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First Move with Julia Chatterley
Netflix Shares Drop Premarket As It Loses "Friends" And U.S. Subscribers; A Face App Backlash As Users Realize It's Owned By Russians; Exclusive Interview With St. Louis Fed President, Jim Bullard. Aired 9-10a ET
Aired July 18, 2019 - 09:00 ET
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JULIA CHATTERLEY, CNN INTERNATIONAL ANCHOR, FIRST MOVE: Live from the New York Stock Exchange, I'm Julia Chatterley. This is First Move and here's
your need to know. A bad day at the office. Netflix shares drop premarket as it loses "Friends" and U.S. subscribers. Getting old. A face app
backlash as users realize it's owned by Russians. And coming up, our exclusive interview with St. Louis Fed President, Jim Bullard. It's
Thursday, let's make a move.
A warm welcome to FIRST MOVE once again. Very excited as I mentioned about our exclusive interview with Jim Bullard. The St. Louis Fed President,
that's coming up, but first a quick look at what we're seeing for the markets right now.
We are set to lose a bit of ground here premarket it seems, but set for a mostly flat open, not all bad though. Manufacturing bellwether Honeywell
and insurer, United Health raising their earnings guidance today. So, watch those ones and Morgan Stanley beating estimates on the top and the
bottom lines. Thank you to a strong wealth management performance offsetting what we've seen, a lot of already equity trading revenue
weakness.
But I do think it's poor numbers from Germany's SAP that's helping set the tone here. Trade uncertainty, they say, hitting their Asia business and on
that point, Treasury Secretary Steve Mnuchin saying that China's Huawei is not the sticking point in the current trade talks despite the front page of
"The Wall Street Journal" today. It seems deal making, things are never just that simple.
Now, speaking of not simple, Netflix stock looking pretty challenged premarket and that's where we're going to begin drivers. As I mentioned,
Netflix shares plummeting premarket, down some 10.5 percent right now, adding far fewer subscribers than promised; 2.7 million versus five million
expected.
Frank Pallotta joins us now on these numbers. Frank, first thing, someone in the forecasting department needs firing based on those numbers. But
they said look, this is not about competition. It was about content. What do we make of these numbers?
FRANK PALLOTTA, CNN BUSINESS MEDIA WRITER: Well, they're not good. I mean, this is probably their -- one of their worst forecast misses since
2016, and to really think about this, the question that everyone in Hollywood is really asking is, was this just a really bad quarter and a bad
forecast miss? Or is this the sign of bad times to come for Netflix?
You've got to remember, in the coming year, they're going to see huge competition coming from Disney Plus, HBO Max, which is WarnerMedia, the
owner of CNN's streaming service, Apple and others, not to mention the Hulu's of the world that are already out there.
So, this is kind of showing that they are kind of in a bad place. But we just don't know yet if this is the sign of things to come.
CHATTERLEY: Yes, I mean, the other point is, I mean, they raised prices in the quarter, too. So, there's a sense here that we are now getting to the
point where it looks expensive. Potentially, when you've got Disney Plus coming at half the price in November of this year, I wonder, whether it's a
question about the model itself and whether this also raises questions for some of the others coming from market hereto, Frank, not just about Netflix
themselves.
PALLOTTA: It definitely could be. I mean, Netflix really put the blame on its content, saying that the Q2 content they had come out just did not
bring in the type of subscribers that they anticipated.
They said that the second half of their year is full of just big hits, like "The Crown," "Orange is the New Black," and even like the third quarter
started off with "Stranger Things 3," which is a huge, massive hit for them.
But it could have a lot to do with the price, too, because they said the regions where the price increases happened is where they really saw the
forecast miss. So, it it's going to be interesting to see the next year for Netflix and for all of streaming to see how consumers really take hold
of this brand new world and market of over the top products, I should say.
CHATTERLEY: Yes, have we hit peak pricing giving all the competition. Frank Pallotta, thank you so much for joining us on that. All right, let's
move on and talk SAP because that was also under a lot of pressure in the European session. They reported a 21 percent decline in operating profits
due to restructuring, but it was the Asia business, the software sales that actually drew my attention.
Clare Sebastian joins us now on this. Clare, talk me through it. Because the CEO was saying, look, they are in wait and see mode over there, of
course due to the trade tensions.
CLARE SEBASTIAN, CNN BUSINESS CORRESPONDENT: Yes, Julia, the earnings call is going on right now. Actually, that's exactly the message from the CEO,
Bill McDermott. He basically said in his exact words, "Don't worry about it." He called his minor headwinds. And he pointed out that the quarter
ended on June 30, which was the day after the Trump-Xi meeting at the G20, which of course when they agree to keep talking and hold off new tariffs.
[09:05:06] SEBASTIAN: And he said after that, many of the deals that have been postponed started to come back. He also pointed out that his
companies started to make operational changes because of this trade war. Things like moving supply chains.
Sometimes the value of the deals they do with SAP actually goes up because they need even more help. So he is basically making the point that this
is just a blip. It's just a short term issue.
But I think you know, it really shows just how far and wide this trade war is trickling through the economy. This isn't a Chinese or American company
and this isn't even direct impact, Julia. This isn't something like, you know, costs going up because of tariffs.
This shows the effect of uncertainty and how much that is trickling down at some of the world's major companies.
CHATTERLEY: Yes, and this is also a company that's pushing into Cloud, it's pushing more into software services. I mentioned the restructuring
under the watchful eye, of course of Elliott Management. So, they've got a lot going on right now, anyway.
SEBASTIAN: They do, certainly. They are restructuring. They said today is going to cost about a billion that's causing some layoffs. They are
moving more into the Cloud. They acquired the online software survey firm Qualtrics earlier this year, for about $8 billion and that is certainly
where we see a lot of companies positioning themselves nowadays.
I think the issue that we see and why we see the stock down today is that whatever SAP is doing, it doesn't change the fact that they're still
vulnerable to these macro headwinds -- Julia.
CHATTERLEY: Yes, Clare Sebastian. Thank you for that. All right. Let me bring you up to speed now with some of the other stories that are making
headlines around the world.
A suspected arson attack on an animation studio in Kyoto, Japan has killed at least 25 people and injured 36 others. Police say a man poured what
appeared to be gasoline around the building and set it on fire. They say the 41-year-old suspect in the attack has been detained and that he was
also carrying several knives in a backpack.
The World Health Organization is now calling the Ebola outbreak in the Democratic Republic of Congo a public health emergency of international
concern. There has been more than 2,500 Ebola cases and 1,600 deaths since the outbreak started last August.
Iranian forces have seized a vessel carrying what Iran says was smuggled fuel. That's according to Iranian media which reported the seizure took
place in the Persian Gulf. The reports did not identify the temple or its owner, but they did say 12 people were aboard.
All right, we're going to take a quick break here on FIRST MOVE, but coming up as I've mentioned, our exclusive interview with voting Fed member, Jim
Bullard. Stay with us. That's coming up.
(COMMERCIAL BREAK)
CHATTERLEY: Welcome back to FIRST MOVE. The U.S. Federal Reserve faces a momentous decision later this month. The Fed's open market committee will
vote on whether to cut interest rates for the first time in over a decade.
One of the officials in the room in making that decision will be Jim Bullard. He is the President of the Federal Reserve Bank of St. Louis. He
is one of the Fed's most influential members who urged the Central Bank to make its so-called insurance rate cut at the last meeting in June and Jim
Bullard joins me now. Great to have you with us.
JAMES BULLARD, PRESIDENT OF THE FEDERAL RESERVE BANK OF ST. LOUIS: Great to be here, Julia.
CHATTERLEY: Has anything changed in your thinking or are you still thinking a quarter point rate cut in July is the right move?
BULLARD: Well, I said we should have got it in June, so, now I think we should ratify the signals that we've sent that we're going to follow
through in July.
CHATTERLEY: What about half a percentage point cut?
BULLARD: I don't think we really need to go that far at this point, but we can make further moves as we go through the fall. We'll see how the data
come in. We could be data dependent on that.
CHATTERLEY: You know, a lot of analysts out there and the market itself is pricing three rate cuts for this year. You suggested perhaps one insurance
rate cut in July, another one towards the back end of the year. The market is a bit overenthusiastic?
BULLARD: I mean, you know these things always depend on the data, but I think the critical thing here is to get inflation and inflation
expectations better centered on our two percent inflation target. Credibility is very important. We've missed our inflation target on the
low side for many years.
The economy has actually surprised on the upside during 2017 and 2018 and yet we still haven't been able to get inflation to two percent. So, I
think it's a good opportunity to try to hit that target and then come what may later and we can react to data later.
CHATTERLEY: So if it needs to be three cuts, so be it? If you're simply trying to get that inflation target more centered, three, four, whatever it
takes?
BULLARD: Well, let's not get carried away. Let's move at the July meeting and then let's be data dependent from there and see how things go.
CHATTERLEY: But as you're looking at the data right now, it only justifies two to the end of the year in your mind?
BULLARD: Yes, I mean economic forecasting is not -- not the most exact of sciences. So, if I was just penciling it in, that's what I would guess but
we'll see as the data come in.
I think, you know another aspect about moving now is you have some insurance against further deterioration in the economy. The economy is
slowing down, which isn't a terrible thing at three percent growth year- over-year as of the end of the first quarter.
But most forecasters have about two percent growth in the second quarter and depending on who you look at, maybe less than two percent in the second
half. I think that wouldn't be the end of the world, but what if it slows down more than we think, possibly because of the trade war. This would
provide a little bit of insurance against that.
CHATTERLEY: To those that say you're stimulating stock market prices, we're trading around record highs, that you're acting too early, the
Federal Reserve here with these insurance as you -- as you keep referring to them. What's your message?
BULLARD: Well, I mean we want the U.S. economy to perform well. We want great employment outcomes; we're getting those. And we also want inflation
to be right around our two percent target. We're missing a little bit on the low side there, so we could re-center there. But overall, if that
increases the value of the U.S. corporate sector, you know, that's part of the game.
CHATTERLEY: Can recession be avoided if you act like this with insurance rate cuts?
BULLARD: You know, one thing about recession is recession predictor models are pretty high probability right now.
CHATTERLEY: Yes.
BULLARD: A lot of those are based on yield curve arguments and the yield curve is inverted at -- parts of it are inverted right now. So, one thing
I would like to do is kind of straighten out the yield curve, have a nice upward slope - kind of a natural slope to the yield curve.
CHATTERLEY: And then we'll have a better reflection of the recession risks?
BULLARD: I think it would bring the Fed more in line with markets about where markets think medium term growth is and medium term inflation and
where the Fed thinks it is.
CHATTERLEY: So, those that are saying recession risk is high or at least we could see recession right now in 2020 perhaps based on the yield curve
measures is getting it wrong.
BULLARD: Yes, it's kind of hard to believe recession risk is really high right now because look at the job market, look at everything. But the
yield curve is saying that, but I think if we -- if we make a cut here and maybe a little more later in the year, then we'll get a nice upward sloping
yield curve, that's right.
[09:15:07] CHATTERLEY: Jay Powell was asked recently, and this is to your point on struggling with that inflation target, whether the Phillips curve
relationship is dead, i.e. the connection, the relationship between unemployment and inflation. And he said there's a faint heartbeat.
BULLARD: Yes, if you look at the empirical evidence, it's gotten weaker and weaker. I think that's actually what he said, weaker and weaker over
time. And there are good reasons to think that that -- you know, why that has occurred, I think it's basically the inflation targeting era means that
central banks have paid a lot more attention to hitting their inflation targets.
If they get perfect - if they hit the inflation target perfectly, then inflation never moves even though the real economy is bouncing around, you
wouldn't see any relationships. So, I think we can't just take the Phillips curve as an iron law that you know, when unemployment goes down,
inflation goes up. You can't treat it that way, it's more subtle than that.
CHATTERLEY: Is it subtle enough to say that the relationship is dead, that the Phillips curve is dead here? It's not just about not really feeling
the heartbeat here that the patient has died?
BULLARD: I think the way to think about it is that the Philips curve interacts with the policymaker and if the policymaker offsets the effects
coming from the Phillips curve, then you're not going to see any relationship. It doesn't mean that it's not there.
CHATTERLEY: It doesn't mean the patient is dead.
BULLARD: That's right. Sorry -- so I -- this is a deep issue and it's been discussed in macroeconomics for decades now.
CHATTERLEY: Yes, and we'll continue to discuss it.
BULLARD: Yes.
CHATTERLEY: We're not writing it off at this stage. What do you say to savers at the moment who rely --
BULLARD: Sorry?
CHATTERLEY: To savers.
BULLARD: Oh, savers.
CHATTERLEY: To U.S. savers. I'm not sure we've asked this enough as we talk about bringing rates down and those that rely on that income from
their deposits.
BULLARD: Yes, I would say people now coming into retirement are probably projecting lower returns than they would have, let's say in the `90s or
something like that. So I --there has been some adjustment.
This low rate environment has been going on now for a decade in the U.S. and longer than that in Japan. So, it's definitely a new era and I think
anybody that's saving for retirement should take everything into account as far as the global rate structure.
CHATTERLEY: One of the interesting things -- and you mentioned Japan there, and you've long been talking about the risks of a Japan-ification of
the United States. Is whether you do a similar policy to Japan and target a specific yield level to try and anchor the yield curve, to save you
perhaps having to cut rates or move around such a degree. Are you having that conversation?
BULLARD: Well we are having a framework review and that would definitely be one of the policies that could be considered in this framework review.
We had a conference in Chicago. There's another earlier conference at Stanford on this. There are other conferences around the country and there
are more to come. So, it's one of the things that could be looked at.
The U.S. did target longer term yields in the `40s during World War II, you could argue about that, but it actually ended up badly with a lot of
inflation. But you could argue about whether that's really relevant -- the relevant example.
CHATTERLEY: Times are very different now.
BULLARD: Yes.
CHATTERLEY: Let's talk about trade. You mentioned the trade war and the risks this presents. We have the two things. We have a decision by the
United States government to sign or not sign a trade deal with China.
We also have a President that's very eager to see rates lower. And there are those that look at this situation and say there's a moral hazard
problem. The President could hold off signing a trade deal, allow the Federal Reserve to cut rates two or three times and then sign a trade deal.
And that big risk then goes away. What's the problem?
BULLARD: My assessment is that trade uncertainty used to be relatively low, this used to be an issue that was relatively speaking on the
backburner. The President has moved it to the front burner. Now, I think trade uncertainty is high and I don't see that uncertainty declining any
time soon.
And I think other countries are getting into the game. They're wondering about their own trade relationships, they're wondering if they could get
better deals or renegotiate. So I think we're in for a long period of higher trade uncertainty than what we're used to and it's not just the
U.S., but obviously something like Brexit or other things around the world, I think the Chinese are rethinking their trade policies.
So, I think we're just going to have to cope with the idea that this is going to be a volatile area of policy, at least over the forecast horizon
and maybe even much longer than that, whereas previously we kind of thought of this as okay, that was something that was decided via the post-war trade
liberalization program.
CHATTERLEY: Just to be clear, you're not anticipating a trade deal between the United States and China any time this year?
[09:20:10] BULLARD: Well, I think they could come to a nominal deal, but things could come up later that then, you know, provoke more uncertainty
around that. So, I just think that countries are reconsidering what they're trade relationships are and I think that for investors that just
means, well, you've got to -- you've got to be ready that trade relationships might change on a dime.
CHATTERLEY: I think investors are more optimistic than you right now.
BULLARD: I think the story that you're going to all of a sudden reach a deal with China and then we're not going to hear anything more about trade
over the next five years, I think that's a fantasy. These articles have -- these ideas have been brought out of the box and now we're going to have to
wrestle with them and they're difficult to solve.
CHATTERLEY: Let's talk about new Fed members -- potential Fed members joining. There's a concern out there that the nominations are people that
are aligned with this White House, with the President on cutting rates for other things; if he changes his mind so will they. Are you worried about
the dilution of the independence of the Fed?
BULLARD: Well, one of the potential nominees is my research director, Chris Waller.
CHATTERLEY: Yes.
BULLARD: He was a chaired professor at Notre Dame then he came to work at the Fed. He has long experience on the FOMC, a long research record. A
lot of his research is all about Fed independence; about half of his papers are about Fed independence, so he is actually a world expert on that. And
I think he would be a very good person to put very much in the tradition of the technocratic appointments that we put at the Fed historically.
CHATTERLEY: Let's talk about Judy Shelton then. Is she a good choice?
BULLARD: I don't know Judy Shelton as well. I have met her. I met her at a conference in Paris last year. I thought she was quite articulate, but
she'll have to defend her own views. She's very capable of doing that.
CHATTERLEY: I'm going to agree with you.
BULLARD: Yes.
CHATTERLEY: She did though say in the last year that she favors re-pegging the U.S. dollar to the gold standard. Is that a good idea?
BULLARD: The gold standard -- you know the U.S. did have a gold standard at one time.
CHATTERLEY: And it was very messy.
BULLARD: And then we really didn't fully get off gold until Nixon in the early 1970s. So, there is a literature that talks about gold and the
pluses and minuses.
I've said publicly before that I felt inflation targeting was the modern incarnation of the gold standard because what you're doing is putting some
discipline around the future issuance of the currency and this is stabilizing the inflation outcomes compared to what you would otherwise get
which is exactly what you would be trying to do under the gold standard.
But with gold, you've got mining and you know, how much gold are you going to find? And these kinds of issues and in some cases, it didn't work out
well internationally.
CHATTERLEY: Would you agree that it's inconsistent of someone to want to peg the U.S. dollar to gold but also be wanting to cut rates? You're
trying to enforce a level of discipline on the one hand and then trying to push for lower rates on the other.
BULLARD: Yes, I mean I don't know. We don't have much inflation today. So, my idea is set the inflation target, manage to it and hit it. It's the
credibility of the Central Bank that is really the critical variable here.
CHATTERLEY: It sounds like you two could have some lively discussions going forward. All right, let's talk about the U.S. dollar because this is
something else.
BULLARD: I mean I would say this about this whole issue. A lot to of this was discussed in the 1970s when inflation was high and variable. That
would be the natural time to talk about commodity standards and people did talk about commodity standards.
CHATTERLEY:Yes.
BULLARD: And the outcome of that debate was to not go to a commodity standard but try to get the Central Bank to do what they're supposed to do;
that was the Volcker disinflation. And then since then, certainly since 1995 or so, inflation really has been pretty close to two percent the whole
time.
CHATTERLEY: Yes, I'll call it inconsistent. All right, let's talk about the U.S. dollar because this is something else that the President has said
he would like, a weaker U.S. dollar and we've also seen currency intervention from the Treasury in the past, too. The Fed may not have
liked it, but they went hand in hand with it. What's the likelihood that we see a call from this White House for direct intervention to weaken the
dollar and would the Fed stand by and go with it?
BULLARD: The academic literature on this says it's very hard to intervene and have much impact on the dollar, especially for very thickly traded
markets like dollar/yen or dollar/euro.
CHATTERLEY: But if the White House said, look, we're abandoning our strong dollar policy outright, that would have an impact.
[09:20:02] BULLARD: It's very hard to have an impact and the other thing about exchange rates is it depends what the other guy is doing. So it's a
relative game where the other country might be trying to do the same thing and then nothing happens to the exchange rate. I think, you know, this
idea of competitive devaluation which is something that happened in the `30s is probably not something we want to get into.
We want to run a great policy for the U.S., get great innovation, use the great technology we have, use the workforce that we have, that's how you
have a great economy. I don't think you can depreciate your way to success.
CHATTERLEY: Very quickly because we've got one minute left, your views on Facebook Libra, the cryptocurrency alternative, future alternative to the
dollar, a big threat?
BULLARD: I'm actually going to talk this in a day or two at a conference on cryptocurrency, my session is on cryptocurrency, so I'll have some good
comments about that there, I hope.
CHATTERLEY: Can you give us a teaser, for or against?
BULLARD: Well, this is -- what I've said about this in the past is that there are ideas for monetary theory and then there are ideas that the
computer science guys have. They don't always match very well. So that's mostly what my topic is about.
CHATTERLEY: So you're not a fan at this stage?
BULLARD: I don't think that cryptocurrency really solves any fundamental problems that are natural to any currency and some of the other points are
there's a lot of currency competition already, so you bring another currency in, it doesn't really make any difference.
There's always an equilibrium where no one wants to hold the currency, most of the cryptocurrencies are in that equilibrium today. They're worth zero.
So, these are some of the things that I like to bring up.
CHATTERLEY: Are you on Facebook?
BULLARD: I am not on Facebook. Corporately, we're on Facebook, yes.
CHATTERLEY: We won't go there. Jim, fantastic to have you.
BULLARD: All right great to have you -- great to be here, yes.
CHATTERLEY: Jim Bullard there, President of the St. Louis Fed. The market open is next.
(COMMERCIAL BREAK)
[09:30:00] CHATTERLEY: Welcome back to FIRST MOVE, live from the New York Stock Exchange. Wow, the screaming and shouting this morning is pretty
loud. Stocks right now are opening a little bit lower. I think investors reacting to the latest one of earnings, weaker from the likes of SAP as
we've mentioned. Netflix, of course, too, and a bit of softness as a result of Morgan Stanley's numbers as well. The liner again, equity
trading, the trading divisions of all these banks this week have been weaker.
We also just bought to our exclusive interview with Jim Bullard, of course the President of the St. Louis Federal Reserve confirming, he is still of
course pushing for a rate cut in July. He doesn't think that during half a percent cut at this stage in that July meeting is right. But he did say of
course, that he thinks two this year will be enough.
I tried to push him on current market pricing three, he wouldn't be pushed, but interesting for me, I think on trade when he said, look, as far as the
Fed is concerned, trade risks, trade uncertainty is not going away even if there's some kind of nominal deal between China and the United States. The
risks around trade, even with other countries remains and there's still going to be tensions between these two countries. Interesting.
Let's bring in Greg Valliere now. He is Chief U.S. policy strategist to AGF Investments. Greg, always a pleasure to have you on the show.
Interesting to hear what Jim Bullard said there in light of Steve Mnuchin, the Treasury Secretary's comments today, same talks are going to happen
between the U.S. and China, but the rumor is they are really struggling here.
GREG VALLIERE, CHIEF U.S. POLICY STRATEGIST, AGF INVESTMENTS: Yes, Julia, I think there are a lot of unresolved issues. But one of the takeaways
from your interview with Bullard is that the Fed I think recognizes this. And it's not just China. We haven't ratified the replacement for NAFTA.
And there's still a threat of a trade with Western Europe that would involve hundreds and maybe even thousands of products from the two
countries. So, there's definitely still a trade risk that the Fed has to worry about.
CHATTERLEY: What about the prospects of some kind of agreement over the spending bill, the debt ceiling raised as well, because he hinted that at
least at the top line, they've reached some kind of agreement here. What are you thinking on that?
VALLIERE: Yes, I do think that Pelosi and Mnunchin have made progress. There could be an announcement in the next 24 hours, the markets will be
watching this carefully. But this could slip.
So much stuff in Washington slips until you absolutely have to do something. And they probably don't absolutely have to do something until
early September. So I'm not a hundred percent convinced we will get a deal. And moreover, I'm not convinced that Trump is on board with any deal
that has Nancy Pelosi's fingerprints all over it.
CHATTERLEY: What's in the President's best interest here on both these things, as you said, if it looks like Nancy Pelosi manages to get all sorts
of spending measures passed here, he looks like he's given excessive ground even on the trade front here. This is somewhere where both the Democrats
and the Republicans are united in pushing back on China here. What works best for the president here in campaign mode for 2020?
VALLIERE: Let me offer a theory. I think in the last few days, he has been so aggressive, playing the race card, you saw the rally last night in
North Carolina, his base loves it. So, he has now solidified his base. There's nothing he could do to drive them away.
Now that gives them a little wiggle room to maybe cut a deal with China, to maybe cut a deal that increases spending. The base won't like it. But I
think he's got the base firmly in his pocket now.
CHATTERLEY: You know, it's interesting, a lot of people looked at those tweets over the weekend, we've seen back and forth. I am talking about
their perceived racist tweets towards the four nonwhite Congresswomen, of course, and people were like, wow, this is going to be incredibly toxic.
And then you see as you've mentioned the crowds last night saying, "Send her home." In the end, has he turned what was a battle between the
Democrats and Nancy Pelosi and the squad into something positive for him?
VALLIERE: Well, he's unified the Democrats, but he's also labeled the Democrats as the party of those four women. And I think that that's his
goal. He wants to make it sound as if all the Democrats are like that.
I've talked to a lot of moderate Democrats this week in Washington, who weren't happy with the four women because they now are so inextricably
linked to them. That's Trump's goal all along.
CHATTERLEY: So basically, we found Nancy Pelosi backing four individuals that previously she was sort of saying, "Guys look, get back in your box,
and actually, at certain points your views are extreme, and they don't represent the whole," and now she is finding yourself aligned with them.
In fact, the whole party is.
VALLIERE: That's part of it. But I tell you to you, Julia, Trump is going to need Pelosi in the next couple of months on the debt ceiling, on getting
a new budget, on lifting spending calves. There are a lot of crucial issues where conservative House Republicans may not go along, and he is
going to need votes from her troops. That's going to be fun to watch.
[09:35:16] CHATTERLEY: You know, it's interesting, you sent out a note this week listing all the things that this government has not managed to
achieve. No infrastructure bill, no trade deal, no healthcare bill, no labor reforms. I mean, there was a whole list.
And I have to say at the end of that, I did think what have we achieved? And also where is this Congress aligned, and one of them in particular was
on Jay Powell. Everybody thinks that Jay Powell is the good guy and the right person for the job here.
Ultimately, what matters for investors here and can the Federal Reserve remain independent, follow through on policy and can that also play to
Trump's policies and his campaign in 2020, too?
VALLIERE: It's a huge while card. Obviously, Jim Bullard was not going to talk explicitly about fears that the Fed concerning Powell and Trump, but I
have talked to people at the Fed who worry that Trump may try to not fire Powell, but demote him from Chairman to a mere governor.
Trump apparently thinks he has the legal authority to do that. And I tell you, Julia, if the Fed cuts rates twice in the second half, or even three
times in the second half, it won't be enough for Trump. And at some point next year, maybe the end of the winter, I think the option of demoting
Powell is still going to be very much on the plate.
CHATTERLEY: Wow. Greg, you said it. No doubt, we'll talk about this more. Greg Valliere, always a pleasure to have you on FIRST MOVE. Thank
you.
All right, let's move on. Morgan Stanley, as I've mentioned, earnings, beating expectations in the second quarter stack. Thank you to the
strength in the wealth management business. We're also keeping an eye on a BB&T, of course reporting record earnings in the second quarter for the
mixed earnings picture for their major partner, Sun Trust.
Matt Egan joins us now with all the details. Matt, let's talk about Morgan Stanley first, your observations here.
MATT EGAN, CNN BUSINESS LEAD WRITER: Julia, what I think is really interesting is that Goldman Sachs and Morgan Stanley are really moving in
opposite direction when it comes to trading at least in the second quarter.
Now, Goldman had reported earlier this week an increase in equity trading revenue, which really bucked the broader trend that we've seen, and my
eyebrows were raised when Goldman said that it may have picked up some market share. And now it looks like perhaps Morgan Stanley lost some
ground to its arch rival because Morgan reported a 14 percent decline in equity trading revenue. That is among the worst that we've seen from any
of the big banks surpassing even what we saw from Bank of America yesterday.
And you know, the company blamed lower balances from clients. Now, fixed income trading revenue was down even more, it was off by 18 percent. They
blame shrinking rates, lower volatility, lower structured financial products.
And you know, during the conference call CEO James Gorman, he talked about how in the second quarter, it was met with a mixed market backdrop. He
said the quarter began on a strong footing, but macroeconomic and political uncertainties affected sentiment.
Now clearly, you know, trading businesses under pressure, we're talking about low volatility, the rise of active trading. The bright spot for
Morgan Stanley, as you mentioned though was wealth management, it unexpectedly grew revenue during the quarter. It posts the record pretax
income, and a lot of that obviously has to do with the stock market boom.
So clearly, Morgan Stanley is not firing on all cylinders right now -- Julia.
CHATTERLEY: Yes, it's such a great interesting point about the divergence in approach and performance here particularly for Goldman Sachs and Morgan
Stanley here. I'll tell you what my takeaway, and we've talked about this is the strength in the U.S. consumer. You want to be facing the U.S.
consumers of bank in the United States at this moment.
And it seems like it's the same story for BB&T because again, loan growth here was a real strong point.
EGAN: Absolutely. So BB&T and Sun Trust, both reported some solid numbers. Now, these are, of course, the regional banks, they're joining
forces in a new mega regional bank that will be called Truist. I like to joke that that is the banking industry's answer to Trump as far as naming
goes.
But another interesting point despite like -- on top of the fact that you know, these regional banks are enjoying strong loan growth and deposit
growth. They are under pressure from the Federal Reserve and interest rates though, because both of these regional banks this morning reported to
clients in net interest margins, both from the first quarter and also year- over-year.
And you know, as your interview earlier this morning suggested that this is going to continue to be a problem for banks as the Federal Reserve appears
to be moving close to lowering interest rates -- Julia.
[09:40:10] CHATTERLEY: Absolutely. Matt Egan, thank you so much for that update there. All right, we're going to take a quick move -- quick break
here on the FIRST MOVE. Get my words up, but coming up, plenty of stranger things here, in fact, Netflix earnings were a bit of a horror show, I think
for investors, all the details and some analysis, next.
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CHATTERLEY: Welcome back to FIRST MOVE with a quick look at our global movers today. As you can see eBay trading higher buy some 70.2 percent,
second quarter profit and revenues beating estimates.
The company attracted more customers by making its platform easier to use. We saw net income fall into $400 million, down though from that $600
million last year.
IBM higher by some 2.3 percent. Income beating estimates and the company maintaining its full year outlook. IBM's Cloud division also jumped five
percent on more than $5 billion dollars of revenues. However the overall revenue fell for the fourth quarter in a row.
What about Netflix though? They are down 10 percent. Right now, the online streaming giant posting a rare miss in subscriber growth. They have
added just 2.7 million new subscribers in the second quarter, about half at the five million analysts expected. Netflix also lost some 120,000 U.S.
subscribers. It expected to gain 350,000.
The company says it's expecting to have a strong third quarter. Daniel Ives is Managing Director at investment firm, Wedbush Securities. Always a
pleasure, Dan.
DANIEL IVES, MANAGING DIRECTOR, WEDBUSH SECURITIES: Great to be here.
CHATTERLEY: What about Netflix? I said earlier on the show, sack the forecasting department. I mean that was a huge risk.
IVES: Yes, this is a gut punch for the bulls. I mean, if you look at that subscriber miss, that's one of the worst you've seen in a few years. And
it's also as you feel like the walls are caving in a bit with Disney and Iger, as well as Apple and Cook starting to focus on streaming.
So, I think right now becomes a prove-me story going the second half and this is a silver bullet at least against the bulls.
CHATTERLEY: I mean, to your point and actually Netflix said this, they said look, this was not about competition. This was just about not having
the right content mix in the quarter, but we know they've also been increasing prices.
[09:45:10] CHATTERLEY: And in a zero -- near zero inflation world, a 20 percent price rise feels like a lot at this moment. And perhaps, you know,
subscribers are telling you that.
IVES: Yes, and I think that's really been the balancing act, and they might have sort of right now, a bit of a risk in terms of where they've
priced this. And I think you're seeing consumer, especially in the U.S., you know, bit of a backlash there, especially in Disney and others are
going to undercut them, including Apple from a pricing perspective.
For the first time in many, many years, they have a target on their back and it seems like it is working.
CHATTERLEY: I mean, Disney is going to come in November, and it is half the price that they're charging right now. But my question here is, is
this a warning shot for all of these guys? Are we at a point where we're starting to see some degree of saturation for streaming? I mean, how many
of these different subscriptions ultimately are you going to take home here?
IVES: Yes, there's a lot of kids in the sandbox right now in terms of overall streaming. And I think you're starting to see a lot of consumers,
remember, on average, paying for two, potentially three. And I think now you're seeing a tipping point.
And I think going into next year, you'll see some of the weaker hands sort of play out. You could see consolidation, but it comes down to for the
first time Netflix really has some competition and is facing some headwinds.
CHATTERLEY: Now, I can't get you on without talking Big Tech in general and what we saw in front of Congress this week, whether it was tackling
Amazon on its sort of dual role of host to sellers, but also a seller itself, but also Facebook, of course. So, where do you want to go first?
IVES: Look, I think there was a lot of grandstanding, which we expected of Facebook. You don't expect too many candlelight dinners between Zuckerberg
and from Congressmen and women, and I think that's the issue right now.
You know, that's a glass half empty view of Facebook for good reason. And you look at Libra, you know, they are on the offensive instead of the
defensive. You expected that. Now, the question is, what are their hurdles to ultimately get Libra to a green light situation?
Amazon, in our opinion, this is the first step to a broader antitrust view of them. We continue to think bark is worse than bite. But right now, the
street is taking more of a focus of this issue, especially going into the 2020 elections.
CHATTERLEY: Let's talk about Facebook again there because you've mentioned Libra, and that's the cryptocurrency. And we've focused entirely on that
this week. What about Calibra, which is the payment system that they're talking about developing attached to Facebook?
For me, that could be incredibly powerful, and actually, the crypto part of it is a bit of a distraction.
IVES: Well, you're right. I think crypto is getting a lot of the focus. But when you've got Calibra from a monetization engine that really could be
a successful initiative with not as much regulatory issues. It's about how do you monetize those few billion users, they might have figured out the
formula.
CHATTERLEY: Yes, appetizers. You can click through, potentially, as you're on Facebook and buy something from there. That's got huge money
potential.
Very quickly, Microsoft, after the bounce today, what are we thinking on this one?
IVES: I mean, look, Nadella will continue with the golden touch in Cloud. It is two oars raised M&Ms, and we think Microsoft is gaining net share in
Cloud, expect another strong quarter. And that's why you're seeing more and more of a rerating in the stock. Especially as more investor are
trying to play the Cloud theme.
CHATTERLEY: I've got to ask you about Tesla because that's coming up next week while I have you. We were talking earlier this week about the shifts
in pricing, the juggling of pricing, and it happens so often. What are your thoughts on this one, they're trying everything.
IVES: They're trying everything to stimulate demand. 2Q obviously is a step in the right direction. The issue continues to be second half
numbers. We think they're going to have to rip the Band-Aid off and lower their guidance for the year again, and then it comes down to how can they
do this profitably? That's going to be the focus of the street in terms of profitability in 3Q and 4Q. That's where right now Musk and Tesla need to
prove to investors.
CHATTERLEY: Yes, watch this space. Dan, we'll get you back next week to talk about it. Dan Ives, Wedbush Securities, thank you.
IVES: Thank you.
CHATTERLEY: Always great to get you on. All right. Coming up on the show, fun app or Russian hack? We will discuss the face filter app
millions of people have been using this week that's now sparking major privacy concerns. That's next.
(COMMERCIAL BREAK)
[09:51:16] CHATTERLEY: Welcome back to FIRST MOVE with a look at today's "Boardroom Brief." Shares of U.S. chip maker Qualcomm under pressure, the
E.U. fined it more than $270 million dollars for quote "predatory pricing." The Competition Commissioner says the company sold below cost to force its
competitor, Icera out of the market.
The British fashion e-retailer, Asos issued a profit warning on Thursday. Shares are down as you can see some 16.5 percent late London trading. The
company says they are working on fixing operational issues in warehouses, which increased costs and hit sales. This is Asos's third profit warning
in eight months.
Cybersecurity experts are raising the red flag on the smartphone app that went viral this week called FaceApp. Users are having fun aging their
selfies by decades. But they're also granting the Russian company that made FaceApp full access to their personal photos and their data.
U.S. Senator Chuck Schumer is now calling for an F.B.I. investigation into the app citing national security concerns. Hadas Gold joins us now on this
story.
Hadas, I shouldn't laugh, I am. The number of texts I got from people this week saying you have to try, this is brilliant. And then got a sheepish
follow up text going actually, don't bother. Look at the details of this. Just explain what happened.
HADAS GOLD, CNN BUSINESS REPORTER: Right, Julia. It's very enticing, you know, using one of these fun apps to make -- to see what you might look
like 20, 30, 40 years from now. And as you showed on screen, there's a lot of celebrities and a lot of our friends and families are likely having some
fun with this.
But then people started digging into what this company is. Now, the company behind the FaceApp group is actually based in Russia. So, that
already set up some red flags for people. But I do have to say, more so than where they're based or who they might share the information with, I
think what's more important is if people look into the licensing and what you're allowing this app to do with the photos that you upload.
And what they say is that they allow that they can do whatever they want with a photo that you upload, irrevocable, non-exclusive, royalty free,
worldwide transferable sub-licensable license, pretty much that means they own the photo. If they want to do whatever they want to do with it, they
can do it for commercial purposes, and you won't get any money out of it.
So, that's why I'm sort of surprised to see a lot of celebrities whose whole business is often their image getting so involved with this app.
Now, the app has come out against some of these concerns, especially around the concerns about that they're in Russia saying that, listen, our data is
not being shared with any sort of Russian authorities.
But obviously in today's day and age, people are very concerned about their data going into some company that's based out of Russia, and they're also -
- the company is trying to push back on this idea that they have access to your entire photo roll. They say that is not the case.
But I should also again, emphasize to you that the biggest thing people actually should be thinking about is the licensing and what they're
allowing this app to do with the photo that they are uploading.
But obviously this is getting a lot of attention also from politicians. You noted Senator Chuck Schumer, and also the Democratic National Committee
has warned its employees and its members not to upload the app -- Julia.
CHATTERLEY: Yes, I looked at it. I mean, it's not just about the photos, either. It gives you access to Siri, to search, it gives you access to
refreshing in the background. So, even if you're not using it effectively, it's using you.
I mean, Hadas, big picture here, it proves actually we've learned nothing since Cambridge Analytica. We are still taking risks, huge risks, in fact
with our privacy and with our data.
GOLD: Yes, because people want to use these apps. You ask people, "Do you trust Facebook with your data?" And people will say maybe no, but are you
going to stop using Facebook? No, because people want to use these. These are fun. Obviously, we're seeing how much attention this app is getting.
But there's a lot of privacy and legal issues behind the scenes that people just aren't very educated about that they need to understand what's
happening.
[09:55:12] GOLD: And actually, some of the conversation is now turning to the app stores, to the Apple App Store, to the Google Play Store and
asking, are you vetting these apps in a well enough category to allow them onto your platform and to even in some cases, promote them as an editor's
pick?
CHATTERLEY: Yes, I have to say my favorite was a picture of Boris Johnson one week after he enters Number 10 Downing Street and faces the Brexit
conundrum. That didn't make me laugh. Naughty. Hadas Gold.
GOLD: Yes, you can't deny, it's fun.
CHATTERLEY: Thank you so much for that. All right. Let's take a look at what we're seeing for the markets this morning here in the United States,
we are a little bit softer here. Interesting show there. Lots of news.
Obviously, Jim Bullard as well saying to us, still pushing for that rate cut in July, not pushing for more than two rate cuts at this stage in 2019.
So a little bit of an anomaly there with the market. Lots to discuss. But for now, that was it for FIRST MOVE. Time to go make yours. I'll see you
tomorrow.
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