Transcript: Nightly Business Report – May 28, 2019

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR:  Rush into bonds.  Yields fall sharply pulling stocks down with them as investors grow concerned that the trade war could threaten global growth.  

BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR:  On trial.  The first major case against an opioid maker goes to court, and J&J is at the center.  

HERERA:  Bulking up.  Two electronic payment companies join forces in the fast-growing, fiercely competitive and relatively new fintech industry.  
Those stories and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, May 28.  

GRIFFETH:  And we do bid you a good evening, everybody, and welcome.  
Stocks did close sharply lower and it was the bond market that was in the driver seat.  The yield on a 10-year benchmark treasury fell a 19-month low today to under 2.3 percent.  Investors are growing more convinced that the trade war with China will last longer and that economic growth could suffer as a result.  

And so, while they were embracing the safety of bonds, investors were reducing risk by selling stocks today.  And by the close, the industrial average was down 237 points.  That`s about the low for the session.  The Nasdaq fell by 29.  The S&P was down 23.  
Mike Santoli starts us off tonight from the New York Stock Exchange.  

MIKE SANTOLI, NIGHTLY BUSINESS REPORT CORRESPONDENT:  The stock market has held on to most of its gains for the year during a turbulent month of May, but over the past year, bonds have been better to investors thanks in part to the trade war that is unsettled equities.  The drop in the 10-year treasury yield today to a 19-month low under 2.3 percent highlighted the powerful gain in bond prices which moved in the opposite direction from their yields.  

This bid for safe assets reflects worries over the global growth outlook which have grown more urgent with the U.S.-China stalemate on trade rules and tariffs.  Persistently low inflation has also encouraged the move into bonds and the return of government bonds in Germany and Japan to deeply negative yield has likewise dragged Treasury and U.S. corporate debt yields lower.  

As a result, the total return for the Barclays, aggregate bond index, which captures all government and private sector debt, has been about 6 percent over the past 12 month, a fraction better than the return of the S&P 500 index over that time including dividends.  

The bonds have delivered that return with far less volatility in stocks which suffered a quick 20 percent loss in the end of 2018.  What`s more, it`s the part of the stock market that acts most like bonds, and dividend-focused utilities and real estate that had done best to hold up the broad indexes lately.  Of course, there were longer stretches of time stocks had handily outperformed bonds as finance theory says they should.  

Over the past three years, as a matter of fact, the S&P has returned more than 12 percent annually compared to about 2 percent a year for bonds.  In this way, bonds have again done their job in diversified portfolios by adding stability in time of stock market weakness and holding most their value when stocks are doing well.  The question from here is whether the bond market can continue its impressive performance.  Right now, short term treasuries are strongly pricing in a Federal Reserve rate cut or two in coming months, which presumably would require the economy to lose more steam in a way that stock investors might not like.  

This means that any reacceleration of the economy or unexpected resolution of the trade war could test the strength of bonds and perhaps refresh investors` interest in stocks.  


HERERA:  So, what could this mean for the interest-sensitive sectors of the stock market?

Bill Stone joins us, chief investment officer of Avalon Advisers, to talk about this.

And you point out that the sensitive sectors, utility, real estate and consumer staples have all done pretty good during this period of time.  

They`ve significantly outperformed.  They`ve outperformed both the S&P 500 and also even more the more cyclically exposed or economically exposed and the — and also tend to be the sectors with less dividend.  So, you have to be careful that it`s in many cases the same kind of bet if you`re betting on bonds and you`re betting on also the high-dividend-yielding stocks and that`s why people at the moment like them.  

GRIFFETH:  And that`s my question, though.  At the moment, you know, a lot of our viewers are long-term investors and they`re not short-term traders, they don`t chase trends for the most part.  How long do you think this trend now with yields moving lower will last?  

STONE:  Well, it`s hard to say exactly, but I think you have to look at the relative outperformance of these high-yielding stocks and say, it`s worth starting to look at some of these other areas and just — you know, I would say, you don`t want to get rid of all of them because, you know, we`d say the same thing, we like, in general, high yielding stocks to hold for the long run.  But in terms of relative attractiveness, it`s time to look a little bit.  And if you see, you know, a better outcome in the trade war like we think in the end, you will see some significant underperformance, I think.  

HERERA:  But you make the point that you think, although we will get a deal, it`s going to take a lot longer than some people think.  

STONE:  I do.  I mean, it`s pretty easy to see, it`s with all of the rhetoric heating up, it`s going to be hard to get to anything even before President Trump and Xi meet at the end of June.  So that leaves you hanging out there until at least then and there`s no guarantees that we get a deal even then.  

GRIFFETH:  What about those sectors that are being left behind here, the previous leadership and the technology and others?  You buy that dip or do you wait for them to come back at some point?  

STONE:  I think you start dipping in a little bit.  We like industrials, consumer discretionary and they`ve both been hit very hard.  I think technology is also another spot to certainly look because again, it is right in the crosshairs of the trade war.  

GRIFFETH:  All right.  
HERERA:  Bill, thanks so much.  Bill Stone with Avalon advisers.  
STONE:  Thank you.

GRIFFETH:  And those lower bond yields are pushing mortgage rates down, which you can imagine, which, of course, is good news for potential homebuyers.  But a new report today shows that the nation`s housing market is cooling and that home prices are weakening pretty dramatically in some areas.  
Diana Olick has details.  

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Home prices are still higher than they were a year ago, but not by much.  And in some spots, they`re on the verge of falling.  Nationally, prices were up 3.7 percent in March, a smaller annual gain than February.  A year ago, prices were gaining at nearly twice that pace according to a monthly report from S&P Case Shiller.  

Of course, all real estate is local, Phoenix, Las Vegas and Tampa are still seeing much larger gain, but they were the market`s hardest hit during the foreclosure crisis and prices are still not back from the previous highs of 2006.  In Seattle, Los Angeles, San Francisco and San Diego, prices are up less than 2 percent because those markets overheated during the recovery.  For example, Seattle values were appreciating at 13 percent just a year ago and San Francisco was up 11 percent.  

Prices usually lag sales and sales of existing homes have been weak all year despite lower mortgage rates.  Buyers clearly hit an affordability wall and are no longer to start bidding wars especially as the supply of homes for sale rises.  The average rate on the 30-year fixed continues to fall and is now at the lowest level since March.  

Lower mortgage rates usually light a fire under home prices or at least help stabilize them, but so far, that has not happened.  It may be that prices overheated well beyond any benefit from rates and could be in for a fall.  
For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Washington.  

HERERA:  A positive sign from the economy came from the report on consumer confidence today, which shows Americans remain optimistic.  According to the Conference Board, consumers are upbeat about the labor market and appear to be brushing off the prospect of a prolonged trade dispute with China, at least for now.  

GRIFFETH:  But the CEO of J.P. Morgan Chase called today the trade dispute a real issue that could damage corporate confidence.  Jamie Dimon says the trade dispute has gone from being a skirmish to being far more important than that.  If this goes south in a bad way, he said, you have other surprises, and that could be a part of the thing that changes confidence and changes people`s willingness to invest.  

HERERA:  And with no trade talks scheduled, neither the U.S. nor China appears to be softening its stance.  
Eunice Yoon reports tonight from Beijing.  

EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT:  President Trump says the U.S. is not ready for a trade deal and China says it has conditions, too.  The foreign ministry said they want negotiations to be conducted as equals and with mutual respect.  The U.S.`s approach had been to play hardball to pressure China, but so far, all the signs are that Beijing is toughening its stance.  Chairman Mao Zedong`s book on protracted war about using guerilla warfare against a bigger enemy is gaining popularity here.  State TV continues to broadcast new anti-American films.

And over the weekend, the official media described the U.S. demands in a trade deal as, quote, arrogant, saying changes to state subsidies and tech transfers impinge on China`s fundamental economic system.  We`ve heard this before privately, but now it appears that this opinion is becoming more official, which means to expect more deadlocked negotiations, escalating tensions and economic uncertainty.  
For NIGHTLY BUSINESS REPORT, I`m Eunice Yoon in Beijing.  

GRIFFETH:  Meanwhile, the first ships carrying Chinese goods hit with those new 25 percent tariffs, they`re just now arriving at U.S. ports.  But who is paying the higher cost?  
Jane Wells is at the port of Long Beach.  

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT:  This is where the rubber meets the road, literally.  On this ship are the first goods to arrive from China since the first tariffs hit, things like tires, TV monitors and furniture, and they`re being loaded on to trucks to make their way to the American consumer.  
So, who is paying the higher cost?  

STEVEN FERREIRA, OCEAN AUDIT CEO:  Trump came out and said the importer would only pay 4 percent of the tariff and the Chinese 21 percent.  In reality, in my professional opinion, it`s actually the opposite.  
WELLS:  Here`s just one example.  On that ship are 72,000 bags of dental flossers made in China.  Each bag before the tariff was around 42 cents.  Now, it`s over 48 cents a bag and that difference alone is over $4,000.  

Steven Ferreira estimates the new cargo from China is costing American companies $15 million per ship, though some of the larger companies are putting pressure on their Chinese manufacturers.  

FERREIRA:  The Chinese do not want to lose the business of the Macy`s (NYSE:M), the Walmarts, the Targets, the Lowe`s, the Home Depots.  So, there`s going to be some type of intermediary device that comes in to help the cost between the vendor and the Home Depot (NYSE:HD).  

WELLS:  And the fact is trade continues.  Look at this image from marine traffic which shows all the ships on the Pacific today.  The green ones are cargo ships, and while many are coming from all over Asia, nothing compares to this, the traffic out of shanghai.  
So, what happens if and when tariffs expand to everything we buy from China?  

MARIO CORDERO, PORT OF LONG BEACH EXECUTIVE DIRECTOR:  I`ll give you an example.  The foot apparel industry, they will have a loss of approximately $40 billion a day.  

WELLS:  Long Beach port chief Mario Cordero says companies are now waiting.  They`re changing supply chains to countries like Vietnam.  
CORDERO:  For the month of April, China imports increased in the United States roughly around 2.5 to 2.9 percent.  The increase from Vietnam is in double digits.  


WELLS:  But change comes with a cost.  Economists at the Federal Reserve Bank in New York estimate tariffs will cost the average American household over $800, but most of that cost won`t be due to the tariffs themselves, but to the money companies are spending to get around them.  
For NIGHTLY BUSINESS REPORT, Jane Wells at the port of Long Beach.  

HERERA:  It is time to take a look at some of today`s upgrades and downgrades.  

Southwest Airlines (NYSE:LUV) was downgraded to in line from outperform at Evercore ISI.  The analyst cites the grounding of the Boeing (NYSE:BA) MAX 737 and says the stocks are range-bound until that airplane formally returns.  The price target is $60.  Shares fell 2 percent to $50.03.  

Roku was downgraded to equal weight from overweight.  At Stephens, the analyst cites near-term risk following a recent run-up in the stock.  The price target is $84.  The shares fell 7 percent to $88.83.  

Activision Blizzard (NASDAQ:ATVI) was upgraded to buy from neutral at Goldman Sachs (NYSE:GS).  The analyst sees an inflexion in the game-maker`s earnings trajectory.  The price target is $54.  The stock rose more than 2-1/2 percent to $43.50.  

GRIFFETH:  Still ahead, an automotive powerhouse in the making?  


GRIFFETH:  A landmark opioid-related trial got under way today in Norman, Oklahoma.  It pits Johnson & Johnson (NYSE:JNJ) against Oklahoma prosecutor.  And it`s only one of about 2,000 lawsuits brought by states and local municipalities against drug companies over their alleged role in the opioid prices.  
Meg Tirrell has more.  

MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Johnson & Johnson (NYSE:JNJ) is the sole remaining defendant in the trial of Oklahoma claiming that drug companies helped fuel the state`s opioid epidemic.  Two other drug companies, Teva and Purdue Pharma settled for millions of dollars, Teva just over the weekend.  

It`s the first of a slew of opioid cases expected to play out over the next couple of years.  They paint the drug industry, according to analyst Ronny Gal, as responsible for the devastation of opioid overdose.  
RONNY GAL, SANFORD C. BERNSTEIN & CO.:  There will be a lot of testimony being presented by families that were ruined or lives that have been destroyed, and those will be tied to whatever company is on the other side of this.  

TIRRELL:  It`s also a very public trial with cameras allowed in the courtroom.  

BRAD BECKWORTH, PLAINTIFF`S ATTORNEY:  The evidence is very clear that Johnson & Johnson (NYSE:JNJ) knew this truth before they ever started marketing their drugs here in the state of Oklahoma.  If you oversupply, people will die. 

TIRRELL:  Johnson & Johnson (NYSE:JNJ) disputes the claim, saying its, quote, actions in the marketing and promotion of these important prescription pain medications were appropriate and responsible.  And Teva said its settlement, quote, does not establish any wrongdoing and that it is not contributed to the use of opioids in Oklahoma in any way.  

Some analysts, though, see parallels to tobacco litigation from two decades ago and says settlements, fines and other penalties could add up quickly.  

GAL:  Teva just settled for $85 million to Oklahoma.  Now, Oklahoma is 1.1 percent of the U.S. population.  So, if you grossed it out to the entire stipulation, Teva has just agreed if we take that number, but $7.1 billion in damage if you take all 50 states.  

TIRRELL:  That`s just one company`s potential liability, according to Bernstein`s Ronny Gal.  Together, he says the industry could be facing paying tens of billions of dollars and drug companies plan to vigorously fight the claims.  

HERERA:  Shares of Fiat Chrysler revved higher one day after it formally proposed a merger with the French automaker Renault.  The get-together would create the world`s third largest auto company.  On paper, experts say such a deal makes sense, but will it go through and will it deliver the promised results?  
Phil LeBeau takes a look.  

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT:  At Fiat Chrysler`s headquarters outside Detroit, there is a growing sense the automaker will soon be part of a much larger company.  
FCA, the parent of several brands including Jeep, wants to merge with Renault out of France, creating the world`s third largest automaker, selling 8.1 million vehicles last year, second only to VW and Toyota (NYSE:TM).  

FCA CEO Mike Manley told employees the deal is the right move, adding: In Groupe Renault, we found a like-minded partner who sees the future as we do.  

That means slashing costs and streamlining operation, potentially saving the combined automaker nearly $6 billion while promising not to cut a single job.  

PAUL INGRASSIA, REVS INSTITUTE FOR AUTOMOTIVE RESEARCH:  I think all the signals are pretty high that it is — I mean, when the Renault Manley says, we`ll think about this, quote, friendly offer, and they call it a friendly offer, and also don`t forget, Renault is feeling a little jilted by Nissan right now.  

LEBEAU:  Remember, Renault and Nissan have been partners for two decades.  But late last year, when Japanese authorities arrested Carlos Ghosn while he was still running Renault, it exposed a growing rift between the automakers.  It also created the opening for Fiat Chrysler chairman John Elkin to approach Renault about a merger that would let both companies pool resources and have the size to grow in an auto industry where profit margins are being squeezed.  

Renault`s alliance with Nissan is the unknown factor in this merger offer.  Would the French company tried to break its partnership with Nissan or would it try to bring Fiat Chrysler into that alliance?  Questions the Renault board will be pondering as it considers the offer to merge with Fiat Chrysler.  

GRIFFETH:  “The Sports Illustrated” brand is sold for $100 million in a rather unusual deal.  And that`s where we begin tonight`s “Market Focus”.

Authentic Brands purchased the intellectual property of the iconic sports magazine from Meredith (NYSE:MDP) Corp.  Under this deal, Meredith (NYSE:MDP) will continue to publish the paper version of the magazine and manage its website, and then it will pay Authentic Brands a licensing fee for at least the next two years.  Meredith (NYSE:MDP), the stock today was down nearly 4 percent to $52.57.  

Alibaba is reportedly looking to raise $20 billion through a secondary stock offering in Hong Kong.  According to reports, the additional shares would help the e-commerce company diversify funding channels and add liquidity.  Shares were down a fraction today to $154.81.  

HERERA:  SeaWorld will buy back $150 million worth of stocks.  It also announced that longtime investor Hill Path Capital plans to increase its stake in the company.  That sent the stock higher by more than 16 percent to $31.77.  

Global Payments (NYSE:GPN) has agreed to buy fellow payment technology company Total Systems Services for more than $21 billion.  And this is the sector`s third major acquisition this year.  And according to the CEO, it adds scale in a very competitive industry which can help the company add customers.  

JEFF SLOAN, GLOBAL PAYMENTS CEO:  More and more technology companies, we sell our software directly with merchants, but we`re also part of the software companies, and embed our payments in those software companies.  So, it will continue to be a mixed of merchants today, merchants in the future, software companies, and other technology economies.  

HERERA:  Global Payments (NYSE:GPN) stock was down about 3 percent to $148.87, while Total System was up nearly 5 percent to $118.84.  

GRIFFETH:  And along those lines, a new report by McKinsey and Company says that the electronic payments industry is going to generate $3 trillion a year in revenue in just a few years.  So, what is this business going to look like in five years?  And who will the winners and losers be?  

Joining us tonight, Chris Brendler is an analyst at Buckingham Research.  
Chris, good to see you.  Thanks for joining us tonight.  


GRIFFETH:  In e-commerce, it`s about delivery.  That`s the new frontier right now and getting it there faster.  And now, in e-commerce, it`s about payments and electronic payments.  
How much faster is this thing going grow?  

BRENDLER:  You know, I think that electronic payment processors have benefited from the trend towards e-commerce and I think there`s lots of growth ahead.  You can`t pay with cash when you are buying something online, so e-commerce is a big focus for Visa (NYSE:V) and MasterCard (NYSE:MA) and the payment processors essentially growing four or five times faster than traditional commerce.  

HERERA:  All right.  So, it`s about scale, who is the best positioned if indeed this trend of consolidation and gaining scale continues.  

BRENDLER:  That`s the great question today because we`ve seen three of the biggest emerging acquirers get acquired this year, First Data, Worldpay and now TSYS.  Global buying TSYS is more of a traditional combination, trying to compete I think with the other two mega mergers.  

My favorite today in terms of near-term and the stock price, I like the First Data-Fiserv (NASDAQ:FISV) combination.  I also like Worldpay long term.  Global-TSYS, it seems to me like they`re trying to join the industry, trying to getting bigger and more of a defensive move at this point.  

GRIFFETH:  Where do the companies like Square, you know, Apple (NASDAQ:AAPL) with Apple (NASDAQ:AAPL) Pay, Google (NASDAQ:GOOG) with their electronic payments and companies like that, where do they fall in this whole area?  

BRENDLER:  Well, Square is right smack in the middle of a merger process, the deal today is about the threat that Square proposes to the traditional players.  Traditionally, acquiring it was sold through banks.  Square has a direct model that the only brand name in the space.  So, I think Square is one of the reasons why you`re seeing these mega mergers.  
Apple (NASDAQ:AAPL) Pay and Google (NASDAQ:GOOG) Pay, they`re just digital wallets that use traditional Visa (NYSE:V) and MasterCard (NYSE:MA).  They`re not really competitors in this emerging processing space.  


HERERA:  And you think the banks are the losers.  I`m just curious why they have not invested more in this technology and could the banks be a buyer down the line of some of these companies that you just mentioned?  

BRENDLER:  Absolutely.  I mean, I think banks have traditionally been the go-to source for merchant acquiring relationships, small business customer walks into the branch, they need a checking account.  They also need to accept Visa (NYSE:V) and MasterCard (NYSE:MA).  But that was 10, 20 years ago.  Now, it`s about technology and Square really has reinvented the space for a direct approach and a huge brand name.  

I think the banks continue to consolidate.  I think the deal today is part of that similar trend, the traditional players need to consolidate to get scale and compete on technology, and I think when it comes to technology, players like Square who are based in Silicon Valley and throwing all this money, they have the best talent.  So, the traditional players need to consolidate.  

GRIFFETH:  Very interesting.  

Chris Brendler with Buckingham Research — again, thanks for joining us tonight.  

BRENDLER:  Thanks for having me.

HERERA:  Coming up, tax audits are down, especially among the super rich.  


GRIFFETH:  People are not spending as much time on Facebook (NASDAQ:FB) these days.  A new report by eMarketer says that the time users spend on the platform each day fell by three minutes to an average of 38 minutes and usage is expected to decline even further next year and may remain about flat in 2021.  That`s important because advertisers look closely at that particular metric.  The report attributes the slide to Facebook`s newsfeed changes and to the platform`s overall lack of popularity with teens.  

HERERA:  Getting audited is a big fear among taxpayers.  But odds are, that won`t happen.
Robert Frank explains.  

ROBERT FRANK, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Audits of the nation`s highest earners fell to their lowest levels on record.  New data from the IRS shows that tax collectors audited a little over 6 percent of all returns, but those making 10 million or more, that`s down by half from a year earlier and down about 80 percent from the recent peak in 2011.  

The drop was across the board for the wealthy — those making a million or more, those making 5 million both saw declines.  Now, it`s unclear how much revenue has been lost from those fewer audits, which is a decline now for seven straight years.  A study show the top half of 1 percent of Americans accounted for 20 percent of all underreported income that works out to be $50 billion a year.  

Why the low of audit rates?  Well, budget cuts to the IRS were the main reason which resulted in sharp decrease in the number of auditors.  
JESSE EISINGER, PROPUBLICA:  The IRS is a walking dead bureaucracy.  It`s been eviscerated.  Their budget is way down and you can see in these numbers, you are more likely to be audited in the United States if you make $20,000 a year than if you make $500,000.  

FRANK:  The battle is heating up in Congress over giving the agency more money, especially after the new tax law created new loopholes and opportunities for avoidance.  The IRS estimates that every dollar spent on enforcement generates $5 in revenue.  Each collections officer generates about $2 million a year in revenue.  So, it`s a good return.
Now, Republicans say they don`t want to keep throwing money at a large bureaucracy.  But President Trump is proposing a 1.5 percent budget this year and adding $15 billion over the next 10 years for IRS enforcement.  

Of course, the IRS doesn`t have much voter support.  Polls show it is the least popular agency of government, and that`s low.  

GRIFFETH:  And finally tonight, MacKenzie Bezos, the ex-wife of Amazon (NASDAQ:AMZN) founder Jeff Bezos has revealed plans to give half of her fortune to charity.  She has signed the so-called Giving Pledge which encourages are the world`s richest people to dedicate a majority of their wealth to charitable causes.  MacKenzie Bezos` fortune is estimated to be about $35 billion, making her one of the richest people in the world following her divorce.  

By the way, you can read more about her pledge on our website, at  

HERERA:  Here`s a look at the final numbers on Wall Street today.  The Dow dropped 237.  The Nasdaq fell 29.  S&P 500 down 23.  

That is NIGHTLY BUSINESS REPORT tonight.  I`m Sue Herera.  Thanks for joining us.

GRIFFETH:  I`m Bill Griffeth.  Have a great evening.  See you tomorrow.  

Nightly Business Report transcripts and video are available on-line post broadcast at 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.

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