Transcript: Nightly Business Report — August 12, 2015

NBR-ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Stocks stage a comeback. Is it all part of a bigger correction many have been calling for?

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Change in taste. If shoppers aren’t spending as much at Macy’s (NYSE:M), what are they buying?

HERERA: Connecting Cuba. The one thing standing in the way of Google (NASDAQ:GOOG) getting the island nation online.

All that and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, August 12th.

MATHISEN: Good evening, everyone. Thanks for joining us.

It could have been worse, a lot worse. After the Dow dropped close to 300 points this morning on concerns of China’s economic situation, the selling abruptly stopped. The buying kicked in and the major indexes staged a major reversal.

By the closing bell, the Dow Jones industrial average fell a fraction of a point to 17,402. Well off its lows. The NASDAQ rose 7 and the S&P 500 gained 2.

But the turnaround doesn’t really tell the whole story. Some on Wall Street think the reversal is emblematic of confusion, rather than conviction about where stocks are headed. In fact, 56 percent of the S&P 500 fell into correction territory.

And as Dominic Chu tells us, there are other issues making investors nervous.

(BEGIN VIDEOTAPE)

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT: The stock market has been struggling to get back to its record highs. And there are a number of reasons why some investors are still proceeding with caution.

China is one of the biggest concerns as traders grapple with the possible slowdown in the world’s second biggest economy.

DAVID MARCUS, EVERMORE GLOBAL ADVISORS CEO: Well, China has emerged as one of the largest consumers of almost every product on earth. And so, that will, of course, have an impact globally for companies that sell things, which is all companies.

So, it will have a significant impact. But I think that the headlines make it appear much worse than what the reality will ultimately be.

CHU: Another big worry for the market is tied to what’s happening in the oil markets. A big question here is whether or not the drop in oil prices is due to a global economic slowdown.

China plays into that story as well.

JOSH DUITZ, ALPINE GLOBAL INFRASTRUCTURE FUND: I think it’s depending whether it is supply or demand driven. If it’s demand driven such as China slowing down, I think the world economy could slow down. If it’s supply-driven, then I think that’s OK and there’s too much oil coming on to the market which is great for the consumer actually.

CHU: Then, there’s what’s happening with earnings season. Oil placed into that story. Corporate earnings are expected to show very modest grows because energy-related company are making less money given lower oil prices.

BURT WHITE, LPL FINANCIAL CHIEF INVESTMENT OFFICER: There are certainly quite a few headwinds as it relates to earnings. The biggest one is the impact of the stronger dollar and energy prices, truly weighing down one particular sector and that’s energy. Energy sectors contribute to the vast majority of really the revenue declines, as well as the earnings declines for earnings.

CHU: It’s all very interconnected. But is it really affecting how the average investor is feeling?

UNIDENTIFIED MALE: Who wouldn’t be worried when something like this happens?

UNIDENTIFIED FEMALE: I’m invested (ph), because it’s the American Dream, the apple pie and all that, and it looks like it is going down the tubes. So, what do I do as a retiree?

UNIDENTIFIED MALE: As stock markets go up and down, the question is, how much time do you have, not what’s the market doing? We haven’t had a 10 percent correction in a long time. I plan to live forever.

CHU: It’s safe to say that the jury is still out but expect to see some more movement in the markets in the weeks ahead, as much of America gets back from summer vacation.

For NIGHTLY BUSINESS REPORT, I’m Dominic Chu.

(END VIDEOTAPE)

HERERA: So, let’s turn now to our bull and bear guests for their differing views on this market. Michael Tyler is chief investment officer at Eastern Bank Wealth Management. He’s bullish. Our bearish, Kristina Hooper. She’s the U.S. investment strategist with Allianz Global Advisors.

Kristina, I’m going to turn to you first. You know, for a while, this is the bear case certainly was intact. And then, we saw this dramatic turnaround. What makes you worry about this market at this juncture?

KRISTINA HOOPER, ALLIANZ GLOBAL INVESTORS U.S. INVESTMENT STRATEGIST: Well, we know history. August is typically a bad month for stocks. But beyond that, we’re on the precipice of some very historic moments in monetary policy. Not only have we seen over the past number of years since the global financial crisis interest rates at zero percent, but we now have essentially balance sheets of several central banks that are incredibly swollen. So, we’ve been enormously accommodated for a number of years now.

And we are awaiting eagerly, some very nervously for the Fed to meet in September. There is likely to be a lot of hesitation and nervousness in advance of that meeting, just given how historic and unprecedented monetary policy has been over the past few years.

MATHISEN: Michael, let me turn to you. Kristina said august historically is a bad month for stocks. I’m looking at my notes. You’re quoted as saying that August is a good month for stocks. You seem to disagree —

MICHAEL TYLER, EASTERN BANK WEALTH MANAGEMENT CIO: It’s an OK month.

MATHISEN: — with Kristina.

Tell me about it.

TYLER: Yes. Since 1980 there have been 35 years. In those 35 Augusts, the month was up 20 times. And the average return over that period in August only was about flat.

But, remember, one of those was August of 2011 when we had the debt ceiling and government shutdown which tanked the market 5 percent in that one month. So, actually, August is really a neutral-ish month. It’s not a bad month historically.

And to address Kristina’s other point, I think that by now, pretty much everybody is expecting the Fed to take some action on interest rates. They may or may not raise rates this time around in September. I think they will but I could be wrong.

But there’s so much expectation and attention around it that yes, maybe there will be one or two-day confusion but I think there will be a relief rally coming out of that that finally they did it, if in fact they do raise. And I think can actually spur a leg upward in the market.

HERERA: Kristina, talk to me about Puerto Rico. You listed five reasons why the market may have extreme volatility ahead of it. We’ve talked little about the Fed, the history, the data dependency which I think folds into the Fed. But Puerto Rico, you think people are underestimating the impact of that.

HOOPER: Absolutely. If you look at the numbers in Puerto Rico, it’s a pretty dire situation. For example, labor force participation is not great in the United States but it is abysmal in Puerto Rico. It’s at about 40 percent. There are some really big headwinds and there are no big solutions.

Now, Puerto Rico in and of itself is not going to tank the U.S. economy. But it could create something of a crisis of confidence, particularly as investors start looking at other areas of the United States where there is some weakness, where there’s an enormous amount of pension burdens.

A lot of issues that are affecting Puerto Rico are affecting other states and municipalities but in some smaller ways.

MATHISEN: Michael, let’s move away from the question of history and so forth. Back to the question of fundamentals of corporations that make up, say, the S&P 500. Are you persuaded that their earnings are going to be strong enough, not only to support prices at these levels but to propel them higher and maybe more critically, how about revenues?

Are they going to grow fast enough to help these companies drop more money to the bottom line? We’ve had sort of a shadowy revenue picture in the most recent quarter for sure.

TYLER: Yes, there’s no question, second quarter was a bit disappointing. They beat published estimates. But that was a pretty low bar to jump. And I think that we will be seeing as Christina mentioned, I think we will be seeing a lot more volatility in the markets after the very tight trading range we’ve had in the first six months or seven months now.

So, the question is, what can we expect? And the biggest headwind for corporate earnings has been lower oil prices. That knocked with 4 percent or 5 percent off S&P 500 earnings in the past year simply because the price has come down so much.

Well, guess what? By the December quarter, we’ll be looking at year-on-year comparisons that have $40 or $50 oil in both quarters. That’s no longer a headwind. That becomes almost a tail wind as we go forward.

So, that alone can jump start the earnings growth for the S&P 500. Earnings have been basically flat for the past year.

And then secondarily, the other 4 percent or 5 percent hit to corporate earnings this year has been the stronger dollar. And hit roughly 7 percent or 8 percent of revenues to the multinational companies, maybe half of that drops to earnings. And so, you’re looking at about another 4 percent hit.

I think the dollar will continue to gain ground, not quite as robustly as did it the first half of the year. And what that would mean to me that you would see some headwind. Not quite as strong. Again, the directionality is that earnings ought to be getting somewhat better. So, I think you can see a nice growth there.

HERERA: Michael and Kristina, a thank you very much. Appreciate it.

Ty?

HOOPER: Thank you.

MATHISEN: As Dominic Chu reported, energy is having a big impact on the broader market. Despite today’s slight rise in oil prices, the overall trend has been lower, much lower than most say prices have further to fall. Well, that’s good news for consumers. At what point, is it bad for the economy? We’re just talking a little about that.

And Jackie DeAngelis now has more on it.

(BEGIN VIDEOTAPE)

JACKIE DEANGELIS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Crude oil prices have fallen nearly 30 percent over the last three months — the tumble catching many by surprise. Seasonally, crude prices climb in the summer, along with gasoline, boosted by demand from the summer driving season.

But several factors changed the game this year — a global supply glut that doesn’t appear to be slowing, slowing demand from Europe and China, as well as a stronger dollar — all pressuring crude.

ANTHONY GRISANTI, GRZ ENERGY PRESIDENT: It’s really about the oversupply situation. Many traders thought that the U.S. production would start dropping at this point because we’ve lost almost 60 percent of our rigs, but that hasn’t happened. They’ve learned to be more efficient with the rigs they have online. OPEC, the same thing, you would have thought production would drop there. But now, there are 31.5 billion barrels a day.

DEANGELIS: When crude oil prices drop, the first thing consumers look for is a drop in gas prices. And those prices have come down at the pump, 18 cents in a month. AAA saying the national average for a gallon of regular, $2.59.

Why is crude oil down 20 percent in a month and gas prices only down 6.5?

GRISANTI: It’s a matter of, they need to whittle through the higher expensive gas they bought for the summer, get through that. Once we get into the winter gas, prices will drop significantly.

DEANGELIS: Consumers are saving 88 cents a gallon on gas compared to this time last year. AAA expects prices to fall further this month, possibly to $2.50. They also say it’s possible to see $2 gas again by the end of the year.

It’s good news for consumers but bad news for crude oil producers. Big oil companies continue to try to reduce costs through layoffs, traffic cuts and many have said they expect the second half of the year to remain challenging.

Stock market investors are worried there will be a tipping point, where low oil prices have a chilling effect on the economy that can’t be balanced by low prices at the pump.

GRISANTI: If crude oil stays in the $30s for a significant period of time, what that shows to me and other traders and investors, is that there is some economic slack in the world, that the demand for crude oil isn’t there. You’re seeing with it China right now. In fact, their demand has been ratcheted back with all problems they’re having in their economy and their stock market.

DEANGELIS: Still, some analysts believe that as crude drops to the $30s, it won’t stay there for long. There are a lot of if’s in that equation.

For NIGHTLY BUSINESS REPORT, I’m Jackie DeAngelis.

(END VIDEOTAPE)

HERERA: An outage at the biggest Midwest refinery is sending gas prices in that region higher. Here you can see Chicago station actually raising prices after a piece of equipment at a BP refinery in Whiting, Indiana, was damaged.

Gas stations in Illinois, Indiana, Michigan, Ohio, and Wisconsin get most of their fuel from that Whiting plant.

MATHISEN: Positive news on the job market. Total hiring rose more than 2 percent in June to a six-month high. According to the Labor Department, more people also quit their jobs and that’s a sign of growing confidence in their ability to land new ones.

HERERA: An improving labor market and lower gas prices are supposed to help retailers like Macy’s (NYSE:M), because it puts more money in the pockets of consumers. But that wasn’t the case this time around. The department store reported a decline in revenue and earnings in the most reason quarter. That sent Macy’s (NYSE:M) shares lower in trading today.

So, if consumers aren’t buying as much at department stores, what are they buying?

Courtney Reagan looks for the answer.

(BEGIN VIDEOTAPE)

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: It’s tough to be a clothing retailer these days. Macy’s (NYSE:M) is the latest retailer to report results hurt by changing consumer spending preferences, profits and sales both falling short of expectations, causing the department store to cut its full-year forecast.

While broader data reveals consumers are spending, Macy’s (NYSE:M) CEO Terry Lundgren says shoppers are diverting spending to other areas. Items that Macy’s (NYSE:M) doesn’t sell.

TERRY LUNDGREN, MACY’S CEO: You’re just seeing where the consumer is spending and definitely starting to see a little uptick many consumer spending in the second quarter versus the first — not great but a little better — is in automobiles, it’s in housing, it’s in health care, it’s in — you know, certain apps that you’re downloading. And they’re going on get to our categories but they were not there to the degree we expected them to be this last quarter.

REAGAN: But there are concerns that consumers won’t return to spending and clothing and other traditional retail categories like they once did.

UNIDENTIFIED FEMALE: I do try to save about 20 percent of each paycheck and put that directly into savings so I don’t touch it.

UNIDENTIFIED MALE: Nothing is an impulse buy or everything. It’s like, I’ve got to hem and haw and think about it for a few weeks before I actually — especially if it’s a big ticket item.

UNIDENTIFIED FEMALE: Now that I have more income, definitely, I can use it towards my student loans and also I can pitch in more for rent.

PAUL TRUSSELL, DEUTSCHE BANK RETAIL ANALYST: There really is a shift in preferences — technology, eating out, traveling, anything, Disney (NYSE:DIS) or Apple (NASDAQ:AAPL)-related. When it comes down to it, I don’t think that this is very temporary.

REAGAN: Smartphone plans and streaming entertainment subscriptions are taking a bigger bite out of monthly budgets. Automobile sales at near record highs is evidence consumers are spending more on big ticket categories, taking more from smaller more discretionary categories like clothing and shoes.

And previous quarter results from Home Depot (NYSE:HD) and Lowe’s show strong spending on home improvement, along with an improving housing market. With results still to come from JCPenney, Walmart, Target (NYSE:TGT) and more, some analysts are concerned Macy’s (NYSE:M) could be the canary in the coal mine.

For NIGHTLY BUSINESS REPORT, I’m Courtney Reagan.

(END VIDEOTAPE)

MATHISEN: Dow component Cisco (NASDAQ:CSCO) reported better than expected earnings and revenue, thanks to increased demand for its routers and switchers. The company earned 59 cents a share, topping consensus by 3 cents. Revenue of 12.8 billion was higher than in the same quarter last year. Shares rose in initial after-hours trading.

Mary Thompson has the one key takeaway from Cisco’s report.

(BEGIN VIDEOTAPE)

MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, the networking giant reporting solid results, thanks to a modest re-acceleration in sales of its key switchers and routers. Guidance for the current quarter was in line with expectations. Cisco (NASDAQ:CSCO), of course, has been facing tough competition from software based systems, but new products have helped reinvigorate the company.

In his first call as CEO, Chuck Robbins says he is stepping in at an incredible time for Cisco (NASDAQ:CSCO), one in which governments and businesses are going to be looking to Cisco (NASDAQ:CSCO) to deliver the solutions they need as they make the move toward digital and embrace the cloud.

In order to do this, the company is shedding noncore businesses and said it’s committed to looking at the right acquisitions to help drive its strategy.

For NIGHTLY BUSINESS REPORT, I’m Mary Thompson.

(END VIDEOTAPE)

HERERA: Still ahead, a House united? The issue springing together both Republicans and Democrats.

(MUSIC)

MATHISEN: The move by China to devalue its currency has not gone unnoticed by politicians who have long complained that the country manipulates its currency to benefit China’s businesses and its economy. And it’s not just one side of the aisle that is voicing concerns but both of them.

John Harwood joins us from the nation’s capital.

John, a rare moment of agreement, I suppose. How has Washington reacted to these currency moves?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, you’ve seen a lot of criticism from the traditional critics of Chinese trade practices that this is another attempt to manipulate the value of the currency to the benefit of Chinese exports, and the detriment of American manufacturers.

So, you heard that from Chuck Schumer. He, of course, has worked for a long time with Lindsey Graham on legislation to try to sanction the Chinese for this policy. It has been resisted by administrations of both parties. But you’re seeing that talk which has been quieted lately because the value of the yuan has actually gone up. That’s being revived right now.

HERERA: What’s the administration likely to do in response if anything at all?

HARWOOD: I think not a lot, Sue. Look, the administration put out an equivocal statement yesterday saying it’s possible this could be response to short term market forces as the Chinese economy weakens, but it would be troubling if they’re moving away from their long term commitment to let the value of the yuan float to where it ought to. I think the biggest thing the administration is likely to do any time soon is to try to complete the Trans Pacific Partnership designed to contain and counter China’s influence in the region.

MATHISEN: Let’s talk a little about the 2016 race. I can’t imagine that a 2 percent devaluation in the currency is something that is going to be a big issue in the race. It is too esoteric for most people to grasp. But I can imagine that China and its competitive posture vis-a-vis the United States could be.

HARWOOD: Two words for you, Tyler: Donald Trump. Donald Trump is talking about the United States getting beat by foreign competitors like Japan, like China. A new poll out today in Iowa after that debate everyone thought was so damaging, Donald Trump is leading. That is an indication that he’s going to put this issue on the table in a broad way to talk about trade.

MATHISEN: All right, John. Thank you very much. John Harwood tonight in Washington.

HERERA: Mixed results sent shares of Alibaba tumbling and that is where we begin tonight’s “Market Focus”.

The Chinese e-commerce giant hit a record low at one point in today’s session after reporting earnings that beat estimates, but sales that missed. Its revenue growth was the slowest in more than three years. Shares were down 5 percent to $73.38.

News Corp (NASDAQ:NWS) reported earnings that beat estimates, but revenue declined from the same period a year earlier because of decreasing advertising sales at its print publications, like “The New York Post” and “The Wall Street Journal”. The firm is also blaming the stronger dollar. Shares were higher initially in after-hours trading. But during the regular session, the stock was up as well just slightly to $13.85.

MATHISEN: Kraft (NYSE:KFT) Heinz is cutting 2,500 jobs as part of its effort to reduce costs after the two companies merged. The workers affected are in the U.S. and in Canada. The ketchup maker, among other things, currently has about 46,000 global employees. Shares were off more than 1.5 percent to $76.69.

AT&T (NYSE:T) says it expects earnings, revenue and free cash flow to rise through the year 2018. The positive guidance comes after the company’s purchase of DirecTV. Still, the stock was off about 2 percent to $34.02.

The online home goods retailer Wayfair saw its loss narrow in its most recent quarter. Advertising helped increase sales, but also translated into higher costs. Still, those better than expected results sent shares up 28 percent to $48.95.

And coming up, connecting Cuba. Why even one of the biggest players in the Internet is struggling to get Cubans online.

(MUSIC)

HERERA: Here’s a look at what to watch for tomorrow: A read on the labor market with weekly jobless claim report. Another important data point, retail sales, a look at how the consumer is doing. And the import/export index is out, and that is an indicator of inflation. And that’s some of what to watch for on Thursday.

MATHISEN: Well, the man who runs Fidelity’s Contrafund, a fund often found in retirement plans, 401(k)s, says he’s growing very cautious now on commodities and more optimistic about Internet companies.

Will Danoff oversees $113 billion in assets expects Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB) and Apple (NASDAQ:AAPL) to generate earnings faster than the average company in the coming years. The fund’s total return this year, more than 7.5 percent and that easily whips the S&P 500.

HERERA: And Google (NASDAQ:GOOG) is just one American company that wants to enter Cuba and connect that country to the Internet now that diplomatic and economic relations have been restored.

But as Michelle Caruso-Cabrera reports from Havana, it hasn’t been easy for Google (NASDAQ:GOOG) to make some headway.

(BEGIN VIDEOTAPE)

MICHELLE CARUSO-CABRERA, NIGHTLY BUSINESS REPORT CORRESPONDENT: Cuba is one of the least connected countries in the world and the people of Cuba are desperate to get on the Internet. Up until last month, it wasn’t legal for most Cubans to access Wi-Fi. But just last month, on July 1st, 35 hot spots went up across the country. That’s in a country of 11 million people.

They are constantly busy. We were at one yesterday in Havana. There were many, many people eager to get on the Internet, even though it costs $2.50 an hour, which is a lot of money when most people make on average $20 a month. Most appear to be using Skype-like apps that allow them to talk to their family members overseas with a video apparatus.

JORGE ISAAC: I’m here trying to connect via Wi-Fi with my children. This is one of the place in Havana where the connection is good. It is the possibility to have a connection.

CARUSO-CABRERA: Overhead at the hotspot, you can see the routers for the traffic. They are Chinese made Huawei devices and there in lies the big challenge for any American tech companies that want to be here.

One of those companies, Google (NASDAQ:GOOG). Their executives have visited the country at least twice including Eric Schmidt himself last year. And according to those who have seen the documents, Google (NASDAQ:GOOG) has offered a big expansion of Internet on the island at very low cost to the Cuban government. It might even be free.

But so far, the signals from the government don’t look good. This leak document appears to be the government’s plan for expanding Internet access on the island. It relies on copper cables and Chinese equipment. It would it get Internet access into 260,000 homes by the year 2017.

A second blow against Google (NASDAQ:GOOG), according to local Cubans, when a government official gave an interview to the state-backed newspaper saying, quote, “There exist people who want to give us the internet for free but they are not doing with it the goal of allowing the Cuban people to communicate but rather with the purpose of penetrating us, to use it as one more way to destroy the revolution.”

It’s not clear if that was the final nail in the coffin for Google (NASDAQ:GOOG) or simply a volley in a negotiation. Google (NASDAQ:GOOG) declined to comment for the story.

In Havana, Cuba, Michelle Caruso-Cabrera, NIGHTLY BUSINESS REPORT.

(END VIDEOTAPE)

HERERA: And that does it for NIGHTLY BUSINESS REPORT tonight. I’m Sue Herera.

And we want to remind you, this is the time of year your public television station seeks your support.

MATHISEN: And we thank you for that support.

I’m Tyler Mathisen. Thank you for watching. Have a great evening, everybody. We’ll see you back here tomorrow night.

END

Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by CQRC Transcriptions, 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) 2015 CNBC, Inc.

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