ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Sue Herera and Bill Griffeth.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: New high. The S&P 500 kicks off a big week of earnings at a record, and it may be because of what companies are not saying on their conference calls.
ABC of earnings. Alphabet`s profits disappoint but revenues rise as higher expenses take a toll on the company`s bottom line.
California on fire. From the North to the South, wildfires are spreading and once again the state`s biggest utility is at the center.
Those stories and more tonight on NIGHTLY BUSINESS REPORT for Monday, October 28th.
Good evening, everyone, and welcome. Bill has the evening off.
A new week, a new record. The S&P 500 closed at an all-time high extending its gain into the fourth week as investors cheered corporate earnings. According to LPL Financial, today is historically the best day of the year for stocks and it starts the best six-month stretch for the market.
And today did not disappoint. The Dow Jones Industrial Average was up to 27,090. The Nasdaq added 82 and the S&P 500 rose 16.
And as you know, earnings can often drive rallies, but this move higher appears to be driven by what`s not being said on all of those earnings conference calls.
Bob Pisani explains.
BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: We`re coming up on the halfway part of the earnings season. So far, there`s one big word investors are not hearing and that`s recession. There`s plenty of issues still out there, but the U.S. consumer which is the engine of global growth is still holding up. We`ve been scanning the conference calls. And out of roughly 200 companies that have reported over the last month, just 32 of them have mentioned the word “recession”, and that, along with hopes of a trade deal is the major reason the S&P is hitting record highs today.
The consumer`s holding up. Bank and credit card CEOs in particular have painted a healthy picture of the consumer. Zions Bank Corp CEO said: We don`t see any indications of a broad-based recession on the horizon.
Richard Fairbank, CEO of Capitol One, said the U.S. consumer is in good shape thanks to its strong labor market, rising wages and last year`s tax cuts.
Home builders have also touted strong consumer spending. Stuart Miller of Lennar (NYSE:LEN) said despite all the talk of a recession, customers don`t seem to be viewing it that way and the housing market in general seems to be strong.
Then there are the autos and industrials. That`s a far less rosy outlook. Graco`s CEO said the trade war and the slowdown in automotive in China is really some putting some strain on industrial activity across the board over there.
The bottom line is this: it`s unlikely a recession will become a self- fulfilling prophecy. That`s very good news. The economic narrative has shifted from recession earlier in the year to slower but more stable growth, a far less dire scenario for 2020.
For NIGHTLY BUSINESS REPORT, I`m Bob Pisani at the New York Stock Exchange.
HERERA: Global markets are also in rally mode. Japan, France, Germany and Italy all hitting new 52-week highs in trading today.
So let`s turn now to Larry Adam to talk more about this record-setting market. He is the chief investment officer at Raymond James.
Larry, nice to have you back with us. Welcome.
LARRY ADAM, CHIEF INVESTMENT OFFICER, RAYMOND JAMES: Thanks for having me.
HERERA: Is this move in the S&P 500 and the broader market sustainable in your view?
ADAM: I do think it`s sustainable for a couple of reasons. As you mentioned earlier in the show, there`s no recession. And as long as there`s no recession, that tends to be very positive for the equity markets.
The second reason is that I do think you`re going to see an acceleration of earnings growth going into next year. When you have better earnings growth, that tends to be supportive of higher equities. And then, third, I do think you`re going to see some positive seasonality.
As Bob said earlier, this tends to be the best time of the year. The fourth quarter tends to have the best performance of the four quarters. Positive seasonality tends to extend into next year because when you have an election year, that tends to be very good for the equity markets — 90 percent of the time, you have a positive equity market, and that`s regardless of whether or not the incumbent or the challenger wins.
HERERA: And what about the trade situation? Because that has created so much volatility both on the up side and the down side for investors. But you think the language or at least the optics have changed a little bit?
ADAM: Yes, I think very — if you looked earlier, there was a lot of hardball discussion that was taking place. I think when you look at this upcoming meeting in November 14th and 15th in Chile where you`re going to see President Xi from China and President Trump from the U.S. get together, I think they`re going to want to play ball and get something done because both of them understand the importance of getting a deal done to help support the economy of both countries going forward. So, I think they will work very closely to get a deal and that will be a positive catalyst for the equity markets.
HERERA: We mentioned the fact that the overseas markets were all higher in today`s trading session. Would you be putting money to work in the overseas markets or do you think it`s better to be domestically invested?
ADAM: I still prefer the U.S. equity market over the international markets.
First of all, if you do look at economic growth, it is still better here than in the U.S. than what you`re seeing overseas, because those economies are struggling. That`s bleeding through to earnings growth. When you look at earnings growth of U.S. companies, right now, they tend to be much better than what you`re seeing overseas.
And then the other thing that`s very important is you have to understand what you`re buying. And when you look at the U.S. equity markets, we have a lot more technology exposure. That happens to be one of my favorite sectors. And you`re going to see that during this earnings session, that`s an area to be in. That`s why I continue to favor the U.S. equity markets.
HERERA: On that note, Larry Adams with Raymond James — Larry, thank you so much.
ADAM: Thank you, Sue.
HERERA: An earnings miss for Google`s parent company, Alphabet. Aggressive spending on marketing and hardware development hit its bottom line. The good news though, revenue was strong rising 20 percent. But investors focused on the weaker than expected earnings and the stock was volatile in initial after hours training.
Josh Lipton has more.
JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: When Alphabet reports, they make a beeline for what`s called Google (NASDAQ:GOOG) Properties. That`s the bread and butter, the properties that the company owns and operates like Search and YouTube. That grew 19 percent to $28.7 billion.
Aaron Kessler of Raymond James says that was above his estimate, and that was the good news. On the other hand, Kessler notes that operating expenses came in higher than expected during the quarter, $13.7 billion. However, Alphabet`s CFO Ruth Porat did note that there were some unusual items in the quarter explaining some of that. For example, a $545 million expense related to a legal settlement.
For NIGHTLY BUSINESS REPORT, I`m Josh Lipton, San Francisco.
HERERA: There were reports that Alphabet is interested in buying Fitbit and made an offer, though it`s not clear if negotiations may lead to a deal. That report, though, was enough to send Fitbit shares up more than 30 percent.
To the economy now and a new survey that shows hiring has hit a seven-year low. The survey from the National Association of Business Economists also found that fewer employers are raising pay. More businesses are reporting slower sales and profit growth in part because tariffs have raised prices.
Federal Reserve policy makers begin a two-day meeting tomorrow. A decision on interest rates will be announced on Wednesday. The market views the outcome as critical in part because it comes with the S&P 500 at new highs.
Mike Santoli has more.
MIKE SANTOLI, NIGHTLY BUSINESS REPORT CORRESPONDENT: With a break to a new record high in the major indexes just ahead of a Federal Reserve meeting, Wall Street finds itself in a pretty familiar spot. In fact, the past five Fed meetings going back to march have come as the S&P 500 was approaching or was sitting at an all-time high and each time stocks began to dip or pull back anywhere from 2 to 7 percent in the days surrounding that Fed meeting. The most severe setbacks came after the May or July meeting which came in the thick of a reassuring corporate earnings season.
Investors are now asking whether this pattern will strike again with the Fed widely expected to deliver its third rate cut in four months coming this Wednesday. But there are reasons to think the market is a bit less vulnerable leading up to this Fed move. For one thing, the rally lately has been unusually broad and has beaten the beaten down cyclical stocks and the financial, industrial and transportation sectors.
This is a sign the market is no longer acutely fearful of a recession starting very soon and investors are not seeking open-ended help from the Fed the way they were in past months. Treasury yields as well have begun to rise, especially longer term bonds which is the market`s way of suggesting it believes the Fed can pause after one more rate cut potentially and to see if a soft patch in global growth firms up.
And, of course, the calendar helps. November and December are two of the year`s best months for stocks, at least historically speaking.
Now, of course, with stocks up some 7 percent since their August low, they might be expected to settle back on almost any excuse or headline, but the market might also be in a better position to handle the Fed`s message this time around than it was in the spring and summer slowdown scare.
For NIGHTLY BUSINESS REPORT, I`m Mike Santoli.
HERERA: The European Union agreed to a potential three-month Brexit extension. The new date is January 31st. U.K. Prime Minister Boris Johnson vowed to deliver Brexit on October 31st but was forced to request a delay after he was defeated in parliament. The European Council president reluctantly accepted the postponement saying he had no choice under the law.
Boeing`s CEO will make his first appearance on Capitol Hill tomorrow to testify on the 737 MAX crashes which killed 346 people. His testimony was released today and in it he will acknowledge mistakes and tell the Senate Commerce Committee that improvements have been made to ensure that accidents like these never happen.
It is time to take a look at some of today`s “Upgrades and Downgrades”.
Travelers was upgraded to buy from neutral at MKM Partners. The analyst cites higher policy rates which are expected to persist next year and into 2021. The price target is $160. Despite the upgrade, though, shares of the Dow component fell to $129.30.
JetBlue was upgraded to overweight from neutral at JPMorgan (NYSE:JPM). The analyst cites a more upbeat earnings outlook. The price target is $24. The stock was up 2.5 percent to $19.23.
Lululemon was downgraded to neutral from buy at Citi. The analyst cites a pickup in promotions which could have weaker than expected margins. The price target is $205. The stock finished right around that level, $205.97.
Microsoft (NASDAQ:MSFT) was the best performing stock on the Dow today. This after landing a big defense modernization contract late Friday. The contract is called JEDI, but it has nothing to do with “Star Wars” and everything to do with the cloud.
Here`s Morgan Brennan.
MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: After competition that stretched almost two years and was ripe with controversy, Microsoft (NASDAQ:MSFT) emerging victorious for the Defense Department`s JEDI Program. The Joint Enterprise Defense Infrastructure or JEDI is a large winner-take-all cloud contract to unite the entire U.S. military within a single data framework and up to ten-year contract valued at $10 billion.
Amazon (NASDAQ:AMZN), which had been viewed as the front-runner, Microsoft (NASDAQ:MSFT) and earlier on in the competition, IBM and Oracle (NASDAQ:ORCL) all vied for the opportunity. Analysts say this outcome will have a big impact on the broader market for cloud.
KIRK MATERNE, EVERCORE ISI ANALYST: I think for Microsoft (NASDAQ:MSFT), it`s really a validation of its broader cloud strategy in terms of trying to go deeper with the enterprise customers they already have from a public cloud perspective. I think in terms of what it does for the numbers, it really doesn`t move the numbers in any, you know, in a big way.
BRENNAN: Microsoft (NASDAQ:MSFT) responding, quote, we will forge expanding our long-standing partnership with DOD and support our men and women in uniform, at home, abroad and at the tactical edge with our latest unique, differentiated Azure cloud abilities.
And in a statement, Amazon (NASDAQ:AMZN) saying, quote, we`re surprised about this conclusion. AWS is a clear leader in cloud computing and a detailed assessment purely on the comparative offerings clearly led to a different conclusion. Amazon (NASDAQ:AMZN) can protest the outcome but it hasn`t said whether it would.
Experts think it may have grounds to in part based on some of the, as analysts at Cowan put it, animus between President Trump and Amazon`s CEO Jeff Bezos that, quote, raises the level of intrigue.
One shareholder notes AWS has been slowing but that Amazon (NASDAQ:AMZN) is still the market leader.
ALEX MOAZED, APPLICO CEO: Still Amazon (NASDAQ:AMZN) has a lot of head space beyond Microsoft (NASDAQ:MSFT) number two Google (NASDAQ:GOOG) cloud number three in the space. I mean, I think the one part about the JEDI versus the difference about the general kind of AWS or Azure business is this idea of a network effect of these kind of app ecosystems, right? So that means that there`s a winner take all dynamic if you look at an AWS or an Azure and Amazon`s still the clear leader in that.
BRENNAN: For its part, the Defense Department issuing a lengthy statement addressing some of the very concerns that have plagued procurement since the start. Quote: The process cleared review by the GAO and Court of Federal Claims. At the outset, the competition included four different offers. All offers were treated fairly and evaluated consistently with the solicitation`s stated citation criteria.
But as big as JEDI is expected to be, it`s still just one piece of modernization efforts and the Pentagon says it does anticipate additional cloud contracting opportunities.
For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan at the New York Stock Exchange.
HERERA: Still ahead, California burning.
(BEGIN VIDEO CLIP)
JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT: I`m Jane Wells in Healdsburg, California. We have fire and destruction north and south. The governor has declared a state of emergency. And the state`s large utility companies are trying to stay one step ahead of the flames. We`ll have that story coming up.
(END VIDEO CLIP)
HIERERA: California is scorched. Destructive fires are sweeping through the state and the winds are high. Power has been shut off for thousands of people and the utility PG&E today said that its power lines may have started two wildfires over the weekend in the San Francisco Bay Area. PG&E shares fell sharply again today as the Kincaid Fire in the north casts doubt over the bankrupt utility`s future.
Jane Wells reports from Wine Country in Healdsburg, California.
WELLS: From north to south.
UNIDENTIFIED FEMALE: They want to get people out of there safely. They`ll worry about the structures later.
WELLS: California was on fire again. In southern California, several new fires broke out including one along the 405 Freeway which forced celebrities who live on L.A.`s west side to flee.
MAYOR ERIC GARCETTI (D), LOS ANGELES: I personally saw five homes on tiger tail that have been lost but I saw them holding the lines there and that has not spread further in the last couple of hours.
WELLS: And up north in Sonoma County, the Kincaid Fire doubled in size overnight to over 66,000 acres. Over 180,000 people remain evacuated and more than 2 million people have been without power. PG&E turned off the power intentionally to avoid disaster but disaster came anyway.
The winds were calm and the temperatures cold which slowed the progress of the fire, but a new wind event is expected to start Tuesday and PG&E is telling a lot of people it`s not going to be worth it to turn the power back on from many of them until after that second event blows through.
RYAN WALBURN, NATIONAL WEATHER SERVICE: What we`re starting to get ready for, though, is another red flag event. Right now, it looks like that`s going to start sometime midday Tuesday and push us into Wednesday morning. So, we`ve got kind of a quiet 24 hour and then we`re going into another critical period.
WELLS: A map of PG&E outages shows how widespread the blackout is in the northern part of the state. Well, down south, SoCal Edison warns its current intentional outage areas could increase as the winds kick up. Edison reports earnings on Tuesday, which will give investors the first idea of what fires and blackouts are causing.
PG&E, which is in bankruptcy, reports next week. But its shares continue to have their own sort of power failure.
Governor Newsom is reportedly floating the idea that Warren Buffet buy the utility out of bankruptcy. And even though cutting the power is supposed to cut down on the chances of a fire and may be it has, the fire which destroyed winery may have been started by a power line which was not turned off.
For NIGHTLY BUSINESS REPORT, I`m Jane Wells in Healdsburg, California.
HERERA: Tiffany (NYSE:TIF) gets a proposal. That`s where we begin tonight`s “Market Focus”.
The jeweler confirmed it received a possible acquisition offer from French luxury goods maker LVMH. The financial details were not released but reports say the offer is for about $120 a share. Tiffany`s says it`s reviewing that offer. Its share sparkled up more than 31 percent to $129.72.
Walgreens will be shutting down about 160 in-store clinics as the drugstore chain looks to cut costs and bring in outside providers to help deliver medical services. Walgreens quarterly results also topped expectations, thanks to higher prices for patented drugs and prescription volumes. Shares were up a fraction to $55.80.
Spotify posted an earnings beat that surprised Wall Street, driven by strong monthly active user and premium subscriber numbers. Separately, the company`s CFO will be retiring in January after overseeing Sotify`s direct listing last year. Spotify rose more than 16 percent to $140.20.
And the chicken processor Sanderson Farms (NASDAQ:SAFM) rose today thanks to China lifting its ban on American poultry imports. “Reuters” says this is part of the phase 1 of the trade deal in which the ban will be lifted. Sanderson Farms (NASDAQ:SAFM) rose nearly 16 percent to $155.71.
After the bell, Beyond Meat topped estimates as the company received new partnerships with restaurants seeking more plant-based products. Beyond Meat also raised its full year outlook. The shares were initially volatile after hours and they closed the regular session up more than 4.5 percent to $105.41.
Also after the bell, Mirati Therapeutic said its experimental drug helped reduce tumors in about 40 percent of patients with advanced lung and colorectal cancer in early stage trials. Mirati shares initially rose following the news and they closed the regular session up a fraction to $81.47.
AT&T (NYSE:T) reported better than expected earnings and reached a truce with an activist investor. The company agreed to focus on its bottom line and not enter into any big takeovers in the coming years. Activist investor Elliott Management called into question AT&T`s strategy of making big acquisitions. As part of the truce, AT&T (NYSE:T) also committed to stock buybacks. It will appoint two new directors to its board and will conduct a review of its portfolio and it will pay down debt.
When you think of activists, you may think of investors who pressure a company to aggressively cut costs, but that`s not always the case.
Leslie Picker did some digging.
LESLIE PICKER, NIGHTLY BUSINESS REPORT CORRESPONDENT: When defending against activist investors, companies like AT&T (NYSE:T) often argue that the outside input may not be best for the long run. Elliott had been pushing AT&T (NYSE:T) to focus more on the bottom line and cut out unnecessary acquisitions.
But what if so-called corporate raiders were actually corporate innovators? That`s the case that researchers from Duke, Columbia, Yale and a host of other schools are seeking to make in a Journal of Financial Economics. Their findings contradict conventional wisdom that activist investors slash and burn companies in favor of short-term profits, the academics found instead that activists actually make companies more innovative.
They analyzed publicly traded companies that were targeted by hedge funds between 1994 and 2007. The academics found that while research and development spending dropped significantly in the five years after a hedge fund gets involved with the company, the number of patents and citations for patent actually increased. The study argues that outside intruders make companies more efficient when it comes to innovation.
Elliott hopes that its involvement in AT&T (NYSE:T) can help move the company forward during this pivotal time in the telecommunications industry.
For NIGHTLY BUSINESS REPORT, I`m Leslie Picker.
HERERA: Coming up, why even those with health insurance are avoiding seeking care.
HERERA: For more than 200 million Americans who have employer-based health insurance or by their coverage through the federal marketplace, it`s time to pick your plan for next year. But what type of insurance should you choose during open enrollment and how can you save money?
You know who`s here. Our senior personal finance correspondent Sharon Epperson joins us with some answers.
It`s always great to see you, Sharon.
SHARON EPPERSON, NIGHTLY BUSINESS REPORT SENIOR PERSONAL FINANCE CORRESPONDENT: Great to be here, Sue.
HERERA: All right. I was looking through some of this. It literally is an alphabet soup. There`s a PPO, an HMO and one I had never heard HDHP.
So, what do people have to learn?
EPPERSON: The first thing you have to know is know when open enrollment starts, November 1st for the federal marketplace, and for many companies, the beginning of November as well. They know what they stand for.
HMO is a health maintenance organization. Know that that`s something that`s going to — you pay less probably out of pocket but you have to stay in that network so that`s more constricting.
The PPO, which many employers offer and many people get in their employer plan, will have a higher deductible, higher premium but more flexibility. You may not have to declare a primary care physician. A health — a high deductible health plan is increasing in popularity. And that is key, if you can afford to pay that high deductible and also if you want a health savings account attached to it.
HERERA: OK. So, now that we know what all of those things stand for, what`s the first step in open enrollment, in approaching it?
EPPERSON: Well, the first step in approaching it is kind of understanding what health insurance needs are and what health insurance is. And, unfortunately, many people don`t know that. A new report out from policy genius which is an online insurance marketplace found that one in four people avoided care or treatment because they were unsure of their coverage.
Many of these people already have health insurance but they`re still not sure what it`s covering. Twenty-nine percent, only that number, was able to correctly identify what a premium is, what a deductible is, what a copay is. These are the key expenses involved with your health insurance and you need to know what they are and what you`re paying for.
HERERA: All right. We went over some of the plans. You mentioned a health savings account. What`s the difference between a health savings account and what`s called an FSA?
EPPERSON: These are two ways you can save money for health care expenses. And it`s important to know that with a health savings account, you must be enrolled in a high deductible health plan to do it. Also know that any money that you put into that will roll over year to year.
So it can be an investment opportunity. You can invest that money. It is portable. It is yours.
The difference between that and a flexible spending account, the flexible spending account is only really offered through your employer. So, if you`re getting coverage through the individual marketplace, you can`t get an FSA.
The other thing to keep in mind is that it is not portable. It`s not an investment option for that one. If you don`t use it that particular year, or by the grace period, you`re going to lose that money.
HERERA: Well, that is good to know.
EPPERSON: That`s important to know.
HERERA: All right. When open enrollment comes, you`re sitting at my desk, we`re going through it together. Thank you, Sharon.
EPPERSON: Just review it. You just got to review it.
HERERA: Absolutely. Sharon Epperson.
HERERA: Well, the New York Stock Exchange had an out of this world moment this morning when the first space tourism company began trading. The company was created from the merger between Richard Branson`s Virgin Galactic and a publicly traded shell company. That allowed Branson`s space venture to side step the traditional IPO process.
(BEGIN VIDEO CLIP)
SIR RICHARD BRANSON, VIRGIN GROUP FOUNDER: I think it`s a very big milestone. If the public wants to take a little, you know, dabble a little bit in the space, own a little bit of a spaceship company, they can now do so. We`ve managed to completely fund Virgin Galactic through to when it breaks even.
(END VIDEO CLIP)
HERERA: The shares rose for most of the session but drifted lower and ended the day down just a fraction.
Before we go, here`s a look at the day`s numbers on Wall Street. The Dow is up 132. Nasdaq added 82 and the S&P 500 rose 16 to close at a record.
And that is NIGHTLY BUSINESS REPORT tonight. I`m Sue Herera. Thanks for joining us. Have a great evening. We`ll see you tomorrow.
Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. 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.
<Copy: Content and programming copyright 2019 CNBC, Inc. Copyright 2019 ASC Services II Media, LLC. All materials herein are protected by United States copyright law and may not be reproduced, distributed, transmitted, displayed, published or broadcast without the prior written permission of ASC Services II Media, LLC. You may not alter or remove any trademark, copyright or other notice from copies of the content.>