Transcript: Nightly Business Report – October 10, 2018

ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Bill Griffeth and Sue
Herera.

BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: October rout. The Dow
falls more than 800 points, its worst decline in eight months. And the
selloff was steep and it was sharp.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Tonight, your questions
answered. What`s driving the selling? Is this a brief stumble or
something more? And what does it mean for your money, your savings and
your investments?

You`re watching NIGHTL BUSINESS REPORT for Wednesday, October 10th.

GRIFFETH: And we do bid you good evening, everybody.

Investors with a memory know that October has traditionally not been kind
to their portfolios in the past. Well, it`s happening again this October.

And today was the worst so far. Trading was ugly from the get-go. The
opening bell rang, stocks dropped. And the selling intensified as the day
went. The Dow saw its biggest decline since February. The S&P 500 has now
recorded its longest losing streak in two years with more than half of the
500 stocks in the index now in correction territory, meaning that they are
down 10 percent or more from their most recent highs.

The cause: now, there are plenty. Fears about rising interest rates,
concerns over trade as the Chinese economy slows down, inflation and
increasing cost pressures, and technology stocks, which once led this
market higher, they`ve been leading the charge lower. In fact as a group,
they had the worst day in more than seven years today.

By the close, the major indexes were all down 3 percent or more with the
Dow plunging 831 points to 25,598. The Nasdaq was the hardest hit,
dropping by 315. The S&P was down 94.

And the selloff occurs just as the earnings season is about to arrive. And
as Bob Pisani reports that could bring a new set of risks to the market.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: It was a sea of red on
Wall Street today, the Dow plunging more than 800 points, the worst one-day
drop since February. Rising rates continue to fuel fears in the stock
market. But some believe investors will be able to look past higher rates
if the corporate earnings picture remains strong. That starts on Friday,
earnings season.

Right now, the earnings picture, well, let`s say it`s getting more
complicated than it used to be. Investors are debating the impact of a
large number of variables, principally higher rates, but then higher raw
material costs, weaker foreign currencies, tariffs and even potentially
weaker demand from China. One thing for sure, investor focus is shifting
away from the third and even the fourth quarter earnings and toward 2019
projections.

So, what are the major issues to watch: first, margin erosion. That`s the
most important. That`s mainly driven by higher costs, wages and raw
materials. Amazon`s $15 minimum wage hike won`t effect third or fourth
quarter earnings, but it has everyone scrambling to figure out what the
impact might be on other industries.

The good news is many companies may be able to pass on the higher costs to
the consumer by raising prices. And revenues are still growing at a solid
rate. That`s very important, up almost 8 percent this year, likely rise 7
percent or so in 2019. So, the costs are up 2 percent, but revenues are up
7 or 8 percent, that will go long way towards supporting margins.

The second issue is tariffs. So far, few companies have stated that
earnings would take a direct hit from tariffs. But many are dropping hints
along the way. Goldman Sachs (NYSE:GS) estimates that a 25 percent tariff
on all imports from China would shave off 6 percent of the S&P earnings
next year, that would essentially mean, next year, earnings would be flat
compared to this year.

Finally, we can`t ignore the issue of higher interest rates. What`s it all
mean? For many, the risk reward ratio still favors stocks.

Nick Raich, who covers earnings at the “Earnings Scout”, told me when the
economy is strong, stock prices will typically climb here higher than the
fundamentals suggest. That is what happened in 2000 and in 2007.

For NIGHTLY BUSINESS REPORT, I`m Bob Pisani at the New York Stock Exchange.

(END VIDEOTAPE)

HERERA: So, let`s bring in our guest for their take on today`s big
selloff. Kevin Caron is the senior portfolio manager at Washington
Crossing Advisors. Jack Ablin is the chief investment adviser with Cresset
Wealth Advisors. And Timothy Lesko is our tech expert and a principal at
Granite Investment Advisers.

Welcome to all of you, gentlemen. A pleasure to have you here.

Jack, I`m starting with you. You think — the big question is, is this
just a blip or is it the start of something that may be a little bit more
significant? And you think it is perhaps the beginning of a correction.

JACK ABLIN, CRESSET WEALTH ADVISORS CIO: I do. I think that underneath
the surface, notwithstanding what bob talked about with tariffs and all
that, is a reset in interest rates that will change the dynamic between
stocks and bonds. The fact is that over the last ten years, thanks to
central bank intervention, worldwide, interest rates have been held too low
deliberately to try to get investors to take on more risk. The good news
is it worked.

Now, central banks want to get the rates back to fair value, which means
that the bond market will be able to pull in that tug of where with two
arms. And that`s going to put up a challenge to stocks.

GRIFFETH: Define fair value. What`s fair value in the 10-year, do you
think?

ABLIN: Fair value in the 10-year in my book is 4.5 percent, which equates
currently to nominal GDP. Nominal GDP being real GDP at 2.2 plus inflation
at 2. That gets knee 4.5. And before this whole experiment if you will
with quantitative easing, the 10-year treasury historically tracked nominal
GDP.

HERERA: Kevin, you maintain that the U.S. market and the U.S. economy is
strong, especially when you compare it to economies and markets overseas,
correct?

KEVIN CARON, WASHINGTON CROSSING ADVISORS SENIOR PORTFOLIO MANAGER: Yes,
if you look at what happened today we`re a little bit late to the party.
Most of the rest of the world, think about Europe, think about China, think
about emerging markets, are actually down on the year. The United States
maintains some momentum however up until today.

So, today, what we saw was investors maybe finding value in other parts of
the world that have gotten hit harder, and maybe shifting out of the United
States in that direction. We`ll see whether that lasts. The biggest piece
of investors is not to react to one day`s trading but look at really the
broader sets of data that`s unfolding. And use that really to guide your
judgment.

We think the U.S. economy still remains a leadership economy well into
2019.

GRIFFETH: Tim, the technology stocks began the decline well before the
rest of the market did. Is that anticipating the slowdown in China or is
something else going on here?

TIMOTHY LESKO, GRANITE INVESTMENT ADVISORS PRINCIPAL: I think it`s a
combination of factors. Certainly, the slowdown in China and tariffs on
Chinese goods affect the tech sector in a way that it may not affect some
other sectors. And then add to that, they might have been the most
overvalued. So, when the market resets sets as the other gentlemen talked
about, certainly the highest flyers are going to have the most difficult
days.

HERERA: Now, Jack, as I understand it you`re not selling all your
positions. You`re kind of holding pat in the market. If that is the case
where you watching for as trading develops tomorrow and through the rest of
the week?

ABLIN: Sure, so, you know, I`m going to continue to look for the rebalance
between bond yields and stock valuations. And yes, I think our bottom line
on equities is we see maybe a 10 percent downside. We endured some of that
today.

So, for us, because we are longer term investors, this isn`t something we
are necessarily going to sell out, try to get out in front of and get back
in, especially with taxes and so forth, the amount of gains. But we would
look for, you know, continued downdraft as an opportunity to buy for, you
know, holding for the next five to seven years.

I would be looking for, you know, more news on the earnings front. The
fact is that earnings have been fantastic. And I think that earning season
generally allows investors to take a deep breath, get their wits about them
and really see what`s important, and that`s what companies are delivering.

GRIFFETH: Kevin, yesterday the president said he was unhappy with the pace
that the Fed was raising rates right now. Do you think the Fed will
rethink their strategy if this market selloff continues?

CARON: The Fed always looks at income data. And if things got — or
incoming data, and if things got materially worse, let`s say, for example,
investors began to pull away in mass from the market or there is businesses
— business judgment confidence became impaired, that would factor into
their judgment.

But this is too little for too small of a period of time, this downturn in
the market today to affect their judgment. And ultimately at 2.25 percent,
they are not especially tight. In past cycles, they were at 5.5 percent.
Last go around in 2005, `06 and `07 and higher than that before that. So,
they`ve got quite a ways to do, and I think they are doing the right thing.

HERERA: Tim, you say you have rotated to value tech, companies that don`t
need to take on a lot of debt.

Give me an example of where you`ve been putting money to work in the value
space of technology.

LESKO: Well, certainly one of the hardest hit sectors of technology the
past few months has been semiconductors. Companies like Intel
(NASDAQ:INTC) with rock solid balance sheets, they have strong product
cycles. Certainly, they have had issue was production. But if you`re a
longtime investor, these are opportunities to buy things that have been
unusually punish in the market that was rewarding companies with light
earnings and revenue growth and really hammering companies with strong
balance sheets and slower growth cycles.

So, higher interest rates will certainly hurt those companies that are
being fed by debt and help those companies that have strong balance sheets.

HERERA: All right. Gentlemen, thank you so much. We really appreciate
it.

Kevin Caron with Washington Crossing Advisors, Jack Ablin with Cresset
Wealth Advisers and Timothy Lesko with Granite Investment Advisors.

And a bit later in our program, we`ll discuss how to protect the portfolio
and what money moves if any you should make.

GRIFFETH: In the meantime, it may seem a distant memory but it was just
raft week that the Dow notched a record high for the 15th time this year.
And since then of course the index has reversed course and prompted some to
ask, has the market peaked?

Mike Santoli takes a look now at how this market compares to the last time
the market hit a top more than a decade ago.

(BEGIN VIDEOTAPE)

MIKE SANTOLI, NIGHTLY BUSINESS REPORT CORRESPONDENT: This weeks marks 11
years since the stock market peaked just ahead of the great recession and
global financial crisis which ultimately would send the market to a 50
percent loss. It was a time that resembles our own in a few broad features
of the economy and market: unemployment was low, oil prices were on the
rise, the Fed had been raising interest rates a few years, and stocks were
at record highs.

These parallels have some investors wondering whether it`s time to brace
for an on coming end to this economic expansion and perhaps more difficult
financial market. For sure, the economic cycle seems to have entered a
later phase right now. But the differences between today and 2007 seem
more relevant than the broad similarities, and suggest the outlook now is
more encouraging.

It`s crucial to note that by October 2007, the housing market was more than
a year past the peak and piles of mortgage debt had already begun to sour,
spreading losses throughout the global banking system. Credit markets have
already began signaling a build up in financial stress months before stocks
peaked. That`s not what`s happening now. Household finances at that time
were more precarious with consumer debt service obligations at a much
larger percentage of income.

And while right now, Wall Street is struggling to absorb a fresh multi-year
high in bond yield, this largely reflects a firm economy. Back in October,
2007, treasury bond yields were in a steep decline more months as investors
viewed increasing signs of an economic slowdowns.

Indicators like the purchasing managers index and small business optimism
had peaked years earlier, in fact, in 2007. Whereas today, these are all
near cycle highs.

None of this means the markets or the economy is entirely safe from a nasty
economic surprise or a rough attach tied to stumble in global growth. But
all the same the comparison of the current situation to the one 11 years
ago is more reassuring than alarming.

For NIGHTLY BUSINESS REPORT, I`m Mike Santoli.

(END VIDEOTAPE)

HERERA: It is time to take a look at some of today`s upgrades and
downgrades.

McDonald`s (NYSE:MCD) was upgraded to buy from neutral at Guggenheim. The
analyst cites the company`s push into digital and investments in its
franchises. The price target is $200. The stock fell, along with the rest
of the market, to close at $168.37.

Discovery was upgraded to outperform from neutral over the Credit Suisse.
The analyst cites improved network rating and distribution. The price
target is $40. The stock fell about 1 percent to $32.06

GRIFFETH: Dropbox was added to the focus list at J.P. Morgan with the
analyst there seeing the potential for 30 percent to 50 percent
outperformance in the stock. Price target is now $35 and shares rose a
fracture in an otherwise down day to $22.78.

Kimberly-Clark (NYSE:KMB), Clorox (NYSE:CLX) and Church and Dwight all
downgraded to sell from hold at Deutsche Bank today. The analyst there
cited near term challenges like currency and emerging market volatility,
and the firm also noted long-term headwinds like increased competition and
retail pressures. And as a result, the shares of the three consumer
products giants were all lower today.

HERERA: Coming up, Monstrous Michael. One of the most powerful storms on
record slams into the Florida panhandle, closing businesses, disrupting
commerce and the local economy.

(MUSIC)

GRIFFETH: As expected, Hurricane Michael made landfall this afternoon in
the Florida panhandle. And this storm is punishing and fast moving. And
while it`s way too early to say what the total cost of damages might be,
Wells Fargo (NYSE:WFC) said it could hit tens of billions of dollars.

Courtney Reagan is in Panama City, Florida, for us tonight.

(BEGIN VIDEOTAPE)

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Hurricane Michael
made landfall as a powerful category 4 storm, with wind speed of 155-mile-
per-hour, just two miles per hour shy of the category 5, making this the
strongest storm to ever hit the Florida panhandle.

DONALD TRUMP, PRESIDENT OF THE UNITED STATES: We`re very well-prepared for
it. Massive amounts of food and — and we have first responders all over.
The electrical companies are staged and ready to go in immediately after
the storm.

REAGAN: Power has been knocked out for at least 144,000 people as the
storm continues through Georgia and a badly battered Carolinas, which are
just recovering from Hurricane Florence. Businesses from local restaurants
to big retailers like Walmart and Lowe`s remain closed going on more than
24 hours now. Home Depot (NYSE:HD) also closed a distribution center in
Georgia for the safety of its employees.

CRAIG FUGATE, FORMER FEMA ADMINISTRATOR: Treat this like a tornado. Get
to the interior hallway or room preferably without windows, get low, get in
your bathtub, pull your mattress on top of your head, make sure you have a
flashlight, a battery powered radio and sit tight until this is over.

REAGAN: Tourism is the big business in the Florida panhandle, up 10
percent year to date ahead of the storm here in Panama City Beach. While
it is an off season, major beach erosion and area devastation could hurt
the industry for months to come.

The energy sector is dodging disaster as most major oil assets are west of
the storm, including refineries in Mississippi.

But crop destruction in Georgia is a concern. Only about 12 percent of the
cotton crop has been harvested. Half of the peanut crop and the pecan
harvest has only just began. Fortunately, Florida`s citrus crop is largely
in the lower two thirds of the state that`s going to be spared by the
storm.

It`s too early to get any accurate estimates of total economic loss from
the storm. But that too could be one for the record books.

For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan in Panama City Beach,
Florida.

(END VIDEOTAPE)

HERERA: A key gauge of inflation round rebounded in September. The
producer the price index, the measure of the prices businesses receive for
goods and services increased 0.2 percent. It was the index`s first rise
since June and was driven by increase in transportation prices.

GRIFFETH: Well, certainly, rising prices and inflation were some of the
topics under discussion at the International Monetary Fund annual meeting
today. As we reported yesterday, the organization cut its outlook for
global economic growth and highlighted a few critical risks to the market.

Geoff Cutmore is at the annual gathering in Bali, Indonesia.

(BEGIN VIDEOTAPE)

GEOFF CUTMORE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The IMF and World
Bank may be holding the meeting in one of the most beautiful and
picturesque tourist resorts in the world. But the message on the global
economy is a little more cloudy. In the growth report, they suggested that
growth this year may slow from 3.9 percent to 3.7 percent and also talked
about rising risks to the financial system. This, the result of the trade
war between China and the United States, rising oil prices and, of course,
the pressure that we have seen on emerging market currencies.

It is near term the risk of inflation that is causing some reassessment of
the outlook.

TOBIAS ADRIAN, IMF FINANCIAL COUNSELOR: Inflation at some point might
surprise to the upside in particular to the U.S. what we have seen so far
is a very gradual decline in the unemployment rate to levels that are as
low as we haven`t seen since the 1960s. And, of course, inflationary
pressures might be building at some point. That might lead to a
fascinating sector tightening of monetary policy at some point in the
future.

CUTMORE: One of the other stated key goals here at this event is to put on
a united front over the trade dispute. The IMF, the World Bank, the WTO
and the OECD all coming out and saying, we need a de-escalation of the
trade dispute. And we need to wind back the introduction of tariffs that
are increasing the likelihood of inflation and would ultimately lead to
that lower growth that has been forecast.

This is Geoff Cutmore for the NIGHTLY BUSINESS REPORT in Bali.

(END VIDEOTAPE)

HERERA: The Justice Department approves a merger — a megamerger at that.
That`s where we begin tonight`s “Market Focus”.

Antitrust regulators today gave the green light to the $69 billion merger
of Aetna (NYSE:AET) and CVS (NYSE:CVS). The planned sale of Aetna`s
Medicare drug plan to WellCare resolved government`s antitrust concerns.
The acquisition is among the most significant in the health care industry
in the past decade. Aetna (NYSE:AET) shares were off just a tick to
$203.41. Shares of CVS (NYSE:CVS) fell fractionally to $78.92.

Tobacco giant Altria may be thinking about buying a stake in a Canadian
marijuana producer. “The Globe and Mail” reported that Altria is
considering a minority investment in Altria with the possibility of a
majority stake a little bit later down the road. Altria shares finished
down just a fraction to $62.91.

Myriad Genetics (NASDAQ:MYGN) has been hired to conduct testing for
Pfizer`s treatment of what is called triple negative breast cancer which
has fewer treatment options than other types of breast cancer. Myriad
specializes in testing hereditary cancers. And on an otherwise big down
day, shares of Myriad Genetics (NASDAQ:MYGN) popped nearly 4 percent to
$44.86.

GRIFFETH: Industrial component maker Fastenal (NASDAQ:FAST) faced higher
costs in the most recent quarter. And as a result, the company`s gross
margins suffered and the stock fell despite reporting slightly better
earnings per share. Fastenal (NASDAQ:FAST) shares were down 7 percent
today $51.67.

Cybersecurity firm Imperva said that it is being taken private by a private
equity firm Thoma Bravo for more than $2 billion. Under that deal, Imperva
will be given 45 days to solicit other acquisition offers. Shares of
Imperva popped nearly 28 percent today to $55.11.

And another warning late today, construction firm Fluor (NYSE:FLR) said
revenue are for the quarter is missing Wall Street estimates. Fluor
(NYSE:FLR) will release final third quarter results on November 1st.
Shares initially fell in after-hours tonight, also finished the regular
session down 4 percent to $56.22.

HERERA: Coming up, how you can protect your portfolio after a steep
selloff like today.

(MUSIC)

HERERA: This evening, President Trump was asked about the stock market
selloff and pointed fingers at the Federal Reserve.

(BEGIN VIDEO CLIP)

TRUMP: Actually, it`s a correction that we have been waiting for for a
long time. But I really disagree with what the Fed is doing.

(END VIDEO CLIP)

HERERA: The president has been critical of the Federal Reserve recently,
saying that the Central Bank is moving too aggressively in raising interest
rates.

GRIFFETH: Also late today, a judge granted chemical maker Monsanto
(NYSE:MON) a new trial following a landmark verdict. The company was
challenging a ruling order going to pay $289 million to a man dying of
cancer which he says he got from using Monsanto`s Roundup weed killer.
Monsanto (NYSE:MON), which is now owned by Germany`s Bayer Corporation, had
denied Roundup was responsible for the man`s cancer and now, there will be
a new trial.

HERERA: Investors are not putting as much money into some of the world`s
most popular investment products. According to Morningstar (NASDAQ:MORN),
net inflows into passive investments like mutual funds and exchange traded
funds are down more than 45 percent through the first three quarters of
this year compared to last year. One market watcher says the data makes it
feel like investors are in the early stages of positioning themselves for a
potential downturn.

GRIFFETH: OK. So after a day like today many investors no doubt wonder
what should they do with their money now?

Nancy Tengler gets to answer that question. She is chief investment
officer at Heartland Financial.

Nancy, always good to see you. Thanks for joining us.

NANCY TENGLER, CHIEF INVESTMENT OFFICER, HEARTLAND FINANCIAL: You too,
Bill. Thank you.

GRIFFETH: I guess part of the answer comes from what you think the market
is going to do. You think we`re eventually heading for a bear market,
don`t you?

TENGLER: Well, yes, I still think we have a year to 18 months depending,
you know, based on what we know today.

GRIFFETH: Right.

TENGLER: But, yes, it`s a prudent time to start taking some risk out of
your portfolio.

HERERA: So what have you been doing for your clients? How do you decide –
– and how do you determine what to take out of a particular portfolio?

TENGLER: So, Sue, I think one — the first place to start to trim the
growth of your asset — more growth of your holdings in your portfolio.
So, these would be names of companies that are trading at high price to
earnings multiples, do not pay a dividend for example, and replace them
with value stocks that are — these are companies that pay dividends and
are growing the dividends out of free cash flow. And so, that would be
companies like Chevron (NYSE:CVX), J.P. Morgan, Johnson & Johnson
(NYSE:JNJ). Even Apple (NASDAQ:AAPL) is a company that`s attractively
valued even at these levels.

GRIFFETH: But it sounds like you wouldn`t like some of the technology
stocks that have been high fliers, have high priced earnings ratios and
don`t pay a dividend, right?

TENGLER: That`s correct, yes.

GRIFFETH: Yes. So then what are the value companies? I mean, you were
talking about an infrastructure fund you`ve been looking at since the
beginning of the year. What is that about?

TENGLER: Yes. So, the other thing you want to do is take some of the
correlation to the stock market out of your portfolio. So, a good global
incoming currency fund, pretty low correlation to anything that goes on in
U.S. stocks, infrastructure tends to act a little differently than the
stock market — and particularly if you think that the Democrats are going
to take control of the House, we might get a great infrastructure bill out
of Congress. So, those are ways to protect your portfolio against the
volatility.

But I would also be letting cash accumulate as you sell your winners, and
really look for companies franchise leaders in their industry that can grow
free cash flow and — and the top line. Companies like Home Depot
(NYSE:HD) and McDonald`s are growing the dividends 22 and 15 percent
annually respectively. Those are kind of companies that will provide
protection in a declining market period, and have the opportunity to
appreciate.

HERERA: And I see you say maybe a global bond fund. Would you go into the
— to the short end of the — of the bond market like the 2-year or the 3-
year?

TENGLER: Yes. Well, so — so in the U.S., I would absolutely do that.
Globally, these funds have the ability to troll the globe looking for the
best currency return, the best bond return. And so, they make that
decision for you. But, yes, Sue, if you`re going to be buying bonds in the
U.S., you want to be shorter than the ten-year at this point in the cycle.

GRIFFETH: Very good. Nancy, always good to see you. Thank you.

TENGLER: Thank you.

GRIFFETH: Nancy Tengler with Heartland Financial joining us tonight.

HERERA: Here`s another look at the day on Wall Street. Big selloff, the
Dow Jones Industrial Average down 831 points. The Nasdaq down 315. The
S&P was down 94.

Let`s see what tomorrow brings.

GRIFFETH: Indeed.

HERERA: That will do it for us tonight. I`m Sue Herera. Thanks for
joining us.

GRIFFETH: I`m Bill Griffeth. Have a great evening. We`ll see you
tomorrow.

END

Nightly Business Report transcripts and video are available on-line post
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Business Report is not and should not be considered as investment advice.
(c) 2018 CNBC, Inc.

 

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