ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Bill Griffeth and Sue Herera.
BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Dark cloud. The semiconductor sector has been trapped in the middle of a trade war and it may take a while to undo that damage.
Going shopping. Americans opened their wallets last month, complicating policy decisions for the Federal Reserve which meets in just a few days.
Bring on the summer. That`s what some homebuilders are saying after a fairly lackluster spring.
Those stories and much more tonight on NIGHTLY BUSINESS REPORT for this Friday, June the 14th.
And we do bid you a good evening, everybody, and welcome. Sue is off tonight.
The market finished the week at an inflexion point of sorts today. Investors did not appear too eager to buy or sell stocks ahead of next week`s Federal Reserve meeting, but they were eager to sell shares of semiconductors which have gotten themselves caught in the middle of the trade war with China. Add to that, the rising geopolitical tensions in the Gulf of Oman which lifted oil prices for the second straight day.
And when all was said and done, the Dow was down just 17 points, we`re at 26,789. The Nasdaq was down 40, that was the technology stocks there. And the S&P was down four. And for the week, all of the major averages were up only fractionally.
Mike Santoli says the market seems to be teetering.
MIKE SANTOLI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Stocks finished an indecisive week at something of a crossroads. While the S&P 500 held the gains from the 5 percent rebound from the start of June, trading volume slowed and the indexes worked sideways as investors remained in suspense on a couple of crucial policy issues. The Federal Reserve meets next week as the bond market has proved in to price in high chances of a rate cut by July.
The Fed has struck a tone of patience on rates, but the slowdown in global growth and decline in the inflation rating has treasury yields near two- year lows, as the market essentially lobbies for easier policy to ward off further economic deterioration, as trade frictions worsen.
And on that trade front, world leaders meet at the end of June which could be a forum for the U.S. and China to move towards some agreement which has the chance to avert President Trump applying tariffs on $300 million on Chinese imports.
At this point, though, the market is unwilling to assume any particular outcome. It`s not yet known if the two countries` leaders would even meet at this point. It also feeds that indecision and anxiety.
The U.S. economy continues to hold up OK. The stock market likewise has proved pretty resilient, thanks to steadier defensive sectors such as utilities and consumer staples.
The S&P 500 has recovered nearly all of the 20 percent fourth-quarter collapse, now sits at some 2 percent from its record high. At the S&P at these levels is also merely about where it`s at in late January of 2018, meaning it has effectively made no net progress for 17 months. As a world and policy flux keeps investors unsure of how much time and energy is left in this decade-long economic expansion.
For NIGHTLY BUSINESS REPORT, I`m Mike Santoli at the New York Stock Exchange.
GRIFFETH: And as we mentioned, semiconductor stocks weighed down the overall market today and it all started with that week earnings report from Broadcom (NASDAQ:BRCM) (NASDAQ:BRCM) that we told you about last night. It was a quarter that the company CEO called depressing. And that sent the stock down 5 percent today and it dragged the other chip stocks down with it.
It was another reminder of the impact of the trade war with China, a country that the industry relies a great deal on for business.
Josh Lipton has more.
JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Chip investors got a first look at what an extended trade war could mean for semiconductors and it wasn`t pretty. Broadcom (NASDAQ:BRCM) (NASDAQ:BRCM) CEO Hock Tan bluntly laid out the challenges.
HOCK TAN, BROADCOM CEO: With respect to semiconductors, it is clear that the U.S.-China trade conflict including the Huawei export ban is creating economic and political uncertainty and reducing visibility for global OEM customers. As a result, demand volatility has increased and our customers actively reducing inventory levels to manage risk.
LIPTON: Tan noted that the company had about $900 million in revenue from Huawei last year. And it isn`t just Broadcom (NASDAQ:BRCM) (NASDAQ:BRCM). Micron CEO just said publicly that the Huawei ban has brought uncertainty and some turbulence in his words to the semiconductor industry. Semi sold off now down hard from their highs in April.
These are issues that many chip companies could have to deal with in the quarters ahead and calls into question whether there really will be that second half snapback for these companies that many had predicted.
On the other hand, analysts say the recent pullback could also create opportunities for investors, even Broadcom (NASDAQ:BRCM) (NASDAQ:BRCM) despite the generally poorly received results showed pockets of strength.
CRAIG ELLIS, B. RILEY FBR: One of the things we heard last night from Broadcom (NASDAQ:BRCM) (NASDAQ:BRCM) Limited is strength exists in their networking business, we had seen that before in Marvell. Marvell has been very active with M&A this year. That`s name we really like at current valuation levels to put capital to work.
LIPTON: In fact, Ellis says many of these chip companies now look more attractively valued, giving investors another reason he says to own some of these stocks.
For NIGHTLY BUSINESS REPORT, I`m Josh Lipton, San Francisco.
GRIFFETH: Let`s turn now to Kim Forrest to talk about what`s happening with the chip sector right now. She`s chief investment officer at Bokeh Capital Partners.
Kim, good to see again. Welcome back.
KIM FORREST, BOKEH CAPITAL PARTNERS CIO: Thank you.
GRIFFETH: One Wall Street research firm said this week that this trade war is doing long-term damage to the semiconductor industry. You`re not so sure about that, are you?
FORREST: No, not really. I think this is Wall Street being at the center of the universe and the real manufacturing and the real world is probably not where they are. So let`s try to reconcile those two worlds.
GRIFFETH: I mean, in other words, what you`re saying is once we get a deal with China, you think that the orders come back for the semiconductors, right?
FORREST: Absolutely. Semiconductors are the things by which we conduct most of our lives. It`s sad to say. You know, it`s not just the phone. There`s a whole lot more semiconductors that surround us day in and day out, and it`s our estimation that that`s only going to continue in things like autonomous cars and if not fully autonomous cars, certainly, there will be systems that rely on semiconductors to make us safer and just make our world work better.
So it`s just semiconductors are taking over the world and I think it`s a little short-sighted to think otherwise.
GRIFFETH: But one of the goals of the Trump administration is to bring more assemblage back to the United States here. Isn`t it possible we could see some quotas put on that industry? What would that do?
FORREST: Well, I think that would really make electronics really expensive in the short term. The practical matter is, none of this global trade can be unwound very easily or quickly or cheaply. You have to build the plants. You have to train the people and you have to reroute your supply chain.
And I think that the desire to bring a lot of that back on the shore will never happen just because of the practical matter of how the world works now.
FORREST: And it`s just cheaper and everyone`s kind of used to how things work now.
A little on the edges, maybe, but you know practically moving back all of that, the manufacturing that happens overseas is just probably not practical.
GRIFFETH: So does that mean you`re buying the Broadcoms and the other chip stocks that have been hit so hard by this trade war?
FORREST: Well, I like them and I like them more at this time of the year then maybe two months ago, right? So I think that they have come back and I think investors should take a look at this, especially if they have a long enough timeline which we think is a minimum of three to five years.
GRIFFETH: Very good. Kim Forrest with Bokeh Capital Partners, always good to see you. Thanks for joining us again.
FORREST: Thank you.
GRIFFETH: By the way, the Chinese economy is also feeling the effects of the trade tensions. New reports out this morning pointed to a softening in some key areas of the world`s second largest economy.
Eunice Yoon has that story for us from Beijing.
EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Chinese property sales dropped by their biggest amount since October 2017, and factory output hit a 17-year low. Fixed asset investment cooled. Retail sales were the bright spot, rising 8.6 percent compared to April 16-year low.
Analysts say the better figure is due to higher inflation and government incentives to boost consumption.
The week readings are raising expectations that policymakers will unveil more stimulus soon. Chinese officials say the economy is facing increasing external uncertainties. I spoke with a former vice finance minister who currently advises the government on trade and he said that China wants to talk but that the U.S. needs to lift the tariff first.
ZHU GUANGYAO, FORMER CHIENSE VICE FINANCE MINISTER: I announced target and the Chinese purpose is very clear, the import tariffs must be removed.
YOON: China still hasn`t confirmed that President Xi Jinping will meet with President Trump in a bilateral at the G20 to work out what many people believe would be the best-case scenario, a truce.
For NIGHTLY BUSINESS REPORT, I`m Eunice Yoon in Beijing.
GRIFFETH: Meanwhile, the economic news back here in the U.S. wasn`t all bad. Industrial production rose the most in six months in May. According to the Federal Reserve, the gain was helped by an increase in the production of pickup trucks and cars, and output of consumer goods, business equipment and non-industrial supplies that was also higher.
Retail sales were solid in May and April`s numbers were revised higher, making it three straight months of gains. Worries about the trade war and concerns over the health of our economy apparently did not stop Americans from spending. And while that`s good news for the economy, it could complicate things for the Fed.
Steve Liesman is on that story for us tonight.
STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Amid growing concerns about a weakening U.S. economy, the American consumer said what are you talking about? Retail sales grow strong half a point in May and the government revised April higher by another half a point.
Consumers showed up to spend for health and personal care items and at sporting goods and general merchandise stores, and, of course, on the Internet. It was the kind of discretionary spending that suggests consumers feel pretty comfortable at the outlook and what`s in their pockets.
Barclays wrote: Today`s report paints a picture of strong momentum and consumer spending. This is consistent with our outlook for the second quarter when we expect consumer spending to hold the fort.
There`s still some slowing relative to last year`s tax cut and new spending spree. Economists estimate second quarter growth will come in around 2 percent, down from 3 percent last year.
But it`s about equal to estimates of potential growth for the U.S. economy and better than the earlier estimates of just 1 percent or less.
CONSTANCE HUNTER, KMPG: We still have some slowing consumption compared to last year, but the consumer has been the backbone of this recovery in this expansion and so, we expect that to be maintained.
LIESMAN: This strengthened consumer spending actually complicates policymaking for the Federal Reserve. Does it cut interest rates as the market seems to want because of concerns about slowing global growth, slowing capital spending and the negative impacts of trade wars or does it hold the line on rates, banking that better wages had low unemployment will keep American consumer spending and ignoring the forecasts? Let`s say they won`t.
For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.
GRIFFETH: And there was still more economic news out today. Consumer sentiment fell in the early part of June. The University of Michigan report said that much of that decline was due to tariff concerns and smaller gains in employment. At the time that survey was conducted, there was the possibility of tariffs being levied against Mexico.
One more report on the economy now. There are some early signs that the usually slow summer housing season could start to heat up. And for some home builders in some parts of the country, that would certainly be a welcome development after a so-so spring.
Diana Olick has that story.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Spring is usually the hottest season for the nation`s home builders, but that was not the case this year.
There are however signs of summer strength. Mortgage applications to purchase a newly built home jumped 20 percent annually in May, according to the Mortgage Bankers Association. That coincided with falling mortgage rates throughout the month, rates continued to fall in June and are now at the lowest level in two years. These both signal strength ahead.
But all real estate is local and some areas will fare better than others. John Burns Real Estate Consulting breaks out the public builders and which are poised to do best this summer.
KB Homes market conditions are best because they`re concentrated in the Southwest, where the market is outperforming. NVR (NYSE:NVR) (NYSE:NVR (NYSE:NVR)) as well because it builds in the Northeast, which is bouncing back from weak demand a year ago. D.R. Horton`s concentration in Texas and its focus on entry-level product also puts it in a good position for summer demand. Lennar`s biggest footprint is also in Texas and it`s heavy in Florida and the Southeast.
On the other hand, TRI Pointe and William Lyons Homes are slowing permits because about a third of their exposure is in southern California, where demand is weak and cost to build are highest.
The problem for all home builders though continues to be high home prices. Half of the public home builders have an average sale price above $400,000. Until they can bring prices down, their recovery will continue in fits and starts.
For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Washington.
GRIFFETH: Time to take a look at some of today`s “Upgrades and Downgrades”.
We begin with shares of United Technologies (NYSE:UTX) (NYSE:UTX). They were upgraded to buy from hold at Vertical Research. The analyst says that the stock has fallen too far too fast following the news of its proposed merger with Raytheon (NYSE:RTN) (NYSE:RTN). Price target now: $145. That stock rose a fraction to $125.30.
General Motors (NYSE:GM) (NYSE:GM) was downgraded to sell from hold at CFRA. The analysts cited to believe that the automaker is likely to lower earnings guidance. He also noted a downbeat outlook for auto sales overall and on the company`s operating margins. Price target now $32. And that stock fell 1 percent today to $35.66.
Still ahead, why Boeing (NYSE:BA) (NYSE:BA) has a lot at stake at the upcoming Paris air show.
GRIFFETH: Some major drug makers have filed a lawsuit to stop a new rule that would require them to disclose prices in TV ads. The suit was filed by Amgen (NASDAQ:AMGN) (NASDAQ:AMGN), Merck (NYSE:MRK) (NYSE:MRK) and Eli Lilly (NYSE:LLY) (NYSE:LLY). This new regulation is scheduled to go into effect next month. It`s part of the government`s efforts to bring down drug costs for U.S. consumers.
In the lawsuit, the drug company say that list prices do not accurately reflect the final price paid by patients because it excludes rebates and discounts.
Well, the world`s biggest air show kicks off in Paris this weekend. But this time around, it`s going to be a little different. That`s because Boeing (NYSE:BA) (NYSE:BA) and rival Airbus, the two biggest commercial airplane makers in the world, they`re flying in two different directions.
Phil LeBeau has more.
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Paris loves a good air show but it`s not what`s up above that will turn heads this weekend. It`s what will be said on the ground.
The big story, an expected drop in demand for new planes. After soaring higher the last two years, orders could fall to their lowest level since 2016, mainly because Boeing (NYSE:BA) (NYSE:BA) is unlikely to ring up sales for its beleaguered 737 MAX.
RON EPSTEIN, BANK OF AMERICA ANALYST: It`s hard to imagine that anybody is going to be ordering 737s in an environment where their crest grounded.
LEBEAU: Boeing (NYSE:BA) (NYSE:BA) CEO Dennis Muhlenberg will spend much of the show meeting with customers, reassuring them Boeing (NYSE:BA) (NYSE:BA) has a plan to get the MAX back in the air.
Meanwhile, Boeing`s rival Airbus is expected to launch a new airplane, the latest in its family of narrow-body jets, but this one will have greater range to connect smaller cities that are further apart. The demand is there. In fact a record number of people are flying this year, which is why Airbus and Boeing (NYSE:BA) (NYSE:BA) are ramping up production to build planes as quickly as possible.
Airbus and Boeing (NYSE:BA) (NYSE:BA) have backlogs that are close to record highs, which means airlines that order new planes this weekend will likely not see them flying until well into the next decade.
Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.
GRIFFETH: It turns out Chewy`s bite is as good as its bark, and that`s where we begin tonight`s “Market Focus”.
The online pet product retailer owned by Pet Smart soared in its Wall Street debut today. The company price its IPO at $22 a share, that was above the expected price range, and the company CEO hopes to prove that his company is not like pets.com, which came to symbolize what was wrong with the dot-com bubble of the `90s.
(BEGIN VIDEO CLIP):
SUMIT SINGH, CHEWY CEO: The company was 20 years ago. Look at the way the e-commerce has built out the inputs are changing. Look at our stickiness. Look at the number of customers that were attracting, the fact that we`re servicing greater than 95 percent of U.S. households in less than two days, and the fact that customers keep coming back to us.
(END VIDEO CLIP)
GRIFFETH: Well, Chewy shares were up more than 80 percent for a time today but they settled up 60 percent at $34.99.
Barnes and Noble (NYSE:NE) (NYSE:NE) said today it did not receive any other offers from prospective buyers before hedge fund Elliott Management`s imposed deadline. Last week, Elliott offered about $475 million to take that book seller private and it built in an end of business Thursday deadline for Barnes and Noble (NYSE:NE) (NYSE:NE) to field other possible bids. With that deadline now past, and if the deal does not go through, and then Elliott will receive a $17.5 million breakup fee from Barnes and Noble (NYSE:NE) (NYSE:NE).
And shares of that company fell more than 1-1/2 percent today to $6.74.
Facebook (NASDAQ:FB) (NASDAQ:FB) reportedly has enlisted more than a dozen companies, including Visa (NYSE:V) (NYSE:V), MasterCard (NYSE:MA) (NYSE:MA), PayPal and Uber to back a new cryptocurrency. “The Wall Street Journal” says that each company is going to invest about $10 million in a consortium that will govern the digital coin to be called Libra. The social media company plans to launch that digital currency sometime next year, and Facebook (NASDAQ:FB) (NASDAQ:FB) shares were up more than 2 percent today to $181.33.
Abercrombie & Fitch (NYSE:ANF) (NYSE:ANF) has authorized a new repurchase program for up to 5 million of its shares. The new program allows the retailer to buyback at its discretion while continuing to invest in growth opportunities, and that brings its total buyback to more than 7.5 million shares. Abercrombie stock rose a fraction to $15.49 today.
And the Justice Department is reportedly close to approving T-Mobile`s $26 billion merger Sprint, but only if the companies sell multiple assets to create a new wireless competitor. “New York Times (NYSE:NYT) (NYSE:NYT)” says a settlement could be reached in the next week or so. But complicating all this is the judge who is also scheduled to hear the state`s lawsuit against the merger. That`s going to happen next week as well.
Sprint shares rose nearly 3 percent to $7.01, while T-Mobile shares were a fraction at $74.90, fraction higher.
Time now for our weekly market monitor who has names of stocks that he says will hold up in an escalating trade war. Andy Kapyrin is back with us. He`s director of research at Regent Atlantic.
Welcome back. Good to see again.
ANDY KAPYRIN, REGENT ATLANTIC DIRECTOR OF RESEARCH: Nice to see you.
GRIFFETH: First on the list, Anthem, an insurance company. Now, it`s been a steady riser for a few years, but it`s been very volatile this year. But you think it holds up in the trade war. Why?
KAPYRIN: Well, first, let`s get the 900-pound gorilla out of the way. Health insurance in particular has been in the sights of the White House, of politics generally.
There`s a number of things that Anthem is doing that it`s that will help but catch up to other peers within insurance, in particular the leader in the space is United Healthcare out of Minnesota. They run a pharmacy benefit manager themselves. Now, this is a way to get additional discounts and rebates out of the pharmaceutical trade, which is a big and growing cost for health insurers.
KAPYRIN: What Anthem is now able to do or will be able to do when they built this out is match prices with some of their peers that will allow them to compete better in commercial spaces. It also allowed them to continue to roll out more Medicare Advantage plans, which are incredibly important in that industry.
So, lots of potential growth. Why is it in insulation from the trade war? It`s because they only do business here in America.
GRIFFETH: That`s a good point.
Royal Dutch Shell is your second one. Why that one in particular in that industry?
KAPYRIN: So super majors in the oil industry are a good bet when you don`t know where the direction of oil is going to take you, or you just expect it to be very volatile. Take just two days ago, two tankers damaged in the Persian Gulf.
KAPYRIN: They are less sensitive to those events both on the upside on in on the downside and that`s a good thing. Royal Dutch Shell in particular, as a European super major, trades at a big discount to its American peers, Exxon and Chevron (NYSE:CVX) (NYSE:CVX), in spite of having a solid business.
GRIFFETH: All right. Finally, Google (NASDAQ:GOOG) (NASDAQ:GOOG). Now, there`s a company that`s in the crosshairs as well of the federal government and the stock has suffered as a result here. Why do you like that one here?
KAPYRIN: So, two reasons. One is I think the regulatory angle is overplayed. It is, in fact, a monopoly. It is, in fact, going to face more regulation. But I don`t think it faces a breakup because there isn`t a cohesive group other than ad sales that can really be split off from the business. Think about all the other things that Google (NASDAQ:GOOG) (NASDAQ:GOOG) does.
Google (NASDAQ:GOOG) (NASDAQ:GOOG) Maps, for example, all that is designed to steer eyeballs back to Google (NASDAQ:GOOG) (NASDAQ:GOOG) for advertising. There isn`t really a good way to split it up.
As long as you look past that, you have a mature company, highly profitable, that really has a lot of capacity to continue to grow, that does so at high profit margins with almost no debt. And does so with almost no revenue from China, it was kicked out of China right almost ten years ago.
GRIFFETH: Right. All right. We will see what happens.
Andy, always good to see you. Thank you.
KAPYRIN: Thank you, sir.
GRIFFETH: Andy Kapyrin with Regent Atlantic.
And if you want to read more about his picks, you can head to our website at NBR.com.
And coming up, Main Street feels the pinch of escalating trade tensions.
GRIFFETH: We have some new findings on how Americans view China. According to the latest CNBC All-America Survey, more than half of those surveyed do not care if products are made in China and most Americans don`t view the country as an economic threat. Of the 800 people polled, just 32 percent said, yes, China is an economic threat, compared to 49 percent who said, yes, back in 2007.
And when asked if made in China level matters, 34 percent said they are less likely to buy a product with that label, down from 52 percent when the question was last asked more than a decade ago.
And the trade war with China is turning into a big problem for some small business owners. Kate Rogers (NYSE:ROG) (NYSE:ROG) talked to one who`s trying to navigate the growing tensions.
KATE ROGERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Sandra Payne says she held out for as long as possible before raising prices.
But the president of Denver Concrete Vibrator which makes equipment for infrastructure projects had no choice. A modest price hike became necessary when tariffs hit her vendors who import items, including steel, making prices volatile and increasing costs.
SANDRA PAYNE, SMALL BUSINESS OWNER: We waited a long time to increase prices. We finally did, had a small increase recently but that still won`t cover what we expect in the coming months or years.
ROGERS: Payne says she hasn`t had to cut any of her staff and hope she never has to, but she acknowledges margins will be squeezed in this uncertain environment.
The National Federation of Independent Business says more than one-third of small business owners have reported somewhat or significant negative impacts as a result of recent trade policy changes with Mexico, Canada or China. A coalition of more than 600 companies sent a letter to President Trump Thursday, urging him to resolve the ongoing trade dispute, arguing tariffs are hurting businesses and consumers alike.
Payne says she`s bracing for more price instability. A recent notice from one of her vendors said prices and availability of certain metals are subject to change daily, making planning a challenge.
PAYNE: In many cases, it`s increased by 10 or 12 percent. We`ve been warned though by some of our vendors that it will be seeing 20 or 25 percent increases with our next orders.
ROGERS: For Payne, the message is clear. Tariffs are doing more harm than good for her small business.
PAYNE: You know, every — for years, I`ve been hearing that manufacturing is lost in America and yet, there are thousands of manufacturing companies just like this one out there in the country trying to make things for domestic and for import or export. So, I think it`s going to hurt us very badly.
ROGERS: While the trade war continues on, an anxious Main Street will be watching.
For NIGHTLY BUSINESS REPORT, I`m Kate Rogers (NYSE:ROG) (NYSE:ROG).
GRIFFETH: And before we go, one final look at the day on Wall Street. Not much of a movement for the Dow, down just 17 points. Semiconductors took technology down, that`s why the Nasdaq was down 40, the S&P was down four. For the week, all major averages were just fractionally higher.
That is NIGHTLY BUSINESS REPORT for tonight. I`m Bill Griffeth. Thanks for watching. Have a great weekend. Happy Father`s Day. See you Monday.
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