ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Bill Griffeth and Sue Herera.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Stocks skid. A wave of selling hits Wall Street as investors were concerned that trade troubles will slow the global economy.
BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Banks pummeled. The sector retreats as yields fall. That could cut into the profits of an industry that is considered an engine of the economy.
HERERA: Dazed and confused. The intense volatility is putting focus on the outlook for earnings and it isn`t pretty.
Those stories and more tonight on NIGHTLY BUSINESS REPORT for this Monday, August 12th.
GRIFFETH: And we do bid you a good evening, everybody, and welcome.
Here we go again. Stocks plunged today to start what may be another volatile week for the markets. At issue once again is the future of the U.S. economy. And given how stocks have been trading around the world lately, investors appear to be more concerned that the trade war between the United States and China will linger for a while, further damaging the global economy.
All of that fueled another rally into the safety of treasury bonds, sending some yields to multiyear lows, which some analysts say could be signaling a coming recession. In fact, one strategist today went so far as to say that the Wall Street bear is alive and kicking. That may be a bit extreme, but there is no mistaking how concerned the market is about the economy.
By the way, toward the close, there was a technical issue with trading computers. It`s not clear if all of the volume was reported or if some of the prices of the indexes were affected. You might see different numbers elsewhere, but these are the numbers we have at the close today with the Dow down 389 points to close below 26,000. The Nasdaq fell by 95, the S&P down 35.
Bob Pisani starts us off tonight from the New York Stock Exchange.
BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: It was another ugly day on Wall Street with the Dow plunging more than 400 points at its low. The combination of trade tensions, global growth fears and geopolitical turmoils keeping stocks under pressure, and it doesn`t hurt that more big banks on Wall Street are turning bearish in bumping up their probabilities for recession happening some time in the next 12 months.
Goldman Sachs (NYSE:GS) trimmed U.S. GDP estimates for the fourth quarter, saying they now expect a bigger hit to growth from the latest round of tariffs. They`re no longer expecting a trade deal before the 2020 election. Morgan Stanley (NYSE:MS) reiterated its call that stocks will remain mired in bear market for quite sometime, meaning down 20 percent or more from its recent highs. Bank of America (NYSE:BAC) said the chances of a recession have risen to greater than one in three, thanks to weaker data points.
To top all this off, geopolitical hotspots are also adding to the overall nervousness. Hong Kong is grappling with its tenth straight week of violent, pro-democracy protests, causing the Hong Kong International Airport to shut down.
Argentina is coping with a fallout from current President Mauricio Macri`s poor performance in the primary elections. The Argentinian stock market plunged more than 30 percent, the peso set nearly a quarter of its value.
There`s a lot for the markets to digest. Add it all up, it`s no wonder investors are flocking to safety and buying bonds, pushing yields lower, putting serious pressure on bank stocks as a result of all of that.
For NIGHTLY BUSINESS REPORT, I`m Bob Pisani at the New York Stock Exchange.
HERERA: And as Bob just mentioned, helping to lead this market lower today were indeed the big banks. Some of the biggest names like Bank of America (NYSE:BAC) and Morgan Stanley (NYSE:MS) declined more than 2 percent as interest rates fell.
So, what lies ahead for the sector?
Joining us to talk about that is Eric Compton. He`s an equity analyst at Morningstar (NASDAQ:MORN).
Eric, welcome. Nice to have you here.
ERIC COMPTON, MORNINGSTAR EQUITY ANALYST: Thanks for having me.
HERERA: Bob outlined some of the things that are affecting the market, but specifically to the banks. You see the risks more to the downside, more things that could go wrong for the banks than could go right. Such as?
COMPTON: That`s correct. So, our view on the banks at Morningstar (NASDAQ:MORN) at least for the U.S. banks has been that the risks are more to the downside at this point. And so, it`s one way you see that playing out already is with interest rates. And so, as interest rates on the long end go lower, that hurts banks` profitability. They learn less on their longer duration assets and also the worse the economy gets, the more pressure that puts on the Fed to lower short-term rates.
And so, that would also directly impact bank profitability. So, that`s — that would be one example, you know, rates going lower, credit costs, slowing growth, a lot of issues you outlined already.
GRIFFETH: And yet, rates have been low for more than a decade. We all know that, and banks have learned to cope with that. Fundamentals for the banks are good. The latest earnings reports were very good, and yet, the market continues to wring its handle over what lower rates would do love to the banks` profits down the road.
COMPTON: I mean, absolutely. So the rates will hurt the banks. You know, some banks have adjusted better than others, and highlight the largest banks have stronger fee income streams. And so, you know, as your interest income declines, those fee income streams that aren`t tied directly to interest rates served as, call it better installation in times of distress. And so, if you`re looking for some installation against that, that could be one way to play that.
GRIFFETH: So, that — I mean, that gets to the heart of my question. It would appear that the markets are worrying about something that they don`t need to worry about. Do you agree with that at all?
COMPTON: I would push back against that a little bit. So, banks are certainly macro sensitive. Rates is one way. While fee income may provide some insulation against that, lower rates are still going to hurt them. There`s no way to completely neutralize that.
And then as the economic cycle matures, if we get any kind of turn in that, you could see rising credit costs. And so, that would also be detrimental to bank performance. So, there`s a number of things that could go wrong. I`d say the bull case right now is things kind of stay as they are, nothing goes wrong from here on out.
HERERA: All right. Eric, thank you so much. Eric Compton with Morningstar (NASDAQ:MORN).
GRIFFETH: And those concerns about the economy may be starting to affect the outlook for overall earnings.
Bob Pisani is back with us again to look at how quickly that forecast is changing.
PISANI: The latest round of tariffs is what Wall Street is dazed and confused because trade concerns are now not only weighing on stocks, but they`re also weighing on earnings projections and that`s what really matters. The weakest sectors today, all trade related, banks, retail, energy, industrial, and those are the sectors seeing the biggest downgrades in earnings estimate for the current quarter.
So, what this is what you want to keep an eye on. So, 2019 earnings were looking kind of flat-ish, but additional tariffs are starting to impact those estimates, particularly energy and industrial earnings. They`ve been coming down fast in the last few weeks, energy earnings down 21 percent for the third quarter. That`s deeper than analysts had forecast in the beginning of July. Industrials have gone from up 6 percent earnings estimates a few weeks ago to now just up 2 percent.
Other sector growth forecasts have also been coming down, including financials that have been hit by lower interest rates and specialty retail, which includes many of the big apparel makers like Lbrands and Gap (NYSE:GPS).
Earnings group for the whole now expected to be down slightly, not surprising considering retailers have been weak for a long time, PVH, Lbrands, Chico`s, Gap (NYSE:GPS), all down on the corner. Tiffany (NYSE:TIF), which gets about 16 percent of its revenues from mainland China has fallen 7 percent for the quarter.
Don`t forget about big tech and apple. One fight of iPhone`s revenues now are coming from China. So, you put all these cuts together and 2019 earnings, which have been described as I said as flat-ish going into august, are starting to look like they could end up in negative territory.
For NIGHTLY BUSINESS REPORT, I`m Bob Pisani at the New York Stock Exchange.
GRIFFETH: And as we mentioned earlier, the word recession is being whispered on Wall Street these days. An analyst at Bank of America (NYSE:BAC) Merrill Lynch was the latest to use that word just today. And while the bond market may agree with that forecast, the stock market most certainly does not.
So, what to make of this dichotomy?
Joining us now is Christopher Smart. He`s chief global strategist at the Barings Investment Institute.
Good to see you. Thanks for joining us tonight.
CHRISTOPHER SMART, BARINGS INVESTMENT INSTITUTE GLOBAL STRATEGIST: Nice to be here.
GRIFFETH: So, yields on the treasuries are multiyear lows. That usually means they`re worried about the economy, but the stock market, even though it`s volatile, is much closer to its all-time highs.
What do you make of this division right now?
SMART: I think Bob Pisani had it right. The market is dazed and confused and maybe a little schizophrenic on top of it all. The economic data, as you know, is very mixed in the sense that the consumer looks very good, unemployment is very low.
At the same time, you have businesses that aren`t reinvesting in itself. Capital expenditure is low, in spite of tax cuts a couple of years ago. At the same time, as you just pointed out, on the stock market, we have a market that is sold off but it has sold off from all-time highs that it set a couple weeks ago. Even as the bond market is signaling a recession.
I think we`ve got a recession clearly in our future. I`m not sure it`s going to come as quickly or as sharp as the markets are currently predicting right now. But clearly, there are a lot of worrying signs on the horizon. On top of it all, it`s the middle of August and there`s not a lot to say this might turn things around.
HERERA: And there`s a lot of headline risk with trade front and center. But who usually — which instrument usually prevail prevails, the data or the bond market?
SMART: Well, the data ultimately prevails but it`s always a question of timing as to when markets ultimately accept the verdict of the data. I think it`s — you know, data is always backward looking, and bond markets are always forward-looking, so that is the eternal quandary for anybody trying to put money to work.
GRIFFETH: And it only heightens the guessing game about the Federal Reserve and what they will do. The guess right now is that there is a certainty that they will cut rates when they meet next month and then there are two more meetings after that the rest of this year. Would rate cuts help this at all at this point?
SMART: I think they would. I think, you know, it`s the old saw about don`t fight the Fed, if the Fed is at work trying to boost the economy, trying to support economic activity, cheaper money is always better. And I think in particular when you look at consumer behavior, mortgages, affordability of homes and the potential for capital expenditure, that always helps.
Of course, the trade uncertainty doesn`t help. And I think, you know, investors are going to be weighing those two things at the same time.
HERERA: So, where is the best place to put your money on a global basis?
SMART: Well, I think as people look around the world, the global economy has been slowing and you`ve seen a variety of data streams in the economic sphere. But even as the United States has been slowing, it is still the best game in town when you compare it to Europe, you compare it to Japan, when you compare it to the uncertainties in China or other emerging markets right now. I think the United States is still the preferred destination. That`s why you see a lot of foreign funds coming into the market both stocks and bonds right now.
GRIFFETH: And it may explain why we see a stronger stock market than we might otherwise expect.
Christopher Smart with Barings Investment Institute — again, thanks for joining us tonight.
SMART: My pleasure.
HERERA: The new head of the Federal Aviation Administration was sworn in and today, he made clear how he plans to handle the grounding of the Boeing (NYSE:BA) 737 MAX.
(BEGIN VIDEO CLIP)
STEPHEN DICKSON, FAA ADMINISTRATOR: This plane will not fly in commercial service again until I`m completely assured that it is safe to do so. The FAA is not following any time line for returning the aircraft to service.
(END VIDEO CLIP)
HERERA: As you may know, the plane has been grounded since mid-March following two fatal crashes. Shares of Boeing (NYSE:BA) fell more than 1 percent in today`s trading session.
GRIFFETH: Time to take a look at some of today`s “Upgrades and Downgrades”. I have a couple to tell you about tonight.
Humana (NYSE:HUM) was upgraded to overweight from neutral at Cantor Fitzgerald. The analyst cited the growth in its Medicare Advantage business and its strong second-quarter results. Price target $345, but despite that upgrade, shares fell a traction today to $295.50.
Occidental Petroleum (NYSE:OXY) was downgraded to inline from outperform at Evercore ISI. The analyst says that the acquisition of Anadarko Petroleum (NYSE:APC) makes Occidental larger but significantly less valuable. Coverage was resumed without a price target. Shares were down 4-1/2 percent today to $44.99.
HERERA: Still ahead, a view of international maritime trade like few have seen before.
GRIFFETH: The Department of Agriculture is forecasting a bigger than expected corn harvest this season. That is surprising given the harsh weather that included a wet spring followed by very dry conditions across much of the Midwest. That`s why analysts have been expecting the government to lower its estimates, but it was just the opposite, and that sent corn futures down sharply today along with shares of farm equipment maker Deere.
HERERA: As we mentioned earlier in our program, mass protests in Hong Kong shut down that city`s main airport earlier today. That is significant because it`s one of Asia`s major financial hubs.
And as Eunice Yoon reports, the unrest is putting some luxury brands in an unusual position.
EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Hong Kong airport is effectively shut down. All flights canceled. Airport officials have been warning people not to go there because many fear a major showdown between thousands of protesters and riot police. Protesters have been at the airport for days to raise awareness among travelers of concerns that Beijing is increasingly encroaching on their civil liberties.
However, footage emerged over the weekend showing police charging into a subway station, firing people at point-blank range with nonlethal weapons. One woman was shot in the eye and that has been enraging people, motivating them to join the demonstrators at the airport.
The protesters are calling for an inquiry into the police. Chinese officials here in Hong Kong has said the recent violence is showing signs of terrorism. State media have been featuring videos of armed police gathering in the Chinese city of Shenzhen across the border from Hong Kong and that has been raising concerns about what Beijing will do next.
Businesses are under pressure to take a side over Hong Kong. People on social media have been calling for boycotts for brands they believe don`t properly respect China`s sovereignty. Coach (NYSE:COH), Versace and Givenchy are being fiercely criticized for t-shirt designs that to the Chinese eye appear to list Hong Kong as a separate country to China instead of a Chinese territory.
All three labels have apologized but the authoritative “People`s Daily” posted a warning, directed at all multinational companies, saying if you challenge the bottom line of Chinese sovereignty, how far do you think you can stay in China before your body becomes cold?
For NIGHTLY BUSINESS REPORT, I`m Eunice Yoon in Beijing.
GRIFFETH: Blackrock buys a stake in the parent of “Sports Illustrated.” And that`s where we begin tonight`s “Market Focus” with the asset management firm buying a majority stake in authentic brands group for about $875 million. Authentic Brands also owns the retail chains Aeropostale (NYSE:ARO) and Nine West. The company CEO says that this deal values this deal at more than $4 million. BlackRock (NYSE:BLK) shares fell more than 2 percent today to $416.34.
Cloudera says it`s going to give billionaire investor Carl Icahn two board seats as part of a settlement that limits Icahn`s ownership of the Cloud date company. Icahn will cap his ownership stake at no more than 20 percent. Shares of Cloudera dropped more than 4 today percent to $6.69.
And Tyson Foods (NYSE:TSN) says nearly 4,000 workers will be out of work after a wildfire partially damaged one of its meat processing plants in Kansas. No injuries were reported. The company did say it`s going to provide those workers with what it called some guaranteed pay. The plant will be closed indefinitely and there are still no details about what caused the blaze. Stock was down a fraction today to $88.27.
HERERA: Rite Aid (NYSE:RAD) has named Hayward Donegan as its new CEO, replacing John Stanley who stepped down after leading that drugstore chain for the past nine years. Shares fell more than 2 percent to just about $7.02.
Barrick Gold`s results came in line with estimates and earnings estimates. The world`s second largest gold producer saw an increase in production and a rise in the price of gold due to the continued trade war with China. The stock was down a fraction to $17.97.
And food distributor Sysco (NYSE:SYY) beat earnings expectations but fell short on revenue estimates. The company saw an increase on operating expenses due to higher labor and supply chain costs. Shares rose more than 3 percent to $72.19.
GRIFFETH: Saudi Aramco reported a 12 percent drop in its profits in the first half of the fiscal year, although it still generated about $47 billion in net income. The company cited weaker global oil prices for that decline. Saudi Aramco has been releasing more details lately about its finances as officials consider whether to list its shares on the public market. Today, the price of domestic crude rose despite all of those concerns we`ve been talking about, about a global economic downturn.
HERERA: At the center of the energy market is the Strait of Hormuz. It is considered the single most important oil passageway because it`s the only way to move oil from the Persian Gulf to the world`s oceans.
Hadley Gamble traveled to the region for a firsthand look.
HADLEY GAMBLE, NIGHTLY BUSINESS REPORT CORRESPONDENT: With crude oil prices in a slump that even a geopolitical crisis in the Persian failed to shake, the U.S. is struggling to form a coalition to protect international maritime trade, including the 21 million barrels of oil in transit each day.
REAR ADMIRAL MICHAEL BOYLE, USS ABRAHAM LINCOLN: In this particular case, where 20 percent of the world`s oil comes through the Strait of Hormuz, that`s not just a United States issue. That`s a global issue.
GAMBLE: Operating today out of the North Arabian Sea at the southern tip of the Strait of Hormuz, the USS Abraham Lincoln is one of two U.S. aircraft carriers in the region tasked with deterring Tehran.
CAPTAIN WALTER SLAUGHTER, USS ABRAHAM LINCOLN COMMANDING OFFICER: This is 4.5 acres of sovereign U.S. territory that I can park anywhere in the world. We`re kind of the 911 force if something were to happen. We can move the ship up there very quickly. The beauty of a Navy aircraft carrier is our speed and agility, one of the fastest ships the Navy has, so we`re able to reposition very quickly.
GAMBLE: Though with six attacks on tankers since President Trump`s decision to double down on security in the Gulf back in May, many question whether even such a sizable force is really enough.
CAPTAIN BILL REED, USS ABRAHAM LINCOLN: The aircraft carrier is a great symbol of American presence. We show up, we`re ready, we`re ready to act, and what that does is if we try to add stability to the region. What we have seen is we`ve seen there`s an understanding from Iran, our goal is not to go to war with Iran.
HADLEY: So, the 5,600 crew members, 89 flights a day, no doubt, a massive undertaking her aboard the USS Abraham Lincoln, but many back at home beginning to question whether the trillions of dollars spent to keep the Fifth Fleet in action here in the Persian Gulf are really paying off.
In June, President Trump tweeted as much saying, China gets 91 percent of its oil from the strait, Japan 62 percent, and many other countries likewise. So, why are we protecting the shipping lanes for other countries for zero compensation?
And while the U.S. already partners with 33 nations to protect commercial shipping lanes, gulf oil exporters may find getting their crew to market in the future could come at a cost.
BOYLE: What`s more critical for them that freedom of navigation is maintained through the Strait of Hormuz probably than it is for us. So, I think they see us as a reassuring presence here in the region.
GAMBLE: Does that mean they should be paying for it?
BOYLE: I don`t — I can`t say that.
GAMBLE: For NIGHTLY BUSINESS REPORT in the North Arabian Sea, I`m Hadley Gamble.
GRIFFETH: And coming up, how to get a legitimate edge in the college application process.
HERERA: Amazon (NASDAQ:AMZN) wants to open another type of brick-and- mortar store, one that sells alcohol. As first reported by the “San Francisco Business Times”, the company applied for a license in the city of San Francisco. The application is still pending. It would allow Amazon (NASDAQ:AMZN) to deliver alcohol through its prime mail service. Prime customers can get some items delivered within two hours.
GRIFFETH: College students are getting ready to head to school, some for the very first time, and while the college admissions scandal remains fresh in the minds of some parents, our Scott Cohn reports that there is a way to legitimately use a college admission coach.
SCOTT COHN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Long before confessed college admissions fraudster Rick Singer launched his massive scam, he was running an apparently legitimate consulting business in Sacramento.
But parent Margie Amott immediately sensed something was wrong.
MARGIE AMOTT, EDUCATIONAL CONSULTANT: His main pitch was I can get you into college X and I was appalled because no ethical counselor can ever say that.
COHN: Amott immediately started her own consulting business, competing with Singer for a time. He moved to southern California, rigging exams and creating fake athletic profiles for hundreds of students. Rich parents were so desperate, they paid $25 million to rig the system.
Getting into college can be at least as stressful for the parent as it is for the student, but there are ways to channel all that energy constructively and you don`t have to be rich or famous.
First, consider what`s available for free, the school guidance counselor.
AMOTT: The ones I`ve dealt with, they are amazing.
COHN: If you want to hire help, look for a certified educational planner. They`re not cheap, a full package starting around junior year will cost upwards of $5,000, but a far cry from the hundreds of thousands Rick Singer charged. A good planner will motivate the student to do the work.
AMOTT: I want the kids to be engaged they`ve made the choice.
COHN: College application season is one of those times that put your parenting skills to the test.
COHN: Thirty-four wealthy parents who did not do well on that test have been charged in the college admission investigation known as Operation Varsity Blues. The investigation is not over yet. More parents, coaches, and others could be charged and authorities won`t rule out charging students or schools. Bill, Sue.
GRIFFETH: Scott, what is the status of Rick Singer, the mastermind of this scam right now?
COHN: Yes. We reported on him extensively for an episode of CNBC`s “American Greed.” He is still cooperating with authorities. He is still naming names.
He was supposed to be sentenced next month. That sentence has just been pushed back indefinitely as he continues that cooperation.
HERERA: You know, Scott, the colleges have been portrayed as victims, so what are they doing, if anything, to prevent this from happening again?
COHN: Well, Sue, there were eight elite colleges that were touched by this scandal, all have said they knew nothing about the fraud that Rick Singer was pulling off, and they`ve all promised various types of reforms and reviewing the students that are involved. But there are also those who look at this industry who say that perhaps the colleges don`t mind the publicity because it shows just how desirable they are, that the richest, most powerful people are willing to get into them, willing to do anything to get their kids into them.
And so, there`s a lot of skepticism about what they`re going to do on a substantive basis, but they do say they are making changes.
GRIFFETH: I`m intrigued about this certified educational planner that you profiled. What is that? I mean, how do you find one?
COHN: You know, it`s a little bit tricky because there are actually a number of different organizations that have these — issue these sorts of certifications, all totally voluntary. And that`s one of the issues of this. There are about 13,000 or so educational planners, admission coaches or the like that are out there. Only about 20 percent of them have any sort of certification.
The American Institute of Certified Educational Planners is one of them, the one that Margie Amott, who you heard from a moment ago, that she belongs to. They have to do site visits to colleges, they have to do continuing education, so it is a good thing to ask about. One of the first places you can ask is your high school guidance counselor if you`re looking for outside help. These do not come cheap.
I mean, it can be like $5,000 or so for a full package, but of course it is a lot less than what Rick Singer was charging. Plus, they do it legitimately.
HERERA: Exactly. Very quickly, Scott, the students themselves, what are the schools doing about students that may have been admitted?
COHN: Well, they`re reviewing all of them. In some cases, their registrations are on hold. Some students have been expelled. There are literally thousands of people who worked with Rick Singer, some legitimately, some that did not. They`re all being reviewed.
GRIFFETH: Scott Cohn in San Francisco, again, thanks, Scott. And to read more about these college admissions coaches, you can head to our website at NPR.com.
HERERA: A quick look at the final day`s numbers on Wall Street. Due to a technical issue towards the close, not all of the volume may have been accounted for. Here`s what we have, the Dow was down about 389 points, the Nasdaq down 95, S&P down 35.
And that is NIGHTLY BUSINESS REPORT. I`m Sue Herera. Thanks for joining us.
GRIFFETH: I`m Bill Griffeth. Have a great evening. See you tomorrow.
Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by ASC Services II Media, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2019 CNBC, Inc.
<Copy: Content and programming copyright 2019 CNBC, Inc. Copyright 2019 ASC Services II Media, LLC. All materials herein are protected by United States copyright law and may not be reproduced, distributed, transmitted, displayed, published or broadcast without the prior written permission of ASC Services II Media, LLC. You may not alter or remove any trademark, copyright or other notice from copies of the content.>