Transcript: Nightly Business Report – August 11, 2017

ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue
Herera.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Calm is cracked. The market
has one of its worst weeks of the year as the war of words between the U.S.
and North Korea escalates again.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: New low. J.C. Penney,
once a dominant force in retail, sees its shares tumble as shoppers stay
away from its stores.

HERERA: Pinot and pond. Why there may be some seeds of discontent growing
in northern California`s wine making region.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Friday,
August 11th.

MATHISEN: Good evening, everyone, and welcome.

Well, after a remarkable string of regard highs, investors turned cautious
this week and the result was the second worst week of the year for stocks.
The calm that had swallowed the rising market like a warm blanket all year
long finally cracked. The rupture came as the war of words between the
United States and North Korea intensified, beginning on Tuesday and
continuing through today.

Soggy earnings reports from major retailers didn`t help either. The result
was a down week, the worst in months with all of the major indexes off 1
percent or more. But what was almost as surprising as the suddenly
blustery turn in rhetoric was that the weekly losses weren`t even steeper,
that`s in part because stocks turned up today. The Dow Jones Industrial
Average rose 14 points to 21858, the Nasdaq added 39, and the S&P 500 was
up three.

HERERA: The president today did not back down against North Korea saying
the leader of that country will, quote, regret it fast if he acts against
Guam or any American ally.

(BEGIN VIDEO CLIP)

DONALD TRUMP, PRESIDENT OF THE UNITED STATES: This man will not get away
with what he`s doing, believe me. And if he utters one threat in the form
of over-threat, which, by the way, that he has been uttering for years, and
his family has been uttering for years, or if he does anything with respect
to Guam or any place else that`s an American territory or an American ally,
he will truly regret it.

(END VIDEO CLIP)

HERERA: China, the world`s second largest economy, has repeatedly warned
both Washington and Pyongyang not to do anything. Today, it reiterated the
idea.

And Eunice Yoon reports tonight for us from Beijing.

(BEGIN VIDEOTAPE)

EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Chinese state
media fired a warning shot at Pyongyang and Washington over their ongoing
war of words. In an editorial, “The Global Times”, the communist party
backed paper, said if North Korea launches missiles that threaten U.S. soil
first and the U.S. retaliates, China will stay neutral. If the U.S. and
South Korea carry out strikes and try to overthrow the North Korean regime
and change the political pattern of the Korean peninsula, China will
prevent them from doing so.

This is a significant change from the messaging out of the Chinese
government and state press which has been calling for dialogue in
attempting to get both sides to tone down their rhetoric, but this
commentary and it`s not an official, in the case of the Chinese, are
warning Kim Jong-un that if he does something rash that leads to a
conflict, he`s on his own and the Chinese won`t step in as they did in
1950s war to save North Korea. At the same time, the Chinese are warning
President Trump that if the U.S. were to start a war, they wouldn`t only be
fighting with North Korea, but also with China.

This may be China`s way of hitting home the risks involve in escalating a
war of words.

For NIGHTLY BUSINESS REPORT, I`m Eunice Yoon in Beijing.

(END VIDEOTAPE)

MATHISEN: North Korea appears to be a poor country. And it is. And yet,
it has managed to develop every more sophisticated weapons and generate
nuclear power. Those are costly things to do.

So, Michelle Caruso-Cabrera followed the money trail to find out where
North Korea gets its cash.

(BEGIN VIDEOTAPE)

MCHELLE CARUSO-CABRERA, NIGHTLY BUSINESS REPORT CORRESPONDENT: The short
answer, they sell commodities to China. That`s very well-known and less
well-know, they manufacture and sell weapons, mostly to African countries.
They also export North Koreans as a form of slave labor in places like
Russia, China and Africa. And in the category of weird, they design and
export huge brass statues.

We know all of this because of this. This is an annual report from the
U.N. panel of experts, investigators who work for the U.N. and put out a
report every year on North Korea`s progress toward nuclear weapons and
whether or not countries in the U.N. are enforcing the sanctions imposed by
the U.N.

The sale of coal and mineral, like I said, widely known. Let`s move on to
arms sales. Just one of many examples in this report the investigators
discovered North Korea sold automatic pistols, assault rifles, anti-tank
missiles and anti-personnel mines to the Congo for use by the presidential
guard and special units of the Congolese police.

This is a photo of 30,000 rocket-propelled grenades seized from a ship in
the Suez Canal, which were manufactured in North Korea. They`re tough to
see. They`re underneath the tarp there, underneath that dirt.

The North Koreans do all this through front companies. For example, they
have a company called Glocom. That`s short for Global Communications that
makes military equipment you see here in this photo, that`s in this report.
That company, by the way, advertises on the Internet.

Moving on to labor, this shows that a North Korean construction company
built a new military headquarters for Namibia using North Korean labor and
North Korea also build enormous, socialist style statues like this one in
Senegal. U.N. sanctions were imposed on North Korean statues back in 2016.

For NIGHTLY BUSINESS REPORT, I`m Michelle Caruso Cabrera. Back to you.

(END VIDEOTAPE)

HERERA: We have been talking a lot recently about how a rise in
geopolitical tensions could affect the stock market. But what about the
economy?

Steve Liesman did some digging.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Suddenly, economists
have a lot more than just the next Fed rate hike to forecast. Geopolitical
risk has joined the list of uncertainties clouding the outlook. Others
include the risk of a government shutdown as soon as September and chance
that meaningful tax reform may not happen this year.

All the other risks, though, when it comes to geopolitical risk seem to
pale by comparison. Carl Weinberg from High Frequency Economic sees huge
downside potential from the North Korean situation. He writes, quote: If
North Korea can threaten world trade even with conventional weapons, it
could threaten the global economy. The global financial system is
vulnerable to the same disruption of trade.

JPMorgan (NYSE:JPM) calculates the level of geopolitical anxiety with an
index and unsurprisingly finds it elevated right now. Other notable peaks
from the index include, the Desert Storm War in the early 1990s, the 9/11
terrorist attack and the Arab Spring.

JPMorgan (NYSE:JPM) says it`s looked back on other times when the index has
spiked and finds these geopolitical rules of global risk. First, it`s the
rule, not the exception. Second though, it has delivered four of the past
six recessions, mostly through an oil price spike. But third, there`s a
short-term market reaction, but there`s often a big retracement within a
few weeks or months.

Goldman Sachs (NYSE:GS) points out that for decades, investors have been
rewarded for betting that a flare up in the North Korean problem would go
away. The question is whether the real situation with North Korea`s
advanced nuclear program and rhetoric from both sides have changed the
situation enough so that this time, the market should be less complacent,
that is more concerned.

For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.

(END VIDEOTAPE)

MATHISEN: Inflation has been soft for five straight months, raising
questions about whether prices will rise enough to hit the Federal
Reserve`s target level. The Labor Department reports that consumer prices
rose just 0.1 percent last month. That was less than the forecast. The
cost of cell phones continued to decline as did the price of used cars and
hotel rooms. Some Federal Reserve officials have called these transitory,
but the ongoing softness is pushing against the idea that unemployment at a
16-year low will help inflation accelerate as the Fed wants.

HERERA: And the head of the Minneapolis Fed says that report on consumer
prices is yet another reason for the central bank not to raise interest
rates in the near future. Neel Kashkari wants to see clear evidence that
inflation will rebound before deciding where to go with monetary policy.
Mr. Kashkari has been the lone dissenter against the Central Bank`s two
interest rate hikes this year.

MATHISEN: Still ahead, are under the radar stocks your best bet for the
long-term? Our market monitor has a list of names he recommends.

(MUSIC)

HERERA: Anthem will put out of Virginia`s individual Obamacare market.
The company citing uncertainty from the federal government, including the
president`s indecision on whether to continue paying the subsidies which
make premiums affordable for some consumers. Anthem already announced that
it would exit marketplaces in Wisconsin, Indiana and Ohio. The insurer has
until the end of September to decide whether it will leave more exchanges.

Why the stock market appears on edge because of the situation with North
Korea, one group is getting a lift — defense company shares.

Morgan Brennan shines a spotlight on the sector.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: It was a week
shaped by a war of words between North Korea and the U.S.

TRUMP: They will be met with fire and fury like the world has never seen.

BRENNAN: And while the broader market sold off amid the rise in
geopolitical risk, defense stocks hit new highs. The sector has been
outperforming the S&P 500 all year with iShares I.T., aerospace and defense
ETF, up by almost 20 percent. But you`d be hard pressed to find an analyst
who doesn`t believe this sector could go even higher.

Richard Safran of Buckingham Research cautioned it`s notoriously risky to
bet against defense at a time like this — a time when global spending is
ratcheting up and the geopolitical threat and not just because of events
this week. Defense spending runs in 20-year cycles and an upturn has
already begun, tied to equipment upgrades rather than economic growth or
even who`s on the White House. Safran says the aerospace industry is
depending on orders and equipment deliveries, more defense spending implies
more orders and that could lead to gains if stocks.

Couple that order backlog with decent dividend yields and defense stocks
are defensive. Safe haven investments like utilities or gold that
investors flock to when volatility increases and the broader market sells
off, the very scenario that unfolded this week.

For N IGHTLY BUSINESS REPORT, I`m Morgan Brennan.

(END VIDEOTAPE)

HERERA: Shares of J.C. Penney hit an all time low. The beleaguered
retailer lost more money than feared in the most recent quarter, and all of
its attempts to revive sales just don`t seem to be sticking. The company
reported a decline in a key sales metric, making it the latest department
store chain to announce dismal results. The stock took a beating. It fell
16 percent.

Courtney Reagan has more on J.C. Penney`s troubles.

(BEGIN VIDEOTAPE)

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: J.C. Penney isn`t
inspiring any more hope than most other department stores this week,
leaving investors feeling shy of getting their penny`s worth. Going out of
business sales at nearly 130 store, plus higher levels of shoplifting and
damaged merchandise led to a bigger than expected loss for the retailer,
even with sales in nearly all categories improving.

On the flip side, the liquidation sales are helping them clear merchandise
going into the most important part of the year.

PAUL TRUSSELL, DEUTSCHE BANK: They do go into the second half of the year
with a much cleaner slate. They continue to get a nice contribution from
alliances. The CEO mentioned on the call they`ve started august strong in
terms of their back to school selling season and so still a very tough set
up. Lots of hurdles remain. But we would say it was a bit of a cleaner
report.

REAGAN: J.C. Penney still thinks it can hit its previous forecast for the
full year, but analysts and investors aren`t so sure. The department
store`s online sales are growing, but approximately 85 percent of sales
still done in its physical stores, traffic remains a key issue for J.C.
Penney, like it does for other stores. Shoppers are going elsewhere,
leaving the group in a tough spot, regardless of new strategies they`re
deploying.

MATTHEW BOSS, J.P. MORGAN: You really have to focus on that value. And
you have the off pricer, T.J.Maxx, Burlington and Ross Stores
(NASDAQ:ROST), which in the consumers` minds are a better value right now.
So, they have to match the values at the off pricers and they have to
figure out this convenience factor, the rate Amazon (NASDAQ:AMZN) has them
by the throat.

REAGAN: And that has many investors wondering if this is as good as it
gets for department stores.

For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan.

(END VIDEOTAPE)

MATHISEN: The golf company Acushnet bogeys its quarterly results, maybe
double bogeys. And that`s where we begin tonight`s “Market Focus”.

The company reported a worse than expected drop in sales as fewer people
bought Titleist golf balls and clubs. Acushnet also see weakness ahead,
slashing its revenue outlook for the year and that pressured sales. They
carted a snow man, down 8-1/2 percent to $15.59. I`ve had a few of those.

Yoga works had a rough start on its first day of trading as a public
company. After delaying its IPO back in July, the yoga chain debuted on
the Nasdaq today, pricing its offering at $5.50, low end of its range, and
shares went downward facing dog falling nearly 12 percent to $4.85.

The Canadian telecom company TELUS said higher spending on efforts to
attract and retain customers are eating into profits, did so in the latest
quarter and its result, as result missed expectations. TELUS said it saw
an increase this the average monthly wireless bill as customers streamed
more online content. Nevertheless, shares fell a fraction to $35.58.

HERERA: Lawyers of plaintiffs suing General Motors (NYSE:GM) for faulty
ignition switches allege the automaker must pay $1 billion in stock as part
of a settlement. But G.M. says it didn`t have any knowledge of that
settlement between the plaintiffs and trusts set up for creditors of the
old GM, which is what was left behind when the government bailed out the
company. General Motor says it believes the trust colluded with the
plaintiffs` attorneys to come up with that $1 billion amount. G.M. shares
today were up a tick to $34.93.

The chip maker Nvidia reported earnings and revenue that beat expectations,
but shares still fell as analysts were disappointed by the performance of
the company`s data center and autonomous driving businesses. Shares were
off 5 percent to $155.96.

HERERA: Intuitive Surgical (NASDAQ:ISRG), which makes robotive medical
equipment, says it is planning a three for one stock split. If approved,
investors would receive two additional shares of what they own. Shares of
Intuitive Surgical (NASDAQ:ISRG) rose 1 percent to $942.25.

MATHISEN: Time now for our weekly market monitor, who`s finding
opportunity in some small cap names he says you want to own long-term.
This is his first time joining us on the program. He`s Matt Finn with
Thrivent Financial.

Matt, welcome. Don`t be nervous. Sue and I are very nice people. You`re
going to enjoy this. It`s going to be painless.

We`re going to begin by taking something that cures pain. Your first pick
is a liquor company. Tell us which one and what they do.

MATT FINN, THRIVENT FINANCIAL SENIOR PORTFOLIO MANAGER: Hi, Tyler. Hi,
Sue.

MGPI Ingredients is a low cost wholesaler of liquor to brandy companies
like Diageo. So, as you know, brown liquor sales have been increasing in
recent years after decades of decline, that benefits them because the
profits from brown liquor are higher than white liquor, so you get decent
sales growth, better profit for the next several years.

MATHISEN: People are drinking more rice and bourbons I note. Do they make
bourbons that whose brands I would know or do you sell them as private
label? Or what? I don`t understand quite what they do.

FINN: Right. They wholesale to Diageo, who makes the Bulleit Rye brand,
for example, Seagram Seven, and hundreds of other brands. They actually
supply the wholesale liquor and one of the other nice things about their
business is they sell 1-year-old brown liquor for one price. If they age
it four years, they sell it for two and a half times that price. So, they
are putting liquor into inventory, which helps their margins as they sell
the older liquor over time.

HERERA: And if you have too much of that brown liquor, you might need a
little coffee, which is where Cott (NYSE:COT) Corporation comes in, right?

FINN: Yes, Cott (NYSE:COT) Corporation is a solid business. They are one
of the largest companies delivering coffee and water to homes and
businesses in North America and the United Kingdom. What management has
done is they sold the decline in private label beverage and bottling
business so what you`re left with is decent top line, better operating
profit growth and lots of free cash flow.

MATHISEN: Kirby (NYSE:KEX) Corporation is your third choice. What do they
do and where do you see the price going?

FINN: Well, Kirby (NYSE:KEX) is a cyclical company. They are one of the
largest companies that transport refined products and chemicals on barges
in the Mississippi system and the Gulf of Mexico. Their sales were $2.5
billion in 2014. Now, they`re $1.8 billion. The stock`s been cut in half.

We think the business is going to tighten up over the next several years
and you can get back to close to its prior high.

HERERA: Now, what about the time period? How long would you recommend the
individual investor hold these stocks?

FINN: Well, I think MGP Ingredients (NASDAQ:MGPI) is a longer term hold.
I think that Cott (NYSE:COT) Corporation, if it got ahead of itself in the
mid-20s, we may look to cut that back. And then in the case of Kirby
(NYSE:KEX) Corporation, I think that`s a name that you hang on for the
upcoming cycle, which could be three to five years.

MATHISEN: Matt, it was pretty easy, wasn`t it?

FINN: Yes, it was great. Thanks for your time, Tyler. Thanks, Sue.

MATHISEN: All right, Matt. Matt Finn with Thrivent Financial.

HERERA: Coming up, is there a budding battle emerging in California`s wine
industry?

(MUSIC)

HERERA: Here`s a look at what to watch for week. On Tuesday, Dow
component Home Depot (NYSE:HD) is out with earnings. We`ll find out if
home improvement spending remained strong. On Wednesday, the minutes from
the last Federal Reserve policy meeting will be released. On Thursday,
Walmart reports its earnings and investors will be looking to see if its
in-store investments are finally paying off. And that`s what to watch next
week.

MATHISEN: Islamic State may have used eBay (NASDAQ:EBAY) to channel money
to an operative in the U.S. As first reported by “The Wall Street
Journal”, the man who allegedly received the payments was an American
citizen who was arrested last year. According to a recently unsealed FBI
affidavit, the American citizen allegedly sold computer printers on eBay
(NASDAQ:EBAY) as a front to receive payments through PayPal.

HERERA: Google`s CEO late yesterday canceled a meeting to discuss
diversity issues after individual employees were singled out online.
Questions submitted prior to the meeting had been published online along
with the employee`s names and several workers expressed fears for their
personal safety.

As we reported earlier this week, Google (NASDAQ:GOOG) fired an engineer
who posted a lengthy memo suggesting that women are less capable than men
of working in high-tech jobs. CEO Sundar Pichai has come under fire for
his handling of the issue, and today, David Brooks, columnist with “The New
York Times (NYSE:NYT)”, called for his resignation.

MATHISEN: In California`s wine country, a battle is brewing between wine
and weed. The state`s legalization of recreational marijuana is prompting
some cannabis entrepreneurs to set up shop where grapes grow in the
northern part of the state.

Aditi Roy has the story from Redwood Valley, California.

(BEGIN VIDEOTAPE)

ADITI ROY, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): On a warm
summer evening at a vineyard in Sonoma, California, the grapes are ripe,
the wine is flowing and the food is abundant.

UNIDENTIFIED FEMALE: Isn`t it good? And open up that jar.

ROY: But this isn`t your average farm to table dinner in wine country.
It`s a chance to pair food and wine with pot.

UNIDENTIFIED MALE: All right. Thank you.

UNIDENTIFIED MALE: Mind if I finish?

ROY: It`s hosted by marijuana entrepreneurs. Hoping to show long time
wine makers like Dennis Delamontanya that wine and weed go together in
business as well.

DENNIS DELAMONTANYA, VITNER: Hey, I`m curious, are you thinking about ever
infusing a wine?

ROY: Delamontanya, a sixth generation wine maker, says at the very least,
he`s interested.

DELAMONTANYA: I think I`d be foolish if I didn`t look at those
opportunities.

ROY: As California prepares to hand out licenses to marijuana businesses
on January 1st, many are eyeing northern California`s wine making region as
a pot of gold. Some industry experts say one acre of cannabis can be worth
at least $1 million while an acre of wine grapes in Sonoma County only
brings in just under $200,000.

(on camera): How much marijuana do you expect to be processed through
here?

MICHAEL STEINMETZ, FLOW KANA CEO: A lot.

ROY (voice-over): Michael is tapping into the budding market. He`s a
marijuana entrepreneur who bought this 80-acre property in Mendocino
County, California, that used to belong to Spencer, one of California`s
biggest winemakers.

STEINMETZ: The opportunity is massive if we get it right.

ROY: His company Flow Kana will eventually have a research division and
wellness retreat here. They`ll also process the marijuana that local
farmers grow, helping them scale up.

CYRIL GUTHRIDGE, WATER DOG HERB FARM OWNER: We just have to grow and let
them do all the sticky work.

ROY: Cyril Guthridge is one of those farmers.

GUTHRIDGE: We live in a very rare Mediterranean climate. Mediterranean
climates lean very well to growing cannabis.

ROY: But among the bud growing in these fields are seeds of discontent,
with long time winemakers worried that pot farms will poach their labor and
customers.

DEVIKA MASKEY, TSO SONOMA FOUNDER: They`re a little nervous about the
cannabis industry coming into Sonoma and how it`s going to impact the
tourism dollars for the tasting rooms around here.

ROY: And then there is the skeptics. Like Sonoma County supervisor Linda
Hopkins, who says marijuana may not be as lucrative as some people think,
because prices will go down as supply increases and regulations will be
tough.

LYNDA HOPKINS, SONOMA COUNTY SUPERVISOR: Cannabis is going to be the most
highly regulated agricultural community in the statfe of California.
Period.

ROY: And while some winemakers are nervous, others are still hopeful that
weed and wine will pair well.

DELAMONTANYA: I think that there`s a opportunity for both industries to
flourish in this community.

ROY (on camera): Here in Flow Kana, they planned on launching in the fall.
The region also recently hosted its first ever wine and weed symposium to
better educate winemakers on the cannabis industry. It was a sold out
event.

For NIGHTLY BUSINESS REPORT, I`m Aditi Roy, Redwood Valley, California.

(END VIDEOTAPE)

HERERA: That`s going to be fascinating to watch.

MATHISEN: Yes, have a car service ready to take you back.

HERERA: All right. On that note, that does it for us tonight. I`m Sue
Herera. Thanks for watching.

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

MATHISEN: And I`m Tyler Mathisen. We thank you for your support. Have
great weekend, everybody. We`ll see you Monday.

END

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