NIGHTLY BUSINESS REPORT for January 15, 2016, PBS - Part 1

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

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Selling engulfs the street. The major averages fall sharply and one prominent money manager says stocks will slide even more.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: What`s next? With oil dropping and economic data disappointing, how nervous should individual investors be?

MATHISEN: Where to hide. Some surprising places to find safety in a treacherous market.

All that and more tonight on NIGHTLY BUSINESS REPORT for Friday, January 15th.

HERERA: Good evening, everyone, and welcome.

The dark clouds over Wall Street turned ominous. A wave of selling sent the Dow cratering 500 points this afternoon, and fear and anxiety over the economy and oil prices gripped the market. All of the major averages plummeting 2 percent or more.

The Dow Jones Industrial Average finished the day lower by 390 points to 15,988. It had been down as much as 530 points at midday. The NASDAQ tumbling 126, the S&P 500 lost 41. For the week, the indexes saw declines of at least 2 percent. And just two weeks into the New Year the numbers are ugly, with losses of 8 percent or more.

As for oil, which has been at the center of the sell-off, prices centered below $30 a barrel for the first time since 2003.

Dominic Chu has more on this nervous market.

(BEGIN VIDEOTAPE)

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Stocks capped off what was three straight weeks of losses now with today`s price action, and it now puts firmly the Dow, the S&P, the NASDAQ into that correction territory that is at least a 10 percent move lower from their most recent highs. A lot of bank and related earnings came out this morning.

What`s interesting about today`s trade is the energy side of things. Financials actually performed worse than energy. Remember, energy and oil stocks have been a huge focus over the past few months given the sharp declines in oil. So, a rocky week overall that could get more volatile next week.

First of all, you`ve got a big economic calendar coming out. You`ve got big reports coming out from the likes of the Chicago purchasing managers index, also existing home sales, new housing starts. That sort of thing could help propel the market one way or the other.

Remember, inflation data, the consumer price index also out next week as well. And then you`ve got a lot of earnings reports, a very heavy week for earnings. You`ve got Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC), Morgan Stanley (NYSE:MS) all reporting their results. And then Netflix (NASDAQ:NFLX), one of the top reporting stocks of last year, also coming out with earnings again next week.

So, again, as you take a look at the rocky week that was, wait and see what happens. We could have a lot of catalysts on the docket next week.

For NIGHTLY BUSINESS REPORT, I`m Dominic Chu here at the New York Stock Exchange.

(END VIDEOTAPE)

MATHISEN: Many investment professionals say there is even more selling likely to come. Larry Fink, the head of Blackrock, that`s the world`s largest asset manager, says stocks could fall another 10 percent from today`s levels.

And that`s not the only thing he sees.

(BEGIN VIDEO CLIP)

LAURENCE FINK, BLACKROCK CHAIRMAN AND CEO: Having a market decline like this in the first couple weeks of the year really puts -- in my mind puts a negativity across the economy, a negativity to every CEO looking at his or her stock price, and negativity related to business and the forward thinking about businesses.

I actually believe you`re going to start seeing more layoffs in the middle part of the first quarter, definitely the second quarter because, if we don`t see some swift rebound -- and as I said, I think we`re going to have probably more pain before we have that lift. But I do believe by the second half of the year, the market`s going to be higher.

(END VIDEO CLIP)

MATHISEN: Mr. Fink also said oil prices could test $25 a barrel.

HERERA: So let`s turn now to Mohamed El-Erian to talk more about what`s happening in the markets and the global economy. He`s chief economic adviser with Allianz.

Good to see you, Mohamed. Welcome back to the program.

MOHAMED EL-ERIAN, ALLIANZ CHIEF ECONOMIC ADVISER: Thanks for having me on.

HERERA: Could you put in perspective what happened today and what it means for the individual investors?

EL-ERIAN: So, think of a car going down a road and the driver had assumed the road would be very smooth. And suddenly, there are many, many bumps because the road is no longer being resurfaced.

And that`s what`s happening. Markets have been ignoring lots of economic, political and geopolitical issues on the assumption that the Fed would always have our back covered. Now, that assumption is being tested, and the result is higher volatility. The higher the volatility goes, the more selling you get. So, we`ve entered a new regime if you like of a lot more volatility up and down and a buy sort of downside.

MATHISEN: A lot of the focus this week, so far this year, Mohamed, as you know, has been on China and the possibility of a real sort of financial meltdown in that country. How do you handicap that probability and what would it mean if there is a full-fledged financial crisis that emanates from that country?

EL-ERIAN: So, China faces the same issue we faced 10 years ago. They pursued a social objective, that of spreading ownership of stocks across society so that people would have a stake in the drive to a market economy, and like us with housing, they went too far.

So, China`s going to go through a correction, a financial correction, but it`s not going to be as painful on the economic front as ours did with housing. Why? Because they still have quite a few policy levers.

So, expect the financial situation in China to continue to be worrisome. But I`m not a buyer of a hard landing of the economy. I think that will soft-land their economy at about 5 percent growth.

HERERA: What about our economy? There was some talk today out there about slipping back into recession, and there was a lot of talk that the Fed might not be able to move on interest rates. How do you feel about those two issues?

EL-ERIAN: I was asked by you, in fact, a few months ago, what was the probability of a recession in 2017? And I said 30 percent. Which means 70 percent we can avoid it, because this economy is still quite resilient.

We`re still creating a ton of jobs. We`ve created almost 6 million jobs in the last two months -- in the last two years alone. We have a lot of cash on the sideline waiting to be engaged productively, and we have lots of exciting stuff happening on the technology front. So, the probability of a recession is there, but it`s not the dominant one.

For the Fed, I don`t think they`re going to hike four times, which is what they were telling us they were going to do. Maybe we`ll get a couple of hikes. But don`t expect the Fed to change course. Don`t expect them to go to a QE5. I think the Fed is going to try and get away with one or two more hikes because it`s looking to normalize its policy.

HERERA: Mohamed, we`ll leave it there. Thank you so much. Mohamed El- Erian with Allianz.

EL-ERIAN: Thank you.

And we should mention Mohamed has a book coming out a little bit later this month called "The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse."

MATHISEN: Sounds like a good idea.

HERERA: Mm-hmm.

MATHISEN: So how concerned should investors be when they see such steep declines? We have two Wall Street veterans here.

Kenny Polcari -- don`t you love when you get called a veteran. That says you`re an old guy. He works on the floor of the New York Stock Exchange. He`s director of O`Neil Securities.

And Michael Farr, president of his own money management firm, Farr, Miller and Washington.

Gentlemen, good to see you.

Kenny, let me ask you what it was like today from the starting gate through the end of the close.

KENNETH POLCARI, O`NEIL SECURITIES DIRECTOR: Right. It was nervous clearly from this morning, right? You could tell by the way the futures were acting, what was happening in Europe, what had happened in China, and you could feel the heaviness right away.

Although I have to tell you, like the last couple days, it wasn`t this panicky heaviness, and I think that`s very -- that needs to be said, right? Investors need to understand, this wasn`t like throw the kitchen sink out, capitulation, I`ve had it kind of a day, right? It was heavy --

MATHISEN: So, it doesn`t feel like a bottom to you then?

POLCARI: It doesn`t yet feel like a bottom to me. I agree with Larry, I`m not sure we`re going down 10 percent but I think we would test the 2013 lows, which would be -- 2013 highs, which would be like 1,820. So, down another 50 points on the S&P, it would be another 3 percent or so.

HERERA: But, Michael, if you`re a long-term individual investor, you know, it certainly is disturbing to see days like this, but what should you do and what are you telling your clients to do?

MICHAEL FARR, FARR, MILLER & WASHINGTON PRESIDENT: Well, days like this are never pleasant, and it certainly wasn`t pleasant watching the markets go lower. It hasn`t been so far in 2016.

But when you think that seven years ago, the Dow was trading just below 7,000, we had an 11,000-point rally. We`ve given up a couple of thousand points -- unpleasant but shouldn`t be all that unexpected.

So, it`s not a time for panic certainly. This is a time when you look at what you own and make sure you`re comfortable with it and you think about your investment discipline.

You don`t want to be Pollyannaish. You don`t want to be panicky. I think prudence is -- I came up with three Ps. Come up with prudence as an approach and really think about what`s in your portfolio and if you have years to invest, which you likely should if you have money tied up in the long-term investments, you should be fine.

So, stick to your knitting and think, Warren Buffett`s not panicking. Warren Buffett`s thinking about what he`s going it buy. He`s not thinking about what he`s going to sell.

MATHISEN: You know, watching the market from poolside in Naples, Florida, is a lot nicer, isn`t it, than watching the market from the pits down there?

As we go into a long weekend, Kenny, I`m not going to ask you what you think is going to happen on Monday, but it is a time that people typically don`t want to go in long on a holiday weekend.

POLCARI: Which is exactly why even more so as the day kind of wore on you felt that heaviness. Why would you want to go in? Why would you step in front of this train at the moment knowing that Monday we`re closed, the rest of the world is open, a lot it happen in China, a lot can happen in Europe, and so therefore, it will just create some anxiety, right? As it is, I think next week as Dominic pointed out there`s a lot of macro data on the calendar, a lot of earnings on the calendar, a lot of reasons why you might get some more volatility.

HERERA: Right. Now, Michael, if indeed we see a sell-off in other parts of the globe on Monday, we`re not trading here Monday, but the rest of the world will be reacting to what happens today. Would you step in? Would you buy some of your longer-term holdings, add to those positions?

FARR: I would. I did that -- I did that in some accounts today where we had some cash. We have some triggers in other accounts where we have large cash positions that actually if the market does fall further we will put money in and begin to step in.

I think it`s really important to remember that this -- and I`d like to know what Kenny thinks too because this doesn`t feel like a bubble bursting to me. It doesn`t have those touchstones.

There`s a lot of liquidity in the market as Mohamed El-Erian said. The banking system, this is not 2008. Banking system is sound, well-reserved, liquid, passing stress tests.

So, our markets are adjusting to a lot. They`re adjusting to a world without the fed. We`re adjusting to a slower-growing China. We`re adjusting to a world awash in oil.

And any one of those three things would be a big deal for the market. We`re taking all three of them on at once. But this doesn`t feel like a bubble burst to me.

MATHISEN: Final quick thought, Kenny.

POLCARI: It doesn`t. But, you know, Michael, to your point, net-net on today, I was a buyer on balance for my customers. And my customers are not retail. I`m not a retail broker, right? I`m not managing money. My customers are asset managers.

But net-net, I was a buyer on balance. Not an aggressive one. I was a patient buyer. If prices came, I was happy to buy them as the customers were happy to buy them.

MATHISEN: We have to leave it there. Gentlemen, thank you very much. Kenny --

FARR: That`s what we`re doing.

MATHISEN: -- and Michael, appreciate it.

POLCARI: Thanks.

HERERA: Meantime, in a phone interview today, respected investor Leon Cooperman of Omega advisers told investors to hang tough and that this rout doesn`t have the signs of a classic bear market.

(BEGIN AUDIO CLIP)

LEON COOPERMAN, OMEGA ADVISORS CEO: I guess what I`d say is I`m not selling, I`m holding on because I do believe it`s a growth scare rather than a bear market. You look at retail sales and overall economic activity, I think it`s a soft patch rather than a recession.

(END AUDIO CLIP)

MATHISEN: But talk of recession is picking up steam after a batch of economic data were released today. Steve Liesman here to help us make sense of it all.

Steve, how lousy was the data?

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: It wasn`t recession- type data, Tyler. Here`s the story I think coming in this morning with all the data on the table. There was a sense, a hope out there among some bulls. Data could at least help maybe stymie the sell-off a little bit if the consumer, for example, in December came a bit stronger than expected. In fact, it came in a little bit weaker than expected. What happened is you had retail sales falling 0.1 percent.

MATHISEN: Is that mostly gasoline?

LIESMAN: A lot of it`s gasoline and even more of it is prices. By the time the government inflation adjusts its data it`s probably going to show consumer growth. The real story is the consumer has come down from being very strong, at 3 percent, to more like 2 percent. And the trouble is it offsets some other weaknesses in the economy.

HERERA: So, how real -- you know, we heard this recession talk from professional traders and the like out there. How real is the risk of recession? Do you have a gauge? I know you talked --

LIESMAN: We do. We did a survey today and we asked about 30 market participants out there, some of them economists. What the probability of recession was in the next 12 months. You can see it`s up. It`s about 28 percent.

Now, before people panic, understand that in general, there`s a 1 in 5 chance of recession in a given year. So, you`re 8 percentage points higher than that, which is -- which is higher. And we`ve had in our survey in the past, higher numbers and they have not resulted in recession. It`s higher.

You know, Mohamed El-Erian just told you 30 percent.

HERERA: That`s right.

LIESMAN: So, it`s around that area in the next 12 months. It`s not off the charts.

In general, the economists think this sell-off is disconnected from the economic fundamentals. Unless you draw this line from less Federal Reserve liquidity directly to this market sell-off, if there is not money to keep it up and that that results in weaker economic data.

MATHISEN: Mohamed El-Erian said the Fed doesn`t seem to have the market`s back the way it did. What does this sell-off imply or the economic wobbles around the globe imply for Fed policy?

LIESMAN: You know, I think it`s very interesting. New York Fed President Bill Dudley spoke today. He did not make comments about the market. He did not suggest that this market volatility had made him change his forecast for Federal Reserve rate hikes.

I think Mohamed may be exactly right that there`s a new dawn here, a new era where the Fed is disconnecting itself a bit from the markets and saying you know what, we have a mission to do, which is to normalize rates. And that is perhaps somewhat disconnected from where the market`s going to go here. Although not disconnected from the economy.

If we get really bad economic data, the Fed will either not raise or reverse course but not from the market.

MATHISEN: Steve, thanks very much. Thanks for staying around tonight.

And still ahead, the rare move Walmart is making to take on the competition. But first, a look at the 30 Dow components and how they did today. You can see a lot of red.

(MUSIC)

HERERA: Walmart is closing hundreds of stores. The world`s largest retailer and largest private employer has decided to shut hundreds of locations as it tries to compete in an ever challenging retail environment.

(BEGIN VIDEOTAPE)

HERERA: `Tis the season for store closures. Walmart joins Kmart, Finish Line, Macy`s, and others, announcing it will close 269 stores globally, 154 in the U.S., the highest number of closures ever for the retailer.

In October, Walmart outlined ways that it planned to make changes to be a better retailer in the long run. The U.S. store closures are a mix of the retailer`s store types from super centers to Sam`s Clubs, including all of its small express stores, just five years after piloting that concept.

The rest of the closures are in Latin America. More than half in Brazil, a country that`s proven challenging for the retailer.

Deutsche Bank analyst Paul Trussell says closing stores is a good move in the long term because it will improve profitability and comparable sales. But he does believe it will be more difficult for Walmart to grow sales at the rate it forecast in October. The store closures will impact 16,000 workers in total, 10,000 in the U.S. employees will be given opportunities at nearby stores or receive 60 days of pay.

Walmart also says it`s committed to disciplined growth. And beginning February 1st, it will open several hundred stores in the U.S. and abroad but will be careful about where.

(END VIDEOTAPE)

HERERA: In trading today, shares of Walmart fell more than 1 1/2 percent.

MATHISEN: Citigroup (NYSE:C) topped earnings and revenue expectations, and that is where we begin tonight`s "Market Focus".

Despite the beat, though, shares of the bank did fall sharply. Many analysts say the firm`s revenue gains came from a handful of one-time items and called the results soft. Shares off more than 6 percent on this down day to $42.47.

Wells Fargo (NYSE:WFC), meantime, reported a dip in quarterly profit. The biggest residential mortgage lender in the U.S. is also a major creditor to the energy industry. And this report today showed that the banks set aside more money to cover bad oil loans. Shares fell more than 3 1/2 percent to $48.82.

General Electric (NYSE:GE) is going to sell its appliance business to a Chinese firm, the Haier Group, for about $5.5 billion. The agreement comes weeks after a deal to sell the business to Electrolux fell apart. Shares of G.E. dropped nearly 2 percent to $28.49.

HERERA: Merck (NYSE:MRK) will pay $830 million to settle a lawsuit about his former blockbuster painkiller Vioxx. The class action accused Merck (NYSE:MRK) of making false and misleading statement about the safety of the drugs. Vioxx was pulled from the shelves in 2004 after studies showed the drug increased the chance of heart attacks and strokes. Shares of Merck (NYSE:MRK) were off more than a percent today to $51.14.

The first case of bird flu since June has been reported and it`s a different strain from the one that caused a big outbreak last year. The Department of Agriculture says a commercial turkey flock in Indiana has been infected.

As a result shares of the poultry producers were lower. Sanderson Farms (NASDAQ:SAFM) was one of the hardest hit, down nearly 8 percent to $74.66. Pilgrims Pride lost 5 percent. Tyson Foods (NYSE:TSN) off about 1 1/2 percent. But the egg producer Cal-Maine Foods (NASDAQ:CALM) was up 5 percent on the notion that egg prices could rise if there`s a new outbreak, and that company has no exposure in the Midwest.

MATHISEN: Growth stocks are having a particularly tough time in this market. Many were called the darlings of 2015. But it is a different story this year, with some of those stocks taking a turn for the worse.

Julia Boorstin reports on the quite steep declines in some widely owned growth stocks.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), and Google (NASDAQ:GOOG), now called Alphabet, helped drive markets higher last year. Now, they`re underperforming the major indices. So far in 2016, Amazon (NASDAQ:AMZN) shares are down about 16 percent. With Netflix (NASDAQ:NFLX), Facebook (NASDAQ:FB) and Alphabet all down nearly 10 percent, all four underperforming the major indices.

MARK MAHANEY, RBC CAPITAL MARKETS: The setup to all of this was the dramatic outperformance in these four stocks, Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), and Google (NASDAQ:GOOG) last year. Why did that happen? In part because those four stocks underperformed in 2014. So there`s almost like a cycle to them.

BOORSTIN: Last year, Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) were the two best-performing stocks in the S&P 500. The only two stocks in the index to more than double. Netflix (NASDAQ:NFLX) gained 134 percent. Amazon (NASDAQ:AMZN) 118 percent last year.

And Mahaney says there`s still a bull case for these stocks.

MAHANEY: If the market 10e8d off on China, oil, and terrorism -- I mean, none of those three are really material issues. Long-term sustainable material issues for these particular -- for the FANG names.

BOORSTIN: Mahaney warns these fang stocks tend to be volatile but he still has a buy rating on all four companies as we head into earnings, starting with Netflix (NASDAQ:NFLX) reporting after the bell Tuesday.

For NIGHTLY BUSINESS REPORT, I`m Julia Boorstin in Los Angeles.

(END VIDEOTAPE)

HERERA: So if even the hot stocks of last year are hurting, where can you hide your money in this market? We`ll have that plus our market monitor next.

But first, here`s a look at all 500 members of the S&P. Most were lower today.

(MUSIC)

HERERA: In this type of market, many investors want to get defensive to protect their money. So where can you hide?

Well, Mike Santoli has some ideas.

(BEGIN VIDEOTAPE)

MIKE SANTOLI, NIGHTLY BUSINESS REPORT CORRESPONDENT: The violent market sell-off f has sent investors grasping for the typical safe havens of treasury bonds, cash, and gold. If there are other investments that can provide some shelter of stocks remain under pressure while still offering an attractive return in the event the market recovers. High-grade corporate bonds have come down modestly in price and are relatively secure. The iShares iBoxx investment grade corporate bond exchange traded funds now yield about 3.5 percent for example.

Some strategists and investment advisers also recommend seek out closed end bond funds which often trade at steep discounts to the value of their portfolios. Individuals are now also able to invest in big corporate loans, which are paid back before a company`s bonds if trouble strikes. The power shares senior loan portfolio ETF yields more than 4 percent.

Now, for those wishing to participate in a potential stock market rebound while taking a bit less risk, shares of the most financially solid blue chips have become a good deal cheaper. One fund that holds only high quality companies based on several financial criteria is iShares USA quality factor ETF.

Finally, a couple of dozen stocks have higher dividend yields than their bonds issued by the same company. Among the big companies in this category are Cisco (NASDAQ:CSCO) Systems, Walmart, Procter & Gamble (NYSE:PG), and Emerson Electric (NYSE:EMR). While no guarantee of safety, those dividends should provide at least some protection against further market storms.

For NIGHTLY BUSINESS REPORT, this is Mike Santoli at the New York Stock Exchange.

(END VIDEOTAPE)

MATHISEN: Our market monitor on this wild Friday is Mark Spellman, portfolio manager at the Alpine Funds. He says to shore up your defense, look for those reliable dividend payers.

Last time he was here in August of 2015, for the last sharp sell-off, he picked Discover Financial, off 11 percent. CBS (NYSE:CBS), down 8 percent since then. And oops, Kinder Morgan, the pipeline company, off 61 percent.

I guess we can forgive you there. I`m not sure that many people saw the magnitude of the decline in the energy sector and in that one in particular. I believe they cut their dividend too.

MARK SPELLMAN, ALPINE FUNDS PORTFOLIO MANAGER: Yes. We did exit that position in early December. They raised some money. We thought that was going to go toward funding their expansion plans in 2016 and for shoring up the dividend.

Unfortunately, they decided to make an acquisition, put more debt on the balance sheet. We exited that position. Subsequent to that, they cut the dividend by 75 percent. And the shares have decreased another 40 percent.

So, it`s not one of our shining moments, Tyler, but in retrospect it was certainly the right thing to do for our shareholders.

HERERA: I think there were a lot of companies in that trade, Mark.

Let`s talk about some of the stocks you that want to highlight tonight.

SPELLMAN: Sure.

HERERA: AT&T (NYSE:T). It`s a defensive play. It also has a dividend.

SPELLMAN: Yes. Big boring AT&T (NYSE:T). I think the time has come. It`s a slow growth story. They`re coming off an acquisition binge last year, DirecTV, some wireless properties in Mexico.

2016 is going to be concentrating on the synergies, increasing revenue, and all three of those kind of acquisitions. Five-point-six percent dividend yield is more than 2 1/2 times the treasury, the ten-year treasury. We think it`s an extremely attractive yield. We think it`s a safe yield. And we like the stock right here.

MATHISEN: Second choice is CVS (NYSE:CVS) Health -- obviously, exposed to retail and also the medical payments business.

SPELLMAN: Yes. Not the typical coats and shoes kind of retail for sure.

MATHISEN: Right.

SPELLMAN: The health care system has usually been immune to massive down drafts. We like the fact that this company should grow at least 10 percent.

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