Transcript: Nightly Business Report – January 17, 2019

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

BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR:  Trade turnaround?  There are conflicting reports tonight that the U.S. is thinking about easing tariffs on Chinese imports, and stocks wasted no time reacting.  

Binge watch.  Netflix (NASDAQ:NFLX) revenue was not as strong as Wall
Street had hoped and that took some air out of the stock that has been on a
tear recently.

Rising risks.  Could extreme weather trigger a foreclosure crisis?  
Tonight, a close look at the potential threat.

Those stories and much more tonight on NIGHTLY BUSINESS REPORT this
Thursday, January the 17th.  

And we do bid you a good evening, everybody.  Sue is off tonight.  

The stock market lately has become like a coiled spring, especially when it
comes to trade issues.  Witness what happened today.  There was no official
government release about the ongoing negotiations between the U.S. and
China, but there was a report midday from “The Wall Street Journal” saying
U.S. officials were debating whether to ease tariffs on Chinese imports,
and that spike in stocks was immediate, as you can see.  Trade sensitive
names like Boeing (NYSE:BA) and Caterpillar (NYSE:CAT) led the way higher.  

But some of those gains were soon pared back when CNBC reported that
neither the treasury secretary nor the U.S. trade representative had made
any recommendations with respect to tariffs by the close.  

At the close, the Dow was up 162 points.  As it happens, that was near the
high of the day.  The Nasdaq was up 49 and the S&P 500 added 19.  

Now, when investors saw that sudden midday rally in stocks, many of them
did not want to miss out, and that`s the way the thinking has been taking
hold lately on Wall Street.  

Bob Pisani explains.  

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT:  The markets have a new
fear, FOMO or fear of missing out on the rally.  The old fears haven`t gone
away — tariffs and China slowdowns, Fed aggressiveness, all those issues
are still out there.  But as we got into the heart of earnings season, the
markets have again resumed their upward drift.  So why is this happening?  

First and foremost, the fear that earnings growth would go to zero in 2019
is largely abated.  Earnings expectations are lower, but most still are
expecting gains in the mid-single digits rather than zero or negative
earnings growth.  For the first quarter, for example, earnings growth
expectations have gone from 8 percent growth on October 1st to just 3
percent today, but the rate of decline has slowed down.  

Second, the market is considerably cheaper than a few months ago.  Even
with a 10 percent rally, the S&P is trading roughly 15 times 2019 earnings.  
That`s the low end of the historic range and it`s well below the roughly 17
to 18 level it was during the height of last year.  

Another factor is declining volatility.  This has made momentum following
trends more comfortable with getting back in.  

Finally, there`s FOMO, as I mentioned, this fear of missing out.  With the
S&P unexpectedly up 5 percent in the first half of the month, fund managers are again underperforming.  Those fund managers underperformed last year in a down market.  Now the opposite has happened and they can`t afford to underperform in an up market as well.  

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

(END VIDEOTAPE)

GRIFFETH:  Now, while some investors are fearful of missing out on any
stock market rally, there are those who are keeping a close eye on another
key financial market, namely U.S. corporate bonds.  Companies today carry a $9 trillion debt load, and that is twice as much as they did ten years ago
at the height of the financial crisis.  

What does that signal about the economy?  

Joining us tonight is Kathleen Gaffney.  She`s director of diversified
income with Eaton (NYSE:ETN) Vance.  

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

KATHLEEN GAFFNEY, EATON VANCE DIRECTOR OF DIVERSIFIED INCOME:  Thank you.  
Great to see you, Bill.  

GRIFFETH:  I guess it would make sense for companies to issue more debt
over time when we were enjoying record low interest rates, right?  

GAFFNEY:  Absolutely.

GRIFFETH:  Were you surprised at how much debt they took on, though?  

GAFFNEY:  Well, it is, I would think, a normal response to interest rates
moving lower.  And as long as the companies can still pay the bonds back,
that`s not a problem.  

GRIFFETH:  We have a chart we can show that was put together by a money
manager that is based on information from the Federal Reserve and the
Commerce Department and “The Wall Street Journal” and it shows the rise and
fall of corporate debt as a ratio of corporate debt to the size of the
economy, going back to the 1980s.  And each time there was a peak in that
ratio, the economy went into a recession every single time.  

Now we seem to be at a peak again.  Are you concerned about the level of
the debt, its relationship to the economy and the possibility of a
recession?  

GAFFNEY:  I am not overly concerned about the amount of debt because the interest rate that companies of debt because of debt because the interest
rate that companies are paying is so low right now.  The leverage to the
economy is definitely something to keep an eye on, but that`s more relevant for assessing the country risk.  Is the U.S. government going to be able to pay back their debt?  

With corporate bonds, you are lending money to corporations.  And in the
investment grade market, most of these companies are household names and
very solid credits.  They have been borrowing at lower interest rates and
borrowing at the very long end of the yield curve.  That means that they
aren`t going to have to pay off that debt tomorrow, so they have time to
grow into that.  

So I`m not worried about a systemic problem in the market, but I do
recognize it has definitely grown by leaps and bounds.  

GRIFFETH:  Are there sectors that you think are good — are attractive
right now in the corporate bond market, for people who may be looking for
income right now?  

GAFFNEY:  Oh, gee, the positive side of interest rates moving higher is
that income levels will move higher too and that`s great for savers and
people living on a fixed income.  But we`re coming off of what was
essentially the zero bound.  And what the Fed is trying to do is just get
the level of interest rates at the short end, which is basically the price
of money.  What does it cost to borrow in the corporate bond market?  

And getting back to a normal level, which would reflect a healthy level of
inflation and a healthy growth rate —

GRIFFETH:  Right.  

GAFFNEY:  — is where they`re headed.  

We have a ways to go before we get there.  There is still a fair amount of
stimulus being provided.  I wont` say that the Fed is trying to tighten.  

GRIFFETH:  Right.  

GAFFNEY:  It just means the cost of money is going up.  

GRIFFETH:  All right.  Kathleen Gaffney Eaton (NYSE:ETN) Vance, thanks for
joining us tonight.  Appreciate it.  

GAFFNEY:  Thanks.  

GRIFFETH:  Well, a few days after Netflix (NASDAQ:NFLX) announced that
largest price hike in its history, it reported a mixed quarter.  Earnings
out after the bell tonight were better than expected, but revenue was a
little light.  

Here are the numbers that we got late today.  Netflix (NASDAQ:NFLX) earned 30 cents a share, 6 cents better than estimates.  Revenue was up 27 percent from a year ago, but analysts were looking for more.  That sent the stock lower in initial after-hours trading tonight.  

Julia Boorstin has the one takeaway for investors.  

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Netflix
(NASDAQ:NFLX) giving more details of its massive reach.  On top of
announcing record paid membership growth, adding 8.8 million paying
subscribers worldwide, the company giving a sense for the very first time
of how many people are watching its shows around the world.  The company saying it estimates that over 80 million member households will watch “Bird Box” starring Sandra Bullock in its first four weeks on the platform.  

Also talking about the company`s global hits, saying Spanish language
original “Elite” has been viewed by over 20 million member households in
its first four weeks.  The company also projecting two new series, “You”
and “Sex Education” will be watched by over 40 million households in their
first month.  

Against the revelation of these massive numbers, CEO Reed Hastings talking about competition, saying it`s not just competing with similar subscription streaming services such as HBO, but more so competing with videogame Fortnite as well as YouTube.  Hastings saying with all this competition, Netflix` focus remains on improving its content.  

For NIGHTLY BUSINESS REPORT, I`m Julia Boorstin in Los Angeles.  

(END VIDEOTAPE)

GRIFFETH:  Also out after the bell tonight, Dow component American express reported record revenue, as more people used its credit cards and charged more.  The CEO said that growth was broad based and that the company is seeing good returns on its investments, but earnings were not as strong as hoped for.  Investors sent that stock initially lower in after-hours trading tonight.  

And then there`s Morgan Stanley (NYSE:MS), which many say was the most
disappointing bank earnings report this week.  Both profit and revenue came in below expectations because its two biggest businesses, trading and
wealth management, suffered declines amid what it called a difficult market environment.  

But on the earnings conference call today, CEO James Gorman said the most recent quarter is not indicative of things to come.  

(BEGIN AUDIO CLIP)

JAMES GORMAN, MORGAN STANLEY CHAIRMAN & CEO:  We do not believe the fourth quarter is a new normal.  In fact, while it`s early days, the first quarter has started on a similar path to the start of the first quarter of 2018.  

(END AUDIO CLIP)

GRIFFETH:  But shares of Morgan Stanley (NYSE:MS) did fall 4 percent in
today`s session.  

Elsewhere, the State Department today recalled most of its furloughed
workers and said it is taking steps to pay salaries despite the partial
government shutdown.  Other agencies have also recalled some of their
workers as well, but without pay.  And they did so by expanding the
definition of essential services.  

Contessa Brewer has more on that from Hackettstown, New Jersey, tonight.  

(BEGIN VIDEOTAPE)

CONTESSA BREWER, NIGHTLY BUSINESS REPORT CORRESPONDENT:  After 27 days of a
partial federal government shutdown, the doors of the Farm Service Agency
opened once again, but for three days only.  The FSA provides crop
insurance and serves as a lender of last row sort for farmers on the brink
of going belly up.  Farmers like George Fetzer.  

GEORGE FETZER, VALLEY VIEW FARMS:  I lost $40,000 retail.  For a small guy like me, I can`t afford that.  And all I wanted to do was get a loan to pay
my bills off.  

BREWER:  Fetzer expected to close on his loan in December, but the shutdown prevented him from getting the final paperwork.  And so as Agriculture Secretary Sonny Perdue ordered 2,500 employees to open half the FSA offices around the country for very limited services, farmer George Fetzer showed up to see if he could push through his loan.  But no such luck.  

FETZER:  I cannot get my money because they don`t have the funding in
place.  

BREWER:  Nationwide, other agencies are also bringing back furloughed
employees.  

MICHAEL JESSE, FURLOUGHED FAA INSPECTOR:  Aviation safety is a priority and
should remain a priority.

BREWER:  Thirty-six hundred safety inspectors for the FAA have been
recalled to their jobs.  The FD is bringing back 400 inspectors to check
high-risk foods, medicine and medical devices.  And the IRS will bring back
half its workforce, or 46,000 employees to help issue tax refunds.  

None of these workers will get paid.  Air traffic controllers and other
employees sued the Trump administration over mandatory work without pay.  A U.S. district judge this week declined to rule on the issue and declined to give employees the right to sit out if they choose.  

In the meantime, other federal agencies are beginning to run out of money.  
The federal court system, including the Supreme Court, can only sustain
funded operations through January 25th.  And civilian businesses are
beginning to see an impact from the government shutdown too.  Some farmers who were getting payments to mitigate the financial damage from tariffs and the trade war haven`t received their checks.  

FETZER:  I see how this has affected me, but all these people that this
whole shutdown has affected, it`s just like people`s lives are getting
ruined over this.  

BREWER:  As more federal employees are punching the clock again action even as the shutdown barrels on, a new bill signed by President Trump now
guarantees back pay for the 800,000 employees who have been forced off
their jobs.  

In Hackettstown, New Jersey, Contessa Brewer, NIGHTLY BUSINESS REPORT.

(END VIDEOTAPE)

GRIFFETH:  Time to take a look at some of today`s “Upgrades and
Downgrades”.  

We begin with Dow component Walgreens Boots Alliance.  It was given a sell rating in new coverage at UBS.  The analyst there says the company`s core retail margins will remain under pressure the next several years.  The
price target now is $70.  The shares there fell one penny to $71.99.  

Chipotle was downgraded from hold to buy at Maxim Group.  The analyst says any positive news is factored into the stock given its 30 percent gain
since late December.  Price target $510.  Shares today rose along with the
broader market to $517.66.  

Still ahead, Airbus deepens its ties to the Deep South.  

(MUSIC)

GRIFFETH:  Shares of missile and weapons makers rose today after President Trump announced the results of a missile defense review and rolled out his plan to ramp up the systems` capabilities.  This would be the first update to that program since the Obama administration back in 2010.  

(BEGIN VIDEO CLIP)

DONALD TRUMP, PRESIDENT OF THE UNITED STATES:  Our review calls for 20 new ground-based interceptors at Ft. Greeley, Alaska, and new radars and sensors to immediately detect foreign missiles launched against our great nation.  We are committed to establishing a missile defense program that can shield every city in the United States.  

(END VIDEO CLIP)

GRIFFETH:  The review recommends studying space-based weaponry and it did single out North Korea as an ongoing threat.  That sent shares of Northrop Grumman (NYSE:NOC), Lockheed and Raytheon (NYSE:RTN) all higher in today`s trade.  

Meanwhile, the growing importance of the Deep South to America`s aviation industry is getting a big boost.  Europe`s Airbus is expanding its
manufacturing plant in Mobile, Alabama.  

Phil LeBeau has more on this newest commercial airplanes that will soon be flying out of the southeastern United States.  

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT:  With fireworks and
applause, Airbus executives and political leaders broke ground on new
assembly lines in Mobile, Alabama, where Airbus`s newest plane, the A-220,
will eventually be built.  Adding 400 jobs and more than doubling the
number of people currently working at the plant.  

TOM ENDERS, AIRBUS CEO:  We didn`t come here because you were just nice
people.  We made the decision because we were convinced it was for the good
of Airbus going forward.  

LEBEAU:  Airbus opened its first plant in Alabama four years ago in hopes
it would help the European company win more military and commercial plane
orders in the U.S., and that`s happening with its new plane, previously
known as the Bombardier C-series, which will seat up to 150 passengers.  

This move also reinforces just how important the Southeastern U.S. has
become for commercial aviation.  Boeing`s plant in Charleston, South
Carolina, where they build the 787 Dreamliner now employs more than 6,500
workers.  

While there`s no expectation the plane building hubs outside Seattle,
Washington, or Toulouse, France, will ever be replaced, Boeing (NYSE:BA)
and Airbus have clearly spread out their footprints.  

And both footprints, along with manufacturing jobs, continue to grow in the
Deep South.  The Airbus plant in Alabama is scheduled to roll out its first
all-new A-220 by the middle of next year.  

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.  

(END VIDEOTAPE)

GRIFFETH:  Signet Jewelers loses the sheen and how.  That`s how we lose
tonight`s “Market Focus” with the company cutting its profit and sales
guidance following slower-than-expected holiday sales.  It also hinted it
could close more stores as a way to improve profitability.  But shares
plunged by 24 percent today to $25.13.  

Industrial company PPG issued a weak outlook, citing a softening global
economy and declines for its products in some countries.  The company is
also considering splitting up its building and products coatings unit
following pressure from an activist investor.  The stock rose more than 4.5
percent today to $107.36.  

Construction supply company Fastenal (NASDAQ:FAST) easily topped Wall
Street revenue forecasts.  Its results were helped by stronger demand, but
it gave only modest signs it`s been able to push through higher pricing.  
Fastenal (NASDAQ:FAST) results were often seen as a gauge of the health of
the broader manufacturing sector.  That stock was up nearly 6 percent to
$57.34.  

Regional bank BB&T (NASDAQ:MSDXP) (NYSE:BBT) topped the Wall Street
estimates, thanks to higher revenues and a decline in costs.  Loans and
deposit balances improved during the quarter and the company CEO says that
should continue.  

(BEGIN VIDEO CLIP)

KELLY KING, BB&T (NASDAQ:MSDXP) (NYSE:BBT) CHAIRMAN & CEO:  Our business
activity was strong in the fourth.  Everything we see now would suggest
that it will be strong on a seasonally adjusted basis through the first.  
So there`s no real reason today to be concerned about business activity.  

(END VIDEO CLIP)

GRIFFETH:  The stock gained 1.5 percent today to $48.28.  

Back when the tax law was passed more than a year ago, many thought that
there would be a migration from high tax states to lower tax states because
the legislation limited deductions for state and local taxes, including
property taxes, to $10,000.  And more than a year later, that appears to be
exactly what is happening, especially for the wealthy.  

Robert Frank takes a look now at the millionaire migration.  

(BEGIN VIDEOTAPE)

ROBERT FRANK, NIGHTLY BUSINESS REPORT CORRESPONDENT:  A new report out
today shows the south Florida real estate market shining bright, while the
Northeast is facing a long market chill.  Average sale prices up 7 percent
in Miami and up 20 percent in Boca Raton.  Ft. Lauderdale, Palm Beach and
Wellington also posting solid numbers for the fourth quarter, that`s
according to a report from Douglas Elliman and Miller Samuel.  

Now, Florida brokers say it has been the strongest start to a winter
selling season in years.  But Manhattan just finished its worst year since
the financial crisis.  Greenwich, Connecticut, once home to all those hedge
fund billionaires, well, it is now filled with empty mansions.  Prices
there falling 20 percent in the quarter, and there is now a two and a half
year supply of luxury homes.  

So, why the tail of two markets?  Well, taxes are one big reason.  The new
tax law which limits the amount of state and local taxes you can deduct
makes it more expensive now to live and own in New York and other high-tax
states.  

GIL DEZER, DEZER DEVELOPMENT PRESIDENT:  A person, a business owner making
a million dollars a year will actually be saving enough money in taxes to
support a $2 million mortgage on a condo in Miami.  

FRANK:  Demographics is another reason.  The population is getting older
and many want to retire in Florida.  Developers are responding with ever
more elaborate and luxurious buildings in the Sunshine State to lure those
migrating millionaires.  

Dezer Development just finished a Porsche Tower, which has a glass elevator
to bring your car to your apartment and it`s now finishing the Armani Casa
where you can have your wardrobe and you entire apartment designed by
Armani.  

And more high-end development is likely as the builders follow the money.  

For NIGHTLY BUSINESS REPORT, I`m Robert Frank.

(END VIDEOTAPE)

GRIFFETH:  Coming up, could extreme weather trigger the next foreclosure
crisis?  

(MUSIC)

GRIFFETH:  Les Moonves is not giving up without a fight.  According to a
regulatory filing, the former CBS (NYSE:CBS) CEO is demanding binding
arbitration following the company`s board`s decision that he was fired for
cause and, therefore, not entitled to $120 million in severance payments.  
Moonves was ousted last fall following multiple allegations of sexual
misconduct.  He has denied any wrongdoing.  

Microsoft (NASDAQ:MSFT) announced today it is investing $500 million to
tackle Seattle`s housing crisis.  The company says the money will go toward
building new homes and preserving existing housing in an effort to increase
affordability for local residents.  But Microsoft (NASDAQ:MSFT) added its
role is only part of the solution.  

(BEGIN VIDEO CLIP)

BRAD SMITH, MICROSOFT PRESIDENT AND CHIEF LEGAL OFFICER:  We need market
incentives, we need zoning changes, we need to incentivize lower and middle
income housing, we need capital.  We`re bringing capital to the table.  
Different solutions may make sense for different communities or for
different companies.  

(END VIDEO CLIP)

GRIFFETH:  Microsoft (NASDAQ:MSFT) pointed out that in Seattle, the local
median income has not kept pace with rising housing costs.  

Finally tonight, a new government report warns climate change will cost the
U.S. economy hundreds of billions of dollars in annual losses by the end of
the century.  From floods to droughts, the threat of extreme weather to
homes is certainly clear, but the risk to the mortgage market is just now
coming into focus.  

Diana Olick has the next installment of her series called “Rising Risks.”

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Hurricane Harvey
flooded close to 100,000 Houston area homes, and the vast majority of them
had no flood insurance.  

JENNIFER TAYLOR:  Ultimately ended up about four feet.  

OLICK:  Jennifer and Andy Taylor did have insurance, and at the time vowed
to rebuild.  

TAYLOR:  The fabric of the community has been amazing.  

OLICK:  But as they watched several homes on their street go into
foreclosure and the fabric of their community seem to unravel, the Taylors
joined other struggling neighbors and sold to hungry investors who
descended on the city.  

Houston`s strong economy made it a hot housing market before the storm, and
investors are still swarming foreclosure auctions like this one now,
rekindling images from the foreclosure crisis a decade ago.  

AMANDA LECUREUZ, FORECLOSURE INFO & LISTING:  I`ve heard plenty of stories
of homeowners who had no choice but to walk away.  

OLICK:  In Harvey`s federally declared disaster areas, 80 percent of the
homes had no flood insurance because they weren`t normally prone to
flooding.  Serious mortgage delinquencies on damaged homes jumped more than
200 percent, according to Core Logic.  

Houston could have seen a massive foreclosure crisis were it not for that
strong investor demand.  The next city to get hit by a natural disaster
might not be so lucky.  

In Houston, investor purchases of ten or more properties jumped more than
50 percent in the year following Harvey, according to Adam Data Solutions.  
Some were large buyers like Cerberus Capital and HomeVestors.  Other were
smaller home flippers like JP Patel.  

JP PATEL, REAL ESTATE INVESTOR:  As an investor, it`s kind of a perfect
opportunity.  

OLICK:  Patel and his team have bought more than 80 flooded properties so
far.  

PATEL:  We literally can avoid the whole problematic nature of the
foreclosure process.  

OLICK:  And it`s not over yet.  

Even a year after Harvey, neighborhoods like this one are still rebuilding,
littered with empty houses and empty lots.  Some say all of this should be
a wake-up call to the nation`s banks and mortgage lenders.  

We asked Ed Delgado, the CEO of a mortgage trade association, if the
mortgage market is prepared for increasingly severe weather.  

ED DELGADO, FIVE STAR INSTITUTE, CEO:  I don`t think they are.  I think if
we look at the basic foundation of what drives the mortgage market is the
application of credit risk.  What`s missing is the inspected understanding
of weather risk where those can take place.  

OLICK:  Delgado emphasized that most of the damaged homes in Houston were
not in FEMA flood planes.  

DELGADO: You have this tremendous urbanization, population growth, roads
that are being built in the last ten years.  Where does the water go?  Is
there an underlying risk for us to examine with respect to our portfolio
and then make decisions, should we be lending in those markets?  

OLICK:  Lenders today and the federal government that backs most loans
based their risk on FEMA`s flood maps.  But even top FEMA officials admit
their maps don`t account for increasingly extreme weather.  

David Maurstad leads risk management at FEMA.  

DAVID MAURSTAD, FEMA:  We can`t determine what`s going happen in 12 months
beyond because insurance is set up for what your risk is today, and it
wouldn`t meet actuarial science to charge you for a future potential.  

OLICK:  FEMA is required to update its maps every five years and Maurstad
says it relies heavily on local communities reporting problems.  But some
don`t because they don`t want their insurance premium to go up.  

MAURSTAD:  We know that only one-third of the properties in the high-risk
area have flood insurance, so we have a lot of work to do.  

OLICK:  As does the mortgage industry, which could ultimately see a climate
foreclosure crisis.  

DELGADO:  I think if it comes close in terms of exposing lenders to
uncontrollable risk, when you have a trillion dollars of real estate at
risk in coastal markets, it`s time you start paying attention to that.  

OLICK:  For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Houston.  

(END VIDEOTAPE)

GRIFFETH:  Thanks for watching tonight.  We`ll see you tomorrow.

END

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