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NIGHTLY BUSINESS REPORT for December 10, 2018, PBS

December 11, 2018

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<Show: NIGHTLY BUSINESS REPORT>

<Date: December 10, 2018>

<Time: 18:30:00>

<Tran: 121001cb.118>

<Type: SHOW>

<Head: NIGHTLY BUSINESS REPORT for December 10, 2018, PBS>

<Sect: News; Financial>

<Byline: Bill Griffeth, Mike Santoli, Wilfred Frost, Eunice Yoon, Leslie

Picker, Diana Olick, Scott Cohn>

<Guest: Quint Tatro>

<Spec: Dow Jones Industrial Average; Stock Markets; Business; Economy;

Bernie Madoff; Ponzi Scheme; Crime>

<Time: 18:30:00>

ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Bill Griffeth and Sue Herera.

BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: What a reversal. After falling more than 500 points, the Dow finished higher. Is there a way do protect your portfolio from what feels like never ending volatility.

Jumping ship. There have been a lot of sellers in this market but it`s who is doing the selling that may signal how long this volatility could last.

And, lessons learned. Ten years since Bernie Madoff confessed to orchestrating the largest Ponzi scheme ever, what has changed?

Those stories and much more tonight on NIGHTLY BUSINESS REPORT for this Monday, December 10th.

And we do bid you a good evening, everybody. I`m Bill Griffeth. Sue is off tonight.

What a reversal indeed. It looked like today was going to be another ugly one for investors, for a lot of reasons. There were still trade concerns after a White House official said that March was a hard deadline for talks with China. Apple (NASDAQ:AAPL) got caught up in a legal battle with Qualcomm (NASDAQ:QCOM) when the Chinese government banned the sale of most iPhone models. And a critical vote on Brexit in the U.K. parliament was delayed.

It all served to push the Dow down about 500 points at the low of the day. But then Apple (NASDAQ:AAPL) suddenly reversed course midday, and that seemed to help lift the tech sector and then the broader market.

By the close of another wild day of trading, the Dow finished 34 points higher to 24,423. The Nasdaq added 51. And the S&P 500 was up by 4 points.

Mike Santoli takes a look at the volatile market and what to expect in the days and weeks ahead.

(BEGIN VIDEOTAPE)

MIKE SANTOLI, NIGHTLY BUSINESS REPORT CORRESPONDENT: More than two months into a nasty downturn, stocks are behaving like some hybrid of a bull and a bear market. The S&P 500 is lower than it was a year ago in its second 10 percent correction in ten months and half of its stocks are down at least 20 percent from their high. Several potential positive catalysts, the midterm elections, a dovish turn by the Federal Reserve chairman, a trade truce with China have not led to any sustained rallies. Safe defensive sectors are the only ones holding up OK.

To many traders and investors, this all represents a sign that a bear market might have taken hold. And even with all of that, the S&P is down only a couple percent for the year and remains up more than 40 percent since early 2016 and the economic fundamentals continue to suggest no imminent risk of a U.S. recession. Unemployment at 50-year lows, consumer spending solid in both manufacturing and services sector expanding nicely.

A recession is usually what prompts a true bear market often defined as a 20 percent or greater drop in the broad market indexes. These conflicting signals have investors grasping at prior periods when the market occupied this gray area between bull and bear. Some reach back just a few years to 2015 and early 2016 where we saw two ugly corrections, a global slowdown, an oil crash, and credit market stress similar to now.

Back then, the Fed raised rates in December 2015, it`s controversial first hike of the cycle. Then the Fed stood back for a full year as stocks recovered through the Brexit vote and then the U.S. presidential election. It would be a comforting outcome eventually if the market followed that path but that doesn`t make the day-to-day gyrations any less jarring and of course no two market cycles match up in every detail.

For NIGHTLY BUSINESS REPORT, I`m Mike Santoli.

(END VIDEOTAPE)

GRIFFETH: And those day-to-day gyrations may not let up any time soon. Hedge fund manager Paul Tudor Jones, who was widely credited with having predicted the market crash of 1987 today said that investors should expect more big moves in the New Year.

(BEGIN VIDEO CLIP)

PAUL TUDOR JONES, JUST CAPITAL FOUNDER AND CIO: I think we`re going to is he a lot more of what we just saw, which is a lot more volatility. You know, it`s really easy to say I`m really bullish, I`m really bearish. I kind of see a two-sided market. I think in the next year, we`ll be where we are today ten down and ten up.

(END VIDEO CLIP)

GRIFFETH: He did add that a potential decline in the market could lead the Federal Reserve to hold off raising interest rates in 2019 and that in turn could boost equity prices.

And speaking of which, the Fed funds futures markets which reflect traders sentiment about the future rate moves by the Federal Reserve, it`s gradually reducing the probability of a December rate increase. It now stands at 68 percent. That`s a four-month low.

The market is also interestingly currently pricing in no rate increases for all of next year. That could change though.

As we mentioned at the top of the program, there was disarray in London today when British Prime Minister Theresa May was forced to delay a parliamentary vote on her proposed Brexit deal because of concerns it did not have enough votes. Not only did that create uncertainty for Europe and for Britain`s future as part of the European Union, but it further clouds investor`s outlook on the global economy.

Wilfred Frost reports for us tonight from London.

(BEGIN VIDEOTAPE)

WILFRED FROST, NIGHTLY BUSINESS REPORT CORRESPONDENT: U.K. Prime Minister Theresa May called off what have been billed as a make or break final vote on the Brexit plan which was due tomorrow because she feared defeat.

THERESA MAY, U.K. PRIME MINISTER: If we went ahead and held the vote tomorrow, the deal would be rejected by a significant margin. We will, therefore, defer the vote scheduled for tomorrow and not proceed to divide the house at this time.

FROST: And she was mocked in parliament as she explained her reasons why.

MAY: I listened very carefully to what is being said in this chamber and out of it, to what has been said in this chamber and out of it by members from all sides. From listening to those views, it is clear that while there is broad support for many of the key aspects of the deal, on one issue, on one issue, the Northern Islands backstop, there remains widespread and deep concern.

FROST: She now heads to Europe hoping for major concessions from European leaders, particularly on that issue of the Irish backstop, something that seems difficult based on this tweet from the president of the European Council, Donald Tusk, who said, quote, we will not renegotiate the deal but we are ready to discuss how to facilitate the U.K. ratification. The British pound had a torrid session off the back of all of this, hitting a 20-month low due to fears of a no deal disorderly Brexit that could destabilize financial markets and question marks about the prime minister`s own future.

That said, she has salvaged a couple of weeks in order to try to save her deal and with it her political future.

For NIGHTLY BUSINESS REPORT, I`m Wilfred Frost in London.

(END VIDEOTAPE)

GRIFFETH: Now more on Apple (NASDAQ:AAPL), which as we mentioned contributed to the volatility we saw in the market today. That stock initially opened sharply lower on word that the sale of some older iPhone models had been banned in China after a court ruled that they violated patents held by Qualcomm (NASDAQ:QCOM) which, as you know, has been locked in patent battles with Apple (NASDAQ:AAPL) for several years. Well, Apple (NASDAQ:AAPL) responded by saying it did not violate any Qualcomm (NASDAQ:QCOM) patents and this afternoon filed an appeal to overturn that sales ban. That appeared to be when the stock turned higher midday and it took the rest of the market with it.

Meanwhile, in Canada, the chief financial officer of Huawei was back in a Vancouver court today and lawyers for that executive asked for bail in the U.S. extradition case. They`re arguing that surveillance devices could ensure that she does not flee. And even though it is unrelated to the trade dispute between the U.S. and China, this Huawei case is now contributing to heightened tensions between our two countries, especially in Beijing where the response has been unusually strong.

Eunice Yoon has more for us tonight.

(BEGIN VIDEOTAPE)

EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Chinese government summoned both the U.S. and Canadian ambassadors to lodge Beijing`s complaint calling Huawei CFO Meng Wanzhou`s detention vile in nature, extremely nasty and warned of grave consequences if the CFO is not released. The CFO and her company are under scrutiny by U.S. authorities who claim the Chinese telecom`s gear maker violated sanctions on Iran through what they described as a Hong Kong shell company called Skycom.

The U.S. believes that Meng misrepresented Huawei`s influence over Skycom to international banks, putting them at risk of breaching Iranian sanctions. The language out of the Chinese government is unusually strong for an official reaction, highlighting how angry Beijing is about Meng`s arrest and why American companies, especially the tech sector, are worried about a potential blowback on U.S./China trade talks and on them.

The Chinese state media has been subscribing the CFO`s treatment wearing handcuffs and ankle bracelets as degrading. Huawei`s response, though, has been much more muted, saying: We have every confidence that the Canadian and U.S. legal systems will reach the right conclusion.

For NIGHTLY BUSINESS REPORT, I`m Eunice Yoon in Beijing.

(END VIDEOTAPE)

GRIFFETH: So what a day, from trade to the fed to concerns overseas, there are a lot of issues contributing to this volatility.

Is there a way to protect your portfolio from all of these wild swings?

Joining us for an old-fashioned strategy session tonight, Quint Tatro is back with us. He`s founder and president of the money management first Joule Financial.

Quint, good to see you again. Welcome back.

QUINT TATRO, JOULE FINANCIAL FOUNDER & PRESIDENT: Good to be here, Bill. Thank you.

GRIFFETH: And we`re speaking broadly here. We`re not trying to provide specific advice, because it varies from individual to individual. But broadly speaking, first thing you say is don`t panic sell in this volatility, right?

TATRO: I think that`s exactly right, Bill. For example, today when we came in, it was a very negative day. Think about it, investors had all weekend to think about all the terrible things that are going on in the world. We came out. We were down 500 points, and right when you thought oh, the worst, you know, we`re kind of coming over this cliff, the market breathed the sigh of relief and we saw a pretty decent rebound into the bell.

GRIFFETH: Right.

TATRO: Our view isn`t that we`re out of the woods. That`s not our view at all, but what we talked to investors about is if they want to take an approach, an active approach to the volatility and reduce exposure, they should have a plan in doing so. Not panic sell but have a plan as the market recovers, look to reduce the allocation or the exposure when the recovery sets in.

GRIFFETH: And you say reduce to a target amount, what do you mean? What is that?

TATRO: So we talked to our clients about a specific allocation when the markets are good, when we`re feeling positive about the valuations and let`s say somebody, for example, is a 70/30 allocation, 70 percent exposed to stock, 30 percent to bonds, we adjust that depending on our fundamental or technical view of the market and so, we are currently at about 1/2 allocation level. So if somebody is typically 100 percent invested, they`re actually about 50 percent invested right now.

And so, we are encouraging people to revisit their allocation and find a level that is comfortable for them because I agree with Paul Tudor Jones. I do not think that we are out of the woods with volatility. I think that will continue.

GRIFFETH: I`m going to run out of time here, but this is important. Where do you go then to try and smooth things out or at least find some security? Like gold, for example, what about bonds?

TATRO: I do like bonds if you can buy the individual paper. Bond funds are going to be difficult because they`re going to erode as interest rates go up.

GRIFFETH: Right.

TATRO: One, two, three-year treasury bonds, if you can buy them outright are, in my opinion, offering good yield and a good place. Utilities and staples are another area that we like here.

GRIFFETH: All right. Hang on. Buckle (NYSE:BKE) up. Do whatever you have to do.

Quint Tatro from Joule Financial -- again, thanks for joining us tonight.

TATRO: Thank you, Bill.

GRIFFETH: Time to take a look at some of today`s “Upgrades and Downgrades”.

Now, FedEx (NYSE:FDX) was downgraded to neutral from buy at Bank of America (NYSE:BAC) Merrill Lynch, with the analysts citing the management shakeup at the express unit in the middle of its busiest season. Price target now $220 and the shares fell 4 percent today to $192.93. Visteon was downgraded to sell from neutral at Goldman Sachs (NYSE:GS). The analyst there expects the auto part`s makers upcoming business update to be a negative catalyst for that stock. Price target now $63. Visteon shares were down 5 percent to $64.14.

And retailer Five Below was upgraded from buy to hold in Loop Capital. The analysts says the five below is more resistant to an economic downturn than most retailers. Price target $120 and shares rose more than 6 percent today $101.71.

Still ahead, you know, passive investing has become very popular, but what happens when the market turns downward?

(MUSIC)

GRIFFETH: More international news. There was a dramatic development in Paris today when French President Emmanuel Macron pledged to eliminate that recent controversial tax increase proposed on pensioners. And he proposed to raise the national minimum wage in France come January.

Macron`s televised address was in response to the wave of protests that challenged his authority. They were Macron`s first public statements after weeks of demonstrations that turned violent this weekend in Paris. Macron called this an historic time for his country and he vowed to speed up the tax relief and to restore calm.

Meanwhile, the White House has imposed sanctions on three North Korean officials, including a top aide to leader Kim Jong-un. The action is aimed at punishing Pyongyang for conducting cyber attacks and abusing human rights. The sanctions freeze assets under U.S. jurisdiction and prohibit transactions with anyone in the United States.

And in Japan, prosecutors there have indicted Carlos Ghosn, the former chairman of Nissan. Officials alleged that Ghosn violated financial laws by underreporting his compensation. The indictment comes three weeks after authorities arrested him. Ghosn, as you know, is once one of the world`s most respective automotive executives.

Well, the latest market volatility is causing retail investors to grow more cautious and pull their money out of mutual funds. And according to some estimates last week, the 24th consecutive week of fund outflows. And that could have implications, of course, for the broader market.

Leslie Picker joins us tonight from New York.

How much money are we talking about when you talk about the mutual outflows in recent weeks and months?

LESLIE PICKER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Mutual outflows in equities specific mutual is over $12 billion last week over the course of 24 months. We`re looking at over $100 billion, Bill. So this is pretty significant. Twenty-four weeks for those who don`t want to do the math, that`s about six months worth of outflows, which is pretty significant when you think about what that means for the mutual fund industry as well as what it means for the equity market.

GRIFFETH: Now, so-called passive investing, index funds, exchange traded funds, they become very popular at the expense of actively managed funds where you have human beings buying and selling stocks. So, when you see -- and they`ve been very popular during a bull market for the last decade.

But what happens when the market heads lower. What is the expectation in the industry for active versus passive investing?

PICKER: That`s a big question that a lot of people are considering, including the Federal Reserve, is what does all of this move towards passive investing mean for the broader market? What we start to see, this is according to market participants, is that index funds, when people redeem from index funds, meaning when they take money out of the index funds, the index funds are therefore forced to sell assets in an equivalent to the index. So, it`s all of the different stocks in an index are weighted in a certain amount and people start taking their money out of index funds.

Those index funds have to sell stocks that kind of mirror an index, so to speak. So there`s no real discrepancy in the stocks that they`re selling, which makes it really hard for other participants in the market to pick stocks that they believe are poised to prosper because of fundamental reasons when they look at the balance sheet, when they look at the income statement and other catalysts that could drive the stock higher. It turns out they get punished because people are selling the index fund.

GRIFFETH: Pretty much tight at that point.

Leslie Picker in New York, thank you. See you later.

Elsewhere, Nutrisystem shares are bulking up. And that`s where we begin tonight`s “Market Focus”.

The weight management company is being purchased by Tivity Health for just under $1.5 billion. Tivity develops fitness programs for customers age 50 and older. And Nutrisystem would presumably add nutrition to those programs. Nutrisystem, as you may know, is the parent company of the namesake brand and of the South Beach diet. Shares of Nutrisystem, one of the big gainers, up 27 percent, while Tivity Health dropped by 31 percent.

And more than 10,000 Verizon (NYSE:VZ) employees have chosen to leave that company by the middle of next year through voluntary buyouts. Verizon (NYSE:VZ) has been looking to cut costs as it invests in the 5G network. The company had about 152,000 total employees at the end of the third quarter. Shares of Verizon (NYSE:VZ) rose 1 percent to $58.27.

Meanwhile, Gilead Sciences (NASDAQ:GILD) will soon have a new CEO. A Roach executive with experience in Oncology will take over the top spot of the biotech company in March. One analyst says that that move will now make the stock more ownable, as he put it. The stock fell, though, 1 percent today to $67.49.

A major Yelp shareholder is calling for changes at that company`s board. SQN investor says it believes the board has failed to hold itself and management accountable for the company`s strategic missteps. Yelp, though, defended its board, calling its directors active and open minded. Shares rose 3 percent today to $35.64.

And GoPro plans to move production for most cameras that are bound from the U.S. out of China. The company says that decision was made to avoid any new potential tariffs. And the cost of the move will be minimal. In a regulatory filing, the company said production of international bound cameras will remain in China. Stock fell 1 percent today to $4.92.

Now to housing and because of recent price declines, homeowners are no longer seeing big gains in equity. Some are even losing the ability to pull cash out of their homes.

Diana Olick has more.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Homeowners in most places are still making money, but they are now seeing the smallest gains in two years. The average homeowner with a mortgage gained $12,400 in home equity between the third quarter of last year and this year according to Core Logic. That includes price depreciation and paying down the mortgage. But that`s down from $16,000 in annual gains in the second quarter.

States in the West saw bigger gains, California and Nevada, more than $30,000 on average. Homeowners in North Dakota, Louisiana and Connecticut lost value.

This is all because the gains in home prices are shrinking. Why? Rising mortgage rates which did drop back in the last month but are still considerably higher than a year ago. We`re also seeing more homes come on the market which has taken the heat out of that strong competition we were seeing. The drop in equity gains has been sharpest in the third quarter of this year. In fact, the amount of tappable equity, which is how much cash homeowners can pull out of their homes fell quarter to quarter for the first time since the housing recovery began. About a quarter of a million fewer homeowners actually have any equity to tap now.

While most homeowners aren`t losing any money, they are feeling less confident about their investment. And that means they`re less likely to put more money into their homes and even into the greater economy.

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

(END VIDEOTAPE)

GRIFFETH: Coming up, it`s been ten years since the biggest investment fraud in history was uncovered and the victims are still picking up the pieces.

(MUSIC)

GRIFFETH: Here`s a look at what too watch for tomorrow.

The producer price index will give investors a fresh read on inflation, something the Fed will be watching closely. Google (NASDAQ:GOOG) CEO Sundar Pichai is scheduled to testify on Capitol Hill over potential bias in its search results. CBS (NYSE:CBS) holds its shareholder meeting after two delays in the wake of former CEO Les Moonves stepping down. That should be interesting. That`s what we`ll be watching for on Tuesday.

Meanwhile, the number of job openings has climbed back toward a record. According to the Labor Department, there were more than 7 million positions available in October. That`s the second highest level ever. And it means there are now 1 million more job openings than unemployed workers, more evidence of our tight labor market even as questions continue to arise about the health of the broader economy.

And gasoline prices have hit a low for the year. According to AAA, the average national price of a gallon of regular was $2.42. That`s 4 cents lower than a week ago, 28 cents lower than a month ago. Fueling that decline is a drop in oil which fell another 3 percent today to settle around $51 a barrel.

A number of pharmaceutical companies are facing an investigation into alleged price fixing. What began as a lawsuit brought by states into two medications in 2016 has now expanded into a government probe involving 16 companies. Investigators claim that those drug makers colluded to keep the prices artificially high for at least 300 different medications.

The generic manufacturers have rejected those accusations, though. Shares of several generic makers finished mixed in today`s trading.

The victims of Bernie Madoff are still picking up the pieces. Ten years after the biggest investment fraud in history was exposed, Madoff, as you remember, confessed to the $65 billion Ponzi scheme a decade ago, in the thick of the financial crisis. It fundamentally changed the way we invest, the way investment advisors are regulated and who we trust.

Now, in a new era of volatility, many are wondering, could it happen again?

Scott Cohn has our report.

(BEGIN VIDEOTAPE)

SCOTT COHN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Joyce Greenberg who invested millions with Madoff remembers the shock.

JOYCE GREENBERG, MADOFF VICTIM: I think what he did is despicable.

COHN: Ilene Kent says her parents now in their 90s lost 3/4 of their net worth.

ILENE KENT, MADOFF VICTIMS` DAUGHTER: It was shock. It was disbelief. It was distrust.

COHN: The world had seen investment scandals before but nothing like this. Bernard Madoff was respected, former chairman of Nasdaq, a sought after expert on market structure, like at this roundtable a year earlier.

BERNARD MADOFF: We saw, meaning my brother and myself, that there was an opportunity to bring automation into the over-the-counter marketplace.

COHN: But his investment advisory business with a reported $65 billion under management was a sham.

HARRY MARKOPOLOS, MADOFF WHISTLEBLOWER: I gift-wrapped and delivered the largest Ponzi scheme in history to them and somehow they couldn`t be bothered to conduct a thorough and proper investigation.

COHN: The SEC has missed all the signals, including from whistleblower Harry Markopolos. Since then, the agency has had a total overhaul.

MARKOPOLOS: There are 46,000 people at the SEC, if they don`t have it in the front of their mind, they certainly have Madoff in the back of their mind.

COHN: The lead prosecutor in the Madoff case, now in private practice, says the whole industry is more careful.

MARC LITT, LEAD MADOFF PROSECUTOR: It was an abject lesson both for institutions and for regulators. And hopefully, the passage of ten years has not led them to lose track of that lesson.

COHN: Madoff claimed to have acted alone, but 15 people, including his younger brother Peter, either pleaded guilty or were convicted in the cover-up. Four people, including Madoff`s SON Mark committed suicide. Madoff himself is in the tenth year of a 150-year sentence at a medium security prison in North Carolina.

His former defense attorney stays in touch.

IRA LEE SORKIN, MADOFF DEFENSE ATTORNEY: He`s doing okay, I mean, for 80 years old.

COHN: When we visited in 2013, Madoff told us prison is like being in the army. Only you`re not worried about killed. Much less stressful than his life to crime.

GREENBERG: He`s leading a lot better life than many of the victims are.

SCOTT: As for those victims, it`s complicated. On average, they`re getting back about 75 percent of their principal, unheard of in a typical Ponzi scheme. But investors who took out more than they invested, like Ilene Kent`s parents, are lucky to get anything at all. That`s because courts have ruled the returns the investors thought they had earned, some $50 billion in all, were nothing about Bernie Madoff`s cruel fiction.

For NIGHTLY BUSINESS REPORT, I`m Scott Cohn.

(END VIDEOTAPE)

GRIFFETH: All right. Before we go, a final look at the day on Wall Street. And these numbers don`t tell the whole story as you`ve heard by now. The Dow closing up 34 points, but it had been down as many as 500 points at the lows of the day. The Nasdaq added 51. The S&P was up four. What a day.

That`s NIGHTLY BUSINESS REPORT for tonight. I`m Bill Griffeth. Thanks so much for Washington, everybody. Have a great evening. We`ll see you tomorrow.

END

Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by ASC Services II Media, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2018 CNBC, Inc.

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