SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Big stake. An activist investor jumps into GE in order to revive the share price of one of the most widely owned stocks in mutual funds.
TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Deal reached. Twelve nations, one controversial trade pact. And the impact on the U.S. economy could be massive.
HERERA: Cost of convenience. Why you’re paying record amounts to withdraw your cash.
All of that and more tonight on NIGHTLY BUSINESS REPORT for Monday, October 5th.
MATHISEN: Good evening, everyone, and welcome. Glad you could be with us on this rally Monday.
Stocks started the week on a high note. The Dow Jones Industrial Average soared 304 points to 16,776. The NASDAQ was up 73. And the S&P 500 added 35 points, its fifth straight day of gains and its longest win streak of the year. All three of those major barometers are now out of so-called correction territory meaning they’re now less than 10 percent off their most recent highs.
Now, one of the reasons for the blue chip surge was General Electric (NYSE:GE). The widely held company found in many mutual funds and retirement plan offerings has a new big investor. Trian Fund Management run by the activist investor Nelson Peltz has accumulated a $2.5 billion stake in GE, becoming one of the conglomerate’s largest shareholders.
The fund says GE shares are undervalued. And just look at the stock’s performance over the past decade — shares of GE down about 20 percent. Well, the S&P 500 has gained a little more than 60 percent.
Today, shares of GE rose more than 5 percent on word of that Trian stake.
Mary Thompson has more on this big investment by a very big and influential investor.
MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: In a first for General Electric (NYSE:GE), the 123-year-old company is targeted by an activist investor in the midst of CEO Jeff Immelt’s latest restructuring.
STEVEN WINOKER, BERNSTEIN: He’s already doing those major changes. Peltz is going to push him a little bit further.
THOMPSON: Peltz is Nelson Peltz, a billionaire investor whose Trian Fund has had a hand in restructuring at Wendy’s and Heinz. In GE, Peltz’s partner Ed Garden says his firm sees value the market hasn’t recognized.
EDWARD GARDEN, TRIAN PARTNERS: It’s an amazing risk reward and I think we bought the best industrial business on the planet happens to be trading at the cheapest valuation.
THOMPSON: Despite Immelt’s constant tweaking of GE’s portfolio, its stock has lagged the broader market and its dividend remains well below pre-crisis levels.
Still, Trian likes GE’s market share and businesses like jet engines and power, its commitment to research and development and Immelt’s latest effort to remake the company by expanding GE’s industrial businesses while selling off $200 billion in financial assets.
But Trian wants GE to sell off even more financial assets, take a tougher stance on cost cuts and use debt to buy back stock.
GARDEN: Management has said they’re going to return $90 billion of capital to shareholders. I think that number could be $110 billion to $120 billion. Depending how you capitalize the industrial business going forward.
THOMPSON: GE says it welcomes the investment and points out Immelt considered putting Peltz on the board back in 2007. And while Trian says it’s not pushing for a board seat or looking to push Immelt out now, that may change.
GARDEN: I think they’ll execute. If they don’t, then all options are on the table.
THOMPSON: For NIGHTLY BUSINESS REPORT, I’m Mary Thompson.
HERERA: Channing Smith joins us now to discuss what he thinks this will mean for GE stock and the investors who own it. He is co-portfolio manager at Capital Advisers.
Channing, welcome. Nice to have you here this evening.
CHANNING SMITH, CAPITAL ADVISERS: Thank you.
HERERA: What do you think of this particular move by Nelson Peltz?
SMITH: Well, we would agree. I mean, if we look at GE, we think it’s one of the most undervalued stocks in the marketplace today. We think the opportunity is tremendous for this company to take their operating margins from kind of a low teens number to a high teens number.
But the plan has already been in place. The transformation from a conglomerate to an industrial is under way. I think that Peltz has realized this. If you look at what he’s trying to change, not much. So, if management continue to execute, this stock price is going to go higher.
MATHISEN: I think you just answered my question, and that is what would Peltz have Immelt do that Immelt’s not already doing only faster or deeper?
SMITH: Well, you know, it’s interesting, Tyler. If you look at what he’s doing, he’s really supporting management here. The changes that he’s making to the capital structure are really minor.
But look at what GE’s done. If you go back and look at their second quarter, they have been executing.
If you look at their industrial orders, they were up 8 percent. Aerospace is strong. Power and water is very strong. Health care has actually rebounded. Oil and gas pretty much flat-lined but pretty good performance in a very weak environment.
So, if management can continue to execute and get rid of these financial assets, take that capital, use it for buybacks and for key acquisitions, this stock has got more upside potential in the long term. In the near term, we do have some reservations.
HERERA: All right. I want to get to those reservations in a moment. But first, management has been executing on this plan from Mr. Immelt for some time, and the street hasn’t liked the stock for a long time. Why is it different now?
SMITH: Well, it’s just tough. Immelt has had his chances and he’s missed on some opportunities. But I think what you’re seeing right in the share prices, that industrials have been very weak. If you look at that sector, it’s been underperforming. A lot of that price stems from global growth concerns, emerging market demand has been very weak, and so a lot of these industrials are selling off.
The difference is, if you look at GE, about 83 percent of their industrial revenue is recurring. So, we feel very — that there’s very stable income there. Very under-levered balance sheet and a very good dividend yield.
So, we think GE will probably see a hiccup in this third quarter just because you’re going to see pricing come down, but investors should stick with it. We think it’s probably in a range of 24 to 28 in the near term. But we do think that if operating margins do increase, they keep the executing, this stock is at 30 to 35 stock in 12 to 18 months.
MATHISEN: Why do you think the stock has not performed for so long?
SMITH: Well, you know, we were investors back in ’07, and there’s this hangover I think from GE Financial. There’s still a stigma on the stock, but we think that’s finally going away. You’re starting to see that’s going to be a less and less important part of the business —
MATHISEN: But GE Financial contributed a lot of the company’s profits for a long, long time.
SMITH: No, they did. And if you look at the regulations and everything that’s happened in the financial industry, it’s not as attractive an industry as it used to be. If you can look at industrials and if you can execute this is a very profitable business with high margins, that’s what GE is going after, huge growth them engineering markets and international growth. That’s where they want to go.
HERERA: Channing, very quickly, does Mr. Immelt — how long does Mr. Immelt have to execute those changes before Mr. Peltz and his company puts pressure on him to leave?
SMITH: Well, I think if they can continue to execute on their plan, then he has a little bit of life left. If they start to stub their toe, I think that Peltz will probably step in. Look, GE is a tremendous asset, a tremendous brand —
SMITH: And it should have been doing better for the last couple years.
HERERA: Channing Smith with Capital Advisers, thank you very much.
MATHISEN: Trian’s Mr. Peltz also went after DuPont, looking to gain seats on the board. He lost that one. But the activist investor didn’t do well in that fight earlier this year.
And late today, however, the CEO of DuPont announced her retirement. Ellen Kullman plans to step down from her position on October 16th. DuPont director Edward Breen will assume the role of interim CEO. Shares initially rose on the news in after-hours trading.
HERERA: A deal on the controversial free trade pact has been reached. The United States and 11 other nations have agreed to the Trans Pacific Partnership, which would open new markets to American companies.
Michelle Caruso-Cabrera explains what that deal might mean for the U.S. economy.
MICHELLE CARUSO-CABRERA, NIGHTLY BUSINESS REPORT CORRESPONDENT: In Atlanta today, trade representatives from 12 countries, all of them on either side of the Pacific Ocean, announcing a free trade agreement which will remove tariffs and barriers on nearly all goods and services between the countries involved.
MICHAEL FROMAN, U.S. TRADE CHIEF: After more than five years of intensive negotiations we have come to an agreement that will support jobs, drive sustainable growth, foster inclusive development, and promote innovation across the Asia Pacific region.
CARUSO-CABRERA: If the deal is finally ratified, it will cover 40 percent of the world economy. China is not a member of the agreement. With an economy that is still relatively closed, economists think it would be difficult for them to meet the agreed standards.
The agreement is controversial because it’s been negotiated in secret and final details trickled out during the day. It’s one of the reasons why Senator Marco Rubio, who is running for president, said today he wanted to read the agreement before he would decide whether or not to vote for it.
SEN. MARCO RUBIO (R-FL), PRESIDENTIAL CANDIDATE: Well, we’ve got to see the details of it. I’m generally very much in favor of free trade. I explain to people all the time that the United States cannot get locked out of 95 percent of all the world’s consumers. I want to look and see how the trade agreement deals, the non-tariff barriers to trade. I’m interested in those sorts of things. But the details of it are what we need to understand.
CARUSO-CABRERA: President Obama is likely to get more support from Republicans than Democrats. Many of whom complain that free trade agreements don’t do enough to protect American jobs and hurt labor rights abroad.
U.S. Senator Bernie Sanders, who is running for president, called it a win for Wall Street and big corporations and vowed to do all he could to defeat the agreement.
One of the key sticking point was over a new class of drugs called biologics, which are made from living cells and include cancer drugs like Avastin, for example. Currently in the United States, biologics enjoy exclusivity for 12 years before a competitor can make a generic version. Under this agreement, that exclusivity will fall to eight years, maybe as little as five years.
The Congressional Research Office says it’s difficult to measure the economic impact on the United States, but almost all analysis suggests it will add to the U.S. economy, potentially as much as $35 billion annually to U.S. GDP.
They acknowledge it could hurt the U.S. manufacturing sector but could help the U.S. services sector significantly.
For NIGHTLY BUSINESS REPORT, Michelle Caruso-Cabrera.
MATHISEN: The services sector expanded at a slower pace in September, the lowest level in three months. The report from the institute of supply and management suggests that this segment of the economy may not be immune to uncertainty abroad.
Despite the decline, the services sector, which includes things like construction, banking, restaurants has expanded for 68 straight months.
HERERA: No hurry to hike. That’s what former Federal Reserve Chairman Ben Bernanke said today about the timing of the Central Bank’s first interest rate hike in more than a decade. Bernanke led the Fed during the financial crisis and earlier today, Steve Liesman spoke to him in a rare interview since leaving his post.
STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Former Fed Chairman Ben Bernanke, quiet since he left office about Fed policy at least in public, waded into the great rate debate today in a live television interview to promote his new book. Bernanke made fairly clear his view. He supports the Fed’s current easy monetary policy and would appear to be in no hurry to raise rates.
BEN BERNANKE, FORMER FEDERAL RESERVE CHAIRMAN: I would just point to the inflation rate. Even if the Fed had no interest whatsoever in growth and employment, which of course it does, but it has a 2 percent inflation target, it needs to get inflation up to that target. And you know, easy money is justified by the need to get inflation.
LIESMAN: As to why the economy is not firing on all cylinders Bernanke said the lackluster performance is the result of slower productivity growth.
Bernanke’s new book “Courage to Act” hit the bookstore shelves today. It’s a factual, political, and at times emotional recount of the financial crisis and the extraordinary actions taken by the Fed. He defended the Fed’s policy, saying they led to better results for the economy in a slow growth world.
The former Fed chair also recounted some of the more personal recollections including his most fearful moment of the crisis.
BERNANKE: The worst moment I think won’t shock you, was the Lehman weekend and the knowledge it was going to fail, and the fear and uncertainty that was associated with that. And then the next couple of days as we had to deal with AIG and talk to Congress —
LIESMAN: What does that mean, though, worst moment for a Fed chair? Does it mean you were worried the economy was going to blow up?
BERNANKE: Yes, I was very worried. I mean, my whole background as an academic was studying the Great Depression, studying financial panics or effects on the economy, and I saw we were, you know, having the granddaddy of all financial panics about to explode on us. And I thought the consequences would be tremendous.
LIESMAN: But Bernanke in the interview and in the book concedes there were things he could have done differently. Among them combating critics with more public appearances and explanations of the Fed’s controversial crisis policies.
It’s not a stretch to think Bernanke’s title “Courage to Act” is an implicit criticism of other parts of government. He’s saying he and the Fed had the courage to act to save the economy, enacting unique policies, but other parts of the government, especially Congress, fell down on the job.
For NIGHTLY BUSINESS REPORT, I’m Steve Liesman.
HERERA: Still ahead, how much are you paying to get your cash from an ATM? Probably more than you’d like.
MATHISEN: The Department of Justice has finalized a record settlement with BP, more than $20 billion, biggest pollution penalty in U.S. history. It covers the 2010 “Deepwater Horizon” spill in the Gulf of Mexico. Attorney General Loretta Lynch called the settlement a strong and fitting response to the worst environmental disaster in U.S. history. It resolves all federal and state claims against BP for the accident.
HERERA: The new term of the Supreme Court got under way today, and there are some noteworthy case that’s could influence the way business gets done in this country.
Hampton Pearson has more from our nation’s capital.
HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: The 2015 Supreme Court term finds big business hoping for favorable decisions from the Roberts court in two high-profile cases that could curb costly class action lawsuits.
RICHARD SAMP, WASHINGTON LEGAL FOUNDATION: There is a feeling I think among some members of the court that the lower federal courts have turned too far in the direction of helping out plaintiffs, and they are wanting to cut back on that.
PEARSON: The most high-profile case involves Tyson Foods (NYSE:TSN). They’re looking for the justices to overturn a $5.8 million judgment because they failed some 3,000 employees at a pork processing plant for the time spent putting on and off protective gear.
At issue is just how many of those employees were eligible.
SAMP: In the Tyson case, many of the employees worked nowhere near 40 hours a week, so even if they spent 15 minutes donning and doffing uniforms, they would not have been entitled to overtime pay. Nonetheless, the lower courts lumped all of the Tyson employees into one big group.
PEARSON: Another case involves the Internet search engine Spokeo. It’s being sued by a Virginia man for publishing inaccurate information. The individual admits there was no harm, but he still wants to preserve his right to sue.
Mandatory union dues for government workers is at issue in a case involving the California Teachers Association. The union argues they should collect dues from all workers, even those who don’t join the union, because all workers benefit from collective bargaining between the unions and government.
ELIZABETH SLATTERY, HERITAGE FOUNDATION: The issue in this case is whether public employees who opt out of joining a union can be forced to pay dues nonetheless that cover the reasonable costs associated with collective bargaining. In the 1970s, the Supreme Court said that this is fine, but in recent years, in two cases, the justices questioned the validity of this 1970s case.
PEARSON: The election year calendar also finds the court dealing with cases involving voting rights, race in college admissions, and religious objections to birth control.
The court’s decisions on many politically charged issues will come during the heat of the presidential campaign, with candidates from both parties already making the future makeup of the court a lightning rod issue in the 2016 election.
For NIGHTLY BUSINESS REPORT, I’m Hampton Pearson at the Supreme Court.
HERERA: And the Supreme Court declined to hear an insider trading case which the Department of Justice had hoped would broaden the definition of that crime. The justices gave no reason for turning it down, but by doing so, they keep in plays an appeals court decision making it more difficult to prosecute such cases and possibly undermine a number of convictions.
But U.S. Attorney Preet Bharara told CNBC he thinks the decision will only affect a small subset of cases.
MATHISEN: Twitter today naming co-founder Jack Dorsey as CEO as expected. And that is where we begin tonight’s “Market Focus”.
As we reported last week, there was speculation Dorsey would be named chief of the social media firm. He has been interim CEO since July when former chief Dick Costolo left the company. Dorsey will also remain the head of Square, a payments start-up he co-founded. Twitter shares up about 7 percent on the news. They close the day at $28.15.
Spark Therapeutics announced a successful stage 3 gene therapy trial that treats night blindness. The company plans to file for approval from the FDA next year for what could become the first gene therapy treatment in the United States. Shares of the biotech firm soaring today 20 percent. They finished at $53.02.
And the health technology firm Illumina (NASDAQ:ILMN) warned investors of lower-than-expected revenue for the third and fourth quarters. The firm blamed disappointing sales in Europe and weakness in Asia and the Asia-Pacific region. That sent shares tumbling in initial after-hours trading. As you see, it fall of the cliff there. During the regular session, the stock was off just a fraction at $163.17.
HERERA: Activist investor Starboard Value increased its stake in the security company Brinks. Starboard is already the company’s largest shareholder and hopes to turn around Brinks’ poor financial performance. Brinks shares popped about 4.5 percent on the news ending the day at $29.70.
The Container Store announcing earnings and revenue that missed estimates after the close. This as margins narrowed and expenses increased. Shares were initially lower in after-hours trading. During the regular session the stock was up nearly 3 percent to $15.57.
The LA Times is reporting that Lionsgate and Starz are in advanced merger talks. That combination would create another major media company. The two companies reportedly held high level talks for several months, but no deal is certain however. Lionsgate saw its shares pop in initial after-hours trading. During the regular session it was up more than one percent. Starz also rising initially after the close, during the regular session the stock was up 4 percent.
MATHISEN: Well, you may want to think twice if you don’t already about using an out-of-network ATM. A Bankrate.com annual survey says the average fee to withdraw money from an ATM that’s not affiliated with your bank will cost you a record $4.52. That charge is up 21 percent over five years ago.
Greg McBride, senior financial analyst at Bankrate.com, joins us now to talk more about the study.
What’s going on here, Greg? Is it as simple as they’re charging it because they can get away with it?
GREG MCBRIDGE, BANKRATE. COM SENIOR FINANCIAL ANALYST: I think that’s part of it, Tyler. I think a lot of it too is the fact that people are getting smarter about how they use their money and how they make these cash withdrawals. People are using less cash and when they make their withdrawals, increasingly they’re doing so at their own network’s ATMs.
So, there are fewer people going outside the network and that cost is being spread to fewer people. I’d see that’s a big contributor to these ever escalating fees.
HERERA: So, in the survey, you went to a number of major cities around the country. Let’s take a look at the highest average ATM fees. And Atlanta tops the list.
MCBRIDE: Yes, Atlanta would top the list. New York also is in second place, both of them over $5 on average. And what a lot of people don’t realize is when you go outside the network you’re not just paying one fee, you’re paying two. You’re going to pay your bank and then you’re also going to pay the ATM owner. These figures reflect the combination of those two fees.
So, even if your bank says we won’t charge you for going outside the network, it doesn’t mean it’s a free withdrawal, because you’re also going to have to pay that ATM owner.
MATHISEN: The cheapest cities are no bargain. San Francisco at $3.85. Cincinnati at $3.86. All the others are over $4.
But let me ask you this. I don’t know you that know the answer to this, Greg. But give me a guess. They’re charging $4.65 an average for this. What is their cost for doing one of these transactions? What’s their margin?
MCBRIDE: Well, the cost — the cost to your financial institution is probably pretty minimal. They’re charging you $1.50, $2, $2.50. I think it’s fair to say that it’s not costing them anywhere near that deposits —
MATHISEN: Pennies, right? Pennies?
MCBRIDE: In all likelihood. Yes, maybe small coins. The ATM owner on the other hand — I think the policy there has always been the bank’s own customers get the access to the ATM for free. So it’s the non-customers that pay the freight. And that’s one where — that’s where we see it go up year in and year out in large part.
MATHISEN: But even to them the cost must be minimal. I mean, they own — Wells Fargo (NYSE:WFC), I’m picking a name. Wells Fargo (NYSE:WFC) charges their customers nothing but they’re charging me, a TD Bank customer, $3. Their cost for that transaction is nowhere near $3.
MCBRIDE: It’s not the cost of the transaction as it’s the overall upkeep of the network, upgrades for the network. All that cost is being borne by non-customers. So, something to keep in mind the next time you’re thinking of making an ATM withdrawal, plan ahead so you can use your own bank’s ATM and not have to pay these fees at all.
MATHISEN: What can I do? I can avoid all of these, right?
MCBRIDE: Yes, absolutely. The fees are completely avoidable. So, we’re not hostage to the higher fees. The first thing is, you know, use your bank’s website or their app and find out the location of the nearest in-network ATM. These networks are bigger than ever. So that’s easier than ever.
If you’re in a pinch for cash and you’re using your debit card at the point of sale get cash back that way. That’s tantamount to a free withdrawal. And then also consider banks that have broader ATM access. A lot of community banks and credit unions belong to large nationwide networks. You’re not necessarily at a disadvantage.
MATHISEN: Always great to see you, Greg. Thank you.
Greg McBride, Bankrate.com.
HERERA: And according to financial data firm SNL financial, the banks with the highest ATM fees are Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), JPMorgan (NYSE:JPM) Chase, TD Bank, and PNC Bank (NYSE:PNC).
MATHISEN: Who knew “Saturday Night Live” had a financial arm?
Coming up, planning a trip to Disney (NYSE:DIS). You might want to take a close look at your calendar.
HERERA: Here’s a look at what to watch for tomorrow: a report on the trade gap, an important economic indicator. The International Monetary Fund will release its world economic outlook ahead of its annual meetings. PepsiCo and Yum Brands (NYSE:YUM) will report earnings. And that is what to watch on Tuesday.
MATHISEN: Planning a trip to Disney (NYSE:DIS)? Well, the cost could soon depend on when you go, the company considering surge pricing. You pay more on peak days like Saturdays and holidays, less on other times.
Julia Boorstin explains why.
JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: It could cost less to go to Disneyland or Disneyworld in the middle of the week or in the winter and more on the busiest days of the year. For the first time in the 60 years since Disneyland launched, the Magic Kingdom is considering switching to demand-based pricing.
DAVID BANK, RBC CAPITAL MARKETS: The parks are doing so well and operating at such high capacity at this point that they’re trying to improve the customer experience by probably redirecting some of the traffic, you know, more evenly throughout the year as opposed to having it concentrated in absolute peak season. And this is the kind of thing they wouldn’t be doing if things were going badly. This is the kind of thing I think you do when things are going really well.
BOORSTIN: Disney’s been raising prices faster than the rate of inflation over the past several years, but that isn’t necessarily enough to deal with massive crowds. Both Disneyland here in California and Walt Disney (NYSE:DIS) World in Florida have seen record attendance each of the past three fiscal years. Plus, the quarter that ended in June.
That means if you wanted to visit a park on a holiday, it could cost far more than the $99 it now costs to visit Disneyland and the $105 to visit Disneyworld. That plus busier parks during the down season could be a big boost to Disney’s bottom line.
BANK: I think over time variable pricing is going to have a positive impact on operating income and on revenue. I think largely because it will keep the customer experience as positive as possible for each price range.
BOORSTIN: Disneyland Paris has been offering tiered pricing since last year, with prices ranging from $64 for the low season to $94 for a ticket for any time of year. Disney (NYSE:DIS) tells me there’s no official plan to launch variable pricing here in the U.S. yet. It’s just something that they’re exploring internally and talking to visitors to see how they feel about it.
For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin in Los Angeles.
HERERA: And that does it for NIGHTLY BUSINESS REPORT tonight. I’m Sue Herera. Thanks for joining us.
MATHISEN: And I’m Tyler Mathisen. Thanks from me as well. 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) 2015 CNBC, Inc.