Transcript: Nightly Business Report – October 30, 2019

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR:  Shiny Apple (NASDAQ:AAPL).  Revenue at the company rises even as sales of the flagship iPhone decline, reassuring investors for now.  

JEROME POWELL, FEDERAL RESERVE CHAIRMAN:  We would need to see a really significant move up in inflation that’s persistent before we even considering raising rates to address inflation concerns.  

HERERA:  The Fed cuts interest rates for the third this time year, but it was the outlook for future rate hikes that sent the S&P 500 to its 15th record close of 2019.  

Grilled on the Hill.  Lawmakers slammed the CEO of Boeing (NYSE:BA), this time for his $30 million salary.  

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, October 30th.  

Good evening, everyone, and welcome.  Bill has the evening off.  
The S&P 500 closed at a record following comments from the Fed chief.  We’ll have more on that in just a moment.  

But we begin tonight with Apple (NASDAQ:AAPL).  The trillion dollar company reported earnings and revenue that topped expectations, even as iPhone sales declined and overall profit fell from a year ago.  The company said it’s all-important holiday quarter could potentially beat last year’s growth.  It also suggested that it could surpass the record $88 billion in revenue hit in 2017.  The stock which is widely held by investors in everything from mutual funds to ETFs to retirement accounts rose in initial after-hours trading.  
Josh Lipton has more on the quarter from Apple’s headquarters in Cupertino, California.  

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Apple (NASDAQ:AAPL) no longer breaks out how many iPhones they’re selling quarter in and quarter out.  But they do still break out total iPhone revenue, and that was better than expected at $33.4 billion in the quarter, and also, they’re looking for something closer to $32.4 billion.  Now, iPhone revenue was down 9 percent, but that was a sequential improvement.

CEO Tim Cook telling me in an interview that of those three new iPhone models, the 11, the 11 Pro and 11 Pro Max, it is the 11 that has been his bestseller.  Remember, that’s a successor to the XR.

Beyond Apple’s bread and butter iPhone franchise, investors make a bee line to that faster growing higher margin services segment.  That jumped 18 percent to also a better than expected $12.51 billion in the quarter.  
For NIGHTLY BUSINESS REPORT, I’m Josh Lipton, Cupertino, California.  

HERERA:  Daniel Flax joins us now to talk more about Apple’s earnings beat.  He is the senior research analyst at Neuberger Berman.  
Welcome, Daniel.  Nice to have you here.  


HERERA:  The outlook that Tim Cook gave was quite bullish.  Do you think it signals that he has managed to transform the company from its reliance strictly on iPhone sales?  

FLAX:  Sue, I think it’s showing the broadening of revenue drivers.  The iPhone franchise remains healthy.  I think what’s most important in the recent launch of the iPhone 11 was the $50 price cut helping to drive demand.  Of course, you have batteries that last longer, a significant upgrade to the camera.  That’s important.  

I think the services business remains very healthy.  And then you have opportunities in wearables, where the company is really just getting going.  

HERERA:  So, if you had to look at the stock right now for a long-term investor, a lot of people feel as though the stock is expensive.  It certainly is performing well.  But it may be a little expensive.  What do you think of the stock?  

FLAX:  Sue, we think the stock is attractive over the next couple years because you have this company innovating on multiple fronts.  And ultimately, it’s about delivering differentiated products and services.  You, of course, have Apple’s new TV offerings coming out in November.  
And so, we like the story here over the next two years.  

HERERA:  In terms of what Mr. Cook said about transforming the company, he has a lot of competition, as you just pointed out going into the streaming space and the like.  How do you think Apple (NASDAQ:AAPL) is positioned for that competition?  

FLAX:  I think the way they are approaching it is really to come up with curated content.  The company from what I can tell is not trying to be all things to all people.  I think the content creation and working with luminaries such as Oprah and Steven Spielberg give Apple (NASDAQ:AAPL) a spot to make a difference over the next couple years.  

I think when we think about the story, content has the ability to strengthen the ecosystem appear really help add value to Apple (NASDAQ:AAPL) customers’ lives.  

HERERA:  All right.  On that note, also, the iPhone sales decline — is that at all worrisome or did you factor that in?  

FLAX:  We expected the iPhone to decline.  Recall, of course, that in the prior year the iPhone sales were very strong.  
HERERA:  Uh-huh.  

FLAX:  When we look out over the next 12 to 18 months, we expect the iPhone business to return to growth.  And that’s driven by, of course, very strong product lineup.  And at the end of next year, we should have a 5G iPhone coming out which could also help sales.  

HERERA:  We will see.  Daniel, thanks so much.  Daniel Flax with Neuberger Berman.  
FLAX:  Thank you, Sue.  

HERERA: And now to the other big story this evening, and that is the Fed.  The Central Bank lowered interest rates again, and pointed to a possible halt on further rate cuts.  But the Fed chief did more than that.  He also hinted about when the next rate hike might come, and that helped lift the stock market.  

The Dow Jones Industrial Average rose 115 points to 27,186.  The Nasdaq added 27.  And the S&P 500 was up 9 to an all-time high.  
Steve Liesman has more from Washington.  

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT:  The Federal Reserve met market expectations and cut interest rates by a quarter point, its third cut this year.  The new range of the Fed’s overnight lending rate is now 1.5 to 1.75 percent.  

But Fed Chairman Jerome Powell signaled that the rate cutting exercise is likely over for now.  

POWELL:  We think that the current stance of policy is likely to remain appropriate, likely to remain appropriate as long as incoming information about the economy is broadly consistent with our outlook which is a positive one of moderate economic growth, strong labor market, and inflation moving close to 2 percent.  

LIESMAN:  Concerns over the trade war and global economic weakness were behind the cut now.  But Powell suggested the Fed had provided a lot of help to the economy and that seems like enough.  

In its statement, the Fed dropped the critical phrase from prior announcements that would, quote, act as appropriate.  That had been the signal to markets that future rate cuts were coming.  That’s gone now.  Instead, the Fed says it will, quote, assess the appropriate path of the funds rate and that means the Fed is likely on hold for a while.  

So, what would it take for the Fed to resume cutting?  Powell said the economic data would have to come in a much weaker than the Fed expects.  And Powell also provided positive news to markets by suggesting the Fed is far from potentially hiking interest rates.  

POWELL:  I think we would need to see a really significant move up in inflation that’s persistent before we would consider raising rates to address inflation concerns.  

LIESMAN:  There were two dissents to the statement, both by Fed bank presidents who did not want to cut rates.  But presumably, after three rate cuts and now a Fed that’s on hold, the committee might be less divided now.  
For NIGHTLY BUSINESS REPORT, I’m Steve Liesman in Washington.  

HERERA:  Let’s turn now to Brian Nick for more analysis on the Fed and market.  He is chief investment strategist at Nuveen.  
Brian, welcome.  Nice to have you here.  


HERERA:  What did you make of what the Fed not only did today, but what the chief said today?  

NICK:  Yes, I think what he said was much clearer than what was in the statement.  So, we had to wait for about a half hour for it to become I think crystal clear that, yes, the Fed does intend for this to be the last rate cut at least for the moment and that they’re moving into December with I think somewhat more optimism that some of the policy risks that had been bothering have mitigated somewhat on trade, potentially on Brexit.  

They don’t think continuing to cut rates is going to be necessary for the U.S. economy to grow at about where it grew in the third quarter which is about 1.9 percent.  That’s the Fed’s forecast for next year.  It’s about our forecast as well.  

HERERA:  So the trade situation, though, still seems to be somewhat more fluid than certainly the market would like it to be.  Is that the biggest risk for the Fed now?  

NICK:  In the short-term, absolutely.  There are still tariffs set to go into effect on December 15th.  The October 15th tariffs were cancelled.  
I think when Powell talked about mitigating risk, I think he talked about — was mainly are referring to those October 15th tariffs that could have gone into effect but were tabled as part of the ongoing negotiations between the U.S. and China.  But if those December 15th tariffs move forward, it seems likely that they’ll also be delayed as part of the ongoing negotiations.  But if they go into effect, that’s something that I think would potentially bother the Fed.  

Unfortunately, their meeting is December 11th.  And the tariffs go into effect on December 15th.  So, they have a bit of a time problem with trying to figure out exactly what’s going to be happening at the end of the year.  

HERERA:  And also, the Brexit situation, granted, things are still fluid there.  But they do seem to have lessened.  How would you rate that in terms of a risk for the market, the economy and the Fed?  

NICK:  It’s still a risk but much lower than it was because the risks of the U.K. crashing out of the E.U. with no deal in place and a lot of uncertainty about how the border would be treated, how taxation would work, that seems like it’s gone from the likely outcome to one of the less likely outcomes.  

There is going to be an election, again, December 12th, the day after the FOMC meeting.  So, the FOMC won’t have an idea what’s going to be happening with U.K. politics but it may feel better knowing regardless of the outcome of election, you’ll either have a second referendum that will end up potentially with no Brexit or you’ll have a deal that’s now more solid between the E.U. and U.K. which would be much less disruptive to global financial markets.  

So, that was one reason why you see interest rates move up in anticipation of the FOMC meeting because there’s some risk being taken off the table with Brexit that’s affecting the global markets.  

HERERA:  But beware of December I think you hear you saying that.  
Brian, thanks so much.

NICK:  A lot can go wrong in December.  

HERERA: Yes, exactly.  Brian Nick with Nuveen.  Thanks so much.  

NICK:  Thanks, Sue.  

HERERA:  Job growth at private businesses picked up in October.  According to ADP, employers added 125,000 positions last month, that is slightly above expectations.  Education, health services and transportation all saw job gains while manufacturing, construction and mining saw job losses.  

A separate report showed the economy grew at annualized rate of 1.9 percent in the third quarter, thanks to continued consumer spending which offset a decline in business investment.  That rate was slightly better than expected.  

The CEO of Boeing (NYSE:BA) was back on Capitol Hill today.  Dennis Muilenburg answered questions from a House panel over the troubled 737 MAX.  And in second day of testimony was just as heated as the Senate hearing was yesterday.  

Phil LeBeau was in Washington for us following the story.  
Good evening, Phil.  What did you make of the testimony today?  What about the — go ahead.  

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT:  I — Sue, I was going to say, much more pointed today, especially around two issues.  One, the compensation that he receives and whether or not he should waive that compensation.  And also, should he even remain as CEO of the company?

REP. STEVE COHEN (D), TENNESSEE:  Is anybody at Boeing (NYSE:BA) taking a cut or working for free to try to rectify this problem like the Japanese would do?  

DENNIS MUILENBURG, BOEING CEO:  Congressman, my board will conduct a comprehensive review.  

COHEN:  So, you’re saying you’re not giving up any compensation at all.  You’re continuing to work and make $30 million a year?  After this horrific two accidents that caused all these people’s relatives to go, to disappear, to die?  You’re not taking a cut in pay at all?  

MUILENBURG:  Again, our board will make those determinations.  
COHEN:  You’re not accountable then.  You’re saying the board is accountable.  

MUILENBURG:  My intent is to see this through.  I think that’s part of my responsibility.  

REP. DEBBIE MUCARSEL-POWELL (D), FLORIDA:  Mr. Muilenburg, if you had an ounce of integrity, you would know the right thing to do is to step down.  

REP. JESUS GARCIA (D), ILLINOIS:  You’re the captain of this ship.  A culture of negligence and incompetence or corruption starts at the top and it starts with you.  You padded your personal finances by putting profit over safety.  And now, 346 people, including eight Americans, are dead, on your watch.  Today, you said you made mistakes and you’re accountable.  

LEBEAU:  Following the hearing, we had a chance to catch up with Dennis Muilenburg and I asked him point blank, does he plan to stick with the company or give back compensation?  
Here’s what he had to say.  

LEBEAU:  You had more than one representative say, you’re not the person, you should resign.  

MUILENBURG:  No, I understand those inputs, Phil, and I respect them.  But again, my focus here is on taking responsibility, owning it, we know what we need to fix.  We’re making those changes.  We’re going to continue to get better as a company and I remain resolute on the responsibility.  

LEBEAU:  Will you waive your compensation this year?  
MUILENBURG:  Phil, again, compensation is a decision that my board will make.  And they’ll do as comprehensive review.  

LEBEAU:  By the way, Dennis Muilenburg’s compensation, typically, that is decided by the Boeing (NYSE:BA) board of directors as far as a bonus, Sue, that would likely happen early next year, likely in February or March.  

HERERA:  There were also questions, Phil, about the plane itself, and its possible return to service by the end of the year.  Boeing (NYSE:BA) has been predicting that.  But what are the possibilities of that?  

LEBEAU:  I think that there is still a chance that could happen.  And the people we talk about part of the process think it could happen.  But keep in mind, the last two days have been brutal not only for Boeing (NYSE:BA), but also for the FAA.  They’re going to face some pressure not to be pushing this plane back into service too quickly.  

HERERA:  Phil LeBeau in Washington for us tonight — thanks, Phil, as always.  

LEBEAU:  You bet.  
HERERA:  It is time to take a look at some of today’s “Upgrades and Downgrades”.  

Nordstrom (NYSE:JWN) was downgraded to sell from neutral at UBS.  The analyst says a weak holiday shopping season, tariffs and e-commerce disruptions are likely to pressure earnings.  The price target is $30 and the stock fell 5 percent today to $35.21.  

Xerox (NYSE:XRX) was downgraded to underweight from neutral at JPMorgan (NYSE:JPM).  The analyst cites the stock’s valuation after a 70 percent run up so far this year.  The price target is $31.  The shares fell a fraction to $34.12.  

Biogen was upgraded to outperform from market perform at Bernstein.  The analyst cites the company’s experimental Alzheimer’s drug that it plans to submit for FDA approval.  The price target is $370.  The shares were up a fraction to $299.89.  

Well, Facebook (NASDAQ:FB) users don’t appear to be fazed by the political pressure facing the social media company.  It reported better than expected earnings and revenue and saw its user base grow.  That sent the stock higher in initial after-hours trading.  
Julia Boorstin has the details.  

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT:  The key take away from Facebook’s earnings, the social giant is still firing on all cylinders.  Facebook (NASDAQ:FB) beating expectations across the board, drawing advertisers and using despite the regulatory concerns about the company and investment in protecting the platform.  

The key metric of Facebook (NASDAQ:FB) success: average revenue per user.  The number grew to $7.26.  That’s more than 20 cents better than analyst consensus expectations and perhaps most notable is the growth of its most valuable user base in the U.S. and Canada which had been stagnating over the last two years.  In the third quarter, Facebook (NASDAQ:FB) grew its daily active users in the U.S. and Canada by 2 million, and grew those monthly active users by 3 million, showing users aren’t bothered by negative headlines.  

For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin in Los Angeles.  

HERERA:  Twitter late today said it is banning all political advertising from its service.  The company says that advertising on social media offers unfair level of targeting compared to other mediums.  And as you may know, the majority of money spent on political ads in the U.S. goes to television ads.  
Still ahead, as the wildfires burn, insurance companies are reassessing their risks.   

HERERA:  Chile is calling off the Asia-Pacific Economic Cooperation summit that it was scheduled to host next month.  That is the same meeting where President Trump and China’s President Xi were planning to meet to discuss a possible phase 1 trade deal.  The cancellation comes amid anti-government protests there.  

The White House says it is awaiting information on a new location for the summit and that it’s looking forward to finalizing the deal with China within the same time frame.  Word of the cancellation sent the Chilean ETF lower in today’s trading session.  

And now to California where a new fast moving brush fire broke out north of Los Angeles.  The fire is burning near the Ronald Reagan Presidential Library which has been evacuated.  And for the first time ever, an extreme red flag warning was in effect in southern California.  Wind gusts could reach 807-mile-per-hour making the fire harder to contain.  The wildfires are also putting a lot of attention on the insurance industry.  
So we asked Contessa Brewer to do some digging.  

CONTESSA BREWER, NIGHTLY BUSINESS REPORT CORRESPONDENT:  For insurance companies, the cost of doing business in California is going up.  The industry has paid out almost $25 billion for wildfires in California the last two years.  And actuarial firm Millman estimates the 2017 wildfires season alone wiped out more than 10 years of underwriting profits for companies that write home owner policies in California.  

Insurers are trying to make the numbers work.  Hiking premiums and lowering exposure.  The state insurance commissioner says 340,000 rural home owners had their policies dropped in just four years.  Last year, non-renewal increased 6 percent statewide.  But in fire-prone Nevada County, in the foothills of the Sierra Nevada Mountains, there was a 38 percent increase in dropped policies.  And these numbers don’t include the aftermath of the Camp Fire in Paradise, the deadliest wildfire in California history, about 30,000 people lost their homes and $8.4 billion in insured losses were reported to the California Department of Insurance.  

Today, the CEO of Chubb (NYSE:CB) Insurance, Evan Greenburg, was asked on the company’s earning’s call about his exposure to the California wildfires.  He said, quote, I’m just concerned, did we measure the exposure correctly?  And did we charge a proper price for taking the risk?  
For knows who have seen their insurers drop the policies, it’s often difficult to find a new policy and almost impossible to find one at affordable rates.  

Another way the insurance companies are trying to minimize risk is to reduce the risk of homes catching fire.  Insurers like Chubb (NYSE:CB) contract with the nation’s largest private firefighting company, Wildfire Defense Systems.  The company deploys teams of certified firefighters to go house to house and mitigate risk, installing portable sprinklers, laying down flier blocking gel, removing fuel for embers.  Right now, the company has 55 engines at Kincade and Getty Fires.  

USAA told me it provides that service to all members in the 15 wildfire-prone states it serves and service provided at no additional cost, just one more way insurers have trying to lower their own risk.  
For NIGHTLY BUSINESS REPORT, I’m Contessa Brewer.  

HERERA:  General Electric (NYSE:GE) shows progress and that’s where we begin tonight’s “Market Focus”.  

GE posted better than expected earnings and revenue as the company focuses on its balance sheet and paying down debt.  The conglomerate raised the full year cash flow outlook and says it sees signs of trouble power unit stabilizing.  The shares responded rising 11.5 percent to $10.11.  

Tupperware (NYSE:TUP) missed estimates as both profit and revenue fell.  The company cited slowing demand in several of its key markets.  Tupperware (NYSE:TUP) also lowered its full-year guidance and shares were punished, hitting a 52-week low and losing more than a third of the value to close at $10.16.  

McKesson (NYSE:MCK) posted mixed results as the drug distributors beat analyst revenue forecasts thanks to price increases on branded drugs and distribution of specialty drugs.  But the company fell short on earnings estimates due to settlements in the opioid-related cases.  The key, though, may have been a drop in its operating margin, which signals pricing pressures in that industry continue.  The shares lid slid more than 8 percent to $136.79.  

And reporting after the bell, Lyft reported better than expected revenue thanks to an increase in users who also spent more per ride.  The ride-hailing company also raised guidance for the year.  But shares were volatile in initial after-hours trading.  And they closed the regular session up just a fraction to $44.11.  

Also after the bell, Starbucks (NASDAQ:SBUX) topped Wall Street’s revenue expectations, driven by an increase in U.S. and worldwide same store sales.  It also saw strong demand for its loyalty program and new delivery options.  Shares initially rose in after-hours trading.  They closed the regular session up a fraction to $84.19.  
Coming up, did Juul knowingly ship contaminated pods?  That’s what a lawsuit is alleging.  

HERERA:  HBO Max is entering the increasingly crowded streaming industry later than its rivals and at a higher price.  The service will debut in May of next year and cost $14.99 per month.  AT&T (NYSE:T) owns HBO, along with CNN, Turner Broadcasting and Warner Brothers, which it acquired with the $85 billion purchase of Time Warner (NYSE:TWX).  
And according to Warner Media CEO, content is just one of its advantages.  

JOHN STANKEY, WARNERMEDIA CEO:  We go forward on this people aren’t just baying content for content sake.  They’re buying content because it’s associated with other products and services.  Whether it’s Amazon (NASDAQ:AMZN) who chooses to offer marketplace incentives to have video, or it’s AT&T (NYSE:T) that chooses to put great value with paid TV or connectivity or broadband associated with it.  Those are other reasons for people to come into the product as well.  

HERERA:  Shares of AT&T (NYSE:T) were up slightly in today’s session.  
Challenges are mounting for Juul.  The best selling e-cigarette brand in the U.S. is now at the center of a lawsuit that includes some pretty serious accusations.  
Frank Holland has more.  

FRANK HOLLAND, NIGHTLY BUSINESS REPORT CORRESPONDENT:  This whistle-blower lawsuit claims that Juul knowingly sold 1 million contaminated nicotine pods earlier this year.  It accuses former CEO Kevin Burns of putting profit over the health and safety of customers.  
Now according to the lawsuit when the whistle-blower voiced concerns over potentially unsafe pods, Burns said to him.  

Half our customers are drunk and vaping like mo-fos, who the blank is going to notice the quality of our pods.  

The lawsuit was filed on Tuesday by Siddharth Breja, who was former senior vice president of finance.  He claims he was terminated in March for confronting management.  The lawsuit claims the contamination was a direct result of Juul trying to make up for revenues lost by removing flavored pods from stores and maintain the company’s valuation.  

In November of last year, Juul announced it would only sell flavored pods online and in response to teen vaping concerns and the FDA.  According to the lawsuit, Juul also intentionally marketed mint pods as menthol to avoid classifying them as a flavor and pressured a supplier to increase production of mint which allegedly led to the contamination.  

The lawsuit also alleges Mr. Breja was instructed to recover $7 million from that supplier in compensation for the contaminated pods, while some were still sold to consumers.  

The lawsuit filed on the same day reports surfaced that Juul CFO Timothy Danaher (NYSE:DHR) is leaving the company.  In the lawsuit, Danaher (NYSE:DHR) is accused of knowing that contaminated pods were being sold.  

Juul issued a statement this morning saying: Mr. Breja’s claims are baseless.  He was terminated in March 2019 because he failed to demonstrate the leadership qualities needed in his role.  The allegations concerning safety issues with Juul products are equally meritless and we already investigated the underlying manufacturing issue, and determined the product met all applicable specifications.  

Mr. Breja’s attorney responded to that that statement this afternoon saying in part, Juul is now admitting that a large number of pods with manufacturing issues were shipped to customers although internally executives repeatedly termed it as contamination.  If the product met all applicable specifications, then why did Juul instruct Mr. Breja to obtain a multimillion dollar refund from its supplier?  

We also reached out to tobacco giant Altria which last year purchased a 35 percent stake in Juul for nearly $13 billion.  The company declined to comment but will likely face questions during its earnings call on Thursday.  
For NIGHTLY BUSINESS REPORT, Frank Holland, New York City.  

HERERA:  Before we go, here’s another look at the day’s final numbers on Wall Street.  The Dow rose 115 points.  The Nasdaq added 27.  And the S&P 500 was up 9 to another all-time high.  

And that is NIGHTLY BUSINESS REPORT for tonight.  I’m Sue Herera.  
Thanks for joining us.  Have a great evening and we’ll see you tomorrow.  


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