ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Bill Griffeth and Sue
BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Lifting the curtain. New
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 —
STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: — but President
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
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.
SCOTT BROWN, CHIEF ECONOMIST, RAYMOND JAMES: My pleasure.
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
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
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.
BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: The market is pretty
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.
SETH KAPLAN, AIRLINE WEEKLY MANAGING PARTNER: Likewise, Bill. Good to be
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.
BERTHA COOMBS, NIGHTLY BUSINESS REPORT CORRESPONDENT: This year, CVS
(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
LARRY J. MERLO, CVS (NYSE:CVS) HEALTH PRESIDENT & CEO: The growth
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.
For NIGHTLY BUSINESS REPORT, I`m Bertha Coombs.
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.
ROSS MUKEN, EVERCORE ISI EQUITY ANALYST: Absolutely.
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
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.
(BEGIN VIDEO CLIP)
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.
(END VIDEO CLIP)
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.
JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Welcome to the
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)
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.
ROBERT FRANK, NIGHTLY BUSINESS REPORT CORRESPONDENT: As many taxpayers are
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.
CHUCK MARR, CENTER ON BUDGET & POLICY PRIORITIES: You have this perfect
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.
For NIGHTLY BUSINESS REPORT, I`m Robert Frank.
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.
Nightly Business Report transcripts and video are available on-line post
broadcast at http://nbr.com. The program is transcribed by ASC Services II
Media, LLC. Updates may be posted at a later date. The views of our guests
and commentators are their own and do not necessarily represent the views
of Nightly Business Report, or CNBC, Inc. Information presented on Nightly
Business Report is not and should not be considered as investment advice.
(c) 2019 CNBC, Inc.