Transcripts For BLOOMBERG Market Makers 20150902

Ont as far as what is going in china, every day, around 2 00 p. M. , chinese time, markets recover because state money comes in to buy stocks. Will be closed on the mainland, and tomorrow they will be closed for the military parades and victory celebrations for world war ii. Here spurredsses by the chinese erik s p 500 ended in correction, more than 10 down from its recent high on july 20. Matt the big losers in percentage terms netflix was down on concern apple is going to meet its lunch with original content. Dollar tree was down because it is trying to absorb family dollar. Erik the guidance with disappointing. And there was no revenue guidance because they have to deal with the purchase of family dollar. The point mac moran makes copper. Copper was down, and i think it that said competitors are not going to stop. There were some winners that were interesting. Cablevision erik i will hold you right there because matt American Airlines . Erik no, marc faber is going to be with us. He is the editor of the of the gloom, boom doom report with us from thailand. Good morning. Marc good morning. Thank you for having me on your program. Erik here is what i want to know where would you turn right now . If there is one market in the world, one asset class that offers either safety, or the prospect for Capital Appreciation over the short term, what is it . Modern think because of central banking and repeated interventions with monetary qe, allin other words, around the world by Central Banks, there is no safe asset anymore. When i grew up in the 1950s it was safe to put your money in the bank on deposit. The yields were low, but it was safe. Nowadays, you do not know what will happen next in terms of the purchasing power of money heard what we know money. What we know is it is going down. If i have to turn anywhere, where, as you say, the opportunity for Large Capital gains exists, and the Downside Risk, in my opinion, is limited, it would be the Mining Sector Precious Metals. Mining companies, in other words, gold shares, and i would also look, as you mentioned freeport s like t, that havefreepor been hammered because of Commodity Prices. They have gone down before, but i do not think they will stay down forever. Kind of answer the question i was going to follow up with are you effectively calling the bottom of the metal cycle . It is not selected is necessarily the bottom, but how long is it going to take before we see the prices gold has already started to recover a little bit, but the base metals are in a disastrous state, whether it is copper, aluminum, nickel, whatever. Marc i would rather focus on platinum, gold, because they do not depend on the industrial demand as much as base metals. As i indicated on this program already a year ago, the chinese economy was decelerating already then. It was just that the Fund Managers did not want to accept it. Now it is obvious that the chinese economy is growing at nowhere near what the ministry of is Publishing Ministry of truth is publishing in china. No more than 2 . That is a huge impact on Commodity Prices and in turn a huge impact on the commodities of all the producers of the world, russia, africa, and these countries, with falling Commodity Prices, have less money to buy american goods. Matt we saw the chinese devaluation, and then we saw vietnam follow, and cause extent kazakhstan. Do you expect to see that continue . Marc [laughter] countries follow the example of what mr. Mario draghi try to achieve with lowering the value of the currency, which is to create a depression in real income and a confession of world terms, and a contraction of trade in dollar terms, which is negative for Economic Growth around the world. Matt who is next, if you had to bet . Marc i think the chinese will let the currency go down somewhat, but the safest bet if you want to bet against the currency, in my income is too short the hong kong dollar because it will not be revalued against the u. S. Dollar. That is out of the question. If the chinese currency, the yuan, continues to weaken, then there will be a lot of pressure in hong kong on asset prices, and then maybe the government chooses to caution through devaluinge peg and the hong kong dollar. So, you have upside potential without Downside Risk. Rc, i know you are of quantitative easing, but u. S. Stocks mr. Bernanke it, and then janet yellen after that, got what they wanted. U. S. Stocks, until recently, were on a sixyear care. Why is it we should not expect something similar out of japan, where stocks have done well since they began quantitative easing, or europe, where stocks have been outperforming . Why is that not going to continue . Marc because in my humble book wealth is being created through, essentially, a mixture of Capital Spending and land and labor. If these three production factors are used efficiently, it then creates a prosperous society. As america became prosperous from its Humble Beginnings in the 1800s, or thereabout, through the 1960s, the 1970s, but it is ludicrous to believe you will create prosperity in a system by printing money. Economic stuff is him at its best. In the meantime, there was a lot of money to be made in u. S. Stocks, now . No . Marc i did not say the opposite, but unfortunately the money made in u. S. Stocks with distributedid evenly. Benefiteden actually from the stock market post2009. It is not even 1 of the population. T is 0. 01 they took the bulk. The majority of americans do not anyway. Shares in other countries, 90 of the population do not own any shares. So, the printing of money has limited impact on creating wealth. You, why is i ask it the homeownership rate is at a record low . Please explain that. Homeownershipt at a record high before the financial crisis . Marc [laughter] someoneo laugh when like you tries to lecture me on what creates prosperity. Erik i am not at all. I am just as adjusted inequality as you seem to be, but as i am agentg to you, being the for our viewers, i am trying to figure out how to make money. That is what they want to know. Marc that is why i told you if i were you, i would buy mining stocks. I am not saying they will go up, but they will go down less than other shares. By the way, if you ask me about relative value, i think emerging cheap, but not yet the return expectation i would have over the next seven to 10 years by investing in emerging markets would be much higher than, say, u. S. Stocks. The emerging markets are overhyped and expensive in terms from historic perspective. Marc, you must then have, years,e next seven to 10 a neutral, if not positive view of what happens in chinas future. I was going to ask what happens to president xi . To power . D on he has no control of the markets. If they continue to intervene like this, they will not have foreign reserves left to hold up the currency. I mean, can he hold onto power as we held head into this victory celebration for world war ii . Marc well, i mean, we have to put the achievements of china and president xi in the context 20, 30 years was ago, and what it is today. It is a remarkable change. Will china have a setback . Do not forget, the u. S. , after the 1800s had setbacks, the civil war, world war i, the depression years, and world war ii, and the country continue to grow. I think china is, from a cyclical point of view now, in a very serious downturn. Serious. And from a secular point of view, i think there is still tremendous Growth Opportunity in china in the long run. Cyclically, they are going to have a tough time. C, make you very much, joining us from thailand this morning. One of my favorites, editor of the gloom, boom doom report. Time for the five things you need to know. Times reports ierre andurand thinks oil is going to go down into the 20s. There are a number of people that think it takes oil in the 20s for excess supply to be mr. Impact alpha andurand predicted last year. I get it. He made a good call, and not many professionals have called for 20 oil. Erik tom petri. He ishe is also matt also an incredibly smart guy. I would also like to point out that a lot of people in oil are getting fired. The story last night conical phillips, chevron. It looks Like Companies might agree with that. Number 2 Goldman Sachs is sticking with its bullish view on chinese stocks in hong kong same valuation is an expensive and improving Economic Data will spur a rebound. Tomorrow, markets will be closed through the end of the week, only in the mainland, as i pointed out. You will see Hong Kong Open up on friday. Erik i need to interrupt you because we have adp reporting private payrolls increased in the month of august by 190,000. The economists we surveyed were looking for a gain of some 200,000. Lets take it to vonnie quinn, who has a few more details. Vonnie i do. 173,000, which leads 17000 and goods producing jobs. Economists were looking for 200,000. The friday estimate has come down. We are now looking at 218,000 friday for the average estimate of economists in our survey. This will not do much to change that. It is short of the median by about 10,000, but the previous number as well was revised by about 7000. Overall, we see the trend continue. Looking at Market Reaction really not much of a reaction. Futures were higher before holding on to the gains. Erik thank you. Number three i picked this for matt miller. Contractwagen ceos extended through the end of 2016. Offll remember, he squared with feet. He has done a tremendous job, truth be told. Matt he has. I am only joking a little bit because the volkswagen brand was outsold by subbarao. Subaru. Erik i cannot blame americans for not wanting to buy the pas sat. Matt it is sovietera. Volkswagen has some outstanding bugatti,amborghini, so, he has been a great job. And if you face off against ferdinand and win, he is the first and only to do that. Erik what about number four . Matt General Electric the deal might get to look from regulators. Ge will sell certain assets including servicing contract and intellectual property to an italian rival. Erik massively important for jeffrey immelts effort to transform ge back into an industrial company. In 10 years i promise you they will go back to a giant conglomerate that has a financial company. I started with siemens 10 years ago and it is the same thing. Executives like to buy things better than they like to sell. Erik quick number 5 we talk about whether m a will shut down, and there is a market that has effectively shut down and that is the investmentgrade debt market here in america. More props to the financial times. It has been 10 days since an issuance, the longest drought of issuance in at least 10 years. Matt 10 days. That is surprising. Why is that . Erik because it is a volatile market and i think more a sellers rike than panic. Not for highend traders . Erik highend . Matt highyield. Erik more news from bonnie. Vonnie Senate Democrats bob casey of pennsylvania and Bobby Cremins came out in favor of the iranian deal. Of the u. S. Isrt preparing to extend sanctions over the fighting in ukraine. According to the wall street journal, was quoted sanctions against russian and ukrainian separatist individuals and companies will be extended until march 15. In mexico, president and make it and you tell will deliver a different speech than he did one year ago. Last year he talked about reforms on telecommunications, and this year is ago is raising rising facing rising violence and a slowing economy. Ruled uberudge has will have to defend a lawsuit. If the status is changed from contractors, they would be entitled to on implement and workers compensation. In the u. S. Olympic committee id toack los angeles b host the 2024 olympics. It came after los angeles agreed to a contract that would require the city to cover financial losses. They will compete against brohm, paris, rome, paris, budapest, and hamburg. I think they have a good chance. Erik thank you very much. I want to go back to futures to remind people how eggs are shaping up after how things are shaping up after a drop on the dow. More importantly, the s p 500 futures contracts are up. Yesterdays stocks, as measured by the s p 500, dropped almost three percentage points, with an acceleration into the close, as you are you were as you were reporting yesterday afternoon. The the Hong Kong Matt Hong Kong Market close. Europe has been swinging back and forth between gains and losses. It does not look like you will recovery. Aped matt we do not see move erik we do not see a lot of movements in other markets. Oil is something we should keep our eye on. Under 45 a barrel. We will be back after a short commercial break here on Market Makers. Great time for a shiny floor wax, no . Not if you just put the finishing touches on your latest masterpiece. Timings important. Comcast business knows that. Thats why you can schedule an installation at a time that works for you. Even late at night, or on the weekend, if thats what you need. Because you have enough to worry about. I did not see that coming. Dont deal with disruptions. Get Better Internet installed on your schedule. Comcast business. Built for business. Matt welcome back to Market Makers. I am matt miller. Time for futures in focus. We are taking a closer look at the mix. What a started was in september for the fear gauge, jumping 10 , already a high level, after a record month in august. A record game. Volatility jumped in august by 135 , the biggest gain ever, and now sits below 32, a level that before august we had not seen since 2011. Joining me is bob iaccino from toe to discuss thevix discuss the vix. What do you see ahead today . Bob i think we will get a reprieve from massive selloff we have seen simply because Chinese Markets, as you have mentioned all morning, will be closed, so we get to see how much, exactly, u. S. Stocks will trade on fundamentals, especially with the nonfarm, the payroll to just reported. The payrolls you just reported. Having said that, we have only had three other closes since the trading. Tarted we have only had three other times when the monthly close was this high, and in each finishede, the vix higher at the close of the next month, the s p finished higher. You mentioned it is a fear gauge. That is the point. It is uncertainty as well. We do not know how much this will affect Global Economy and view of the Global Economy. Matt i know it inverted. Does it stay that way or flip around at some point. Does flip. K it 80 of the economists thought the fed was going in september. The market changed in a matter of two and a half weeks, but the vix is not necessarily telling us that. The vix does not tell us if it is a bear market correction. Us the market does not know if it is a bear market or correction. We will see where the fed doesnt go in the we get more worried. Bob, when you wake up in the morning, and you grab your mobile device, what is the first thing you look at what are the indicators you are looking at to get prepared for this kind of market . Espresso first, and then my mobile device. Then i look to see if the s p has reacted to china. About one year ago we all had to become crude oil experts and i have to do work for an oilbased firm, so that was easy for me. This is harder, trying to get a perspective that someone like marc faber has. I do not have that. I look at the reaction versus what is going on in china. Earlier in the show, both of you mention the Chinese Government was not brian buying equities, and that did not translate. That is what i look at, news in china versus what the futures are doing. Matt bob iaccino, i appreciate your time. Erik . Erik have you lost your appetite for common stocks . I cannot when you. There are other instruments, or specifically investing in the dead and or equity of private u. S. Companys. Michael forman is ceo of the ingest bbc in many bdc the nation. Bdcsl, in some circles, have a bad name. People are concerned because typically the loans you make or the debt you invest in is highyield and there are second secondly concerns that managers are charging too much money and transparency into is not adequate enough. Can you respond to those issues . Michael sure. Thank you for having me. We have about 20 of the market. In some respects we have change the market and brought an institutionalized approach focusing on transparency, best practices, and trying to really been great performance to our clients. Fsic since its listing, we started raising money in 2009, listed in 2014 and we have performed well. Even today, we are trading at a slight premium to net asset values. We think we have delivered terrific performance. Lets talk about high yield. You raise equity. You can limit equity. If the highyield market does fall out of bed, and it has been falling out of bed, isnt that bad . Michael well, we invest in credit. Erik i understand. Certainly there is volatility in the markets. We take a longterm approach to investing. In these markets, if you do not have to manage to liquidity, we think you can get outsized returns. Think the real risk is managing to daily liquidity. We do not have to do that. We can take a longer approach, by somewhat illiquid assets. You hat stands out for michael it is a time to be cautious. We like investing at the top of the capital structure. Inare located locating first liens where you get paid before junior debt and equity. In terms of volatility, we are of fsic. 8. 5 in terms one of the reasons people like credit is they are floating rate instruments. At some point the fed will start to shut down the path of raising Interest Rate. Start down the path of raising Interest Rate. Fixed yield assets will lose value. Floating will increase. We think we are a great hedge against Rising Interest Rates if we ever see inflation, but it is also a very defensive asset class by investing the top of the capital structure. Erik thank you a much, michael. Michael forman, the ceo of franklin square, largest bdc manager in america. Lets take you to mohammed elerian. He is speaking to surveillance anchor tom keene. Tom Mohamed Elerian with us. We welcome all on bloomberg television. Erik schatzker, thank you so much. I talk about your game theory about what markets when markets collide and the unknown unknown. What is the big unknown unknown . Back howe spill much of this volatility will spill back onto the real economy . It is a big question for china first and foremost and in the Global Economy. The big unknown is the spill back. I know volatility will continue in the Financial Markets. Willis under my Global Growth in a serious way . Over to theat come United States, and if were talking about the money, the financial side, and it goes over to the real economy, all of those impulses, can that, dr. Mohamed elerian, affect the u. S. Economy, and brings disinflation and weaker Economic Growth bring us disinflation and weaker Economic Growth . Mohammed it is a risk. It will not the u. S. Economy will continue to grow. Will not escape escape velocity, it will continue to grow. There is a risk. The longer the financial volatility continues, the bigger the risk becomes. I know you are glued to the w. A. R. P function where everybody games the parlor game of the moment, the fed. Davis an update on the give us nuance of an update on interesting you want of october is that the out for chair yellen and president fisher . Hard to it would be move in september. They would risk two things. One is adding to Global Financial instability and the second is strengthening the dollar too much, too early. My gut feeling is they do not move in september. With a move in october . If the Financial System calms down quickly, maybe. December would be more likely than october if they do not move in september. Tom i do not see a Financial System calming down. I see further elements of deviation for the reversed with currency appreciation. The ruble to 70 the other day does not tell me we are getting r state, convenient for the fed. In terms i am with you of volatility continuing for the reasons we talked about earlier, but i would tell you do not ignore two things. There is a lot of cash on the sideline. H r block today, coming back into by its own shares. Not underestimate the amount of cash on the sideline. That is one stabilizer. A second stabilizer in the system is at some point present themselves become a stabilizer. If you heard me, for the last few months, i have advised people to be much more barbelled , but most in cash, some in higherrisk ventures, because the public rockets were simply mispriced. Now, some Public Markets are more attractive. I agree with you. The most likely scenario is continued volatility. I have eight ways to go. I have to touch on what was said about Morgan Stanley the other reversalMorgan Stanley from what your old pimco said years ago, a coalesced central europe. I thought everything was clear in greece. Spreads are wonderful. Yields are wonderful in greece. Is the crisis over . Were you wrong . Mohammed unfortunately, the crisis is not over. They are not address the fundamental problem, how to generate fundamental growth in the eurozone. For now. Alm people are awaiting the outcome of the elections. Money has come back into the system, but it is basically paying creditors. A very little has made its way to the real economy. Unfortunately, it has not been resolved. It has been more extended. The fundamental issue of generating Economic Growth within the eurozone for greece has not been resolved yet. You have a wonderful transatlantic perspective with your heritage at oxford and the diplomacy of your family when you were a child. In diplomacy now of migrants europe is original, something americans there may have on their radar. Maybe it has been happening in the last few days. I would say this is borderline unprecedented, to see budapest as the wall keeping the migrants out of germany. Do you have any estimate on how the game theory of this migration will play out in europe . Mohammed this is a huge human tragedy because the supply of migrants will continue unabated and the reason for that is they are playing tragedy at home. There is a massive push factor. The demand for migrants is very low. This is not something that gets solved through the price system, ok . It is a fundamental mismatch of supply and demand. Am talking as an economist if youre going to have massive, social, political consequences, this is a human crisis that, unfortunately, is not going to go away anytime soon. Tom i have to go to the news flow and the 18 things to speak to you about this morning, we challengingth some efforts in court on three journalists in al jazeera. Ive spoken with president occ before, who makes sure he is clear of the court process. Can you presume a suspect successful outcome on liberty in egypt as the president acts unilaterally from its court system . Mohammed you had a great interview with him, and what he said to you, and what he has repeated his he has to allow tom the process. Mohammed yes, go through the process. He has a decision to make. His view had been to allow the legal system to play its course, and then he would have the theon, like you have in u. S. , you can pardon, and that is the choice he has to look at. Tom one final question how do you determine a bottom in oil . How do you determine if we find a bid in oil . Mohammed it will take time and we will see massive volatility. When you on age unhinge a market as much as oil has been unhinged, it takes a long time. Supply has been fundamentally changed in terms of its paradigm. Demand has been changed of the Global Economy, and you have no swing producer. That is a massive shock for the oil market. Longterm, these prices will look attractive. Shortterm, the most important thing is to recognize that this price volatility, up and down, is going to be with us for a while. Tom dr. Mohamed elerian, think you so much. Erik that was tom keene talking to Mohamed Elerian. We returned to Corporate News about apple. The company is going hollywood. Apple is planning to rent to the original content game with exclusive shows for it Apple Tv Service going head to head with netflix, amazon, and lets not forget about hbo. Will this company set a new standard in video . David bank is an analyst at rbc capital markets, with us now on Market Makers. That applent is it is getting into the original content game . David i think every media platform, be it bloomberg, cbs, apple,azon, hulu, or, ultimately, is one show away from relevant. Men thinkd about the transition. Nonpurely economic sense, it could be very important. If they come up with that one piece of content that all of a sudden differentiates the apple product from an increasingly Competitive Landscape as they are launching, that could be really important. Do i think a handful of shows is going to put them in the same way instantly with a Major Networks . Probably not. It is more like marketing cost. I think it is worth it. If they get a hit, it is fantastic. If they do not, it is marketing cost. Erik lets think about it less in terms of what apple could do, but what any success apple could have means for the likes of netflix, hbo, the incipient competition from amazon. David right. The tracke has record, the brand, and on that basis some will go with apple tv because they expect apple to be successful. Will they say hbo i am the sure i want to play a 15 a month, netflix, 11, whatever it might be, or will they buy it all and cut the cord on the cable . David i would take the question as the difference between what apple brings to you and what you have in your traditional tv ecosystem, it is a closed business. You have verizon competing against direct, dish, time warner cable. You always have a handful of guys who are buyers of some piece of content. We have that piece of content. You should come to us. If you take apples success to ultimo st possible ultimate conclusion, you wind up with a closed system. And if you wind up with a closed system where they become the gatekeeper, they become the owners of the master switch, it potentially prevent these other platforms from participating. So, thats potentially prevent these other platforms from participating potentially prevent these other platforms from participating, and what exists is do they withhold others . Erik we will be back with david bank covering media. Erik you are watching Market Makers here on bloomberg television. I am Erik Schatzker talking to david back david bank we have and to be talking about apple, because for those just joining us, apple is getting into the original content business. Heres what i would love to know companies do not like to negotiate with apple. We learn that with itunes and a lot of the large music publishers. Producers have deep regrets with the deals they struck with apple to get into itunes years ago. David yes. Erik why wont they feel similarly about video content . David i think about when you think about the environment in which those conversations happened around the music industry, in a sense, at that point, there was an unprecedented amount of change in an unprecedented short amount of time. Under panic, i would say, in the music industry, and there was not a lot of time to consider the circumstances consequences. It was do this deal, or be pirated out of business. I think the Television Industry to had a decade and a half sort of figured this out. They are tough negotiators also. My sense is the reason apple has start theed to streaming service for a better part of a decade it was tough negotiation on the part of content providers that has slowed it down. Erik given the fact that apple has such attractive margins, does the company feel better is it more able, ready, willing, to spend money on original content than netflix might be willing to . Netflix gave up its deal with epix, we believe because it is expensive. Is that an annex essential thread, even to the likes of an existential threat even to the likes of hbo . David you look at showtime they gave up their deals and what did they replace it with . They replaced it with less expensive, original television content. I guess they were feeling the theatrical stuff was being marginalized and that it was television that people really want to watch on the internet. At the end of the day, it was a programming strategy as much as it was a financial imperative. If i could come up with one or two shows, it is expensive, but expensive. Gglingly an original series that really gets you buzz that makes agents want to take content platform, consumers to your platform it is marketing cost. Very logical marketing cost. Erik bottom line, based on the little we know on what apple tv will be, do you think apple will be successful with it . David i think they will be successful, but not Game Changing in the beginning. Erik david bank covers media at rbc capital markets. When we come back, stocks of large multinationals have been getting crushed. What about the smaller, more domesticallyfocused counterparts . We are talking about small caps. Erik welcome back to market ,kers Market Makers everybody. Its a great opportunity to remind you what happened yesterday accelerated endedng in the s p 500 the day down almost 3 , but today we have a little bit of a recovery happening. Dow futures are up 160 points. About a fulles up percentage point. Not making much headway into yesterdays declines, but inching back and underscoring the volatility in pricing we have seen more than anywhere else i wont say that at least in equities, and more than anywhere else in oil. Oil staged its biggest threeday rally at the end of last weekend early this week in a couple of decades. Yesterday it dropped 10 , leaves everyone scratching his head. Correction is in category. Treasuries are risky because the Federal Reserve is going to raise Interest Rates, and oil is a guess, would you put your money question mark i asked marc faber, money . Earlier thisfaber hour. Intervention of all around the world by Central Banks, there is no safe asset anymore. The 1950s, itin was safe to put your money in the bank on deposit. The yield merlot, but it was safe. Nowadays, you do not know what will happen next in terms of purchasing power of money. What we know is that it is going down. I would say if i had to say if i had to turn anywhere, where, as you say, the opportunity for Large Capital gains exists and the Downside Risk is, in my opinion, limited, it would be the Mining Sector,pecifically Precious Metals Mining Companies in other words, gold shares. And i would also look, as he just mentioned before, stocks freeportmacmoran, newmont, that have been hammered. I do not think they will stay down forever. Marc faber not calling the bottom of the commodity market, but it presents value. Erik good morning once again, everybody. I am Erik Schatzker. It is the second hour Market Makers of Market Makers second hour of Market Makers on bloomberg television. Stephanie ruhle is on assignment. European stocks got hammered. Today there is recovery on the side of the atlantic. S p futures are gaining some momentum, now up more than 1 . Dow futures up 173 points. The Dow Jones Industrials dropped one and 79. 8 we have a long way to go before making up that loss. Oil has been all over the map. Yesterday oil dropped 10 . At least uti crude dropped 10 wti crude dropped 10 . It has recovered some. 45 a barrel for crude. Lets look at treasuries, which are pretty stable. The 10year yield was lower, but as stocks have begun to appreciate more in price, the yield on the 10year has climbed as treasury prices have dropped. Lets bring you up to date on the stories we are following. Vonnie quinn in the newsroom. Vonnie two days to go before the august implement numbers and we are starting to get figures. Adp says private employers added one had a thousand jobs, slightly fewer than estimates. Workers were more productive. Productivity rose 3. 3 . Employee hours and compensation were also up. Lastage applications sort week. They rose 11 , the biggest increase since january. The average rate for a fixed, 30year, held steady, just under 4. 1 . Oil has resumed following. West texas intermediate is below 45 a barrel. A government report coming out at 10 30 a. M. Eastern may put more pressure on prices. The report is expected to say Oil Stockpiles rose last week. Now we are seeing live pictures from budapest, hungary, where thousands of migrants were blocked from seeking asylum in germany and other european countries. The main protest outside of the train station here. It is the latest focal point for margaret four migrants fleeing poverty. Some countries have offered to take them in, like iceland. Erik thank you very much, vonnie quinn, with the top headlines. Chinese stocks pared losses overnight. Stillanghai composite down slightly. It has dropped 12 in august, adding to a 40 slide in july. 4 slide in july according to seminary estimates from eureka hedge, the equities dropped 10 in august, the worst month they have sustained in 15 years. There is always come at some point, a buying opportunity. Is it now . Lets ask christopher mcguire. You are timely with your calls on the stock market we talked a couple of months ago. Neutral, to short bias. Where are you now . Chris i think we are in a volatile range. The markets will be coming down, but i want to see markets lower before you back up the truck. Erik how will you know when the Chinese Market put in a bottom markets put in a bottom question chris it is bottom . Chris it is difficult. They have been the best to is this fall so they do not kill Retail Investors that have been mrs. Speculators. It is very hard. It is very much a traders market. We need to pick our points. There is no real perfect science to it. Given that it is, as you put it, manipulated. We know this. How can one invest in it confidently at all . If one is looking to be a longterm investor, a multiyear investor, you have to close your eyes and recognize one must take profits. Looking at a threeyear horizon at what stocks have been the last few months is somewhat foolish. This is still a somewhat emerging country. We have to look for deep cuts in prices. We might see that more again. When the market was trading at 4000, up 100 in 12 months, i do not think anyone should be necessarily possible with a buy and hold indefinitely. Erik have evaluations improved enough where you would be calling this market cheap . Chris not quite yet. It is cheap, but not cheap across the board. Markets could settle more. There is an implicit put. We are getting close to the point where the market falls will start to slow down or have more whipsaw activity to the upside. Erik explain how you are positioned now. Do you actually own equities and youre not particularly that long because you have hedged the exposure . Some we have been buying convertible bonds and shares as well, but we stick to large names were there are shares in hong kong. We can trade in and out. We can have more conspiracy transparency than smaller Cap Companies and taking longer exposure by buying convertible bonds, we have some exposure to the downside. You are raising the point people forget there is the shanghai market, the shenzhen market, the Hong Kong Market. If it is the mainland stocks most impacted, why not take a breather in tyler from the mainland and trade in the and stay in hong kong . Chris it makes sense. Hong kong has a substantially different level of risk. It is a good point. It is part of what we are doing. Particular in in hong kong you would point to as chief . Chris we generally look at the markets overall. We are not stock pickers. I would not be the perfect guy to be calling stocks. It is more macrolevel. Erik very quickly, chris, do you expect the chinese to devalue the yuan more aggressively, and you expect an Interest Rate cut in china . Chris we have seen five since november and i expect there is more. The devaluation of the yuan could continue. A lot of people are thinking 10 to 15 , and that will happen. Erik chris maguire, thank you. Lets bring you uptodate on futures. I just want everyone to know what is going on. Things have been moving so quickly. Right now, relatively stable. S p 500 futures contracts up a little more than 1 . Dow jones futures up 170. Were taking a quick commercial break here on Market Makers. I will be back and we will be talking small caps. Erik you are watching Market Makers on bloomberg television. I am Erik Schatzker. It is time to ask that question again will they, or wanted. They being the fomc. With me, jim bianco. People think of the fed and they official have two mandates price stability and max employment. Dodd frank effectively give them a third mandate, regulating Systemic Risk and preserving stability. Stability is what i have on my mind given what we had seen the last few days. Does the volatility in stocks and in oil, for that matter, mean the fed might not raise Interest Rates this month . certainly bill dudley, president of the new york fed, hinted at that. Stan fisher, kind of, contradicted him. Jim we have three decisionmakers. Janet yellen has not weighed in yet. That is the confusion we are at right now. You are right. Financial stability has been a big issue. If you go back over the several years, quantitative easing, the purpose of quantitative easing was to raise asset prices and create a wealth affected. We could argue whether or not that has happened. What the fed does not want to do is create a reverse wealth of and have the stock market go down because they believe and ben bernanke, now that he is in the private sector, has said this in his blog they believe qe has been a success in creating jobs. If they believe that, they are not going to ram stock markets down and reverse that. All of this financial instability we have seen will probably affect the fed and they will probably sit on the sidelines in september. What ifre is a scenario. Lets say august 21 was the morning of september 17, and the dow plunged 1000 points. Could the fed feasibly raise Interest Rates on a day like that . I am thinking who knows what will happen on september 17, but as the fed goes in having pointd to raise its basis its rate by 25 basis points, what happens . Jim the fed is a bit of a Political Animal as well. They do not want to raise rates on an extraordinarily volatile day or extraordinarily volatile period because then they say blame me for everything, whether it is right or wrong. That is probably what will happen. They would prefer the markets calm down. If we see this volatility on the 17th of a which is only two weeks away i do not expect it 17th, which is only two weeks away, and i do not expected to disappear, they do not want to be blamed for this either. Fed funds futures suggest there is a 33 , 34 chance of a hike in september, a 40 of hikety of a 25 basis point in october and 44 in november. How good of an indicator are those Market Expectations right now . Alwaysior to 2008 it was deadon accurate. Now, the fed has not moved rates in nine years. Is thist know how good new postcrisis environment. It does bring up a good point. Does it matter to the fed . If you look at the fed funds futures, only onethird is priced into the market. Does that matter . Does that matter . I think it does. The fed wants to market to be repaired and what the fed fund future says they are not is saying is they are not prepared. The only way they can prepare the market is janet yellen has to break the tie. She has to come out and say what they are going to do. Either they are, or they are not. Inwas a Dramatic Movement fed funds futures in the market would price it out depending on what she said. Erik thank you for spending time with me this morning. Jim the uncle from chicago this bianco, fromimbia chicago. As we go to commercials, here is a snapshot of the markets. Erik volatility is everywhere these days. Not just the s p 500, but smallcap stocks as well. Thegauge of volatility in russell 2000 illustrates the point. Frank gannon is the chief executive officer of a company that invests specializes in smallcap investing. Small caps and midcap have been doing better than large caps or the course of the year, and i have just run the numbers here, over the course of the year, and i have just run the numbers. You can see them on my bloomberg screen. All boats are sinking. Frank what we see in the russell erik what we see the s p 500, the dow industrial, and the russell 2000, the much tracking each other. They ended up in the same place. Frank that is right. We are still dont almost 30 from the peak of the market in the russell 2000, which was at the end of june. We have torspective, look at the smallcap correction been a normal part of what we do in the smallcap space. We had a 13 correction in the smallcap space last year from july to october. Volatility is increasing, which we think is a good thing. As a manager, we say we are allowed to be increasingly more selective, which is a positive, from our perspective. The market is creating more opportunities. Why are smallcap stocks doing better . They do not generate as much revenue overseas, they are not exposed to currency risk and we have seen that in stocks like yum , motors. Ple, general look at the volatility in the euro. Small caps do not have to worry about that kind of thing. Frank everything is thrown out at the same time. You are correct, 20 of small cap revenues are generated outside of the United States, so they are domestically focused. That is using the russell 2000 as the index. The other thing you have to look at, even though they are located in the United States and only 20 of the revenue does operate outside of the United States, you still see them think and operate like a global company. These companies are getting together and coming down the same time. This correction is another economic scare. It is a growth scare. China was the growth scare engine this time. Oft year, it was the europe them. These economic skaters happen and create opportunities. Erik to the degree that you have cash, are you putting it to work now, or are you waiting . Frank i hate to say this, but on down days, people are getting at our office. We have the opportunity to put cash to working great companies. Erik so that was happening yesterday, for example. Frank happening yesterday and last week. The biggest opportunity are in highcap equity companies. There are certain things that have happened from a quantitative easing standpoint, thanks the Federal Reserve has done, that have skewed the nonearners like nonearners lead the market to new highs. If you look at the russell 2000 today, a full third is at the highest level weve seen in nonrecessionary periods erik . S. Ik period erik thank you, frank gannon. Erik welcome back to Market Makers, everybody. I am Erik Schatzker. It is that time of the day the three things you need to Pay Attention to. Tracy alloway, executive editor of Bloomberg Markets is here, and i am delighted, from boston, james swanson. Jim, good to have you with us. Tracy is going to begin with her first of the three things. Tracy all right. Lets do volatility once more vix but doook at the the term different, structure. Tickle your screen. It is inverted. Take a look at your screen. It is inverted. Normally it goes up. Futuresmore for vix that are further out, right . What does this actually mean . It spells a huge amount of pain for people that have been selling volatility and had been depending on the upward slope for arbitrage. Jim we will talk to swanson about volatility in a second, but there is breaking news and vonnie quinn has informed. Vonnie indeed. Pursuit of area ariadndoned pursuit of from a cynicals. Alt investors expressing concern. We showed prices. Im am not sure if you had a look. Lets continue our conversation with jim swanson and tracy alloway. Jim, tracy made a great point about the inversion in the vix futures curve. What does that say to you . S. it says to me the market is nearterm worried, but longerterm basically what we have been seen slower growth, high Free Cash Flow Business Cycle and i think that is alternately what the vix is telling us. When you see these humps in the near term structures, you see what the market rate is telling you, and look beyond that, six or nine months, the market is not seen that upset. E had a spike in the vix people take advantage of that. Longerterm, i think its as complacency will rule again, and that is the way im thinking about this. Erik complacency, but complacency only up to a point, right . Although the futures curve does suggest that volatility will decline or moderate from current levels, it will still be in the 20s, and the 20s, jim, are a whole lot higher than where we were a year ago, when the fix was barely trading north of 10. Jim s. 20 is more normal and that was abnormally low. If you look at the vix over a long amount of time, you would 1822. Vix its the recent spike that had me concerned and the fact that the market is pricing at a lower fear index going out the rest of the year tells me most people think this cycle, in other words china will not bring us into global recession. I think that is the question the markets are trying to deal with. Segue fora is a great the second of three things to watch. Tracy, we heard the opening bell. Then york stock exchanges open for business. The dow is up almost 120 points. Chinese stocks are about to go on holiday for a couple of days. We have to worry about chinese volatility for a little while. This brings me to number two. Something a bit more real economy in the chinese stock market. Lets look at macau and specifically casinos which it had a terrible week, month, year even. Erik massacre in macau. Tracy the gaming index is down Something Like two thirds since its peak this year. We have had a big corruption investigation in china which is make people nervous. You obviously had the big fall in the stock market. Yuan evaluation. People are less and is yesterday about throwing away their money and casinos. Erik to what degree do you care about china . I quoted some statistics that i believed to be true which is u. S. Exports to china account for just 1 of u. S. A one percentage point contraction shortfall in benas gdp growth rate would five or six basis points of u. S. Gdp growth. Is it a facetious question is to ask . Question to ask . I try to break it down in terms of what we went through in 2007. This is a Global Financial crisis in the making . Orear china is imploding really going into a disaster mode and that is not the case. Retail sales in china are running 10 . We give our eye teeth the havoc on a growth. It is not like good compare this compared to 17 growth, but it could not a continued the way it was. Isquestion as an investor is this a Global Financial crisis in the making . The markets are signaling something and i think the term structure of the vix is an excellent question. I think longerterm investors are saying no, this is not a dealbreaker Business Cycle that we have witnessing. Germany is growing, the u. S. Is going moderately. Some countries have problems but mostly were moving ahead. Erik Global Financial crisis in the making . Tracy you always come up with tough questions. Thisnk the big question is sort of confidence factor in china and the firepower at the disposal of Central Banks to boost markets. Particularly the interplay between the u. S. , and bargaining on a tightening cycle, and china and places like europe. That is something to watch. I tend to be pessimistic about these things. Number three, the opposite of pessimistic. A rare spot of economic sunshine for you this morning. German engineering orders are up driven by huge surge in domestic demand from the eurozone in germany. We actually have some really good things happening. Erik what are we talking about when you say engineering orders . Tracy engineering machinery. The smart german Engineering Technology that we all like to talk about. This is a good time for the German Economy specifically. What does it mean for the macro situation in europe . Obviously, investors are very reliant on quantitative easing actually happening. If we start to see real signs of an inflation, is that going to derail that . Erik jim, what do you think . Will investors like you be rewarded for buying europe on these dips the way you are rewarded for buying the dips during the taper tantrum . Jim no, i do not believe so. The cost structures in europe have not come down enough to make them competitive in this environment. That would be labor costs, comparing labor costs in europe compared to the u. S. And competing countries. I do take some solace in that number this morning. Exportman economy is 50 . This is domestically german demand. That means their economy is balancing out and doing something internally to offset some of the weakness abroad. It is a good sign but i would not buy their equity markets here. I think the labor cost disadvantage that many countries have in the eurozone, italy and france, it makes it difficult to get the kind of Margin Expansion that we saw in 20092010 coming out of the recession. I would shift more to u. S. Equities rather than europe. Erik jim, thank you very much. Chief Investment Strategy and Portfolio Manager at mfs. And our thanks as always to tracy alloway, executive editor at Bloomberg Markets. Lets take you to matt miller with an update on the Financial Markets now that the nasdaq is open for business. Matt just a few minutes in the trading we are looking at 1 gains across the board. S p gaining 19 points. We were wondering if we would test the lows of 1867 we saw in august. Dow jones industrial average now up 180 points. 16,238. We are looking at gains as far as the s p and individual stocks. 471 gainers and 21 losers. It is looking a little bit better today after china was able to backstop its mainland market. Those will go on vacation for the next couple of days. Hong kong off thursday and back friday but the main that off thursday and friday. As far as home, individual movers yesterday we saw a lot of influence from oil. That was pushing Airline Stocks higher but pretty much Everything Else lower. Today you see crude coming back a little bit. Only . 20 to 45. 61 per barrel. Dont expect a lot of influence on American Airlines or delta that we saw yesterday. Take a look at nabastar. A company that would normally be influenced by oil. The truck maker oil is part of it she operation. Came down with a surprise lost in the third quarter. Its tied to as ec investigation sec investigations. An incident back in 2012 that the sec is looking into. Also, disney today on the upside right now. Just 1 beginning to 160 per share. In 16 andt earnings 17 to be about 5 higher than the street consists is because of disneys film and licensing business. Feead star wars and bobba tt figurines. Hes my favorite. Erik i figured. While the fourthlargest producer is cutting domestic jobs. It has something to do with crude prices. Erik u. S. Stocks are kind of in rally mode which is hard to say after yesterdays drop in the dow. Right now it is up about 200 points. Recovering a little less than one half of that decline. The biggest point gains on the dow, this is not a great indicator of anything, but Goldman Sachs, home depot, and apple together accounting for about 40 points of the dow s rise. Conoco phillips is cutting 1800 jobs. This has to do with the price of oil which is dropped by more than half since hitting last years high at the end of june. Many companies have gotten rid of 120,000 jobs. Here to discuss it is andrew cosgrove. Most of these oil companies, whether it is chevron cutting 1500, or shell, or conoco phillips, bateson big adjustments to their cost structure and their capital plans earlier this year. Why are they making these adjustments . I would call it more finetuning because why is it happening out . Andrew maybe some anticipated oil prices being a little higher than where they are right now. I think maybe they were looking at history and assuming maybe we bounce a little bit more from here and find a lower price. Speaks tospeech a broader term. It is bad news for the Services Company that i cover Like National oil, cameron. I think what you are seeing is a moot the technology and these its trying to Push Technology lower costs per barrel for recoveries. All that does is increase activity which in effect erik in the median to longterm great for the oil industry . Andrew it encourages more production as well. Sortkind of a double agent doubleedged sword. What their assumptions are for the oil price over the next 1218 months . Andrew i think they are lowering for a lawyer why would you be cutting jobs . Weve seen this in previous downturns in the past with a cut too much, especially in the oil Services Side with a cut too much and then never caught redhanded when things recovered and they were forced to hire and costs increased. In this case its the to a broader, longerterm trend. Erik where they facing the most pressure . . North of the border in the alberta tar sands where because of the thickness of the oil and the distance over which it has to be transported you get 30 a barrel instead of 45 . Andrew i think they are also looking offshore. Costs are a little higher on the crosscurrents of the Capital Outlay is initially much higher than some of the short cycle investment that you see on shore in the u. S. So what does that mean longterm . The Big Oil Companies will tell you they are built for environment like this. Shell, chevron, exxon mobil will say yes, we have seen upanddown so for and we have to keep investing and largely offshore oil project because that is effectively how we built the company to survive over not just a couple of years with decades. Well they sacrifice those opportunities mediumterm ve to meet thead demands of shareholders . Andrew i think you will see the migrate to projects with greater operating visibility. Those longer be time projects largeare offshore, Capital Outlays, the capital is migrating orton there. They are trying to turn that tide. Bundle these lowcost Solutions Together and reignite the investment wave that was migrating towards deepwater when we had High Oil Prices and weve reset the balance now. Erik great insight to what these ceos are going through and thinking. Andrew cost growth. Sfrove. Police requested data searching a Village North of chicago. Schools and fox lake are closed and people are being asked to stay indoors. The officer was shot while chasing three men on foot. He was the fourth u. S. Police officer killed in less than two weeks. Amazon as a feature to its prime service. Members can stream some movies and tv shows for free. And it may be downloaded only two phones or tablets. Joining prime costs 99 per year. Of three is on the way to the International Space station. Is the 500th launch from russias basin cause extend based in cause extend based extend. Se one of the new astronauts took a later with them. Erik lego makes it to outer space. When we come back, if you have not paid attention to what is become a migrant crisis in europe, you need to. It has political implications. We will be talking about it next on Market Makers. Erik europe is facing immigration crisis. Mostly refugees from syria, the middle east, north africa. In greece4000 arrived and now 2000 people are camped out in a train station in buena vista, hungary where theyve been prevented from getting onto trains to get a germany and other countries. Tony, most americans have not been paying attention to this migration crisis. They talk about migration and immigration, its a debate over building a wall on the mexican border. This is a huge problem. Help us understand the scale and the scope of it and where things are headed in europe. Tony i think you can take to ingles to illustrate two anglees to illustrate this. See 800,000 it may asylumseekers. People coming to germany saying they are persecuted, which does not necessarily mean they will be able to stay. Which compares to 200,000 last year. A huge increase. Just to put it into perspective, 800,000 people is a full percentage point or more of germanys population. Tonuy it is one percentage point. You can say that is not much but germany is a very rich country but it is actually a lot, especially compared to the past. A postwar by far record for germany. Erik what kinds of pressures is it exposing . Or is it putting on the European Union and what can a divisions is it exposing . Tony its exposing divisions on one level between countries that in very generous in taking asylumseekers or refugees. And others which are not. I will not point fingers but the numbers do show that for example sweden, germany, austria, and beenrecently hungary have very generous in taking in refugees. Compared to native population. You have one division there. And i think this is important. Europe has been built in what system ofd a borderfree travel which expanded as the European Union expanded. It has really become a cornerstone of united europe. Because there is this problem of people crossing borders just like that and chaotic circumstances, that is under threat. Jensen are the chancellor of germany has said it herself. Its like if you had a threat of whatever pennsylvania reintroducing checkpoints at the new york state border. Erik is that what she is talking about when she says that the eu must uphold the current Legal Framework . Right. Hat is as is usual in the European Union, there is a set of rules and regulations and agreements among the countries. This one says that in general the country where asylumseekers show up first, people from outside the eu, that country should handle them, process them, and also decide to send them back if necessary if it turns out they are basically economic migrants. She is saying Everybody Needs to a poll that because it is not happening now. Erik thank you very much, tony. See the him at Brandenburg Gate in the background. A chinese artists are showing to support for the yuan by becoming his own work of art. Flags tod a collage of support the global Goal Initiative to fight extreme poverty and Global Climate change. It is not mod, it is gravy. Played host tond the world gravy championships. They do to doubt in pools of like a shirt gravy. It was scored by judges based on their moves. We end bloomberg market day Market Makers. I will see you tomorrow. Is 10 00 a. M. Here in new york. We are talking volatility. How to invest during stomach churning market days. Said regulators get ready to celebrate. This is after a busy morning of Economic Data. Olivia good morning everybody. This is bloomberg market day. First, a check of where u. S. Stocks are trading. They are rallying on the major benchmark averages up by about 1 . Clearly not enough to recover yesterdays losses. The dow was up by more than 300 points. All the major averages off by 3 right now. We want to show you what is happening in the oil market. Oil is rebounding. We had positive Economic Data out this morning, including productivity better than forecasted. We you are ng