Transcripts For BLOOMBERG Market Makers 20131211

Find out where the industry is headed next. You are watching Market Makers everyone. So much to cover. Let sit to the news. The top business stories from around the world. More than a courtier billion sign up for insurance. That is more than twice as many as we saw in october when they struggled with technology problems. Has asked herius Inspector General to find out exactly what went wrong. Hilton worldwide hopes to raise ipo on2. 4 billion for record and it comes at a time when occupancy and room rates are continuing to kleiclimb. Named popene has francis its person of the year. Who is poisedtar to transform a place that measures changed by the century. Francis became the pope in march. Since then, he has elevated the Healing Mission of the Catholic Church and warned of the dangers of income inequality. Patty murray and paul ryan have a plan to fund the government for two years, restore spending cut under sequestration, and reduce the deficit. Have to sell it to their fellow lawmakers. Peter cook has been talking to rankandfile republicans, many of whom say this deal does not go far enough. Will it pass the house of representatives . The early indication is that it will. We just left the scene outside where the House Republicans are meeting behind closed doors. Convincingade a declaration according to darrell issa. He expects a majority of majority of House Republicans to pass this proposal put forward by paul ryan and patty murray. His vote counting was pretty good usually. They think the majority of the House Republicans will back it. From someard republicans and do not like it. Democrats left the room and i heard skepticism from two of them. They dont think this goes far enough to help those who are hurt by sequestration and those who are Unemployment Benefits might lose those benefits. , it doesnt pass overwhelmingly is what it sounds like. Lets talk about how it is getting paid for. Touestration was supposed cut spending by 80 billion next year. How do you cover for restoring all of that spending . Bag of randomb user fees, revenue raisers come and other areas. No to if he could tax increases. It includes the Aviation Security feat that hits the passenger every time they get on a plane. It will be raised to more than five dollars per flight. You have changes to federal and military pension plans. There are other changes as well. Of bottom line is that none these have shown owners they will blow up the deal. It is my understanding that something called the master file plays a role in those budget agreements. What exactly is that . What role does it play . It stands out as being perhaps the quirkiest of these out here. It has kept the Commerce Department and the Social Security ministration in particular. Of who died in this country in a given year and it is used by companies to verify if someone has died. Their benefit payments to beneficiaries and it is used by the government as well with regards to things like debt. There are changes that would penalize the misuse of that master file, up to 250,000 a year. How much they hope to raise. There has been a very unusual thing and people might worry about the file. The government hopes to make it a money raiser. Thank you very much, our chief washington correspondent peter cook. We will find out what the business committed he is making of the deal. We want to talk about the focal role. Why should we be making such a big deal about this agreement that accomplishes so little . What isu look at keeping our economy from growing, the most important factor is the lack of confidence and what is coming out of washington, d. C. There is so much uncertainty. It is seven not the grand bargain and hopefully what would happen if we reach an agreement for the next couple of years. , congress can spend more time on longerterm issues and fixing longerterm entitlement issues and change our tax process which is way too complex. As a businessman, do you feel like this is a productive deal or are we just so fatigued by so little out of washington that you will take everything . It has been so dysfunctional in the past. The agreement like this. Quite frankly, i dont think it will happen. I really wish that the fed would begin tapering in december. There has been more publicity tapering for someone who has the least amount of impact on the economy, it is amazing to me. If we can get all of those things done, then we can focus on the fundamentals on the fact that we should be growing much faster than we are. This would be an impetus, i think. It does not get the longterm but we get the short term out of the way before we can hit the longterm and washington, d. C. This is a Government Shutdown which is off the table for two years. You mentioned the debt ceiling, that will rear its ugly head again by march. What would she say to lawmakers who are thinking to themselves, yes, we can deal with this smalltime deal on the budget because we will bring things to ahead again over over the debt ceiling. That would be a terrible outcome. The fact that they have been able to come together apparently on the short term sequester, i think it shows a pathway that will come together on the debt ceiling as well. We will be back with you with more in just a few minutes. That is the former wells fargo chairman. Income inequality was a hot button issue but some measures, the gap between the rich and poor has not been this widen century. Resident obama has made dealing. A quality a centerpiece the combined trends of increased in and increasing mobility poses a threat to the american dream, our way of life, and what we stand for. Almost two thirds of americans do not think the country offers everyone an equal chance to work hard and get ahead. Michael mckee is here with more. What did the poll show . That was the definition of the american dream, that anyone could work their way up. Americans are feeling that the deck is stacked against them. Americans say that the u. S. Does not give everyone an equal shot at getting ahead. This is widespread across many income levels. You think it would be most reverend among those that make the least. Even 60 of those that make over 100,000 a year agreed that the u. S. Economy is unfair at this point. What is worse for the theticians is 68 say that gap is getting bigger. Theres is the potential for an American Spring coming up. Some sort of unrest in the u. S. Because people do not feel that they can get ahead. Should we be grading on a curve . Where does u. S. Economy rate against other countries . Is not as good as other countries. The measure of International Inequality has declined. The question is what do you do about all of this . Americans are interestingly divided. They have better systems, less income inequality in places like switzerland. The government is heavily involved. They dont want it involved. They are split between the government should take care of it or market should take care of it. Are goinge markets to achieve some income redistribution. This is part of the american myth as well and perhaps along with the american dream. How . How, specifically . I dont know if the poll those into that. It does not go into the specifics but it does cuts on something that the pope talked about. , 56 sayown economics the government should abandon that. It does not work. We read about the people on wall street making lots of money but that does not help the people on main street. Should it . Those are people people who could have grown up with a very humble again means and gone on to have been actual ordinarily successful. Government policies have made it easy for them to get ahead and the rest of the people. Thank you for bringing us the details. How americans feel about their chances of getting ahead. Horatio alger. Some will even the american dream. It is a good country, i am happy to be here. In a minute, we will be talking to former wells fargo ceo. Did the four core go too far . Rule go tooolcker far . We will ask the ceo of one of the biggest Solar Panel Makers out there. Ons is Market Makers bloomberg tv, streaming on your phone, tablet, and at bloomberg. Com. You are watching Market Makers everyone. Can it really be happening . The final version of the volcker rule was passed that no one is complaining. We continue our conversation with the former chair and ceo of wells fargo. Is it possible to have a win win win . The banks, the antibank activists, and the regulators seemed pleased with the way the parole or rule turned out. Rulee way the volcker turned out. The details have to be worked out but the framework seems to be reasonable. Are two overarching truths that we must be sure that we understand. The first one is that there is no evidence that proprietary trading either caused or even contributed to the financial crisis and that has not been portrayed that way. The value that banks , businesses,conomy and consumers is taking risks. We add no value unless we take risks. There is a perception out there that we should be eliminating the risks and banks. If he did that, he would not perform the duty. The businesses will grow, consumers can get loans. Volckerl rule rules not made for your kind of bank. They took the approach that the best hedge against bad credit was good underwriting. Now, the rule deals with two things that did not really concern you, portfolio hedging and trading that was not a big deal at wells fargo. Why do you feel strongly . I said that good underwriting is important but i said more important is the diversity of risk and diversity of income. There are people that believe that all of the banks should do is make loans. If we did that, there would be three or four times Bank Failures in the past. There is a less risky Financial Institution that has a balance and a noninterest income. This is the ability to buy and sell securities. This is uncorrelated with loan risks. Supply and in our customers have. Are you concerned that when the volcker rule is implemented, it will hinder banks ability to provide liquidity customers . If i am a traitor that buys a bunch of bonds and then my customer flakes because the regulators say this is a proxy trade, couldnt that hinder the way that they try to provide liquidity . It could. It is all in the implementation. And you have 1000 pages of rules, that is a mistake. His could be much more simpler if i was the regulator, i would say that we are talking about diversity of income streams. If the organization is in the trading business and income from that, revenues from that, it is less than 10 of the income. You dont worry too much about their inventory levels. They would simply look at their profitability. As long as they were reasonably profitable to move percent of their revenue. You can be assured it is a good thing going on. A thousand pages might be needed for companies that are well above that. The organization was a billion a billiond it was dollars a proprietary trading. After the volcker rule, they eliminated the proprietary trading. Theyre back up to 2 billion. You need to limit the percentage of your revenue that is due to any particular risk and i think a rule of some is you dont want any risk to be more than 10 of your total. I want to go back to income inequality. As it relates to wall street, it has gotten a tough time, a beating. People think that wall street continues to get an unfair advantage and that is only widening. It a deep problem. I would say the greatest increase and income equality, and income equality over the past four or five years. And the policies that are ineffective and it is increasing income inequality. The Federal Reserve is trying to come to investors to go to risk assets. Record high stock prices. The top 20 of the income people are doing really really well because the stock market is at an alltime high. The rest of the 80 to rely on saving the talent are at record low Interest Rates. The said policy of qe1, 2, 3. We cannot voice their own opinions because i would say that i agree with you. Great to see you. Coming up, getting your bitcoins, it is just part of the battle with the virtual current see. He is going through 12 days of bitcoins. 26 past the hour. It is time for on the markets. Luckily, i am here. The market is down. Groups arey following except for Consumer Staples which are slightly higher because Everyone Needs deodorant and shampoo. The s p and the nasdaq are down. Now thatpossible investors have seen a sign of progress on the fiscal front that they feel as though the fed will not be so inclined to support the economy with monetary policy. Here we are, december 12. People are taking profits. It is the end of the year, they are wrapping up. Possible. Always the Hilton Hotel Chain is getting ready to go public. This will be the biggest year for ipos since the. Com boom. Live from bloomberg headquarters in new york, this is Market Makers with Erik Schatzker and stephanie ruhle. Welcome back to Market Makers. About it,is talking hilton is going public. I want to focus on the health of the Capital Markets and jeff solomon is here to do that with us. It seems like everybody wants it and they just wanted extended, obviously everyone played in twitter. Our ipos just hot coming into the market . Good Business Models are relatively easy to finance in a market where it is sanguine. Most importantly, we are in a time where we have a lot of volatility dont have a lot of volatility in the equity market. A lot of the Early Stage Companies that we see in particular are taking advantage of the fact that there is capital available to raise. Is it giving anyone pause to sponsor. Smartest in the room. Many are kind of the endgame many have gotten done in the late 2010. Before the financial crisis. That is an expectation five to seven years after they go private that there will be a private offering. People are paying close attention to valuation so things investors think they can make money from here. We havent talked about the the focal rule and i am wondering if you think about this for a moment. We havent talked about the volcker rule. And analyst at Sanford Bernstein wrote that u. S. Regulators have not destroyed Capital Markets. Wealth management revenues are expected to improve in 2014. He feels like this is a demonstration that despite all the criticism that they face, they actually got the recipe right. There is a little bit of a a dichotomyof there. Last year we had 12023 countries that became public. 100 75. E reality have last year, we had 123 companies that became public. This year, we had 175. Is increasingen the supply of companies that can come to market and the easier way to raise capital. In the heyday we were bringing 400 600 companies a year public. That will not go back but we are a far cry from that. If we look at those that are lost every year. We areot exactly like raining ipos. In part because it has been such a long drought in the capital formation. Isnt every Capital Market just a of buyers and sellers. If there is a belief in the early stage. What does that mean . Like that is for companies that are less than a billion dollars in revenue and have less than 700 and 50 million. Click some say the loopholes that they get to go through. Twitter is an exception. 82 of the companies that became public use the emergent Growth Company status. We have opened up the supply to meet the demand. Without this, we have seen in previous years there might be in demand for ipos. The earlier stage are funding businesses that do not require capital intensity. If you think about the medical devices, they used to go public in the 1990s. Those dont get funded with the idea with the money in the public market, they are more funded towards selling it to the big consolidators. That is where we have missed this job growth boom. When you speak to investors every day, equity market investors, arent they more interested in emerging Growth Companies . Those of the companies that have innovation as opposed to the ibms of the world that are just plain defense. There is a large percentage of investors that would like to be more and small cap. How do we make it easier and more attractive for institutions to trade in small cap stocks . They dont have access. It is tough. We had to fix the supply problem. We need to make sure in the trading of small stock that there is enough liquidity so that bigger Institutional Investors Pay Attention, come in, and provide additional growth for these companies that have become public. Ultimately, for these emerging Growth Companies, these Small Companies that you describe, is it a good thing for them that Companies Like hilton and extendedstay are going public . Or are those companies soaking up demand that would otherwise go to others . I dont think that they are soaking up demand. In general, it is good when Equity Investors are making money and ipos. You can do more because they trend. Od about the last time i said the health of the u. S. Market, you can look at the health of the ipo market. If theyre working, youre likely to have a positive equity move. It does not stop up demand but it has the patina of fact and it allows people to think that the window was open. I want to go back to the focal rule to the volcker rule. It seems like the top banks are breathing a sigh of relief. Does this have less to do with the actual language and now you know what the lay of the land is . Not knowing what the future holds is difficult. You are financial engineers. It will not take long to figure out a way around this rule. A number of us out of there. There are many that are not impacted negatively or adversely by the vertical rul v. You are talking about adding additional regulation for a handful of really large Banking Institutions and you want to make where the regulators are really protecting the money from risky trading. For the vast majority of us, that is not relevant to cause we dont take depositor money and we dont have retail accounts or Financial Intermediaries that are looking for ways to finance these companies. You are watching these layout. Will anything, this . If you are an undergraduate student, you should look into getting a law degree and think about doing regulatory law. Like so, come on. And thethe banks antitank activists and the regulators all be happy . I am a cynic. There are 1000 pages. I would be lying to you if i read every page. You are repeating the bloomberg story. Yes, i went to bloomberg and got the interpretation. What is hedging, what is hedging on behalf of clients . There is a lot of definition that has to remind me of this. As it relates to big banks getting involved in private equity and getting involved and hedge funds. Those guys have been big contributors of capital to these. We have seen those banks began to divest themselves. Moving out ofhose banking organizations into other firms where they do what they do without the overarching regulatory framework. I do think it will be challenging for the larger institutions to navigate this but i have a lot of confidence in this. I am sure that they will be able to figure out something because they always do. They do so much for joining us. Away, you got to use the word cadre in the segment. Not knowif you did this about him, he is an incredible singer. Homeowners, we will wait until next time. Homeowners are warming up to this industry. Solar industry at its biggest quarter yet for residential installations. Is booming in america. Capacity is up 35 in the past 12 months and for the First Time Since the mid1990s, the u. S. Is on track to install more solar panels than germany. Our guest is with the Second Largest Company in the u. S. Tom warner point us. What is driving the pace of and what people want to know is if it is sustainable. Thats what we have seen is that the cost of solar has come down by half. On top of that, consumer can lease the system so that they can pay and lessen their electricity bill today. They are making cash in the first month with no money down. It is making solar an opportunity for everyone. Of thebig a part business is this . Whats it has gone from 10 20 of the business. Demand is bigger than supply. Now it is 20 and residential is the lions share of your revenue, how much bigger is it need to be . If you could, could you finance all of your residential sales . This isrend in solar, to sell energy not systems. That means that everything is financed. What we do is we guarantee the Energy Output and we guarantee the cost of energy. , it is a greatl deal. Then it becomes a capital efficiency play. Can you raise the tax sufficient to raise the machine. Want to do this which returns the sun power into . Good at delivering economic energy. We want to be the Energy Service provider. We want to sell you energy that is economic and we want to add services that are on that. He will go from a passive bill you can dial in your energy bill. We will bring in outside financing. We are not going to be the big financer. We will have others help us. What rule did Capital Markets have to do . This is capital intensive to begin with. The u pitt in for the original leases that you can can recycle for new leases. But you effectively have to sell bonds that would be backed. Y the lease payments exactly. You would have to show that the lease payments are a solid asset that are worth low rates so that you can recycle the money very efficiently. We see the Capital Markets think that the risks are coming down rather somatically. We see these markets are likely to open up and that means that the lease market will be charged. That is what is happening here in north america, maybe theres a possibility of Something Like that happening in europe. I dont know. What about asia . You highlighted the strength of the japanese market. We see a lot of policy change in china. How will that affect you. The exciting thing about these countries is that there is no penetration. On ast closed this project that we did with our majority owner hotel. We are selling market rates unsubsidized. That is because that they have a very hot and dry desert. We will start in the right ways. We will proliferate that around the world. What we see is japan is 26 of our shipments. We see huge opportunities to see increases in Revenue Growth from south america to the middle east where the numbers make sense. They have a lot of oil. Great to see you. Always nice to have tom warner, the chairman and ceo of sun power here. When we come back, the 50 plu bt places to work. We will have that for you. Stay with us. It is the 12 days of bitcoin. Matt miller is back for day three. Andught a du quoin yesterday he shop with it and today he is putting on his professors tweed jacket with elbow patches. Bitcoinught a yesterday and he shop with it. I was learning about it in reddit community. Then they asked me, how does it work, how can i get a bitcoin . Starts with obviously changing your dollars or your euros, your yen, whatever you have got into bitcoins. I put a regular wallet with dollars and then a digital wallet. Looks more like a clutch, doesnt it. I would love to see you with that. Let me explain wallets. You have to get a wallet before you can do any transaction. Pour the consumer, it works like a regular wallet. You spend out of it. For a merchant, producer, service provider, it works like a cash register. In order to make a transaction happened, each wallet has a private key and a public key. If you are selling something or if you are accepting bitcoin, you show someone your public key. You can take a picture of that key with your wallet if you are abuyer and it generates numeric code that is random. When those two things come together, the private key and the merchants public key, it makes a transaction. Those all go into a page on a ledger. There are hundreds and thousands of data Mining Operations there that are competing to try and verify and secure those blocks. What they do is they wrapped a kind of digital armor a big block. The transactions are all irreversible. It is an interesting procedure. What happens . There is a fixed number of bitcoins. There are many that seem so critical to this transaction process. There are more and more minors to try to get to get to the 25. This is almost 25,000. Exactly. Every four years, it will be half. By 2040, it will only be worth one bitcoin. The incentive is reduced but the. Alue will go up we have to leave it there but it is day three. Are you a buyer or a seller . We are going to have a meeting with bitcoin people and maybe i will buy another one. A reallyk it interesting community. That it is a commodity, not a currency. Much. Nk you very matt miller, day three. Is goingpoint out, high and brother. You have heard about the peoples choice awards. What about the employees choice award . We will bring that to you in this mornings off the charts. , bloomberg tv, are we in there. We are not in there but this is not self nominated. A lot of tech names on there. Such as google, interactive intelligence. Falling. Laster, number 6, 2 years ago was number five, now is number eight. For google. Love how about from number five to number one, facebook. It has fallen for spot since last year. This is the first time in four years is not in the top three. This is the most interesting to me, bain. This is not the only survey in which it is come out on top. Oneas named as the number place to work. Something about the culture and how the work that they do i has an impact. Are they doing something on aeir own despite creating good place to work. The employees are nominating the company. They are saying based on their reviews. Summit he should have said something years ago for mitt romney. Somebody should have said something years ago for mitt romney. Well, this is bain bain capital. T well, he could have used anything to help them. Market makers will be back in two minutes. Stay with us. Live from bloomberg headquarters in new york, this is Market Makers, with Erik Schatzker and stephanie ruhle. It is not the same old song. Spotify ramps up the competition with pandora and itunes radio. They are offering an ad supported service for mobile devices for free. Will investors check into this . Generates likely to one of the biggest private equity profits of all time for the blackstone group. It is the industry that is on fire. Many are puffing on e cigarettes. Lawmakers are trying to figure out how they should be regulated. You are watching Market Makers. I am Erik Schatzker. I am stephanie ruhle. A lot to cover in this hour. Lets get back to hilton. They are expected to price its ipo after the close today and it could raise up to 2. 4 billion, making it the largest ipo launching ever. Olivia sterns joins us. Is it a dumb question to say is at the right time . It seems like it is. The s p is up with the six percent. That suggests people are in the mood to buy up stocks. If you look at the lodging sector, analysts will tell you that we are offering the sweet spot, limited supply. Demand is expected to rise. We are in the sweet spot spot of that lodging cycle. Look what blackstone did last month. Proof in the pudding is that it was five times oversubscribed. What about the valuation question mark hilton appears to be pricing towards the high end. What justifies the premium . 77 of their rooms are in the u. S. That is the sweet spot. They want to enjoy the good write up. Ride up. There is a management premium. Hilton is higher than the industry average and theyre making more money. Cachinge issue of the of the brand. The waldorf astoria comes with a lot of real estate. It is a great time for real estate. How about the fact that the market is super hot . Isnt that one of the best things for economy . People are not looking under the hood and getting into the weeds. It is interesting how much demand there is for real estate ipos. Blackstone has been pushing away from owned robberies and into franchising. There is a higher margin business rather than take on the capital risk of owning or lead leveraging or leasing the property. That could be another reason why they are getting a higher than industry of that valuation. Jeff loves a waldorf salad. Who told . He loves a big return. Were going to do a waldorf salad segment another time. We are talking about the hilton. Hilton found of the pina colada. I want to talk about what blackstone stands to make out of the deal. If the price is a dollar beyond the top end of it, it is the biggest return on one particular deal. Put it in context for us. Apollo . Is bigger then number is the current one, the Chemical Company that went into bankruptcy and came back out. They would gain somewhere in the neighborhood of 10 million dollars. You have to give blackstone credit. They rode out the storm. Bought at the top of the markets. They wrote it all the way down and they have been patient and longterm. They have looking to lot laquinta. I cannot quite trill that way. Should we be thinking about as this offering comes to market . There is some thought that blackstone might look to sell out some of the real estate assets that hilton owns. Like the waldorfastoria. They can sell it off and still manage it. They could bring in some more cash. One thing that is probably holding down the shares, laxton wants to get out in the next three to 5 blackstone wants to get out in the next three to five years. They think theres still value, so they want to get out. I think they will of roughly 75 and they will slowly extricate. Is that why investors are so hot on this deal . You are joining the smart guy. Covertly ho correctly time the market, so you get to ride it out with them. They would pocket all the proceeds in the could still take the Management Company public without the property. Ofi think it is a matter timing. 2014 will be a better time to sell off commercial real estate. They made a good steel on extended stay, making a good deal here and they have la quinta. Theyre going to rake and a ton of dough after a deal like this, what do you see them doing next . They will sit on all this cash. We have heard that it is a great time to sell. Now they will be flush with dough. What will they do with it . Thats a good question. Some 10 billion lbo type activity next year, that is what you will wonder. This is part of the real estate business. Doesnt hilton come out of blackstone business . They have to look for something else. What bites them now is it is expensive. Moreackstone is pushing and more into property, especially in asia. As you said, if the stock goes just one dollar, the biggest equity profit. Does this diffuse any doubt that john gray is without a doubt going to be the guy . Heis a real estate guy, is going to be the face, the name, the guy running blackstone . It doesnt hurt him. Them. Trophy on the shelf. And we told you that stephanie likes the waldorf salad . There is a feature we did on making one. M john boehner has weighed in on the new budget deal. He says anyone who supports Debt Reduction should the in favor of this bipartisan agreement. He criticized conservative groups that came out against the deal saying that theyre using lawmakers for their own goals. A vote should come tomorrow. Kathleen sebelius is back on capitol hill for more questioning about obamacare. Whatas asked to find out went wrong with the rollout of healthcare. Gov. The website has been plagued by software errors, delays. The reports are that it is getting better. Demonstrators were fought with by police. They tried to chase them away from an area outside city hall. The protests began last month. Russia may offer its own deal with the ukraine. For spotify, it is a matter of no money, no problem. They offer music on your mobile device for free. We will have that story next. Negotiators have to sell the budget deal to the rest of congress. We will be talking about it in a few moments on Market Makers. This is bloomberg television, streaming on your tablet, your phone, and bloomberg. Com. Welcome back to Market Makers. I am stephanie ruhle. Spotify has unveiled a free Music Service for your mobile devices. Will they have new listeners tuning in . Talking about what it takes to win in the online music space, i want to bring and paul singer. Walk us through rhapsody and what you do. Offer a low price, we customers unlimited access to music without advertising. On your mobile, your home, your car. To be ableis going to offer us this free music because of advertising . I dont think music should have advertising. Everything has advertising in its. Every 14 minutes i have to watch commercials. We believe music should not be interrupted by commercials. If you are having a dinner party, you dont want an ad for target coming in and interrupting your moment. You should not be subject to a Single Company and their desires to interject advertising in the middle of what you want to listen to. You feel consumers are going to agree with you . We are seeing 30 quarter over order growth in our premium subscription model. What does that get me . Whether it is i heart radio, pandora, spotify, i have so many options. What does rhapsody offer . Choice. You are completely in control. The listener is in control with our service. They can access their music on any of the mobile devices across 300 different platforms, including connected tvs, we announced an agreement with bmw to be integrated into the car. Global agreement with telefonica to bring Music Service to 300 million of their circle subscribers. Consumers are in control and they want choice. Smartphone gives them choice. They can take their music. The original ipod was a thousand songs in your pocket. What do you do to help listeners sift through that . What is your genius bar option . 25 million through songs. I do not want to hear i will survive. How do you help me know what i want to listen to . We have a team of music editors. We hire people specifically to curate music for markets. We have hundreds of thousands of playlists between our users and editors. We have been doing this for a long time. Win theat what will online music worse . I think it is part of it. Customers know what they want to listen to. Discovery comes from offline experiences. Your best friend that says check out this band. Your friend takes you to a concert and you this cover and you discover a new band. The services that will win will be the ones that connect a listening experience with off line realworld experiences. How do you get those artists on rhapsody . Emerginges, they are artists. How do you get those on rhapsody . Memo we work with all of the major independence and we have label partners. Our category ill catalog is 25 million songs and growing. Artist you can find on our service today. 25 million songs is more than enough to less press play. Theres so much competition, are you worried theres going to be a price war and you will be forced to drive your price down . I think more in terms of the value that you create for users. Coffee a of copy month, you can have full control no doubt, but people love free. 60 Million People a week are listening to music during drive time. That is free, or it is at reported. Havenly thing that people less of that money is time. When you offer a great service, people want to pay for it. We are active. What is your leading demographic . Little bit more women than men, and more than half of our base is 35 and older. This is for me. Already seven and a girl. 37 and a girl. He is the senior vp and head of product for rhapsody. When we come back, one of the monopolies ing the oil business is on the verge of ending. We are going to go to mexico for that story when bloomberg takes you back in just two minutes. Youre watching Market Makers. Stay with us. You are watching Market Makers. I am Erik Schatzker. Mexico is on the verge of its biggest change in Energy Policy in more than seven decades. Like exxonpanies, mobil or shell, will be allowed to drill for oil there. It goes to the lower house for approval. We take you to mexico city oh and and adam williams. About howen talking important this is to mexico. It is very important. Had a state owned monopoly for 75 years. Production output has been dropping. 9ths heading towards its year of output decline. By allowing outside companies to come in, it is expected to at least one percentage point to the gdp by 2018 and more beyond that. It is important, especially considering mexicos economy is slow. It is a big deal here. Explain the mechanics of the bill. What would Foreign Companies be allowed to do and what when they be allowed to do . Proposal was for profitsharing. What was presented to the senate is thatoved today, Foreign Companies will be offered a production sharing and contracts. They will be able to book reserves and put them on their accounting sheets. It is deeper than originally proposed in august. There is still some fine tuning to be done in the legislation, but it is production sharing and licenses. Does that mean it is not as potentially lucrative to foreign partners . Mobile, exxon mobil, shell, the chevrons of the world . It will be more lucrative. The profitsharing is something that is not as utilized around the world with International Oil companies. It is the licenses and the production sharing it gives andanies more liberty therefore International Oil companies before that prefer that. We talking oil are about . Mexico has untapped oil reserves and to potentially there stuff to be discovered. Does anybody have an idea what the resource and reserves might be . Mexico has the thirdlargest reserve in latin america. That is behind brazil and venezuela. Has a large reserve base in oil and natural gas. Largest they largest oilh producing company. Become,ould potentially, in the top five of oilproducing countries in the world. Thank you. Talking about landmark legislation that could change the Mexican Energy business for good. We are approaching 26 past the hour so it is time for lumber to take you on the markets. Lets look at the u. S. Markets. Early in the red, and we continue there. S p, dow, and nasdaq continue to be down. It could be because the economy is doing well, giving a signal to taper. I think businesses are closing their books. Lets look at a few individual names. Pandora getting a little hammered, five percent down. Pandora competes with rhapsody. If you were witty here, you would have said they are getting mc hammered. Mastercard announced a 10 for one stock split. They continued to climb to new record highs. Marcher thercard past few years has been extraordinary. I get to talk about another falling stock. It is avon. Dash of announcing a job cuts. Theyre trying to trim costs. Those avon ladies are not falling. Back, john boehner says anyone in favor of Debt Reduction should support the new budget deal. Persuade skeptical republicans . We will have that story next. Live from bloomberg headquarters in new york, this is Market Makers, with Erik Schatzker and stephanie ruhle. Now comes the hard part. Congressional leaders have to sell their budget deal to both sides of the aisle. Republicans say it doesnt cut spending enough and democrats say it does not close Corporate Tax loopholes. Our guest is with us from d. C. This morning. Lets start with this. What chance do give this bill a passing in the house where it appears to be anything but a certainty . A pretty good chance. It is not a slamdunk. 55, 60 . Most of the democrats will support it i think. Why do they support it . If we go back to the language that was being used during the Government Shutdown, this is a big change of heart, or it would appear to be. Not all that much is getting done. Theres a lot of fatigue in this town. Nui, whatever word you want to use. People are tiring of the brinksmanship and bickering. They do not want to go there again. They have obamacare which is a much better narrative for them to use politically. I think the republicans are gun shy about again a big confrontation. Should we call it a gift from god . Is anyone, whether we are talking about the bickering in our budget or the Affordable Health care act, all of this has to do with the american people. They are not winning in any of this. I think the idea that theres not going to be another dysfunctional budget fight for a year and a half, this is a long deal. Taxpayers and businesses and the markets can count on some predictability. Olympus uncertainty that unnerves people over the last few months is over. Uncertainty that unnerves people over the last few months is over. Get a realoing to grand bargain . Not unless the markets freak out. Markets are fat and happy. They do not have a problem. You could see Interest Rates sprite spike if Interest Rates went up. The budget deficit is going to fall in the next two or three years. I think by 2016 we will be close to a surplus. I do not see a big crisis coming on. Believe theming you debt ceiling is going to be resolved in march. It is worse than a you bet. April or may. They may be able to hang in there until mid spring. I have talked to some of them who do not want another confrontation to worry Global Markets about the fall prices. That is something the republicans do not want to do. What have they not done as they prepare to leave town . Do we have . Time immigration reform, freddie and fannie, the tax reform. It is a long list. Benefits. Nt it will probably go back to that issue when we get into january and might extend them for a wild. , the lasteek or so week of congress is ugly to watch. They will let a lot of things to lapse into next year. What you mean by ugly . They say during the year that they will do for the Big Decisions until the end and then the end comes in they want to go home. They say we will extend the farm bill until the end of january. It is not a great way to run a railroad. Here is that this brutal dysfunctional partisanship has decreased a bit. For the markets, that is positive. Is that to say that your constituents and clients are higher Potomac Research going to be renewed before the end of the year and that everyone can breathe easy . They will not be renewed. There is not time for that. The last week in congress is not pretty to watch. They may be renewed retroactively in the winter. My clients are going to worry about this deal eliminates a big source of uncertainty. That means the fed has one less reason to wait on beginning tapering. If we get a strong retail sales report tomorrow, i think chances of tapering will tip over 50 . Is that to say that your clients want quantitative easing to continue indefinitely . Sure. It is like free drugs. It is a great stimulus. Everybody is enjoying it. Once the fed begins at, there will be concerned that it is the beginning of a long process where the fed gets less accommodative. Theyre going to do it because the economy is getting better. That is a good story. Am i thank you for sharing your hard work and insights with us on Market Makers. States are telling washington lead or get out of the way. They are not waiting for congress to raise the minimum wage. We will have that next on Market Makers. States are not waiting for congress to act. They are raising the minimum wage. Five have done so far just this year along with individual cities around the country. Analyzesr economist how policy decisions affect the business. You have given some thought to this idea that states and municipalities are raising minimum wage. What does it mean . We are going to get this password minimum wage across the country. Memo wage across the country. There will be vastly different standards for minimum wage laws. There has been Economic Research lead to jobncreases losses. What has not been studied as how to cities close together can change the local dynamic in employment by having vastly different minimum wages. What happened to National Chains . We were talking about its impact on fast food change. Those are in every city and state across the country. How do you make sense of that . It means that as a business, you have to Pay Attention to dozens of minimumwage standards. We dont know what it means strategically. If i am a franchisee for one of these fast food chains and i have two counties with two different minimumwage wells, what decisions do i make . Do i make those decisions locating a franchise within a mile of each other in separate cities . Yet to play have out. States and localities, cities are tired of waiting for the federal government to act. They are acting on their own. There would be arbitrage between different wage regions. What does this suggest . Do companies migrate to the locality or state where the minimum wage is lower . The biggest concern for economists, that changes in minimum wage laws would lead to that kind of migration. Is only built since then. The finding is fairly conclusive, which is there is very little evidence that increasing the minimum wage thes employers to leave city that they are located in. What has not been looked at so far is when these changes are within a state or when the changes are different close together. It is going to be the new wave of research. Is where the new Research Needs to go on minimum wage. What states are leading the way . California just passed a law to increase minimum wage to 10. That is right around where the minimum wage would be if it was indexed to inflation. We saw changes in massachusetts, new york, new jersey. Next year in maryland and in south dakota. We have counties here in the district tom a maryland county, and arecounty, setting the wage at the largest in the country, 11. 50. We are seeing it all over the country. Red states and blue states. This is a reallife experiment. Raising the minimum wage. Thank you very much. When we come back, it is the device that may make smoking socially acceptable again. Now the government is trying to figure out. How to regulate ecigarettes. We will have that next. We are streaming on your tablet, your phone, and bloomberg. Com. Live from bloomberg headquarters in new york, this is Market Makers, with Erik Schatzker and stephanie ruhle. Welcome back to Market Makers. I am stephanie ruhle. You can forget smoking. Is all the vaping rage. Electronic cigarettes is estimated to be a 10 million business, but theyre unsure how to regulate it. Our guess is with us from grand rapids, michigan. Growing into ae big business. What happens if you end up getting regulated the same way traditional tabak of products are us to mark traditional Tobacco Products are . It is fair tohink be regulated or taxed in the same way that cigarettes are because these products only have four ingredients, a m Tobacco Products that have more than 4000. It is not proven that any of the ingredients in an Electronic Cigarettes are cancercausing like those in regular cigarettes. We dont support being treated like regular cigarettes. That is what you believe. You run an ecigarettes business. What would happen to you if you did get that regulation . From my perspective, it will have some impact on the category. The fundamental truth will not change. This is a healthier and clean air alternative cleaner alternative to tobacco. The evidence shows that 99 of all Electronic Cigarette users source from tobacco and our existing tobacco users. And demandental opportunity and source of volume is not going to change. Regulations may have a short term impact, but it does not change the fundamental transition and shift from smokers to a healthier or cleaner alternative. Who vape the people are former smokers and are not new to cigarettes of any sort . That is correct. Who did the research, where to the facts come from . It is done by the industry societies which is the Industry Group that supports overall Electronic Cigarettes. There have been another of other studies around the world. When you ask consumers of Electronic Cigarettes why they chose Electronic Cigarettes, the number one reason they choose is to help them stop from smoking. The second reason is to be able to smoke any time, any ways. Isif the number one reason to help stop smoking, do you run the risk of having diminished customers . If they go from being a full on smokers to and ecigarettes motor, the next up would be not smoking at all. We dont think smoking is good in this says this is an alternative to that. 1. 3 billion smokers worldwide. The size and scope of the opportunity is so big that we think it is fine if they start smoking electronic or start vaping Electronic Cigarettes as an alternative and then they get off Electronic Cigarettes altogether. That is fine. Is in the going to kill your business . That going to kill your business . It depends on your purpose and mission as a company. Our mission is to provide an alternative to smokers. Smokinge size of the population, it is significant. , theillion smokers business may diminish, some smokers may no longer do Electronic Cigarettes, and our evidence says that from our 150 ,000 person database that it takes six months to get off cigarettes and then even stop using Electronic Cigarettes. It takes times to do it time to do it. Because there are only four in ants or Electronic Cigarette and 4000 or so in a regular cigarette, they should be taxed the same way. Tobacco has been taxed since the 1790s. As long before anybody had any idea that tobacco was carcinogenic. We support taxes like any other consumer product. There is some regulation that we think makes a lot of sense. These products are for dolts. Our intention is to provide them for adult smokers to give them the healthier choice. We do not want any young consumers smoking these products or vaping these products. We have to leave it there. Thank you for joining us. He is the ceo of victory e cigarettes. That will do it for todays Market Makers. Tune in tomorrow. Shares of hilmar due to begin trading. Hilton due to begin trading. We will be talking to the ceo, chris nassetta. It is 56 past the hour. Bloomberg television is taking you on the markets. Scarlet fu has more. To focus on the Software Giant adobe. They report earnings after the markets close tomorrow. With the stock up almost 50 theres a strategy to capitalize on a potential pullback. This is a bit of a contrary and call. That is no indication theres a dropoff in this quarter. That is right. There are no real indications. If you go with the stock has done, it is already the average price per analyst. Upside possible, yes. In the short run, there is a case to be made for pausing caution. You say the stock, the company is in the middle of a transition. What do you mean . Adobe is transforming itself from selling its Creative Suites product at a standalone races to a clout subscriptionbased model. From a new business model. It seems to be adjusting well, but at the same time, there is a lot of expectation that is already built into the company to increase the clout subscription base by about 25 . Subscription base by about 25 . It is priced for perfection and could stumble if the earnings are not up to snuff or if the good news is not there in the forecast. That is correct. People who are looking for an increase in the rate of conversion and if they do not get it or if anything, they get a slight low number on the increase, that would be possible. The stock could sellout. Give us your strategy. We want to buy a january spread. We want to start getting around 55 in january. We want to die by anat 52. 5. 52. 50 put. To buy a a total cost of about . 50. In the best case scenario, it will acquire a 10 selloff in the stock. Your breakeven is around 52, right . 50 expected to pull back 2 . The stock sold back just below 50. That is the and reason why we are comfortable with the 50 level. Minor pullback, even if it is a five percent have value inll my 52. 5 put. Why january . It gives me a little bit of extra time. The december options, youre not getting much in terms of value. Are implying 5. 5 anyway, in terms of a oneday move. Argument five times in a row in the past five quarters, this is a way to get the pullback. They may give you more time for the trade to develop. What he is recommending us to buy the adobe at 52. 50. In 30 on the markets minutes. Lunch money is up next with adam johnson. Welcome the lunch money. We tie together the best stories and interviews. I am adam johnson. We have a budget deal. Why is everyone so down . Payday and ipo. Blackstone ready to cash in. 101. In we are in day three of our 12 days of it going. Bmw is trying to decide where to build this new engine plant. Of a steinway. We will show you how the pmo has been made for over 160 years. Right over the river in queens