Transcript: Nightly Business Report – October 9, 2018


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

BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Taking a toll. Rising
interest rates continue to hit stocks. But now, there`s a new concern.
Could rising costs take a bite out of corporate profits?

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Rude awakening. Mortgage
rates rise to a level not seen in eight years. Why it could spell trouble
for the winter housing market.

GRIFFETH: And gathering storm as Hurricane Michael bears down on Florida,
residents and retailers hunker down once again.

All that and more on NIGHTLY BUSINESS REPORT for this Tuesday, October 9th.

HERERA: Good evening, everyone. And welcome.

A choppy session for stocks today. The major indexes swung between gains
and losses, throughout the day as investors once again grapple with how
exactly higher interest rates might affect stocks. But today wasn`t just
about interest rates. It`s also about inflation and how rising costs could
hit corporate America as earnings season approaches.

So, today, the Dow Jones Industrial Average fell 56 points to 26,430. The
Nasdaq rose 2 and the S&P 500 was down four.

GRIFFETH: But let`s start with those interest rates. Yes, they`ve been
rising and expectations are that that will continue. As you know, that`s a
big shift for the stock market that has been enjoying historically low
interest rates for a very long time. But investors now need to know why
rates are rising.

So, we asked Steve Liesman to explain.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Interest rates are
rising and the question Wall Street wants to know is if they are going up
for the right reason or the wrong ones. That is, are rates going up
because growth is going up or just because of inflation without the growth?

J.P. Morgan declaring in a recent report, quote, rising U.S. yields are a
symptom of U.S. strength and should not be feared. The trouble for stock
investors is that until now, they`ve been able to have the cake and eat it
too. That is better growth and higher earnings while interest rates stayed
unusually low.

In fact, the treasury markets have almost ignored the Fed`s increases in
short-rates. That`s until now.

ROBERT SHILLER, YALE UNIVERSITY: It`s not just Fed policy. It`s also just
a generally strong consumer confidence process that we see at this point of
time. The economy has looked strong for years. And especially since Trump
took presidency, and I think we`re just in an exuberant time. People find
these rate increases as normal given the economic conditions.

LIESMAN: The list of what`s pushing up rates is long. There`s better
growth and lower unemployment. Core inflation, that is excluding food and
energy, is steadily now above 2 percent. The Fed is pushing up rates.

Sometime next year, other central banks may also increase their rates.
There are tariffs pushing up prices. There`s also a growing deficit which
also usually means higher interest rates. Those higher rates could put a
crimp in growth, hurting sectors like housing and autos but they`re not
expected to derail it.

DAVID WESSEL, BROOKINGS INSTITUTION: We`re seeing the return to more
normal term premium, the extra yield that people demand for holding long-
term paper. So, I think it`s in this case, it`s a relatively good sign.
It means that there`s confidence that the economy can be — is coming back.

LIESMAN: One modest upside could be that higher rates will help the Fed
slow the economy to a more manageable growth rate. If so, the Central Bank
could be done raising rates sooner rather than later, adding just another 1
percentage point from here. That`s if rates are rising for the right
reason, that is growth, and not the wrong one which is inflation.

For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.

(END VIDEOTAPE)

HERERA: And one industry paying very close attention to interest rates is
the auto sector. As rates move higher, financing a car is becoming more
expensive. That along with higher sticker prices is translating into
monthly payments that are close to record levels.

Phil LeBeau has more.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: It is the part of
buying a car that nearly everyone dreads, determining how much you`ll pay
every month. Four out of five consumers finance their new vehicle with an
auto loan. And as the Federal Reserve has gradually raised rates, it`s
forced lenders to do the same with auto loans. As a result, monthly
payments and auto interest rates have steadily moved higher.

Five years ago, buyers paid an average of $457 a month on a loan with a
rate under 4.5 percent. Since then, monthly payments and interest rates
have steadily moved higher. Today, the average new vehicle payment is now
well over $500 a month, and the average rate is close to 6 percent. Those
higher costs have not slowed down demand, mainly because consumer sentiment
remains near a record high. So, millions are still looking to buy.

In fact, sales this year are on pace to top 17 million vehicles, making
this the best four-year stretch of auto sales the U.S. has ever seen. And
while you may see showrooms offering zero percent deals, it is harder and
harder to actually get one. Edmund says there is no interest rate on just
5 percent of all auto loans, the lowest level since 2005.

If interest rates continue to move higher, there is a concern the monthly
payments will rise to a point where auto buyers say it`s too expensive.
But so far, dealers have yet to see that happen.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

(END VIDEOTAPE)

GRIFFETH: And today, the head of the Dallas Fed said he supports moving
ahead gradually and patiently with interest rates increases, and even
though he sees the inflationary pressures building, Robert Kaplan also
believes that dueling forces will keep prices from spiking sharply.

(BEGIN VIDEO CLIP)

ROBERT KAPLAN, FED RESERVE BANK OF DALLAS PRESIDENT: I don`t believe
inflation is going to run away from us. I think you`re going to see,
particularly with the tariffs and input costs, you`re going to see it
building. But I personally think that these more structural forces are not
going away, if anything, they are intensifying and I think they`re going to
have some muting effect on inflation.

(END VIDEO CLIP)

GRIFFETH: And Mr. Kaplan also said he is starting to see companies try to
raise prices the first time in a long time to counter those rising input
costs.

HERERA: And the trade issue with China is a game changer for the global
economy, so says the International Monetary Fund which is cutting its
outlook for world economic growth to 3.7 percent. The organization says
when the world`s two top economies impose tariffs on each other, everyone
feels it. The IMF expects growth in the U.S. to slow to 2.5 percent next
year. Growth in China could drop top 6.2 percent.

GRIFFETH: Did you know that 85 percent of the toys sold in the U.S. are
made in China? So, it makes sense that industry executives are very
concerned about the current tariff tiff and that includes the CEO Mattel
(NASDAQ:MAT).

(BEGIN VIDEO CLIP)

YNON KREIZ, MATTEL CEO: We are watching the situation very closely. And
there could be an impact on the industry. This is outside of our control
but the role is to design an organization that is flexible and adaptive and
can respond to market changes and negative headwinds.

(END VIDEO CLIP)

GRIFFETH: And he added that Mattel (NASDAQ:MAT) is looking at different
manufacturing options as a way to deal with the impact of trade tensions.

HERERA: And investors will be listening for comments about China, trade,
inflation and interest rates when companies report their earnings and issue
their outlooks for the rest of the year. Yesterday as we reported,
industrial company PPG said soft demand from China is turning into a big
problem as is significant rises in raw materials costs. The stock dropped
10 percent today, continuing a late slide that we told you about yesterday.

GRIFFETH: Well, the effects of the trade tensions are starting to be felt
globally as well. Not just in the U.S. Britain`s biggest car maker today
reported a nearly 50 percent drop in sales in China, saying that import
duties and a trade war with the U.S. has hurt demand.

And so, Jaguar, Land Rover said today it`s going to close a U.K.-based
plant for two weeks to align supply with better with fluctuating demand.

HERERA: And Procter and Gamble said it received word from the U.S.
government that it is now exempt from the 25 percent tariff on impart
exported steel. P&G said the steel is used for the razor blades, a product
that makes up a majority of P&G`s grooming business. The decision is a
relief for the company since P&G said it was unable to find enough high
quality steel for their razors here in the U.S.

GRIFFETH: All right. So, should investors expect to hear more about China
and rising costs as earnings season gets under way.

Joining us tonight, Karyn Cavanaugh is senior market strategist at Voya
Investments.

Karyn, thanks for joining us tonight.

KARYN CAVANAUGH, VOYA INVESTMENTS SENIOR MARKET STRATEGIST: Thank you for
having me.

GRIFFETH: So, the Chinese economy is slowing down, prices are going up in
part because of tariffs. What impact do you think that will all have on
earnings? What are we hearing from companies starting next week?

CAVANAUGH: Well, we definitely are going to be listening to see what they
say about China. But right now, we`re still expecting overall plus 20
percent growth, a little bit less than the second quarter but right now, it
looks like earnings growth is going to be about 20 percent year over year.

GRIFFETH: But what about specific industries? I mean, we just talked
about PP&G — P&G rather and PP&G yesterday, talking about the fact that
their input costs go up and they can have a material effect.

Will we see some sector specific comments from companies?

CAVANAUGH: Yes, I think we will, especially in the automotive sector, in
some of the agricultural products, some of the industrials, any of the
companies that import or export a lot with China, we`re going to see the
effects and we`re going to see them talk about that in their earnings
calls. Plus, we`re also going to see a lot of companies just talk about
the general uncertainty. And uncertainty is never really a good thing for
earnings.

But despite that, that`s — with all those worries around, we are still
seeing 20 percent growth year over year because the U.S. economy continues
to do well.

GRIFFETH: OK, but the comparing to last year is going to be difficult
because we had a pretty good year at the end of last year as well. So, the
questions for investors is, do they continue to stay with these companies
or do you think they will start to suffer if this tariff tiff continues
much longer.

CAVANAUGH: Well, I think that a lot — it depends on the company. Some of
the companies are more agile, they`re more flexible. And they can change
the way they manufacture their products or sell their products.

But I think that a lot of it is we`ve been talking about this for so long.
A lot of it is already baked in. So, I think that we`re already
anticipating a lot of the bad news. So, there is a potential upside for a
lot of these companies that have been bracing for let worst could end up
being a good situation.

HERERA: What about the economy overall? I think we just talked about the
fact that global growth may be cut because of some of the tariffs. But the
U.S. economy has been chugging right along. Do you anticipate that
continuing into the New Year?

CAVANAUGH: I do. And I don`t think the tax cuts are just a sugar high,
because we are now seeing companies be more productive and those productive
companies are being rewarded with better stock prices. And that
productivity is working its way through the system. And that`s making the
workers more productive, that`s going to increase wages. And it`s good for
sustained economic growth.

So, I see good things for the U.S. economy coming up. I see that 2019 is
looking to shape up to be a pretty good economic year.

GRIFFETH: All right. Let`s see what happens. Karyn Cavanaugh with Voya
Investment Management — again, thanks for joining us tonight.

CAVANAUGH: Thank you.

HERERA: And it is time to look at some of today`s upgrades and downgrades.

Walmart was upgraded to buy from hold at the Deutsche Bank. The analyst
cites the retailer`s growing online grocery business and its investment in
ecommerce. The price target is $113. The shares finished up 2 percent to
$97.08.

And also at Deutsche Bank, Kroger (NYSE:KR) was downgraded to sell from
hold. The analyst cites higher costs as Kroger (NYSE:KR) expands its
ecommerce program. The price target is $24. Kroger (NYSE:KR) shares were
off nearly 5 percent today to $27.92.

GRIFFETH: Mylan (NASDAQ:MYL) was downgraded to equal weight from
overweight at Morgan Stanley (NYSE:MS). The analyst there cited recent
trends in the highly competitive generic drug market. Price target now
$36. Shares of Mylan (NASDAQ:MYL) ended the day down nearly 2 percent to
$34.61.

Whirlpool (NYSE:WHR) was downgraded to neutral from overweight at J.P.
Morgan. The analyst says that moderate home price appreciation may
actually result in softer repair and remodel demand. Price target $122.
Whirlpool (NYSE:WHR) shares fell more than 5 percent today to $106.30.

HERERA: Still ahead, why investing in dividend stocks is getting a little
bit trickier.

(MUSIC)

HERERA: Optimism among U.S. small business owners remains near historic
levels despite edging a bit lower last month. The survey from the National
Federation of Independent Business showed that optimism dipped when it came
to employment and capital spending and that`s a bit of a reversal from
August. The top issue raised by companies remains a lack of skilled labor.

GRIFFETH: Sears (NASDAQ:SHLD) has added a restructuring expert to its
board just days before the struggling retailer faces a more than $100
million debt payment. The appointment comes just as Sears (NASDAQ:SHLD)
chairman and controlling shareholder Edward Lampert urges the board to
approve a rescue plan to try and avoid bankruptcy.

HERERA: D.R. Horton (NYSE:DHI) issued preliminary quarterly results and
they were not pretty. The home builder said sales for the period came in
below expectations. And it is forecasting sales and orders to disappoint
for the year as well. The company will report its full results next month.

Today, shares of D.R. Horton (NYSE:DHI) fell 3 percent and the sector is
now in a bear market. The home builder ETF is down more than 20 percent
from its high of earlier this year, thanks to those rising rates.

GRIFFETH: Speaking of which, the average rate now on the 30-year fixed
mortgage, that`s now crossed the 5 percent threshold for the first time in
about eight years. And for those looking to buy their first home, it`s
entirely possible this may be the highest rate they have ever seen.

So, the question is, will this send a chill through the winter housing
market?

Diana Olick takes a look for us tonight.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Back in the early `80s
when another celebrity was in the White House, mortgage rates were three
times what they are now, and people still bought and sold homes. But
today`s buyers, especially millennial buyers, have short memories and high
home prices have more of them on the margins.

MATTHEW GRAHAM, MORTGAGE NEWS DAILY COO: There is always going to be a few
buyers, a certain percentage of buyers that are on the edge of being able
to qualify, and when rates go up as much as they have, then that can
actually push them out of being able to qualify for a home. Bus of the
debt to income guidelines associated with loan qualifications. So, yes, it
does take a toll.

OLICK: The last time the average rate on the 30-year fixed crossed 5
percent was eight years ago and that was only briefly. It hasn`t been
sustained over 5 percent at least a decade. A year ago, it was just below
4 percent and two years ago hit a low of 3.5.

So, what does that mean to borrowers? For example, on a $300,000 loan,
you`re paying about $200 more per month than you would have a year ago.
But it`s not just the payment. It`s qualifying for the loan, and also
feeling good about buying at that rate.

Consumers and investors have felt very good for a while now. But Nobel
Prize winning economist Robert Shiller says that`s not always good.

SHILLER: The economy seems to be coasting upward. But this kind of
complacency, this confidence I think is volatile.

OLICK: The only good news for the winter buyers is that higher rates could
mean sellers finally realize the sky is not the limit and cut the red hot
home prices we`re still seeing today.

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

(END VIDEOTAPE)

GRIFFETH: And to read more about the impact of mortgage rates at 5
percent, you can head to the website at NBR.com.

HERERA: An activist investor takes a stake in Starbucks (NASDAQ:SBUX)
where we begin tonight`s “Market Focus”.

Bill Ackman of Pershing Square Capital revealed a $900 million position in
the coffee chain. Ackman says the stock could more than double over the
next three years, and he added that the retailer is one of the best
positioned if minimum wages rise. Starbucks (NASDAQ:SBUX) says it looks
forward to a productive dialogue with Mr. Ackman. Starbucks (NASDAQ:SBUX)
shares rose 2 percent to $57.71.

And takeover talk is heating up over at Papa John`s. There are reports
tonight that the Trian Fund Management is considering a bid for that
beleaguered pizza chain. But according to the “Wall Street Journal”, there
is also no guarantee that a deal will get done. Papa John`s has been
exploring a sale while it tries to recover from a messy battle with its
founder and former chairman and CEO, John Schnatter. Shares of Papa John`s
jumped nearly 9 percent to $54.90.

American Airlines says that fuel costs are rising and that it lost $55
million in revenue last month due to Hurricane Florence. Those fuel costs
concerned investors who sent those shares down more than 6 percent to
$33.55.

GRIFFETH: ExxonMobil (NYSE:XOM) is committing $1 million over the next two
years to promote a tax on carbon emissions by corporations. According to
the “Wall Street Journal,” this type of donation is rare among the oil
majors. Exxon, though, sees a carbon tax as an alternative to patchwork
regulations out there right now. ExxonMobil (NYSE:XOM) shares rose a
fraction to $86.51 today.

And shares of Snap hit an all-time low after a “Wall Street” analyst warned
the company in his words is running out of money. According to
MoffettNathanson, the social media platform may be forced to raise capital
as early as the middle of next year. And the analyst, in the meantime, is
also predicting a slowdown in user growing. Snap shares finished down more
than 6 percent today to $7 even.

And “Bloomberg” is reporting that a malicious implant was discovered a
couple months ago on a server owned by telecom company Supermicro Computer.
That report follows that “Bloomberg Businessweek” article of last week that
said that Chinese manufacturers had secretly inserted spy chips on
Supermicro motherboards.

Supermicro is denying the claims in both of those articles now.
Nonetheless many shares of Supermicro plunged by 15 percent today to
$12.46.

HERER: Many investors look to dividend stocks for income and some of the
top paying dividend stocks in the S&P 500 so far this year are names like
Century Link, L Brands, Kimco Realty (NYSE:KIM) and others.

But as interest rates rise, should your dividend strategy change?

Jeremy Zirin is the head of investment strategy at UBS Wealth Management
Research. He joins us tonight.

Jeremy, so I guess that is the question. You want to look for dividend
stocks, but are there different types of dividend stocks that in a rising
rate environment might be a better bet than others?

JEREMY ZIRIN, HEAD OF INVESTMENT STRATEGY: Certainly. If interest rates
are rising because the economy is expanding and growth is picking up, that
means that company`s earnings should be rising and should be able to fund
the dividend. The problem for dividend investors is that when interest
rates rise, that means that bonds create more competition for dividend
yielding stocks.

So, what you see when there rates rise, typically, you see dividend — a
higher dividend yielding stocks in the market lag the overall market. But
where you really see some difference is in the dividend growth stocks
versus higher dividend yielding stocks.

So our view is that looking forward, you know, the long end of the bond
yield curve is probably already moved and seen the bulk of its increase and
that short-term rates certainly will increase with the federal increasing
interest rates. But dividend growth stocks should provide a greater
balance in the portfolio. They`ll benefit from increasing their dividend
and they`ll provide a bet of a hedge against future inflation because those
companies are able to raise their dividends.

GRIFFETH: You know, the list we showed of the top 10 dividend paying
companies, the yield at the high end is above 10 percent right now. But
you see the 8 percents, the 6 percents, the 5 percents.

Is there a level above which you won`t go because it may present more risk
than necessary? I mean, people may be tempted to go to the higher risk,
higher yielding stocks because of higher interest rates, right?

ZIRIN: Exactly. But I think the issue with that is that the stocks that
have the highest dividend yield also have the highest negative sensitivity
to rising rates. So, what you see when interest rates rise, you see the
highest yielding stocks underperform the market by the greatest amount
because they benefited from the most low interest rate environment.

GRIFFETH: So, what`s the sweet spot? What`s the sweet spot for yields?
If can you say that broadly speaking here, right?

ZIRIN: Broadly speaking, we tend to think about looking for stocks that
consistently grow their dividend and have a dividend yield anywhere from 2
percent to 3 percent, right? So, you sacrifice some of the current yield
because you will make it up in those companies compounding their dividend
growth over multiple years.

HERERA: All right. On that note, Jeremy, thank you very much. Jeremy
Zirin with UBS Wealth Management.

GRIFFETH: And coming up, preparing for another hurricane.

(BEGIN VIDEO CLIP)

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: I`m Courtney
Reagan in Panama City, Florida, where retailers like Home Depot (NYSE:HD)
are full of residents still stocking up before Hurricane Michael. I`ll
take inventory coming up on NIGHTLY BUSINESS REPORT.

(END VIDEO CLIP)

(MUSIC)

HERERA: And here`s a look at what to watch for tomorrow.

The producer price index, a key gauge of inflation, will be released and
with the focus on interest rates, it could move both the bond and the stock
market. Investors will also be paying close attention to comments from a
number of Federal Reserve officials. And Hurricane Michael is on track to
make landfall in the Florida panhandle.

That`s what to watch for on Wednesday.

GRIFFETH: Always love that segment.

And as Hurricane Michael approaches the Florida coast, energy producers are
temporarily shuttering their operations in the Gulf of Mexico affecting
both oil and natural gas production. According to one estimate, about 40
percent of Gulf Coast daily oil production has already been taken off line.
ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX) and Anadarko are some of the
operators that have evacuated their rigs at this point. Both domestic
crude and natural gas prices settled higher in the futures markets today.

HERERA: And as that storm makes its way to land, retailers down there
prepare for the worst. And they`re working hard to get supplies to where
they need to be.

Courtney Reagan is in Panama City, Florida, for us.

(BEGIN VIDEOTAPE)

REAGAN: Retailers are spending critical hours before Hurricane Michael
hits the Florida panhandle flooding logistics to get truck loads of
supplies to stores. This storm is expected to produce high winds, up to a
12-foot storm surge and up to a foot of rain. Supplies like plywood,
generators, gas cans, tarps, chain saws, batteries and more are critical.

Even as mandatory evacuation orders went into effect, many residents are
staying through the storms, lining up for supplies starting this morning.

UNIDENTIFIED MALE: I need a new saw blade and some batteries and making an
extension cord for the generator.

UNIDENTIFIED MALE: I`m shopping for sand today to put in front of the
door.

UNIDENTIFIED MALE: We have so much water. No generator.

REAGAN: Home Depot (NYSE:HD) has deployed more than 300 shipments to its
30 stores in the affected areas.

JACK MILAM, HOME DEPOT STORE MANAGER: We ran out of generators yesterday.
So, we called Atlanta, Atlanta sent us three, four truck loads, we went
through almost 200 today.

REAGAN: Lowe`s has already sent out 200 trucks full of supplies to the 50
stories in Hurricane Michael`s paths. Not all the trucks have gotten to
the stores yet, at least for now. The drivers should be able to be on the
roads and deliver the goods.

LT. EDDIE ELMORE, PIO, FL. HIGHWAY PATROL: Each storm is different. Every
storm that`s coming in is different. We`ve got very limited time as far as
this storm goes. So, we`re going to keep the bridges open as long as
possible.

REAGAN: Jack and Mackenzie Bennett have spent hundreds of dollars
preparing. They have to stay because Jack works in law enforcement.

MCKENZIE BENNETT, LYNN HAVEN, FL. RESIDENT: Stocking up for the storm
preparing. We got a bunch of plywood to go board up the house.

REAGAN: Hurricane Michael formed quickly and is only intensifying,
catching some residents off guard and behind in planning. Retailers too
are closing earlier than anticipated. This Home Depot (NYSE:HD) will close
at 8:00 p.m. tonight and not reopen until 8:00 a.m. Thursday morning.
Nearby, Lowe`s closed at 1:30 this afternoon.

MILAM: I`ve been through about three or four. But this is the most
powerful one that`s been hit, we`re in direct contact with.

REAGAN: Many critical supplies are still available, but residents are
running out of time.

For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan in Panama City, Florida.

(END VIDEOTAPE)

GRIFFETH: Finally tonight, the iconic toy retailer FAO Schwarz is
officially returning to New York City. The company saying it`s planning to
open a flagship in Manhattan`s Rockefeller Center next month, more than
three years after it closed the longtime Fifth Avenue location. Back in
August, we reported that such a move was in the works. And also, FAO
Schwarz also says it plans to grow its presence in international markets
including Canada, China and Europe.

HERERA: Cannot wait.

All right. Before we go, here`s a look at the day on Wall Street. She
tried to say. The Dow fell 56 points, the Nasdaq rose two, and S&P 500
town four.

Got me all tongue tied thinking about FAO Schwarz.

GRIFFETH: I can`t wait for the tall nutcrackers guarding the front door.

HERERA: Exactly.

That does it for us tonight. I`m Sue Herera. Thanks for joining us.

GRIFFETH: I`m Bill Griffeth. Have a great evening. We`ll see you
tomorrow.

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
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Business Report is not and should not be considered as investment advice.
(c) 2018 CNBC, Inc.

 

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