Transcript: Nightly Business Report – August 14, 2019

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR:  Stocks tank.  The Dow falls  800 points, it`s worst day of the year, as the bond market flashed an  ominous sign and fears of a worldwide economic slowdown took hold.  

BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR:  We`ll explain what it  means, why it happened and what it all could mean for your investments and  your money.  
We have those stories and much more tonight on NIGHTLY BUSINESS REPORT for  Wednesday, August 14th.  

And we do bid you a good evening, everybody, and welcome.  
This says it all right here.  As Sue said, it was the worst day of the year  for the Dow Jones Industrial Average.  It was ugly before the opening bell  as investors remained on edge about slowing global growth after new reports  out of China showed the world`s second largest economy is hurting and a  separate report showed that Germany isn`t doing much better.  That set the  tone.  

Then, our bond market gave the loudest signal of all, yields inverted.   That means that shorter term treasuries paid out more than longer term  treasuries, and that doesn`t happen very often.  But when it does, it has  been a good predictor of recessions.  

And from there, investors pulled money out of stocks today with the Dow  plummeting 800 points, it was the low of the day at 25,479, the Nasdaq  dropped by 242, the S&P fell by 85.  

Now, a lot of this is technical.  We know a lot of it is complex, but we`re  going to do our best to try to explain it and describe how it could impact  you.  
We begin with the market sell-off and Bob Pisani at the New York Stock  Exchange.  

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT:  The stock market is  getting punched in the gut from all angles, including the bond market,  which is now flashing warning signs of a possible recession.  As it  concerns yesterday`s tariffs delays maybe isn`t the secret sauce that will  improve the markets after all, but the immediate driver of today`s weakness  was more signs of a global slowdown.  

Overnight, China released its industrial production figures for July, which  showed industrial output in the world`s second largest economy slowed to  its weakest growth in 17 years, and Germany`s second quarter GDP shrank as  well, meaning Europe`s largest economy is on the verge of falling into a  recession.  Growth in the eurozone all slowed down significantly from the  first quarter.  

Now, naturally economically sensitive cyclical stocks like financials,  retail, energy and tech led the markets lower.  Banks got beaten up from  pressure on bond yields and falling crude prices weighed on energy names  like Chevron (NYSE:CVX) and Apache (NYSE:APA).  But really everything sold  off except for gold and utilities and a handful of consumer staple stock.  
A basket of retail stocks and energy stocks dropped to bear market levels,  meaning they`re down 20 percent or more from their recent highs.  It has  been a tough day all around.  

So, where is the bottom?  Some are looking to the 200-day moving average  for the S&P 500 for short-term support.  It is still a ways away from  today`s close of 2,840.  
For NIGHTLY BUSINESS REPORT, I`m Bob Pisani at the New York Stock Exchange. 

HERERA:  Bob just mentioned the weak report out of China which shows just  how much of a toll the trade war is taking on the Chinese economy.  
Let`s go now to Eunice Yoon in Beijing.  

EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT:  The tariff dispute is  squeezing the economy here.  The data out today missed July industrial  output, came in at the worst level in 17 years, retail sales sank, hit by  weaker auto purchases.  The Chinese Statistics Bureau says the economy is  facing increasing downward pressure but that the impact of the trade war  should be controllable.  

As for President Trump`s tariff reprieve, the interesting part is that  Beijing didn`t officially respond.  State news agency Xinhua reported on  the phone conversation between trade negotiators but only said that China  lodged its opposition to the tariffs that will kick in September 1st, which  suggests that China doesn`t see the move as particularly meaningful.  

I spoke with suppliers who sell to the United States, and many said that  President Trump`s relief wouldn`t have a major impact since many Christmas  shipments are already out, though it does give them extra time to adjust  pricing into 2020.  
For NIGHTLY BUSINESS REPORT, I`m Eunice Yoon in Beijing.  

HERERA:  And now to that warning sign from the bond market.  The last time  the yield curve inverted was more than a decade ago and we all know what  happened soon after.  That is why Wall Street had such an intense reaction  to this market phenomenon.  

HERERA:  It doesn`t happen often, but when the two-year Treasury bill  begins paying more interest than the 10-year note, recent history indicates  there`s a recession coming.  This morning, the payouts on the notes crossed  — an ominous warning to investors and market watchers.  
Think of it is tame way you would think about how your bank pays interests  on certificates of deposit or CDs.  A six-month CD is lower risk and it  ties up your money for less time, so the interest paid on that CD is  typically less than the amount paid on a longer term CD, like a three-year  or a five-year.  
So why is it imp

ortant?  The last five times it has happened since the late  1970s, a recession has followed, sometimes a year later, sometimes almost  two years later.  The inversion itself won`t cause a recession, but it  means markets, the Federal Reserve and consumers will all be extra  sensitive to economic data in the coming months.  

GRIFFETH:  And, in fact, according to Credit Suisse, a recession usually  does occur on average 22 months following such an inversion and often the  S&P is actually higher one year after an inversion.  So now that this  warning signal has been flashed once again, what happens next?  
We`re joined tonight by Kathy Jones.  She is chief income strategist at  Charles Schwab.  

Kathy, it`s always good to see you.  Thank you for joining us tonight.  

GRIFFETH:  Janet Yellen said today it was possible it was a false signal by  the bond market.  What do you think?  

JONES:  Well, there have been instances where we`ve had the yield curve  invert in the past and it hasn`t led to recession, so there have been a few  false signals.  I think what she was referring to was the fact that in this  particular case the reason short-term rates are above long-term rates is  that long-term rates are falling rather than the reason being that rates  are rising and the Federal Reserve is tightening policy by raising short- term rates.  So, because it`s being led by the longer-term rates, she may  be implying that this may not be consistent with the past.  

HERERA:  So what could change the situation?  Because this inversion came,  as Bob mentioned earlier, against weak global growth, the numbers out of  Germany were bad, the numbers out of China were bad, which complicates the  situation, does it not?  

JONES:  Absolutely.  I think the falling long-term yields in the United  States and all around the world are reflecting that slowdown in global  growth and that fear of a global recession compounded by the trade  situation.  
So I think the risk of recession certainly is rising for those reasons.  I  think what happens next is we probably will see the Federal Reserve lower  short-term interest rates to try to offset some of the impact of the  slowdown in the global economy.  

GRIFFETH:  And, of course, the $64 question, what does the individual  investor do with all of this right now?  

JONES:  Well, you know, first things first, is if you are an investor, take  a deep breath, take a look at what you own, and are you comfortable with  where you are in terms of the risks that you are taking.  And do you need  your money in the next one to two years?  

So, if you do, that money should be in a safe place like a CD or a treasury  bill.  And if you have that tucked away and the rest of your money is for  long-term horizon, then, you know, you may be OK.  But if it is  uncomfortable, you might want to rebalance.  He you might want to move into  less volatile securities, have more bonds than stocks.  

It`s really about having kind of a financial plan laid out where you can  ride the ups and downs of the market.  But you have to have the capacity to  do that, to take the risk.  

GRIFFETH:  Kathy Jones with Charles Schwab.  Again, thank you for joining  us tonight, Kathy.  

JONES:  Thank you.  

GRIFFETH:  And a little later in the program, we`ll look at some other  investment opportunities that are taking shape in this market right now.  

HERERA:  Concerns over the global economy rippled into the oil market, both  benchmark Brent and domestic crude settled 3 percent lower today.  
Here to discuss oil prices, John Kilduff, founding partner at Again  Capital.  Good to see you, John.  

JOHN KILDUFF, FOUNDING PARTNER, AGAIN CAPITAL:  Good evening, Sue.  Good to  see you.  

HERERA:  Where do we go from here?  Do you think that the drop will  continue?  

KILDUFF:  Well, just a couple of weeks ago we tested potentially breaking  the $50 mark for the U.S. grade WTI.  All of the economic data points that  Bob Pisani spoke about earlier in the program go right to the heart of the  demand side of the equation for oil prices.  It is the key.  

Given how much the U.S. is producing, given how hard OPEC is trying to hold  back on supplies, the crucible of all of this is Asian demand.  And the  fall-out from the U.S./China trade war affects the major Asian economies  you have been talking about the most, Japan, South Korea, China itself.   And, of course, Germany, the other main manufacturing and oil demand  center, because they manufacture so much and sell into the Asia region  which is weakening.  So, it`s a really bad card for the oil market we`re  having this trade war persist, not get better.  

GRIFFETH:  What do you expect the producers to do about it, not just OPEC?   U.S. producers are a major portion of this equation now as well.  

KILDUFF:  No doubt.  I mean, we are certainly seeing signs of financial  strain within the pure play shale drillers.  None have gone down yet  although we had a bankruptcy last week and there`s probably more to come,  and we`re seeing the U.S. rate count slowly creep lower and lower.  
There`s still a bounty.  We are still providing 12.3 million barrels a day,  exporting upward of 3 million barrels a day.  We`re a major, major player.
And to the point that the Saudis have said the past week they`re going to  do, quote, whatever it takes.  Sound familiar?  To try to balance the  market and get prices stabilized, which is Latin for them back higher.  So  — but they have their yeoman`s work cut out for them and I don`t think  they can do.  

HERERA:  OK.  In they can`t do it, that begs the question as to where oil  prices go from here.  Key levels are 50 certainly on the oil market.  Where  do we go?  

KILDUFF:  I think we`re going to go back down and test that 50, probably go  back down into the 40s.  This is bad news for the U.S. oil patch, but  nothing is better for helping to stimulate the economy, prop up the U.S.  consumer, who is two-thirds of the economy with lower gas prices.  They  will be usually smiling as those gas prices can somehow in some communities  can dip below $2 a gallon and you will see that.  

HERERA:  All right.  John Kilduff of Again Capital — thank you, John.  
KILDUFF:  Thank you.

GRIFFETH:  See you later, John. Now, as bond yields have been declining so have mortgage rates.  And as a  result homeowners rushed to refinance last week, no surprise.  The Mortgage  Bankers Association said this morning refinancing volume surged to the  highest level in three years.  Refinancings can support the economy by  leaving households with extra cash and overall applications for new  mortgages, they were up more than 20 percent last week compared to the  prior week.  

HERERA:  It is time to take a look at some of today`s “Upgrades and  Downgrades”.  

Bristol-Myers was upgraded to overweight from neutral at Atlantic Equities.   The analyst cites upcoming data on some of the drugs in second half of the  year.  The price target is $63.  Shares fell nearly 2 percent to $45.64.  

CVS (NYSE:CVS) was upgraded to buy from neutral at Bank of America  (NYSE:BAC) Merrill Lynch.  The analyst cites the deal with Viacom  (NYSE:VIA) and the new company`s strategic positioning.  The price target  is $63.  

GRIFFETH:  But not all firms agreed.  Bernstein downgraded CVS (NYSE:CVS)  today to underperform from market perform.  This analyst says that CVS  (NYSE:CVS) stands to lose more from inheriting Viacom`s structural problems  than it would gain from any synergies.  The price target there, $46, and  that stock was down 8 percent today to $44.65, part of the sell-off today. 

Meanwhile, Ferrari was upgraded from buy to neutral at Goldman Sachs  (NYSE:GS).  The analyst cites the luxury automakers strong backlog and  solid demand.  Price target, $182.  Shares fell 3 percent to $155.90.  
HERERA:  Still ahead, why the magic of Macy`s (NYSE:M) may just be an  illusion.  

HERERA:  A tough quarter for Cisco (NASDAQ:CSCO).  The company is  forecasting first quarter profit below Wall Street estimates as it tries to  transition away from selling routers and switches.  Earnings in the most  recent quarter came in slightly better than expected and revenue was higher  from a year ago, but investors focused on the outlook, sending shares lower  in initial after hours trading.  
Josh Lipton has more on Cisco`s quarter.  

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Cisco (NASDAQ:CSCO) is  a tech bellwether, giving us a good read into the health of enterprise  spending.  That`s why investors pay close attention to the company`s  results.  

RBC`s Mitch Stevens, who covers Cisco (NASDAQ:CSCO), says the report itself  was basically in line, including its so-called infrastructure platform  segment that refers to the company`s core networking offerings related to  switching and routing, but guidance he said was weak on the top and the  bottom.  That tells us, Steve says, that more broadly overall I.T. spending  could be slowing down here too.  

For NIGHTLY BUSINESS REPORT, I`m Josh Lipton in San Francisco.  

GRIFFETH:  And the quarter wasn`t any better for Macy`s (NYSE:M) either.   It is facing a number of issues from higher costs from tariffs to deep  discounts that eat into profits.  The department store chain missed profit  forecast for the first time in two years and cut its full-year forecast at  the same time.  That stock sent — it sent the stock down 13 percent today  in the session.  
Courtney Reagan has more on the mess at Macy`s (NYSE:M).  

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Macy`s (NYSE:M)  quarter didn`t go as planned.  Some of the department store`s women`s  clothing disappointed shoppers, sales of warm weather apparel was slow and  international tourist spending was down.  International tourists typically  buy full-price merchandise and make few to no returns.  

As a result, Macy`s discounted merchandise more than planned to entice  consumers to buy and that took a big bite out of earnings. 

CEO Jeff Gennette told me, quote: We took our medicine, we took almost a  full point of margin with the additional mark downs.  Adding, we needed to  protect fall.  

Still, there are headwinds and uncertainty ahead.  Macy`s (NYSE:M) lowered  its annual earnings forecast to reflect this quarter`s miss, but it doesn`t  include the impact of tariffs on September 1st and December 15th.  The  retailer is still evaluating its plan to address those higher costs.  

Gennette told me he learned from the last round of tariffs going from 10  percent to 25 percent in May that, quote, the customer has no appetite for  price increases, and that right now, we are expecting that there won`t be  price increases, at least with new tariffs at 10 percent.  If tariff rates  increase to 25 percent, Gennette says he will have more work to do to  figure out how to manage the higher costs without raising prices.  

Macy`s (NYSE:M) stock plunged on the disappointing earnings and on the more  persistent concern for department stores in general, which Gennette  addressed as he tried to reassure investors on the conference call.  

JEFF GENNETTE, MACY`S CEO:  While we know there is negative sentiment on  our sector, we are confident in our plans.  There is strong consumer demand  for high-quality, affordable fashion.  We are strengthening our  relationship with our current customers and bringing new customers into the  brand.  

REAGAN:  Macy`s (NYSE:M) comparable sales grew slightly.  It just logged 40  straight quarters of double digit online sales growth and its back-stage  discount department at the stores that have it.  The retailer is  experimenting with consignment clothing and its Bloomingdale division is  piloting a clothing rental program.  
But there may be external forces more powerful than even the right  strategy.

JAN KNIFFE, JAN ROGERS KNIFFEN WORLD WIDE:  I think he is doing all of the  right things.  I don`t think there`s something Macy`s (NYSE:M) really could  be doing different than what they are doing.  I just think the environment  as a mall-based retailer is really tough and not going to get easier.  

REAGAN:  Especially if broader concerns about a recession become a reality.  
For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan.  

HERERA:  Teva and Mylan (NASDAQ:MYL) are getting pressure from Washington.   That`s where we begin tonight`s “Market Focus”.  
U.S. lawmakers want the pharmaceutical companies to hand over documents as  part of an ongoing investigation into generic drug price increases.  The  probe was initially launched in 2014, and in May, 44 states filed a lawsuit  against both companies, alleging price fixing.  Teva shares dropped more  than 10 percent to just about $6.30.  Mylan (NASDAQ:MYL) was off more than  8 percent to $18.04.  

Outer wear maker Canada Goose saw its sales grow in all geographic regions  which helped that company top revenue estimates, but the retailer reported  an earnings miss and it plans to maintain its prior full-year outlook.   Canada Goose shares dropped more than 7 percent to $39.97.  

GRIFFETH:  Disney (NYSE:DIS) and Charter Communications (NASDAQ:CHTR) have  reached a multiyear carriage deal, avoiding any blackouts of Disney  (NYSE:DIS)-owned networks on Charter`s cable service.  Charter will also  now include Disney`s new streaming network in its package to subscribers.   Disney (NYSE:DIS) fell 3 percent today to $132.85.  Charter shares dropped  more than 1 percent to $375.18.  
And Starbucks` main rival in China, Luckin Coffee, posted the first  earnings report since going public.  The Chinese company beat revenue  estimate but fell short of earnings targets.  Luckin has been aggressively  discounting prices and it has found success with several smaller pickup  stores.  Shares plunged though by 16 percent to $20.44 today.  

HERERA:  With recession fears creating steep declines in the stock market,  you are probably wondering if there are still opportunities in the market.   Our next guest, Ben Phillips, joins us now with some ideas.  He is founder  and chief investment officer at EventShares.
Ben, nice to have you here.  

BEN PHILLIPS, EVENT SHARES FOUNDER & CIO:  Thanks for having me, Sue.  

HERERA:  Quite a day to have you here actually.  What did you make, first  of all, of today`s sell-off?  And what did you do during the sell-off?  
PHILLIPS:  Well, we`re long-term investors which I think most of your  viewers are as well so we`re not reacting necessarily to the news, but we  are looking for opportunities.  I think that`s why you`re having me on.  We  are looking for areas, though, and I think that`s why you have me on.   We`re looking for areas of the market that maybe are being dislocated  because it does look like it`s just broad-based selling.  

So, it`s not necessarily — there`s no rhyme or reason to it.  It`s just  everyone is de-risking, they`re selling stocks overall. 

GRIFFETH:  So you are looking for sectors that didn`t deserve to be sold  off, those not necessarily as exposed to the global economy as others.  So,  what sectors are we talking about here, do you think?  

PHILLIPS:  Yes.  So, we like telecom, particularly the 5G, the fifth  generation of telecom roll out.  We like health care as well, certain areas  of health care, even some of the managed care which has been beaten up.  We  are generally more cautious on pharma and the drug distributors.
And we like some renewable energies.  We like some, you know, some  infrastructure names as well.  So, there are pockets of opportunity out  there, but you do have to know where to look.  

HERERA:  Right.  Perhaps just as importantly, what would you be staying  away from?  

PHILLIPS:  Well, we`re more cautious probably on technology, both from more  policy-based investors looking at policy changes and how that`s going to  influence sector economics and the fundamentals of different companies.   Our view on technology is going to be continuing challenge the regulatory  environment.  We are seeing it more and more in the headlines but we expect  it to continue.  

We also think that individual investors are generally overexposed to  technology, given the run the tech stocks had over the past few years.  So,  you see the tech stocks are becoming a bigger portion of the portfolio but  people are not necessarily selling and rebalancing back to lower weightings  or more appropriate weightings.  

GRIFFETH:  And with yields of multiyear lows, do you see any opportunity in  fixed income right now, Ben?  

PHILLIPS:  Well, we do.  We have — we think the ten-year will go close to  zero and could dip into the negative territory in the next recession.   There are opportunities in bonds, particularly U.S. treasuries, municipal  bonds as well.  We are more cautious on corporates, investment grade and  high yield both, but there are opportunities in the U.S. 

HERERA:  Do you think the longer term investor should perhaps increase  their cash position if, indeed, we still have the headline risk of the  trade war slowing global growth, especially in Germany and China?  

PHILLIPS:  Yes, absolutely and great question.  I think a lot of people  forget to view cash as an asset class.  You can use cash.   It creates a  lot of optionality in your portfolio.  

So, people who are sitting on a lot of cash right now probably feeling  pretty good when they look at the volatility and they may be able to dip in  sooner and buy some of the bigger dips.  You know, this is not the  beginning of a recession we don`t think, but it is good to be raising the  dry powder, raising cash balances, have maybe two years on reserve plus  four times when the markets get really volatile and everyone says, don`t  ever own a stock again.  

HERERA:  On that note, Ben Phillips with Event Shares — Ben, thank you.  
PHILLIPS:  Thank you.  
GRIFFETH:  And coming up, the airline industry is facing a number of  challenges and now it is dealing with one more.  

GRIFFETH:  Yes, the sun will come up tomorrow and here is what we are  watching.  
Walmart reports earnings amid questions over the impact of tariffs.  Retail  sales overall for July will tell us if the consumer is still spending, and  we will find out if the home building industry is feeling confident in this  falling interest rate environment.  That`s coming up Thursday.

HERERA:  WeWork is expected to go public as soon as next month.  Today, the  company released the most detailed financial report to date and we learned  that the workspace rental company lost $900 million in six months on $1.5  billion in revenue.  WeWork`s business was valued at $47 billion after its  last funding round.  In a year full of public offerings, it is expected to  be one of the largest of the year.  

GRIFFETH:  And concerns over a global slowdown pressured the airline sector  today.  American, United, Delta, they all fell about 3 percent to 5 percent  in today`s session.  Add to that the ongoing grounding of Boeing (NYSE:BA)  737 MAX, and that`s creating an additional headache for the industry as it  starts to plan for its next big rush, the holiday travel season.  
Phil LeBeau has more.  

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT:  There`s no slowdown in  demand for air travel.  Great news for airlines.  But with hundreds of 737  MAX planes grounded, setting schedules has become a juggling act.  

Just ask Vasu Raja, head of scheduling for American Airlines.  

VASU RAJA, AMERICAN AIRLINES VP:  This is probably one of the more hard, if  not the hardest scheduling problem that the airline could have.  We`re  making a lot of changes to the schedule which impacts literally every part  of the airline.  

LEBEAU:  Since the FAA grounded the MAX in March, American has pushed the  return of the plane from April to June, August, September, and now,  November.  

Here is the problem: All airlines set schedules up to a year in advance,  coordinating flight crews, maintenance themes and airport operations.  For  American, that means planning almost 7,000 daily flights with more than  1,500 planes flying to 365 destinations.  Not just in the U.S., in 61  countries around the word.  

Lock in a schedule so customers book trips with no last-minute changes.  
RAJA:  Most of our customers, certainly in our domestic system, start  booking their travel at about 90 to 100 days from the time they actually  plan to fly.  The point at which we would like to be able to make that  decision is the 90 to 120-day window.  

LEBEAU:  Ninety days from now is early November, when American and United  plan to fly the MAX again, while Southwest has pushed it off the schedule  until January.  

But if the MAX is not ready to take off and American has to cancel more  flights, again, then many travelers who booked flights for Thanksgiving  weekend that were supposed to be on a MAX will have to be rebooked on other  flights, and the scheduling headaches begin again.  

SUSAN DONOFRIO, MACQUARIE RESEARCH:  The last thing the airlines would want  is to have a schedule that they have to all of a sudden change and then  people, you know, have to cancel their plans.  

LEBEAU:  It is not just the impact on passengers but also on the bottom  line.  Take Southwest.  It`s cut flights for later this year because it  won`t have as many planes as originally planned, and at American, it`s  delaying the retirement of older, less fuel-efficient aircraft in order to  have enough seats to cover its schedule.  


HERERA:  Before we go, here is a look at the day`s final numbers on Wall  Street.  The Dow plummeted 800 points.  Nasdaq, down 242, and the S&P 500  skidded 85.  

That is NIGHTLY BUSINESS REPORT for tonight.  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 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.

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