NIGHTLY BUSINESS REPORT for January 04, 2016, PBS - Part 1

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Steve Liesman, Phil LeBeau, Mary Thompson>

Arabia; Energy; Middle East>

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Rough start. The Dow dives, marking the blue chip index`s worst first day of trading in eight years. What happens next and what should you do with your money?

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Global shock. China shares plunge nearly 7 percent as concerns about that country`s economic slowdown fuel a sell-off here and worldwide.

HERERA: Escalating tension. Oil roils as the divide between Saudi Arabia and Iran deepens.

All that and more tonight on NIGHTLY BUSINESS REPORT for Monday, January 4th.

MATHISEN: Good evening, everyone, and welcome.

2016 picked up right where 2015 left off, with a sell-off. This was the worst opening day for stocks since 2008, though equities did end off their lows.

Let`s get right to the closing numbers on this, the first trading day of the New Year. The Dow industrials dropped 276 points to 17,147. It had been off as much as 467 points earlier in the day. The NASDAQ declined 104 points. That`s 2 percent. And the S&P 500 lost 31.

The trigger, China, and more evidence of slowing growth in the world`s second largest economy. A new report out of that country showed the manufacturing sector contracted at the end of 2015. The Shanghai stock market plunged almost 7 percent and then circuit breakers kicked in and trading was halted.

From Asia, the selling spread around the world to Europe first and then here to Wall Street. But China wasn`t the only cause for the drop today.

Bob Pisani has more on today`s rout from the New York Stock Exchange.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Ugh. What a lousy open for the year. Most of the market was down 2 percent the whole day except for a very brief rally at the close.

There were several reasons that stocks traded down.

First, we had a poor close to 2015 at a time when the markets normally rally.

Second, China was a major factor in the drop today, with disappointing manufacturer numbers, a new circuit breaker that halted trading when the market dropped 7 percent and probably caused more panic than anyone expected, and as traders sold ahead of news that large shareholders previously banned from selling would be able to do so at the end of the week.

Now, third, the Saudi-Iran conflict was a major geopolitical event, and oil couldn`t even hold a rally, though energy stocks were down less than the overall market.

Finally, the U.S.`s own December manufacturing data was weaker than expected.

You add it all up, and it collectively sends a message to the markets. There is not a lot of reasons to be long stocks at the moment.

Now, is there any hope for 2016? Well, of course, there`s hope. Remember, stocks aren`t cheap. But for the most part they`re not really expensive. They may have to drop to levels that attract buyers to compensate for the risks.

Now, we saw this earlier today when some beaten-up retailers like Kohl`s (NYSE:KSS) and JCPenney were up on a big down day, and at the close when very large buy orders materialized as at least some buyers tried to pick up bargains.

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

(END VIDEOTAPE)

HERERA: And as Bob just mentioned, rising tensions in the Middle East -- one of the most volatile regions in the world exacerbated today`s sell- off. Relations between Saudi Arabia and Iran, two of the most powerful nations in that region, and two of the biggest oil producers, deteriorated following Riyadh`s execution of a Shiite cleric.

Now, that sent oil prices higher earlier in the day, only to end lower on continuing supply concerns. And gold prices rallied when diplomatic ties between Saudi Arabia and Iran were severed as investors sought safety.

Michelle Caruso-Cabrera has more on the troubled relations and why investors are paying attention.

(BEGIN VIDEOTAPE)

MICHELLE CARUSO-CABRERA, NIGHTLY BUSINESS REPORT CORRESPONDENT: Bahrain, the UAE, Sudan, all led by Sunni governments, siding with Saudi Arabia, also led by a Sunni government. Those countries either severing or reducing diplomatic ties with Shia-led Iran.

This comes after Iranians ransacked the Saudi embassy in Tehran, the capital of Iran, in retaliation for the execution of a Shiite cleric in Saudi Arabia. The Saudi government said that cleric has helped lead protests against the government and the Saudi government does not tolerate dissent.

The situation raising tensions between the two regional powers which are already fighting military proxy wars in Syria and Yemen. In Syria Iran is backing Syrian leader Bashar al Assad while Saudi Arabia is backing Sunni rebels on the ground. In Yemen, Iran is supporting Shia rebels while Saudi Arabia is defending the Sunni government.

Both Iran and Saudi Arabia are oil producers. Saudi Arabia, one of the biggest in the world, while Iran is anticipating being able to sell oil once again if and when U.S. sanctions against the country are lifted.

While oil prices initially rose on the escalating conflict, Middle East watchers say counter-intuitively, the situation could keep oil prices lower. It may Saudi Arabia yet another reason to keep producing oil at full tilt, knowing that it hurts Iran to keep oil prices low.

For NIGHTLY BUSINESS REPORT, Michelle Caruso-Cabrera.

(END VIDEOTAPE)

HERERA: The White House urged Iran and Saudi Arabia to deescalate tensions. At a news briefing today, Press Secretary Josh Earnest said the U.S. warned Saudi officials about the potential consequences of executing a prominent Shiite cleric.

(BEGIN VIDEO CLIP)

JOSH EARNEST, WHITE HOUSE PRESS SECRETARY: We`re urging all sides to show some restraint and to not further inflame tensions that are on quite vivid display in the region. And Secretary Kerry has been in touch with his Iranian counterpart. U.S. diplomatic officials in Saudi Arabia have been in touch with their counterparts to convey this message.

(END VIDEO CLIP)

HERERA: President Obama has not contacted leaders of either country, but the White House says that he is aware the situation.

MATHISEN: Patty Edwards joins us now to talk more about today`s dramatic sell-off. She`s managing director of investments for U.S. Bank Wealth Management.

Patty, good to see you and happy New Year.

PATRICIA EDWARDS, U.S. BANK WEALTH MANAGEMENT MANAGING DIRECTOR: You know, no one ever wants to make too much of a single day`s trading. It`s really a fool`s errand to try and do that. But it did occur to me that in this single day, three of the major influences that are likely to be keys to trading for the entire year were on display. The health of China`s economy, geopolitical tensions in the Middle East, and concerns about the U.S. economy, particularly in light of the fact that the Fed`s financial stimulus is being pulled out.

Do I have that right?

EDWARDS: I think you do. There are a couple of things that are a little bit of a back story, though, that I think we should really highlight. So, manufacturing data out of China, as you`ve already said, really not that good. It`s below the level where we need it to be for growth.

That being said, if you look at the same PMI data for non- manufacturing, looking at where the consumer is spending, that actually looked pretty good and is continuing to look stronger over in China. When you look at Middle East tensions -- yes, absolutely, that`s going to distract investors. On the other hand, the price of oil is now being set by the markets, not being set by one single producer moving their production up. You`re not going to see the price of oil go up until someone shutters production however they do it, voluntarily or involuntarily.

HERERA: So --

EDWARDS: And then, finally, when you start looking at the U.S., you know, the U.S. manufacturing being a little bit slower than expected. Not such a big deal. Now, if we start to see that in the U.S. consumer, much bigger deal.

HERERA: I was just going to say the consumer is what I`d like to focus on a little bit here, Patty, because you`ve pointed out to us before on this program that you consider the consumer key to the continued economic recovery or expansion here in the United States.

EDWARDS: Right. So the U.S. consumer is looking pretty good. And that`s one of the things that gives us hope for this market going forward, that they`ll continue to spend. If you look at the health of the consumer`s balance sheet, they`ve used the savings from gas to pay down debt and now that I starting to turn around and use that money for other experiences.

So, we`re seeing the numbers for dining establishments go up. They`re having better sales. Auto sales continue to be strong, because the consumer does start -- has started to feel better from that gas price increase. And it is about 75 percent of the U.S. economy is based on what the consumer does, not what our manufacturing does.

MATHISEN: Better year for stocks or for bonds? Better year for U.S. equities or for overseas markets?

EDWARDS: So, we have a tactical tilt right now. We`ve been actually fairly conservative for the last six months. But our tactical tilt is to be a little bit heavier in equities than fixed income. We don`t think that there`s going to be a huge increase in rates during 2016, but we do expect some. And we favor equities for that reason.

On top of that, within the equity sector, we not only favor U.S. equities, but we favor developed markets over emerging markets, and we like to have a position in hedged equity because we think that will help offset some of the volatility we may see during this year.

MATHISEN: All right, Patty, thank you very much. Patty Edwards with U.S. Bank Wealth Management.

Well, the global sell-off and the health of the world economy was a major focus at the American economic association`s annual meeting in San Francisco.

And as Steve Liesman reports, the question on the minds of economists is how might events abroad impact the economy here at home?

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: The stock market rout that rang in the New Year with a sour tone served to highlight the biggest risk facing the U.S. economy in 2016. Not from homegrown problems but from abroad.

Precipitating the plunge: weak manufacturing data from China. Chinese stocks fell 7 percent, and chip circuit breakers that suspended trading nationwide for the first time. The sell-off ricocheted to Europe and then to U.S. markets.

Over the weekend, thousands of academic economists gathered in San Francisco at the American Economic Association Annual Conference. The general opinion -- the U.S. economy is holding up well despite the challenges from overseas.

MARTIN FELDSTEIN, FORMER CHAIRMAN OF COUNCIL OF ECONOMIC ADVISER: The U.S. economy is now in very good shape. We`re essentially at full employment with the overall unemployment rate at 5 percent. And the unemployment rate among college graduates a remarkably low 2 1/2 percent.

LIESMAN: The troubles facing the U.S. economy are seen as less immediate than elsewhere in the world. Feldstein points to the need for serious reform of U.S. Medicare and Social Security, and to revamp the tax system in order to break out of the 2 percent group doldrums. But that 2 percent looks impressive compared to other developed economies.

JOHN WILLIAMS, SAN FRANCISCO FED PRESIDENT: I think we`re on pace to enter this economy with still a very good job market and continued job gains. So, you know, it may be a yawn in terms of one more year of 2 percent, 2 1/4 percent growth, but I think that`s actually quite good, we`re adding a lot of jobs, we`re keeping unemployment -- we`re getting unemployment even lower.

LIESMAN: Williams thinks the U.S. economy will be strong enough for the Federal Reserve to raise interest rates three to five times this year. But that forecast depends in part on whether foreign troubles wash up on America`s shores. The conclusion from today`s market trade is that the U.S. economy can`t go it alone.

For NIGHTLY BUSINESS REPORT, I`m Steve Liesman in San Francisco.

(END VIDEOTAPE)

HERERA: U.S. manufacturers continue to feel the heat. Activity in that sector contracted at the fastest pace in more than six years in December. The nation`s factories saw new orders shrink. As a result, they cut some jobs.

The report from the Institute for Supply Management shows many of the challenges from last year, such as slow growth, the strong dollar and low oil prices, will likely continue to weigh this year.

MATHISEN: Construction spending fell in November for the first time in 17 months. The Commerce Department reports a dip of 0.4 percent following a slight rise back in October. This reflects weakness in spending on hotel and other private non-residential construction.

Still ahead, blue chip blues. Why one of the worst-performing Dow components of last year is now off to a shaky start in 2016.

(MUSIC)

MATHISEN: The Department of Justice and the Environmental Protection Agency are suing Volkswagen over emissions cheating software. The lawsuit is the latest step in the government`s case against the automaker and alleges that the company installed illegal defeat devices that tricked emissions testing equipment to show pollution levels at or below EPA standards. The software was found in about 600,000 vehicles sold in the U.S.

HERERA: Tesla delivered more than 17,000 vehicles in the last three months of 2015. But that was at the low end of its target, and it brings the sales for the whole year to more than 50,000. The maker of electric luxury cars said it`s on track to scale up production in the year ahead. Shares of Tesla, though, fell almost 7 percent.

MATHISEN: Ferrari made its trading debut over in Milan today, and it sputtered. Shares were relatively flat after the luxury sports car maker completed its separation from its parent, Fiat Chrysler. The listing in Milan comes after Ferrari made its public debut on the New York Stock Exchange back in October. The chairman of Ferrari and the CEO of Fiat Chrysler, Sergio Marchionne, said this will be a generous payout for Ferrari but the details are still being decided.

HERERA: General Motors (NYSE:GM) is making an investment in ride- sharing company Lyft. Audi is making a big bet on a small rental car business. Both automakers want a piece of startup companies that are changing the way that people get around. Their investments and the new partnerships mean the auto world is quickly shifting gears to try new business plans few could have imagined just a couple of years ago.

Phil LeBeau has the details.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: After more than a century of selling millions of cars and trucks, General Motors (NYSE:GM) is getting into the car-sharing business. It`s investing a half billion dollars in the ride share company Lyft. As the two companies develop autonomous drive car share programs and new ways for people to rent GM vehicles to do part-time driving for Lyft.

JOHN ZIMMER, LFYT CO-FOUNDER AND PRESIDENT: We can now market to those individuals that have already applied but didn`t have the right car, as well as let people know that this is a really great income-earning opportunity, whether or not you have a car.

LEBEAU: In the world of car-sharing, Lyft is much smaller than Uber, which has grown so much it now has a valuation greater than General Motors (NYSE:GM). So, why is GM investing in Lyft? Because the way millions use cars and trucks is rapidly changing. In fact, a new study projects a slight drop in the growth of global car sales over the next 15 years as more people look to share, not buy a vehicle.

DANIEL AMMANN, GENERAL MOTORS PRESIDENT: We talked through that. We found more opportunity around the autonomous on-demand network and really around defining and redefining the future of our ability, particularly in the open-end environment. And we at General Motors (NYSE:GM) really want to be at the forefront of that change.

LEBEAU: GM`s not alone investing in start-ups. Audi has led the latest round of fund-raising for Silver Car, the fledgling rental car company that rents only silver Audi A4s. Add to that, Ford talking with Google (NASDAQ:GOOG) about developing autonomous drive vehicles and it`s clear traditional automakers are rethinking how they do business and how we will likely drive in the future.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Las Vegas.

(END VIDEOTAPE)

MATHISEN: General Motors (NYSE:GM) also making an executive change today. The CEO of the nation`s largest automaker, Mary Barra, will take on the additional role of board chairman. The change is effective immediately. The move considered a vote of confidence in her leadership of the company.

HERERA: And good news for drivers. Gas prices will remain low this year. In fact, AAA is predicting that the price you pay at the pump may be even lower than last year. The organization says the average price of a gallon of regular unleaded will cost between $2.25 and $2.45. That compares to an average of $2.40 in 2015.

MATHISEN: The New Year kicks off with a reported health care deal, and that is where we begin tonight`s "Market Focus".

According to "Bloomberg", Shire (NASDAQ:SHPGY) is in advance talks to acquire Baxalta for about $32 billion in cash and stock. Reports say the two companies could announce a deal as soon as this week, though final details are still being discussed. Shares of Baxalta rose more than 5 percent to $41.17. Shire (NASDAQ:SHPGY) down 3 percent, as you see there.

Shares of two gun makers rose today as President Obama considers an executive action on gun control. The president met today with Attorney General Loretta Lynch to discuss what measures can be taken on his own authority. He`s scheduled to deliver remarks on reducing gun violence tomorrow morning. An executive order would not require congressional approval.

Smith & Wesson ending the day up more than 5 percent to $23.28. Sturm Ruger (NYSE:RGR) up for the day at $61.39.

Well, data storage firm EMC (NYSE:EMC) mc plans a round of layoffs as it aims to cut annual costs by $850 million. The layoffs come as the company prepares to be taken over by the computer maker dell. Shares of EMC (NYSE:EMC) down slightly for the day to $25.59.

HERERA: A pair of analysts giving Lululemon an upgrade today citing strong company fundamentals as well as improving profit margins that will ultimately meet the company`s goals. Shares of the athletic ware company rose nearly 6 1/2 percent in a down day to $55.86.

Valeant pharmaceuticals on the down side today after activist investor Bill Ackman cut his firm`s stake in the company to 8 1/2 percent. In a filing, the firm reasoned it was selling the shares to generate a tax loss for investors in the company. Shares of Valeant fell 3 percent to $98.50.

And investors got the first chance to react to a weak report on gambling revenue in Macau that was out on Friday which showed a decline of 34 percent, making 2015 the second year in a row that revenue declined. And that hurt shares of Wynn Resorts (NASDAQ:WYNN), Las Vegas Sands (NYSE:LVS), and MGM Resorts (NYSE:MGM).

MATHISEN: American Express (NYSE:EXPR) (NYSE:AXP) was one of the worst-performing stocks in the Dow last year, and it got off to a shaky start today in 2016. Shares of AmEx fell almost 3 percent after Fidelity ended its relationship with the firm.

Mary Thompson has more now on the latest piece of business lost by American Express (NYSE:EXPR) (NYSE:AXP).

(BEGIN VIDEOTAPE)

MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: After a tough 2015, American Express (NYSE:EXPR) (NYSE:AXP) stumbles out of the New Year`s gates. Fidelity investments ending a 12-year relationship with AmEx and Bank of America (NYSE:BAC) in favor of a co-branded card from Visa (NYSE:V) and U.S. Bancorp (NYSE:USB).

CHRIS DONAT, SANDLER O`NEILL: This is part of a long list of losses for them.

THOMPSON: The loss of the Fidelity business wasn`t unexpected and not a big hit to the payment giant`s top or bottom line. Amex says the Fidelity cards accounted for less than 1 percent of its total billings, and analysts speculate it could be offset by a pending card deal with Fidelity rival Charles Schwab.

Still, it comes after last year`s loss of co-branded business from Costco (NASDAQ:COST) and JetBlue. The Costco (NASDAQ:COST) loss especially painful as cards linked to the discount retailer accounted for about 8 percent of the AmEx cardholders` total spending.

The co-branding space is increasingly competitive with partner firms demanding steep cuts in the price AmEx charges for processing transactions or managing rewards programs, making many of these relationships economically unattractive for the 165-year-old firm.

So, expect the spotlight on CEO Ken Chenault to grow harsher. After 14 years at the helm he`s recently lost key managers and potential successors to either death or departure. His growth strategy for the firm hasn`t been heartily embraced by shareholders, and because of this analyst Chris Donat says he expects Chenault and his troops will continue to rely on expense reductions to appease investors.

DONAT: I think you might see more pressure on American Express (NYSE:EXPR) (NYSE:AXP) to do things around their cost base. They do a lot of things around the world in a lot of different geographies, but it seems to me that with that large cost base, there should be opportunities to reduce that.

THOMPSON: Off 27 percent in the last year, AmEx`s stock was the Dow`s third worst performer in 2015. Trading at levels today that analysts say make the company considered by "Forbes" to be one of the world`s most valuable brands looking more and more like a value play.

For NIGHTLY BUSINESS REPORT, I`m Mary Thompson.

(END VIDEOTAPE)

HERERA: Coming up, the sell-off and your money. The changes one financial adviser is telling his clients to consider following today`s decline.

(MUSIC)

MATHISEN: Here is a look at what to watch tomorrow. Auto sales for December are due out. Numbers for the full year are expected to set records. Treasury Secretary Jack Lew will host a town hall in Denver. It focuses on saving for retirement. And we`ll head to Houston, Texas, to see how that state`s economy is holding up with oil prices now below $40 a barrel. And that is what to watch Tuesday.

HERERA: Approvals for first-of-a-kind drugs climbed last year to the highest level in 19 years. The Food and Drug Administration approved 45 drugs in 2015, edging past the previous year`s total. The FDA also gave the OK to the first 3D printed drug, which treats certain types of epileptic seizures. Approvals from the agency are considered a barometer of innovation in the pharmaceutical industry.

MATHISEN: The New York attorney general wants DraftKings and FanDuel to give back all the money they made in the state. In an amended lawsuit, Eric Schneiderman also seeks a civil penalty of up to $5,000 per case. This lawsuit adds to the original one that asserted that DraftKings and FanDuel are running illegal sports betting operations.

HERERA: Our next guest manages money for individual investors and fielded some calls from newer, a little bit nervous clients today. He is Kelly Campbell, principal and CEO of his own wealth management firm, Campbell Wealth Management. And he joins us now.

Good to have you back here, Kelly.

: Great. Thank you. Hi, Sue.

HERERA: So, what questions did you get from some of those newer and more nervous investors?

KELLY CAMPBELL, CAMPBELL WEALTH MANAGEMENT PRINCIPAL & CEO: Well, you know, it was interesting. We didn`t get a huge amount of questions now, and the reason being is that we really do a financial plan for every client. And I think the big issue is that a lot of people that don`t have a financial plan or haven`t had a financial plan, they don`t know how to react to this.

In other words, they`re looking at it saying, "oh, my gosh, I`m taking money out of my portfolio to live off of and I`m seeing my portfolio get down", or worse yet, they`re not seeing their portfolio go down, they`re listening to the news, they`re reading the newspaper and they`re seeing significant decreases in the market. They`re worried.

So, the questions are, what do we do? Should we make a move? That`s probably the biggest question I had, was, should we make a move today?

MATHISEN: And what did you tell them?

CAMPBELL: Well, I told them that make a move today was probably one of the worst things to do because if we made a move today, then the issue would have been that you`re making a knee-jerk reaction. A knee-jerk reaction is never good because oftentimes, you know, it could be that today`s a down day, tomorrow`s an up day.

So, if you made that move when it was going down, then it creates a problem for tomorrow. Now, I`m not necessarily sure exactly what`s going to go on, as nobody is. But the knee jerk reaction is one of the worst up- front moves you can make. You`ve got to look at it and see what you think is going to happen over the next few days. I think that`s the bigger move.

HERERA: All right. Sell-offs like today can also provide opportunities. Say, we get another down leg tomorrow.

What sectors of the market have you been watching and that you like and maybe would be able to add to or go in and beef up the portfolio a little bit because of all the carnage on the street?

CAMPBELL: Well, the problem that you have with looking at the sectors in the market right now is that nothing can look good when the market -- if it`s really precipitously going down, everything could go down. So, before I look at saying I want to, you know, jump in or I want to take that opportunity, I want to hold off and I want to wait for something good to happen. In other words, before just jumping on the bandwagon while it`s going down I`d rather see it come up a little bit before I make that move.

Now, there could be some great things that happen from this. You know, there could be some great opportunities. But before we make that move, we`re going to wait for it to come up. You know, areas like growth stocks could be a great place to go because they haven`t done as well in the last few years.

Looking at the U.S., we`re definitely favoring the U.S. over international. And even in international, there could be some great plays there, but more developed markets.

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