SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Streak snapped. The Dow’s red-hot run comes to an end as the post election rally cools off.
Buyer beware. Shipping stocks are surging, but investors are advised to proceed with caution.
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UNIDENTIFIED FEMALE: Well, it definitely has affected our business.
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HERERA: Ripple effect. As coal jobs disappear, entire towns feel the impact. Tonight, we hear the stories from Powhatan Point, Ohio.
Those stories and much more tonight on NIGHTLY BUSINESS REPORT for Wednesday, November 16th.
Good evening, everybody. Welcome. I’m Sue Herera. Tyler Mathisen is on assignment.
An unusual thing is happening in the stock market, and it is raising some eyebrows. Shares of shipping stocks, many of them tiny, micro caps, have been surging since last week’s presidential election. Just take a look at dry ships. The stock is up about 1,500 percent in the past week. Globus Maritime has soared about 675 percent, and Sino Global has climbed 450 percent.
And this performance is even more peculiar, because the sector has been facing a number of challenges as it deals with global overcapacity and sluggish trade. You may recall, the bankruptcy filing earlier this year of South Korea’s Hanjin Shipping. So what’s going on?
Dominic Chu takes a look at some theories and why investors need to proceed with caution.
DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT: The stock market has been riding high since the election, and there have been a lot of bets placed on companies in industries that might benefit or be hurt by a Trump administration. But the recent surge in small and microcaps shipping stocks have defied a lot of market logic.
The question is, what is fueling this parabolic move and traders are offering a multitude of theories on why bulk cargo shippers could be seeing brighter days ahead. Could a Trump presidency lead to a surge on spending on things like roads, bridges and other infrastructure projects? If that were to happen, there could be a lot of demand for things like gravel, concrete, steel, et cetera, which could lead to more activity and more revenue for cargo shipping companies.
Others believe the move in some of these smaller market caps shipping stocks has to do with technical market factors, like traders rushing in to buy stock in order to close out possible bets on stock market declines.
But buyers should proceed with extreme caution, even if you believe that the story is bullish for chipping stocks. Not much can justify a rise in some cases by 1,000 percent in a little over a week. The mind-boggling move isn’t just catching the eye of traders. The NASDAQ stock market halted the trading of dry ships early on Wednesday morning, because it was requesting more information from the company about what’s happening with its stock. NASDAQ said it would keep the trading halt in place until its request for information was fully satisfied.
Dry ship stock as traded below $5 per share just before the election and rose to over $100 a share earlier this week. It and many other bulk shipping companies have seen their stocks fall dramatically over the last few years, and many are still down a lot since their highs in that span, even with this big rally.
Regardless of the possible reasons behind the big move, any time you see trading action like this in small and microcap stocks, many experts quote that Latin phrase, “caveat emptor”, translation: buyer beware.
For NIGHTLY BUSINESS REPORT, I’m Dominic Chu.
HERERA: Michael Weber joins us now to talk more about what you need to know before investing in microcap stocks. He is managing director of research and senior analyst at Wells Fargo Securities.
Michael, welcome. Nice to have you here.
MICHAEL WEBBER, WELLS FARGO SECURITIES: Thank you for having me.
HERERA: Before we get to the potential pitfalls, what do you think is going on in this particular sector?
WEBBER: You know, the degree of volatility we have seen in the past week has been — it’s been pretty extreme, even for a sector like shipping. You know, I think that what we’re looking at here is it’s almost a bit of a perfect storm. We’re first really three things happening.
First, you get a Trump rotation tried. A lot of money put into riskier assets and a bit of a retail bid into those stocks. So, a lot of retail money that drives some short squeezes. So the outperformance of seller rates is a little more. And then, most recently, we think we have seen basically the machines take over. We have seen — we think we have seen a significant amount of volume driven by algorithmic trading, which is how you’re getting these kind of parabolic stock rises we have seen in the past three or four days.
HERERA: And to be clear for those who don’t understand what that is, that’s a program that is put into a computer by a trading desk or by a money manager, and it’s triggered when a stock hits a certain point in the program.
WEBBER: That’s right. So, you’ll get a bit of a short squeeze and then all of a sudden, once that performance hits a certain level, the program will take over, and it will just ride from there. So, I think that’s what we have seen. I don’t necessarily think the last two or three days have been indicative of fundamentals, but even buyers or sellers.
HERERA: But in a market that has had a little less volatility than some traders or investors would like, making it harder to make money, a lot of times when you see these stocks, the individual investor wants to get in. So, what do they need to know before they even venture anywhere near a microcap, whether it’s in shipping or some other sector?
WEBBER: Yes. The message here is to be very careful. Especially for names like we’re talking about that have these parabolic pricing moves. As little as a month ago, we were talking about these companies still be in business. Now they’re up 1,000 percent, 2,000 percent. So, if you are going to look at those sectors, there are companies usually within the sectors that have solid balance sheets. That’s a bit like buying a lottery ticket and actually buying a company and you’re actually investing.
So, from our end, we really look at the balance sheets. We want to make sure if we can minimize our downside risk. If we are going to take a risky bet on a sector like dry bulk, which is easily the most beaten up and most down trodden of the sectors we cover, we want to make sure that balance sheet is in really good condition. Most of the stocks you’re seeing that are really off to the races here, and have these big moves are really the bottom of the barrel.
HERERA: So, good old stock-picking due diligence.
HERERA: Michael, thank you very much.
WEBBER: Thank you very much.
HERERA: Michael Webber with Wells Fargo Securities.
On Wall Street today, the Dow snapped its seven-day win streak as financials weighed on the broader market, and a rebound in oil prices stalled a bit. The blue chip Dow index fell to 18,868. The NASDAQ added 18, and the S&P 500 was off 3. But the small cap Russell Index saw nine straight days of gains, its longest win streak since early 2013.
To the economy now, where inflation pressures remain mild, according to the latest government report. The producer price index, which measures the prices that companies receive for their goods and services was unchanged in October. The reading was below the slight gain many economists had been looking for.
And manufacturing output rose for a second straight month. Production at factories, which makes up about 75 percent of all output, increased 0.2 percent. Factories are starting benefit from steady household spending growth, and gains in the production of motor vehicles following a prolonged slump.
But that prolonged slump is still being felt at the nation’s coal mines. Where production has dropped sharply, and where jobs have disappeared. President-elect Donald Trump promised to bring the coal industry back to its former glory.
And as Contessa Brewer reports, that resonated with voters.
CONTESSA BREWER, NIGHTLY BUSINESS REPORT CORRESPONDENT: In tiny Powhatan Point, Ohio, the grind and roar of coal production sounds hour after hour.
APRIL MCCORT, OIL & GAS SAFETY SUPPLY GENERAL MANAGER: This whole section right here, used to be a coal mining section.
BREWER: Inside a rural store outfitting energy workers, the silence is deafening.
MCCORT: We try to ride it out. Like I said, in the past six months, six items in the whole section were purchased and we had to close it out.
BREWER: Coal has been on a steady decline nationwide. In the last five years, 30,000 coal jobs, gone, the percentage of electricity generated by coal, down to 31 percent. A 14 percent drop.
GINA PONZANI, SNIPS HAIR DESIGNERS, INC.: It definitely has affected our business.
BREWER: Gina Ponzani runs her hair salon out of the same house where she grew up. As coal jobs disappeared, so did the extras customers were willing to pay for.
PONZANI: Wives and of husbands that worked in the mines, they maybe have to cut the budget a little bit here or there. They might instead of getting color, they might color it at home.
BREWER: Like many of her customers, she is looking for a change. Donald Trump campaigned hard here. And coal country in Pennsylvania, West Virginia, Ohio, voted overwhelmingly for him. But independent experts say President-elect Trump may not have the power to keep his promise.
JOHN DESKINS, WEST VIRGINIA UNIVERSITY: In recent years, we have seen a perfect storm of three factors that have come together that put tremendous downward pressure on coal demand.
BREWER: First, international demand weakened for American coal. Though China has just announced a massive 20 percent rise in power, produced from coal. Secondly, natural gas has gotten cheaper as production has climbed. While it’s grown by 15 percent in the last five years, coal production has dropped by 18 percent.
ROBERT MURRAY, MURRAY ENERGY CORP. CEO: I can handle that. I’m an American first. I can compete with natural gas, and will, as long as we have a level playing field.
BREWER: Coal leaders accuse President Obama of stacking the deck against them with environmental regulation. They want Donald Trump immediately to kill the Paris climate agreement, and to appoint a Supreme Court justice who will abolish Obama’s clean energy plan.
MURRAY: Mr. Trump has a mandate to carry out what he said. It’s going to be difficult to do it all. But he’s got to do it.
MCCORT: He’s not even officially in office yet. So, yes, I hope they give him patience.
BREWER: But patience, like gear for the coal miners, may be in short supply.
For NIGHTLY BUSINESS REPORT, Contessa Brewer, Powhatan Point, Ohio.
HERERA: The decline in coal volumes has also hurt the railroads, which moved the commodity from place to place. But there is renewed hope that the rail sector will get a lift from the possibility of increased infrastructure spending under the new president.
Morgan Brennan has our story.
MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: You’re at CSX Bedford Park rail yard, 22 trains loaded with some 1,300 containers moved daily on equivalent of 26 miles of track. It is a huge facility and it privately funded by CSX. It highlights the fact that the freight railroads already maintain their own networks, on track to spend $26 billion this year alone.
But if President-elect Donald Trump comes through on plans to drum up a trillion dollars in infrastructure spending, rails will still likely benefit as connecting highways and passenger rail tracks and ports get an update.
But the biggest boon would actually be moving the building supplies themselves, increasing volumes at a time when rails have struggled amid a weak freight environment.
FREDRIK ELIASSON, CSX EXEC VP: We served industrial economy, to large degree. And when they win, we win. And there’s opportunities here, based on what ultimately the policies are going to be for potentially more spending and obviously be helpful for us, as well.
BRENNAN: But there are many questions that are far from being answered, particularly around trade. If the incoming Trump administration takes a more protectionist approach to trade, upending NAFTA and taking a tougher stance against China, that could have big ripple effects in the North American supply chain.
For the U.S. railroads, about one-third of total traffic is trade-related, according to Association of American Railroads with chemicals, grain and autos among the biggest groups.
Analysts say some railroads would be more affected, particularly those that have benefited with booming trade with Mexico, a growth story in an otherwise tough freight environment.
KEN HOEXTER, BANK OF AMERICA TRANSPORTATION ANALYST: We’re certainly going to see a shifting trade pattern and that could certainly impact some of the railroading that go across border. And continue on trade. And does that investment go back into that Rust Belt States where you could see more and more traffic originate from those areas.
BRENNAN: And more traffic could come. The president-elect has vowed to reinvigorate coal which for the rails has plunged by half from a peak of 140,000 weekly car loads in 2008. But while coal deregulations could boost revenues and certainly the stocks, not even the railroads themselves expect to return to the commodities’ glory days.
For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan in Bedford Park, Illinois.
HERERA: While out on the campaign trail, President-elect Donald Trump vowed to lower taxes. He promised to streamline the tax brackets and to cut taxes for the wealthy and the middle class. If all of this were to happen, how might his proposed tax changes impact you?
Reed Fraasa joins us, financial planner at Highland Financial Advisers.
Good to see you. Welcome back, Reed.
REED FRAASA, HIGHLAND FINANCIAL ADVISORS FINANCIAL PLANNER: Good to see you, Sue. Thank you for having me back.
HERERA: You were looking back at history to tell us exactly what you think the president-elect will be able to achieve.
FRAASA: Yes, it’s an interesting statistic dating back to Woodrow Wilson to the present. Every president makes promises during their campaign. Statistically, about 70 percent, 75 percent of the promises actually get fulfilled during their tenure as president.
So, looking at that, even Barack Obama has completed about 73 percent of what he promised. So, the trend follows. So, a good probability that a lot of these tax proposals are going to remain intact, at least three quarters.
HERERA: All right. So let’s run through some of the things you think will happen based on what the president-elect has said on the campaign trail. You say it’s time now for individuals who have control over their income to defer some of that into next year.
FRAASA: Right. So if you look at those tax brackets, these basically have taken seven brackets and boiled it down to three brackets. It’s some simplification, but it’s a good possibility that you may be in a better tax position next year.
So, for those people who have control over their income, it’s not everyone, but sole proprietors, people who have a small business, corporate executives who can control deferred comp. Things like that, most postponing until next year. You’re better off postponing any income you can until next year. You won’t be worse off than you may be better off.
HERERA: What if you’re single, you file single? What do you think will happen, especially since Mr. Trump may have a friendly Congress? So, he may be able to get through some of his initiatives.
FRAASA: It’s interesting on the single tax bracket. So, for single taxpayers, there’s three brackets now — 12 percent tax bracket is for taxpayers who are going to be up to $37,500. The next bracket, 25 percent, is for taxpayers who are going to be up to $112,500, and then above that, 33 percent.
So, for single taxpayers, what we find is for both married and single, the people who are probably at that upper end of each of those brackets. So, as you get close to the $30,000 to $37,000, as you get close to the $90,000 to $112,000, you may be actually end up being worse off than today. But the people — most people, it looks like they’re going to be probably better off.
HERERA: And what about if you file married, or if you’re married and filed jointly? What kind of a break might you get? Obviously, depending on your income?
FRAASA: Yes, so for those, there’s a couple things going on, especially as you get into the higher income brackets. The highest income bracket now is at $225,000, 33 percent. That’s quite a bit of a reduction from that top bracket it used to be. They’re also proposing to eliminate the alternative minimum tax.
So, there’s a lot of moving parts to this for most people. In that area, if you are married and you have income above $225,000, you’re most certainly going to pay less taxes. We also see the people in the very low bracket, whether you’re married or single, you’re probably going to pay less tax.
HERERA: All right.
FRAASA: Those are the two benefits.
HERERA: We will see what happens.
HERERA: Reid, thank you very much.
FRAASA: Thank you.
HERERA: Reed Fraasa with Highland Financial Advisers.
And still ahead, the big bet two real estate developers are now making on a risky market.
HERERA: The Securities and Exchange Commission approved a new system to detect market manipulation. The agency okayed the creation of a digital warehouse designed to track and leave an audit trail of every trade made in the U.S. market. Officials say the system should be mostly operational by the year 2018.
Facebook says it found more problems with the data it provides to advertisers and publishers that use its sites. The social network miscalculated four metrics, including undercounting the number of people who watch an entire video, and overcounting how much time is spent reading certain articles. Facebook and Google account for the majority of digital ad dollars spent in the U.S.
Cisco said profit for the current quarter will be weaker than expected. This as the Dow components switcher and router business struggles with slowing demand and increased competition. In the most recent quarter, Cisco earned 61 cents a share, 2 cents better than estimates. Revenue fell about 2.5 percent to more than $12 billion. But it was the profit outlook that moved the stock in initial after hours trading.
The back to school shopping season helps Target get an “A” with investors and that’s where we begin tonight’s “Market Focus”.
The retailer said an uptick in digital sales helped to beat profit and revenue estimates. The company also raised same-store sales guidance for the quarter, as well as its earnings forecast for the year. Shares rose 6 percent to $76.03.
A slow down in customer traffic caused Lowe’s to post a disappointing quarter. The home improvement retailer missed profit and revenue estimates as well as same-store sales expectations. Lowe’s also cut its earnings outlook for the year. Shares fell nearly 3 percent to $67.02.
The European Commission said Microsoft has reportedly made undisclosed commitments to European antitrust officials regarding the company’s takeover of professional networking site LinkedIn. Reuters says the E.U. expressed concern last week over the $26 billion deal. The commission is expected to give its approval decision December 6th. Microsoft shares were up 78 cents to $59.65, while LinkedIn shares rose 1 percent to $193.47.
After the bell, L Brands, which owns Victoria Secret and Bath and Body Works, posted better than expected earnings. But the company gave a weak outlook for the upcoming holiday quarter. Shares initially fell in after hours and ended the regular session down just a fraction to $67.93.
Well, today the Trump name was removed from three large apartment complexes in Manhattan. Workers took down the gold letters that spell Trump Place on the building’s facade. But the building’s landlord, Equity Residential, said it was a business decision, not a political one.
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SAM ZELL, EQUITY GROUP INVESTMENTS CHAIRMAN: We have been in the process of dealing with this for over a year. Our goal was, we have no interest in having any political position on anything. Once Mr. Trump made the decision that he was going to enter the political scene, we looked at it and said, you know, we just want to be neutral. We don’t want to have an opinion.
And this was part of an agreement we had with him. The agreement is expired, and we’re basically renaming the buildings according to the street.
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HERERA: Sam Zell said the removal had nothing to do with resident protests, as well, to drop that Trump name.
Two billionaire real estate developers, one from Cuba and the other from Iran, are teaming up for the first time, opening a luxury condo and hotel tower in the heart of Miami.
Diana Olick talked to both men about their risky bet that they’re making on that Miami market, but also about fellow developer, President-elect Donald Trump.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Luxury, style and more luxury are the buzz words at Miami’s brand-new SLS Brickell 450 condos, two James Beard award restaurants and a hotel, all in one colorful tower. It is the first collaboration for Miami’s so-called condo king, Jorge Perez, of Related Group and California based hospitality mogul Sam Nazarian of SBE.
SAM NAZARIAN, SBE ENTERTAINMENT GROUP CHAIRMAN & CEO: I think he moves the centers of gravities of different cities with his projects, as he has projects all over. So as it pertains to us, it was one of our biggest — I think one of the biggest milestones of our company, and me personally to have him ask us to work with him.
OLICK: The project sold out in 90 days preconstruction. That was back in 2013 when sales were booming. The Miami market is now slowing down. Condo sales are off 25 percent compared to a year ago, and prices are falling for the first time since the recession.
GEORGE PEREZ, RELATED GROUP CHAIRMAN & CEO: They’re very safe investments and nobody speculating. There’s none of our buyers that were buying, saying, I’m going to flip this apartment before. They were buying saying, I’m either going to use it as a second home, or I’m going to rent it. And by the way, our rental demand is huge.
OLICK: The project also sold out before President-elect Donald Trump was even on the political radar. At least half of Miami condos sell to international buyers, and the immigrant population here fuels not only real estate, but the workers who build it.
George Perez is a Cuban-American, Sam Nazarian, an Iranian American.
NAZARIAN: The more we can be consistent in whatever path we take, and in a welcoming path. This country is a welcoming country. I think from that perspective, I feel — he’s also — has been up to now in the hospitality business.
PEREZ: I think he understands — he well understands the importance of investment in cities like Miami, and cities like New York. That’s what has helped them become what he’s become. And he’s marketed his name internationally very well.
OLICK: But they believe in the market and keep putting the towers up.
For NIGHTLY BUSINESS REPORT, I’m Diana Olick in Miami.
HERERA: Coming up, the road ahead. How business may change for the auto industry during a Trump administration.
HERERA: Airfares may actually fall next year. According to a report by American Express, overcapacity and increased competition among carriers could put downward pressure on prices. Short haul economy flights could see 3 percent drops. Long haul business class fares may decline by about 1.5 percent.
But the airlines may charge higher fees to offset those lower fares.
It is auto show season, and this year, near record sales. A strong economy and a slew of new models are helping generate some buzz.
Phil LeBeau is at the first big show in Los Angeles where executives are talking about the president-elect and the new cars and trucks that are turning heads.
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: In a city of stars, no expense is spared, rolling out dream cars. Take the $323,000 Mercedes-Maybach Cabriolet, unveiled in the Hollywood Hills. Mercedes expects strong sales of a rich vehicle only the very rich can afford.
DIETMAR EXLER, MERCEDES N.A. CEO: We are only building 300 worldwide, and we’re only bringing 75 to the U.S. So, we will have a situation that we already see where we have more demand than we actually have cars available. But I think that’s the right strategy.
LEBEAU: L.A. remains the center of America’s luxury vehicle market. But it’s also become the largest market in the country for pickup trucks, which is why GM chose L.A. to roll out its new Chevy Colorado ZR2.
ALAN BATEY, GENERAL MOTORS N.A. PRESIDENT: What we know here is that there’s a lot of people who want to go off-road. They really want a capable vehicle. I can tell you, this is seriously capable.
LEBEAU: But amidst the new models, automakers are facing questions about doing business during the Trump administration. Will fuel economy standards drop, and will cars built in Mexico, but sold in the U.S., face a 35 percent tax? It’s a move that could cripple auto sales.
SCOTT KEOGH, AUDI N.A. PRESIDENT: What the automotive business is, it’s an international business of parts and manufacturing and logistics and trade. It’s an ecosystem. It’s an ecosystem that works quite well in America. We make a lot of cars here. We make a lot of cars across the globe. And I think the ecosystem works.
REBECCA LINDLAND, KELLEY BLUE BOOK: The consumer really isn’t looking at uncertainty when it comes to the automakers. They are looking — they’re focused on what is being offered today, what is out there on their showroom floors.
LEBEAU: One thing is certain. Demand for luxury vehicles is not slowing down, especially high-end SUVs.
In fact, when you walk the floor and talk with auto executives here at this show, one thing is clear. They plan to feed America’s appetite for bigger vehicles, which is why we should see more SUVs debut at upcoming auto shows.
Phil LeBeau, NIGHTLY BUSINESS REPORT, Los Angeles.
HERERA: And that is NIGHTLY BUSINESS REPORT for tonight. I’m Sue Herera.
Thanks for joining us. Have a great evening, everybody. We’ll see you here tomorrow.
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) 2016 CNBC, Inc.