SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Sagging stocks. The market extends its downward trend. But are small investors getting in just as the big investors are getting out?
Driving force. What the automakers are doing as their most lucrative market starts to cool.
And the growing battle over the next generation trainer jet.
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MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Meet the T-50A. This is Lockheed Martin’s proposal for the Air Force’s jet trainer competition. We’ve got a view from inside the cockpit coming up on NIGHTLY BUSINESS REPORT.
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HERERA: Those stories and more for tonight, for Wednesday, April 19th.
Good evening, everyone, and welcome. I’m Sue Herera. Tyler Mathisen is off tonight.
A one-two punch took the market lower. IBM was a big drag on the blue chip Dow index, following the company’s disappointing earnings which we told you about yesterday.
Add to that a skid in oil prices, which pressured energy shares, and the result was a decline in the broader market. The Dow Jones Industrial Average lost 118 points to 20,404. It’s the second straight triple digit decline. The NASDAQ rose 13 and S&P 500 fell four.
A surprise increase in gasoline inventories wiped about 4 percent off the price of domestic crude. Today’s decline in stocks follows a pattern that we’ve seen for nearly two months.
And as Bob Pisani reports, there are reasons for the slide.
BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: There’s a dangerous stew of uncertainty for stocks right now.
First, fiscal reforms are being pushed out. The honeymoon is over on tax cuts, in less regulation, and infrastructure spending. The president said he was working on tax cuts yesterday. The markets ignored them.
Second, weaker, hard economic data is very visible from retail sales to the producer price index, the producer price index. Economic data has been weaker than anticipated recently. The odds for a June rate hike are down to about 45 percent from close to obvious 60 percent over a week ago.
Third risks, geopolitical risks, the French election, a tougher stance on Brexit from the U.K., and particularly North Korea, where all background stories until the last few weeks. This weaker data and this geopolitical risk have put downward pressure on bond yields, that’s another problem.
Finally, there’s earnings risks. This is new. Stocks are expensive. The risk is to the downside. This leaves stocks vulnerable to a selloff, particularly if there’s even the slightest hint of an issue.
Just look what happened to Goldman Sachs yesterday. Look what happened to IBM today. The worry is that the first quarter might represent the peak for earnings growth, which is now about 10 percent for the first quarter.
Now, there’s no panic yet. This could all change if we get stronger second quarter GDP data. And the Fed does indeed raise in June. That would almost certainly push bond yields higher, and a lot of these issues would go away.
But for right now, it’s a tricky moment for the markets.
For NIGHTLY BUSINESS REPORT, I’m Bob Pisani at the New York Stock Exchange.
HERERA: The rally in the markets since last fall may be one reason why individual investors are getting back into the stock market.
Today, TD Ameritrade recorded an increase in new accounts which are primarily used by individual investors. It also said the number of trades per day grew. Rival discount broker Charles Schwab yesterday said account openings hit a 17-year high. So, while it appears smaller investors are going into the market, a survey says fund managers and big investors are avoiding stocks. Many say equities are getting too expensive and others are worried about a tax cut delay.
Mike Holland joins us now to talk more about why small investors are getting into the market when the guys are pulling out. He is chairman of his own management firm, Holland and Company. And it’s always good to have him on NBR.
Good to see you, Mike. Welcome.
MICHAEL HOLLAND, HOLLAND & COMPANY CHAIRMAN: Great to be with you again, Sue.
HERERA: You know, I’ve often felt that Wall Street kind of sells the individual investor short. The adage is that, you know, when the individual investor is getting in, the market is peaking, and the institutional investors really know the lay of the land better. But it doesn’t seem to be playing out that way.
HOLLAND: You’re a very smart person. And you have it exactly right. It doesn’t play out that way and in history, it hasn’t played out that way.
I am in this group you referred to as the fund managers, the large investors, the people getting out of the — reducing their exposure to the market right now. And the viewers in the main are — many of them are the individual investors. Over my experience over the decades that I’ve been in the business, the individual investors do better than we, the institutional investors, the large investors.
One of the reasons for that is the individual investors only do, Sue, what makes sense to them, when it makes sense. Of course, they make mistakes. We all make mistakes.
They make fewer mistakes because it’s their own money and they tend to do things that are simply common sense. Individual investors have competition. They have worries about selling their product to people, so they do part of their lives doing it.
So, the individual investor actually has a major step up on the institutional investor, interesting to hear.
HERERA: And it’s interesting in this time, when we have, you know, a change in Washington, an agenda that’s coming up in Washington that will influence the economy and certain sectors of the market pretty dramatically. Has the smaller investor or perhaps, better said, the individual investor learned how to separate the politics or the noise from Washington, from the fundamentals of the market?
HOLLAND: The most pertinent question. Individual investors look at what they should do with their money, they’re coldly rational, most of the time, with their money. Individual investors have — once again, have a leg up on institutional investors, some of whom have political pressures or political leanings which can get confusing to their day to day process. So they may have a political leaning one way or another that may influence what they do more so than the individual investor.
I’ve just observed that. There’s no way for me to quantify that. If you get any e-mails or tweets, what’s he talking about, I’ve just watched it over the decades.
So, I think right now, it’s very important in this highly politicized time to separate your politics from your money and do what you think makes sense. Common sense right now says that in Washington, there’s a party in power, both in the House and — in the Congress, the Senate, the House, and in the White House, who have a favorable program for business.
Now, whether they can get it enacted, we don’t know. But all things being equal, that should be good for investors.
HERERA: So, where would you put money to work if you were a longer term individual investor, Mike?
HOLLAND: Well, since I’ve alienated all my friends in the investment management business, I would say the current phase that we’re going through of people going to exchange traded funds and funds that invest in index fund, that is actually a pretty good idea. That’s the opposite of what I’ve done all my life.
And the reason is say that where — we have relatively low rates in the fixed income markets, but also as Bob Pisani was talking about before, highly priced equity stocks. So, the returns, the huge returns from 2008 and ’09 —
HOLLAND: — may not be around for the next five years. Therefore having index funds with low cost is really important. But if you have some industries or companies you really like, I would probably buy them too.
HERERA: OK, Mike, always a pleasure to have you with us. Thanks so much.
HOLLAND: Thanks so.
HERERA: Mike Holland of Holland and Company.
Now to the economy, which is growing modestly across the country, so says the Federal Reserve Beige Book, an anecdotal look at the nation’s economy. Employment is expanding nationwide and inflation pressures remain muted, despite the difficulties some employers are having attracting and retaining workers.
The head of the Boston Fed says it’s time the central bank sheds its bond holdings. Eric Rosengren added that it needs to be done in a way that’s gradual so that it has little effect on the Federal Reserve’s planned interest rate hikes. The Fed, which is the largest holder of U.S. government debt, will likely start paring back some of its $4.5 trillion worth in assets as soon as this year. The central bank purchased the bonds in the years following the financial crisis.
ExxonMobil reportedly wants a waiver from U.S. sanctions on Russia. As first reported by “The Wall Street Journal,” the energy company has applied to the Treasury Department to be exempt in a bid to resume its joint venture with Russia’s Rosneft. ExxonMobil was once run by Secretary of State Rex Tillerson. The company has not commented on the story.
And Secretary Tillerson today said the Iran nuclear deal fails to achieve its stated objective of preventing that country from becoming a nuclear state.
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REX TILLERSON, SECRETARY OF STATE: An unchecked Iran has the potential to travel the same path as North Korea and take the world along with it. The United States is keen to avoid a second piece of evidence that strategic patience is a failed approach. The comprehensive Iran policy requires that we address all of the threats posed by Iran and it is clear there are many.
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HERERA: But the secretary left open the possibility that the White House will uphold it anyway and that the ultimate decision will be determined by a review of the agreement. Since the landmark nuclear deal was struck, Boeing has sold billions of dollars’ worth of planes to Iran with the latest $3 billion deal reached earlier this month.
And Boeing is also one of the frontrunners to win a potentially lucrative defense contract. The company is up against rival Lockheed Martin to build the next generation trainer jet.
Morgan Brennan is in Greenville, South Carolina.
MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Meet the T-50A.
Oh, my gosh! Woo-hoo!
UNIDENTIFIED MALE: Nice job.
BRENNAN: We got a 16,000-foot view from the cockpit. Lockheed Martin, along with Korea Aerospace Industries, is proposing the T-50A for the Air Forces’ T-X trainer competition. The competition represents one of the biggest defense contracts of the decade, a $16 billion program for 350 jet trainers, expected to be awarded later this year.
MIKE GRISWOLD, LOCKHEED BUSINESS DEVELOPMENT DIR.: This is going to be a hard fought competition.
BRENNAN: When President Trump talks about rebuilding the military, a big part will be future programs like this, which is needed to replace the T-38 Talons that have flown since the 1960s.
MARK “RED” WARD, LOCKHEED CHIEF TEST PILOT: So, it changes the entire model of how we train.
BRENNAN: Mark Ward, aka, Red, would know. A former Air Force pilot that now tests Lockheed’s trainer, he learned to fly in T-38s. He says a factor in driving down training costs and recruiting more pilots is the ability to do more by simulator, a featured key to Lockheed’s proposal.
WARD: So, right now, all of that is done in the fourth and fifth gen airplanes, what we have is a student who knows all that stuff.
BRENNAN: But Lockheed isn’t alone. Boeing and Saab and Leonardo are also in the running. Boeing built a brand-new plane for this contract. Leonardo’s T-100 already trains F-35 fighter pilots in Israel and Italy.
This plane is an upgraded version of the T-50 Golden Eagle which already trains pilots in South Korea and other parts of the world. If it does win the contract, Lockheed says production could begin immediately.
GRISWOLD: We can deliver new trainer aircraft at least two years ahead of the Air Force’s schedule. The reason we can do that, low-risk, on-time, on-cost program, is because we’ve done all the basic design and development and test work to show that everything is ready today.
BRENNAN: Thanks to the Pentagon’s focus on costs, analysts expect a bidding dogfight that will come down to Lockheed versus Boeing.
HOWARD RUBEL, JEFFRIES MANAGING DIRECTOR: I think that Lockheed has an in-production aircraft which gives us an advantage. But I believe that Boeing is offering is more tailored towards what the RFP, or request for proposal is all about.
BRENNAN: For now, contenders are busy taking to the skies to rack up test miles, in a contract face-off that could over coming months prove to be a wild ride.
For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan in Greenville, South Carolina.
HERERA: Still ahead, the Chinese auto market at a crossroads.
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PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: What are the hottest vehicles in China? Entry level SUVs. And, believe it or not, they’re causing a bit of a problem for those automakers who have long been having success in this market.
I’m Phil LeBeau in Shanghai. That story coming up on NIGHTLY BUSINESS REPORT.
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HERERA: Malaysia Airlines is the first carrier to sign up for a new satellite-based flight tracking system. The satellite network will allow the airline to track its planes in areas where it currently cannot be monitored, like Polar Regions and remote areas over the ocean. The move comes three years after one of its flights bound for Beijing disappeared.
China’s auto market, long a driving force for the entire industry, finds itself at a crossroads. After years of very strong growth, overall sales are slowing. Automakers around the world are now facing stiffer competition to drive profits in a market that’s been very lucrative.
Phil LeBeau reports tonight from the Shanghai auto show.
LEBEAU: Edgy, youthful, and full of energy, automakers in China are hoping more SUVs and crossovers strike a chord in a market where sales have cooled off.
JAMES CHAO, IHS MARKIT: Double digit declines in January and February, total decline 19 percent. We did see some indication in March of wholesale sales shipments increasing, but not a lot. So I have a lot of concern about this first part of the year.
LEBEAU: After selling more than 23 million vehicles last year, China remains well ahead of the U.S. as the world’s largest auto market. What’s driving it these days are entry-level SUVs and crossovers from Chinese automakers. Their models are popular and priced well below other well-established international brands like VW.
The price war has forced the people who make Peugeot and Citron to declare they need a new business plan to compete in China.
CARLOS TAVARES, PSA GROUP CEO: We need to be much more efficient in terms of cost reduction and making sure that on variable cost, we can compensate. If not, of course, the margin gets squeezed and then we get in trouble.
LEBEAU: Of course, global leaders in luxury, like Mercedes-Benz continues to dominate the high end of Chinese auto market. Last year, sales surged 37 percent and they remain strong this year.
DIETER ZETSCHE, MERCEDES CEO: We see big expansion for this year again and we see no reason whatsoever for a slowdown, including the first quarter GDP numbers which were on the high side of expectations. All things are looking good here.
LEBEAU: It’s not just Mercedes. Nearly every luxury auto brand is cashing in on China’s growing appetite for top end models.
That includes U.S.-based Tesla, which tripled sales in China last year. According to one analyst, Tesla has momentum in this country, which has already become the world’s largest market for electric vehicles.
Phil LeBeau, NIGHTLY BUSINESS REPORT, Shanghai, China.
HERERA: Higher customer spending helped soften the blow at American Express. That’s where we begin tonight’s “Market Focus”.
AmEx, which is still dealing with the loss of its partnership with Costco nearly a year later saw a profit drop but less than expected. Revenue also fell but the results were good enough to top street targets. The company also reaffirmed its earnings outlook for the year. Shares rose initially in after-hours trading, but ended the regular session down just a fraction to $75.55.
Morgan Stanley said strength in its investment banking unit along with higher trading activity helped its latest results. The bank posted earnings and revenue that came in ahead of estimates. Shares were up 2 percent to $42.04.
And in its latest quarter, BlackRock said it received a record level of inflows into its iShares ETF, showing increasing investor demand to put money into lower cost, passively-managed funds. The world’s largest money manager posted stronger than expected profit. But revenue came up short.
Nonetheless, the company raised its quarterly dividend by 9 percent to $2.50 a share. BlackRock, though, fell, more than 1.5 percent on the day to $377.10.
Intercontinental Hotels said last year’s date breach that affected 12 of the company’s properties actually impacted many more. Intercontinental, which operates chains including Holiday Inn and Crown Plaza, said more than 1,000 of its locations were hit by a three-month-long cyber attack that targeted customers’ credit card information. The shares were off three cents to $49.22.
And Alcoa will shut down its New York City office and relocate its headquarters to Pittsburgh in an effort to cut costs. The company also plans to close several other locations in the U.S. and abroad over the next 18 months. The shares fell more than 1 percent to $31.30.
Executives at FOX News have parted ways with one of its biggest stars. Bill O’Reilly will not be returning to FOX News Channel. The network said that agreement was reached after, quote, “a thorough and careful review of the allegations,” end quote. Mr. O’Reilly calls the move, quote, “incredibly disheartening.”
The decision comes amid sexual harassment complaints against the talk show host. According to “Forbes” magazine, his show brought in an estimated $111 million in ad revenue last year. Shares of 21st Century Fox were lower in today’s training.
So, when a company becomes embroiled in a scandal, whether it’s the latest sexual harassment claims against Bill O’Reilly at FOX or United Airlines forcibly removing a passenger from a flight about a week ago, if you’re an investor, what should you do? Leave or wait it out?
Let’s get some answers tonight from Bruce Goldfarb. He is the CEO at Okapi Partners.
Bruce, welcome. Nice to have you here.
BRUCE GOLDFARB, OKAPI PARTNERS CEO: Good to see you, Sue.
HERERA: That is the central question: how do you make a decision? Now, those are two completely different types of stories, United versus what’s going on at FOX News. But it has a financial impact nonetheless.
GOLDFARB: That’s right, Sue. There is an impact financially for companies when something happens that becomes a big media story. The big issue becomes, how do you deal with that right away and how are investors going to respond?
Frequently, especially with consumer-focused companies, it is that management response that is the first step in terms of how the market reacts and people start trading. A lot of that trading is on the retail side.
For the larger institutions, though, it’s a little more wait and see, looking at all of the factors, including that initial reaction, but including that PR, but then also, is there a plan? Is the situation something that needs to be addressed going forward? And how or when the rest of the market responds? So —
So, we have some of your bullet points. The company’ response, you have to gauge that. No demonstration of the plan, which you mentioned. And long term investors are critical of the reaction.
So, in other words, on that last point, you’re saying those that have held the stock for a long period of time, if they start to sell, that might be an indication of a lack of confidence.
GOLDFARB: That’s the significant issue, a big concern. Long term investors frequently have done a lot of research on the company. They understand the issues that may come up. But they want to see how a management team and how a board reacts to a particular crisis situation.
If that reaction looks to be something that is going to continue the free fall, if it’s going to cost you consumer confidence, cost you customers, cost overall loss of revenue, you’re going to see the institutions getting out of the stock.
Now, I should remind you, there are a number of times where institutional investors simply cannot sell, because they own the shares as part of an index, and in those instances, you may see the reaction in terms of being more vocal about the investment, looking for change at management, looking potentially for board change. That’s where a company, a firm like mine works on a potential proxy fight in those situations, where you can’t have a buy or sell opportunity but you do need change.
HERERA: And also the role of social media. It seems to me that in the past, one of the only ways that the individual investor could voice their displeasure is to sell the stock. But we saw in the case of United Airlines that the pressure on management came — is coming increasingly from social media sources. And that is another way that the individual investor can focus their displeasure.
GOLDFARB: I think that’s exactly right, because now, the individual has an outlet and a vehicle to express opinion, and that opinion can be shared even globally through the social media. And ultimately, what happens in the social media is the reaction and it can cause a lot of consumer issues, which can then lead to that downfall.
HERERA: All right, Bruce, thank you so much. We’ll leave it there. Bruce Goldfarb at Okapi Partners.
GOLDFARB: Thank you, Sue.
HERERA: Coming up, why Google wants your blood, spit, and tears.
HERERA: It’s not just health care companies that want to make new medical discoveries. So do tech companies in Silicon Valley. And today, Google is investing a lot of money to learn why people go from being healthy to getting sick.
Meg Tirrell has our story.
MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT: Google collects all kinds of information about people from their web searches. Now its live sciences unit Verily wants to get even more personal.
DR. ADRIAN HERNANDEZ, DUKE UNIVERSITY: We’re looking for 10,000 pioneers, of people who are interested in donating their information or their data towards understanding health problems.
TIRRELL: Called Project Baseline, the new study announced today is a collaboration between Verily, Stanford Medicine, and Duke University School of Medicine. It aims to enroll 10,000 Americans of diverse ages and backgrounds and observe them for at least four years to gain a deeper understanding of human health and what causes disease.
HERNANDEZ: Right now, what we do is we actually treat people when they come in the hospital with a problem. We actually want to prevent that.
TIRRELL: Study participants will have their genomes sequenced, providing a map of their DNA. And at least once a year, they’ll go to a study sites to have tests like eye exams, chest x-rays and others. But that’s not all. They’ll also tuck a sleep sensor under their mattresses, and wear Verily’s new study watch capable of measuring heart rate and blood pleasure, as well as logging its wearer’s location.
DR. SAM GAMBHIR, STANFORD UNIVERSITY: The wearable gets us to a closer point where we do have continuous measurements.
TIRRELL: But it’s not your typical wearable health device. All it tells the person wearing it is the time.
GAMBHIR: One of the things we don’t want to create is a lot of anxiety for any individual around returning results all the time, for you to always have, for example, a given measurement and be constantly looking at may in fact even change your behavior.
TIRRELL: Participants will have access to some of their data, but researchers say they shouldn’t consider the visits a substitute for regular medical care. The project is part of a broader move to gather information on huge numbers of people, to better understand health, and to better develop medicine and diagnostics.
ROSS MUKEN, EVERCORE ISIS: There’s several examples over time where these large scale population-based studies have helped us with a better understanding of human disease.
TIRRELL: Work is going on at the government level as well. President Barack Obama started a precision medicine initiative that aims to gather information on a million Americans to provide greater insights into health. Similar work is going on around the globe.
MUKEN: Ultimately, the globe is we’re going to try to understand what causes disease, you know, at a more individual level, and then effectively be more preventive in how we live.
TIRRELL: The team behind project baseline says no other study has been as comprehensive in what it measures. The researchers emphasize they won’t share it with insurance or medical providers without consent and say the information will be stored on a secure encrypted database. They say it may be a few years before the first major insights come in, but that they expect the program to yield discoveries for years to come.
For NIGHTLY BUSINESS REPORT, I’m Meg Tirrell.
HERERA: And that does it for NIGHTLY BUSINESS REPORT tonight, I’m Sue Herera. Thanks for joining us. Have a great evening.
We’ll see you right here tomorrow.
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