ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Bill Griffeth and Sue Herera.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Solid results. Apple`s quarter was strong. The outlook was as well, thanks to demand for products and services other than its iPhone.
BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Murky picture. President Trump has sharp words for China, adding an element of confusion to the new round of trade talks.
HERERA: Massive bank breach. Millions of Capital One customers had their data accessed by a hacker, but this one is unlike most others.
Those stories and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, July 30th.
GRIFFETH: And we do bid you a good evening, everybody, and welcome.
One of the tent poles of any earning seasons is Apple`s report. And after the bell tonight, we learned that its revenue returned growth, reassuring those shareholders concerned that the slowdown in sales of its flagship iPhone was going to hurt other things. The company also reported better than expected profits and issued solid guidance.
There was a noticeable improvement in its operations in China and it posted record revenue for its services business. Apple`s results, of course, are widely followed given its status as one of the world`s biggest companies and its shares are held in most mutual funds and retirement accounts.
Tonight, the stock rose in initial after hours trading.
Josh Lipton starts us off tonight from Apple`s headquarters in Cupertino, California.
(BEGIN VIDEOTAPE)
JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Apple (NASDAQ:AAPL) today sells a range of products and services from the watch to music streaming but its bread and butter remains the iPhone, iPhone revenue in the quarter came in at $26 billion, that was roughly in line with what Wall Street was looking for. That was down 12 percent, but it is an improvement from their prior quarter.
Remember in Q2, iPhone revenue was down about 17 percent. Part of the issue for Apple (NASDAQ:AAPL) with the iPhone franchise right now is that the replacement cycle is getting longer. I mean, people are holding on to their iPhones for longer.
I asked Tim Cook whether his trade-in programs at the company are having a positive impact or are they tightening the replacement cycle. Cook telling me it was a key part of the improvements sequentially, meaning quarter over quarter. Also, he told me the trade-in and financing program were key to results in China.
For NIGHTLY BUSINESS REPORT, I`m Josh Lipton, Cupertino, California.
(END VIDEOTAPE)
HERERA: Dan Morgan joins us now to talk more about these numbers from Apple (NASDAQ:AAPL). He is a portfolio manager at Synovus Trust.
Dan, welcome. Nice to have you here.
A lot of people were focusing on China`s — on Apple`s China`s strategy. And, you know, we just saw Josh Lipton mention a couple of things, but it sounds like their multi-pronged approach to China was very successful this last quarter.
DAN MORGAN, SYNOVUS TRUST PORTFOLIO MANAGER: Well, you`re right, Sue. I mean, if you look at revenues, they only fell by 4.1 percent compared to a drop of 25 percent in the previous quarter. So it seems like things are starting to turn around a bit. The bleeding in China, so to speak, is starting to improve. So that`s a big part of the recipe for growth for them going forward.
So very encouraging that we are seeing not such a big drop in China on this most recent third quarter.
GRIFFETH: Tim Cook`s not-so-secret strategy has been to transition Apple (NASDAQ:AAPL) away from hardware sales and emphasize services more. Are you seeing that with this kind of report, Dan?
MORGAN: I think so. I mean, even though service revenue was a little bit short, it was still pretty strong. That is a big component, as you say, of their future growth story. If you think about this, services, their gross margin is about 64 percent and the total gross margin for the company is about 37 percent. So, it`s a big component of future growth and growing their margins.
HERERA: Now what about this replacement cycle? Josh once again mentioned that. Are you satisfied with the way that Apple (NASDAQ:AAPL) is approaching that particular problem, people are holding on to their devices longer? Are you happy with Tim Cook`s strategy there?
MORGAN: Well, Sue, it is still a big challenge for them and, you know, they have some new phones coming out this fall, the iPhone 11. Probably not much is going to happen there, but next year, they`re supposed to be issuing their 5G, potentially a foldable phone that will compete against Samsung. I think that`s going to hopefully generate some of the upgrade cycle they`re looking for.
HERERA: Dan Morgan, thank you so much. Dan is with Synovus Trust.
MORGAN: Thank you, Sue.
GRIFFETH: And on Wall Street, the Dow snapped a three-day win streak today with a modest decline. Certainly, earnings are important but so are those trade talks in Shanghai, and it probably didn`t help that President Trump renewed his attacks on China just as the talks were getting started again.
That seemed to contribute today`s minus signs with the industrial average down 23 points to 27,198. Nasdaq was down 19, the S&P slipped by seven.
Eamon Javers reports tonight from Washington.
(BEGIN VIDEOTAPE)
EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Even as the U.S. delegation arrived in Shanghai today for a new round of trade talks, President Trump gave a conflicting assessment of China`s interest in reaching a deal. Speaking to reporters outside the White House, the president first suggested Chinese negotiators were stalling until after the election, but seconds later said just the opposite. That he believed the Chinese side was eager to do a deal with him.
DONALD TRUMP, PRESIDENT OF THE UNITED STATES: Well, I think the biggest problem to a trade deal is China would love to wait and just hope, they hope — it is not going to happen, I hope. But they would just love if I got defeated, so they could deal with somebody like Elizabeth Warren or Sleepy Joe Biden.
And I will tell you this, China is dying to make a deal with me, but whether or not I`ll do it — it is up to me. It is not up to them.
JAVERS: The president`s divergent assessments added an element of confusion to an already-murky picture with both sides lowering expectations of a deal between the two economic powers. It`s not clear what progress Treasury Secretary Mnuchin and U.S. Trade Representative Lighthizer can make with their counterpart this week.
Still, White House officials voiced optimism that the talks were happening at all, the 12-round of discussions, but the first to rekindle negotiations since talks broke down in May.
MARC SHORT, CHIEF OF STAFF TO VP PENCE: We felt we were run to about the ten yard line previously and then we felt there were several hard liners within China that pulled back because some of the enforcement mechanisms they were unwilling to live with. I think it is going to challenge our relationship with China for some time, is that when they strike deals, they backtrack on a lot of areas where we wanted to enforce the restrictions that we put in place.
JAVERS: And the president praised himself on Twitter for slashing millions of Chinese jobs and seizing the initiative in the ongoing talks.
Officials have released scant details on the progress of or even the schedule for the negotiations in Shanghai this week, but a White House official tells me that officials are encouraged that the talks are even happening. And that means the relationship might be back on the right track.
For NIGHTLY BUSINESS REPORT, I`m Eamon Javers in Washington.
(END VIDEOTAPE)
HERERA: Well, the trade war and slowing global growth have proved to be a drag on some company`s quarterly results but not all. That`s just one of the trends emerging at the halfway point of earnings season.
Bob Pisani reports from the New York Stock Exchange.
(BEGIN VIDEOTAPE)
BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: There`s good news and there`s bad news about earnings. The good news is we`re halfway through earnings season. We managed to avoid an earnings recession two straight quarters of negative earnings growth, and corporate guidance for the second half has not collapsed.
Earnings are essentially flat for the second quarter compared to the second quarter of last year, 76 percent of companies are beating. That`s right in line with the recent average.
But there are some warning signs for investors. First, stocks are pretty pricey right now. There`s very little room for misstep. Second, clarity on global growth is, well, to put it mildly pretty illusive. And the trade wars and slower global growth are clearly having an impact on earnings.
Companies that generate more than half of their revenues overseas are seeing declines in their earnings of about 10 percent on average, but companies with less than half of their sales from overseas, that are more domestically focused, on average, they`re seeing gains of 6 percent. That`s a big difference.
Finally, the markets are becoming a lot more dependent on looser monetary policy from the central banks to cushion the blow from slower global growth. But it`s not clear that global central bank magic is always going to work wonders. The market`s biggest fear is that central bank rate cuts may in the future no longer provide any big boosts to global growth or to corporate earnings, implying central banks are essentially running out of bullets. Well, if that happens, you are going to see earnings guidance come down dramatically, but it has not happened yet.
Well, the most dire warning of the bears have not come to pass, they do have a point though. It is tough to be bullish when the S&P 500 is up 20 percent for the year, earnings are flat, and there is so little clarity on global growth.
For NIGHTLY BUSINESS REPORT, I`m Bob Pisani at the New York Stock Exchange.
(END VIDEOTAPE)
GRIFFETH: Federal Reserve policymakers began their two-day meeting on interest rates today, and while many expect the central bank to loosen monetary policy tomorrow, not everyone agrees.
Steve Liesman breaks down the latest great rate debate.
(BEGIN VIDEOTAPE)
STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Most in the market agree with what the Fed will do with monetary policy tomorrow, that is cut interest rates. But they disagree on what the Fed should do.
Ninety-eight percent of the respondents to the CNBC Fed survey see a rate cut and nearly all say it will be a quarter point rate cut. But asked what the Fed should do, and that`s where there`s a split. About half say the Fed should not cut rates at all, mostly because the economy is in pretty good state.
John Kattar, chief investment officer at Ardent Asset Management writes in response to the survey, quote: Objectively, the case for a rate cut is not obvious. The economic data has simply not been weak enough and the level of rates is already low. More economic data today showed strong consumer confidence along with healthy growth in personal income and spending. It`s not the kind of economic data you typically see when the Fed is cutting rates.
And the survey showed most expect the economy to slow, but not much more than expected when the Fed was still raising interest rates. Growth in gross domestic product seen in the survey falling at 2.3 percent this year from 2.5 percent in 2018, it slows further to 2.1 percent in 2020, but that`s roughly in line with most measures of what the potential of the economy is anyway.
Those supporting the cut point to the uncertain effects of the global trade war and the low inflation rates in the United States.
LAWRENCE SUMMERS, FORMER TREASURY SECRETARY: I think the case is probably stronger, inflation really does appear quiescent. There`s uncertainty about where the economy is going to go in the future. The risks of a cut seem to me to be lower than the risks of staying where we are and risking a tip into recessions.
LIESMAN: That would make the Fed rate cut an insurance move based not on the data, but on the fear of what will happen in the months ahead, for example, with events like Brexit.
And insurance policies, well, they are always judged against the cost and the risk. For the Fed right now, the cost of the insurance looks cheap compared to the risk of recession.
For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.
(END VIDEOTAPE)
HERERA: Housing makes up an important part of the economy and after a week spring, new reports hint at a possible turnaround.
Diana Olick has the details.
(BEGIN VIDEOTAPE)
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: A surprise jump in pending home sales in June, gaining from a year ago for the first time in 17 months according to realtors. Pending sales are signed contracts to buy existing home so an indicator of closings in July and August. Sales were stronger across the nation but particularly in the west where home prices have been moderating the most.
In fact, prices in see a little are lower than a year ago, according to the latest S&P Case Schiller report. That`s the first city to see a drop since 2012.
Clearly, lower mortgage rates are helping. The average rate on a 30-year fixed mortgage stood at 4.29 percent on May 1st and ended June at 3.81 percent according to mortgage news daily. That had to help with affordability, but home prices are still high and the supply of homes for sale, which had been gaining earlier this year, is under pressure again.
Builders are still not putting up enough entry level homes, but D.R. Horton (NYSE:DHI) is seeing big gains with the help of its cheaper Express (NYSE:EXPR) brand. The company reported strong quarterly earnings. Horton chairman Donald R. Horton called the spring selling season, quote, “solid”.
June`s strong sales read could indicate a turnaround but only if more supply comes on the mortgage and mortgage rates stay low. At this point, neither of those are a sure bet.
For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Washington.
(END VIDEOTAPE)
GRIFFETH: Time to take a look at some of today`s “Upgrades and Downgrades”.
We begin tonight with Pfizer (NYSE:PFE), which was downgraded to equal weight from overweight at Morgan Stanley (NYSE:MS). The analyst says that yesterday`s spin-off deal with Mylan (NASDAQ:MYL) may have inadvertently exposed a lower than expected earnings potential in Pfizer`s other businesses. Price target: $40. That stock sells 6 percent today to $38.79.
Also at Morgan Stanley (NYSE:MS), Micron was upgraded to equal weight from underweight. The analyst says the trade tensions are driving short-term inventory accumulation right now. Price target, $48. That stock rose more than 1 percent today to $47.46.
HERERA: Still ahead, big pharma`s big profits despite pressure coming from Washington.
(MUSIC)
HERERA: It is one of the largest-ever data breaches of a big bank. Capital One Financial (NYSE:COF) says a hacker accessed the personal information of millions of credit card customers and applicants. The scale of the hack and questions over other potential vulnerabilities sent the stock lower in today`s trading session.
Aditi Roy has more.
(BEGIN VIDEOTAPE)
ADITI ROY, NIGHTLY BUSINESS REPORT CORRESPONDENT: It`s one of the biggest breaches to hit a bank, and the number of customers affected by the Capital One hack are staggering, 100 million U.S. customers impacted, 6 million in Canada, and among the data stolen 140,000 Social Security numbers and 80,000 linked bank accounts. Also names, addresses, birth dates and even credit card scores.
Capital One estimates the intrusion will cost the company up to $150 million. But this breach is different. It involved one alleged perpetrator, Paige Thompson, a 33-year-old former software engineer who didn`t appear to use the information for identity theft. Many other hacks are believed to be the work of groups or state-sponsored actors.
Investigators arrested Thompson after she accessed the files and made them more accessible. Capital One says it will notify customers who are affected by the breach. The news comes just one week after a credit reporting bureau, Equifax (NYSE:EFX), settled its massive 2017 hack for $650 million.
The finance and insurance sectors are the most targeted industries, accounting for nearly a fifth of all U.S. cyberattacks, according to a report from IBM. The reason, it`s easy for bad actors to make money from customer bank account information. Cybersecurity consistently ranks among the top concerns of bank CEOs, who are spending an increasing amount of money to protect their networks.
JAMIE DIMON, JPMORGAN CHASE CHAIRMAN & CEO: If we spend $600 million a year in cyber, all of us spend huge amounts of money to protect privacy of the system. I agree with you, cyber risk is probably the biggest think the financial system faces in the world. It is a global risk and you are absolutely correct. All of those folks get involved and make it very complicated.
ROY: Customers who might have been affected in the Capital One breach will have to watch for any potential identity theft that could stem from their information landing in the wrong place.
For NIGHTLY BUSINESS REPORT, I`m Aditi Roy, San Francisco.
(END VIDEOTAPE)
HERERA: ATMs are also vulnerable to high-tech threats and that`s a story we will explore later in our program.
GRIFFETH: In the meantime, Merck (NYSE:MRK) and Eli Lilly (NYSE:LLY) are the latest drugmakers to top Wall Street earnings estimates for the second quarter. Both also raised their forecast for the full year. But the market response was mixed. Merck`s shares finished higher, Eli Lilly (NYSE:LLY) lower.
Meg Tirrell takes a closer look now at what`s working at these two big pharma firms.
(BEGIN VIDEOTAPE)
MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT: Merck (NYSE:MRK) was helped by its blockbuster cancer drug Keytruda, as well as higher than expected sales of pediatric vaccines.
In particular, a vaccine called ProQuad, which protects against measles, mumps, rubella and chicken fox virus, driven by demand amid the record measles outbreak in the United States. Lilly`s results were boosted by its drugs for cancer and rheumatoid arthritis, as well as a new drug for migraine. Sales growth came despite the blockbuster drug Cialis facing generic copies after losing patent protection.
DAVE RICKS, ELI LILLY CHAIRMAN AND CEO: After a period of time, products become very cheap in our industry. What we need to do is invent new things at a faster rate than we lose those patents, and that`s exactly what`s happening at Eli Lilly (NYSE:LLY) now.
TIRRELL: The companies also raised their forecast for the full-year result, following similar moves from Johnson & Johnson (NYSE:JNJ), AbbVie, and Bristol-Myers.
The upbeat tone from the industry is at odds with the view from Washington, where politicians on both sides of the aisle are focusing on the price of prescription drugs.
Health Secretary Alex Azar joined the administration just months after leaving his role running U.S. pharmaceuticals at Lilly.
ALEX AZAR, HHS SECRETARY: I can change the rules of the road and I`m working with Congress to change the rules of the road so that they have the financial incentives to actually have prices go down.
TIRRELL: Democrats are focused on the issue as well and with a second set of presidential debates tonight, investors are bracing for the impact on stocks.
BRIAN GARDNER, KBW (NYSE:KBW): I think the Democrats are going to come out the full-out the merger announced with Pfizer (NYSE:PFE) and Mylan (NASDAQ:MYL). I think it`s going to be a great attack point for a number of the candidates. So I think pharma could take it on the chin in the debate.
TIRRELL: Whether or not it results in any actual drug price reform is another question.
For NIGHTLY BUSINESS REPORT, I`m Meg Tirrell.
(END VIDEOTAPE)
HERERA: Procter & Gamble (NYSE:PG) posts its biggest quarterly sales growth in more than a decade. That`s where we begin tonight`s “Market Focus”.
The consumer products company topped expectations thanks to raising its prices and seeing a sales increase in its beauty line. This comes as P&G sees the importance of millennial customers.
(BEGIN VIDEO CLIP)
JON MOELLER, PROCTER & GAMBLE CFO: We have to respond to the needs and demands of the millennial consumer, as well as other demographics. We are generally doing that. Seventeen of our top 20 brands in the U.S. are either number one or number two with millennial consumers. We are expanding our range of naturals offerings both under current brand names and under newly-created organic and acquired organic brand names.
(END VIDEO CLIP)
HERERA: Shares rose nearly 4 percent to $120.41.
Under Armour (NYSE:UA) had mixed results with an earnings beat but revenue missed as the athletic apparel maker saw an increase in footwear sales but a drop in apparel. The company also lowered its full-year forecast with declining sales expected in North America. That sent the stock down more than 12 percent to $24.08.
Same-store sales growth internationally helped Ralph Lauren post better than expected results but the luxury clothing and accessories company seas weak North American sales due to what it calls a different result retail environment and less spending by foreign tourists. Shares fell almost 4 percent to $104.13.
GRIFFETH: BP topped profit expectations thanks to increase in oil and gas production. That helped to offset lower prices in the quarter. BP was up more than 2 percent to $39.99 today.
MasterCard (NYSE:MA) beat street estimates with an increase in transactions, strong consumer spending and a drop in operating costs, but shares were off more than 1 percent today to $278.16.
HCA Healthcare missed both earnings and revenue estimates mainly due to higher expenses. The company did however raise its full-year outlook. But that wasn`t enough as shares dropped more than 9 percent today to $132.80.
Then, after the bell tonight, Amgen (NASDAQ:AMGN) said that an increase in sales of its arthritis treatment Enbrel and its new migraine drug help to beat expectations. But overall, revenue at the biotech fell because of increased competition of its older off-patent drugs. Amgen
(NASDAQ:AMGN) did however raised the lower end of the full-year forecast. Shares initially rose in after-hours trading this evening. They closed the regular session today up a fraction at $176.45.
HERERA: Coming up, just how vulnerable are bank ATMs to those new high- tech threats?
(MUSIC)
GRIFFETH: Finally tonight, modern-day bank robbers don`t have to enter banks anymore. They can now target ATMs in ways that you would never imagine possible. This new high-tech twist has become financial headaches for many of the banks in this country.
Andrea Day investigates this cutting-edge break-in.
(BEGIN VIDEOTAPE)
UNIDENTIFIED MALE: It is brazen. It is in broad daylight and in front of hundreds of people.
ANDREA DAY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Take a close look at this ATM attack caught on camera, the images obtained from the Secret Service. And according to the agency, the guys you see in uniform are criminals grabbing loads of cash.
What left this seasoned investigator stunned?
GREG NARANJO, SECRET SERVICE: How normal it looked and how calm they were.
DAVID TENTE, ATM INDUSTRY ASSOCIATION: We know for a fact that ATM crime and fraud does cost the banking industry and financial services industry billions of dollars per year.
DAY: David Tente is the U.S. executive director for the ATM Industry Association.
TENTE: It just seems like in the U.S., no one really wants to talk about that. They`d rather not have their customers and others thinking that their ATMs aren`t safe.
DAY: According to the Secret Service, recent attacks like this one caught on camera cost the bank more than $3.5 million in just a few months. But they`re just the beginning of a new wave heating up overseas.
NARANJO: It is just a matter of time.
DAY: Greg Naranjo is the assistant special agent in charge. He says the Secret Service has been investigating training camps located outside of the United States with kingpins organizing new recruits.
NARANJO: Some training facilities are in South and Central America.
DAY: Are you saying they`re bringing in their foot soldiers into those schools, training them and letting them loose into the United States?
NARANJO: Yes.
DAY: We went to Toronto, Canada, to meet with IBM`s special unit, X-Force Red.
CHARLES HENDERSON, IBM X-FORCE RED: We are in the business of attacking ATMs because our mission hacking anything to secure everything.
DAY: Charles Henderson heads up X-Force Red. The banks, he says, are so overwhelmed by attacks they are quietly coming to X-Force for help.
HENDERSON: We are now sitting at a 500 percent increase since last year in testing demand.
DAY: Henderson revealed an attack he thinks criminals could be fine-tuning right now.
Does the hacker mastermind have to even leave his computer or touch this machine to make it work?
HENDERSON: No. The criminal can sit at home, send a street thug out to collect the money for them.
DAY: To show how it works, IBM`s David Byrne playing the role of the mastermind at a remote location, hacking into the bank`s network.
DAVID BYRNE, IBM X-FORCE RED: We intercept the traffic, the response from the bank and change the deny response to an approval.
DAY: The bank won`t see that you have changed the no to a yes and gotten in?
BYRNE: That`s correct. It is completely invisible to the bank.
DAY: Henderson plays the foot soldier.
HENDERSON: The street thug that the hacker mastermind sends out can conceivably sit here and collect money after money until the ATM is empty.
You can lose tens of millions, sometimes even hundreds of millions of dollars and very quickly.
DAY: So, what can the banks do now?
NARANJO: Test that ATM just like a criminal would before a criminal has a chance to.
DAY: And he says the banks aren`t the only ones losing out here, that some of the ATM fees are made to offset fraud. So when you pay that fee, you are really paying for insecure ATMs.
For NIGHTLY BUSINESS REPORT, I`m Andrea Day.
(END VIDEOTAPE)
HERERA: Before we go, here is another look at the final day`s numbers on Wall Street. The Dow fell 23 points to 27,198. The Nasdaq was down 19 and the S&P 500 slipped seven.
Tomorrow, we`ll get more earnings and the Fed will issue its decision on interest rates.
GRIFFETH: We`ll probably see some fireworks around 2:00 Eastern Time tomorrow.
HERERA: Yes, I think so. So you have to join us.
That does it for us tonight. I`m Sue Herera. Thanks for joining us.
GRIFFETH: I`m Bill Griffeth. Have a great evening. See you tomorrow.
END
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.
<Copy: Content and programming copyright 2019 CNBC, Inc. Copyright 2019 ASC Services II Media, LLC. All materials herein are protected by United States copyright law and may not be reproduced, distributed, transmitted, displayed, published or broadcast without the prior written permission of ASC Services II Media, LLC. You may not alter or remove any trademark, copyright or other notice from copies of the content.>
