Transcript: Nightly Business Report – September 1, 2015

NBR-ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

SHARON EPPERSON, NIGHTLY BUSINESS REPORT ANCHOR: September selloff. Stocks shred about 3 percent to start the month, sending all three major indices into correction territory.

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: All revved up. Sliding stocks didn’t stop customers from putting the pedal to the metal in the showroom. Auto sales stopped expectations again, but what happens if China slows? Can they keep up the pace?

EPPERSON: And active or passive? In volatile times like this, which is the best investing route to take?

All that and more for Tuesday, September 1st.

Good evening, everyone, and welcome. I’m Sharon Epperson, in for Sue Herera.

GHARIB: And good evening from me as well. I’m Susie Gharib, in for Tyler Mathisen.

EPPERSON: After the worst month in years for stocks, it was a sour start to September. Stocks were pummeled to the tune of about 3 percent today as a new month did little to quell concerns about China and the Federal Reserve.

You know that story. Let’s take a look at the damage. The Dow Industrials fell 469 points to 16,058. NASDAQ shed 140 and the S&P 500 gave back 58. It’s the worst start to a September in 13 years.

Bob Pisani has more on today’s selloff.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: We fell 2 percent in the open and we stayed down. You can blame it on China’s pour manufacturing numbers if you want, but the number was in line with consensus. It was a broader selloff than that. The whole market was down roughly 3 percent.

OK. Industrials like General Electric (NYSE:GE) and United Technologies (NYSE:UTX) down 2 to 3 percent. I can understand that. Commodity names, Exxon, Du Pont, down 2 percent to 3 percent, it makes sense. They all have international exposure.

But telecom stocks and utilities? They were all down 2 percent or 3 percent as well. AT&T (NYSE:T), Verizon (NYSE:VZ), Con Ed, Duke, all down — they don’t sell to China.

And how about the regional banks? They’re all down 3 percent or are more as well. SunTrust doesn’t have business in China. KeyCorp (NYSE:KEY) doesn’t either and neither is Regions Financials or SunTrust.

My point is there is what Traders called de-grossing going on, where traders are simply taking down overall exposure a bit. The Fed is a big problem. They’re part of this. Some argue that the Fed should remove uncertainty and raise ratings once in September and then say they’re done for the year. Others argue the opposite, that not raising would renew uncertainty.

So what happens from here? It’s very normal to have a retest of the lows after the big rally we had at the end of the week. Very normal.

The low for the Dow last week was 15,370. We closed today at 16,058. We’re still 700 points away. That’s a long way away.

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

(END VIDEOTAPE)

GHARIB: Boston Federal Reserve President Eric Rosengren weighed in on the potential for an interest rate hike in September. Rosengren didn’t say when the Fed would raise rates but said that the employment target needed to justify raising rates has been met. But other metrics like inflation are not as clear cut.

Rosengren, who is not a voting member of the Fed Policy Committee also said global economic weakness is a wild card and could pressure inflation.

EPPERSON: Art Hogan joins us to talk about the concerns over global economic weakness and China, and if it really matters for the U.S. market. He’s chief market strategist at Wunderlich Securities.

And, Art, I’ve seen polls out there that show that individual investors don’t think China matters necessarily that much. But what are they missing here? It matters a lot.

ART HOGAN, WUNDERLICH SECURITIES CHIEF MARKET STRATEGIST: Well, it does matter and I think the direct linkage is not as tight. So, think about the U.S. GDP as being about 13 percent exports. We export only about 1 percent to China. So, as a direct trade partner, it’s not a big export market.

But China is very important to the global economy and whatever affects the global economy is going to affect the U.S. Think about 40 percent of the S&P 500 does more than 60 percent of their business overseas. So, whatever slows down the global economy, i.e., China, is going to adversely affect the earnings of the S&P 500.

GHARIB: And, Art, we know it takes a long time to turn an economy around and really to get it revved up. So, if this slowdown continues for who knows how long, what impact could that have on our markets here? I mean, what’s the worst case scenario?

HOGAN: Well, the worst case scenario, and that’s a great question, and everybody is trying to calculate that right now. I think what the market is trying to do is priced in worst case scenario and we’re probably pretty close to that.

Worst case scenario is that China has no growth and I don’t think anybody’s estimating that. I think what we will see is an economy that used to grow at 7 percent and that’s their target, grows at something like 5 percent. And that’s probably where they’re growing right now. If that’s the worst of it and, oh, by the way, if China steps in and does some important things to stimulate their economy, the worst may already be behind us and we may be on the road to recovery.

We won’t know that for several months. In the meantime, the market is going to do its job of pricing in worst case scenario until we find out the good news and then we’ll bounce back again.

EPPERSON: The other question on investor’s mind is what about the Federal Reserve and what impact that is having on the markets. What is your outlook there?

HOGAN: You know, it’s interesting. I think as an institution, the Federal Reserve would love to raise rates in 2015. I think they wish they had already done this. I think as they look at turmoil and global financial markets, it gives them a pause, but I think held like to get at least one interest rate done in 2015. I think it’s 50/50 at best that it happens this month, probably happens in December for sure if it doesn’t happy in September.

And, oh, by the way, I don’t think that makes a big difference in this market whatsoever. I think the Fed is going to be in a one and done scenario for the time frame. So whether it’s September or December, I think that’s the last raise we’ll see for at least six months.

GHARIB: All right. So, these are anxious times for a lot of investors, particularly individual investors. We always hear the standard stuff, diversify and stuff like that. But do you have any good advice for what investors should do at a critical time like this?

HOGAN: I think the two best things to think about in times like this is first and foremost not to panic. I think the worst decisions are made when they’re made emotionally and not made rationally and logically. I think if the recent volatility that we’ve seen over the last couple of weeks are arguably for the entire month of August and heading into September here has got you to it a point where you’re nervous about your investments, you probably have too much exposure to stocks.

Conversely, though, if you’ve been waiting for quality names to come at a reasonable price, that’s happening in real time in front of you. So, if you’ve been that person that’s always wanted to own XYZ corporation but just didn’t think the price was right, it’s probably a whole lot cheaper and may continue to be during the month of September.

So, sharpen the pencil, make a list of quality companies you’ve wanted to be invested in and you’re going to start to see bargains along the way here and it may be time to get involved. But the worst thing you can do at this point in time is to panic.

EPPERSON: Great advice, Art. Thank you.

Art Hogan with Wunderlich Securities there.

GHARIB: Well, oil prices followed the cue from stocks and prices fell and they fell hard following a three day surge, the likes not seen since 1990. Prices for domestic crude fell nearly 8 percent. Weak Chinese manufacturing data was blamed for the selloff, raising concern over global oil demand.

John Kilduff joins us now to talk more about the outlook for oil. He’s founding partner at Again Capital. Maybe you can make sense out of this crazy oil markets.

Yesterday, they were way up. Today, they are way down. Is it about that China data or something else is going on?

JOHN KILDUFF, AGAIN CAPITAL FOUNDING PARTNER: Well, for starters, the massive move up that we experienced the past couple days, this happens in commodities. It’s a little more fluid if you will than regular stock investing by a long shot. The market was — people in the market were lined up on one side of the ball if you will and we had an implosion up went prices and everybody and their brother tried to cover their short position.

Now things are settling back down and the key to remember here and what Art was talking about, if China’s mixed bag for U.S. stocks, its real bad for global commodities. And that’s because the infrastructure got built up in a big way, not just crude oil, but copper, iron, are things you’ve been hearing about —

GHARIB: Right.

KILDUFF: — to supply China and its massive growth and to supply South Korea and to supply Japan. Now, all of a sudden, that story is unraveling and you have this huge infrastructure ready to meet a demand that’s not there. That translates into a glut and that forces prices down considerably.

EPPERSON: So how long will the volatility continue and how much depends on the global supply that we’re seeing of oil and how much is out there?

KILDUFF: And this brings trading into it. As you know, Sharon, these big price swings on a daily basis, they tend to beget more of that for a while. So, we’re going to need these daily ranges to settle down for a bit and then see what the equilibrium hits. But it’s clear that we’re heading back into the downtrend channel that we’ve been in price-wise for the past almost a year now.

GHARIB: All right. And you’re predicting somewhere around $20 a barrel for oil. That just seems so very low from where we are right now.

Talk us through why you’re thinking that.

KILDUFF: Well, we were just at $38 before we had the massive —

GHARIB: Yes, but $20 is a real dive down.

KILDUFF: It is, and what’s going to happen here now, we haven’t even hit the phase of this yet in the market timing perspective that I’ve been waiting for and that is the U.S. refiners going to a seasonal maintenance period, basically shut down for a while to retool their mix. They go — deemphasize gasoline, emphasize diesel fuel and heating oil for the winter. OK?

But that causes them not to use crude oil like we saw last year, crude oil inventories now will build up massively, almost to the point of filling up all the available U.S. storage. That causes prices to go down, just exacerbating the glut perception in the market.

EPPERSON: So, the volatility that we’re seeing, and we’ve seen, of course, a lot of volatility in stocks as we were talking about before, it’s even greater in oil prices. What does that mean for consumers? When we look at the Dow versus oil prices, it’s a huge, huge amount of volatility that we’re seeing. We’re not the seeing exactly the same amount of volatility at the gas pump, but we’re seeing pretty low prices now.

What are we going to see next?

KILDUFF: You’re going to see considerably low prices. I — number of states have mostly sub $2 gasoline now. We’re going to see more of that. We saw that in New Jersey this morning just anecdotally.

This is going to be great for consumers, OK? It’s going to put more money in their pocket when they fill up at the tank. The back to school sales should be terrific. Holiday shopping season should be terrific. The car sales are doing great because you can afford a higher monthly payment because your gasoline bill is lower.

So, it’s really a terrific thing. I think really unequivocally, because the amount of jobs that are being lost in the oil sector are terrific jobs, high paying. I don’t want to diminish them in any way, but they are not necessarily material amount of jobs to affect the overall economy.

GHARIB: But is this really sustainable. I mean, what is the flip side of the low prices? Not much incentive for big oil companies to go and explore and drill for oil. Are we going to pay the price down the road for these really super low prices?

KILDUFF: I know it made me angry and others when you hear people say that no better cure for high commodity prices. Thanks a lot when you’re filling your tank with $4 and $5 gasoline. The same is true on the converse side here.

You are seeing big layoffs. As we said at ConocoPhillips (NYSE:COP) today, other companies, Russia, Iran, others in OPEC, even the Saudis will start to feel the pinch here. They will react.

We’re seeing already lessening amounts of crude oil being produced here in the U.S. You’ll see lessening amounts in Saudi Arabia. At some point, they’ll blink and get together, cut production and prices will go back up, but not until I would say mid-point next year.

EPPERSON: So if we see $2 gasoline, we’re going to pay for it on the other side?

(CROSSTALK)

KILDUFF: There, unfortunately, will be a day of reckoning. The commodity cycle is a business cycle and it’s here to say, it looks like.

GHARIB: All right. Thank you so much, John. Always great analysis. Great to be on with both of you.

EPPERSON: The recent market moves are enough to make any investor’s hair stand on end. So, in these volatile times, which way makes the most sense, active or passive? We’re going to tackle that in just a few minutes.

(MUSIC)

EPPERSON: The mixed economic data out today, growth in the manufacturing sector slowed in August to its weakest level in more than two years. The Institute for Supply Management said factory activity fell to 51.1 when compared to the month before. But a report on construction spending paints a different picture of the economy. Spending surged in July to its highest level in more than seven years, up 0.7 percent to more than $1 trillion. The strong number was fueled by an increase in the number of homes and factories built.

GHARIB: Also, some strong numbers on auto sales. August sales came in better than expected even as the selling period was cut short.

Phil LeBeau tells us what’s driving the results and which brands outperformed.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: As expected, August turned out to be a red hot month for auto sales, with almost every automaker reporting better than expected sales. Take a look at the largest automakers and while these numbers may not seem impressive, a gain of 5.4 percent from Ford was actually double what most were expecting. And even Toyota (NYSE:TM), a decline of 8.8 percent, many were expecting sales to drop 12 percent.

What was selling last month? Same thing that’s been selling basically for the last six months — trucks and SUVs. Jeep sales up 18 percent last month.

And when you look at General Motors (NYSE:GM), this is a perfect example of a company that is in the sweet spot of the market right now — truck and SUV sales both up double digits last month. And the average transaction price up $660 for General Motors (NYSE:GM), topping $34,000. One reason why General Motors (NYSE:GM) has been posting strong profits in North America, that’s expected to continue following the report of August sales being relatively strong. It now sets up what many are expecting to be a strong fall and winter for auto sales, the pace of sales being above 17 million for the year.

Nobody is forecasting that the overall sales will top what they were in 2000 when they hit a record of 17.4 million. But again, August auto sales better than expected with a pace above 17 million vehicles.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Denver.

(END VIDEOTAPE)

EPPERSON: Stocks have been selling off because of fears that China is slowing. If that’s true, what might it mean for those strong auto sales?

Michelle Krebs, auto analyst at AutoTrader.com, joins us now.

Michelle, thanks for being here.

And so, how big a deal is China to auto sales? What do you think is going to happen for the fall and winter as Phil mentioned after the strong August that we’ve seen?

MICHELLE KREBS, AUTOTRADER.COM AUTO ANALYST: Well, right now we’re not seeing any impact of China on U.S. car sales. As Phil said, we had an amazing month way above forecasts. And that sets up September nicely because there is the Labor Day holiday and the lots of promotions will be going on.

So, we’re looking at a very strong finish to 2015 in terms of U.S. car sales.

GHARIB: But, Michelle, could there be a delayed reaction that many of the big automakers are going to see that things are slowing down in China. They’ll take their allocation perhaps that were destined for the Chinese markets and sell them here? I mean, could that, is that a possible scenario and how might it play out?

KREBS: Well, I think that that is an interesting question. I think it will wait and see how — how long this lasts in China. But I think there is certainly a lot of talk about, we’re building these vehicles, where can we put them.

North America is hot. Maybe some of the allocations originally planned for China may come to the U.S. and that poses some interesting questions for automakers here because they have been very restrained and very disciplined on maintaining certain levels of inventories, not going too crazy on incentives and really building up the profit margin. So, we’ll see if they’ll stick with that discipline.

EPPERSON: Now, a number of automakers have big market in China. We’re talking about G.M., Volkswagen, will they be the hardest hit? If China continues to slow, what major automakers will be affected the most?

KREBS: Well, clearly, General Motors (NYSE:GM) and Volkswagen are the big players there, so, you know, there is a chance they will be hurt. Ford is just getting a foothold there. It’s a little early to see, you know, who will be impacted and in what way and we also don’t know what kind of strategies are being put into place. But that is certainly something we will be watching especially as earnings come out for the next quarter.

EPPERSON: Michelle, let me just switch gears real quickly. We have half a minute.

What about the stock market jitters? To what extent could that knock down buying confidence here in the U.S.?

KREBS: Well, certainly, the stock market all the volatility can cause consumers to have some jitters with confidence. And that’s an important key in the auto markets. But there are a lot of other strong fundamentals, employment, construction housing business, that feeds pickup truck sales. A lot of other good indicators to drive car sales.

EPPERSON: Michelle, thanks so much. Michelle Krebs with AutoTrade.com.

GHARIB: More job cuts in the oil patch is where we begin tonight’s “Market Focus”.

ConocoPhillips (NYSE:COP) will slash 10 percent of its global workforce, or about 1,800 people. Most of the cuts will be employees in North America. The move comes as the company deals with low oil prices. Shares fell nearly 3 percent to $47.75.

M&T Bank (NYSE:MTB) settled a lawsuit, which charged the company with lending bias in New York City. The firm was accused of practicing discriminatory lending practices. M&T Bank (NYSE:MTB) says it’ll upgrade its policies as part of the settlement. Shares were down almost 5 percent to $112.65.

Dollar Tree (NASDAQ:DLTR) was the worst performing stock in the S&P 500 today on mixed quarterly results. The retailer beat estimates on the bottom line, but revenue and same-store sales came in lower than expected. The chain’s recent acquisition of Family Dollar was blamed for the disappointing results. The stock tumbled more than 8.5 percent to $69.65.

EPPERSON: Susie, Chipotle is being sued for deceiving customers. In April, Chipotle announced it would no longer serve foods with genetically modified ingredients. A new lawsuit claims the burrito chain’s food does contain GMOs since its meat, cheese and sour cream is made from animals fed with GMO soy and corn. The chain says it will contest the claims. Shares fell a fraction to $706.71.

Amazon (NASDAQ:AMZN) Prime may soon be less convenient. According to the Wall Street Journal, Amazon (NASDAQ:AMZN) is testing a new program called Ship by Region, which means items will only be available for free, two-day shipping in certain regions. Shares fell 3 percent to $496.54.

And Hilton is teaming up with Uber. Hilton guests will be able to set up automatic notifications to request a car from the ride-sharing app to go to and from the chain’s locations. Also, members of Hilton’s honors program will be able to use a digital guide of spots frequented by other Uber riders. Shares of Hilton tumbled almost 3 percent to $24.10.

GHARIB: All it takes is a stretch of stock market down days for investors to debate this question: which is better, active or passive investing?

Our next guest has a treasure trove of performance data to help us answer that question. He’s Jeff Holt, fund analyst at Morningstar (NASDAQ:MORN).

Hi, Jeff. Thanks for joining us.

JEFF HOLT, MORNINGSTAR FUND ANALYST: Thanks for having me.

GHARIB: All right. This is a controversial issue. When you look at all the data, is there a right way or wrong way to go about this?

HOLT: You know, there is no clear cut answer for active or passive investing. Both have a role. The key is to be confident in what you’re investing in, and to be confident that that’s a good approach for you as an investor.

EPPERSON: When you look at the performance of funds, of large cap blend funds and the S&P 500, how have they done over the last year or so, and really what does better?

HOLT: You know, in the past few years, we’ve seen passive strategies to do a lot better and particularly in the U.S. large cap space. Over the five-year period through yesterday, the S&P 500 was up about nearly 16 percent, whereas the average U.S. large cap blend fund was up just over 14 percent. So, it has been a period where passive traders have outperformed active strategies. But that can always reverse.

GHARIB: And there are cases where some of these active funds do rather well. But you have to your homework, right? So what are some of the things that you can tell our viewers at home at what they should to when they do their research?

HOLT: Well, Morningstar (NASDAQ:MORN), we analyze over 1,000 funds and on a forward looking basis on gaining confidence in how they will do going forward. A few things that we emphasize are management team who is running the portfolios, the process that they have and is that process repeatable, and also looking at other factors like performance and fees, because fees make it a lower barrier for future outperformance.

EPPERSON: A lot of investors are scratching their heads thinking I don’t know which way to turn, active or passive. I just want someone to do it all for me. And they’re turning to target date fund which is, of course, get more conservative, hold less stocks as you get closer to your target, usually retirement.

How do those fair and what should investors know about playing that game in this volatility?

HOLT: Well, target date funds, it really depends on how the asset allocation decision. And even more important than the active/passive decision is the asset allocation decision and the mix between stocks and bonds. So, different target date funds have different exposures to stocks and bonds. Those that were heavy in bonds and really have an eye toward protecting capital, they held up pretty well in the recent market downturn in August. But some of those that had are more equity and are more long term in trying to combat longevity risks fell significantly.

GHARIB: Jeff, you know, as Sharon was saying, nobody wants do all of this research, they want the easy answer. And we asked you to name active fund and passive fund that have done relatively well on the Morningstar (NASDAQ:MORN) ratings.

So, we have it up on the screen. Tell us a little bit about each one of these. You have the Vanguard 500 Index Fund and then the Dodge and Cox Stock Fund. Tell us real quickly, which is which.

HOLT: So, the Vanguard 500 Index Fund is a large cap stock fund and it’s intended to investors that just want cheap broad exposure to the U.S. equity market. And it’s a — being that it has low fees, it’s a very good option in that space. Dodge and Cox stock on the other hand is an active fund and it requires a little more patience from investors. There will be times when it will lag, but over the long term, it has proven to deliver for investors.

GHARIB: All right. We’ll have to leave it there. Thank you so much, Jeff.

Jeff Holt of Morningstar (NASDAQ:MORN).

HOLT: Thanks for having me.

EPPERSON: Apple (NASDAQ:AAPL) revolutionized music with iTunes, and now, it might be looking to do the same with television content. We’ll tell you how, coming up next.

(MUSIC)

EPPERSON: Here is what to watch tomorrow. The Federal Reserve will release its beige book, so we’ll get a glimpse of how policymakers view the U.S. economy. ADP’s employment report is out, a read on the health of the labor market ahead of Friday’s big jobs number.

Also on the data front, a read on productivity and labor costs. We’ll also get factory orders released. And that’s what to watch Wednesday.

GHARIB: And Google (NASDAQ:GOOG) has a new look. If you were on google.com today and noticed a different logo, it wasn’t one of those one day doodles that the company does. The search giant has unveiled a new corporate logo saying it’s more mobile-friendly and easier to read on small devices.

Here is a look at how the logo has changed over time.

EPPERSON: As Apple (NASDAQ:AAPL) gets ready to launch its new operating system a week from today, reports are flying that it’s exploring a move into original programming.

Julia Boorstin looks at why Apple (NASDAQ:AAPL) might be making this move and what it will mean for the TV landscape.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: At Apple’s big event next week, it’s expected to introduce a new Apple (NASDAQ:AAPL) TV box. The question is whether it wants to eventually offer its own exclusive programming on that box. That’s what it is exploring right now. It also tries to pull together a bundle of streaming video channels for major media companies which has been in the works for months.

DANIEL IVES: They need to get more entrenched in the consumer living room. That’s why the Apple (NASDAQ:AAPL) TV, next week, the next gen, that’s tip of the iceberg because then it ultimately is going to lead to more streaming, and more of an entertainment to where Apple (NASDAQ:AAPL) is going to build itself.

BOORSTIN: Offering original content, it would put Apple (NASDAQ:AAPL) into direct competition with one of the most popular apps on Apple (NASDAQ:AAPL) TV. Along with Amazon’s prime streaming service plus Hulu, which is owned by media giants Disney (NYSE:DIS), FOX and CNBC’s parent Comcast (NASDAQ:CMCSA) (NYSE:CCS), and, of course, traditional pay TV bundles.

While Apple’s first foray into music with iTunes may have revolutionized the music industry, it failed to stay on the cutting edge and was late to the game with its streaming music play Beats. And it hasn’t been part of the streaming video explosion led by Netflix (NASDAQ:NFLX).

So, Apple’s content play may be less about generating significant revenue from selling content and more about securing a powerful place in consumers’ living rooms.

IVES: They’re trying to build that ecosystem out. They cannot be left behind when it comes to programming. But when you look at the broader set, what they’re working on in terms of augment reality, streaming entertainment, they’re building out other pieces of the puzzle, and they need to make sure that they — you know, that they’re not missing any of these trends. And that’s really why they’re focused on its entertainment programming as content is going to be key.

BOORSTIN: The question Hollywood and investors are watching, whether its key that Apple (NASDAQ:AAPL) make a bold move into creating content or whether it will just license what’s already out there.

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

(END VIDEOTAPE)

GHARIB: And that is NIGHTLY BUSINESS REPORT for tonight. I’m Susie Gharib.

Great being with you, Sharon, tonight.

EPPERSON: Great to be with you as well.

I’m Sharon Epperson. Have a great evening, everyone. We’ll see you tomorrow.

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) 2015 CNBC, Inc.

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