SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Casting a shadow. Small cap stocks turn negative for the year. Why? And is it a sign the rally’s momentum is slowing?
TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Astronomical meeting. Two of the most prominent figures in tax reform say they hope to have details on a plan next month, but a number of important issues are still being worked out.
HERERA: Solar fest. Business is over the moon for those in the path of today’s total solar eclipse. But the sun is shining bright on NIGHTLY BUSINESS REPORT for Monday, August 21st.
MATHISEN: Good evening, and welcome, everybody, to this solar eclipse edition of NBR.
And that eclipse brought midday darkness and excitement across parts of the country. You could see the enthusiasm outside the New York Stock Exchange where traders and tourists flooded the streets to look up at the sky. But inside the exchange, the light was muted, trading was quiet, volume was light.
But don’t think for a minute nothing is happening in this market. New lows today eclipsed new highs. We had to do it. Some say investors are becoming jittery even though the Dow and S&P 500 were higher for the first day in three sessions. A closer look shows the indexes are being pulled back down to earth on track for their worst month of the year.
Today, the Dow Jones Industrials rose 29 points to 21703 but Nasdaq fell 3 points. Meantime, the S&P was up a modest two.
But it is small cap stocks, the Russell Index, that is getting a lot of attention these days. It tends to start and lead declines and today it turned negative for the year.
Bob Pisani has more.
BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Stocks going mixed today but the Dow is still on track to post its worst monthly performance since October of last year. You know, we’ve seen something we haven’t seen in some time. We saw a selloff in the last two weeks followed by no bounce.
That’s strange. Traders just aren’t buying stocks after a decline like they used to. Is this worrisome? We don’t know.
One particular red flag some market experts have been pointing to is the Russell 2000. This is an index of small cap companies. It fell into negative territory for the year right at the open this morning and is now down 7 percent from its all-time high it hit just in July. The big cap S&P 500 is still up 8 percent for the year.
So, what’s going on? Some believe it’s due to leadership doubts about President Donald Trump, and the ability to get his tax cut program through. The Russell really has been failing ever since the health care bill failed. That’s an issue.
So, smaller cap companies tend to get most of their revenues from within the United States. They don’t have the luxury of parking their profits overseas, like a lot of multinational companies. They need the money here in the United States.
It looks like some are now downgrading the hopes of pro-growth policies like tax cuts from the Trump administration. That may be what the Russell selloff is about. Now, we’ll see if that turns around in September, as the president and the Congress said they would turn to tax reform in earnest. There’s a lot riding on this right now.
For NIGHTLY BUSINESS REPORT, I’m Bob Pisani at the New York Stock Exchange.
HERERA: So, let’s talk more about what risks might potentially derail this market. Peter Mallouk is president and chief investment officer at Creative Planning Services and he joins us now to talk a little bit more about that.
Peter, welcome, first of all. And second of all, Bob mentioned the corporate tax reform plan. And you also cite that as something that you’re going to be watching very carefully.
PETER MALLOUK, PRESIDENT AND CIO, CREATIVE PLANNING SERVICES: Yes, I think if you look at the risks to the market, you know, we get a lot of questions from our clients about North Korea, the speech about Afghanistan tonight, and unrest in Charlottesville, Boston protests. It’s really about earnings.
The number one thing that impacts earnings from these levels is not getting corporate tax reform passed. I think this is the thing the market is looking at more than everything else put together.
MATHISEN: Is that baked into prices today already, Peter? And if it looks like this tax reform plan isn’t really reform but is merely a tax cut, or nothing happens at all, how much is the market likely to decline?
MALLOUK: Well, I think that when you saw Trump get elected and the talk about tax reform, you saw the market rally, and a lot of people attributed it to tax reform, but really you had a lot going on in the background. You had unemployment happen to hit full employment right around election day, and you had a strong U.S. market the two years prior, and it continued through that year. So , that was a big part of it.
The other part is the market is expecting tax reform, in particularly, the market’s looking at a corporate tax cut. So, even if it just gets to the corporate tax cut, that’s very favorable. And I think a lot of that’s baked in but not all of it.
HERERA: What about tonight when the president addresses the nation about the Afghanistan situation and his plan going forward? Ideally, what would the market like to hear?
MALLOUK: Well, I think the market really is looking — the market’s cold. It only cares about earnings.
So, the most questions I’ve gotten since Trump’s election has been, how’s Trump going to impact the market? How is Charlottesville and things like that going to impact the market? North Korea, nuclear war and now, it’s Afghanistan.
The market really looks at all this and says, all of these things have the potential to be disastrous but they’re not probable. At least that’s how the market sees it. Whereas it looks at tax reform as — that not passing is actually probable. A lot of things haven’t passed but people thought the Trump administration could pass.
I think the market’s probably going to hear, Trump’s going to add a few thousand troops to Afghanistan, probably find a way for Afghanistan to pay for part of this and the market will probably shrug its shoulders and go back to looking at corporate tax cuts.
MATHSEN: So, I want to come back to the possibility that tax reform or even a tax cut doesn’t happen, you suggested that it’s largely, if not totally, baked into current prices. If it doesn’t happen, what is the downside risk to the market? Is it 5 percent? Is it more?
MALLOUK: Well, you look at — corporate tax rates are at 35 percent and I think the talk had been anywhere from 25 percent down to 15 percent. Well, when you start to bake that into the market, that’s dropping directly to the earnings line. And so, it has an immediate impact on stock prices. Now, part of that has waned as people have become less confident in the Trump administration’s ability even with a Republican Congress to get things like health care passed.
But, still, I think the market looks at tax reform differently. That seems to be one thing most Republicans can agree on. So, I do think it’s mostly baked in.
I think if it doesn’t pass, I think you are going to see a bit of a top. I couldn’t speculate how much it would be. It would probably be something like 5 percent to 10 percent. Just based on the expected earnings just evaporating from what the market sees here.
HERERA: Peter, thank you very much. Appreciate it. Peter Mallouk with Creative Planning Services.
MALLOUK: Thanks for having me.
MATHISEN: As we mentioned, the president tonight will outline the country’s new strategy in Afghanistan during a nationally televised primetime address. He’s expected to announce a troop buildup which put renewed attention on defense stocks. Some of the biggest ones are up a lot this year, easily outperforming the broader market as you see there.
HERERA: In deal news, Sempra Energy is buying Oncor for about $9.5 billion. This after the owner of Oncor abandoned a deal to sell the power company to Warren Buffett’s Berkshire Hathaway. Now, that decision marks a rare defeat for Mr. Buffett who made an attempt two months ago to buy Oncor after two previous attempts to sell it were blocked by Texas regulators. Buffett had offered $9 billion for the company.
MATHISEN: The Danish ship company Maersk has agreed to sell its oil and gas business to the French energy company, Total, for nearly $5 billion. The chairman of Total recently said his company plans to take advantage of relatively low energy prices to start new projects and seek acquisitions. This deal makes Total the number two operator in the North Sea.
HERERA: Well, deal activity is important to the market, and so is tax reform. It’s one of the issues investors hope will get pushed through Congress sooner rather than later even as other parts of the president’s legislative agenda have stalled. Well, today, Treasury Secretary Steven Mnuchin and Senate Majority Leader Mitch McConnell, two of the most important players in tax reform, made a joint appearance in Louisville, Kentucky, to discuss the issue.
Ylan Mui was there.
YLAN MUI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Treasury Secretary Steven Mnuchin, and Senate Majority Leader Mitch McConnell appeared here in Louisville to talk about tax reform. But perhaps more important than what was said was how it was said.
The Trump administration has been at odds with Mitch McConnell in recent weeks, but Mitch McConnell made clear here in Louisville that he has a strong, working relationship with Mnuchin and one point calling the treasury secretary an extraordinary individual. That relationship will be critically important for the two men as they get into the hard negotiations of tax reform this fall. Mnuchin said that President Trump still remains fully committed to that effort.
STEVEN MNUCHIN, TREASURY SECRETARY: We’re 100 percent committed to getting it done. I’d like to think there’s bipartisan support, or some bipartisan support. The issues that we’re focused on, tax reform, are good for the American worker. They’re good for the middle class. This is about making business competitive and making business competitive is about making jobs.
MUI: But before they can get to tax reform, they have to deal with the debt ceiling. McConnell was adamant that lawmakers will raise it.
SEN. MITCH MCCONNELL (R-KY), SENATE MAJORITY LEADER: There’s zero chance, no chance we won’t raise the debt ceiling. No chance. America is not going to default and we’ll get the job done in conjunction with the secretary of the treasury.
MUI: The two men headed over to Ft. Knox after their speaking engagement and no word they got to see the solar eclipse.
For NIGHTLY BUSINESS REPORT, I’m Ylan Mui in Louisville.
MATHISEN: And it is that total solar eclipse that everybody was talking about today. It carved its way across the U.S. from Oregon to South Carolina, places throughout the country, people lined up to see something that doesn’t happen very often. For some, it was the business opportunity of a lifetime.
Jane Wells reports from Madras, Oregon.
JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): They came, they saw, they wondered.
UNIDENTIFIED FEMALE: This is so awesome.
UNIDENTIFIED FEMALE: So cool.
UNIDENTIFIED FEMALE: It is.
WELLS: The great American eclipse for a few hours united a fragmented country in awe. Some had been planning to be here for years.
UNIDENTIFIED MALE: It’s a once in a lifetime opportunity.
WELLS: A once in a lifetime opportunity which towns in the path of the total eclipse hoped would put revenues over the moon, including the tiny town of Madras, Oregon.
CORY MILLER, “BALLOON MEISTER”: This is huge just for everybody that’s here.
WELLS: Corey Miller brought in hot air balloon operators from around the country to make extra bucks.
MILLER: Our portion, alone, we will end up bringing in close to $75,000.
SHAWNA BOYNTON, CENTRAL ORGANICS: So, this is the one we have the special on, the train wreck.
WELLS: Marijuana stores cashed in on out-of-towners discovering state legalized pot.
BOYNTON: I say Wednesday was one of our highest grossing days in history and then as of about 2:00 this afternoon, we’ve doubled that.
WELLS: Beye Antonsen spent over $5,000 on port-a-potties, as she was charging up to $150 a spot on her dad’s farm for campers. Too much?
BEYE ANTONSEN, ECLIPSE-PRENUER: I’ve had to work through that. However, I think that’s one of the beautiful things about America is that you can do things like this.
WELLS: Madras’ population of 6,200 grew more than tenfold as tourists came from all over the world.
(on camera): How much money have you spent to be here?
MATT SNOOK, BRITISH VIRGIN ISLANDS: I don’t really know. I don’t really want to know, to be fair.
WELLS (voice-over): But nobody complained.
SNOOK: There are certain things in life, it doesn’t matter what you do, whatever money you’ve got, it’s all about experiences in life and friends you make on the way. So, that’s one of the reasons why I’m here.
WELLS: And as soon as it ended, they all started heading home. But America won’t have to wait so long for another total eclipse of the sun. The next one will travel from Texas to Maine in April 2024.
For NIGHTLY BUSINESS REPORT, Jane Wells, Madras, Oregon.
HERERA: Still ahead, can’t find a house to buy? Why some are blaming the baby boomers.
MATHISEN: Even in these dog days of summer, there is still robust demand for home buying. The trouble is, there’s very little to buy and one generation may be making matters worse.
Diana Olick takes a look at why baby boomers are staying put.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Baby boomer Laraine Goldberg loves her five-bedroom suburban Maryland home, loved raising her two sons here.
LARAINE CAMERA GOLDBERG, BABY BOOMER: They built forts. They had shows. They had — it was just wonderful.
OLICK: And still love throwing pool parties in her luxurious backyard.
GOLDBERG: I had friends come over, yes.
OLICK (on camera): That’s good.
OLICK (voice-over): But now, she admits —
GOLDBERG: I’m in a neighborhood by myself that really I don’t belong in.
OLICK: Her kids are grown and gone. And she and her husband divorced. After nearly 40 years here, she’d like to downsize to something more urban, but —
GOLDBERG: It’s actually less expensive to stay here than move into the city. I don’t know what to do and I keep calling realtors and driving them crazy. And so then, I just stay here.
OLICK: Realtor Brooke Heiberger says she sees this all the time.
BROOKE HEIBERGER, COLDWELL BANKER: Baby boomers are really struggling with the decision to downsize because there’s not really great options for them to downsize to. Currently the trend is to live in urban centers. They want to be close to restaurants and shops. They want to have easy access to public transportation.
But because the demand to live in these areas is so high, it’s just become very cost prohibitive for them.
OLICK (on camera): Baby boomers simply aren’t moving, at least not at the rate previous generations did when they hit this age, and by staying in their big houses longer, they are causing a crucial logjam in the housing supply line.
(voice-over): If boomers don’t sell their homes, then those in smaller homes can’t upsize. So they stay put, putting more pressure at the entry level where millennial demand is only increasing. All that demand with so little supply just pushes home prices higher.
Baby boomers own almost 3.6 million extra bedrooms according to Trulia, a real estate Website. Goldberg has four of them. She continues to look for a new place, but she also visits her new grandchild on the West Coast, leaving her big house empty for weeks at a time.
For NIGHTLY BUSINESS REPORT, I’m Diana Olick in Washington.
MATHISEN: And to read more about the impact baby boomers are having on the housing market, head to our Website, NBR.com.
HERERA: Competition may be intensifying for Nike and that’s where we begin tonight’s “Market Focus”.
The largest sportswear maker was downgraded to hold from buy by Jefferies. The analyst citing the popularity of its rival, Adidas, which it says has been able to avoid the soft trends in the athletic shoe and apparel markets. According to the analyst report, competition from Adidas could cap market share gains and margin expansion. Nike was the worst performing stock on the Dow today, off nearly 2.5 percent to $53.61. And shares of the other sporting goods retailers also dropped.
Sales at Francesca’s are weak and they are expected to stay that way. The women’s apparel and accessories retailer said its back to school sales got off to a challenging start. And its chief merchandising officer has stepped down. The shares plunged to a record low, off nearly 12 percent to $7.03.
Hedge fund Camber Capital Management has taken a more than 5.5 percent stake in Tenet Health Care. That’s according to a regulatory filing. On Friday, two Tenet Health Care directors resign. Both of those directors worked for Glenview Capital, which owns 18 percent of Tenet. The stock was up 14 points, 6 percent to $16.56.
MATHISEN: Herbalife out with a series of announcements. The nutritional supplement company recently held talks to go private. But the discussions ended last week without a deal. It also announced plans to repurchase stock valued at $600 million and cut a deal with its biggest investor Carl Icahn who agreed to keep his stake below 50 percent unless he makes a move to buy the company outright. The hedge fund manager, Bill Ackman, has been betting shares of Herbalife would fall. The stock rose nearly 10 percent today to $68.04.
Meantime, Bill Ackman also trying to shake up the payroll processing company ADP. The firm today rejected his three candidates for the board. Last week, Mr. Ackman outlined his transformation plan for the company. CEO of ADP called the activist hedge fund manager a, quote, spoiled brat. Shares of ADP dropped nearly 1-1/2 percent to $102.89.
HERERA: Taxpayer money funds the Secret Service. But there are reports today the Secret Service is running out of money to pay its agents. Expenses are high and now, it’s up to Congress to approve additional funding.
Eamon Javers has the details.
EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Secret Service officials said today that more than 1,100 Secret Service officers will work more overtime in 2017 than they are allotted under the law to be paid for. That means they’re going to need a fix on Capitol Hill in order to change the law and pay overtime to the Secret Service officers.
In a statement today, the Secret Service initially said this. They said: The issue is not one that can be attributed to the current administration’s protection requirements, but rather has been an ongoing issue for nearly a decade due to an overall increase in operational tempo.
But then they changed the statement, adding one single word that seems to indicate the Secret Service believes that Donald Trump and his family require a whole lot of Secret Service protection due to all of their travel. They say the issue is not one that can be attributed to the current administration’s protection requirements, alone, but rather has been an ongoing issue for nearly a decade.
In either case, bipartisan group of legislators on Capitol Hill today said they expect a legislative fix to come soon. So, at some point, presumably, the Secret Service officers working here at the White House behind me will be able to be paid for their overtime.
For NIGHTLY BUSINESS REPORT, I’m Eamon Javers at the White House.
MATHISEN: Well, we’re 95 percent of the way through second quarter earnings season with many of the big name companies having reported their results, of course. And now, at the beginning of the season, a little more than a month ago, we had Mike Thompson on the program to share his second-quarter predictions and he’s back tonight to see things — see how things have fared. He’s president of S&P Investment Advisory Services at S&P Global.
How’d you do, Mike?
MIKE THOMPSON, PRESIDENT, S&P INVESTMENT ADVISORY SERVICES PRESIDENT: I think we did a pretty good I think. Tyler, you may have done a little better than I did on the top line number. But I think we got it right for the viewers.
Look, we said that technology and financials were going to be the leaders and lo and behold, they were the leaders. Technology came out almost 21 percent earnings growth over same quarter last year, and if you look at financials, another good turnout there, 10.7 percent over the same quarter last year. Very strong earnings.
Energy, no surprise, 314 percent growth in earnings —
HERERA: Right, right.
THOMPSON: — over the same quarter last year — good stuff.
HERERA: Is that unusual, that kind of earnings growth? Because I remember we challenged you a little bit when you gave us those numbers because they sounded a little bit rosier than others on the street. So, as we look at these now, some of them came in even a little bit stronger than you expected. Is that typical?
THOMPSON: Yes. Sue, so, yes, think if there’s a surprise here, what surprised me, you know, actually was that the difference between the guided numbers going into the season and the end number, although they always tend to under-promise and over-deliver, that they did it on a much larger scale.
Usually, you see 2 percent, 3 percent beat. That’s kind of normal. This time, we’re well over 4 percent difference between the two. So, that’s one of the, I think kind of the head scratcher here. It was a very strong quarter for earnings growth for U.S. companies.
HERERA: Can it continue? Can it get better than this? Or have we hit a peak in this cycle?
THOMPSON: Tyler, there are forces at work here that I think most of the professional investment community acknowledges are out there, but we haven’t been able to measure them. And they come in the form of productivity enhancers through technology.
You know, I think we all know that we have technologies now that have changed the way we operate and I think nobody realizes how it’s changed the productivity of workers at almost all levels of this economy and it’s just transforming the productivity. You know, people communicate much more often, the idea generation in certain industries, even the way you two into a store and return an item, the amount of labor. Everything has gotten much more efficient. And time is money.
And, you know, honestly, you know, when you see technology —
MATHISEN: So, that suggests that you think it can get better?
THOMPSON: I do. I think we’ve had this from — for so many years, we asked, how long can it last? And we say, well, there’s got to be a finite end to it. It’s not.
Energy is a great example. Look at the way they reduced costs through technology, improving new reserves they never thought they had, or even extracting gas or oil from shale. It’s amazing.
MATHISEN: All right. Mike, thanks very much. And we’ll have you back next time around and see — put you to the test once again. Mike Thompson with S&P Global.
And coming up, a far out idea. How Volkswagen is looking to the past to make a big push in the future. Remember those?
HERERA: The former General Electric CEO has reportedly emerged as the front-runner to become Uber’s new chief executive. According to Recode, a board vote is expected within two weeks. Mr. Immelt is still GE’s chairman until the end of the year. Uber hasn’t had a CEO since Travis Kalanick resigned in June and the company has lost multiple other executives this year. Neither GE nor uber have commented on the story.
MATHISEN: A Chinese car maker is considering making a bid to buy Fiat Chrysler’s Jeep unit. Fiat Chrysler says it’s not been approached by China’s Great Wall Motors about its Jeep brand or any part of its business. If the move were to happen, it would give the Chinese automaker a global brand. Earlier this year, that company’s chairman said his goal was to become the top specialty SUV producer by 2020. That sent shares of Fiat Chrysler higher.
HERERA: Well, if you grew up in the ’60s or ’70s, the Volkswagen bus was an iconic image from that era. From Woodstock to Scooby Doo, the microbus captured the spirit of those days, and now, Volkswagen is hoping to recapture the magic but with a modern twist.
Phil LeBeau takes a look at the updated all-electric van called the I.D. BUZZ.
BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): It’s a blast from the past planned for the future. Volkswagen’s I.D. BUZZ is an electric van hitting the street in 2022.
HINRICH WOEBCKEN, CEO, VW OF AMERICA: This car is for us a rebirth of a great heritage, but it also carries into the future the mobility with all the electrification and sensors which will make the car fully connected and autonomous.
PISANI: Volkswagen may pack the latest technology into the I.D. BUZZ, but it’s hoping the new van will carry the spirit of the VW Microbus — youthful, carefree, a reminder of when Volkswagen was cool.
These days, Volkswagen’s image is far from different. The Passat or Jetta are fine, but they’re not cutting edge. And many were diesel models caught up in the rigged emissions scandal. In short, VW’s image and sales in the U.S. have taken a beating, a fact the company readily admits while trying to turn the page.
HERBERT DIESS, VOLKSWAGEN AG BOARD MEMBER: Volkswagen is a brand which has a basis here. Everyone knows the Microbus or the Beetle from the old days. So, basically, people love Volkswagen from the old days.
We made many mistakes here, but now, we try to make it right from start. And I’m quite happy with the development over the past months, and I’m quite optimistic about this year and next year.
LEBEAU (on camera): Volkswagen sales are still down compared to 2015 when the diesel scandal erupted and the company was forced to stop selling some models for a brief period of time. Now, Volkswagen is hoping to regain customers by rolling out a slew of new models, many with electric motors.
Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.
MATHISEN: I always wanted one of those minibuses.
HERERA: My first car was a Beetle.
MATHISEN: I learned to drive on a vehicle.
HERERA: Yes, excellent.
HERERA: That does it for us tonight. I’m Sue Herera. Thanks for joining us.
MATHISEN: I’m Tyler Mathisen. Have a great evening, everybody. We’ll see you back here tomorrow.
HERERA: I almost stabbed you with my pen.
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