Transcript: Monday, February 3, 2014

NBR ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Susie Gharib, brought to you in part by —

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TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Stock market chill. February continues where January left off, in a deep freeze. The Dow plunges 300 points, the NASDAQ closes below 4,000.

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Small caps touch correction territory. Bond yields fall as gold rallies. What`s pulling the market lower and where can you find protection?

MATHISEN: This is a special market selloff edition of NIGHTLY BUSINESS REPORT for Monday, February 3rd.

GHARIB: Good evening, everyone.

Sell, sell and more selling. That was the story on Wall Street today. On this first trading day of February, stocks got slammed. Market pros have been calling for correction and it looks like the major market averages edge closer to correction territory today.

So what happened? A weak report about manufacturing activity in the U.S. worried investors, adding to the anxiety China reporting that its factory sector is also not growing much. That was enough to push the major averages down 2 percent or more in one of the most volatile days in trading in seven months.

Here are the closing numbers on Wall Street: The Dow plunged 326 points, that`s a 2 percent decline. The blue chip average is now down 7 percent for 2014. The NASDAQ tumbled nearly 107 points, closing below the key 4,000 mark for the first time since December of last year. And the S&P lost 40 points with all ten of its sectors in the red.

In the bond market, prices rose and yields fell — the yield on the 10-year note dropping below 2.6 percent.

Bob Pisani has more on what stocks and sectors were hit the hardest today, and the mood of traders at the New York Stock Exchange.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Stocks sold off today with the Dow closing at a three-and-a-half month low. The market started to the downside but it took another leg down in the late morning when January manufacturing data and the auto sales both came in weaker than expected, though everybody cited the weather, concerns about a slightly weaker U.S. economy, on top of worries about emerging markets left traders in an unforgiving mood.

It was an ordinarily but broad sell off, with almost all sectors down 2 percent to 3 percent. Even defensive groups like health care and consumer staples were down 2 percent. The volume was heavy today. It was one of the heaviest days in a year, in fact, suggesting that many professional traders were lighting up on their exposure to stocks.

The bottom line, most traders thought bonds would continue to drop and the yields would rise in 2014 and that stocks would move up. So far, that consensus has been completely wrong but then again, it often is.

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

(END VIDEOTAPE)

MATHISEN: Sell-offs, corrections, bear markets — where does one end and another begin? Why it`s not just a matter of semantics and where you might take cover in today`s suddenly volatile market.

Dominic Chu has our report.

(BEGIN VIDEOTAPE)

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): The stock market has gotten off to a rocky start and that`s got investors worried. This time, many are blaming it on weakness of emerging market countries like Brazil and Russia. Still, others are saying it`s not just those countries but bigger developed markets like Japan. Its stock market has already entered a correction, dropping by 10 percent in value since its recent highs.

But is a pull back in stocks really something to be feared? Take a look at the last time we have a pronounced correction for U.S. stocks. It was between April 29th and October 4th of 2011. The S&P 500 lost 18 percent in that time frame.

Among the worst performing stocks were cyclical ones, the ones with the most exposure to the ups and downs of the bigger picture economy. In that last correction, financials, materials and energy stocks all were hit the hardest. Think banks like Regions Financial and oil companies like Marathon Oil (NYSE:MRO).

Conversely, the stocks that weren`t as impacted by economic weakness fared better. The so-called defensive stocks, utilities, consumers staples companies, they didn`t fall nearly as much. Think Duke Energy (NYSE:DUK) and Colgate-Palmolive (NYSE:CL).

After all, we all still use electricity, gas, toothpaste and paper towels, even if times are tough.

(on camera): Many traders and investors are placing their bets on these kinds of companies, depending on what their market view. But one shouldn`t lose too much sleep over the drop in stocks in 2014, at least not according to Bank of America (NYSE:BAC) Merrill Lynch.

SAVITA SUBRAMANIAN, B OF A MERRILL LYNCH STRATEGIST: Corrections aren`t that unusual. So, you know, we went back over the last few decades and we found that 5 percent pull backs happen on average about three times a year. So, I think that what we`re seeing right now is just kind of a normal, a normal phenomenon.

CHU (voice-over): So, whatever your view, keep an eye on cyclical and defensive stocks, where the action is going to be.

For NIGHTLY BUSINESS REPORT, I`m Dominic Chu.

(END VIDEOTAPE)

GHARIB: So, what is going on in the markets, and why now, and what should you do about it?

Let`s turn to three market experts for their analysis.

Anastasia Amoroso, she`s global market strategist at J.P. Morgan Funds. Anika Kahn, senior economist at Wells Fargo (NYSE:WFC), and Tom Luster, co-director of fixed income at Eaton (NYSE:ETN) Vance.

Ands thank you all for joining us tonight.

Anastasia, let me begin and just ask you, how much more selling are we in for and how serious is this really?

ANASTASIA AMOROSO, J.P. MORGAN FUNDS GLOBAL MARKET STRATEGIST: Well, today certainly has been a disappointing day, but I think I would agree with the analysis that the markets have been right for correction for sometime. We are coming off a very exceptionally strong 2013 and we`ve had an exceptionally strong last five years. So, the markets were set out for correction.

How far does ask a pull back go? You know, the worry today is that we did breakthrough some pretty critical levels, and perhaps there is more to this downside. But everything needs to be kept in perspective and what is so important for investors to do now is assess not only how to protect their portfolios, but also how to take advantage of this opportunity because that`s exactly what we see here today is that with the stocks having pulled off some of the highs, the buy list should be looked at very carefully right now.

MATHISEN: Anika, an awful lot of people have been citing some weaker economic numbers and citing everybody`s favorite excuse, the weather.

How weak have these numbers been, and how really justifiable is the excuse that a lot of it is weather-related?

ANIKA KAHN, WELLS FARGO SECURITIES SENIOR ECONOMIST: Yes, it`s a great question, because most of it really is weather-related. Even if you look at the ISM manufacturing index report, respondents specifically noted it was the weather.

And it`s not just weather. We typically get cold weather in December. It was unseasonably cold weather, and so it not only had an impact on ISM manufacturing, but we also saw durable goods as well as a host of housing market indicators that were hit as a result.

As we look forward to the next two months, it`s very likely that some of those housing market indicators could be weak, but other indicators should start to come back.

GHARIB: You know, Tom, let me turn to you, it seems like all of our reporting and also what we`re hearing from the other panelists here, is that this is all kind of normal sale off correction sort of stuff, but the bond market doesn`t seem to be behaving like everything is OK here. We saw the yield on the 10-year was around 3 percent the beginning of January. Now, it`s below 2.6 percent. In bond market terms, that`s a huge move.

How critical is this and what is it telling us?

TOM LUSTER, EATON VANCE FIXED INCOME CO-DIRECTOR: Well, certainly, what we have seen is as you mentioned about a 40 basis point decline in the 10-year treasury. I think it`s a classic example of going from a risk on trade to risk off trade, selling stocks and buying treasury bonds as a safe haven.

You know, we`ve seen this numerous times over the past five years, since the credit crisis, and I think it`s another good example of it happening again.

MATHISEN: Anastasia, let`s turn to what I should do with my money. Should I do anything in this context if my portfolio is relatively diversified? And if I want to play defense, and we saw Seattle win with defense yesterday, what should I do to play defense intelligently?

AMOROSO: I think there is definitely room for both. So, let me start with defense first. It`s absolutely for the investors where the critical objective is to protect principal, absolutely there is room for safety in the portfolio, and that`s why we turn to safe haven treasuries and specifically on the longer end of the spectrum they have done very, very well — longer term of the maturity spectrum.

Also, you know, within equities, investors could rebound away from the cyclical stocks, such as industrial, such as materials that are heavily tied to this emerging market trade and focus more on the defensive sectors.

But I wouldn`t say this is the only thing investors should do. In fact, I would say that investors should be skewed towards looking at the opportunities that lie under the surface here, specifically with the S&P cyclical stocks and also European cyclical stocks. They have been hit quite hard because of the emerged market fears.

But in reality, those are economies that are driving the global recovery, not the other way around.

GHARIB: Anika, let me ask you what role the Fed plays in this and how it might impact the decisions that investors should make with personal portfolios? A lot of talk today, this is the first day that Janet Yellen is serving as the chief of the Federal Reserve. And now, she`s faced with this market condition and maybe changes in the economy.

If there`s any change in Fed policy about this whole taper business, maybe less tapering, how will that impact investors? Will this be a positive or a negative for investors in the markets?

KAHN: Yes, the Fed is still going to be very data dependent. It`s going to look at its dual mandate, what is the labor market doing, what is inflation doing, and, of course, we expect the employment and labor market to continue to increase. What is inflation doing? It`s at a very low rate today.

But the Fed definitely will use how much to taper as another policy tool. The Fed has said it`s not on a preset course. And so, that means in light of softer data, they could decide not to taper in the March meeting.

However, if you look at the Fed`s projections, they are looking at better data for 2014 and 2015 which coincides with private sector data, as well.

MATHISEN: Tom, if I had bought bonds on January 2nd, I`m feeling smart now with the 10-year Treasury that is given, the fall in interest rates. But what is the outlook for the rest of this year and what should I do to position my bond portfolio in light of your outlook?

KAHN: Tyler, I do think what is going on now is a correction in what is otherwise an upward trending stock market and upward trending rates, as well. So, we`ve been suggesting to our fixed income clients certainly that they avoid interest rate risks and in lieu of that, where they do need more health care, they are better off taking some credit risk in order to get it.

So staying short in duration, as we call it, (AUDIO GAP) interest rate risk low and taking on some credit risk, buying some corporate bonds, being invested in high yield and bank loans and those sorts of sectors in the bond market in order to generate some attractive return.

GHARIB: Anastasia, we have half a minute, real quickly, do you agree with that, what kind of bonds to put in portfolio? And number two, what about gold? They had a nice move today.

AMOROSO: Absolutely. I agree with the credit statement. I think what you want to own as fixed income right now is sectors that have sensitivity to improve economic environment and how yield bonds certainly do, convertible bonds certainly do. So it`s a buying opportunity here.

Gold, long term, we think the catalysts are just not there. So, it might be a short-term bounce here.

GHARIB: All right. Anastasia, thank you so much.

Thank you all.

AMOROSO: Thank you.

GHARIB: Anastasia Amoroso, Anika Kahn, and Tom Luster — we really appreciate your input tonight.

MATHISEN: And while stocks did head lower today, the price of safe haven commodities went up, especially gold, we were just talking about.

Jackie DeAngelis now has more on why the precious metal is getting renewed attention these days.

(BEGIN VIDEOTAPE)

JACKIE DEANGELIS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Gold prices rallying, popping as much as $25 intraday and traders say bullion could be staging a rebound. And why are investors flocking to gold? Well, when the equity markets are volatile as they have been recently, investors believe the stock market for safer investments like gold.

Right now, it looks like a perfect storm is brewing for gold bugs. There is multiple concerns out there, including growth in emerging markets in China but also what`s happening here at home. Recent data showing that the U.S. economy may not be rebounding as quickly as everyone hoped, coupled with the Federal Reserve scaling back at bond buying programs, and questions over earnings and guidance from corporations.

And history tells us that when the going gets tough, traders flock to gold. Remember the great debt ceiling debate of 2011? The U.S. lost its AAA credit rating, gold prices rallied and hit a record-closing high of $1,888.70 in August that year.

So, how high will prices go this time? Traders are saying it`s difficult to say exactly, but if the global markets continue to see more volatility, they do expect gold to continue to shine, maybe not to those record levels, but they are looking for it to recoup some of its more than 30 percent losses that it saw in 2013.

For NIGHTLY BUSINESS REPORT, I`m Jackie DeAngelis, reporting from the NYMEX.

(END VIDEOTAPE)

GHARIB: And coming up, Treasury Secretary Lew issues another warning to Congress — act now because time is running out to lift the debt ceiling. Will this be the next big headache for investors?

MATHISEN: January`s rough weather spelled trouble for auto sales — another bit of news that did nothing to cheer investors today. General Motors (NYSE:GM) saw sales fall almost 12 percent, Ford and Toyota (NYSE:TM) reported a drop of 7 percent, but Chrysler did buck the trend with an 8 percent year-over-year increase.

And it wasn`t just the automakers that felt that chill from the weather, but also the airlines.

Phil LeBeau has more.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): From long lines at airports to no lines in showrooms, the auto and airline industries had a terrible month in January.

How bad? GM, Toyota (NYSE:TM) and Ford all saw sales drop last month, while Chrysler was up. But all of them posted weaker than expected sales in part because of snowstorms keeping people from visiting dealerships.

JESSICA CALDWELL, EDMUNDS.COM SR. ANALYST: From the second polar vortex hit, I think that`s when, you know, sales dipped again and with sales closing in this past Friday, there was really no time to recover those sales.

LEBEAU: When you look where auto sales fell in January, it`s the eastern half of the U.S., from Chicago to Atlanta to New York, bad weather reeked havoc, as it did for the airline industry.

JOSH MARKS, MASFLIGHT CEO: I think it`s safe to say it can`t get any worse. January was an all-time low point, so to speak for the airline business when it comes to cancellations.

LEBEAU: All together, 49,000 flights were cancelled last month and thousands more were delayed, impacting 30 million passengers — masFlight says changing flights, scrubbing trips, booking and rebooking hotels cost travelers $2.5 billion. Those hardest hit, people flying regional jets often to smaller cities.

MARKS: And the airlines try to prioritize the aircraft that have the most number of people on board. That`s why you see the smaller airplanes that are operated by regional carries cancelled first so that the 200 or 300-passenger planes can take priority.

LEBEAU (on camera): While storm after storm made for a miserable January, they expect business to bounce back this month, provided Mother Nature cooperates.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

(END VIDEOTAPE)

GHARIB: There could be stormy weather in Washington, not from Mother Nature but lawmakers on Capitol Hill. The deadline to raise the nation`s debt ceiling is this Friday.

Treasury Secretary Jack Lew warned today that time is running out. He says that with tax refunding starting to go out, his office will run out of what he calls extraordinary measures to keep the government open for business by the end of this month if Congress doesn`t lift the nation`s borrowing limit.

(BEGIN VIDEO CLIP)

JACK LEW, TREASURY SECRETARY: And at the beginning of tax filing season, tax refunds result in cash flows that deplete borrowing capacity quickly. We now forecast that we`re likely to exhaust these measures by the end of the month.

(END VIDEO CLIP)

GHARIB: A temporary suspension of the debt limit was passed by Congress last year, but that expires this Friday.

John Harwood joins us now from Washington.

John, let me just begin by asking you about, you know, how investors are going to respond to all of this stuff going on in Washington. Up until now, there was a feeling we don`t have to worry. There`s going to be a bipartisan agreement and all of that. But now with this huge sell off going off Wall Street, is this debt limit going to be another headache?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: Susie, I think investors should watch and monitor. I don`t think there`s reason yet to be overly concerned about this, for the simple reason that Republicans who are the ones been holding up the debt limit in the past realize that that is something that could hurt them politically. They are heading into an election year which things are otherwise looking good. They don`t want to get in the way of their own good news. So, I think it`s likely that this gets resolved in a non-crisis atmosphere.

MATHISEN: So, the dams (ph) will be taken off the railroad tracks one more time. But what is the nature of the solution? Are they going to give — are the Republicans going to give a blank check to the debt limit raise or what?

HARWOOD: I think the nature of the solution, Tyler, is not exactly a blank check. It revolves around something that makes Republicans feel like they can tell their conservative base that we`ve got some sort of concession. Last — a year ago at this time, it was no budget, no pay. If the Senate doesn`t pass a budget, they won`t get paid. Of course, they did, and everybody forgot about that issue.

So, it`s a matter of coming up with some fig leaf for the speaker to be able to tell conservatives, I got the best we could but let`s focus on the things that we think work for us like Obamacare, not go back into that debt limit mess.

GHARIB: So, if everything goes according to plan, what is the timetable here?

HARWOOD: Well, as you noted, the debt limit, we hit it on Friday. Then you have extraordinary measures but because the government is going to be paying so much in tax refunds, there isn`t the length of time that members have become used to. They`ve become used to this dragging on for months past the date.

Now, the economy is fairly strong at the moment. So that could provide some addition cushion. But right now, Jack Lew is saying by the end of this month, by the end of February. And so, that`s the target that they`ve all got to shoot for right now.

GHARIB: So, another countdown for us to keep track of. Thank you so much, John.

HARWOOD: Yes.

GHARIB: John Harwood, reporting from Washington.

MATHISEN: Well, watching the sell-off in the market closely is the new chair of the central bank, Janet Yellen, who says, “I`m the chair, not the chairwoman”, was sworn in today as the first female chair of the Federal Reserve. The oath was administered in the Fed`s boardroom by Fed Governor Daniel Tarullo.

And her predecessor Ben Bernanke will not join the long-term unemployed. Just three days removed from his post at the top of Federal Reserve, Bernanke today took a position at the Washington think tank, the Brookings Institution. He`ll be a distinguished fellow and resident at its Hutchins Center on Fiscal and Monetary Policy.

And coming up, as yields fall, so do mortgage rates but for how long, and could Friday`s jobs report send them back in the other direction?

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GHARIB: Despite the massive sell off on Wall Street today, Pfizer (NYSE:PFE) was the only Dow component up today and that`s where we begin tonight`s market focus. Pfizer (NYSE:PFE) said an experimental breast cancer drug met study goals in a mid-stage trial. The treatment is considered one of the drug maker`s most valuable products in development. Some analysts believe it could account for annual sales of more than $5 billion if approved. Pfizer (NYSE:PFE) shares rose a fraction to $30.60.

AT&T`s move to make customers happy left investors disappointed. It announced a 20 percent price cut for customers who share large data plans. It`s an attempt to gain ground lost to Verizon (NYSE:VZ) and T-Mobile. Many on Wall Street are expecting Verizon (NYSE:VZ) to follow AT&T`s lead.

But AT&T (NYSE:T) shares still tumbled 4 percent to $31.95. Verizon (NYSE:VZ) also down losing more than 3 percent to $46.41.

Now, after the market closed, Yum Brands (NYSE:YUM), this is the parent of KFC and Pizza Hut reported earnings that came in higher than estimates, but revenues missed. Overall, comparable sales were down which analysts didn`t expect and they fell 4 percent in China, that`s Yum`s top market. The company did reaffirm, though, its guidance for the year. Shares were up initially after hours in the regular session. Yum shares were down by 1.5 percent to $66.16.

MATHISEN: Herbalife (NYSE:HLF), the nutritional supplements company, is estimating its fourth quarter profit and sales will come in above the market forecast. The company also upped its buy back program to $1.5 billion. The stock surged toward the end of the day, up 7 percent to $69.02 on a very rugged day in the market.

Jos. A. Bank has rejected Men`s Wearhouse`s latest take over offer again. Bank says the $1.5 billion bid substantially undervalues the company. At the same time, there are reports that Jos. A. Bank is in talks to buy the retailer Eddie Bauer. It is owned by the private equity firm Golden Gate Capital.

Shares of both Bank and Men`s Wearhouse (NYSE:MW) tumbled today. Bank off 5 percent to $53.39. Mens Wearhouse down almost 8 percent to $44.31.

And L Brands, the parent of Victoria`s Secret and Bath and Body Works, raised its annual dividend by 13 percent and declared a special dividend of a dollar. A share that`s going to be paid on March 7th. Still, the stock was down nearly 3 percent to $50.87.

GHARIB: Well, markets are selling off and investors are rotating money into bonds. There is one upside in all this uncertainty, mortgage rates. They are ticking lower. But with Friday`s jobs report looming, is it time to lock in your mortgage rate right now?

Diana Olick gets some answers.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): This winter`s wallop sent a chill across the economy but it`s also helping some borrowers by pushing mortgage rates lower. As investors flee the stock market, they are buying bonds sending yields lower. Mortgage rates follow the yields.

MATTHEW GRAHAM, MORTGAGE NEWS DAILY: Some are viewing this as an anomaly so far. But it`s really only limited by how bad the situation gets for equities and the other markets that investors are leaving.

OLICK: Last week, the average rate on the 30-year fixed fell to a three-month low and rates dropped again today on weak manufacturing data. For the best borrowers, 4.25 percent is a real possibility. It`s a quarter point drop in a week barely $30 a month saved on a $200,000 loan, but it means a lot for.

GRAHAM: If that quarter of a percent takes rates to say the lowest they have been in several months or a year, then that psychological effect, not only affects borrowers individually but the industry makes a bigger deal about it.

OLICK (on camera): The downward slide in rates is a really a double edged sword. Rates are only going down because of concern in the broader economy. That concern has investors fleeing the stock market and what`s bad for the market is not good for the housing recovery.

JED KOLKO, TRULIA CHIEF ECONOMIST: Affordability is not just about mortgage rates. It depends on your income. If the economy does worse, more people stay out of work, incomes don`t rise. That really hurts affordability.

OLICK: Despite the rate move, credit is still tight as ever and potential buyers remain leery.

DAVID GOLDBERG, UBS HOME BUILDING ANALYST: The biggest concern is consumer confidence, right? It`s the question of, can we get enough buyers at the table. Are people going to pause because they`re not sure what the broader economic conditions? That`s what builders are really worried about.

OLICK: The decline in mortgage rates may be short lived, especially if the employment report Friday delivers good news. That`s why borders looking to refinance might want to look in now and hedge their mortgage bet while the hedging is still good.

For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Washington.

(END VIDEOTAPE)

GHARIB: To read more about mortgage rates and where they might be heading, go to our Web site, NBR.com.

And that wraps up our special market sell off edition of NIGHTLY BUSINESS REPORT. I`m Susie Gharib, thanks for watching.

MATHISEN: And I`m Tyler Mathisen. Thanks from me, as well. Have a great evening, everybody. We`ll see you back here tomorrow night.

END

Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by CQRC Transcriptions, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2014 CNBC, Inc.

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