NIGHTLY BUSINESS REPORT for December 28, 2015, PBS - Part 1

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Reagan, Morgan Brennan, Julia Boorstin>

Affairs; Star Wars; Entertainment; Movie Industry>

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Where`s Santa? This is when investors wait on the rally to close out the year. So far, it hasn`t come. Should investors be concerned?

Oil squeeze. Saudi Arabia posts a record budget deficit, thanks to a dramatic fall in crude this year. Could this further destabilize an already tumultuous Middle East?

And seeing stars. "Star Wars" latest chapter is the fastest movie ever to rake in a billion dollars. Why that juggernaut might be good news for other movies and good news for Hollywood.

All that and more on NIGHTLY BUSINESS REPORT for Monday, December 28th.

Good evening, everyone, and welcome. Tyler is off this evening.

It is the final four days of 2015, and it`s that time of year when investors expect the market to rally into the change of the calendar, better known as the Santa Claus rally. But so far, everyone seems to be searching for Santa. And today wasn`t any different.

Triggered by a better than 3 percent drop in the global oil benchmark, stocks ended the day lower but well off of their lows. The Dow fell nearly 24 points to 17,528. The NASDAQ dropped 7 1/2. And the S&P 500 was off more than four, and is once again negative for the year.

Bob Pisani takes a look at what`s going on.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: A lot of investors are relying on a year-end push, but we may have front-run the Santa Claus rally with a big 3 percent move up last week. The traditional rally during the last five days of the trading year and the first two of the new one is called the Santa Claus rally. It`s been a very reliable trade. It`s good for a roughly 1.4 percent gain in the S&P 500 since 1950.

But we`re off to a rocky start. December`s usually a reliable up month. It`s been up six of the last seven years. But it`s down actually for the month so far.

The problem is that the two biggest factors in the stock market this year, China and oil, both down today. China`s Shanghai stock market after being fairly calm the past few months was down over 2 percent and oil was down almost 3 percent today.

Don`t be discouraged, though. There`s powerful incentives for a modest rally into the close of the year. That`s because a lot of professional traders are just on either side of break even for the year, with the difference between an up and down year so close, there`s a lot of incentive to bid up the market. If only oil would behave.

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

(END VIDEOTAPE)

HERERA: So, what can we expect from the markets in these final trading days of 2015?

Chad Morganlander, portfolio strategist at Stifel, joins us now.

Good to see you, Chad.

CHAD MORGANLANDER, STIFEL PORTFOLIO STRATEGIST: Great to be here.

HERERA: You know, Bob made the point perhaps the rally was front-run with a 3 percent rally last week. Would you agree with that?

MORGANLANDER: I completely agree. It looks as if the end of the trading year will be rather lackluster with performance. We have three more trading days left. The economic data that will be coming out will really not move the market all that much. It looks as if global growth is going to continue to decelerate over the course of the next several months.

HERERA: At least we have the fed rate hike out of the way. That`s one factor that`s a certainty for the market at this point, correct?

MORGANLANDER: Without a doubt. And now, we`re going to be looking towards the next rate hike and perhaps we get one in March. Also, the big news for next quarter will be the ECB, the European Central Bank and what they will do or won`t do. That will also move the markets, not only on the equity side but also the fixed income side.

HERERA: So, what does that mean as we go into these last few trading days and into the New Year? What are your expectations? Is it kind of steady as she goes? It doesn`t sound like you`re expecting a significant move in the market.

MORGANLANDER: I believe that perhaps you`ll continue to see downward pressure within the oil markets. Last week, the oil markets were up about 7 percent, 8 percent, 9 percent. So, now, you could perhaps see some downward pressure there. And that the equity markets will follow suit as well.

The overriding concern over the next several weeks will continue to be the overseas markets, in particular the emerging markets.

HERERA: What do you expect in terms of equity performance in -- you know, we`ve seen so much pressure in the oil markets -- would you still avoid those stocks or there are some people out there who are doing some bargain hunting because they`re so beaten up?

MORGANLANDER: Right. And that is perhaps one opportunity. But we don`t believe that opportunity is there yet. We believe the commodity markets, in particular oil, will continue to see lower lows in 2016 and perhaps eventually we will see that opportunity. But you will really need to see global growth particularly on the China side reaccelerate. We don`t believe that that will happen. We believe it`s not a cyclical downturn but rather a structural downturn.

HERERA: OK. So, what would you put money to work in as we go into a new trading year and the end of this one?

MORGANLANDER: So, our general thematic is you that want to be more conservative with your portfolio, in particular with your equity exposure. So, we would be moving into consumer discretionary stocks, consumer staple stocks, high-quality companies that have less volatility.

Look at utilities as well. We wouldn`t be surprised to see the ten- year bond or 30-year bond. Interest rates actually go lower in 2016. And that may provide some opportunity for those rising dividend stocks that we focus on.

HERERA: What about technology? A lot of people view technology as the growth engine for the market and also for the economy. Would you dabble in technology at all?

MORGANLANDER: We would, but we wouldn`t go with those highly volatile, high-tech stocks that have a tremendous amount of momentum. We would go with more low momentum technology names. So, look at companies like Cisco Systems or Oracle for that matter and Microsoft. We would stay away from the dotcom names. We believe that as the Federal Reserve raises rates, and there is a more volatile environment in 2016, those types of companies will underperform.

HERERA: How important are dividends to you?

MORGANLANDER: We like companies that are increasing their dividends over a period of time. We don`t like high dividend stocks. So, we want to look at companies that cash flow`s tremendous, it`s growing, it`s profitable and it`s well-capitalized. We do not want to be in companies that have a lot of debt on their balance sheet.

HERERA: Not in this environment certainly.

MORGANLANDER: Without a doubt.

HERERA: Chad, thank you so much.

MORGANLANDER: Thank you and happy New Year.

HERERA: Happy New Year to you as well. Chad Morganlander of Stifel.

As we mentioned a bit earlier, a slide in crude prices helped trigger today`s slump in stock prices, but the drastic fall in crude this year has been felt around the world and today, oil powerhouse Saudi Arabia showed just how much it`s feeling that impact.

Jackie DeAngelis explains.

(BEGIN VIDEOTAPE)

JACKIE DEANGELIS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Low oil prices have hit the kingdom of Saudi Arabia, hard. Saudi Arabia reporting its 2015 budget today, a deficit of nearly $100 million.

Saudis also said that revenue was lower than expected and spending was higher than expected. Remember, this is an oil-producing country. It gets roughly 80 percent of its revenues from oil. The last surplus that we saw was 2013.

Questions raised by this report, will Saudi Arabia come to the market again in 2016 to raise capital? We saw about $4 billion in financing raised from the market this year, but back in October, S&P cut Saudi`s rating to negative because of this oil price drop.

The bottom line here, Saudi Arabia is being squeezed by these prices. If they, along with some of the other OPEC countries, maintain their stance that they will weather the storm while they try to maintain their market share, it`s not to say that it won`t be painful. Drastic spending cuts will be necessary and innovative ways will be needed to bring more cash into the system.

For NIGHTLY BUSINESS REPORT, I`m Jackie DeAngelis.

(END VIDEOTAPE)

HERERA: Helima Croft joins us now to talk more about Saudi Arabia`s budget shortfall and whether or not we could see more destabilization in that region because of that and the drop of oil. She is the global head of commodity strategy at RBC Capital Markets. She focuses on geopolitics and energy.

Which means you have been a very busy lady lately.

HELIMA CROFT, RBC WEALTH MANAGEMENT GLOBAL HEAD COMMODITY STRATEGY: Yes.

HERERA: So, I guess the question we really posed in the intro, Saudi Arabia reporting this deficit. Oil continues to fall. How destabilizing are those two factors in that particular region?

CROFT: I mean, if you think about Saudi Arabia, they are the powerhouse of the Middle East and the only way they really survive the Arab spring in 2011 was $130 billion in new domestic spending. That`s why their budget break even is well north of 100.

If Saudi Arabia carries through with a lot of these reforms, it`s going to be a test case of whether they can keep their population with them. It`s not like I think people are going to be at the barricades but it`s going to be a very interesting year to see whether they can manage to get their population away from a generous welfare safety net they feel entitled to.

HERERA: So, what does that mean for the upcoming OPEC meeting? Because we`re going into this meeting in a couple of days with all of these disparate parties, further apart than I remember them ever being really and a global commodity fall that shows no signs of abating.

CROFT: Yes. I mean, I was at both the June meeting and the recent December meeting. What was so interesting at the June meeting was the optimism that we would see 70 by year end. Saudi Arabia`s veteran oil minister Ali Naimi jumped on the stage at the OPEC seminar in June and said the future looks bright for oil, we`re in the midst of a demand recovery. At the recent meeting this meeting --

HERERA: Yes, at the recent meeting, it was very different.

CROFT: It was terrible. I mean, Ali Naimi was grimfaced when he walked out. They basically said, we couldn`t reach any agreement. Hence, we no longer have a ceiling.

But what they said is we`re going to wait and see whether what do the Iranian barrels look like year, what does Russian production look like, what does U.S. production look like, and then we`ll see if we need to do anything.

So, I would say if you think about OPEC, you do want to watch the next six months. If these countries have a hard time implementing austerity, I wouldn`t rule out some type of course correction in June.

HERERA: I misspoke when I said the meeting coming up -- I meant the meeting that just was.

In your November report I found this very interesting. The risk of a systemic sovereign failure is clearly rising. Do you still feel that way?

CROFT: Yes. I mean, Saudi Arabia I think is somewhere in the middle of we call it`s spectrum of pain for the OPEC producers. At the one end are the rich small Gulf countries, UAE, Qatar, Kuwait, they`re well placed to ride out the storm. Saudi Arabia`s in the middle. They have a large population. FX reserves don`t go as far.

But the countries that we really think are very fragile are the ones that don`t have reserves, real political challenges. I mean, look at Venezuela. They have $15.2 billion in FX reserves, $15.8 --

HERERA: FX is foreign exchange.

CROFT: Foreign exchange, $15.8 billion in debt obligations coming in 2016. Can they make this math work? And you have a parliament now at the hand of the opposition. Maduro, the current head of state very unpopular. And so, that`s a country that could really face sustained political challenges over the year.

HERERA: Very quickly, what does Saudi Arabia have to do now to not only keep itself whole but keep the region intact?

CROFT: Saudi Arabia`s going to have to find a way to deal with their domestic population. Again, Saudi Arabia had a bargain, don`t go into the streets, don`t ask for political change, and we`ll take care of you from cradle to grave. They`re going to have to redraw their social contract with their population.

HERERA: That`s going to be very interesting.

CROFT: Very interesting.

HERERA: We`ll be speaking to you quite often I think.

CROFT: Thank you.

HERERA: Thank you, Helima. Appreciate it.

Helima Croft is with RBC Capital Markets.

Well, as the year draws to a close, mortgage rates have ticked lower despite a hike in interest rates by the Federal Reserve.

But as Diana Olick notes, mortgage rates might not be the only housing bright spot in the year ahead.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Federal Reserve raised interest rates for the first time in almost a decade, but mortgage rates don`t follow the Fed, and so far, the rate on the 30-year fixed is actually lower than it was a week ago.

Still, as the economy improves, mortgage rates could rise. But there is a bright spot for borrowers. More lenders are reporting easing credit standards, according to a new survey by Fannie Mae, and expect standards to ease further rather than tighten in the near future.

This could help affordability in the housing market, which has been suffering under both tight credit and tight supply of homes for sale. The potential for rising interest rates, which would narrow the field of customers applying for loans, may increase competition among lenders and force them to ease some of the extra safeguards they added after being sued by the government for billions of dollars over bad loans dating back to the last housing boom.

Fannie Mae, Freddie Mac, and the FHA have been clarifying lender liabilities for bad loans and have been pushing lenders to ease up as well.

For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Washington.

(END VIDEOTAPE)

HERERA: The holiday shopping season might be over, but `tis the season for returns. Coming up, who won and lost the holidays, and what that means for the companies involved.

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HERERA: A pair of drug companies got hammered today for two very different reasons. Chimerix lost more than 80 percent of its value after one of its drugs missed its goals in a clinical trial. And Valeant Pharmaceuticals was off about 10 percent after its CEO took a medical leave.

Meg Tirrell has more.

(BEGIN VIDEOTAPE)

MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT: Two big pieces of news today from the drug industry, Chimerix a small pharmaceutical company in North Carolina plunged this morning after announcing its experimental medicine failed to meet the goal of a late-stage study. The drug called Brincidofovir is an anti-viral and was being tested for prevention of infection after stem cell transplant.

Piper Jaffrey analyst Josh Schimmer lowered his price target on the stock to $10 from $63 on the news. Chimerix and this medicine have been making headlines quite a bit in the last two years, first in early 2014 as the subject of a battle over compassionate use for 7-year-old patient Josh Hardy. After intense pressure on the company to provide the experimental drug, Chimerix started a new clinical trial with Hardy as the first patient. He recovered but the company`s CEO stepped down after the controversy.

And then, later last year, the drug made headlines again for its experimental use against Ebola. After the results reported today, Chimerix is seeking to explore its next steps for development of the drug.

In other pharmacy industry news, embattled drugmaker Valeant said its CEO Mike Pearson taking a medical leave of absence. That`s after Pearson was hospitalized for a severe case of pneumonia. A company spokeswoman said Pearson is receiving treatment in the hospital and declined to comment further on his condition or the expected links of his leave.

Valeant will be run on an interim basis by a committee of three executives. The stock has lost half its value in the last six months as the company faces scrutiny over its drug pricing practices and short sellers took aim at its business. The stock sank again today.

For NIGHTLY BUSINESS REPORT, I`m Meg Tirrell.

(END VIDEOTAPE)

HERERA: Shares of wearable device maker Fitbit getting some pep in its step today. And that`s where we begin tonight`s "Market Focus".

The Fitbit app was the most downloaded from Apple`s App Store on Christmas Day, suggesting strong holiday sales for that company. Shares of the company up over 3 percent to $29.86.

Freeport McMoran`s executive chairman James Moffett stepping down after a brutal year for the company`s stock. Freeport is also facing pressure from Carl Icahn, who took a large stake in the company earlier this year. Shares of the miner fell 9 1/2 percent today, down over 70 percent for the year to $6.85.

Intel completed its takeover of chipmaker Altera today after announcing its $16.7 billion takeover bid back in June. Shares of Intel little moved by the announcement with shares ending the day down just slightly to $34.93.

And a pair of food companies in the news. The food industry making news with Chipotle and Whole Foods. Over the weekend, Chipotle reopened its Boston location, where 136 became ill from the norovirus earlier this month. That was separate, though, from the E. coli outbreak that affected Chipotle in 12 states.

And Whole Foods will pay half a million dollars to resolve an investigation into whether the company charged too much for some items in New York City stores. Whole foods will also conduct quarterly audits to ensure accuracy.

Both companies were lower on the day. Chipotle down a fraction to $493.52, while Whole Foods was off less than a percent to $34.24.

Deutsche Bank agreed to sale its stake in the Chinese bank Hua Xia Bank. It`s a part of Deutsche Bank CEO`s John Cryan`s plans to strengthen the core focus and finances at the company. The bank expects the sale of its 20 percent stake to raise about $4 billion. U.S.-based shares of the German bank down fractionally for the day to end at $24.46.

Signet Jewelers getting a lift today after "Barron`s" ran an article this weekend saying the stock will come back from its recent decline. The magazine cites growing sales and higher margins as drivers for the company going forward. Its recent acquisition of Zale`s is also beginning to pay off as it improves profit margins in that unit. Shares of the Jeweler up 1 percent to $120.89.

And activist investor Carl Icahn is raising his offer for auto parts seller Pep Boys to about $1 billion, or $18.50 a share, topping the bid from Bridgestone. On Christmas Eve, Bridgestone had upped its offer to about $950 million. Shares of Manny, Moe and Jack were off just a fraction today to $17.41.

Well, the holidays seem to have been fairly good this year. According to MasterCard spending pulse, sales excluding auto and gasoline grew nearly 8 percent during the traditional holiday shopping season, which runs from Black Friday to Christmas Eve. But now come the returns, and it`s not just online.

And as Courtney Reagan tells us, those returns may be just the thing to set the stage for a comeback at the physical stores.

(BEGIN VIDEOTAPE)

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: The main gift-giving holidays are now in the rearview mirror and retailers are betting on returns to fuel end of year sales for two main reasons -- recapturing the sale of an unwanted item and selling through leftover merchandise. The National Retail Federation estimates holiday returns could be worth more than $50 billion.

Now, many are crowning online retailers like Amazon the winner this holiday season. But this final week it may be the physical stores that have the edge. Here`s why: with online shopping, the rate of returns increases. About 1/3 of all online purchases are returned.

It`s even higher when it`s clothing. That`s closer to 40 percent. Less than 5 percent of items bought in store, however, are returned. Now, both the rate for online and in store is a bit higher during the holidays.

Physical stores also have a much higher conversion, or getting a customer to turn a trip into a sale. Impulse buying is also a key piece of retailer sales this week, which again happens much more often in stores than online. Shoppers are much more likely to spend more on other items while returning an unwanted gift to a physical retailer.

Plus, it`s free to return at least most goods to stores. Not always the case online. Retailers offering free shipping for returns are observing the cost often without recapturing a sale. Retailers offering free shipping both ways are somewhat training shoppers to over-order and return what doesn`t work at the expense of the retailer.

For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan.

(END VIDEOTAPE)

HERERA: Well, with all of those increased sales the shippers like FedEx and UPS had their share of headaches during the holiday.

Morgan Brennan takes a look.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Bad weather in certain parts of the country and a bigger than expected last-minute spike in e-commerce demand caused service snarls for the shipping companies, particularly FedEx. The delivery giant did not deliver all of its planned packages in time for Christmas. Severe storms in the south near its Memphis sorting hub were partly to blame.

But the company also says during the week leading up to Christmas, it handled volume that, quote, "far exceed all previous records, including an unprecedented surge of last-minute e-commerce shipments."

FedEx has not disclosed how many shipments missed that holiday deadline, but it did add operations on Christmas Day, and extra operations on Saturday as well. Analysts say volumes from certain retailers and e- tailers blew past the forecast shared with shipping companies to plan for the peak season.

DONALD BROUGHTON, AVONDALE PARTNERS: We had shippers who shipped way more than they forecasted they would ship, which is akin to me going into a bank and saying, I`d like to borrow $10 million and they say, OK, fine, you`re approved for a loan of $10 million. Then I come back a couple of weeks later and say, well, I`d like to have $50 million, and they say there`s no way we`re going to loan you that and I say, well, that`s a bad bank.

BRENNAN: For its part, UPS says it got all of its planned packages delivered by 8:00 p.m. on Christmas Eve. And that the company did not send workers out on deliveries Christmas Day.

But both carriers still experienced hiccups. According to ShipMatrix, UPS and FedEx started the Christmas week strong in terms of on-time delivery performance. But as the days progressed, service for overnight and one-day shipping fell dramatically. As low as 77 percent for FedEx and 79 1/2 percent for UPS on Wednesday, before recovering on Christmas Eve.

The big question now, cost. Will the shipping companies, particularly FedEx with its increased operation, spent to get shipments to doorsteps last week?

BROUGHTON: It`s been constant ongoing growth. The question is, how do you fund that growth? Can you handle the surge that`s happening in a manner that ends up being profitable for the company doing it?

BRENNAN: And while questions around Christmas remain, the second part of peak season is kicking off. With e-commerce returns and gift card purchases getting under way. UPS alone expects between now and January 6th to see 5 million return deliveries, a 15 percent increase versus last year.

For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan in New York City.

(END VIDEOTAPE)

HERERA: Coming up, how a billion dollars by "Star Wars" is helping the rest of the movie business.

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HERERA: Here`s what to watch for tomorrow. Investors get a read on global economic trends when the international trade numbers come out. Housing grabbed some headlines as we get a glimpse at home values with the Case Shiller index. And consumer confidence in December is sure to get some attention from investors as well. And that is what to watch for.

It was quite the Christmas weekend for Disney as its megahit "Star Wars: The Force Awakens" continued to topple box office records. And as Julia Boorstin tells us, all the buzz surrounding "Star Wars" is giving a halo effect to the rest of the movie industry.

(BEGIN VIDEOTAPE)

UNIDENTIFIED FEMALE: Get ready.

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: "Star Wars: The Force Awakens" led the box office to another record weekend, the biggest ever for the Christmas holiday, and the second after only "Star Wars" debuted the prior weekend.

Disney`s "Star Wars" film brought in over $49 million in ticket sales on Friday alone, more than twice the Christmas Day record. In fact, the film hit $1 billion in global box office in a record 12 days as of Sunday. And it hasn`t even opened yet in the world`s second biggest movie-going market, China.

CHAD BEYNON, MACQUARIE SR. ANALYST: The numbers that we`ve seen so far have definitely surpassed anyone`s expectations, the best opening weekend, the best second opening weekend. And on Christmas Day, over 5 million people in the United States went out to see the movie. So, these numbers are completely staggering.

BOORSTIN: "Star Wars" blockbuster performance is leading the U.S. box office up 7 percent year to date, on track to hit $11 billion for the first time ever. In "Star Wars`" record-crashing debut seems to be sparking interest in movie-going, as alternatives also performed pretty well this weekend. Paramount comedy "Daddy`s Home" starring Will Ferrell and Mark Wahlberg grossing $39 million in the U.S.

UNIDENTIFIED FEMALE: The world doesn`t owe you a thing.

BOORSTIN: FOX`s "Joy," which is drawing Oscar buzz, grossing 17 1/2 million. Though Sony`s "Concussion" about a doctor take on the NFL did not have such a strong debut, grossing only $11 million in the U.S. And analysts are optimistic theaters will continue to be packed following the trend of higher movie-going after hit "Avatar."

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