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Sedgwick, John Harwood, Jane Wells, Julia Boorstin>
Government; Politics; California; Sempra Energy (NYSE:SRE); Disasters;
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ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Setting the tone. Will the four major themes of the first two months play out over the rest of the year?
TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Making a splash. A wild day on the campaign trail that included water-throwing and a major endorsement for the GOP front-runner.
HERERA: Price tag. The company behind the biggest natural gas leak in U.S. history is tallying the cost of that disaster.
All that and more tonight on NIGHTLY BUSINESS REPORT for Friday, February 26th.
MATHISEN: Good evening, everyone, and welcome.
Well, two straight weeks of gains for stocks, and while that may sound like a positive trend, in this market, it`s a little bit hard to tell.
Just look at what we`ve seen so far this year. One leap year day shy of the two-month mark in 2016, the major averages are all down 4 percent or more. Along the way there have been big ups, bigger downs, and dizzying swings.
So, two months down, almost, ten to go. And while no one knows what`s next for the market for sure, we can be pretty sure that four of the themes that set the tone in the first two months of 2016 will persist for the rest of the year.
(BEGIN VIDEOTAPE)
MATHISEN: First, oil prices. Stocks and oil. Oil and stocks. They`ve been linked for the most part virtually every day this year.
And until there`s more clarity on production levels, out of OPEC especially, and more clarity on prices, chances are stock prices will ride the wave of oil until they don`t. Meantime, the low oil price and the possibility it could fall more is pressuring U.S. exploration and production companies with high debt.
Listen to Again Capital`s John Kilduff.
JOHN KILDUFF, AGAIN CAPITAL: Well, I`m going to piggyback on a report from Deloitte just recently this week that said 75 percent bankruptcy, restructuring of debt at the least, or out and out windups at the worst.
MATHISEN: Next, fears of a global recession.
WILLEM BUITER, CITI CHIEF GLOBAL ECONOMIST: Growth continues to slow down globally. I think there`s still further slowdown to come in China. Now also the advanced economies, including the U.S., are slowing down.
MATHISEN: China is growing, but at the slowest rate in a generation. Japan is dead in the water. Europe`s growth is spotty.
Strong some places, weak in others -- which brings us to the U.S. The economic data points are a mixed bag. Fourth quarter GDP revised up today but up to just 1 percent.
That`s still down sharply from mid-2015. Consumers didn`t spend at the end of last year but January`s consumer spending number was up more than expected, half of one percent. Consumer sentiment slipped a bit in February, but it was higher than previously thought.
So, what will the world`s central banks do? That`s the third enduring theme of 2016.
And here, to coin a word, the bankers are not just uncoordinated, they are dis-coordinated. China, Japan, and the European central bank are pumping money into the system. The Federal Reserve here in the U.S. wants to siphon it offer so gradually. The great rate debate will persist through the year.
BUITER: I think it will dawn on people that the old game by the central banks could stimulate demand from their own is over.
MATHISEN: And finally, theme number four, the U.S. presidential election. It will hang over the economy and the mystified global markets like a Beijing smog. Could it choke U.S. growth or stifle stock prices? You bet it could.
DONALD TRUMP (R), PRESIDENTIAL CANDIDATE: He doesn`t even know how to tell the truth --
(END VIDEOTAPE)
HERERA: John Canally joins us now to talk more about these dominant themes, from oil to the economy, to the presidential election, and how they may play out in the market over the next year. He is chief economic strategist with LPL financial.
John, welcome, nice to have you here.
JOHN CANALLY, LPL FINANCIAL: Good to be here.
HERERA: Of those four themes that we outlined, which resonates the most with you at this point? And do you think that it will continue for the rest of the year?
CANALLY: I do. I think all those are crucially important. They`re all interrelated.
And I would say that the most important one to me is the price of oil. But they`re all sort of the same. We`ve gone through eight years where the Fed kept rates at or close to zero. We also came from a period where China was growing 10 percent to 12 percent. Now it`s growing maybe at 4 percent.
Those are -- each of those shifts by themselves is a big deal. To have two of them happening at once was almost too much for global markets to handle. And it took eight years to get into the structural imbalances that we have and it`s not going to take just eight weeks or eight months to get out of it, it may take awhile longer.
So, we think the first two months of the year are a pretty good template for what`s going to happen over the final --
MATHISEN: Why are oil prices and stock prices, at least in the U.S., so intimately connected these days?
CANALLY: They shouldn`t be. And some of the correlations are quite strange and disturbing. But they are quite high. I think what`s happening is that oil prices have become a proxy for global growth, rightly or wrongly.
In our view, it`s more right than wrong but it`s not entirely right. Most of the oil problem is a supply problem, not a demand problem. And on the supply side we have seen some cuts. So for example, here in the United States, supply is down about 7 percent from the peak last June. That`s good. Overseas, however, OPEC has agreed to a freeze in production but not a cut yet. So, that really remains an issue.
But day to day, week to week, month to month, until oil and stocks can decouple, unfortunately I think they`re going to remain coupled if that makes any sense. The only way they`re going to decouple is if supply can kind of tighten up a bit and oil prices are going to go higher. It`s a very complex issue. But I think in order to decouple oil stocks have to come down. Oil supply has to come down more rapidly than it already has.
HERERA: All right. Well, it`s going to be an interesting year to say the least. John, thank you so much.
CANALLY: Thank you.
HERERA: John Canally with LPL Financial.
MATHISEN: And as we just reported, the Federal Reserve`s policy decisions will certainly shape the market in the months to come, but those decision days which occur roughly every six weeks aren`t the only times we hear from the Fed`s top guns. Officials give speeches did and interviews often, nearly every day, as Steve Liesman reports, they may be speaking too much.
(BEGIN VIDEOTAPE)
STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: A new research paper coauthored by top Wall Street economists, academics and a former fed official asks should the Fed just shut up when it comes to telling the market when it will raise interest rates? This 100-page paper, it was delivered to the Chicago Booth School`s monetary conference, they meet every year in New York.
It pretty much says that. It says the Fed should stop telling markets when it will raise interest rates and focus instead on economic data. Stop talking about when or how many times in a given year it will hike. The paper says this leads to more market volatility and to worse economic outcomes.
And it blames the market, and in fact the financial media, for focusing too much on time and not enough on data. It raises the question about whether the Fed should get rid of the dots or their forecasts for future Federal Reserve interest rate hikes.
But top Fed officials who they were in the audience, they`re pushing back. Fed Governor Jay Powell, he spoke at the conference. He said, "I`m not convinced my own judgment`s different in significant respects from those described in the paper."
San Francisco Fed President John Williams also said he was not convinced, "By this evidence that time-based guidance leads to bad outcomes."
Fed officials right now are looking for the right language to guide the markets in this era of potential rate hikes, when in fact the market is forecasting none at all. But the early response to this paper says the Fed will keep forecasting and talking about when it will hike, but dependant on the data.
For NIGHTLY BUSINESS REPORT, I`m Steve Liesman in New York.
(END VIDEOTAPE)
HERERA: A mixed finish on Wall Street as investors digested the recent economic data and kept a watch on oil, of course. By the closing bell, the Dow Jones Industrial Average fell 57 points to 16,639, the NASDAQ rose 8 and the S&P 500 lost 3. For the week, all of the major indexes rose 1.5 percent or more.
MATHISEN: China is seeking to restore confidence in its economy. Leaders from that country are talking up plans to increase growth as G-20 nations gather in Shanghai. Concerns about the global economy loom large.
Eunice Yoon reports.
(BEGIN VIDEOTAPE)
EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Persistent worries about China`s slowdown and Beijing`s ability to manage it have been identified as key risks to the global economy. I spoke about this with Hank Paulson who said that Beijing`s leaders have a messaging challenge but they`re taking steps to address it.
HANK PAULSON, FORMER U.S. TREASURY SECRETARY: A big part of things they can do is they can show right now they`re very serious about dealing with inefficient state-owned enterprises as they take capacity out of the steel industry, coal industry and others by letting some failing companies fail.
YOON: In fact, China`s leaders have been messaging that they understand there`s a greater need for transparency in their policymaking. The Chinese central bank governor today held a news conference which some officials took to mean the central bank is embracing more openness.
The central bank governor also made remarks today, notably in English, and some people took that to mean he wanted to speak directly to global investors. He said that the bank didn`t see any basis for persistent RMB depreciation and also the central bank believed it had enough tools in its tool box to stimulate growth. Some investors think that could mean we could see more interest rate cuts to come.
For NIGHTLY BUSINESS REPORT, I`m Eunice Yoon in Shanghai.
(END VIDEOTAPE)
HERERA: And now to Ireland which remains the fastest-growing economy in Europe. Today, the Irish electorate went to the polls to vote in the general election. The question is whether the austerity-weary country will usher in more fiscal restraint.
And as Steve Sedgwick reports from Dublin, the results could have broader implications for all of Europe.
(BEGIN VIDEOTAPE)
STEVE SEDGWICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Here in Dublin and throughout Ireland, the country is going to the polls on Friday and it`s an absolutely key event for not only this country but also for the broader Eurozone.
For the broader Eurozone, concerns about lack of appetite for austerity, for more reforms inspired by the European central bank, by the IMF, and by the commission is a key issue after inconclusive results on elections in Spain and Portugal.
For Ireland, it is absolutely key, because it`s a country which has grown aggressively over the last couple of years, appearing to recover fully from the debt of the crisis of 2010 and 2011. The money markets have confidence again in the Irish economy. Rates for 10-year paper are now under 1 percent, and unemployment has gone down from 15 percent to around 8.5 percent.
So, the appetite of the Irish people for more austerity, for more reforms, is a key test for not only this country but the broader Eurozone and European Union.
This is Steve Sedgwick for NIGHTLY BUSINESS REPORT, in Dublin, Ireland.
(END VIDEOTAPE)
MATHISEN: And now to our election. There was a surprise endorsement on the campaign trail today. New Jersey governor and former Republican presidential candidate Chris Christie endorsed the GOP frontrunner Donald Trump.
(BEGIN VIDEO CLIP)
GOV. CHRIS CHRISTIE (R), NEW JERSEY: America needs someone who`s going to make sure that Hillary Clinton doesn`t get within ten miles of the White House. Donald Trump can do it.
(CHEERS)
(END VIDEO CLIP)
MATHISEN: John Harwood, of course, has been following this latest twist in a wild race.
John, welcome.
Many observers I think thought Mr. Trump had a rough night in last night`s debate. So, how important was this endorsement today? And more broadly, do endorsements really mean anything in the long run?
JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, endorsements generally, Tyler, don`t mean all that much in terms of bringing votes. But they can change the psychology of a race. They can change the storyline of a race. And that`s why this is big for Donald Trump.
Chris Christie is as mainstream a Republican as you can get. He was the keynote speaker at the last Republican convention. He was once believed to be a front-runner for the Republican nomination itself.
And he becomes the first person who`s not a fringe figure like, say, Sarah Palin, to embrace Donald Trump right at a moment where, if he has a breakout on Super Tuesday, March 1st, 11 states voting, he could be rolling toward the Republican nomination and it`s something that change the storyline away from that debate where Donald Trump got pummeled last night.
HERERA: So given what we saw today, John, what`s the path ahead for Marco Rubio?
HARWOOD: Well, Marco Rubio seems to have decided, based on how well he did in the debate last night and the crowd response this morning, that he`s going to go all trump on Trump. He was mocking trump from the stage. He talked about how Trump wanted to check a full-length mirror before the debate. He said maybe he wanted to see if his pants were dry.
He was -- he was ridiculing Donald Trump in the fashion that we`ve become accustomed to seeing from Trump. The question is, is that going to work for him? Is it going to let him pull the party together? Is it going to let him win any states on Tuesday? Which is the big question. He`s not leading in any of the Super Tuesday states.
MATHISEN: Let`s talk about Ted Cruz. He has a very big day ahead on Tuesday. Where was he in all of this hullabaloo?
HARWOOD: Well, he was pretty much out of the storyline, although late in the day, he talked to reporters, went very hard after Donald Trump, also went after Hillary Clinton.
The big test for Ted Cruz is, can he win the state of Texas on Tuesday? That`s the biggest prize on Super Tuesday. Ted Cruz has been leading Donald Trump there, but this Trump endorsement from Christie was in Fort Worth today. Texas will be a big test of whether Donald Trump has got momentum from the general run of the campaign plus this endorsement to overtake Chris Christie. If he does, that could push Ted Cruz out of the race.
MATHISEN: All right. John Harwood, thanks very much. It`s getting real exciting.
HERERA: In Washington today, the IRS said that more than twice as many taxpayer accounts may have been hit by cyber criminals than previously thought. The agency says hackers gained access to as many as 700,000 accounts. Last August, the IRS said 330,000 accounts may have been compromised. The hackers did not target the main database but rather one that allows taxpayers to obtain previous year tax return information.
MATHISEN: Still ahead, beaten and bruised. Why our market monitor says those are the stocks that could be good buys.
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HERERA: The United Technology/Honeywell drama continues. The industrial conglomerate rejected a $90 billion offer made by rival Honeywell earlier today. United Tech says the bid undervalues the company and that any combination would be irresponsible toward its shareholders. Shares of both companies fell in trading today.
MATHISEN: Apple (NASDAQ:AAPL) CEO Tim Cook defended his company`s opposition to the FBI`s request to hack into an iPhone used by one of the San Bernardino shooters. Speaking at the company`s annual shareholder meeting, Cook said, "Apple (NASDAQ:AAPL) is a staunch advocate for our customers` privacy and personal safety." The company also committed today to raise its dividend annually.
HERERA: Sempra Energy (NYSE:SRE), it`s not a household name but it owns the California storage field responsible for the largest natural gas leak in U.S. history. Despite the leak the company`s earnings were upbeat, even as it tallied the cost of the recently capped well.
Jane Wells has more from Los Angeles.
(BEGIN VIDEOTAPE)
JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT: It`s called the worst manmade greenhouse disaster in U.S. history, displacing thousands of people and costing hundreds of millions of dollars.
UNIDENTIFIED MALE: I have not been in my house for three weeks.
WELLS: Yet the company behind the leak in Los Angeles reported earnings Friday which beat the street. Sempra Energy (NYSE:SRE) had a fantastic quarter, even as its Southern (NYSE:SO) California Gas division dealt with a devastating leak at a massive natural gas storage facility under a neighborhood in northern Los Angeles. The leak started in October and residents soon complained of the odor and health problems.
UNIDENTIFIED FEMALE: Headachy, sinusy, naggy headache. That`s what I experienced.
WELLS: Schools had to shut down and the utility was ordered to pay for temporary relocation of residents. The leak was finally sealed last week but not before spewing an estimated 5 billion cubic feet of methane gas into the atmosphere, the equivalent of a full year of methane emitted from nearly 600,000 cards.
Sempra CEO Debra Reed said the analysts call that costs so far is estimated at $330 million, but Sempra will only probably pay about $5 million.
DEBRA REED, SEMPRA ENERGY CHAIRMAN & CEO: We have concluded it is probable that we will receive insurance recovery for the total amount, less retention of $325 million.
WELLS: Sempra says it has four insurance policies totaling over $1 billion in coverage and it may need to tap into them. Yesterday, residents were told they could move home. The tests showed the air was safe. Many don`t want to and a court has ordered Southern (NYSE:SO) California Gas to continue paying relocation costs for three more weeks.
UNIDENTIFIED FEMALE: You need to shut it down. It`s killing us.
WELLS: Then there`s the debate whether to ever open the storage facility back up. SoCal Gas president Dennis Arriola said shutting it down for good would be bad for L.A.
DENNIS ARRIOLA, CALIFORNIA GAS COMPANY PRESIDENT & CEO: It`s vital that we have safe and reliable gas storage to support not just gas demand but especially in the Los Angeles basin, electric reliability as well.
WELLS: But now, the county has launched a criminal investigation of the utility and it`s also being sued by local air quality regulators. Still, SoCal Gas saw earnings skyrocket last quarter and while future fines might be covered by insurance, one might expect that Sempra`s insurance premiums will rise.
For NIGHTLY BUSINESS REPORT, Jane Wells, Los Angeles.
(END VIDEOTAPE)
MATHISEN: A blowout quarter for JCPenney and that is where we begin tonight`s "Market Focus."
The retailer posted better than expected revenue and earnings and so its market share grows, helped in part by strong holiday sales in the company`s Sephora and footwear segments. The department store chain also says it expects to post its first annual profit in five years. Shares up more than 14 percent on the day to $9.59.
Footlocker`s fourth quarter sales and profits topped street expectations, but the shares tripped after the company said February comparable store says could fall year over year. The stock down more than 4 percent to $64.14.
HERERA: Macy`s (NYSE:M) said it would raise its quarterly dividend by 5 percent. It will also add $1.5 billion to its share buy-back program. The news comes after the retailer said earlier this week that it saw a more than 30 percent decline in profit for its latest quarter. Shares of Macy`s (NYSE:M) were up fractionally to $43.43.
Weightwatchers shares thinned out a bit today. Investors had their first chance to react to earnings out late yet. The diet company reported a sharp drop in revenue, hurt by a decline in subscriptions. Weightwatchers tumbled more than 29 percent to $11.01.
MATHISEN: And now to our weekly market monitor who is finding opportunities in battered stocks across a few different sectors. This is the first time join us the program. Welcome to Sarah Hunt, portfolio manager at the Alpine Fund.
Sarah, good afternoon, evening, good to have you with us.
SARAH HUNT, ALPINE FUNDS PORTFOLIO MANAGER: Good evening. Nice to be here.
MATHISEN: You don`t see the market making a lot of headway as far as your eyes can see, why?
HUNT: I think right now, we`re in a little bit of a difficult time, because you`ve got the Fed, you`ve got to the ECB, you`ve got the BOJ. We`re not all going in the same direction.
Markets have been pretty unsteady since the beginning of the year and toward the end of last year. I think for that reason and I think until the markets start to feel like there`s either a direction where everybody`s headed in the same direction or the fact that we`re having divergent monetary policy is not going to affect the market much, I think until then, you`re going to continue to see volatility.
HERERA: You did manage to find stocks for our viewers to take a look at. The first one on the list is FedEx (NYSE:FDX). You have a price target of $165. Tell me about that.
HUNT: So I think FedEx (NYSE:FDX) is a stock like a lot of the transportation stocks have been hit very hard. If you look at the S&P right now, you`ve seen a lot of stocks beyond a bear market and down more than 20 percent. I think FedEx (NYSE:FDX) has taken a bunch of selling pressure because of the fact that people are worried about the global economy, because of the fact that people are worried about what`s going on in the U.S. and outside the U.S.
And the transports tend to take a dim view in the economic picture changes. And I think those stocks have taken a pounding. We like where FedEx (NYSE:FDX) is sitting. The ground business is stabilizing. They`ve made an acquisition. If they can get through the integration, we think that FedEx (NYSE:FDX) right now where it`s sitting is in pretty good shape.
MATHISEN: Give us a few phrases on BE Aerospace (NASDAQ:BEAV). You have a price target in the mid $50s.
HUNT: So, BE Aerospace (NASDAQ:BEAV) makes the interiors for planes. It makes seats and cabin interiors and kitchens and things for airplanes. You`ve got two markets there. You`ve got the new equipment market and you`ve got the retrofit market.
So, we think that that stock has been beaten down pretty hard. It`s separated from its distribution business. There was talk of a takeout before that happened. The stock did not get bought.
So, I think the valuation got very attractive for us here. We think the risk/reward here is pretty nice. We look at how much traffic continues to grow. And we say, you know what, the airplanes are going to continue to be built, they`re going to continue to roll off the lines, and they`re going to have to have interiors.
HERERA: And if you want to go into the energy sector, do it for the dividend and BP is your recommendation there. So, I assume you think that dividend is safe?
HUNT: Well, we are -- we have several dividend funds and we`re very focused on dividends. We like BP here because they`ve done a lot of work already to get their balance in shape for what is turning out to be a very difficult oil price. They had to do that for not such great reasons, but because they did it they`re in a pretty good situation right now with their balance sheet.
Now, oil prices are definitely going to be the key to this entire sector and the dividends across the sector. We like BP, we like Exxon, and we think that they`re in pretty good shape to keep those dividends.
MATHISEN: All right. Sarah, thanks very much, well done.
HUNT: Thank you.
MATHISEN: You can come back.
(LAUGHTER)
HUNT: Thanks so much.
MATHISEN: Sarah Hunt with Alpine Funds.
HERERA: We look forward to it.
All right. Coming up, Hollywood`s biggest night comes as the industry undergoes tremendous change.
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MATHISEN: Here`s a look at what to watch next week.
On Tuesday, automakers will release sales figures for February. Several states head to the polls on Tuesday. To vote in the primary on what is known as Super Tuesday. And Friday, it`s Super Friday. We`ll get the unemployment report for February right before the opening bell. That`s what to watch next week.
HERERA: And finally tonight, glitz, glamour, the big business of Hollywood will be on display at Sunday`s telecast of the Academy Awards.
Hollywood`s biggest night comes at a time of change and controversy for the industry.
Julia Boorstin reports from the red carpet.
(BEGIN VIDEOTAPE)
JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Academy`s rolling out the red carpet for Hollywood`s biggest night of the year, as studios face all sorts of new challenges.
For their media giant parents, studios` performance is increasingly important, as their TV division counterparts are under pressure from cord cutting.
Viacom (NYSE:VIA) perhaps is feeling it the most. It just started strategic investors to take a stake in its Paramount Studio.
And the most successful studios face tough comparisons after last year, thanks to Disney`s "The Force Awakens" and Universal`s "Jurassic World," the biggest box office year on record.
GITESH PANDYA, BOXOFFICEGURU.COM: We have a "Star Wars" movie coming out in December, but it`s more of a spinoff and not a direct sequel. So, it will be a little bit hard for studios to match up last year`s box office.
BOORSTIN: Plus, there are some new issues. First, while movie ticket prices continue to rise, but consumers have more options what was to watch on TV or to stream at home.
Second, for lower-budget films, the type that tend to draw Oscar attention, like this year`s nominee "Brooklyn," studios face new competition from Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN), which have snapped up movies on the festival circuit.
And third, the Academy and studios are under fire for a lack of diversity. All 20 acting nominees are white this year and last year. #oscarsowhite tweeted over a half a million times since January.
PANDYA: For a business perspective, it makes total sense to reflect the population, the people in your movies.