NIGHTLY BUSINESS REPORT for January 20, 2016, PBS - Part 1

BUSINESS-REPO-01

REPO-01

LeBeau, Diana Olick, Morgan Brennan, Kayla Tausche, John Harwood, Kate

Rogers (NYSE:ROG)>

Housing; Real Estate; Elderly; Lifestyle>

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

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: A bottom or a bounce? Stocks skydive only to trim their losses. Is there a sense now on Wall Street that the worst of this selling spree is over?

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Threat to sales? Autos and housing are coming off strong years. But will Americans keep buying if their portfolios are shriveling?

MATHISEN: And tough choices. If you are close to retirement, what decisions do you need to make now with the markets flying?

All that and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, January 20th.

HERERA: Good evening, everyone, and welcome.

A wild Wednesday on Wall Street ends with the Dow only losing 249 points, only. It was that kind of a day.

Stocks started lower, then plummeted hard midday, falling more than 560 points. And just when it looked really scary, the indexes started rising, cutting their losses almost in half. The Dow traveling about 1,100 points total for the day.

And by the close, the Dow Jones Industrial Average lost 249 points to 15,766. The NASDAQ fell five points. The S&P 500 lost 22.

As for crude, which, of course, is at the center of the sell-off, prices settled down nearly 7 percent to the lowest level since May of 2003.

Bob Pisani tells us whether today`s market move is a sign the worst of the selling is over.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Is this capitulation? Well, do you believe we`re in a bear market or not?

One thing`s for sure, for a brief moment in the middle of the day, we saw some very strange numbers -- I mean really strange. Almost 40 percent of the stocks at the New York Stock Exchange were at 52-week lows. There were 30 stocks down for every one that was up. That is a weird number. And volume was twice as heavy as usual.

Now, all this suggests panic, and it`s usually associated with at least a short-term market bottom, and that`s exactly what happened. Stocks rallied in the middle of the day, and they rallied hard. The Dow Transports rallied almost 300 points from the top to the bottom! That`s about 5 percent. And traders cheered when the index went positive.

Here`s the problem -- this only suggests that the selling has halted for the moment. In bear markets, you always get rallies. Some of them last for a day, some of them last for a few days, but then the markets just drooped again.

So, you have to believe one of two things. First, if you believe this is just a garden-variety sell-off -- and so far, the S&P is only down 13 percent from its highs last year, that`s a garden-variety sell-off -- then there`s a good chance we`re near the bottom.

But if you think we are headed for a steeper drop many feel we could drop another 10 percent or more -- then today`s action ends the likely modest bounce we will get tomorrow just a brief respite. So, ladies and gentlemen, place your bets.

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

(END VIDEOTAPE)

MATHISEN: Meantime, a dark cloud of investor anxiety hangs over the World Economic Forum in Davos, Switzerland. That`s the annual meeting of business and political leaders, and it comes at a time this year when trillions of dollars have been wiped from stock market values worldwide.

Andrew Ross Sorkin is there, and he spoke with some very powerful names in investing about the state of the global economy.

(BEGIN VIDEOTAPE)

ANDREW ROSS SORKIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: We`re here in Davos, Switzerland, at the World Economic Forum, where we had a chance to catch up with the biggest leaders in the world of finance amid all of these market gyrations, trying to understand what`s happening in the real economy, where it is today and where it`s all headed.

RAY DALIO, BRIDGEWATER PRESIDENT & CIO: I think the risks are asymmetric on the downside. That`s why I said before that I think the next major move in Fed policy will be toward a quantitative easing, not toward a tightening.

BRIAN MOYNIHAN, BANK OF AMERICA CEO: The consumer confidence, unemployment is down, wages are growing, not as fast as people would like, but they`re growing. And so, we see that. That`s the tug-of-war. That versus these other external impacts are going to be interesting as we close out the quarter.

GLENN HUTCHINS, NORTH ISLAND CHAIRMAN: We had 200,000-plus jobs created every month over the last year. American companies, while experiencing some issues on the edge still continued on that pace of job growth.

STEVE SCHWARZMAN, BLACKSTONE CEO: China is actually slowing, but it`s not collapsing. And I think there is a reaction to what`s going on there.

SERGIO ERMOTTI, UBS CEO: We have to put China in context of what they did in the last 20 years and what they can do in the next 10, 15 years. That`s the reason why we are bullish on China.

DALIO: We are now in a situation globally where China plays an important role on the rest of the world, and the rest of the world plays a role on China, and that is negative.

JAMIE DIMON, JPMORGAN CHASE CEO: We`re having slow growth. I wish it was more. China, I think they have the growth at 5 percent or 6 percent. Europe`s going to grow a little bit. So, yes, it`s going to be worse than we thought, but it`s possible, I`m hopeful that this is all just a big adjustment and in a couple of weeks, we`ll all take a deep breath and say thank God that`s over.

SORKIN: For NIGHTLY BUSINESS REPORT in Davos, Switzerland, I`m Andrew Ross Sorkin.

(END VIDEOTAPE)

HERERA: Here in the U.S., consumer prices fell in December and posted the smallest annual increase in seven years. Part of the reason is that big drop in energy prices.

The consumer price index declined 0.1 percent last month. According to the Labor Department, core inflation, which excludes energy costs and food costs rose 0.1 percent, the smallest monthly gain since August.

MATHISEN: Homebuilding fell unexpectedly in December with declines in both single and multifamily construction. Housing starts dropped 2.5 percent from the prior month. The Commerce Department also said permits, a sign of future building activity, were weak, suggesting the housing market lost momentum at the end of last year.

HERERA: That weak data is diminishing expectations that the Federal Reserve will raise interest rates when it meets in March. In fact, some are saying the Central Bank may only raise rates once this year, one and done, compared to just a few weeks ago when four rate hikes were expected, and many will be paying very close attention to the Fed`s next meeting, which is next week, and comments from Chair Janet Yellen to potentially calm the markets.

Danielle DiMartino Booth is head of economic consulting firm Money Strong, and a former adviser to the Dallas Federal Reserve.

Welcome. Nice to have you here.

DANIELLE DIMARTINO BOOTH, MONEY STRONG PRESIDENT: Thanks for having me, Sue.

HERERA: So, at this point, given what you`ve seen in the markets and also, some weak economic data, lack of inflation, where does this put the Fed?

DIMARTINO BOOTH: Well, it`s interesting. Standard & Poor`s` Howard Silverblatt put out interesting numbers at the end of the trading day that show that outside of the eruptions we saw in 2009 that we`re living through a period of unprecedented volatility in the stock market. So, it`s not just the up days, the down days, it`s the level of volatility that I think is really going to capture policymakers` attention in the same fashion it did at the end of August.

MATHISEN: You know, Danielle, you`ve worked with and advised the Dallas Fed, and so, you know the kinds of conversations that take place within the Federal Reserve. Take me inside there. How much do the Fed governors, do the Fed Bank presidents, how much do they take into account as they get ready to go and talk about interest rates what`s going on in the broader world of the markets?

DIMARTINO BOOTH: Well, you know, I think that this is kind of an era of learning inside the Federal Reserve, if you will, because it used to be that the rest of the world followed the United States. And what we`ve discovered since China preemptively devalued the yuan back in August is that other areas of the global economy now have a pull on our own economy, and we`re really not used to seeing that.

And I can tell you, policymakers, for them at least, this is a new era of making policy. You know, it`s at their peril, I think, that they discard what`s going on in other areas of the world.

HERERA: So, if you were a betting person, do they raise rates in March, all things being equal and the market`s volatility, which is expected to continue?

DIMARTINO BOOTH: You know, I listen to the technical analysts and what Bob Pisani was just saying right now, and we certainly could see a roaring comeback in the markets in the weeks that come, but judging from what my good friend, Art Cashin, had to say about the quality of jobs produced in the month of December, I venture to say that policymakers are going to be paying very close attention to whether or not the market rebounds and the economic data come in better than expected in the months to come. And the international situation calms down.

So, there are a lot of factors going into whether or not they`ll pull the trigger --

HERERA: Right.

DIMARTINO BOOTH: -- in march. And I would say right now the chances are very much against that happening.

HERERA: Danielle, nice to have you on the program. Thanks for joining us.

DIMARTINO BOOTH: Thank you for having me.

HERERA: Danielle DiMartino Booth.

MATHISEN: All right. Growing fears the economy is slowing has many re-evaluating now the outlook for almost every sector, including those that have been doing pretty well. Two prime examples, autos and housing, despite today`s weak numbers on housing.

But after a record year for vehicle sales and rising home prices, is the market sell-off a threat to these two industries?

Diana Olick takes a look at housing, but first, Phil LeBeau on autos.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: It`s the tale of two worlds. Stock markets around the globe are hitting the brakes. But in the auto industry, business is still accelerating. In fact, global sales this year are expected to hit another all-time high -- thanks to increases in China, Europe and the U.S.

Today, President Obama celebrated the resurgence of America`s auto industry while touring the Detroit Auto Show.

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: Because today, factories are humming, business is booming, the American auto industry is all the way back!

LEBEAU: So far, buyers have shrugged off talks of the economy slowing down. Auto sales historically move in tandem with consumer confidence, which remains high. Housing starts are increasing, which is expected to help demand for pick-ups.

And auto loan interest rates remain relatively low. All of this convinces leaders in the auto industry that business should stay strong, even as they see weakness in stock markets around the world.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Call it the up side to the sharp downturn in stocks. Mortgage rates are heading back toward record lows again, and that just means more buying power for house- hunters pounding the pavement today. The average rate on the popular 30- year fixed is down below 4 percent, the lowest of this year and much of last year.

But there are bigger factors at play in housing today, namely, supply, or lack of it. Home sales have been weakening because there are so few listings, and what is out there is either overpriced or has been sitting on the market for a reason.

Today`s read on December housing starts down over 3 percent from November, was particularly disappointing, given December was one of the warmest on record. Sure, consumer confidence is a factor. A home is the biggest purchase most consumers will ever make, and if they get nervous about the economy and their job, they might pull back.

ATUL LELE, DELTEC INTERNATIONAL GROUP: The areas of the U.S. economy, such as the U.S. consumer, are in the best shape they`ve been in in ten years. The U.S. housing market, which has not only the benefits of strong real income growth at the consumer level, but you`ve also got 30- year mortgage rates at 3.74 percent still, and you`ve got huge demographic tailwinds behind you as well. So, there`s a few areas there in the U.S. economy that just aren`t impacted at all by emerging markets, and that`s where we see the opportunities right now.

OLICK: But really, today`s housing market is fueled by huge, pent-up demand, job growth and demographics that all favor increased sales. That is, as long as there`s something to buy. There is one caveat, and that is for those relying on stock portfolios to buy the home. This is not a huge share of buyers, but for those heavy into equities, their net worth has fallen quite a bit over the last few weeks, and that could hurt when it comes to qualifying for a loan or using stocks to fund the down payment.

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

(END VIDEOTAPE)

HERERA: Still ahead, a major oil company feels some major profit pain from the plunging price of oil.

(MUSIC)

MATHISEN: Royal Dutch Shell is the latest victim of the route in oil prices, the energy company warning investors that profits likely plunged 50 percent last quarter compared with a year earlier.

And as Morgan Brennan reports, Shell is hardly suffering alone.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Royal Dutch Shell issuing disappointing earnings guidance ahead of a much-anticipated shareholder vote on the proposed $50 billion acquisition of rival BG Group.

As part of the announcement, it also said spending for the merged companies would be slashed by a staggering 45 percent and that layoffs would total 10,000 workers. The warning comes as crude prices tumbled to 12-year lows, stoking fears that current levels are unsustainable for many companies and oil-producing countries and could potentially result in a global contagion.

Shell sheds light on what`s anticipated to be another tough quarter. Energy sector earnings are estimated to have fallen more than 70 percent in the last three months of 2015. But as the integrated oil companies, including Chevron (NYSE:CVX) and ExxonMobil (NYSE:XOM), prepared to report in coming weeks, analysts are less focused on last quarter and more concerned about forecasts for 2016. Allen Goode, senior equity analyst from Morningstar (NASDAQ:MORN), expects to see sharply lower profitability in production again, with refining operations remaining fairly robust.

He and others say this earnings season, the biggest topics will be spending budgets, plans for future projects, and perhaps most importantly for investors, promises that dividends will continue to remain intact, at least for now.

For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan.

(END VIDEOTAPE)

HERERA: And it`s not just energy companies that are feeling the effects of low oil prices, the big banks are as well. As we`ve been telling you, Wall Street firms issued loans to help finance all those drilling projects, and now we know which financial institutions have the biggest exposure.

Kayla Tausche has more.

(BEGIN VIDEOTAPE)

KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The S&P financial sector has fared nearly as badly this year as the energy sector because it`s almost as directly affected by the price of oil, and that correlation plays out in two specific ways. First, as stress in the oil market continues hurting global growth, the Federal Reserve is faced with a tougher case to raise rates this year, and that was supposed to be the big benefit to bank stocks.

Then, banks chased the energy boom for the last several years, loading debt on to companies trying to drill for oil and gas. Lower prices mean less profits for those companies, and they`re less able to pay their debts. Those debts are what investors are most interested in and why executives have gone to great lengths to lay out exactly by how much they`re at risk.

Goldman Sachs (NYSE:GS) on today`s earnings call said it has $10.5 billion in direct exposure. Bank of America (NYSE:BAC) and Citigroup (NYSE:C) have north of $20 billion, Wells Fargo (NYSE:WFC) $17 billion, JPMorgan (NYSE:JPM) $14 billion, and Morgan Stanley`s just $5 billion, but for that bank, it`s the biggest share of its overall lending.

More important, though, is how much the banks are setting aside should a portion of those portfolios go belly up. According to analyst at Goldman Sachs (NYSE:GS), Wells Fargo (NYSE:WFC) is setting aside the most, Bank of America (NYSE:BAC) the least.

And even though the banks have different size portfolios, different types of risk, they all say if oil continues to stay low, their costs will only go one direction, and that is up.

For NIGHTLY BUSINESS REPORT, I`m Kayla Tausche in New York.

(END VIDEOTAPE)

MATHISEN: Oil is also playing a part in presidential politics these days. The governor of Iowa said he wants Republican candidate Ted Cruz defeated. He said Cruz is in the pockets of big oil and called him the biggest opponent of renewable fuels. The comments come just weeks before voters turn out to caucus in the ethanol-rich state of Iowa.

John Harwood is following the story for us.

John, how unusual is it for a governor not to endorse a candidate but to say, don`t vote for one?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: It`s very unusual, Tyler. Terry Branstad`s the longest serving governor in American history, and it`s extraordinary for him to single out Ted Cruz.

This is in part because of the issue of ethanol, renewable fuel, popular among Iowa corn growers, but it`s also because a lot of Republican elected officials really, really don`t like Ted Cruz.

HERERA: What does it tell us, though about this presidential campaign, which has been different from almost any other we`ve seen in recent memory?

HARWOOD: Well, the role, Sue, of ideology in this Republican race is much different than it`s been in the past. The drift of the Republican Party has been to get more and more conservative, and you even, in fact, had an Iowa senator elected two years ago who was a little bit squishy on those ethanol mandates that was unconventional. And that`s because she criticized it, like other Republicans, as crony capitalism.

But in this particular race, Donald Trump is scrambling all of those categories, and he`s been endorsed by Sarah Palin the last couple days, and she was out saying, hey, what is the GOP establishment calling us, not ideologically pure enough, given all the things they have done and not done for the American people?

MATHISEN: John Harwood, thanks very much -- John in Washington tonight.

HERERA: A massive fine drags down profits at Goldman Sachs (NYSE:GS), and that`s where we begin tonight`s "Market Focus."

The Dow component saw quarterly earnings fall more than 60 percent, but it was still enough to beat estimates on an adjusted basis. The drop was from a recently announced $5 billion settlement over mortgage bond sales leading up to the financial crisis.

If you take out that fine, the investment bank`s earnings would have risen. Shares of Goldman were off about 3 percent today to $153.75.

Staples (NASDAQ:SPLS) and Office Depot (NYSE:ODP) are extending their merger deadline for three months. This will allow the office supply chains to complete their deal, which has come under fire from antitrust regulators. Staples (NASDAQ:SPLS) agreed to buy its rival last February for a little bit more than $6 billion. Shares of Staples (NASDAQ:SPLS) were up fractionally. Office Depot (NYSE:ODP) shares were lower.

MATHISEN: TD Ameritrade (NASDAQ:AMTD) beat earnings estimates and matched revenue targets in its latest quarter. The company did say that it is well positioned to benefit from a rising interest rate environment. TD Ameritrade (NASDAQ:AMTD) shares, though, fell 2 percent today to $28.31.

Brinker International (NYSE:EAT), which owns the Chili`s Restaurant Chain, said revenue fell because of traffic declines in its stores. Earnings, however, rose, thanks to the acquisition of more than 100 franchisee-owned stores. Shares of Brinker, which trade under the wonderful symbol EAT off 3 percent to $46.63.

HERERA: Well, despite some concerns over economic growth, one area that`s expected to do well is franchising, and it`s being helped in part by lower oil prices.

Kate Rogers (NYSE:ROG) takes a look at just how fast this segment is expected to grow.

(BEGIN VIDEOTAPE)

KATE ROGERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Robert Dorfman is a believer in the franchise model.

ROBERT DORFMAN, WORLD OF BEER FRANCHISEE: I think it gives small businesspeople, like myself, a great opportunity to leverage some brand equity, which is very difficult to create over a short period of time, and to use that brand identity to then take the kind of entrepreneurial spirit and control my own destiny.

ROGERS: He`s gearing up to open his second World of Beer location in Loudon, Virginia, this spring. Before that, he owned nearly three dozen Five Guys Burgers and Fries locations in seven states.

Past success has Dorfman betting on a strong 2016. And he`s not alone. The International Franchise Association is forecasting a sixth straight year of solid growth for the industry.

Nationwide, the total number of franchise locations is estimated to grow to nearly 796,000, employing more than 9 million workers. Increased business spending and lower oil prices are expected to help the franchise industry`s GDP grow to $552 billion.

Despite his sunny outlook, Dorfman has concerns about how future regulations may impact his growth. Minimum wage and the Affordable Care Act are top of mind.

In 2016, small businesses with as little as 50 or more full-time employees will have to offer those workers insurance or will face fines of up to $2,000 per worker per year for failing to comply.

DORFMAN: I am a strong proponent of providing all of my employees, making sure they`re well-compensated, that they have appropriate benefits, they feel great about the environment in which they work. However, the Affordable Care Act is going to put a serious financial limitation on myself as a small business person.

ROGERS: Also on the minds of franchisees, a pending case before the National Labor Relations Board against McDonald`s (NYSE:MCD) on joint employer status. Industry advocates say if McDonald`s (NYSE:MCD) loses and parent companies are held responsible for actions at their franchise locations, the industry`s growth could come to a halt.

For NIGHTLY BUSINESS REPORT, I`m Kate Rogers (NYSE:ROG).

(END VIDEOTAPE)

HERERA: To read more about potential growth in the franchise sector, head to our website, NBR.com.

MATHISEN: Coming up, are you nearing retirement? As uncertainty grows in the markets, there are some steps you may want to take now to protect your nest egg.

(MUSIC)

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: A lot of people get caught up in the emotion of it and that helps drive the stock market down. But overall, I think the economy is OK and I think the underlying fundamentals are good.

UNIDENTIFIED MALE: I might change some investments that I have, maybe pull out of a couple of things, just in case. I know everyone always says wait for the long term, but still a little bit scared to kind of think about that.

UNIDENTIFIED MALE: I think that it`s a lot of panic, sellers, and I`ve always been a caller of just stick it out.

(END VIDEO CLIP)

HERERA: Well, some investors are nervous, and others, as you saw there, are staying the course.

And, today, Jack Bogle, founder of the Vanguard Group, the world`s largest mutual fund company, said that`s exactly what retirement savers should do.

(BEGIN VIDEO CLIP)

JACK BOGLE, VANGUARD GROUP FOUNDER: This is really important. This is the most serious piece of advice I could give people. If you`re investing in a retirement plan, as tens of millions of people are, don`t stop investing when the market goes down. The prices are 10 percent better than they were. Keep investing, keep putting money in, just as you would. Don`t interrupt your savings pattern because you`ll pay a huge price for it in the long run.

(END VIDEO CLIP)

MATHISEN: But what if you are close to retirement, a year, two years, three years? This market may be too nerve-racking to ride out the volatility.

Joining us in our "Retirement Red Zone" is financial adviser Rick Edelman. He`s chairman and CEO of Edelman Financial Services.

Rick, always great to see you. I count you as a friend and a guy I respect a great deal.

Let`s talk about -- if I`m close to retirement, and let`s say I feel like I need to transition from 60 percent equities to something like 50 percent equities, do I do that all at once, or do I do that gradually over a period of months?

More