NIGHTLY BUSINESS REPORT for February 3, 2016, PBS - Part 1

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Tausche, Courtney Reagan, Josh Lipton, Kate Rogers (NYSE:ROG)>

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

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Warning signs. The U.S. economy got disheartening news about one of its most important sectors. We`ll put it in perspective for you.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Financials tumble. Why bank stocks here and across the globe are getting beaten and bruised in 2016.

MATHISEN: Protect your portfolio. The mutual funds that may protect your money in a market like this one.

All that and more tonight for NIGHTLY BUSINESS REPORT on Wednesday, February 3rd.

HERERA: Good evening, everyone, and welcome.

Do not underestimate the power of crude, at least not in this market. Stocks staged a massive comeback just as the price of oil surged. That relationship between stocks and oil is so strong it shrugged off an unexpectedly weak services report which pressured equities early on and sent bond yields sinking. We`ll have more on that momentarily.

By the close, the blue chip index gained 183 points to 16,336, moving 400 points from its low to its high. The NASDAQ slipped 12 and the S&P 500 rose 9.

As for domestic crude prices, take a look at that percentage gain, 8 percent to the upside snapping a two-day rout as the dollar tumbled and despite record inventories. If anything, today was a reminder of why this market is anything but boring.

Bob Pisani explains what fueled today`s rebound.

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BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: We stopped dropping when oil stopped dropping about 11:00 a.m. Stocks went sideways until about 2:00 p.m. when the whole market turned around. The Dow rallied over 250 points in about an hour. Oil also rallied to the highs for the day.

So what happened? Well, some are citing vague rumors that oil-producing countries are trying to cobble together an agreement to limit production. But, you know, we`ve heard those rumors before. Regardless, beaten up sectors like bank stocks finally rallied.

You know, some of these regional banks are down 15 percent to 20 percent this year, they don`t have international exposure and most do not have huge exposure to energy loans. So, why are they selling off so dramatically? I get there are concerns low rates will hurt banks but most traders feel the extent of the selloff makes no fundamental sense.

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

(END VIDEOTAPE)

MATHISEN: More now that the sobering economic news. The services sector which accounts for about 80 percent of U.S. economic activity is starting to cool. And as Steve Liesman explains, that`s exactly what economists don`t want to see.

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STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: A key economic report that bulls hoped would show the U.S. economy holding up instead weakened unexpectedly. It was the third straight monthly decline for the much followed service sectors survey from the Institute for Supply Management. It`s now dropped to its lowest level in two years as the outlook for services employment and new orders also declined.

The measure still shows growth in the economy and growth in services, but the weakness suggests that troubles elsewhere in the economy from manufacturing, a strong dollar, a declining energy industry, and weak overseas growth are now spilling over to the service sector which is the biggest part of the U.S. economy.

JOE LAVORGNA: We learned today that the service sector is following the manufacturing sector lower in traditional lagged form. This means that the broader economy is likely slowing as measured by real GDP growth.

LIESMAN: As a result, Lavorgna upped his chance of a U.S. recession to 40 percent from around 33 percent. Despite a separate ADP report suggesting strong job gains in excess of 200,000 in January, others on Wall Street were more inclined toward the pessimism.

JEFF ROSENBERG, BLACKROCK: The global environment is very much part of the recessionary risks that the U.S. faces. It`s about importing those risks from an external shock and the manner in which that occurs is through financial market conditions.

LIESMAN: In addition to ignoring the stronger than expected ADP report, there was also little focus on dovish comments from the New York Fed president. Bill Dudley said in an interview that a stronger dollar and weaker global economy could have, quote, "significant consequences for the U.S. economy", and that financial conditions are tighter now than they were when the Fed last met in December and the Fed has to take tighter conditions into account making monetary policy.

Most of the data this week has been soft. But there`s one more chance for the bulls. If the payroll report on Friday shows strength along with wage gains, it could direct the market away from fear of recession and back to the upside of cheaper oil and more Americans being employed and bringing home paychecks.

For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.

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HERERA: Michael Hanson joins us to talk more about the economy. He`s senior economist with Bank of America (NYSE:BAC) Global Research.

Michael, welcome. Nice to have you here.

MICHAEL HANSON, BANK OF AMERICA GLOBAL RESEARCH: Thanks.

HERERA: Let`s start with that recession call, Joe Lavorgna, 40 percent, others are right around there. But you think that the percentage would be quite a bit lower than that, why?

HANSON: Yes, we`ve been saying that it`s probably in the vicinity maybe of 20 percent. I do think the risks are perhaps skewed toward it being higher if we continue to see a selloff in the markets.

But right now, it still looks like the fundamentals of the economy are not as weak as the markets might suggest and as one of your early stories suggested, there does appear to be a bit of a disconnect there. The labor market continues to be strong. We`ll obviously see if that continues on Friday. Consumer fundamentals are fairly good. The housing market is doing well.

Now, we actually have a fiscal stimulus in place this year as opposed to the drag the last couple years. So, there`s a number of things are going the right way and comes down to whether the service sector can hang in there. It`s a much larger share of the economy. We saw a loss of momentum today but not a deterioration, whereas the strong dollar has really pulled back manufacturing and that`s certainly something we`re keeping on eye on.

MATHISEN: Michael, do you see the economy slowing from its fourth quarter pace? It doesn`t have much farther to slow. It was 7/10 of 1 percent growth. Or picking up steam here in the first half of the year?

HANSON: Yes, picking up steam might be a little strong, but I think we do get a rebound. I don`t think 0.7 is the likely trend in the near or longer term for the economy. I would say we`re probably going to see something in the vicinity of around 2 percent growth this year, give or take. I think the underlying trend is a little softer than that, so if we run above trend we should continue to see job gains and lower unemployment rate as well.

HERERA: What about the dollar? That has been certainly today it had a dramatic move, but overall it has been higher and stronger for a lot longer than everybody thought. Is that what`s really hurting the manufacturing and services sector?

HANSON: I think it`s hurting manufacturing more than it`s hurting services by a notable margin. Most services are produced and consume domestically, and so, they`re not exposed to the dollar but there`s a significant portion of manufacturing that is and that`s been a significant shock.

You`re up some 20 percent to 25 percent in the dollar in the last year and a half. That`s one of the larger moves we`ve seen in quite some time and I do think it`s having a meaningful adverse impact on the industry sector.

HERERA: All right, Michael, we`ll leave it there. Thanks so much for joining us.

HANSON: Thank you.

HERERA: Michael Hanson with Bank of America (NYSE:BAC) Global Research.

MATHISEN: As concerns about the economy grow, bank stocks have been beaten and bruised and how, the financial sector is the worst performing group this year so far, down almost 12 percent. And it`s not just U.S. bank stocks but European ones as well.

Kayla Tausche explains why.

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KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT: 2016 was supposed to be a banner year for the banks, but a week economy has been putting even more pressure on the industry. Fears of an economic slowdown based on market drops overseas and negative data will be gone on the services sector here in the U.S. move investors into treasuries, pushing prices up and yields down. The yield on the ten-year treasury fell to its lowest point in a year.

Now, that has a negative effect on the banks because that`s the benchmark for mortgages and fixed rate loans so while low yields might be great for consumers, they hurt bank profits and, therefore, bank stocks. If the slowdown does cause the Fed to hold off on rate hikes, another potential benefit for the banks, that`s going to hurt, too. And then the icing on the cake, the fear more energy loans could go bad.

For all of those reasons, Paul Miller of FBR said it might take a while for investors to jump back in.

PAUL MILLER, FBR CAPITAL MARKETS: You got to get the ten-year to stabilize, you got to get energy prices to stabilize, I think before anybody really comes in. If you have a long-term view, you can buy some of these things and make a lot of money here. But right now, nobody wants to own these things.

TAUSCHE: In Europe, the problems are well worse. The euro stock 600 bank index down 23 percent this year as the lengthening recession makes more loans go bad.

Italy, for instance, has 350 billion euros in bad loans. They`re now off- loading to private investors with government backing.

In Spain, the Bank of Spain said bad loans fell to 10.3 percent of total credit in November, but that risk has (INAUDIBLE) all falling.

The fear is there`s more where that came from and the earnings have not been reassuring to that end.

Deutsche Bank has seen its market cap halved in the last year and warned it`s seen more than $7 billion in losses in 2015. Government-owned RBF said it will post a loss, too, and pay more than $2 billion in a mortgage settlement with the U.S. Standard Chartered plans to lay off 15,000 employees in the next 3 years so these restructures, bad headlines, familiar to U.S. investors because we went through it after the financial crisis.

But right now it`s hard for investors on both sides of the Atlantic to see a light at the end of the tunnel.

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

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HERERA: Growth in China has been an overarching concern for investors, and today, the Chinese government said the world`s second largest economy would expand between 6.5 percent and 7 percent this year. The new target comes as policymakers in that country battle the slowest growth in 25 years. Beijing will also try to curve overcapacity and that could increase unemployment in areas with a high output of steel and coal.

MATHISEN: A Chinese company making s biggest foreign acquisition yet. The China National Chemical Corporation known as Chem China will buy the Swiss seed company Syngenta for $43 billion in cash. According to Dialogic (NASDAQ:DLGC), it`s the most expensive agricultural transaction ever. The deal will help China expand food production but it may raise regulatory concerns here since Syngenta owns U.S. chemical facility.

HERERA: The Chinese slowdown has been hitting some U.S. multinational companies very hard, but for many American retailers, it hasn`t been all that bad.

And as Courtney Reagan reports, these companies are invested in China for the long haul.

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COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: For decades, China was synonymous with outsized growth, offering investors and companies a new market to penetrate. But as fears of a worsening China slowdown weigh heavily on industrial and commodity based companies, retailers look at China differently and growth is still a large part of that view.

OLIVER CHEN, COWEN & CO. SR. RETAIL ANALYST: China can ebb and flow. There are different considerations with GDP growth in China, the housing market and different economic considerations, but as far as retail goes, in terms of luxury goods and global brands, it`s a very important market for the long term. So, retailers can`t really ignore this market and need to continue to invest in it. And also build their awareness and their brand and their identity globally.

REAGAN: On a conference call, Bernard Arnault, CEO of luxury conglomerate LVMH acknowledged the economic slowdown in China but also said, quote, "Many observers underestimate the fundaments of China`s economy, noting household consumption is on the rise there. Like other retailers, the luxury goods seller looks to the country as a long-term growth driver.

PVH Corp just announced it will buy the remaining interest in its Tommy Hilfiger joint venture in China. CEO Manny Chirico says China is the fastest growing market for Calvin Klein and Tommy Hilfiger.

Michael Kors and Coach (NYSE:COH) reported double digit comparable sales growth in China while noting weakness in Hong Kong and Macau.

Retail experts with an eye on China say the higher end consumer`s pension to spend may be leveling off as evidenced by weakness in travel to Hong Kong and Macau, but spending in mainland China remains healthy, which is where retailers are concentrating their investments in the country.

CHEN: We`ve been seeing somewhat of a global pause in Chinese traveling so that`s something we watch out for at names like Tiffany (NYSE:TIF) and higher end names.

COURTNEY: But mid-tier retailer H&M says it`s, quote, "very happy with business in China", even in a tougher environment. H&M and Victoria`s Secret parent company Elle Brands plans to add stores in China this year.

However, retailers that don`t operate in China like Macy`s (NYSE:M) are seeing a drag from China`s economic slowdown. Fewer Chinese tourists are traveling to the U.S. which means less spending at flagship stores in big cities and China has proven lately to be unpredictable, so if the slowdown leads Chinese consumers to pull back their spending, it could be trouble for retail.

For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan.

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MATHISEN: Still ahead, mutual funds that may help you stay calm in a stomach-churning market.

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MATHISEN: Sumner Redstone has resigned as chairman of CBS (NYSE:CBS). CEO Leslie Moonves will assume the title of chairman and replace the 92-year- old. A lawsuit challenging Redstone`s mental competence raised questions about whether he should continue in that role.

Shares of CBS (NYSE:CBS) rose in initial after-hours trading as did shares of Viacom (NYSE:VIA), where she`s also chairman. Viacom`s board will reportedly meet tomorrow.

HERERA: GoPro swings to a fourth-quarter loss and issues a disappointing revenue forecast. The action camera maker lost 8 cents a share. Analysts were looking for a break-even quarter. Revenue also fell short at $437 million, that`s a decline of 31 percent from year ago. The result sent shares lower after initially rising in after-hours trading.

But as Josh Lipton reports the real focus is whether the company has a strategy of being more than just a camera maker.

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JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: GoPro was a Wall Street darling when the company went public in summer of 2014, investors bid up the stock to nearly $100 that fall, but since then it`s suffered a wild ride, just like one of the company`s famous action-packed videos.

GoPro`s big mistake, last year it introduced its newest camera, Hero 4 Session. GoPro billed the camera as its smallest and lightest camera to date, but the company grossly mispriced the product. The original price of $400 was slashed twice down to $200. On top of that, GoPro`s CEO Nick Woodman says the company made a mistake by not dedicating enough resources to its marketing efforts. Add it up and GoPro suffered a disappointing holiday season leading to layoffs at the company and a stock that dropped to $10.

So what can Woodman do now to turn around this company? Analysts say it starts with a new camera that needs to boast exciting innovative features.

CHARLIE ANDERSON, DOUGHERTY & COMPANY: There are a number of cameras we`re seeing that are starting to only out, Nikon had one that can capture in 360 degrees. So, the idea is a GoPro camera today captures at 180 degrees, but you`d love to look at the full sphere around you, and that would be something that you could use that video, and like a VR headsets, you could fan around and see the video from all sides, share it on social media, people could pan around 360 degree video. I think that`s where the cameras are headed in the future.

LIPTON: Analysts say GoPro also has do upgrade its software, making it easier for users to edit and share content. There are also new products on the way that need to be a hit.

ANDERSON: First out of the gate would be the drown they`re calling Karma that`s supposed to debut in the first half of 2016. So it would be their first effort in a quadcopter drone. It`s a big market already. DJI is the market leader. It`s over $1 billion. They`re a popular holiday gift.

So, you know, GoPro is the brand, they have the distribution, a lot of the drones that people have used historically use a GoPro camera built that they attach into it, so they already have some mind share in the category.

So, as long as they get that product right, I think they will have an audience.

LIPTON: Even bulls like Anderson though say it`s fair to ask whether it`s just too little, too late for GoPro after such a tough year winning back credibility with investors won`t be easy, but the start of a rebound, if there`s going to be one, begins now.

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

(END VIDEOTAPE)

MATHISEN: The pharmaceutical giant Merck (NYSE:MRK) misses its revenue target and that is where we begin tonight`s "Market Focus."

The company said a strong dollar and increased pricing pressure cut into sales. Fourth-quarter profit at the drug maker fell nearly 90 percent compared with the year before, when it had a big gain from the sale of its consumer health business. Merck (NYSE:MRK) also issued a cautious 2016 outlook. The company`s shares fell fractionally today to $50.05.

Similar story at the snack company Mondelez, it saw shares fall after a 17 percent drop in quarterly revenue partly because of the dollar and sale of a majority of its coffee business. The Oreo cookie maker was also hurt by a $800 million accounting charge related to its Venezuela unit. Guess they don`t eat Oreos down there. Shares of Mondelez fell 6.5 percent to $39.23.

General Motors (NYSE:GM) benefited from strong results in the U.S. and China and rode them to a record profit in 2015, nearly $10 billion. The nation`s biggest automaker also reiterated its upbeat earnings outlook for 2016. But despite the news, shares fell 2.5 percent today to $28.92.

And the shares of the battery manufacturer Energizer Holdings (NYSE:ENR) kept going and going today after the company saw an increase in earnings and revenue that topped Wall Street estimates. The company attributed its growth to strong sales and increased prices and it raised its full-year guidance. Shares surged nearly 17 percent to $36.86.

HERERA: Activists investor Starboard Value has taken a nearly 7 percent stake in Marvel Technology Group, saying the chip maker shares are undervalued. Marvel has lost over 40 percent of its value since last year, following the September announcement of an internal accounting investigation. Marvel`s shares rose about 7 percent to $9.27.

Fourth quarter profit at oil refiner Marathon Petroleum Corporation fell nearly 80 percent but that was still good enough to beat street estimates. Revenue at the independent oil refiner fell by almost 30 percent and that was well short of expectations. Company said it plans to cut capital spending for 2016. Shares of Marathon fell more than 7 percent to $37.20.

Insurance giant MetLife (NYSE:MET) missed forecasts on its top and bottom line. The company blamed a drop in operating earnings on a strong dollar and a decline in investment income. Shares initially dropped in extended hours adding to the 1 percent loss today in which they closed at $41.95.

MATHISEN: Well, it`s been a bumpy ride for the U.S. stock market so far this year. Don`t need to remind you for that. And also, though, for the mutual funds that invest in U.S. companies. If the downdrafts have you wondering if you`re in the right mutual funds, we have solutions for you, funds that participate in rising markets but lose less than most when stocks swoon.

Joining us now to discuss is Christine Benz, director of personal finance at Morningstar (NASDAQ:MORN).

Christine, always good to see you. Welcome back.

CHRISTINE BENZ, MORNINGSTAR DIR., PERSONAL FINANCE: Tyler, good to see you.

MATHISEN: You know, it has been a down year. The S&P 500 off, what, about 6.5 percent or thereabouts. How is the average U.S. stock market doing? And are there any making money so far this year?

BENZ: Just a tiny handful of funds have made money and most of them are using odd strategies. So I would say if you`re looking for funds that have made money, you generally don`t want to hold them as core positions within your portfolio. What you want to look for are mutual funds, if you`re in the equity market, mutual funds that have lost less than --

MATHISEN: So, make me feel better or worse, what`s the average fund down so far this year? U.S. fund?

BENZ: About 7 percent through yesterday.

HERERA: And, you know, I`m noticing these are some of the equity funds in the green year to date, but I`m looking at the returns and those returns, many of them don`t even equal 1 percent. I think the Federated strategic value dividend class "A" is the top and that`s just over 2 percent. So, even those who are in the green, the results are not all that impressive compared to previous years.

BENZ: That`s right. You might find some funds that are using inverse strategies. Those are up. But they`ll also tend to be way, way down when equities are up. So, you generally don`t want them in your portfolio.

HERERA: So, you gave us a list of three funds that can provide protection in this market, lose less than the averages when the market goes down. They may make less than the average when the market goes up. But tell me about number one, American Century Equity Income. Why do you like it?

BENZ: This is just kind of a classic equity income fund. It`s dividend focused.

One thing that it does a little l bit differently from some other dividend- focused funds is it typically holds some convertible stock, as well as some preferred stock. And that does two things. It bumps up the income cushion a little bit, and it also tends to -- that piece of the portfolio tends to behave a little bit better when equities are going down.

So, it has a very long tenured management team. They`ve been doing this same strategy for a number of years. They tend to focus on the defensive industries like health care, consumer defensive and utilities.

HERERA: Next on the list, the Jensen Quality Growth. You say it is a tame large growth fund.

BENZ: Right. We often think of the large growth category as being kind of an aggressive category. This is not an aggressive fund. It uses a pretty formulated strategy in that it focuses on companies that have returns on equity of 15 percent or more over the past 10 years.

That tends to give it a basket of highly profitable, highly stable companies. It`s been a good performer in weak markets, including so far in 2016.

MATHISEN: And a quick thought on Vanguard dividend growth, Christine.

BENZ: This fund would actually be at the top of my list among defensive funds that I would recommend. It`s a sturdy fund. It uses a quality conscience strategy.

So, its yield will not be high in absolute terms. It will be kind of right there line with the S&P 500, but it will be a quality basket of holdings. Also very low cost like any Vanguard --

MATHISEN: And a manager who`s been there for a long time.

BENZ: He has, Dan Kelbright (ph) from Wellington Management.

MATHISEN: All right. Christine, thank you very much. Christine Benz with Morningstar (NASDAQ:MORN).

HERERA: Coming up, why this weekend`s big game means big business for one small store.

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HERERA: A tough day for shares of Buffalo Wild Wings (NASDAQ:BWLD). The restaurant chain`s quarterly results fell short of Wall Street estimates. Same-store sales also declined and food safety concerns hit one of its restaurants in Kansas. Shares fell more than 4 percent in the regular session and extended those losses initially in after-hours trading.

MATHISEN: But this, folks, is a big time of year for chicken wings especially for small business owners who rely on strong sales during the big game this weekend.

Kate Rogers (NYSE:ROG) reports from Bellmore, New York.

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KATE ROGERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: The competition will be fierce on the field and in the kitchen this Super Bowl 50 weekend. And it`s not just the teams that have something to prove.

MATTHEW LICHT, WING ZONE FRANCHISEE: One goal we`re looking to break this year is our hourly volume to surpass 4,000 which we missed it by 50 bucks last year during one hour we did about 3,900.

ROGERS: Wing Zone franchisee, Matthew Licht, is out to top last year`s sales of nearly 50,000 wings on Super Bowl Sunday alone. It`s the calm before the storm right now but all hands are on deck at the store come this weekend.

Everyone from his dad, Steve, who`s co-owner, to his wife, Marissa, who`s eight months pregnant, will be working. So far, he has just under $11,000 in preorders between his two stores on Long Island.

This year, Americans are set to eat 1.3 billion chicken wings on super bowl weekend which is big business for fast casual restaurants.

Last year, national chain Buffalo Wild Wings (NASDAQ:BWLD) sold more than 11 million wings on that weekend, alone.

MATTHEW HALLER, INTERNATIONAL FRANCHISE ASSOCIATION: The growth in the restaurant industry in franchising is really across the board, both from quick service restaurants, to full service restaurants, and really that fast casual area that sort of cuts in between both.

ROGERS: The challenge for small businesses like his is ordering the right amount to keep up with demand. Wing Zone already has 4,000 pounds of wings in the cooler, but they had to learn the hard way a decade ago.

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