SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Rate hike reality. Stocks fall sharply as investors adjust to the likelihood of higher rates. Is it time for you to shift your investments and your stock market expectations?
TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Retail in focus. Why the next couple of weeks will be a key for a sector that helps power the economy.
HERERA: What’s old is new again. The comeback story of vinyl records.
All that and more tonight on NIGHTLY BUSINESS REPORT for Monday, November 9th.
HERERA: Good evening, everyone, and welcome. Glad you could join us.
Reality bites. At least it did today in the stock market. There’s a new realization among investors that the Federal Reserve is close, very close, as in December close to raising interest rates for the first time in nearly a decade. And that weighed on stocks.
But it wasn’t the only thing. The Organization for Economic Cooperation and Development lowered its global growth forecast.
So, while things may be looking up for the U.S. economy, especially after last Friday’s jobs report, it comes at a time of weakening economic growth around the world.
By the close today, the Dow Jones industrial average dropped 179 points to 17,730. NASDAQ fell 51. And the S&P 500 lost 20.
As for the bond market, yields rose as prices fell. The ten-year U.S. note is now up more than a third of a percentage point in yield in less than a month.
Bob Pisani shows us how the market is responding to this new reality.
BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Stocks experienced their weakest day in over a month. Much of the decline was due to continuing fallout from the strong jobs report and the increasing likelihood that the Fed will raise rates in December. Interest rate-sensitive groups like REITs and emerging markets and home builders were all down about 2 percent.
This rate hike thing is suddenly looking very real. Fed Chair Janet Yellen will make a major policy speech at the economic club in Washington on December 2nd. That’s just two days before the next jobs report. And many are expecting her to again lay the groundwork for a Fed rate hike.
The other reason stocks had a problem today is that we’re coming off a six-week rally that saw the major indices advance about 10 percent. So stocks are overbought and a little bit expensive. And the earnings expectations are not improving much. Earnings remain down year over year for the S&P 500, and the fourth quarter looks negative as well. This would make four straight quarters of negative earnings growth.
Speaking of earnings, department stores were all among the bigger decliners today. They report later this week and the earnings estimates have been coming down for them as well.
For NIGHTLY BUSINESS REPORT, I’m Bob Pisani at the New York Stock Exchange.
HERERA: As Bob just mentioned, retail earnings will soon be released and they’ll be scrutinized in part because the consumer is such a powerful component of the economy.
Dominic Chu shows us what to watch for in the coming days and weeks.
DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT: It may not be the biggest sector in the stock market, but there’s a reason why so many traders and investors pay such close attention to the consumer discretionary stocks. Some estimate that more than 2/3 of the U.S. economy is powered by consumer spending, and a lot of that happens with retail-oriented companies.
While that broader consumer discretionary sector is the best-performing one in the S&P 500 so far this year, within that sector, retail stocks themselves have been lagging.
DAVID DONABEDIAN, ATLANTIC TRUST CIO: The broader consumer discretionary category has actually been the best-performing sector. It is true that in recent weeks, you’ve seen somewhat of a pullback there in a relative sense. Some of it I think is valuation-oriented. Again, the stocks did very well earlier in the year.
CHU: There may also be some concern about how consumers and retailers will fare with the prospects of higher interest rates in the coming months. Still, with the economic picture showing some signs of life, some experts remain relatively bullish on the consumer spending picture.
MARK LUSCHINI, JANNEY MONTGOMERY SCOTT: We see healthier wage growth. Two and a half percent came out in the labor report, which was the best annual growth race in wages in six years. And there’s a direct corollary between wage growth and spending. And so, the consequence to us means that retailers in the aggregate are going to be the beneficiary of that.
CHU: This week, we’re going to get not only economic data on October retail sales but also earnings reports from retailers like Macy’s (NYSE:M), Kohl’s (NYSE:KSS), and Nordstrom (NYSE:JWN) just to name a few.
All of this is happening just weeks before things really ramp up for the holiday shopping season, the most important part of the year for these retailers. Investors will be listening closely to what these companies have to say about any signs for the rest of the year.
For NIGHTLY BUSINESS REPORT, I’m Dominic Chu.
MATHISEN: Well, retail slowing global growth and higher expectations the Fed will raise rates. The market may be undergoing some dramatic shifts.
So, should investors reconsider where they put their money and adjust their expectations?
Our guest now is David Lebovitz. He’s global market strategist at JPMorgan (NYSE:JPM) Asset Management.
David, welcome. Good to have you with us.
DAVID LEBOVITZ, J.P. MORGAN ASSET MANAGEMENT GLOBAL MARKET STRATEGIST: Thanks for having me.
MATHISEN: I assume that you were in the camp that what is going on here is kind of an expectation reset as we get adjusted to the idea of higher interest rates. What does that mean in practice for ordinary personal investors?
LEBOVITZ: So I think that that’s exactly what this is. It is a reset of expectations. You know, six weeks, eight weeks ago you had investors that were not really thinking the Fed was going to go at the end of the year but after last week’s jobs report it’s become a much higher probability that the Fed does go for the end of the year.
Now, the key for retail investors is to understand that there tends to be volatility around the time of a Fed rate hike and stay the course when there’s volatility, inevitably rears its head around December.
HERERA: So, when you say stay the course, in other words, if you’re an investor who puts the — averages into the market, puts the same amount in, don’t change your strategy just because of this one event.
LEBOVITZ: Exactly. Historically when you look at the historical record, there is volatility around that Fed rate hike. But in the subsequent months equities have moved higher.
And remember, the Fed is hiking rates for all of the right reasons. They’re hiking rates because the economy is much healthier.
MATHISEN: How about bonds? If I have a fairly sizable slug of my portfolio in bonds or bond funds, should I be concerned that as rates move up the value of that portfolio’s going to go down?
LEBOVITZ: So the value of the portfolio may fall, but the Fed has been adamant that they’re going to be very slow in how they normalize interest rates. So the pain that bond investors feel may not be as severe as what they’re expecting. If the Fed were to raise rates very quickly, that could mean pain for fixed income investors. But given we’re looking at a slow rise, I actually think the pain in the bond market may be relatively muted.
HERERA: Yes. You know, is the economy as healthy in your view as that jobs report seemed to indicate last week? Because there are pockets of weakness out there. We’ve gotten some very mixed data.
LEBOVITZ: There is mixed data. But the negative data is really on the manufacturing side. The consumer still looks very healthy. Vehicle sales are right around their all-time highs.
When we look at what drives growth in the U.S., which is really the consumer, the combination of strong wage growth and robust consumption makes us relatively comfortable with where the U.S. economy is currently sitting.
MATHISEN: Let’s talk about whether you’re comfortable with where stock prices are currently sitting. Article in the “Wall Street Journal” today pointed out the P/E ratio, price to earnings, is relatively high when you look at trailing earnings. Are those E’s — those earnings — going to be there to justify today’s or tomorrow’s higher prices?
LEBOVITZ: So, we think that earnings growth will come back in 2016. Right now, we’re dealing with some issues in the energy sector. We’re dealing with the strength of the dollar.
So, it’s been difficult over the past 12 months for earnings to get off the bottom. That being said, we’re looking for about 10 percent earnings growth in 2016 and it’s our expectation that growth will materialize, providing support for equity prices to push higher.
HERERA: How big a problem is the dollar, the strengthening dollar at that, going to be for some of these companies?
LEBOVITZ: So, in our view, it’s much more about the pace of appreciation than it is about the absolute level. And while we think the path of least resistance for the dollar is still up, we’re not sure we’re going to see the 20 percent gains over six months that we saw earlier this year. We think dollar gains could be more muted, which give businesses a chance to push back against that.
HERERA: David, thank you so much for being with us. David Lebovitz with JPMorgan (NYSE:JPM) Asset Management.
LEBOVITZ: Thanks for having me.
MATHISEN: You bet.
HERERA: To merger news now, Weyerhaeuser (NYSE:WY) is buying Plum Creek, creating the largest timber, land, and forest products company in the U.S. The price tag: more than $8 billion. The company will manage more than 13 million acres, and according to the companies, the merger will save 100 million NASDAQ costs every year. Plum Creek Timber (NYSE:PCL) surged 17 percent. Weyerhaeuser (NYSE:WY) fell almost 3 percent.
MATHISEN: And Canadian Pacific Railway (NYSE:CP) is reportedly interested in acquiring Norfolk Southern (NYSE:SO). As first reported by Bloomberg, the two companies have held early merger talks, and the discussions come as the sector suffers from slack demand as commodity shipments slide. Read that coal. The report sent shares of both companies higher.
HERERA: And Apache (NYSE:APA) has reportedly received an unsolicited takeover offer from an unidentified party. According to Bloomberg, the oil exporter rejected the approach and is working with Goldman Sachs (NYSE:GS) on the defense. Shares rose 13 percent on that report.
MATHISEN: On Wall Street, merger and acquisition bankers are some of the lucky ones this year, especially when it comes to their bonuses. That one group, maybe that group alone, is expected to do well while most others are not. For the first time since 2011, year-end payouts overall will fall below the prior year’s levels.
Mary Thompson has more on Wall Street’s bonus time.
MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Global uncertainty about growth and interest rates seen take a bite out of wall street bonuses this year. Compensation consultant Johnson & Associates predicting a decline in the average bonus. So certain pockets of finance will get healthy increases.
Hardest hit: fixed income traders. Their bonuses seen falling between 10 percent to 20 percent, hindered by volatility in global interest rates. Bankers focused on underwriting, asset managers, and private bankers also forecast to get lower payouts.
The recent troubles among hedge funds expected to hit their employees with Johnson & Associates predicting bonuses will fall 15 percent or more.
But not all areas of Wall Street will take a hit to the wallet. Bonuses for equity traders are seen matching or exceeding last year’s payouts by up to 10 percent. M&A bankers are forecast a 20 percent bonus bump. And private equity firms will be writing bigger bonus checks too.
Alan Johnson, CEO of Johnson & Associates, expects market uncertainty to persist into 2016 and is forecasting Wall Street will be forced to cut more jobs in order to adjust.
For NIGHTLY BUSINESS REPORT, I’m Mary Thompson.
HERERA: And still ahead, the hottest items this holiday season that are already hard to find.
HERERA: Volkswagen is reaching out to owners of those diesel cars that were recalled. The automaker is offering gift cards and dealership credits to those who have vehicles with the emission-cheating software. VW will also offer three years of free roadside assistance. If vehicle owners accept the offer, however, they relinquish their right to participate in a class action lawsuit or take legal action on their own.
MATHISEN: Friday, we told you that a tentative contract agreement between Ford and the UAW had been reached. Tonight we know more of the details. According to the union, the deal eliminates the two-tier wage structure over eight years. Top-tier workers will get their first pay raise in more than ten years. It includes a promise of $9 billion worth of investments in U.S. plants over the next four years and — get this — an $8,500 bonus per worker if the contract is ratified.
HERERA: Shares of BHP Billiton (NYSE:BHP) continue to decline after last week’s deadly dam breach at its jointly owned iron ore mine in Brazil. The mining company said today that it has not determined what caused the dam to fail but one analyst puts the economic damage for cleanup and rebuilding at more than $1 billion. And that same analyst said it is possible the mine stays closed until 2019. Shares of BHP fell more than 2 1/2 percent.
MATHISEN: General Electric (NYSE:GE) will help modernize India’s rail system. The company won a nearly $2.5 billion deal to supply and service 1,000 diesel locomotives. The agreement is GE’s largest ever deal in India and the biggest contract ever won by its transportation unit.
Separately, GE’s aviation unit secured a $16 billion deal with Dubai’s Emirates Airlines. The contract includes maintenance and repair of the engines that will power the airline’s fleet of certain Boeing (NYSE:BA) aircraft over 12 years.
HERERA: Hertz posts afternoon earnings that missed the street estimates and that is where we begin tonight’s ‘Market Focus”. The car rental giant saw its profits rise in its most recent quarter but its bottom line performance was not to the street’s liking. So, cost cutting did benefit the company in its most recent quarter. But shares tumbled more than 12 1/2 percent to $16.44.
Several successful auctions helped Sotheby’s post revenue that topped consensus. The auction house also reporting a smaller than expected loss for the quarter. Still, shares slipped 6 percent to $32.01.
Record hotel bookings lifted Priceline’s results. Despite better than expected quarterlies the travel site operator is forecasting fourth quarter profits below estimates, which it’s blaming on the strong dollar. But the CEO says he expects strong performance to continue into the future.
(BEGIN VIDEO CLIP)
DARREN HUSTON, PRICELINE GROUP CEO: We continue to see strong results. Obviously, as you debt to be the size we are with over a billion guests now staying on booking.com. And the room nights that we’re printing which are double our nearest competitor. Growth rates are always difficult, but year after year we seem to be able to find ways to keep that up.
(END VIDEO CLIP)
HERERA: Shares fell 9 1/2 percent to $1,311.39.
Dean Foods (NYSE:DF) swung to a profit in its most recent quarter. The milk processor maintained high processor despite a decrease in raw milk costs which contributed to its strong results. The company also giving upbeat earnings guidance for the current quarter and the full year. As a result, shares were more than 7 percent higher to $19.25.
Dish Network says that more paid television subscribers dropped its service. That caused the satellite TV company to report revenue that was slightly below estimates. The stock off today by roughly 1 percent, roughly the market slide, to $63.09.
Cisco (NASDAQ:CSCO) and Ericsson announcing a strategic partnership. The collaboration focuses on developing next-generation networks. And the companies say the move could generate a billion dollars for each partner by 2018. Cisco (NASDAQ:CSCO) Systems off a fraction to $28.18. Ericsson was up more than 1 1/2 percent at $9.99.
Perrigo (NASDAQ:PRGO) has sent a letter to shareholders urging the rejection of a takeover bid by Mylan (NASDAQ:MYL). The CEO explaining today why he doesn’t think shareholders should approve the merger.
(BEGIN VIDEO CLIP)
JOSEPH PAPA, PERRIGO CHAIRMAN & CEO: This is a bad deal for the Perrigo (NASDAQ:PRGO) shareholders for a lot of reasons. So, as we look at that situation in terms of the spread today, we think that if this was going to happen you would have seen that spread narrow. And the fact that has not narrowed today suggests to us that the Perrigo (NASDAQ:PRGO) shareholders, as I’ve said believe this is a bad deal and therefore are not going to tender.
(END VIDEO CLIP)
MATHISEN: And shares fell more than 1 1/2 percent today. They finished $159.66.
Mallinckrodt saw its shares tumble after the short seller Citron Research said the stock could fall more than its peer, Valeant Pharmaceuticals, warning that its business model, Mallinckrodt’s, that is, is in danger of unraveling. This is the same stock commentary site whose post helped propel Valeant’s recent stock decline. Mallinckrodt has responded to the comment saying it’s confident in its business strategy. Shares nevertheless 17 percent lower at $58.01.
HERERA: College football is big business. And today it also proved it’s mighty powerful. The University of Missouri football team along with other students and faculty pressured the school’s president to resign over his handling of racial incidents. The football team had said it would boycott upcoming games until Tim Wolfe was out. If no game was played this weekend, it could have cost the university $1 million.
Phil LeBeau is on campus in Columbia, Missouri, for us tonight.
So, Phil, how much did money talk in this particular case?
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, nobody wants to say this was all about money, sue, but certainly it played a factor in the decision of Tim Wolfe to resign as president of the University of Missouri. We’ll run down just how powerful Missouri athletics department is in terms of its financial impact on the university.
But first, here’s the University of Missouri Tim Wolfe announcing his resignation earlier today.
(BEGIN VIDEO CLIP)
TIMOTHY WOLFE, UNIVERSITY OF MISSOURI FORMER PRESIDENT: I take full responsibility for this frustration, and I take full responsibility for the inaction that has occurred. I’d ask everybody, from students to faculty, staff, to my friends, everybody, use my resignation to heal and start talking again.
(END VIDEO CLIP)
LEBEAU: Tim Wolfe’s resignation comes after several weeks of African-American students here on this campus demanding his resignation or at least demanding the university’s administration do more to hear their concerns. But it wasn’t until the Missouri football team announced on Friday starting with a group of players and then eventually the entire team saying, “We will boycott this weekend’s game against BYU unless the president resigns.” That’s when the decision ultimately was made. It was made this morning.
And, by the way, for some sense of how powerful this athletic department is in terms of the money generated, $83.5 million were brought in to the athletic department last year at the University of Missouri. The profit: $3.5 million. And, Sue, most of that is because of the football program.
So, the football program spoke, other students rallied around them, and eventually the university listened and the president resigned.
Sue, back to you.
HERERA: Phil, thank you so much. Phil LeBeau in Columbia, Missouri.
MATHISEN: And coming up, going for a spin. There’s a resurgence in the music industry, and it may not be what you think.
HERERA: Here’s what to watch for tomorrow. On the data front a report on import and export prices. Also the small business optimism index is out. And the Supreme Court will hear arguments on a case involving Tyson Foods (NYSE:TSN). The outcome of that case could impact future class action lawsuits against companies. And that is what to watch on Tuesday.
MATHISEN: Gap (NYSE:GPS) reporting same-store sales fell 3 percent last month. The biggest decline coming from Banana Republic stores. And on that, the retailer lowered its third quarter guidance. Shares fell in initial afterhours trading, as you see there.
HERERA: Target (NYSE:TGT), one of the nation’s largest retailers, plans to open on Thanksgiving Day as part of its Black Friday sales strategy.
Stores will open their doors at 6:00 a.m., at the same time basically as they did last year, and Black Friday deals will be online earlier that day, along with some available actually on Wednesday.
MATHISEN: And although Black Friday is still more than two weeks away, some of this year’s hottest items are already sold out. But the shortage may not be a bad thing for some of the nation’s most recognizable retailers and to retailers and toymakers during their most important season of the year.
Courtney Reagan tells us why.
COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: ‘Tis the season for holiday headaches. Procrastinators beware. The National Retail Federation says 40 percent of shoppers have already started their holiday shopping before Halloween, leaving many items already in short supply even though Black Friday is still more than two weeks away.
For the second straight holiday season the iconic L.L. Bean Boots are extremely limited in supply, with some styles back-ordered until the end of February 2016.
Jim Silver, CEO of consumer review site TTPN, says many LEGO products are selling phenomenally as are the PAW Patrol toys. Disney (NYSE:DIS) says “Star Wars” collectibles are early best-sellers like the die cast figures sold only at the Disney (NYSE:DIS) Store. The Fisher-Price BeatBo baby toy is back ordered until November 20th. Early sellouts are already making headlines. Industry watchers are telling shoppers don’t wait.
STEVE PASIERB, TOY INDUSTRY ASSOCIATION PRES. & CEO: We are seeing robust sales. We’re seeing online sellers having a much bigger role. So, as a shopper, don’t wait for that last-minute sale. I know there’s a temptation to kind of, all right, I’m going to hedge my bets last minute. If there is a toy your child really, really wants, err on the side of buying that early.
REAGAN: The fashionista on your list may be disappointed when no Balmain for H&M items are unwrapped. Most of those sold out in minutes when launched around the world last week.
Tech toys are hot, too. The Sky Viper camera drone currently unavailable on Amazon (NASDAQ:AMZN) with spotty available at Toys “R” Us over the last several days. According to a survey by Fusion Ops, consumers say a shortage of in demand smartphones will cause them the biggest problems, followed by shortages for video games, “Guitar Hero Live”, “Call of Duty Black Ops 3”, and “Star Wars Battlefront”.
Many retail experts think inventory levels are a bit higher than last year, in part due to a forecast for a decent holiday sales year, plus elevated inventories in the wake of last year’s West Coast congestion. But predicting demand and ordering the appropriate supply is both a science and an art. Too much inventory is a financial burden for retailers. Too little can leave shoppers disappointed.
Sellouts can create positive buzz for manufacturers and retailers involved, but too many empty-handed shoppers isn’t good either. For most, the goal is to match supply and demand as closely as possible, though ultimately hot items can be hard to predict.
Shoppers be warned, one in four Americans surveyed by Fusion Ops say they’d be willing to play dirty if that’s what it takes to walk out of the store with the last hot holiday gift.
For NIGHTLY BUSINESS REPORT, I’m Courtney Reagan in San Francisco.
HERERA: And finally tonight, a comeback story. This one is in the music industry. Sales of vinyl records are taking off. More than 13 million of the big round platters were sold last year. And sales continue to be upbeat this year.
Kate Rogers (NYSE:ROG) explains why vinyl is going for another spin.
KATE ROGERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: That’s the sound of demand for vinyl records of all things, in a world where digital music reigns supreme. In fact, independent record pressing in Bordentown, New Jersey, is aiming to manufacture 1 million records this year.
SEAN RUTKOWSKI, INDEPENDENT RECORD PRESSING GENERAL MANAGER: That’s going to be capacity. Demand far exceeds that. We’d be able to run these presses 24 hours a day, seven days a week and still not be able to meet demand.
Capacity — really the shelf point in the vinyl industry right now, and while you’re hearing about a resurgence, is there is such a demand compared to what the capacity is.
ROGERS: And in a strange turn of events, Rutkowski thinks it may have been digital music that’s created a resurgence in vinyl’s popularity. According to consumer research group Music Watch, half of vinyl record buyers are younger than 25.
RUTKOWSKI: I really believe that digital has helped the comeback of vinyl because digital strips out the tangibility of music. It really is just a file. And I think the great thing about vinyl is it’s such a great tangible piece.
ROGERS: And it’s not just the final that’s vintage. These machines are actually more than 40 years old, and in that time period, not much has changed in terms of how they operate but it does mean that if one of them actually breaks down, fixing it can both time-consuming and costly.
It takes about 25 to 40 seconds to make one record.
DAVE MILLER, INDEPENDENT RECORD PRESSING PLANT MANAGER: The process begins with the raw vinyl being put in the machine behind me that you see in the hopper. And that raw vinyl is then heated somewhat like a big spaghetti maker.
ROGERS: The vinyl is molded and pressed under 350 degrees and 100 tons of pressure. From there, the record is then compression molded, cooled, and trimmed. Next up, spot testing for quality before being packaged.
Here’s Matt DeMarco’s “Salad Days” being spun.
So, with vinyl back in vogue, only one question remains. Will cassettes be next?
RUTKOWSKI: You hear a lot about the cassette comeback. And again, I think people aren’t going to cassettes for the cassette audio. I mean, the cassette is inferior even to an MP3 in terms of sound. But it’s a cool medium.
ROGERS: For NIGHTLY BUSINESS REPORT, I’m Kate Rogers (NYSE:ROG).
MATHISEN: Bring back the 8-track, huh? Remember those?
MATHISEN: Oh, you’re much too young.
HERERA: Thank you.
Good night, everybody. That’s NIGHTLY BUSINESS REPORT for tonight. I’m Sue Herera. Thanks for joining us.
MATHISEN: Tyler Mathisen here. Thanks for joining us, everybody. Have a great evening. See you tomorrow.
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