BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Recall crisis. General Motors (NYSE:GM) calls back another 8 million cars related to the faulty ignition switches and says it will take a massive charge in the second quarter. This on the same day it outlines compensation for victims.
SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Decision day. The Supreme Court hands down rulings on two important issues for business, unions and health care.
GRIFFETH: Taking stock. Investors close the books on the month, the quarter, and the first half with the S&P 500 notching its best second best quarter gain since 2009.
We have all that and more tonight. It’s NIGHTLY BUSINESS REPORT for Monday, June 30th.
First half of the year is already over. I’m Bill Griffeth. Good evening, everybody. I’m in for Tyler Mathisen again tonight.
GHARIB: And I’m Susie Gharib. Good evening from me as well.
We begin tonight with General Motors (NYSE:GM) and its widening safety crisis. The automaker stunned consumers and investors today, announcing another huge recall and this one involves more fatalities. G.M. is recalling over 8 million vehicles, nearly all of them in the U.S., after defective parts have been linked to at least another three crash-related fatalities.
Now, this brings the total number of recalls to 28 million vehicles worldwide. Just for this year. Now on top of that, G.M. also said it would increase the second quarter charge to earnings to $1.2 billion to help pay for all those recalls.
The surprising news came on the same day that G.M. laid out the plans to compensate survivors and the families of another 13 people who were killed in crashes related to those faulty switches.
Investors sold on the news. G.M. shares fell nearly 1 percent.
Joining us now to talk about all of this, our own Phil LeBeau who has been covering the G.M. crisis right from day one. And also with us, Colin Langan, who’s an auto analyst at UBS.
So, Phil, let me begin with you. You know, just a few weeks ago, the CEO of G.M., Mary Barra, was saying that she thought that they were coming towards the end of this whole recall crisis. And now this, and this is a big one.
So, what does this mean for her credibility? But also more importantly, what does this mean for the credibility of General Motors (NYSE:GM)?
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, it means they’re not clear to clearing out the potential cases related to ignitions, related to other quality problems. And ultimately what this does is it calls into question the quality control at General Motors (NYSE:GM).
Now, this may be the last massive recall, Susie. But at some point, people are going to say when does it end? And there’s no way of predicting that as we know from today’s recalls.
GRIFFETH: What do you by this that, Colin? When do you think it ends? And what about the price tag they’re putting on it so far? Could those charges that they’re taking against earning goes even higher, do you think?
COLIN LANGAN, UBS AUTO ANALYST: I think if you look at the company earlier this month, they indicated by Q2 they have a better grip on the recall situation. Today is the end of Q2, so I think there is very logical time here for the announcement. So, some areas, it’s not too surprising. I think the size of the charge is a bit larger than many people anticipated. It could go up.
Based on comments from the company earlier this month, they basically said it would take them to the end of this quarter to kind of get through the pipeline of potential issues. So, I do think that it’s going to be materially lower from here on out.
GHARIB: You know, Colin, you must still be feeling pretty good about General Motors (NYSE:GM), because I saw the latest report today. And you’re still confirming your buy on G.M. stock. Why is that?
LANGAN: Yes, I mean, I think once you get these recall issues behind the company, the valuation here is very compelling. I think if you go into the second half of the year, you’ll have a pretty good market share story as they ram up production of their new pickup trucks. And I do think, you know, getting the recall behind is key event. So, the victim’s compensation fund announcement, hopefully this will be the final major recall announcement that we see from G.M.
It’s pretty good positive in terms of getting it past the company and moving on to, you know, moving forward for the company.
GRIFFETH: Phil, I want to be careful how I word this question because obviously safety is very important.
GRIFFETH: And especially to G.M. right now. But they recalled, what, 28 million cars so far this year.
Are we to the point now where maybe they’re overdoing it?
LEBEAU: Well, there’s no doubt. When you look at the 54 recalls from General Motors (NYSE:GM) this year, a number of them are very ticky-tack minor things that ordinarily would have been handled at the service bulletin, shouldn’t part of a recall.
However, there are a number of substantial recalls amongst those 28 million that involve potentially deadly defects or in some cases are deadly defects. So, you had to be careful about how you look at it. It’s a huge number, Bill. There’s no doubt about that. Any time you have a company recalling 28 million vehicles, it’s going to get a lot of attention.
But there are some in these recalls that are clearly initiated because the federal government is looking at them so closely.
GHARIB: And speaking of the federal government, Colin, let me go to you. We’ve been talking about red flags for G.M. The government is still investigating for any criminality of General Motors (NYSE:GM). If there are any criminal charges brought against General Motors (NYSE:GM) itself or any of its employees, how you would react to that? Would that change your view on General Motors (NYSE:GM), the company, and the stock?
LANGAN: To be honest, we anticipate there will be a criminal penalty. If you look at the Toyota (NYSE:TM) recall, there was about a $1.2 billion penalty. That will probably take several years to come to that final settlement. But I actually I think it is likely and we should anticipate something in the future.
GRIFFETH: All right. Gentlemen, stay right there. We have more to talk about here.
As mentioned earlier, General Motors (NYSE:GM) gave more details today on how it plans to pay millions of dollars to settle those ignition switch cases. But for some, the automaker’s offer may not be enough.
More Phil LeBeau, he talked to the man in charge of the compensation fund. Watch.
LEBEAU (voice-over): Attorney Ken Fienberg admits money is no substitute for a life that’s been lost or tragically altered by a crash involving a defective G.M. vehicle. Still, he’s putting a price on how much the automaker will pay victims for their pain and suffering.
KEN FEINBERG, G.M. COMPENSATION CLAIMS ADMINISTRATOR: What does the individual victim, whether it’s a death claim, a physical injury claim, what did that person — what would that person have made over a lifetime but for this horrible accident? What about noneconomic, pain and suffering? The individual cases vary from case to case to case.
LEBEAU: Feinberg says there will be no cap on settlement awards, though the families of those killed in defective G.M. models will get at least $1 million. Those injured could get at least $20,000. With claims paid out in 90 to 180 days depending on the complexity of the case.
FEINBERG: I took the best I could from everybody’s submission to me, and this protocol is mine and mine alone.
LEBEAU: Feinberg met with the families of two victims after announcing the compensation fund. The birth mother of a 16-year-old killed in a 2005 Chevy Cobalt says she’ll likely pass on the payoff from the fund, and instead sue G.M. for punitive damages that could be costlier for the automaker.
LAURA CHRISTIAN, VICTIM’S MOTHER: You know, if dollars and cents is what G.M. is focused on before and maybe focused on again in the future, you know, that would send a message never ever to do this again to anyone else.
LEBEAU: G.M. says the fund shows it’s taking responsibility for at least 13 deaths linked with faulty ignition switches. But attorneys suing G.M. say it doesn’t go far enough.
LANCE COOPER, ATTORNEY: You have a significant punitive component here. In other words, not only is G.M. at fault for what happened with these victims, but there could be punitive damages awarded because of the egregious nature of their conduct.
LEBEAU: The G.M. victim fund will start processing claims on August 1st and by the end of the year, General Motors (NYSE:GM) is hoping that the fund will resolve 90 percent of the cases involving people who were killed or injured in defective G.M. cars.
GRIFFETH: Phil, I mean this is a — could be a quagmire. But if anybody can do it, it’s Ken Feinberg. He’s made a whole career of dealing with these Herculean funds, hasn’t he?
LEBEAU: And he out some parameters here in which he basically said, look, I’m going to give you some examples, of different potential victims and what they might get, whether it’s $2.2 million, $5.5 million, whatever it might be. But General Motors (NYSE:GM) is optimistic that when you look at Ken Feinberg’s track record, in the past when he’s done this, whether it’s with BP or to 9/11, about 90 percent of potential cases are resolved this way.
And that’s what General Motors (NYSE:GM) is banking on. They would love to clear up most of those cases this way and avoid the uncertainty and cost of going to court.
GHARIB: Colin, what do you by this that? I’m sure you’re running numbers and doing analysis on the potential liability for General Motors (NYSE:GM).
And Ken Feinberg sounds like he really wants to be fair about all. This could really go to court and end up with a lot of money. Is that what you see? What are your numbers telling you?
LANGAN: Yes, I mean, one thing you have to realize is that G.M. does have bankruptcy protection for many of these claims. That’s something they take they’re going to have to consider if they do go to court. Their chances, you know, they’re going to have to prove that senior management at G.M. is in the bankruptcy and that may be a hard claim.
So, I think there’s a good chance they’ll settle a lot of this out. When I look at it, we’re estimating in our numbers about a $300 million cost to G.M. That’s about a third the size of the civil settlement that Toyota (NYSE:TM) incurred. They’re actually about a third of the numbers of vehicles on a relative basis specific to the ignition recall issue.
GRIFFETH: Colin, before we let you go, you know, this is a horrible situation that they face and it’s very, very expensive, obviously, are you surprised the stock hasn’t fallen more than it has and what do you think of it right now?
LANGAN: I think that today it’s down less than 1 percent on some pretty bad news. I think it gives a sense of how low sentiment is in the name and that is a buying opportunity here for investors. Obviously a lot of negative news is priced in.
You know, I think the company and senior management is handling it as best as they can and trying to be transparent. I do think as we head into the second half of the year, there’s clearly some upside to the stock as they kind of get past this issue.
GRIFFETH: Colin Langan from UBS, thank you. Phil LeBeau, as always, thank you. Thank you both for joining us.
GHARIB: And let’s move on beyond G.M. to Wall Street now, stocks ended this last trading day in June mixed after data showed the pace of business activity in June in the Midwest dipped more than expected. And contracts to buy previously owned homes hit an eight-month high in May.
By the closing bell today, the Dow fell 25 points. The NASDAQ rose by 10 and the S&P was off just by a fraction. But they all posted solid gains for the just completed second quarter. The Dow was up 2 percent and both the NASDAQ and the S&P 500 rose by nearly 5 percent.
GRIFFETH: Today was decision day at highest court in the land, as the U.S. Supreme Court wrapped up its current session with a handful of major rulings. In two of the most closely watched by the business community, the justices sided with some employers over contraception issues and against unions on some fees.
Hampton Pearson was there. He has more on what it all means.
HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): For the second time in recent years, a last day ruling on Obamacare filled the Supreme Court plaza with demonstrators. This time, the clash was over birth control versus religious freedom.
Today, the court ruled closely held companies have a religious right to opt out of the general health care law requirement that companies provide contraceptive coverage for employees. The owners of Oklahoma retail giant Hobby Lobby with 600 stores and 13,000 employees took the lead on behalf of 50 for profit corporation seeking a religious base exemption from the health care law.
However, even the attorney believes this is a narrow ruling.
LORI WINDHAM, ATTORNEY: We think today’s decision was very careful. The majority was careful to say this would not decide other kinds of cases, other kinds of options that employers might have. And they were right to keep the focus where it belongs, which is on the Green family and their religious freedom.
PEARSON: At the White House, a pledge from the administration to begin looking for alternatives.
JOSH EARNEST, WHITE HOUSE PRESS SECRETARY: Now, we’ll, of course, respect the Supreme Court ruling and we’ll continue to look for ways to improve American’s health by helping women have more, not less, say over the personal health decisions that affect them and their families.
PEARSON: A second ruling was a setback for organized labor. It focused on efforts by the Service Employees International Union to compel Illinois home health care workers to pay union dues. In a narrowly crafted 5-4 decision, Justice Samuel Alito said the part time public employees who brought the lawsuit could not be forced to pay dues or join the union.
Experts say it is a blow to labor efforts to organize home health care workers and other independent contractors.
THOMAS GOLDSTEIN, SCOTUSBLOG: Though this case wasn’t huge setback for public employee unions, it was a real obstacle to them moving forward. They really had an agenda to try to expand into these nontraditional areas like home health care workers.
PEARSON (on camera): The Supreme Court justices may be gone for the summer. But their Hobby Lobby ruling puts Obamacare back in play for Congress. Republicans praising today’s decision as a win for religious freedom for small business owners, Democrats vowing to continue their fight for reproductive freedom for women.
At the Supreme Court, I’m Hampton Pearson for NIGHTLY BUSINESS REPORT.
GHARIB: In another decision, the Supreme Court declined to consider an appeal from a trustee looking to sue some of the world’s biggest banks on behalf of victims of the Ponzi scheme that was orchestrated by Bernie Madoff and Allen Stanford. The trustee maintains the banks ignored obvious signs of the massive scam but the high court ruled that he lacked the legal standing to represent thousands of victims in those lawsuits.
GRIFFETH: Still ahead, health care stocks had a good run in the first half. But will the rest of the year be a different story? That’s coming up.
GHARIB: A big victory for federal and state regulators that accuse French back BNP Paribas of violating U.S. sanctions. The bank agreed to pay nearly $9 billion and plead guilty to criminal charges of conspiracy and falsifying business records after performing transactions with Iran, Cuba and Sudan.
GRIFFETH: Looking to turn around a troubled agency, President Obama today nominated Bob McDonald. He’s a West Point graduate and former CEO of Procter & Gamble (NYSE:PG) to be the new veterans affairs secretary.
Certainly, the job will not be easy for McDonald. The department has been plagued by massive treatment delays, cover-ups and management at its veterans hospitals forcing the last secretary to resign. This nomination, of course, must still be proved by the Senate.
Also in Washington today, some tough words from President Obama on immigration reform. He said he can no longer wait for congressional Republicans to act. So, he’s going it alone.
(BEGIN VIDEO CLIP)
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: In this situation, the failure of House Republicans to pass a darn bill is bad for our security. It’s bad for our economy. And it’s bad for our future.
(END VIDEO CLIP)
GHARIB: The president says he will use executive action to deal with the system that he calls, quote, “broken.” John Harwood joins us now from Washington with more on all of this.
So, I guess, John, what exactly can the president do and why is he going this route? Why is he taking this stance?
JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, the reason is that he was re-elected with overwhelming support from Hispanic voters who expect some results. And the president’s been pushing this bill. He got a bipartisan bill through the Senate in 2013. But it hasn’t moved in the House. The speaker has indicated that there isn’t going to be a movement on that issue in the House.
And so, the president’s trying to look at whatever executive actions he can take to assist especially the 11 million people who are already here in this country without documentation.
GRIFFETH: So, no action in the House this year or out of Congress overall on immigration reform. Is this something that business should be happy about or should they be concerned?
HARWOOD: Well, I don’t think they can know yet because the president hasn’t spelled out what executive actions he can take. But, Bill, I think that until we have legislation reflecting some compromise between the two parties, business is not going to have the kind of certainty they want for their purposes of their hiring and making sure that their own businesses operate legally. That is going to take legislation the only question is when can that happen? It’s clearly not going to be in 2014.
GRIFFETH: John Harwood, thank you, tonight from the White House.
Elsewhere, large cap health care stocks easily outperform the broader markets during the first half of the year. Even though their explosive growth may be slowing, Bertha Coombs takes a look now at the upbeat outlook for health care stocks the second half of the year.
BERTHA COOMBS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): The Affordable Care Act may be shaking up health care. But for investors, health care stocks have been a good ride. The health care exchange traded funds seen double digit gains to all time highs led by biotechs in the first half.
But those biotech gains came with lots of volatility, one reason health care fund manager Michael Gregory is taking pause on those stocks.
MICHAEL GREGORY, HEALTH CARE FUND MANAGER: Biotech just experienced a 30 percent peek to trough drop. That’s a rollercoaster ride that not many investors want to participate in, including us.
COOMBS: Biotechs have gained 19 percent year-to-date, but midcap hospital stocks are not far behind, up 16 percent. Health insurers, pharmaceuticals and medical device makers also seen double-digit gain, all outperforming the overall market.
Gregory says hospitals should continue to see strong growth with less volatility. He favors mental health in patient providers like Universal (NYSE:UVV) Health which are seeing more demand fueled by the ACA which strengthens mental health reimbursement.
GREGORY: For behavioral health, you have a supply and demand imbalance in the U.S. There is only supply to meet 50 percent of demand beyond the sickening stream of headlines we hear related to school violence, and demand drivers. There is also significant demand pickup from the Affordable Care Act.
COOMBS: For insurers, the ACA has also meant new demand, but analysts say it’s coming at a time when medical costs are expected to rise due to more usage and new high cost drugs.
SARAH JAMES: They’ve been pricing well above cost trend and that’s created a cushion. I still think we’re going to have some of that cushion left in second quarter. So, I’m not worried about the quarter. I think it’s going to start diminishing over the next 6 to 12 months, which means that the earnings beats and raises may not be as strong.
COOMBS (on camera): Gains (ph) still expects insurers to outperform in the second half, but maybe not enough to impress momentum investors that moved into the sectors the last few years, and that could be the stock’s biggest hurdle.
Bertha Coombs, NIGHTLY BUSINESS REPORT.
GRIFFETH: By the way, to read more about the prognosis for health care stocks the second half of the year, you can head to our Web site. You’ll find it at NBR.com.
GHARIB: An activist investor builds a position in Bank of New York Mellon (NYSE:BK). And that’s where we begin tonight’s “Market Focus”.
Shares of the bank jumped on news that Nelson Peltz’s hedge fund has taken a stake in the company. The nearly 2 1/2 percent position is valued at just over $1 billion. Now, the move could lead to a shake-up at the bank as its stock performance has been lagging and operating expenses have been higher. The stock was up nearly 3.5 percent today to $37.48.
Linn Energy (NASDAQ:LINE) saw its shares rise after news that oil and natural gas company will buy assets from Devon Energy (NYSE:DVN) for more than $2 billion. Devon will sell its noncore gas-rich properties in numerous states in an effort to focus on its more lucrative oil assets and cut down debt. That sent shares of Linn up 1 percent to $32.35. Shares of Devon fell a fraction to $79.40.
And TreeHouse Foods is buying Flagstone Foods. It’s a private label healthy snack maker for $860 billion. Flagstone makes trail mix and dry fruit and TreeHouse says the acquisition will raise the annual revenue by $750 million in the first year after the deal is closed. Shares of TreeHouse up a fraction to $80 and change.
GRIFFETH: Investors got a chance today to react to news that the FDA has approved a new diabetes treatment. In this case, regulators gave the thumbs up to MannKind’s inhalable insulin. It’s been three years since the FDA first asked for additional studies on that drug’s affect. MannKind’s stock popped more than 9.5 percent as a result of that approval to $10.96.
And a recent study conducted by Facebook (NASDAQ:FB) has some people outraged. The social media giant admits it secretly manipulated some of its users’ news feeds to see how emotions can be spread on social media. The company argues that users consented to participate in that when they agreed to its terms and service. Still, the Facebook (NASDAQ:FB) researcher who led the study posted a public apology on his page. Today’s shares of Facebook (NASDAQ:FB) fell to $67.29.
And private equity firm Blackstone is ramping up its footprint in the hedge fund business now. According to reports, the company will fund several teams of traders to place a small number of big but risky bets at a time when many hedge funds are shying away from these types of wagers. This multi-strategy hedge fund is pitched to wealthy clients in turn. Shares of Blackstone down slightly today to close to $33.44.
GHARIB: And coming up on NIGHTLY BUSINESS REPORT, think technology plays a critical role in the financial markets today? Well, wait until you see what the future may hold. That’s coming up.
GRIFFETH: Look at the calendar. Already, tomorrow is July 1st — the start of the new fiscal year and a lot of U.S. states and because of better finances and the number of them, residents will see some taxes getting cut, believe it or not.
California drivers will see a 3 1/2 percent decline per gallon in their gasoline tax. Connecticut residents will no longer have to pay on sales tax on prescription drugs. Indiana and Rhode Island will lower their corporate tax rates. People in businesses in Idaho buying software through the Cloud will no longer to pay sales tax on those programs. And Maryland is pumping up the tax credits related to cyber security, biotechnology and research development, all this to entice more companies to relocate to the Old Lion State.
GHARIB: And finally tonight, the major averages just wrapped up a strong first half of the year. And while a lot of analysts are giving their market outlook for the next six months, we’re taking a longer view with a look at what the markets and trading might look like way into the future.
Dominic Chu has our story.
DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): The seeds for Wall Street’s next evolution are already being sewn all the way across the country.
VIVEN RANADIVE: There might be nonconventional players sitting here that could cause a huge disruption to Wall Street as we know it today.
CHU: And for good reason. If you think computers are mission critical for markets now, just wait.
MARK PALMER: The future, 25 years from now, will be settled by having this infinite depths of historical information to temper choices and decisions.
CHU: The concept is called fast data, which takes boundless amounts of information and lets users make real time decisions. Imagine knowing all at once manufacturing activity in China, oil output in Saudi Arabia, inflation data in the U.S., plus a million other factors, and then generating a trade based on the combined outcome.
BOB OREFELD: Twenty-five years and now, you certainly going to see man and machine come together in some way. It’s going to be very interesting to watch.
CHU: Leaders on Wall Street say they need to embrace concepts like fast data to stay ahead.
JEFF SPRECHER: If you don’t change from within, you’ll find a group of, you know, 20-year-olds, smart 20-year-olds in Silicon Valley will suddenly create something that will be disruptive.
CHU: Disruptive technology will also impact the nature of exchanges.
(on camera): The concept of exchanges is simple. Bring buyers and sellers together to get deals done.
SPRECHER: Technology and smart entrepreneurs are finding ways of putting networks together almost overnight.
CHU: Some say new technology will change the face of the financial markets.
BILL O’BRIEN: In terms of trading floors, they’re there. They’re really not there to support the trading business. The overwhelming majority of trading, like it is today, will be done in a hyper automated way.
CHU: Whether trading takes place on a Wall Street trading floor or not, there is no doubt the level of investing sophistication is bound to grow.
For NIGHTLY BUSINESS REPORT, I’m Dominic Chu.
GHARIB: And that is NIGHTLY BUSINESS REPORT for tonight. I’m Susie Gharib. Thanks so much for watching.
GRIFFETH: I’m Bill Griffeth. Have a great evening, everybody. We’ll see you tomorrow.
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.