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First Move with Julia Chatterley
U.K. Prime Minister Boris Johnson Says Prepare For A No Deal Exit In 99 Days; Facebook Earnings Strong Despite Privacy Scandals And A Record Fine; Tesla Stock Tumbles Premarket As The Timeline To Profitability Extends Again. Aired 9-10a ET
Aired July 25, 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. Turbocharged: U.K. Prime Minister Boris Johnson says prepare for a no deal exit in 99 days. No facing the music. Facebook
earnings strong despite privacy scandals and a record fine. And an electric shock. Tesla stock tumbles premarket as the timeline to
profitability extends again. It Thursday, let's make a move.
Welcome once again to FIRST MOVE I'm not a moment too soon. There is a lot going on. Let's get to this. Let me show you the markets first. We've
got right now the NASDAQ and the S&P 500 kicking off the session at record highs though, we could see the NASDAQ pare back a little bit here at the
open. The Dow futures though boosted by some earnings and we'll get to those, too. I'm still amazed ultimately that we're at these levels
considering the news flow right now. Weakened earnings, falling survey data, trade risks, of course, and now a sweeping probe of that the tech
giants that's putting a lot of pressure on Jay Powell's shoulders ahead of next week.
But let me walk you through some of my key observations over the last couple of days. Treasury Secretary Steve Mnuchin's comments yesterday that
Amazon specifically has, quote, "destroyed the retail industry." Wow. Also firms that get the bulk of their sales from overseas say the
conditions remain grim.
Caterpillar's earnings missing badly. They lowered their full-year guidance citing the trade wars. We saw shares falling some four percent
yesterday. Motor giant, Ford posting a loss in China. Chemical giant, BASF warning profits could fall sweet zero percent this year. That's 30
percent. They are of course based in Germany, where data this week showed factory activity plunging to its lowest level in seven years.
The key question here is, what can the European Central Bank do here to help them? Well, we heard from Mario Draghi earlier today sending their
strongest signal yet. The fresh rate cuts are coming here and that everything remains on the table here to help stimulate the economy,
including returning to asset purchases. He says quote, "Significant stimulus is needed." European stocks are mostly higher on the news.
German bund though incredibly falling to fresh record lows.
The rate cuts in September of course, will be pretty timely ahead of more Brexit related fireworks potentially ala Boris Johnson and that's where we
kick off the drivers.
The first full day of Boris Johnson. Well, what did it bring? The new British Prime Minister holding his first Cabinet meeting after culling 17
Ministers from Theresa May's government. A few hours ago the Prime Minister addressed the Brexit stalemate in Parliament. Listen in.
(BEGIN VIDEO CLIP)
BORIS JOHNSON, BRITISH PRIME MINISTER: We will throw ourselves into these negotiations with the greatest energy and determination, and in the spirit
of friendship and I heard that the E.U. will be equally ready and that they will rethink their current refusal to make any changes to the withdrawal
agreement.
If they do not -- if they do not -- we will of course have to leave the U.K. without an agreement under Article 50. The U.K. is better prepared
for that situation than many believe.
(END VIDEO CLIP)
CHATTERLEY: Nina dos Santos joins us now. Nina, this is Teresa May's Brexit means Brexit on steroids quite frankly. You know, when I look at
the Cabinet makeup here, if you want to send a message to the E.U. that we're not messing around, this is the way that you do it.
NINA DOS SANTOS, CNN CORRESPONDENT: Yes, 17 out of 22 of Teresa May's top Ministers were unceremoniously either sacked or put in a position where
they had to step down knowing that they'd probably be sacked by an incoming Prime Minister, Boris Johnson. He has made it very clear by giving the top
three positions -- the Home Secretary position, the Foreign Office, and other key positions to pro-Brexiteers who backed him, and in fact some of
them stood next to him as he campaigned for leaving in the 2016 E.U. referendum. They have been given some of the most powerful positions in
the land.
He said that they're going to be trying to turbocharge the plan to get the country ready for potentially leaving the E.U. without a deal on that next
deadline, which is October 31st, which by the way is only 99 days away.
And he very -- he was very keen to make sure that he also in Parliament, when he was addressing Parliament, both sides of the House during his first
session there, his maiden speech and Prime Minister's Question time that he turned around theatrically to try and get those backbenchers of his own
party that he may have alienated in this vicious Cabinet reshuffle on his side. Theatrically accurately turning back and forth, not just to the
opposition, but also to the backbenchers.
[09:05:20] DOS SANTOS: Well, people also are thinking what is probably going on here, Julia, is that we may well be preparing ourselves for a
general election in the autumn.
Remember that Parliament actually breaks up for the summer recess tomorrow. So, there isn't a huge amount of time for these preparations to get
underway. And also Brussels itself will be breaking up for summer as well. So, although Boris Johnson has talked about turbo charging Brexit, the real
issues that he has got his work cut out in a very short period of time, during which a lot of people will be on their summer vacations -- Julia.
CHATTERLEY: Absolutely. Nothing about the conditions here of change, whether it's Parliament or the E.U., quite frankly. So it's yes, turbo
charged off on holiday at this stage. We shall see. Nina dos Santos, thank you very much for that.
All right. Let's go and take a look at Facebook right now because their shares are higher premarket. They reported $17 billion worth of revenues
for Q2. That was up 28 percent, I believe a quarter-on-quarter. Clare Sebastian joins us now.
Clare, I mean, I was looking at their user numbers across all their key monetizable areas right now, they're solid, and advertisers are going
nowhere. It's a win-win.
CLARE SEBASTIAN, CNN BUSINESS CORRESPONDENT: Absolutely Julia. It's really interesting. If you look at those user numbers, about 10 percent of
Facebook users are in the U.S. and Canada, but they get about 48 percent of their advertising revenue from this region. So, it was crucially
important, looking at those charts that those numbers are remaining stable, and even slightly growing.
Although, of course, most of the growth in users comes from emerging markets. Advertisers continue to be lower just because of the dominance of
Facebook's position. Facebook and Google continue to corner more than 50 cents on the dollar of every dollar spent in online advertising around the
world. That is something that businesses simply can't overlook.
And I think it's worth thinking as well that Facebook isn't just tapping into this market, it is also creating it. Sheryl Sandberg said on the
call, look, we taught businesses how to advertise on mobile. Now, it's teaching them how to shift into things like stories. There's more
ephemeral bits of social networking.
But one thing that they did say is that they expect to see a pronounced deceleration in revenue growth going into the fourth quarter of this year
and into 2020. That's because of ad targeting related headwinds. They called it things like GDPR and other regulations around the world, how
that's affecting how browsers deal with privacy, how that's affecting how they deal with privacy with the own products. That caused a bit of
volatility in the stock price, after hours. Although most analysts are seeing this as just management being conservative this morning.
CHATTERLEY: Yes, I remember when they first warned about that margin squeezes and the higher cost in things a year ago and the stock plunged 20
percent. Now we're approaching what? Record highs again. What about antitrust? Because we did see the record FTC fine of $5 billion, a fresh
FTC investigation, and of course, the antitrust issues. What did they have to say on that point?
SEBASTIAN: So, this was really the first thing they talked about on the call. Mark Zuckerberg went straight into this. He said, look, this is
going to be something that means fundamental changes to the way we do business. He said, we're making some major changes to how we build our
services and run this company.
He said that's going to lead to higher cost. He said it may lead to delays in how they roll out their products. Now, that doesn't tally with some of
the dissent that we've seen from the FTC. We know that in coming to this decision, this $5 billion settlement, they were divided down party lines.
The Democrats on the committee didn't think that it went far enough that that $5 billion was, you know, just about a third of the revenue that we
saw from Facebook in this quarter, not enough of a deterrent and didn't lead to fundamental changes in the way they do business in terms of ad
targeting.
But Facebook trying to make the opposite point saying that is going to lead to fundamental changes. So, although one thing I thought was interesting
from Mark Zuckerberg, he said, you know that he wants regulation, he wants comprehensive regulation. Otherwise, he says that frustration with the
industry will continue to grow. Perhaps, he's a little tired of all this bad publicity -- Julia.
CHATTERLEY: Yes, absolutely. Well, let's just go on to say that we're going to announce a cryptocurrency or something if you really hate bad
publicity. Yes, yes, skeptic here. Clare Sebastian, thank you so much for that. Talk about inviting criticism.
Oh, speaking of that, Tesla stocks down some 10 percent premarket reporting a much bigger loss than expected in the past quarter. They did deliver a
record number of cars which of course we knew previously. Paul La Monica has been looking at the details that this. Paul, the path to profitability
pushed back yet again, and a lot of details in here I think worrying analysts once again.
PAUL LA MONICA, CNN BUSINESS REPORTER: Yes, I think the biggest problem right now, Julia is that even though sales are strong, particularly for the
Model 3, which is the quote unquote, "cheaper" of you know, cheapest of Tesla's available models. That's bringing down profit margins, and that's
leading to these continued losses more than a $400 million quarterly loss. I mean, the Model S and Model X are expensive cars.
[09:10:10] LA MONICA: So, as Tesla goes more mainstream and tries to sell these Model 3s to more average, middle class consumers and not just the
affluent on the Coast that can really afford the Model S or the Model X, that's going to be I think, a big problem going forward.
So, I don't know, maybe Tesla needs its own cryptocurrency to get people to buy more of its cars.
CHATTERLEY: Just change the name, don't even bother doing any of the work, just change the name. That used to help. Paul, there are so many things I
could question or ask you about this. Obviously, they're trying to use all methods they can to cut costs here and that did filter through, but simply
the cost of producing these cars is high.
One of the things to me was how low the R&D costs are for a company that's talking about going to autonomous vehicle technology, it is promising all
sorts of big things over in China as well. That was worrying for me. But one of them was what Elon Musk said on the call about actually trying to
reduce service costs by telling people how to switch their cars on. Wow.
LA MONICA: Yes, there are a couple of things -- a lot there, Julia, Musk being a little glib talking about how some people were having trouble
turning the car on. You know, I think he was obviously saying that in jest.
I mean, you'd have to think that, you know, your more affluent Tesla consumer is not sitting there really struggling that much with things of
that basic of a nature.
But it is a good point that you have more of these problems with the cars, you know, Consumer Reports has noted them as well, people have to bring
them into the service centers and that costs a lot of money.
So, if Tesla can do more education to consumers and more downloads of updates via you know, via Wi-Fi and what have you, that's something that
will lower costs as well. And this is going to be very important because Tesla's Chief Technology Officer, JB Straubel, one of the cofounders with
Musk is also stepping down, which is another big problem, because Tesla has had this well-known brain drain for some time. And I think it does speak
to, you know, the question of, is Musk too difficult of a person to really deal with on a day-to-day basis?
CHATTERLEY: Yes, and it's a good point. But even if you are struggling to turn your car on, it's still a phone call to the service center. It's
still a wasted 30 seconds or one minute or even perhaps even more, that you could be helping someone with bigger problems.
So, I think it's right to tackle some of these issues, that the challenges remain. Paul La Monica, thank you so much for that.
All right. Let me bring you up to speed now with some of the other stories that we're following around the world. Ukraine says it's detained a
Russian tanker, which it claims was involved in a clash at sea last year. The incident last November led to the capture of 24 Ukrainian sailors.
Fred Pleitgen is in Moscow for us.
Fred, what else do we know? Because the suggestion from the Ukrainian Security Services, that they simply recognized the ship, it's just been
called something else.
FREDERIK PLEITGEN, CNN SENIOR INTERNATIONAL CORRESPONDENT: Yes, that's exactly what they're saying, Julia, and we're still sort of gathering the
evidence on this or the information on this. And it seemed as though what the Ukrainians are saying is that this ship was in a port in Western
Ukraine, a port called Izmail, and was there in fact, under a different name.
However, they say that the local authorities there seem to have identified that ship, and that the name had been changed and through the registration
number, found out that it was actually the ship that apparently had been involved in that incident in last November.
Now, what the Ukrainians are saying is that at this point in time that that ship has been detained, as they say. They say various security sources, or
security services are on that ship and are searching that ship. And they say what they want to do is they want to go to a local port and have that
ship as they put it be arrested, which obviously means that that ship would be impounded because the Ukrainians are saying that that ship is
essentially evidence because of course, there's still several of their sailors detained. And of course, they're in a standoff with Russia about
that incident that took place last November.
Now, as you can imagine, the Russians not at all happy with what was going on there, the Russian Foreign Ministry coming out and saying, if this is a
case of Russians being held hostage, as they say that the Russians would say that this is of the most severe incident, and that a response would be
very quick and not long and coming and would be very heavy and severe as well.
So as you can see, sort of an escalation of that standoff seems to be brewing. Of course, we need to remind our viewers that that original
incident that took place was last November. I think you're seeing some of the video there right now on your screen where the Russian Coast Guard
came, and essentially detained three Ukrainian warships and 24 sailors that were on board those ships, and those sailors remain in detention until
today.
Now, what the Ukrainians are saying is that this tanker was involved by essentially blocking the Strait of Kerch, which is a key waterway in the
Black Sea. And so therefore, they're saying that this ship is essentially evidence.
One of the things, Julia that has been going on over the past couple of months since Ukraine has had a new President, Volodymyr Zelensky, there had
been talks between himself and Vladimir Putin to try and get these sailors released. There was talk that apparently these negotiations had been
making headway, but of course, now it seems with this incident, it could be that all bets are off once again -- Julia.
[09:15:11] CHATTERLEY: Yes. And now, it perhaps means as well that the Ukrainians have detainees or as the Russians are calling them, hostages to
exchange. Interesting. Fred, great to have you with us. Thank you so much. Fred Pleitgen there in Moscow for us.
All right, South Korean officials say two projectiles launched by Pyongyang early Thursday are a new type of short-range missile. They are calling it
a military threat, one that risks undermining efforts to ease tensions on the Korean peninsula.
There were celebrations on the streets of San Juan after Puerto Rico's Governor announced he is stepping down effective one week from tomorrow.
Ricardo Rossello's homophobic and sexist messages in a group chat were made public kicking off days of mass protests. Lawmakers have said they are
prepared to begin impeachment proceedings.
Europeans is suffering the summer's second extreme heat wave and the worst is yet to come. Britain and France are facing life-threatening
temperatures on Thursday. Paris just hit a record 41 degrees Celsius. U.K. officials warn the heat could bring the train network to a grinding
halt.
American rapper, ASAP Rocky will go on trial on Tuesday to face challenges of assault. The musician has been detained in Sweden since July the third.
Swedish authorities say he will remain there until his trial.
All right, we're going to take a quick break here on FIRST MOVE, but still to come, tech titans are in the Justice Department's crosshairs, a new
antitrust probe could bite into FAANG dominance or will it?
And it's a bird, it's a plane, its UPS -- how the shipping company's deliveries will soar as drone operations take flight. That's all to come.
Stay with CNN.
(COMMERCIAL BREAK)
[09:20:00] CHATTERLEY: Welcome back to FIRST MOVE live from the floor of the New York Stock Exchange where it looks like we're giving back earlier
premarket gains here. The market is set to open slightly lower here.
The NASDAQ and the S&P 500 of course hitting fresh record highs yesterday, some good earnings as well. But it is a mixed bag. 3M, one of the ones to
watch, up some four percent premarket after strong results this morning, too.
What about Europe as well? Mario Draghi saying significant stimulus is needed right now for Europe, perhaps a rate cut here. New stimulus looking
likely now in September. The European Central Bank saying everything remains on the table here including potential -- further going back, I
should say, to asset purchases.
Turkey also in focus, joining the rate cutting bandwagon. No surprise there, but it was huge, four and a quarter percentage point cut here. The
first move, of course for Turkey's new Central Bank Governor. Like I say, no eyebrows raised there.
Let's get some context here. Joining me now is Sam Stovall. He is a chief investment strategist at CFRA. Sam, I'm delighted to have you with us.
SAM STOVALL, CHIEF INVESTMENT STRATEGIST, CFRA: Good to be here.
CHATTERLEY: Let's start with the European Central Bank here. I mean, Mario Draghi saying this morning all options on the table. We're
considering it, but given how low rates are right now, the unemployment picture in Europe still pretty weak, what more can stimulus do here?
STOVALL: Well, I think what it can do really is try to boost investor confidence to say that the ECB is attempting to do something, not just
sitting on the sidelines, expecting the markets to act on its own.
So, as Draghi had said 10 years ago, we're going to do whatever we can to make sure that this works.
CHATTERLEY: We will cut rates further into negative territory and we will buy assets. BlackRock said that they should be buying equities this time
around. Do you think that's where we're going to end up where the European Central Bank is buying stocks, not just sovereign bonds?
STOVALL: Well, I think nothing is off the table. And when you think about how low international equities are, even European equities, relative to the
S&P 500, they're trading at levels that really have not been seen since the MSCI EAFE was created in 1969.
CHATTERLEY: Wow. I mean, some would argue there is a reason for that, quite frankly. But I looked at your portfolio and you suggest putting 15
percent of the total portfolio in international equities. Are you recommending European stocks? Select European stocks or where around the
world are you suggesting here? And is it hard to convince U.S. based investors given the headline risk here to invest outside the U.S.?
STOVALL: Yes, it's very hard to get U.S. investors to invest overseas because the international equities have underperformed domestic equities in
the last 10 years. So, investors are saying "Well, wait a minute, you know, yes, I appreciate that on a relative basis, prices look very, very
attractive. Also on a relative price to earnings ratio, the profitability perspective, things also look very appealing. But I'm not going to be the
first one to jump into the pool because I might -- my portfolio might end up drowning."
So, at CFRA, we cover about 1,500 stocks around the globe. We have equity analysts in Europe and Asia. And yes, they do believe that there are some
selected opportunities, but you've got to be careful.
CHATTERLEY: It's cherry picking rather than just looking at an index in isolation, right? Well, I'm going to defend the rest of the world versus
the United States, because there's plenty of headline risk hereto quite frankly, whether it's trade headwinds, the Mueller report yesterday was
something else. I think everybody was kind of keeping an eye on earnings finally coming in kind of unexpected, but expectations were low. Why are
we sitting at record highs? Is it all to do with Jay Powell and the Federal Reserve?
STOVALL: I think it has to do with the difference between headline news and bottom line news. That yes, the Mueller situation and a lot of other
things that are swirling around have really more to do with headlines, politics, et cetera. But then the question comes down to how will it
affect bottom line? How will it affect corporate profits?
People have been calling for very, very weak corporate earnings growth for quite some time. Fool me once, shame on you; fool me 29 times shame on me,
because it's now expected that this quarter will be the 30th consecutive time in which the actual results have exceeded end of quarter estimates.
CHATTERLEY: Do we just need to fire all the analysts quite frankly?
STOVALL: No, we have to congratulate the management for doing such a good job managing expectations.
CHATTERLEY: Managing -- good answer. Also, I noticed in your portfolio, you have 15 percent in cash? Is that a lot relative to where you've been,
say in the past two years? And just explain that to me because that's not earning any money really.
STOVALL: Well, it's not earning any money. But the feeling is, it keeps the powder dry. We are in a very challenging period time-wise of the U.S.
equity market. Historically, the July through October period can be very, very volatile and also very weak.
We had this third strongest year-to-date performance since the end of -- through the end of April and 80 percent of the time of those top five, the
market was down July through October. So, with equity evaluations, you know, the profitability metrics, et cetera, looking pretty expensive. I
think investors are saying, you know what, maybe I'm not going to be totally invested, I will save some on the sidelines for better prices
ahead.
[09:25:28] CHATTERLEY: Antitrust. Tech leadership. What do you make of the noise surrounding this? And do you think -- and are you telling
investors perhaps to rotate out of technology into some of the other big enough sectors? Or are you saying hang on in there? Because if it's
coming, it's not really going to have teeth and it's not coming for a long time.
STOVALL: Hang on, you've brought up a good point of saying it is just noise. This has been around for quite some time, yet why is it that tech
is beating the broader market by a two to one margin over the last one month, three months, six months basis when everybody has been aware of this
already? So, it's going to add to volatility, but we still believe that the growth lies with technology.
CHATTERLEY: So, if we do see any pullback, it's a buying opportunity, perhaps rather than anything else.
STOVALL: Exactly. Bull markets don't die of old age, they die of fright. What they're most afraid of is recession. So, keep your eye on economic
growth. We're going to be getting the U.S. GDP report fairly soon showing about a 1.8 percent rise, pressure possibly from Boeing. But then really
the question is what kind of assessment about the future will come out?
CHATTERLEY: And in the end too, more resolute Jay Powell and his rate cuts.
STOVALL: Exactly.
CHATTERLEY: Thank you so much for that. Sam Stovall there. Chief investment strategist at CFRA. All right, we're counting down to the
market open. A softer open expected, but still lots of news to get through. Stay with FIRST MOVE. We've got you covered. You're with CNN.
(COMMERCIAL BREAK)
[09:30:00] CHATTERLEY: Welcome back to FIRST MOVE here at the New York Stock Exchange. The opening bell in Thursday's session, and as you can
see, we've got the S&P and the NASDAQ falling, easing back slightly here from record highs.
The tech stocks in fact, down the most. Big earnings on deck of course not only what we've been talking about with the likes of Tesla and Facebook,
but Amazon, Intel and Alphabet all out later on today.
Interesting observation here as well, as we await the Q2 GDP numbers for the United States tomorrow. The Russell 2000, the smaller cap stocks now
out of correction territory, thanks to a one and a half percentage point gain yesterday. That's some encouraging sign, remember because these guys
have a far more significant exposure to the domestic -- the U.S. economy here.
All right. Let me walk you through some of our global movers in the session as well. Ford under a bit of pressure here. The Q2 profits
missing expectations. They were hurt by efforts to restructure over in Europe and South America. The full-year outlook also missed, so easing
their guidance here, and the automaker is cutting thousands of jobs this year as it plans to invest some $11 billion by 2022 in electric and hybrid
vehicles, as we heard of course, when we spoke to their CEO, a week and a half ago.
All right. Southwest also in focus. The low-cost carriers says it is pulling out of Newark Liberty International Airport due to the Boeing 737
MAX delay. It says it does not plan to fly the jet now until next year. Southwest of course has more of those MAX jets than any other airline. So,
that impact clearly being felt here. The Q2 revenues also missing estimates here.
Now, Tesla as we've also done talked about already on the show, the electric car maker posting a $408 million loss in the second quarter well
below Wall Street's expectations here. However, it did reaffirm its full- year delivery guidance. It expects to return to profitability in the third quarter of the year. Can they make it though?
Dan Ives joins us now. He is the Managing Director and Equity Analyst at Wedbush Securities. A pleasure to have you on the show, as always.
DAN IVES, MANAGING DIRECTOR AND EQUITY ANALYST AT WEDBUSH SECURITIES: Good to be here.
CHATTERLEY: You said that these numbers were the one to watch. Let's talk about that guidance. Is that guidance pie in the sky right now? Because
that's looking like a real ask, given what we've seen here.
IVES: Yes, I mean, but two things first, in terms of that unit guidance, that's an ever slight uphill battle, in our opinion, and the bigger issue
is really profitability because it comes down to can they get there in a profitable model? A record quarter, gross margins below 20 percent. This
is a nightmare scenario for the bulls.
And this is really in many ways, I think, a fundamental question around their business model.
CHATTERLEY: I feel like we are sounding a bit broken record like of it being a nightmare scenario though, for the bulls here. I mean, to your
point, what we've talked about over the past weeks is stripping back costs. And we did see an eight percent quarter-on-quarter dropping cost, but
producing these cars is increasingly more expensive it seems in terms of the numbers, and they're producing more Model 3s now at the expense of the
higher margin cars, and you can see that drag on the margins hereto. This is a problem.
IVES: That is the underpinning of the issue, a really emotional bull-bear story here, because you had car selling $70,000 to $75,000.00; now, 35 to
40, the margins on there are not enough and now you're seeing it flow through the numbers.
You know, bulls are popping champagne when we got those delivery numbers. Now, it comes down to can they do it profitably? That was the issue, and
also that unit guidance for the year, they should have ripped the Band-Aid off because I continue to believe that is going to be an extremely
difficult number to hit.
CHATTERLEY: Interesting. Do you think he would be rewarded now for perhaps being a bit more realistic? Because we did see those deliveries
and everyone was like, "Wow, that's brilliant." And the snapshot of those deliveries is great, but not if you can't afford to produce them at that
rate.
IVES: That's the problem. And right now, Tesla and Musk are playing a poker game with the Street. And I think going into the next few quarters
is a fork in the road situation. That's why last night, bulls are open for more. You had in the deliveries, but the profitable nature of those,
that's really going to be the issue. And that's going to be the debate here and you'll get the stock that's going to get rerated lower.
CHATTERLEY: And you've adjusted your price target here lower as a result of these numbers.
IVES: Yes, we've lowered it to 220, and I think, look, there could be another way down if profitability gets pushed out further, then the stock
could go below $200.00.
CHATTERLEY: Is there any price here where you go, you know what, this now looks like value.
IVES: I think somewhere in their call, 160 to 170 range.
CHATTERLEY: Wow. That's a long way down.
IVES: But that's the level where it starts to become significantly attractive. Because you have factored in now 360 to 400, more of a 330 to
340 type number. That's where the model starts to kind of plateau.
[09:35:06] CHATTERLEY: You know, one of the things that worries me was the fact that their R&D, their research and development costs were the lowest
they've been for a year in this quarter. They've nowhere near spent what they said they were going to do in 2019. For a hugely innovative company
in the bull case, the guys I speak to, the bulls here still talk about the two, three, four, five-year horizon and how innovative this company is, but
right now, it can't afford to spend on the R&D.
IVES: And the albatross around the neck is the debt. When you have $9 billion of net debt. That's the issue. And that's why walls start to cave
in in terms of restrictions of what you can do. You've got to lower CapEx and for a company with Musk trying to balance all these initiative, robo
taxis, Giga 3 in China, and all others, that is a --
CHATTERLEY: These are the growth opportunities.
IVES: Unless, he is David Copperfield, that's very difficult.
CHATTERLEY: He might just be though. Who knows? All right, we're going to stop talking about this because we could continue for the next half an
hour. Never mind that. Big tech, you've been looking at this again, because you've had a lot of clients saying to you, look, what are your
thoughts here?
Steven Mnuchin, Treasury Secretary yesterday saying that Amazon had destroyed retail. Are we looking at any likelihood of antitrust fire for
some of these big guys because in the end, you have to prove the consumer has been hurt, and I am not sure you can do that to many of these?
IVES: That's really the issue and some that I have lived through and covered, Microsoft through the antitrust. That's a great blueprint.
There's going to be a big drum roll on both sides of the aisle especially going to the 2020 election. The D.O.J. definitely has some teeth in terms
of what they're looking at.
But I think, in the street, you see them stocks that are viewed as more background noise. Fundamentally, we think it's more of a finer business
model tweak. And that's why despite all the skeptics and black clouds, Facebook, Amazon, these FAANG names, we think are going higher.
CHATTERLEY: You know, you mentioned a great point. I saw Democrats and Republicans lambasting the FTC here saying, look, that $5 billion fine was
peanuts effectively to Facebook. My understanding is this, Congress gives the powers to regulators like the FTC. They need to beef up those powers.
Law change is required. Is that coming?
IVES: Well, we don't see that coming in Congress. And that's why right now, in the 202 area code, there's a long line of regulators waiting to sit
down with Zuckerberg and Facebook, and his software peers.
CHATTERLEY: Yes. Yes. He is laughing, announcing cryptocurrencies and the like. Dan Ives. Thank you so much for that. Dan Ives, Managing
Director and Equity Analyst at Wedbush Securities there.
All right, we're going to take a quick break here on FIRST MOVE, but coming up, are we in a gin-aissance? Fabulous word. Diageo is raising a glass to
its profits. We will speak to the CEO for all the details including the answer to that question.
(COMMERCIAL BREAK)
[09:40:48] CHATTERLEY: Welcome back to FIRST MOVE with a look at today's "Boardroom Brief." Nissan is cutting more than 12,000 jobs after reporting
a stunning 99 percent fall in quarterly profits. The Japanese car maker warned last quarter that it was at quote "rock bottom." It is now warning
that things won't improve anytime soon despite a major cost cutting program.
The security issues surrounding Chinese firm of Huawei are giving a boost to one of its main rivals. Nokia reported better than expected earnings on
the back of strong sales of 5G equipment. It says customers are reconsidering who to buy equipment from because of security concerns.
Shares in Nokia soared on the news.
And the world's largest brewery has shrugged off the recent turmoil over its failed Asian IPO. Shares in AB InBev are trading higher after it
reported better than expected results. Earlier this month, the company had to abandon plans to list its Asia business after weak investor demand.
We are feeling very spirited today. Diageo also posted its earnings from gin sales and boosting profits, but shares are a touch lower today. I have
to make the point though, they're up some 18 percent year-to-date so far.
Ivan Menezes is the CEO of Diageo and joins us now. Ivan, always a pleasure to have you here on the show. I called it earlier a gin-aissance
-- gin-aissance. If I look around all of your regions here, whether it's Asia, whether it's Africa, whether it's North America, solid growth here,
you must be pleased. Talk us through it.
IVAN MENEZES, CEO, DIAGEO: Yes, I am. We've had an excellent year. Sales has grown 6.1 percent; profits, nine; EPS, 10; strong cash flow. But the
quality of growth is what I'm most happy about.
As you mentioned, all our regions in growth. North America, five; Africa, seven; Asia and Latin America, nine; Europe is a strong four. And our
categories, I mean, you talked about gin. Gin is growing fast. But it's still a relatively small category for us and for the overall industry.
Tequila is doing really well, growing very fast, particularly in the U.S. and Mexico. Whiskey is on trend everywhere in the world, and its
premiumising nicely. So, you know, Johnnie Walker, up seven percent; but Johnnie Walker Blue Label growing double digit.
India and China doing well. Both those markets have qualities growth. So, the business is doing well because we're investing more behind marketing.
And we've had a banner year on new product innovation. And those investments are paying off as we look to build a sustainable and consistent
trend there.
People around the world are drinking better. And we benefit from that. People around the world are looking for better brands, better products,
better experiences and that's what we're about, it is being innovative in how we provide that to consumers around the world.
CHATTERLEY: Talk to me about some of those innovations in particular because your TV tie ups have created all sorts of news whether it's the
White Walker of course, a play on HBO's "Game of Thrones," which I know was a real highlight, but also the "Walking Dead" as well, your bourbon launch
there, I mean, just engaging with the consumer and perhaps a younger consumer here in a very different way.
MENEZES: Yes, so part of what we like to do and how we build our brands is make them relevant in the current cultural context. And so brands living
in culture is a very important part of our category and because you look at where our products play, they play in moments of socializing, of
celebration of relaxing, and our brands mean a lot to people.
They choose their products based on how they feel about the brand and in what you see with "Game of Thrones" collaboration on Johnnie Walker and on
our range of malts, it's brought new consumers into scotch whiskey and it's also helps make Johnnie Walker cool.
And so we're getting bolder and more innovative in how we do this, but at its heart, you've got to be very careful, you can't overdo it. I mean,
brands need to be authentic and true to what they stand for. And we've been very pleased with the "Game of Thrones" collaboration that's worked
really well for us around the world.
[09:45:38] CHATTERLEY: I also want to talk to you about potential M&A here as well, because obviously, we've been very focused on what we've seen from
AB InBev and the IPO that they sort of tried and failed to do over in Asia, selling off the Australian business.
I know you've been through a process over the last decade of sort of reshaping your offering, and as you called it, the premiumization of the
brands that you're doing here, but where are you looking? Whether it's geographically or in the sort of product mix here. Because to your point,
I mean, gin is still only what? Four percent and the growth opportunities -- the four percent of your revenues and the growth opportunities here
perhaps for that brand around the world is pretty huge.
MENEZES: Yes, and we are fortunate in the portfolio we have today, it gives us a very good geographic footprint. You know, the developed markets
of the U.S. and Europe still have very good growth for premium spirits. And we're well positioned in Asia, Latin America, Africa, India, and China.
So, we have a good starting position footprint.
In terms of brands and categories, again, that the Diageo portfolio has good completion, but we're always looking for interesting businesses to
buy. I'd say the last most recent one we did was Casamigos Tequila, which we did a couple of years ago. And that acquisition is performing really
well for us.
Diageo has a strong balance sheet. We have very good cash. We want to be building the brands of tomorrow, acquiring new interesting brands that have
good long-term growth. And so we will we will stay active in the space of adding to our portfolio for the right opportunities that come along.
CHATTERLEY: Yes, always looking for potential opportunities. Ivan Menezes, great to have you on the show, as always, the CEO of Diageo there
and their solid results. So, congratulations again.
All right, let's move on. UPS just posted record breaking earnings, too. But the U.S.-China trade war could mean further trouble ahead. My
conversation with the CEO of UPS, next.
(COMMERCIAL BREAK)
[09:50:00] CHATTERLEY: Welcome back to FIRST MOVE. Trade talks between the United States and China is set to resume next week. The first time
since their -- let's call it a pause -- back in May. It comes after the IMF warned this week, if you remember that 70 percent of the world's
economy is now slowing trade, a huge contributory factor.
I spoke to the UPS CEO David Abney, and he was saying to me that he wants to see more measurable progress towards a comprehensive agreement. When we
sat down, I asked him about what he is seeing in China and what the overall declining export numbers are telling him.
(BEGIN VIDEOTAPE)
DAVID ABNEY, CEO, UPS: Exports are slowing. But if you're based in the U.S., you can judge China exports based on what's coming into the U.S. And
so what we've seen that has diminished. There is no doubt about that. It is still a pretty hefty clip, but it's less than what it was.
But we're seeing China to the rest of the world increase. So, we're seeing trade flows change. And, in fact, we took a 747-8, our largest aircraft
that we were going to fly from China to the U.S., we're actually flying it from China to Europe now. It's just an example of how we can change our
network when you have these headwinds that come in. So, headwind always creates a tailwind somewhere else, so we're taking advantage of that
tailwind.
CHATTERLEY: But what you are saying is actually China then is trading to a greater extent with other areas. So, even as their business with the
United States drops, they're actually substituting for other nations.
They are. Now, they're not fully able to substitute because the decrease in the U.S. is more than increase in the rest of the world. But they are
doing a good job diversifying and they are offsetting some of that impact.
(END VIDEOTAPE)
CHATTERLEY: This week, the U.S. Treasury Secretary Steven Mnuchin said that the Justice Department is right to launch an antitrust probe into
Amazon. He says the e-commerce giant has, quote, "destroyed the retail industry across the United States" that has no doubt limited competition.
It's a fascinating comment. UPS is both an Amazon competitor of course, and also a partner at times. So, I asked Abney what he made of those
comments.
(BEGIN VIDEO CLIP)
ABNEY: Anything that the governments across the world can do to take away barriers, to create trade agreements that will encourage the small and
midsize businesses. We've talked about this before. Only one percent of U.S. small and midsize businesses export. We can encourage them through
trade agreements and through logistics networks, like UPS and increase that number. If we do that, that will make them more competitive.
CHATTERLEY: It's quite fascinating to me, because I mean, Amazon has what? Forty percent market share of the e-commerce market, but it's less than
five percent, I believe, of the overall retail market. So, I guess your point here is, as much as you can perhaps look at the power of some of the
big retailers in the United States, what policies here is the government promoting to support smaller and medium sized enterprises, particularly as
far as digitization is concerned? Is that the point?
ABNEY: That is absolutely the key and there's so much the government in the U.S. and throughout can do. And we believe that the U.S., Mexico,
Canada Trade Agreement is a big step in that direction. The old NAFTA did not even address e-commerce.
This has a particular chapter just on small and midsize companies and they are the ones who will benefit. It has been ratified in Mexico. We want to
see it ratified in Canada and the U.S.. And we do think they're just becoming a little more bipartisan. So, we believe there's an opportunity
to get that done.
CHATTERLEY: I'm sure you talk to the government all the time. I'm sure you talk to the Treasury Secretary, do you think he gets it? Do you think
he understands sort of the challenges both for small employers and large ones in the United States from this perspective? You have confidence that
he gets it?
ABNEY: You know, I have had several conversations with Treasury Secretary Mnuchin and I do believe that he does. It does not mean that we agree on
everything. I've been married for 42 years. We don't agree with everything either.
CHATTERLEY: Congratulations.
ABNEY: But we do have good conversations back and forth between the Secretary and myself. He listens and he lets me give my opinion, and then
of course, he is going to make up his own mind. He is going to make his recommendations. But I do believe he understands global trade, and what we
need to do to enhance global trade and create jobs in the U.S., which he wants, we want, and the American public wants.
(END VIDEO CLIP)
CHATTERLEY: Forty years and it's up, up and away for UPS in the future. They're applying for a certification from the Federal Aviation
Administration for drone operations. I asked David if he believes UPS can get that certification and what they'll then do with it and how fast?
(BEGIN VIDEO CLIP)
[09:55:11] ABNEY: We do believe we can be the first or among the first to get this FAA Part 135 certification. If we can do that, we can duplicate
what we do at Wake Med, to clinics all across the country without having to have line of sight and without restricting the numbers, and then you can
look at doing it across other industries, too.
So, we think it is a very good opportunity. It's not meant to replace the UPS uniformed driver, but it's certainly meant in places where urgency is
so important that we can offer our customers another level.
(END VIDEO CLIP)
CHATTERLEY: David Abney there, the CEO of UPS. All right, a quick look at the markets. We are softer here. So, moving away from those record highs
hit yesterday for the S&P and the NASDAQ, of course, too.
I'll be back on "The Express" with more, but for now, that's it for the show. You've been watching FIRST MOVE, time to go make yours.
(COMMERCIAL BREAK)
[10:00:00]
END
