Transcript: Nightly Business Report – January 2, 2018

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Rotten Apple. The company cuts its revenue guidance for the current quarter, citing fewer iPhone upgrades and weak sales in China.

BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Bad start. New signs of economic weakness in China have investors worldwide wondering how bad can it get.

HERERA: Locked out. Why the partial government shutdown is making it hard for buyers to get a loan for their new home.

Those stories and much more tonight on NIGHTLY BUSINESS REPORT for Wednesday, January 2nd.

GRIFFETH: And we do bid you a good evening, everybody, and welcome. We’re kicking off the New Year here at the New York Stock Exchange.

HERERA: You know, many investors I’m sure were looking for a fresh start after stocks closed out 2018 with their worst performance in a decade, but that is not what they got.

GRIFFETH: Boy, that is for sure, because late today, Apple, of all companies, warned investors that business during the holiday shopping season was not nearly as good as they thought it would be. The company said revenue for the current quarter will come in well below estimates and is blaming China and the weakness in the emerging markets.

During an exclusive interview with CNBC today, CEO Tim Cook explained this issue.

(BEGIN VIDEO CLIP)

TIM COOK, APPLE CEO: If you look at our results, our shortfall is over 100 percent from iPhone and it’s primarily in greater China. And so, as we look at what’s going on in China, the — it’s clear that the economy began to slow there for the second half. And what I believe to be the case is the trade tensions between the United States and China put additional pressure on their economy.

(END VIDEO CLIP)

GRIFFETH: The stock, of course, is widely owned in mutual funds, retirement accounts among other things. It fell sharply in an initial affirm hours trading tonight, wiping out another billions in market value. It’s been falling precipitously all fall.

We’re joined tonight by Tom Forte. He’s managing director and senior research analyst at D.A. Davidson.

You have to be surprised by this. I mean, it was just a couple months ago they were giving some pretty good guidance about iPhone sales overall. So, what do you make of this announcement tonight, Tom?

TOM FORTE, SENIOR RESEARCH ANALYST, D.A. DAVIDSON: Sure. So, basically, if you look at the $84 billion versus the $89 billion, it’s about a 6 percent shortfall. If you look at the fact that the average selling price on iPhones was higher this year than it was last year, for example, 7.5 percent on even the lowest cost new iPhones, it does suggest that unit sales were really weak in the December quarter. And it’s highly unusual for apple to preannounce in general.

So, it is a surprise and it is disappointing.

HERERA: How much of that do you think, though, because the stock has been falling for some time now, is some of this already in the stock? Certainly in the afterhours response it doesn’t seem so. But what do you think?

FORTE: Sure. So, Sue, I think definitely if you look at Apple’s shares that have been down about 20 percent prior to today’s pre-announcement. And if you’re looking at a market move, 7 percent after hours, it does seem like some of this was priced into shares. But, again, it’s highly unusual for apple to preannounce a 5 percent to 6 percent shortfall on the low end of revenue. Not surprised to see a further pullback even after shares were presumably already pricing some of this pressure.

GRIFFETH: Tim Cook is laying this all on China. Do you believe that? And do you think that’s where the big weakness is and why? I mean, we know their economy is slowing down. How much of this is the trade tiff with the United States? And, really, realistically, do you think we’re seeing a slowdown in the United States as well in terms of their sales?

FORTE: So, for Apple, I do believe their problems are China specific. Apple was walking a tight rope to the extent that 20 percent of their sales are to Chinese consumers, and the company is trying to manage the incremental pressure from tariffs. So, I do think it’s specific to Apple. I’m not surprised there’s incremental weakness in their sales within China

HERERA: If you own the stock, what do you do right now and what’s your price target on it?

FORTE: I have a $280 price target right now, and I would still hold on to shares. So I think that the good news for Apple is that they generate a lot of free cash flow. They had something like $180 billion in net cash at the end of September quarter and they’ve talked about having a net neutral cash position.

Well, why is that important? They have a $100 billion repurchase program in place right now and generally speaking in April, they update us on their plans to return money to shareholders. They could buy back more than 100 billion shares over the next year.

So, while this is disappointing —

GRIFFETH: All right.

FORTE: I still think that the next 12 months might be OK for Apple’s shares

GRIFFETH: We will see. Tom Forte with D.A. Davidson, thanks again for joining us tonight.

FORTE: Thank you. My pleasure.

HERERA: Disappointing economic data out of China set the tone for the first day of trading in the New Year. And as you know, it is one of the same worries that plagued the market in 2018.

After falling nearly 400 points, the Dow rebounded then traded in and out of positive territory for the rest of the session. By the end of trading, the Dow Jones Industrial Average rose 18 points to 23,346. The Nasdaq added 30, and the S&P 500 was up three.

We’re joined now by Jeff Kleintop. He’s the global chief investment strategist at Charles Schwab.

Good to see you. Nice to have you here, Jeff.

JEFF KLEINTOP, CHARLES SCHWAB CHIEF GLOBAL INVESTMENT STRATEGIST: Thanks for having me.

HERERA: Let me start with China, if I could, because we just heard from Apple that greater China was really the thorn in its side. You’re also worried about the slowdown in China.

KLEINTOP: I am. And on the corporate side, we’re not just hearing from Apple. I think Samsung in December announced they were shutting down one of the production facilities in China. We heard from other large manufacturers that sell into China, particularly from elsewhere in Asia, like Japan, for example. Talking about the slowdown there, and, of course, this morning, we got that PMI number, the Purchasing Managers Index, that showed a further slowdown in Chinese manufacturing, a key gauge for what’s going on in China.

So, clearly, there’s a slowdown. And, Sue, in the past, what China would have done is weaken their currency and lower interest rates. But the trade talks are tying their hands on that front.

GRIFFETH: Yes, I was going to say, is this about the trade talks? Is this about the tariffs that have been battling back and forth between the United States? Or how much of it also, Jeff, as you know, they have trying to convert their economy to a more consumer-oriented economy. But that’s subject to the vagaries of a business cycle. So, what’s going on there, do you think?

KLEINTOP: China tried to impose a number of reforms to walk away from some of the bad, undisciplined lending that is taking place. And we’re seeing the lag effect of those reforms on this slowdown. So, some of it took place even a year ago. But it’s compounded by a general global economic slowdown.

We saw other PMIs weaken, including, by the way, the one in the U.S. that came out this morning. But that’s being magnified by the fact that China is in a very difficult spot on those trade talks, and that is certainly weighing on sales as well.

HERERA: Very quickly, Jeff, Tim Cook said that he was encouraged by what he’s hearing on trade. There are a lot of other analysts on the street who are not as encouraged by that. Where do you stand? How do you think this is all going to play out?

KLEINTOP: Ultimately, there’s probably going to be some type of solution. I don’t know if it rolls back all the tariffs, but it will make future ones less steep.

But here’s the thing — it’s so key. The backdrop is one of global slowing growth and that’s going to be the main factor here. That’s really what drove the pullbacks, including the one in October tied to the Fed and financial conditions than trade conditions. So, I’m focused on those interest rates and financial indicators. Trade is certainly a side show.

HERERA: Jeff, thank you so much. Jeff Kleintop with Charles Schwab.

KLEINTOP: Thanks for having me.

GRIFFETH: Well, certainly, with China in focus, there are a number of events that investors will be focusing on in this first few weeks of the New Year.

Dominic Chu has our road map for us tonight.

(BEGIN VIDEOTAPE)

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT: The wild ride for the market that started in the last quarter of 2018 will have plenty of reason to stay that way in 2019. That’s thanks to a slew of possibly market-moving events in the coming weeks. Later on in this week, we’ll not only get public remarks from Federal Reserve Chairman Jerome Powell, but also the monthly jobs report, arguably the most important economic data released each month.

The week of January 7th, it is expected that trade talks with China will resume in some fashion, and that means possibly more headlines and tweets. The week of January 14th seems the unofficial kickoff to corporate earnings season. Investors do expect to see earnings continue to grow, just not as strongly as last year.

And then there’s the Fed interest rate decision of the year on January 29th and 30th. Fast forward to march and we get the deadline for reaching a trade deal with China before a possibly new round of tariffs as well as another Fed rate decision. And, by the way, remember, that all Fed rate decisions this year will have press conferences attached to them. That’s a first in Federal Reserve history.

And those are just a handful of the potential catalysts.

For NIGHTLY BUSINESS REPORT, I’m Dominic Chu.

(END VIDEOTAPE)

HERERA: The first economic report from December showed manufacturing activity in the U.S. get a 15-month low, according to a survey, more than two-thirds of manufactures reported higher costs attributed the rise in prices to tariffs. Some factories also reported trouble finding workers and business confidence in the sector fell to its weakest point in more than two years.

GRIFFETH: Well, it doesn’t appear that any progress was made at the White House today to try and end the partial government shutdown. Both Republican and Democratic House and Senate leaders had a meeting with President Trump this afternoon, but it ended with no deal and no signal that one may happen anytime soon. Earlier in the day, the president maintained that he will keep the government shuttered for as long as it takes to get funding for a border wall.

(BEGIN VIDEO CLIP)

DONALD TRUMP, PRESIDENT OF THE UNITED STATES: The $5.6 million is such a small number, literally. It’s one month in Afghanistan. And we’re talking about national security.

This isn’t just a border. This is national security. This is health and wellness. This is everything.

(END VIDEO CLIP)

HERERA: The partial government shutdown is also putting mortgage lenders in a tough spot and it could delay the approval of some home loans.

Diana Olick explains.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Trouble in this House is starting to cause headaches for houses like these. The partial government shutdown has fully shut off some home loan programs and may delay closings on others. The biggest issue is the IRS, which has an income verification system used by mortgage lenders to validate a borrower’s tax returns. That is now not happening.

So, lenders like Craig Strent are having to take on more risks.

CRAIG STRENT, APEX HOME LOANS CEO: While windows are closing loans on time during the shutdown, they’re certainly taking on a lot more risk by doing so. There are certain items that need to be verified through government agencies, including Social Security numbers and in certain cases, self-employed people, IRS tax transcripts. And those things are not occurring right now.

OLICK: There are also issues at the FHA, the government insurer of home loans which is part of HUD. It’s operating on a skeleton staff. Lenders get automated loan numbers from FHA, but if there are problems with the application, they’re not likely to get anyone on the phone fast.

STRENT: If there are duplicate case numbers or a specific inquiry you need to make of FHA staffers, you’re probably not going to get the response time that you’re looking for.

OLICK: Finally, there’s the Agriculture Department’s rural home loan program. It’s a very small percentage of the overall market, but a much bigger deal in rural states. It’s totally shut down for now. All of this couldn’t come at a worst time for the housing market and margin markets, interest rates which had been rising fell back this month, a great incentive for buyers.

As long as buyers think of it as temporary though, the shutdown shouldn’t seriously shut down most deals.

But the longer it goes on and the more it messes with the mortgage market, the tougher that decision could be.

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

(END VIDEOTAPE)

GRIFFETH: Time to take a look at some of today’s upgrades and downgrades.

We start with Wells Fargo, which was upgraded to sector perform from under perform at RBC Capital Markets. The analyst there cited valuation after a 25 percent decline in the shares in last year’s trade. Price target now is $48. Shares rose more than 1-1/2 percent to $46.96.

Bausch was upgraded to overweight from neutral at Piper Jaffray. The analyst there says the drug maker is exhibiting earnings stability as well as the potential for long-term growth. Price target, $27. By the way, Bausch is the company formerly known as Valeant Pharmaceuticals. Shares rose 9.5 percent today to $23.23.

And CVS was upgraded to overweight from equal weight at Stephens. The analyst cited improving investor sentiment and stronger pricing. Price target now $58 and that stock rose 4 percent today to $45.66.

HERERA: Still ahead, some strategist say cash is king in this uncertain market, but what exactly does that mean, and what should you do with your money?

(MUSIC)

GRIFFETH: Yes, it’s one of the best performing asset classes last year was of all things, cash. And more than a few money managers have increased their cash levels because of all of the stock market volatility. So, if you are sitting on a higher than normal amount of cash right now, what should you do with it?

Joining us tonight to talk short term cash strategies, Sandy Villere is back with us. He’s core portfolio manager of the Villere Balanced Fund.

Good to see you again. Happy New Year.

SANDY VILLERE, VILLERE BALANCED FUND: Happy New Year, Bill. Thanks

GRIFFETH: I know you’re on a little higher cash level in your own portfolio these days. You’re not an advocate a long-term cash strategies. But if you’re holding some cash right up, other than just sitting, you know, and earning nothing, what do you do with that cash these days, Sandy?

VILLERE: Yes, I want to stay short in duration and there’s money market funds that are yielding now, you know, 2.28 percent, which is much more reasonable than it was, you know, a year ago. So, you can actually have a bit of cash on the sideline and decrease some of that volatility in the market.

HERERA: What about bonds? I mean, the 10-year note, or even the shorter maturity on the yield curve. It’s at least paying you something.

VILLERE: Yes, I’d rather stay short. If you want to get — you know, people that sort of try to chase yield, they’re either going to go lower in quality or they’re going to try to go further in duration. And, you know, the tenure is about at 266 and I don’t want to buy that. It’s just too long in duration right now. So, I’d rather stay shorter and keep the — and stay on that side of the yield curve.

GRIFFETH: How high is your cash position now, and how long do you expect it to be there? I mean, I assume it’s because of the volatility. How much longer do you think that’s going to last?

VILLERE: You know, we had as much as 12 percent or 13 percent cash. When the volatility index started to spike as you got, the VIX, as you got into Christmas Eve and the day after Christmas, we started to put about 40 percent of that cash to work between Christmas Eve and New Year’s.

So we kind of consider it like bullets in the gun that we want to fire away and use when the stock market gets, you know, cheaper or panic is at a high. So, we’ve put some of that cash to work already.

GRIFFETH: All right. Sandy, thanks for joining us as always.

Sandy Villere with the Villere Balanced Fund with us tonight.

VILLERE: Thanks.

HERERA: Tesla delivered more than 245,000 electric cars and SUVs last year. That’s nearly as many as all previous years combined. But it wasn’t enough to match analysts’ estimates. And that stock sent the stock lowered by nearly 7 percent in today’s session.

GRIFFETH: In fact, Tesla has also become the first electric car maker to cut prices because of the decline in the federal tax credit on some of the most popular electric vehicles.

And as Phil LeBeau reports now, the New Year is bringing changes for many looking to go green on the road.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Walk into a Tesla showroom and you’ll immediately see prices have been cut, down $2,000. The auto maker is trying to entice potential customers to still buy a Tesla despite the federal EV tax credit being cut in half to $3,750.

JEREMY ACEVEDO, EDMUNDS: This is really coming at really an inopportune time for Tesla. This puts them at a competitive disadvantage and certainly we can expect a loss of sales.

LEBEAU: As Tesla sales have grown in recent years, it has sold more than 200,000 vehicles, the point where automakers start to lose the federal EV tax credit. That credit was put in place by the Obama administration to entice Americans to buy an electric car which would likely cost more than a comparable gas powered car. That has helped sales of electric models like the Nissan Leaf and the Chevy Bolt.

But GM recently sold its 200,000th electric car, so its customers will soon see what Tesla buyers are now experiencing, a substantially lower tax credit, which raises the question. Will the phase out of that incentive hurt sales of those electric models?

ACEVEDO: These automakers do stand to lose a lot of sales, particularly for GM. Tesla might be a little bit more insulated with a less elastic base of buyers, but they can still count on a significant drop in sales because of this.

LEBEAU: The federal tax credit of $7,500 is not going to away anytime soon for other automakers who have sold few electric vehicles. But don’t look for this credit to be extended any further. The Trump administration has given no indication it wants to give Americans further motivation to plug in their vehicles.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

(END VIDEOTAPE)

HERERA: An energizing buyout to start the year. That’s where we begin tonight’s “Market Focus”.

Dominion Energy completed its merger with SCANA, which is a South Carolina utility that was drowning in debt following a failure of a nuclear construction project. Dominion said it paid nearly $7 billion for the company. Dominion shares finished down a fraction to $71.18.

Watsco boosts its dividend 10 percent, raising the yield to more than double the S&P 500. Watsco is a distributor of heating, air-conditioning and refrigeration products. Shares finished up a tick to $139.19.

GRIFFETH: Elsewhere, Alphabet’s Google unit has won approval from regularities to deploy a radar-based motion sensing device. The FEC says it can operate the sensor at higher power levels than currently allowed. The agency says the decision will serve the public interest by providing touchless hand gesture technology. Alphabet shares were up nearly 1 percent today to $1,054.68.

And Arconic may be closed to being taken over. According to Bloomberg, a deal with Apollo Global Management could be reached by mid-January for as much as $22 a share. That news sent Arconic shares higher by 10 percent to $18.56.

HERERA: California introduced recreational marijuana one year ago. The industry was expected to take off, but instead, it hit a number of road blocks and business for some went up in smoke.

Aditi Roy explains.

(BEGIN VIDEOTAPE)

ADITI ROY, NIGHTLY BUSINESS REPORT CORRESPONDENT: For the past five years, Northern California-based Bloom Farms has manufactured and distributed vape pens filled with cannabis concentrate.

Why vape pens?

MICHAEL RAY, BLOOM FARMS FOUNDER: Simple. Convenient, easy, very manageable.

ROY: Founder Michael Ray says in the early years, they sold to dispensaries carrying medical marijuana which had been legal in California since 1996. But when the state legalized recreational marijuana in 2018, Ray had high hopes about growing his business.

RAY: It was an exciting time we thought was going to be very, very busy.

ROY: But it wasn’t. In fact, sales went down last year. Ray is not the only cannabis entrepreneur who is struggling. For the first six months of 2018, the state brought in $84 million in cannabis tax revenue, less than half of what had been estimated. Ray blames cumbersome regulations, including the requirement that licensed distributors like Bloom Farms only sell to licensed dispensaries.

RAY: In 2017, there was right around 2,000 retail and delivery locations that were available to sell in California.

ROY: Once recreational cannabis was legalized, all of those preexisting retailers and the new ones had to get approval from state and local regulators in order to legally sell marijuana in the state. It’s been a slow-moving process and the state currently only has 1,100 licensed marijuana retailers, down from the year before, and also way below the 6,000 the state had original projected. On top of the shrinking retail base, costly and time-consuming and labeling requirements.

RAY: The requirements for child resistance. Inside of our packaging, we have a very special child resistant pouch. You cannot open this without scissors essentially.

ROY: And with added taxes, Ray says his products are at least 30 percent more expensive this year than they were last, sending customers to the black market. One market research firm says California’s black market for marijuana grew after legalization, from $10 billion in 2017 to more than $11.5 billion in 2018.

RAY: We’re excited about this year. We’ve always been at the top of our game as far as executing our plan, but this year, we now know what the rules are.

ROY: Ray is hopeful more enforcement will mean a better year ahead.

State officials say they had hoped to have more licensed retailers by now, but the process has been slow, even though recreational cannabis sales are legal at the state level. Insiders say less than 20 percent of cities in California allow it.

For NIGHTLY BUSINESS REPORT, I’m Aditi Roy, San Francisco.

(END VIDEOTAPE)

GRIFFETH: And coming up, the New Year is ushering in a number of new laws.

(MUSIC)

GRIFFETH: Quick look at what we’re watching for tomorrow.

Actually, a busy day. The new Congress convenes. Topping the agenda, of course, will be the partial government shutdown. Automakers released their sales figures for December and investors will get a fresh read on the housing market with two weeks’ worth of mortgage application data. That among other things will be among the things we’re watch for Thursday.

HERERA: It is a new year, and for several states that means a number of new laws go into effect. Eric Chemi runs through some of the changes from the serious to the seemingly silly.

(BEGIN VIDEOTAPE)

ERIC CHEMI, NIGHTLY BUSINESS REPORT CORRESPONDENT: State governments have introduced countless new measures, many of the laws are straightforward, several states raising the minimum wage, requiring businesses to collect tax on Internet sales, and banning companies from asking about a job candidate’s wage history.

But then there are quirky, odd and strange laws popping up. In Illinois, if school buses are used to transport people above the age of 18 who aren’t using the bus for school or church reasons, then the school bus sign has to be covered up. And the stop signal arm and flashing lights cannot be used.

Also in Illinois, if you want to go hunting, you can do so wearing bright blaze pink clothing. In Colorado, full strength beer can now be purchased at the grocery store. Until now, beer above 3.2 percent alcohol content had to be purchased at liquor stores. It’s one of several states making it easier to buy alcohol, including easing restrictions on Sunday sales.

In Oregon, drivers can now salvage meat from deer and elk accidentally struck by vehicles. But you still have to fill out an online permit, and you have to give the antlers back to the government.

In California, pets are now legally considered part of the family when it comes to divorce court. Judges can assign joint or shared custody based on what the judge decides is in the best part of the pet.

In Washington state, the state’s new discrimination law will clearly define what a service animal is and creating a maximum $500 penalty for anybody misrepresenting a regular animal as a service one.

For NIGHTLY BUSINESS REPORT, I’m Eric Chemi.

(END VIDEOTAPE)

GRIFFETH: Finally tonight, more people may be concerned about a possible recession. Google searches for that word have spiked to their highest levels since 2011 back when that was the time when Europe was facing a debt crises that almost led to a collapse of the Eurozone. By the way, searches for bear market also have reached a record, surpassing those of July of 2008 by more than 50 percent.

HERERA: Before we go, here’s a look at the final numbers from Wall Street. The Dow finished up 18 points to 23,346. The Nasdaq gained 30 and the S&P 500 added 3. And Apple fell sharply in initial after-hours trading after it cut its revenue forecasts for the current quarter.

And that will do it for NIGHTLY BUSINESS REPORT tonight. Thanks for joining us. I’m Sue Herera.

GRIFFETH: Nice to be back at the New York Stock Exchange.

HERERA: It is, yes.

GRIFFETH: If only for just a few days.

Thanks for joining us. I’m Bill Griffeth. We’ll see you tomorrow.

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