Transcripts For BLOOMBERG Market Makers 20140723

Disclosure, empty and herbalife shares have their best day ever. Good morning. I am watching i am erik sheth i am Erik Schatzker. Stephanie is out today. Lets begin with the newsfeed. It has taken almost six years, but today the sec is poised to approve an overhaul to the 2. 6 trillion money market, closing one of the scariest chapters of the financial crisis. Require prime market new rules will require prime money market funds to drop below the sacred one dollar a share. Money market funds sold to Retail Investors will be exempt from the new rules. Big presentation on herbalife yesterday turned out to be a moneymaker for investors on the other side of his short. Carl icahn, herbalifes biggest shareholder, made 234 million as the stock surged. Other big winners include george soros and richard parry. The owner of the l. A. Clippers cries foul again. Donald sterling is suing his wife and the nba accusing them of fraud over the planned sale of the team to steve ballmer. Sterling says he is the sole shareholder and his wife cannot sell the team without his consent. To forcee is trying sterling out over racist remarks he made a few months ago. This is this could be the most unimportant quarter ever for apple. On the Conference Call following the Earnings Report yesterday, executives including ceo tim cook come drop multiple hands cook,he company will drop multiple hands hints that the company will unveil new product this fall. Investors could care less. Bloomberg contributing editor Paul Kedrosky is with us from San Francisco this morning. Paul, apple is fascinating in so many ways. What surprised me, perhaps most of all, is that in the most recent quarter we saw 35 million iphones sold at a time when it seems everybody who could be buying iphone is waiting for the new iphone, the iphone six and the bigger iphone and we expect to come in october. Were you surprised, too . The numbers i was watching i was expecting there would be some weakness in the iphone sales because of the phenomenon you describe. It is traditional, once people know a new product is coming along, they hold back and they say why would i buy the next last generation when the new one is coming up so quickly . This was 12 , which was better than i expected, and it seems like it was driven in large part by sales and the emerging markets in particular emerging markets for apple, that is china, elsewhere. That helps to explain what is going on. There was some freezing of sales in north america, but that was made up for us with. Made up for elsewhere. What does it say about the quarter right now, and more poorly, about when the sales, when the more importantly, about when the sales hit the market . What we are talking about largerscreen size iphones in the fall, which is the worst kept secret in the world at this point. The bigger risk, and this is something not talked about in the context of the ipad sales number, which was down Something Like 9 , what will the impact of the larger iphone be on the ipad . I had sales were already week and they have not even launched a new product. What will the impact on ipad mini sales be . I think it will have a major impact. People do not want to carry both units. With a smaller iphone in their pocket, there is no reason to lug around and ipad as well. We are already seeing weakness and it has not even shifted yet. We have seen iphone sales continue to rise. Will, since the introduction has been steadily pad sales haves i platitude. That makes me wonder if tim cook cares as long as he is getting a sale, ipad mini or the larger iphone, doesnt matter, or would he prefer the iphone because there is a higher margin . Works and is definitely a margin, but at the same time, the ipad history keenly there is definitely a margin, but at the same time he ipad is important. In the past, they were direct enemies. It is a niche thing example of what apple is trying to do to push the product in the market in the face of what is flagging demand for the ipad. He cares because he sees it as strategic in terms of not losing their foothold in businesses elsewhere where tablets have been increasingly important replacing laptops in many places, that i really believe the weakness in laptops in ipad is just beginning. Technology often makes for strange bedfellows, paul. Ibm and apple partnering to penetrate the enterprise. What about microsoft . We saw numbers from microsoft yesterday as well. Transition story, but a transition story that seems to be working because all of a sudden they have found success in the cloud. Yeah, they have. I mean, to be fair, this is bill enterprise story as much as they want to drive it as cloudfirst, and mobilefirst, and all of the other things that are first that Satya Nadella likes to talk about. It is still enterprise story. They are doing a study transition to cloud services, and that is all great, but the thing that is really driving the story right now are, surprisingly, an awful lot of the legacy businesses, the business is better than around the company for a long time and involve some selling licensed products into Large Organizations and what has helped him his financial engineering. We have had aggressive stock ive asked. We have had some cost stock buybacks. We have had some cost cutting. They cannot go on for a long time, but they have the luxury of having a lot of dials to turn that are helping the numbers. Paul, thank you for jonas. Paul kedrosky getting up early. Lets turn to pepsi. This company is duking it out with billionaire investor nelson peltz, who wants to break it up, and the ceo ingenuity might have on herself some breathing room. Is an analyst at Deutsche Bank securities with a buy rating on pepsi shares. Bill, there was some striking Margin Expansion at pepsi. Nooyit enough for indra to silence the critics that might side with nelson peltz . I do not think so. He has made it clear that he is in it for the long haul. He has his mind made up. Nelson peltz might not be quiet, but the folks that he needs to persuade to go along with him are listening to his story on the one hand, and looking at the numbers that noo yi is delivering on the other. Is she offering enough . Greatk, this will be a set of results. It is only one quarter and he has some broader point about having the benefits of a beverage and snack business together. It is one battle in a long war, and like i said, he will continue to press pepsi shareholders. It is probably not enough to get him to walk away, or the people that he needs to influence. Does he have a point . Would pepsi be a Better Company if it were two companies food on the one hand, beverage on the other . I do not think so. First of all, if you separated the business, it would result in additional cost of 800 bill 800 million to 1 billion. Talking about activist investors broadly, it is actually a winwin for pepsi investors and even for indra nooyi and the board because as long as he is hanging around the net, you have downside support and theres pressure on the company to do it better and faster, which they might not otherwise feel the urgency to do it he was not sticking around. Better and faster is something every investor would like. What is going to satisfy, again, all those other people . Im not sure, because pepsi have such a big foodie business, it is probably not fair to direct it direct and. Directly with coke, compared it directly with coke, but i was looking at the margins. Coke is 25 . Can pepsi do anything to approach that number . Probably not. We can go into the subtleties, but because coke is much more of a soft drink business, fundamentally, unless pepsi made some pretty draconian changes to their business model, it is almost mathematically impossible to approach cokes margin structure. Taccone and is a good use good draconian is a good word to use. At what point do the cost cuts begin to become taccone and and hurt the business more than they and hurt thenian business more than they help . The changes they embarked onto a half years ago was driven by an activist shaking things up, and the money they are saving, it is now a gadget putting it at the bottom line it is not like they arent eating it to the bottom line. After hearing the apple guys cat should speak, it is not like theyre just cutting costs and uploading to the bottom line to drive earnings. They are trying to reinvest a decent portion of the savings back into the business, and on a relative basis, it is working. If you look at their market share trends, in most markets, especially the food side, they looked pretty healthy. In what category, bill, do you think you see those investments delivering those overtime . It is probably doritos. It kind of sounds silly because you look at health and wetness wellness, and you look at fritos and doritos. The salty snack business is almost like a wholemeal or place an alternative. You are starting to see it. That business in the u. S. And internationally. Not is local, and it has globalized yet, but as you have urbanization in emerging markets and people go from agrarian type of occupations to more officetype service type jobs, they have less time, so the snacking behavior taking for granted in the u. S. Is starting to emerge in a lot of these fastgrowing developing markets. Will that mean that one year or two years from now we will see food account for an even greater percentage of pepsis s itnue than the two third accounts for now . It is about half right now. Snack business should grow dramatically faster than the beverage business, as it is done for the last three or four years. Bill, t were very much. Bill schmitz is an analyst with Deutsche Bank in. He has a buy rating on pepsi shares. Now some breaking news to share with you, everybody. A plane crash near taiwan. The taiwanese government has confirmed that a flight to take off from the capital of taipei crashed near the island at around 7 20 p. M. Local time, about three hours ago. The report suggests as many as 51 people may have died. The area was better this morning by a typhoon. Bad weather certainly a factor there. We will keep following this and bring you more headlines as they become available. When we return here on market big dud. Bill ackmans promising that herbalife was it fought of the scale of enron. Investors saw something else. Tom barrack is coming your way. We will talk about the middle east, and all of the conditions in the equity markets have everyone afraid. Is tom barrack the same . We are digital. We are streaming on your tablet, apple tv, and amazon fire. Empty promises that is what it felt like watching bill ackmans latest presentation on herbalife yesterday. Two days ago he promised us right here on Bloomberg Television that he would prove once and for all herbalife is a fraud, but in esters did not see anything but investors did not see anything new. Instead, they might have seen something else. The shares surged 25 , herbalifes best day ever on the stock market. What went wrong and what will come of bill ackmans billiondollar bet against the company . Lets bring in the wayne stanford, who covers herbalife, and contributing editor bill cohen. I characterized how i felt watching the presentation yesterday. What did you see, doing and duane . It was a long presentation. The lead up was repetitive. I think people were expecting him to get to the meat of the argument sooner. What you saw with a detailed mistybout some of the that he sees and some of the things that could go wrong assuming everything that he found there is true, and what that adds up to his questions about whether the company is actually regulating and overseeing distributors strong enough. The big question that investors have is whether that actually, that anecdotal evidence actually adds up to some sort of action by the ftc that would be meaningful, such as shutting down the company. , like a Duane Stanford good report, is playing it safe area how did you feel safe. How did you feel . I felt like it was deja vu all over again. Having lived through the december, 2012 presentation, i thought it was thorough. Bill ackman is thorough, smart, diligent. I thought it was more evidence unethicalnly behavior. It does not make me feel good about what herbalife does, what what he says they do, but on the other hand, i am not sure that ,e are talking about fraudulent as he said. He got very emotional at hand he talked about his family. Then he said this was a fraudulent organization. A criminal enterprise, in fact. I believe he used those words. Exactly. Bill, to your point, bill ackman is a very smart guy, and he is been a very smart investor with some titanic just epic homeruns. Mbia,l goals, growth, and his fund is doing very well this year. It makes me wonder, the rest of us, are we missing something here, that bill knows something we did not pick up . He has in making that case for a year and a half, that there is something here that none of us know, that the ftc does not know, that the attorneys generals in various states do not know. Say what you will, bill is a smart guy, and he wrote mbia for seven years when no one else saw it, but look at the market yesterday. If you need a referendum ever on your ideas, the market can be brutal, and it was yesterday. A 25 increase yesterday, the best ever for herbalife. That is an astounding judgment on what went on yesterday. I am sure bill tried to put the best face on it, and in the end he may be right, but yesterday the market loaded, and devoted sorry, bill, we do not build voted, and it voted sorry, bill, we do not believe you. Ackman learned his lesson . Will we see another presentation on herbalife with promises that come up short . People debate this, but i think blackman believes the case he has laid it out. As some have pointed out, bill ackman believes the case that he has laid out. As some have pointed out, it is more of anecdotal evidence. I do not see him going away. You put yesterday aside and the presentations aside, the one fact that still remains is that the arbiter of this will be the ftc. What they say is ultimately going to be the thing that decides it. The stock can go up 25 yesterday. That does not mean ackman necessarily loses, although right now, by all accounts, and by all of the evidence that he has presented, it is not looking good for him is how most people are seeing it. Bill, it was not so long ago that Hedge Fund Managers did not do this kind of thing. Now, bill ackman might have taken it further than anyone else this idea that you have to make a public presentation of your, sort of, best ideas, and hope the market agrees with you, whether or not the ftc, at the end of the day, in this case, decides herbalife is a fraud. Should we be questioning the value of this kind of presentation where you, sort of, theyre all, and like i say, hope that other investors take your side . You put your finger on it. It is an ira stone phenomenon. It is a genie that i want to put back in the bottle right now. And with all due respect, lets be honest, the media does lay into that. This guy play into that. This guy got three hours of coverage yesterday, and he has to be thinking why not, frankly. One that you did not mention is allergan, where he made basically 1 billion for lending his Balance Sheet to the acquirer. It is not over yet. The value of his stock has gone up. He has had a phenomenal year this year. This one lowers loser since he got rid of jcpenney. He has this. Who knows how much he really lost. Day,usly yesterday was a but why not swing for the fences, get the media attention. He makes a coherent, intellectual argument. He is a very good student. He always has been. The argument would be why not because his investors are suffering. He has a 1 billion short bet i get short bet against herbalife and the stock went up to the 5 . 25 . The why not is elegant. Swing allergan. Swing for the fences. Maybe it will work this time. , you are aboutrd to jump in. Not whetherion is you should do what he is doing, but whether he is right. If you are going to go after a company in this way, you had better be right, and at the end of the day that is what people will judge him on, whether he is right, and a that comes down to what the that comes down to what the ftc says about the matter. It does seem like he is right about some things. Herbalife is a detailed and distasteful business, and as was pointed out on bloomberg view, in many cases over the last year and a half, bill ackman has pointed out something about herbalife that he considers wrong, and herbalife has subsequently changed its behavior. That does not make it a pyramid scheme, but it does say something, Duane Stanford, does it not, about the case that blackmun is making bill ackman is making. Thee have reported about illinois case. Besides are credible. Clearly, something happened there. It is very difficult. Regulars will have to work through this, but it is difficult to figure out exactly who was told what and what happened. That eventually could be a compliance issue for herbalife. It could potentially mean they are not looking hard enough for this type of activity, assuming what happened actually happened. These are all questions that are valid and no serious person would say those are not important and valid questions that he is raising. The issue becomes does all of that, and the anecdotal evidence, rise to the level of a criminal enterprise, especially when youre looking at a definition of a pyramid scheme that is very debated. It is not a clearcut answer. Some people say it is. Some people say it is not. The fact is the amount of debate that is happening, it is clear the definition is not adequate, and it is almost i will have to see it to believe it situation, or i will know it when i see it. All of us are kind of feeling that way i need to see it to believe it, and we have not seen it yet. Thank you, Duane Stanford. Lumet contributed editor bill Cohan Bloomberg contributing editor bill cohan the escott. Skype. Rack via on singlek is huge family home investing and he will also tell us why he is big on the middle east, one of the biggest hotspots in the world right now. Live from bloomberg headquarters in new york, this , with erikakers schatzker and stephanie ruhle. , onis is Market Makers Bloomberg Television. I am backchecks. It stephanie i am Erik Schatzker. Stephanie is out today. An airline crashed in taiwan on the main island. It happened three hours, 10 minutes ago. Trans asia says 58 people were on board. There are unconfirmed reports 51 of those are dead. The area was battered by a typhoon this morning. Trans asia says the weather was good on takeoff and approach, so it might not have been a factor in this crash. More news on this situation as we get it. Famine, sword, intilence, just like it was the middle ages, and that is what it is like in the middle east, but according to tom barrack, the time might be now to invest in the middle east. Always good to see you. Thank you for taking time out for Bloomberg Television. Why would the time been out for the middle east . Thank you, erik great to be with you. The middle east has always found its own way of navigating crisis, andlict and of course, you have to concentrate on a part of the world that possesses, owns, and explores more than 50 of the consumable fossil fuels in the world. So, in the middle of what seems conflict, the surgical refocusing of all of those countries, such as saudi arabia opening its Stock Exchange recently, and concentrating on its own infrastructure, its own development, and its own diversification from hydrocarbons, need the soft and sculptured touch of the west. The west has always been a dominant factor in the development of the region. So, from saudi arabia, to qatar, to the united arab emirates, management, politics, they have always been the foundation of the economies, and now that we are in the Third Generation of development, you have an unbelievable entrepreneurial and professional base. In saudi arabia you have relayed investors in printout will lead, and qatar, you have the best investment authority. In abu dhabi, you have one of the most unbelievable stories in recent civilization development in dubai and abu dhabi. Money, whichon to many of these oilproducing Company Countries do not need, the opportunity to open and broaden their cultures, their economies, their civilizations to western influence is usually best done in the middle of the storm, which is now. Is that why you call this opening of the Saudi Exchange to Foreign Investors a major event . Absolutely. Look, the saudis have been looking to do this for a long time. In addition to being a brilliant financial move and opening and accessing longterm, sticky, professional capital this is not about hot money, Hedge Fund Investing it is about the time investors that want to be in the region. It is the largest economy, the largest stock market. Think about it. Saudi arabia has gone from 2 Million People in a key and 72 in 1972ar oil to at two dollar oil to today at 103 oil. The integration into western culture has provided them with the confidence in saying this is a great first step in providing a cultural soft boundary to allow, officially, now, professional capital to enter the kingdom. Before, you could invest in the saudi stock market, but you did it in swaps and is a perry anticipatory notes and other exchange agreements. , twoat would you say, tom people who look in the middle east and see a civil war in syria, who see islamic rebels trying to establish a caliphate from syria across georgia, into iraq, who see consistent instability in places like egypt and other parts of the region, themselves, why not wait, the situation could deteriorate as easily as it i can prove . As it might improve . Look, all of those things, for sure, are reasons why it requires courage and great partners. Our view, the western view of what is going on in the middle east is always a little bit difficult to focus on clearly because we do not have daily contact with the people, the place, or the circumstances of what is happening, but if you look at the economies of the oilproducing countries, the gcc countries, and you that at the people who on a daily basis are responsible for those decisions, you have some of the best and most sophisticated investors in the world today who are operating in the middle of that volatility with very little volatility. Alyou take prints prince waleed, who is one of the most generous, philanthropic people in the world, and weve been fortunate to be partners with operation years, his is as sophisticated as any operation in the middle of wall street. If you took the Qatar Investment authority, or the operating companies, they are more than most of the Companies Operating in what we would consider stable investment environments. In a stable investment environment, you have a Central Bank Policy of zero Interest Rates. Everyone is fighting for yield. 200 andet is accepting 300 basis point yields with no growth. In a region in the middle of a conflict, you have 5 to 6 growth, a population with under a under the age of 25, diversification away from hydrocarbons and oil, and oil price the continues to soar, giving them access funds and profit to reinvest in western industry and diversification. So, if youre looking for conservatism and a postage stamp, in the eye of the storm might be the safe this safe this safest place. People have an idea that these are individuals riding camels across the desert and still trading in frankincense and pearls. Tom these are the most sophisticated individuals we do business with. Made,the point you just there are sovereign wealth funds with incredible resources they can bring to bear as investors, and families with astounding fortunes in the middle east. The place is swimming with private capital. Why should there be good returns in an environment like that benchmark in theory, the private like that . In theory, the private capital to chase the opportunities and arbitrage out the returns. You are right, but, again, all of those funds, those brilliant investing families, policies,rn practice, expertise. As they are expanding their own cultures, because in most of those oilproducing countries, they are trying to wean themselves off of the soul, oil. Ious appetite for they do not need money as much as they need a diversification of western integration of practices, policies, procedures, company, technologies. Technology is changing everything. When you go to doha, dubai, abu riyadh, mecca, or maybe not, it is amazing the dinah ina, it is amazing. It is the number back of western technology. Most of these people are western educated. What about the wildcard what if iran gets the bomb . Im not a geopolitical analyst, but i can tell you since the time of the crusades, and there were seven crusades, these issues have been going on between the east and west forever, yet the countries we are talking about were trading to that conflict forever, and at the end of the day, the idea that there is this impenetrable ,narchy between shia and sunnis and the pieces of islam with israel it was easy for me. I was the son of a lebanese immigrant grocer who was a roman catholic. I grew up in a jewish neighborhood so i went to shabbat every night and i was sent to saudi arabia as a lawyer when i was 22, so i have a pretty objective view of it all, and at the end of the day, the middle east is going to survive and thrive, and work through all of these issues which are primarily political, and you have some great nomadic forays moving forward. You have a new, young ruler in qatar. Qatar, which is a tiny country, has taken this diplomatic post across the world in spreading the arab spring and the extent of democracy through al jazeera. It sent shockwaves. You can walk through doha and you have an office of everything. Hamas, everyu have fraction of that middle east fabric known to mankind, but as a result of this, through commerce, through tolerance, through westerners spending more time, taking more thought, and investing more in the region, i believe that tolerance and understanding will prevail at the end of the day. Tom, i love how thoughtful you are about all of this, so i will ask to take a moment, while we take a commercial break, when we return, put it all into context. Tom barrack with us exclusively on Bloomberg Television. You are watching Market Makers, on Bloomberg Television. I am with tom barrack, private Equity Investor with holiday capital. Colony capital. I hope nobody missed our terrific conversation about saudi arabia opening its exchange to Foreign Investors. Andcall equities top the fixed income under wyoming. Is that synonymous underwhelming. Frothy,synonymous with overheated, or perhaps even bubblelike . It is a great question. I do not think it is bubblelike, and i do not think it is frothy. If you take the zero Interest Rate environment, the world is in search of yield with no growth. So, what happens is we are all investing in assets that are increasing in value, but it is ok because we are borrowing more money at a lower Interest Rate. So, if you look at the buyout market buyout spree 2007, maybe you would buy a company excuse me, seven or eight times, and you would get leverage at four or five times. Today we are buying it 10 or 11 times, and getting you leverage getting leverage at nine times. And the nature of that dying is better for a borrower then it was in 2006. Asset prices are increasing, Interest Rates are lowering. Arelies our hours borrowing more and lenders are taking more risk borrowers are borrowing more, and lenders are taking more risk, but the effect of technology and everything is disintegrating every middleman. Why is there no growth . What we are doing is disaggregating corporate Balance Sheets. They have more cash and profitability than they have had in the last three decades. We are increasing dividends to shareholders, so they are happy. Borrowers are borrowing more money. The only problem is in employment factor of what were doing with our own nation stays flat because we are increasing jobs, but those are not great jobs. Dissonant ber which disintegrates the transportation company, you are not taking those transportation experts and making them tech experts. Right. It is appropriate for where we are with centralbank policy. Everyone command to search for yield, if you look at the fixed income market, it is not goldilocks. Either way, youre probably wrong. The spreads common. It come in. If there is no growth, you probably mispriced your fixed income and the same thing will happen in on the equity happen. On the equity side of life, if you look at ipos, about 70 of all of the ipos since 2010 have been profitless companies. Profitless. So, im not sure what all of that needs. We are all looking for postage stamp capital preservation. I do not know what it means either, but i was hoping you have a better idea. The multitrillion dollar is hown, tom, clearly much longer can all of those things you just described continue . Wont there be a point at which the asset prices stopped rising, and once that happens, what kind of environment will it be . Will it be a correction, and if it is a correction, will he be in orderly correction, a messy correction question mark correct set correction . I certainly do not know the answer, but we are at the tail end of the beta harvesting. From 2009 on in the real estate business we had mispricing, and are still miss pricing, but it is at the tail end we are going to the alpha side where you have to create value and do something. My personal opinion is it can go on for a long time. Really . Ere is a debate there is a debate absolutely. When you think of the effect, the Central Banks do not have ammunition left in their guns. In a zero Interest Rate environment, if something happened and he needed a reservoir to apply to the problem, we have very few tools to make that work. At the same time, the health and the time it of what is moving forward feels pretty good. Corporations are not reinvesting their own capx. Gross revenues are not increasing dramatically. Technology and social media is, kind of, in the event of the day, and real estate is a sanctuary for everyone because for all of the reasons you are saying, it is a capital preservation tool. It is an inflationindexed income stream. To me, this policy will probably go on for a while, but all of the real estate that has been cycled is jurassic park. Very few people want to be in a highrise, graniteclad Office Building anymore. If you look at most of the urban markets, the premium for office space is on another kind of office space, the distribution what zillow is doing, what has happened across logistics and fulfillment in every arena, what is happening digital distribution of movies and theaters the impact on real estate is you need a different kind of real estate. If you need a new point of view and it could go on for a long time. Problem, it will correct itself, and we will adapt and find a way around it, but that to say that what we have seen from the fed, what we see from the bank of japan, from the ecb, and the bank of england, is working, or not working . Well, look, from my humble point of view, absolutely it is working. I woke up in 2008 and i said thank god my father forced me to go to law school because i could always go back and practice law because the private equity business is probably over. Fast forward, we are all reaping the benefits of whatever it was. Employment is returning. Households are feeling better about the equity in their homes. We are missing the middle class, which we have to fix. We are trying to fix health care. We are trying to adapt to school policy. Businesses, corporations, the stock market has never been higher of course we are all scared to death. We are all scared to death because we have no volatility, corporate default rates are at an alltime low, and corporate debt issuance at is at an alltime high and all those things are great, but been great scares us to death. Tom, i could talk to you all day long. Thank you for joining me. Tom barrack, one of the worlds great private equity and real estate investors. More coming on Market Makers. Stick around. I will be back after a short break. It is 56 minutes past the hour. Bloomberg tv is on the markets. I am scarlet fu. We are keeping an eye on shares biotechnologies, soaring after the company said it saw a positive result for an experimental drug on breast cancer. It is based in l. A. , has 49 employees, and saw market caps well to 6. 8 billion. Citigroup says it is a likely takeover target. , the biggest maker of multiple sclerosis drugs, raising its 2014 profit forecasting. We are on the markets again in 30 minutes. Market makers will return with Erik Schatzker in a bit. In the loop. And live from bloomberg World Headquarters in i am erikthe fifth schatzker. Stephanie ruhle is out today. Does our the sec likely to vote to approve role changes to the 6. 2 trillion dollar money market, changes that were almost 60 years six years in the making. Our chief washington correspondent peter cook is on the story from d. C. Sixnd us what happened years ago, because some people may have forgotten what it means to break the buck. The reserve by mary fund back then, six years ago the financial crisis, the first simmering for problems in the Financial System and a run for the exit on part of the investors. Including the reserve primary fund and a question about whether or not the one dollar investment that people had always taken for granted, whether it was indeed worth one dollar. The indications are likely to prevail. They are intending to reduce the risk by making sure the investments do indeed carry risk and that a dollar invested may not always be worth a dollar when they go to get their money out at the end of the day. Instead, the new rules require the funds that cater to big Institutional Investors must abandon the standard 61 share price and maintain what is called a floating Net Asset Value. These are the big ones that generally buy riskier securities such as riskier paper. The other big change, the new rules to impose fees designed to slow redemptions when prices start to drop. Effectively giving ability to stop a run before it gets too far along. They will have two years to comply with the change. Tremendous debate over how to change the Money Market Mutual Fund rules. There has been debate at the end of the day. A delay in theng action. They think this might drive fund money out of money market funds. Risk to corporate financing. Thinking there could be Tax Implications as well. The Financial Stability Oversight Committee involved as well. Finally, a compromise of the end of the day likely to prevail although we have to wait to see how it plays out. A compromise may be a solution or a solution that satisfies nobody. There are those that say the rules are wrongheaded in the worst place and companies and investors should have more time to adjust to them and those on the other side of the debate that say more is required because to your point, the prime funds only that would have to submit to the new regulation. They only account for something close to a third of the market. What about the other 63 on percent of money market funds . Ideaey could not sell that over the course of the past six years. Certainly a lot of of investor advocates who made the case that the floating Net Asset Value should apply to all money market funds. That has been the argument. Right now that could not past that fcc. Spastic the sec. At the end of the debate, the argument has been would doing that removes an important Investment Vehicle for Retail Investors, something that has served a useful purpose. There is another decision poised to be made in washington. We made bloomberg broke the story late yesterday. Has to do with net life metlife it coming a systemically financially important institution. Is a debate that has taken place of the Financial Stability oversight council. Of the question about systemically important Financial Institutions and beyond the Banking Institutions might qualify for the designation and therefore qualify for top or tougher regulatory scrutiny and oversight from the federal reserve. They have the mugging of Insurance Companies and investment and Asset Management firms as well. According to people familiar, that financial Oversight Committee will qualify it when it meets later on this month. Metlife will have the challenge chance to challenge the decision. And has been lobbying against that decision am a saying it does not pose the same risk as banks and worn portly should not be regulated as a bank. That is something janet yellen has been asked about on capitol hill. An ongoing debate as to whether or not it is the right treatment for these kinds of of institutions and whether they pose the same risk that large banks do. I know metlife fought long and hard to avoid the designation because it used it as something akin to a scarlet letter. Can we say at this point whether the decision to designate metlife suggests or indicates the stock might take a similar path or make the same decision as Companies Like black rock, which also have been fighting long and hard to avoid it . Folks of the Financial Stability oversight council, regulatory agencies involved make the point that they are treating every single one of these potential designees individual, looking at every single one of them and giving them the chance to make the case why they are not, and i do not think you can draw conclusions based on the case of one company that another will be similar. A lot of this has to do with sheer size and assets under management and how big they are but not the only factor they are considering so i do not think you can draw that conclusion just yet. Peter cook. Big developments in d. C. The sec poised to adopt new rules for money market funds and designation of metlife as a systemically important financial institution. John kerry flew to israel in pursuit of a ceasefire between israel and hamas. And nofly zone after rocket landed about a mile away from tel aviv airport. Airlines around the world have been canceling flights. Scarlet fu has the facts and figures about what you need to know on the decision to halt flights to and from. A rocket landed in a suburb north of tel aviv. Near the airport, about a mile away. Air,ta flight was in the about two hours away from israel when it got word. It turned around and got diverted to paris. The faa then came around and made a decision around noon yesterday to ban all flights into and out of israel. This applies only to u. S. Carriers. We should note other International Airlines have suspended flights. It is easier now to say who is not canceling. British airways still flying. They are monitoring the situation. Flag carrierli flying as well. Michael bloomberg, chief executive founder, maturity Majority Shareholder made a point to fly to israel last night. Route is newy of a york tel aviv and the Financial Impact it will have on American Airlines that are banned now from the faa flying . Certainly busy for israel. Of the u. S. Airlines, not as big of a deal. For israel, makes a big difference, especially in the busy time, the summer season. Leisure travel makes up a big portion going in and out of the airport. That is the airport most affected when u. S. Airlines cannot fly in. There are other airports elsewhere but they usually serve domestic travelers and european. In terms of the impact on tourism amid the israeli flight carrier has said revenue by will drop by 50 million. And half of passengers have delayed trips and our canceling future reservations. Numbers, itk at the makes up two percent of gdp. Scarlet fu. Next, talking about the facebook advertisement strategy, a company that ensures facebook advertisements. And has shark nato jumped the shark . The crazy inexplicable phenomenon of 2013 is back with a sequel. We will talk to the producer the high in this movie. Hotly anticipated or not . You be the judge. You are watching Market Makers. I am Erik Schatzker. Learning time for facebook. Due at the end of the bell today. Revenue surged 60 last month locale of the success of ads largely. This has investors and others asking him the growth continue . Insight with the cofounder of ad parlor amah a company that helps marketers advertise on facebook joining us from toronto. Lets take a step back and talk about what is working. Why is it all of the sudden after much expect tension and anticipation, mobile advertisements have taken off on facebook . Yes, a few things working. Facebook has gotten much better with targeting. They are able to go after users they want to reach. Secondly, measures measurements have gotten a lot better. We have the ability to see and understand and meet the advertising object that. How does the targeting work . And you are the intermediate dairy on how do you explain that to them . Essentially, we have access to the same targeting options that an advertiser would if they were going directly to facebook. You have the standard targeting, age, gender, but recently facebook has done a great job introducing new types of targeting. One of my favorite types of targeting that advertisers are now leveraging, custom targeting. They can take the existing list of email addresses or phone numbers and can then match that with what users have put on facebook and specifically target the users. Rex ok. You mentioned measurements is also involved. You have to identify the audience in figure out whether the advertisement is working. Know that advertisements are in fact working . One of the most popular advertisement type on mobile is the mobile app install advertisement unit. I am sure you have seen it on your newsfeed. You will see an advertisement that says click here to install the app. You click on it and takes you to the app store or android app store. Not we can do now is we are just seeing they have seen the advertisement but that a click on it and can see the usual the user installed it. We can see the levels of engagement. Every advertisement demands engagement. How do you know someone who does not say like an advertisement or click on it clicked through to whatever happens to be behind it that it is creating an impression with the user . That is a little bit more difficult. An easy and advertisement, you see it takes up a large piece of real estate. Every user looks at the advertisement that takes up so much of the screen. Willre hoping the impact be made. There are ways to try to measure them offline. Nook and measure brand recall and things like that but the bread and butter in where we see the most success is when there is an action at the back end that can be easily tracked and identified. I presume everybody gets this. Is that to say in the future all advertisements on facebook will require action and will not be passive advertisements to decreased the deposit . Say that. Not there will always be room for passive advertisements, which we would call branding, but there is a focus on measurement. So for example, if you were a branding ad, there would be a way to see if there is an increase in opening accounts in the area where youre targeting. So there is a focus more on measuring as opposed to just branding. Described, just branding, seems to be no different than putting a tv commercial on or in advertisement in a magazine if the bank were to put an advertisement in a business toazine or even a newspaper try to determine whether account activity and branches within predetermined areas went up. The same thing, right . It is difficult. Essentially the same thing and a difficult problem to solve. A problem marketers have been trying to solve forever. If you take out a billboard advertisement for coke, does that mean there will be more coke purchases in the area, and how do you track that across walmart, convenience stores, the golf course . So many places where it is sold, it is hard to track that. Facebook is working on things to try to do offline measurement. Something that is an ongoing process. Where do you see facebook going next . Advertisement in the newsfeed were crossing the rubicon. Part they seem to have gone extremely well as by the 60 revenue last quarter. What is the next innovation . Facebook has been doing extremely well on mobile. At the same time, facebook needs to be cautious. You do not want to inundate the newsfeed with more and more the userments such is feels like the User Experience has been ruined. Have seen the facebook audience network, which means facebook will start to serve advertisements on mobile but outside of facebook. I think there is a lot of potential for the audience that way. Lex very good to start to talk to you this morning. Talk to you good to this morning. He stands between facebook and companies that want to advertise on the platform. When we come back, talking about john thane back in the spotlight. Steelmaker once again. A dealmaker once again. I am Erik Schatzker. You are watching Market Makers. The man who found a buyer for Merrill Lynch on the eve of Lehman Brothers collapse now back in the spotlight. John thane, ceo of cit group. Yesterday he entered a three point 4 billion deal to buy one west. We have a reporter here to talk not so much about the deal itself but about john thain, the guys who agree to the bonuses they came back to bite inc. Of america very badly wanted a sword Merrill Lynch. Is we definitively say he back and his career is on the upward trajectory again echo when he joined the i. T. In 2010 it was to turn around the ofpany cit in 2010 a lot that it was to turn around the company and bring back his reputation. Of thelmination turnaround, people in the market watching him for a long time have said the culmination of the turnaround would be a deal. It,ulation around selling he himself acknowledged it was a possible and likely situation so to speak. Solidified areally comeback a lot of investors and analysts are saying. And makes cit a lot harder for anyone else to buy. No foreign banks are shopping and the big domestic lenders are effectively prohibited either fed and the Financial Stability oversight on full from doing deals like this. Absolutely. When i spoke with him yesterday, he said it certainly is possible to take consider a takeover bid that not very likely. How does this transform cit group which has tremendous traditionally been a middle lender . Now they will have more access to retail deposit in cheaper sources of funding and will be deemed systemically important financial. With that becomes more regulatory scrutiny. They will have to undergo stress testing. They have to get Regulatory Approval for the deal, which has been a challenge for others. The biggest pending u. S. Bank merger right now is the takeover of hudson city, which was announced two years ago and has not received approval. That is the next challenge. Why then do they seem to be confident they can get the deal done early next year . They have already invested in a lot of the compliance. In other words, spent a lot of money on lawyers . They said yesterday they have been investing and making, putting the right systems in place so they can meet regulatory requirements. Regulators have long said an effect they wanted to a step they wanted to see them take is to get more deposits, which is what theyre are doing with the deal. . Why is that important will help them boost profitability, get cheaper sources of funding by accessing retaill accessing the deposits. Also a way he is able to spend and deploy the excess Capital Building up of the bank. Rex thank you very much. Talking about john thain and the cit group. Live from bloomberg headquarters in new york, this is Market Makers. With Erik Schatzker in stephanie ruhle. You are watching Market Makers. I am Erik Schatzker. Stephanie ruhle is out today. So much for strong earnings and a better fullyear forecast, shares of boeing falling this morning. The concern, a new Tanker Program growing 300 or do 2 million after taxes than on military taxes. Any losses recouped over the link of the contract. Coke tim cook says get ready for big new products. Talking about an incredible pipeline and signals Something Big could be announced as soon as september. The Company Reported higher profit and revenue for the most recent quarter but fell below analysts estimates. John kerry and the uns secretary general are in tel aviv today hoping to negotiate a truce in gaza. The minister says the country will stay on the defensive as long as hamas remains a threat. You have seen them, and millions of recalls. Gm has recalled 30 million calls. Cars. If you were to look at the company, does not seem like anything is wrong. Lets find out why. Matt miller is here. How is it that recall after recall no one seems to care . The stock is up six percent and change since they started recalling cars in february. The reason is they are doing so well with sales. Secondquarter earnings out tomorrow and expecting to see an of 2. 7 ingain secondquarter sales. That does not tell the whole story because what they are selling the most of our super highmargin trucks. We saw sales of the new uconn up it before percent. They own the the big suv markets. That is where they get the biggest margin. Chevy truck is doing well as well. Selling a lot of those in the fourth cars. The high margin vehicles are where they are making the most ground. Why the demand for trucks . Market hasing rebounded quite well. We are asked acting it continued to increase. It is strongly correlated to the truck market. Is a famous vehicle that sells well in the housing market. Obviously construction workers by truck and people need them to help build houses and move stuff around but the silverado has had incredible success this year. They have increased the discount to get you to come to the show room and buy it. General motors has decreased the intensified 10 . The cut is only in the truck market. They finished the program for the cars. They are still offering that for the trucks. They are not giving you cash back incentives, but the financing offers, this is the special onetime thing. Not like they have been doing it for the whole quarter. They are drawing people in that way. They want to sell as many as they can. They are developing a new truck. Isnt that a slippery slope for the automakers . Themember talking to executives about the fact that they were discounting so much. They were also discounting. Hrough the financing the Cash Incentives they have to eat it later. They would tell you they tried to do away with as much as they can. Obviously they still offer you 3000 and cash back. The financing only a temporary measure. To take a little bit. The tahoe and escalate, they are making like 10,000 per truck. Escalade. Escalade had a sales increase of 18. 5 of the first half. They are selling a lot of the most expensive suvs. Sellor every car that they aor 45,000 what might corvette would sell for more than that. A very high margin product. Cadillac not as much as the corvette. They are making decent margins. They do not tell us these numbers so we have to have analysts guess. They get margins of more than 10 . Interestingly enough, adam jonas from Morgan Stanley estimates this year 100 of General Motors profit will come from the u. S. They still have issues in your rep am not doing as well as they could in asia. In europe. Get 100 like they will of global profit from the u. S. , which is not about thing because theyre doing so well here. It is the same across the industry. Europe will start to contribute positively to ford earnings and General Motors earnings as the Macro Economic picture starts looking better. We will hear from General Motors tomorrow. I will interview the cfo tomorrow morning at 8 00 and you will hear from ford, we and your show. Matt miller with the latest on gm earnings coming tomorrow. Ist, why Michelle Obama under fire for pressuring schools to serve students more fruits and vegetables. Lex you are watching Market Makers. You are watching Market Makers. This gives the phrase food fight all whole new meaning. Just a couple of years ago schools got a makeover with the help of Michelle Obama. These days the lunch ladies once Michelle Obamas allies are teaming up with House Republicans to roll back some of the rules. We have more on the battle in washington. Why the shift . Here is one possible answer, 11 . 6 billion is the price tag for the National School Lunch Program and healthier standards are taking a big fight out of Companies Like conagra and onsico who spends millions Food Industry lobbies in the past few months and who happen to be members of the School Nutrition association. It is a very organization that once worked with the white house to get the rolls past but is now siding with House Republicans to roll them back. Without saying that Michelle Obama is perplexed and went on the offensive at last fridays dinner. Not surprising there are certain interests resisting change and trying to take us back to the old way of doing business because for them, there is a lot of money on the line. Amnesia and Food Industry influences are one theory. Others are fruit and protein prices are rising and simply that kids do not like the healthier food. Instead being dead to the trash cans, not the students. So far the battle mostly between the house of representatives and the white house but the senate is now weighing in with the hearing in the agricultural midi where the president says the rules can afford to be relaxed before they are reauthorized next year. We will encourage continue to encourage them to make healthy choices, but operators need a little bit of flexibility in order to ensure all of the students participate in the program. So far the School Nutrition association is the side making strides in the case. Provision in the house agricultural bill would allow some schools to opt out of the standards, at sign of lobbying on the issue. 105,000 dollars paying off. Facts do we get a sense as to whether there are enough democrats in the senate who support the measure for Something Like that to past . In the senate controlled by democrats, you are not seeing the sense that they should be doing away or rolling back the waivers. There are schools losing money, that is for sure. The reason is to be debated. Right now what is interesting is neither side, democrats or republicans, the house or white house are really debating getting more money for the program. In the hearing the new york senator Kristen Gillette brandes said she thinks money to be the solution that if the schools were given more money, they could afford to provide healthier foods, whole grains, low sodium items on the menu. So that is a suggestion, recommendation we are seeing in the senate. Whether or not there is money in the budget for that is an entirely other question. Great to see you this morning. The latest on Michelle Obamas efforts to keep kids eating healthier. When we come back, could this be the movie of the year . Shargh nato to is almost here. It was one of hollywoods most unlikely Success Stories but can you really make a series out of it . Shark nato 2 is coming. It cost less than 2 million to make and will not be not be coming to a theater near you. It will preview next week on scifi. We are in trouble. Had to get out of here. A file them is the studio behind it and along with other movies. Paul vales is a partner there and producer. Los angeles this morning. Last time you were with us you told me everyone of the movies you make makes money. When it was a runaway success last year, not just social media but ultimately the limited release in peters, was it a nobrainer it was coming this summer . Yes. Couple of days after it came out we have the go ahead to make the sequel. They have even green lit shark nato 3. Described to me the thought process that went into this. The original was a bizarre enough concept as it was where a tornado filled with killer great in l. A. Riving we have always wanted to base a film in new york. It really was a nobrainer that we destroyed the west coast in the first movie. The east coast in the second one. Ok. Was aw the original massive success, given the fact that it was such a low budget film to begin with. How well did it do financially and how much better where the terms for you . I would love to be able to tell you i am soaking in bathtubs of money, but the truth is, it has performed about the same as the other movies relative to the budget. However, the benefit in addition 2 and 3 is the fact that the scifi channel has green would a series, and most importantly, where the First Time Ever in my career if someone asks me as they have heard of anything i have made, the answer is yes. How do you translate the phenomenal quality of the one . Nal to this we are talking about it, that clearly helps. Whats really lit up was the unanticipated social media response. Is there any way to ensure you get that type of reaction again . I do not think there is any way you can insure it. I really believe social media had a big impact. I think the awareness of the movie gives us a very good chance of repeating history. So much of what made it appealing was not just the bizarre, crazy plot which is what the despair, but williamsburg hipsters would call the ironic quality to the movie. This time around you are trying to do it as a sequel. No telling whether you will pull it off the same way you did with the original but you have and ive had asked. Is there not the possibility that there is too much of a good thing . There is always that risk, but i can say, and i have seen the movie and there is no one more cynical about the movies than me, but it is better than the first. It is a nonstop roller coaster ride. I think if people tune in and out of interest, they will stay. An interesting way to describe the difference between the first and second. I have seen the trailer. I guess you have to be lurking for certain things to call it better. Wewill it be said to . Have not decided yet. Since it is supposed to take place in the summer and we filmed it in february in new york during the blizzard, we are all hoping we can place it very warm. Thank you very much. Paul vales, production studio nato. Shark that will do it for Market Makers. Stephanie ruhle will be back tomorrow talking to the ceo of union pacific. Just about 66 56 minutes past the hour, which means Bloomberg Television is on the markets. Here is scarlet fu once again. Checking in on equities first. The s p 500 at another record highs. Having a big lift to Companies Like apple. Joining me for the options inside is the equity derivatives strategist. We were just talking about how the s p 500 at 1988. The fixed now back below 12. Looks like we have gone back to the slow summer trade again. The vix now back to below 12. Right now the markets fully focused on earnings. Stocks are moving based on earnings. We are seeing huge moves on stocks. The largecap names like microsoft and apple, we see theks moving west to upside. An interesting day today so far. A selloffning we saw in microsoft and apple. Rex both of those shares are higher in premarket cash market. Yes, they are now but in the morning trading not as high. At the same time, the stock started to rally and we saw some selling. For example, microsoft we saw a selloff. See sellers of september 100 strike calls. The stock started to climb back up. We now see fires. Does that suggest conviction or lack of conviction . I think people trying to figure out where the stock is going to settle. I think this sentiment was bullish going in. Initially it was to get out of the position and hedge again. Broadening the look at the market overall, next week we have the fomc decision wednesday. More economic data. Pretty quiet today in terms of broad market triggers for the market. How do you see that playing into where traders are positioning . I have come on the program before and talked about how i would like to be long going into the offense. Buying the volatility be on the event and selling something before. That trade working out just fine. I think it is still the trade to put on. Goingk you should be long in. The meeting is on wednesday, july 30. You have a specific trade for us on qualcomm, moving before the earnings due out after todays close. My strategy is picking out from a sixmonth range, basing on 2. 5 up yesterday. I want to buy the august expiration 82. 5 86 call spread. It gives me a good this it decent risk reward. On average three percent . Percent thehree past three quarters. Seems to me i did a very good risk reward. If you look at the charts in terms of looking how much you stand to profit, the prophet much larger than a potential loss. Qualcomm reporting earnings after the bell. That comes out after the market closes. Right now up by 26 points at 81. 79. The stock market overall is rising, at least if you look at the s p 500 currently gaining 4. 91 points. The dow industrials little changed right now. 17,100. Thank you so much. In terms of the other markets, why dont we get a quick check on currencies in treasuries as well. If you look at how they are see there isan buying in treasuries and deals as a result are coming down by a hair. Point 45 . Looking at the dollar as well. The dollar index trading. It is up not just barely. Act on the markets once again in 30 minutes. Back on the markets. I amlcome to money clip, adam johnson. Apple gives something for investors to nibble on. Bill ackman swings for the fences on herbalife. He comes up short. Should money go to keep kids healthy . In todays wild card, the world according to joe torre. And it is the world series for scifi fans. We will kickf