ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Bill Griffeth and Sue Herera.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Growing skepticism. Boeing`s 737 MAX crisis seems to be getting worse and the stock once resilient is coming under pressure.
Last-minute deal. A settlement was reached just before a major opioid trial was set to begin but the story is far from over.
Backyard bungalows. Second homes are cropping up in backyards across America and some homeowners are reaping the financial rewards.
Those stories and more tonight on NIGHTLY BUSINESS REPORT for Monday, October 21st.
Good evening, everyone. And welcome. Bill has the evening off.
Boeing (NYSE:BA) shareholders are getting used to rough days, but the past two have been doozies. The stock is down about 10 percent during that time, enough for any investor to take notice. Today, it fell almost 4 percent amid mounting questions over the company`s 737 MAX.
It was about one year ago when the Lion airplane crash in Indonesia followed a few months later by another fatal crash and then the grounding worldwide of Boeing`s most popular jet liner.
Tonight, pressure mounts as investors try to figure out if new revelations will return its date to service.
Here`s Phil LeBeau.
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: There`s growing skepticism that 737 MAX will be back in the air before the end of the year which remains the guidance of CEO Dennis Muilenburg. With the release of emails and instant messages from a Boeing (NYSE:BA) technical pilot suggesting he may have misled regulators while the MAX was in development has analysts questioning if the FAA will slow down the process of improving the MAX to fly again.
Credit Suisse downgraded Boeing (NYSE:BA), saying we can no longer defend the shares in light of the latest discoveries, discoveries which significantly increase the risk profile for investors.
UBS also downgraded Boeing (NYSE:BA), writing: We think a push out of the return to service could increase the likelihood of a pause on the 737 MAX production system.
Meanwhile, Boeing (NYSE:BA) is wrestling with a crisis that seems to be getting worse.
ERIC DEZENHALL, DEZENHALL RESOURCES CEO: Then you have the theater of crisis management which is like an episode of succession where everybody is sitting around figuring who goes on TV and does the interview and who goes before Congress because whoever goes, whoever is public ends up losing their job.
LEBEAU: Analysts are openly speculating about the future of Boeing (NYSE:BA) CEO Dennis Muilenburg. There are also questions about Kevin McAllister who runs the commercial airplane division. Boeing (NYSE:BA) says there are no plans to replace either executive even as the MAX remains parked and the company`s stock slump close to a three-month low.
Still, some believe with global demand for air travel continuing to grow, Boeing (NYSE:BA) will eventually come through this crisis with plenty of orders including many for the revamped MAX.
DOUG STEENLAND, FORMER NORTHWEST CEO: I would view this almost as a buying opportunity that you would then hold and keep for the long term just given the dynamic of the business.
LEBEAU: We`ll get a sense of Boeing`s outlook and exactly how much the 737 MAX grounding has cost the company when reports Q3 earnings on Wednesday. That`s also when analysts from Wall Street will hear from CEO Dennis Muilenburg for the first time in a couple of weeks.
Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.
HERERA: So let`s turn now to Ivan Feinseth to talk more about Boeing (NYSE:BA) under pressure and if you should own the stock. He is the chief investment officer and director of research with Tigress Financial Partners.
Good to see you again, Ivan. Welcome back.
IVAN FEINSETH, TIGRESS FINANCIAL PARTNERS CIO: Thank you.
HERERA: We should note you are bullish longer term on Boeing (NYSE:BA).
FEINSETH: Very much.
HERERA: Let`s look a little shorter term though. There are a number of key hurdles that the company has to overcome, not the smallest of which is appearing on Capitol Hill. What do you think happens near term to Boeing (NYSE:BA) stock?
FEINSETH: Well, I think it may be under pressure through this process and it could be under pressure into the end of the year as people who have losses sell it to book end `18. And then I think the stock bounces back — I`m sorry, 2019, bounces back in 2020 and I think that they should, as they say, get close to getting this plane back into service by the end of the year.
It`s a very important plane for the industry and for Boeing (NYSE:BA). And it unfortunately, the problem does not only affect the shareholders of Boeing (NYSE:BA). It affects a very large consistency of stakeholders that include Boeing (NYSE:BA) employees, Boeing (NYSE:BA) shareholders, Boeing (NYSE:BA) customers, the customers, shareholders and employees of the airlines and the suppliers. This has been very damaging to the airline industry and to the consumer because it has caused a big increase in cost of flights.
HERERA: Uh-huh. What do you expect to happen to management? Or what do you think as you analyze this company should happen to the current management?
FEINSETH: Well, I think, overall, you want to buy good companies when they`re having a hard time or a bad time. That`s why I think there`s a buying opportunity here, because as Phil LeBeau said, the industry is so capacity constrained they need the planes.
However, this has taken very long and I think a lot of what`s going on now is a lot of people at Boeing (NYSE:BA) trying to cover themselves by saying, I told you there was a problem, you didn`t listen to me. So, that`s causing a lot of these emails and messages that are surfacing.
However, I think that one of the keys of managing a crisis is get in front of it and fix it as fast as possible.
HERERA: So, you anticipate more volatility as we see Boeing (NYSE:BA) have to navigate this landscape. But you have a pretty bullish forecast for the stock six months from now.
FEINSETH: I think within six months that the plane — the MAX goes back into service, the stock will probably be above $450 a share.
HERERA: You also like it for the dividend which we —
HERERA: — should note they maintained today?
FEINSETH: Yes. Well, I think any company that has a dividend of over 2 percent with a 10-year Treasury at 1.5 percent and the average yield on the S&P 500 at just below 2 percent. So, any company that has a good dividend and over the years a significant amount of total return from companies have come from their dividends.
HERERA: All right. Ivan Feinseth, thank you so much. Good to see you again.
FEINSETH: Thank you.
HERERA: Ivan Feinseth is the chief investment officer and director of research with Tigress Financial Partners.
And even if you don`t own shares of Boeing (NYSE:BA) outright, you might own them in a fund. According to Morningstar (NASDAQ:MORN), the biggest holders are the Vanguard Total Stock Market Index, Vanguard 500 Index Investor and American Funds Washington Mutual.
The decline in Boeing (NYSE:BA) shares capped broader market gains today, but the major indexes did move higher to start this busy earnings week. And they`re closing in on record levels. The Dow Jones Industrial Average rose 57 points to 26,827. The Nasdaq was up 73 and the S&P 500 added 20.
So what might it take for the market to continue to rally and reach those new highs?
Mike Santoli identifies three things.
MIKE SANTOLI, NIGHTLY BUSINESS REPORT CORRESPONDENT: With the stock market emerging from a late summer slump and stalling for weeks just short of its record highs, bulls and bears agree on the basics. Earnings are flattish, growth has slowed and the Fed will likely cut rates again this month. With this as a backdrop, the possibility of a fourth quarter rally now hinges on three crucial debates involving credit markets, crowd psychology and calendar patterns.
The bond market was at the center of august recession scare with the ten year treasury yield plunging towards record lows but the market for corporate debt never signaled much concern. Something it often does as economic stress builds. Investors have continued to demand relatively modest extra yields from companies even riskier ones.
Such firm credit decisions tend to support equity values giving companies flexibility to issue and refinance debt. Should investors trust this credit market message? Crowd sentiment has remained quite subdued despite the S&P 500 recovering to within 1 percent of the July levels. Investor survey, stock fund and measures of equity exposure by professional traders all show persistent skepticism.
This tends to be a bullish factor leaving investors more open to positive news than negative surprises. So, is the crowd correct this time in its pessimism?
And the calendar is about to turn friendly again. We had October through December, it`s one of the strongest stretches of the year throughout history. The positive seasonal forces did not arrive last year when stocks had a rare fourth quarter collapse losing as much as 20 percent by late December.
Still, one year ago there was much talk of a likely fourth quarter rally while this year expectations are much more muted. So, investors must now ask what are the chances a traditional year end up side bias failed to take hold two years in a row?
For NIGHTLY BUSINESS REPORT, I`m Mike Santoli.
HERERA: An 11th hour deal averted for now at least. The first federal trial related to the opioid crisis. The settlement sent shares of the nation`s three biggest drug distributors lower. But Teva shares gained on word of a deal with four states though questions remain about that.
Meg Tirrell went to Cleveland to report on the happenings inside the courthouse but instead has the story of what happened outside.
MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT: The jury was selected, the courtroom packed, but just minutes before the first federal trial over the nation`s opioid crisis was set to begin this morning, word came of a settlement. The trial was off.
But it`s more of a delay than a reprieve. Four defendants, three big drug distributors and drugmaker Teva reached a settlement with the two Ohio counties that were plaintiffs in this trial. It`s worth about $260 million and adds to the $66 million settlements already reached with four other drugmakers.
But more than 2,000 cases against drug companies remain brought by cities, counties, Native American tribes, states and others. Work towards a broader settlement was underway late last week and over the weekend, and this afternoon the state attorneys general leading those talks said they had reached a broad settlement framework with five companies. It includes $18 billion in cash over 18 years from the three drug distributors, $4 billion cash over two to three years from Johnson & Johnson (NYSE:JNJ), as well as provision of $23 billion worth of addiction treatment drugs from Teva over 10 years.
But the plaintiff cities and counties said they haven`t signed on. Joe Rice, co-lead attorney for those parties, said part of the issue is $18 billion over 18 years from the distributors is too little and too slow.
JOE RICE, SUMMIT COUNTY AND CO-LEAD COUNSEL: You take $1 billion and spread out over this country, these counties were slated if you make an assumption they would have gotten, you know, a few hundred thousand dollars a year. That`s not going to help us. We need the money up front. It`s got to be more money.
TIRRELL: There are more than a dozen drug companies, distributors named in the suits. They claimed pharma companies deceptively marketed it and that the distributors and pharmacies reached enormous profit from failing to monitor and report suspicious activity.
As part of the settlements, the companies admit no wrongdoing and as work continues towards a potential broader settlement for the counties here in Ohio, the deals mean immediate funds towards fighting the crisis.
ARMOND BUDISH, CUYAHOGA COUNTY EXECUTIVE: We`ve got the problems now. People are suffering now. People are dying now. We have to deal with these issues now. So the fact that we were able to get the money in a short time frame is very helpful and that`s one of the motivations for settling this.
TIRRELL: The next trials aren`t scheduled until next year and unless cities and states can come together on a broader agreement, these piece-by- piece deals may be community`s best hope for relief.
For NIGHTLY BUSINESS REPORT, I`m Meg Tirrell in Cleveland.
HERERA: It is time to take a look at some of today`s “Upgrades and Downgrades”.
IBM was downgraded to neutral from buy at UBS. The analyst expects the company to have trouble sustaining mid single digit revenue growth given the pressures facing its legacy businesses. The price target is $140. The stock fell 1 percent to 132.58.
EBay was downgraded to hold from buy at Deutsche Bank. The analyst sites a challenging competitive environment expects the stock to be range bound. The price target is $42. The stock was up 1 percent to $39.26.
Apple`s price target was hiked to $280 at Raymond James, which is the highest on Wall Street. The analyst says 5G, Apple`s biggest opportunity, and raised the iPhone sales estimates. The firm has an outperform rating on the stock. The shares rose more than 1.5 percent to $240.51.
And now to Britain`s exit from the European Union or Brexit.
Tonight, a new twist in the ongoing drama. Willem Marx is in London.
WILLEM MARX, NIGHTLY BUSINESS REPORT CORRESPONDENT: When British Prime Minister Boris Johnson left Downing Street this past weekend —
REPORTER: Were you still leaving on the 31st?
MARX: — it was to join lawmakers for their first Saturday session in 37 years, in the hope of finally resolving an historic standoff.
BORIS JOHNSON, BRITISH PRIME MINISTER: This is the second deal and the fourth vote 3 1/2 years after the nation voted for Brexit. And during those years, friendships have been strained, families divided and the attention of this house consumed by a single issue that has at times felt incapable of resolution.
MARX: Tens of thousands of anti-Brexit protestors pounded the pavement around Westminster Palace while the man who championed the campaign to leave the E.U. pressed parliamentarians to soothe this national sore.
JOHNSON: It is now so urgent for us to move on and to build a new relationship with our friends in the E.U. on the basis of a new deal, a deal that can heal the rift in British politics.
MARX: The response from opposition lawmakers, not conciliatory but critical.
JEREMY CORBYN, LABOUR PARTY: He has renegotiated the withdrawal agreement and made it even worse.
MARX: Even as while allies from Northern Ireland slammed the British leaders` Brexit inconsistencies.
NIGEL DODDS, DEMOCRATIC UNIONIST PARTY DEPUTY LEADER: Please reconsider the fact that we must leave as one nation together.
MARX: But the most concrete challenge inside the chamber came from a fellow conservative.
OLIVER LETWIN, BRITISH LAWMAKER: Despite my support for the prime minister`s deal, do not believe that it is responsible to put the nation at risk by making that threat.
MARX: Former Minister Oliver Letwin proposing that parliament postpone its approval in principle until all Brexit legislation successfully passes.
LETWIN: We can be secure in the knowledge that the U.K. will have requested an extension tonight which, if granted, can be used if and to the extent necessary and only the extent necessary to prevent a no deal exit.
JOHN BERCOW, SPEAKER OF THE HOUSE: Order.
MARX: Johnson said he would rather be dead in a ditch than ask Brussels for another delay.
BERCOW: The ayes to the right, 322. The nos to the left, 306. So the ayes have it. The ayes have it.
MARX: The vote on Saturday left him little legal alternative.
So, after parliaments waste the weekend, the government today sought a second vote, after a separate setback.
The speaker of the House of Commons insisted Monday afternoon that to allow an up or down vote on Boris Johnson`s Brexit deal would be disorderly and repetitive. The legislature he said already debated and voted on the exact same plan just 48 hours earlier.
While the E.U. continues to watch and wait, the U.K. government must now attempt another parliamentary approach to win approval for Johnson`s deal.
For NIGHTLY BUSINESS REPORT, I`m Willem Marx in London, England.
HERERA: Still ahead, why this week will see the intersection of earnings, trade and the economy.
HERERA: There was some optimism today over U.S./China trade. And the upbeat sentiment came from Beijing, both the tone was different.
Eunice Yoon has more.
EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: China is sending a positive signal on the trade talks. Over the weekend, Vice Premiere Liu He was China`s chief negotiator with the U.S. made a rare public speech on the talks, suggesting progress.
At a tech event he said, China-U.S. have made substantial progress in many aspects and laid an important progress for a phase one agreement. China is willing to work in concert with the U.S. to address each other`s core concerns.
The comment sounds like standard lines out of the government on the talks, but the state media descriptions are not. The Communist Party paper, “The Global Times”, described the remarks as Beijing`s most clear and authoritative on progress. State media blog Taoran closely watched by trade experts said Liu`s comments indicate the negotiators are, quote, approaching a phase one agreement.
The official press have been managing expectations down and now the tone slightly optimistic that an agreement can be reached.
That optimism helps support the Chinese stock market today, which largely shrugged off a surprise decision by the central bank. The PBOC left its new benchmark lending rate for banks, the LPR, unchanged in October. Some analysts believe this means policy makers are cautious about loosening policy because of the high debt here.
But with the economy slowing, most expect rates to drop further by the end of the year.
For NIGHTLY BUSINESS REPORT, I`m Eunice Yoon in Beijing.
HERERA: And this week, we may find out how those trade tensions have impacted the industrial sector when Caterpillar (NYSE:CAT), United Technologies (NYSE:UTX) and 3M (NYSE:MMM) report earnings. That group is often viewed as a barometer of the global economy which is why investors will be paying close attention.
Seema Mody has more.
SEEMA MODY, NIGHTLY BUSINESS REPORT CORRESPONDENT: It`s all about demand. Large American manufacturers and other industrial firms have enjoyed strong sales for many years, but as the global economy slows down, that may start to change while a slowdown in China has been evident for a couple of quarters, recent data on the U.S. economy has raised concerns about a more intense slowdown here and a looming effect on profit and capital spending.
Economists are blaming the trade war and a softening agricultural sector. Reports show farmers are holding back on purchases of big ticket items like tractors and other farm-related equipment due to the uncertainty around trade and whether they will receive support from the government in 2020. As worries grow, analysts are bringing down their expectations.
Ahead of Caterpillar (NYSE:CAT) earnings on Wednesday, Morgan Stanley (NYSE:MS) downgraded the stocks saying the construction equipment market peeked this year while the oil and mining industry, Caterpillar (NYSE:CAT) Services, continues to weaken.
It`s not just Caterpillar (NYSE:CAT). Third quarter estimates for the broader industrial sector had them lower from 6 percent in early July to just 0.9 percent today. That has some investors staying away from the space altogether.
JOHN DAVI, ASTORIA PORTFOLIO ADVISORS FOUNDER & CIO: I agree it`s cheap, but I think it`s cheap for a reason. When I look at a lot of the macro indicators, ISM is rolling over, OECD, lean economic indicators have rolled over. I prefer other sectors more so than industrial. So, we`re very defensively positioned at Astoria Portfolio Advisors. Until those indicators stabilize, I`d avoid industrials.
MODY: But other investors see opportunity.
DAVE NADIG, ETF.COM MANAGING DIRECTOR: I think you have to think about industrials as being the canary in the coal mine for really all of next year. It`s one of the only portions of the S&P 500 where we`re expecting positive earnings this season. The rest of the S&P is really weighed pretty heavily down.
MODY: As big manufacturers report earnings, shareholders will be listening for any commentary regarding the potential detente between the U.S. and China over trade and whether that could lift sentiment.
For NIGHTLY BUSINESS REPORT, I`m Seema Mody at the New York Stock Exchange.
HERERA: Halliburton (NYSE:HAL) sees more cost cuts coming, and that`s where we begin tonight`s “Market Focus”.
The oil field services company is looking to combat slow demand from its North American shale drilling which helped cause a bigger than expected decline in revenue. Halliburton (NYSE:HAL) did match analysts` earnings estimates. The shares rose nearly 6-1/2 percent to $19.61.
Coty is exploring options and possibly selling its beauty products brand such as Clairol, Wella and OPI in an effort to help pay down debt. Several of the brands were part of Coty`s acquisition of Procter and Gamble`s beauty unit earlier in the year. Shares of Coty rose about 13.5 percent to $11.48.
Shares of Alexion Pharmaceuticals (NASDAQ:ALXN) rose today after the FDA approved the company`s Ultomiris drug for a second rare blood disorder. The new approval will help treat patients with abnormal blood clots in their kidney blood vessels. Alexion shares rose more than 2 percent to $173.
Microsoft (NASDAQ:MSFT) and Humana (NYSE:HUM) will be teaming up in a multiyear deal. Microsoft (NASDAQ:MSFT) will serve as Humana`s preferred cloud provider and will provide artificial intelligence to the health insurer to help improve care options for the members. Microsoft (NASDAQ:MSFT) shares were up a fraction to $138.43. Humana (NYSE:HUM) shares were down a fraction to $287.15.
And after the bell, TD Ameritrade (NASDAQ:AMTD) reported better than expected results. The online broker also sees next year`s full revenue above estimates. Despite the company previously saying the elimination of trading commissions would put a dent in first quarter results. Shares initially rose in after-hours trading after closing the regular session up more than 2 percent to $37.65.
Coming up, small houses are big business for homeowners and builders.
HERERA: Here`s a look at what to watch for tomorrow.
Dow components McDonald`s, P&G, Travelers and United Technologies (NYSE:UTX) all report earnings. Existing home sales for September will show whether lower mortgage rates entice buyers. Opening statements are expected in Exxon`s climate change trial.
And that is what to watch for on Tuesday.
The world`s millionaires now own close to half of the world`s wealth. According to a new study, there are nearly 47 million millionaires with a combined worth of $158 trillion. The U.S. leads the world in total number creating 675,000 new millionaires over the past year. China added 158,000.
Well, forget she sheds and he sheds, more homeowners are building real second homes in their backyard and reaping the rewards of rental income.
Diana Olick has our story.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Lisa and Chris Puchalla recently tore down their garage and built a second home in its place.
LISA PUCHALLA, ADU OWNER: We lived in it for ten months while we renovated our main house and we loved it.
OLICK: And they love the rental income it generates even more.
CHRIS PUCHALLA, ADU OWNER: So the accessory dwelling unit, you know, sort of movement, income producing, yes. So, you know, you can live in an area that`s very nice and generate income.
OLICK: As states and local municipalities relax zoning laws, more homeowners with extra backyard space are building small auxiliary dwelling units or ADUs either for family members or to use as income properties.
That means huge growth for PrefabADU. A Bay Area builder which built and installed about 100 ADUs this year and could expand to at least 1,500 next year and possibly even 3,000.
As for pricing, the most common product at Prefab is a 288-square-foot home which goes for about $105,000 installed.
STEVE VALLEJOS, PREFABADU CEO: Inquiries are split probably 50/50 from people who are looking to address housing for family members, whether it`s adult children who are struggling to survive or it`s, you know, a senior family member who`s weighing this against the cost of doing assisted living. And then we have other people who are looking for the rental income.
OLICK: While zoning rules are changing as cities try to create more affordable housing, there are still roadblocks to greater growth in the ADU industry, especially when it comes to costs.
VALLEJOS: ADU is still really for the most part an affluent homeowner product being that you have to have cash on hand to take this on. And until we — until we really solve some of the financing issues out there in this space, we`re really not going to tap into a larger portion of this market and expand into, you know, a whole different homeowner profile.
OLICK: There is also local push back in some communities as homeowners fear an influx of renters could lower property values and change the dynamic of the neighborhood. The Puchallas were definitely sensitive to that.
L. PUCHALLA: Before we built it, we talked to all of our surrounding neighbors and sent them the plans. This is what we`re thinking of doing and we`re going to be using it for family and friends, may rent it short term and everybody was on the same page and really nice throughout the entire process.
OLICK: And after it was finished, several neighbors came by to check it out and see if it might work in their backyards.
For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Washington.
HERERA: Before we go, here`s another look at today`s final numbers on Wall Street. The Dow rose 57, the Nasdaq was up 73 and the S&P 500 added 20.
And that is NIGHTLY BUSINESS REPORT for tonight. I`m Sue Herera. Thanks for joining us. We`ll see you tomorrow.
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