Transcript: Nightly Business Report – February 2, 2018

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Stocks pounded. The Dow
plunges more than 650 points. One of the biggest point declines for the
blue chip index ever.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Inflation threat. Jobs
are being created, wages are growing. But good news on Main Street is bad
news on Wall Street.

HERERA: Rising rates. As yields go up, how should you invest? Our market
monitor has some advice.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Friday,
February 2nd.

Good evening, everyone, and welcome.

So, sit back, relax, enjoy the flight, because the day`s turbulence is
over, at least for now. And what a day it was. For the first time in a
very long time, stocks hit some serious air pockets. It was, to be blunt,
the worst selloff in years, fueled by concerns about rising interest rates
and some nitpicking about selected corporate profit reports.

The Dow Jones Industrial Average plunged 665 points to 25,520 or about 2.5
percent. The Nasdaq dropped 145, and the S&P 500 dipped 59. All 30 of the
Dow components were lower — a day of red numbers. And of all the 500
stocks in the S&P 500, only a handful were in the green and higher.

Today concluded the worst week for the major averages since 2016.

HERERA: And selling starting with the release of the January jobs report.
Employers added 200,000 jobs last month, which was more than expected. The
unemployment rate remained steady at 4.1 percent. And wage growth
accelerated. Average hourly earnings jumped 2.9 percent from a year
earlier, the strongest year over year gain since 2009.

Investors are concerned however, that that could trigger higher inflation,
and so bond yields rose and stocks fell.

Bob Pisani has more on the selloff from the New York Stock Exchange.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Stocks gave up about
one third of January`s strong gains. The Dow and the S&P 500 both suffered
their worst week in two years. Volatility spiked to a 15-month high, and
trading volume pretty substantial.

Now, we are halfway through earnings season and it`s been a great quarter.
Earnings are up nearly 14 percent from the same time a year ago. And until
now, they have kept going up.

But rising interest rates are clearly posing a threat to the stock market.
Today`s January jobs report showed that wages through 3 percent year over
year, that`s the strongest since 2009. That`s good news for American
workers but it has investors on edge because a pick up in inflation could
mean the Federal Reserve raises rates four times this year instead of
three. That would be a problem.

We saw stocks trade in tandem with bonds throughout the day, when the 10-
year hit 2.85 percent going up, the market hit its initial lows in the
morning.

Then the GOP released a controversial memo from the FBI around noon.
Adding to the nervousness, and the S&P fell another seven points in the
middle of the day.

Now, keep in mind, the major averages are still hovering right around where
they were about two weeks ago and down 4 percent from their all-time highs.
That`s hardly a correction but it does have investors wondering if we are
in for an even steeper drop in the coming weeks.

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

(END VIDEOTAPE)

MATHISEN: Well, a 600-plus point drop on the Dow has only happened eight
other times. Today`s drop in percentage terms was about 2.5 percent. And
for perspective, that`s a lot less than past 600-point drops.

As you can see the last big point decline that big was 2016, when the Dow
was trading at 17,000. That resulted in a 3 percent fall. The selloffs in
2008 resulted in declines of around 7 percent. That`s because the Dow was
trading at levels much lower than it was today.

All right. Now, back to that jobs report that teed so much of what
happened today.

Hampton Pearson takes a closer look at America`s strengthening labor
market.

(BEGIN VIDEOTAPE)

HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: January saw a
rebound in hiring, with worker pay rising at the fastest rate since the end
of the recession eight years ago. Average hourly earnings are up 2.9
percent in the last 12 months to just under $27 an hour.

Economists say pay hikes stemming from Republican tax cuts plus increases
in the minimum wage in 18 states were key factors.

MICHAEL STRAIN, AEI RESIDENT SCHOLAR: The employment figures are kind of
right where they have always been. What we have been waiting for is wage
growth. And today, we saw wage growth that`s healthy. That`s trending in
the right direction.

PEARSON: Job growth was broad based. Construction led the way, adding
36,000 new workers to meet depends for new housing and remodeling. Health
care continues to be an engine of job growth with 26,000 new workers. They
were 23,000 high wage new hires at business service firms needing engineers
and accountants.

Both small and large businesses are competing for a shrinking pool of
workers. For Earth Fare, which runs a chain of 45 natural organic food
stores in 10 states, business is booming. It`s now hiring 1,300 new
employees to work in the ten new stores opening this year. Its CEO says
competition for qualified workers often pivots on pay and benefits.

FRANK SCORPINITI, EARTH FARE CEO: We are constantly benchmarking and
making sure that we have the most competitive remuneration for our team
members, depending on which area of the business that they work in. There
has been some upward dynamic to that in — very recently.

PEARSON: Higher wages may be good news on Main Street. But markets see
inflation red flags, and concerns the Federal Reserve may raise key short-
term interest rates at the faster pace in the coming months.

JARED BERNSTEIN, CENTER ON BUDGET & POLICY PRIORITIES: This kind of wage
growth could spook the Fed into adding another rate increase this year.
That said, what we really haven`t seen in this economy is wage growth
mapping on to price growth.

KENNETH ROGOFF, HARVARD UNIVERSITY: The Fed is going to be very patient.
It`s the main point. I think they are going to let the economy grow. We
are seeing global growth, of course.

PEARSON: That pick up in wages while long overdue for workers in the
coming months will test the patients of both the Fed and the markets.

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

(END VIDEOTAPE)

HERERA: So, let`s dig a little bit deeper into the January jobs report and
also talk about why we saw such a dramatic selloff in stocks today.

Joining us to talk about the jobs report is Jim O`Sullivan, chief U.S. from
High Frequency Economics. And here to tell us what`s going on in the stock
market is Nancy Tengler, chief investment officer at Heartland Financial.

Welcome to you both.

JIM O`SULLIVAN, HIGH FREQUNECY : Thank you.

HERERA: You know, Nancy, I think I`m going to start with you. What did
the market tell you today? Or what is it trying to tell us?

NANCY TENGLER, HEARTLAND FINANCIAL CIO: Hi, Sue. Thanks so much for
having me.

Yes, listen, none of us like this. But we know we need it. Think of it as
a garden you need to prune back so you can clear out the excess and get the
growth you need going forward.

The stock market got a little bit ahead of earnings. We had been talking
about a correction as early as late July. We thought we needed to see one.
We have gone 16 months without a correction. That`s probably the longest
period in history.

And markets just don`t go straight up. And so, this will — it may take a
little bit of time. We may get additional selloff in the early part of
next week. And as an investor I think that`s good news because it allows
you to go in at lower prices and buy the high quality companies that have
delivered — 80 percent of companies have beat their estimates from an
earnings standpoint.

That`s unprecedented in my career.

MATHISEN: Jim O`Sullivan, there is a curious kind of “Alice in Wonderland”
quality to what happened today. We have been waiting a long time for wage
growth to pick up in this country. And today, we got indication that it
did, up 2.9 percent.

That`s great for American workers. How worrisome is wage growth that
robust? Or is it an unmitigated good thing?

O`SULLIVAN: Well, Tyler, certainly 2.9 percent or so on wage is not a
problem. And, of course, it`s not the average early earnings number, but
the employment cost index number earlier this week showed a 2.8 percent
increase and whereas that number a year ago was running 2.3. So, the point
I think here more is there is acceleration underway and the message is the
unemployment rate is low enough to start putting up a pressure on wages and
probably inflation as well.

So, certainly, if you were to stop at these rates of change, you throw in
even 1 percent growth, and you got 3 percent wage gains, and that`s a
basically 2 percent per year unit labor cost number, which is consistent
with the Fed`s goal of 2 percent over time. But I think the issue here
that`s being raised is employment growth at even $175,000 a month is more
than strong enough to keep the unemployment rate coming down.

So, I think the message to the fed here is, yes, inflation is not a real
problem at this point, but they have got to look ahead and stop the down
trend in the unemployment rate and to do, they`ve got to normalize monetary
policy.

HERERA: Nancy, if you had money to put to work and you had the stomach to
do it as an individual investor, where would you be looking to add to the
market positions that you hold next week?

TENGLER: Well, see, we will be putting some money to work next week. One
of the areas that we like a lot is — or one of the stocks is Federal
Express (NYSE:EXPR). This is a company that benefits from e-commerce and
has already done all the capital investment to improve their productivity.
So, we like companies that benefit from technology and can show sustainable
growth.

I also put some money to work in Verizon (NYSE:VZ) as a defensive play, a
company with a high dividend yield that grows over time and is in a pretty
low valuation level by historical standards is.

And then I can`t believe I`m saying this, but I actually am going to take a
fresh look at Apple (NASDAQ:AAPL). We had been selling into the strength
last year. And I thought the earnings report wasn`t terrible. Average
selling prices went up.

So, we`re going to do a little more work and that might be an area where we
add to some of our holdings next week.

MATHISEN: Jim, you said the phrase normalized interest rates. That I
think that`s econo speak for raising interest rates. How many times do you
think the Fed will raise interest rates over the next year, year and a
half, how high will they go, and what will it mean for bond holders, for
mortgage folks, for people who have a home equity lines?

O`SULLIVAN: Well, in my own forecast at High Frequency Economics, I`ve got
them going once a quarter. So, 100 basis points in the next year, 150
basis points in the next year and a half. And if that`s the case, that`s a
bit more than the markets are pricing in. And in turn, I would expect bond
yields to keep on rising.

So, certainly, the ten-year jumped from 240 to 280 so far this year. I
would see it going above 3 percent and potentially 3.5 percent by the end
of next years. And mortgage rates will tend to go up as well.

So, they are at still pretty low levels historically, but there is a lot of
room here for rates to go up.

HERERA: Well, we will see. Thank you both so much for joining us. It`s
going to be an interesting week ahead. Jim O`Sullivan with High Frequency
Economics, Nancy Tengler with Heartland Financials.

Merck (NYSE:MRK) reported a mixed quarter. The Dow component reported
profits that topped analyst expectations thanks to a lower tax bill. But
sales for the quarter were not as strong as expected in light of increased
competition for some of its products. Merck (NYSE:MRK), along with the
rest of the market, fell today. Merck (NYSE:MRK) was down 2 percent.

MATHISEN: ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX), the country`s two
biggest oil companies reported profits that missed expectations, despite a
climb in crude prices in the most recent quarter. Now, Exxon`s drilling
business in the U.S. continues to struggle, losing money for the twelfth
consecutive quarter. Each of those stocks fell 5 percent or more in
trading today — the two worst performing stocks by the way on the Dow.

Jackie DeAngelis has more on big oil`s soggy results.

(BEGIN VIDEOTAPE)

JACKIE DEANGELIS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Even with crude
oil over $60 a barrel, big oil is struggling. Those higher prices were
unable to offset weakness overseas for Exxon and Chevron (NYSE:CVX). Their
earnings misses are troubling. Energy was an underperformer last year.
The market thought this year would be different because oil prices are on
the rise, but that might not be enough by itself.

On the bright side, both companies saw benefits from the new tax laws.
Exxon is planning to increase its spending to $50 billion over the next
five years. That would bring its U.S. spending to levels not seen since
was around $150 a barrel.

On the flip side, rival ConocoPhillips (NYSE:COP) benefitted from its
strategy to cut debt. It also was more conservative with production
increases, attempting instead to focus on margins and returns for
shareholders.

But Exxon and Chevron (NYSE:CVX) could continue to benefit from higher
prices. Just this week, Goldman Sachs (NYSE:GS) raised its oil price
forecast. While the road to recovery may be slow, some feel there could be
a light at the end of the tunnel.

For NIGHTLY BUSINESS REPORT, I`m Jackie DeAngelis.

(END VIDEOTAPE)

HERERA: It is time to take a look at some of today`s upgrades and
downgrades.

Apple`s rating was cut to market perform from outperform at Bernstein
following the company`s earnings release. The firm says demand for the
iPhone X slowed dramatically since December. The price target dropped to
$170 from $195. Shares fell 4 percent to $160.50, pushing the stock into
correction territory, now 10 percent below its all-time high.

Google`s parent Alphabet saw its rating lower to hold from buy. The firm
cites longer term concerns including Amazon (NASDAQ:AMZN), Google`s cloud
market share, and regulatory risks. The price target remains at $1150.
Shares fell 5 percent to $1119.

MATHISEN: HP taken down a notch to neutral from buy at Mizuho. The firm
cites limited upside to earnings over the near term. The price target says
where it is, $23. Shares fell 3.5 percent to $22.48.

Teva Pharmaceuticals downgraded to sell from neutral at BTIG. The firm
sees continued declines in the U.S. generic drug market and higher
borrowing costs. Price target now $17. The stock was off nearly 3 percent
at $20.57.

HERERA: Still ahead tonight, market monitor. The stocks you may want to
buy in a rising rate environment. But, first, a look at some of the
biggest decliners in trading today.

(MUSIC)

HERERA: On a day when investors were worried about rising interest rates,
a Federal Reserve official appeared to downplay those concerns. San
Francisco`s Fed President John Williams said he sees the Fed should stick
to its plan of gradual interest rates hikes this year. Some said that
implied that he believes the central bank should not overreact to a
strengthening economic outlook.

MATHISEN: Sprint post as surprise profit, and that`s where we begin
tonight`s market focus. The telecom reported earnings and sales that beat
expectations as the recent tax cuts and an uptick in new subscribers helped
results. Sprint is also raising its free cash flow and operating income
forecast for the 2017 fiscal year. Sprint shares rose 5 percent to $5.36.

Honda Motors up its profit forecast for the year because of strong sales in
China. The automaker said its Asia market was the only region that saw
sales growth during the quarter. In fact, demand was so strong that Honda
expects that region now to become its largest market, a designation the
U.S. currently holds. Profits during the period also beat expectations.
Honda up nearly 3 percent on this down day to $36.16.

Estee Lauder said there was strong demand for its newly added brands
touring the holidays. Robust sales for its Too Faced, that`s my favorite,
and Becca products helped Estee Lauder top expectations and also raise
guidance for the full year. Lauder shares off a fraction at $134.39.

HERERA: Operating income surged in the latest quarter at Sony (NYSE:SNE),
thanks in part to strong sales of PlayStation videogame console. The
strong results prompted the company to raise its earnings guidance for the
year. Sony (NYSE:SNE) also announced that its CEO will step down in April
and the current CFO will take over. Shares rose almost 6 percent to
$51.99.

Drug maker AstraZeneca said it has entered into partnerships with Chinese
tech giants Alibaba and Tencent, in a move that will expand its presence in
China. AstraZeneca said the deals will focus on artificial intelligence to
help with patient treatments and also combating counterfeit drug sales.
AstraZeneca shares were up 2 percent to $35.90.

And OSI Systems (NASDAQ:OSIS) which makes x-ray machines and metal
detectors said it`s being investigated by the Securities and Exchange
Commission regarding its compliance with the Foreign Corrupt Practices Act.
The investigation was prompted by a report by a short seller who alleged
that OSI used bribery tactics to win foreign contracts. Separately, the
company reported earnings and sales that grew. But the shares plunged,
they were down 18 percent to 54.60.

MATHISEN: Tonight`s market monitor has three picks she says will do well
in a rising interest rate environment. Last time she was on in July, she
Nutanix which is up 62 percent, JPMorgan (NYSE:JPM) Chase up 23 percent.
The iShares Nasdaq Biotech index up 8percent, and Alexion Pharmaceuticals
(NASDAQ:ALXN), 4 percent higher.

Mariann Montagne is with us tonight. She`s a portfolio manager at Gradient
Investments.

Mariann, welcome back. Let`s get a quick thought if we might on this big
of 665-point decline on the Dow today. How nervous should we be? Or not
nervous at all?

MARIANN MONTAGNE, GRADIENT INVESTMENTS PORTFOLIO MANAGER: Yes. I don`t
think we should be all that nervous given the gains we had in January. You
know, we have been calling for a pullback in the market because that`s a
normal thing, for probably the last five months. And it`s finally here.

I don`t think that the data that came out today supports this kind of
decline in the marketplace. But people are taking some profits and giving
us some buying opportunities.

HERERA: Well, speaking of buying opportunities let`s get to your stock
picks. The first is Pinnacle Financial Partners (NASDAQ:PNFP). It`s about
a $5 billion market cap.

Why do you like it?

MONTAGNE: Right. This is a bank based in Nashville, which is a growing —
it is a one of the top growing metropolitan areas in the entire country.
The growth just doesn`t stop. And they have been growing their loans at
about a 10 percent rate. Well, that compares to more like a 3 or 4 percent
rate across the rest of the country.

We think that the tax reform, you know, accelerated depreciation, more
expensing on the part of the companies will only accelerate that rate of
growth. But recently, they kind of stumbled with an acquisition in the
Carolinas and Virginia, and that`s given us a buying opportunity here. So,
we think we can — we have owned it before. We think we can make another
15 to 20 percent on Pinnacle.

MATHISEN: Air Lease Corp is in the aircraft leasing business as its name
suggests. Why is this a good play if rates rise?

MONTAGNE: Well, I think the stock hasn`t risen as much as it should have
based on fears of rising interest rates. And this is a company that`s a
specialty banking, you know, lending company. They always take their cost
of capital plus a spread. And when rates are rising, that spread is higher
dollars.

So, they are matching their cost of capital, plus the spread. And they are
participating in that whole arena of raising international travel. So,
about two thirds of their business is outside the U.S., about 46 percent is
in Asia alone, where people are flying more than they ever have before.

So, we think it`s a great business. The company is only selling at one
time its growth rate. And at about a 35 percent discount to the market.
So, we think this is another probably 20 percent up side to the country.

HERERA: All right. And then, quickly. Sun Trust Bank, another bank here,
in the Southeast region.

MONTAGNE: Right. So, again, the Southeast is an area of superior growth
versus the rest of the country. We think the tax reform will only assist
their loan growth acceleration. The management has been very cautious
about upcoming rate hikes thinking there will be only two. We really don`t
know.

The Federal Reserve is going to be completely different down the road as
Trump has three more appointments on the board and we have the new chair
that just came in. So, two, four, whichever, you know, the rate hikes
would be. It`s going to help all the banks.

MATHISEN: Right.

MONTAGNE: But we think this one has been conservative. They pay a 2.4
percent dividend deal. The only one of these stocks that pays a dividend.
And we are expecting a nice bump, maybe 10 to 15 percent in the dividend
this summer.

MATHISEN: That would be a nice bump. Mariann Montagne with Gradient
Investments, have fun with the Super Bowl this weekend in your town of
Minneapolis.

MONTAGNE: Oh, it is the bowl north up here.

(LAUGHTER)

MATHISEN: You can read more about Mariann`s bowl top picks on our Website,
NBR.com.

And still ahead, drilling down. You`re going to meet the entrepreneur who
had the bright idea to heat homes by digging a hole.

(MUSIC)

MATHISEN: Using the earth`s heat to heat and cool your home is energy
efficient. But installing a geothermal system means drilling down hundreds
of feet. That costs a lot. Less than 1 percent of homes use geothermal
systems, which can cost 50 grand.

That`s why one bright entrepreneur got what she hopes will be the bright
idea to make them more affordable.

(BEGIN VIDEOTAPE)

MATHISEN: Becky Meier knew geothermal heating and cooling system is
quietly shaking up her home economics.

UNIDENTIFIED MALE: Kind of nice, no more oil bills.

MATHISEN: Last September, Meier and her partner, Bob Conners (ph), stopped
paying $3,000 or $4,000 a year for heating oil. Some of the savings helps
pay covers higher electric bills. Some covers the monthly payments for the
new system. The rest lands right in their pockets.

A new furnace would have cost $6,000, maybe $7,000. Instead, Myer paid
about $20,000 for heat, air-conditioning, and two new hot water tanks. A
lot less than she was quoted the year before.

BECKY MEIER, HOMEOWNER: Thirty-seven thousand dollars. It was too
expensive.

MATHISEN: The price dropped when Becky Meier became Dandelion Energy`s
customer number one.

KATHY HANNUN, DANDELION CO-FOUNDER AND CEO: The experience of having
geothermal, very good. The process of getting it, not as good.

MATHISEN: Kathy Hannun`s company aims to cut the cost of that process,
which involves drilling hundreds of feet down to install a narrow U-shaped
pipe. Water travels underground through the pipe where temperature stays
between 50 and 60 degrees. The 50 degree-ish water is piped back up to a
heat pump which uses vapor compression to take the heat from the water,
then heats it further, and then pushes hot air out to heat the house in
winter.

MEIER: You can feel the heat.

MATHISEN: When it`s hot outside, the system reverses, taking hot air from
the house and cooling it in the pump, the technology isn`t new. It dates
back some 70 years. But dandelion`s prices are new.

Before Dandelion, Hannun worked at Alphabet`s R and D arm X, developing a
product that converts sea water to fuel. That project ended when X
couldn`t fine a commercial market for it. With geothermal, Hannun sees a
market and says the sky is the limit.

HANNUN: Just people using fuel oil in the Northeast are spending tens of
billions of dollars per year just buying fuel. You have to make it worth
people`s while.

MATHISEN: Dandelion`s pitch, new systems for no money down. The company
negotiated bulk rates with a contractor to do 20 installs in Upstate New
York last summer. Dandelion pays the contractor, and homeowners pay
Dandelion $140 or $200 a month over 20 years.

HANNUN: Allowing a homeowner to switch without spending any money and save
money immediately, that just really changes the game for a lot of people.

MATHISEN: To change the game, Dandelion is partnering with contractors,
hoping to do 200 installs this year for roughly $25,000 each. Contractors
using Dandelion`s software can do estimates in minutes instead of hours.
And Dandelion developed a narrower, lighter drilling rig to fit into tight
spaces this. This year, Dandelion rolls out its own heat pumps.

The company says its waiting list has thousands of potential customers in
all 50 states, allowing Hannun to dream that Dandelion systems might some
day spread like dandelions.

HANNUN: We intend to expand from homes to service buildings like schools
and commercial buildings and military bases. I mean, really, the
possibilities are endless.

(END VIDEOTAPE)

MATHISEN: And according to the American Council on Renewable Energy, 41
states have rebate programs that include geothermal heat pumps.

HERERA: Before we go, here`s another look at the selloff on Wall Street
for you. The Dow plunged 665 points. The Nasdaq dropped 145. The S&P 500
dipped 59. See what next week holds. That`s it for us tonight. I`m Sue
Herera. Thanks for joining us.

MATHISEN: I`m Tyler Mathisen. Thanks from me as well. Have a great
weekend, everybody. We`ll see you back here, if you`re brave enough, on
Monday.

END

Nightly Business Report transcripts and video are available on-line post
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Media, 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) 2018 CNBC, Inc.

 

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