Transcript: Nightly Business Report – January 12, 2016

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR:  Bubblin’ crude.  Oil prices dip below $30 a barrel for the first time since 2003, as supply swamps demand, pressuring prices.  What’s next?

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR:  NASDAQ gains for a change.  The tech heavy index ends higher for the first time this year.  But small company shares are mired near bear market territory.  Why one stock picker says 2016 is the time to think small.

HERERA:  Political theater.  The president delivers his last State of the Union speech tonight.  What he’ll say and what Congress might do and what it surely won’t.

All that and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, January 12th.

MATHISEN:  Good evening, everyone, and welcome.

Up through the ground came a bubbling crude.  It made Jed Clampett rich, but today, the unrelenting supply of crude oil from Saudi Arabia and the oil states, Russia and the United States is causing nothing but pain in the petroleum world.

Today, domestic crude prices cracked $30 a barrel, heading down.  That hasn’t happened since 2003.  Supply and demand are way out of what can.  After breaking that level, oil managed to settle just above that psychologically important level of 30 bucks.

And the pressure though is mounting.  Prices are down 17 percent since the start of this year.  That’s just 11 days ago, seven trading sessions.  It’s even uglier for some of the world’s biggest commodity companies.  Freeport McMoRan this year cratering 40 percent this year.  BHP Billiton (NYSE:BHP) down 20 percent, Rio Tinto off 18 percent.

Jackie DeAngelis reports tonight on the dramatic day in the oil pits.

(BEGIN VIDEOTAPE)

JACKIE DEANGELIS, NIGHTLY BUSINESS REPORT CORRESPONDENT:  The volatility continues for the crude oil trade, intraday low today $29.93, before we managed to settle back over the $30 mark.  Adding to the skittishness to the downside today, another bold call on Wall Street, calling for $10 crude from Standard Chartered.  The company explaining its other factors driving crude oil right now like currencies and equities that can tribute to the downside fall.

Remember, on the supply/demand side, there’s still no equilibrium.  Supplies continue to rise, and the EIA saying today its 2016 demand forecast remains stable.  So, if supply moves up and demand doesn’t move along with it, we still continue to stay out of whack here in terms of that aspect of the story.

Adding more pressure, OPEC two delegates saying emergency meetings were requested, but the cartel will not hold an emergency meeting.  So, we won’t see something until June.  That’s the next scheduled time the group will come together to discuss cuts in production.  Having said that, all of these factors together adding more pressure.  Remember six months ago, Goldman Sachs (NYSE:GS) called for $20 oil.  It will certainly seems possible and just yesterday, Morgan Stanley (NYSE:MS) saying these other factors mentioned could take us into the two handle, as well.

So, that’s what we’re waiting for at this point, and traders think the fact that we broke the $30 level today really leaves us open to break and hold in the future.

Reporting for NIGHTLY BUSINESS REPORT, I’m Jackie DeAngelis.

(END VIDEOTAPE)

HERERA:  Despite the decline in oil, stocks managed to finish another volatile session higher.  The Dow Jones Industrial Average rose 117 points to 16,516, the NASDAQ added 47, snapping an eight-session losing streak, and the S&P 500 gained 15.

But much attention is being paid to the small cap sector which is down nearly 20 percent from its most recent intraday high last June.  And that’s because small cap stocks tend to lead the broader market both lower and then higher again.  Here to talk more about that group is Francis Gannon, co-chief investment officer with the Royce Funds.

Good to see you, Frank.  Welcome.

FRANCIS GANNON, THE ROYCE FUNDS CO-CHIEF INVESTMENT OFFICER:  Thank you, Sue.  How are you?

HERERA:  I’m good, thank you.

So, tell me whether you think we’re closer to the end of the rout notice small caps or do we have further to go in your opinion?

GANNON:  Well, I think what you’re seeing in the small cap is not really too surprising.  You know, you’re in a healthy correction notice overall market as you said, down roughly about 20 percent and you’re kind of conventional definition of what a bear market is.  At the same token, you’ve been in a market that actually has been in the small cap world straight up for the past six years.

So, to have a 20 percent correction is actually quite healthy.  And what’s even more healthy is the end of that bear market has really come you know at a time where we saw some of the riskier side of small caps doing quite well, be it non-earners or the biotech technology companies, which led that market into that peak into June.

MATHISEN:  What’s going to flip it around, Frank?

GANNON:  I think one of the more — the transitions and I would say the small cap market is a market in transition today is that you’re seeing the market rotate from growth to value.  Value has dramatically underperformed growth in the small cap space over the past six years.  In fact, growth has outperformed in five of the past six years within the small cap space.  And that transition really started in the latter part of last year and it’s one that I think is going to continue throughout this year.

HERERA:  You also say that this year is the year of active management.  You’re going to having to pick and choose.

GANNON:  Well, I think they’re one and the same believe it or not, Sue.  You know, I think it’s a year of value investing especially within the small cap space and I would say across most asset classes.  But active management is going to make a comeback here.  In a market where market peaks and market transitions where you see the market loaded with yesterday’s winners I think the next year and, in fact, the next five years is going to be dramatically different than the past five years that we just had.

MATHISEN:  I want to bear down on value funds, which is the Royce Funds specialty.  Explains what that means.  I guess companies that are selling below what you see is their intrinsic value as opposed to growth funds that are being — whose prices are being buoyed by their earnings growth pace.

Why will value start to outperform?

GANNON:  Well, you’re essentially right, Tyler, that’s effectively what we do.  We’re trying to find great businesses at great prices.  But we also think of ourselves as risk managers within the small cap space.  And over the past five years, that risk has been forgotten about within the small cap space.  In fact, I would say one of the unintended consequences of being a zero interest rate environment for such a very long period of time is that any company had access to the capital markets.  And for a period of time, the laws of finance in the small cap space have been suspended.

So, you could have companies like biotechnology companies which are not typical biotechnology companies you’d find in the S&P 500.  But these are, I’d say, speculative businesses at best.  In fact, of the 155 biotech companies in the Russell, only 18 have cash flow and generate earnings.  So you can see that this is a market that has been buoyed by and companies that have been able to take advantage of the fact that they’ve had access to easy capital and you’ve been able to value them on a longer duration aspect given the fact we’ve been in the zero interest rate environment.

HERERA:  Frank, thank you so much for spending time with us.  We appreciate it.

GANNON:  Thank you.

HERERA:  Frank Gannon with Royce Funds.

MATHISEN:  In China, that country’s stock market saw a choppy session but managed to close higher.  The Shanghai composite rising fractionally as the central bank tried to stabilize currency and reports surfaced the cabinet may take a more active role in regulation.  Additional economic data due overnight may undergo the slowdown.

And as Eunice Yoon reports, China’s factories being particularly hard hit.

(BEGIN VIDEOTAPE)

EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT:  If you’ve ever bought a decorative glass lamp at Home Depot (NYSE:HD) or Lowe’s in the U.S., chances are it was made by Eric Lee.  From his factory in China, the Taiwanese businessman has been making colored glass for light fixtures for 15 years, but he’s not sure he’ll be doing it for much longer.

“Our factory has been facing big challenges this year,” he says.  “The business has dropped by 10 percent.”

China’s economic rise was powered by manufacturers like Lee, but with demand so sluggish for Chinese products both at home and overseas, the government says hundreds of factories have been deserted.  Businesses fear the plant closures are in the thousands with so many in the country’s industrial south now for lease.

We’re in the manufacturing town of Dongguan.  We’re in a part of the city that used to be one of the most prosperous.  Business people would come from all over the world to place orders at factories here for clothing and shoes.

But now, this area is almost entirely abandoned.  Shops like this one that used to cater to factory workers are completely shut down.

Lee had to idle his plant for 40 days over the summer because his inventory got too high.  He’s also been battling rising costs.  Higher minimum wage and rising living standards have forced him to offer pay races as much as 10 percent every year for the past five years to the current salary level of more than $1,000 a month for many of his workers.

“The main difficulty we are facing now is rising costs, especially for labor.  This casts a huge shadow over our operation,” he says.

The recent devaluation of the Chinese currency has helped narrow losses, but Lee only sees it as temporary relief.

“I’m afraid what we have seen of the slowdown is just the beginning and it’s far from the bottom,” he says.

His survival strategy?

ERIC LEE:  We pray every day.

YOON:  Praying for a miracle in China’s rapidly cooling economy.

For NIGHTLY BUSINESS REPORT, I’m Eunice Yoon in Shenzhen.

(END VIDEOTAPE)

HERERA:  The head of the International Monetary Fund says slower but more sustainable growth in China may actually benefit the world in the long run.  But Christine Lagarde made it clear that there are no risks — that there are risks rather to China’s economic transformation.

(BEGIN VIDEO CLIP)

CHRISTINE LAGARDE, IMF MANAGING DIRECTOR:  In the short run, however, this transformation generates spillover effects through trade and lower demand for commodities as well as through financial channels.

(END VIDEO CLIP)

HERERA:  At her speech in Paris, Ms. Lagarde also said interest rate hikes by the Federal Reserve need to be gradual or they risk hurting already fragile emerging economies.

MATHISEN:  To the job market now.  The number of openings rose in November.  The Labor Department reports an increase of 82,000 in its monthly survey.  More people also quit their jobs, which is viewed as a sign of growing confidence in the labor market.

HERERA:  And the economy is just one of the many topics President Obama is likely to touch on during his State of the Union Address tonight.

John Harwood is in Washington with more on what we can expect to hear.

Good to see you, John, as always.

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Hey, Sue.

HERERA:  White House aides say said he will deliver kind of a different kind of State of the Union Address tonight.  What do they mean by that?

HARWOOD:  Well, typically, State of the Unions are long speeches that include a request for Congress to take action across a wide front big issues, small issues.  The president’s getting to the end of the line.  He’s got a Republican Congress.  He knows they’re not going to give a lot.

So, he’s simply not going to go through that and do some looking back, looking at the distance that the United States has traveled under his presidency.  From the days of the financial crisis and the Great Recession, but also look forward and try to give some prescriptions for where the country needs to go even if it doesn’t go there during his presidency.

MATHISEN:  So, if he’s not going to ask the GOP-controlled Congress for specific legislative priorities, what does he want from them?

HARWOOD:  Well, he’ll ask for a couple in particular.  The most notable I would say are the Trans Pacific Partnership, the big trade deal.  They — Congress has given him fast track to the way to move that quickly through Congress, but Congress isn’t sure they want to move it that fast.  Paul Ryan is more interested than Mitch McConnell in the Senate.  So, he’s going to ask for that.

The other thing is the new authorization to use military force in Syria.  The administration has been acting under the old authorization that dates back to the Iraq war.  They say they can continue to act but they would like a new statement from Congress to demonstrate unity of purpose in the United States strategy against ISIS.

HERERA:  The president did face some setbacks in 2015 on the fight against ISIS in particular.  But he had a lot of successes, as well.

So, gauge the mood of the president as he goes into his final State of the Union for us.

HARWOOD:  Sue, I think the president’s going to be more upbeat in the State of the Union Address than he’s been for any of the prior ones.  He believes that with 292,000 jobs added last month, just as to underscore the economic recovery, that the economy is in solid shape.  He believes that the record auto sales are signs his policies have worked.  He’s gotten action internationally on climate change, on Iran’s nuclear program.

All of those things lead him to think he’s coming to his last year with a sense of momentum and part of what he wants to do is galvanize the public to press for priorities that he may not achieve during his presidency like immigration reform and paid family leave, things like that.

HERERA:  All right.  John, we’ll be watching.  Thank you.  John Harwood in Washington.
MATHISEN:  Still ahead, why fourth quarter earnings could be the next hurdle for the market and your money.

(MUSIC)

HERERA:  CSX (NYSE:CSX) reports better than expected fourth quarter earnings but revenues disappointed.  The railroad operator earned 48 cents a share, that’s two cents better than estimates.  But revenues light, coming in at $2.8 billion, a decline of more than 12 percent from a year ago.  The company also reported a drop in freight volumes and said the weak global economy would weigh on results in the coming year.  And shares were volatile after that report.

Mary Thompson takes a closer look at CSX (NYSE:CSX) results.

(BEGIN VIDEOTAPE)

MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Well, after a tough year for the railroads, CSX (NYSE:CSX) is suggesting the road ahead doesn’t look easier.  The nation’s third largest railroad saying earnings for 2016 are expected to come in below the $2 a share earned in 2015.

The company citing continued low commodity prices, a strong U.S. dollar and the energy markets transition.  All of this coming as the railroad’s fourth quarter profits declined from last year, though they did beat expectations.  Revenue for that period coming up short.

Like many railroads, CSX’s business has been hurt by a decline in demand for coal here at home, as low natural gas prices have U.S. utilities opting for that fuel to power their operations.

Add to that experts of thermal and metallurgical sales remain soft because of oversupply in the global markets.

For NIGHTLY BUSINESS REPORT, I’m Mary Thompson.

(END VIDEOTAPE)

MATHISEN:  Well, CSX (NYSE:CSX) did report better than expected fourth quarter results today.  But how will the rest of the quarter go for other companies reporting their fourth quarter results in the days and weeks ahead?

Mike Thompson is chairman of S&P Investment Advisory Services and he joins us now to talk more about those fourth quarter numbers.

Mike, welcome.  Good to have you with us.

You say the big drag on earnings as we all know is going to be energy.  We expect that to be way down.  Materials, we expect that to be way down.

But my notes indicate that you also think materials, information technology, staples, utilities, financials, industrials, will also be down.  That doesn’t leave much to be up.

MIKE THOMPSON, S&P INVESTMENT ADVISORY SERVICES CHAIRMAN:  No, well, that’s right.  Three out of tin is the best you’re going to get this time, Tyler.  What you have is health care, you have telecommunications and our stalwart, consumer discretionary sector, the gift that keeps on giving.  Those are the only ones having green next to them in terms of earnings growth year over year, Tyler.

HERERA:  Which is why everybody out there that we’ve been talking to recently is talking about or using the phrase “profit recession”.  But you don’t seem to agree with that.

THOMPSON:  Well, I think people love the drama behind it, because I think, you know, it started several years ago.  You have two consecutive quarters of negative growth in something and immediately people want to go and make a story out of it.

But to be honest with you, you probably — this could be very well the last of the negative growth quarters.  I sort of feel like that’s the expectation from the Wall Street analysts, yes, indeed.  We were down last quarter and had quarter it’s even worse.  We’re down 6 percent for the fourth quarter.

You know, if you take energy out, maybe you break even.  Next quarter expectations aren’t that high, up a half a percent.  If you take energy out, you get a little bit of growth there.

But by the end of the year, you know, you’re kind of feeling like you’re going to get probably in totality about 7 percent analyzed growth which is just about where you want to be to be on a historic average.

MATHISEN:  You know, we were speaking earlier today to another investment pro who said, you know, last year, earnings growth kind of flat, 1, 2 percent.  That’s kind of what you got in the stock market.

Is that what you expect in the stock market this year?  In other words, will stock prices basically track corporate earnings which I just said might be up year over year 7 percent?

THOMPSON:  Well, honestly, I think that there’s a new dynamic.  You’re pretty much rightly valued on historical fundamental perspective but, you know, we’re in a new paradigm.  Honestly, you can’t get any yield in the credit market.  So, the U.S. equity market is probably the most rational and best place to invest money in the world.

And when I talk to people globally, no matter all the woes of people talking about and certainly it was harder to digest the 17.5 times next year’s earnings multiple but we’ve corrected.  We’re done at 16 times, it’s in line with the 15-year average, yields are next to nothing in the fixed income markets.  Heck, you get as much on a dividend yield on the S&P 500 as you do the U.S. treasury 10-year.

Honestly, with profit margins stable at 9 percent across the 500, equity is probably the least worst alternative.

MATHISEN:  Very quickly then, do you think this will be a better year relatively for S&P 500 returns, stock market returns than last year was?  You got to go fast.

THOMPSON:  Indeed I do.

MATHISEN:  OK.  Mike, that was a quick answer.  I appreciate it.

Mike Thompson with S&P Investment Advisory Services.

HERERA:  Starbucks (NASDAQ:SBUX) has ambitious plans to expand in China and that is where we begin tonight’s “Market Focus”.

The company looks to open 500 stores per year for the next five years.  Starbucks (NASDAQ:SBUX) already has 2,000 stores in that country and about 100 cities.  Shares of the company up nearly 3 percent to $59.46.

Lululemon saw its holiday sales improve.  This comes after the company initially released weak guidance last month, citing declines in foot traffic.  However, the company has raised earnings and revenue guidance for the quarter.  Shares of the apparel retailer up nearly 4 percent to $56.82.

BP cutting jobs due to the continuing decline in oil.  The company plans to lay off 4,000 workers in its exploration and production units this year, 600 in the U.S.  The announcement follows the path of other energy companies who had to shave their workforce due to the falling price of oil.  BP shares off 19 cents to $28.65.

MATHISEN:  And Ford reports upbeat earnings guidance.  The automaker expects to have operating profit of at least $10 billion in 2016 as a result of its strong performance.  It will issue a $1 billion supplemental cash dividend.  Shares dipped in early after hours trading.  During the regular session, Ford was up slightly at $12.85.

And MetLife (NYSE:MET) intends to separate a large portion of its U.S. life insurance business via a sale spinoff or initial public offering.  The life goes out of MetLife (NYSE:MET).  Shares rose initially in after-hours trading.  The stock ended fractionally higher during the regular at $41.99.

HERERA:  A ground breaking deal in the newspaper business.  “The Philadelphia Inquirer” has been donated to a non-profit institute.  It’s just one of many traditional publishers trying to overhaul its business model.

Julia Boorstin takes a look at the future of print journalism and attempts to survive in the digital age.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Monday, “The Nation” announced its implementing a pay wall.  Today, the owner of “The Philadelphia Inquirer,” “The Philadelphia Daily News” and philly.com has donated the media company to a foundation in the hope that a non-profit business model will help them survive.

And “The New Republic” put itself up for sale.  Its owner nearly four years, Chris Hughes, saying he, quote, “underestimated” the difficulty of transitioning an old and traditional institution into a digital media company.

LOU COLASUONMO, FTI CONSULTING SR. MANAGING DIR.:  It’s clearly a tough time.  It’s capricious.  There are going to be some survivors and some fatalities in this.  It’s not going to be easy transition.  We’ve seen it right along and it’s been in progress for 15 years.  Very difficult to monetize content.

BOORSTIN:  These announcements come in the face of rising questions about how many people are actually reading articles in Apple’s news app, to which all the major publishers are contributing.

But there are signs of hope from two of the most established publishers.  “The New York Times (NYSE:NYT)” CEO telling me in December he expects the company to return to strong digital ad growth.  And the publisher CEO just announced it’s already making money off virtual reality after distributing Google (NASDAQ:GOOG) Cardboard headsets to a million newspaper subscribers.

And “The Washington Post (NYSE:WPO)” has seen a surge in traffic under Jeff Bezos ownership, surpassing “The New York Times (NYSE:NYT)” in unique visitors for two straight months.

UNIDENTIFIED MALE:  It’s chaos.

BOORSTIN:  But all these legacy players are up against a slew of rivals including Vice, BuzzFeed and new millennial focused news apps such as Mic, Vocativ and Fusion, and free services have the advantage.

COLASUONMO:  People are unwilling to pay for content because it got free 10, 15 years ago.  And it’s hard to get that genie back in the bottle.

BOORSTIN:  There’s no doubt the 80 million young people in the U.S. are interested in news.  It’s just a question of which services will be able to make it a profitable business.

For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin in Los Angeles.

(END VIDEOTAPE)

HERERA:  Coming up, office space.  The secretive startup that’s making mysterious moves in the Palo Alto real estate market.

(MUSIC)

MATHISEN:  California regulators today rejected Volkswagen’s plan to fix their diesel cars.  That had the emissions cheating software installed.  The state’s air resources board said the proposed fix not adequate.  In response, VW says it is developing a revised recall plan and it is committed to working with California regulators.  VW will meet with the EPA tomorrow.

HERERA:  Palantir, a hot Silicon Valley startup that’s also one of the most secretive is scooping up a lot of property in a very pricey real estate market.  And there are a few reasons why.

Josh Lipton in Palo Alto explains.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT:  It’s a $20 billion startup best known for its clients such as the CIA.  But Palantir is also becoming a force in Silicon Valley real estate.

CNBC has learned that Palantir now leases more than 20 buildings in downtown Palo Alto or up to 15 percent of total office space.  There is 542 High Street, a building it remade into a company cafeteria for its 1,800 employees or 101 Forest, best known to locals for the Philz Coffee Shop, and recently Palantir signed a long-term lease at 2861 Hamilton.

Palo Alto real estate is some of the most expensive in the country, but that is not a problem for Palantir.  Sources say the company generated revenues last year topping $1.5 billion.

Palantir’s software allows government agencies to see relationships among a large amount of data such as phone records.  And that’s one reason it needs so many different facilities.  It sometimes has to operate in offices outfitted with special security.

AVIVAH LITAN, GARTNER:  I’m sure that their computers are behind double locked doors, that they need biometrics to enter into those buildings, into those rooms.  And more than biometrics, I’m sure they have to have a special pass code.  And so, the idea is it’s physically locked down.

LIPTON:  Beyond security, Palantir wants to stay close to Stanford University when it recruits top talent.  Palantir is the most popular destination among private companies for Stanford computer science graduates according to data from the LinkedIn (NYSE:LNKD).

Palantir’s expansion is a boon for the Palo Alto economy, but it squeezes the city’s startup community.  Venture capitalists say it is fundamentally changing the character and culture of this college town.

PETER HEBERT, LUX CAPITAL CO-FOUNDER AND MANAGING PARTNER:  Here, you just have consolidation where a lot of the buildings that used to have 25 companies now have one.  So, there’s a large behemoth that’s occupying the downtown scene.

LIPTON:  Case in point, Pebble and Wealthfront are relocating because they can’t find space or compete with a company that has now raised nearly $2 billion from investors.

Palantir declined to comment for the story, but soon enough, the company could be facing more competition of its own.  Amazon (NASDAQ:AMZN) is becoming an increasingly active player here, recently outbidding them for a 50,000 square foot space.

For NIGHTLY BUSINESS REPORT, I’m Josh Lipton in Palo Alto, California.

(END VIDEOTAPE)

HERERA:  And to read more about Palantir’s real estate strategy, head to our Web site, NBR.com.

MATHISEN:  And finally tonight, the entire nation talking about the Powerball drawing Wednesday night and today, the jackpot increases to a staggering $1.5 billion.  It may not stop there.  Single winner would have the option of a lump sum cash payout of an estimated $930 million.

HERERA:  Look at that.

MATHISEN:  And given the strong ticket sales, see line, the jackpot could climb even higher.  Wow.

HERERA:  It’s exciting.  That does it for NIGHTLY BUSINESS REPORT tonight.  I’m Sue Herera.  Thanks for joining us.

MATHISEN:  And I’m Tyler Mathisen.  Thanks from me, as well.  Have a great evening everybody.  And we’ll see you right back here tomorrow night.

END

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