Transcript: Nightly Business Report – October 14, 2019

ANNOUNCER:  This is NIGHTLY BUSINESS REPORT with Sue Herera and Bill Griffeth.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR:  Another round.  China  reportedly wants more trade talks before agreeing to phase one of the deal,  and investors aren`t sure what to think.  

Boeing (NYSE:BA) shakeup.  The CEO is stripped of his chairman`s role as  Boeing (NYSE:BA) moves more aggressively to resolve the major challenges  facing the company.  

New capitalism.  The Salesforce CEO is the latest business leader to say  the system needs a reboot.  
Those stories and much more tonight on NIGHTLY BUSINESS REPORT for Monday,  October 14th.  

Good evening, everyone, and welcome.  Bill is off this evening.  
The optimism of Friday did not carry over into the new week.  Stocks  drifted between small gains and small losses as investors tried to figure  out just how much progress was actually made on trade.  Treasury Secretary  Steve Mnuchin maintained today that a fundamental agreement between the two  countries has been reached.  

STEVE MNUCHIN, TREASURY SECRETARY:  It is subject to documentation and  there`s a lot of work to be done on that front, but it includes  intellectual property rights, it includes financial services, it includes  currency and foreign exchange and it also includes very significant  structural issues in agriculture.  

HERERA:  But some investors felt details were scant and China is describing  the agreement in a different way.  
Eunice Yoon starts us off tonight in Beijing.  

EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT:  A Chinese state media  blog attempted to explain why the Chinese have been describing the outcome  of the trade talks as substantial progress as opposed to President Trump`s  term, deal.  Taoran Notes, which is closely watched by trade experts, says  that the reason is even though the Chinese shares the same spirit as the  Trump administration on the talks, that they`re cautious about their words  because of previous, quote, flip-flops.  

That has been the message from the Chinese side that from Beijing`s  perspective, a firm agreement is not yet in place.  State media here has  made little mention of Beijing`s pledge to buy up to $50 billion of U.S.  agricultural products except for Taoran which said buying farm goods is  China`s unique bargaining chips and should be complimentary to the  country`s needs.  

I spoke to a former trade official who follows that talks closely and he  said similar to a Bloomberg report that in his opinion, the Chinese side  would ask that the U.S. scrap a December tariff hike to make the phase one  agreement more balanced.  He also said any text that would be presented to  President Xi Jinping for the APEC Summit which now appears to be the target  for finalizing phase one, would have to be completely locked down.  The  Chinese have been nervous throughout this process that President Trump  could say or do something that could potentially embarrass President Xi.  

So that means that the clock is ticking for the trade negotiators and from  what Treasury Secretary Steven Mnuchin says, there`s a lot of work to do by  mid November.  
For NIGHTLY BUSINESS REPORT, I`m Eunice Yoon in Beijing.  

HERERA:  That caution surrounding the partial trade deal put pressure on  oil prices.  The energy market is also watching developments in the Middle  East after the U.S. said Friday it was deploying more troops in Saudi  Arabia.  Domestic crude settled about 2 percent lower.  

And one of the companies that has the most to win or lose in the U.S.-China  trade war is Caterpillar (NYSE:CAT), in part because of the amount of  business it does in that country.  That`s why it`s followed so closely by  investors and why its outlook is becoming more difficult to predict.  
Seema Mody has more.  

SEEMA MODY, NIGHTLY BUSINESS REPORT CORRESPONDENT:  A growing number of  analysts see Caterpillar (NYSE:CAT) as a trade proxy for the market, given  its global footprint tied to China`s growth story as well as its reach into  the U.S. market.  

BORIS SCHLOSSBERG, BK ASSET MANAGEMENT:  Caterpillar (NYSE:CAT) is probably  the single most levered name to the U.S.-China trade relations you could  find from both ends, simply because it obviously has to get a benefit from  the farmer`s side, in the U.S. side, and just generally from the Chinese  demand that they sell into quite a lot over there.  

MODY:  The back and forth on trade has created a volatile year for the  stocks.  Shares have trailed its peers and the broader market due in part  to the bruising trade war.  Tariffs have increased manufacturing costs and  disrupted trade.  China`s slowing economy has hurt profits.  Caterpillar  (NYSE:CAT) also generates a significant amount of its revenue overseas,  making it highly exposed to the slowdown in the global economy.  

SCHLOSSBERG:  The two most vulnerable groups, the farmers and Chinese  demand for U.S. multinational corporations are really the crux of  Caterpillar`s business.  So on the positive side, it really gets a  tremendous amount of benefit if there`s any kind of problems, it`s the  first one to be hit.  That`s why it`s so incredibly sensitive to both sides  of the issue.  

MODY:  Some say any sign of de-escalation on the trade front will improve  visibility around Caterpillar`s future earnings and signs of progress  between U.S. and China will lift confidence among companies making capital  investments.  But other market experts are less optimistic.  Others say a  partial trade deal helps improve sentiment but delaying new tariffs only  stops things from getting worse rather than making things materially  better.  

Industrial analysts also point to the latest headlines that suggest the  Chinese are more cautious about the trade agreement made in Washington last  week, which keeps the outlook for Caterpillar (NYSE:CAT) cloudy.  
Later this week, China will publish the latest figures on growth which will  be watched closely by multinationals like Caterpillar (NYSE:CAT) that in  the past had seen the country as a source of growth.  Analysts caution if  China`s economic story worsens, that could weigh on shares of Caterpillar  (NYSE:CAT), even if progress is made on trade.  

HERERA:  And the trade data out of China was weaker than expected.   According to “Reuters”, China`s exports fell more than 3 percent in  September from a year ago while imports dropped more than 8 percent.   Economists pinpoint the decline on the ongoing trade war with the U.S. 
The World Trade Organization has formally backed U.S. tariffs on European  Union goods.  The Trump administration no longer faces any legal obstacles  for previously scheduled sanctions that could take effect on Friday.   Unless a deal is negotiated between Washington and Brussels, the tariffs  will hit everything from scotch whisky to French wine to Italian cheese.  

And President Trump is raising tariffs on steel imports from Turkey back to  50 percent.  He is also ordering sanctions against officials in response to  Turkey`s incursion into Syria, which the White House says threatens  stability in that region.  

As we mentioned, stocks made small moves as new trade concerns emerged.   Trading volume was also thin with many banks and fixed income desks shut in  observance of Columbus Day.  The Dow Jones industrial fell to 26,787, the  Nasdaq down 8 and the S&P 500 was off 4.  
Attention now turns to earnings which kick off in earnest this week and we  could hear details on how the trade war`s impacting corporate America.  

We`re joined by David Dietze, president and chief investment strategist —  strategist I should say — at Point View Wealth Management.  
Welcome, David.  Nice to have you here.  

HERERA:  What kind of season are you expecting overall?  
DIETZE:  Well, the headline number is quite negative.  We`re going to be  down 4.6 percent.  But once you start digging into the details, it`s not  quite that bad.  So, for example, earnings per share, because of massive  stock buybacks will leave earnings down only 2 percent.  

If you look at the average stock as opposed to the market cap measurement,  we`re actually going to be up 6 percent.  The other thing to watch for,  Sue, is revenues.  Revenues are actually going to be up 3 percent market  cap weighted up as much as 4 percent on the average stock.  

HERERA:  What about the trade war that`s going on between the U.S. and  China?  This I believe is really going to be the first earnings season in  earnest where we may get a chance to really see how trade and tariffs are  affecting stocks.  

DIETZE:  You`re absolutely right.  The wheels came off the bus in terms of  trade negotiations in May.  That was halfway through Q2.  So, Q3 is the  first one where we have the full negative winds of the trade tension.  

So I think the more overseas-oriented a company is, the more goods are  going to be impacted.  And that`s certainly in sync with what earnings  analysts are forecasting.  So, for example, information tech companies are  going to be 10 percent and energy and materials companies which are also  very sensitive to the global economy will also be down much more than the  overall market.  

HERERA:  How important are the financials, are the banks?  They`re the  first to report.  We`re going to get some this week.  What do you think?  

DIETZE:  Well, the financials are very important.  First, they can set the  tone because they go first as you just mentioned, but because the banking  system is touched by about every actor in the economy, whether as a  borrower or as a lender or both, they have a good sense of the economy.  
I would caution that a little bit insofar as they`re domestically-oriented.   I don`t think they`re going to be the best barometer overseas and  therefore, what the multinationals are doing.  

Plus, of course, they`re very interest sensitive.  And we`ve seen a decline  in the net interest margins.  So, they`re impacted by that in a way that  other parts of the economy really aren`t.  

HERERA:  What sector do you think will fare the best?  
DIETZE:  Well, certainly, the interest rates interest sensitive sectors are  going to benefit from the tailwind of much lower interests this year.  That  will be particularly utilities.  That will be particularly REITs.  
Health care companies which also aren`t too exposed to the global economy  also going to do better than the average company.  

HERERA:  All right.  David Dietze, nice to have you with us, David.

DIETZE:  Thank you.

HERERA:  Appreciate it very much.

And David is the president and chief investment strategist at Point View  Wealth Management.  

Well, months after regulators around the world grounded the 737 MAX due to  safety concerns, Boeing`s CEO has been stripped of his role as chairman of  the company.  It is the latest indication that Boeing`s board is getting  more aggressive in resolving a crisis that is weighing on Boeing (NYSE:BA)  and its share price.  
Phil LeBeau has more on the changes in the C-suite.  

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Boeing`s executive  shakeup means CEO Dennis Muilenburg will no longer be chairman of the  aerospace giant.  

That job is now held by David Calhoun, who after a decade on the Boeing  (NYSE:BA) board, becomes non-executive chairman of the company.

JEFFREY SONNENFELD, YALE SCHOOL OF MANAGEMENT:  In this case, a non- executive chairman is very little difference than a presiding or lead  director, the role he previously had.  They`re going to define it in a way  I think which gives him a little bit more authority.  

LEBEAU:  Calhoun has vast experience with major industrial companies,  including GE, where he ran the aircraft engine division and Caterpillar  (NYSE:CAT), where he sits on the board and once served as chairman.  
After being selected as chairman at Boeing (NYSE:BA), Calhoun said the  board has full confidence in Dennis as CEO, and believes this division of  labor will enable maximum focus on running the business with the board  playing an active oversight role.  

Back in April, at Boeing`s annual meeting, more than 1/3 of the  shareholders voted to split the chairman and CEO jobs.  After that meeting,  Muilenburg dismissed questions about possibly resigning.  
REPORTER:  In the light of the crisis facing your company and in the  interest of re-earning the trust of the flying public, have you considered  resigning?  

DENNIS MUILENBURG, BOEING CEO:  I think the important thing here again is  we`re very focused on safety.  

LEBEAU:  That focus goes well beyond correcting software problems that led  to two 737 MAX crashes.  It also involves growing questions about the  culture at Boeing (NYSE:BA).  Last week, an in depth report by a panel of  aviation regulators slammed the company for failing to make proper  disclosures about key components during the MAX certification.  
Now, with hundreds of MAX planes parked around the world, Muilenburg`s top  priority is getting the plane cleared to fly again.  
Muilenburg is sticking with his guidance that the MAX will be back in  service this year, which means Boeing (NYSE:BA) has to clear several  hurdles over the next ten weeks in order to convince the FAA and other  regulators that the MAX is safe to fly.  

HERERA:  In addition, the Southwest pilots union today said it is looking  at, quote, probably a February time frame to say the least, end quote, for  the return of Boeing`s 737 MAX.  

It`s time to take a look at some of today`s “Upgrades and Downgrades”.  
Nike (NYSE:NKE) was upgraded to neutral from underperform at Bank of  America (NYSE:BAC) Merrill Lynch.  The analyst cites the outlook for the  sports wear business especially for women and children.  The price target  is $98.  The stock rose 1 percent to $94.88.  

Toll Brothers (NYSE:TOL) was downgraded to neutral from positive at  Susquehanna.  The analyst cites the stock`s valuation following  outperformance since the beginning of the year.  The price target is $42.   The stock fell a fraction to $39.25.  

Tapestry, the parent company of coach, was downgraded to neutral from buy  at UBS.  The analyst cites the rising popularity of used handbags.  The  price target is $25.  The stock fell more than 2.5 percent to $25.25.  
And Delta Airlines (NYSE:DAL) was downgraded to equal weight from  overweight at Stevens.  The analyst cites the outlook for higher costs for  the second half of the year.  The price target is $57.  Despite the  downgrade, the stock rose slightly to $52.99.  

Still ahead, the Switzerland of streaming.  Roku has found a unique role  for itself in the hyper competitive industry and it`s paying off.  

HERERA:  Don`t look now, but Roku shares have been soaring this year and  it`s all because of the company`s distinctive position in the fast-growing  streaming industry.  
Julia Boorstin takes a look at Roku`s rise and its risks.  

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Roku shares have  been a rocket ship, up about 300 percent year to date.  What`s driving  those gains is expectations that Roku will benefit from the explosion of  streaming apps, with Apple (NASDAQ:AAPL) TV Plus and Disney (NYSE:DIS) Plus  launching next month, followed by HBO Max and Peacock next year, Roku is  expected to gain ad revenue from the new services as they market themselves  to consumers and if people subscribe through the Roku platform, it will  earn a share of revenue.

MARK MAHANEY, RBC CAPITAL MARKETS:  You want to be the Switzerland during  the streaming wars.  They are — they are Switzerland, then the wars are  occurring around them.  They should be paid by a lot of these arms dealers.  

BOORSTIN:  In addition to generating ad revenue from the free ad supported  content it offers, and taking a cut of subscription revenue and downloads,  Roku also makes money from selling streaming devices which range from $30  to $100.  Also from licensing its technology to smart TVs which cost $200  and up.  

Roku had more than 30 million active accounts as of its last quarterly  report and analysts expect that number to continue to grow as Roku  capitalizes on a shift to streaming and as it begins its international  expansion launching in Europe next year.  

MAHANEY:  Roku has been entirely North American, entirely U.S. phenomenon  to date.  They announced they`re launching into Europe.  I don`t see any  particular reason why they can`t be successful both as a device vendor,  those Roku devices as an operating system vendor and into smart TVs in  Europe and in the rest of the world, but also as streaming platforms.  

BOORSTIN:  In contrast to Roku soaring on the potential for it to benefit  from the streaming wars, Netflix (NASDAQ:NFLX) has given up most of its  gains from earlier in the year.  It`s now up 6 percent year to date, this  as investors watch all the coming competition for streaming subscribers and  content.  
For NIGHTLY BUSINESS REPORT, I`m Julia Boorstin in Los Angeles.  

HERERA:  Smile Direct Club sees challenges in California, and that`s where  we begin tonight`s “Market Focus”.  
California`s governor signed a bill allowing the state`s dental board to  extend operations overseeing and regulating dental services until the year  2024.  The new law also gives protections for patients who receive direct  to consumer orthodontic treatment from technological platforms such as  Smile Direct Club.  Shares slid nearly 13 percent to $9.70.  

ConocoPhillips (NYSE:COP) is selling to operations in Australia for nearly  $1.5 billion to its Australian business partner, Santos.  The oil and  energy company sees this as an opportunity to help shift capital to other  projects.  Shares fell a fraction to $56.13.  

Both Lyft and Uber are suing New York City as the ride-sharing company`s  challenge the Big Apple`s new rule limiting drivers from spending time  cruising in Manhattan without passengers.  Separately, Uber laid off 350  employees across multiple units and marks the third round of cuts in recent  months totaling more than 1,000 positions.  Lyft shares were up a fraction  to $39.80 while Uber shares rose more than 3 percent to $31.12.  

After the bell, Reata Pharmaceuticals reported successful trial results for  its treatment of a neuromuscular disorder.  The news helped shares  initially spike 40 percent in afterhours trading after closing the regular  session up about 5 percent to $159.  

The co-CEO of Salesforce, Marc Benioff, says capitalism as we know it is  dead.  In a “New York Times (NYSE:NYT)” editorial, Benioff wrote that the  current system has led to inequality.  This follows recent comments from  Facebook (NASDAQ:FB) CEO who said of billionaires that no one deserves to  have that much money, and Senator Sanders who said that billionaires should  not exist.  
So, does capitalism need a reboot?  

We are joined by Erik Gordon, professor of the University of Michigan`s  Ross School of Business, and Mark Weisbrot, co-director at the Center for  Economic Policy Research.  
Welcome to both of you.  



HERERA:  Erik, you think things are pretty much fine the way they are in  terms of capitalism.  Why?  

GORDON:  Well, you know, I don`t know if everything is fine, but I don`t  think capitalism is dead.  I don`t think it needs to be changed into quasi- socialist capitalism because the problems that the other Marc, Marc  Benioff, complains about, things like income inequality, no right of  privacy, no climate protection — those are big problems in socialist  economies.  If you look at China, there`s income inequality, giant income  inequality, no right of privacy and climate protection.  It`s just terrible  there.  

HERERA:  Mark, you agree with what much of Mr. Benioff says.  And a number  of CEOs, 200 CEOs have signed the same contract that he did talking about  basically social justice and income equality, correct?  

WEISBROT:  Yes.  And nobody`s talking about turning the United States into  China.  We`re having a debate and if you look at Bernie Sanders campaign,  for example, he got 43 percent of the vote in 2016 and his ideas are now  the main ideas of the Democratic Party — Medicare for all, $15 minimum  wage, college free — tuition free college and forgiveness of student loan  debt.  

All of that happened because people really want this.  The people are  really ready for serious change and I think that`s what we`re really  talking about, getting the things in this country that other high-income  countries have.  We`re the richest country in the world and we don`t even  have health care as a right.  

HERERA:  Mark — rather, Erik, what is wrong with what Mr. Benioff is  arguing when he says, quote, it`s time for a new capitalism, a more fair,  equal and sustainable capitalism that works for everyone, where businesses  including tech companies don`t just take for society but they also give  back?  Is there — is there something wrong with that?  

GORDON:  No, I don`t think there`s anything wrong with that, but I think  when Benioff goes beyond that and says capitalism is dead, I think that`s  wrong.  I think capitalism is a system, just like socialism, is a system  that`s been tinkered with over, you know, many, many years.  The capitalism  we have today is not the capitalism we had at the turn of the 18th to the  19th century.  

So I think capitalism needs to evolve and I think it will evolve but I  don`t think it`s dead, which is what Benioff claims.  

HERERA:  Mark, what about that?  What about the fact that 200 CEOs did sign  off on trying to change capitalism, trying to change society but when you  look at the grand scheme of things, there are a lot of others who have not  signed off on that?  

WEISBROT:  Well, I think — I don`t know what the author of the op-ed that  we`re talking about really meant by capitalism is dead.  He means  capitalism as we know it in the U.S. is dead in the sense that people are  really unsatisfied.  

Look, we`re at the peak of a business cycle that`s the longest running  expansion in U.S. history.  Unemployment is at a 50-year low and inflation  is very low, and yet people are really dissatisfied.  And they`re looking  for the kind of change that I`ve just talked about.  

So, clearly, something is very wrong.  You don`t even need the statistics.   You can just look, talk to somebody who grew up in the `60s or `70s or even  the `50s and a person — a worker with an average wage or salary could buy  a house, send their kid to college and the kids didn`t come out with loans  that they were going to pay off for the rest of their lives.  
So something has changed.  We`ve had enormous growth in productivity and  growth in the economy since then and yet it all went to the upper end of  the income distribution.  That`s really a fundamental, deep problem.  

HERERA:  Erik, you get the closing thoughts.  

GORDON:  You know, I agree with Mark that that`s a deep problem.  I don`t  know if it`s caused by capitalism.  It could be caused by the government.   It could be caused by other social factors.  It could be caused by an  education system that has left people behind.  

It`s a problem.  I`m not sure who has caused it or how to solve it.  

HERERA:  On that note, more to discuss next time around.  Erik Gordon with  University of Michigan`s Ross School of Business, and Mark Weisbrot at the  Center for Economic and Policy Research.  

Still ahead, the brewing battle between politicians and social media  companies.  But, first, a look at how commodities fared because the bond  market was closed today.  

HERERA:  Booking Holdings, formerly Priceline, is the last one to back away  from Facebook`s cryptocurrency project called Libra.  The decision follows  similar moves by eBay (NASDAQ:EBAY), MasterCard (NYSE:MA), Visa (NYSE:V)  and Stripe.  Libra says it remains focused on moving forward with the  project.  Treasury Secretary Mnuchin said he told Libra representatives he  would take action if the cryptocurrency did not meet regulatory standards.  

Elizabeth Warren and Mark Zuckerberg are at it again but this time the  Democratic senator and Facebook (NASDAQ:FB) CEO are feuding over fake ads,  and they`re not the only ones.  Ylan Mui has our story.  

YLAN MUI, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Senator Warren is  accusing Facebook (NASDAQ:FB) of allowing politicians to place misleading  ads on its platform.  And she proved it by running a fake ad herself.  It  claimed that Zuckerberg endorsed President Trump for reelection.  The ad  does admit that`s not true, but it argues what Zuckerberg has done is give  Trump free rein to lie and then pay Facebook (NASDAQ:FB) gobs of money to  push out those lies to American voters.  
Facebook (NASDAQ:FB) has been very clear that politicians are held to  different standards on its platform and that anything else would be  undemocratic.  

NICK CLEGG, FACEBOOK GLOBAL AFFAIRS VP:  Would it be acceptable to society  at large to have a private company in effect become a self-appointed  referee for everything that politicians say?  I don`t believe it would be.   In open democracies, voters rightly believe that as a general rule, they  should be able to judge what politicians say themselves.  
MUI:  And it`s not the only social media company that made exception for  speech from politicians.  Twitter notifies users when content may violate  its standards, but it`s kept up in the public interests.
YouTube applies different standards to content beyond ads that comes from  candidates and elected officials.  

SUSAN WOJCICKI, YOUTUBE CEO:  When you have a political officer that is  making information that is really important for the constituents to see or  for other global leaders to see, that is content that we would — that we  would leave up because we think it`s important for other people to see.  

MUI:  But the current political climate is testing the limits of that  approach.  Former Vice President Joe Biden has asked all three platforms to  take down what he says is a misleading ad from President Trump`s campaign  that goes after his son.  All three companies refused but it`s Facebook  (NASDAQ:FB) that`s taken most of the heat. 

LEE GOODMAN, FORMER FEDERAL ELECTION COMMISSION CHAIRMAN:  Facebook  (NASDAQ:FB) is condemned whether they do, whether they don`t.  And, you  know, they don`t want to be the arbiter and they don`t want to take sides  in these political debates and their stated policy, I think, is fair.  

MUI:  Expect this fight to continue as the Democratic presidential  candidates and the Trump campaign gear up for tomorrow`s debate.  
For NIGHTLY BUSINESS REPORT, I`m Ylan Mui in Washington.  

HERERA:  And finally tonight, the Nobel Prize in economics was awarded to a  trio of economists for their work in alleviating global poverty.  The three  tested specific policies to improve educational outcomes and health and  other issues associated with the very poor.  Two of the winners are from  MIT, the other is from Harvard.  

And that is NIGHTLY BUSINESS REPORT tonight.  I`m Sue Herera. Thanks for joining us.  Have a great evening.  See you tomorrow.  


Nightly Business Report transcripts and video are available on-line post  broadcast at The program is transcribed by ASC Services II  Media, LLC. Updates may be posted at a later date. The views of our guests  and commentators are their own and do not necessarily represent the views  of Nightly Business Report, or CNBC, Inc. Information presented on Nightly  Business Report is not and should not be considered as investment advice.  (c) 2019 CNBC, Inc.

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