SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Back to back. A triple digit losses led by health care stocks after the Treasury announced new rules to halt so-called “inversion deals”, leaving some large proposed acquisitions hanging in the balance.
TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Big bank theory. Volatility is back just in time to close out the quarter and that could be good news if you hold shares of the big money center banks.
GHARIB: Where business meets politics. President Obama, former President Clinton and the wealthiest man in China, Alibaba’s Jack Ma, gathered today to discuss some of the biggest issues facing business.
We have all that and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, September 23rd.
MATHISEN: Good evening, everyone, and welcome.
I’m Tyler Mathisen, stocks sold off sharply again today. The Dow had its worst day since early August, and it’s first back to back triple losses since June. The S&P 500 and the NASDAQ each finished at five-week lows. More market details in just a moment.
But one reason for the selloff was a sharp slide in health care shares. Why? Because last night, the treasury announced new rules that make so-called tax inversions harder. Those are the deals some companies have used to skirt U.S. taxes by buying a foreign company and then moving the newly combined firm’s headquarters offshore.
Drug biotech and medical device companies have been the strongest users of inversions, some with pending deals are among the hardest hit today on the stock market. Medtronic (NYSE:MDT) down 3 percent, it aims to buy the drugmaker Covidien for $43 billion and rebase to Ireland.
A 2 percent drop for Abbvie. It’s looking to buy the drugmaker shire for $55 billion, and move to the U.K. Shire (NASDAQ:SHPGY) also down 2 percent, and U.K.-based AstraZeneca fell nearly 5 percent. Pfizer (NYSE:PFE), as you may recall, tried to buy that firm and invert for $120 billion but was rebuffed.
Eamon Javers in Washington has more on the nuts and bolts of the Treasury’s proposed regulations. And Meg Tirrell is on set with a closer look at the impact on the industry.
Eamon, to start with you — what are the new rules the Treasury introduced? I know they’re a little complicated.
EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Yes, they’re using terms like spin version and what the treasury is doing is changing rules on how companies have engage in inversions and blocking the most common tactics. The idea is to make inversions a lot more expensive for companies, so they will choose not to do it.
What they couldn’t do is block inversions altogether, that would take an act of Congress to change the law. And they don’t have the votes up on Capitol Hill to do that. And Capitol Hill doesn’t seem like it’s going to do anything now between the election that’s coming up in November. So, they said, you know what, we’ve got to move now, treasury took the action yesterday and this will be effective as of yesterday, Tyler.
GHARIB: Meg, you have been on the phone all day contacting companies with deals. What do the new rules mean for them? And what were they telling you?
MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, it’s not really clear right now. There’s a big question overall of these companies. There are at least five big companies in the middle of these inversion-type deals.
So, they announced them. But they haven’t yet closed them. They were expected to close in the early fourth quarter, or the early in 2015. Some of them include Abbvie and Shire (NASDAQ:SHPGY), Medtronic (NYSE:MDT) and Covidien, the ones you mentioned. These are more than $40 billion deals.
And what I’m hearing from analysts and bankers is everybody is reassessing right now, and while a lot of these companies say they would have pursued the deals anyway because there are things they like about the target companies other than just their tax rates, is that they might want to re-negotiate the terms of the deal, specifically Medtronic (NYSE:MDT) and Covidien, they might want to change the mix of debt and equity and if they can’t reach an agreement with Covidien, if Medtronic (NYSE:MDT) can’t, that might ruin it all, analysts say. So, there’s a lot of questions going on here.
MATHISEN: Eamon, are there new rules proposed subject to challenge? Could anybody fight back against them?
JAVERS: Yes, there’s some expectations here that there might be a lawsuit, excuse me, particularly with companies who have deals in process who are now effectively blocked by this. But some folks in Washington say it appears to be very carefully written by Treasury to make sure they stay within the four corners of their legal responsibilities here as Treasury, and not getting too far into something that would be a law change. So, the expectation at least among folks I’m talking to here is that this was the survival lawsuit.
On the other hand, some of these companies feel like they’ve been wronged here and they might want to test it in the courts.
GHARIB: And is that what you’re hearing, Meg? I mean, will these companies go the full mile and test in the courts?
TIRRELL: That’s some speculation among analysts, like ISI Group Terry Haines. He was saying today that it might take one of the companies that’s already in the middle of a deal to sue Treasury, saying it doesn’t have the purview to put these rules in place or it’s not doing it the right way and to try to stop these deals coming into place.
But even today, we saw renewed speculation that Pfizer (NYSE:PFE) might try to do an inversion with Actavis. And Bloomberg News is reporting the story. They’re saying Pfizer (NYSE:PFE) is not deterred by these potential rules. So, we could still see more of these. What we’re seeing now is uncertainty and that causes some of this to take a pause and, of course, hits the stocks.
MATHISEN: Meg, Eamon, thank you very much.
JAVERS: You bet.
TIRRELL: Thank you, guys.
GHARIB: Well, those inversion worries weren’t the only reason for the market selloff today. The escalating war in the Middle East and the economic impact of U.S. airstrikes in Syria as well as down beat data out of the eurozone economy also weighed on investor confidence. All ten sectors of the S&P were in the red today. By the closing bell, the Dow lost is 16 points, the NASDAQ was down 19, and the S&P off by 11 points.
MATHISEN: Reimagining impact, whatever that means, is the overall theme of this year’s Clinton Global Initiative in New York City, where business, government and entertainment leaders from around the world gather to discuss controversial issues and look for solutions. It’s a big event, filled with headliners, and it coincides usually with the annual U.N. General Assembly meeting across town.
John Harwood was there.
JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is a rare event where the sitting president of the United States was not necessarily the principal focus, even on a day when he’s discussing new airstrikes against Syria, that’s because the Clinton Global Initiative draws celebrities from every field, talking about ways to improve communities around the world, from actor Matt Damon discussing the need for clean water, to Alibaba CEO Jack Ma talking about the rising impact of mobile technology.
JACK MA, ALIBABA CEO: Young people so focused on the mobile phone, that is the opportunity. The world is going to be changed by mobile Internet. Mobile technology, countries like you guys helping young people succeed, helping young people to reach the inflammation, helping the young people try the new things.
HARWOOD: Of course, given our host, it’s no surprise the intersection of business and politics came up. Former President Bill Clinton said he supports the Obama Treasury’s effort to curve corporate tax inversions.
BILL CLINTON, FORMER PRESIDENT: The Treasury should do what they can. It’s their duty to collect whatever money is owed under American law. If they can find a way to discourage people from moving overseas, they ought to. But the best discouragement is to reform taxes and to give incentives to repatriate now nearly $2 trillion overseas.
HARWOOD: President Clinton acknowledged that he oversaw the last increase in the corporate tax rate but said it’s now time to come together on a bipartisan basis to come together on a bipartisan basis, to reduce it, to keep America competitive with the rest of the world.
John Harwood for NIGHTLY BUSINESS REPORT, New York.
GHARIB: Some encouraging news on home prices. They inched a little bit higher in July and have now regained much of what was lost in the 2008 housing crisis. They rose 1/10th of 1 percent in July. It doesn’t sound like a whole lot but they are still rising.
And according to the Federal Housing Finance Agency, U.S. home prices are now almost 6 percent below their all-time highs from 2007.
MATHISEN: Home prices are not the only thing rebounding from the financial crisis. U.S. manufacturing activity for September currently hovering around a 4 1/2-year high, that according to the financial data firm Markit. That report also showed employment levels among producers rose to a 2 1/2 year high. Manufacturing accounts for about 12 percent of the U.S. economy.
GHARIB: China is also seeing a much-needed lift in manufacturing, amid concerns that its overall economic growth may be slowing down.
Eunice Yoon has more from Beijing.
EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: HSBC’s survey of China’s manufacturing sector showed that factories here picked up steam in September. The class PMI came in at 50.5, a modest improvement from August and better than what investors were expected.
New exports orders were stronger, as companies overseas ordered more goods from China. However, investors were concerned about the employment picture. The data showed factories are shedding jobs at their fastest pace in 5 1/2 years when China was grappling with the global financial crisis.
Some economists say that the data means that manufacturers are bracing for tougher times as China slows down. Many expect the country’s leadership to continue with targeted measures to keep growth going, while bad debts, excess capacity and other hurdles continue to haunt the Chinese economy.
For NIGHTLY BUSINESS REPORT, I’m Eunice Yoon in Beijing.
MATHISEN: A disturbing new forecast concerning the rapid spread of the Ebola virus in Africa. The Atlanta-based Centers for Disease Control says that unless officials get the virus under control and quickly, nearly a million and a half people could be infected in West Africa alone by January. But one official says it is still possible to avoid this worse case scenario if a sufficient number of patients are isolated. Once this happens, the number of cases will likely decline very rapidly.
GHARIB: Still ahead, will September historically a bad month for stocks deliver a pleasant surprise for investors and banks? The answer coming up.
MATHISEN: Barclays Bank is paying a hefty fine for the way it mishandled customer funds, British banking regulators fined the U.K. bank a record $62 million for exposing its clients’ money to what it called “unnecessary risks” and for keeping a shoddy record. This is the second fine for the bank since 2011, over the way it handled customer accounts.
GHARIB: Another big bank, Goldman Sachs (NYSE:GS), is looking to enter into the fast-growing business of exchange traded funds. Goldman is seeking regulatory approval to design and sell to investors a variety of so-called ETFs, a series of actively managed ones. And others based on their own propriety index is created by the bank.
Now, other banks have been moving in this direction. J.P. Morgan in June launched its first ETF, and Wells Fargo (NYSE:WFC) got the OK from regulators in August.
MATHISEN: Well, historically, September is the worst month of the year on average for the stock market. But this year, it’s shaping up to be a pretty good month for traders, and that could deliver a September surprise for the money center banks.
Mary Thompson has the story.
MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: For traders, September is the make or break month in the third quarter. This year, it looks like they might make it.
MARTY MOSBY, VINING SPARKS: What we’re looking at is September being stronger than we had seen.
THOMPSON: Across a wide range of trading businesses, volume and volatility is up, since the summer slump of August, and a modest July.
And that could be good news for big banks including JPMorgan (NYSE:JPM) and Goldman Sachs (NYSE:GS), where trading revenue could be anywhere from 15 percent to 40-plus percent of a bank’s total.
The stock market’s record run and a flood of initial public offerings, including the largest ever, Alibaba’s, among the reasons analyst Marty Mosby think September is looking better.
MOSBY: We started to see some IPOs hit, which caused some trading activity, as we’re starting to see at least the middle part of the old curve moving higher. And as we’re seeing some foreign exchange volatility finally, we could think that September might be able to at least hold the third quarter in there close to what we saw in the second quarter.
THOMPSON: Mix in the volatility scene in the oil markets, and the higher level of activity across currency, bonds and stocks could create a September surprise.
(on camera): Still, analysts including Mosby, cautioned it may not be enough to overcome the sluggish start to the quarter. Meaning, any surprise may be subtle.
(voice-over): Yet after a year marked by declines in trading volume, a subtle change to the upside, a welcome sign for banks.
For NIGHTLY BUSINESS REPORT, I’m Mary Thompson.
GHARIB: Shares of CarMax (NYSE:KMX) tumbled, even though the company posted earnings that topped estimates. And that’s where we begin tonight’s “Market Focus”.
The used car superstore said its profit rose 10 percent in the second quarter, driven by an increase in used car sales. But its profit margins fell from a year ago and sales rose less than expected. Shares plunged 9 1/2 percent to $47.80.
Carnival (NYSE:CCL) hiked its outlook for the year as it reported that its third-quarter profits jumped more than 30 percent. The cruise operator’s good results were driven by higher on-board spending and a stronger performance in its Asia division. Shares rose a fraction to $40.51.
CF Industries (NYSE:CF) was the best performing stock in the S&P 500 today. That’s because the fertilizer company is in preliminary merger talks with Norway’s Yara, which is also a fertilizer producer. Yara says there’s no guarantee that any deal would come out of these discussions. Still, shares popped 5 percent to $269.37.
Deere says it’s mulling strategic options for its low-margin crop insurance business and it has hired Citigroup (NYSE:C) as an adviser. Revenues at the farming equipment maker have been falling as farmers hold off from buying new products because of lower expectations for commodity prices and harvests. The stock lost a fraction to $83.32.
MATHISEN: The FTC may be looking to block the planned merger of Sysco (NYSE:SYY) and US Foods according to reports. Regulators are considering an anti-trust lawsuit because they are concerned that combining the nation’s two biggest food suppliers could threaten competition. Shares of Sysco (NYSE:SYY) off 2 percent to $36.75.
Procter & Gamble (NYSE:PG) is shedding the rest of its pet care business, selling its Iams and Eukanuba brands in Europe to Spectrum Brands. The maker of household products like Tide Detergent says exiting the business will help it focus on its core units. The financial terms of this particular deal weren’t disclosed. Shares of P&G down a little bit, $84.44 was the close there.
And Facebook (NASDAQ:FB) is unveiling a new ad platform. This is according to “The Wall Street Journal”, to improve the effectiveness of online advertisements. The new tool will reportedly help marketers understand which Facebook (NASDAQ:FB) users have seen or interacted with ads that appear on the social media. The move is Facebook’s effort to challenge Google’s dominance in the online ad space. Shares of Facebook (NASDAQ:FB) up almost 2 percent on this otherwise down day to $78.29.
And after the bell, shares of Bed Bath & Beyond (NASDAQ:BBBY) initially popped on a strong earnings report. The retailer beat on both the top and bottom lines and it gave an upbeat full-year outlook. As you can see, shares rose after the close, and moved in to the great beyond during the regular trading day. Bed Bath & Beyond (NASDAQ:BBBY) was down 1 1/2 percent to $62.69.
GHARIB: As we reported earlier, former President Bill Clinton at the Clinton Global Initiative, discussed issues important to businesses, including wages, the shrinking middle class and what corporations care about most.
(BEGIN VIDEO CLIP)
CLINTON: Company after company takes more of its profits and spends it on dividends, stock buybacks, management increases, and less on sharing it with the employees broadly.
(END VIDEO CLIP)
GHARIB: That, he said, will change over the next few years. But it could be one of the reasons why many Americans don’t have a strong opinion of corporations. In a recent CNBC Burson-Marsteller survey on corporate perception, 52 percent of people in developed nations have a favorable view of corporations, compared to 72 percent in developing countries.
So, what role do corporations have in society?
Bill George, former CEO of Medtronic (NYSE:MDT) and now a professor of management at Harvard Business School joins us to discuss this issue.
Bill, thanks for coming on the program. Glad to have you here.
BILL GEORGE, HARVARD BUSINESS SCHOOL: Thanks, Susie.
GHARIB: You know, another statistic out of that survey that sort of stood out for me, it says four in 10 millennials and baby boomers view corporations as a source of fear, not hope.
So, my question to you is, why the disconnect? And is it important to American corporations to fix this perception?
GEORGE: Absolutely, it’s essential. We have had 12 years of breaching the trust, going all the way back to Enron, and the financial crisis in 2008. And a lot of corporations are trying to rebuild it, but it takes a long time to rebuild that trust. And I think that is where we have to go right now.
President Clinton had it right.
MATHISEN: So, you clearly think that corporate misbehavior is contributing to the reason why Americans have a lower view of corporate sort of imagery than foreigners do. Does the wealth gap play in there as well, Bill?
GEORGE: No doubt about it, the fact that Americans are not earning as much and they’re not sharing in the success of companies. I think that plays a big factor. And the fact that the government has been coming at businesses, supporting our great global companies, the government is doing everything it can to fine them, to penalize them, to send them to jail. And I think this has caused a breach of trust, as well.
GHARIB: It seems also there is a disconnect between what corporate America thinks their responsibilities are. I mean, we just heard from President Clinton saying that, you know, they have to do more for the social good, so to speak, and that seems what the American public wants. Is there a way to bridge this misperception?
GEORGE: Well, I think the CEOs today, we’ve had the best group of CEOs we’ve ever had, and they’re committed to rebuilding its trust. Every CEO I know and I spent a lot of time with a number of CEOs, is committed to this. But there is a clash between the Wall Street’s desire, short term, let’s make money, the activist investors, people like Carl Icahn and Nelson Peltz taking on great companies like DuPont and PepsiCo, and this clash is hurting us.
Business has got to recognize, I think, first and foremost, it has to — it’s chartered to serve society. That’s how we get our existence, whether in China or the U.S. or Japan.
MATHISEN: Of course, I guess those activist investors, Bill, would also say we have a salutary effect on corporations. We’re making them better. That’s for another conversation, obviously.
But I wonder why you think people in the United States have a more favorable view of large corporations than we do. Is it because they don’t know them as well? Why?
GEORGE: Well, they haven’t had the battering of large companies. They see them as the job providers, the wealth creators that are building these developing countries. And, frankly, a lot of researchers are going there as we don’t have the growth opportunities in this country, Tyler.
GHARIB: So, what do you think is going to be the wake-up call for American companies and what’s your prediction, let’s say 10 years from now? Is the situation going to be the same, better or maybe worse?
GEORGE: Susie, we have had our wake-up call. The answer is for CEOs to come together with government, which we have not been able to do and declare that we’re there to serve society everywhere we go in the world. And we’re not just there to serve the short-term shareholder. If we do that well we serve our customers through the mainstream business. We create shared values, as my colleague Michael Porter said, we will rebuild that trust.
But we’ve got to put customers first. You can’t put the shareholders first. Shareholders come third. We’ve got to put the customers first, the employees first. And if we do that, we’ll build great long-term company, and the shareholders will be the huge beneficiaries as they have been in the last four or five years as the stock markets —
MATHISEN: That’s a really interesting point because I think a lot of people in the investment community would say that the ultimate responsibility of a board, of a CEO, is to serve the shareholders and they do come first.
GEORGE: Well, I don’t agree. The law says it’s to the company and its shareholders. That’s what the law says. And we’ve kind of forget about the company.
We want to sustain institutions. We want DuPont, Deere, you mentioned. These are great institutions, we want them to go on for another 100 years so they can compete globally and create jobs. And they’re doing that.
But I think people don’t appreciate that. You can’t just as President Clinton said, you can’t just do stock buybacks, and stock up your cash that way with more and more dividends. They’re fine, but we’ve got to invest in the companies in research, in people, and in market expansion.
GHARIB: Bill, I’d love to sit in on your class at Harvard. Sounds fascinating discussion.
Bill George with Harvard Business School.
GEORGE: Thank you. Well, that’s what we teach. So, thank you.
MATHISEN: All right.
Coming up, when times got tough, one small business decided to shift the strategy to survive and eventually thrive. We’ll meet the business owners tonight when we kick off our series “Small Business Matters”.
GHARIB: More health plan choices are coming to the federal insurance marketplace next year. Department of Health and Human Services official, these are the folks who run the Affordable Care Act healthcare.gov marketplace, now say that the number of providers offering health care plans in 2015 will increase by 25 percent.
MATHISEN: Meantime, government-backed hackers purposely breached the healthcare.gov Web site and got some mixed results. The Department of Health and Human Services sent its own hackers to break in to the federal health insurance Web site, finding what it called a, quote, “critical vulnerability” during a security scan but it didn’t elaborate on exactly what the problem was. It wouldn’t be so wise to elaborate.
Now, those insider hackers also reported some strong defenses on the site, which aim, of course, to keep personal data secure.
GHARIB: Several estimates show that the U.S. lost more than 170,000 small businesses during the Great Recession, and the ones that survived are leaner, more focused, and risk averse, being careful not to repeat past mistakes.
In the first segment of the series called “Small Business Matters”, Sharon Epperson talked to several entrepreneurs about lessons they’ve learned since then.
Here’s step one: when times are tough, cut the fat.
SHARON EPPERSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Roberto and Colleen Crivello are the husband and wife team behind a company you may not have heard of.
COLLEEN CRIVELLO, FDS: FDS is a design and brand-building consultancy for the apparel industry.
EPPERSON: But likely you’ve seen their work.
ROBERTO CRIVELLO, FDS: Our clients range from boutique to Fortune 500 clients like DuPont, or the Gap (NYSE:GPS), or most recently, Puma.
EPPERSON: FDS designs clothing for corporate clients, and a year ago launched its own label, Chalk NYC, a premium children’s brand sold at luxury department stores, popular with celebrities and moms.
One of its best selling products? Stretch leather pants for kids with a $500 price tag sold at Barneys.
MICHAEL PARRISH DUDELL: I think what they’ve done really well is they understand exactly who they’re selling to. They have a very sort of expensive product that from a fashion line, they’re selling to parents that have the money to spend.
C. CRIVELLO: We’re excited. It has been a good year so far.
EPPERSON: FDS has had many good years, but 2008 was the defining moment for this design company, a critical juncture when many other small businesses went out of business.
C. CRIVELLO: Huge companies were laying people off. It was a huge deal in fashion because it is fashion. And it’s, you know, one of the things that people cut from their budgets, right away. With foresight and effort to not go out of business, we decided to immediately restructure.
EPPERSON (on camera): What resulted was a leaner, more efficient FDS, that operated virtually, by letting go full time employees and hiring designers on a project basis, the company was able to cut down overhead costs and reduced unnecessary work space.
R. CRIVELLO: With our previous company, we had expenses of $200,000 a month. Now, it’s like $25,000. So, it’s a drastic difference and it just makes a lot of sense.
DUDELL: With the huge financial crash that could have gone under, and instead they were able to adopt. They were able to see what was happening in the world and make big changes in their business, which started by changing the whole sort of model of how they worked with designers.
EPPERSON (voice-over): For FDS, the transition to working virtually using mostly freelancers has been seamless.
R. CRIVELLO: We just love working this way. And it’s been very, very efficient for us. It’s a new way of working, I think.
EPPERSON: It’s becoming the new model for many small businesses and for some, the secret to their success.
For NIGHTLY BUSINESS REPORT, I’m Sharon Epperson.
MATHISEN: And finally tonight, the most expensive cities in the world to live and do business. And there is a new name at the top.
Third place, the Big Apple (NASDAQ:AAPL), New York City. Second, the winner for the past five years, Hong Kong. And in the top spot now? London, a stronger British pound over the past year was the main driver for London’s rise dubiously to the top.
GHARIB: That’s NIGHTLY BUSINESS REPORT for tonight, I’m Susie Gharib. Thanks for being with us.
MATHISEN: And I’m Tyler Mathisen. Thanks from me, as well. Have a great evening, everybody. We hope to see you back here tomorrow night.
Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by CQRC Transcriptions, 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) 2014 CNBC, Inc.