ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Bill Griffeth and Sue Herera.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Brokerage blockbuster. Charles Schwab is reportedly in talks to buy TD Ameritrade (NASDAQ:AMTD), further consolidating an industry undergoing massive change.
BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Macy`s (NYSE:M) mess. Sales slip at the department store. And the retailer blames warm weather and weaker mall traffic.
HERERA: Drug discovery. How artificial intelligence is being used to drive the next medical breakthrough.
Those stories and much more tonight on NIGHTLY BUSINESS REPORT for Thursday, November 21st.
GRIFFETH: And we do bid you a good evening, everybody, and welcome.
A reported megadeal on the brokerage industry caught Wall Street off guard today. According to reports, Charles Schwab in talks to buy one of the big rivals, TD Ameritrade (NASDAQ:AMTD), which would create a massive firm with more than $5 trillion in combined assets. The move could tighten Schwab`s grip on an industry that`s already been upended by zero fee commissions, a trend that was started by Schwab itself and one that effectively killed a key source of revenue for the whole sector.
News of the potential tie-up sent shares of TD Ameritrade (NASDAQ:AMTD) up nearly 17 percent today. Schwab was even up, up 7 percent.
Mike Santoli takes a look at why these two companies may want to become one.
MIKE SANTOLI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Technology continues to drive down the cost of investing. And it reflects the push for greater scale in an investing industry dominated by low cost index funds, zero commission trading and a multitude of digital start-ups vying for the investment dollars of younger consumers.
Schwab was a pioneer of low cost brokerage from the dawn of the industry in the 1970s. And its brand has consistently been to make investing more affordable and accessible. Ameritrade, the product of numerous mergers earlier, had become a sizable competitor. Together, they would house about $5 trillion in client assets for stocks, bonds, funds, and bank accounts.
In recent months, Charles Schwab led the way to zero commissions, a move that hurt shares of Ameritrade more due its greater emphasize on trading volumes. Getting together would possible position the companies better in a low interest rate world. These brokers rely heavily on collecting interest on customer cash balances, which has been pressured by rate cuts.
The willingness of retail investors to invest through a mobile app or allow a software model to determine a portfolio allocation means leading companies must constantly upgrade their technology offerings and advertise heavily to pull in new accounts.
Brokerage startup Robinhood and automated investment advisers such as Betterment and Wealthfront have won the backing of Silicon Valley investors to capture a younger, digitally attuned cohort.
Schwab has become more of an asset gatherer and wealth manager. Joining Schwab with Ameritrade could eliminate about half the combined the company`s operating expenses, according to some analysts, which helps explain why the stock market applauded the reported deal, driving up share prices of both firms.
While mergers often reduce industry competition, in this case, a combined Schwab Ameritrade would continue to fight even larger competitors, Vanguard and Fidelity, for customer dollars and loyalties. So, in this case, the individual investor could continue to benefit from the race to make investing ever cheaper, faster and easier.
For NIGHTLY BUSINESS REPORT, I`m Mike Santoli.
HERERA: And let`s turn now to Michael Wong to talk more about what a potential deal between Charles Schwab and TD Ameritrade (NASDAQ:AMTD) would mean for the rest of the online brokerage industry. He`s an equity analyst over at Morningstar (NASDAQ:MORN).
Welcome, Michael. Nice to have you here.
MICHAEL WONG, MORNINGSTAR EQUITY ANALYST: Thanks for having me.
HERERA: What do you make of the potential deal? And does it make sense to you?
WONG: Yes, of all the potential mergers with the publicly traded online brokerages, this was probably the least likely. The market was betting likely that ETRADE would merge with the TD Ameritrade (NASDAQ:AMTD) or ETRADE would merge with Charles Schwab. And I think the nearly 70 percent pop in TD Ameritrade (NASDAQ:AMTD) and a drop in ETRADE are about proof that this was unexpected.
GRIFFETH: Yes, ETRADE was down sharply today. You might have thought it would go up in sympathy, but it had gone higher anticipating maybe a deal something like this. So, does this take ETRADE out of the story? Or do you think there are other mergers coming?
WONG: I think that ETRADE is still in play. Besides just a regular industry consolidation of them, you know, merging with let`s say a Schwab or Ameritrade, we think that they could potentially merge with a regional bank or even a wealth management firm. So, there are plenty of players out there that would find a lot of value in ETRADE retail trader base and their employee stock plan business.
HERERA: Mike Santoli, in our report outlined if indeed this deal did happen, some of the positives for the companies involved. But are there negatives if indeed this deal does happen?
WONG: There could be a little bit of a culture clash. TD Ameritrade (NASDAQ:AMTD) has been well-known for large kind of open architecture platform, whereas Charles Schwab has had a more vertically integrated platform with more of their own products on there.
And, you know, definitely a big hurdle for the merger potentially is Toronto Dominion ownership stake in TD Ameritrade (NASDAQ:AMTD). And Charles Schwab having to you think tangle that relationship between Toronto Dominion and TD Ameritrade (NASDAQ:AMTD).
GRIFFETH: If this deal happens, they end up, as we mentioned, with $5 trillion. That surpasses Fidelity with the amount. They`ve got about $2.6 trillion. Does Fidelity need to step up now or anybody else, the giants in this industry?
WONG: Yes. So, Fidelity can definitely be a player that can challenge this Charles Schwab-TD Ameritrade (NASDAQ:AMTD) merger. That said, I think that there are many other players that may be considered a little bit less traditional, like Bank of America (NYSE:BAC) Merrill Lynch with the Merrill Edge platform. JPMorgan (NYSE:JPM) with the You Invest platform or even Robinhood.
So, there are still many players out there that can go head to head with a potentially combined Charles Schwab-TD Ameritrade (NASDAQ:AMTD).
HERERA: Just very quickly, do you see any regulatory hurdles at all?
WONG: Definitely, you could see some anti-competition hurdles coming up. They are some of the most well-known online brokerages. They do have a really good hold on the investment adviser space for IRAs. So, there is definitely going to be some industry concentration that I think regulators will be looking at.
HERERA: Michael Wong with Morningstar (NASDAQ:MORN) — thank you, Michael. Appreciate it.
And a bit later in our program, we`ll take a look at how such a merger could potentially impact those who use discount brokers to invest.
GRIFFETH: To Wall Street now. The Dow and S&P posted declines for a third day in a row, their longest string of losses in months. New reports on trade negotiations between the U.S. and China continue to pressure stocks. We`ll have more on that in a moment.
But, first, the closing numbers for this day with the industrial average down 54 points, still below 28,000. Nasdaq was down 20 today. The S&P was down nearly 5.
HERERA: And to the economy and the housing market. Sales of previously owned homes rose 1.9 percent last month. It`s the latest report to show the impact of lower mortgage rates.
The report shows that the median sales price of a home was up more than 6 percent to a little bit more than $270,000. And this reflects a trend we`ve been telling you about, that the supply of homes is falling well short of demand and that is driving up prices.
GRIFFETH: And to retail now. It`s been a big week for earnings as you know. And today, it was Macy`s (NYSE:M) turn to report. The department store reported better than expected earnings, which is a good thing, of course. But its sales week weaker than expected. And that sent the stock down more than 2 percent today.
Courtney Reagan has details.
COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: The magic wasn`t with Macy`s (NYSE:M) in the third quarter. Sales fell worse than expected, the first decline in two years which led to the department store to slash its full year outlook to reflect this quarter`s weakness. While digital sales grew, quarter also marked the end of 40 straight quarters of double digit online growth.
Macy`s blamed the slide on several factors, a warmer fall, which made it harder to sell cold weather items, like coats and boots, lower spending by international tourists, weaker than anticipated performance in, quote, lower tier malls. And there were brief issues with the Website as it made changes ahead of the holiday season.
CEO Jeff Gennette told me the U.S. consumer is, quote, healthy. They have set the bar high for all retailers. We have to earn their trust and their business every day. And added, quote, we know Macy`s (NYSE:M) fits into the consumer consideration set.
But analysts aren`t sure.
OLIVER CHEN, COWEN & CO.: What we worry about is really women`s apparel. That`s been a tough category. Also, it`s a highly promotional quarter with other retailers really competing for that dollar.
RANDY KONIK, JEFFERIES RETAIL ANALYST: Consumer wants value. They want brands. And they`re going to places like TJX. They`re going to Target (NYSE:TGT). They`re going to other places other than Macy`s (NYSE:M).
REAGAN: One thing Macy`s (NYSE:M) did differently than competitor Kohl`s (NYSE:KSS) this quarter decided not to discount more than planned to chase sales which did help protect margins and led in part to stronger earnings.
CHEN: There are bigger picture issues here, specifically the future of the mall. As you know, mobile is the new mall. As you know, the female shoppers is so different now with the real Instagrammable generation that`s interested in speed and trend and value.
REAGAN: On its conference call, chief financial officer Paula Price says Macy`s expects sales will improve in the holiday quarter and the department store remains, quote, confident in its holiday plans.
There is a lot riding on next week for Macy`s (NYSE:M), the most important several days of the year for the retailer. Its annual Thanksgiving parade is a huge marketing event and then hours later, its stores open for Black Friday and the holiday season gets under way.
For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan.
HERERA: It is time to take a look at some of today`s “Upgrades and Downgrades”.
AMD was downgraded to market perform from outperform at the Northland Capital. The analyst expects some profit taking in 2020. The price target is $36. The stock fell 3.5 percent to $39.52. But that stock has more than doubled so far this year, and that makes it the best performer in the S&P 500.
Carnival (NYSE:CCL) Cruise Line was downgraded to hold from buy at SunTrust Robinson Humphrey. The analyst cites recent analysis of its bookings and price cuts. The price target is $47. The shares fell a fraction to $43.02.
GRIFFETH: RH, formerly known as Restoration Hardware, was downgraded to hold form buy at Luke Capital Markets. The analyst cited that stock`s valuation. It`s had a very big run this year. Price target now, $190. The stock continued higher, though, up more than 2 percent now to $195.08.
And Duke Energy (NYSE:DUK) was upgraded to overweight from equal weight at Barclays. The analyst cited the stock`s valuation following a nearly 10 percent decline over the past month. Price target now $98. The stock was down a fraction to $86.66.
HERERA: Still ahead, the next major medical breakthrough and how to pay for it.
HERERA: In Washington, House Speaker Nancy Pelosi cast doubt on the possibility of passing the new NAFTA trade deal, known as the USMCA. She had previously characterized an agreement as imminent. But today, she said she is not sure there is enough time to finish before the end of year timeline many hoped for.
GRIFFETH: Well, it`s also unclear whether the U.S. and China will be able to finish phase one of their agreement by year`s end and whether a reported invitation to meet face-to-face will be accepted.
Here is Eunice Yoon with more.
EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Commerce Ministry said today that China wants a phase one trade deal but one where the two sides work out their core issues equals with mutual respect. “The Wall Street Journal” is reporting that China`s chief negotiator Liu He has invited his U.S. counterparts to Beijing for another round of face-to-face talks possibly before Thanksgiving but adds that the U.S. team isn`t keen to come unless they have firm commitments from China on issues like agricultural purchases.
Meanwhile, China`s top diplomat is warning that the relationship between the U.S. and China could suffer because of the passing of the Hong Kong bill in Congress. The foreign ministry said the U.S. should stop before it`s too late and a state paper, “The People`s Daily”, says that China could take revenge if the bill turns into law.
For NIGHTLY BUSINESS REPORT, I`m Eunice Yoon, in Beijing.
HERERA: The Senate today passed a short-term spending bill that will keep the government open. The measure funds the government through December 20th. The House already passed the bill earlier in the week. The legislation gives lawmakers time to work through some issues. Like the funding level for the White House`s border wall. And tonight, the president signed that bill.
GRIFFETH: A new report concludes what we have all suspected anyway, that health care premiums and deductibles have outstripped wage growth over the past decade. The report was prepared by the Commonwealth Found. It found that in 42 states last year, employer premium contributions and deductibles exceeded at least 10 percent of the average income. That was up from just seven states in 2008.
HERERA: The future of medicine was being discussed today on the campus of MIT, a place that many consider to be the heart of biotech. Doctors, investors and executives all converged for the first ever stat summit to find ways to push the limits of what`s possible in health care.
Our Meg Tirrell was there.
MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT: Artificial intelligence was a key focus. Daphne Koller, CEO of AI startup Insitro, said the technology can enable things humans can`t do.
DAPHNE KOLLER, INSITRO CEO: It turns out that computers are much better at seeing the subtle signals in cells than people are, and they`re also a lot less bias. They don`t come in with a preconception of what makes for good or bad intervention or what makes for sick or healthy cell. Therefore, they find patterns people will never see.
TIRRELL: Her company is working with drug giant Gilead to find new medicines for the liver disease NASH. Industry experts also weighed at the conference on new approaches to cancer, Alzheimer`s diseases and depression.
STEVE HARE, SAGE CEO: We`ve already completed two pivotal programs. One in major depressive disorder and another in post-partum depression. Both of those showed a very rapid response and durability of response even though we only used the drug for two weeks.
TIRRELL: But as the industry is pursuing its highest science yet, it`s also grappling with the existential problem, its reputation.
Nick Leschly, CEO of Bluebird Bio, said the industry`s core standing with the public is partly its own fault, as some companies, primarily makers of older biologic drugs that draw billions of dollars a year reaped outsize profits.
NICK LESCHLY, BLUEBIRD BIO CEO: We need to make sure that the reward overtime actually is not egregious, right? And that`s what we`re trying to make sure the out front industry is doing better at, and it`s not. There are some behaviors that still go in that our industry that are simply not good enough.
TIRRELL: His company, which is still unprofitable, just introduced a new one-time gene therapy for the rare blue disease beta-thalassemia. Its price, $1.8 million. But he argues that price makes sense for a one-time treatment for a very rare disease.
LESCHLY: If we have a whole bunch of cures that come out through gene therapy and other modalities, as a human being, that`s exactly where we want to go. We have to figure out how to pay for it. But don`t forget, all of these diseases cost an amazing amount of assistance. So, if you zoom out one notch and say, paying a certain amount for a potential cure and then the lifetime savings, the pharmacoeconomics are sort of what should you be willing to pay for that? Actually, on each of these medicines, it`s tremendous.
TIRRELL: Meanwhile, Washington is at work on drug pricing as well. Industry CEOs set a plan from House Speaker Nancy Pelosi to cap drug prices would mean Wall Street interest in funding new medicines would slow.
HARE: The vast majority of work to develop a drugs comes from private resources. I think if we you know, it`s highly risky. Of course, you`ll have the chilling effect on investment.
TIRRELL: To avoid more regulation, the industry says it needs to be better at self-policing.
For NIGHTLY BUSINESS REPORT, I`m Meg Tirrell in Cambridge, Massachusetts.
GRIFFETH: Xerox (NYSE:XRX) is not taking HP`s rejection lightly, and that`s where we begin tonight`s “Market Focus”.
We reported earlier in the week that HP had turned down Xerox`s acquisition bid, saying it undervalued the company. Well, now, Xerox (NYSE:XRX) has sent a letter to HP`s board, threatening to take its $33 billion bid directly to HP`s shareholders if the printer maker does not reconsider by Monday. Xerox (NYSE:XRX) rose about 1.5 percent to $38.69, while HP was down a fraction to $19.65.
Will Tiffany (NYSE:TIF) say yes to LVMH`s new proposal? The French luxury company that owns Louis Vuitton and Christian Dior reportedly has upped its bid to take over the iconic luxury jeweler. “Reuters” says the new offer is 8 percent higher. Tiffany (NYSE:TIF) shares rose more than 2.5 percent to $126.50.
GRIFFETH: And ExxonMobil (NYSE:XOM) is reportedly increasing the size of its asset sales to $25 billion. The plan focuses on major oil and gas projects it has in Europe, Asia and Africa. Reuters says that “Exxon” is preparing sales in at least 11 countries in order to improve its cash flow. Shares rose more than 2 percent today to $69.67.
HERERA: After the bell, the Gap (NYSE:GPS) topped Wall Street estimates but the clothing retailer did see a drop in comparable store sales and global demand. The gap also said it is making progress with its separation plans from Old Navy. Gap (NYSE:GPS) shares initially rose in after hours trading after closing the regular session down a fraction to $16.22.
Also after the bell, Nordstrom (NYSE:JWN) posted better than expected earnings and revenue was in line with estimates. The retailer saw a decline in department store sales but growth in online revenue. Nordstrom (NYSE:JWN) also raised its guidance. Shares initially rose following the news. They close the regular session up about 1 percent to $34.32.
William Sonoma also reported after the bell. The parent company of Pottery Barn and West Elm had sales come in slightly above estimates, while profits were in line with forecasts. The retailer saw increase in same store sales and raised the lower end of its full-carrier outlook. Shares initially fell in after hours trading after closing the regular session up a fraction to $68.75.
And finally, Ross Stores (NASDAQ:ROST) topped analysts` expectations after the bell. The discount retailer had a spike in same store sales and raised its full year outlook. Shares initially rose after-hours. They close the regular session up more than 1 percent to $111.79.
GRIFFETH: Now, back to the stop story tonight, that Charles Schwab is reportedly in talks to buy rival TD Ameritrade (NASDAQ:AMTD) in a deal that would create a massive brokerage and asset management company. So, what would this deal mean to investors who have accounts with either of the companies? And what happens when your broker is gobbled up by another company?
We join now Reed Farasa. He`s a financial planner with Highland Financial Advisers to get some answers here.
Welcome back. Good to see you again.
REED FRAASA, HIGHLAND FINANCIAL ADVISORS FINANCIAL PLANNER: Good to see you, Bill, Sue. Thanks for having me.
HERERA: Nice to see you.
GRIFFETH: Now, again, this deal hasn`t happened.
GRIFFETH: But even if it were to be announced let`s say tomorrow, customers wouldn`t see changes for quite a while, right?
FRAASA: That`s right. It takes quite a while. Full disclosure, we`re an advisory firm. We work with both of them.
FRAASA: So, it affects the institutional and retail side. So, yes, this is probably likely to happen. And we think it would be a very strong fit for the two companies. They both have strengths in both areas.
So, for the average investor, what`s probably going to happen is similar to what we saw happen about two years ago when TD Ameritrade (NASDAQ:AMTD) bought Scottrade.
FRAASA: So, the lawyers get together, they get through regulations and legalities, and eventually they close a deal and then you have the back offices working on technology integration.
HERERA: So, if I have an account with either one of those two firms, what differences might I see? What changes might I see?
FRAASA: So, Schwab we believe is buying TD Ameritrade (NASDAQ:AMTD) primarily for their technology and assets. Zero commissions, they have to find other ways to make money.
FRAASA: Basically, these companies make money off, you know, cash accounts. So it`s in their best interests to make the retail and institutional customers very happy through the process. As an — as a retail investor, you probably deal with local branches for your accounts. TD Ameritrade (NASDAQ:AMTD) when they bought Scottrade, they have increased by about three times the number of offices. They have one of the largest networks of offices now.
So the average person is probably not going to see too much change until after that point when all the technology — because you have a lot of data that has to be integrated, tax, transactions, it all has to be integrated in the back office first and eventually they will throw a switch and whoever is dominant technology player, you will just log in one morning and you`ll have a new log-in.
GRIFFETH: Very quickly, TD Ameritrade (NASDAQ:AMTD) tends to use products that are made by other companies.
GRIFFETH: Schwab has its own products, its own mutual funds, its own ETFs.
GRIFFETH: Who wins in that one, do you think.
FRAASA: Well, that goes back to how they make money. So, you know, they both took a big hit on revenue when they stopped charging on transaction fees. For mutual fund trees you still pay. But also make money on spreads on bonds. The cash is where they make most of their money.
So, when they consolidate, they`re going to have probably about — Schwab will have a 40 percent increase in assets. If interest rates go up again, they have a big windfall. So, they`re in a great position. The great thing with investors is, with that additional revenue, it`s likely free trades are going to remain.
GRIFFETH: Well, we certainly hope that`s the case. That`s for sure.
GRIFFETH: Reed, always good to see you. Thank you.
FRAASA: Thank you very much.
GRIFFETH: Reed Fraasa with Highland Financial Advisers.
And coming up, a missed opportunity, a federal initiative meant to help poor neighborhoods may actually be benefitting the rich.
HERERA: Here`s a look at to what watch for tomorrow. President Trump is scheduled to meet with the vaping industry as he considers a ban on flavored e-cigarettes. On the economic calendar, we`ll get fresh reads on manufacturing and consumer sentiment, and we get one more retail earnings report, this one from Foot Locker. That`s what to watch for on Friday.
GRIFFETH: In the meantime, Facebook (NASDAQ:FB) is reportedly considering making changes to its political ad policy. According to the “Wall Street Journal,” some of the changes would include preventing campaigns from targeting a small number of people, the goal is to curb the spread of misinformation.
HERERA: WeWork is laying off 2,400 employees. The beleaguered office sharing start-up is working to cut costs and create a more efficient organization. The job reductions represent about 19 percent of the company`s total workforce and those job cuts have been widely expected.
GRIFFETH: Finally tonight, remember opportunity zones. They were billed as a way to redevelop low income neighborhoods around the country. The idea was received and — received bipartisan support. But now, some are calling the zones a missed opportunity.
Ylan Mui explains.
YLAN MUI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Opportunity zones were billed as a bipartisan way to help poor neighborhoods attract billions of dollars in new investments. And Senator Cory Booker told CNBC this summer that he was onboard.
SEN. CORY BOOKER (D-NJ), PRESIDENTIAL CANDIDATE: We`ve got to make sure that this economy is working for the ideals that we taught. That`s why I passed that legislation with Tim Scott across the aisle for opportunity zones.
MUI: So were several of his fellow presidential candidates. Mayor Pete Buttigieg championed the program as a way to drive inclusive growth in South Bend, Indiana. Entrepreneur Andrew Yang was part of the think tank coming up with the idea.
But now, the political winds are shifting. What was once only the bipartisan provisions of tax law has come under attack as a handout for the wealthy.
Take this opportunity zone investment fund founded by Anthony Scaramucci. In this presentation for potential investors, the first project is in a trendy neighborhood in New Orleans. The New Virgin Hotel is an experiencing lifestyle property with a premium room product. The minimum investment, $100,000.
SEN. RON WYDEN (D), OREGON: We`ve got to have some limits on the type of investments.
MUI: Investors get to defer taxes on any capital gains they put into an opportunity zone. They also become eligible to discount those gains by up to 15 percent. And any money they make on the opportunity zone investments, it`s tax free.
STEVE GLICKMAN, DEVELOP LLC CEO: The pool of unrealized capital gains, which is the source of capital for investment opportunity zones, is about $6 trillion. You really only need 1 percent or less of the capital to have a program that creates a major new marketplace.
MUI: But that`s a major new problem for another presidential candidate, Bernie Sanders. He tweeted: We`re going to end in tax scam and invest in working class communities that have been fleeced.
As for Booker, he is now sounding the alarm, writing a letter to the Treasury Department, warning that reports of abuse would be a perverse violation of public trust.
For NIGHTLY BUSINESS REPORT, I`m Ylan Mui in Washington.
HERERA: And that is NIGHTLY BUSINESS REPORT for tonight. I`m Sue Herera. Thanks for joining us.
GRIFFETH: I`m Bill Griffeth. Have a great evening. See you tomorrow.
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