Transcript: Nightly Business Report – October 16, 2019

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

BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR:  Streaming profits.  Netflix  (NASDAQ:NFLX) saw its earnings grow but subscriber growth missed  expectations, just as the company gets ready to face a lot more  competition.  

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR:  Taking a break.  Consumers  pull back on spending in September and investors wonder if the main pillar  of growth is becoming shaky.  

GRIFFETH:  House hunters.  The pickings are slim for affordable homes.  And  some say the problem could get worse.  
Those stories and much more tonight on NIGHTLY BUSINESS REPORT for  Wednesday, October 16th.  

HERERA:  Good evening, everyone, and welcome.  
A critical quarter for Netflix (NASDAQ:NFLX) which for a very long time  dominated the streaming video industry.  Tonight, Netflix (NASDAQ:NFLX)  reported better than expected earnings.  Revenue was just about in line  with expectations but the company did not add as many subscribers as it  thought it would.  And in just a few weeks, it will some new competition  from Apple (NASDAQ:AAPL) and Disney (NYSE:DIS).  
But investors chose to focus on the company profits.  
Julia Boorstin starts us off tonight with more on Netflix`s quarter.  

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Netflix  (NASDAQ:NFLX) shares soaring despite lower than expected guidance for the  fourth quarter.  Investors appear reassured by better than expected  earnings and international growth in the third quarter, also potentially  reassured by frank commentary by CEO Reed Hastings in his letter to  shareholders about competition.  This ahead of Disney (NYSE:DIS) Plus and  Apple (NASDAQ:AAPL) TV Plus launching next month.  

Hastings saying that Netflix (NASDAQ:NFLX) has been preparing for this new  wave of competition for a long time, saying, quote: The launch of the new  services will be noisy.  There maybe some modest headwinds to near-term  growth but we tried to factor that into our guidance.  In the long-term,  though, we expect we`ll continue to grow nicely given the strength of our  service and large market opportunities.  

Now, the question is whether Netflix (NASDAQ:NFLX) can indeed add the 7.6  million subscribers that it forecasts it will add in the coming quarter,  even with rivals Disney (NYSE:DIS) Plus and Apple (NASDAQ:AAPL) TV Plus` launch.  
For NIGHTLY BUSINESS REPORT, I`m Julia Boorstin in Los Angeles.  

GRIFFETH:  Let`s turn now to Tuna Amobi to talk more about Netflix  (NASDAQ:NFLX) and the coming streaming wars.  Tuna is with CFRA Research.  

Good to see you again.  Welcome back.  
TUNA AMOBI, CFRA RESEARCH : Thanks, Bill.  Good afternoon.  

GRIFFETH:  Is Netflix (NASDAQ:NFLX) in your view ready for the added  competition?

AMOBI:  Well, you know, I think they`ve been doing everything possibly they  can to get ready for the intensified competition.  We have seen them  ratchet up content spending and starting to skew those from license to what  original and that trend will continue.  Next year, we expect that they  could go from $15 billion cash content, potentially up to $17 billion or  more.  

So, you see that pathway is really preparing them for quite some time.  My  sense is that they`re going to, you know, obviously be one of the potential  winners here.  

HERERA:  What about the subscriber growth which came in a little bit short  certainly, still healthy but short of what Wall Street was looking for.   Does that concern you at all it`s coming at this juncture right before all  that competition?  

AMOBI:  You know, that`s right, Sue.  I think that`s an important  observation at this point in Netflix`s life cycle where seeing kind of a  bifurcation of growth where the U.S. on the one hand is showing signs of  maturity.  On the other hand, I think there is still a lot of potential  upside on the international market of which we think local language  production is going to be one of the catalysts for international growth  also markets like India where they are shifting towards mobile first.  

So, all in all, I think there is really a lot to be said about the upside  internationally.  In the U.S., you know, I think it`s inevitable when you  look at what`s happening, that there is definitely going to be some kind of  peaking of that growth for Netflix (NASDAQ:NFLX) sooner than later.  

GRIFFETH:  Quickly, next month, it`s Apple (NASDAQ:AAPL) Plus and Disney  (NYSE:DIS) Plus.  Early next year, it`s Peacock which is owned by our  company, Comcast (NASDAQ:CMCSA) (NYSE:CCS) that owns us.  And then HBO Max.  
Who provides the greatest competition do you think for Netflix  (NASDAQ:NFLX)?  

AMOBI:  You know, I`d have to say, you know, Disney (NYSE:DIS) — 
AMOBI:  — for what I think are obvious reasons here.  I think the content  pipeline that Disney (NYSE:DIS) brings to the table with the Disney  (NYSE:DIS) Plus, frankly, it`s — you know, it`s ground breaking and  potentially you know second to none.  

So, you throw in all the other companies you mention.  Everyone is pulling  out all the stops, ratcheting up their spending.  And don`t forget, also,  pulling out their most popular shows off of Netflix (NASDAQ:NFLX), which  again trying to give themselves a good head start in what`s really becoming  an intensifying landscape.  

GRIFFETH:  Tuna Amobi with CFRA Research — again, thanks for joining us  tonight.  
AMOBI:  Thank you, Bill.  

HERERA:  IBM also reported earnings late today.  Big Blue`s revenue  disappointed investors.  But the profits were slightly better than  expected, thanks to growth in high margin cloud computing business.  That  business has been a focus for the CEO who has tried to lower IBM`s  dependence on its traditional hardware products.  But it wasn`t enough for  investors, who sent the stock lower in initial afterhours trading.  
Deirdre Bosa has more.  

DEIRDRE BOSA, NIGHTLY BUSINESS REPORT CORRESPONDENT:  IBM is still  struggling to revitalize its business.  The computing giant has made big  bets in artificial intelligence and cloud computing, next generation  technologies.  But the company has seen more than five straight quarters of  being declining revenue this quarter the first since closing the deal with  Red Hat (NYSE:RHT), its biggest acquisition ever.  IBM saw its cloud  revenue grow 14 percent, a significant improvement from earlier this year.   However, the rate still trailing cloud players Amazon (NASDAQ:AMZN) and  Microsoft (NASDAQ:MSFT).  

CFO James Kavanaugh telling CNBC that they are driving growth in key value  areas and is pleased so far with the Red Hat (NYSE:RHT) deal.  
For NIGHTLY BUSINESS REPORT, Deirdre Bosa, San Francisco.  

GRIFFETH:  As for the market itself, it was remarkably flat in spite of all  the economic reports and earnings news, the Dow never strayed far from the  unchanged level as all the major averages still remain within striking  distance of their all-time highs.  At the close, the industrial average was  down just 22 points, still above 27,000.  The Nasdaq lost 24.  The S&P was  down almost six.  

HERERA:  The president of the Chicago Fed said no more interest rate cuts  are needed this year.  Charles Evans thinks the economy and policy are  both, quote, in a good place now.  The market, however is anticipating  another rate cut at its meeting later this month.  Evans is a voting member  of the Federal Open Market Committee.  

GRIFFETH:  Two new economic reports, though, could help policymakers decide  whether another interest rate cut is needed.  First, there was the Fed`s  own survey of the economy called the Beige Book, which showed some softness  in some sectors due to trade tensions.  Then there was a surprising decline  in retail sales in September.  
Steve Liesman ties it all together for us.  

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT:  The Federal  Reserve`s Beige Book reported just slight to modest grout throughout the  country in September and early October.  That was a bit of downgrade from  the prior survey.  The collection of the economic reports from the Fed`s 12  district banks found trade tensions and slower global growth weighing on  the U.S. economy.  Many businesses reduced their outlook for growth in the  next six to 12 months.  

The New York Fed said growth was subdued and Boston found signs of slowing  more widespread.  Kansas City and Chicago reported only slight increases  for growth.  

While manufacturers lower their head counts amid soft orders, overall  employment saw slight gains.  Those gains were tempered however by worker  shortages in many places and industries.  The report comes as Fed officials  weigh whether to cut interest rates again at its meeting later in the month.  

Markets price in a third quarter point rate cut but Fed officials, they  seem more divided.  After two rate cuts, some want to see more negative  economic news even providing even more stimulus to the economy.  They got  some of that today in the September retail sales report which sharply  disappointed to the downside.  The 0.3 percent decline in September  compared with expectations for a 0.3 percent increase.  

Auto furniture and department store sales all declined sharply.  Apparel,  one of the few sectors to see gains.  In any event, economists now believe  the recently completed third quarter grew at 1.5 percent, which is about  half the pace of growth registered in the first quarter.  

The question is whether there will be additional slowing from here.  
For NIGHTLY BUSINESS REPORT, I`m Steve Liesman in Washington.  

HERERA:  Brett Ryan joins us now to talk more about the retail sales  report, maybe telling us about consumer spending.  He is the senior U.S.  economists at Deutsche Bank.  
Welcome.  Nice to have you here, Brett.  

BRETT RYAN, DEUTSCHE BANK SENIOR U.S. ECONOMIST:  Great.  Thank you for  having me, Sue.  

HERERA:  How do you interpret this report?  Yesterday, the bank said the  consumer is strong is borrowing, is spending on credit cards.  And today,  we get this report.  Is it an outlier or not?  

RYAN:  Well, I think bank earnings are a little bit backward earnings it`s  the previous three months of the year.  And while 70 percent of the decline  in retail sales this month were auto — auto related, ex autos were also  down.  And the weakness was a little bit broad based.  

And that would be less concerning, you know, we could say — that was the  first time since February, by the way.  It would be less concerning if we  had a clear catalyst.  But this is also occurring amid slowing job growth,  slowing hours worked and wages that are beginning to move sideways.  Wage  growth that`s kind of slowing.  

So, you know, in a — in an otherwise strong data that would be fine.  With  you we see other signs of weakness in the data and that`s what`s concerning  about this report.  

HERERA:  Uh-huh.
GRIFFETH:  So, this is — it`s not just about one report.  You feel like  there is the beginning of a slowdown here for the consumer, which has been  the main growth engine for the economy, right?

RYAN:  That`s correct.  We think the consumer is getting a little bit more  cautious as — as I noted hours worked have been slowing.  The pace of  hiring, you`re seeing more evidence of slowing there.  Firms, business  sentiment has been declining since the beginning of the year and the risk  is that business — the slowing of business sentiment spills over into  consumer sentiment, and consumers become more cautious.  Today is a  possible sign that we`re beginning to see that.  

HERERA:  You are forecasting three more rate cuts by the Fed.  Is that —  is the Fed going to be able to keep the economy from slowing down too much?   Or possibly even going into recession?  

RYAN:  Well, it remains to be seen how much monetary policy is needed to —  to sort of address these downside risks.  You know, do we see the trade —  trade war resolution shortly and that boosts business sentiment and  companies begin to invest for growth again?  

HERERA:  Uh-huh.  
RYAN:  Or do companies remain cautious during of an election year in which  there is domestic policy uncertainty in addition to trade policy  uncertainty.  

HERERA:  Well, there will be a lot to talk about.  Thanks so much, Brett.   Brett Ryan — 
RYAN:  Thank you for having me.  
HERERA:  — with Deutsche Bank.  

GRIFFETH:  Time to look at some of today`s “Upgrades and Downgrades”, a  couple to tell you about tonight.  

Johnson & Johnson (NYSE:JNJ) was upgraded to neutral from underweight at  Atlantic Equities with the analyst citing the growth potential across the  three main business franchises, price target on J&J, $129.  And separately,  there are reports tonight that J&J has offered to pay about $4 billion to  settle lawsuits accusing the company of contributing to the opioid crisis.   Stock was up more than 1.5 percent today to $153.17. 

Adobe was downgraded today to neutral from buy at Citi.  The analyst cited  the potential for limited margin expansion in that business.  Price target,  $313.  Shares fell more than 2 percent today to $272.70.  
HERERA:  Still ahead, the big bet the casino industry is making on the  future of the Vegas Strip.   

GRIFFETH:  General Motors (NYSE:GM) and UAW have confirmed that the two  sides have reached a proposed tentative contract agreement that could end  the month-long strike.  Leadership and rank and file still need to vote on  the deal and they called a meeting for tomorrow.  Details of the deal not  known yet.  But workers had been asking for a bigger share of GM`s profits  and for more job security among other things.  

Forty-eight thousand workers walked off on September 15th.  It`s estimated  the strike cost the automaker roughly $2 billion.  Shares of GM rose 1  percent today.  

HERERA:  Home builder confidence rose to its highest level in nearly two  years.  Economists credit lower mortgage rates and a steady job market.   The industry expects sales and demand to grow.  This report marks the  fourth straight month of increases.  

GRIFFETH:  And the housing market has been unseasonably brisk this fall,  thanks to those lower mortgage rates.  But buyers are coming up against one  of the big barriers to entry, which could get even worse in the coming  months.  
Diana Olick explains.  

UNIDENTIFIED FEMALE:  I actually have a listing going live in about two  weeks.  

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Anyone out shopping  for a home today already knows the pickings are slim and they will likely  get slimmer.  The supply of homes for sale hitting a record low two years  ago but then mortgage rates started to rise and buyers pulled back.  

It was a slow spring this year.  And that helped build the amount of homes  for sale.  But then mortgage rates dropped sharply over the summer and  demand came back in a big way, eating away at supplies again.  

ROBERT DIETZ, NAHB CHIEF ECONOMIST:  It`s going to be very frustrating for  home buyers right now seeing the low mortgage interest rates but no kind of  easy available supply of housing.  

OLICK:  National housing inventory fell 2.5 percent annually in September,  a sharper decline than in August, according to  
And it`s worse on the low end.  The supply of homes priced below $200,000  is 10 percent smaller than a year ago.  Demand also surged in the move up  market.  The supply of homes for sale priced between $200,000 and $750,000  which makes make up 60 percent of the market flat lined in September after  18 months of strong inventory growth.  Supply is now expected to decline in  the months ahead.  

And the nation`s home builders are not helping much either.  Single family  housing starts have been rising very slowly and mostly in the move up and  luxury segments of the market due to higher costs for construction.  

DIETZ:  We face what has been called a perfect storm of supply side  challenges.  There`s been an ongoing labor shortage.  We lack the necessary  land and lots to build homes.  We have had building material cost concerns.   And then probably the most important factor has been higher regulatory  costs since the great recession.

OLICK:  Low supply coupled with strong demand is recipe for higher home  prices and prices are already pretty high.  If rates should move higher,  that could take off the heat.  But if they stay even close to where they  are now, we could be in for one of the tightest and most competitive spring  markets in history.  
For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Washington.  

HERERA:  Bank of America (NYSE:BAC) posts solid results and that`s where  with he begin tonight`s “Market Focus”.  

The bank topped analyst expectations driven by strong consumer banking,  which is B of A`s biggest business and increase in investment banking,  which helped offset interest rates cuts.  Shares of Bank of America  (NYSE:BAC) rose about 1.5 percent to $30.17. 

Bank of New York Mellon (NYSE:BK) posted better than expected profits by  cutting costs to help offset softness in investment management unit and  lower interest rates.  But the bank missed street revenue expectations for  the fifth time in the last eight quarters.  Bank of New York was up a  fraction to $44.44.  

Fiat Chrysler reportedly may be hit with about an $80 million civil penalty  for not meeting fuel economy requirements in 2017.  “Reuters” says the  automaker received a notice from government regulators and has two months  to respond.  Fiat also paid about $77 million for the same violation in its  2016 models.  But shares rose today more than 1 percent to $13.47.  

GRIFFETH:  American Eagle said today it plans to hire nearly 10,000  seasonal workers this year, but that less than half the number it hired  last year.  The retailer though will be holding a hiring event this weekend  at stores around the country.  Shares rose a fraction today to $15 and a  penny.  

Alexion is buying Achillion Pharma for $930 million.  That deal helps  Alexion expand its pipeline of drugs to treat certain rare blood disorders.   Achillion shares skyrocketed nearly 72 percent today to $6.27 while Alexion  shares fell about 5 percent to $99.51.  

And after the bell tonight, CSX (NYSE:CSX) beat profit expectations while  revenue was in line with forecasts, growth in railroad merchandise segment  helped offset declines in its coal and intermodal shipment units.  Shares  rose initially rose in after-hours trading tonight, but did close the  regular session down a fraction at $69 even.  

HERERA:  MGM Resorts (NYSE:MGM) is selling one of its signature properties  on the Las Vegas Strip.  The Bellagio will soon be owned by Blackstone,  which is paying more than $4 billion for it.  And the selling of land to  raise cash is becoming one of the biggest trends in the casino industry.  
Contessa Brewer is in Vegas for us tonight.  

CONTESSA BREWER, NIGHTLY BUSINESS REPORT CORRESPONDENT:  The Bellagio with  its dancing fountains is one of the must-see sights in Las Vegas, but it`s  about to have a new owner.  Blackstone Real Estate Income Trust or a REIT.   MGM Resorts (NYSE:MGM) is selling the casino resort and raising billions in cash.  

JIM MURREN, MGM RESORTS CHAIRMAN & CEO:  We`re going to reduce our  financial leverage.  All the money we receive from Blackstone here at  Bellagio will go to reduce our financial leverage.  So, by the end of 2020,  our balance sheet will be vastly stronger than even it is today.  

BREWER:  MGM will continue to operate the Bellagio and pay rent to  Blackstone, so visitors shouldn`t see a difference.  For the company, the  difference is being an operating company versus a property company.  
DAVID KATZ, JEFFERIES MANAGING DIRECTOR, GAMING:  The capital markets have  been very clear over the past five years, ten years that the separation of  real estate from operations, branded operations is a capturing the highest  value in stock prices.  And that message has come across loud and clear.  

BREWER:  MGM deployed the strategy with more than a dozen other properties.   Among them Mandalay Bay and New York, New York in Las Vegas.  And the  Borgata in Atlantic City.  

And other companies are increasing looking to entice investors, maximizing  their cash by selling the property under the casinos to REITs.  Caesars did  it when it emerged from bankruptcy, selling many of its properties to the  REIT Vici, and national gaming currently operates more casinos nationwide  than any other company.  But many of the properties themselves belong to  the REIT gaming and leisure properties.  
In the volatile casino industry, cash on hand is a safety net worth having.  
Are you anticipating another recession?  

MURREN:  I`m anticipating that we`re late in an economic cycle.  And I want  to prepare for the unforeseen.  And I want I want to be stronger as each  incremental day goes by.  

BREWER:  MGM is selling Circus Circus outright, a famous destination on the  Vegas Strip for more than 50 years.  Treasure Island owner Phil Ruffin  isn`t paying $825 million.  And Murren says it`s likely he will sell the  MGM brand.  

Bottom line, it`s a long-term high stakes bet on renting versus owning. 
In Las Vegas, Contessa Brewer, NIGHTLY BUSINESS REPORT.

GRIFFETH:  And coming up, Volvo rolls out an all electric car, but are  buyers ready for a plug-in SUV?  

GRIFFETH:  There is yet another front in the trade war with China, one that  is not often talked about.  It`s rare earth metals, which China produces a  lot of, and which American business needs a lot of.  
Here is Brian Sullivan.  

BRIAN SULLIVAN, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Rare earth, 17  minerals you may barely remember from high school chemistry or geology.   They got funny sounding names like praseodymium, dysprosium, neodymium and  europium.  They look like little more than sand but they`re perhaps the  most strategically important minerals in the world right now.  

If you want a cell phone, computer screen, electric car or rechargeable  battery, you need these minerals.  They`re also critical in the production  of magnets, necessary for building renewable energy projects.  
Now, the United States used to be a world leader.  But 20 years ago, China  figured out how important rare earths would be and boosted supply.  Prices crashed.  

Soon, it was no longer profitable to operate mines in the United States.   The last major rare earth company in North America, Molycorp (NYSE:MCP),  filed for bankruptcy four years ago.  We now rely on China for more than 90  percent of rare earth production or processing, creating a big problem  process, and not just a problem for consumer technology but for national  security.  

Many of these elements are critical components in defense systems, so  critical in fact the Trump administration put out a report highlighting  their importance saying, quote: The assured supply of these critical  minerals and the resilience of their supply chains are essential to United  States` economic security and national defense.  

The long-term concern is that China will end up controlling so much rare  earth mining and refining that it will be able to dictate price and  availability around the world.  
For NIGHTLY BUSINESS REPORT, I`m Brian Sullivan.  

HERERA:  Controversial and inappropriate comments made by Ken Fisher of  Fisher Investments are costing him.  Philadelphia`s Board of Pensions  terminated its business relationship with Fisher, which amounts to about  $54 million.  

This follows a similar decision by Michigan`s Retirement System which  pulled $600 million of its pension fund from the wealth management company. Fidelity says it is reviewing its relationship with the money manager as is the Florida State Board of Administration.  

And the Boston mayor has asked that city`s retirement board to end its  relationship with Fisher Investments.  
The comments were made at a recent financial conference.  In a memo to  employees obtained by “Reuters”, Fisher apologized.  

GRIFFETH:  Volvo is the latest automaker now to roll out an all-electric  vehicle and it`s all part of a wave of plug in models that the auto  industry plans to put on the road over the next five years.  But is there  enough demand for vehicles powered by electricity in a world with  relatively low gasoline prices.
Phil LeBeau has our story.  

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT:  This is the latest  model in a slew of electric vehicles that could dramatically change what we  buy and drive in the future.  The XC40 is Volvo`s first all electric model  going on sale next year.  

HAKAN SAMUELSSON, VOLVO CAR GROUP CEO:  An electric car is not just  environmental friendly.  It also has some other big advantages.  It has a  super response.  It`s quiet.  And I think one of the most important things  is you can fuel it at home.  

LEBEAU:  Volvo says that buy by 2025, it`s hoping for EVs to make up half  of its global sales.  And ambitious goal since electric vehicles make up  just 2 percent of all the models sold in the world.  And an even lower  percentage in the U.S. 

Still, auto makers are rolling out more and more EVs.  So how tough will it  be for Volvo to convince buyers to buy a plug-in SUV?  

KAR BRAUER, COX AUTOMOTIVE:  I think Volvo will be facing a lot of the same  challenges that every automaker faces when they go into the EV marketplace.   There`s just not a lot of demand there.  And there is still a lot of  concern about things like range and price and battery condition, and how  long those last.  

LEBEAU:  The other issue slowing down EV sales, cheap gas.  In fact, prices  have been so low for so long there is little pain at the pump.  As a  result, most car buyers rarely think twice about buying a gas-powered  vehicle.  
But Volvo CEO is undeterred.  

BRAUER:  Of course the fuel price is always a certain headwind but it goes  up and down.  So, I think you have to act of course long-term.  But you  should also remember these other advantages with the car, an electric car.   Quiet, a really good response and that you can fuel it at home.  

LEBEAU:  While electric power trains are coming to every type of vehicle,  including pickup trucks — the reality is, it may be several years until  plug-in models take off in large numbers.  And even then, auto makers like  Volvo will have work cut out to make sure their EV stands out from the  others expected to be in show rooms.  

HERERA:  And before we go, here is a another look at the day`s final  numbers from Wall Street.  The Dow was down 22 points.  Still, just above  the 27,000 level.  The Nasdaq lost 24 and the S&P was down almost 6.  

And that is NIGHTLY BUSINESS REPORT 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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