NIGHTLY BUSINESS REPORT for July 5, 2016, PBS - Part 1

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Mike Santoli, John Harwood, Phil LeBeau, Eamon Javers, Jane Wells>

Politics; California; Agriculture>

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

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: The rally stalls. Stocks drop, crude crumble, yields hit record lows, as investors` attention turns to jobs and profit reports.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: No charges. The FBI recommends against charging Hillary Clinton in her handling of e-mails as secretary of state, but the controversy may not be over.

MATHISEN: And the next cash crop? Why California farmers may be starting to plant the seeds of something really big.

All that and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, July 5th.

HERERA: Good evening, everyone, and welcome.

It was nice while it lasted. But the rally that led to the biggest weekly gain of the year did not spill over into the new week. This as investors grew concerned about the strength of the global economy. In a major report, the Bank of England warned that risks associated with last month`s vote by the U.K. to leave starting to crystallize.

In response, the British Central Bank took steps to bolster lending.

(BEGIN VIDEO CLIP)

MARK CARNEY, BANK OF ENGLAND GOVERNOR: Three quarters of U.K. banks accounting for 90 percent of U.K. lending will immediately, immediately, have greater flexibility to supply credit to U.K. households and firms.

(END VIDEO CLIP)

HERERA: Uncertainty over policy both here and abroad sent stocks lower. It also pressured crude and sent the yield on a ten-year treasury to a record low. The Dow Jones Industrial Average lost 108 points to 17,840. The NASDAQ was off 39, the S&P 500 was down 14.

MATHISEN: And it`s not just the U.K. economy that is feeling the effects of the so-called Brexit vote. The impact could spread to other weaker parts of Europe, like Italy and potentially cause more serious problems.

Michelle Caruso-Cabrera explains.

(BEGIN VIDEOTAPE)

MICHELLE CARUSO-CABRERA, NIGHTLY BUSINESS REPORT CORRESPONDENT: More than a week after the vote in the U.K. to leave the European Union, there is one clear victim: the Italian banking sector. Italian banks have fallen more than 30 percent since the vote, and year to date, they`re down more than 50 percent. The Italian banking system has long been troubled, swamped with bad loans, and they need more capital.

The world was reminded of this yesterday when Monte dei Paschi, that`s the world`s oldest bank and Italy`s third largest lender, informed the market that the ECB, the European Central Bank, was demanding that they do more clean up their balance sheets. So, their stocks and bonds have fallen further.

Italian banks have an estimated 360 billion euros, that`s roughly $400 billion, of non-performing loans. So, no one disputes the banks need the capital. What there is a dispute about is how the banks should get that money. The Italian prime minister would like the government to help out the banks. However, new rules that went into effect on January 1st prohibit a government from using taxpayer money to bail out a bank, that is unless they first punish the shareholders and bondholders.

And in Italy, just so happens a lot of retailer investors, what we call mom and pop investors, hold bonds that could potentially get wiped out or suffer severe losses in the event of a bailout. Prime Minister Renzi wants an exception to those rules and he says Brexit justifies that.

So far, the Germans and other members of the European Union disagree. However, there are growing concerns across Europe that if small investors believe they`ve lost money, because Italy belongs to the European Union, it could lead to even more demands for a break from that union.

For NIGHTLY BUSINESS REPORT, Michelle Caruso-Cabrera.

(END VIDEOTAPE)

HERERA: Well, the stock market has indeed been volatile since the U.K. vote and that`s making one thing clear for investors -- the fallout and its impact on the markets will likely linger for a while.

Dominic Chu has more.

(BEGIN VIDEOTAPE)

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Stocks in the U.S. took a breather today after four straight days of gains and that was all on the heels of that vote by the United Kingdom to leave the European Union, that so-called Brexit vote. And it could be a big part of the market`s story for months and possibly years to come.

RICH WEISS, AMERICAN CENTURY INVESTMENTS: You`re talking about a potential recessionary item for the U.K. if not Euro link. And then, longer term of course, the possible other dominos to fall, what are they calling it, Ita-leave and Portu-go. So, it`s the canary in the coal mine here. It`s potentially very significant event.

CHU: Many investors used the recent selloff to buy stocks at a discount and as a major result, the ten industry sectors within the S&P 500 are positive since the market lows on June 27th.

While health care and industrial stocks have posted some of the biggest gains, materials and utility stocks have posted some of the smallest ones. A number of big name stocks have not participated in the post-Brexit rally. Among them, familiar names like Zion`s Bancorp, also farm equipment maker Deer and Company. Chain restaurant owner Darden and oil and gas company, southwestern energy. But overall, some experts believe that the U.S. still represents one of the most attractive places to invest in the world.

WEISS: To the extent Europe dissolves economically, it will have a much stronger and hand and U.S. stock and bond prices and currency should fare well over the intermediate term. So, lots of potential opportunity, but at this point, without some of the geopolitical uncertainties resolved, it`s a real gamble.

CHU: As for what to expect the second half of the year, a lot will depend on the global economy.

BOB PHILLIPS, SPECTRUM MANAGEMENT GROUP: If we don`t see real growth hold up and companies around the globes earnings come in better than last year, to me, that`s the absolute key that`s going to drive the market higher. If earning stays relatively flat, earnings stay flat, I think the market probably stay in a band they`ve been trading in for the last couple of years.

CHU: Now, add to that potential action or inaction by the Fed, as well as central banks around the world and, of course, our own presidential election uncertainty, and you have the makings of what could be a rocky ride for the rest of the year.

For NIGHTLY BUSINESS REPORT, I`m Dominic Chu.

(END VIDEOTAPE)

MATHISEN: So, with concerns about the global economy sending stocks down today, will the jobs report and earnings season that kicks off in earnest next week be the catalyst that might help lift stock prices?

John Canally is chief economic strategist at LPL Financial and he Joins us now.

John, welcome back. Good to have you with us.

JOHN CANALLY, LPL FINANCIAL CHIEF ECONOMIC STRATEGIST: Good to be here.

MATHISEN: Let`s talk about and maybe dispose of the thing that Michelle Caruso-Cabrera was just talking about earlier, the Italian banks. Do American investors need to worry about what happens to Italy`s banks?

CANALLY: You know, I think you do. It would be similar to what we went through about a year ago with the Greek banking system. It might impair the ability of our banks to lend to business and consumers. So, yes, I think it is worth watching.

I think the silver lining over the last six or seven years is that central banks and policymakers know now better how to respond to these type of things and in the wake of the Brexit vote, central bankers have largely done and said the right things to help calm markets.

HERERA: You know, today, though, they weren`t calm initially. How worried are you about Britain specifically. Yes, the central bank made moves today to try and loosen up lending and free up more capital, but a lot of people think it`s going the take a while for that to actually play out.

CANALLY: Yes, I think it`s going to be a difficult environment within the UK. The pound is down to 30-year lows. That`s going to make it difficult to do business. It will cushion the blow right away. It will make their exports a little bit cheaper to overseas markets, but I think the U.K. is at least going to skirt a recession over the second of the year and probably will fall into a recession early next year.

The impact of that though on U.S. companies is probably pretty muted. Only about 5 percent of U.S. company earnings are derived from the U.K.

MATHISEN: Britain`s biggest export is Adele, I think.

Let`s move on to the U.S. and what you see in U.S. profits. One of the prior guests in Dom`s piece said if profits don`t start to click upward, we`re going to be calm for a long time in the markets. How do you see U.S. profits?

CANALLY: We`re just about to head into second quarter earnings reporting season, and I think that`s actually a bright spot. We`ve had this Brexit vote a couple of weeks ago. Now, we`re going to hear from these big multinational corporations that are doing business in Europe and eurozone and we`re going to hear directly from them how this might impact their second half of 2016 and maybe even 2017 as well.

And I think when all is said and done, they`ll fare. We still think earnings are going to be down about 4 percent, year over year. You have some lingering impact of the stronger dollar and weaker oil prices. But I think the guidance for the second half of the year is going to be far more important than what companies tell us about the second half or the second quarter.

Remember, the second quarter is pre-Brexit. The second half is post- Brexit. What the market wants to know now is what`s going to happen.

MATHISEN: So, watch the guidance, not the rearview mirror.

CANALLY: Exactly.

MATHISEN: John Canally, thanks very much, with LPL Financial.

HERERA: Well, those concerns that Britain`s exit from the E.U. could potentially slow the global economy weighed on the price of oil today. If the global economy slows, demand won`t grow enough to supply the glut. As a result, domestic crude slid nearly 5 percent today to $46.60. A separate report estimates the U.S. is sitting on more untapped oil than any other country in the world. According to Rystad Energy, more than half of America`s untapped oil is unconventional shale.

MATHISEN: Orders at U.S. factories dropped in May. The Commerce Department reported a 1 percent decline. Those numbers dragged down by less demand for steel, furniture and military aircraft. The lackluster performance of the manufacturing sector has blamed on weak growth around the globe.

HERERA: The president of the New York Fed says the outlook for U.S. monetary policy is uncertain right now, especially following the British vote. Bill Dudley said that the central bank will watch the data before deciding what`s next for interest rate policy. Until recently, the Fed was widely expected to raise interest rates at some point over the summer.

MATHISEN: One of the most important pillars of the U.S. economy, of course, is the consumer. And even before last month`s U.K. vote to leave the European Union, there were mixed signals about whether U.S. shoppers are on solid or shaky ground.

Mike Santoli tries to make sense of it all.

(BEGIN VIDEOTAPE)

MIKE SANTOLI, NIGHTLY BUSINESS REPORT CORRESPONDENT: The American consumer is the single biggest driver of the world economy. From a broad view, consumer fortunes look bright. Unemployment is low. Job openings at a record high. The wages have been growing faster than inflation for a while now.

The housing market continues to rebound. What`s more, the average household has borrowing under control. The percentage of income needed to serve his debt hasn`t been lower since the 1980s. Thanks to low interest rates and small balances.

It`s stocks that are closely linked to consumer spending and lending have been conspicuously weak in recent months. A hint that the markets are concerned conditions might worsen from here. Whether retailers, car maker, airlines or credit card stocks, the shares that should be helped by flushed consumer are having a tough year. This might be because credit card and auto loan delinquencies have turned higher lately, albeit from extremely low levels.

This raises early alarms that this consumer credit cycle might be turning for the worst. Now, this might also simply represent an excessive worry by investors who were burned ahead of the last credit crunch. Even after last month`s disappointing employment report that showed just 38,000 new jobs added in May, the backdrop for the typical worker seems benign. The bottom line, consumers for now seem to have an ability to spend more. But with financial market turmoil and a contentious campaign season underway, it`s unclear if they will choose to open their wallets wider in coming months.

For NIGHTLY BUSINESS REPORT, I`m Mike Santoli at the New York Stock Exchange.

(END VIDEOTAPE)

HERERA: In Washington, the focus was on e-mails. Specifically, those of Hillary Clinton while she served as secretary of state. Despite a blistering review of Clinton`s actions, the FBI said it will not recommend criminal charges be brought against the presumptive nominee.

(BEGIN VIDEO CLIP)

JAMES COMEY, FBI DIRECTOR: Although we did not find clear evidence that Secretary Clinton or her colleagues intended to violate laws governing the handling of classified information, there is evidence that they were extremely careless in their handling of very sensitive, highly classified information. In this case, given the importance of the matter, I think usual transparency is in order. Although there is evidence of potential violations of the statutes regarding the handling of classified information, our judgment is that no reasonable prosecutor would bring such a case.

(END VIDEO CLIP)

HERERA: John Harwood joins us from our nation`s capitol tonight.

John, was Director Comey`s statement today a surprise or not?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, a couple of surprises, first of all, the fact it took place. We know that Hillary Clinton was interviewed over the weekend. Didn`t know how quickly the director would come out and issue his conclusions. It was not a surprise that he did not recommend criminal charges to the Justice Department. But it was a surprise just how blistering that review was that you played that sound bite of, saying that the -- Hillary Clinton and her aides were extremely careless, that even if the material was not marked classified, they should have known that it was classified. It was very strong criticism of the secretary.

MATHISEN: The campaign later today after Director Comey statement said, "We are pleased to put this matter behind us." Is it?

HARWOOD: No. As a legal matter, once we hear from the Justice Department and Loretta Lynch, the attorney general, has said she will follow the recommendations of career officials and certainly, James Comey meets that test, legally, it will be behind her. However, politically, those words from Director Comey are going to be heard throughout the fall campaign and, of course, Donald Trump was out on Twitter very quickly saying it`s evidence of a rigged system.

HERERA: Yes. It must have been awkward, or maybe it wasn`t, for the president today, because it was his first campaign stop with Hillary Clinton after the FBI director criticized her.

HARWOOD: Sue, if only we could have been on Air Force One with Hillary Clinton and Barack Obama after that Comey announcement. But, yes, it was certainly awkward that the president`s FBI director criticized his former secretary of state.

However, President Obama did not betray any of that awkwardness on the stage today. He was extremely enthusiastic about going after Donald Trump, he was enthusiastic about defending Hillary Clinton. He gave every sign that he is going to throw himself into being a surrogate, to try to make sure that he`s succeeded by a Democratic president.

MATHISEN: What do we know about the Trump campaign`s search for a vice president?

HARWOOD: Well, we know that Donald Trump has been having a series of meetings with potential vice presidents. Joni Ernst, the senator from Iowa, Mike Pence, the governor from Indiana. He`s going to be campaigning tomorrow with Newt Gingrich, the former house speaker. Chris Christie has been close to Donald Trump since he got out of the race in 2016 himself. All of those are potential choices.

We believe that Donald Trump will make that announcement next week in advance of his convention. We could also get Hillary Clinton`s announcement as well next week because when you`ve got the Republican convention immediately followed by the Democratic convention, there`s not going to be a clear space in the media for Hillary Clinton to select her running mate. We could get both next week.

HERERA: All right. Get your rest, John. You`re going to be a busy guy. Thank you very much, John Harwood, in Washington.

MATHISEN: Still ahead, cash is king, but not in the fast growing marijuana industry. We`ll tell you why.

(MUSIC)

MATHISEN: Shares of Tesla came under pressure today after the automaker said it delivered fewer vehicles than expected than the second quarter of the year. The stock closed down more than 1 percent on this down day. But that was way off the lows of day and this is the second time this fallen short of delivery expectations.

But as Phil LeBeau reports, the automaker says it is still on track to meet its full year targets.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Tesla`s jump from building one car on an assembly line to cracking out two vehicles, including an SUV packed with complex features, is taking longer to ramp up than many people were expecting. Tesla delivered 14,370 vehicles in the second quarter, well below analyst`s expectations. About a third of the vehicles sold the new Model X SUV with falcon wing doors that have slowed down the company`s plan to speed up the assembly line this year.

Tesla has admitted to overreaching on the complex design of the Model X and they are paying the price, wrote one analyst. While investors knocked Tesla shares lower, the company points out it still expects to deliver at least 80,000 vehicles this year, a target that will require the company to dramatically increase production from now through December. If that happens, Tesla CEO Elon Musk will say it shows his company is ready to push production even further, for the new Model 3 scheduled to come late next year.

The Model 3 is at a the heart of Tesla`s big goal, building a half million vehicles annually by 2018. A target Tesla is sticking by even as it struggles to meet near term sales estimates.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

(END VIDEOTAPE)

HERERA: Delta Airlines (NYSE:DAL) cut its second quarter forecast for a key revenue figure today and that`s where we begin tonight`s "Market Focus". The company cited higher fuel costs and a decline in a consolidated passenger revenue as factors in its weaken outlook. Shares of the airline fell more than 3 percent to $35.62.

Apple (NASDAQ:AAPL) shares fell after Citigroup (NYSE:C) trimmed its earnings estimates on a widely held Dow component. The bank cited uncertainty stemming from Britain`s vote to leave the E.U. It also cited currency volatility and longer iPhone replacement cycles. Shares of Apple (NASDAQ:AAPL) fell a little less than 1 percent to $95.05.

BlackBerry will stop producing its classic smart phone, one of its last models that has a physical keyboard. In a post online, the company executive cited the need to keep innovating and advancing our portfolio. Software updates for existing users will be rolled out into next years. Shares of the company fell down in today`s down trading session by more than 3 percent to $6.53.

MATHISEN: Pharmaceutical giant Bristol-Myers Squibb (NYSE:BMY) brought Cormorant Pharmaceuticals, a Swedish firm that specializes in immuno therapy drugs. The company could spend upward to $520 million on the purchase of Cormorant. This is Bristol`s latest deal involving drugs that use the immune system to attack tumors. Shares of the drug company rose fractionally on the day to $73.80.

Comcast (NASDAQ:CMCSA) (NYSE:CCS) and Netflix (NASDAQ:NFLX) have reached a deal that will put Netflix`s content on Comcast (NASDAQ:CMCSA) (NYSE:CCS) X1 cable top set boxes. Say that ten times fast. Comcast (NASDAQ:CMCSA) (NYSE:CCS) has well over 20 million video subscribers across the country and approximately 35 percent of those customers have the souped up X1 box. Shares of the cable company fell slightly to $65.01, shares of Netflix (NASDAQ:NFLX) up at $97.91.

Comcast (NASDAQ:CMCSA) (NYSE:CCS) is the parent company of CNBC, which produces this program.

Well, the racetrack owner International Speedway (NASDAQ:ISCA) saw profits fall in the second quarter. Despite a rise in revenue, the company whose properties include Daytona International Speedway (NASDAQ:ISCA) in Florida also lowered profit and revenue forecasts for all of 2016. Shares slipped more than 5 percent to $32.24.

HERERA: The maker of Twinkies is preparing to its stuff public. The owner of Hostess Brands struck a deal with the special purpose acquisition company to return to the public market. The enterprise value will top $2 billion. It comes about four years after Hostess filed for bankruptcy protection.

MATHISEN: Marijuana may be league in a growing number of states, but doing business in the weed trade is anything but simple. One big problem, federal banking laws make marijuana merchants virtually untouchable.

Eamon Javers reports from Portland, Oregon.

(BEGIN VIDEOTAPE)

EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Every month, Don Morse, owner of the Human Collective marijuana dispensary, loads about $15,000 into a nondescript bag and makes the 45-minute drive down to the Oregon Department of Revenue to pay his taxes in cash. Morris would rather send a check. It`s easier and safer for him and his employees.

But even though recreational marijuana is legal in Oregon, marijuana business still struggle to get back access to the banking system, because banks are weary of breaking federal anti-money laundering rules.

DON MORSE, HUMAN COLLECTIVE DISPENSARY: People come in, we can`t take credit cards. We have an ATM here. People can get cash for their purchases. But everything has to be done in cash, we take the money in, sizable amount.

JAVERS: That gap in the rules has created an opportunity for third party financial entrepreneurs who are creating ways to get marijuana cash into the regulated banking industry.

In Las Vegas, entrepreneur Sylvain Derosiers is selling kiosk designed to take in and secure cash at the point of sale. He`s applying lessons learned from the gaming business and how to keep organized crime out and help newly legal businesses comply with the law.

SYLVAIN DEROSIERS, GREENIOSK CEO: How do you get rid of the organized crime in these businesses is by adding solid compliance. There`s no secret about it.

JAVERS: The biggest coup for the nascent industry came last week as Microsoft (NASDAQ:MSFT) became the first large company to dip its to toe into the marijuana business. The software giant announced the partnership to sell government compliant software with the Los Angeles-based startup called Kind Financial.

DAVID DINENBERG, KIND CEO: You know, marijuana, the cannabis industry, any way you want to look at it, or slice it, it`s the fastest growing industry in America.

JAVERS: Don Morse and his colleagues at the Oregon Cannabis Business Council continue to push legislators for more access to the banking system, but all of that is likely going to have to wait for more action out of Washington, D.C.

For NIGHTLY BUSINESS REPORT, I`m Eamon Javers in Portland, Oregon.

(END VIDEOTAPE)

HERERA: All right. Speaking of growing things, coming up, can California`s farmers feed the growing demand for what some call the perfect food?

(MUSIC)

MATHISEN: The economy is front and center among the topics to watch tomorrow. The Federal Reserve releases the minutes from its June meeting where the committee decided to leave interest rates right where they are. Fed governor Daniel Tarullo discusses monetary policy and financial regulation, and new reports will come out on trade and the services sector. That`s what to watch Wednesday.

HERERA: America is in the middle of quinoa craze. Up until now, the grain has been grown almost exclusively in South America, but as it turns out, it has the potential to be California`s next cash crop.

Jane Wells has more from Elk, California.

(BEGIN VIDEOTAPE)

UNIDENTIFIED MALE: This variety is called cherry vanilla.

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT: You`re looking at what could be the perfect food being grown in a perfect place.

UNIDENTIFIED MALE: It`s a super, super food.

WELLS: It`s quinoa, a gluten-free grain which contains high amounts of protein and essential amino acids, a weed really which doesn`t need much water to grow. And it is showing up in more food products.

UNIDENTIFIED MALE: Quinoa cakes, quinoa entrees, quinoa snacks.

WELLS: Bryce Lundberg of Lundberg family farm is best known for growing organic rice for chains like Whole Foods. But he began experimenting with growing quinoa a few years ago because Americans are consuming tens of millions of pounds of the grain annually. Up until now, quinoa has almost been grown up in the Andes of South America. The results in the U.S. were surprising.

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