SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: There’s no place like home. But are there enough of them? Why builders are having a hard time keeping pace with the strong demand.
TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Playing defense. Why the defense sector may be a good place for your money now.
HERERA: Big blues, big gamble. Can Watson, famous for his win on Jeopardy, make IBM a leader in the hot field of artificial intelligence?
Those stories and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, October 26th.
MATHISEN: Good evening, everyone. And welcome.
We begin with America’s housing market. What “The Economist” magazine calls the world’s largest asset class. And today, we learn that more Americans than expected bought new homes last month. A sign that demand is strong, despite a dwindling inventory of properties to buy. New home sales rose more than 3 percent in September, to their second-highest level of the recovery.
Still, builders are struggling to keep pace with demand. Production is up, but not by enough.
Diana Olick has more now on housing’s big challenge.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: The autumn leaves are mostly changed, but the market for newly built homes is still in something of a holding pattern. Sales figures rose in September, but only after the readings from the summer were revised down sharply. The overall trend is higher, but not by much.
ALEX TERRAZAS, ZILLOW ECONOMIST: They really struggled to take off. They’re nowhere near where they need to be. If you think about a normal market, where supply is meeting demand, they presently probably need to be about 800,000 to 1 million. So, you know, quite a bit higher.
OLICK: The supply of existing homes for sale is still very low, as millions of entry-level properties were bought by investors during the housing crash, and now service still vibrant rental markets.
Buyers are desperate for new construction, but they need it to be affordable. The median price of a newly built home in September did not give them what they wanted. It rose to the second highest level on record.
TERRAZAS: The market is really tough out there for entry-level buyers, for first time buyers. The inventory of existing homes in the market is tighter than it’s been almost ever.
OLICK: Builders say they want to get into that all-important entry-level market, but their costs are too high. Land, labor, materials, and tough new regulations make it impossible, they say, to build cheaper homes.
Price gains for existing homes were easing earlier this year, but have now turned in the opposite direction, rising far faster than incomes due to tight supply. That has led to more and more frustration among buyers who are showing less and less confidence in the housing market.
For NIGHTLY BUSINESS REPORT, I’m Diana Olick in Washington.
HERERA: On Wall Street, stocks stalled as oil extended its losing streak, and investors analyzed profit reports to gauge the health of corporate America and the economy. The Dow Jones Industrial Average gained 30 points to 18,199. The NASDAQ fell 33 and the S&P 500 lost 3.
MATHISEN: Boeing was the biggest gainer on the Dow today. Its profits rose, cost-cutting helped offset a decline in revenue. The world’s largest plane maker said it will deliver more jetliners than originally planned and held off cutting production of its very profitable 777 plane. Shares got a lift up more than 4.5 percent.
HERERA: Fellow Dow component Coke reported better-than-expected quarterly profit and also said it plans to reduce the amount of sugar in its beverages. The world’s largest beverage maker was helped by higher prices for sodas and strong demand for water and sports drinks. Shares of Coke, though, fell fractionally in today’s session.
MATHISEN: Defense companies are blowing past earnings expectations, bucking what’s been an otherwise downbeat season for many in the big industrials. Northop Grumman, General Dynamics, the latest to report better than expected results and issue upbeat guidance.
Morgan Brennan explains why the defense sector is on the offensive.
MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Call it a great defense. Investors in the aerospace and defense index have seen double the returns of the broader stock market this year. And that could continue on the heels of solid earnings results for defense bellwether Lockheed Martin, Northrop Grumman and General Dynamics. On a conference call, Northrop Grumman CEO Wes Bush telling analysts, strong demand for a wide variety of defense products is being driven by world events.
WES BUSH, NORTHROP GRUMMAN CEO: It is looked broadly across the classes of the threat profile, that range, you know, all the way from competitors to the world of cyber. It’s clear to me that we’re seeing a growing support, and I would say this as — you know, across both sides of the aisle — a growing support for the need for the nation to really reinvest in its defense capabilities.
BRENNAN: Northrop’s earnings beat what’s helped by higher sales in the aerospace segment, which makes the center fuselage for the F35 fighter jet. More buying in top-secret programs and autonomous systems also contributed to a higher 2016 profits forecast, the third such revision this year.
The results came one day after Lockheed Martin, the world’s defense contractor, trounced analyst estimates, as well, sending the stock to multiyear highs. The F35 is the Pentagon’s costliest arms program and Lockheed produces the super sonic stealth fighter, which despite some challenges, did enjoy higher sales last quarter.
A third defense name, General Dynamics, also raised guidance and reported a profit beat. But the maker of the Striker Combat Vehicle and nuclear-powered submarines did see sales slide as its Gulfstream jet business disappointed investors. Adding to the defense deluge, Raytheon will report tomorrow.
But overall, a new wave of government spending is propelling the entire defense industry, as American allies beef up security and the U.S. is poised to do the same. No matter which presidential candidate takes the Oval Office. For that reason, some analysts argue defense stocks could be a good place to park cash, and that the strong results could drive up earnings for the broader stock market overall.
For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan.
HERERA: And now to Apple, which was a drag on the broader market today, following its earnings result last night. As we reported, the world’s most valuable company posted its third straight quarter of revenue declines and as investors focus on where the company will find its next leg of growth, there is one big obstacle standing in its way.
Josh Lipton has our story.
JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Last quarter, Apple sold fewer phones than it did in the previous year and made less money. But the company is hoping the new iPhone 7 introduced in late September will turn that around. Apple’s CEO, Tim Cook, says that he could not be more excited about customer response to the new iPhone 7 and iPhone 7 Plus models.
But there is a problem. Demand right now for some models is actually exceeding supply. In other words, consumers might want that new iPhone 7 plus, but that doesn’t mean there is one to buy.
Analysts on the company’s conference call asked cook when will he be able to meet that demand by the end of this quarter. Cook says it isn’t totally clear, at least right now.
TIM COOK, APPLE CEO: It’s hard to say. I believe that on iPhone 7, we will — iPhone 7 plus, I’m not sure. I wouldn’t say yes at this point, because the — the underlying demand looks extremely strong on the — on both products, but particularly on the iPhone 7 Plus, versus our forecast going into the product launch.
LIPTON: The challenge of not being able to meet demand right now is evident in Apple’s Q1 guidance.
The tech giant expects revenue between $76 billion and $78 billion. Piper’s Gene Munster says that that guidance is unit growth of about 1 percent. Now, that does suggest an iPhone business that is stabilizing and even growing, albeit very modestly.
But after the stock jumped 20 percent in the past three months, modest wasn’t good enough for some investors.
There are two ways to look at Apple’s challenge. If Apple remains supply-constrained, then that has a negative impact on overall growth. The company can only sell what it has to offer customers. On the other hand, analysts say that what’s important is that there is demand for these new iPhones.
PATRICK MOORHEAD, MOOR INSIGHTS AND STRATEGY: The good news here is that iPhone 7 and iPhone 7 Plus demand is really, really high. And that makes sense, because Apple essentially didn’t leave a stone unturned when it came to the phone. And the reason why that’s important is because without demand, you can’t meet it with supply.
LIPTON: Apple bulls are now making the bet that Tim Cook will figure out this production problem eventually, and when that happens, so they argue, this iPhone franchise will return to much stronger growth in the quarters ahead.
For NIGHTLY BUSINESS REPORT, I’m Josh Lipton, San Francisco.
MATHISEN: Well, Apple does face some challenges as Josh pointed out. It remains the world’s most valuable company, and the country’s most profitable. Just look at some of the numbers.
Apple, as Josh mentioned, expects to bring in as much as $78 billion in sales in the December quarter. That’s just in one quarter, folks. Its market value, more than $600 billion. The company sits on a mountain of cash, more than $200 billion. Yet those numbers were just not enough for investors. Shares fell more than 2 percent in trading today.
So, why does Wall Street want to see more?
Walter Piecyk is a research analyst at BTIG.
Walter, good as always to have you with us. So, as far as Apple goes, it feels to me like it’s a glass half full, glass half empty sort of argument here. Where are you on it?
WALTER PIECYK, BTIG TECHNOLOGY ANALYST: It is. We’re in the glass is half full, because the company a couple months ago, there was concerns of whether there was enough change in this phone, even to deliver that very small growth expectation for the December quarter. Now they have, and we can start looking at to the December quarter, and to the March quarter and into next year where they might have a more exciting product.
But all this really does, for a company that is attractively valued at 14 times earnings, is buy time for a potential new product. I mean, they have been investing a lot of money, $10 billion last year alone in R&D for what everyone hopes is new products to drive additional growth.
HERERA: Or maybe an acquisition. They’re sitting on an enormous amount of cash.
PIECYK: Not only the $10 billion are indeed, but they’re also buying $6 billion worth of stock back, the quarter before that, $10 billion. And they still have $150 billion of net cash, let alone the excess cash. So whether the R&D investments can deliver a new product to deliver some extra growth, or using that cash can provide an acquisition to find growth, investors keep giving the company additional time.
And by delivering, even on even small growth for their very core product, the iPhone, I think the investor will continue to do that the next couple of quarters.
HERERA: You know, Apple has not not made deals, but they haven’t made big ones. Is there a big deal that you see fitting with them?
PIECYK: I mean, there’s a lot of areas of interest that the company has talked about in the living room, as a point of frustration for people. Obviously, the auto industry is potentially going through a major transition, as we look for ways to have automated cars. So, I think in those two areas, if you look at the leading companies today, that might change, obviously, in the next year or two. Those would be very expensive acquisitions. But something that only a company like Apple could actually afford.
HERERA: So, Walter, is Wall Street simply spoiled? Because for so long, Apple was such a consistent performer, and outperformer. And was such an — and is such an innovative company. Is Wall Street not used to that and not used to a decline in certain aspects of the company’s business or revenue?
PIECYK: I mean, the irony here, we have had excess volatility. Historically, yes, you have those great years of 30 or 40 percent growth. But then there’s been other years like last, where it was a decline. So, now, when the company just beats earnings a little bit or delivers guidance that’s just above consensus, while maybe the initial reaction today was not so great. Actually, lower volatility and tighter expectation — tighter performance against expectations is ultimately something that investors would actually prefer.
MATHISEN: Walter, thanks, as always. Walter Piecyk with BTIG.
HERERA: And still ahead, a year after Chipotle’s food scare. Why aren’t its customers coming back?
HERERA: Republican presidential candidate, Donald Trump, went to Washington today, for a ribbon-cutting ceremony for his new hotel in the nation’s capital. But the bigger question for his business is whether this campaign season is damaging the Trump brand.
Robert Frank has more.
ROBERT FRANK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Donald Trump has made the most of his political campaign to market his company. Today’s event at the D.C. hotel marks the 32nd time he has held a campaign event at a Trump property.
DONALD TRUMP (R), PRESIDENTIAL NOMINEE: We’re very proud of our company. We have built one of the greatest in the world, but it seems very insignificant compared to what we’re doing now.
FRANK: Rather than helping his company, Trump’s political run may be damaging the brand. New data from Brand Keys, the brand research group, found that while the early stages of his campaign gave a boost to the Trump name, that value has fallen quickly. The premium for the Trump brand, or the added value of his name, last October, was 43 percent in entertainment and TV, 40 percent for golf courses, and 30 percent in real estate. All of those numbers have fallen this month.
More than 300 residents at the Trump place buildings in Manhattan’s west side have signed a petition asking for the name to be removed from the building. The building’s owner saying, they, quote, “will assess” the use of the name when the contract Trump expires.
Trump’s name has already been taken off a golf development in Dubai. The developer of the Trump Tower in Toronto was trying to strip the name from his building, and the mayor of Vancouver is pressuring top officials to rename the new Trump Hotel.
The Trump Organization itself is dialing back on the name. It’s launching a new brand of hotels that will be called Scion, the name referring to Trump’s children who are taking a growing role in the company. The D.C. hotel was largely the brain child of Trump’s daughter, Ivanka, and her brand seems to be holding up.
Despite calls by some women to boycott her products for supporting her father, Brand Key is finding that more than half of millennial shoppers are very or extremely likely to buy Ivanka’s branded shoes or clothing.
Trump saying the hotel shows he can build things on time, and under budget, but it also shows his talents for leverage. He used a 60-year lease from the federal government for a $170 million construction loan from Deutsch Bank to help fund the $200 million renovation. He also received a $40 million tax credit from the National Park Service under its historical preservation program.
As Trump always says, no one knows the Tax Code better than Donald Trump.
For NIGHTLY BUSINESS REPORT, I’m Robert Frank.
MATHISEN: Less than two weeks before the election, leaked e-mails from Hillary Clinton’s camp are surfacing on one of the most controversial issues of the campaign, trade — and specifically, the Trans Pacific Partnership.
Eamon Javers has details.
EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: While the battle on the stage has officially concluded, there’s a different battle still plaguing the Clinton camp behind closed doors. Newly released e-mails illegally obtained by WikiLeaks showing the conflict on the Trans Pacific Partnership, something Donald Trump made sure to highlight in the final debate.
TRUMP: Now, she wants to sign Trans Pacific Partnership. And she wants it — she lied when she said she didn’t call it the gold standard in one of the debates. She totally lied.
HILLARY CLINTON (D), PRESIDENTIAL NOMINEE: When I saw the final agreement for TPP, I said I was against it. I’m against it now. I’ll be against it after the election. I’ll be against it when I’m president.
JAVERS: The emails leaked last week show that Hillary Clinton advisers were concerned about the back and forth on this agreement. Ron Klain, an adviser for the Clinton campaign, in an e-mail to foreign policy adviser Jake Sullivan, says in part, quote, “She has to be for TPP. She called it the gold standard of trade agreements. I think opposing that would be a huge flip-flop.”
CLINTON: I’ll be against it when I’m president.
JAVERS: In another e-mail released last week, chief strategist Joel Benenson also concerned about TPP, e-mails Clinton adviser Amanda Renteria. “The reality is, HRC is more pro-trade than anti, and trying to turn her into something she is not could reinforce our negative around authenticity.”
For NIGHTLY BUSINESS REPORT, I’m Eamon Javers in Washington.
HERERA: Tesla reports its first quarterly profit in more than three years. That’s where we begin tonight’s “Market Focus.”
The automaker swung into the black in the latest quarter with results driven by an increase in deliveries. The company also said revenue rose and it maintained its forecast to deliver 50,000 cars in the second half of this year. Shares initially surged after hours, but finished the regular session down about a dime to $202.24.
Southwest Airlines set a technology outage experienced in July hurt sales, resulting in lower than expected quarterly revenue. The airline also saw profit fall, but those results edged past analysts’ estimates. Southwest expects unit revenue to fall between 4 and 5 percent in the current quarter, and announced plans to trim capacity growth. Shares were off more than 8 percent to $38.40.
MATHISEN: GlaxoSmithKline posted higher profit and revenue as the drugmaker benefitted from a strong demand for its flu vaccine and a drop in the British pound. Shares were up a tick today to $40.34.
A surge in new users helped the food delivery service, GrubHub, top earnings expectations. The company also gave revenue guidance for the quarter that was above analysts’ expectations. Still, investors may be concerned with GrubHub’s growth, which has been slowing. Shares were crushed today, down nearly 13 percent to $37.88.
And despite launching more promotions and a loyalty program, Chipotle failed to attract more customers in the latest quarter. After the bell last night, the burrito chain said its profit and revenue fell more than expected, along with same-store sales. Shares were off a big 9 percent today at $368.02.
HERERA: And it has been a year since the nationwide E. Coli outbreak made hundreds sick at Chipotle and the brand is still struggling to recover. But restaurants like Taco Bell in 2006, Sizzler in 2000 and Jack in the Box back in 1993 all suffered similar foodborne illness outbreaks and they bounced back. So, why can’t Chipotle?
Let’s turn to Dean Crutchfield. He’s the branding expert with his own firm, the Dean Crutchfield Company.
Dean, it’s always good to have you here. Welcome back.
DEAN CRUTCHFIELD, BRANDING EXPERT, DEAN CRUTCHFIELD COMPANY: Good to be here.
HERERA: I guess that is the question. Why can’t chipotle seem to bounce back the way other brands have been when they have been in a crisis?
CRUTCHFIELD: Well, I think it starts from actually when the crisis, you know, happened. It was a really bad response, very unprofessional. We nearly had to drag Steve Ells out of his office to respond to the public’s concern.
And then there was the whole deluge of bad news, lawsuits and public concern. And that’s really dragged on. It’s never got over that. That’s been partly the problem.
MATHISEN: One other problem I’ve thought about, the idea that Chipotle really marketed itself as clean, fresh, sustainable. Fast food that was good for you, too.
This really damaged that. It might have had quite as much effect if it were a different kind of company.
CRUTCHFIELD: Well, absolutely. I mean, one of the things about Chipotle is that it’s all about fresh food. And that totally changes the dynamic of its food supply. It’s kind of all over the place as opposed to a big chain like McDonald’s. Theirs is centrally sourced food. You don’t have that with Chipotle.
So, there’s a lot of mismanagement that can happen. And by the fact that it’s fresh food, it opens it to issues that are, you know, foodborne pathogens like the norovirus. So, basically, if that’s your business model, it’s part of its problem, because it’s very hard to manage and get out of the issue it had.
It is all about quality and ethics and morality and living a healthy lifestyle. That all came crashing to an end. So, yes, in a sense, its own brand caused its own problem by the very nature of what it was.
HERERA: Can they repair it? And how?
CRUTCHFIELD: Well, I think they can repair it. I would hate to push this, but I do believe that they say a fish begins to rot at its head. So maybe there is a need for new leadership.
MATHISEN: So, it’s taken a long time. Are you surprised that it’s taken a long time for them to bounce back? I mean, but really, what you were just talking about, it called into question the entire brand premise.
CRUTCHFIELD: Yes. Everything is up for question. And don’t forget, a lot of people were dismayed by what it did. They were concerned about what it did. And it’s a reputation they think that’s been hard for them to shake off.
And, again, I think it’s because their initial response and those weeks that followed was really abysmal, for such an important company with a responsibility to its customers, who were genuinely concerned. They just handled it really badly. And I think that caused a bad reputation, and that meant people voted with their wallets and they went elsewhere.
HERERA: Yes, they did. Well, you know what, we will see where there is a chains at the top and if there is, you heard here first, folks.
Dean, thank you very much.
CRUTCHFIELD: Thank you.
HERERA: Dean Crutchfield with the Crutchfield Company.
MATHISEN: All right. Coming up, cutting edge technology. Can IBM’s Watson turn the blue chip into a dominant player in the artificial intelligence business?
MATHISEN: The EpiPen is about to get some competition. The Auvi-Q, which is an epinephrine auto injector will be reintroduced in the first half of next year. The CEO of the company that makes it says it will come at a very, very low cost to patients.
Last year, Sanofi, which previously licensed the Auvi-Q, voluntarily recalled the injectors amid concerns about incorrect dosing. But, apparently, that problem has been fixed.
HERERA: Big Blue is making a big gamble on artificial intelligence. The technology is considered a game-changer for computing and IBM wants to lead the way with Watson. And as Deirdre Bosa explains from Las Vegas, Watson uses are expanding.
DEIRDRE BOSA, NIGHTLY BUSINESS REPORT CORRESPONDENT: Five years ago, Watson earned fame with its “Jeopardy” victory. Now, there is an entire event dedicated to Watson’s applications in the real world. It’s called world of Watson and it’s brought thousands of businesses here to Vegas. Watson is IBM’s big bet on artificial intelligence, which experts say is the next battleground for computing.
The AI industry is expected to grow from $8 billion this year to $47 billion by 2020, according to research firm, IDC. And IBM wants to be the dominant player. As part of that push, IBM is building partnerships to bring Watson to a wide range of companies and industries.
General Motors will integrate Watson into its existing OnStar offering. Messaging platform Slack will use Watson to power the next version of its virtual assistant. IBM is also building on existing partnerships with Apple, GlaxoSmithKline, 1-800 Flowers and American Airlines.
JASON ANDREE, GLAXOSMITHKLINE: GSK and Theraflu are using Watson to tap into the insights of what consumers are really feeling in the moment when the first symptom strikes.
CHRIS MCCANN, 1-800-FLOWERS PRESIDENT: And if you come to us today and let’s say you’re a previous customer of mine, looking to send something for a birthday today, we look in our database and realize it’s your mother-in-law’s birthday coming up next week, you might not want to forget that. We will remind you.
BOSA: Watson is already making major leaps in medicine using big data analytics to boost personalize cancer therapies. Beyond the Enterprise applications, developers and designers are experimenting with Watson. Like this cognitive beer stand that chooses a brew based on your personality and a Marchesa dress that lights up based on feedback on social media.
GEORGINA CHAPMAN, MARCHESA CO-FOUNDER/DESIGNER: It gives us a platform and I think this can only help excite our customers to really respond to their wants and needs. And I think what was exciting about Watson is we can feed in information and really get a read on the emotional response of our consumer. So, yes, I think it only enhances designers.
BOSA: IBM faces competition as tech giants like Facebook, Amazon and Google invest heavily in artificial intelligence, but IBM is unique in opening up its AI platform to the broader business world.
IBM will have to demonstrate that it can make money with that approach, and soon. After 18 straight quarters of declining revenue, IBM’s AI business still makes up a relatively smaller portion of its total sales.
For NIGHTLY BUSINESS REPORT, Deirdre Bosa, Las Vegas.
HERERA: And that is NIGHTLY BUSINESS REPORT tonight. I’m Sue Herera. Thanks for joining us.
MATHISEN: And thanks from me, as well. I’m Tyler Mathisen. We’ll see you back here tomorrow night.
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.