Nightly Business Report – February 20, 2019

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



details have emerged on why the Federal Reserve decided to make an about-

face on policy and what it might do next.  

In pain.  As CVS (NYSE:CVS) Health integrates it big Aetna (NYSE:AET) 

acquisition, an old takeover is giving the company a real headache.  

And living in fear of an audit.  What are the odds that the IRS will 

actually come after you?  

Those stories and much more tonight on NIGHTLY BUSINESS REPORT for this 

Wednesday, February —  




Trump and others want to see growth return to the post-war average of 3 

percent plus.  To do that, the U.S. would need more workers and more 


JOSEPH QUINLAN, MERRILL LYNCH AND U.S. TRUST:  Historically, any society or 

economy that has an aging population has a shrinking labor force.  It 

doesn`t have to be the end of the world in terms of output and growth and 

your position in the world.  But you have to run faster just to maintain 

the level of output that we currently —  


LIESMAN:  — market think that could happen as soon as March.  The Fed 

noticed that the market inflexible on the balance sheet reduction, not 

really paying enough attention to changes in the economy, so the Fed 

adopted a patient and flexible policy approach to balance sheet reduction 

and that led to a new statement that came out on the balance sheet at the 

January meeting.  

On the critical issue of interest rates, the Fed explained its pivot to a 

pause from gradual rate increases because it saw growth risks increasing.  

It noted that financial conditions had tightened with the big sell-off in 

the market.  There was also the government shutdown and trade tensions, 

leaving the Fed to expect slower growth in 2019 than it previously had.  It 

also saw softer business and consumer sentiment and the outlook for foreign 

growth also turned weaker.  

At the same time, inflation was muted so the Fed saw little risk in 

pausing.  How long will that pause last?  Well, some in the minutes said 

that the Fed might return to hiking rates later this year, depending upon 

economic developments and some thought that was not likely.  We`ll have to 

watch economic data and listen closely to Fed speak over the next couple of 

months to know if a returning to rate hikes is possible in 2019.  

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


GRIFFETH:  Scott Brown joins us now to talk about those minutes and Fed 

policy overall.  He`s chief economist at Raymond James.  

Scott, thanks for joining us tonight.  


GRIFFETH:  In those minutes, they also express surprise at the decline of 

the stock market in December as it seemed that the market misunderstood 

their policy, that maybe they weren`t as hawkish as the stock market seemed 

to think.  

Do you think the market has been wrong about Fed policy?  

BROWN:  I think that you`ve certainly seen a very heightened level of 

sensitivity to even minor changes in the Fed outlook.  Back in December, 

you know, in his press conference after that policy meeting, Fed Chairman 

Powell said that the low inflation outlook would allow the Fed to be 

patient so used the same language in January.  

So, really, I don`t think it was a drastic change.  The Fed has gone from 

sort of a mild tightening bias to essentially what is neutral.  And the 

bottom line is that the future Fed policy decisions are going to be data 

dependent still.  

GRIFFETH:  Right.  And there were some today and there have been for the 

last few days on Wall Street who feel that the Fed is probably going to 

have to raise rates before the end of the year, maybe in the fall sometime.  

What do you think?  

BROWN:  Well, the correct answer is always “it depends”.  If the economy 

picks up and we`ve certainly seen a lot of downside risks.  You had the 

government shutdown, you had trade policy uncertainty.  We saw a pretty 

sharp drop in both business and consumer expectations in January.  

A lot of those fears and downside risks may be starting to abate a little 

bit.  If the economy continues to gain strength, then yes, it would be 

appropriate to maybe, you know, tap on the brakes a little, maybe a rate 

increase in June, maybe another one in December.  

But, you know, we`re still a long way from that.  The Fed has plenty of 

time.  We`re not seeing a lot of pressure from inflation.  

GRIFFETH:  And before you go, quickly, if the Fed does start raising rates, 

what do you think the market does about that?  

BROWN:  Well, it depends on why the Fed is raising rates.  If it`s because 

the economy is strong and you`d like to see continued growth in earnings, I 

don`t think there`s any real danger that the Fed is going to choke off 

growth here, and I think that`s still a positive outlook.  

GRIFFETH:  All right.  Scott Brown, the chief economist of Raymond James — 

again, thanks for joining us tonight.  

BROWN:  Thank you.  

GRIFFETH:  Meanwhile, on Wall Street, stocks meandered for a second 

consecutive day, although the major averages did get a small bump after the 

release of those Fed minutes.  A rise in technology stocks helped the 

Nasdaq turned in its eighth straight day of gains.  By the close, the 

industrial average was up 63 points to 25,954, the Nasdaq added two, and 

the S&P tacked on just about five points.  

The other big issue for the market is still trade and the resolution of the 

U.S./China trade talks could be just the thing that drives equities higher.  

Bob Pisani takes a look at where stocks may be heading.  



clearly pricing in a trade deal.  I guess the question is, how much exactly 

is priced in?  

Art Cashin from UBS thinks it`s at least 50 percent priced in, but it could 

be more.  And with that comes potential risk to the recent rally.  

So, if a trade deal is announced by that March 1st deadline, the uptick in 

stocks should be fairly modest if it`s priced in, and the market seems 

comfortable knowing the deadline could be pushed back or delayed.  But if 

the White House announces no trade deal and tariffs on China go to 25 

percent from 10 percent, that`s not priced in.  Stocks could drop 

significantly, perhaps even back to their December lows.  

So, with the S&P 500 hovering near 2,800, what could push it over 3,000?  

Besides a trade deal, talk of the Federal Reserve possibly easing would be 

significant.  And any clear sign that the Fed would slow down the unwinding 

of its $4 trillion balance sheet.  

Also, less talk about an earnings recession.  I think that would be a big 

help to the markets.  I think, though, most importantly of all will be less 

talk about a global slowdown.  

Some positive growth in Europe, that would help.  Some economic stability 

in China, that would help.  And even better economic data out of the U.S. 

than we got last week with those dismal retail sales and disappointing 

industrial production numbers.  

Meanwhile, new highs are expanding.  The market looks good.  There`s little 

reason to sell right now and the Dow is on pace for a ninth week of gains.  

The problem is it`s hard to argue that the market is really cheap right 

now, given how far it`s advanced off of those December 24th lows.  

The bottom line is this: it`s looking very hard to move the market forward 

notably unless you get stability on the global growth front and some kind 

of trade deal in the mix.  

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


GRIFFETH:  We have mixed signals in the oil patch today.  Oil prices did 

rise to their highest level of the year after Nigeria said it was willing 

to reduce its output.  But the Energy Information Administration also is 

forecasting record shale production is expecting 8.5 million barrels of oil 

per day next month.  But that did fail to slow oil`s rise.  Domestic crude 

did settle above $56 a barrel, posting its sixth straight day of gains.  

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

Transocean (NYSE:RIG) was upgraded to overweight from underweight at 

Barclays today.  The analyst there called the stock undervalued and said 

that Transocean (NYSE:RIG) could benefit from a transformed offshore 

industry.  The price target now is $10.  But despite that upgrade, shares 

fell a fraction to $8.69.  

Charles Schwab was downgraded to a sell from neutral at UBS.  The analyst 

cited growth concerns and says that buybacks will not cushion the blow from 

rising costs.  The price target now $42.  That stock fell more than 1 

percent today to $46.45.  

And Southwest Air was downgraded to a sell from neutral at Goldman Sachs 

(NYSE:GS), with the analyst saying that the airline`s new route to and from 

Hawaii could be too costly.  Separately, the airline cut its outlook for 

the first quarter saying that revenue declines due to the recent government 

shutdown were bigger than expected.  And stock fell more than 5-1/2 percent 

to $54.41, and the other airlines fell in sympathy on southwest guidance 

and that put a drag on the transportation sector today.  

So, what is the Southwest Airline downgrade and the weak guidance telling 

us about the state of the airline industry right now?  Joining us tonight 

is Seth Kaplan.  He`s managing partner with Airline Weekly.  

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



GRIFFETH:  Higher costs and maybe slower traffic due to the government 

shutdown.  Is that sort of the perfect storm the airlines face right now?  

KAPLAN:  Yes.  Southwest obviously has its own set of problems.  No 

surprise that it led the sector lower, as you said.  A few minutes ago you 

were talking about higher oil prices, their highs for the year.  You know, 

you can`t talk about oil without also talking about airlines.  

Now, these airlines all think they`re better structured than ever to deal 

with higher oil prices but the immediate impact of higher oil prices is 

higher costs for airlines.  

GRIFFETH:  They don`t have the pricing power to be able to raise prices 

commensurate with the rise in jet fuel?  

KAPLAN:  Over the medium and long term, they do, and really do it through 

capacity moves.  Airlines are always charging as much as people are willing 

to pay at the moment.  

The way they get to higher fares is by constraining capacity.  If they 

think oil prices are going up, they`re going to start growing less.  That`s 

what they`re doing a better job of these days than they did in the past, 

but there`s lag time.  You know, the immediate impact is that if jet fuel 

costs more tomorrow than it does today, and everybody tomorrow is going to 

be flying around on tickets that they bought months ago, schedules that 

were filed months ago, and that comes out of the airline`s pocket.  

GRIFFETH:  Traditionally, airlines are very economically sensitive.  Are 

they telling us something about the economy right now or not, do you think?  

KAPLAN:  Well, right now the economy, as you know, is resilient.  The 

question becomes, well, what happens going forward?  There have been 

patches of softness, Bill, where yes, it could be a broader indicator.  

December had some moments of what`s going on with business travel.  

Generally speaking, more good than bad right now.  The question becomes 

what happens if the economy does turn down and what does that mean for 


Obviously not good things but more problems for airlines, it depends a lot 

on premium traffic, you know, the Deltas of the world.  You know, like 

Southwest may not be exposed to some of that.

GRIFFETH:  All right.  Seth Kaplan with Airline Weekly, again, thanks for 

joining us tonight.

KAPLAN:  Thank you, Bill.

GRIFFETH:  Still ahead, CVS`s checkup.  While an old acquisition could slow 

the health company`s move in a new direction.


GRIFFETH:  CVS (NYSE:CVS) Health is now telling investors that 2019 could 

be a rocky year for the company.  They issued a profit forecast that was 

well below Wall Street estimates.  And that sent the stock down more than 8 

percent in today`s session.  It also raised questions about its ability to 

integrate its recent acquisition of Aetna (NYSE:AET) as quickly as it would 


Bertha Coombs has details for us.  



(NYSE:CVS) Health is trying to focus on integrating its acquisition of 

health insurer Aetna (NYSE:AET) and rolling out new services.  The problem 

is an old acquisition isn`t working out as planned.  CVS (NYSE:CVS) took a 

$2 billion charge for continuing losses in Omnicare (NYSE:OCR), which it 

acquired in 2015.  The pharmacy unit that caters to senior living in long 

term facilities had a major long-term care client file for bankruptcy in 



opportunity with Omnicare (NYSE:OCR) was always focused on the independent 

and assisted living spaces.  Those opportunities still exist.  The 

challenges that we have in that business are really around skilled nursing 

facilities which have been worse than we originally expected.  

COOMBS:  CVS`s pharmacy benefits business is also facing pressure.  The 

Trump administration wants to ban confidential rebates or discounts that 

CVS (NYSE:CVS) and other firms negotiate with drug makers, proposing that 

Medicare drug plans pass discounts directly to seniors at the pharmacy 


CVS (NYSE:CVS) CEO Larry Merlo warns that the move will raise prices on 

Medicare drug plan premiums.  

MERLO:  We see the rebate roll taking us backwards, not forwards.  And, you 

know, we`ve been very public about the fact that 100 percent of rebates are 

turned over, you know, in the Medicare business, and have been utilized to 

buy down premiums.  You look at that dynamic, premiums will increase and 

some actuarial reports have it, you know, growing as much as 52 percent.  

COOMBS:  CVS (NYSE:CVS) says it expects to combat the issues weighing on 

its pharmacy units over the next year.  It`s a big challenge, as it`s also 

fixing higher costs to integrate its I.T. systems with those of Aetna 

(NYSE:AET).  Total integration costs are expected to be $200 billion above 

the projected savings from so-called merger synergies this year.  



GRIFFETH:  So what next for CVS (NYSE:CVS) and for health care overall?  

Let`s face it.  

Joining us tonight Ross Muken.  He`s an equity analyst at Evercore ISI.  

Ross, thanks for joining us tonight.  


GRIFFETH:  First on CVS (NYSE:CVS), the Aetna (NYSE:AET) acquisition was 

build as the next step in the future of health care.  Is that still the 

case or is that a whole different story now?  

MUKEN:  Yes.  I mean, I think the entire time this was going to take quite 

a ways and quite a lot of investment to get to where they need to be to 

serve, you know, the American people with a more integrated model for 

health care, but obviously, today, the base was a little bit disappointing 

in terms of where we`re jumping off from.  But I think the premise and the 

industrial logic of why these businesses came together still holds.  

GRIFFETH:  What I`m interested in, just around the time this acquisition 

was announced, there was a scramble between health care providers and 

insurance companies to get together and none of that ever happened.  The 

Anthem/Cigna deal fell apart.  Humana (NYSE:HUM) ended up only partnering 

with Walmart to try to reduce costs.  But there`s been no other blockbuster 


What happened?  

MUKEN:  Yes, I think, look, in the health care complex, large-scale mergers 

are always challenging and they`re hard to agree to.  And, you know, 

understanding how the landscape is going to change, particularly given all 

the political noise, is not particularly easy.  

But I think these assets made a lot of sense together.  What they`re aiming 

to do eventually with the boxes at the stores and with Aetna (NYSE:AET) 

member base all should eventually lead to lower costs for people.  It`s 

just the path there will take more time.  But these are pretty complex 

deals and these are very large businesses.  So putting them together in a 

dynamic environment is certainly not easy.  

GRIFFETH:  So, CVS (NYSE:CVS) says this will be a challenging year for the 

company.  What do you think of the stock?  

MUKEN:  We still recommend it.  I think the stock is quite inexpensive.  

Look, the entire time we thought it would take multiple years to get to a 

place where you could start for them seeing them lower Aetna`s medical 

costs, which essentially should be passed on also to individuals, which it 

helped them gain share.  So, that`s the whole premise here.  

You know, unfortunately, the starting point or the base for earnings is 

going to be lower than many of us expected, and so we`re jumping off of a 

lower point.  But I still think the ability to sort of revolutionize parts 

of health care still holds.  

GRIFFETH:  Maybe we just need to be patient.  It is a big deal.  

Ross Muken with Evercore ISI — thanks again for joining us tonight.  

MUKEN:  Thank you.  

GRIFFETH:  Constellation Brands (NYSE:STZ) is slimming down and that`s 

where we begin tonight`s “Market Focus”.  

The spirits company said today it is looking to sell some of its lower-end 

wine brands so it can focus on the more profitable high-ending market.  

Constellation expects its earnings to take a hit from its investment in 

Canadian marijuana company Canopy Growth, which reported a loss last week.  

The stock of Constellation fell more than 4 percent today to $166.98.  

And speaking of marijuana, Canadian marijuana company Tilray plans to buy 

Manitoba Harvest, that`s the world`s largest hemp food maker, for more than 

$300 million.  Tilray`s CEO sees the deal as an opportunity to speed up its 

entry into the United States.  


BRENDAN KENNEDY, TILRAY CEO:  They have relationships with 30,000 acres of 

hemp grown by farmers.  They have a state-of-the-art processing facility 

where they make these products.  And then they have a distribution channel 

through 13,000 of the largest retailers in the U.S.  And our intent is to 

use that supply chain to help accelerate the CBD products that we will 

introduce by this summer.  


GRIFFETH:  Tilray`s shares rose more than 5 percent today to $81.10.  

Tesla`s top lawyer is leaving after just two months on that job.  The 

electric carmaker`s general counsel, who represented CEO Elon Musk last 

year when he was sued by the SEC has now decided to return to his old law 

firm.  It is the latest in a string of high-level departures at Tesla.  

Shares were down 1 percent today to $302.56.  

Health care company Magellan is considering selling itself after coming 

under pressure from activist hedge fund Starboard Value.  Magellan is in 

the early stages of exploring such a deal.  Shares rose nearly 11.5 percent 

on that news to $72.45.  

And Gannett (NYSE:GCI) missed earnings and revenue estimates despite a 

spike in digital subscriptions.  The newspaper publisher has been hit by 

layoffs and declines in print revenue.  The results come as Gannett 

(NYSE:GCI) face an unsolicited takeover bid from hedge fund owned MNG 

Enterprises.  Gannett (NYSE:GCI) shares dropped more than 5-1/2 percent 

today to $10.63.  

And late today, Disney (NYSE:DIS) and Nestle said they were pulling ads 

from YouTube after reports of a pedophile network showing up in the comment 

section of certain videos.  YouTube has come under fire before from 

advertisers who do not want to show their brands represented next to 

offensive or extremist content.  

Well, your cable bill is likely a big monthly expense, but ditching cable 

and cutting the cord is not necessarily a simple process.  In part because 

of all the options available, which can seem overwhelming, of course.  And 

in the end, consumers just want to know if it`s worth it.  

Julia Boorstin digs into that for us tonight.  



bundle.  Consumers are creating their own streaming bundles from three 

major types of services.  First, there are the sports apps, such as ESPN 

plus, boxing app DAZN and WWE Network.  Second, there are ad-free premium 

content apps such as HBO and Showtime along with Netflix (NASDAQ:NFLX).  

And third, skinny live TV bundles from Hulu, YouTube, DIRECTV (NASDAQ:DTV) 

and Sling.  

MIKE BLOXHAM, MAGID:  There`s a plus side for the consumer in terms of the 

increased choice, but there`s the other side of that coin, which is that 

choice creates dynamic.  It creates difficulties.  You have to make 


BOORSTIN:  So, is it worth it to cut the cord?  To compare traditional TV 

with the new options, we created two sample digital bundles.  Take a look 

at what a sports lover might pick.  Along with high speed broadband, 

DirecTV is a good live TV option for sports fans because you can access NFL 

Sunday ticket.  You had boxing services DAZN, ESPN Plus, and Netflix 

(NASDAQ:NFLX), this bundle would cost $138, down from the $215 a cable 

bundle can cost in Los Angeles.  

But if you don`t care about sports and are more interested in premium cable 

content, you might bundle your broadband access with Hulu for live TV, 

because of its originals.  Adding HBO, Showtime and Netflix (NASDAQ:NFLX), 

that would add up to approximately $154.  

Digital bundles can end up costing more, depending on the discounts you get 

on your cable bundle and how many streaming apps you choose.  Broadband 

costs increase when you call to cancel cable.  For people who don`t want to 

pay, there are a range of companies betting on the ads supported market, 

which generated $28 billion in revenue last year according to E-Marketer.  

BLOXHAM:  There`s no question there is a real market for ad-supported 

streaming video, in so far that there are an enormous number of advertisers 

that really wanting to be able to get exposure and make connections with 

consumers who are using those services.  

BOORSTIN:  NBCUniversal is creating an ad-supported streaming service for 

pay TV subscribers.  Facebook (NASDAQ:FB) is licensing more professional 

content for its Watch video hub.  And Viacom (NYSE:VIA) bought ad-supported 

Pluto TV.  These are among a range of ad-supported services, including the 

Roku Channel`s Tubi TV, Xumo, Sony`s Crackle, Freedive, owned by Amazon 

(NASDAQ:AMZN), and Walmart`s Vudu.  And we`ll see how Disney (NYSE:DIS) and 

Apple`s upcoming subscriptions options change the landscape.  

With all of these choices available, whether it`s worth it really depends 

on what you want.  

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


GRIFFETH:  And coming up, tax audits.  They`re time consuming, costly and 

stressful.  But what are the odds that the IRS actually audits your 



GRIFFETH:  Samsung has unveiled a new line of Galaxy phones, and they fold.  

The company hopes that the Galaxy fold will help turn sales and provide the 

innovative kick that the smartphone industry is looking for.  Samsung spent 

five years developing its foldable technology which comes with a price tag 

of nearly $2,000.  

Meanwhile, Hershey is adding its name to the list of companies raising 

their prices.  Remember yesterday we told you about everyday items that are 

likely to see a bump in prices this year.  And today, Hershey said that it 

plans to put a new pricing structure in place in North America in 2019.  

The company says it will use the extra revenue to maintain its strong 

investment in the business and offset rising operational costs.  

Well, it`s tax time and there`s one thing that all filers have in common, 

its concern that they would be audited.  But the answer to that might be 

different this year.  

Robert Frank explains.  



discovering, the new tax code is filled with loopholes and gray areas, but 

their chances of getting caught by the IRS are the lowest in 15 years.  The 

IRS audit rate has fallen by half since 2011.  Only six in every 1,000 

returns were audited in 2017.  The IRS did 630,000 fewer audit last year 

than they did in 2011.  

The wealthy, which are audited the most, have seen the biggest reduction.  

Among those making $1 million or more, about one in six used to get 

audited.  Now it`s less than 1 in 20.  

The main reason many say is budget cuts.  The agency`s total budget is down 

16 percent since 2011.  Its staff has been cut by 24,000.  The number of 

auditors, known as revenue agents, has fallen from about 14,000 to under 

10,000.  That is the lowest number since 1953.  


storm of these budget cuts followed by this very complex law.  And now you 

have honest taxpayers in the first filing season of this law trying to file 

their taxes.  And if they have a question, which they have many questions, 

they call the IRS, they can`t get the phone answered.  They just passed the 

most complex law, the Congress passed that.  It`s the Congress` 

responsibility to give the IRS the resources to implement it.  

FRANK:  Many Republicans say it`s a bloated bureaucracy that became 

politicized under the Obama administration and should be reformed and cut 

even further.  Now, while some in Congress are seeking to increase funding 

for the agency, especially to improve its outdated technology systems, 

others say the agency itself could be made obsolete if we just made the tax 

code a little simpler.  

DAN MITCHELL, CENTER FOR FREEDOM & PROSPERITY:  If we had a simple, neutral 

fair system like a flat tax, a lot of these problems would disappear 

because you wouldn`t need these big fights between rich taxpayers and the 

government because the system could be simple if politicians would let it 


FRANK:  But for now, it looks like the biggest rewrite in the tax code in 

more than 30 years will be administered by an agency short on cash.  



GRIFFETH:  And finally tonight, Fast Company is out with its list of most 

innovative companies in the world.  At number one is a Chinese tech 

platform that expedites booking and delivery services like food, hotel 

stays and movie tickets.  Number two is an app called Grab.  It`s a 

Singapore-based ride-hailing company that expanded into other services.  

Rounding out number three is the NBA.  The magazine cited its move into e-

sports and it has seen growth in its streaming service as well.  

Before we go, a final look at the day on Wall Street.  Kind of a quiet day 

with the Dow up 63 points, the Nasdaq added just two, the S&P added five.  

That is NIGHTLY BUSINESS REPORT for tonight.  I`m Bill Griffeth.  Thanks 

for watching.  See you tomorrow.  


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