Transcript: October 19, 2018

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

tested investors` nerves. But it`s not totally clear why stocks moved
sharply higher one day only to tank the next.

rates rise, the American dream of home ownership moves out of reach.

HERERA: Think big. The Mega Millions jackpot hits $1 billion. A number
that`s hard to grasp and wrap your head around.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Friday,
October 19th.

GRIFFETH: And we bid you good evening, everybody. Welcome.

Investors got a wakeup of call of sorts this week. Volatility did return
with big intraday swings and choppy trading sessions. What was peculiar,
though, about this week was the news didn`t change from day to day.

But that didn`t stop the market from rising and falling sharply, and today
was no different. In the end, major indexes finished mixed with the Dow
gaining 64 points. It`s at 25,444 after sliding more than 320 points
yesterday. The Nasdaq was down 36. The S&P fell 1.

And for the week, after all the wild swings, we only saw fractional gains
and losses. And they certainly don`t tell the whole story.


GRIFFETH: A choppy week marked by continuing rising geopolitical tensions
between the U.S. and Saudi Arabia and concerns about the Chinese economy
and an Italian budget crisis. All of it had investors wondering if the
U.S. economy could stay as strong as it looks now.

The market struggled all day and moving between gains and losses.

On Monday, the Dow ended down 89 points. Then strong earnings from a broad
swath of tech, health care and financial companies set the stage for a
relief rally on Tuesday and the week`s biggest move, a gain of 547 points.
But the relief was brief.

HERERA: The Federal Reserve hints at more rate hikes.

GRIFFETH: On Wednesday, minutes from a recent Fed meeting confirmed
beliefs that another interest rate hike is coming in December. The Dow
dropped more than 300 points early on before finishing down 91.

Adding to the global plate of worries on Thursday, China`s economic
slowdown and European central bank leader Mario Draghi who worried out loud
about E.U. members spending beyond their means. The Dow dropped 327

And today, another bumpy ride. A gain of more than 200 points disappeared.
But the Dow bounced back again and finished up 64.

In many ways, the wild ride traces back to last week`s two-day loss of more
than 1,300 Dow points. Since then, a lot of bumps.


HERERA: And the question investors want to know is whether this bumpy ride
will continue.

Mike Santoli digs into that.


hit some turbulence in October with daily swings of at least 1 percent in
the five of the past seven days and its sharpest drop in eight months. So,
is this just another test of the market`s resilience or the first phase of
a tail spin into a deeper, longer lasting correction of the sort investors
endured early in this year and before that, in late 2015?

Traders are dissecting the day to day gyrations for clues. For the moment,
the market lows set a week ago on Thursday, on the S&P 500. That was down
7 percent from the record high of a month ago has held up and the jumpy
rallies and selloffs that followed are typical of a market trying to steady
after a swift setback.

Longtime Wall Street wisdom holds that a good market bottom is often re-
tested over the course of days or weeks, to see whether bargain hunting
investors again step in at those prices. This is exactly the pattern that
unfolded between February and April of this year.

The optimistic take on the recent action says that simply a choppy
adjustment to higher interest rates global market weakness and the flagging
leadership of big steak stocks, rather than the stirring of the drastic
downturn. Earnings are generally coming through strong for add third
quarter, and seasonal patterns tend to turn positive from about in time in
October through the end of the year.

But the age of the economic expansion and concerns about the eventual end
have become more pervasive in recent weeks. The effect of tax cuts and
fiscal spending hikes were weighing next year and the Federal Reserve seems
intent on lifting interest rates another three times or so in 2019 despite
risks of slowing growth.

In the meantime, trade conflict has dropped China`s market into a bear
market and European markets are all down more than 10 percent from their
highs. The way these cross-currents play out in the coming weeks will
determine whether any further weakness in the U.S. stocks is a simple re-
test of buyers resolve or relapse into something more painful.



GRIFFETH: Now, one theory the that tries to explain the recent volatility
is that it has been driven by computers, and sophisticated algorithms.
That was one of the explanations offered yesterday by David Solomon. He is
the new CEO at Goldman Sachs (NYSE:GS).


DAVID SOLOMON, GOLDMAN SACHS CEO: The growth of passive products, index
product, ETF, the growth of systematic trading and also you know machines
more involved in what we do. All those things are untested over any
duration of time with severe stress.

Now, when we see a little bit of stress, you know, you can see reactions
that might lead to you believe that there is a risk that would more
significant stress that could play a bigger role but I wouldn`t predict
that, but it`s something we watch. There is no question looking at last
week, some of the selling is the result of programmatic selling, because as
volatility goes up, some of these algorithms force people to sell.


GRIFFETH: Let`s turn to our friend, Kenny Polcari. He`s director of the
New York Stock Exchange floor division at O`Neil Securities, to talk about
computerized trading and support.

Kenny P., nice to see you my friend.


GRIFFETH: So, there were times this week I have to admit when we were
scrambling to come up with a reason for an intraday swing, whether it was
up or down. How much of it do you think is preprogrammed computerized
trading right now?

POLCARI: A lot of it is preprogrammed at this moment because what you have
to understand is what happened last week, right, as rates shot up, as the
market was ill prepared for the surge in rates then you had the selloff.
The selloff produced a lot of internal damage. And you know, internal
damage meaning to the broader market as well as to individual names.

And that damage exacerbated by the speed at which the markets and
individual stocks can trade because of the automation.


POLCARI: The automation is one. The market fragmentation is the other.
Remember, the New York Stock Exchange is no longer the central marketplace.
There are 10 exchanges and 40-plus alternative venues where people can buy
and sell stocks. And so, therefore, it`s a fragmented marketplace which
also adds then to the volatility.

HERERA: And for the average — for the average long-term investor, Kenny,
what do they need to look at in a week like this where you see the violent
swings and they wonder, should they sell or not? Can you give them a
nugget of advice as to when to pull the trigger given the automation that
we have?

POLCARI: Sure, I`d love to.

So, here is the deal, right? If you are long-term investor, you got a
well-thought out plan and the stocks that are in your portfolio are ones
that have a good story, they`re strong, you stay on top of it, you make
sure the story has not changed. And then when moves like this happen in
the broader market gets hit for whatever reason, whether it`s, you know,
talk of interest rates, whether surging interest rates that all of a sudden
cause the selloff, the stocks that you have that are in your portfolio,
that are good names with a good story, those are stocks when they go on
sale, the way we saw are stocks that you should consider adding positions
to or putting more money to work in.

The last thing you should do is run out the door on that unless of course
the story on that particular stock has change. If it`s changed, then
that`s a different story.


POLCARI: But if it hasn`t changed and the stock goes on sale, then that
should be an opportunity for a long-term investor to put more money to
work. The long-term investor should not listen to the daily noise, right?
The noise that`s created by this automation. They need to learn to
eliminate that.

GRIFFETH: Before you go, I think it`s important to note very quickly that
I can hear Larry Kudlow or Jack Vogel saying that in the long run, it`s
earnings that matter to the stock market and prices and you`re right. The
short-term swing is just noise, right?

POLCARI: And the short-term swings in this case is being created by not
only the surge in interest rates but some of the geopolitical issues,
right? What`s happening in Saudi Arabia, what`s happening, you know, down
in D.C. And all that stuff, although creates short-term noise does not no
the long term price stocks.

GRIFFETH: Sounds like you had a busy week with the voice there I can tell.


GRIFFETH: Kenny Polcari with O`Neil Securities — always good to see you.
Thanks for joining us.

POLCARI: Yes, bye-bye.

HERERA: And the Federal Reserve official is adding another item to the
list of risks to the market. According to “Reuters”, the president of the
Atlanta Fed said the case of missing journalist Jamal Khashoggi is being
monitored because it might lead to sanctions that could disrupt the oil
markets. Rafael Bostic is believed to be the first central banker to
comment on that case.

Today, the price of domestic crude climbed although it was down overall for
the week.

GRIFFETH: Well, China`s economic growth is slowing. The world`s second
largest economy today reported its slowest quarterly growth in nearly a
decade and some global companies are starting to feel the effects as well.

Seema Mody explains.


cooling down just as the U.S.-China trade tensions heat up. Chinese
officials blamed external factors like higher rates and trade frictions for
the drop in growth. China`s Central Bank followed with new measures to
boost the economy, an attempt to ease investor concern about growth
stalling. The slowdown in the world`s second largest company is ratcheting
up financial pressure and companies that do business there.

slowing. And it`s really masking I think a much bigger problem that`s
developing. The owners of businesses that I know and investors in China
are deciding that the trade war with the U.S. is morphing into a longer
term cold war of sorts and that it`s not going away when the tariffs go
away if they do.

MODY: This morning, French tire maker Michelin warned of a slowdown citing
weak demand from China. It comes after luxury conglomerate LVMH reported a
drop in sales from Chinese shopper, a concerning sign as China is a growth
market for high end fashion retailers.

Analysts at Oxford economics say a string of disappointing data over the
past month from China suggest a broader based slowdown is now emerging,
inconvenient timing as tensions between the United States and China
continue to intensify.



HERERA: And from China to Europe. European Union officials continue to
spar with Italy over its budget. Investors around the world are watching
to see how this is going to play out. Even as the E.U.`s budget chief
tries to calm concerns that Italy`s financial problems could spread.

Willem Marx is in Brussels for us tonight.


ECB president Mario Draghi and the European commissioner for economics,
Pierre Moscovici, had strong words of warning to Italy`s new government and
its future spending plans. Draghi`s said the eurozone countries, including
Italy, must follow budgetary rules. While Moscovici expressed, quote,
serious concerns about Italy`s draw up budget, it was submitted to the E.U.
at the start of the week.

Senior politicians in Rome did not react kindly to the criticism. One
deputy prime minister, Luigi de Maio said bureaucrat there in Brussels
should not, quote, pontificating, and instead find out what ordinary
Italians really want. His far right counterpart in Italy`s coalition,
Matteo Salvini, said the European warning simply showed Italy was in the

Today, still in Rome, Commissioner Moscovici has insisted the E.U. has no
intention of interfering in the Italy`s economic affairs, but the bad blood
is unlikely to end any time soon. Italy must formally respond to his
concerns by Monday and in the meantime today, Italian 10-year bond yields
with a four-year high, the country`s stock market touched a 21-month low,
and bank stocks in particular took a hammering.

For NIGHTLY BUSINESS REPORT, I`m Willem Marx in Brussels, Belgium.


GRIFFETH: Time to take a look now at some of today`s upgrades and

We begin with Disney (NYSE:DIS) tonight. It was upgraded to overweight
from equal weight at Barclays. The analyst cited the company`s focus on
streaming and its potential for growth in that area. The price target
$130. Shares of Disney (NYSE:DIS) rose 2 percent to $118.90 today.

Ford downgraded to equal weight from overweight at Morgan Stanley
(NYSE:MS). The analyst cited limited progress from the automaker`s
restructuring and said the dividend may be at risk. Price target, $10.
That stock fell a fraction to $8.50.

HERERA: Ebay was downgraded to hold from buy at Stifel Nicklaus. The
analyst says PayPal`s earnings release yesterday suggests weaker sales
trends at eBay (NASDAQ:EBAY) in the third quarter. The price target is
$35. The stock dropped more than 8 percent to $28.75.

Apple (NASDAQ:AAPL) is rated outperform in new coverage at Wedbush
Securities. The analyst there see strong iPhone demand and cites that
company`s growing services business.


DAN IVES, WEDBUSH MANAGING DIRECTOR: Services we think that business alone
as it is about half a trillion, call it $450 billion. I think that`s
really what the street now is starting to resort — sort of reanalyze that,
and the multiple continues to expand.


HERERA: And the price target is $310, that is the highest on Wall Street.
Shares rose 1.5 percent to $219.31.

GRIFFETH: Still ahead: Stock surge, the Dow component that proved doubters
wrong, at least for today.


GRIFFETH: The Treasury Department unveiled new rules for investors looking
to finance development in underserved communities. In return, those
investors would receive significant breaks. The proposal would govern
investments in so-called opportunity zones. These were created by last
year`s new tax law.

Treasury officials expect as much as $100 billion in private capital to be
funneled into those areas.

HERERA: Existing home sales fell by the most in more than two years. The
National Association of Realtors says that sales dropped 3.4 percent last
month as a combination of higher prices and rising mortgage rates made
homes less affordable. And for those already in the process of buying a
home, the rise in rates is changing their plans.

Diana Olick has our story.


Richeson signed a contract on a newly built home in Austin, Texas, at the
start of this year, when interest rates were low.

NATASHA RICHESON, NEW HOME BUYER: One of the things that we considered was
where the interest rates were going, because of what we heard about
everything you know possibly going up in the future. And that`s one of the
reasons we took the step when we did. And now, we are in a different
place, even just eight months later.

OLICK: Because construction is taking longer than expected and the rate
they locked in long ago expired. Now with rates a full percentage point
higher than they were at the start of the year, they are looking at a whole
new set of numbers.

SCOTT RICHESON, NEW HOME BUYER: We don`t anticipate it being a problem
getting another loan. But at the same time it`s definitely doesn`t feel as
a solid foundation as it did when we had it already approved.

OLICK: While Scott and Natasha will still buy the home, they will likely
dial back on the amenity like electronics and higher end appliances.

S. RICHESON: There`s just a lot of kind of uncertainty as to what we`ll be
able to afford by the time we buy and we lock in the interest rate.

N. RICHESON: We thought we had a plan, but now, it`s a little — we`ll
we`re just nervous.

OLICK: For others, though, higher rates could knock them out of home
ownership entirely. The Richeson`s agent B Barnett says some of her buyers
have decided to wait and so have some of her sellers.

B BARNETT, REAL ESTATE AGENT: I have several customers decided to lease
properties right now instead of sell, because they are afraid with those
raising rates that they won`t be able to get the same market value they
once did earlier this year.

OLICK: Other sellers are staying put because they don`t want to move and
lose their current low rate. Moving up to a better home now also means
moving up to a higher rate.

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


GRIFFETH: To earnings now in and Procter & Gamble`s very big day. The Dow
component reported strongest sales growth in five years and said it is
raising prices on a handful of products. And that sent shares up the most
in a decade.

Sara Eisen takes a look at P&G`s better than expected results.


Procter & Gamble`s best sales growth in five years. CEO David Taylor said
when it comes to the improvement that they are seeing, it is broad and it
is global.

together in terms of the absolute top line growth. But what you see in
this trend, you know, three months ago, six months ago you saw North
America, U.S. rather turning positive. And now, we are positive on share
on pass one, three, six months. You`ve seen the sequential improvement in
China. We`re now at sequential improvement in the — our Latin America

We are starting to overcome some of the very invite headwinds in the Middle
East. We are making good sequential progress on India. But it`s really
focused on superiority of the brands across the elements we talked. And
the productivity helped offset what has been a very difficult external

EISEN: The take away, this quarter is a reflection of both a better global
economy, especially in the United States, and P&G`s turnaround strategy
starting to bear fruit. That explains the growth that the company saw in
its beauty business. Home care and even grooming which had been doing
poorly lately, shedding brands streamlining decision-making by geographies
and specific products, just some of the move Taylor has made over the last
years to get P&G growing again.

Now, despite this momentum, the company did keep its long-term outlook
intact, saying it expects to grow 2 percent to 3 percent organic sales this
year. Taylor told me they`re being conservative because the macroeconomic
environment globally is challenging. That has hurt P&G in the form of a
stronger U.S. dollar and higher commodity costs putting pressure on their
input costs. They`re also passing the higher price onto the consumer,
something that`s going to impact spending over the next few quarters.



HERERA: The denim business is fading at VF Corp. And that`s where we
begin tonight`s “Market Focus”.

The owner of Wrangler and Lee jeans issued a bleak forecast for its jeans
business and reported slow sales at some of its outdoor branch, including
Timberland (NYSE:TBL). That offset quarterly results that were stronger
than expected. The stock tumbled more than 10 percent to $77.76.

The SEC has opened an investigation into Honeywell`s accounting. The
company says it is cooperating with the probe. Separately, Honeywell
reported better than expected earnings and revenue in the most recent
quarter, but warned that the ongoing trade war between the U.S. and China
will pressure its margins in 2019, potentially costing it hundreds of
millions of dollars. The stock fell 1 percent to $153.47.

GRIFFETH: Trade concerns have apparently eased at Kansas City Southern
(NYSE:SO) (NYSE:KSU). The railroad operator said today it supports the
reworked trade agreement between the U.S., Canada and Mexico. And added
that steel and aluminum tariffs still need to be worked through as the CEO
put it. The company also reported a 30 percent increase in profit for the
most recent quarter. Shares rose more than 3 percent to $106.12 today.

And it is not often that a CEO belittles Wall Street analysts and investors
during the company`s earnings conference call, but that`s exactly what
happened today when the head of Cleveland Cliffs said analysts can`t read
numbers, his words. He also went after one unnamed person with jarring


embarrassment to your parents. With this being said, we are going to use
money to reward the long-term shareholders. So, if the stock continues to
go down, based on this kids that play with computers and somebody else`s
money, we are going to buy back stock. We are going to screw this guy so
badly that I don`t believe that they will be able to only resign. They
will have to commit suicide.


GRIFFETH: Well, the mining company stock has been heavily shorted and
shares today fell more than 3 percent to $11.05 despite reporting an
increased in profits and improved revenue. Clearly, that is what upset the
company`s CEO today.

HERERA: Now to our weekly market monitor who says he is finding
opportunity in under valued small cap tech stocks right now. He is Jay
Kaplan, co-portfolio manager of Royce Dividend Value Fund.

Welcome. Nice to have you here.

to be here.

HERERA: I can`t wait to get the names out.

Insight Enterprises (NASDAQ:NSIT) is your first pick. Why do you like it?

KAPLAN: They sell all technology hardware and software to everybody. So,
they are agnostic about winners and products. There is more cyber, there
is more cloud, there`s more services. Stock sells 11 times earnings with
the Russell selling at 25 times earnings.

And we think the growth is there for a couple of years. It should really
be good.

GRIFFETH: Vishay Intertechnology (NYSE:VSH). Now, this is a specialized
semiconductor company. You`re a dividend fund. You like the dividend on
this one, among other things.

KAPLAN: Yes, it`s almost 2 percent yield. They sell passive components.
There is a worldwide shortage of capacitors right now. And autos get more
electric, there`ll be more of this in cars.

This problem is not going to be solved until well into 2019. So, that`s
really good for business.

HERERA: So, my car is going to get even smarter. It`s already smarter
than me.

KAPLAN: It`s going to be crazy.

HERERA: Let`s turn to Electro Scientific Industries (NASDAQ:ESIO). Trades
at about 7 times earnings.

KAPLAN: Yes, it`s a turnaround with new management. They make laser based
machines that drill holes thinner than a human hair. So, the connecters
inside your cell phone, itty bitty holes. Business is down right now, but
this should be really, really good over the next few years. And at seven
times earnings, I think it`s good for long-term.

GRIFFETH: So much of the interest, of course, has been with the big

KAPLAN: Of course.

GRIFFETH: These so-called FANG stocks. Why do you look to small caps?

KAPLAN: Well, first of all, Royce, we`re small cap investors, so that kind
of helps. But when you`re away from the news flow and you can really think
about company fundamentals, and great valuation, without the noise and you
have a long-term holding period that`s more than a week or a couple of
months, three to five years, you can find great companies that are going to
do very well for you over the long period of time.

HERERA: As you point out very quickly, a number of them also a pay a
fairly decent dividend.

KAPLAN: They do.

HERERA: So, you get paid while you wait.

KAPLAN: We love dividends. Dividend performing stocks in the Russell over
time have outperformed non-dividend payers.

HERERA: Thank you so much, Jay. Nice to have you here.

KAPLAN: Thank you, guys.

HERERA: Jay Kaplan with the Royce Dividend Value Fund.

And to read more about Jay`s picks, you can head to our website

Coming up, the Mega Millions jackpot hit a record. But what`s a billion
dollars really worth?


HERERA: The Mega Millions jackpot hits $1 billion. The largest ever. But
can you really grasp what a billion dollars is worth?

Frank Holland asked around in Hackensack, New Jersey.



play the Mega Millions today. People across the country dreaming about the
ten-digit jackpot, despite long odds, one in 302 million.

UNIDENTIFIED MALE: Me and my wife would be all over the world. Take a
trip here and there. Invest, you know, things you do when you win that
kind of money.

UNIDENTIFIED FEMALE: I think I`m going to do more because with so much
money, you think why not take a chance? It`s only a buck or two.

HOLLAND: Before taxes, the winner would have twice the net worth of LeBron
James, Taylor Swift and George Clooney. Also a bank account bigger than
the gross domestic product of island nations Samoa, Saint Kitts and Nevis,
and Tonga.

But most winners take the lump sum payment for this drawing, it`s $565.5
million and even the winner won`t be lucky enough to escape their tax bill.
If you estimate at least 30 percent going to Uncle Sam and the state, that
leaves about $396 million — a pretty good return on investment for a two-
dollar ticket.

UNIDENTIFIED MALE: Yes, for two years can`t beat that. Can`t beat that.
I mean, that`s a chance you take in a lifetime.

HOLLAND: If no one wins the Friday night`s drawing, it would roll over to
$1.6 billion, a new U.S. record and it could grow even higher. Depending
on how many more people play.

For NIGHTLY BUSINESS REPORT, Frank Holland in Hackensack, New Jersey.


GRIFFETH: Finally tonight, October 19th, 1987, ring a bell? Remember
Black Monday? It was 31 years ago today when the Dow plummeted by 22
percent. Still, the largest single day percentage crash in U.S. history.
Point-wise, the Dow fell 507 points that day.

Now, if the same percentage decline happened today, it would amount to a
decline of 5,700 points. But as we know, circuit breakers have since been
created to try to prevent declines like that from happening again, at least
not without pauses during the day to let things settles down.

HERERA: I don`t think either one of us will forget that day.

GRIFFETH: You remember it very, very well.

HERERA: Indeed.

Before we go, here`s a look at the final day`s numbers on Wall Street. The
Dow gained 64 points, the Nasdaq was down 36. The S&P 500 fell 1. And for
the week, all — after all those wild swings, we saw only fractional gains
and losses. But there is always next week.

GRIFFETH: That`s right.

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

GRIFFETH: I`m Bill Griffeth. Have a great weekend. See you Monday.


Nightly Business Report transcripts and video are available on-line post
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