Transcript: Nightly Business Report – June 19, 2018

ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Bill Griffeth and Sue

tensions escalate and investors wonder whether the strong fundamentals that
drove this bull market are now under threat.

Economists first dismissed those tariffs as a rounding error for the U.S.
economy, but that may be changing.

BREWER: A big change to the Dow. General Electric (NYSE:GE) is out.
Walgreens is in, changing the makeup of the oldest and most widely followed
market indices.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, June

And good evening, everyone. I`m Contessa Brewer, in tonight for Sue

MATHISEN: And I`m Tyler Mathisen, in for Bill Griffeth.

Well, all that trade war talk is starting to stick to stocks. Today, the
Dow notched its longest losing streak in 15 months, down six in a row.
Those gains for the year out of here, gone, this after President Trump
threatened to slap additional tariffs on hundreds of billions of dollars of
Chinese goods, ratcheting up trade tensions between the U.S. and China.
Investors held on tight as stocks dropped sharply, not just on Wall Street
but all across the globe.

The Shanghai Composite Index fell to its lowest level in nearly two years.
In Shenzhen, stocks fell about 6 percent. Meanwhile, the Dow down 287
points to 24,700 on the button. The Nasdaq dropped 21. The S&P was down

Boeing (NYSE:BA) and Caterpillar (NYSE:CAT), the two companies considered
bellwethers for trade tensions were the biggest losers on the blue-chip Dow
index. And as trade tensions escalate beyond expectations now questions
are being raised about the outlook for stocks.

Bob Pisani starts us off tonight at the New York Stock Exchange.


unpleasant reality. The main reason for the stock market rally the record
corporate earnings growth, thanks to the expanding global economy and tax
cuts may now be under a bit of a cloud. Earnings estimates have been going
up in the third and fourth quarters, and the market is now worried that
these numbers might be in danger, thanks to the threat of a looming trade

Stocks have held up very well this year because analysts have been
consistently raising estimates for all quarters, all four quarters are
expected to pass 20 percent earnings growth. That`s huge. You don`t get
those kinds of numbers very often.

The problem is sectors like energy and materials and industrials and
technology, the most critical sectors when it comes to boosting earnings
growth, just so happen to be the sector`s most exposed to global trade and
the stronger dollar. Given the sky-high estimates for earnings for the
rest of the year and the exposure of these key sectors to the trade
tariffs, it`s little wonder that the market is starting to expect earnings
cuts maybe coming even though analysts don`t have any numbers to plug into
their models yet, they just don`t know.

But the markets starting to get worried. Some strategists appear to be
clinging to the hope that Trumps get tough policy on immigration and trade
are designed to appeal to voters in the midterm election and that with a
strong economy, the president can afford to press this issue for a few
months even if the markets drop and then compromise after the election.
They believe it`s significant that some of the tariffs will likely not take
effect until after the midterm election, implying Trump`s main objective
may be to get the point — to get to that point and that he may relent soon
after. But the stakes have definitely been raised.

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


BREWER: Well, the Trump administration doubling down on its tariff
strategy against China. With a request for up to $400 billion in
additional tariffs on Chinese goods.

Kayla Tausche is in Washington tonight.


battle intensifies, President Trump defended new tariffs, his weapon of
choice to fight China`s unfair trading practices. We have to do something
about it.

Now, maybe something happens where they come and they say we agree it`s
been unfair for the last 25 years. But somehow, that doesn`t seem to work
so easily.

The tactic slapped new fees on Chinese goods coming into the U.S., first
targeting $50 billion in products like dishwashers and aircraft parts.
After China said it would retaliate, Trump targeting $200 billion more.
And if China launches yet another counterpunch, an added $200 billion on
top of that.

The resulting policy would touch the majority of goods coming into the U.S.
from China, which totaled $500 billion last year. By comparison, the U.S.
sent $130 billion in goods to China, which is why White House trade hawk
Peter Navarro, the proponent of this strategy says China has more to lose.

Goldman Sachs (NYSE:GS) CEO Lloyd Blankfein says the tariffs may just be a
negotiating tactic.

LLOYD BLANKFEIN, GOLDMAN SACHS CEO: That`s what you would do if you are
crazy and really wanted to end free trade, and that`s what you would do if
it was a negotiating position, you want to remind your negotiating
counterparty of just how much firepower you had.

TAUSCHE: Investors worried China could move beyond the tit-for-tat on
tariffs and limit U.S. business there, or stop buying treasuries.

JILLIAN MANUS, STRUCTURE CAPITAL: I think this is a slippery slope and
investors are keeping an eye on this.

But this pure protectionism path is a very, very dangerous.

TAUSCHE: One key pawn in this battle, Chinese phone maker ZTE banned from
buying U.S. parts after sanctions violations. Trump wants to revive it to
extract concessions from China. Lawmakers this week moved to put guard
rails around Trump`s ability to do that and say it`s still a national
security threat.

SEN. CHUCK SCHUMER (D), NEW YORK: If we allow ZTE into this country, China
and its government will use our phones to spy on each of us.

TAUSCHE: The White House will appeal to lawmakers tomorrow to stand down
on ZTE. But even if they do, it`s unclear how President Trump would use
that leverage. There are no trade talks scheduled with the Chinese, but
according to Navarro, the phone lines are open.

For NIGHTLY BUSINESS REPORT, I`m Kayla Tausche in Washington.


MATHISEN: The Chinese government meanwhile accused the U.S. of blackmail
and warned of swift retaliation to that tariff threat.

Eunice Yoon picks up the story from Beijing.


President Trump`s tariffs as blackmailing. The commerce ministry said
today that China would fight back firmly and is considering qualitative and
quantitative measures.

Now, those words have caught the attention of the American business
community here because the fact of the matter is that China cannot match
the U.S. on tariffs covering $200 billion worth of goods. That`s because
China only buys $130 billion worth of goods. So, there are a lot of
questions as to what China could do next to retaliate.

Some of the business people I speak to say that they`re worried about
investigations or safety inspections, delayed license approvals, to block
expansions and consumer boycotts.

Now, despite the tough talk, there are Chinese who are worried about the
impact of the U.S. tariffs on the Chinese economy. That was reflected in
the stock markets today. Shanghai was down by 5 percent at one point.
Shenzhen felt 6 percent before recovering and Hong Kong lost 3 percent.

One former Chinese official told me that he is worried about the impact of
the U.S. tariffs because all the economic indicators are showing that the
economy here is going to be weaker. The FAI or a fixed asset investment is
slowing down, there are problems in the property sector, and debt is

He also said that China still relies on exports more than the United
States, but what China does have is political will, just as President Trump
might not want to appear weak to his supporters, President Xi Jinping will
not want to look as though he`s caving to international pressure. This is
not a democracy and there are a lot of levers of the government can pull,
and that was hinted at in the state media today with one state paper saying
that the U.S. seems to have fooled itself thinking China is running out of
bullets in this ongoing trade war. The truth is it argues as long as the
U.S. wants to fight it, China will not run out of bullets.

For NIGHTLY BUSINESS REPORT, I`m Eunice Yoon in Beijing.


BREWER: Some economists are now also concerned about the impact on the
economy and the potential for this trade fight to leave economic scars.

Steve Liesman looks further into this.


goes, a few billion here, a few billion there, and pretty soon, it starts
to be real money. President Trump now going where economists feared most,
escalating the trade disputes to a place where all the tariff threats can
have measurable impacts on U.S. and global growth.

DARRELL CRONK, WELLS FARGO: If you were to have $400 billion of tariffs
executed, not just discussed but actually executed, you`re probably talking
about 4/10 off of global GDP, which today is about 3.9 percent to 4

LIESMAN: Add to that, potential negative effects on sentiment and the
added uncertainty, which are both weighing on stocks now.

MARK LUSCHINI, JANNEY CAPITAL MANAGEMENT: Does it resolve itself by way of
a negotiated outcome that allows both parties to walk away, claiming some
level of victory or is this something that we continue to have to deal with
on a day over day basis, incurring tape bombs along the way that disallows
equity investors from getting enthused about the underlying strong
fundamental conditions that support corporate earnings.

LIESMAN: With potential for new tariffs and retaliatory tariffs up to $400
billion, the impact will depend on the strength of the U.S. economy when
those tariffs start to hit.

KRISHNA MEMANI, OPPENHEIMER FUNDS: If the underlying economy wasn`t doing
as well and if we didn`t have the stimulus both tax and budget deal, I
think there`d be a lot more to worry about. The U.S. economy I think in
the second half is going to accelerate as opposed to decelerate. So,
whatever pressures we face on the trade side, I think we are in a much
better position to absorb it.

LIESMAN: Most economists agree. Fair trade from China would boost U.S.
growth. There`s just increasing doubt and growing concern about the costs
of getting there.



MATHISEN: So, at what point could these escalating trade tensions become a
sizable headwind for the markets?

Joining us now is Andres Garcia-Amaya, founder and CEO of Zoe Financial.

Andres, good to see you again.

You heard probably the previous guests say that the tax and budget
tailwinds more than offset in the short term whatever headwinds there are
from trade. Do you agree with that?

look at the most recent data coming from for instance retail sales, we saw
some acceleration actually going into the second quarter. So, earlier
comments I think make a lot of sense, which is if anything — if this had
happened maybe in January or February, it might have actually had a bigger
impact in the overall markets. But going into that acceleration of the
U.S. economy, I think it could cushion it up to now.

If this does escalate, that could actually mean a little bit more
volatility than we`re seeing right now.

BREWER: The expectation, Andres, has been for a strong second half of the
year, that Q3 and Q4 earnings would continue to show growth now when you`re
looking at what the possibilities of a trade war do to that. Is it going
to temper those expectations?

GARCIA-AMAYA: That`s a great question and I do think that there is one
more driver that affects earnings going into the second half which is oil,
right? If you look at earnings and earnings expectations or any earnings
guidance going into the second half, energy stocks is where the biggest
upgrades to earnings have come in, so I will keep an eye on oil. If oil
continues to fall, that would I think actually even have a bigger impact in
earnings for the second half than these trade tensions.

MATHISEN: Why is oil coming down?

GARCIA-AMAYA: Well, for one, we have one catalyst coming up, which is the
OPEC meeting in Vienna on Friday, right? So, there`s this expectations
that OPEC might decide to actually increase production, right? Therefore,
in essence, more supply of oil would affect up oil prices.

The other one is that the dollar had been has been appreciating, right?
And there`s a negative relationship between the dollar is getting stronger
and oil prices falling.

So, those are two of the major drivers. But that it — let me put it this
way — I think that`s a bigger driver for the overall equity markets going
forward than this trade tensions.

If these trade tensions do escalate into a full-out trade war, there might
be a different story, but we`re not quite there yet.

BREWER: So, how are you advising your clients now to factor in the risk of
a global trade war, the importance of oil into this equation?

GARCIA-AMAYA: I think there`s a great question and the best way to think
about it is do not let headlines dictate your long-term investment
strategy, because we don`t know what`s going to happen when it comes to
trade. We don`t know what`s going to happen with oil. If I had to pick
between those two, I think oil matters more, but either way, that is why
you have a well-diversified portfolio, right, so that you don`t have to
actually know and have a crystal ball what`s going to happen next.

MATHISEN: Andres, thanks very much.

GARCIA-AMAYA: Thank you.

MATHISEN: Good to see you. Andres Garcia-Amaya with Zoe Financial.

BREWER: And to another issue that`s part of the national conversation
today, immigration, the top two business lobbying groups came out against
the White House`s policy of separating immigrant children from their
families after they crossed the U.S. -Mexico border. In a blog post, the
Chamber of Commerce said: This is not who we are and it must end now. The
Business Roundtable which represents CEOs urged the administration to end
the policy immediately, calling the practice cruel and contrary to American

MATHISEN: And in a wide-ranging speech to small business owners, the
president today asked Congress for a third option on immigration.


do is to give us a third option which we have been requesting since last
year the legal authority to detain and promptly remove families together as
a unit. We have to be able to do this.


MATHISEN: Senate Majority Leader Mitch McConnell said the problem at the
border needs to be fixed and that he expects the Senate would address it
with a narrow bill, not a wider immigration reform measure.

BREWER: Still ahead, some of the companies with the biggest exposure to


MATHISEN: A big shake-up coming to the Dow. Walgreens will replace
General Electric (NYSE:GE) in the index prior to the open on Tuesday the
26th. GE was an original member of the Dow back in 1896. The S&P and Dow
Jones which determines which companies are in or out of the Dow said the
decision that the economy has changed and with consumer finance, health
care and tech companies becoming more prominent, while the relative
importance of industrial companies is less. GE`s low stock price was also
a factor.

Following the news, shares of GE fell in the extended hours, as you see
there. Conversely, Walgreens jumped.

BREWER: Well, here`s a real wake up from Starbucks (NASDAQ:SBUX). The
coffee retailer warned sales would come in weaker than expected and the
company plans to closed doors. That sent the stock lower in initial after-
hours trading.

Kate Rogers (NYSE:ROG) joins us now with more details.

Kate, what are you learning?

Contessa. Well, Starbucks (NASDAQ:SBUX) CEO Kevin Johnson presenting at a
conference this afternoon and the company breaking quite a bit of news,
first lowering their comps store sales guidance for the third quarter of
2018 to 1 percent from 3 percent globally.

During the presentation, Johnson said that shareholders, quote, deserve
better, and added that he`s determined to fix this. He also talked a lot
about growth with Howard Schultz stepping down as executive chairman next
week. Starbucks (NASDAQ:SBUX) announced it will be also closing 150
underperforming stores in its densely penetrated markets in 2019. This is
up from a historical average of about 50 stores per year.

Beyond that, the company announced it would be slowing its licensed store
growth. Those are the stores you see in hotels and airports around the
country. The company will also be hiring an outside consultant to make it
more efficient and also to help it identify areas of opportunity and

They plan to return approximately $25 billion in cash to shareholders via
buybacks and dividends through 2020. This is up $10 billion from their
guidance in 2017, and they also approved a dividend of 36 cents per share,

BREWER: A lot of news there, Kate.

ROGERS: A lot of news.

BREWER: Yes, for sure.

MATHISEN: All right. Kate, thanks very much.

ROGERS: Thank you.

MATHISEN: Appreciate it.

Starbucks (NASDAQ:SBUX) just one of a number of companies with operations
over in China. The semiconductor sector has the highest revenue exposure
to China. Dominic Chu runs through the list of companies that do get a
fair amount of revenue from the world`s second largest economy.


in the world have become increasingly multinational over the years. Not
every company reports in detail how much business it gets from different
regions globally, but some do. And for those that actually break it down,
China can play a huge role.

Of the biggest industrial companies in the S&P 500, many get a large part
of their sales from China. According to data from MSCI (NYSE:MSCI) and
FactSet, farm equipment maker Deere and company gets around percent of his
total business from China. Construction and heavy machinery maker
Caterpillar (NYSE:CAT) gets 9 percent. Aerospace giant Boeing (NYSE:BA)
has around 11 percent. Diversified industrial 3M (NYSE:MMM) gets 13
percent and for water heater maker AO Smith, a third of its business comes
from China.

But it isn`t just the industrials. Well-known consumer-oriented companies
also have a lot of exposure. Take athletic apparel maker Nike (NYSE:NKE),
which gives 12 percent of its business from China.

Jewelry chain Tiffany (NYSE:TIF) gets 13 percent. Coffee giant Starbucks
(NASDAQ:SBUX), 15 percent, and the same with fast food king McDonald`s
(NYSE:MCD). Even apple gets around 20 percent of total sales from the
greater China region.

These are just some of the companies to watch if trade gets even more
heated in the days, weeks and months to come.



BREWER: A rough day for the automakers. Shares fell on those rising trade
tensions in part because China is the world`s largest auto market and a
very lucrative one for the sector.

Phil LeBeau is at the port of Charleston which exports a large number of
vehicles — especially I understand, Phil, BMW. So, how important is China
to this port?

Contessa. I`m standing in the middle of I`d say about 5,000 BMW SUVs.
These are vehicles that are parked here tomorrow or the next couple of days
many of them will be loaded onto container ships and then set off to China.

If you look at the numbers in terms of vehicle exports to China from the
United States, it has steadily increased over the last 10 years, about
267,000 were sent over there last year, and that number is expected to move
a little bit higher this year. And you`re primarily talking about BMW,
Mercedes-Benz. You do have some from the big three as well, although a
smaller number, and Tesla, which is also setting its vehicles built in
Fremont, California, over to China, which is the largest and fastest
growing electric vehicle market in the world.

MATHISEN: You know, Phil, China has said it would lower its auto import
tariffs. That was good news for companies like BMW.

LEBEAU: Absolutely.

MATHISEN: But with a trade war in the air, could that be under
reconsideration. It`s already under reconsideration for certain vehicles.
Here`s an example: when the Trump administration said, you know, we`ve got
about $200 billion in new tariffs that we are going to implement

And this was about a week ago, a week and a half ago, China responded and
said, OK, we`re going to hit certain agricultural products, other products
from the United States and certain hybrid electric vehicles, which means
certain Tesla models, custom-made Tesla models that are ordered from
Chinese customers now will be added slapped with a percent tariff as
opposed to a 10 percent tariff.

And that`s the concern in the auto industry, Tyler, that some of these
BMWs, maybe a month two months from now China could come back and say, you
know what? Let`s move back to 25 percent or let`s move it even higher.

BREWER: And, Phil, Boeing (NYSE:BA) also has a plant in North Charleston.
So, what would be the impact of a trade war there?


Well, Boeing (NYSE:BA), its biggest customer is China, if you look at
markets. Two hundred and two of the Boeing (NYSE:BA) commercial airplanes
delivered last year went to China. That`s about 26 percent of its annual
deliveries last year. It has a little bit of a cushion in the fact that
airlines order airplanes knowing that they`re not going to be delivered for
several years. So, it`s unlikely that Chinese airlines would cancel orders

That said, China does have a reputation and a track record for saying, you
know what, we`re moving some of these orders over to Airbus or any future
orders could go over to Airbus. And that`s why Boeing (NYSE:BA) is
sensitive to these trade tensions.

BREWERE: Phil LeBeau at the port of Charleston, thank you, Phil.

MATHISEN: Well, Sarepta`s gene therapy treatments shows promise and that
is where we begin tonight`s “Market Focus”.

The drug maker said three boys with Duchene muscular dystrophy saw
improvement after taking the experiment treatment for three months. And
while the trial is still in its early stages, Sarepta said the therapy
helped grow a key protein that is missing in people with this disease.


DOUG INGRAM, SAREPTA THERAPEUTICS CEO: What we need to do is take the
results we have, we need to treat additional children and we need to watch
the children for a while. But this is potentially transformative. We
given this gene therapy that replaces that dystrophin, that shock-absorber,
and at least in these first three children at months, they`re showing this
amazing expression.

So the shock absorber appears to be in the muscle and it does at least in
early days appears to be working.


MATHISEN: Sarepta shares soared 36 percent to $143.93.

And after the bell, FedEx (NYSE:FDX) said it shipped more packages at
higher rates and that helped overall earnings rise and top expectations.
The delivery giant also gave strong guidance for the full year, though it
does see earnings coming in just a little light. Shares were volatile
after hours. They ended the regular session down 2 percent at $258.39.

Meanwhile, the business software maker Oracle (NASDAQ:ORCL) reported an
increase in profits after the bell, saying a growth in its cloud division
helps overall results. Revenue also inching a little bit higher. Shares
of Oracle (NASDAQ:ORCL) initially higher in the extended session, but
finished the regular day down fractionally at $46.27.

BREWER: La-Z-boy also delivered an earnings beat after the bell. The
furniture retailer said more customers made purchases in the quarter,
resulting in growth across all divisions and higher same store sales. For
the full year, La-Z-boy said it expects consolidated sales to rise more
than 4 percent. But shares were initially lower in after-hours ended the
day up a fraction to $33.25.

And preliminary results show that billionaire activist investor Carl Icahn
now has full control over Sandridge Energy`s board of directors. Icahn
sought to control the board and sell the company earlier this year after he
criticized management for missteps. Shares took off, rising 7 percent to

MATHISEN: Coming up, what`s at stake for Apple (NASDAQ:AAPL) as trade
tensions with China rise?


BREWER: Apple (NASDAQ:AAPL) is the world`s most valuable publicly traded
company. It`s also a stock that a lot of investors own either outright or
in a mutual fund or a retirement account, and it could find itself in the
crosshairs of the intensifying trade standoff.

Josh Lipton explains.


critical to Apple`s success in a very important part of its financial
future. Analysts estimate the country accounts for about 15 percent of the
company`s total annual revenue and Apple (NASDAQ:AAPL) has vast
manufacturing operations in China. Most iPhones are assembled there and
then shipped around the world.

Apple (NASDAQ:AAPL) CEO Tim Cook has made China a priority, visiting the
country, setting up R&D centers there and making big investment in Chinese
companies like ride-hailing giant Didi Chuxing.

“The New York Times (NYSE:NYT)” reports that the Trump administration told
Cook that it wouldn`t place tariffs on iPhones, though just today, White
House trade adviser Peter Navarro countered he had no knowledge of any such
iPhone exemption.

Regardless, Apple (NASDAQ:AAPL) could get caught in the crossfire in other
ways. Apple (NASDAQ:AAPL) is now reportedly concerned that the Chinese
government could cause delays in its supply chain in retaliation for the
president`s proposed tariffs. Some analysts who cover Apple (NASDAQ:AAPL)
though say they aren`t too worried.

DAN IVES, GBH INSIGHTS: We`ve estimated probably a hundred to a hundred
fifty million of cost could increase, which would still be a rounding error
for Apple (NASDAQ:AAPL). So, it`s not a cost perspective. The worry is
from that supply chain perspective.

As of now, I think it`s more of a scary headline than a reality but that`s
when investors are concerned about.

LIPTON: Analysts note a potential advantage for the iPhone maker in this
trade fight, it sells a popular device in China and its assembly employs a
lot of people, more than million Chinese work on some way on Apple
(NASDAQ:AAPL) products.

For NIGHTLY BUSINESS REPORT, I`m Josh Lipton, San Francisco.


MATHISEN: And before we go, maybe against our better judgment, here`s
another look at today`s big declines on Wall Street. The Dow off 287
points, the Nasdaq dropped 21, the S&P 500 was down 11.

BREWER: And that does it for NIGHTLY BUSINESS REPORT for tonight, I`m
Contessa Brewer. Thank you for watching.

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


Nightly Business Report transcripts and video are available on-line post
broadcast at The program is transcribed by ASC Services II
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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