NIGHTLY BUSINESS REPORT for January 11, 2016, PBS - Part 1

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Olick, Meg Tirrell, Phil LeBeau, Sharon Epperson>

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

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: On edge. Stocks attempt to stabilize even as oil prices continue to plummet. And they may have even further to fall.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Another threat. Alcoa (NYSE:AA) kicks off earnings season, and this time around, investors could be in for a rare earnings recession.

MATHISEN: The upside of volatility. Why you may be one of the millions who could save money on your mortgage even now.

All that and more tonight on NIGHTLY BUSINESS REPORT for Monday, January 11th.

HERERA: Good evening, everyone. And welcome.

Stocks staged a late-day comeback in a volatile session, but the sell-off in oil prices deepened. Domestic crude hit a fresh 12-year low, flirting with $31 a barrel, falling more than 5 percent.

And today, Morgan Stanley (NYSE:MS) said oil prices could plunge even further to $20 a barrel if the dollar continues to strengthen. And that`s something Again Capital`s John Kilduff said was possible about a year ago on NIGHTLY BUSINESS REPORT.

(BEGIN VIDEO CLIP)

JOHN KILDUFF, AGAIN CAPITAL FOUNDING PARTNER: We`re in the beginning part of the price zone right now that hurts production in a big way and starts to reverberate through the economy, the manufacturing economy especially. It will be particularly painful if we do break the $40 level and then if we do break the $33 level, which is my low price target, and we go down into the 20s. Then, it`s going to be a real bleak situation.

(END VIDEO CLIP)

HERERA: And John Kilduff, founding partner with Again Capital, is back.

MATHISEN: He`s wearing his lucky shirt. Did you notice that? It`s the same shirt he had on.

HERRERA: He knew he was coming on.

KILDUFF: I take care of things, you know.

HERERA: You know, John, where do you stand now? I mean, you correctly forecast where oil was going to go. We`re at about $31 a barrel. Are we near the end of the cycle or not?

KILDUFF: Unfortunately, no. I think the low point now will be $18 a barrel.

HERERA: Wow.

KILDUFF: Because that`s what it`s going to take to get a response from the major oil producers that are part of this family of oil producers in the world. The Russians, the Saudis, Iraqis, Iranians, and even our U.S. shale folks are not doing anything to cut back production. What they`re doing right now is scrambling to stay alive and try to outlast the other person, if you will.

MATHISEN: I thought U.S. production was coming down. But I guess just not enough.

KILDUFF: Tyler, it came down from a high of 9.6 million barrels to 9.2 back in October. And even since then, there`s been a huge drop in the U.S. rig count, and we`ve plateaued. Not a barrel of oil has come off the market since then. Even this past is December, we thought we`d see several hundred thousand barrels.

MATHISEN: Why not? Why not?

KILDUFF: Well, most of the companies have done amazing jobs in terms of being able to stay alive at $50, at $40, and even now at $35. The Permian, the folks in Texas still produce profitably. And believe it or not, there`s been some offshore projects, long time in the making, have come on line to offset some of the cutbacks.

HERERA: But what are the implication for the U.S. economy? I mean, lower oil prices usually a boon to consumers, usually a shot in the arm to the economy. But at what point does it then become deflationary, and are we looking at that scenario ahead for oil?

KILDUFF: Well, I believe that`s still the case, that this is still overwhelmingly good for the U.S. economy and the U.S. consumer because this is 80 percent of our economy. No doubt that there`s discretionary spending dollars available for all the other things in life here. It`s bad for the U.S. oil exploration and production industry, obviously, and those great- paying jobs that go with that.

But I don`t and still don`t think that it`s a big enough problem to take down the economy. And deflation is really something that`s more of a problem for economists if you ask me than it is for the average consumer.

MATHISEN: Very quickly, when do we get close to that $18 a barrel bottom you that forecast?

KILDUFF: I think it will be more toward the late winter, early spring. U.S. refiners go into maintenance to get ready to make the gasoline that we need for the summer driving season. And that`s going to cause crude oil to back up again in inventories, and that`s going to cause prices to really collapse finally and shake them out and really take a two-by-four to the world`s producers and say, guys, we`ve got to do something here.

HERERA: All right, John. Good to see you as always.

KILDUFF: Same here.

HERERA: Thanks for joining us, John Kilduff.

KILDUFF: Thank you.

HERERA: All righty. On Wall Street, stocks may have finished higher for the day, but it was not easy getting there. The Dow started with a triple- digit gain despite another steep loss overnight over in China, on concerns over that country`s economic growth prospects. Then stocks followed oil`s lead and headed lower. But right before the close, there was some buying.

And on this volatile day, the Dow Jones Industrial Average managed to gain 52 points. It finished at 16,398. NASDAQ dropped five. That means it has fallen every session so far this year. And the S&P 500 added a single point.

Small caps finished lower. The Russell 2000, look at that, down four points. It is now in bear market territory, meaning the index has dropped 20 percent from its most recent intraday high.

HERERA: And now to earnings. Alcoa (NYSE:AA) unofficially kicked off the season with results after the closing bell. The company reported record global aluminum demand and better than expected earnings of 4 cents a share. Revenue came in just a hair light at $5.2 billion and were lower from a year ago. Investors liked what they saw because shares rose initially after the report.

And in an interview, CEO Klaus Kleinfeld said overall business is strong.

(BEGIN VIDEO CLIP)

KLAUS KLEINFELD, ALCOA CHAIRMAN AND CEO: If you look at the quarter it`s been really a solid quarter. We have substantially grown our aerospace business. Our customers have seen it and positively responded. And we`ve seen a string of large contract overall in the last quarter, $4 billion of aerospace contracts, on the whole year, $9 billion.

(END VIDEO CLIP)

HERERA: Mary Thompson has more now on Alcoa`s quarter.

(BEGIN VIDEOTAPE)

MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, after a difficult year marked by a steep decline in aluminum prices, CEO Klaus Kleinfeld sounding an optimistic note. He said that the price declines the company saw in 2015 are unlikely to happen again in 2016, and he is also encouraged by continued strong demand. In fact, Alcoa (NYSE:AA) is forecasting record demand for aluminum in 2016 and is expecting growth of 6 percent.

He is also very optimistic about a fast-growing area of his business, that being the aerospace business as well. As he pointed out, the company will try to control the things it can and will continue to cut costs and rein in production in order to maintain profitability, as it looks to separate into two separate companies later this year.

Back to you.

(END VIDEOTAPE)

MATHISEN: Mary Thompson reporting.

Alcoa`s results mean that earnings season is under way, and the overall results could confirm something that many investors fear, namely, that corporate profits are in a recession, about to decline for the second quarter in a row.

Dominic Chu tells us what to expect from those fourth quarter numbers.

(BEGIN VIDEOTAPE)

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Earnings season is kicking off, and some traders are worried about what could be an earnings recession. Now, in economic terms, a recession is defined as at least two straight quarters of negative activity, and we could be seeing that same thing happen for corporate profits.

According to data compiled by Thomson Reuters (NYSE:TRI) IBUS, earnings at S&P 500 companies for the fourth quarter of 2015 are expected to decline by 4.2 percent from the same time last year. Now, that would follow what was a decline of 0.8 percent in the third quarter. So, two straight quarters of earnings declines possibly.

ERIK RISTUBEN, RUSSELL INVESTMENTS CHIEF INVESTMENT STRATEGIST: I think clearly, the biggest drag on corporate earnings this season is going to be energy. That`s what it has been for all of 2015. I don`t think the fourth quarter will be any different.

CHU: The best expected earnings growth will come from the telecommunications, financial, and consumer discretionary sectors. Now, it`s no secret where a lot of the weakness in profits will come from. The same place it`s been coming from in recent memory.

Despite all the negative headlines surrounding oil and energy-related companies, some experts still think valuations are approaching relatively attractive levels.

ROB LUTTS, CABOT WEALTH MANAGEMENT PRESIDENT & CEO: I think we`re going to bottom on energy and oil in the first quarter of 2016, and I would expect that`s going to be behind us. So, probably the trough in earnings may be the first or second quarter and I think by the third or fourth quarter, we`ll start to see positive relative performance to last year in the earnings sector.

So I think really earnings in the energy sector could be a contributor for all of 2016.

CHU: The last time that the S&P 500 energy sector actually produced profit growth was the third quarter of 2014. And the forecasted declines in profits for the sector are so pronounced that if you hypothetically stripped away energy companies from the calculations, you`d actually get forecasted profit growth. Now, the question for investors is whether or not all of that pessimism has already been priced into stocks or is there more downside ahead.

For NIGHTLY BUSINESS REPORT, I`m Dominic Chu.

(END VIDEOTAPE)

MATHISEN: Jim Paulsen joins us now to talk more about the market and whether or not he thinks fourth quarter earnings will be the catalyst that sends stocks lower. He`s chief investment strategist with Wells Fargo (NYSE:WFC) Capital Management.

Jim, always great to have with us.

You know, typically stocks don`t go into a bear market in the United States unless the U.S. economy goes into a recession. But here we may have the prospect of what Dominic Chu describes as an earnings recession.

Do you think this bear market is either dead or dying? Excuse me, this bull market. Excuse me, this bull market.

JIM PAULSEN, WELLS FARGO CAPITAL MGMT CHIEF INVESTMENT STRATEGIST: Yes. My guess, Tyler, at this point is I think we`re going to avoid a full- fledged bear market where the overall stock market, S&P 500, falls 20 percent from its peak.

But I think we might get close. And I think we`re going to challenge those August lows yet, that 1867 level about on the S&P 500, and maybe actually fail that and get down around 1,800 before we find a low. But I think that the earnings recession which it looks likely we`re going to have, the second quarter in a row of declining profitability, is mainly related to the energy and materials sector -- a deep, deep recession in that area.

But there`s still a lot of other sectors that are growing earnings. And if we can arrest this drop in energy costs, then stop the burn rate of earnings loss from those two sectors. I think the rest of the sectors will overtake and will avoid a full-fledged economic or bull market ender, if you will.

HERERA: So if you have some cash sitting on the sidelines, Jim, you know, I`m reading from what you`re saying that the volatility is going to probably continue, but if you have cash sitting on the sidelines, would you deploy it here in the U.S.? Or do you find better value or better economic fundamentals or more accommodative central bankers elsewhere in the world?

PAULSEN: Yes, Sue, I think -- I think that we`re going to find a bottom in the stock market sometime in the first half of this year probably. But I think the leadership on the resumption of the bull market here might be away from the United States. Not that the U.S. won`t participate. But I really think we`re going to have a nice turn in both emerging and international developed markets abroad.

I just think they`ve underperformed for four years running, they`re under- owned in most portfolios, there are better relative values right now relative to the United States market. They have, as you mentioned, they have policies that are going to be supporting those markets where the Fed is turning more hostile toward ours.

They`re still in an early part of their recovery cycle where they have more upside leverage in earnings among their companies, I believe. And personally, I think maybe the dollar may surprise us yet in 2016 and weaken a little bit in the second half, which could help a lot if you have a little international exposure. So, yes, I`d be putting cash flows on weekdays to work overseas I think.

MATHISEN: Jim Paulsen, stay warm out there in Minneapolis.

Jim Paulsen with Wells Fargo (NYSE:WFC) Capital Management.

HERERA: And now to the Federal Reserve. Today, Atlanta Fed President Dennis Lockhart said there may not be enough data on inflation to support a second rate hike in January or March. The central bank`s 2 percent inflation goal will be a big part of the debate when the Fed next meets and when they should next raise rates, especially as oil prices continue to decline.

MATHISEN: And all of the anxiety in the stock market is trickling into the bond market, and that may be good for homeowners because of the pressure it is placing on mortgage rates. That means the refinancing wave may have crested, but even now for some homeowners, refinancing could still make sense.

Diana Olick runs the numbers.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: More than 5 million U.S. homeowners could be leaving cash on the table. That according to a new report from Reese, Inc. With rising home equity, more borrowers are now eligible to refinance. Nearly 2.4 million could save $200 or more per month, and almost 2 million more could save between $100 and $200 a month. Add it up and that`s $1.2 billion in monthly savings being left on the table.

If rates go up just half a percentage point from where they are now, 2 million borrowers fall out of the running. A full percentage point and it`s 3 million. The remaining pool of potential refi candidates would be the lowest number in recent history.

And that`s why borrowers may want to act now and not just to refinance but to take out a home equity line. Reese ran the numbers and found that the amount of home equity available to be tapped is now up to 4.2 trillion collectively. That`s up 600 billion over last year.

Obviously, lenders are more strict on these loans nowadays than they were during the last housing boom, when borrowers were using their homes like ATMs. But that doesn`t mean these loans have gone away. Borrowers today are starting to use them more and more but on the conservative side, to pay down other debt.

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

(END VIDEOTAPE)

HERERA: Still ahead, turbo-charged. What automakers are doing to keep consumers spending after a record year for auto sales.

(MUSIC)

HERERA: Arch Coal (NYSE:ACI) became the latest victim of falling commodity prices. The company, one of the nation`s coal producers, filed for Chapter 11 bankruptcy protection. The filing is part of a plan to cut $4.5 billion in debt from its balance sheet.

MATHISEN: A health care mega merger to tell you about. Shire (NASDAQ:SHPGY) has agreed to buy Baxalta for $32 billion. The deal combines the makers of treatments for rare diseases and ends a six-month pursuit that was held up because of tax issues.

Shares of both Baxalta and Shire (NASDAQ:SHPGY) fell in trading today. Shire (NASDAQ:SHPGY) dropping nearly 9 percent, and it comes on the same day as the biggest health care investing event of the year.

Meg Tirrell was there and spoke with some of the industry`s major players.

(BEGIN VIDEOTAPE)

MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT: It was a tough start to the JPMorgan (NYSE:JPM) conference this year as concerns in the industry over drug pricing really seem to weigh on stocks across the industry.

We caught up with Novartis CEO Joe Jimenez to talk about that issue here.

JOE JIMENEZ, NOVARTIS CEO: If you think about cancer pricing, you have to think about the value that we`re creating. Remember, this is a deadly disease. Innovation has to continue to be rewarded or we`re just not going to be able to see the kind of breakthroughs that we`ve seen in the last -- even just the last year.

TIRRELL: There was a lot of news coming out of the conference, including the announcement of the $32 billion acquisition of Baxalta by Shire (NASDAQ:SHPGY). That had been anticipated for some time. The news coming today. Both stocks declining in this sort of overall environment of negativity in the sector.

We also talked with Pfizer (NYSE:PFE) and Allergan (NYSE:AGN), that $160 billion deal, the biggest of last year. They said they are confident it will close in 2016 despite some uncertainty around it, some political pressures.

Now, upcoming this year, there are some interesting clinical readouts. Specifically, Eli Lilly (NYSE:LLY) has a much anticipated clinical trial reading out at the end of the year in Alzheimer`s disease.

We caught up with CEO John Lechleiter about that and what else is ahead for Lilly.

JOHN LECHLEITER, ELI LILLY AND CO. CEO: I think the fundamentals of our industry have never been stronger. I`m actually very optimistic about the year ahead, particularly given that Lilly is now out of its period of patent expirations, launching new products and getting back to growth.

TIRRELL: The conference continues for a few more days this week. Investors certainly hoping the mood picks up.

For NIGHTLY BUSINESS REPORT, I`m Meg Tirrell in San Francisco.

(END VIDEOTAPE)

HERERA: Macy`s (NYSE:M) comes under pressure from an activist investor. And that`s where we begin tonight`s "Market Focus".

Starboard Value wants Macy`s (NYSE:M) to better leverage its real estate portfolio to generate more value for shareholders. Starboard previously urged the company to spin off its real estate holdings, which Macy`s (NYSE:M) rejected. Shares of the retailer up over 8 percent to $38.82.

And also in the retail sector, Kohl`s (NYSE:KSS) is reportedly considering going private or even breaking up the company. This as its shares have dropped about 40 percent since last spring. The board is said to be mulling over numerous ideas, and discussions are ongoing. Shares of the department store chain up 4 1/2 percent to $50.06.

MATHISEN: Celgene (NASDAQ:CELG) cut its 2015 profit outlook, and it is also projecting that 2016 sales will miss analyst estimates and the biotech company also making changes at the top. Its current chief operating officer will become CEO effective in March. Shares of the company finished down nearly 5 1/2 percent to $103.03.

The for-profit educator Apollo Education Group exploring a possible sale to the private equity firm Apollo Global Management. The for-profit educator has struggled recently with enrollment amid various government investigations. Shares of the company down more than 3 percent to $6.38.

Online craft marketplace Etsy getting hit today as a lockup period for early investors expired. That means those investor shares can be sold and sell those shareholders did. The marketplace went public back in April at $30 a share and it`s seen its stock drop ever since. Today, shares of the company fell more than 11 percent. They finished at $7.43.

MATHISEN: Well, coming off a year with record auto sales in the U.S., automakers believe they are in the midst of what could be a long and very prosperous run. This week, they`re unveiling their newest models at the Detroit Auto Show.

And as Phil LeBeau reports, luxury, technology, and even a bit of controversy were all on full display.

(BEGIN VIDEOTAPE)

UNIDENTIFIED MALE: This is the future of the Chrysler brand.

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: It`s not often a minivan gets as much attention as Chrysler`s new Pacifica.

But there`s no single model dominating this year`s Detroit Auto Show. It`s a wide variety vying to turn heads. The Infiniti Q60, the redesigned Ford Fusion, and the new Mercedes E Class, all models giving automakers confidence in a red hot auto market.

DIETER ZETSCHE, DAIMLER AG CHAIRMAN: Based on all the great products we are launching, we feel very confident that we will enhance our inventory in this market.

LEBEAU: It`s not new cars but the potential fix of a half million diesel models with rigged emissions that was the main question facing VW`s new CEO, Matthias Mueller. Mueller says his company is sorry for the scandal but won`t say how or when those defective VW models will be repaired.

But aside from the future of VW, the other question at this auto show is whether the profits in the U.S. can continue to climb. With so many new models coming out and annual sales expected to grow only 1 percent to 2 percent, analysts worry automakers will boost incentives to win over business.

MARK WAKEFIELD, ALIX PARTNERS: The big concern is as they raise incentives or if they raise incentives, that the sales keep going but profits start to drop.

LEBEAU: Ford`s CEO hears the concern but says this market is not overheating.

MARK FIELDS, FORD MOTORS CEO: We still think the consumer`s pretty healthy. I mean, when you look at our business, our actual incentive levels are essentially flat with last year and our transaction prices are up. So, consumers are really seeing the value for our products.

LEBEAU: That`s the message for nearly every company here: the auto industry is rolling again. And we haven`t seen an optimism like there is at this show in 15 years, the last time auto sales were this strong.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Detroit.

(END VIDEOTAPE)

HERERA: And at that Detroit Auto Show, the Honda Civic was named the North American Car of the Year and Volvo`s XC-90 won the North American Truck of the Year Award.

MATHISEN: Coming up, playing Powerball. What you should do if you win. And important money moves to make if you don`t.

(MUSIC)

HERERA: And here`s a look at what to watch for tomorrow. CSX (NYSE:CSX) earnings are due amid the rout in the transportation sector. Global stock markets may react to Chinese trade data, which will be released overnight. And the president delivers his final State of the Union Address. And that is what to watch for for Tuesday.

MATHISEN: Democratic presidential candidate Hillary Clinton proposed a new tax on the richest Americans. She`s calling for a 4 percent surcharge on taxpayers who make more than $5 million annually. According to her campaign, it would raise over $150 billion over a decade and would affect about two out of every 10,000 taxpayers.

HERERA: Powerball has become the world`s largest jackpot, hitting a record $1.4 billion. The lump sum cash payout would be $868 million. The winner could also opt to receive the entire jackpot in annuities over 30 years. So what should you do if you win and perhaps more importantly what should you do if you don`t?

Sharon Epperson has some answers.

You know, everybody wants to win. It`s a huge pot. You may get that $868 million, but there`s a huge tax hit too.

SHARON EPPERSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: There`s a huge tax hit. You want to consider the fact that right off the top 25 percent tax withholding is going to take about 217 million of that.

And then you are going to be in the highest tax bracket. That may not be you right now but it will be if you win. That`s 39.6 percent. So you`re going to have to add that part on top of the 25 to get to that 39.6 percent. That`s $126 million, 127 million dollars. They`re going to take that.

Then, you`re going to have to think about state and local income tax. Unless you`re lucky enough to live in Florida, a no-tax state, you`re going to have to pay a considerable amount. In New York state considering the state tax, the local tax, all of that, about 15 percent. Take that off, $130 million.

So, you`re stuck with less than $400 million after all is said and done.

MATHISEN: You`re stuck with -- oh, I feel awful.

If I take an annuity payout, I don`t know obviously all those up front taxes. I pay on the amount I take in a year. What happens if I die after two years?

EPPERSON: Well, if you die it does become part of your estate.

MATHISEN: The remainder.

EPPERSON: So, the remainder becomes part of your estate.

MATHISEN: Let me ask you, what should I do before I claim the prize other than change my phone number?

EPPERSON: You definitely want to try to protect your identity. That`s for sure. But you want to protect that ticket first. So, make sure that you sign it, make copies of it, put the original in a safe deposit box if you can. You want to really protect that ticket.

Staying anonymous is difficult because many states, if they`re asked, they`re going to tell who the winner is. So, you may want to move somewhere someone may not know, a neighbor or a friend so you can stay anonymous and stay under the radar and avoid the media crush initially.

But the most important thing you want to do before you claim that -- your winnings is to build a financial team. And so, that`s a financial adviser, a money manager, an accountant and a lawyer -- someone who`s going to really help you set up a good plan.

HERERA: Right. Now, say, you do claim the prize. You get the check. Do you just put it in a bank? What do you do? Give it to a brokerage firm? Give it to a financial team? What do you do?

EPPERSON: Well, you need to set up a plan to figure out what you want to do that money. Definitely consult with a team. But initially, just take a breath for a second and actually put that in an interest-bearing account until you figure out what you`re going to do with it. You have to figure out if you want the lump sum or annuity first and then work with the advisers to figure out what debts you need to pay, how to invest it, how to spend it.

HERERA: What if I don`t win?

EPPERSON: Of course, it`s not going to happen to you, 292 million chance of winning. But what you need to think about is a lot of people play all the time because this is going to help them save for retirement. This is going to help them buy that house.

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