Transcript: Nightly Business Report – July 5, 2017

ANNOUNCER:  This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue
Herera.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR:  Rising tensions.  The
president leaves on a high stake foreign policy trip one day after North
Korea tests a missile that could carry out a nuclear warhead into U.S.
territory.  The markets kept cool, but the next few days could provide some
stern tests.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR:  Playing defense.  As
tensions rise around the globe, why America`s defense companies may be an
excellent place for some of your capital.

HERERA:  Looking for a mortgage?  Why they could soon be easier to get for
millions of Americans.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for  Wednesday,
July 5th.

MATHISEN:  Good evening, everyone, and welcome.

International tensions and anticipation ran high as investors returned to
the markets today after Monday`s abbreviated session and yesterday`s July
4th holiday.  So, how would global markets react today after news yesterday
of North Korea`s first ever successful launch of an intercontinental
ballistic missile, one capable potentially of carrying a nuclear warhead
into U.S. territory?

Well, the answer frankly is there wasn`t much reaction.  Stocks, bonds,
currency and gold were largely calm today, but that could change in an
instant, as the week`s news plays out.

(BEGIN VIDEOTAPE)

MATHISEN (voice-over):  Front and center, that missile launch.  A test
North Korea`s dictator said was coming and that President Trump derided.

It won`t happen, he tweeted earlier this year.  But it did, just as the
U.S. conducts missile tests of its own with South Korea.

In statement today, the top U.S. military commander in South Korea said the
U.S. and the South are prepared to go to war with North Korea if given the
order.

As for efforts to enlist China to put pressure on Pyongyang, they don`t
seem to be bearing fruit.  Mr. Trump tweeted today, quote: Trade between
China and North Korea grew almost 40 percent in the first quarter, so much
for China working with us — but we had to give a try.

So, what`s left to try?

RICHARD HAASS, COUNCIL ON FOREIGN RELATIONS PRESIDENT:  The words solution
and North Korea probably have never been mentioned in the same sentence
before.  The options are all pretty poor or unattractive.

MATHISEN:  The Korea conundrum playing out as the president departed for
Europe in a meeting of the G20 in Hamburg, Germany, later this week.
There, he will come face-to-face for the first time with Russia`s Vladimir
Putin.  He`ll also meet with China`s Xi Jinping, who himself met with Putin
in Moscow Monday and Tuesday.

The stakes could not be higher.  Will Trump try to directly tie U.S.-China
trade to Beijing`s help with North Korea?  What about Russia`s role in
Syria, Ukraine and the U.S. elections?

And then there`s the delicate matter of U.S. relations with traditional
European allies, like France and Germany.

HAASS:  You`ve got real disagreements over trade, real disagreements over
climate change, questions about America`s willingness to stand up to
Russia.  Probably the Europeans won`t be as muscular as we would like them
to be when it comes to North Korea.  Plus, the personal dynamics between
Chancellor Merkel and President Trump shall we say are less than ideal.

MATHISEN:  So far this year, markets have largely shrugged off global
worries and put geopolitics in the backseat, but that could change and the
backseat could become a real front seat market driver.

(END VIDEOTAPE)

HERERA:  While the broader markets were flat, one sector that did move
today on the rising tensions with North Korea was the defense sector.
Boeing (NYSE:BA), Raytheon (NYSE:RTN) and Lockheed Martin (NYSE:LMT) were
all higher and they`re all companies behind our country`s military
defenses.

Morgan Brennan has more.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT:  The Pentagon is
describing it as a new kind of missile that, quote, did not seen before.
An intercontinental ballistic missing or ICBM tested by North Korea as
America celebrated Independence Day.  The ICBM flew for 37 minutes, making
it the country`s longest launch before landing off the coast of Japan.

While experts are skeptical of the North`s ability to turn it into a
weapon, it`s the sure sign yet the rogue country is moving closer to its
goal of being able to target Alaska and other parts of the U.S.

But the Pentagon says it`s ready, especially in light of its own recent
test that successfully intercepted a mock ICBM.  That system called the
ground base mid course defense is a $40 billion network of radars, sensors
and rocket propelled interceptors that can track and destroy long range
ballistic missiles in space, the only such ground based system capable of
protecting the entire U.S. from such a threat, even as its effectiveness
has at times been questioned.

Boeing (NYSE:BA) is a prime contractor of the system with parts made by
Raytheon (NYSE:RTN), Orbital ATK and Aerojet Rocketdyne.

But there are other missile defenses in use as well.  Lockheed Martin`s
THAAD and Raytheon`s Patriot both ground based and Lockheed`s Aegis, which
is largely deployed on ship.  All three counter-regional threats and work
for the Boeing (NYSE:BA) system as a layered defense approach.

Demand is growing in the expectation as lawmakers will green light more
money to develop more defenses, but all of it will take time.

For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan.

(END VIDEOTAPE)

MATHISEN:  So, how should investors like you factor in geopolitical
tensions and could global flashpoints eventually start to affect investment
values?

Here with some insight is Paul Christopher, global head of — market
strategist with the Wells Fargo (NYSE:WFC) Investment Institute.

Mr. Christopher, welcome.  Good to have you with us.

PAUL CHRISTOPHER, MARKET STRATEGIST, WELLS FARGO INVESTMENT INSTITUTE:
Thank you.

MATHISEN:  Why do you think global tensions haven`t affected the markets
really very much over the past year or so, and especially not this year?
We`ve had terror events in England and elsewhere, this missile test
yesterday.  But the market seems to sort of roll merrily along.

CHRISTOPHER:  That`s right.  Yes, there`s several reasons I can think of.
One is that, frankly, we`ve had a synchronized global economic recovery in
place since the middle of last year and investors have really just become
aware of that.  Since late last year, call it November or December.  And
that`s been one important factor.

Second is really the continued, let`s say, the ongoing use of stimulative
monetary policies.  There`s just an awful lot of liquidity sloshing around,
whether it`s still in the U.S. with low interest rates in Europe and in
Japan.

And I think the third reason is something even more basic and that is, you
know, with these high risk, low probabilities or I should say high impact,
low probability events, there`s a strong tendency to just say oh, well,
that`s just another one of those low probability events out there, and
people frankly tend to underestimate.

HERERA:  Right, and is North Korea perhaps one of those events or one of
those situations that they are underestimating?  We had a special session
of the U.N. today.  And you have allies of the United States calling for
basically stricter sanctions now on North Korea.  Is that situation
changing in the market tides or not?

CHRISTOPHER:  I think it will.  And it depends a lot — interestingly, I
think it depends less on the launch of that test missile yesterday than it
does upon what the conversation looks like and sounds like between
President Xi and President Trump that we`re going to hear about in the next
few days.  That`s going to be much more important.  I think there`s another
risk here, that is there`s obviously the extreme risk of some sort of
nuclear or preemptive attack by the U.S., I mean, nuclear event by North
Koreans, or preemptive by the U.S.

But there`s another risk here and that is really that the U.S. and China
have a bigger falling out over North Korea.  That puts questions on the
board about trade and interregional cooperation.

MATHISEN:  So, these are big, high concept thoughts that you`re putting out
there.  Bring it back to me and my portfolio, Paul, if you don`t mind,
quickly.  How can I event-proof my portfolio or should I even try?

CHRISTOPHER:  Yes, I don`t think anyone can event-proof a portfolio, but
here`s what you can do.  You can play the probabilities that are very much
higher.  One is that we believe the global economic recovery will continue
in a synchronized way going forward.

So, number one, play growth.  Number two, because there are so many risks
out there, you mentioned Russia, the Middle East, there`s even U.S.
political risk here in terms of what we do with tax reform and
infrastructure.  Rather than try to pick one of those risks and try to
inside or inoculate your portfolio, take a diversified approach, rebalance
the portfolio often and play the growth theme.  We think by doing that, you
won`t necessarily catch all the risks, but you also won`t be strung up by
all the worst ones if you try to go the other way.

MATHISEN:  Paul, thank you very much.

CHRISTOPHER:  OK.

MATHISEN:  Paul Christopher with Wells Fargo (NYSE:WFC) Investment
Institute.

HERERA:  Stocks were steady today as we said, despite the events overseas.
Technology stocks snapped a three-day losing streak and the Federal Reserve
released the minutes of its last meeting.  More on that in just a second.

First, the closing numbers.  The Dow Jones Industrial Average was off just
one point to 21478, the Nasdaq rose 40, and the S&P 500 added three.

Crude prices fell sharply on reports that OPEC`s oil exports rose in June,
and on a separate report that Russia would not support a further extension
of ongoing production cuts.

MATHISEN:  Well, the oil market will also be watching developments in the
auto sector.  In a statement today, Volvo said all, all of its new models
it produces will be electric or hybrid starting in 2019.  The CEO had made
a similar statement in May.

According to “Reuters”, the decision makes Volvo the first traditional
automaker to set a date to phase out conventional car engines.  Volvo is
owned by Geely, a Chinese company.

HERERA:  Auto production is carefully watched by the manufacturing sector
and today, the Commerce Department reported that new orders for factory
goods fell 0.8 percent in May, marking the second straight month of
decline.  Manufacturing activity accounts for more than 10 percent of the
U.S. economy and has lost a bit of momentum as motor vehicle sales
moderate.

MATHISEN:  Is there a split within the federal reserve?  The minutes of the
last meeting point to agreement on some issues important to the economy,
but not on others.

Hampton Pearson explains.

(BEGIN VIDEOTAPE)

HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Minutes from the
June Fed meeting show monetary policymakers divided on the outlook for
inflation and its possible impact on the timing and number of future
interest rate hikes.  Most say inflation below the Fed`s 2 percent target
is a short-term phenomenon, due in part to things like cheaper telecom
prices and falling gasoline prices.  But others are concern that had the
lack of wage inflation in a tight labor market means inflation has slowed.

JIM MCDONALD, NORTHERN TRUST ASSET MANAGEMENT:  I think they`re laying out
the case that it may not be wholly transitory, so the fact that they put
those caveats in while expressing comfort that things will go back to
normalcy does give me some confidence that they think there`s a chance
we`re in a different environment.

PEARSON:  At that mid-June meeting, several policymakers wanted to announce
plans to start reducing the Fed`s $4 trillion portfolio of treasury bonds
and mortgage-backed securities.  But there was no consensus on with when to
start.  Fed watchers however say markets are prepared and the economy is
strong enough to withstand the Fed`s key policy moves.

JIM CARON, MSIM GLOBAL FIXED INCOME:  I think it`s going to be modestly
felt initially, but long-term, ultimately, the Fed is going to be the
dictator of where rates go.  Clearly, we need good day to back it up.  We
need some inflation to come back.  If that doesn`t happen, I think rates
stay low.

PEARSON:  So, those June minutes suggest inflation is really the X-factor
for future rate hikes, and as far normalizing the balance sheet, it all
comes down to timing, with late September the most likely kickoff.

For NIGHTLY BUSINESS REPORT, I`m Hampton Pearson in Washington.

(END VIDEOTAPE)

MATHISEN:  Coming up, why mortgage hunting is getting a little bit easier.

(MUSIC)

MATHISEN:  If you were shopping for a home, you may be in luck.  We told
you last week about some scoring changes, but could help borrowers,
potentially making it easier to get a home loan.  But there are some risks
as always.

Diana Olick explains.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):  Just over
a decade ago, big lenders were giving big mortgages to anyone with a fault,
and this is what happened.  Today, it`s much harder to get a home loan, but
that has sidelined some worthy borrowers.  So, the vise is now loosening
yet again.

Two major changes in underwriting going to effect this month.  First, the
nation`s credit rating agencies are dropping tax liens and civil judgments
from consumer`s profiles if they`re not fully documented.  That`s because
one in five consumers have mistakes on their credit reports.  Of about 220
million Americans, with a credit profile, about 7 percent have these credit
hit.  Without them, their FICO credit scores could go up by as much as 20
points.

Second, Fannie Mae and Freddie Mac are increasing the amount of debt
payments a borrower can have compared to their income, from 45 percent to
50 percent of pre-tax income.  That is a response to today`s high level of
student loan debt.

DOUG DUNCAN, FANNIE MAE SVP & CHIEF ECONOMIST:  We`re not changing the
other underwriting criteria, and we believe that the additional increment
of risk from making that change is very small and given how pristine credit
has been post-crisis, we don`t feel like that`s an unreasonable risk to
take.

OLICK:  But it does mean some consumers will be saddled with even more
debt.

THOMAS BROWN, LEXISNEXIS SVP OF FINANCIAL SERVICES:  I think the main
concern that I have is the fact you have these multiple issues coming
together.  You have, you know, more stretched consumers.  You have
potentially consumers that have demonstrated credit problems in the past.

OLICK:  Brown says consumers who have had a tax lien or civil judgment are
from two to five times more likely to be late on a payment again.

BROWN:  It doesn`t really do a consumer well to be extended credit that
they can`t afford, they can`t reasonably service.

OLICK:  But debt limits and credit scores are not the only thing lenders
consider.

DUNCAN:  We look at all the other criteria that are information rich.  In
term of assessing individual`s risk profile and they have to look good in
all those other areas.

OLICK (on camera):  And the lending market itself isn`t changing its
appetite for overall risk and potential losses.  So, while it may loosen up
in some areas of credit, it may also tighten in others.

For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Washington.

(END VIDEOTAPE)

HERERA:  While it may appear to be easier to get a mortgage due to those
new credit score changes, credit card defaults are rising.  Even as the
economy is on solid footing  So, what does this suggest about the health of
consumer borrowing?

Craig Dismuke is chief economist at Vining Sparks and he joins us to talk
about.

I guess that is the question: what does this mean in terms of the health of
the consumer?

CRAIG DISMUKE, VINING SPARKS CHIEF ECONOMIST:  Good evening.

You know, I think the consumer is when we look at it broadly is very
healthy right now.  You look at their balance sheets, they`ve deleveraged
quite a bit.  You look at the labor market, obviously, it`s very healthy
with unemployment rate down to 4.3 percent now.  And you see a little bit
of earnings growth starting to pick up.

And so, we see the consumers being fairly stable right now.  The uptick in
defaults on credit cards is just fractional.  First quarter reports showed
an uptick to 7.4 percent, I believe it was.  And that when you look at over
the longer period, it still remains low.

So, you know, we see the consumers being very healthy right now despite the
recent uptick in the credit card delinquency rates.

MATHISEN:  I think, Craig, I was supposed to feel good during Diana`s
report that mortgages may become easier for some people to get.  At the
same time, I heard her say that the people who were going to get those
credit reports now may be able to pay up to 50 percent of their pre-tax
income in debt payments.  That sounds very, very high to me.

DISMUKE:  It reminds message of the early 2000s actually when we saw that
the income levels go up, the underwriting criteria were getting looser and
looser.  And so, it`s similar to that.  it reminds me of that.

And you`re right.  It makes me a little bit nervous as well and remember,
that`s pre-tax income.

MATHISEN:  Right.

DISMUKE:  And it`s also pre-insurance.  And so, when you`re talking about
spending 50 percent of your pre-tax pre-insurance income on housing, that`s
a concern.

HERERA:  What else would be concerning to you, we started out talking about
credit card defaults which you made the point that historically is very
low.  At what point would that start to worry you?

DISMUKE:  Well, if you see credit card delinquency rates jump up above 8
percent, 9 percent.  I think that becomes a bigger concern.  And credit
card debt is still a fairly small component of overall debt, though.  When
you look at overall consumer debts, 68 percent, almost 70 percent of it
comes from mortgages.

Mortgages appear to be in fairly solid position right now.  Consumers or
homeowners have refinanced their mortgage rates down from 5.5 percent down
to an average of 3.7 percent now, going back over the past seven years.
So, they`re saving about $240 billion a month on mortgage interest
payments.  So, you know, really, when you look at credit, we see some
positive things there.  But if you were to see the default rates tick up on
credit cards, that would be a concern.

The other thing that`s a concern, obviously, is the student loan market.

HERERA:  Right.

DISMUKE:  Student loans are — the default rate is over 11 percent and
that`s been the biggest area of growth for consumer debt.

HERERA:  Craig, thank you very much.  Craig Dismuke with Vining Sparks.

DISMUKE:  Thank you.

MATHISEN:  O`Reilly Automotive posted weaker than expected sales, and that
is where we begin tonight`s “Market Focus”.

The auto parts retailer also said a mild winter caused consumer spending to
slow, resulting in same store sales that missed the company`s guidance and
analyst estimates.  O`Reilly said the missed will have an impact on its
operating profitability.  Shares of O`Reilly down nearly 19 percent at
$178.77.

And the disappointing results also sent shares of other auto parts
retailers down, as you see right there.

The apartment real estate investment trust Monogram Residential will be
bought by the nation`s largest apartment operator, Gray Star Real Estate
Partners.  It`s going to acquire Monogram for about $3 billion.  Monogram
up 21 percent on the news, to $11.89.

Goldman Sachs (NYSE:GS) says it sees demand plateauing for Tesla`s current
products that might cut its six-month price target on the automaker stock
by nearly half, citing the company`s lower than expected second quarter
deliveries.  Goldman also lowered its annual growth estimate for the Model
S and X vehicles through 2021.  Tesla down 7 percent today to $327 and
change.

HERERA:  The graphic chip maker Nvidia reached a deal with China`s search
engine Baidu (NASDAQ:BIDU) to apply artificial intelligence to various
applications.  As part of the partnership, Baidu (NASDAQ:BIDU) will use
Nvidia`s technology in its cloud computing and in its initiative to develop
self-driving cars.  Nvidia shares rose more than 2.5 percent to $143.05.
Baidu (NASDAQ:BIDU) added 2 percent to $183.83.

And the U.S. credit card processor Vantiv said it reached a deal in
principle to buy British rival World Pay for about $10 billion.  The
proposed merger would give the new company greater access to brick and
mortar and e-commerce businesses.  Vantiv shares fell 2 percent to $61.02.

Mobile payments are changing the way we buy things.  Peer to peer lending,
changing the way businesses are financed.  These financial innovations
aren`t just happening here, but also in China, reaching into remote areas
of the country and potentially providing a new type of growth for the
world`s second largest economy.

Eunice Yoon has our story.

(BEGIN VIDEOTAPE)

EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):  Far from
his posh Beijing office, Roger Ying is meeting some of his best clients.

ROGER YING, FOUNDER & CEO, PANDAI.CN:  We love coming down here.  It`s
always a threat.

YOON:  Stanford grad from South Africa founding a peer to peer lending
company called Pandai.  The P2P industry in China has run into financial
trouble.  To survive, Ying lent almost solely to people on the farms.

YING:  When I look at the China economy, there`s 1.3 billion people, 300
million to 400 million in first and second class cities have already been
reached.  There`s 900 million other farmer have been left behind by the
mainstream financial system.  We see the unmet demand for farmers.

YOON:  Farmers like the Fus.  In the village of Xiobao (ph) in southwest
China, Fu Chengji used to be a coal miner.  After getting injured, he
wanted to try pig farming, but didn`t have the money.

In the country side, it`s hard to get money, he says.  Even if I were to
get a loan from the bank, it would be too small to start the business.

The, the local village chief introduced him to Pandai.  Pandai approved a
loan of 80,000 yuan, more than $11,000.  But rather than hand over cash,
the company bought the pigs and feed.  In one year, Fu expects to earn a
profit of $14,500 after paying back the loan plus the 15.5 percent
interest.

(on camera):  This kind of lending may sound risky, lending to people on
the farms who don`t have much experience with modern finance.  But in fact,
Pandai says their recovery rate is 98.5 percent and in a country where
zombie companies may or may not pay their debt back, these farmers are a
good bet.

YING:  The farmers, we find them to be very honest and very reliable and
very basic people, and they are just looking improve their own lives, out
of poverty.

YOON (voice-over):  That`s what`s happening to the Fus.

I wanted to have a fridge and a TV when I got married.  But we didn`t have
the money, Fu`s wife says, now, we do.

Good for an economy in need of new consumers for future growth.

For NIGHTLY BUSINESS REPORT, I`m Eunice Yoon in Xiobao (ph) Village.

(END VIDEOTAPE)

HERERA:  Coming up, summer stinker.  Why most of the movies that were
expected to be blockbusters are turning out to be busts.

(MUSIC)

HERERA:  The jeans retailer True Religion is filing for bankruptcy
production.  The company`s financial struggles are due in part to changing
consumer taste and the shift away shopping at department stores where True
Religion jeans are primarily sold.  The retailer said it is aiming to stay
in business, though some stores will be closed.

MATHISEN:  The July Fourth holiday, usually a sizzling time of year for
movie-going, but not this year, not this weekend.  And today, movie theatre
stocks traded lower.

Julia Boorstin tells us why a summer slump appears to be taking hold in
Hollywood.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):  The
beach and barbecues burn the box office.  The holiday weekend failed to
turn around a weak summer so far.  The season is down to about 9 percent
from last year, pulling the year to date U.S. box office down nearly 1
percent from the year earlier, according to Comscore.

Universal`s “Despicable Me 3” grossed $99 million in the U.S. in its first
five days.  But $72 million it brought in over the weekend in the U.S. is
about $10 million lower than the opening for “Despicable Me 2”.

Another new release, Sony`s “Baby Driver”, outperformed with a $21 million
take.

While Will Ferrell and Amy Poehler`s comedy, “The House”, from Warner
Brothers, fell flat.

PAUL DERGARABEDIAN, COMSCORE SENIOR ANALYST:  Right now and over the past
few weeks, there`s only be a handful of movies that have really grabbed
audiences and got them out from either, you know, behind their TV or from
the beach and got them in the theater this summer.

BOORSTIN:  With the exception of “Wonder Woman” and “Guardians of the
Galaxy Volume 2”, every summer tent-pole has underperformed expectations in
North America.  And the trend isn`t expected to turn around anytime soon,
even with big films such as Sony`s “Spider-Man” reboot opening Friday, MKM
Partners warns that given tough comparisons for July and August, the third
quarter box office will likely fall about 6 percent, and Morgan Stanley
(NYSE:MS) just slashed its price target on theater giant Regal, on a lower
box office forecast.

But for studios, even films that are suffering stateside are outperforming
overseas.

DERGARABEDIAN:  And there`s something going on here with international
audiences where the novelty, the bombast, the epic size of these American-
made movies are enough to get them in the theater and excited to go back
over and over, whereas North American audiences seem much more jaded.

BOORSTIN:  Internationally, “Despicable Me 3” is off to a huge start, and
even the fifth films in “Pirates of the Caribbean” and “Transformers”
franchises, though underperforming other sequels here in the U.S., have had
a huge run overseas.

That increasingly powerful global audience is already impacting what movies
Hollywood makes and where they`re shot.  We`ll see how the upcoming
“Spider-Man” and other big films such as “War for Planet of the Apes”
perform overseas.

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

(END VIDEOTAPE)

HERERA:  And that`s NIGHTLY BUSINESS REPORT for tonight.  I`m Sue Herera.
Thanks for joining us.

MATHISEN:  And thanks from me as well.  I`m Tyler Mathisen.  Have a great
evening, everybody.  We`ll see you back here tomorrow night.

END

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Business Report is not and should not be considered as investment advice.
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