Transcript: Nightly Business Report – August 31, 2016

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Summer sizzler. August ends on a down note as the S&P has its first negative month since February. So, what does September hold?

New heights. How one of the largest real estate research companies is trying to get a leg up on the competition.

And, space venture. The hot new area attracting big-time Silicon Valley money.

All that and more on NIGHTLY BUSINESS REPORT for Wednesday, August 31st.

Good evening, everyone, and welcome. I’m Sue Herrera. Tyler Mathisen is off tonight.

August went out with a thud. Stocks closed out the month lower as investors took a step back and lock their focus on Friday’s big jobs number. Many believe that number could be a big input in the Federal Reserve’s equation on when to raise interest rates.

All in all, it wasn’t too bad today but stocks did and in the red. The Dow Jones Industrial Average fell 53 points to 18,400, the NASDAQ dropped nine, the S&P 500 was off five. For the month, the Dow and the S&P were slightly lower, but it was the first losing month for the S&P since February. But the NASDAQ did manage a one-percent gain.

So, now that August is in the books the markets turn the page and look ahead to September. So, what can we expect?

Dom Chu gives us a history lesson.

(BEGIN VIDEOTAPE)

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT: After what’s been a pretty uneventful summer of trading outside of that Brexit vote in June, some traders are anticipating what could be more volatile September as many get back from their vacations. And they also get back to work, of course. Our kids go back to school.

Now, in the post-financial crisis era, which were going to call the last six years, stocks have seen slightly more volatility in September than other months. But on average, it ends up being pretty flat.

According to our data partners over at Kensho, since 2010, the NASDAQ, S&P and Dow have gained a percent or less during September, but it’s only been a 50-50 split on whether the month was positive.

Now for the rest of the year, Kensho data shows that over the last 20 years, during the months of September through December, the trends have been more positive.

The S&P 500 has gained over 4 percent on average during that time span and then a positive result, 80 percent of the time. Healthcare stocks are among the better performers, meanwhile energy stocks are among the lagging performers. Now, remember, we’re talking average numbers here and timeframes do matter.

September though remember filled with potential market moving catalyst like jobs data in the U.S. Federal Reserve interest rate meeting, as well as a presidential debate later on in the month and OPEC meets as well which could lead to action in the oil markets. So, when it comes to September, the average numbers may suggest that you could be an uneventful month, but that could all change in a New York minute.

For NIGHTLY BUSINESS REPORT, I’m Dominic Chu at the New York Stock Exchange.

(END VIDEOTAPE)

HERERA: As we mentioned earlier, Friday is the August jobs report, and many believe that is the number of the Fed is looking at. Today, we got a bit of a warm-up as payroll company ADP said private companies added 177,000 jobs in August. That was in-line with the 175,000 estimate.

Steve Liesman takes a look at what might happen after Friday.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: If the jobs number is right, does the Fed have to hike? That’s the question on Wall Street ahead of the August payroll report this Friday.

The Wall Street consensus looking for a hundred and eighty thousand jobs and unemployment rate that jobs 4.8 percent. A key indicator for that report, the ADP national employment report came in right on target, showing private-sector job growth of 177,000 for August. Same Fed watchers Mohamed El-Erian, he says the odds of a hike is 60 percent and could go higher on Friday.

MOHAMED EL-ERIAN, ALLIANZ CHIEF ECONOMIC ADVISER: What makes that probability go a lot higher, in Friday report that has three things, drop creation in excess of 180,000, wage growth going up, and no significant move in the participation rate that pushes the unemployment rate up. If you get these three conditions, then you’re going to go for about sixty percent to about eighty percent.

Behind the increasing odds of a September hike, comments of Fed Chair Janet Yellen in Jackson Hole who said the case is strengthening and Fed Vice-Chair Stan Fischer who said a rate hike in September is possible and maybe more than one this year if the data cooperate.

TOBIAS LEVKOVICH, CITI CHIEF U.S. EQUITY STRATEGIST: You listen to what the Vice Chair Fischer and Chairperson Yellen said over the past few days, they are looking for incremental data points that would suggest economic activities or feel more willing to consider the rate hike.

LIESMAN: Citi is still betting on a December hike as is the overall market. Odds of September rate increase are up, but still under thirty percent. The December odds say there’s a better than even chance for a hike.

The bet is the Fed doesn’t want to act before the presidential elections, though Fischer from the Fed insists they would not play a role. There is still considerable data before now in the next meeting beyond the jobs report. Some Fed officials have said they want to see inflation rise before hiking rates. That makes us a September meeting a close call.

But a healthy jobs report, it will be the first step on the path to a hike.

For NIGHTLY BUSINESS REPORT, I’m Steve Liesman.

(END VIDEOTAPE)

HERERA: So, what will Friday’s jobs report mean for the Fed and perhaps a September rate hike? And are there any investment moves you should make now that will put you ahead of rising interest rates?

Jim Swanson joins, chief investment strategist at MFS Investment Management.

Good to see, Jim. Welcome.

JIM SWANSON, MFS INVESTMENT MANAGEMENT: Thanks for having me.

HERERA: Let’s start, first of all, with what you are expecting on Friday. Are you in line with the rest of the market?

SWANSON: Pretty much so. This whole year, we’ve seen 194,000 average number for nonfarm payroll and I say it’s going to be pretty close to that, but not enough to push them over the edge.

HERERA: All right. So, you’re looking at December rather than September for a rate hike.

SWANSON: That’s my hunch. Yes. I think people need to begin to look at their portfolios first. But I think we’re in for a rate hike this year but not next month or not this month.

HERERA: All right. So, you said people need to take a look at their portfolios. It sounds as though you feel as though this is a window of opportunity for lack of a better phrase, so that people can position themselves correctly.

SWANSON: I think that’s right. I think people need to do two things. If the Feds willing to do this, that means they’re probably seen more rate increases coming. They just don’t want a one-time rate increase. This would be the second in this cycle and it means bond prices generally fall, and that means investors need to look for those longer-dated bonds and trim those positions really long duration, long maturity type bond holdings, and pivot to shorter baby, you know, high-quality, you know, credit type, corporate type bonds.

And also, to look for those bonds substitutes in this stock market that have gotten very pricey. Parts of the stock market have been used as bond substitutes and they’re getting very expensive.

HERERA: Such as? Give me some examples.

SWANSON: Well, take a look at the utility sector. Take a look at the REIT sector, telecom. These are high dividend paying sectors of the S&P and they’ve gotten very pricey. Some of these companies, 20 times cash-flow, it’s very hard to justify that when rates start going up on cash instruments, on bond instruments, that are a lot safer.

And I think this is going to be the competition and I think people need to trim those positions. You know, not radical moves but this is the time to take a new look at your portfolio.

HERERA: And I understand you like the financials. Any particular sector of financials?

SWANSON: Yes, I’m pretty much in favor of the banks here. They haven’t been very expensive, and now, we’re looking at that part of the cycle tends to be mid to late cycle, where interest rates are on their way up and banks start doing more commercial lending,

And the combination of those two is very good for interest rate profitability for these banks. So, I think this will be finally a time for the banks to shine.

HERERA: You know, a lot of people are saying that regardless of whether we get an interest rate hike in September or December, that volatility is going to start to pick up, maybe it’s around the election, maybe it’s just either, you know, some issues with the Fed, if they don’t hike or if they do hike. Do you expect volatility to pick up considerably or not?

SWANSON: Yes, and here’s an important reason. There are cross-border flows across the world. We’re in a global world and we’ll be hiking. We’ll be raising rates when the rest of the world still easing, and that’s going to create turmoil. It means differences in FX or currency exchange rates. It means capital flows will start moving more to the U.S.

A lot of crosscurrents here. So, it’s another time to sort of I think step back and realize that risky assets have been on the move for months, and it’s I think it’s a time to pull back on riskier assets and trim some of those positions.

HERERA: All right. We’ll leave it there. Jim, thank you. Jim Swanson with —

SWANSON: Thank you.

HERERA: — MFS Investment Management.

Treasury Secretary Jack Lew weighed in on the big story that we told you about last night. The EU making Apple pay more than $14 billion in back taxes, and he wasn’t a fan.

(BEGIN VIDEO CLIP)

JACK LEW, TREASURY SECRETARY: Our concern with European Commission action is that it is using the state aid theory to make tax law. It is doing it in a way that is retroactive and that overrides national tax law authority in our view, and we think that it undermines the environment in Europe for international business because it creates uncertainty that ultimately will not be good for the European economy.

(END VIDEO CLIP)

HERERA: He also said it undermines the spirit of economic cooperation and wasn’t consistent with established a tax law principles.

Brazil’s President Dilma Rousseff was voted out of office after being accused of breaking fiscal laws while managing the country’s budget. The vote brings to an end a year-long fight, which paralyzed the most powerful economy in Latin America.

Ahead of his immigration speech tonight, Donald Trump met with Mexico’s president in Mexico.

Eamon Javers has been following this story for us.

Good evening, Eamon.

EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Yes. Hi, Sue.

It was an extremely subdued Donald Trump that we saw speaking in Mexico City today, alongside the Mexican president. He was speaking from a prepared script which he doesn’t always do and in a tone of voice that was almost a whisper at points.

But Trump really making his sales pitch to the Mexican people, saying that his policies on immigration and trade are actually good for them as well on immigration, saying ultimately that having migrants coming up north through Mexico into the United States is not good for Mexico or for the migrants themselves. And on trade, saying that we have to keep manufacturing wealth “in our hemisphere” was the phrase he used, citing competition with China.

And in contrast to some of this language that we saw on the campaign trail about Mexico not being our friend or even being our enemy, Trump painted a very different vision of the way the two countries would relate going forward.

Here’s what he had to say.

(BEGIN VIDEO CLIP)

DONALD TRUMP (R), PRESIDENTIAL NOMINEE: Improving pay standards and working conditions will create better results for all and all workers in particular. There’s a lot of value that can be created for both countries by working beautifully together.

(END VIDEO CLIP)

JAVERS: Working beautifully together. Now, that’s a phrase that we may or may not see in his speech tonight on immigration. He’s going to be in Arizona. He’s going to talking about what the particulars are of his policy and particularly in a week where we’ve had some sense that Trump might be softening his immigration policy. We’ll see if that holds up as well in tonight’s speech or not.

Really, nobody’s totally sure where Trump is going to land on immigration tonight. So, it’s fascinating moment.

HERERA: It is a fascinating moment. Any word whether Secretary Clinton will be — will be visiting Mexico or speaking with the Mexican president.

JAVERS: Well, we know that the Mexicans have invited both candidates. Donald Trump accepted that invitation. Hillary Clinton’s team says that there are no plans right now for her to go to Mexico as well.

But, of course, you know, you’ve seen in the past where candidates for president have seen that for a little bit of foreign travel is good for the resume and good for the image as presidential. We’ll see if Hillary Clinton decides that she needs a foreign trip as well at some point between now and Election Day.

HERERA: Very quickly, how do you think Mr. Trump’s speech will play with Republicans who are not in favor of his candidacy?

JAVERS: Well, look, if I’m Trump and if I’m his campaign, I tell my supporters, we’re going down to Mexico to start the process of negotiating with the Mexican people, that he was asked at the press conference there whether or not they discussed, whether or not Mexico would pay for the wall, that he plans to build between the United States and Mexico. That’s one of his key promises out on the campaign trail and ultimately, said we didn’t discuss that yet, that’s for a later date.

So, you can frame this as the beginning of a process of talking to the Mexicans about this.

HERERA: All right. Eamon, thank you so much. Eamon Javers in Washington.

JAVERS: You bet.

HERERA: Up next, how one research company is using big data to soar above the competition.

(MUSIC)

HERERA: More signs the housing sector is holding its own, pending sales which measures homes under contract rose one-point-three percent last month. That was nearly double the estimate. And applications for new mortgages rose nearly 3 percent last week.

Competition in the real estate industry is fierce and information is king. One of the largest property research firms CoStar is trying to get a leg up. It’s taking data mining to new heights, spying from the sky on construction below.

Diana Olick went for a ride to see the real estate recon.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: In the skies above Southern Maryland —

AMBER SURRENCY, COSTAR AERIAL RESEARCHER: That green dots are telling me that this is information Costar notes is under construction.

OLICK: Former Marine Amber Surrency is mapping construction sites below, using the same technology that gathers intelligence over Iraq and Afghanistan.

So you can point out something and say, OK, I see a building under construction there, or I see a site that hasn’t even been started yet, but may have been listed as affirmative.

SURRENCY: Yes.

OLICK: It’s not the government watching. It’s a publicly-traded real estate information company. CoStar which invested millions in data mining and is seeing big returns.

ANDY FLORANCE, COSTAR GROUP CEO: We typically collect twice as much under construction activity as any of our competitors, and that can be as much as hundreds of thousands of construction of apartment units that we know about that no one else knows about.

OLICK: Just gathering construction data on one city like Baltimore used to take CoStar a year on the ground.

Now, they can do it in three days. The data is invaluable to developers and landlords who need to know where the competition is in the market. It also helps banks who might be lending to those developers to know if the property will be able to sustain occupancy and rent from apartments to offices, even to farmland. The system contract projects in a way that old-fashioned government permitting offices cannot.

Not only is CoStar mining data to sell to its clients, it’s also searching for clients who might use CoStar’s website, apartments.com

It’s a billion dollars a year. Is it worth it?

FLORANCE: Absolutely. We identify probably $10 billion to $15 billion (ph) of annuity compliance each year by doing this and we create an awful lot of value for information clients.

OLICK: The next frontier for CoStar single-family housing as homebuilders ramp up production to meet rising demand, this kind of information can mean the difference between a bumpy housing boom and a smooth landing.

For NIGHTLY BUSINESS REPORT, I’m Diana Olick over Southern Maryland.

(END VIDEOTAPE)

HERERA: U.S. regulators aim to block Deere’s deal with Monsanto, and that’s where we begin tonight’s “Market Focus”.

The Justice Department filed a lawsuit against Deere, attempting to prevent the agricultural giant’s proposed takeover of Monsanto’s precision planting equipment business. The government said the tie-up would raise costs for farmers and remove competition for farming technology. Deere shares fell one percent to $84.55.

Bob Evans Farms saw profit rise, beating expectations and prompting the food distributor to raise its full-year earnings guidance. The company did report a worse-than-expected drop in sales as fewer restaurants and operation impacted results. But nonetheless, shares rose nearly 6 percent to $41.

Palo Alto Networks posted a rise in revenue, thanks to higher spending by government institutions on cyber security products. The results came in ahead of analysts targets. But the technology company said, it’s lost widened and it gave weaker-than-expected guidance for the current quarter, despite raising its full-year outlook. Shares fell seven percent to $133.17.

UPS pilots have signed a five-year labor agreement that will include an immediate pay hike of nearly 15-percent and a 3 percent annual wage increase over the next five years. UPS shares fell 16 cents to $109.22.

And AstraZeneca will pay five-and-a-half million dollars to the U.S. government to settle claims that its divisions in China and Russia violated U.S. anti-bribery laws. The drugmaker did not admit or deny wrongdoing in that settlement. Shares fell 1 percent on the news to $32.81.

And Brown-Forman said both profit and revenue fell as weakness in some foreign markets hurt results. The maker of Jack Daniels Whiskey also said the divestiture of two of its brands contributed to the declines. Brown-Forman shares fell more than three-and-a-half percent to $48.52.

Florida Governor Rick Scott has declared a state of emergency in preparation for Tropical Storm Hermine. It’s in the Gulf of Mexico and it’s expected to move towards the west coast of the state.

(BEGIN VIDEO CLIP)

GOV. RICK SCOTT (R), FLORIDA: We had 6,000 members of our National Guard ready to be mobilized. But just think (ph), we’re going to have a storm surge. We’re going to have rain. We have the risk of tornado. And this is going to go across the state.

It’s going to start sometime tomorrow and is going to hit most of the northern part of the state. We’re going to see a lot of rain especially on the — on the east the southeast side of this storm.

(END VIDEO CLIP)

HERERA: And Hawaii is bracing for a double whammy as two storms bear down on the state.

And as Susan Li tells us, the storms arrived amid a record year for tourism in the Aloha State.

(BEGIN VIDEOTAPE)

SUSAN LI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Not one but two hurricanes and back-to-back. Hurricane Madeline has weakened to a category one storm, but still packing winds of 90 miles per hour and it is expected to pass dangerously close to the big island of Hawaii on Thursday morning.

Roughly following Madeline’s path is Hurricane Lester, classified as a more powerful category four storm and forecasts a hit over the weekend. Hawaii’s governor has already declared a state of emergency with school closures, residents stocking up on food and water, boarding up their windows. Meantime, visitors are being told to take all necessary safety precautions with Hawaiian airlines waving flight change fees to and from the big island.

Tourism is the biggest business in Hawaii, accounting for over sixteen percent of the state’s economy last year, and making up over thirty-five percent of Hawaiian jobs in 2016. And with five straight record years of visitor numbers and spending, it’s boom time for the Aloha shores.

HANNAH SAMPSON, SKIFT: Hawaii has a lot going for it right now the other parts of the world don’t. Namely, it hadn’t been in the news for negative reasons like terrorism and Zika which has been affecting a lot of other island destinations isn’t there.

LI: More direct flights are also helping bring in the visitors with another record number forecast for this year. Hawaii’s government predicts nearly 9 million will make their way to the Aloha State. Americans represent the largest percentage of tourists to Hawaii, that is followed up by Japan, Canada, Australia, South Korea and China.

Canadian visitors have fallen over eleven percent so far in 2016, thanks to the stronger dollar and the weaker Canadian currency. That decline though is being more than made up for by the influx of Korean and Chinese travelers.

Hawaii’s tourism authority says that it’s really too early to tell if it’s when hurricanes will have any impact on visitor numbers.

SAMPSON: The threat of storms will maybe make people nervous if they’re planning to fly to Hawaii in the next, you know, week or whatever the timeline of those storms are. But there’s a near-miss or if they just bring a little bit of rain, then I can’t imagine honestly it does much of anything.

LI: Hawaii maybe bracing for stormy weather this week, but the forecast for tourism remains rosy with another record year expected.

For NIGHTLY BUSINESS REPORT, I’m Susan Li.

(END VIDEOTAPE)

HERERA: Coming up, why Silicon Valley venture capitalists are turning their gaze to space.

(MUSIC)

HERERA: The first commercial flight between the U.S. and Cuba in more than half a century landed in the Cuban city of Santa Clara. The JetBlue flight took off from Fort Lauderdale and took under an hour. In addition, the Transportation Department granted eight U.S. airlines permission to begin scheduled flights to Havana as early as this fall.

And finally tonight, in Silicon Valley, it’s not all about just ride hailing services and food delivery startups venture capitalists are also now exploring space for outsized returns.

Josh Lipton tells us where the money is going.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: So far this year, venture capitalists have already committed more than $200 million across 20 space-related deals. That’s on top of the more than $2 billion they invested in 2015.

The startups that have raised the most money include Elon Musk’s private rocket builders SpaceX, OneWeb which uses satellites to provide high-speed Internet access, Blue Origin, the startup founded by Amazon’s Jeff Bezos, satellite builder Planet and Kymeta, a company backed by Bill Gates that sells small satellite antennas.

The rise of private spacecraft, big data analytics, cloud computing, as well as the increased efficiency and drop in price electronic components have all contributed to the growth of these space-related startups.

And V.C.s say interest is only increasing in this market.

PETER HERBERT, LIX CAPITAL CO-FOUNDER: Believe it or not Silicon Valley has been known to inspire herd-like behavior and I would say that right now, we’re kind of at the nexus at one of Those areas where there is not probably a week that goes by where I don’t get outreach from some other institutional investor saying that they’re looking for a space investment.

LIPTON: There are challenges though. It would be hard for this industry to really flourish until commercial rocket launches are more frequent and reliable. Also, V.C.s say there’s a shortage of smart software engineers.

STEVE JURVETSON, DFJ PARTNER: (AUDIO GAP) people like you know Mars needs software. We need all types of development. It’s the tightest recruiting partially because the people who do that could go join other kinds of companies. They can join electric car company. They can go join Facebook. They could join anything.

LIPTON: V.C.s like Jurvetson are excited about the technology to come. For example, he says we are on the cusp of space tourism to the moon and beyond.

Given technological advances in the amount of money now supporting these space startups, the stars and the moon might indeed be aligned to make those projections become a reality.

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

(END VIDEOTAPE)

HERERA: And that’s NIGHTLY BUSINESS REPORT. Thanks for joining us.

We want to remind you, this is the time of year your public television station seeks your support. We’ll see you tomorrow.

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) 2016 CNBC, Inc.

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