Transcript: Nightly Business Report – October 12, 2016

NBR-ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Stumpf out. Late news tonight, Wells Fargo’s CEO retires effective immediately, in the wake of that big fake account scandal.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Soon-ish. That’s when some Fed policymakers think interest should rise. But today, we learned about the depth of the divide within the nation’s central bank.

MATHISEN: Aging and innovation. Older America are tech-savvy, have unique needs and disposable incomes to boot, and startups are taking notice.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, October the 12th.

Good evening, everyone. A big story develops late today. Wells Fargo’s embattled CEO, John Stumpf, is retiring, stepping down as chairman and CEO, the move effective immediately.

Taking over the top job at the big bank is current Wells Fargo president, Tim Sloan. The big shakeup at one of the nation’s biggest banks follows the high-profile fake accounts scandal, where the bank is alleged to have opened as many as 2 million bank and credit card accounts that may not have been authorized by customers.

Wells Fargo paid a $185 million settlement to address the charges, but has since faced public outrage, and an angry Congress. Shares rose in after-hours trading on the news.

HERERA: Dominic Chu is following the Wells Fargo story for us this evening.

So, Dom, good to see you. How much of a surprise was this announcement?

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT: This announcement may have come as a surprise to some people, but given what’s been happening with Stumpf, with chief executive John Stumpf and appearance he’s made on Capitol Hill, the grilling, the questions he has taken over these practices that have perhaps showed some of the fraudulent type activities that some of their bankers had been a part of, allegedly, in this whole process. It doesn’t come as a surprise to very many with regard to whether or not somebody had to go, and in this case here, it was the person really at the top, the chairman and CEO, John Stumpf.

And, of course, guys, this is something where he is not getting any kind of a golden parachute package, he’s not getting a severance package. He’ll collect his retirement benefits from the company.

But still, Tyler, a very interesting development here —

MATHISEN: That was going to be my question. This has cost him his job, will it cost him money and will it calm the outrage?

CHU: Again, it’s already cost him some money. They have clawed back certain parts of his compensation, total compensation. They made a point, a spokesperson at Wells Fargo, to say that John Stumpf will not be the recipient of any golden parachutes, also that they’re going to be normal retirement benefits that any employee or executive there would be entitled to. There is going to be about a six-month lag before he can really capitalize on some of those retirement benefits. But that’s a normal waiting period for a lot of people who go through this retirement process.

And that’s the reason why, perhaps, a lot of people say this is maybe the best outcome, if you want to say that, for both the company and for John Stumpf. It’s been a smooth transition. There was not an oust type situation. It was more — it appears as though through the statements they kind of agreed to this.

And in the statements, guys, they both said the new nonexecutive chairman, this guy, Steven Sanger, as well as outgoing chairman and CEO, John Stumpf, both said they believe that new leadership is required at this time, given where the company stands.

HERERA: What do we know about his replacement? He’s from inside the company. And there were those calling for someone from outside the company. In other words, a real change in leadership and change in culture, perhaps.

CHU: Sloan — Tim Sloan is going to be the new CEO. He is a 29-year veteran. He led basically every major banking unit at Wells Fargo. There are those who would say that he is probably the best person to take over as the CEO of this particular company, because he knows the operations there, the deepest. He’s been the head of pretty much every single major banking unit there, and for that reason, perhaps some analysts will say this is perhaps a good, good appointment to that CEO level, guys.

MATHISEN: Dominic, thank you very much. Dominic Chu, reporting.

HERERA: A peek behind the curtain. Investors got a peek behind the Fed’s closed doors today when the Central Bank released minutes of its meeting last month, consider crucial not only to the U.S. economy, but to the global one, as well. Central bank policymakers laid the ground work to raise the short term interest rates relatively soon.

But the point of contention has to do with timing. Some want to hike rates sooner rather than later. Others want to wait. And as Hampton Pearson reports, it reflects the deepening divide within the world’s most powerful central bank.

(BEGIN VIDEOTAPE)

HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Minutes from the September Federal Reserve meeting showed the decision not to raise interest rates was a close call, but a majority argued for a delay, citing inflation well below the Fed’s 2 percent target with few signs of wage pressure and slack in the labor market. Proceeding cautiously, the majority argued, could promote further labor improvement.

LINDSEY PIEGZA, STIFEL CHIEF ECONOMIST: Really the doves have the argument with the data behind them — slow growth, nonexistent inflation, the consumer under pressure with declining income, negative business investment.

PEARSON: But the minutes showed deep divisions. The centers warn waiting too long could pose risk to economic expansion, tighten labor markets and damage the Fed’s credibility.

DANIELLE DIMARTINO BOOTH, FORMER DALLAS FED ADVISOR: They don’t have any bullets left in their chamber. And I think it’s as simple as that. I think they see that a recession coming sometime the next 12 to 18 months, and they don’t know that unconventional monetary policy is going to be the way to combat that recession.

PEARSON: The September decision produced three rare dissents. Regional bank President Esther George of Kansas City, Loretta Mester from Cleveland and Eric Rosengren of Boston all wanted the Fed to raise rates at that September meeting.

Fed watchers believe the Central Bank will wait until its last meeting of the year in December before raising rates. The next FOMC meeting in early November comes just one week before the presidential election.

For NIGHTLY BUSINESS REPORT, I’m Hampton Pearson in Washington.

(END VIDEOTAPE)

MATHISEN: The president of the New York Fed says the American economy is on track to expand at a moderate pace for at least five years. Speaking at the business council of New York state, Dudley said the best way to do this is to — use gentle interest rate hikes

(BEGIN VIDEO CLIP)

BILL DUDLEY, FEDERAL RESERVE BANK OF NY VICE CHAIRMAN: I think we’re at a point where the economic expansion has plenty of room to run. Inflation is a little bit lower target rather than above our target. So, I think we can be quite gentle as we go, in terms of gradually removing monetary policy accommodation. I think this economic expansion can last a good while longer.

(END VIDEO CLIP)

MATHISEN: Mr. Dudley also said there is still slack in the labor market, and that is one of the reasons why the central bank has been patient, some would say too patient, in raising interest rates.

HERERA: The number of job openings hit an eight-month low in August that. That decline can be largely attributed to a drop in openings for professional and business service positions. The number of people who quit their jobs remain mostly unchanged. But this latest report from the Labor Department does add to recent evidence that the pace of hiring may be slowing just a bit.

MATHISEN: On Wall Street, stocks struggled for direction, most of the day, and closed mixed after the release of the Fed minutes. Utilities and real estate, best performing sectors. When all is said and done, the Dow Jones Industrial Average rose 15 points to 18,144. NASDAQ lost 7. The S&P 500 added 2.

HERERA: From Moscow today, an epic shocker. Russian President Vladimir Putin denied that his government was behind the hacking of the Democratic Party’s e-mails. Speaking at a business forum, Putin said, “Trying to influence the American election is not in Russia’s interest.”

Geoff Cutmore has more tonight from the Russian capital.

(BEGIN VIDEOTAPE)

GEOFF CUTMORE, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is the first time the Russian president has seriously addressed allegations that Moscow has been interfering in the U.S. presidential election process. He was here in Moscow, attending a financial forum. And I took the opportunity to ask him directly about allegations that he had been involved in state-sponsored hacking of e-mails in the United States — a claim he categorically denied.

VLADIMIR PUTIN, RUSSIAN PRESIDENT (through translator): What we are observing, certain hackers have released certain information about how unseemingly Mrs. Clinton’s headquarters have been behaving during the election campaign. They have been supporting one party candidate at the expense of another. And then this hysteria started, that this was done in the interests of Russia. There is nothing there that is in Russia’s interest.

CUTMORE: The president talking about how he felt Russia had been dragged into the U.S. election by both Hillary Clinton and Donald Trump as a way of trying to bolster support in the United States, and he said it wasn’t appropriate for either candidate do have done that.

He also made the point he is finding it increasingly difficult to have any sort of dialogue with the current administration. Given Hillary Clinton’s position in the Obama government, it looks as though post the election, if Hillary Clinton does indeed become president, it is going to be increasingly difficult to unwind the tense relationship that currently exists between Moscow and Washington.

This is Geoff Cutmore for NIGHTLY BUSIENSS REPORT, in Moscow.

(END VIDEOTAPE)

MATHISEN: Well, Pennsylvania is divided, and the battle is on for its 20 electoral votes is heating up. While Hillary as an eight-point lead in most recent polls in the state, Donald Trump is stealing support in what used to be Democratic country, coal country — those coal-mining counties out west.

Contessa Brewer reports tonight from Waynesburg, Pennsylvania.

(BEGIN VIDEOTAPE)

CONTESSA BREWER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Jim Popielarcheck is passionate about his ’54 Chevy and about coal mining. Four generations of coal miners in his family.

JIM POPIELARCHECK, COAL MINER: Why would you shut down a coal mine that makes so much money, in this area?

BREWER: Emerald Mine closed last year, laying off close to 300 workers. It’s a trend nationwide.

In the last five years, 30,000 coal jobs gone. The percentage of electricity generated by coal, down to 31 percent. A 14 percent drop.

At the debate this week, Trump used Hillary’s own words against her.

DONALD TRUMP (R), PRESIDENTIAL CANDIDATE: Hillary Clinton wants to put all the miners out of business.

BREWER: His message is simple.

TRUMP: Coal, clean coal, clean coal. We’re bringing it back. Big league.

POPIELARCHECK: I’m a Democrat, but I’m not voting for Hillary Clinton.

BREWER: Why?

POPIELARCHECK: Because she came right out and said, she’s going to shut us down. Trump said he’s going to come and help the coal miners.

BREWER: Clinton supporters say she and President Obama deserve the blame.

RICH FITZGERALD, ALLEGHENY COUNTY EXEC: It’s been the switch from power plants going from coal to natural gas that has cut into the industry as much as anything.

BREWER: Clinton may not need the Pennsylvania coal counties. In the big cities, she is seeing a surge of support.

CHRISTIAN BROOKHOUSE, STUDENT: She not only has very good plans for revitalizing our energy sector, but a way to transition from the coal heavy production in western Pennsylvania, to new renewable energy sources.

BREWER: Hillary Clinton’s proposing a $30 billion plan for job retraining and other benefits for coal miners. She’s working with Pennsylvania Senator Bob Casey on a big to support miners with black lung disease. All that, yet the miners are not persuaded.

BRUCE E. BLACK, RETIRED COAL MINER: You’re talking political bull crap again.

BREWER: Retired coal miner, Bruce E. Black Sr., feels burned by political promises. His buddies are laid-off coal workers who now work at peer counselors at the local career center, offering other out-of-work miners job retraining and replacement. But those new jobs pay just a fraction of what coal mining did.

DAVE BAER, CAREERLINK PEER COUNSELOR: They feel that there should be more jobs out there that pay good money. There is not around this area. We have guys that got their 401(k) already to stay afloat.

BREWER: Dave Serock got an offer to return to coal mining.

The fact that you decided to give up $70,000 of income when you got called back to stay here at this job, is that an indication you think a job in coal mining is a gamble?

DAVE SEROCK, CAREERLINK PEER COUNSELOR: I do. I mean, for some people, you have no option. It’s a big gamble, not only for we don’t know how long it’s going to stay or how long it’s going to last. You don’t know what’s going to happen after this election.

BREWER: And at the end of the day, for this grandpa with coal mining in his blood, a vote for trump means a vote for the future of his grandson.

For NIGHTLY BUSINESS REPORT, Contessa Brewer, Waynesburg, Pennsylvania.

(END VIDEOTAPE)

HERERA: Still ahead, why the transportation sector may be in for a bumpy ride this earning season.

(MUSIC)

MATHISEN: Samsung sees its profit forecast go up in smoke, cutting it by a third. The company says its preliminary third quarter guidance reflects the financial impact of its recall of its Galaxy Note 7 smartphone. The new guidance also includes the increased likelihood that customer will seek a refund for the full price of the device and not just an exchange.

Yesterday, Samsung said it would halt production entirely of that particular smartphone.

HERERA: CSX reported better than expected earnings, helped by cost cuts. But the nation’s number three railroad operator was hit by a decline in revenue and volume. CSX earned 48 cents a share, that was 3 cents better than estimates. Revenue fell 8 percent to $2.7 billion. And the CEO says he’s always looking for ways to save in order to offset lower commodity prices.

(BEGIN VIDEO CLIP)

MICHAEL WARD, CSX CHAIRMAN & CEO: Restructure some of the coal fields. We had to close down some operations unfortunately, especially in the coal area. We have a number of our dedicated employees who are furloughed. But what we’re doing, we’re running longer trains, consolidating trains and we’re turning over every stone everywhere where we can find any possible savings.

(END VIDEO CLIP)

HERERA: As for the stock, it rose initially in after-hours trading.

MATHISEN: Earning weakness is widely expected across the transportation sector this quarter.

And as Morgan Brennan explains in our sector spotlight tonight, investors are bracing for a potentially very bumpy ride.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Earnings weakness expected to again play out for much of the transportation sector, as a widespread slump in industrial production weighs on freight demand.

Analysts say the focus will be on volumes and pricing.

DONALD BROUGHTON, AVONDALE PARTNERS: For both the trucking and railroads, we’re seeing lower volume and lower pricing and it’s really simple. When you’re — selling less and getting paid less for what you are selling, it’s going to put pressure on your earnings, it’s going to put pressure on your margins.

BRENNAN: Rail stocks, including CSX, Union Pacific, Norfolk Southern and Kansas City Southern have all jumped by double digit percentages this year as investors bet the worst volume declines have already happened. But results will be telling.

Avondale Partners’ Donald Broughton warns pricing power for the rails could be weaker than currently believed, and that could result in significant contraction in those stocks’ valuation.

It’s been a rough ride for trucking this year, as well. Too many trucks coupled with lackluster freight growth have pressured rates, with earnings for truckload carriers like Warner Enterprises and Knight Transportation expected to plunge.

But some bright spots do exist.

BROUGHTON: We continue to be very, very positive on shares of FedEx, UPS, continue to be positive on freight forwarders such as CH Robinson, Echo, XPO, Global Logistics, for the basic reason they participate in, A, e-commerce, which is growing. Still growing gangbusters. And B, they participate in the freight markets without using assets. So, they’re not victim of lower asset utilization. In fact, their margins get better in times like these.

BRENNAN: As companies report, other topics sure to arise including layoffs which have already been taking place at many rail and truck carriers. The bankruptcy of container ship line Hanjin, which continues to roil the global supply chain, and early commentary about the impact of Hurricane Andrew.

Coming into today’s results, CSX had already disclosed significant flooding, washouts and power disruptions on parts of its network from that storm.

For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan.

(END VIDEOTAPE)

HERERA: Stanley Black & Decker adds to its tool box. That’s where we begin tonight’s “Market Focus”.

The tool and storage company will buy Newell Brands Tools Division for nearly $2 billion. Stanley will add power tool brands Irwin and Lenox to its portfolio. Newell, which also owns Yankee Candle and Sharpie markers, will use the money to trim some debt.

Stanley Black & Decker up nearly 3 percent. Shares of Newell Brands rose 2 percent.

Humana lowered its rating on some of the health insurer’s Medicare plans. The company said the reduced rating on plans that enroll more than 1 million people does not mirror how businesses actually performing. And as a result, Humana plans to ask the government to reassess its rating. Separately, the company also raised its quarterly and yearly outlook. Shares were off 5 percent to $168.44.

Telecom equipment company, Ericsson, said third quarter profit would be almost entirely wiped out. Ericsson said a big drop in its core mobile networking business, as well as restructuring fees, were to blame. The company also said it may implement add cost cuts. Shares plunged 20 percent to $5.55.

MATHISEN: Sprint said it will sell and then leaseback some of its wireless airways to raise $3.5 billion. The company values its wireless spectrum at more than $16 billion. Sprint made similar moves back in November and April. Shares unchanged on the day at $6.78.

Cyber security company Fortinet shares got whacked after it cut earnings in sales forecast for the quarter. Late yesterday, the company said the outlook was a result of customer spending more time making purchasing decisions. Fortinet is expected to report results October 27th. Shares were off 10 percent to $30.66.

HERERA: Amazon announced today a streaming on-demand music service that cracks the standard $10 a month barrier. Analysts are now adjusting their price targets on the company to over $1,000 a share.

And Youssef Squali is one of those analysts. He is global head of Internet and media research at Cantor Fitzgerald.

Youssef, nice to have you here. Welcome.

YOUSSEF SQUALI, CANTOR FITZGERALD: Thanks for having me.

HERERA: One of the reasons you made the move is you say that e-commerce is reaching a tipping point and Amazon is the biggest beneficiary. What do you mean by a tipping point?

SQUALI: Right. Exactly. So, if you look at growth rates in e-commerce over the last nine months relative to, say, the first nine months of 2015, what you’ll see is the year on year growth actually accelerated to the mid-teens, relative to high single digits in the prior year.

So, that’s a very, very substantial move, and because Amazon is by far the largest player in the U.S., maybe not in China, but certainly in the U.S., and across Europe, we think Amazon is by far the best position to grow, because of that acceleration. And, in fact, if you look at even Amazon’s results in the last three quarters, we have seen a hint of accelerating top-line growth for the retail business, even putting aside the AWS business, which everybody is excited about.

MATHISEN: How profitable are they? Do we really know?

SQUALI: Well, we have a better idea today than we had maybe a year ago, before they broke out EWS. We know that AWS, that’s the cloud business, is generating 25 to 30 percent incremental margin. That’s very good that’s even better than what most people in the street thought. That’s partly why the stock rallied on that news.

But if you strip that out and just look at the retail business, last quarter, the U.S. retail business was running maybe 5, 6 percent operating margin or incremental margin. The international business was still break-even.

But remember, international is still very early. They just doubled down in India, spending $2 billion in the next couple years. So, think of AWS as the most profitable retail, U.S. being decently profitable. And with scale, should get a lot more profitable and international is very much in investment mode right now.

HERERA: On that note, Youssef nice to have you here.

SQUALI: Thank you.

HERERA: Youssef Squali with Cantor Fitzgerald.

MATHISEN: Coming up, when startups and seniors converge, it creates a very lucrative market.

(MUSIC)

HERERA: Toyota is recalling 340,000 redesign Prius sedans worldwide. Nearly 100,000 in the U.S. It comes after reports of a potentially deadly parking brake defect. The model years in question are 2016 and 2017. Toyota is currently looking into reports of crashes, injuries and deaths.

MATHISEN: While you may not think of baby boomers or seniors as consumers of cutting edge technology, but some tech companies disagree. With a number of seniors are expected to spike over the next decade, the 50-plus crowd, they’re young, is a hugely powerful economic force.

And as Aditi Roy reports, that company is working to keep seniors connected.

(BEGIN VIDEOTAPE)

MAXINE DUNCAN, SENIOR CITIZEN: How is your day going?

ADITI ROY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Maxine Duncan’s granddaughter is far away. But the two are virtually face to face —

UNIDENTIFIED FEMALE: I talked to Rachel and Melanie, and they’re coming down for thanksgiving.

Maxine is talking to her granddaughter through this robot, created by a startup called OhmniLabs.

DUNCAN: It’s really fun. It’s fun to do. Because you can see her, see her facial expressions. And she’s a wonderful granddaughter and so I enjoy seeing her.

ROY: The company is partnering with home care assistance, one of the largest providers of in-home care to bring robots into the homes of seniors, and it’s launching the partnership in the bay area.

The robots are controlled remotely and can be accessed any time by family members or caregivers to chat with their older loved ones or check in on them.

THUC VU, OHMNILABS CEO: They can take a walk together. They go cook together. They can watch TV together. So, these are the things that we want to enable.

ROY: It’s part of a pilot program Ohmnilabs hopes will eventually expand across the country. The company says seniors will have to pay an out-of-pocket monthly subscription fee for the robots, but hasn’t disclosed the amount.

They’re not the only tech company targeting the 50-plus demographic.

At the Aging 2.0 Conference in San Francisco this week, startups and seniors are converging to find innovative solutions to problems facing older Americans. It’s a lucrative proposition with the AARP estimating the 50-plus crowd accounts for more than $7.5 trillion in annual economic activity in the U.S.

Tech companies, small and large, are taking note like Google. Jennifer Haroon, an executive with the self-driving car program, is speaking at the conference about the way seniors could stand to gain from autonomous cars.

JENNIFER HAROON, GOOGLE HEAD OF BUSINESS DEVELOPMENT: It turns out here in the U.S., about 4 out of 5 seniors live in more suburban, rural communities, many unfortunately don’t have public transportation. So, when they do have to give up those car keys, it can be really isolating. And we think self-driving cars can help expand their world, even if they can’t physically drive.

ROY: Another source of buzz at the conference, these mini drones. The flying gadgets are the brain child of Professor Naira Hovakimyan at the University of Illinois and can be used for household tasks like bringing medications to you. It’s still a few years from going to market, but with the number of seniors expected to grow, 50 percent over the next 15 years, Hovakimyan is confident there will be a demand for these autonomous drones.

NAIRA HOVAKIMYAN, UNIVERSITY OF ILLINOIS: We can have a slightly bigger drone that can go grab a glass of water or reach under the table to grab a fallen object or clean your (INAUDIBLE) or go get something from the second floor, like a book from a shelf, and other simple tasks.

ROY: But getting seniors to adopt next-generation technologies can be daunting. For instance, one Pew Research report shows that seniors’ use of the Internet goes down 20 percent after the age of 75. But once they’re online, they become daily users.

The companies we’re talking to here are hopeful that once exposed, this demographic will embrace new technology.

For NIGHTLY BUSINESS REPORT, I’m Aditi Roy, San Francisco.

(END VIDEOTAPE)

MATHISEN: The robots are coming. And they’re here to help you.

HERERA: The robots are coming. The rise of the machines.

All right. That will do it for NIGHTLY BUSINESS REPORT for tonight. I’m Sue Herera. Thanks for joining us.

MATHISEN: And I’m Tyler Mathisen. Thanks from me, as well. Have a great evening, everybody. And we will see you back here tomorrow.

END

Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by CQRC Transcriptions, 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) 2016 CNBC, Inc.

 

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