ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Bill Griffeth and Sue Herera.
CONTESSA BREWER, NIGHTLY BUSINESS REPORT ANCHOR: Running in circles. Nike (NYSE:NKE) misses Wall Street earnings expectations for the first time in years as an increase in spending comes at a cost.
BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: New uncertainty. The FAA orders more changes to Boeing (NYSE:BA) 737 MAX after uncovering yet another issue.
BREWER: Rare occurrence. A long-time market watcher says something is happening that he hasn`t seen before and it could result in a big rally in the second half.
Those stories and more tonight on NIGHTLY BUSINESS REPORT for Thursday, June 27th.
And good evening, everyone. I`m Contessa Brewer, in tonight for Sue Herera.
GRIFFETH: And I`m Bill Griffeth. Once again, welcome back.
You know, Nike`s slogan, of course, is “just do it” and usually it does. But today, it didn`t. The world`s largest sportswear maker missed analysts` profit estimates for the first time in years. The company ramped up product launches and sped up product development in an effort to generate more demand. And all of that costs a lot of money.
But its operations in China — well, many thought that would be the big issue. Actually they saw sales rise there. And that caused some confusion in after hours trading tonight.
Sara Eisen starts us off with a closer look at Nike`s results.
SARA EISEN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Nike (NYSE:NKE) painted another healthy picture of its consumer in the report. From North America to China, where there were questions about whether a newfound nationalistic attitude would hurt growth. It did not do that, more than 20 percent growth. Nike`s home market continues to outperform peers up 9 percent on sales.
The only weak spot in the Nike (NYSE:NKE) report, profits came in a bit light. That was because Nike (NYSE:NKE) is a big spender. Costs rose 10 percent. Nike (NYSE:NKE) spends on everything from athlete and celebrity endorsements to big events like the world cup. It`s also had to spend as it transitions its business more toward direct to consumer. Focusing on its own website, its sneakers app which exploded in growth in just two years and its own stores versus a Foot Locker or other third parties.
But overall, another snapshot of a retailer that is performing very well in what`s been a tough macro environment and a tough retail environment thanks to innovations. Everything from Air Max to Jordans to Converse.
For NIGHTLY BUSINESS REPORT, I`m Sara Eisen.
BREWER: And let`s turn now to Mariann Montagne, for more on Nike`s earnings. She`s a portfolio manager with Gradient Investments.
Marianne, thanks for being here.
When we talk about Nike (NYSE:NKE) spending, it`s not that that`s new. So, why did they miss analyst expectations in this particular quarter?
MARIANNE MONTAGNE, GRADIENT INVESTMENTS: Well, Contessa, as far as I can tell, they were putting more into the product pipeline, new products. We think they`re doing very well at that. So, we are going to ride this along with management.
We think it`s a very well-controlled company. We saw that in inventory so as sales rose 11 percent, inventories were only up 7 percent. And we think this is probably a very strategic move coming in to really a peak back to school selling season.
You know, it`s bigger than Christmastime, I believe, for the apparel companies.
MONTAGNE: So, this is a strategic decision-making on their part. And we go along with that.
GRIFFETH: Why did the stock go down then, do you think? I mean, we talked about the confusion. The big expectations were how they were going to do in China. They have long said that China is not a problem for them. But the stock still went down after the report came out tonight.
MONTAGNE: Yes, immediately after the report, Bill, it did go down a bit. But then it`s come back to the positives. And I believe the strength in China was really a surprise to the upside. So, we have been seeing continued deceleration. You don`t expect 35 percent-type growth consistently quarter after quarter on a year over year basis.
But what, in fact, happened is that we got a very slight deceleration from 24 percent growth in the prior quarter to 22 percent growth. And that`s really a surprise to the upside.
BREWER: And how much of an issue do you see the foreign exchange headwinds? Again, the tariffs don`t seem to be affecting Nike (NYSE:NKE) very much. They manufacture 25 percent of their products in China, but only 10 percent of that is imported here to the United States. The foreign exchange issues, is that a headwind for Nike (NYSE:NKE)?
MONTAGNE: Well, the way we see it is foreign exchange will be less of a headwind going forward. That`s the Gradient outlook on the U.S. dollar. So where it has been — the dollar has been surprisingly strong year to date, we think it will either flatten out or reverse itself, so it may become a tailwind for the next six months.
GRIFFETH: All right.
MONTAGNE: But you`re right about, you know, what they are doing in China in terms of the tariffs. They have many levers to pull. They could raise prices somewhere between 2.5 and 5 percent which we don`t think would destroy sales. They could move more of their production out of China which they have done some. The net effect is probably under current estimates maybe 4, 5, 6 percent hit to earnings which we think is not terribly relevant.
MONTAGNE: But in terms of those tariffs, that`s when they come and if they come and we don`t see those happening near term to the full extent.
BREWER: Mariann Montagne with Gradient Investment, Mariann, thank you so much for your insight.
MONTAGNE: Thank you.
GRIFFETH: Elsewhere, Nike`s fellow Dow component Walgreens said it saw sales improve in the most recent quarter but profits fell more than 20 percent from a year ago. The decline reflects the challenges that Walgreens faces right now, especially slowing revenue from prescription drugs. To counter that, the CEO has stressed a new strategy, one that involves turning its stores into medical service centers aimed at customers with chronic conditions. And that seemed to pick up the sales on the stock today, up by about 4 percent in today`s session.
BREWER: Boeing (NYSE:BA) suffered another setback for the 737 MAX plane. The latest problem, a software issue the FAA says must be corrected before the plane flies again. And that wasn`t all. A company official says Boeing (NYSE:BA) now expects to finish all fixes in the September time frame.
Together, that sent the stock down nearly 3 percent in trading today. Phil LeBeau has more.
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: More problems for the MAX and more doubts about the parked planes flying any time soon. In fact, the company now says it doesn`t expect to have all fixes done until sometime in the September time frame. That means the three U.S. airlines which fly the MAX will likely have to push back the September and October dates when they expect to put their MAX models back in the air.
MIKE BOYD, BOYD GROUP INTERNATIONAL: There`s not a lot of cancellations. There aren`t enough airplanes around to have made a big impact.
LEBEAU: The future of the MAX is murkier than ever after the FAA found a new problem with the plane`s software. This one could impact the ability to have pilots to control the max in certain situations. But this issue is different than the MCAS flight control problems suspected of leading to two 737 MAX crashes.
The FAA says it recently found a potential risk that Boeing (NYSE:BA) must mitigate. The question is whether Boeing (NYSE:BA) can do that by tweaking software or if fixing the issue will be more complicated. And how will that impact Boeing`s recertification? A critical step in getting regulators to declare the MAX safe to fly again.
SHEILA KAHYAOGLU, JEFFERIES AEROSPACE & DEFENSE ANALYST: For now, what we are dealing with is the process of the FAA recertifying it. International regulators recertifying it. Potentially, a convergence of all of them coming together.
LEBEAU: The latest issue with the MAX goes well beyond pushing out the date when the MAX could return to service. It also damages the reputation of Boeing (NYSE:BA) and its most popular model. That could make people think twice before they get back onboard the MAX when it`s certified to fly.
Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.
GRIFFETH: On Wall Street today, the S&P 500 snapped a four-day slide, thanks to a rise in bank stocks. Investors are also hoping that progress can be made on trade between the U.S. and China at the G-20 summit. We`ll have more on that later in the program.
But, first, the closing numbers for the day. The Dow fell just ten points to 26,526. The Nasdaq was up 57 and the S&P rose by 11. With one trading day left now in the second quarter, investors will soon be focused on earnings.
Bob Pisani takes a look at what to expect.
BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Market bulls are gearing up for the second half of the year and they have a playbook to push stocks higher from here. You know that though. First on trade, the hope is President Trump and China`s President Xi Jinping will reset relations and at worst existing tariffs will remain in place, but there will be no new tariffs and the trade talks will continue.
Now, if this happens, investors are going to shift gears to focus on earnings and fundamentals next week. The good news on earnings is far there is no sign of any earnings recession. Two straight quarters of negative earnings, declines here.
And that`s not likely to happen in 2020 either. More companies are buying back stock and boosting their earnings. That`s the good news.
Now, here`s the bad news. Earnings estimates are essentially flat for 2019 compared with 2018. This puts investors in a tough position because it`s hard to justify the stock market hitting record highs when we have almost no earnings growth at all.
Right now, earnings are slated to go about 2 percent for the full year. But a lot of our hopes are pinned on a fourth quarter rebound. So, I think it`s fair to say 2019 earnings are flattish.
So, why is this happening, this flattish thing? You could blame it on global growth concerns. The tech earnings in particular have been trending down, thanks to these tariff concerns and slowing global growth. And they`re only expected to see a modest bounce back in the fourth quarter.
The bulls are also counting on another key force, the Federal Reserve. Immigration earnings scout says if we get a rate cut next month estimates for third and fourth quarter will pick up steam. And that`s what the market is betting on. In other words, the market is betting essentially that the Fed is going to backstop them. The bottom line is a lot has to go right to prop up earnings and the markets in the second half.
For NIGHTLY BUSINESS REPORT, I`m Bob Pisani at the New York Stock Exchange.
BREWER: And let`s talk about the economy now. Economic growth accelerated in the first quarter. Gross domestic product increased at 3.1 percent annualized rate, that was unchanged from its estimate last month. This was the third and final reading on first quarter growth. Consumer spending was revised lower and business investment was stronger than previously estimated.
GRIFFETH: Meanwhile, the number of Americans filing applications for new unemployment benefits, they rose more than expected last week. According to the Labor Department, initial jobless claims increased by 10,000 to a seasonally adjusted 227,000. Claims are considered a proxy for layoffs across the country.
Despite that increase, the number does remain near historic lows amid continuing hiring by businesses and that low unemployment rate.
BREWER: And meantime, pending home sales rebounded in May. The number of contracts signed to purchase previously owned homes increased by 1.1 percent, which was more than expected. Pending home contracts are seen as a forward-looking indicator of the health of the housing market because they become sales one to two months later.
GRIFFETH: So, let`s take a step back and look at what`s happening in the economy and the markets now. Growth, as we just mentioned, is decent. Unemployment historically low and stocks are near record levels. And yet investors have been pouring money into so-called defensive sectors like utilities, and consumer staples and real estate investment trust.
That typically happens when the market is going down. And it`s something our next guest said hasn`t happened in decades.
Jim Paulson is back with us. He`s chief investment strategist with the Leuthold Group.
Jim, always good to see you. Thanks for joining us tonight.
JIM PAULSEN, LEUTHOLD GROUP CHIEF INVESTMENT STRATEGIST: You too, Bill.
GRIFFETH: What do you think the market is trying to tell us? Why are investors plowing in to defensive issues when the market continues higher?
PAULSEN: Well, I think investors in general are getting a steady diet of things to be worried about. There`s certainly a lot, Bill. We got a reminder late last year how quick the market can fall, in about almost a 20 percent decline.
We are dealing with trade wars without end. We`ve got an inverted yield curve which is a bad omen typically for future recessions. You know, we`ve got a slow down in the economy and earnings flat-lining. We`ve got geopolitical risk with Iran and maybe Russia.
So, there`s just seem like there are a lot to worry about, and they are taking it to heart. I just don`t remember, to your point, being at a record high in the stock market with such concern about this market imminently going to fall. And as you said, the behaviors, it isn`t what they`re saying, it`s just the behaviors are all conservative and cautious.
PAULSEN: And I think — to me, that`s a good thing for the market to move higher, because if things turn out not good, they just out turn better than feared, then I think the market could go up. And you`ve got a lot of portfolios underweighted, which means a lot people have to come in and start buying even more stocks which could push it even higher.
BREWER: All right. Well, let me push then for specifics. How far could it go back, because right now, you have strategists on Wall Street predicting the S&P will hit 2912 which is essentially where it is?
PAULSEN: Yes, that reflects the cautiousness you talk about, Contessa. Even Wall Street strategists feel that way.
You know, I think there is room for valuation improvement. We are trading at a trailing P, price earnings right now which is slightly above average for where it`s been since 1990, the last 30 years. It`s certainly much lower than it traded above 20 times earnings over much of 19 — 2017 and 2018. And you`ve got to consider that interest rates, by and large, are a lot lower than they were. We are down to 2 percent treasury —
BREWER: Would you sell the defensive stocks then right now?
PAULSEN: I would. I would give those defensive stocks away to people that are nervous at elevated prices and I lean a little towards more aggressive investments. I would look at the emerging markets. I would look at some of the things tied right to the trade war. The manufacturing sector, industrials, and materials and energy stocks in particular.
GRIFFETH: All right.
PAULSEN: And I`d also stick with technology here.
GRIFFETH: Back to tech there.
Jim Paulsen with Leuthold Group, again, good to see you, Jim. Thanks for joining us tonight.
PAULSEN: Thanks a lot.
BREWER: Time to take a look at some of today`s “Upgrades and Downgrades”.
Dow component Travelers was upgraded to sell from hold at Deutsche Bank. The analyst cites the potential for higher catastrophe losses. The price target is $140. Well, despite the downgrade, the stock rose a fraction to $149.20.
Nordstrom (NYSE:JWN) was downgraded to sell from neutral at Goldman Sachs (NYSE:GS). The analyst there cites the uncertain trade backdrop, which could disrupt supply chains, inventory management and pricing. The price target $30. The stock fell 2 percent to $31.45.
GRIFFETH: KB Home (NYSE:KBH) was upgraded to buy from neutral at Buckingham with the analyst saying there is better visibility in the home builders near-term earnings growth right now. Price target, $30. That stock was up nearly 8 percent today to $25.39.
And TripAdvisor was upgraded to buy from neutral at D.A. Davidson. The firm cites proprietary data which points to improving fundamental trends. Price target now $55. And that stock rose more than 5.5 percent to $46.58.
BREWER: Still ahead, a test for the Trump administration`s trade policy.
(BEGIN VIDEO CLIP)
KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT: I`m Kayla Tausche in Osaka, Japan, where world leaders are gathering for the G20 Summit, and Presidents Trump and Xi are meeting to resume trade talks. Can they reach a deal? That`s coming up on NIGHTLY BUSINESS REPORT.
(END VIDEO CLIP)
GRIFFETH: The Federal Reserve released the second part of its stress test result this afternoon. All 19 banks passed. Only the second time that`s happened since 2009. But Credit Suisse did not exactly sail through. The Fed wants that bank to fix problems in its capital planning processes by the end of October. In this test, all banks had to show they could survive an economic downturn while also being able to make loans and pay out dividends.
And speaking of which, as soon as the results were released this afternoon, almost immediately banks announced dividend increases and stock buybacks.
BREWER: Morgan Stanley`s CEO James Gorman says the United States and China have to come to some sort of a trade truce because there`s just too much at stake if they don`t.
(BEGIN VIDEO CLIP)
JAMES GORMAN, MORGAN STANLEY CEO: We need a solution to this. There have been trade disparities between the countries. But the U.S. and China account for over 40 percent of global GDP. Nominal GDP is about $70 trillion. U.S. and China combined are $30 trillion.
We can`t have a trade war. It will have a devastating effect on the global economy. That doesn`t mean there can`t be changes to the way the trade agreements are being written. And I think that`s what the negotiators are figuring out.
(END VIDEO CLIP)
BREWER: Gorman doesn`t think a solution will be reached at the G-20 meeting but the relationship between the world`s two largest economies will be reset.
GRIFFETH: We`ve heard from a number of companies and industries about the effect tariffs are having on their businesses. And today, we heard from the makers of video game consoles. They say tariffs on imports from China could price a quarter of U.S. families out of the market to buy a gaming system this holiday season. Their estimate is the cost would be about $840 million.
BREWER: On the eve of President Trump`s third G-20 summit, the stakes are higher than ever. China has outlined its terms for a trade deal before his talks with President Xi. And world leaders want answers on Trump`s foreign policy.
Kayla Tausche reports tonight from Osaka.
TAUSCHE: President Trump arrived in Japan tonight with a packed agenda, including a dozen meeting with world leaders on trade, Middle East tensions, and North Korea. Kicking off with a working dinner with Australia`s prime minister.
DONALD TRUMP, PRESIDENT OF THE UNITED STATES: We even help our allies militarily.
TUASCHE: Building up to a high stakes one on one with China`s President Xi Jinping who plans to outline the terms for a potential trade deal, reversing a ban on using Huawei parts, removing all tariffs and lowering the amount of U.S. goods Beijing would purchase. In return, China would offer help with Iran and North Korea.
Two sources say President Trump could reach a truce this week and agree to keep talking down the road. The question is how long that truce would last with the top U.S. trade official, Ambassador Robert Lighthizer said to want it to be open-ended.
White House economic adviser Larry Kudlow says, even if no deal is reached, the president has an alternative.
LARRY KUDLOW, WHITE HOUSE ECONOMIC ADVISER: He`s perfectly happy where we are in the discussions, the negotiations, the tariffs. Our economy is strong. Their economy is very weak. He`s perfectly happy with that. If the talks fail, he`s said, we will go to plan B, which is another round of tariffs.
TAUSCHE: It`s not just China in Trump`s sights, tweeting that he`ll discuss India`s unacceptable tariffs in a meeting with its prime minister Friday. The White House expects the president to sign on to the group`s joint statement as he did in December, after longstanding language criticizing protectionism was removed.
This year`s G20 host, Prime Minister Shinzo Abe, has asked leaders to welcome, not clash with Trump like they did at previous summits to help restore credibility to multilateral forums and try to get back to business as usual.
For NIGHTLY BUSINESS REPORT, I`m Kayla Tausche in Osaka, Japan.
GRIFFETH: Ford cuts thousands of jobs in Europe. And that`s where we begin tonight`s “Market Focus” with the automaker saying it`s going to cut 12,000 jobs and shut down six plants in Europe by the end of next year to try to return to profitability as it struggles with weak demand on the continent. The company also announced plans to build more electric vehicles in Europe. Shares rose nearly 3 percent today to $10.20.
Elsewhere, Conagra posted results that missed estimates. The food producer saw declining sales of its Hunt`s Tomato Sauce, Chef Boyardee and Marie Callender`s brands due to aggressive promotions by rivals. The company has struggled with rising commodity and freight costs and doesn`t see that changing this year. Conagra fell more than 12 percent today to $25.43.
And real estate developer Howard Hughes (NYSE:HHC) Corp. has hired Centerview Partners to explore strategic alternatives where it said it includes a possible sale of the company due to its lackluster stock performance over the last three years. Centerview hopes to complete the review process by the end of the summer as the bankers explore joint ventures or spin-offs as well. Clearly, shareholders are hopeful. Shares of Howard Hughes (NYSE:HHC) rose more than 41 percent to $131.25.
BREWER: Health Equity Inc., which is a custodian of health saving accounts, is buying benefits administrator Wage Works, in a deal valued at $2 billion. Both companies said the acquisition should help Health Equity further its access to the health savings account market. Wage Works fell to $50.92, while Health Equity rose 5 percent to $65.27.
Amazon (NASDAQ:AMZN) has teamed up with Rite-Aid, launching a new pick-up option called Counter that allows customers to pick up their Amazon (NASDAQ:AMZN) purchases at more than 100 Rite-Aid drugstores, 1,500 stores by year`s end. The partnership helps Amazon (NASDAQ:AMZN) gain access to a nationwide delivery system while Rite-Aid hopes to gain more customer traffic and increase their store sales. Amazon (NASDAQ:AMZN) rose just a fraction to $1,904.28. Rite-aid was up more than 20 percent to $8.57.
And Adaptive Biotechnologies and BridgeBio Pharma made strong debuts on Wall Street today. Adaptive priced shares at $20 a share. BridgeBio Pharma priced at $17. In the end, Adaptive more than doubled to $40.30, while BridgeBio Pharma rose more than 62 percent to $27.55.
GRIFFETH: Strong IPOs lately.
Coming up, one of Apple`s most influential executives is walking out the door.
GRIFFETH: A very influential executive is leaving Apple (NASDAQ:AAPL). You may not know the name Jony Ive but he`s the man responsible for the design of some of Apple`s most iconic products, including the iPhone. Late today, we learned that he`s leaving the company after nearly 30 years. That news sent Apple (NASDAQ:AAPL) stock lower in initial after-hours trading tonight.
Josh Lipton joins us with more on Jony Ive and what it could mean for Apple (NASDAQ:AAPL).
First of all, why is he leaving?
JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: So, you know, here`s what we know, Bill, that Sir Jony Ive, he`s Apple`s chief design officer. He reports directly to CEO Tim Cook.
It did surprise us. He`s leaving now. He says he`s going to create this independent business which sounds like sort of his own design firm.
They made it clear he`s going to keep working with Apple
(NASDAQ:AAPL), that Apple (NASDAQ:AAPL) is actually going to be a client of this firm. They are going to work together. Tim Cook saying in a statement on some exclusive projects. No detail, though, of what those projects could be.
Certainly, you mentioned it, listen, he is revered in the design community. His designs played a part in some of Apple`s most iconic products. You mentioned a couple, but really it`s the iMac, the iPod, the iPad, the iPhone, the watch.
Not just the hardware. Sir Jony Ive also played a role in designing Apple`s new corporate campus, that multibillion dollar campus in Cupertino. You talk to analysts. They`ll say he deserves credit for a lot of Apple`s success, a lot of its growth, because, of course, a lot of products I just mentioned, they are the very backbone of Apple`s hardware, what we know the company as today, guys.
BREWER: So, Josh, what does it mean for Apple (NASDAQ:AAPL)?
LIPTON: You know, it`s interesting. I actually just spoke with Gene Munster. He, of course, is an analyst that has covered Apple (NASDAQ:AAPL) for a long time.
There was nobody at Apple (NASDAQ:AAPL) beyond Steve Jobs, Munster`s point was, nobody besides Jony Ive there who really and by design cultured Apple (NASDAQ:AAPL) more than Sir Jony Ive. In terms of simple creative clean aesthetic, and I think we associate with Apple (NASDAQ:AAPL) products.
For investors, analysts will say, maybe this wasn`t totally expected. He`s taken a step back in recent years. But certainly, a big change, guys.
GRIFFETH: Indeed. We`ll see what happens from here.
Josh Lipton in San Francisco, again, thanks, Josh.
BREWER: That`s NIGHTLY BUSINESS REPORT for tonight. I`m Contessa Brewer. Thank you for watching.
GRIFFETH: I`m Bill Griffeth. Have a great evening. We will see you tomorrow.
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