMBERT: So, you`re going to see that continue into 2019 and 2020 as well.
GRIFFETH: You know, we went through a period where companies were just
buying back at a rapid pace because they couldn`t think of anything else to
do with all the cash they had out there.
But at the same time, it also improved their bottom line because as Sue
pointed out at the top here, they have fewer shares that spread over the
profitability there. So, are we really growing when we see improved
profitability because of this financial engineering that it`s known as?
LAMBERT: We are seeing strong EPS growth. We are seeing strong net income
growth but not as strong as EPS. So, that`s where your share buybacks come
in.
GRIFFETH: Has that become a red flag for you when a company has been
buying back its shares then and improves their profitability at the same
time?
LAMBERT: It doesn`t necessarily become a red flag because let`s not forget
buybacks are a good thing. You`re increasing your payouts to shareholders,
but investors need to know what they`re paying a premium for as long as the
P/E stays the same on that stock, it`s going to lift the stock up because
as you said there`s less shares.
So, investors just need to focus on the quality of the earnings. Let`s
focus on strong revenue growth and strong net income growth, rather than
that EPS number that investors like to use to justify the price they pay
for stock.
HERERA: Rob Lambert with Strategic Wealth Management — Rob, thank you.
LAMBERT: Thank you.
GRIFFETH: Well, the air was let out of the tires at Goodyear, and that`s
where we begin tonight`s “Market Focus”.
The company cut its full year operating income guidance and placed the
blame on conditions in China and in Europe. Goodyear also cited a decline
in its tire unit volumes in the fourth quarter and a rise in raw material
costs. Shares fell by 13 percent today to $19 even.
Sherwin-Williams (NYSE:SHW) is warning that 2018 earnings will come in
below expectations. The paint maker cited weak sales in North America, but
the CEO says the demand decline was a blip, not a sign of broader economic
troubles. Shares, though, fell by 4 percent today to $381.44.
And private equity firm Apollo Global Management is reportedly nearing a
deal to buy an aluminum producer, Arconic. According to “The Wall Street
Journal”, the takeover would be valued at $10 billion. It would be one of
the largest leverage buyouts we`ve seen in recent years, and the deal could
be announced this year. Arconic shares rose 3.5 percent to $20.07.
HERERA: Walmart is splitting with CVS (NYSE:CVS). The retailer`s
pharmacies will no longer be part of CVS` health plans after a dispute over
pricing. CVS (NYSE:CVS) is one of the largest administrators of
prescription drug plans in the U.S. Walmart is complaining of what it
calls unregulated power of pharmacy benefit managers. Shares of CVS
(NYSE:CVS) fell to $63.74 while Walmart rose to $96.25.
Walgreens is entering into a strategic alliance with Microsoft
(NASDAQ:MSFT). The drugstore chain will use Microsoft`s cloud computing
services to gather data in an effort to improve health outcomes and lower
the cost of care. Financial terms not disclosed. Walgreens rose more than
1 percent to $71.79. Microsoft (NASDAQ:MSFT) gained nearly 3 percent to
$105.01.
And United Airlines reported profit that topped Wall Street expectations,
thanks to an increase in the number of flights out of its hubs. The
carrier also said it was able to win back customers after a series of
public relations problems. Shares rose in initial after-hours trading and
finished the regular season 1.5 percent higher to $81.20.
GRIFFETH: Coming up, putting together the retail puzzle one piece at a
time.
(MUSIC)
HERERA: Sears (NASDAQ:SHLD) Chairman Eddie Lambert reportedly presented a
new bid for the retailer today to save the company from liquidation.
According to “The Chicago Tribune”, the new offer includes terms that are
more favorable to the chain and its creditors. The overall value of
Lambert`s deal is still pegged at more than $5 billion.
GRIFFETH: Well, there`s a big question mark hanging over the retail
industry right now. Just last week, Macy`s (NYSE:M) cut its profit
forecast after seeing weak holiday sales. And today, during a panel
discussion, the company`s CEO said that Macy`s (NYSE:M) needs to do a
better job of focusing on the customer.
(BEGIN VIDEO CLIP)
JEFF GENNETTE, MACY`S CEO: I think the one word is experience. We`ve got
to figure that out. We`ve got customers that have put us on notice. The
better the experience, the more we`re going to build their lifetime value.
(END VIDEO CLIP)
HERERA: As we told you earlier in our program, the retail sales number
itself will not be released tomorrow because of the government shutdown.
So, Courtney Reagan tried to piece together what we know about the state of
the industry. She`s in New York for us tonight.
(BEGIN VIDEOTAPE)
COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: The government
shutdown is causing an economic data void. With no one able to work in the
Commerce Department to gather the data, there won`t be a December retail
sales report tomorrow. Without the Commerce Department`s December retail
sales, the national retail federation can`t give its final retail sales
tally because it uses certain categories of the government`s numbers for
November and December.
While most metrics put the online sales growth over the holidays between 16
percent and 19 percent, when it comes to the in-store numbers and the
overall results, it gets a little murky. First data which processes
payment when you swipe your card at check out says holiday sales grew under
2.5 percent in 2018.
GLENN FODOR, FIRST DATA ANALYTICS AND INSIGHTS SVP: Some people call it
mixed. I`d say that`s a fair characterization. I`ll call it varied. I
would say the season started strong, as it typically does over
Thanksgiving, Black Friday through Cyber Monday. And then as it usually
does, it tapers off to kind of like a low single digit, even keel
trajectory for most of December.
REAGAN: MasterCard (NYSE:MA) says it was the strongest season in six
years, with shoppers spending 5 percent more in November and December than
the year prior.
While credit card purchase volume grew at Citi, JPMorgan (NYSE:JPM) and
Wells Fargo (NYSE:WFC) during the holiday quarter, all three banks also
said purchase volume decelerated from the prior quarter. The mixed
messaging continues with the retailers results. Even as most saw holiday
sales increase over last year.
Target`s strong holiday sales put it on track to having its strongest sales
results in 13 years. However, Macy`s (NYSE:M) holiday sales while up, fell
short of expectations and the department store lowered its annual forecast
as a result. Kohl`s (NYSE:KSS) saw its holiday sales grow similar to
Macy`s (NYSE:M) and it increased part of its forecast.
Lululemon, American Eagle and Tilly`s saw among the strongest sales growth.
While Tailored Brands, the company that owns Men`s Warehouse and Jos. A.
Bank reported a drop in holiday sales, along with JCPenney and Express
(NYSE:EXPR). But without the government data as a broad equalizer, it`s
still hard to know exactly how the season averaged out.
For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan in New York City.
(END VIDEOTAPE)
GRIFFETH: And before we go, a final look at this day on Wall Street. Of
course affected by that historic Brexit vote in the U.K. The Dow added 155
points. The Nasdaq was up 117, led higher by Netflix (NASDAQ:NFLX), by the
way, on that price increase. And the S&P 500 rose by 27.
Of course, it would be very interesting to see how the European markets
respond tomorrow to the Brexit vote. We may have that no-confidence vote
in parliament as well. So another historic day could be in the offing
tomorrow as well.
HERERA: And we will be here to cover it all for you. That does it for
NIGHTLY BUSINESS REPORT tonight. I`m Sue Herera. Thanks for joining us.
GRIFFETH: I`m Bill Griffeth. Have a great evening. We`ll see you
tomorrow.
