Transcript: Nightly Business Report- January 6, 2016

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Hold on tight. Stocks slide, oil tumbles, as China concerns deepens and North Korea rattles global markets.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Surprise subpoena. Chipotle food issues are now at the center of a criminal investigation.

HERERA: You’re hired. Private payrolls rise, a positive sign for the job market. But is it just a matter of time until the troubles overseas hit our shores?

All that and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, January 6th.

MATHISEN: Good evening, everyone, and welcome. Glad you could be with us.

Not such a good start to the trading year, in fact, the worst since 2008 in the midst of the Great Recession. In the past three sessions, the Dow Jones Industrial Average has lost about 520 points.

North Korea adding to the growing list of geopolitical concerns after that country announced a nuclear test and claims to have successfully tested a hydrogen bomb. China fears deepened when a report showed the services sector of the world’s second largest economy grew at a slower pace than expected. And add to that the situation in the Middle East, a drop in oil prices big time, and investors all across the world were rattled this day.

The Dow Jones Industrial Average slid 252 points to 16,906, NASDAQ dropped 55, the S&P 500 declined 26. Domestic crude settled at its lowest level since December 2008, down nearly 6 percent to $33.90 a barrel.

Michelle Caruso-Cabrera reports now on the global events pressuring stocks today.

(BEGIN VIDEOTAPE)

MICHELLE CARUSO-CABRERA, NIGHTLY BUSINESS REPORT CORRESPONDENT: The selling started late last night when the world learned North Korea conducted yet another nuclear test, claiming they had detonated a hydrogen bomb. If true, that would be a significant advance in North Korea’s nuclear capabilities.

The claim was met with skepticism, because the tremor set off by the explosion appeared to be too small for a hydrogen bomb. Still, stock futures sold off on the news overnight.

And then adding to the woes a few hours later, weak data out of China. A measure of the service sector came in at a 17-month low, worrisome, because China optimists have said it doesn’t matter if Chinese manufacturing slows down because the service sector would pick up the slack. The data today suggests there may be a hole in that narrative.

In addition, the Chinese central bank allowed the currency to fall to a new five-year low. The Chinese currency does not trade freely in China. Its rate versus the dollar is set by the Chinese central bank. And investors worry the central bank’s move, which makes Chinese exports more competitive, could suggest the Chinese economy is weaker than the government is letting on and that the government is trying to use the currency to help out the economy.

And in the Middle East, the war of words between Saudi Arabia and Iran kept the pace. The price of oil down sharply again, in part because investors believe the tense situation between the two countries likely means Saudi Arabia will continue to pump oil at full tilt because it will hurt the Iranians just as they hope to begin selling oil on the international market if and when sanctions are lifted, possibly in the next month.

For NIGHTLY BUSINESS REPORT, Michelle Caruso-Cabrera.

(END VIDEOTAPE)

HERERA: And today, the World Bank cut its global forecast for 2016, expecting the world economy to grow 2.9 percent this year, down from its previous forecast. The main reasons — China and its impact on emerging markets and the plunge in commodity prices.

MATHISEN: Joining us to talk more about the geopolitical cross currents and what they mean for your money here in the U.S. is Sameer Samana. He’s global quantitative strategist at Wells Fargo (NYSE:WFC) Investment Institute.

Sameer, welcome.

You know, none of these geopolitical events that we’ve talked about today — China, North Korea, the Middle East — have really started to show up in the fundamentals of the U.S. economy or U.S. companies, but of those three, which one has the greatest potential to do so in 2016?

SAMEER SAMANA, WELLS FARGO INVESTMENT INSTITUTE: Tyler, that’s a great point about how it hasn’t shown up in the economics or fundamentals yet. But the one that probably holds the most risk for U.S. markets is probably the Middle East. And I say that because right now, we’ve gotten really used to low energy prices, and that’s been a great boom to U.S. consumers, to international consumers.

If that situation were to change meaningfully, and by that, I mean, you know, higher oil prices, that would be something we would really watch as something where the global economy might be shocked if oil prices were to jump sharply from here.

HERERA: Yet, when we saw the saber-rattling between Saudi Arabia and Iran the other day, we did see a pop in oil, but then it dropped back down again.

So, it doesn’t seem to be responding in what would be the typical way to the war of words that we’re hearing.

SAMANA: Exactly, Sue. What’s happening this time is you’ve got kind of the geopolitics working in reverse, where historically, what’s happened is when there’s been some kind of conflict, oil prices have jumped.

This time around, it seems to be more of a war of words, maybe a war by proxy, where they’re both kind of jockeying for position. So, what that’s leading to is both of them working through their oil production in terms of trying to produce as much oil as possible so that the price goes some down, so that each one of them actually ends up in a worse financial position.

So, it’s very interesting to see it play out that way.

MATHISEN: So, Sameer, I’ve got to do something with my money in 2016. What should I do?

SAMANA: You know, in our mind, it’s kind of a lot like it’s been over the last few years, where the U.S. continues to be the best place. We think U.S. companies are very well-positioned to continue to grow their earnings. We think that developed markets, think Europe, think Japan, probably come in next, and that’s because their central banks are stepping up the stimulus, and they’ve got currencies that are a lot lower than they were a year ago.

And then we think emerging markets are probably last. And if you look at specific sectors, we think consumer discretionary, think restaurants, think home-builders, think about information technology — again, what’s going on with the cloud, innovation, et cetera, and then industrials. You know, what’s going on with global growth, you know, continuing to firm. We think all of those sectors will continue to do well.

MATHISEN: All right. Sameer, thank you very much. Sameer Samana with Wells Fargo (NYSE:WFC) Investment Institute.

HERERA: Those plunging commodity prices we just mentioned are reverberating throughout the sectors today. CEOs from some of the biggest energy companies in the nation discuss the low price of crude, how it’s impacting their firms and where they think prices are headed.

(BEGIN VIDEO CLIP)

GARY HEMINGER, MARATHON PETROLEUM CEO: We’re probably going to see $30 crude before we see $50 crude, and you know, we’re seeing a downturn in the crude price today. It was off about $1.65. I think that’s going to continue to put pressure on gasoline and probably come down and probably be below $1.60 a gallon if this continues into the weekend.

THOMAS NIMBLEY, PBF ENERGY CEO: The fundamentals are bearish oil. There’s 500 million barrels more oil in tank this time this year than last year. There’s 100 million barrels more crude oil in tank in the United States. This is simply supply and demand.

TRAVIS STICE, DIAMONDBACK ENERGY CEO: You have to be the last man standing in a commodity-based price business. And the only way you can be the last man standing is to make sure that your cost structure is the lowest and your execution is the highest.

(END VIDEO CLIP)

HERERA: Those CEOs were gathered at the Goldman Sachs (NYSE:GS) energy conference in Miami.

MATHISEN: The drop in oil is considered deflationary. The Federal Reserve wants to see more inflation, and today, the Central Bank released the minutes from its latest meeting when policymakers raised interest rates for the first time in nine years.

As Steve Liesman reports, the decision for some was a close call.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Minutes from the Federal Reserve’s December meeting show that all Fed members agreed that the labor market and inflation data had shown that the committee’s criteria for hiking rates had been satisfied. All members also agreed that future rate hikes would be gradual.

However, for some members of the committee, that rate hike was actually a close call, and they say they’re going to want additional proof that inflation is moving up towards 2 percent before they hike again. The Fed gave four reasons why rate hikes would be gradual. They include the idea that the inflation outlook is uncertain. Second, it allowed the Fed to assess inflation as they go. Third, the neutral rate, or the rate where unemployment and inflation are balanced, where the Fed wants it to be, it seemed to be right now around zero and will rise only slowly.

Finally, it’s harder for the Fed to fight deflation, so it’s going to err on the side of hiking rates more gradually rather than more quickly.

In CNBC’s exclusive interview, Fed Vice Chair Stan Fischer was asked about the Fed’s median forecast that there would be four rate hikes this year, and here’s how he responded.

STANLEY FISCHER, FEDERAL RESERVE VICE CHAIRMAN: Those numbers are in the ballpark. You know, the reason we meet eight times a year is because things happen. And as they happen, you want to adjust your policy. Otherwise, we could meet in January and close down shop until a year later, but we have to react to incoming events, and we will react to them.

LIESMAN: Fischer said he saw continued uncertainty from around the world, including from China and from the possibility that North Korea may have detonated a hydrogen bomb, but the committee in the minutes in deciding to hike rates said it saw global risk receding and expected some improvement from the global economy this year.

However, the drag on U.S. net exports from a stronger dollar, they expect to be around for some time. Among the other lingering concerns was further dollar appreciation, persistent commodity weakness and further difficulties out of China, but they did see some upside risk, including lower energy prices, spurring better consumer spending than expected. Ultimately, most in the market think the Fed will take a pause in January and not hike rates, and then reconsider the issue again in March if fourth-quarter weakness that we’ve had with GDP running only around 1.5 percent for the fourth quarter turns around in the first quarter.

For NIGHTLY BUSINESS REPORT, Steve Liesman in Washington.

(END VIDEOTAPE)

HERERA: The trade deficit narrowed in November as imports of goods fell to their lowest level in five years. The Commerce Department also reported a decline of 0.2 percent in orders to U.S. factories, and that is the third drop in the past four months.

And in a separate report from the Institute for Supply Management, growth in the services sector expanded at its slowest pace since early 2014.

MATHISEN: Positive news on the labor market. The latest private-sector payroll report showed a larger-than-expected gain in job creation last month. ADP reported an increase of 257,000 positions in December, which was more than expected. And the gains were evenly distributed among small, medium and large businesses.

HERERA: Ethan Harris (NYSE:HRS) joins us now to talk more about the labor market and if some of those troubles we’ve just highlighted overseas could at some point spill over into the U.S. economy. He is co-head of global economics research at Bank of America (NYSE:BAC) Merrill Lynch.

Ethan, welcome. Nice to have you here.

ETHAN HARRIS, BANK OF AMERICA MERRILL LYNCH GLOBAL ECONOMIST: Thank you.

HERERA: Let’s start, first of all, with the labor market. I mean, the ADP report certainly was solid. Are you expecting those numbers to translate into the overall government report?

HARRIS: Yes, I mean, the labor market is the shining part of the economy right now. It’s not just this ADP report we got today, but if you look at the number of people filing for jobless claims, you look at surveys of what consumers think of the labor market, we’re seeing steady, solid gains.

On Friday, we’re looking for 225,000 on the official government numbers, so this is one of the strongest parts of the economy, and it shows no sign of slowing down.

MATHISEN: What about incomes, Ethan, are they going to rise much this year? I think a lot of companies are looking at 2 percent, 2.5 percent raises, not much more than that.

HARRIS: Well, one of the encouraging things here is after six years of this kind of two steps forward, one step back recovery, we’re finally seeing in the labor market something close to full employment. We’re not quite there yet. And if you look at a variety of measures of wages right now, there’s the beginnings of that little bit of pickup in wage growth that we’ve all been waiting for.

So, I do think in the year ahead, you probably don’t get quite as big of job gains, but that will be replaced, I think to some degree, by finally getting a little bit of wage pressure. And as I said, it’s already evident in a number of series.

HERERA: Ethan, what about the troubles that we’ve been talk being this hour in overseas markets and overseas countries, like China, also the situation in the Middle East and now North Korea?

At what point, if at all, does that tend to affect our economy and our markets?

HARRIS: Yes, I mean, it’s a question of how long it lasts. I mean, right now, I am concerned that the turmoil in China continues, turmoil in their equity market, because I think there’s a good case for further correction there. I think that there’s also going to be further weakness in their currency. So, I am a bit worried about further headline risk coming out of China.

The other stories really depend on whether they escalate or not. The U.S. economy’s pretty resilient normally in the face of this kind of news, but right now, too much is piling up at the same time. I think that’s why the market’s having so much trouble with this. It’s like, suddenly, there’s three, four different major stories popping up, and it’s just a little too much to handle.

And so, the stock market, of course, doesn’t like what it’s looking at.

MATHISEN: Very quickly, did you see anything in the Fed minutes that give you a clue to the pace or trajectory of rates this year?

HARRIS: You know, I don’t think they know. I think that they’re going to go slow. That means they’re not going to go in January, and they’ll wait at least until March, but a good chance to go later. I think that the minutes were what you’d expect of a central bank that’s not ready to make a real commitment.

HERERA: All righty. So, we’ll leave it there. Thank you for your perspective.

Ethan Harris (NYSE:HRS) with Bank of America (NYSE:BAC) Merrill Lynch Global Research.

MATHISEN: Still ahead, an earnings warning and a subpoena. They both add to Chipotle’s troubles, which appear far from over.

(MUSIC)

MATHISEN: A subpoena and a warning sent shares of Chipotle lower. The company still reeling from food safety issues reported a big decline in December sales, much bigger than expected.

Also gave a weak fourth-quarter outlook for both sales and profits, and to top it off, Chipotle said it was served a grand jury subpoena in California.

That all sent shares down nearly 5 percent today. Look at the slide. It is off 40 percent during the past three months.

Jane Wells with more now on what’s ailing Chipotle.

(BEGIN VIDEOTAPE)

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT: When it rains, it pours in bad news for the restaurant chain whose motto is “food with integrity”. But it turns out, the biggest surprise in Chipotle’s release today involved an incident here in southern California last august, which didn’t get a whole lot of attention.

It was an isolated outbreak of norovirus at a store in Simi Valley, which sickened over 200 customers and employees, allegedly, after an infected employee came to work. We have reached out to the U.S. attorney here about why a federal grand jury has subpoenaed Chipotle in a criminal investigation, what documents it’s looking for, Chipotle saying it is fully cooperating.

That August incident has been followed by well-known outbreaks of E. coli and another norovirus incident in Boston, and those have really hurt sales. Chipotle now estimates same-store sales for the fourth quarter will be down over 14 percent, its first drop since going public. Sales plummeted as much as 37 percent during one week in December.

At the same time, though, it plans to buy back a lot more shares. In December alone, Chipotle repurchased over $200 million worth of shares, though at prices almost $100 higher than where they are now.

So, what should investors do? A lot of analysts say, “wait and see”, which seems to be what a lot of customers are doing.

Telsey Advisory Group says, quote, “The silence in Chipotle’s dining rooms is deafening”. But Baird analysts are, quote, “warming up” to Chipotle shares at current levels, hoping the worst, if not over yet, will be over eventually. Stay tuned.

For NIGHTLY BUSINESS REPORT, Jane Wells, Los Angeles.

(END VIDEOTAPE)

HERERA: Macy’s (NYSE:M) cuts its profit outlook, and that’s where we begin tonight’s “Market Focus”.

The department store lowered its earnings guidance for the fourth quarter and the full year, citing disappointing sales in 2015 and the warmer weather. It also outlined plans to shutter stores, cut jobs and shed $400 million in costs.

The news came after the close of regular trading, sending shares initially higher. In the regular session, the stock fell about 2 percent to $36.15.

Valeant Pharmaceuticals announcing an interim chief executive as CEO Michael Pearson remains hospitalized. The company had previously announced a three-person committee to head the company but has now placed the former chief financial officer in charge. Shares of the company up $102.40.

Reports today indicating Apple (NASDAQ:AAPL) will slow its iPhone production, as inventory continues to build. The company released the iPhone 6 and 6S in September with record sales, and the company gave holiday guidance back in October that predicted record sales of the iPhone. Shares of Apple (NASDAQ:AAPL) fell almost 2 percent to close just above the key $100 level.

Monsanto (NYSE:MON) seeing a sizable revenue decline in is first quarter as sales weaken. The agriculture company also announced plans to lay off another 1,000 employees as it continues its restructuring efforts. Monsanto (NYSE:MON) announced a round of layoffs back in October. Shares of the company down 1.5 percent to $95.21.

MATHISEN: Yahoo (NASDAQ:YHOO) taking heat today from the activist investor Starboard Value, as the firm pushes for management changes there. Starboard wants the company to spin off or sell some of its core business units. Shares of Yahoo (NASDAQ:YHOO) down fractionally for the day. They finished at $32.16.

The oil and gas exploration firm Pioneer Natural Resources (NYSE:PXD) says it’s going to write down the value of its wells by about $1 billion. However, the company expects production to increase in 2016. Shares of Pioneer off more than 7 percent today to $116.15. Rough day in the energy patch.

Other energy news, Consol Energy cut its 2016 sales outlook and announced it will cut capital spending for the year as well. The company also lowers its coal sales expectations as commodity prices continue to drop. Shares of Consol fell more than 11 percent to $7.58.

And the Netflix (NASDAQ:NFLX) CEO, Reed Hastings, took the stage at the Consumer Electronics Show in Las Vegas to announce a large expansion in the company’s footprint.

(BEGIN VIDEO CLIP)

REED HASTINGS, NETFLIX CO-FOUNDER & CEO: Today, I am delighted to announce that while we have been here on stage at CES, we switched Netflix (NASDAQ:NFLX) on in Azerbaijan, in Vietnam, in India, in Nigeria, in Poland, in Russia, in Saudi Arabia, in Singapore, in South Korea, in Turkey, in Indonesia, and in 130 new countries.

(END VIDEO CLIP)

MATHISEN: The expansion completed a year ahead of schedule, sending shares higher by more than 9 percent. They finished the day at $117.68.

HERERA: Well, that wasn’t the only announcement today at the Consumer Electronics Show. Still coming up, the gadgets that the tech world wants to turn into the next big thing.

(MUSIC)

MATHISEN: Here’s what to watch tomorrow.

Initial jobless claims due out. It is the last piece of labor market data ahead of the big Friday employment report.

Two Fed presidents will speak. They include Chicago’s Charles Evans and Richmond’s Jeffrey Lacker.

And Boeing (NYSE:BA) will let us know its total commercial airplane orders for 2015.

And that is what to watch for Thursday.

HERERA: Volkswagen is going electric. The automaker showing off a new prototype at the Consumer Electronics Show in Las Vegas. It’s an attempt to change the company’s image as it tries to dig out from the diesel emissions scandal, but will VW’s new electric car help usher in brighter days?

Phil LeBeau takes a look.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: With two electric-powered concept cars, Volkswagen took center stage at the Consumer Electronics Show, trying to reposition itself as a green car company. But its current problems with diesel models that had rigged emissions meant more apologies from Volkswagen’s brand chairman.

HERBERT DIESS, VOLKSWAGEN BRAND PRESIDENT: We disappointed our customers and the American people, for which I am truly sorry and for which I apologize.

LEBEAU: Volkswagen’s legal woes include the Department of Justice filing a civil suit on behalf of the EPA. There are also criminal investigations. And VW has yet to find a fix for roughly 500,000 diesel models in the U.S. that are putting out too much pollution.

On top of that, VW dealers are stuck with scores of diesel models they can’t sell. Last month, Volkswagen’s U.S. sales plunged 9.1 percent, and they dropped more than 4 percent in 2015, while the rest of the auto industry had a record year in the U.S.

DIESS: The diesel issue, for sure, damaged us here, and it was a setback for us. We can’t dispute that. Our dealership is fighting hard against it, and they’re really doing a fantastic job. Also, I think our sales organizations, they are doing a fantastic job. I think once we sorted the diesel issue, I think we have a wonderful future in the United States.

LEBEAU: That future, according to Volkswagen, will include more electric models, with more connectivity and features like instrument panels operated through gestures and voice commands.

Cool ideas the company put into the Bud-E electric microbus concept vehicle, which could go 373 miles fully charged.

But right now, the Bud-E is a concept car, and there are no plans to build it. Still, VW says this is the future, one driven by electric cars as it tries to distance itself from diesel models and a scandal that is far from over.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Las Vegas.

(END VIDEOTAPE)

MATHISEN: Concept cars, gadgets, new devices and the latest innovations are all on display at the CES. More than 150,000 attendees, along with Phil LeBeau, were hoping to spot the next big trends in tech, and so is Josh Lipton. He’s our man in Vegas tonight, baby.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Intel’s CEO kicked things off with the introduction of a new drone that’s light, portable and small enough to fit in a backpack. It will cost around $2,000.

And Intel’s not alone. Nearly 30 drone companies are here demonstrating the latest breakthrough for unmanned aerial vehicles.

A leader in the drone space, French company Parrot unveiled its newest consumer drone called the Disco, fully automated and fast. This drone can fly up to 50 miles per hour. Parrot’s CEO sees only more growth for the industry ahead.

HENRI SEYDOUX, PARROT CEO: The drone market is dominated by two companies — DGI, a Chinese company, and Parrot. So, the business is growing a lot. I think we will see more competition. But also, it is the only place where you can be very creative.

LIPTON: Beyond drones, plenty of start-ups here are hoping to capitalize on smart home technology. This newly launched outdoor security camera features facial recognition and can detect when cars or even animals are moving outside your home.

MATTHEW BROADWAY, NETATMO COO: What’s really exciting to me is you’ve got smaller start-up companies, you’ve got 20, 25-year-old engineers, fresh out of university, who are already able to generate this groundbreaking technology and that we’re able to bring it to market at a really consumer-accessible price point.

LIPTON: But these companies face a skeptical consumer. Nearly 50 percent of respondents in a recent Accenture survey cited security and privacy concerns as a barrier to buying an Internet-connected device.

Finally, the wearables market is set to explode, from 76 million units shipped last year to more than 170 million by 2019, according to IDC.

Under Armour’s new headphones measure your heart rate while you run, while its smart sneakers measure distance and even track their own life span, about 450 miles until users need a new pair.

So, which wearable will be the next big hit with consumers? It could be from a start-up right here at CES.

For NIGHTLY BUSINESS REPORT, I’m Josh Lipton in Las Vegas.

(END VIDEOTAPE)

HERERA: Have you bought your Powerball ticket yet? The jackpot is worth $500 million, making it the sixth largest jackpot in history. The lump sum cash payout about $306 million.

And according to organizers, the majority of past winners let the computer pick their numbers. But you know the odds, and they’re not good, about one in 292 million.

If you do win, you don’t have to worry about what I’m about to tell you, and that’s another look at today’s market sell-off on Wall Street. The Dow Jones industrial average down below 17,000, worst three-day start to a year since 2008. NASDAQ fell 55. The S&P 500 off 26.

HERERA: Well, eventually, somebody has to win.

MATHISEN: Right.

HERERA: All right, that does it for NIGHTLY BUSINESS REPORT. Good luck! I’m Sue Herera. Thanks for watching.

MATHISEN: And I’m Tyler Mathisen. Thanks from me as well. Have a great evening, everybody and we’ll see you tomorrow.

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