Transcript: Nightly Business Report – October 11, 2018

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

BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Stock market carnage. The
Dow sheds 1,300 points in two days. The trading was volatile. It was
turbulent, and it was leaving a lot of investors with a lot of questions.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Out of control. Why the
president isn`t holding back in criticism of the Federal Reserve.

GRIFFETH: Peak Permian? As interest rates rise, this is as good as it
gets for the American shale boom perhaps. It`s centered around an industry
loaded with debt.

Those stories and much more tonight on NIGHTLY BUSINESS REPORT for this
Thursday, October the 11th.

HERERA: And good evening, everyone. And welcome.

There is only one way to describe today — ugly. And there is only one way
to describe the past two days — really ugly. The selling was widespread.
The volume heavy, the market has become gripped by fears of rapidly rising
interest rates, a possible global economic slowdown and high tech
valuations.

And according to one tally, this is now the worst start to a fourth quarter
since 2008. The Dow Jones Industrial Average shed 545 points to 25,052.
The Nasdaq fell 92 points, and the S&P 500 dropped 57.

Bob Pisani at the New York Stock Exchange tells us what`s behind the
selling and what`s getting hit.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Wall Street`s steep
Wednesday selloff bled over today with the Dow tumbling almost 700 points
at the lows before ending down about 500. Stocks were all over the map,
moving between gains and losses in very choppy trading. But rates continue
to be the main driver overall. The markets looked to the holding steady
until 2:30 Eastern Time when there was a huge burst of selling around some
ETFs in the equity space and treasury bond ETFs, in other words, a rotation
out of stocks and into bonds.

What we`re seeing is a momentum driven flush-out of some of the big cap
names and there also a couple of sector specific stories driving action
today. So, for example, bank stocks have been weak early on because of a
weaker read on consumer prices. They were driven even lower by strong
demand for treasuries at today`s 30-year bond auction, all of which pushed
bond yields down to session lows, generally negative for banks.

And energy lagged on the day, falling on a bigger build up than expected in
crude oil inventories. And that was an issue for all the energy stocks.
Tomorrow will be a key day to watch with bank earnings kicking off,
starting with J.P. Morgan and another big read on consumer sentiment.

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

(END VIDEOTAPE)

GRIFFETH: Now with all of the selling, we asked Mike Santoli to look for
any clues about when the downward pressure might ease up. Here is what he
found.

(BEGIN VIDEOTAPE)

MIKE SANTOLI, NIGHTLY BUSINESS REPORT CORRESPONDENT: After a sharp and
jarring market drop, investors quickly move to asses the damage and search
for signs of stability. And this process is now underway following the
biggest two-day tumble since February.

The damage has been swift and pervasive across the market, and the downside
momentum has not yet let up. Traders are noting that the market has
quickly become oversold, which means the indexes are stretched far below
their recent trend.

Along with the fact that the vast majority of stocks are down more than 10
percent from the high in a short time, this can ultimately set the stage
for a bounce simply as a technical matter. But selloffs can feed on
themselves as traders seek shelter from a more treacherous market action.

One indicator getting a lot of attention is known as the volatility index,
a measure of how urgently traders are buying protective options. This
index has surged from 15 to the high 20s this week and elevated level, but
while the low extremes reached in February that marked the correction low.
Veteran traders like to see this volatility gauge retreat dramatically from
a peak over the course of a trading session, often a sign the market is
calming itself.

Investor sentiment has been turned cautious as well. Typically a nasty
decline spreads worry which also can set the scene for an eventual
recovery. One clue to end this market might find its footing is to whether
the majority of stocks participate in any relief rallies that pop up.
While the skid in the market got rolling with a move to new multiyear highs
in bond yields, it continued after yield stock going up on Thursday,
suggesting it had became a violent rotation out of some of the best
performing tech, industrial and consumer stocks as fears of rising rates, a
possible profit slowdown and unsettled global markets flared up.

There is no reliable way to call an end to these ugly market episodes. But
one consolation might be that the action is not clearly based on evidence
of a weakening economy. This is mostly a stock market event tied to
valuations and investor risk appetites for now, which means the market
itself will have to tell us when these painful adjustments might be nearing
an end.

For NIGHTLY BUSINESS REPORT, I`m Mike Santoli.

(END VIDEOTAPE)

HERERA: And now to the Fed, which is at the center of the concern over
interest rates. Today, the president of the Kansas City Fed said the
central bank will likely continue to raise interest rates. Esther George
says a tightening labor market could lead inflation to accelerate over the
next few years, though she had the pace remains a matter of discussion.

Separately, a new report showed slowing inflation last month. The consumer
price index rose just 0.1 percent, which was less than expected.

GRIFFETH: And the president as we have been reporting has been a vocal
critic of the Fed`s monetary policy. He recently called the Fed`s recent
stance on interest rates too aggressive. But is it?

Steve Liesman reports.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: The president of the
United States not holding back in his criticism of the Federal Reserve`s
interest rate hiking policies, blaming the recent stock market selloff
directly on the central bank.

DONALD TRUMP, PRESIDENT OF THE UNITED STATES: I think the Fed is out of
control. I think what they`re do something wrong. I think the Fed is far
too stringent and making a mistake. And it`s not right.

And it`s — despite that we are doing very well. But it`s not necessary in
my opinion. And I think I know about it better than they do, believe me.

LIESMAN: So, is the Fed crazy? Before answering, it`s worth pointing out
three of the four members of the board of governors chair and two vice
chairs were all appointed by President Trump.

Beyond that, it`s worth looking at how the Fed changed interest rate policy
in the past year, largely in response to the president`s own policies.
Last year, the Fed forecast 2 percent inflation for 2018, 2 percent growth
and 4.1 percent unemployment rate. The median forecast as a result looked
for the Fed to raise rates by about three quarters of a point to 2 percent.

So, what happened? Inflation came in right on target, but growth surge and
unemployment came in well below the forecast. That is, the economy did
better than the Fed expected.

So, the Fed changed its outlook. It now forecasts a full percentage point
rate rise this year compared to 3/4 of a point or just 25 basis points in
the prior forecasts.

Is that crazy? After a huge tax cut, a surge in the deficit and series of
price-raising tariffs, most economists say the Fed is responding
appropriately to the change in the economy.

JOHN RYDING, RDQ ECONOMICS: There`s a rate hike in does in its forecast.
It has three rate hikes next year. My guess is actually the inflation
numbers will push the Fed to four. But none of that is a disaster as long
as companies generate profits.

LIESMAN: The danger is if the economy doesn`t keep up its momentum. In
that case, the Fed`s forecast could be too aggressive. But it can always
dial back its plan to raise rates if the economy weakens. That`s not
crazy. That`s monetary policy.

For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.

(END VIDEOTAPE)

GRIFFETH: Joining us now to help put all of this into perspective.
Joining us tonight is Andres Garcia. He`s founder and CEO of Zoe
Financial.

Andres, always good to see you. Thanks for joining us tonight.

ANDRES GARCIA, ZOE FINANCIAL FOUNDER & CEO: Thanks for having me.

GRIFFETH: So, the selloff this week essentially wiped out gains we`ve seen
over the last three months in the stock market here in the U.S. So, now
what? What — put this in perspective for us.

GARCIA: OK. So, the first thing that I would mention is we`re still what
5 percent from all all-time highs, right? So, let`s take a deep breath.

Another thing that`s important to keep in mind is we have had 23
corrections that are 5 percent or more since March of 2009. So, this is
not — this is not — is not an everyday event but is not totally abnormal.

I`ll give you one more stat. If you go back 39 years, on average, if you
look at the worst intra year drop, it`s 13 percent. So, even if we see
this, you know, 5, 6 percent correction turn to the 10 percent correction,
that is still considered normal when we look at the last four decades,
right? That`s important to keep in mind.

GRIFFETH: OK.

GARCIA: I don`t know what`s happening next. And I think that`s important
to keep in mind as well. Nobody does. So, if it`s s out of your control,
try to basically not to focus too much on the headlines and stay focus on
the long-term.

HERERA: All right. So, what is the best advise then for our viewers who
are watching tonight? Because, I mean, interest rates have been edging up
gradually, but all of a sudden, it seems to be what the market is focused
on.

So, if you have a long-term horizon what is the best strategy to keep all
this volatility in perspective.

GARCIA: Yes, I think that`s the key.

And I`ll say one more thing about the interest rates as well. Let`s not
forget that interest rates, long-term interest rates and short-term
interest rates have been rising a while. In fact, long-term interest rates
have been rising since last summer. And last time I checked, the S&P 500
has been up since then.

The other kind of headline that I see is that trade wars are creating this.
Last time I check, trade wars have been ongoing this year, and the market
is still up 5 percent and it was up 10 percent when this trade war
situation was pretty rough.

But going back to your question, what is under people`s control is how much
they save, do they invest, and do they have a plan for the long-term?
That`s under their control.

And then the last thing under their control is how they react to short-term
volatility. If you keep control of those things in the long-term, you`ll
be okay.

GRIFFETH: Very quickly, technology stocks have been the darling of this
market. The FANG stocks have been getting a lot of the attention in the
last couple of years. And they`re leading this market lower.

What do you do with those guys?

GARCIA: I`m not going to comment on short-term volatility, on tech stocks.
What I would say is that their volatility in general tends to be much
higher than the overall market. So, people forget that they were up 50, 60
percent. They feel it more when they`re down 15 or 20, right?

GRIFFETH: Right.

GARCIA: So, higher risk, higher return, and that`s the essence what you`re
getting when you`re investing in those types of stocks.

GRIFFETH: One of the sacrosanct laws of Wall Street, the higher the risk,
the higher gains.

Andres Garcia with Zoe Financial — always good to see you. Thanks for
joining us tonight.

GARCIA: Thanks for having me.

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

Lear (NYSE:LEA) was upgraded to buy from neutral at Goldman Sachs
(NYSE:GS). The analyst cites solid free cash flow and the potential to
gain market share. The price target is $195. Shares of Lear (NYSE:LEA)
rose nearly 2 percent to $137.54.

The price target for shares of “The New York Times (NYSE:NYT)” was
increased to $32 at J.P. Morgan. The analyst there expects the upcoming
elections to help drive its paper`s digital subscriptions. The firm
maintains the overweight rating. “The New York Times (NYSE:NYT)” shares
rose a fraction to $24.84.

And J.P. Morgan cut the target on Abercrombie & Fitch (NYSE:ANF) to $16.
The analyst cites potential margin pressure as a result of tariffs and
higher wages. The rating remains underweight. The shares finished down
more than 5 percent to $17.99.

GRIFFETH: Still ahead, tipping point? Money had been flowing into passive
investments like ETFs and mutual funds. But is that starting to shift?

(MUSIC)

HERERA: A group of senators are not pleased with Google (NASDAQ:GOOG).
Today, they sent a letter to the company criticizing it for failing to
disclose the data vulnerability that affected hundreds of thousands of
Google (NASDAQ:GOOG) Plus users. Senator Thune said he was disappointed
that Google`s chief privacy officer testified before the Commerce Committee
a few weeks ago and failed to provide information on that breach. Google
(NASDAQ:GOOG) disclosed the breach after it was reported by the “Wall
Street Journal.”

GRIFFETH: And as we have been reporting, of course, the Nasdaq selloff has
been sharp. The index is off more than 9 percent from its most recent
highs into August. And, of course, it is loaded with some very popular
technology stocks, which begs the question, will this group that led the
market higher now lead it lower?

Josh Lipton looks at what may be next.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: High-fliers have been
losing altitude. That`s the story of big tech`s recent performance in the
stock market that has seen names like Alphabet, Amazon (NASDAQ:AMZN) and
Netflix (NASDAQ:NFLX) fall sharply from their recent highs.

Many on Wall Street say the reason for the decline is simple. When there
is a broad, sharp selloff investors tend to sell what has been performing
the best. And that`s especially true when the winners are some of the
biggest, most liquid names in the market. But a major concern is whether
there is a broader rotation happening from sectors with significant growth
potential to those that appear cheaper and more defensive. If that`s the
case, it would be bad news for tech in the quarters ahead.

TIMOTHY LESKO, GRANITE INVESTMENT ADVISORS: Right now, you have a lot of
other crosswinds that are scaring investors. So, this may last a little
while longer as people get comfortable with what goes on in tariffs,
inflation and rates.

LIPTON: Still there are tech bulls on Wall Street. For example, the team
at CFRA Research remains bullish on the tech sector. Next year, they
estimate earnings growth of 11 percent and revenue growth of 9 percent,
both better than the broader market.

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

(END VIDEOTAPE)

HERERA: So, with all of that selling on Wall Street and money flowing out
of passive investments like ETFs and mutual funds, is this setting the
stage for the comeback of active investing?

Amanda Agati is the co-chief investment strategist at PNC Financial and she
is here to share her thoughts with us.

Good to see you, Amanda. Welcome.

AMANDA AGATI, PNC FINANCIAL CO-CHIEF INVESTMENT STRATEGIST: Thank you for
having me.

HERERA: You make the points in the notes that I`m reading here that you
are starting to see that, and it`s been going on for a little bit now.

AGATI: Well, yes, absolutely. We believe very strongly that a comeback or
a resurgence in active management is already occurring. It`s not just
precipitated by the last couple of days of spike in volatility in the
markets.

And actually, the backdrop for active management has been evolving and
improving basically over the course of 2018. So, yes, we think it`s
already underway and likely to pick up steam.

GRIFFETH: But you know why people were rushing to the passive investments,
the exchange traded funds, the index funds, they`re cheaper. The fees are
much cheaper. It`s more expensive to invest with an actively managed fund.

So, what`s the argument to go back for the actively managed funds?

AGATI: Well, I think really we believe strongly that the mix of active and
passive that we employ in portfolios should evolve as the cycle involves.
And so, the rush towards passive investing has really been borne out of the
cycle that we have been in, really since the financial crisis, where it`s
been very long, slow, sluggish growth. And with this as a back drop, we
have seen high correlations among stock. So, large swaths of the market
moving together.

Volatility near record lows if not at record lows over extended periods of
time. And then with the, you know, highly accommodative monetary policy
stance out of the Fed, it`s really made for a back drop of easy access to
cheap capital for companies. So, it really hasn`t created a back drop to
easily distinguish between winners and losers from a stock picking
perspective.

So, we think all of the trends are reversing course now.

HERERA: So, are you telling your clients to have a mix of both active and
passive?

AGATI: Yes, absolutely. So we believe strongly that depending on the
cycle and also depending on the asset class mix, the mix of active and
passive can be different in every client`s portfolio. So, we`re not fully
recommending 100 percent passive in portfolios, just as we wouldn`t
recommend 100 percent active exposure as well. There really is very much a
mix.

HERERA: All right. On that note, Amanda Agati, thank you. Amanda is with
PNC Financials.

AGATI: Thank you.

GRIFFETH: Soaring demand helps Delta`s profits fly high, and that`s where
we begin tonight`s “Market Focus”.

The airline said today that the higher ticket prices and stronger sales for
its premium seats nearly offset the rise in its jet fuel costs. Delta also
managed to keep a tight lid on other costs as well, leading to an overall
earnings beat. And when it comes to rising rates, Delta thinks it stands
to benefit as well.

(BEGIN VIDEO CLIP)

ED BASTIAN, DELTA CEO: The demand we are looking at in 8 percent growth in
Q4 in terms of top line growth. So, demand is continuing strong. At
Delta, we paid down the vast majority of our debt. We got the investment
grade rating back. Our debt level is arguably lowest in our history.

We also have, still have the pension liability and as interest rates climb,
it actually causes the pension liability to come down. So, we`ll probably
be a net beneficiary on the balance sheet from a rise in rates.

(END VIDEO CLIP)

GRIFFETH: Delta shares took off, up more than 3 percent today to $51.48.

In the meantime, Lockheed Martin`s F-35 fighter jets have been temporarily
grounded. The Pentagon says that fuel tubes are being examined after the
Joint Strike Fighter jets crashed last month in South Carolina. The F-35
is the most expensive weapon system in the U.S. military. The inspection
of the 320 jets currently in operation is expected to be completed in two
days. Lockheed shares were down 3 percent to $326.26.

HERERA: PayPal is teaming up with Walmart to provide financial services
and products to their shared customers. The program will mark the first
time PayPal`s mobile app users will be able to take cash out of their
PayPal account in a brick and mortar environment. PayPal shares rose a
fraction to $75.90. Meanwhile, shares of Walmart were down nearly 2
percent to $93.92.

RH, the retailer formerly known as Restoration Hardware, plans to buy back
up $700 million worth of shares. In a statement, the CEO of the home
furnishings company says he believes the stock is undervalued and the
repurchase reflects confidence in the business. Shares of RH climbed 10
percent to $118.62.

GRIFFETH: Walgreens Boots Alliance today became the first Dow component to
report its earnings for this season. And while the company is not facing
direct headwinds from China or rising interest rates, it is trying to
overcome challenges of its own.

Bertha Coombs takes a look at Walgreen`s mixed quarter.

(BEGIN VIDEOTAPE)

BERTHA COOMBS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Walgreens earnings
results topped analyst expectations despite disappointing revenues, driven
in part by strong prescription volume growth. The company says its share
of the U.S. prescription market is now about 22 percent, thanks in part to
the closing of its deal to buy more than 1,900 Rite Aid (NYSE:RAD) stores
earlier this year.

But the firm`s key chief financial officer admitted the profit margins on
specialty drugs were down year over year due to lower reimbursement.
Pharmacy benefit managers and insurers have been driving harder bargains on
brand name drug prices. The drugstore`s overall retail sales were down
from a year ago in part because they purposely deemphasized cigarette sales
as they shift their focus.

Quote: We think we`ve done a good job in terms of shifting the emphasis to
become more of a health, beauty, wellness expert, co-COO Alex Gourlay told
analysts, adding that there`s a lot more to go.

To that end, Walgreens is expanding its relationship with Lab Corp.
They`re going to be bringing more blood testing to 600 of their stores.
It`s a strategic partnership. So, a likely CVS (NYSE:CVS) Aetna (NYSE:AET)
merger poised to ramp up competition in drugstore clinics with more
integrated offering.

For NIGHTLY BUSINESS REPORT, I`m Bertha Coombs, New York.

(END VIDEOTAPE)

HERERA: Coming up, is there trouble in the Permian?

(BEGIN VIDEO CLIP)

BRIAN SULLIVAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: I`m Brian Sullivan
in the capital of the shale oil boom, Midland, Texas, where the combination
of low interest rates and higher oil prices had been great for the
industry. But coming up on NIGHTLY BUSINESS REPORT, why many are concerned
if rates keep rising, all the debt that this industry is based on will come
back to haunt it.

(END VIDEO CLIP)

(MUSIC)

GRIFFETH: We note it`s your favorite segment. Here`s what to watch for
tomorrow.

Earnings from J.P. Morgan, Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC)
are due. Attention will be paid to loan growth and interest margins. And
with the central bank rates and inflation in focus, investors will listen
to what a number of Fed officials have to say about the economy tomorrow as
well. And we`ll get a fresh read on consumer sentiment which has been a
driving force behind spending.

And that`s what we`re watching for on Friday.

HERERA: The Postal Service is proposing the biggest stamp price hike in
its history, to help shore up its finances. Under the proposal, the cost
of a Forever Stamp would rise from 50 cents to 55 cents. The request from
the USPS board of governors must be proved by the postal regulatory
commission.

GRIFFETH: Well, starting in January, Social Security recipients will see
their biggest pay raise in seven years. Beneficiaries will receive a cost
of living adjustment of 2.8 percent for 2019. For the average Social
Security recipient, that works out to an increase of $39 a month.

The annual adjustment is based on changes in the so-called consumer price
index. It affects roughly one in five Americans, including disabled
veterans and federal retirees.

HERERA: Oil prices slumped to more than two-week lows as global stock
markets fell and the government reported a bigger than expected build in
crude inventories. The price of domestic crude settled just above $70 a
barrel. That drop in oil prices coupled with rising rates is putting
pressure on the country`s shale producers, many of them located in the
Permian Basin in Texas.

And that is where we find Brian Sullivan tonight.

(BEGIN VIDEOTAPE)

SULLIVAN: Here in West Texas, long timers in the oil and gas business will
tell you the industry has really built on three things, rock, people, and
money.

The Permian basin of Texas, the richest oil area in America, has plenty of
the first, but always needs more of the other two. And that`s why some
people are beginning to question if the great American shale oil boom has
reached a peak, so-called good rock is plentiful here. It`s estimated
there are tens of billions of barrels of oil just waiting to be sucked out
of the ground.

But to do that you need the oil and gas workers to do the job, something
that is increasingly hard to come by in a city 500 miles west of Houston
with one of the hottest real estate markets in the country.

RON GUSEK, LIBERTY OILFIELD SERVICES: Getting people to move here is a
difficult challenge. Obviously, real estate, particularly troublesome in
that housing is very, very expensive, more expensive here than Houston or
Dallas or someplace like that. And so, for younger families trying to come
here and start up, that`s a lot to ask.

SULLIVAN: Locals have told us, some houses will sell in less than 24
hours. Some workers live in hotels where rates can be eye-popping. A
hotel like this can run nearly $400 per night.

But the biggest concern about the shale boom on Wall Street is not people,
it is debt. Moody`s estimates that some $200 billion of oil and gas
company debt will mature in the next five years, with nearly $100 billion
of that alone coming from the exploration and production companies. We
asked the head of research at Simmons Piper Jaffray about the impact rising
rates could have on the industry.

BILL HERBERT, SIMMONS PIPER JAFFRAY: Of course they matter. Actually, the
collective balance sheet of the upstream sector with regard to EMP and oil
services are in much better shape than it`s been in a long time. Companies
are living with a much closer I guess proximity of cash flow. And there`s
been true capital allocation reform.

So, effectively, I think that was a germane argument two or three years ago
when the companies were living well outside of cash flow. But today,
coupled with pretty responsible balance sheets and living within closer
proximity of cash flow, I don`t think it`s nearly as alarming as it could
have been.

SULLIVAN: A few years ago, many oil and gas companies had almost no free
cash flow. Now, they`ve gotten smarter and they`ve cleaned up their
balance sheets. Low interest rates and higher oil prices have been a great
combination for the industry. But if rates keep moving higher and oil
prices fall due to slowing economy, the booming shale oil industry and the
boom town of Midland, Texas, could find itself between a good rock and a
hard place.

For NIGHTLY BUSINESS REPORT, Brian Sullivan, Midland, Texas.

(END VIDEOTAPE)

GRIFFETH: And before we go, another look at the day on Wall Street.
Another selloff. The Dow down 545 points. The Nasdaq was down 92. The
S&P was down 57.

And don`t forget, we`ve got those bank earnings starting tomorrow.

HERERA: Exactly.

GRIFFETH: It should be very interesting day again.

HERERA: We will see what Friday holds. We hope you`ll join us for that
tomorrow night. In the meantime, 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

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