NIGHTLY BUSINESS REPORT for January 25, 2016, PBS - Part 1

BUSINESS-REPO-01

REPO-01

Bob Pisani>

Food and Beverages; Electronics; Technology>

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Miserable Monday. Stocks head south to start the week, following oil prices lower as Wall Street keeps an eye on this week`s Federal Reserve meeting and a wrap of economic data coming out.

McMuffin moment. All daybreak fast help jumpstart McDonald`s (NYSE:MCD) sales and investors are wondering if that turnaround is for real.

And tech time. Big names, big reports due out. The ones investors need to watch.

All that and more for Monday, January 25th.

Good evening, everyone, and welcome. Tyler is on assignment tonight. It was another very rough session for the faint of heart on Wall Street today. Stocks were holding their own for a while, but a better than 7 percent sell off in oil was too much and things fell apart in the afternoon.

The drop improved after a few days of stabilization reignited growth concerns ahead of big economic week. The Federal Reserve begins a two-day meeting tomorrow. And while no interest rate move is expected, the Feds view and tone on the economy will be key.

There is also a lot of data for investors to pour over this week, as well as about quarter of the S&P 500 companies reporting their earnings. So, growth was the focus.

In the end, the Dow fell 208 points to $15,885. The NASDAQ dropped 72, and the S&P was off 29.

Shares of Caterpillar (NYSE:CAT) were one of the biggest drags on the Dow after Goldman Sach`s downgraded the Dow component to sell from neutral. The Goldman analyst who`s forecasting a sustained downturn in infrastructure spending due to the rout in commodities. Shares of Caterpillar (NYSE:CAT) were down 5 percent on the day.

On the flip side, McDonald`s (NYSE:MCD) was one of the best performers after the fast food chain saw a global sales surge 5 percent and domestic sales did even better up nearly 6 percent. The big catalyst, all daybreak fast. Shares gave back a lot of early gains as the overall market sold off but still managed to stay higher.

Jane Wells has more on McDonald`s (NYSE:MCD) strong report.

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JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT: You know, I saw a new McDonald`s (NYSE:MCD) billboard driving in this morning which said, "Actions speak louder than words. Watch us."

Well, McDonald`s (NYSE:MCD) exceeded street expectations both on sales and profits with its best growth in nearly four years in U.S. stores open at least 12 months. Those sales are up nearly 6 percent. The main reason? One word, McMuffin. Since all day breakfast went national in October, CEO Steve Easterbrook says customers who might have gone elsewhere for lunch are coming to McDonald`s (NYSE:MCD) to have breakfast for lunch. And people coming in for lunch are adding breakfast items.

STEVE EASTERBROOK, MCDONALD`S CEO: All day breakfast positions us to regain market share we have given up in recent years. In fact, since the launch of all day breakfast, we have experienced positive weekly comparable sales gaps relative to our QSR (INAUDIBLE) competitors. We ended the quarter with a positive gap of 2.9 percent.

WELLS: Easterbrook says it`s going to take another six months of steady growth before they move from turnaround mode to growth stage. McDonald`s (NYSE:MCD) stock today hit an all-time high. Globally sales growth not as impressive as in the U.S. Easterbrook said the terror attacks in Paris in November have had an impact in Europe.

China however saw 4 percent growth in stores opened at least a year, and McDonald`s (NYSE:MCD) plans to open 250 new stores in China this year, the most of any market.

Other initiatives include here in the U.S., the McPick 2 menu, two items, $2. As Easterbrook says 25 percent of customers are all about price. They are also experimenting with delivering food to your table here in California and the company will improve its app so it actually adds to sales this year.

And, finally, management plans to give shareholders back $14 billion in dividends and share repurchases in 2016.

For NIGHTLY BUSINESS REPORT, Jane Wells, Los Angeles.

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HERERA: Our guest tonight owns more than 600,000 shares of McDonald`s (NYSE:MCD) and he says this feels like a turn around for the company, and he envisions long term changes in its growth pattern.

Joining us is Joseph Zock, portfolio manager with Tocqueville Asset Management.

Joe, welcome. Nice to have you here.

JOSEPH ZOCK, TOCQUEVILLE ASSET MANAGEMENT: Good evening, Sue.

HERERA: You bought this stock when the street did not love it at all. So, you had a nice gain in this particular position that you own. Tell me what you think about the report that we had today. And you say it feels like a turnaround to you.

ZOCK: Well, it`s a bit surprising that the initiative too old hold so immediately. But this is really a long term story where McDonald`s (NYSE:MCD) has been grappling with two things, changing consumer taste and they`ve had a decade of horrible public relations that they had to overcome. But the changes are underway and a change in management was the first thing that caught our eye.

HERERA: Steve Easterbrook has been an interesting CEO to watch, because everybody this stock, even though it had a really decent dividend and still does. Are you confident the initiatives he`s put in place, the expansion in China, will continue to go higher?

ZOCK: Yes, and he`s done everything a normal manager would do. And when I say normal, if you`re in the retailing business, you want know what your customers think, you want to listen to your franchisees and you want to have to have the courage to make those changes. So, the Egg McMuffin is just the beginning of the changes that he`ll initiate, and expansion is an important part of McDonald`s (NYSE:MCD) game plan.

HERERA: There`s some who feel that the aggressive expansion in China might be a little bit risky because that economy has been slowing down.

ZOCK: Right. Well, as you know, many years ago, people bought McDonald`s (NYSE:MCD) as a defensive holding in their position because food, consumption of food is something that really didn`t move with the economic sensitivity that other companies did. So, I think he`s taking a cautious approach and starting with a limited menu. So, I think it`s a massive market that should be approached.

HERERA: Speak to me about what you call the underleveraged balance sheet and also the dividend, which you found very attractive?

ZOCK: Right. Well, when we first bought the stock, really our clients pushed away from table and said, are you crazy? McDonald`s (NYSE:MCD) is not something we want to have in our portfolio. We showed them the balance sheet and asked them to imagine if it was an industrial name. That helped them overcome that especially in this environment where energy stocks are overleveraged and under-pressure.

However, the dividend is something we could also point to because at the time, treasuries are yielding much lower numbers and while we waited for this turn around to take place, it was a reasonable proposition.

HERERA: Are you at all worried about the dividends near term? There are some companies cutting it and McDonald`s (NYSE:MCD) has not been on the list because the stock has been doing so well.

ZOCK: The stock is doing well. They can easily cover the dividend payment. It`s something that once again Steve Easterbrook has announced he will not cut back. So, when the company steps to the microphone and says they want to give shares or money back to shareholders, we view that as an exclusively positive thing.

HERERA: All right. Thanks for spending time with us tonight, Joseph.

ZOCK: Thank you, Sue.

HERERA: Joseph Zock with Tocqueville Asset Management.

And as the market slides, and we`re currently in correction territory, there`s a popular strategy called buy the dibs. It`s essentially looking for bargains in the stock bins. And as Dominic Chu tells us, it`s not a strategy that just the pros can take advantage of.

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DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Picking tops and bottoms in the stock market is no easy task and you`d be hard pressed to find anyone who can do it with consistency. The recent market downdraft in stock has left some wondering, though, whether this is the time to invest.

JOHN BUCKINGHAM, AFAM CAPITAL: We just had stocks go on sale 10 percent or even more for individual security. So, absolutely, I think a long term investor should be taking advantage.

CHU: So, where are some investors looking for bargains? Some are looking at relative winners over the past year that have taken a dip recently. Among members of the large cap S&P 500 index, only around ten stocks have posted gains over the past week of 5 percent or more and still have positive returns over the past 12 months as well.

Among them names like Verizon (NYSE:VZ), also Nike (NYSE:NKE), McDonald`s (NYSE:MCD) and Amazon (NASDAQ:AMZN).com. Each have seen buying on a shorter term basis and managed also to hold onto gains longer term.

Others, though, are looking for potential winners in places that have been relative laggers up until now, a potential reversal of current trends.

JIM PAULSEN, WELLS CAPITAL MANAGEMENT: I think there`s going to be a lot of change. I think international markets o better than domestic. I think industrial and producer stocks will do better than consumer. I think some caps may do better than large caps. In other words, it`s not just about finding the market bottom. I think the entire leadership of this bull is changing as we go forward.

CHU: Now, the bulls do have a case. After all, markets have managed to rebound sharply since the financial crisis. However, caution remains a big theme among experts with slowing economic growth around the world and the potential for large market shock that haven`t been seen yet in 2016, understanding once risk tolerance will be a big part of any buy or sale decision in the market.

For NIGHTLY BUSINESS REPORT, I`m Dominic Chu.

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HERERA: Meantime, the downturn in oil prices continues to takes its toll. Halliburton (NYSE:HAL) posted a loss in its last quarter. The country`s second largest oil field services provider was hurt by a steep decline in its North American business. Revenue at the unit was cut by 50 percent. Shares were off 3 percent.

And that drop in oil is having ripple effects throughout the economy. Business activity tied to oil and commodities is one of biggest pressure points. As energy and mining companies cut back on spending, the manufacturing sector is feeling the pain.

Morgan Brennan takes a look at the damage and whether it might get worse.

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MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: More signs depressed oil prices are taking a toll on manufacturing. Today, the Dallas Federal Reserve saying business activity in Texas has tumbled to the lowest level since the recession of 2009, much more than expectations.

According to analyst, Peter Boockvar, the, quote, "data speaks" for itself and reflects the major recession the energy patch is and the ripple effect on other industries.

It`s the latest sign that energy companies aren`t the only ones feeling the adverse effects of the crude price collapse. It`s as dynamic that has Deutsche Bank chief U.S. economist Joseph Lavorgna concerned.

JOE LAVORGNA, DEUTSCHE BANK CHIEF U.S. ECONOMIST: Investors need to be worried about the manufacturing sector because even though it`s a small piece of the overall economy, it tends to be a very leading indicator of what happens to the overall economy.

BRENNAN: Lavorgna adds that with an economy growing at 2 percent, the risk of broader recession is much higher than in its economic growth were more robust and it isn`t just oil prices pressuring sector either.

LAVORNA: A portion of the manufacturing sector is oil, but I think equal parts also include the fact that the U.S. dollar has had one of its strongest rises on record. And, thirdly, we have a pretty sizable inventory correction working through.

BRENNAN: Nonetheless, as energy companies slash spending for a second straight year, that`s trading into less business for a variety of industries. For miners that supply sands needed to frack oil wells, to steel makers like U.S. Steel, which plans to lay off hundreds more workers in Texas. The transportation equipment makers like Green Briar Industries, which saw rail car orders plunge 80 percent last quarter from the three months prior.

Wells Fargo (NYSE:WFC) analyst Justine Ward says the architectural billing index is also flashing a warning sign, with industrial construction close to, quote, "recession territory. The sector typically leads broader building activity in its dust likely the first to signal a downturn.

Analysts will be focused on all this as earning season plays out with companies including U.S. Steel, Norfolk, Southern (NYSE:SO), Caterpillar (NYSE:CAT) and Freeport-McMoRan reporting this week alone. The expectation: that the energy downturn will once again drag down results, and that businesses are hunkering down for another rough year.

For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan.

(END VIDEOTAPE)

HERERA: Coming up, it`s a big week for earnings, as we said, but in particular for technology. The key reports to watch when we come back.

(MUSIC)

HERERA: The East Coast continues to dig out after this week`s blizzard that buried the region under several feet of snow. Slowly, things are getting back to normal as streets continue to get plowed. Amtrak is up and running, albeit on a limited schedule, and planes are once again taking off at the airports after the storm forced the cancellation of thousands of flights.

Another multi-billion dollar inversion deal, this time with two industrial names. And that`s where we begin tonight`s "Market Focus".

Johnson Controls (NYSE:JCI) and Tyco have agreed to merge in a deal valued at more than $30 billion. Johnston, which makes automotive seating and air conditioning equipment, among other things, will own 56 percent of the company and will keep its name while moving headquarters to Ireland where Tyco is domiciled. Tyco makes protection and video surveillance systems. Shares of Johnson Controls (NYSE:JCI) dropped 4 percent to $34.21. Tyco soared nearly 12 percent to $34.15.

Sprint is reportedly cutting about 2,500 jobs as part of its efforts to slash about $2.5 billion in costs. Most of those layoffs are coming by closing call centers. It`s the third round of cut backs in the last year and a half. Shares of Sprint fell 12 percent to $2.52.

Consumer products maker Kimberly Clark missed targets for both its earnings and its revenue numbers as a strong dollar and falling global currency hurt the company`s results. The makers of Huggies and Kleenex said due to significantly unfavorable currencies, net sales will likely come in flat to down again this year. Kimberly Clark sales were off 3 percent to $122.69.

And D.R. Horton (NYSE:DHI) posted a slightly better profit but it saw its home building revenue grow at its slowest rate since 2011. The nation`s biggest home builder did see a rise in orders in the quarter which is an indicator of future revenue. D.R. Horton (NYSE:DHI), though, fell nearly 5 percent to $26.50.

The Supreme Court threw out a ruling in favor of Amgen (NASDAQ:AMGN) employees who said they lost money in the company stock ownership program. The original lawsuit from 2007 said the value of the plaintiffs retirement plans fell when Amgen (NASDAQ:AMGN) stock dropped. It was revealed the company concealed negative clinical study results of an anemia drug and marketed it for off label uses that were unsafe. The court said the original ruling was incorrect and it sent the case back to lower courts. Shares of Amgen (NASDAQ:AMGN) fell more than 1 1/2 percent to $153.43.

As we mentioned just a bit earlier, about a quarter of the S&P 500 scheduled to report earnings. It`s a big week for some of the titans of technology.

Josh Lipton takes a look at why Wall Street will be particularly focused on a trio of the big names.

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JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: It has been a tough start to the year for tech. Sector is down some 7 percent, 33 tech stocks were nearly 50 percent in the S&P 500 are in bear market territory -- meaning: a drop of 20 percent from a recent high.

Investors are concerned about global economic growth and that`s a problem for tech given that 60 percent of the sectors revenue comes from overseas. Despite the sector`s drop, though, investment strategists remain on the sidelines for now.

SAM STOVALL, S&P CAPITAL IQ, U.S. EQUITY STRATEGIST: The sector doesn`t look cheap at these levels. Even though we have seen a bit of a price decline, primarily because earnings are expected to grow pretty much in line with the overall market. And also, the worries persist as to what will be happening overseas and how that will reflect on this highly international sector.

LIPTON: Now, investors await three critical reports from big technology companies that will give a better indication of how tech performs from here. The first is Apple (NASDAQ:AAPL), which will report earnings tomorrow after the close. Already that stock is down around 20 percent in the past six months as investors worry about iPhone growth in the quarters ahead.

Still, some analysts argue that the stock could move higher this year on new products and strong buy backs. Also, will CEO Tim Cook continue to sound as bullish about the company`s business in China given that economy`s slow down? Mainland China now accounts for some 30 percent of Apple`s revenue.

Then, on Thursday, Amazon (NASDAQ:AMZN) reports the stock is down about 10 percent this year. But it`s up more than 90 percent over the past 12 months.

RBC`s Mark Mahaney, an Amazon (NASDAQ:AMZN) bull, says he`ll focus on unit growth, the key retail metric which he thinks will jump more than 20 percent as well as whether the company`s cloud business maintains strong momentum. Amazon (NASDAQ:AMZN) has a lot of supporters on Wall Street. Sixty-five percent of financial analysts covering the company rated a buy.

And, finally, investors are fans of Microsoft (NASDAQ:MSFT) CEO Satya Nadella and the powerful cloud business he`s built up. The stock is up 10 percent.

But Intel`s latest reporting highlighted weakness in the P.C. market which could spell a challenging quarter for Microsoft (NASDAQ:MSFT). We`ll know when the company reports results on Thursday.

For NIGHTLY BUSINESS REPORT, I`m Josh Lipton in San Francisco.

(END VIDEOTAPE)

HERERA: So, let`s turn to our next guest, David Garrity, to talk more about tech earnings and the one he says investors should be watching closely. He`s principal of his own tech firm, GVA Research.

Good to see you again, David. Welcome back.

DAVID GARRITY, GVA RESEARCH PRINCIPAL: Thank you, Sue.

HERERA: Let`s start with Apple (NASDAQ:AAPL). Are you one of those out there that thinks this is make-or-break quarter for Apple (NASDAQ:AAPL)?

GARRITY: I would say, in terms of looking at Apple (NASDAQ:AAPL), I mean, the stock clearly is trading a very, very low valuation relative to earnings, whether you adjust to cash or not. And certainly, when you have a low multiple on a company, such as Apple (NASDAQ:AAPL), I think the market`s already factored in its own concern around the products.

Going forward, if we look in September of 2016, we will have the introduction, the new iPhone 7. From that standpoint, that probably should help to jumpstart growth going in towards the end of the year. So, if there is a pull back here on Apple (NASDAQ:AAPL), coming off the December quarter results, we would think it`s attractive time to consider establishing a position or adding to an existing position.

HERERA: All right. Let`s move onto Facebook (NASDAQ:FB). Everybody is going to be watching the Instagram part of Facebook (NASDAQ:FB).

GARRITY: In terms of Facebook (NASDAQ:FB), again, the stock has not been immune to the downturn in terms of the overall market and that technology sector in particular. Instagram has been something to help drive traffic to the Facebook (NASDAQ:FB) site. But I think investors are going to be looking at how well Facebook (NASDAQ:FB) is doing in terms of their audience engagement and how that is driving their own advertising revenues on a global basis.

One thing we`d also say to Facebook (NASDAQ:FB), is that unlike Apple (NASDAQ:AAPL) or other companies on technology sector, Facebook (NASDAQ:FB) has no operations in China. From that standpoint should be immune in that regard.

HERERA: What about Microsoft (NASDAQ:MSFT), David? Because everybody is kind of watching management and how they are positioning this company in an ever changing world, you know the cloud and things like that. What you going to be watching for?

GARRITY: Certainly in terms of Microsoft (NASDAQ:MSFT), I mean, people might have raised concerns with how regard to the Windows 10 software upgrade. The company is deciding not to charge to bring the users base up to fully current level, to the extent that they can.

We think that, though, if investors have been very much encouraged about the move to the cloud. Certainly, it`s something that`s worked well for Amazon (NASDAQ:AMZN). People have to know that Microsoft (NASDAQ:MSFT) is number two behind Amazon (NASDAQ:AMZN) in terms of their cloud base operation. It`s the growth in that area that clearly is going to be driving stock price returns over the balance of 2016.

HERERA: All right. I have 30 seconds left. Let`s try and squeeze in eBay (NASDAQ:EBAY). What are you going to be looking for?

GARRITY: In terms of eBay (NASDAQ:EBAY), I mean, the company`s spun off the PayPal operations. The concerns we have, if you look at the scale of competitor, such as Amazon (NASDAQ:AMZN), are we going to find that volumes are down substantially. Are there other ecommerce out there doing a better job of engaging with consumers and driving their use on eBay (NASDAQ:EBAY)? So, there, we`re not so sanguine.

HERERA: All right. David, great to see you again.

GARRITY: Thank you.

HERERA: David Garrity with GVA Research.

Competition from the likes of Uber and Lyft are becoming too much from traditional transportation companies. Can these two worlds coexist? That`s next.

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HERERA: Exchange rated funds better known as ETF have grown in popularity, so much that some even consider them their own asset class. The biggest and brightest from the industry are gathering to explore many topics that could impact investors in those founds.

Bob Pisani has more from Hollywood, Florida.

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BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Market volatility was the hot topic at the ETF.com Conference with the CEO of Vanguard telling investors to stay the course.

WILLIAM MCNABB, VANGUARD CHAIRMAN & CEO: We`re telling investors that this volatility may be with us for a while, but it`s very important to stay diversified, keep a long term perspective. And so far, the behavior is actually re-enforcing that.

PISANI: Three other hot topics here.

First, smart beta ETFs weighed in some other way than market capitalization. Goldman Sach`s made a big splash last year with three ETFs that weighed by value, momentum, quality and low volatility. The big question is, do they really out perform market cap weighted indices? The jury is still out on that.

Second, active management. So much money is coming in ETFs that it has attracted the active management crowd that insists that they can outperform passive index funds. The industry is split on this. Half say, who needs them? We don`t need them. The other half says there`s plenty of room for other investment style.

Finally, is the SEC going to tighten regulation of ETFs? They recently announced that they would be looking into the suitability of investors of complex ETFs like leverage and inverse ETFs. And they`re also looking at limiting the amount of leverage that could be used in an ETF portfolio.

For NIGHTLY BUSINESS REPORT, I`m Bob Pisani at the ETF.com Conference in Florida.

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HERERA: San Francisco`s largest taxi company Yellow Cab Cooperative has filed for bankruptcy, as the company faced a steep drop in passengers, as it faced tough competition from the likes of app-based services like Uber and Lyft.

Last year, Chicago`s yellow cab service filed for bankruptcy, citing app- based transportation network. So will other taxicab companies file for bankruptcy in other cities around the country?

Let`s find out from Mitchell Moss, director of the Rudin Center for Transportation at New York City. He joins us now.

Welcome. It`s nice to have you here.

MITCHELL MOSS, NYU`S RUDIN CTR FOR TRANSPORTATION DIRECTOR: Thank you. Glad to be with you.

HERERA: I guess that is the question. How prevalent is this going to become, do you think?

MOSS: Well, we should not generalize from San Francisco. Everyone loves the city of San Francisco. It`s beautiful. It`s spectacular.

But the cab service has been terrible there. It`s hard to hail a cab on the street, very expensive when you get in. It`s no surprise that Uber and Lyft has taken over because the taxi industry has not been very responsive.

HERERA: What about Chicago?

MOSS: Well, Chicago I think is a different case. There`s been many different cabs. But I think the companies. But I think the first part to understand is that in Chicago, there are so few people who want to drive a cab now that the mayor is having "American Idol" kind of competition to get a cab driver and giving away a free medallion.

This is because across the country, we`re finding out that the taxis have had a franchise, a monopoly position and when people are getting better service and cost, Uber and Lyft, they`re preferring it.

And San Francisco, by the way, I should point out, has had a kind of bankruptcy filing largely because they have had millions of dollars in judgments against them that have been filed and the courts have awarded the plaintiffs damages. So, it`s not just due to Uber. It`s due to this is a co-op. It`s a particularly kind of version.

I think you`re also finding out across the country that there are many individuals that would rather pay less for better service. Certainly, you don`t take a taxi to go to Los Angeles International Airport. It`s far better to take Uber or Lyft or one of the other alternatives because it`s quicker, it`s cheaper and certainly, the market has now entered the area of mobility for for-hire service.

Up until now, we`ve had a monopoly in many cases. The city police department regulated them. Unfortunately, taxi companies may be going out of business but taxi drivers are switching to drive Uber and Lyft where they have better arrangements. This is a different case, though, in New York, let me point out, where the taxi limousine commission is very smart, very sophisticated and may have both Uber, Lyft, for hire, green taxi, and yellow cab coexisting.

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