Transcripts For BLOOMBERG Market Makers 20140711

Cigarettes, reynolds american, is in talks to buy lorillard which is valued at almost 23 early in dollars. The combined company would be a closer competitor to altria. Up. Hen cohen has paid his firm pettitte 900 Million Dollar penalty for insider trading. Sacfilm that used to be a capital was given until tuesday to pay. Palestinian militants are firing more rockets into israel and israel appears to be getting prepared for a Ground Invasion and have called 33,000 reservists. Three inch and the three infantry brigades have been deployed. Secondquarter profits rose at what is now the worlds most valuable bank, world wells fargo. But we will ask michael moore. For the full story. Credit was better than expected. A lot of people have been asking if they would still release reserves and they were able to do that. The loan growth did not keep up with the deposit growth and they have a lot of deposit wrote. It was there but it was not very robust. It surprised everybody given the sluggish economy. The economy is improving on the credit front but not generating loan growth. You saw compression for an eight straight quarters are we had two years of margins shrinking. That has been a continuing theme. This is what the bank ceos continue to complain about. We heard that with the bench market Interest Rate at zero, its a difficult environment for banks to lend money to make money. Wells fargo was almost at four percent on their Net Interest Margin a few years ago. Now its closer to 3. 15. Thats a significant move and youre talking about ilions of loans. About billions of loans. Thanks are ready for the Interest Rates to rise. They are looking to steer their business in a different direction looking to generate revenue from other parts of the business. At the same time, expense control remains the big team. What did we learn from wells fargos efforts to contain costs . Expenses were up a little more than work specter then part of that was litigation reserve, not anywhere near that of the big banks. That was up quite a bit. I think they are continuing to try to get their arms around the expense question which is all they can do right now. We are talking about headcount at the banks . Headcount was down and wells fargo and i think you might see it down at the other banks as well. What else did we learn from wells fargo that might give us a sense of whats to come when other banks report next week . Seems to be stabilizing and has not dropped as much. But mortgages are more important to wells fargo and they are to citigroup or bank of america or j. P. Morgan . Definitely the leader in mortgages so that may come through. The one thing we did not get a read on was trading and Investment Banking. They are not as big in that area and thats the big question for jp morgan and Goldman Sachs the banks have been warning about bad trading. Since may . Thats right. Jpmorgan typically kicks things off but this time it will be citigroup. I keep hearing from Fund Managers that they like citigroup the long haul. What are you hearing . Its a question of execution. Citibank has a good story and that they are everywhere. Whether they of can clean up some of the issues they have had. They had the issue with tcar and the issue with mexico so people want to see discipline. At. 7 troup is trading the book and wells fargo is highest of the big banks, closer to 2, 1. 7. The trading and investment typically getss the kind of business. We talk about the various settlements with the department of justice. What will you be looking for in the coming days . We hear from Bank Executives and what settlements are likely to be resolved. That will be the big question especially for citigroup to see if they put anything aside. I think people expect them to put something aside as they get toward the finish lines of these discussions. America, they have some remaining litigation that people want to hear about. When you leave us, you will return to the wells fargo Conference Call which has just started. The ceo of wells fargo is speaking right now and says the u. S. Economy appears to be accelerating. That in theory should portend good news for the Banking Industry but at some point, the fed will have to raise Interest Rates and if youre generating most of your income from lending the way that wells fargo does, there are good times ahead. A big piece of it will be the pace. Wells fargo just wants to see higher rates but the other banks are allen sing the Capital Markets and the commercial bank business. You want to go up and you dont want to spike up. Because that will be reflected in Capital Markets. Right. Thank you very much. Sync Technology Ride may be over. No revenue, no product, no assets but one alleges employee but yesterday it was worth 4 billion at the 25,000 increase in value but the sec halted trading yesterday. What does this company do . It sounds like something out of a moving. Shell companyis that does not really do anything. It has a website but the website does not actually appear to transact any business. It says you can pay to be connected with celebrities and other people but if you try to sign up, it does not seem to quite work. I talked to a gentleman yesterday who trades in these penny stocks on a regular basis and he says you guys are not hang attention. It does not matter what its supposed to do. Thats not the point. It could do anything. The point is that someone is trying to get people to buy this thing and for a little while, it worked pretty well. The sec did indeed step in this morning and said in a statement that it temporarily suspended trading. We will see if that becomes permanent. There were concerns regarding the accuracy and adequacy of information in the marketplace and potentially manipulative transactions in the common stock. That is the key we dont know whats going on in the shadows. We dont know if there really is a pump and dump scheme operating. We dont know who may have paid commentators or newsletter writers as far as talking about it. We know that about a month ago, there were a number of tweets that came out that were virtually identical that said this stock would go up 750 . It was purporting to give tips on it. The increase in the stark it started to happen before that but then it ask celebrated that it accelerated after that case. I wonder about the inaccuracies in a filing document. To someone before the sec stop trading but he said its not uncommon that you have these mystery companies. Jacob reg out used to be with frenkel used to be with the sec and he said this is relatively common. He prosecuted litigated a lot of these pump and dump stocks. If it is in fact that. Thats where people are being tricked, right . A momentum play and people are piling into a stock that is moving, theyre the victims of their own ignorance of they lose money because they can do what we did if they wanted to, what you did yesterday pull up securities filings and pick up the phone and call the number and do all of these things and establish for themselves whether theres anything to this business were not. Theye question is have been told something that is not true about what is going to be happening with the company. He said this kind of thing has become more common as we have gotten more into the internet age. People abroad can be sending emails or tweeting or doing other types of social media to get the word out. This makes it more difficult for the sec to investigate and eventually bring some sort of suit or action related to it. If you have these offshore entities were doing this kind of thing. Does this mean we are in a bubble . It is sort of a sign of the frothy mist of the market. Frothiness of the market. With anotherg security law professor and this kind of thing happens relatively frequently. Its not so unusual. I think its a sign that investors are as gullible as ever. Gullibility does not necessarily seem to change. Thank you for bringing us the latest. Coming up next, we will take you to the big economic summit in jackson hole for an exclusive interview with the president of the philly fed, charles schlosser. We will be back after this break. You are watching Market Makers. Top of the countrys central bankers and monetary mines are in jackson hole, wyoming right now not for the annual Kansas City Fed conference which comes next month but for something called the rocky mount and economic summit, chance for feta vessels to talk to ridley to the public. To talk directly to the public. Michael mckee is there with the president of the Philadelphia Fed, Charles Plosser. Thank you very much. Thank you for joining us this morning. There is a chance for fed officials to talk directly with the public. What would your message to the public be . I asked this chart guess . Charles evans earlier and he said dont hold your breath on a rate increase . [laughter] monetaryge is that policy is very accommodating and has been for a long time. At the same time, we are moving closer to our goals and objectives. Inflation is drifting toward the objective in the Unemployment Rate continues to move down so its important that we knowledge that we are getting closer to our objectives and its important for me that we adjust Monetary Policy appropriate way as we approach those objectives. In the press, we like to say lets let you and him fight. We are not close to objectives said Charles Evans this morning. The rate of unemployment that he would like to see is around five percent and that inflation should run half of what you think is running at. How divided is the fed over this . Me, regardless of where you define your objectives to be, we are closer now than we were. We are closer than we were a year ago. Sense, i believe that we should not be keeping Interest Rates at zero. Until we reach all our objectives. For me, that would be an uncomfortable position for the fed to be an. We have never been there before. You look back in history and ask yourself when the last time was that unemployment was at six percent and inflation was close to 2 and we had the funds rate at zero . Not very many episodes. I think we have to acknowledge to ourselves and the public that as we get closer and you can debate whether we are there but as we get closer, Monetary Policy should be coming in my mind, reacting to those movements. What is driving inflation now . Whys it moving up to a sustainable level, to your mandate level . Most economists now believe that an important element of inflation is inflationary expectations, keeping those anchored. Inflation expectations have been anchored and pretty stable and thats a good thing. I think that is why many economists and the fed has said we anticipate inflation will gradually drift back toward our target. That is partly relying on the notion that expectations are keeping inflation low. Janet yellen says the inflation signals we have got closer to two percent is just noise. Was it owing to take for you to be certain it is what is it going to take for you to believe its just its not just noise . Economic data is always noisy. We have been anticipating that inflation would drift up and we have been saying that in our statements. This is evidence that in fact its doing what we thought it should do. What will happen in the future . Woodruff back down again or stay up will it go back down again or stay up . We dont know the answer but it is kind of doing what we anticipated it to do and we will have to see over time whether that remains stable. Areet months of data that noisy and some are lower and higher. There is good signs that in the cpi and the pce have both moved up a little bit and thats a good thing. The intersection of your two mandates of unemployment and inflation are wages. We see unemployment go down but we are not seeing wages rise. Why is that . I think wages actually are rising faster than they were two or three years ago. They have drifted up as well but they are not rising rapidly. Historicallysually is a lagging indicator of inflation. I think wages will continue to drift up that by bit and that would be a good thing as well. Do you think they push Inflation Higher . No, they respond to higher inflation. Respond tohat wages higher rates of inflation rather than wages push inflation up. You suggest we could meet your mandated targets by the end of the year and janet yellen has suggested you get to that point and you wait whether it is the six. Months here is reset or not but you wait what is the fed waiting for . Im not waiting. That a lot of the guidelines we look at, rules and things like that that give us guidelines about where the policy should be for any combination of inflation and unemployment, where that policy rate should be, many are indicating that we should begin gradually raising Interest Rates. That is informative to me. The message is that for us to deviate from what these guidelines and benchmark rules tell us is we would have to have good reason to deviate from them and explain why. I think we are closer than many people might think. Are you afraid the fed loses credibility if you wait too long . We may lose control of inflation, we may lose control of Financial Markets where we find ourselves later on having to raise rates faster and higher than we otherwise would like to because we are so far behind that the markets get ahead of us. That could be disruptive sofa we wait too long, we can find ourselves raising rates faster and higher than i want to and the same thing is true for the balance sheet. That is opposed to provide accommodation. If we dont begin to shrink the balance sheet, if we are to achieve any level of Monetary Policy accommodation, Interest Rates have to be higher and rise faster than they otherwise would with a small balance sheet. I think there is some subtle could on the exit that cause for a bumpy ride coming out of this up we wait too long. Monetary policy olds works with a leg but do you think the speed of transmission has changed . Do you have less time than you might have had . I dont think so but again, we are sitting at a point right of where historic amounts accommodation, unemployment six percent and inflation close to two percent are we already behind and how far behind . An Historic Place we have been before. The question is are we already behind . Lagtary policy works with a in what those are people can debate but if the Financial Markets get ahead of us and decide rates need to go up, they will go up and we will have to follow them up. If we want to keep inflation under control, well have to raise rates faster probably than we otherwise might choose. You have seen unemployment come down a lot. Janet yellen points out there are is still slacken a number of areas. If you raise rates, how does it affect the economy . Me was take so much to out of the economy that those problems are not solved . A lot of the measures of slack is that we dont understand that the labor market is very puzzling to many people. There are structural issues and maybe there is still slacken theyre. The question is not so much if there is slack or not. The question is there is less than there was and so Monetary Policy should respond to reductions in the distance between where we are and what our goals are. If were going to have a reaction function, the committee has said in his statement that monetary lc and Interest Rates will be adjusted as we get closer to our goals but we are not doing that. We are still trying to provide more accommodation because we are still buying assets. We are still working in the opposite direction even though all of our data is suggesting we are getting better. We are still trying to provide more accommodation. That cannot go on forever. When you start raising rates, how far, how fast . We dont know the answer to that. We are in uncharted territory. Typically, the fed would like to move things gradually and we always like to do things slowly. If the markets get ahead of us and Interest Rates rise rapidly, we will not have any choice but to raise them quickly. I think thats part of the challenge we are facing. The further we are away from where we need to be when the time comes, the more disruptive it possibly could be. Believe rates could be lower than the historically would have been because the economy has a lower trend growth . A reasonableats discussion to have but im not convinced thats the case. I would say thats a reasonable discussion to have. The number is not zero the new neutral is not zero. No matter where you want to put that number, whether you put it at four percent or at 3. 5 , we are still a long way from there. When you get here, how do you communicate to the world that youre ready to move . I think you have to have conversations about preparing markets and the public that say we are moving back toward our objective and we can debate whether we are there yet or not but as a gift closer and the economy gets healthier, we need to begin to talk about the fact that Monetary Policy ought to be reacting to the data. Right now, we are not reacting to the data. Says low a path that for long we have no plans to raise rates and a time soon and yet as the data keeps telling us, we should be raising rates. Do we need to have more press conferences . Many people would like to see that and im ok with that. Having four press conferences per year but we only meet three times a year. I am being a bit facetious but not entirely. Meeting every six weeks leaves the fed to focus on shortterm things. We focus on the longer term with fewer meetings. We hope we have more meetings with you, charles luster of the Philadelphia Fed, thank you for joining us. Thank you. An exclusive interview with Charles Plosser in jackson hole. Join in throughout the day for more of mikes coverage at 2 p. M. Eastern time and he will have an exclusive with the president of the atlanta fed, dennis lockhart. Thats a hawkish view to balance out the dovish take. A lot of debate within the fed. We will see how the real market reacts as we speak with kevin giddis to get have traders and market should digest all of that conflict a discussion within the federal reserve. And how janet yellen will split the difference with her congressional testimony next week. Up, we will talk about the Portuguese Bank crisis rocking the market next live from bloomberg headquarters in new york, this is Market Makers. Hello once again and happy friday. It time to raise Interest Rates or keep holding them near zero . That is the big debate in Monetary Policy circles and we heard from one of the most hawkish members of the fmo see, Philadelphia Fed president Charles Plosser who said the fed could raise Interest Rates sooner than people think. John is now from memphis, tennessee with the reaction is from raymond james. There is a debate here and what Charles Plosser was saying pushes against what Charles Evans was saying. Is the Market Pricing and right now in terms of an Interest Rate increase in what do you expect . Plosser and i agree with the one statement he made and that is that things are not as bad as they used to be. If you go back to last fridays employment report, even though the number was much higher in terms of the jobs created, the market honed in on something that was Wage Inflation and the fact that wages are not really rising. Its hard to think they would raise Interest Rates at a time where the actual job creation is not as robust as it should be or the wages are growing enough to push the economy forward. Evans,re like charles this is more the end of 2015 before the fed needs to raise Interest Rates. Charles plosser said in the past that the fed is not very good at forecasting inflation. We have seen is not very good at forecasting the drop in unemployment as well. What is the Central Bank Good at . Stimulus for the last few years is what i have been really good at. Is orderlyown of qe because it did not work that well the third time versus the previous times and we needed it. The statement of the fed saying october will be the end of qe, the market understands that in they are reacting to is to fact of what will take us the next level with housing starting to slow and if wages are not growing, what types of jobs are being created . What will be the catalyst that gets us to three percent growth . Charles plosser was looking for that in february. Are we looking at two percent growth by the end of the year . Thats what you worry about from the fed perspective that they dont understand. We are not doing as well as they may think and we dont need to start tightening right away. We are in uncharted territory. This is a chart from green Capital Markets. I will describe it to you it shows a triangle, the hierarchy of needs of maslow but its in the form of a credit bubble. It says we are on the cusp of entering a bubble. We are at the point where Credit Investors feel they can find i you were no one can by doing things through leverage and a liquid securities and flipping and they are on the cusp of having to selfactualization where they are investing in complexities. You can talk about these obscure liquid products so would you agree we are on the cusp of entering a bubble phase . I really would not. There is a real reach for yield going on right now. Down onds to lead us Credit Investments but i dont think us to the extent where we 2008 that would lead to the popping of a bubble. In terms of leverage, there is more cash being put up front to manage leverage. 401 onsee we are out leverage. Were argan bubble off on anything right now. How can you Say Something like that with confidence . You dont know you are in a bubble until it has already burst. What is certain is that a reach for yields begins to stretch valuations on things that most investors would not normally touch if we were not living in a zero interest environment. It depends on how you want to define the bubble. When an asset reaches such a level that it does not make sense in the marketplace to fund the next level is where we see a bubble. I am not sure we are there in terms of lower Interest Rates that will cause everybody to get. Rapped in certain securities i am looking for the things that are going to cause the change. Inflation would be a cause of change. European growth would be a cause of change. Nobody can say with confidence but i dont see the things that you would look for when trying to determine where a bubble would exist right now. If we are not in a bubble, where do you see the most value in the fixed income world . Tends to bealways centered around Municipal Bonds that are highquality. There is good value in the mortgage area but a lot of that spread has been pulled in recently. When you look at highquality munis, forget the stories in the marketplace about detroit in illinois and puerto rico. Highquality munis against a isable equivalent basis where the spread is in the marketplace and will continue to be. You can go out longer with confidence there and get your aftertax yield but its hard to get away from that market. Thank you so much for your perspective. Back, we got Jon Erlichman to do this he went behind the scenes to see how disney is designing the next generation of themepark rides. It looks like the holodeck of the enterprise. Disney theme parks are one of the biggest this misses in the disney empire and they are going to be even more important with a new resort in shanghai next year. To help bring the ideas to life, disney leans on a group of employees called the imagineers. Imagrlichman went to ineering headquarters in burbank. Hidden in this building their disney headquarters, you will find a virtual room. When you think Virtual Reality come you dont always think disney. This is pretty vr. Its pretty cool. Is the closest thing to a holodeck we can create. It is called digital immersive showroom. We have modeled complete kitchens in the space and brought the chefs in and they have looked at placement and preparation and they said we want to move the cabin over here and we can virtually pick those elements up in a digital kitchen. The dish was created by the disney and imagineeers. Imagineering is architects and designers and engineers that bring the ambitious park ideas to life like the new fantasyland expansion at Walt Disney World in orlando. Disneys parks and resorts generated more than 14 billion in revenue last year. Nearly 1 3 of the companys total sales in the empire runs 11 parks and shanghai is on the way and 46 retort resort hotels and for cruise ships meaning the imagineeers are involved with hundreds of experiences. The best way to show you how this works is to place it on your head and we will take it for a spin. Inside the dish, sensors on this have pick up your eye and enabling employees to jump into a 3d version of the park. With a pair of 3d glasses, they can test a ride like that recently completed mine train. What can you do now that you could not do before . Years ago, we would have to make it out of foam and model pieces and look into it. In this environment, it is completely immersive. Riders made spot the work on the faces of the dwarves. Its called 3d audio anima tronics. You are seeing mapping where we take a flat 3d file and the animate the face and its mapped to a projected four. The innovative thinking has led to more than 100 patents including one for the mine train swinging buckets. More opportunities have opened up for the imagineers. We are partnering with pixar and our friends at lucasfilm and marvel. I think thats the future of disney. Very cool. Amazing stuff. That is Jon Erlichmans day job. Legalize pot in Washington State. Up, the Hedge Fund Manager who is when one of the savviest who was one of the savviest investors. U. S. Regulators are cracking down european banks and we will ask him about that and what is going on . All of a sudden, european banks are back in the headlines. A portuguese lender is trying to assure investors and regulators that its still solvent and in austria, and other bank warned it will post billions in losses as a bad debt. Some people are jumping to alarming conclusions saying this could be europes Lehman Brothers moment. I want to know what the Smartest Bank investors are thinking and the savviest of them all is right here. Investments. Us his of Lehman Brothers moment . Absolutely not and its good to make headlines but we are talking about the beginning of the tarp moment in europe. After the crisis in america, the government decided to do a proper stress test and recap was the Banking System and in europe, it takes a couple of years longer. We will take it easy and enjoy life but this is a key moment. Asset quality review is triggering this. Its a rough stress test which is happening. Anticipating the Capital Needs by asking the bank to make provisions. Seeing more than a 70 manyon capital raised and are holding the levels. Here the bank is not in trouble. The shareholder is in trouble. Its not the parent company, just the shareholder. It has nothing to do with the bank. Santos family owns 25 of the bank. The Family Office is virtually crept. This will have a trigger effect. The banks exposure and the maximum range expected is within euros. Ee5 billion so they can observe it . Exactly. The Family Office that owns the bank is in trouble and it could be game over for them. And it is not systemic. The skeletons are falling out of the closet and thats fine. Thats very good. Justber, mario draghi 800 billion tia quero. They have delevered by 3 trillion euro. It is mainly in america and in asia and domestically in europe. Billionis giving 800 euro for new loans in europe. You went on a diet and you lost 300 and now youre getting free food. Its positive for the economy because suddenly will have zero cost and liquidity in order to make marginal new lows. Is this of theve Portuguese Banking system . This is idiosyncratic. Increaseto the capital and they filed and that triggered an investigation. When the central bank analyzed the Family Holdings and the Family Office that control the bank, they took action. They fired the management at the bank to make sure there were no links and they took the necessary steps. The other skeletons that might emerge might show Something Different but different kinds of problems. Yes, what i expect is you will probably see the ecb stress testing 70 of european banking assets which is 130 banking institutions. I think they are 95 done. The private sector is where the pain will be. As a result, i expect 60 billion euros of further capital raises that will affect them. They will have to be dealt with in different ways. Last year for different reasons, this bank was in the crosshairs and that turned out to be a great way it this buying opportunity. This bank has only one unknown. They have a bank in angola and that has been profitable. 70 of the banking assets are guaranteed by the government and i have a 2. 5 billion euro exposure. Once that is resolved, i think that could be a great opportunity. What about the Collateral Damage is causing among other peripheral european banks . I think its a great bank opportunity. There is an idiosyncratic risk. This is a great entry point for the rest of the sector and we still need to see what happens with the gold exposure. We know the next two or three years earnings will accelerate because of the actions of the ecb. Would you love to buy debt bank of america at 10 . Yes you would. You mentioned earnings and one thing that will hit earnings are these penalties and settlements at various european banks that have been negotiated with u. S. Authorities. Negotiation may be a stretch. Is the u. S. Crackdown on european banks fair . I think its totally unfair. Of bnp paribas, they did not breach any law. They were transacting with proper monetary rules. At the transaction happened in europe, there would have been no fine. I think this is a far overreaching situation. They want to get money and they are heading europeans and i think this will have a real repercussion effects. Ultimately, the rest of the world will say we are filing following proper rules. If they want to use the dollar as the currency of trade, why can you impose a sanction on us when there was nothing wrong . They were not financing terrorists. They were Financing Oil pipelines and thats a big difference. I would expect the dollar in the years to come to be less relevant as a result of this. People are saying thats too much. Profition is twice the that bnp paribas maiden tenures in this country. Made in this country. American infrastructure loans they have been financing and themouve fine for twice the probably made in 10 years because of no Money Laundering issues . Thats crazy. Thats an awful lot of money. Are we likely to see bigger penalties for the banks . I heard that europe is ready to retaliate. I think in europe, the attitude is that these guys are basically using what is called racketeering techniques. Its basically bullying. Are you hearing this . I am hearing this. People are crazy because even central bankers are saying that we are doing all this work. America atawyer in the department of justice that decides to wake up with a quantum of defense. Do you know what form this retaliation would take . Thats a good question. Isi am a u. S. Bank and there libor manipulation europe, i would worry. Eventually, this has to be a policy than the european governments will get the money back elsewhere. Before we finished, we have to talk about what is going on in the Investment Banking world specifically Capital Markets. Trading at the outset of this quarter is not doing so hot. It sucks. How long will that persist . Sucks reason why trading is because volatility has crashed because the fed has printed 5 trillion. There is like 10 trillion of extra liquidity for monetary holocene. For Monetary Policy. The fed iss that behind the curve because the economy is all almost is doing as good as 2006. They still have the fed as of today still printing billions of dollars every month. Right, do the banks need to charge more for treading services . I think thats wrong because banks should facilitate Market Infrastructure and clearing should be done and trading should be done in markets and not by banks. He is the best, great to have you here. Great conversation, we will be back in two minutes. From bloomberg headquarters in new york, this is Market Makers with Erik Schatzker and stephanie ruhle. Tobacco m a is on fire. The maker of kill cigarettes is in talks to buy lorillard. Native advertising. A new study says that you hate it. What madison avenue may do to have you buy in. Bloomberg crunches the numbers to find out the likely winner of sundays big game. You are watching Market Makers. Im Erik Schatzker. Form scarlet fu, in stephanie ruhle. She is in iceland. Crawling around extinct volcanoes. They have 22 hours of sunshine there. She will come back with no sleep. Per usual. These are the top business stories from around the world. Wells fargo earning streak comes to an end. Earningspershare failed to increase for the First Time Since 2009. The banks debtincome missed analysts estimates. That network has no members. Of the company has no assets and there is only one employee. It looks like marijuana users in Washington State cannot get enough pot. The only legal shop has run out of marijuana on its third data state approved sales. The owner of cannabis city says growers do not get licenses enough in enough time. Reynolds is in talks to buy lorillard, a deal that would combine the camel and newport brands. To bring in Bloomberg Industries ken shay, who covers the tobacco industry. Should we expect to see more consolidation now that we are sinking seeing sinking cigarette sales in the u. S. . These twos sense for firms to merge. After that you are talking about an industry that is so concentrated, this would be to firms controlling 90 of the market here in i dont see a lot of consolidation left in the u. S. Or could be consolidation outside of the u. S. Is an prompt for this expiring 10 year moratorium on british tobacco, which owns a stake in reynolds america. That might get the ball rolling here. That is true. It seems like lorillard and reynolds are trying to go before that moratorium hits. It is a strange situation that vat owns 40 of reynolds. On news today, it seems that reynolds and lorillard are talking about out right merger with b. A. T. Simply agreeing to it. Their role is still to be determined. You look at lorillard and you have to wonder to yourself whether there is any risk for this company any risk for reynolds in this company, because lorillard is known for newport. A menthol cigarette. There has been a longrunning effort to get Menthol Cigarettes banned. Some activist members of the Africanamerican Community say that it disproportionately hooks smokers and is for a popular in black communities. It is a passionate issue for these people, and i wonder if it creates some political risk. You raise a good question there. Curbing menthol is the biggest risk of this deal happening. It is undetermined, the fdas official stance towards menthol. Most people are under the belief that it will be allowed to remain on the market. Has a lot of unintended consequences by banning it. Like 85 of the cigarettes smoked in the Africanamerican Community. Thats right. The mental industry, particularly newport and lorillard have come under heat as far as, are they targeting the demographic. They say the job of the Consumer Products company is to target markets that are big users. It is popular among africanamericans in urban areas. I dont think theres any debate about that area that. The question is, will change of ownership change that situation . I dont think so. To correctow me myself. I think the Africanamerican Community accounts for 85 of menthol cigarette consumption as opposed to 85 of all cigarettes smoked in the Africanamerican Community being menthol. Cigarette makers are trying to get into the ecigarette market. They have been slow to recognize the growth an appeal of that market. He given the fda is still determining whether there are restrictions on that, would consolidation between lorillard and newport be a defensive move . I think it is an offense of move. Reynolds has moved slowly. Thellard has a big jump on competitors. The defensive angle here is that all these cigarettes have become somewhat marginalized to the category,vapor socalled open systems where users can put their liquids inside 10 to be more economical and flexible. That arepanies producing these closed ecigarettes will have a tough choice, do they jump into a market ofto a vaporizers where there is almost unlimited competition and not a lot of barriers to entry, very unlike the economics of traditional cigarettes. A lot of people like cigarette stocks because they produce income. They pay a fairly rich dividend. The case of reynolds, lorillard is considerably lower. Ise these companies merge, the dividend likely to remain at four and a quarter or would approachand drop it to something closer to what lorillard is paying . The payout ratios are high. It also depends on the financing arrangement here. We have done some calculations, finding that if reynolds , it coulduch a deal very well fall below investment grade. That would trigger a whole lot of negative things. It could require them to securitize a lot of their loans and debt. They have to figure out a way to get this deal done, possibly by issuing equity. It will be interesting. A dividend is going to be a strong consideration. A lot of the investors are dividend type investors. Thank you so much for your perspective. Down twoamerican percent. Lorillard is up by four percent. They say politics makes for strange bedfellows. It sure does, and we are seeing it again. In the New York Times today, if are in political stripes are coming together in a push for reform,ion reofrm, slamming congress for immigration gridlock. Peter cook has more on their message and the response from tigris. Warren buffett and bill gates are good friends. You dont see them with Sheldon Adelson too much. Billion in net worth. What can they do with all that money when it comes to congress . It is a striking Political Team we are seeing in this oped, adelson in particular. Buffett better known for giving to democrats. These are three people who resonate in washington. They are huge players in the business community. This oped is really blunt. They are talking about Immigration Reform and the failure of congress to act. Let me use a quick russian of it it. T part of it is time for the house to draft a bill. Differences with the senate should be hammered out. They are making the case a lot of Business Ceos have. Imagine they will be able to move the ball all that much right now, because the attitude among republicans in the house is, we are about to do well, probably take the senate back. Why should be rock the boat and try to jeopardize that in any sort of way . I do not think this will resonate in the same way that other ceos have resonated. The other thing to watch here is adelsons participation. If he puts his money where his , this oped could mean a whole lot more. What is it that buffett, gates and adelson say they are most worried about . Illegal immigrants into citizens who can contribute over the long term to america, and the humanitarian crisis we see unfolding on the border right now with all these undocumented children coming into the country, or are they talking about something that serves corporate interests such as hightech workers . You touched on something that has been a criticism. They are talking in broad terms about dealing with the 11 million undocumented workers. There are specific items in their oped that refer much more to the business component, the hightech workers who are being forced to leave the country after they go to graduate schools because there are not visas for them. Visas foralking about wealthy immigrants who come to the country and invest in the u. S. They would like to see that program expanded. That is not into you and with the rankandfile immigration essues in tune with th rankandfile immigration issues. It is one reason they are not really resonating as much as you might think. Peter cook. Politics does make for strange bedfellows. Worn buffet, bill gates good job good buddies already. Coming up, what is the point of advertising if the audience cannot stand the way you deliver the message . That is a problem with native ads. It is friday. Time to play the yearbook a game. He is the ceo of a retail company, graduated from a high school in brooklyn in 1971. Who is he . We are digital. tv. Mberg. Com bloomberg tv plus on your tablet and smartphone, and apple tv or amazon fire tv. This is Market Makers. Im Erik Schatzker with scarlet fu. Imagine if you build a business on a hot new product and commissioned a study to see how consumers felt about it, only to find they cannot stand it. That is what happened to a Company Whose breadandbutter is native advertising. What do they do now . Here to tell as is the cofounder. Michael sebastian covers brand advertising. Ne, what is it that people dont like about native advertising . It is confusing. Our business is still doing well and we commissioned the study because we want people to do this stuff right. It does no good if an industry thinks that people love what they are doing if two thirds of them dont know what it is, much less care for it. This devil you know versus w dont. People are concerned that they dont know what sponsored content is. Thats the problem, they feel deceived . Two thirds of people say they felt tricked by a post or video that was sponsored by brand after finding out about it. Is the solution to have a highquality advertisement that is clearly marked to sponsor content . It depends on who you ask. If you are the New York Times together want to have their content advertising highlighted as advertising. If youre another media company, maybe you want to have it blend in a bit. The banner ads we see on websites, people dont click them. They are trying to get people to click on some sort of advertisement online. Is that part of the problem, withmedia dont deal native advertising or whatever you want to call it, the same way . What you see on newyorktimes. Com is not the same thing as you see on forbes. Com. If you intend to click on something because it looks interesting, you will spend more time with it great if you spend something spend time on the side and this is not what i thought it was, you are going to leave. Red bull has the Worlds Largest and best Action Sports magazine. They are not confused and they love the content. A lot of this boils down to red bull is very much out in the open about it. Exactly. How trustworthy do people find online content overall . We pit sponsored content against buzz feed, mommy blogs, and it needs those three categories beats those three categories. People are skeptical of what they read because there is so much out there. Any mistakes or sloppiness turns into mistrust. That is like saying journalists are more popular than congress. Sure. What does this mean for the advertising business . The advertising business is excited about sponsored content. They are spending a lot more money than they have been on native advertising. This is not going to stop anybody. No. Head of aing to the Media Buying Agency the other day and this person said that not a day goes by where a large brand is asking them, we want to isnt asking them, we want to do content. Isnt it true that most of the folks who respond to your survey grew up without sponsored content, and the longer this people becomeoung older people but young people who grew up with native advertising, they wont feel awkward about it at all . Good point. We are in a buyer beware situation now. People know what you are getting when you go on a certain website. Talking about certain Media Properties that are more lifestyle focused. You are not going to become a more informed citizen or voter if you are reading certain websites that are a little bit more entertainment focused. How much money is going into native advertising . Is it a growing pie . Theres a bifurcation happening in the Online Advertising ecosystem right now. Many of these banner ads you see online are being sold via machines. Money is going towards sponsored content. There are billions of dollars in this field right now. Thehane, how do you change way you approach native advertising or not . You are deciding how it appears on a clients site, are you . We are trying to educate this market so they do it the right way and it ends up being viable for a long time. So people love it. The most profitable sponsored content is the lego movie. People paid 200 million to watch this advertisement. It was so good. That is the ideal to aspire to. More brands can do that sort of thing, and it will be a very good business. In terms of what companies do, i know that you were looking at g and how it has been very active in native advertising. And how it has been very active in native advertising. Tell us about that. Many of us may not be aware of it. G. E. Is out front when it comes to native advertising sponsoring content. The essentially employee reporters internally to go and ferret out stories about ge, to tell people about the jet engines they make and that kind of thing. Are on buzz feed doing all kinds of sponsored content. They want to be able to recruit people via buzz feed and recruit new shareholders as well. Shane, what right now is the vanguard of native advertising . What are people asking you to do today that they never did before . People are asking the question of, should we sponsor something somewhere if we build something of our own . Say, weome to us and went to build our own presence where we have more control. You see Companies Like coke doing that. That is an example. Selfpublishing is the biggest trend. Loggers. Back to is the cofounder of contently and michael sebastian. Up, highfliers, airplane makers will not be the only ones looking for business at the big airshow in the u. K. The governor of alabama will be there as well. It is time for bloomberg on the markets. Street day of losses. The stock is trading at the lowest since midjune, june 16. Earnings per share of 1. 01, matching the consensus. Revenue fell. It was a little bit higher than what analysts were looking for. Some of the comments from the Conference Call that just ended, wells fargo said it sees Net Interest Income growth in the future and liquidity is now where they wanted to be, pretty much. It sees a slower rate of credit improvement. An unexpected decline in samestore sales at the gap is causing shares of that company to drop as well. Coming up on Market Makers, looking way outside their borders to attract jobs. Play thetime to yearbook game. Here is the ceo of a retail company. He graduated from high school in brooklyn in 1971. He was also a fire marshal and played varsity football. Tweet us your guesses. Live from bloomberg headquarters in new york, this is Market Makers with Erik Schatzker and stephanie ruhle. This is Market Makers on bloomberg television. In forcarlet fu, stephanie ruhle. She is off traipsing in iceland. New york state officials are asking a court to stop the car lyft frommpany opening for business in new york city. It was supposed to happen today. That miller has been following these developments. What is the story . The problem that he has with similar to the problem a lot of regulators are concerned about with uber and what we discussed with the halo founder as well. That is whether or not these companies are properly insured. I spent a lot of time last night with the cofounder of lyft out of brooklyn. They plan on starting Services Tonight at 7 00 p. M. In brooklyn and queens. Mustaches . The with or without. You are welcome to put a pink mustache on the front of your car if you like. I tied one up to my aston martin gt and drove around learning about how to become a lyft driver last night. Regulators are concerned about whether these drivers are regulated. Lyft has had a Million Dollar policy they offer to drivers. To provide offering a one milliondollar primary insurance policy to all its drivers in all of the 65 locations it serves in the u. S. Not they have properly communicated that to Eric Schneiderman yet is unclear , and seems as though they havent or he is not yet satisfied with that. They willind of thing have to work out if they want to properly operate in new york city. I will talk to them again as soon as i get offset and see what the holdup is. Industry that is attracting an unbelievable amount of attention, not just because people like using these has abut because uber valuation of 18 billion. We heard people saying yesterday he said he thinks it will be a 50 billion company right now. Right now he feels like 18 billion is awfully rich. You have to keep that discipline as avc a v. C. A round ofot financing. Matt miller with the latest on car sharing, car booking, call it what you like. The nations governors are gathered in nashville for their summer meeting in the top item on their agenda, jobs. Alabamas republican governor is now headed overseas. Washington correspondent megan hughes is covering the meeting in nashville and governor bentley is joining her. Jobs are the hot topic here in nashville this weekend. Joining me is governor bentley. Thank you for being here with us. Lets talk about this airshow. You are headed straight from nashville to london. What are you hoping to get done there . Airshow is the largest accumulation of Aerospace Industries anywhere in the world. And we ceos are there go every year. Alabama has over 300 Aerospace Industries. He put a major emphasis on aerospace in alabama. What are you looking to get done there . Last year i talked with 40 ceos. This year we have many of those lined up again, and we hope to have a couple of announcements while we are over there of expansions of companies that are in alabama. One of them being airbus . The two are related to airbus. They are suppliers for airbus, and they make some of the products for airbus. We are trying to recruit a lot of the tier one suppliers for airbus. The National Governors association a very collegial atmosphere. I understand governor pence will be heading to that same exact airshow. Me about competition between states for these kinds of deals, competition with other countries. What are you dealing with . I talked to governor pence three months ago and said, are you going to go to the airshow . He said, i dont know anything about that. I said, have your Commerce Department get in touch with ours. We helped them because i think this is a state issue. Anyone who has Aerospace Industry needs to go to the airshow. This is the hardest three days i ever worked. It is very important for us to try to recruit jobs and talk to these companies. What kind of help are you getting from the federal government in terms of recruitment . To be honest with you, it is a state issue. States compete with each other. The federal government can impede jobs. States create jobs. You dont think the federal government should be doing more . The federal government needs to get out of our way. If the federal government would get out of our way, we could recruit more jobs for the states. There has been a touchy relationship between the white house and a lot republican governors. Vice President Biden will be addressing the group this afternoon. What do you need to hear from him today . What i would like to hear from the Vice President and the to saynt is, we need that the regulations placed on businesses need to be lightened so that epa will not put a orain on the coal industry, other industries in the states. They actually impede the creation of jobs. The states and local entities are the ones who create jobs in america. Lets talk specifically about alabama. There has been a lot of improvement since you have been in office. To numbers are not back prerecession levels. If you look yearoveryear, alabama unemployment has gone up. What has been going on . Gonee unemployment has down. Since i have been governor, month over month compared to each year, we have had more jobs created. Not a single decrease in the number of jobs since i have been governor. When i came in, it was low. We were in some bad situations. Things are improving. Ourre putting into place accelerate alabama plan, and we are concentrating on the Automobile Industry and the Aerospace Industry grade ind ustry. We are putting in place an organizational structure that will reap benefits three or four years down the road. Up for reelection. There are 22 republican governors up for reelection. Do you think we will continue to see what we have been seeing on the state level with republicans . And 2012. Weep in 2010 there are some states that it is going to be we may lose a governor or two. I dont know. In alabama, we are ok. We will have to wait and see. Americaneve that the people have more trust in the states than they do the federal government. Thank you so much for joining us. You. Ank coming up, the republican partys secret weapon, george h. W. Bushs socks. Political fundraisers are a creative bunch. They come up with innovative ideas to get people to part with their money for political causes, like george w. Bushs george h. W. Bushs socks. What do 41 socks and political fundraising have to do with each other . It is as if republicans going through the nostalgia stage have got lightning in a bottle with the socks right now. President george h. W. Bush is known as a sock guy. Anywhere you see him publicly he has colorful, striped socks. I dont know if he matches with you, erik, but he gets pretty close. I was talking to the Republican National committee. Bush and george w. Mitt romney have become crucial fundraisers through things you can actually purchase online. George h. W. Bushs socks have raised 2. 3 million from donations over the course of the last four months. If you put the minimum donation for those socks, 35, that is over 65,000 pairs of socks the Republican National committee has parted with to raise money. You look at george w. Bush. This is a guy who was barely invited to the 2008 Republican National convention. They have just released a short, i miss w. Betterirt has done even than the early stage george h. W. Bush socks. Republicans have seized on former stalwarts that were not that popular when they left office. How does this compare with what democrats are doing to raise money . Are they selling bill clinton artifacts . Jimmy carter. Be more apt. Ld at 2012, the obama team really solidified and perfected fundraising. One of the things they figured out worked best on digital fundraising requests, doom and gloom headlines. Dccc hashewable see raised money over the last year and a half, over 100 million raised since january of 2013. They had an email alert come out, a fundraising pitch the all hope wast said lost. Inside, it said two totally different ways of raising money. Both highly effective. Daremongering from the democrats part, and tshirts and socks from the republicans. It takes all stripes. , coming up on Market Makers germany versus argentina for the world cup title. We crunch the numbers to find out who is likely to win. This sunday, argentina and germany will go to war for the title of world cup champion. The war is taking place on the soccer field. On the one hand, this marks argentinas first trip to the finals. Germanys victory over brazil in the semifinals may be shifting the odds in their favor. Which of these teams is likely to win . Lets put the question to bloomberg televisions head of data, eric chemi. War. You taking it very seriously, huh . The germans and argentinians are. It is not like a typical world war ii rematch we often see when were European Countries heny against each other w European Countries play against each other. The straight takeaway number is 51 to 49, the german edge over argentina. Interesting is that that was the same percentage of germany over brazil. We saw how that went. That went way more than a coin flip. Sometimes the numbers are not the whole story. This will probably be a low scoring game. There are situations where that does not happen. Germany is a disciplined defensive team. Argentina has been playing good defense. The vast majority that he will be two goals or less total. The most likely outcome after 90 minutes is probably 11. This is not making stock look anymore making hockey look more appealing to me. The least penalized world cup in our generation. You look cards and red cards are way down this year. Even though there are plenty of shenanigans on the field. People are getting knocked out, behaving badly, no one is getting in trouble. Just like what happened in the brazil game. That luis suarez bite did not even have a card. A lot of these things are happening without punishment. Is that what we will remember from this world cup, the suarez bite . We will remember the brazilians getting crushed, humiliated and embarrassed on home soil. We will remember how unpredictable it is in certain ways. None of them made it out of the group stage. Ourthe teams that advanced europe and latin america. Look who the finalists are. Europe and latin america sport. They just have not been able to break through yet. It may not happen for a decade or two. You talked about the lack of punishment. What about concussions . Have there been bad injuries aside from neymar . What they said and what is true that was not from him, right . Thehere are floppers on field, floppers verbally. There is all kinds of flopping going on. Concussions are an issue. Beyond football, soccer is one of the most dangerous sports. They are going up with their heads. It is not the ball that gets them, it is other peoples heads and body parts hitting their head. Thank you so much for bringing us the latest on the world cup. The finals on sunday, 3 00 p. M. , germany versus argentina. It is friday here on Market Makers. Time to play the yearbook game. This man is the ceo of a retail company, graduated from a high school in brooklyn. Who is he . I am absolutely stumped. I was saying j. Crew. I have run out of guesses. Ideas . Got any brooklyn retail guy. I dont know. Tweet us. It is the yearbook game. That is what we do friday on Market Makers. This man graduated from high school in canarsie, a neighborhood in brooklyn, in 1971. Who is he . I now know, but not because i guessed. I could not figure it out. Be philguess would knight. But i dont even know if he is from brooklyn. He is no longer even the ceo of nike. A bloomberg customer just shot me a message to say starbucks guy, howard schultz. And i think he is correct. Some peace work between the end of high school and when he became a ceo. Gustavo is that a phone number . Howard schultz. He got it. The grand coffee maker. Nice one, howard. And i think howard got a gustavo. Congratulations. It is for pride. And why not . Recognition here on bloomberg television. Isnt that enough . Its eternal, especially online. Thank you for joining me. That will do it for Market Makers. We wish you a fabulous weekend. The weather will be fine in new york city. You on monday we are heading across the atlantic to the air show in britain, talking to the ceo of one of the worlds most fastestgrowing airlines. Goodbye to to say everybody and note it is 56 minutes past the hour. Here is markets correspondent matt miller. Lets take a look on this friday at how we are shaping up to end the week in equities during did not look like a good week so far. This morning without we might bounce back a little bit, but it does not look like we are bouncing back that much at all. Dow jones industrial average and s p 500 still down a little bit. The nasdaq recovering a little bit from its losses yesterday. Lets focus in on options today, following the week that saw the start of earnings season. Whate going to dial in this means, what the fed means about inflation, what concerns about the health of your Financial System mean, and what the action in the middle east means for options. We are going to take a look at the markets, where they may be headed. Trading advantage scott bauer joins us to talk about the broader look. We were talking during the break and you said the middle east may be trumping europe as far as the market is concerned. I really think it is. We had the big selloff on the opening yesterday based on the news out of portugal and europe. It was more of the same. Traders on the floor were like, we are down 130, 150 points. Into thek going weekend with things escalating in the middle east, that does trump the other news out there. Even though we see the fix relatively unchanged, i think going into the end of the day today we will see volatility come back into the marketplace. I would not be surprised to see that fixed number vix number trade up. We only have about a minute left. What is your trade . Earnings next week, paypal expanding. They are the base of ebay here. I want to buy the august 52 and a half, 57 and a half call spread. I can pay a buck for that. Max risk is a dollar. I really like this play because with the news coming out on ebay, with icahn on the sidelines there, with a huge Share Repurchases they have had, these will support the stock going into earnings. About facebook. 30 seconds left. There is an interesting move here. It has been trading technically for the last few months or so. This move to the upside is huge. When we hit 62 and a half a couple days ago on the big social media selloff, it was like a colony of people came in, big support, i see this thing moving up over 70, which is what the option markets pricing on earnings coming up. Thank you so much for that. We are on the markets again in 30 minutes. Welcome to money clip where we have the best stories, videos, interviews and business news. I am adam johnson. Three of the richest men in america dive into the inigration debate. Live jackson hole, the future of the fed. We talked to a couple of mutual Vice President s about the forecast. In sports, argentina versus germany, but this is a little different. We have the economic edition of the world cup final. And your summer destination is not necesly