ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Bill Griffeth and Sue Herera.
BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Bank CEOs go to Washington.
The heads of the country`s largest banks appear before Congress for the first time since the financial crisis.
Year of patience. The Fed sees little need to change interest rates in 2019, but the door is open to hikes if needed.
Tension pain. Some public plans are so underfunded that not even the decade-long bull market has provided a fix.
Those stories and much more tonight on NIGHTLY BUSINESS REPORT for this Wednesday, April 10th.
And we do bid you a good evening, everybody, and welcome. Sue is off tonight. You know, it`s not often that the CEOs of the country`s biggest banks are called before Congress. The last time it happened was during the financial crisis roughly ten years ago, but it happened again today. The chief executives were back together on Capitol Hill testifying in front of the House Financial Services Committee. As a group, they defended a financial system that they say is more resilient today than it was a decade ago. Some of the questions they faced were focused on the industry`s new challenges like cybersecurity and slowing global growth. Other questions were politically charged.
(BEGIN VIDEO CLIP)
REP. STEVEN STIVERS (R-OH): What do you think the biggest risk to our financial system is today?
MICHAEL CORBAT, CITIGROUP CEO: Our ability to talk ourselves into the next recession.
JAMIE DIMON, JPMORGAN CHASE CHAIRMAN & CEO: I think I — probably the cyber that we mentioned that is the biggest. I think the growing non-bank segment, I don`t think it`s systemic yet, but I think it is growing very rapidly and should be closely monitored.
JAMES GORMAN, MORGAN STANLEY CEO: Global growth is slowing and U.S. growth is slowing a little bit and global growth is slowing and ultimately that will have the impact on the ability to serve as credit around the world and that impacts the financial system.
DAVID SOLOMON, GOLDMAN SACHS CEO: Cyber, certainly first. I`d also say slowing growth around the world, but in particular the difficulties between the U.S. and China.
REP. NYDIA VELAZQUEZ (D-NY): I`m just asking that if it seems fair to you, the ratio of the amount of money that you`re making compared to the $49,000 average employees is making.
CORBAT: My compensation is decided by our board and voted on by shareholders.
VELAZQUEZ: Just unbelievable. How can we make America competitive when there are a large number of people graduating and they see no future?
DIMON: This group pays all their employees quite well, including medical, retirement, minimum wage at $37,000 a year or something like that. Competitive business will drive wages and jobs over time.
UNIDENTIFIED MALE: Would you say, Mr. Dimon, that we`re a leader in global finance?
DIMON: I think America is a leader in global finance, and I hope to God we remain that for the foreseeable future.
(END VIDEO CLIP)
GRIFFETH: So is the U.S. banking system better and safer than it was ten years ago? Joining us tonight is David Ellison. He`s portfolio manager of the Hennessy Large Cap Financial Fund. David, good to see you. Thanks for being here tonight.
DAVID ELLISON, HENNESSY LARGE CAP FINANCIAL FUN PORTFOLIO MANAGER: Hello, Bill. It`s good to see you. It`s been a while.
GRIFFETH: It has been a while. Certainly, they are better capitalized than they were ten years ago, but do you think they`ll be able to weather another financial downturn should there be one?
ELLISON: Well, I think some of what we heard today was kind of rear-view mirror. I think clearly to handle a credit cycle and they`re ready to handle a liquidity cycle and to some degree a rise in rate cycle. I think that one thing they didn`t mention today at all was the real damaging impact that lower rates has done to their business and what rates, if they So I`m surprised. They`re fighting the old war of credit and liquidity and capital is over. If we end up like Japan, their margins are going to get hurt pretty badly and that, to me, is the biggest risk. If rates go down too much, lending will dry up and that will be the problem.
GRIFFETH: You know, Jamie Dimon mentioned the so-called non-bank industry where a lot of highly leveraged loans are being made these days and they`re not regulated. How troublesome is that in your eyes for this industry?
ELLISON: Well, we had that last time and that wasn`t the problem. You know, it was Bear Stearns and Lehman and everybody else. So, these — all these shadow banks didn`t create the problem. I don`t think it`s a problem today. Yes, they`re big and they`re levered, but that`s not the issue. The issue, I think, and I`ll come back to it is what are rates going to do the next five or ten years?
ELLISON: We need them to stay here or go higher. They can`t go much lower.
GRIFFETH: Another issue they brought up a lot, cybersecurity. How big of a challenge is that or a threat to our financial system?
ELLISON: Well, it certainly is, and I don`t know enough about it, and the disconcerting thing is that we have very few people in the country or in the world that know enough about it. So we have to hope that they are on top of it. Yes, they`re talking about spending a lot of money, but I don`t know how effective it is, but so far so good. They`re paying attention to it, which is the most important thing.
GRIFFETH: Before you go. Favorite bank right now or is there just one?
ELLISON: Well, I think the big banks are in the best position to spend the money to stay competitive and to continue to, in a sense, invest in their future. The smaller banks, you know — you know, they`re stuck and they`re being competed out of business —
ELLISON: — and low rates are much more damaging to them. So, I think to be conservative, the big banks clip the dividend and hope that they can change their businesses for the better as we go forward.
GRIFFETH: David Ellison with the Hennessy Large Cap Financial Fund — again, thanks for joining us tonight, David.
ELLISON: Yes. You`re welcome.
GRIFFETH: And on Wall Street, stocks finished slightly higher as investors weighed new economic data showing moderate inflation and affirmation from the Federal Reserve that interest rates would likely remain unchanged this year. The Dow when all was said and done rose six points, and the Nasdaq just gained about 55 points and the S&P added 10.
Steve Liesman takes a closer look at the Fed and what policymakers were thinking at the Central Bank`s last meeting.
STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Minutes from the
Federal Reserve`s March meeting say a majority on the fed think the economy is likely to warrant no change in interest rates for the remainder of the year, and several members of the Fed think the current level of interest rates are close to what they call neutral, and that is where the benchmark rate doesn`t stimulate or slow the economy. Because of several, mostly global uncertainties, Fed officials warned in the minutes that their views on the right level of rates could change in either direction, that is up or down. But one smaller group inside the Fed expects growth to rebound from the current bout of weakness if they`re right. They say that can warrant a rate hike later this year. It was no explicit comment in the minutes around any group or individual expecting rate cuts later this year, but there was broad agreement on the uncertainties faced in the U.S. economy. They include Brexit, the waning effects of the fiscal stimulus and tax cuts and trade tensions. In fact, European Central Bank President Mario Draghi responded directly to President Trump`s recent threats of new European tariffs, saying just the threats undermine the global economy.
MARIO DRAGHI, ECB PRESIDENT: Certainly, even the fact that these threats are vented with some frequency has certainly undermined the general
LIESMAN: Europe is embarking on a new round of stimulus later this year, but for now, depending on how the U.S. economy evolved and how these big global issues resolved themselves, the March minutes may clear and the Fed is firmly on hold. For NIGHTLY BUSINESS REPORT, I`m Steve Liesman in Washington.
GRIFFETH: And now to that inflation report which posted its biggest increase in 14 months in March. The consumer price index rose 0.4 percent. The gain was driven largely by the cost of food, gasoline and by rent. But overall, inflation still does remain benign as domestic and global economic growth continues to slow. Elsewhere, Treasury Secretary Steven Mnuchin said the U.S. and China are making progress on trade. The two sides have now agreed on deal enforcement mechanism which have been a key sticking point.
(BEGIN VIDEO CLIP)
STEVEN MNUCHIN, TREASURY SECRETARY: We pretty much agreed on the enforcement mechanism. We`ve agreed that both sides will establish enforcement offices that will deal with the ongoing matter. So, this is something that both sides are taking very seriously.
(END VIDEO CLIP)
GRIFFETH: Secretary Mnuchin also described the economic outlook as robust With stocks up double digits so far this year and the S&P closing in on an all-time high, the thing that could derail the run right now is earnings and don`t look now, but here they come. Bob Pisani tells us what to look for.
BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Earnings season officially kicks off on Friday and right now, first quarter earnings are the first earnings decline we`ve seen since the second quarter of 2016, but the S&P 500 is still less than 2 percent from his historic high. Wait a minute, stocks are rising even with lower earnings forecasting? What`s going on? Well, investors are focused on the future. That`s what`s happening. Remember, the stock market is a discounting mechanism for a future stream bottoming and that should lend some stability to the global markets. half to rapidly re-accelerating growth in the fourth quarter and in the beginning of 2020. A lot of industries that were under pressure in the fourth quarter, so, for example, think semiconductors. They snapped back necessarily mean that the stock market is in trouble. First of all, turn positive and won`t be negative. Second, declining earnings do not necessarily correlate with a decline in the stock market. There have been many times in the past where earnings have been flat or declined and even when the market declined, they quickly bounced back because there was no recession that followed, and that`s the key. If you believe that there will be a recession in 2020, then earnings will certainly decline and go negative along with the stock market, but it`s not all clear that that`s going to happen.
For NIGHTLY BUSINESS REPORT, I`m Bob Pisani at the New York Stock Exchange.
GRIFFETH: “The Wall Street Journal” reported this morning that even after one of the longest equity bull markets in U.S. history, many public pension funds around the country are still underfunded, some dangerously so, and because the stock market returns are projected to be below historic levels for the foreseeable future, the problem of underfunded public pensions is not expected to be solved any time soon. Joining us tonight to explore this issue further is Chris Ailman, the chief investment officer of the California State Teachers Retirement System or Calstrs. It is the largest public teacher`s pension fund in the country. Chris, always good to see you. Thanks for joining us tonight.
CHRIS AILMAN, CALSTRS CHIEF INVESTMENT OFFICER: Good evening, Bill.
GRIFFETH: The problem is for the whole industry is that the number of people that are retiring and the rate of retirements is growing faster than the returns you can get on your investments, right, among other things?
AILMAN: The baby boomers are retiring and that`s not a headline, yes they are, so we`re seeing an increasing amount, and it`s expected, but this demographic wave needs to work through all the pension plans.
GRIFFETH: And every time we see a big decline in the market like we did after the financial crisis of three years ago, that`s money out of your fund and we have to play catch-up over those years. So, as “The Journal” years has not brought you back to full funding at this point because of that, right?
AILMAN: That`s correct, Bill. But I want everybody to back up and think about the longer term picture. A pension plan funding it is like climbing a hill, just like a 401(k). You`re climbing slowly over time. `08 was a drop, a sudden valley in that climb. We`re back to where we would be with the pattern of ascent, but we`re still not at the summit, because it takes about 30 years to fully fund a pension.
GRIFFETH: And you are only 70 percent or a little bit below that, right?
AILMAN: That`s correct. We are basically right where we were in the late 1980s or early 1990s and the one thing as the article pointed out that happened to us in that time period, investments have generated the right return. But you know what? People are living longer.
AILMAN: And so, longevity has been a challenge. We have to pay that pension out for a longer period.
GRIFFETH: I was reading, how many teachers are now over the age of 100 around the country?
AILMAN: Well, in our plan alone in California, 364 teachers are over 100 years old and still receiving a pension.
GRIFFETH: They won the pension lottery, in that case.
AILMAN: Yes, they did.
GRIFFETH: Is there a temptation on your part or anybody who is managing these funds to take a little more risk otherwise to play some catch-up as you try to reach full funding?
AILMAN: I think that`s an active debate that retirement boards face on a regular basis because there`s only two ways to fund a retirement, whether it`s a defined benefit plan or a 401(k). That`s contributions or investment return. So when you don`t put enough contributions you feel that pressure on that investment return, but the markets are only going to give you a very decent rate of return and you can`t out-invest your way out of a problem. It really has to come from steady contribution.So I think the board feels that tension and I feel in the case of our board in California make very reasonable decisions to diversify and invest for the long term.
GRIFFETH: Do you agree, by the way, very quickly that the returns for the foreseeable future in the equity market is going to be a little below historic levels?
AILMAN: Well, we`re at very late stage in a bull market and historically, you would expect to see the market fade out, but as we said, Bill, bull markets don`t die of old age and they can grow long in the tooth. As Bob Pisani was pointing out, there may be recession out there in the future.So, I think we`re going to see choppy returns, slow growth. But I think, again, I look at 10 and 20-year time periods and I think it is reasonablethat we`ll get a fairly decent return and I can`t say where we`ll go in the next six months or next year.
GRIFFETH: Very good. Chris Ailman with CalSTRS, good to see you. Thanks for joining us tonight.
AILMAN: Thank you.
GRIFFETH: Time to look at today`s “Upgrades and Downgrades”.Now, Apple (NASDAQ:AAPL) was downgraded to reduce from hold at HSBC. The analyst cited concerns over its new services including the potential for lower margins. The price target $180 and today`s shares closed at $200.62. Disney (NYSE:DIS) was upgraded from market perform at BMO Capital Markets. The analyst there cited Disney`s streaming service launch and the opening of two new star wars attractions at Disneyland and at Disneyworld. Price target now $140. Disney (NYSE:DIS) finished up slightly at $117.16. Nordstrom (NYSE:JWN) was downgraded from overweight at sector weight at KeyBanc. The analyst cited opportunities for key growth in several areas of that retailer`s business. Price target is $55, and Nordstrom (NYSE:JWN)
And Under Armour (NYSE:UA) was upgraded to buy from neutral at city. The analyst cited the company`s renewed focus on profitability and the return
(NYSE:UA) closed up at $19.32.
Coming up, if you`re an investor in airlines or thinking about getting in, is the group ready for takeoff or landing?
GRIFFETH: Sanofi has cut the price of insulin for some of its patients to $99 per month. The drugmaker made the announcement today only hours after one of its executives testified before a congressional committee on the rising price of the medicine. And during that hearing, she described the new pricing plan. As we`ve been reporting, the cost of insulin for treating type 1 diabetes has nearly doubled over the past five years.
A Boeing (NYSE:BA) shareholder has now filed lawsuit against the company accusing it of covering up safety problems with its 737 MAX jet. The shareholder claims that Boeing (NYSE:BA) put profitability and growth ahead of airplane safety and honesty, and that`s just one of the challenges Boeing (NYSE:BA) faces right now. Several lawsuits have already been filed by victims` families who called Boeing (NYSE:BA) negligent, and one of China`s state-owned airlines is now looking for compensation from Boeing
(NYSE:BA) over the prolonged grounding of the MAX fleet worldwide. Boeing
(NYSE:BA) shares lost 1 percent on the day.
Delta reported a solid quarter this morning. The airline posted better capacity consistent into the summer months which will alleviate investor concerns that too many flights during peak travel season could lead to lower fares and when asked about the impact of the grounding of 737 MAX jets by Boeing (NYSE:BA), CEO Ed Bastion said he has complete confidence in Boeing (NYSE:BA).
(BEGIN VIDEO CLIP)
EDWARD BASTIAN, DELTA AIRLINES CEO: I`m confident Boeing (NYSE:BA) will get to the right answer with respect to the fix and we`re all cheering for him hoping to get the product up in the sky as quickly as possible.
(END VIDEO CLIP)
GRIFFETH: We should point out, Delta does not have any 737 MAX jets in its fleet, and today, that stock closed higher by more than 1.5 percent.
So, you know, it`s good to be Delta these days, but now that may not be the case for the rest of the airline industry with some of its rivals lowering earnings projections right now for various reasons. Is now the time to consider airline stocks?
Joining us tonight to talk about that, David Vernon is senior transportation analyst at Bernstein. David, thanks for joining us tonight.
DAVID VERNON, BERNSTEIN SR. TRANSPORTATION ANALYST: Thanks for having me on.
GRIFFETH: And I know that even with the decline for the growth in the month of March, overall, the XIL, and the New York Stock Exchange Airline index, is up 13 percent this year. So it`s had a pretty good year overall so far.
VERNON: Yes, I think coming into the year there was a sell off in the equity market and we started from a fairly low base. And I think what we learned was more confidence in the booking environment and also in execution, particularly carriers like Delta and the strong earnings today.
GRIFFETH: But how much an impact do you see of the MAX jet grounding having on the industry at this point?
VERNON: Near-term, it`s very disruptive, right? If you take these planes out, your pilots have bid and your crews are ready to fly, and it`s very hard to take cost out very quickly. I think the airlines are now ratcheting down their schedules and you will see less capacity coming into coming out, and that will start to work its way to the fair environment.And as the airlines get better at scheduling down the staffing resources and the other costs that are required to run the operation, and you will see the financial turbulence settle down a little bit and earnings actually get a little bit stronger.
GRIFFETH: Delta seems to be doing so well these days and what are they doing that others aren`t doing right now?
VERNON: Well, I think one of the key things that they have going for them is their partnership with American express and that rewards program and as far as an affinity group of flyers that the credit card company want to target is travelers with a lot of business expenses, a lot of expense going over the card, unless it`s a very, very attractive market. Delta has renewed their partnership with AmEx a couple of years early, and that`s adding a point to revenue and that`s incredibly accretive for them in the near-term. So, one of the thing is Delta is an arrangement. The other thing that Delta is doing really well is understanding how to monetize their network better?
GRIFFETH: I`m sorry. I`m running out of time, but I want to ask you late today, JetBlue announced they are going to begin transatlantic flights in 2021 from New York and Boston. Will that have an impact on that route? Will it be an airfare war? What do you think will happen?
VERNON: Look, I think at a margin as Delta tries to carve out some share, you should see some weakness in walk off fares. I think where — there`s a couple of things where Delta is going to have some challenges. They don`t have the same connectivity in another end of the network. They don`t have the same capability that the airlines have as far as the distribution channel inside of Europe, and as far the configuration of the aircraft goes, we`re going to have to see how they come out and how they`re going to aircraft and the price point and they`ll be able to make the operation work.
So, JetBlue certainly has an opportunity to come into that market. They`re not going to have an attractive customer base as far the corporate travel goes. So, we`ll have to see how that plays out.
GRIFFETH: Indeed. David Vernon with Bernstein, good. Thanks for joining us tonight.
VERNON: Thank you.
GRIFFETH: Elsewhere, Tesla and General Motors (NYSE:GM) get a boost and that`s where we begin tonight`s “Market Focus”, with a bipartisan group of lawmakers planning to introduce a bill to expand federal tax credits for buyers of electric vehicles. As you may know, the existing $7,500 tax credit phases out over 15 months once an automaker sells 200,000 electric vehicles. This expansion will benefit Tesla and G.M., both of which rose 1 percent in today`s trade.
Food processor Archer Daniels Midland said today it`s going to open a voluntary retirement window for employees in North America. It may also cut jobs as part of the restructuring. The company said that the moves will strengthen the company`s core business and shares rose 1 percent today to $43.24.
Bed, Bath & Beyond reported better than expected earnings while revenue was in line with expectations. The retailer said some growth came from its online sales. The board authorized a dividend increase and said a governance review is ongoing. The stock was volatile in the after-hours trading tonight and finished the regular session up 5 percent to $19.41. Coming up, what the White House is doing to try and lower energy prices.
GRIFFETH: As it prepares to start selling shares to the public, Uber is aiming for a valuation of as much as $100 billion. According to “The Wall Street Journal”, the ride hailing company plans to price shares at $48 and $55 a share for its upcoming IPO. That valuation, by the way is below the $120 billion that the lead underwriters have been pitching last year. Amazon`s cashless stores will soon start accepting cash. The retailer did not say when that`s going to happen, only that it is planned. Critics of the automated Amazon (NASDAQ:AMZN) Go Stores said they were discriminating against so-called unbanked consumers who don`t have credit or debit cards and typically pay with cash. Some cities like Philadelphia are enacting legislation that would ban cashless stores.
Oil inventory surged last week. The Energy Department reported an increase of 7 million barrels making this the stockpiled bills. But there was a big drawdown in gasoline, and the price of domestic crude rose by 1 percent to a five-month high, and it all comes down on the same day the president made a push to lower energy prices. Kayla Tausche has details.
KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The White House wants to bring down energy prices by building more pipelines and bringing natural gas to places like New England that currently have lower supply. To do that, President Trump is rolling out two executive orders to spur more construction and transportation of energy.
DONALD TRUMP, PRESIDENT OF THE UNITED STATES: My action today will cut through destructive, permitting delays and denials. Do you know about Those days are gone.
TAUSCHE: The executive orders themselves give the president and the federal government greater authority to green light new projects. One grants the president sole authority to approve cross-border pipeline like the Keystone XL from Canada. The second shifts control of permitting back to the federal government for the state. There`s one project in particular serving as motivation. The 125-mile Constitution pipeline which would bring natural gas from Pennsylvania through New York to New England. But the state of New York is overriding a States and governors are expected to challenge this White House order, too. A senior administration officials say the end goal, lower prices for customers. For NIGHTLY BUSINESS REPORT, I`m Kayla Tausche in Washington.
GRIFFETH: And before we go, one final day on Wall Street. Kind of a quiet day. The Dow was up just six points, NASDAQ gained 55. The S&P was up 10, as we get ready for the flood of earnings. That is NIGHTLY BUSINESS REPORT for tonight. I`m Bill Griffeth. Thanks for watching. See you tomorrow.
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