SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: The rally that wasn`t.
The bounce back evaporates. A 440-point gain disappears as investors have
a change of heart and sell intensely into the close.
Off the sidelines. China makes a big move designed to reassure
investors worldwide. And it worked — at least for a little while.
Silver lining. As the market thrashes around, there`s one important
decision you may want to consider for your retirement money.
All that and more tonight on NIGHTLY BUSINESS REPORT for Tuesday,
Good evening, everyone, and welcome. I`m Sue Herera. Tyler Mathisen
is off this evening.
The rally vanished. The buyers ran away, and it was a reversal to
remember as sellers came out in force, prompting a vicious selloff in the
final minutes of trading.
The morning started out much different. The opening bell rang and
stocks took off. The Dow Jones Industrial Average soaring as much as 440
points, staying elevated for much of the day, thanks to a cut in interest
rates by the Chinese government.
But by late this afternoon, investors appeared less convinced and the
selling intensified, losing about 500 points in the final hour of trading.
By the close, the blue chip Dow index finished lower by 205 points to
15,666. The NASDAQ was off 19, and the S&P 500 fell 25. The reversal in
the Dow and the S&P was the biggest to the downside since the heart of the
Bob Pisani has more on the rally that wasn`t and why the bulls just
couldn`t hang on.
BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: We had a rally at
the open, but stocks lost steam midday and gains were wiped out in the last
hour. So, what`s the problem?
There was a nice rally at the open, but the buyers were never very
enthusiastic. Volume was much lighter than yesterday throughout the day,
but it picked up as the market drooped in the last hour.
There were rebounds in a small group of tech leaders like apple and
Netflix (NASDAQ:NFLX). So, they, too, were well off of their highs, but
commodity and industrial stocks that have had the stuffing knocked out of
them in the last few days should have bounced, but they never did.
Copper maker Freeport McMoRan, for example, down 50 percent in two
months, a seven-year low, but still couldn`t manage to do a rally.
Dupont (NYSE:DD) also been in free fall for three months and it still
continue rally either. Big multinational companies that get a significant
part of their earnings overseas like G.E., Ingersoll Rand, Illinois Tool
Works (NYSE:ITW) all faded at the close and ended down roughly 2 percent.
What this tells me is that caution on global economic growth has not
gone away, even with better than 10 percent decline in these big names in
just a week`s time.
For NIGHTLY BUSINESS REPORT, I`m Bob Pisani at the New York Stock
HERERA: Well, the early enthusiasm was sparked by China. That
country cut interest rates again and flooded its banking system with cheap
money in an effort to stem the rout in stocks. It is the fifth time in
nine months the world`s second largest economy has slashed rates.
But for the Shanghai index, the damage was already done, falling
another 7.5 percent overnight.
Susan Li in Hong Kong has the details.
SUSAN LI, NIGHTLY BUSINESS REPORT CORRESPONDENT: After the Shanghai
Composite crashed through 3,000 today, which is seen as a psychologically
important level out here, China finally pulled the trigger. They had to do
something, send a signal of confidence to the markets because the fact they
had stood still on the sidelines the last two trading selloffs had the
markets forces dictate.
But, no, they did cut interest rates tonight by 25 basis points,
triple Rs, reserves that banks have to hold aside by 50 basis points, which
(INAUDIBLE) says will free up $101 billion immediately into the Chinese
financial system. Well, that could help lubricate the markets.
And, you know, China usually waits for Friday night ors weekends to
cut interest rates or triple R`s. So, the fact they went ahead on a week
day, on this Tuesday evening, means that they want an immediate market
And we did see encouraging signs during the regular sessions. Some
markets actually rallied, despite the fact Shanghai fell another 7.5
percent. We saw big gains in Australia, Taiwan, Malaysia, Indonesia, and
more importantly, the fact that Hong Kong ended up three-quarters of 1
percent higher, which is how foreign investors buy China. This is an
encouraging sign maybe the buying has started once again. Goldman Sachs
(NYSE:GS) for one says that they are still remaining overweight on China
when it comes to evaluation basis.
Often we need to keep things in context, as well. Yes, China is down
from 30 percent from the summer months, but the stock market is still up 50
percent over the past year. And some say, you know, let`s keep things in
perspective and, you know, not have tunnel vision.
For NIGHTLY BUSINESS REPORT, I`m Susan Lee in Hong Kong.
HERERA: Mark Luschini joins us now to talk more about China and the
rally, the lost momentum on Wall Street. He`s chief investment strategist
at Janney Montgomery.
Nice to have you here, Mark. Welcome back to the program.
MARK LUSCHINI, JANNEY MONTGOMERY: Thanks, Sue.
HERERA: You were correct in predicting that the correction that we
saw start last week isn`t over yet, but I wonder whether this is just a
correction or whether you think the bull market is over.
LUSCHINI: Sue, we don`t think the bull market`s been derailed, even
given the recent action we`ve had. In fact, corrections are quite in
market, going back to 1980. For instance, we`ve seen no less than 19
times, during which in the course of the year, we had 10 percent or more
and the annualized rate of return for the stock market on a price only
basis is 8.7 percent.
So, what we think is happening is investors are basically given full
evaluations on more demanding with regard to earnings growth expectations
and right now, those expectations are being disappointed by the prospects
of weakening global growth.
HERERA: What about China? Are you worried China is not able to
really stem the rout in its stock market? Do they have more room to be
accommodative? What tools do they have left?
LUSCHINI: Sure. I think it definitely warrants some caution with
regard to what`s happening there. Obviously, in terms of the size of their
economy, but more important is really the blowback consequences to the
emerging market complex at large, which collectively represents 52 percent
of global GDP. So, we`re not immune from feeling the impact. If China`s
situation continues to deteriorate, and I think they have plenty of scope
from a policy perspectives to continue to try to reflate economic activity.
Yes, they`ve cut rates five times, as you said in your opening
remarks, but the fact is, at 18 percent on the reserve requirement ratio
still among the highest in the world today. Their overnight lending rate
is still quite high when compared to other central bank policies around the
So, we continue to see plenty of full scope for them to continue at a
lower rate and/or a fiscal program, which I think they are reluctant to do,
but all in an effort, if necessary, to at least arrest the slowdown in
HERERA: So, I would assume from what you just said you do not think
what`s happened in the last few days and weeks would lead to a global
LUSCHINI: We don`t. That`s not our base case, sue. We believe they
will ultimately be able to discover some level of growth that maybe below
the 7 percent we had for the second quarter, but well above what others are
defining as a so-called hard landing and as a consequence of that, in the
context of other economies, the U.S., euro, Japan growing, we expect global
growth to remain sturdy, if underwhelming.
HERERA: What`s this do for the Fed? I mean, the expectation has been
either in September or by the end of the year we will see a move up in
interest rates. Does the turmoil in the financial markets tie their hands?
LUSCHINI: Well, I mean, clearly, you can see in the Fed futures the
signed probability to a liftoff in September and even in December have been
taken down considerably. We`re still of the view that they are likely to
do something before year end. I think this may, in fact, jeopardize
September if only in the context of there`s only about three weeks left of
data accumulation that will allow for them to make a decision and it`s been
complicated by recent events in China and elsewhere around the world.
So, that may push that off, but I think they are eager to get off a
zero-bound because of the importance of the signal it means to the
marketplace, which is the economy is sufficiently strong to warrant even so
much as an eighth or perhaps quarter percent interest hike.
HERERA: All right. Mark, we`ll leave it there, thank you so much for
your insights. We appreciate it.
LUSCHINI: Thanks, Sue.
HERERA: Mark Luschini with Janney Montgomery Scott.
And as we`ve been reporting, much of what`s rattling the global market
is China and concerns about growth in that country, its steep market
declines. So, we wanted to see how the people of Beijing with money in
that market feel about the recent turmoil.
(BEGIN VIDEO CLIP)
UNIDENTIFIED MALE (through translator): There`s nothing to worry
about, since I`m used to this stock market drama. It`s more of no
confidence. I have no confidence with regards to the future of our
UNIDENTIFIED MALE (through translator): I can understand why
investors are worried, but no one can say it`s unreasonable investment
frenzy. It`s not right to think someone will be there to solve problems
related to bad investment choices.
UNIDENTIFIED MALE (through translator): I have confidence in our
country`s macro economic outlook.
(END VIDEO CLIP)
HERERA: The Shanghai composite is down more than 40 percent from its
peak in June.
Boeing (NYSE:BA) still has confidence in China. The Dow component
raised its forecast for that country`s aircraft demand over the next 20
years. The company expects China to buy more than 6,000 planes over the
next two decades and that estimate is higher than previous projections.
BHP`s Billiton CEO also expressing faith in the world`s second largest
economy. Despite reporting a nearly 90 percent drop in profits and cutting
long-term forecast for Chinese steel demand, the mining company CEO says
China`s broader economy is on track and growth will hold up in the second
half of the year.
(BEGIN VIDEO CLIP)
ANDREW MACKENZIE, BHP BILLITON CEO: We always said as a company that
as China evolved, its growth would grow steadily from double digits, 7, or
maybe even lower in the future. It`s slightly slower growth. But at the
same time, a transition towards more of a consumption based economy is the
right evolution that gives it based in the future they will be a major
contributor to the world economy.
(END VIDEO CLIP)
HERERA: Today, shares of BHP rose more than 2 percent to 32.92.
The plunge in oil prices has been another big concern for the markets,
but today the buyers came back. Oil prices rose nearly 3 percent to settle
at $39.31 a barrel, near a six and a half year low.
A bit later in the program, Morgan Brennan will report from the
country`s oil capital, Texas, to get a firsthand look at the ripple effects
of this prolonged price downturn.
Well, all the volatility in this market has a lot of people wondering
what it means for their retirement savings. And if you`ve looked at your
401(k) recently, you may feel a little rattled, but we have a silver ling
Sharon Epperson is here to tell us what it is.
So, what`s the strategy here given the market correction, the silver
lining, if you will?
SHARON EPPERSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, the
silver lining is really for retirement investors who have money in an IRA,
a traditional IRA or an old 401(k). You can convert that money to a Roth
IRA, and if it makes sense for you to do so based on your personal
financial situation, the reason you want to do it now is because you`ve
likely seen a decline in the value of those accounts and you have to pay
taxes on the tax deferred accounts when you convert them to a Roth account.
The beauty of a Roth account, of course, is you`re able to see that
growth tax free and draw earnings tax free in retirement, but the key here
is going to be to find money that`s not from your retirement funds and then
be able to have that money tax free when you need it for retirement.
HERERA: All right. So that certainly sounds like a great silver
lining. What if the market continues to fall and you lose more money in
your roth account?
EPPERSON: So if that happens or you decide, hey, this is not right
for me at this particular time and I don`t want to have a Roth account, you
can actually undo it and you can turn it back into a traditional account
and you have until October 15th of next year to do that for any conversion
you do in 2015. So, if not, you do it and have it forever. You do have a
chance to change your mind.
HERERA: OK. Do you have to do it all in one lump sum or a little at
a time or a portion of it?
EPPERSON: So the beauty of the strategy, Sue, is that it`s like any
type of diversification. You want tax diversification as well as asset
allocation diversification, and so you can just take a portion of an IRA or
one IRA if you have several of them and convert that money. You don`t have
to convert it all at one time. You don`t have to convert it all ever.
So, that`s the thing to consider, this is a strategy to perhaps help
you if you are already in a situation where you`re likely going to be in a
higher tax bracket in retirement, that`s the ideal person a Roth is right
for. This might be the way to get that money tax free in retirement while
you have the tax deferred.
HERERA: Kind of button this up, anything to watch up for, any caveats
EPPERSON: Well, you do want to look at your tax situation. A lot of
financial advisers say, hey, don`t let the market drive what you do, look
at what your tax burden is going to be likely and see if this Roth account
makes sense. That`s probably the first thing you want to do. Talk to a
EPPERSON: Financial adviser and accountant.
HERERA: All right. Thanks, Sharon, so much. Always appreciate it.
HERERA: OK, still ahead, the housing market remains red hot, but is
the recent market turmoil creating some headwinds for one of the key
pillars of our economy?
HERERA: Consumers are feeling better than they have in seven months.
The conference board says its index jumped this month, amid an improving
labor market and lower gas prices. That survey, however, was taken before
the global selloff in the stock market. But analysts say that the outlook
for consumption in the second half still remains strong.
That improved labor market is also helping housing. Sales of newly
built homes rose more than 5 percent in July, providing more evidence of
continued strength in the housing market. And home prices also rose in
June. According to the latest S&P Case Shiller home price report.
But as Diana Olick explains, all of that recent market volatility may
be creating some headwinds for housing.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Sales of newly
built homes moved higher in July, as did construction of new homes.
Builders say they are seeing more buyers throw models now, but they`re not
as bullish as the months ahead.
STEPHEN PAUL, MID-ATLANTIC: All during the summer from July to now,
our traffic has been up and sales have been up, and the only thing I can
attribute it to is all the press about the Fed raising the discount rate in
And the customer has to sign this.
OLICK: But Mid-Atlantic Stephen Paul also attributes his company`s
success to lowering prices.
PAUL: We have gone down in size and in price to meet where the
mortgage financing money is.
OLICK: Now with trouble in China`s economy making a U.S. rate hike
less likely, the outlook for housing in the back half of this year is less
SUSAN MAKLARI, UBS: Something we`ve consistently heard from the home
builders is there`s a lack of urgency among buyers in part because rates
haven`t moved at all.
OLICK: Demand for existing homes is already starting to fall as
prices stay stubbornly high, and luxury home builder fell short of earnings
expectations and its average home price soared to a new high. Now, after a
major kick to confidence in financial markets this week, some claim rates
are taking a back seat to consumer caution.
TIM RODD: It`s hard to decouple that psychological effect of the
wealth effect from the stock market, even when you`re not in it, you just
feel better about it, you have that wealth effect, feel you have more
credit, more prospects, income and wealth appreciation over time.
OLICK: The thought just a week ago was the Fed would raise rates this
fall and that could have given housing demand a boost, pushing some buyers
off the fence and convincing others that the U.S. economy is improving
enough to warrant buying a home. Now it seems like that scenario may be on
For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Washington.
HERERA: Our next guest says the U.S. housing market is in a mixed but
He`s Allan Weiss, founder of Weiss Residential Research.
Allan, good to see you. Welcome back.
ALLAN WEISS, WEISS RESIDENTIAL RESEARCH: Thank you.
HERERA: Why do you think it`s fragile?
WEISS: Well, what we`re seeing is that while on average home prices
are rising across the country, it`s a very mixed bag and each of the strong
markets we`re seeing the number of houses that are declining increasing and
even more so in the weaker markets.
So, overall, I can`t say that it`s a strong market, I`d say it`s
HERERA: So what do you think the impact will be of the last couple of
weeks of market volatility, especially given what we saw in Monday`s
WEISS: Sure. Well, it`s already a fragile market. It can`t help at
all. If anything, I think that this can shift the mood such that we`ll see
prices actually tipping down in several major markets across the country.
HERERA: Where is the strength in the market? Which areas of the
country or specific localities do you think could weather any potential
financial storm better than others?
WEISS: Well, certainly, you see tremendous strength in San Francisco,
in Denver, to a degree in Seattle. Those are very strong markets, whereas
New York and Washington, D.C. in particular are rather weak. So, if
there`s going to be a storm, I`d rather be on the west coast.
HERERA: I think in many of us would. What do you think, you know,
investors should watch for at this point? Is it economic news? Is it
continued market volatility? Is it the Fed moving on rates?
What would be the one thing that would keep you awake at night?
WEISS: Well, if we see housing prices across the board start to
weaken further, that can have a ripple effect through the economy because
of the wealth effect. I think up until recently, the reports have been
essentially positive, which is something that holds the market up and holds
the economy up.
But if we see reports of declining prices in major markets and that
continues, then the whole mood can change, and that can impact every aspect
of the economy.
HERERA: Now, the jury is still out about whether or not the Fed is
going to raise rates, especially given the turmoil we`ve seen, but what
impact would, say, a quarter point raise in rates have on the market that
you just outlined?
WEISS: Well, in housing it ties directly into price, because interest
rates and mortgage rates, obviously, are the cornerstone of the cost
structure of owning a home. So, given that the prices have gone up enough,
such that we see weakness in many markets, I would say any increase in
rates can have a surprisingly large leveraged impact on the housing market.
HERERA: Even though the Feds been telegraphing for some time that
they do want to raise rates, that`s not already in the housing market, you
WEISS: No, the housing market is not like the stock market. It`s not
very efficient. People make their move, essentially for personal reasons,
not reasons having to do with investments. It`s not like you can`t get in
and out of it.
So, I would say that kind of impact moves slowly into the market, in a
very opposite way compared to the stock market where you see excess
HERERA: All right. We have to leave it there. Thank you, Allen.
Allen Weiss with Weiss Residential Research.
WEISS: My pleasure. Thank you.
HERERA: The budget deficit is expected to shrink. The Congressional
Budget Office projects it will fall to $246 billion, the lowest level of
the Obama presidency. That forecast is lower than the previous one in
March, but the CBO also warned that Congress needs to take action on the
budget, and if that doesn`t happen, the trend will reverse.
Best Buy (NYSE:BBY) was today`s bright spot, and that`s where we begin
tonight`s “Market Focus”.
The retailer was the best performer in the S&P 500, after reporting an
increase in earnings and revenue that beat estimates and a jump in same-
store sales. Big screen TVs and phones continue to drive sales growth.
Shares rose 12.5 percent to $32.95.
Better sales of full price merchandise helped DSW (NYSE:DSW) post an
increase in sales, but despite the rise, the retailer`s top line results
didn`t meet estimates. The firm backed its full year earnings outlook.
Still, shares tumbled more than 11 percent to $27.35.
Also a disappointing quarter for Sanderson Farms (NASDAQ:SAFM). The
poultry producer missed analyst estimates on both the top and bottom lines,
which it blamed on continued pricing pressure. The stock ended a fraction
lower at $67.84.
DC regulators rejected the proposed combination of power companies,
Exelon (NYSE:EXC) and Pepco. The deal had gotten the OK from surrounding
states, but the nation`s capital said the deal would not benefit rate
payers. Petco slid 16 1/2 percent to $22.51. Exelon (NYSE:EXC) was off 7
percent to $30.40.
Oshkosh won a multibillion dollar contract, and under that contract,
which would be worth more than $30 billion, the firm will build new
tactical vehicles for the U.S. Marine Corps and Army.
Shares rose in initial after hours trading and during the regular
session, the stock was up 1.5 percent to $38.52.
Coming up, how a Texas town at the center of the energy boom is
handling the sharp and fast decline in oil prices.
HERERA: Here`s a look at what to watch for tomorrow. A read on
manufacturing with durable goods orders. More housing data with mortgage
applications. And the market will be listening closely to hear from New
York Fed President Bill Dudley, and that is what to watch on Wednesday.
A former JPMorgan (NYSE:JPM) Securities analyst and two of his friends
have been arrested and charged in their involvement in an insider trading
scheme that allegedly brought in more than $600,000 in illegal profits.
The Securities and Exchange Commission says the analysts got sensitive
information while working at the firm and then tipped off his friends.
With crude oil prices below 40 bucks a barrel and 58 percent lower
than a year ago, the oil industry in Texas is feeling the strain, and no
place is that more apparent, perhaps, than in Andrews, Texas, the town that
has played a major role in America`s oil revival.
Morgan Brennan is there.
MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: The prolonged
price slump is taking its toll on oil towns like Midland, Texas. The metro
area`s July unemployment rate is still extremely low, 3.3 percent, but
higher than the 2.1 percent rate at the end of 2014.
Fewer workers in the energy sector, less money being spent in the
local community. Midland`s mayor, Jerry Morales, says the city which
revolves almost exclusively around oil, is reassessing its budget as tax
MAYOR JERRY MORALES, MIDLAND, TX: For all of 2014, we saw double
digit increases from the previous year from 2013. So, you know, that`s
unheard of. This year, we`re seeing ourselves get back into the single
BRENNAN: Morales, a local restaurant owner himself, says business has
softened. He`s not experiencing lines out the door like last year. Also
home prices have fallen some 15 percent to 20 percent.
But residents of Midland and other West Texas towns have seen these
boom and bust cycles before and everyone is taking steps to ride the
In the Permian Basin, production has continued to increase, just over
2 million barrels per day, according to the EIA, but the number of active
rigs has dropped 55 percent since last September.
By some estimates, an active rig can generate as many as 1,000 direct
and indirect jobs. One business part in the border of Midland and Odessa
is storing nearly 40 inactive ones.
If crude prices remain low, even rigs like this one that are drilling
new wells may need to come offline. That possibility privately held
producer Elevation Resources is currently contemplating.
STEVEN M. PRUETT, ELEVATION RESOURCES: It`s not very exciting to put
$7 million in the ground with the prospect of recovering that $7 million
over 50 years, so this rig was put back to work when oil was $60 a barrel
back in June and with $40 a barrel, we have to reassess whether we can
continue justify running this drilling rig to drill new wells.
BRENNAN: But there is a silver lining. Labor and equipment costs
have come down significantly and some produces, like EXL Petroleum, which
is cash flush from an asset sale last year, maintain there are still
DOUG ROBISON, EXL: We are closing projects now. We`re actually
putting rigs back up in the air. We`re fracking as we`re talking, we`re
completing wells, we`re speaking, and we`ll be drilling. So, it depends on
when your company invested and how much you have invested. We`re in good
BRENNAN: But expansion has certainly not been the norm. There`s a
lag effect from prices falling, to production cutting back, and here in
West Texas, that takes about six months. Elevation Resources` Pruett
expects production to slow through the rest of the year, with U.S. output
likely down by 1 million barrels per day in early 2016. When prices begin
to recover, more rigs will go up and the cycle will begin again.
For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan in Andrews, Texas.
HERERA: And finally tonight, a child in a museum walking past a
million dollar masterpiece. A young Taiwanese boy tripped at the museum
this weekend and caught his fall with a 350-year-old painting valued at
roughly $1.5 million. The oil canvas called “Flowers” by Italian artist
Paolo Porpora suffered a fist-sized hole.
According to reports, the exhibition organizers say the boy was not to
blame and the painting was insured. Thank goodness for that.
That`s NIGHTLY BUSINESS REPORT. I`m Sue Herera. We`ll see you
tomorrow night. Thanks for joining us.
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