Transcript: Nightly Business Report – October 25, 2019

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR:  So close.  The S&P 500 finishes just shy of a record.  And next week could be a doozy with a Fed meeting, a jobs report and a heavy dose of earnings.  

Bargain hunting.  It is hard to do with stocks at lofty levels.  But our market monitor has a list of stocks that he says are worth buying.  

And gaming the game.  Tonight an investigation into an issue no one wants to talk about in the gaming community, and why it is hurting profits. 

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Friday, October 25th.  

Good evening, everyone, and welcome.  Bill has the evening off.  
The stock market flirted with a record to end the week.  The S&P 500 briefly traded above its all-time closing high but ended the day just shy of that level.  The optimism on Wall Street today was driven by U.S. China trade and a fresh batch of earnings.  

The Dow Jones Industrial Average was up 152 points to 26,958, the Nasdaq added 57 and the S&P 500 rose 12.  All of the major averages were higher for the week.  

And now it’s time to look to next week which could determine whether records are broken.  
Bob Pisani is at the New York Stock Exchange.  

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Stocks made another run at record highs come up just short by the close, the S&P, though, is riding a three-week win streak.  Trade optimism was the number one driver behind today’s rally after U.S. Trade Representative Robert Lighthizer said the U.S. and China had made headway and specific issues appear close to finalizing some sections of the phase one agreement.  

But a couple of other factors helped spur the move higher.  First, more signs the U.S. consumer going strong.  We saw that in solid earnings and guidance from credit card companies like Capital One and Visa.  Second, we saw a handful of semiconductor companies at new highs in the back of Intel’s solid beat and good outlook for the year.  They’ve been powering much of the year’s rally.  

The week ahead is going to be brimming with market-moving catalyst, including the busiest stretch of earnings season.  We’ll results from tech titans Apple, from Facebook, and Google parent Alphabet.  We’ll get consumer names like Clorox and Starbucks, Alibaba, and the much buzzed about Beyond Meat, along with oil giants like Chevron and Exxon.  

The Federal Reserve is going to meet to decide upon the fate of U.S. interest rates.  Of course, the markets are expecting a quarter-point cut this month.  Plus the widely watched October jobs report.  Economists expect the GM auto strike to shave off a chunk of the job gains we would normally see.  
And plenty of data is on tap as well.  GDP, consumer confidence, home sales and manufacturing, a busy, busy week.  As always, investors will be keeping a close eye on trade headlines.  These are the single biggest market mover as we saw in today’s session.  

For NIGHTLY BUSINESS REPORT, I’m Bob Pisani at the New York Stock Exchange.  

HERERA:  And if you’re wondering why the Dow is not closer to a record, the answer can be found if in three stocks.  Recent losses in Boeing, McDonald’s and Travelers are holding back the blue chip index, shaving off a few hundred points.  

So, let’s turn now to David Lefkowitz to talk more about what lies ahead for the market next week.  He is the senior equity strategist at UBS Wealth Management Research.  
Welcome back.  Nice to see you again.  


HERERA:  All right.  I’m already exhausted.  There is so much on the market’s plate next week.  And Bob outlined very well for us.
But if you had to prioritize the events of next week, which would be most important to you?

LEFKOWITZ:  I think for me, it’s three things.  It’s going to be continued information about corporate profits and we’ll get the continuation of earnings season.  We’re about halfway done.  So, we have a pretty good handle on how the earnings season is shaping up but we still want to hear some key companies that Bob was talking about and get a final reading on earnings season.  

The Fed obviously is very important.  Look, what the Fed does mass a big influence on the cost of capital, the cost of money, the cost of borrowing.  So, what the Fed does have a big influence on the economy.  So, that’s going to be very important as well.  

Then I’ll be especially looking at the manufacturing sentiment survey.  That is a leading indicator for the markets and has been our market driver recently.  So, that’s going possible important as well.  

HERERA:  What are you expecting to see in that report?  I assume you’re going to be looking for further slowdown in the economy and/or manufacturing.  

LEFKOWITZ:  Yes, I think that’s exactly right, Sue.  I think there’s been some sentiment that the soft patch that we’ve been seeing in global manufacturing might be bottoming a bit.  I think that message came through from the earnings reports that we got in the industrial patch.  Some of the weaker earnings results ended up in stocks actually moving higher on a weaker outlook.  

So, that’s some indication that investors are looking for a bit of a bottoming process in some of that manufacturing data.  And that’s going to be important to see if it does come through in that survey that comes out next Friday.  

HERERA:  If I can take you back to the Fed, the market is expecting a quarter-point cut.  But the language of the Fed chief has been very important lately.  What are you expecting to hear from him?  

LEFKOWITZ:  Yes, not only — I think that’s a good point, Sue.  Not only is the cut itself going to be important.  But I think the Fed is going to be a little bit at potentially a turning point, the which that Fed Chair Powell has been characterizing in is that the cuts they’ve done — this will be the third cut of a quarter point each, have been insurance cuts, trying to make sure the economy avoids risks around trade, around Brexit, around the slowdown in manufacturing.  

And it might be possible that the Fed is going to signal that they’ve taken enough insurance cuts for now and they may stop and pause a bit and be more data dependent and seeing if the data comes in as they expect, they may not have to cut further.  So, that’s going to be a very keen focus for the markets.  

HERERA:  All right.  David, we’ll leave it there.  Thanks so much for your perspective.  David Lefkowitz with UBS Wealth Management Research.  
There are reports tonight that the United Auto Workers Union has ratified the labor agreement with General Motors.  The new four-year contract ends the 40 had-day strike.  Some of the union’s 48,000 members are expected to return to work as soon as tomorrow.  The worker stoppage is estimated to have cost the automaker more than $2 billion.  And the UAW has chosen Ford as the next auto maker to negotiate with.  

The federal deficit increased to nearly $1 trillion.  According to the Treasury Department, the federal deficit rose 26 percent to just over $980 billion in fiscal 2019.  That is the highest in seven years.  Treasury Secretary Steven Mnuchin called on lawmakers to help the administration cut spending.  

Consumer sentiment dipped slightly in October.  According to the latest University of Michigan survey, Americans are more worried about the economy now than a year ago but they do remain fairly optimistic when it comes to their job situation and financial health.  Economists watch sentiment indicators closely because in theory, the more optimistic, the more consumers spend.  And spending makes up a large portion of economic activity.  

Dow component Verizon topped analyst profits and revenue estimates.  The largest wireless carrier in the U.S. attracted more customers with less expensive unlimited data plans.  It also expanded its 5G services to four new cities now totaling 15 in all.  

Despite the better than expected results though, the stock fell a fraction in today’s trading session.  

It is time to look at some of today’s “Upgrades and Downgrades”.  
Dick’s Sporting Goods was upgraded to buy from neutral at Goldman Sachs.  The analyst cites management’s effort to increase traffic.  The price target is $45.  The stock is up 1 percent to $40.36. 

Booking Holdings formerly known as Priceline was downgraded to market perform from outperform at Raymond James.  The analyst cited overly optimistic estimates for next year and 2021.  The firm removed the price target on the stock.  Despite the downgrade, though, the stock finished higher at $2,055.93.  

Avis Budget Group was downgraded to hold from buy at Deutsche Bank.  The analyst there cites softer U.S. pricing and challenging trends in Europe.  The price target is $32.  The stock fell slightly to $29.90.  
And there are also a number of price target changes to tell you about.  
Amazon’s target price was lowered at Morgan Stanley to $2,100 from $2,200 following yesterday’s earnings report.  But the analyst maintains its outperform rating and said its one-day shipping ramp up was impressive.  
Credit Suisse raised the target on Intel to $65 from $58 after the company reported earnings well above expectations.  

And Oppenheimer cut its price target on Twitter to $36 from $46, while maintaining an outperform rating.  

United Airlines, which has been one of the top performing airline stocks this year is now trying to turn around its reputation and customer service.  Today, the company outlined changes designed to create a better experience for its passengers.  
Phil LeBeau has more.  

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT:  United Airlines CEO Oscar Munoz calls this the next phase of turning around the carrier that still carries a customer service reputation that lags other airlines, so it’s making a slew of changes.  A new app automatically books stranded passengers in hotels near airports.  It also gives passengers a view of what their seat will look like on their flight.  

United is also adding a regional jet with a snack bar in the front and its fleet is being updated with newer, bigger bins to hold more carry-on bags, changes United believes will also help employees who have been frustrated with the carrier’s inconsistent performance.  

OSCAR MUNOZ, UNITED AIRLINES CEO:  We needed to rebuild the trust of our employees before we could rebuild the trust with our customers.  

LEBEAU:  That trust hit a low point two years ago when a passenger was dragged off of a United flight that was oversold.  It made United the poster child for those who think airlines care only about profits not customer service.  

MUNOZ:  It was a water shed moment for us.  It accelerated the things that we needed to do.  One of the things we do today is, kind of, introduce those enhancements to people.  

LEBEAU:  So, in the last two years, United has added more flights in the U.S. especially from smaller cities.  It’s also upgraded frequent flier lounges.  Along the way, the attracted more travelers and has grown profits.  

SCOTT KIRBY, UNITED AIRLINES PRESIDENT:  If we can plow our improving profitability back into the product, back into the customer experience, that’s going to drive higher profitability.  

LEBEAU:  While United has done better in the last year, those who track the quality of airline service say the carrier still lags its competitors, reinforcing a reputation that united still has a ways to go to make the friendly skies even friendlier.  

HERERA:  Still ahead, finding value in a mechanic near new highs.  It’s hard to do.  But our market monitor found a way.  

HERERA:  In the news tonight, two major wildfires are spreading in California.  In the northern part of the state, near Silicon Valley, the Kincade Fire has burned tens of thousands of acres.  California utility PG&E said a broken jumper line may have been involved in starting that fire.  And an analyst at Citi warns that disclosure threatens the utility’s exit from bankruptcy.  The news shaved 30 percent off of PG&E’s value in today’s session.  

Meantime in southern California, just north of Los Angeles, the Tick Fire closed major freeways.  
Jane Wells is in Santa Clarita.  

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT:  I’m here in Santa Clarita in one of one of the homes that was destroyed down in main down in southern California.  We have an even bigger fire up in northern California. 

The governor has declared a state of emergency in both counties, in both Los Angeles county and up in Sonoma County.  And he has set aside $75 million in a new fund to mitigate the costs of the massive power shut offs, these intentional power shut offs by the utilities to try to prevent fires.  
Is it working?  Well, we’ll find out.  

I want to show you something first right here.  I don’t know if you can see in the distance, while that home is destroyed, over there you can see the pink on the roof, the check dropped by the firefighters on the homes which to try to save the neighborhood which they did.  

But here we are, hundreds of thousands of people with their power intentionally cut off in the tech capital of the world.  So, what sort of technology are we using to try and better predict these fires?  Well, there are a couple of pilot programs going on for the first time this year.  One of them is called WiFire.  It’s a $200,000 fire program out of U.C. San Diego and they use cameras and other data to sort of predict where the fire is going.  

And L.A. County fire chief Daryl Osby told me, in this fire, it’s working here.  Listen.

DARYL OSBY, LOS ANGELES COUNTY FIRE CHIEF:  When he look at the projection, I mean, we had a press conference last night, there was a lull in the fire and things looked calm, but the WiFire projection indicated that this is going to take a turn and jump the 14 Freeway.  And it did exactly what it said it was going to do.  

WELLS:  But the big concern is what to do about the utilities, when and where to turn them off.  As you can see, they’re trying to work on in-house which has been damaged.  Those power shut offs are going to continue through the weekend.  

The governor is furious particularly with PG&E, at the way they handled this, saying it costs the economy billions of dollars.  PG&E is arguing that it’s prevent the fires by doing this.  Ironically, however, the main fire up in northern California may — may have been started by a PG&E transmission line which was not turned off.  

Reporting from Santa Clarita, I’m Jane Wells.  Back to you.  

HERERA:  There may be a new arms race developing.  The U.S. is modernizing its weapon systems and that could mean lucrative contracts for some of the country’s major defense companies.  
Morgan Brennan looks at the industry’s next chapter.  

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT:  When China celebrated its 70th anniversary earlier this month, it unveiled new weapons, including missiles making a lot of American defense experts very nervous.  

The DF-41 intercontinental ballistic missiles believed to be capable of carrying up to 10 nuclear warheads and hitting the U.S. mainland in 30 minutes.  

And the DF-17 hypersonic missile, while shorter range, represents a new threat all together.  But are formidable, but for different reasons, but both strike at the heart of military modernization, and what the U.S. will need as a new arms race becomes reality.  

Let’s begin with what America has.  The nuclear triad which currently includes Minuteman III  intercontinental ballistic missiles made by Boeing.  Lockheed’s Trident II, which can be fired from submarines, and cruise missiles launched from bomber aircraft.  All are being modernized but none are hypersonic.  

The U.S. also has anti-missile systems including Lockheed’s Aegis which targets intermediate range missiles and the Boeing made ground-based mid-course defense.  The only system to protect the homeland from ICBMs.  

But defense experts warned those current systems may not stop at China’s new hypersonic missile move superfast, at least five times the speed of sound but with cruise missile-like maneuvering.  Unlike ballistic missiles, hypersonics fly at lower and changing altitudes, are harder to see and chart an uncertain flight path, making detecting and intercepting them near impossible for current defense systems.

The Pentagon is fielding its own hypersonic protect types through a handful of programs, largely still in development stage.  But so far, Lockheed Martin has won some contracts, as has Aerojet Rocketdyne and privately held Dynetics.  Some early contracts have also gone to Northrop Grumman and Raytheon, which is merging with United Technologies in part to advance this tech.  

All of these next gen missiles are sparking a new arms race with China and with Russia as well, which is building its own prototypes.  
Hypersonics and modernization of the nuclear triad were key topics on contractors earning calls just this week.  And over the coming decades, all of this could result in billions if not trillions of dollars in future contracts.  
For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan.  

HERERA:  Competition hits some of VF Corps’s top brands and that’s where we begin tonight’s “Market Focus”.  

The apparel maker missed earnings expectations as growing competition slowed sales of its Vans and Timberland brands.  VF also reaffirmed its full year guidance.  The shares dropped more than 7 percent to $84.15.  

Phillips 66 reported better than expected results driven by higher retail fuel margins.  The refiner was also helped by a nearly 20 percent drop in oil prices during the latest quarter which reduced gasoline and aviation fuel costs.  Shares rose about 3.5 percent to $114.42.  

Lower sales in China and higher costs caused the biggest beer company in the world, AB InBev to miss estimates.  The company also cut its full-year forecast.  The shares fell more than 10 percent to $81.83.  
Time now for a weekly market monitor who says he is finding value in some overlooked names.  Craig Hodges joins us, CEO of Hodges Capital Management.  

Welcome back, Craig.  Nice to see you again.  

CRAIG HODGES, HODGES CAPITAL MANAGEMENT CEO:  Thank you, Sue.  It’s a pleasure being on.  

HERERA:  Let’s get right to the picks.  Century Communities, you’re playing these stocks have to do with the home sales business, the home building business.  Why do you like century?  

HODGES:  Yes.  Century is a very interesting in terms of low multiple but the real play on Century are the millennials.  The millennials are just reaching their 30s.  And so, as we know into our 30s, we have a family, we buy houses, we buy cars and that sort of thing.  And it’s the biggest demographic in history.  

So there is going to be a lot of entry level new home buyers for the first time.  And Century focuses on the entry level, the low end.  And the stock you know trades about a little less than 10 times earnings.  

But I think the next four or five years are going to be tremendous for home building because we don’t have enough homes for the amount that’s going to be coming out.  And Century is going to be a good way to play that play.  

HERERA:  Now, a little bit outside of that group, an airline, American Airlines.  Why?  

HODGES:  Yes, American has been the worst performing airlines.  I know you just highlighted United a while ago by has been one of the best.  But we like American in that they have been very, very hurt by the Boeing, you know, grounding of the MAX 8.  They’ve got — they’ve got about 24 of the planes.  And there’s been 8,000 of the flights cancelled last quarter.  

So, it’s been a real hit to the earnings.  Hence, the stock doing poorly.  We think that’s going to be resolved if not the fourth quarter early in the first quarter.  And with the stock down 30 percent versus the average airline stock being kind ever flat for the year, we think American has a lot of room to make up.  

And then let’s not forget, Warren Buffett owns 10 percent of it.  

HERERA:  True.  

HODGES:  So, if it’s good if you enough for Warren, right?  

HERERA:  All right.  Let’s finish up with Generac Holdings.  Now, that’s a play on homes as well.  

HODGES: Yes.  Generac makes generators.  And the generator business is tremendous right now.  

But with all the alternative energies you see what’s going on in California with the blackouts, the severe weather.  So there is a lot more unreliable, you know, electricity out there.  And generators are becoming — that’s also a housing play like you said in that a lot of people are now budgeting into their new houses, you know, a $5,000 to $10,000 generator.
We just tornadoes go through Dallas in my neighborhood.  

HERERA:  I know.  

HODGES:  There is 16,000 homes that have been without power all week long.  But you can drive around and you see the ones with generators and they’re the smart ones.  

Generac, the stock trades about 17 times earnings, but the next four or five years should be tremendous for this company.  

HERERA:  On that note, Craig, thanks so much.  Craig Hodges with Hodges Capital.
HODGES:  My pleasure, Sue.  
HERERA:  Coming up, gaming the game.  Video games are a hot industry and that means hackers are also trying to cash in.  

HERERA:  The video game industry is on a tear with revenue on the rise.  But there is an issue that many video game developers do not want to talk about.  And that is cheating.  

With more money on the line, hackers try and find vulnerabilities that let players get special advantages.  A recent survey by the security company Irdeto found 60 percent of online games were negatively impacted by cheaters.  And main — many players actually will stop playing if they think the competitors are cheating.  
Josh Lipton has our investigation, gaming the game.  

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Take a close look.  This is the exact same video game but in the version on the right the player has special software.  Or cheats, that makes it easier to win.  

BILL DEMIRKAPI, STUDENT & SECURITY RESEARCHER:  This is a bot behind this wall we see him a second.  

LIPTON:  In this modified game, you can see the enemy through walls, a distinct advantage.  

Bill Demirkapi is an 18-year-old recent high school graduate but don’t let his age fool you.  He is an expert in hacking video games to create cheats.  Something he knows could ruin the game.  

DEMIRKAPI:  I don’t think that I’m either good guy or necessarily a booed are bad guy.  But I think that a lot of what I do can be interpreted as being the bad guy.  

LIPTON:  To find cheats hackers find vulnerabilities in the game’s code.  It’s an advantage people are willing to pay for.  

DEMIRKAPI:  For the higher end cheats, I’ve made, I’ve sold them for hundreds of dollars a month, usually $100.  

LIPTON:  The gaming insiders and cybersecurity experts tell CNBC that cheats are a huge threat to the growing video game industry.  

ALEX HAMERSTONE, TRUSTEDSEC PRACTICE LEAD:  Why would you want to play a game you can’t win?  It’s just not fun anymore.  

LIPTON:  Alex Hamerstone works for information security firm TrustedSec helps video game makers keep their products secure.  

HAMERSTONE:  Up here, you’re buying different cheats or add ones for things for the game.  

LIPTON:  He showed CNBC websites where players can buy and sell cheats.  

HAMERSTONE:  This add on is a lot special athletes using steroids or some other performance enhancing drug.  

LIPTON:  From the Halo tournament on the 99th floor to the Willis Tower in Chicago, to a 16-year-old winning $3 million at the Fortnite World Cup in New York, the video game industry is on fire and expected to bring in $174 billion in global revenue.  But in order for games to succeed, players say developers must stop cheaters.  

“SCEPTIC”, FORTNITE PLAYER:  Experienced hackers in Fortnite, those people entire the map hitting me and head-shotting me and instantly killing me which is pretty crazy.  

LIPTON:  But gamers say it’s uncommon to find cheaters at tournaments with money on the line.  

“TRIPPPEY”, HALO PLAYER:  Somebody hacking a tournament they would definitely get disqualified I hope so.  

LIPTON:  At most tournaments, the organizers control the computers and consoles the game is played on and keep a strict watch.  
But when it comes to playing at home, it’s an ongoing challenge for game makers.  

DEMIRKAPI:  You are fighting a battle you already lost because when I have my computer from upon front of me I have physical access it’s difficult for them to actually prevent from cheating, and the best thing they can do is make the bar high enough to where it’s not worth my time.  

LIPTON:  Hacking video games was a presentation topic at this year’s DefCon, a hacking convention in Las Vegas with an estimated 30,000 attendees.  That’s where we met Bill Demirkapi and security researcher Jack Baker.  

JACK BAKER, SECURITY RESEARCHER:  Because there is so much money on the line now, there’s been a lot more of a focus on how can I make money off of that?  

LIPTON:  Let’s say you’re a game developer, you’re a game publisher, what can you do to prevent these cheats?  

HAMERSTONE:  They watch these patterns, they watch for signatures.  There are ways they can look at behind the scenes see if people are using these things.  But a lot of it is still reliant on user’s reporting.  

LIPTON:  Microsoft 343 Industries is the maker of first person shooter game Halo.  

TAHIR HASANDJEKIC, MICROSOFT LEAD ESPORTS PRODUCER:  Halo has never had a huge issue with hacking thankfully.  And for us as developers, competitive integrity and experience of players online is crucial.  

LIPTON:  Epic Games, the maker of Fortnite, declined an interview, instead sending a statement saying, in part: We will continue to pursue all available options, including revoking access to Fortnite to make sure our games are fun, fair and competitive.  

Demirkapi says he hasn’t sold cheats since last year.  Today, he has no regrets.  

DEMIRKAPI:  I’m trying to transition more into the information security field.  Game hacking has been an extremely valuable learning opportunity.  

HERERA:  Demirkapi demoed cheating on “Rainbow Six Siege”.  Ubisoft, the maker of that game, told us in part, quote: Rainbow Six Siege does not tolerate cheats and exploits used in game.  Players found using cheats are penalized or banned accordingly, end quote.  

We also should note that Demirkapi was against bots or computers. 

Here’s another look at the day’s numbers on Wall Street.  The Dow was up strong 152 points, the Nasdaq added 57, the S&P 500 rose 12.  All of the major averages were higher for the week.  

And that is NIGHTLY BUSINESS REPORT for tonight.  I’m Sue Herera.  Thanks for joining us.  Have a great weekend.  We’ll see you Monday.  

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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