ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Susie Gharib, brought to you in part by —
TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Wall Street worries. Stocks sink, economic growth estimates cut, as the federal shutdown enters its second week with no end in sight.
SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Housing threat? Are home buyers starting to get hurt by the crisis in Washington? And how much worse will it get if the government stays closed for an extended period of time?
MATHISEN: And error messages. That`s what many are seeing as they try to log on to the new health care Web site. How serious are the design flaws and what can be done to fix them and how quickly?
All that and more tonight on NIGHTLY BUSINESS REPORT for Monday, October 7th.
GHARIB: Good evening, everyone.
It`s day seven of the government shutdown, and no signs that the United States is getting any closer to avoiding the first default in the nation`s history. There are no scheduled talks between Democrats and Republicans. There are no votes scheduled in Congress. And both sides appear to be digging in for a long fight.
But President Obama said today he would accept a short-term increase in the nation`s borrowing capacity in order to avert a catastrophic default. But he also said both sides need to come to the table.
(BEGIN VIDEO CLIP)
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: We`re not going to negotiate under the threat of further harm to our economy and middle class families. We`re not going to negotiate under the threat of a prolong shutdown until Republicans get 100 percent of what they want. We`re not going to negotiate under the threat of economic catastrophe that economists and CEOs increasingly warned would result if Congress chose to default on America`s obligations.
(END VIDEO CLIP)
GHARIB: Meanwhile, House Speaker John Boehner insists that he doesn`t want to see the nation default but said the president is the one who is not willing to negotiate.
(BEGIN VIDEO CLIP)
REP. JOHN BOEHNER (R-OH), SPEAKER OF THE HOUSE: The president had us all down to the White House last week, only to remind me that he was not going to negotiate over keeping the government open, or over the looming need to increase the debt limit. The president`s refusal to negotiate is hurting our economy and putting our country at risk.
(END VIDEO CLIP)
MATHISEN: Well, on Wall Street, with no real signs of progress to end that government shutdown or to raise the nation`s borrowing limit, the gravity of a possible debt default sank in and the stocks fell hard.
The Dow and S&P are at one-month lows. Today, those blue chip Dow stocks fell 136 points. The NASDAQ was down a steep 37, and the S&P 500 lost 14.
GHARIB: Is the government shutdown and no deal on extending the debt ceiling taking a toll on the markets and the economy?
Joining us now to talk more about all of that, Bruce Kasman, he`s chief economist for JPMorgan (NYSE:JPM) Chase, and Carmine Grigoli, chief investment strategies at Mizuho Securities.
Welcome, gentlemen, to NIGHTLY BUSINESS REPORT.
Let me begin by talking about the economy and start with you, Bruce, if I may.
What is your view on the economy? If the standoff goes right up to October 17th or if it goes a little beyond that, what impact does that going to have on the economy? How much is it going to shave off of economic growth? What do you think?
BRUCE KASMAN, JP MORGAN CHASE CHIEF ECONOMIST: I think the direct effect of the shutdown itself will be limited. It will take a few tens off the fourth quarter. I think the indirect effects of hurting confidence and increasing uncertainty will be a little more.
And the real question is what do we actually do when we get to the debt ceiling limit? If we have we have a solution that clears that out and doesn`t create ongoing problems, I think we`ll have relatively limited damage. But the uncertainty is how we get to that is what`s doing the damage now. And I wouldn`t want to express enormous confidence on how we resolve this, which is really the big issue.
MATHISEN: Carmine, let me turn to you, and what I should do with my money. If I am a typical investor with 60 percent stocks and 40 percent fixed income, is there anything I should be doing right now. And let me put it another way, why shouldn`t be raising cash against the possibility that this really goes off the tracks?
CARMINE GRIGOLI, MIZUHO SECURITIES CHIEF INVESTMENT STRATEGIST: Well, I wouldn`t panic, I think that`s the key here. If you go back in history, what you find is there`s a pretty compelling case that by a week, the markets typically and shutdowns do not react in a very big way. Corrections are normally short, shallow, and you recover relatively quickly. In fact, if you look at shutdowns of 10 days or more, you see a decline on average of about 2 1/2 percent. That`s comparable to what we`re seeing today.
There is no question that fear is intensifying here. I would be using this as an opportunity to buy, and not — it`s not an environment we should be selling.
GHARIB: Carmine, we are not getting government reports, obviously, because of the shutdown, but we will start getting earnings reports starting tomorrow with Alcoa (NYSE:AA) reporting. Will the investors be paying attention to those reports, or are they just going to keep all of their, you know, sights on Washington and what`s going on there?
GRIGOLI: It is going to be hard to shift the focus to earnings. But nonetheless, I think it becomes very important, especially in this particular earnings season. What we`ve seen here in the last couple of months is earnings expectations have been chopped in half. Analysts that have been expecting 6 percent growth are expecting to grow only at 3 percent.
But if you look at the breakdown between overseas earnings and U.S. companies that operate domestically, you`re seeing a big sea change — sea change occurred, with companies that are reporting from overseas, with big overseas earnings, are showing a big improvement in earnings. And I think that that`s going to continue into the fourth quarter this year.
MATHISEN: Bruce Kasman, you probably just heard the president describe the possibility of a debt default or a failure to raise the debt ceiling, as bringing about the possibility of economic catastrophe — his words. Do you see it that way? And would the failure to make good on the federal government`s obligations even for a couple of days, maybe even for a couple of hours, produce the economic catastrophe that so many seem to fear?
KASMAN: I think we have to consider what actually happens. I think if we stop paying our bills and stop paying Social Security, defense spending, all of the things that we do, we would over a period of a few weeks create a fairly significant economic damage that would be far worse than anything we`re seeing right now.
A day or two itself probably won`t be such a big deal. I think we have to recognize that. It is 3 percent to 4 percent of GDP, stop increasing our debt.
The second issue, if we missed debt payment in terms of interest or principle, that I think has unknown consequences. And I wouldn`t want to underestimate the potential impact of that. That we think is very unlikely but it would be a very scary thing to have to experience.
GHARIB: What about what all of this does to Fed policy? Does any of this uncertainly in Washington change the calculus of what the Federal Reserve will do next, especially since they`re working in a vacuum with all of the — you know, the lack of the economic reports. What`s your thinking, Bruce?
KASMAN: Well, we think the Fed already made a decision on September not to begin tapering, partly based on this calculus. We think that the length of the shutdown, the uncertainties that are building and the difficulties in seeing what the economy is doing afterwards may push them back into next year. The idea that they tactically wait, and if the shutdown and debt problems are behind us, they can come back on track looks less likely now with the extended shutdown, the lack of data and the potential risk just lie ahead.
GHARIB: All right, we`ll continue watching this very closely, as I`m sure you will, too.
Bruce and Carmine, thank you both for coming on the program. Bruce Kasman of JPMorgan (NYSE:JPM) Chase and Carmine Grigoli from Mizuho Securities — thank you, gentlemen.
MATHISEN: Well, China, the largest foreign holder of U.S. debt, weighing in today on the looming debt ceiling crisis in Washington, urging the lawmakers here to do what they can to avoid a default. The country`s vice finance minister has called for, quote, “concrete measures to raise the U.S. government`s borrowing limit before the October 17th deadline to protect the safety of Chinese investments.
GHARIB: Meanwhile, the government shutdown and the worker furloughs appear to be causing a problem in the housing recovery. Some lenders in the mortgage lending business are warning that they may not be able to work around the delays in receiving tax documents that are usually required from the IRS to make home loans. And some home loans have stalled entirely, leaving potential buyers out in the cold.
Diana Olick reports.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): A partial shutdown at the IRS threatens to shut thousands of borrowers out of home ownership.
BRIAN ROSS: This is just one more burden market that`s just trying to get its legs.
OLICK: Most lenders require IRS verification of the income stated on the mortgage application. The IRS is not providing that. So, lenders announced lat week they would suspend the requirement, but this week, they`re using words like “temporary” and “short-term”.
A Wells Fargo (NYSE:WFC) spokesperson said, “As that the government shutdown continues, we`ll continue to evaluate the circumstances.”
ROSS: There are a lot of bits and pieces we have to be thinking of. It`s also changing dramatically with each lender, each day. So, each lender has to take a stance on what they`re going to handle in the way of credit risk.
OLICK: Low down payment loans insured by the government`s FHA are still going through, thanks to a largely automated system. But for trickier loans that need the personal touch, only about 2 percent of the FHA`s staff of 3,000 are currently on the job.
Hardest hit, though, are rural borrowers depending on the government`s no down payment USDA loan program. That is shut down — no loans, it`s less than 5 percent of the market but a lot of these are first-time buyers who have no other options. One lender posted the problem on YouTube.
JOHN HUDSON, PREMIER NATIONWIDE LENDING: We`ve got a file in our office right now where literally you`ve got a borrower with five kids that are essentially homeless right now because we can`t get back from the USDA, because they`re shutdown as part of this whole mess.
OLICK: And as negotiations stall in D.C., so too does the local housing market.
THERESA TAYLOR, KW CAPITAL PROPERTIES REALTOR: I have had buyers decide to take pause. Even though they know they`re going to be ultimately be paid, they`re nervous. They don`t know how long this is going to last, and they don`t know what kind of impact it`s made them get out of the market.
OLICK (on camera): As the shutdown drags on, the risk to big banks rises, because they are essentially doing no doc loans, the ones that crashed the market. The irony is immense. All those mortgage safeguards from federal regulators go out the window because the government can`t put its own house in order.
For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Washington.
MATHISEN: Well, the federal work stoppage is forcing the furlough of 2,400 private sector workers at the defense contractor, Lockheed Martin (NYSE:LMT). Now, that`s fewer temporary layoffs than the company first reported and we first told you about last Friday, that`s because the Pentagon decided to recall 350,000 of its civilian workers over the weekend, keeping some work orders for the company in effect.
GHARIB: A better outcome for employees at United Technologies (NYSE:UTX) Sikorsky Helicopter Division. The manufacturer was the first to announce plans to furlough thousands of its workers due to the government shutdown. But now, those plans have been scrapped entirely, and that`s thanks to the same recall of civilian workers by the Pentagon.
MATHISEN: And there is more disruption related to that government shutdown that won`t make a lot of the farmers happy. The Department of Agriculture announced today that it won`t be publishing a key monthly crop report throughout this Friday because of the furlough of hundreds of USDA workers. Those employees have now missed out on the week`s worth of daily reports on livestock, poultry levels, grain reports, milk production and other metrics used in the monthly crop report.
GHARIB: It`s the first Monday in October, and that means a new term of the U.S. Supreme Court. Hearings began today on a handful of cases that are being watched closely by Wall Street and American businesses.
Hampton Pearson has more on what the justices will be looking this term and how it impacts business.
HAMPTON PEARSON, NIGHTLY BUSINESS REPORT (voice-over): The Supreme Court is open for business in spite of the government shutdown, six cases on the argument calendar this week, including tomorrow`s clash over campaign spending limit. McCutcheon versus the Federal Election Commission is the challenge to the overall limits on individual contributions. That limit is just over $123,000 in a two-year federal cycle.
If the challenger wins, individuals could contribute millions. Meanwhile, the Robert`s court will venture into unchartered territory, when justices take up the president`s power to make recess appointments. A lower court says President Obama went too far when he named members of the National Labor Relations Board and installed Richard Cordray as the first head of the Consumer Financial Protection Bureau without Senate confirmation during a congressional recess back in 2012.
ELIZABETH SLATTERY, HERITAGE FOUNDATION: The practical effect, though, is that the court has the opportunity to decide what the recess actually is, is it any break — during a session of Congress or is it only breaks that are between the enumerated sessions of Congress, which are, you know, typically in December, January of each year.
PEARSON: The power of the Environmental Protection Agency to make rules governing greenhouse gas pollution is on the high court radar screen. Two cases focusing on pollution across state lines are on the December calendar. Meanwhile, billions of dollars at stake as the energy industry and environmentalist clashed over current and future EPA power to enforce the Clean Air Act.
Former Justice Department attorney Thomas Lorenzen says it is the environmental issue of our time with more cases to come.
THOMAS LORENZEN, FORMER JUSTICE DEPARTMENT ATTORNEY: EPA has been trying to deal with how do you assess the state`s fair share of their contributions to other state`s pollution and how far can you go in making those states address that?
PEARSON: Other high profile cases include Michigan, fighting to preserve a statewide ban on affirmative action at its universities, housing discrimination, government sanctioned prayer, and buffer zones for protesters outside abortion clinics are all on the argument calendar.
(on camera): The Supreme Court is open for business this week, despite the partial government shutdown. But what happens to the court calendar next week is still very much up in the air.
For NIGHTLY BUSINESS REPORT, I`m Hampton Pearson in Washington.
MATHISEN: And still ahead, how serious are the design flaws behind the new health exchange Web sites and what can be done to fix them.
But, first, how the international markets close this day.
GHARIB: JPMorgan (NYSE:JPM) Chase is still battling from the fallout from last week`s so-called “London whale” trading fiasco and its $6 billion in losses. The nation`s largest bank is denying accusations from Wall Street regulators that it was manipulating the credit derivatives markets. By responding to the charges, the Commodity Futures Trading Commission can now either sue JPMorgan (NYSE:JPM) or try to settle with the bank.
MATHISEN: Good news for Medicare Part D and Medicare Advantage clients. Starting in 2014, United Healthcare is adding Wal-Mart (NYSE:WMT) and Sam`s Club warehouse stores to its network of preferred (AUDIO GAP) begins next year.
GHARIB: Well, speaking of health care, it`s been one full (AUDIO GAP) insurance marketplaces, all part of the Affordable Care Act. But despite the planning, the preparations, officials are still working through technical glitches, long wait times and error messages that have dogged (AUDIO GAP) the latest.
BERTHA COOMBS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Josh and Emily Austein have been trying to create an account on the federal exchange since the day the online marketplace went live, without success.
JOSH AUSTEIN, WEST NEW YORK, NJ: We were able to finish an account one time and then it told us that our user name was incorrect, or our password was incorrect. So, we weren`t able to actually see the different options.
COOMBS: They both work in the health care industry but will lose their health care in January. So, they`re anxious to get their plan of their own and have their coverage resolved.
EMILY AUSTEIN, WEST NEW YORK, NJ: It reminds you a lot about the different things that our clients go through daily in applying for different kinds of services that they want.
COOMBS: New Jersey is one of nearly three dozen states on the federally built exchange. After taking parts down over the weekend, officials said wait times were cut by 50 percent, but they still have more to do.
DAVID SIMAS, WHITE HOUSE DEPTUY SENIOR ADVISOR: Folks are working on it 24/7. Tomorrow will be better than today was and the last week. And we`ll continue to make that progress.
COOMBS: IT experts say the volume of users have amplified flaws in the underlying software codes of the system.
BILL CURTIS, CONSORTIUM FOR IT QUALITY DIRECTOR: They didn`t have an adequate plan for the people trying to get in, we have a capacity issue which accentuates the problem that the codes inefficient, and just makes things slower. Apparently, there maybe be parts of the site that just don`t work yet.
COOMBS: Federal officials say the system will be taken down again overnight to add more hardware, and upgrade the software, but experts say this is no easy fix.
MICHAEL RICOTTA, BLUE MOUNTAIN MEDIA DEVELOPMENT DIRECTOR: Think of a Web site in terms of a house. The front end, the things that everyone else sees or sort of aesthetics. If you have to reorganize the way that the rooms are on the inside, you`d have a much bigger undertaking, because you actually have to sort of rip out all the walls.
COOMBS: Emily and Josh are trying to be patient for now, hoping at some point they will get through.
J. AUSTEIN: It`s a new program, so there are going to be some complications in the beginning, but I would — I`m anxious to see what is out there and if it could help us.
COOMBS: Bertha Coombs, NIGHTLY BUSINESS REPORT, in West New York, New Jersey.
MATHISEN: Well, the major deal between Airbus and Japan Airlines, and that`s where we begin tonight`s “Market Focus”.
The European aircraft maker Airbus secured its first order jet order from Japan Airlines today. The deal a major blow to Boeing (NYSE:BA), which has nominated Japan`s airplane market, thus far. Airbus will sell Japan Airlines 31 of its A350 models worth $9.5 billion. The A350 is a direct competitor to Boeing (NYSE:BA) 787 Dreamliner, which, of course, has recently run into technical and safety issues. Boeing (NYSE:BA) shares down fractionally to $116.69.
And Cooper Tire and Rubber falling sharply and more uncertainty surrounds its deal with India`s Apollo Tires. Apollo agreed to purchase it for $2.5 billion. But now, Apollo is seeking a price reduction because of labor related issues in the U.S. and China, Cooper says that Apollo should make good on its original bid. The conflict sent shares of Cooper Tire down almost 13 percent to $25.72.
Shares of BlackBerry rose today on reports that the troubled smartphone maker is in talks now with Cisco (NASDAQ:CSCO) and Google (NASDAQ:GOOG) and SAP for a possible sale. This deal would be an alternative for the potential agreement between BlackBerry and (AUDIO GAP) financial, which would take the company private. The report sent shares up more than 3 1/2 percent, to $7.97.
GHARIB: Shares up of Fifth and Pacific rose today after the apparel company agreed to sale its Juicy Couture brand to Authentic Brands group for almost $200 million. Juicy sales have plummeted in recent years, Fifth and Pacific plans to sell the labels to focus on its faster growing Kate Spade brand. Shares are surging nearly 5 percent to $25.71.
Deckers tumbling on a warning from research firm OTF Global about sales trends for the company`s UGG Brand. The stock ended the day near session lows on more than double its average volume. Deckers tumbled 7 percent to $63.15.
And call it the Icahn effect. Hedge fund manager Carl Icahn in a tweet late today disclosed a 61 million share position in Talisman Energy (NYSE:TLM). He also tweeted that he may have conversations with management regarding strategic alternative and board seats. The stock rose sharply after hours and closed the regular session at $12.75, up 4.5 percent.
Twitter shares haven`t even began trading yet and the stock has already gotten its first buy rating. The analyst Robert Peck from Atlanta-based Suntrust Robinson Humphrey recommending that his clients buy shares of Twitter, saying they`re going to trade at $50 apiece by the end of next year.
So, why the rosy outlook from a stock that hasn`t even been priced yet?
(BEGIN VIDEO CLIP)
ROBERT PECK, SUNTRUST ROBINSON HUMPHREY: You`re also seeing margins start to creep up. So, now, you got into double digit margins and we think those will continue to increase to probably north of 30 percent. So, they have been investing very heavily in a platform, which I think creates a great barrier around their business and I think you`ll see more of the profitability come out now over the coming years.
(END VIDEO CLIP)
MATHISEN: And Suntrust Bank is not involved in Twitter`s initial stock offering.
GHARIB: Well, if you`re looking to trade in your older iPhone for a new one, two major retailers just made it a lot easier, Walmart and RadioShack are dropping their prices for Apple`s iPhone 5c. This is the one with the plastic backing that comes in five bright colors there. As you see there.
Starting Saturday, RadioShack customers buying a 5c will receive a $50 gift card that can be used for their $99 phone. That offer ends on November 2nd.
Wal-Mart (NYSE:WMT) is lowering its price to $45 and says the discount will last through the holiday season.
MATHISEN: Apple (NASDAQ:AAPL) has gotten the all-clear from Wall Street regulators about its handling of billions of dollars worth of cash and related taxes overseas. “All Things D” reports that four months after opening its books to the Securities and Exchange Commission, the agency is taking no action against Apple (NASDAQ:AAPL), finding that its disclosures are sufficient and in line with tax regulations.
GHARIB: Coming up on NIGHTLY BUSINESS REPORT, California`s Monterey shale is four times bigger that the Bakken and many had hoped (AUDIO GAP). But reaching the oil is tough and just got tougher. We`ll explain in a moment.
But, first, how commodities, treasuries and currencies performed today.
MATHISEN: Good news for drivers. Gasoline prices are falling an average of 14 cents a gallon over the past two weeks, reflecting lower prices for crude. The Lundberg Survey puts the national average price at the pump for regular at $3.38. I saw it today in Jersey for $3.09.
GHARIB: That`s good for you, Tyler.
Well, one reason why energy prices are lower than they were in the past is because the U.S. is now producing more energy than ever. But some of the nation`s biggest underground reserves of oil and natural gas have just gotten harder and more costly to get out of the ground.
Jane Wells has the story.
JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): California is in the middle (AUDIO GAP) could grow exponentially if wells can reach oil trapped thousands of feet below the surface in the Monterey Shale.
JOE WILLIAMS, GEOGUIDANCE DRILLING SERVICES PRES.: Well, we`re looking at a typical drilling rig in California.
WELLS: Joe Williams` company drills wells searching for a needle in a haystack, pockets of and a shale thought to have four times more crude than the Bakken shale in North Dakota.
To get the oil out sometimes requires hydraulic fracturing or fracking, but it has proven difficult and expensive.
WILLIAMS: An operation a like this, depending on what the doing at that particular point of the well can be anywhere from 200,000 to 300,000 a day.
WELLS (on camera): A day?
WILLIAMS: A day.
WELLS: But while traditionally pumping continues, the cost of fracking is about to go up. California has just passed the most stringent fracking law in the country, which will among other things forced oil companies to notify residents when fracking, list the chemicals used, and monitor water quality and seismic activity.
JASON MARSHALL, CA (NASDAQ:CA) DEPT OF CONSERVATION DEP. DIR.: One of the big differences today I think we`re going to see with this law as opposed to is more extensive pre- and post-testing of well integrity.
WELLS: The state is trying to balance environmental concerns without killing the golden goose, though the new laws could slow everything down and in some cases make exploration too expensive.
ROCK ZIERMAN, CA (NASDAQ:CA) IND. PETROLEUM ASSN. CEO: We do have the Monterey shale, we do know that there are potentially 15 billion barrels of oil there. So, it`s just a matter of coming up with the technology that we need to economically go and get that resource.
WELLS: In places like King`s County, they`ve been hoping for more jobs related to the Monterey shale. So far, not so much.
JOHN LEHN: We`re just not seeing the kind of activity that we had anticipated yet.
WELLS: Environmentalists say the new law does not go far enough, they wanted a moratorium on fracking, but the industry argued it`s been fracking for decades in California, with no problems. Now it has to decide if it`s worth it to frack so deep into the earth which may not give up the oil easily.
For NIGHTLY BUSINESS REPORT, Jane Wells, Bakersfield, California.
MATHISEN: Finally tonight, if diamonds are a girl`s best friend, this will get someone a lot of friends. A flawless 118-karat white diamond about the size of a small egg was auctioned off by Sotheby`s in Hong Kong today for a record-breaking price of $30.6 million, which incredibly is on the low end of the estimated sale price.
Susie wasn`t bidding, clearly that`s the reason.
Sotheby`s declined to identify the buyer or even where she or he is from. But we know that a large collectible diamonds like this one have seen big increases as some of the richest people in emerging markets have turned to jewels as investments.
GHARIB: And not just investments, just fun —
MATHISEN: They`re fun to have, right?
GHARIB: That`s a rock.
MATHISEN: When it`s clear — that`s a rock. When it`s clear like that, it goes with everything.
GHARIB: You know, there is a pink diamond coming up just in case you want to think about Joanne (ph) in November, 59 karats.
MATHISEN: Let`s get our money together.
GHARIB: That`s NIGHTLY BUSINESS REPORT for tonight. I`m Susie Gharib. For more on all the stories you saw here tonight, head to our Web site on NBR.com.
MATHISEN: If you want to buy some diamonds, go there, right?
All right. I`m Tyler Mathisen. Have a great evening, everybody. We`ll see you back here tomorrow night.
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