Transcript: Nightly Business Report – December 21, 2018

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

BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: What a week. Stocks tank
again. The Dow and Nasdaq have their worst week since the financial
crisis. Now the question becomes, could a falling stock market sink the
economy?

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Hanging in. As the housing
market begins to soften, investors remain focused on one area that`s still
surprisingly strong, apartments.

GRIFFETH: And portfolio picks. This week`s market monitor has three names
he says will continue to gain market share even if the economy slows down.

All that and much more tonight on NIGHTLY BUSINESS REPORT. It`s Friday,
December the 21st.

HERERA: Good evening, everyone. And welcome.

The first day of winter brought a big chill to Wall Street. Stocks capped
off a brutal week by plunging. The Nasdaq right into bear market
territory. And that may be the good news. That`s because the broader S&P
500 is moving towards it as well.

And as for the Dow and Nasdaq, it was the worst week since the financial
crisis. The Dow was down nearly 7 percent this week, its biggest weekly
drop since October of 2008. The Nasdaq lost more than 8 percent, its worst
since November about a decade ago. And the S&P fell 7 percent, its most
since August of 2011.

As for today, the Dow fell 414 points to 22,445. The Nasdaq dropped 3
percent or 195 points. And the S&P gave back 50.

Bob Pisani has more.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: It was another wild
session on Wall Street. The Dow closed down more than 400 points after the
850-point swing through the day. The S&P capped off the worst week in
seven years. The Dow suffered its worst in a decade. The five trading
days left in December still on pace to be the worst for both indices since
1931.

Today was a heavy volume day. A number of options and futures expiring all
at once. That`s a quadruple switch, so a lot of the selling may not be
driven purely by fundamentals.

But the big headlines are worth noting. First, New York Federal Reserve
President John Williams took on a friendlier, more flexible tone than the
markets heard from Jay Powell and stocks rally almost 40 points on those
comments from the Dow. But the rally fizzled out. All rallies have done
that recently because investors have been more apt to sell on the rallies
and buy on the dips.

Add to that, signs of a looming government shutdown, plus a stormy
resignation from defense secretary, General Jim Mattis, and finally,
contentious comments from White House economic adviser Peter Navarro about
both the Fed and China and all that didn`t help sentiment towards the
close. Naturally, stocks took on a defensive tone. Utilities led the
charge while tech and communications services like Facebook (NASDAQ:FB),
Netflix (NASDAQ:NFLX) and Twitter all led to the downside.

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

(END VIDEOTAPE)

GRIFFETH: Now the market declines in December have also led to concerns
that Wall Street`s gloom could be Main Street`s doom. In other words,
falling stocks could actually create an economic slowdown. The reason: the
wealth effect.

Robert Frank explains.

(BEGIN VIDEOTAPE)

ROBERT FRANK, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Wealth Effect is
a theory that when people`s wealth goes up, they feel more confident and
they spend more. Economists figure that for every dollar a household adds
in wealth, either from stocks or their home, they spend an additional 2 or
3 cents.

But the Wealth Effect also works in reverse, and it`s even stronger on the
way down. When you lose a dollar in wealth, you are likely to reduce
spending by up to 5 cents. Now, the stock market lost over $2 trillion in
market cap just in December. That could reduce spending by over $100
billion.

Mark Zandi of Moody`s Analytics said that if the December losses hold, the
negative wealth effect could cut a half percent from GDP in 2019. And he
said says the effects are greater today than in the decades past because
retiring baby boomers have so much invested stocks. Now, one big caveat,
real estate, which makes up the bulk of wealth for most Americans has not
fallen as much as stocks. So, that could help offset any impact.

Now, there are three sectors that would most likely be hardest hit —
airlines, home improvement, building and hardware, and hotels. It turns
out the first thing people do when their investments are down is reduce
their vacations.

For NIGHTLY BUSINESS REPORT, I`m Robert Frank.

(END VIDEOTAPE)

HERERA: And joining us to talk more about the wealth effect is Anthony
Chan, chief economist at JPMorgan (NYSE:JPM) Chase.

Good to see you, Anthony. Thanks for joining us tonight.

ANTHONY CHAN, CHIEF ECONOMIST, JPMORGAN CHASE: Great to be here.

HERERA: Robert mentioned housing. You are also watching housing very
closely for this wealth effect.

CHAN: Well, certainly, when you look at a lot of studies. And, of course,
Robert Shiller who won a Nobel Prize and others have done studies that find
that the housing wealth effect is twice as strong as the wealth effect from
stocks. And we know that housing prices are up. In fact, on a year over
year basis case shows the way to measure housing prices nationally are up
5-1/2 percent.

Now, if you look at the S&P 500, it`s down 10 percent. But if the wealth
effect is stronger for housing, these things basically wash out. Let`s not
lose sight of the fact that energy prices are down quite significantly and
in fact all around the world will add almost $650 billion of extra
purchasing power to consumers around the world.

To the extent that the U.S., consumers — the U.S. 25 percent of world GDP,
that means up to $$160 billion with the extra purchasing power on
consumers. All of this should offset and even Mark Zandi has done studies
that actually find that the wealth effect for housing is much, much
stronger for housing than it is for stocks.

And then finally, if you look at household net worth, it`s up
significantly. And don`t forget in 1987, in one single day, the stock
market dropped by 22.6 percent on the Dow. And yet we have to wait three
more years before a recession.

GRIFFETH: However, looking back on Robert`s report, he points out that
baby boomers. I mean, things have changed a bit since 1987 in terms of
demographics. We have more baby boomers close to if not in retirement at
this point. And they have an awful lot of their money in the stock market.
So, isn`t there a disproportionate affect for them in terms of what the
wealth effect from the stock market would do to them as the market goes
lower?

CHAN: Oh, there is no question that it`s going to have a disproportionate
effect on those individuals. But remember that if you look at household
net worth all the way back to when this economic expansion began, we`re
talking about a $49 trillion increase. We`re now at $109 trillion. We`re
talking about a $2.5 trillion reduction in market cap in the equity market.
And, of course, that`s not all U.S. consumers. We have foreigners,
institutions.

So, when you look at the numbers and the great are context of how much
wealth has been created since this bull market began or since in economic
expansion began, it is not all that significant. And, finally, look at
what happened to consumer confidence today. It looks like consumers have
not gotten the memo that the stock market is coming down.

HERERA: Very true.

CHAN: Because the University of Michigan is pretty strong.

HERERA: Anthony Chan — Anthony, thanks so much.

GRIFFETH: Aloha.

HERERA: Aloha and happy holidays all at once. Anthony Chan with J.P.
Morgan Chase.

GRIFFETH: The other thing the market watches is the funding fight in
Washington over the border wall. Now, if a deal cannot be struck by
midnight, parts of the federal government will shut down.

John Harwood joins us from D.C. this evening.

At least they have been talking late in the day. Where do we stand right
now, John?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: I think, Bill, it`s
likely that the government is going to shutdown. That`s the 25 percent of
the government that hasn`t been funded already. But talks are ongoing.
And nobody is ruling out Democratic, Republican, House, Senate, White
House, nobody is ruling out the possibility of some sort of deal tonight.
It`s just we don`t have one yet, talks still going on on the Senate floor,
over in the House, and, of course, with the president, Vice President Pence
and others in the administration.

HERERA: So, handicap it for me, John, is there a chance the president gets
some funding for the border wall or not?

HARWOOD: Well, I think the president has a chance of getting some funding
for border security. As of now provisions in homeland security spending
legislation have barred money to go for a concrete wall. Now, the
president has instead been suggesting it will be steel slats can you see
through, something different than he talked about in the campaign. It`s
possible there is wiggle room in terms of what you call what the money is
going for. That`s where a compromise will lay if there is one that`s
achieved.

GRIFFETH: But if there is no compromise or a path to progress as they`ve
been trying to work on here, what happens in midnight tonight?

HARWOOD: Well, not all that much, because we`re going into the weekend.
That reduces the stakes of a shutdown. And, of course, 75 percent of the
government is funded.

However, if nothing is reached over the weekend, the House is out until at
least noon tomorrow. If no deal is reached over the weekend, then this has
the potential to drag all the way to early January when we come back with
the new Congress and the standoff resumes then.

GRIFFETH: All right. John Harwood on the case, thanks, John. We`ll see
you later.

HERERA: Stocks actually got a lift in the morning after New York Fed
President John Williams said the central bank is open to rethinking its
stance on interest rates. He sat down with our Steve Liesman.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: For a few moments
today, it appeared as if New York Fed President John Williams would play
the role of Santa Clause, igniting that Santa rally which often happens at
year end.

And markets did rally strongly while Williams sat for the CNBC interview
and said the Fed is listening to the negative outlook emanating from
markets these days, and that the central bank is not locked into a path of
tighter monetary policy.

JOHN WILLIAMS, NEW YORK FED PRESIDENT: We are listening carefully to
what`s happening in markets for two reasons. One is financial conditions
have an important influence on the economic outlook. And we take that into
account and think seriously about that. Second, I think we are hearing
something important from markets and that is a concern around risks to the
economy and potential slowdown further than we currently expect in our base
case.

LIESMAN: Markets pay close attention as Williams is one of the most
important members of the Fed. He serves as the vice chairman of the rate-
setting Federal Open Market Committee. He added to the gift saying there
is flexibility in the Fed`s controversial plans to reduce its balance sheet
next year by $600 billion.

WILLIAMS: We do view that the movements in the federal funds rate is our
primary instrument to adjust monetary policy in this baseline outlook. If
there is material deterioration in the economic outlook, obviously, we
would reconsider our path for the short-term interest rate and would adjust
policy to the best achieve goals. But we also said we would reconsider the
balance sheet normalization and may even end that process.

LIESMAN: The Fed had purchased trillions of dollars of treasury and
mortgage securities during the financial crisis to help drive down interest
rates. It`s now letting those securities roll off as they expire,
shrinking its balance sheet. But markets are concerned this adds pressure
to the selloff and to the economy.

At his press conference on Wednesday, Fed Chairman Jerome Powell had said
the balance sheet plan was essentially on autopilot. But markets rallied
strongly during the Williams interview, however briefly. Leaders are
selling off as other concerns like the government shutdown seemed to take
over.

The conclusion may be soothing words alone from the Fed will not be enough
to divert Santa`s sleigh and ensure Jolly Old St. Nick stops this year on
Wall Street.

For NIGHTLY BUSINESS REPORT, I`m Steve liesman.

(END VIDEOTAPE)

GRIFFETH: Time to take a look at some of today`s “Upgrades and
Downgrades”.

Altria was downgraded at Citi to sell from neutral today. The analyst
there is saying that Altria`s $13 billion stake in e-cigarette maker Juul
effectively signals Altria has doubts about the future of its core
business. The price target now $45 a share. Shares closed at $49.09.
That was down more than 2.5 percent in today`s trade.

And J.P. Morgan raising its rating on Nike (NYSE:NKE) to overweight from
neutral, following that company`s earnings that we told you about last
night. The analyst cited the valuation of shares as attractive following
that pullback we`ve seen in the stock since September. The price target
now $85. And Nike (NYSE:NKE) closed at $72.37. That was up 7 percent,
very strong.

HERERA: Following the U.S. indicting a pair of Chinese nationals for
hacking American businesses, and engaging in economic espionage, China has
fired back, strongly.

Eunice Yoon has the reaction out of Beijing.

(BEGIN VIDEOTAPE)

EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Beijing has come out
swinging to fight the U.S. charges of corporate espionage. The foreign
ministry issued a statement today saying the U.S. has made up facts and
created noise. And argued that the Chinese government has never
participated or supported anyone in any way in corporate cyber theft.

The ministry countered that the U.S.`s large scale cyber spying is open
secret and that China would never accept these accusations.

Beijing sharper view comes after the U.S. Justice Department alleged that
two Chinese nationals conducted a global campaign of cyber theft against
the U.S. and its allies. U.S. prosecutors say the two are linked to the
Chinese government, targeting 45 American tech companies, the U.S. military
and agencies like NASA.

Sources told “Reuters” that the hackers used IBM and HP Enterprise servers
to reach clients. Neither company would speak specifically about the
claims, but said customers security was a priority. The U.K., Australia
and New Zealand joined the U.S. criticizing Beijing, China slammed their
remarks too, calling them slanderous.

The state media here has also been critical, blaming the U.S. of, quote,
cultural arrogance. The argument is that America`s elite can`t fathom the
idea that China can achieve its own economic rise without stealing American
technology. Difficult to say how all this is going to make the environment
conducive to trade talks.

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

(END VIDEOTAPE)

GRIFFETH: And up next, the slowdown in-housing is causing unexpected
strength in apartments. A look at how investors are taking advantage.

(MUSIC)

HERERA: The recent weakness in home sales has investors kind of surprised
about strength in another housing sector.

Diana Olick has more from Washington.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Barely a year ago as
construction cranes swarmed over major U.S. cities investors and analysts
worried that the rental apartment market was overheated and overbuilt.
Just a year later, they are surprised at how strong the market still is.

JOHN PAWLOWSKI, GREEN STREET ADVISORS: The demand has been better than
expected. It`s been a stickier tenant base and pricing power at the tenant
base, again, in the face of elevated supply has simply surprised us.

OLICK: New apartment units being rented out quickly, in fact, at the
fastest pace in three years, according to the U.S. Census. Apartment
construction took off in 2012 and reached a 20-year high in 2017. It
remained elevated this year despite warnings that demand would slow as more
millennials aged into their home buying years.

But while demand for housing is high, so are home prices and mortgage rates
jumped this year, making home buying even less affordable. That will
likely make more renters stay renters longer than they might have
anticipated in order to save for a larger down payment. And it could also
present investors with a relatively safety bet in a volatile stock market,
namely the multifamily REITs, which also offer dividends.

PAWLOWSKI: We do have a sector overweight call on the residential REIT
sectors, namely apartments, single family rentals and manufactured housing.

OLICK: One downside or risk, mortgage rates appear to be coming back down
again. They`re still higher than they were a year ago. But if they fall
furthermore, more renters could possibly become buyers.

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

(END VIDEOTAPE)

GRIFFETH: Drugmaker Perrigo (NASDAQ:PRGO) faces an unexpected nearly $2
billion tax bill. And that`s where we begin tonight`s “Market Focus”.

The Irish drug maker said it was notified by its own government that it
owes just under $2 billion in back taxes related to an acquisition it made
back in 2013. Now, Perrigo (NASDAQ:PRGO) says it does not plan to shell
out the amount any time soon because it says the case is without merit and
simply incorrect. However, investors nonetheless were concerned. They
sent the shares lower by more than 29 percent today to $37.03.

CarMax (NYSE:KMX) said the stronger demand in its wholesale unit helped
offset a decline in same store sales caused by weaker foot traffic. Both
profits and sales accelerated more than analysts had expected. So, as you
might imagine, shares rose today up nearly 4 percent to $58.96.

HERERA: Chinese officials say that they will start to review gaming titles
for approval following a more than 6-month long restructuring freeze.
That`s good news for the Chinese game developer Net Ease. Investors like
the prospects. They sent the shares higher by more than 3 percent to
$244.43.

And Sprint will pay more than $300 million to settle charges that it
intentionally failed to collect state and local taxes on its wireless plans
that were sold in New York. Officials said it is the largest ever recovery
by a single state in an action filed under a False Claims Act. Sprint
shares fell 3 percent to $5.79.

GRIFFETH: This week`s market monitor is betting that his three stock picks
tonight will continue to gain market share even if the economy begins to
slow. That`s because he says they have strong management, pricing power
and they`re at the forefront of technological innovation.

This is his first time on NIGHTLY BUSINESS REPORT. We welcome Stephen Lee.
He`s founding principal at Logan Capital Management.

Stephen, good to see you. Thanks for joining us tonight.

STEPHEN LEE, PORTFOLIO MANAGER, LOGAN CAPITAL MANAGEMENT: Thanks for
having me this evening. Interesting day.

GRIFFETH: To say the least.

We begin with Masimo (NASDAQ:MASI), one of your picks. This is a medical
technology company. You like the demographics here, but you could say that
for a lot of medical technology companies. Why this one?

LEE: Well, you know, stepping back on the way in. My team and I have been
working together since the early `90s, so we`ve been through a few
challenging markets. And one of the lessons we taken away from that is
that when times get tough, the tough get going. So we want companies with
nimble and experienced management teams, unique products, which Masimo
(NASDAQ:MASI) has and the financial ability to execute.

And in all three cases, Masimo (NASDAQ:MASI) has that. They make non-
invasive sensors. What is that? These are little things that go on your
finger when you`re in the hospital.

GRIFFETH: Right.

LEE: That tells a patient`s medical team what they do, and give some data.
Gives them the data they need to make better — to improve care and do it
efficiently.

HERERA: You also like Nike (NYSE:NKE). It certainly had a very good
earnings report this week. But you also point out the fact that their
customer contact initiatives have really helped it perform very well.

LEE: Yes. And Nike (NYSE:NKE) fits the same general theme. That
management team has been really aggressive on addressing the challenges of
are retail. So, they`ve used technology throughout the business to find
who the customers are, understand them, redesign their products and really,
they`ve gone through and looked at their partnerships for differentiated
retailers.

And I think it`s worth noting that their sales in China were up I think a
little over 30 percent despite some of the concerns we are hearing about
China`s economic growth.

GRIFFETH: Your third is Apple (NASDAQ:AAPL). I have to say you`re not
alone. There have been so many money managers who come to our program
easily talking about Apple (NASDAQ:AAPL), even with this huge decline we
have seen in the stock. The bulls like it because they see the services
business side of the business doing well. But the bears are afraid of the
slowdown in the handset market worldwide.

I take it you like services. Or is that why you like it?

LEE: You know we like services and we like the wearables and we like the
history of the company. When we started buying in the mid-2000s, iPod was
the project. And this is a company that has successfully obsoleted its own
products and dealt with change.

And we think as cellular networks get a lot faster with 5G, 5G coming, the
devices we use to communicate are going to change. And, you know, the
wearable business is only about 4 percent but the watch connected to a
cellular signal we think is an example of maybe how we`re going to be doing
things in the future.

HERERA: In general, you feel as though all of these companies and the
management specifically are nimble enough to handle the type of market
volatility and perhaps economic volatility that is to come, correct?

LEE: Yes, certainly. And what they have is they have — they have
products their customers really value and they`re willing to pay a premium
for. If we see inflation — let`s say the economy improves as opposed to
go over, they push pricing increases through. And they`re still addressing
needs that their customers have regardless whether times or good or bad.

GRIFFETH: Right.

LEE: And they`re pretty well-seasoned.

GRIFFETH: Very good. Stephen Lee with Logan Capital Management, thanks
for joining us tonight. Appreciate it very much.

LEE: Thanks for having me.

GRIFFETH: And to read more about Stephen`s picks, you can head to our
website at NBR.com.

HERERA: Coming up, for those of you who haven`t even started your holiday
shopping.

GRIFFETH: Oops.

HERERA: Tick-tock.

(BEGIN VIDEO CLIP)

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: I`m Courtney
Reagan in Elmhurst, New York. If you haven`t finished holiday shopping,
you are not alone. I got the expectations for Super Saturday coming up on
NIGHTLY BUSINESS REPORT.

(END VIDEO CLIP)

(MUSIC)

GRIFFETH: Here`s a look at some of the economic numbers out today. The
economy grew at a solid annual rate of 3.4 percent in the third quarter.
That though is down slightly from an earlier estimate of 3.5 percent as
consumer spending and exports were both revised lower.

Overall demand for durable goods produced in the U.S. rebounded last month
thanks to a ramp up in aircraft orders. But the gain was only about half
what economists had been expecting. And if you strip out transportation
orders fell by 0.3 percent.

And consumers opened their wallets in November as personal spending rose
nearly half a percent. Personal income rose slightly last month as well.

HERERA: Consumer sentiment also rose this month, thanks to a strong job
market and retailers are hoping that that translates to this holiday
shopping season. And the retailers are gearing up for those last minute
shoppers who are racing against the clock for the holidays.

Courtney Reagan is in Elmhurst, New York.

(BEGIN VIDEOTAPE)

REAGAN: Tomorrow could be the second busiest shopping day of the year
behind Black Friday. The Saturday before Christmas is it often called
Super Saturday, a critical day for retailers to capture those final
purchases before Christmas, punctuating the end of what most experts think
will be a strong holiday season, despite the recent stock market selloff.

STEVE SADOVE, FORMER SAKS CEO, SENIOR ADVISOR TO MASTERCARD: If you look
at the MasterCard (NYSE:MA) spending polls data, up until a day ago, we
were seeing 5 percent growth overall for the consumer and that compares to
two years ago at 3 percent and a year ago at 4 percent. So, we are having
a very healthy consumer season. The next five days are make-or-break for
the retailers.

REAGAN: Even though the holiday season was as long as it could be with the
early Thanksgiving, the National Retail Federation says a quarter of
Americans still have shopping left to do, 134 million consumers are
expected to shop tomorrow. That`s up from 126 million last Super Saturday.

UNIDENTIFIED MALE: Yes, I`m done. I started last week.

UNIDENTIFIED FEMALE: We are going to be done today. Do it all in one day.

UNIDENTIFIED MALE: I definitely hope to be done by Christmas Eve. I still
got to get a couple of things, like some shoes, clothes, definitely all of
that, some jewelry.

REAGAN: Jewelry, healthy and books, accessories and gift cards are the
most popular last minute gifts for coupon hunters on retailmenot.com. A
number of retailers are extending their hours for procrastinators. Kohl`s
(NYSE:KSS) is staying open for 83 straight hours. Most Macy`s stores were
open early and stay open until midnight through the weekend.

Target`s CEO Brian Cornell expects Saturday will be once again be one of
its busiest day. Target (NYSE:TGT) shoppers can place orders as late as
6:00 p.m. on Christmas Eve. A long season and a year of planning is almost
over for retail, and the last chance to wrap it up with a bow.

For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan in Elmhurst, New York.

(END VIDEOTAPE)

GRIFFETH: Before we go, let`s take a look at the day on Wall Street. Yes,
it happened again. The Dow was down more than 400 points. Now, we`re
below 23,000. The Nasdaq dropped by 3 percent or 195 points. And the S&P
500 gave back about 50.

Now, all three indexes lost at least 7 percent just this week, the Dow and
Nasdaq`s worst week since the financial crisis of ten years ago. And it
was the S&P`s worst week since 2011. My suggestion, don`t bother looking
at your 401(k) this weekend.

HERERA: No, not this weekend.

GRIFFETH: Just focus on the holidays and be happy.

HERERA: Be happy. Spend time with friends and family.

GRIFFETH: Merry Christmas to you, by the way.

HERERA: And to you too, my dear.

GRIFFETH: That is NIGHTLY BUSINESS REPORT for tonight. I`m Bill Griffeth.
Thanks for watching.

HERERA: I`m Sue Herera. Have a great evening, everyone, and a great
weekend.

END

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

 

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