Transcript: Nightly Business Report – June 29, 2016

NBR-ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Still bouncing. Stocks rallied for a second day as global markets start to recover, following a Brexit induced plunge.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Border War. How one metro area has become a tax incentive battleground between states and why it’s just one of many playing out across the U.S.

HERERA: And an eggs-celent item. Why the egg McMuffin may be as important as a hamburger to McDonald’s (NYSE:MCD) nearly half a century after it was first cooked up.

All that and more on NIGHTLY BUSINESS REPORT for Wednesday, June 29th.

MATHISEN: Good evening, everyone, and welcome.

Big news out of the banking sector tonight. More on that in a moment. But we begin this evening with the broader markets. And as you surely know, they sometimes teach very hard lessons and the past four trading sessions have been — well, let’s just say instructive.

Violent declines Friday and Monday following Britain’s vote to leave the European Union. The Dow lost 900 point over those two days, but then came Tuesday. A 269-point gain for the Dow, one of the best days of the year. And today, even better. Stocks rallied around the globe and here in the U.S., all three indexes rising more than 1.5 percent. The lesson, what goes down fast can snap back equally quickly.

Today, the Dow rose nearly 285 points to close at 17,694. The average has now recovered more than half of its post-vote losses. The NASDAQ rose 87 and the S&P 500 climbed 34.

For the record, the FTSE 100 index of British stocks gained 3.6 percent today, erasing all of its post-Brexit losses.

And rising oil prices helped U.S. shares today. Oil closed at $49.88 a barrel. That’s up 4.2 percent.

HERERA: And another thing that might help stocked this week, it’s the end of the quarter. Many sectors this quarter had been beaten down and the Brexit vote didn’t help matters any.

Bob Pisani takes a look at whether history could be an indication of an end of quarter bounce.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: The rally continues. Today was even stronger than yesterday and volume was heavy again, indicating that the buyers were enthusiastic. And it was a broad rally, with nine stocks advancing for each one declining. Again, that was better than yesterday.

All right. So, why did we have a rally? Well, partly, it’s the end of the quarter with many stocks down double digits, history would indicate a likelihood of at least modest buying of the most beaten up sectors going into the close of the quarter Thursday, and that’s exactly what we’ve been seeing. So, beaten up groups like restaurants and banks and retailers and especially airlines, were among the leaders today. That’s a good sign that there’s at least short term end of the quarter buying interest.

OK, does this mean that all these Brexit worries are over? Well, that’s unlikely, but it’s really hard to say. The question is this: will Brexit be a long term market moving event or a short-term phenomenon? Will it prove to be a big problem for the markets like say, China’s currency devaluation was, remember that, back in August, or the oil collapse at world markets in February and March of this year?

We just don’t know. But for the moment, the fact stocks have turned around and that the dollar has stopped rising, the buying yields have stopped dropping and oil has turned back off, well, all that’s been a great relief to the trading community.

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

(END VIDEOTAPE)

MATHISEN: One of the reasons the markets may be settling down is the realization that the hysteria following the U.K. referendum is dying down, if just a bit.

Wilfred Frost is in Brussels where European leaders discussed the matter for a second day.

(BEGIN VIDEOTAPE)

WILFRED FROST, NIGHTLY BUSINESS REPORT CORRESPONDENT: Three main takeaways from the European Summit here in Brussels. The first, European leaders will respect the decision of the British people and now work to implement it. The second, they will wait until Article 50 has been invoked before any form of divorce negotiations begin. They’d like that to happen sooner rather than later, but realize a new prime minister needs to be in place in the United Kingdom before that happens.

The final takeaway was that negotiations are going to be tough when they begin. E.U. leaders making it very clear that if Britain wants to maintain free trade, then they will also have to maintain free movement of labor.

The other big focus here in Brussels is that Scottish First Minister Nicola Sturgeon has been meeting various European leaders to try and see if she could extricate Scotland from a possible Brexit. She said the reception had been very sympathetic, though no real decisions are due to be made anytime soon.

NICOLA STURGEON, FIRST MINISTER OF SCOTLAND: I’m not being here today to reach any conclusions, or to press end of the day for any decision or any commitments. I’ve been here today to make sure that Scotland’s voice is being heard and that Scotland’s position is understood. Then, I’m confident that that is the key.

FROST: And indeed, other leaders such as Mr. Junger and Mr. Rajoy of Spain made it clear that they felt this was an internal British issue and no outright decisions could be made directly with Scotland.

So, the focus now turns back to wider United Kingdom and the battle in Westminster to become the next leader of the Conservative Party and with it, the next prime minister. Various candidates have thrown their name into the hat. We should note know all the candidates by late Thursday. The final decision will be made in early September.

For NIGHTLY BUSINESS REPORT in Brussels, I’m Wilfred Frost.

(END VIDEOTAPE)

HERERA: Some good news, bad news for the economy.

First, the good. Consumer spending rose nearly half a percent in May. Household spending accounts for more than two-thirds of economic activity. At the same time, personal income ticked slightly higher, but less than expected.

Now for the bad. Pending home sales fell more than 3.5 percent in May. A sign the housing market lost a little steam.

MATHISEN: GE Capital is no longer too big to fail. Federal regulators today removed its designation that General Electric’s financing arm was a systemically important financial institution, a SIFI. That’s a label that comes with stricter regulation and it comes with a cost. Shares of General Electric (NYSE:GE) up about 2 percent on the session.

Mary Thompson now with more on why losing the title is so important to the likes of GE.

(BEGIN VIDEOTAPE)

MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: GE asked and regulators listened.

KEITH SHERIN, GE CAPITAL CHARMAN & CEO: We didn’t expect to be designated this quickly.

THOMPSON: Three months after the conglomerate requested its finance arm be removed from the federal reserves oversight, regulators concurred. This will save GE hundreds of millions in costs, free up capital and give the firm greater financial flexibility.

Here’s analyst Deane Dray.

DEANE DRAY, RBC CAPITAL MARKETS: The three areas for redeploying the additional capital, buybacks, and you’ll see some dividend growth and then M&A. And M&A, it’s just really going to be the best use of capital, highest returns at that time.

THOMPSON: Once the source of over half of the company’s profits, GE Capital nearly brought the conglomerate to its knees during the financial crisis. Post-crisis, regulators put GE Capital and three other firms under the Federal Reserve’s watch, maintaining they were so big and interconnected, their failure would cause grave harm to the economy.

GE’s parent chafed under the added oversight, and last April, launched an aggressive plan to shrink the finance business and remove its systemically important designation. Here’s GE Capital CEO, Keith Sherin.

SHERIN: In April last year, we announced the strategic change for GE Capital and over the last 15 months, we’ve basically executed what we call Project Hubble. It’s involved reaching sales agreements on more than $300 billion of assets, including the split up.

THOMPSON: The split of the domestic credit card business and GE Capital’s smaller size among the reason cited by regulators in giving the O to remove the systemically important label. Another reason, a new funding model reliant on long-term debt to fund GE’s operation rather than the short-term debt markets where demand dried up during the crisis.

SHERIN: If you look at the processes we put in place with the Federal Reserve over the last several years, we’re much better run company today.

THOMPSON: A company now focused on building a future where finance is a compliment to its main platform. A platform built on the foundations of GE’s industrial past.

For NIGHTLY BUSINESS REPORT, I’m Mary Thompson.

(END VIDEOTAPE)

HERERA: The Federal Reserve gave the green light to 30 major banks to raise its dividends and buyback plans. But one big name on the list did not pass the so-called stress test with flying colors.

Kayla Tausche joins us now with more.

So, good news for most, but not for all.

KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Yes, 30 banks passed with flying colors. Out of 33 banks, the Federal Reserve has been going through these tests for six years and there are always a few stranglers who don’t quite make it through. This time around, notably, it was Morgan Stanley (NYSE:MS) that has to resubmit its capital plan by the end of the year, but the company can go ahead with planned increases to its dividend, and its buyback. To that end, the company is increasing its dividend to 20 cents per share and increasing its buyback to $3.5 billion per share.

The U.S. units of Deutsche Bank Trust and Santander did not pass the test. They failed on qualitative terms and while senior Fed officials said that they did see some progress at those companies, there were still serious deficiencies with the way that those companies planned for potential stress scenarios.

M&T Banks, the regional bank that also takes this test, would not have passed if it had submitted its earlier capital plan, but with feedback that it got from the Federal Reserve, it resubmitted a lower capital distribution plan and then it passed. Notably, some of the big banks did come out with some pretty sizable increases to their plans.

Citigroup (NYSE:C) perhaps the most notable, raising dividend to 16 cents from just 5 cents, raising a buyback to $8.6 billion from $7.8 billion. JPMorgan (NYSE:JPM), Bank of America (NYSE:BAC) as well, increasing both the dividends and buyback. Trickle of good news for these companies perhaps just playing catch up with their counterparts and other sectors.

MATHISEN: Those banks, a couple that you just mentioned there, they had really chafed under the inability to increase their dividends and do buybacks. This is obviously I guess they would say vindication of what they’ve done to shore up their books and also, good news for shareholders.

TAUSCHE: The reason why I said Citigroup (NYSE:C) is such a stunning move, in 2014, its dividend was one cent. To be able in a space of two years after failing the stress test twice in five years, to raise your dividend that type of movement to 16 cents is very notable, and to be buying back $8.6 billion of stock. Certainly, shareholders had a lot not to like about the banks, with continued low interest rates. Low growth and still in cost-cutting mode, but this is one piece of good news.

HERERA: And it comes in a week where we have seen such swings, mostly to the downside in the financials because of Brexit and because of what’s been going on. So, perhaps tomorrow — in tomorrow’s trading session, it will be a little bit of good news because the increase in the dividends certainly makes them more attractive.

TAUSCHE: For the U.S. banks, but I think what people will be taking away from this is the fact that European banks have again not passed the test. What happened next year when Barclays, Credit Suisse and UBS will have to take the test? It does appear that there’s a widening mode between the strength and the quality of the assets being held by the U.S. banks from what we’ve seen on the balance sheets of the European Bank. And that’s going to be an even bigger focus.

HERERA: Kayla, thank you so much. We appreciate it, Kayla Tausche.

MATHISEN: Federal exchange rates could cause travelers to flock to Europe this summer, but security issues remain on everyone’s mind. What you need to know about traveling to Europe this summer.

(MUSIC)

HERERA: Many states fight each other for business and jobs, spending lots of tax dollars in the process. Kansas and Missouri have been waging border war for years, over one metro area, namely Kansas City.

And while conventional wisdom says companies will go where the money is, Scott Cohn tells us that may be changing, slowly.

(BEGIN VIDEOTAPE)

SCOTT COHN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Missouri wants to create jobs. So does Kansas. So, like every other state, they offer incentives. Create a job, get a tax break, which makes things interesting in Kansas City, Kansas and Missouri.

DON HALL, JR., HALLMARK CARDS CEO: Instead of bringing in businesses from outside of this area, they were used to encourage businesses to move just across a street.

COHN: Don Hall, CEO of Kansas City-based hallmark cards, says plenty of businesses, not his, are doing just that. Moving a few employees from one side of the border to the other and back and collecting tax breaks each time.

HALL: And that’s the problem with this incentive, is that it’s a win-lose opportunity for everybody, every time it’s used.

COHN: A study by Hallmark’s charitable arm, the Hall Family Foundation, says in the past five years, the two states have spent $262 million on tax breaks. As of April, Kansas was the net winner of just 1,700 jobs at a cost of $93,000 apiece. Hall is one of 17 area CEOs that sent a letter to both governors urging a moratorium on incentives. That was five years ago.

Critics say the situation here is really no different from the incentive that’s playing out across the country. Lots of real taxpayer dollars chasing few real jobs.

But change could be in the wind. Experts say incentive deals are down even as the economy improves. Not only are some states pushing back, companies are making fewer demands.

GREG LEROY, GOOD JOBS FIRST: People are beginning to understand that tax breaks aren’t what matter for economic development. It’s about workforce, quality. It’s about infrastructure. It’s about quality of life.

COHN: Even here, both Missouri and Kansas have put reform proposals on the table. No agreement yet, but maybe a step toward a truce in a war no one can win.

Scott Cohn, NIGHTLY BUSINESS REPORT, Kansas City.

(END VIDEOTAPE)

MATHISEN: Sales fall for the fourth straight quarter at General Mills (NYSE:GIS), but not as much as Wall Street feared. That’s where we begin tonight’s “Market Focus”.

Currency headwinds and lower product demand dragged down revenue, but the results were still ahead of estimates. That’s the good news. The maker of Cherios and Progressive (NYSE:PGR) Soup also reported better than expected profit, hiked its quarterly dividend by more than 4 percent to 48 cents a share. General Mills (NYSE:GIS) up 3 percent on this good day to $67.86.

Both quarterly profit and revenue fell more than expected at the seed giant, Monsanto (NYSE:MON). The CEO attributed the declines to a, quote, “unforeseen level of challenges.” The company also said it is in talks with the drug maker buyer and other companies regarding alternative strategic options. Shares of Monsanto (NYSE:MON) up more than 2 percent of that news to $103.52.

Diamond Resorts going private. The private equity firm Apollo Global will buy the resort management company. It’s an all cash deal valued at more than a billion. The deal expected to close by the end of this year and shares of Diamond surged more than 23 percent on the news to $29.79.

HERERA: Walmart may increase its stake in JD.com after recently acquiring 5 percent in the Chinese e-commerce company. According to “The Wall Street Journal”, undisclosed terms of the initial deal could allow Walmart to gain, quote, “observer status” at JD board meetings if it ups its stake to 10 percent. Shares of Walmart up a percent to $72.64. JD.com shares up a fraction to $20.39.

An ongoing energy saga seems to have come to an end. Energy Transfer has walked away from its merger agreement with rival energy company Williams. Last Friday, a Delaware judge ruled that a ETE could legally end the troubled $33 billion deal, but Williams had since appealed that ruling. Shares of ETE rose 2 percent to $14.70. Williams share up nearly 1 percent to $20.84.

And Visa (NYSE:V) has filed a counter claim to Walmart, alleging that the retailer intentionally violated its contract by only allowing customers to sign with a PIN when authorizing a transaction. Visa (NYSE:V) said it requires retailers to give customers the choice of using a PIN or a signature. In May, Walmart sued Visa (NYSE:V), alleging that PINs are safer than signatures. Shares of Visa (NYSE:V) up 2 percent to $76.74. Shares of Walmart up a percent to $72.46.

Meanwhile, the Federal Aviation Administration says it has lifted its temporary ban of all fights to and from Istanbul, Turkey. Yesterday, Istanbul’s airport as you probably know was hit by a terror attack that left 41 dead and injured more than 230. At the time of the bombings, ten Turkish flights were inbound to the U.S.

HERERA: Britain’s vote to leave the European Union and subsequent drop in the British pound has many American travelers looking to head across the pond. In fact, Hotels.com says hotel searches for U.K. destinations from June 24th to June 26th are up more than 50 percent year over year.

And as Seema Mody tells us, now might be the time to book that trip.

(BEGIN VIDEOTAPE)

SEEMA MODY, NIGHTLY BUSINESS REPORT CORRESPONDENT: With the British pound trading at a 30-year low, your dollar is now worth more in the United Kingdom. So, that trip to London town just got cheaper.

If you booked a suite at the Four Seasons London last Thursday before the Brexit vote, you would have paid almost $8,000 a night. Book today, it’s now closer to $7,000. Travel agency Ovation Vacation says, on average, hotels, bookings and prices for tourist related activities are 10 to 15 percent lower than last week and 30 percent lower than two years ago.

But hold on. The good deals aren’t confined to just the U.K. The euro has fallen since Britain voted to leave the European Union. So, a visit to the city of lights got cheaper, too, just not as much. A suite at the Four Seasons in Paris last week cost you 3,200 euros a night or $3,640. Book this week and you can save about 3 percent.

Other travel spots to consider: Barbados, Maldives and Dubai. Agencies say these destinations rely heavily on British business and may bring prices down to accommodate last minute travelers.

Now, if you’ve already booked your European vacation, check to see if you can rebook at a better price now that exchange rates have changed. Experts say you may get lucky.

For NIGHTLY BUSINESS REPORT, I’m Seema Mody.

(END VIDEOTAPE)

MATHISEN: So, how will Britain’s presumed exit from the Europe Union and yesterday’s terror attack in Istanbul impact the travel industry and possibly your travel plans this summer?

Dennis Schaal is news editor for the online travel news and information website Skift is here with us to discuss.

Seema just said that you might, if you’ve already got reservations to go to a European destination, you might try and rebook and see whether prices have come down. Good advice?

DENNIS SCHAAL, SKIFT NEWS EDITOR: Great advice. A lot of airlines allow you to do that. So definitely be looking fare drops.

MATHISEN: Airlines, hotels, I assume might as well have come down a little bit.

SCHAAL: Yes, especially if you don’t pre-book your hotel. If it’s pay at the hotel, a lot of times, they’ll honor the lower rate.

HERERA: What impact do you think longer term the terror incident in Turkey is going to have on the travel industry?

SCHAAL: I don’t see the bombing as a game changer in itself. Security has already been a concern after Paris and Brussels for years. And traditionally, travel demand bounces back. I guess it depends on what destination you’re talking about. I can’t see tons of travelers traveling to Istanbul now or to Brussels necessarily. But there are plenty of bargains out there. You know, vacation destinations like Greece or Malta, or Spain, and of course, the U.K.

MATHISEN: That just got cheaper by the way. Let’s talk about it going the other direction. Do you expect that Europeans who have been and Brits particularly, who have been big travelers to the U.S., Disney (NYSE:DIS) World, New York City, Chicago, wherever, are they going to cut back?

SCHAAL: I definitely think they’ll cut back. I think the theme parks will definitely feel a hit. U.S. airlines, hotels. You know, the big hotel brands, Marriott, Hilton, Choice.

MATHISEN: They’re going to feel it.

SCHAAL: They’re going to feel it because their revenue is more concentrated in the U.S. than in Europe.

HERERA: Do they have to cut prices, do you think? Offer more enticing packages, things like that?

SCHAAL: Yes, I think there will be more and — yes, a lot of discounting to bring people in. Who knows? Maybe Airbnb will benefit from this because people are going to be forced to look for some bargain accommodations.

HERERA: That’s an interesting point.

MATHISEN: All right. Dennis, thank you so much for being us. We appreciate it.

SCHAAL: Thank you.

MATHISEN: Dennis Schaal with Skift. Schaal with Skift. Skift with Schaal.

HERERA: Coming up, are you hungry? We’ll take a look at that iconic sandwich at the heart of a Dow component turnaround.

(MUSIC)

MATHISEN: Here’s a look at what to watch tomorrow. Some food and drink is one the menu as we get earnings from the owner of Olive Garden, Garden Restaurants, and we get to wash down those results with the Corona, its parent Constellation brands report as well. We also get a labor market snapshot with weekly jobless claims and that, folks, is what to watch Thursday.

HERERA: An American icon is turning 45 this year. We’re talking about the Egg McMuffin.

And as Susan Li tells us, while McDonald’s (NYSE:MCD) is known around the world for its hamburgers, this breakfast sandwich has been a staple on its menu for nearly half a century and has been a lynchpin of the fast food giant’s stunning turnaround.

(BEGIN VIDEOTAPE)

SUSAN LI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Times change, but tastes don’t seem to. The Egg McMuffin, a simple egg sandwich, continues to feed America’s appetite for McDonald’s (NYSE:MCD). It was created 45 years ago by California franchisee Herb Peterson.

The inspiration?

DAVE PETERSON, MCDONALD’S FRANCHISEE: He started tooling around the kitchen trying to figure out a way to make a handheld Eggs Benedict. He had a local blacksmith craft this ring and that kept the egg at a round circumference.

LI: Round is working. Breakfast now accounts for a quarter of McDonald’s (NYSE:MCD) total U.S. sales and has been the fuel behind the food giant’s turnaround. When McDonald’s (NYSE:MCD) rolled out all day breakfast in October, sales jumped 5 a percent globally.

DAVID PALMER, RBC: Frankly, it’s doing business for the morning day part as well. So, their whole breakfast business has gotten a real quick.

LI: While the Egg McMuffin recipe hasn’t changed in the past 45 years, the ingredients are getting upgrades. Real butter instead of margarine, extra lean Canadian bacon and by the year 2025, they say they’ll use cage free eggs in nearly all of its 16,000 residents in the U.S. and Canada.

DR. WALTER WILLETT, HARVARD T.H. CHAN SCHOOL OF PUBLIC HEALTH: Cage free eggs is really an animal rights issue. It’s not so important for public health or health of individuals, but for some people, that is pretty important.

LI: The fast food giant also wants to move to chickens raised without human antibiotics and to think fresh beef instead of frozen in some Dallas restaurants.

But can McDonald’s afford to make these ingredient changes and still keep profits up for shareholders?

Analysts say yes.

PALMER: A lot of these protein prices right now are heading the right way, so they can afford it. But the most important thing is that they look progressive.

LI: So, as McDonald’s (NYSE:MCD) moves forward to meet the changing demands of its modern customer, some things that never seem to change, including the enduring demand for a simple egg sandwich.

For NIGHTLY BUSINESS REPORT, I’m Susan Li.

(END VIDEOTAPE)

MATHISEN: And finally tonight, Forbes is out with its 2016 list of America’s richest families. I’m not on it. Collectively, the top 25 are worth $722 billion, down slightly from last year.

And here are the top three. At number three, the candy folks, the Mars family worth $78 billion. M&M and Snickers have been good to them. Coming in second, the Kochs whose two brothers Charles and David run the nation’s second largest privately held company. The conglomerate Koch Industries. The families worth coming in at $82 billion.

And the wealthiest family in the U.S., no surprise here, it is the Waltons. Not John Boy and Sue Ellen, but the ones of Walmart fame. Collectively, get this, the Waltons tip the scales at whopping $130 billion. Wow.

HERERA: You may not be on the list, but you’re priceless.

MATHISEN: Aha, oh you’re good.

HERERA: There you go. I try.

That does it for us tonight on NIGHTLY BUSINESS REPORT. I’m Sue Herera. Thanks for joining us.

MATHISEN: And I’m Tyler Mathisen. Thanks for joining us as well. 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 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) 2016 CNBC, Inc.

 

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