Transcripts For CNBC Squawk On The Street 20140710

Look to portugal, tenyear rocketed to 4 , was 358 friday as the european indexes there are firmly in the red. Road map begins with the sell off on the globe; jobless claims fall from a week ago, and european worries drag down equities in the u. S. Family dollar profits fall for the third time as Carl Quintanilla icahn continues to push for the sale of the company. Costco, sales flat in premarket despite same store sale numbers strong. Allergan fights back after the bid to take it over. Well hear from the ceo. Third time the charm for bank of america . Reportedly submitting another capital plan to the fed to raise its dividend. First up, though, look at the premarket once again. A number of things working against the bulls today. China exports did miss for june, 7. 2 , looked for above 10. Fed minutes yesterday show us that the tapers probably going to end in object. Portugal worries about banks. Gaza Ground Invasion looms still, and industrial output from france and italy, worst misses seen in two years. Thats the negatives, and thats impacting now, but jobless claims better that morning, down 11,000. On a fourday sample. Four week moving average came down, and thats what wow want to see, continued improvement in the u. S. , labor market, europe seems to be spooking the markets because the fed minutes, nothing new, yes, the end date for october, but they didnt say much about higher Interest Rates. Thats to figure out next. Oil, though, down ten straight days. A record. A head scratcher given the worries we have in the persian gulf. Without a doubt. And, in fact, we saw, obviousl,; the response in oil when that began, but youre right. Well see how long that continues, not having, perhaps. Effect some thought on airlines, well, delta went down more as a result of not great numbers there, but American Airlines yesterday, quite the opposite being strong. But, yeah, listen, commodities may be the concern. You have a bid for gold, shooting higher. Had a good year overall, and thats what you see in the bond market, treasury, and, i mean, here we are, gold right now, up another 1. 3 , and temperature year yield below 250, who would have thought . Yeah, me men tum names, Lumber Liquidators and pop belly lowering forecasts, but not by a little. No, and getting punished. Tractor supply also. We kid with jim that these are keys to the market, but they are extremely successful stocks to own, as you said, momentum trades. Brutal. Tractor supply also. That worries me, perhaps its a threesome again. Kidding in the sense, but we talk about these names, carl, in all seriousness because they are reflective of momentum in the market and what happens when it reverses. Perhaps more finds on the Housing Market as well. Lets talk more on the markets today. Lets bring in john manley, chief equity strategist here. John, we went through the negatives, but what is causing sell off . All of them. I think last time i was not worried was march of 2000, nothing to worry about back then. Bull markets climb, walls and worries, and days like this is typical of bull market corrections, nasty, brutish, and short. People dont believe deep down. Short meaning . Are we vulnerable to a 10 correction . 4 to 6. We had a lot of those. When we get that much, scares people enough. Thats thomas hobbs on life, not markets. Im an intellectual, but i hide it well. All right. For those waiting for a tradeable correction, this is it. How long do you wait . This is one of many. Give it a few days to settle. You can get the feel for it. Its trying to get the sense we scared people enough. Why is it it takes 5 , why sometimes 25 to refresh the skepticism makes things go higher . I think we get there quickly. I dont think portugal is an enormous situation. Dont under play it, but you dont know what happens. In all these things, it fuels worry as people see its not the end of the world. Expectations for earnings growth, 5 to 6 usually prove conservative. Positive enough to keep the market going and offset Global Concerns . I think so. Something you look at. Im starting to see signs of the numbers of, expectations rising, a little bit of juice in them, a good sign. Somethings happening. Earnings coming through okay, but i get the sense the annual numbers are going up. Not the case until very recently. People ask questions, not maybe about portugal, but about europe. What happened . For a while there, looks like they were getting their act together, and now the manufacturing numbers are pitiful. They are not good. Disappointing, but back to the drawing board. Theyll try something else. You know, they have a template, whats done in the u. S. Works, our system is more effective and efficient than theirs is, but they have something to follow. Its not that bad. I think the central bank will do whatever the central bank has to do to make things better or try to make things better. Whats interesting about todays session is we see correlations come back, risk on, risk off type of stuff, gold higher, treasuries higher, u. S. Stocks down. Unusual given what weve seen over the past month. Correlations breaking down all over the place in asset classes. The last two months nothing going on, less than 1 moves, nothing happening. Its starting to get starting to rev up a little again. In terms of activity, volatility. I mean, its not unhealthy. Id rather market go up 25 points every day the rest of my life. That would make me happy. Its not going to be that way. You have to refresh fear, and markets like that today and in the next week are like. Defensives in the markets . No. Im still in basically cyclical sectors. I Like Technology and the hightech and old tech. Im in industrials. I think america builds out, earnings are coming through. Energy, i think theres going to be a big build. Its not the price of energy i play as much as the activity going on to expand Energy Production and delivery. I dont need to tell you on housing, the number of companies that today, Lumber Liquidators, usg, stock is coming down. The clues about a slow down in housing, and retailers saying on consumer spending, this week alone and more today. Thats two big pieces of the economy. It is two big pieces. They are early cycle stocks. At some point in time, that economy gives way to capital expansion. Thats one of the reasons were playing industrials. Whats weakness in housing is weakness versus expectations, weakness versus what it was two or three years ago . I think the Housing Markets doing okay. Its not getting the daytoday stimulus with rates down, fed added money to the system. What about Profit Margins . Continues to be the date, whether they peaked, whether they can sustain high levels . I think Profit Margins are high by standards, but high for reasons they were not before. In the past, we had a Strong Economy for two or three years when margins got to the level. Its a Strong Economy. American corporations are more efficient, and if we get a better economy here in the u. S. , i think youre going to be pouring more revenues over very lean. Youre on tptimistic. Looking for good guidance . 5 can happen at any time, and im willing to change my mind, but feds accommodate, and evaluations are moderate to me. We get a better economy, we could have been saying the same words, and, in fact, heard them so many times, and yet we have not got that better economy, but an okay. Right. You know, the way i look at the target, make money when things when the economy goes terrible to bad, from bad to okay, and i think its okay. Going from okay to bad . Yes, exactly. Bad to terrible is really bad. Been through that too. In the end, after reading the minutes, are you in the school that yelleyellens hawkish or m dovish . Shell follow her own path. I suspect shell air on the side of the angels. Theres a riskreward there. If i had to place a bet in one sentence, earnings go up before Interest Rates do, and thats good for the stokt. Good for the optimism on a down day in the markets. Family dollar out this morning with first Earnings Report since icahn called on the company to put itself up for sale, profit of 85 cents for the fiscal Third Quarter, a miss. Revenues above consensus despite a 1. 8 drop. Costco Beat Estimates helped by rising fuel prices, transactions up 25, and fx less head wind. Really, the only thing to worry about was electronics were flat, even though theres inflation in good food. They have momentum. Interesting to read the quote from the ceo of Family Dollar, results reflect economic challenges facing our core customer. Hard to figure out where the core customer is in terms of consumer spending. If they are challenged, they would go to the dollar stores, walmarts of the world. Those are the ones that are having trouble right now, and the costcos doing better. Not all in trouble. Family dollar, i saw that quote in the last quarterly releases. I think they trot it out on a regular basis. Consolidation continues, of course, to be a Big Conversation amongst investors in Family Dollar area, Dollar General seen as a potential acquirer or walmart, unlikely as that seems, hope springs eternal maybe the small store format shows itself to be advanced by consolidatioc, but well see if any of it happens. In the meantime, stocks this company, particularly not performing well with Dollar General, an outgoing ceo in may of next year. People think the deal when it happens speaking of walmart, Family Dollars going to start offering wine and beer next fiscal year following in walmarts path. They see q4 comps flat, the coming quarter, and analysts did not guide lower, which suggests to some, at least if youre a believer that the worst is in after, obviously, the tough environment, you know, theyve been a part of. They are continuing restructuring, right . This is the defense, closing stores, opening fewer stores, cutting costs when they can, and carl icahn still pushing the company. Yeah, hes not going away. More than 99 , right . Costco performing well. Yes, helped by gasoline prices this particular quarter, and, again, an annuity business, most profits come from the fee and they can put up respectable comp keeping margins where they want them at 15. Interesting. Loyal fan. I have not been to a costco in ages. Really . I have not been in hours. I think you need kids to go. When we come back, allergan ceo and what he told jim on mad money last night. 11 00 a. M. Eastern, jeff jordan, previously ceo of open table and president of paypal. Take another look at futures. We have not had a 1 move in the s p since april 10th, and today might actually be the day. More squawk on the street from post nine in just a minute. Really. So our business can be on at ts network for 175 dollars a month . Yup. All five of you for 175. Our clients need a lot of attention. Theres unlimited talk and text. Were working deals all day. You get 10 gigabytes of data to share. What about expansion potential . Add a line anytime for 15 bucks a month. Low dues. Great terms. Lets close. Introducing at t mobile share value plans. With our bestever pricing for business. Been awhile since we saw a futures board like this. Looking for a big drop at the open today, dow down 160 points or so on a number of head winds well talk about. Bill ackman trying to shake things up at allergan, and the ceo has a bone to pick with ackman and came out swinging on mad money, take a listen. Bill is saying that you have gotten, and im quoting, a disabling conflict of interests which arises from the fat that you will lose his leadership role at the company and likely his job as a result of the transaction. When i started allergan, it was worth 2 billion, and before Persing Square appeared, it was 42 billion. You know, i got enough money to put a meal on the table, and, in fact, unlike so many other ceos, im not interested in what happens to me short term. I only care about Value Creation for allergan stockholders. Interesting from here on out. Its going to take time. Thats important to point out as well, interesting that he decided to come public. He also met with a number of reporters on background yesterday making the rounds, if you will, in new york to put out a few story lines. Which weve heard before. Namely that vail i cants product line in terms of ogranic growth is not really there, but importantly, when i talk about time, yes, this is going to potentially ramp up, but you may be looking at a december shareholder meeting, and, certainly, theres months to go here in terms of allergan fighting ackman and say its not way it appears to be, would be a mistake for allergan shareholders to vote for the deal when they get et opportunity in terms of so listation which they need 25 for. Not easy. Vote for the consent, hold shares to vote them at the meetings, and consent is voted in order to then vote 50 shares to get the board out, if you can follow me there. Well see what develops here, allergan is fighting the fight now, and he said time and again im not in this for any other reason than to do what the owners want me to do. Interesting, he say this on mad money and in other conversations, hes hearing from the shareholders a potential acquisition by allergan may be the number one thing the shareholders want him to do with the cash that he has, given the Free Cash Flow they are generating, and the debt capacity they have on the Balance Sheet. That stirred people ina bit yesterday. Journal reported on it, and i also say he shares that over time. And shire, citing analysts, trying to be taken over by abbvie. By the way, we have not heard from shire since abbvie made a proposal. It would be an inversion if allergan were to do that, but inversions require shareholder vote, and that begs to question, would shareholders allow it to buy cher to avoid vail yent. You take up the debt capacity on the Balance Sheet which valient needs, and you would not need a shareholder vote. That would be something to do, but if hes a man in favor of rewarding shareholders, he has to make that decision whether thats the best way to go. And valeant could raise the bid. Couple nice pots boiling on the m a stove. With activists and big stakes. Of course, that was unique in that he teamed up with the operating company to do it, hedge funds said, how is it legal he knew about it . Of course, it was, and the same response was, how can i get a deal like that . When we come back, looks like a day to fasten the seat belts. Would he have a helmet on, david . Maybe, maybe on the desk. The desk. Not helmet on head territory yet. What art cashin has to say about it, and a look at the trade, dow down about 170, and more squawk on the street from nyc in just a moment. I make a lot of purchases for my business. And i get a lot in return with ink plus from chase. Like 50,000 bonus points when i spent 5,000 in the first 3 months after i opened my account. 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Is that really what this is about . Well, its 90 of it, yes, yes. Its been brewing for a couple days over there, and it started in the commercial paper market in a bank subsidiary, and they had to defer a payment, spread to the bank itself, and the bank is down 32 over the last four day, and portuguese market was down, dow equivalent of 750 points, so that has spooked everybody. Its begun to spill out into some of the other club med areas down there, a little in spain, a little bit in italy. While you were speaking, i think we have breaking news on portugal. Lets go to michelle carusocabrera. Reporter to followup, the regulator in portugal announced they would suspend trading in the shares of the Problematic Bank talked about tonight pending material information. So we are waiting to see new news about anything to find out. Remember, its initially the problems with the Holding Company that art was referring to, but the bank has investments in the Holding Company, and they have clients with exposure to the company and, hence, the dramatic decline seen today and several dayings as we wait to see whais gone on there, and theres concerns with the bank over the last couple months as welcoming to the headlines. Carl, back to you. Michelle, thank you very much. With all that in mind, art, i mean, futures are weak, but they are the rustsell will be smacked the worst today. The russell, social media groups, feeling on wall street those positions are heavily levered, one of the reasons why you saw an 8 drop in a dozen stocks without any specific company sensitive news. Art, trying to gauge the sort of level of worry right now. Portugal is a small country. We dont follow it too often, but we are having deja vu to the european stock crisis when the u. S. Had a 10 correction. Does this spiral the idea of the bank and sovereign to other bigger countries in europe, or didnt the ecb fix all that . Im not sure they fixed all that. They talked a good game, but well see how well it holds. What you got to frvt here and everybody is sensitive to is the concept of contaigon. As they like to say, rarely is there ever just one cockroach. If its isolated this one bank, thats unique, but you got to think they have dealings with others that may start things in a domino effect. Art, stick around for the open . No, ill hang out. Art cashin stays here at post nine, and well get the opening bell in just about four and a half minutes. [bell rings] time and sales data. Splitsecond stats. Its so close to the options floor, youll bust your brainbox. All on thinkorswim, from td ameritrade. Youre watching cnbcs squawk on the street live from the Financial Capital of the world, opening bell in 90 seconds, and theres a lot to consider today given the worries out of portugal, weak macro data from the european continue tent, oil down ten straight, planes back to the sevenyear low. We have to make sense to this all in addition to high profile profit warnings by a number of high momentum names, so to speak. Art cashin still here at post nine. You said portugal is 930 of this, and some argue fed minutes confirm what they thought, serious about tapering, and theres no additional whisky in the punch bowl. I dont think they surprised anyone with the tapering in object. Fisher had it telegraphed that much earlier m i think its 90 portugal and europe as a whole. Seeing steep declines as the u. S. Market opens here across europe, france down 2 , germany, belgium, i mean, really, declines throughout the board, like the days in the debt crisis. I want to talk levels really quick. What are we watching . Well, if you do enough damage, i would be careful if we break s p 1928, 1932, thatll do damage to the charts, and also, keep your eye on the risk monitor profile. Gold is up nearly 20, and watch the 10year, see if the yield goes below. 25. Losers out pace winners. Bar ji clays starting the launch of the leadership index. Over at the nasdaq, a visual spk kl with women in wireless lighting system play in new york city. All right. Some of the movers touch on i mean, we dont talk about a it lot, david, but Lumber Liquidators. Q2 comps down seven, lower their estimates on earnings. They now say 265 to 3, prior to to the 26 0. A clue on housing or worries about highly valued stocks . I think both, perhaps. Yeah, youre talking 40 to 120 back to 55. That is the downside of momentum names, and this is a name we kiddingly refer to as the key to the marg, but in part because, of course, it was a strong moe men tum name. To be fair, thats slowed for some time, and its not that the stock has not been in a downdraft, but numbers you cited are certainly ringing a great deal of selling. Investors get out when theres no momentum in earnings. The housing demand, the demand saw earlier in the year did not keep pace in may and stocks like home depot fell in sympathy as a result. Worries on depot and lowes and whether or not they are affected. Stocks in the red mentioning weak macro trends in residential remodelling including home sales, and, david, as a corollary, worst performer on the s p right now, tractor supply. It is tractor supply, yeah, just very funny, and we emailed yesterday, when cramer saw it, as a result of both names we an talk about being down sharply. Also, a misthere for tractor supply, and so that stock, percentage wise not nearly the losses, of course, we are seeing in Lumber Liquidators. Meantime, Family Dollar, limgted brands with comps, 2 below the estimate of 31. Of all the problems that the malls have and retailers have, apparently victorias secret is immu immune. 3 comp on up margins. Good if youre based in the mall these days. They have been consistent. They dominated competition, and theyve been at a strong price point over the more high end sellers, but it is interesting to see retailers come out after costco was better, Family Dollar worse, and the comments about the Container Store, still, i think people, that resinated the funk with retail, speaking generally about the industry. Pot belly disappointing. Cant paint with one brush in retail. Its company specific, and as much as you want to draw corollaries from one name, its hard to do. Even across the same space. Its income level specific and who the customer is. We continue to see so this sort of twospeed recovery. All of this against the backdrop, of course, that some argue is the seminole change, which is people just simply use their phones and devices to hit the internet, the benefits of the likes of amazon, which will have, what, 90 billion in revenue this year. I wanted to stocks up, ventas does a lot of things, active on the deal front. None are in danger in any way, but the stock is up this morning. But, all right, give me this one. Why . Well, apparently the former chief accounting officer and controller was having an inappropriate personal relationship with an eny partner. That was enough for young to say we can no longer audit you, last two years, get someone else to come in and verify them. Shouldnt be any trouble with that, but you dont want to see inappropriate relationships that getting in the way of accounting at ventas. Just wanted to share that one, you know, lighten the mood. We cover it all. Also time warner. A number of incoming calls. Sun valley going on, kayla mentioned this, the ceo of the companies, the bells, the balls so to speak, we talked about the possibility that given the con sl dags going on amongst the distributors of programming, those who produce it may feel the need to consolidate. That may be something that plays out over time. But the idea that that is going to happen in rapid order, i think, perhaps, is people getting ahead of themselves. Yes, time warner like a number of other company is not family controlled, no dual class voting structure, slimmed down dramatically, of course, with all the spends, aol, time warner cable, and now time inc itself dispatched over the last number of years. All that being said, dont look for anything near term. Yeah, i even said on our own air i believe murdoch has shown appreciation for hbo as a service, and i thought they should change the name to hbo given the success of the service, but nothing going on right now, keep that in mind. Over the next couple years . Sure, its possible. Maybe cbs and viacom get back together . Maybe google buys them all. Google buys everything. Theyll buy dish and time warner. The goto this week. Just generating the cash flow they can buy. Depends who they have coffee with. Did you see dish came out as urging the fcc to vote against the time Warner Comcast merger . Vocal comments there. I think hell do whatever he thinks gets leverage in any way to help him in certain ways, and coming out against is better than coming out for. Not clear it has. Although, again, some extending the timeline for that review, deeper into next year. Yeah. Keep your eye on housing today, the big narratives at the open, among the worst performers on the s p, home depot, lowes, masco after Lumber Liquidators lowered guidance. Owens corning warned on roofing, not something you want to see, affecting companies dealing in residential and commercial as well. Thats one thing to watch. Still dont have a 1 move in the s p, but getting there. Yeah, seeing volatility pick up for the vix. It is hard to believe we have not seen that kind of break. Yesterday, the stock market went up half a percent, so the dow didnt actually see the first three day losing streak in several months. Today, obviously, a different story. Who saw the europe news coming in portugal . Yeah. Did want to come back to m a, mentioned briefly, but worth coming back to again. A number of days since abbvie, the Largest Pharmaceutical Company in the United States, made a fourth offer to acquire shire, tlc, another episode called inversion if successful. Never willing to go hostile, and the deadline is approaching, july 18th, has to make a decision. Shire has yet to respond. Some saying thats a sign that theres a willingness on the part to come to the table. That would be the hope of people close to abbvie. From what im hearing, no talks taking place at this point. Keep a close eye on that as it potentially develop, and likelihood there has to be that if shire does reject abbvie might most likely will move ahead with a hostile bid. Based on conversations i had, although, we shall see. You have a lot of conversations, a lot going on. Have to be. You can talk to the same bankers and lawyers about numerous deals because theres a lot of cross pollination going on. Overlapping sectors. Health care, food. Health care is with the inversions, fuelling some of it is certainly extraordinary active. Health care, technology, and chicken, the three m a areas right now. Unh downgraded by jeffreys from a hold to a buy on valuation, clearly not helping the majors, and i was struck by wilbur ross on squawk, how much he bought versus selling. Sold six times what they bought in 20 14, and ross, a wizard in disstress, debt and equity not surprising in his words given the market at these highs. Down 140 points right now. You wonder on big drop days, what it means, whats next, the long term perspective at the open, look, the direction is higher, earnings better, and the fed is not in a hurry to raise rates. Does not feel like well revisit the period where all we did every morning was looking to europe until the old ltro. You reminded me of that, came along, and then suddenly, everybody get better about the ability of the banks in europe. We came a long way over the years. Draghi put action behind words. And banks repaired Balance Sheets to a large extent, this one in portugal not as much. Get a taste of u. S. Bank earnings in the next few days f sure. Lets get to bob on the floor. Good morning, bob. Morning, guys, volume heavier than usual. Small caps worst than big caps and Home Builders on the weak side. Lumber liquidators, the poster child for Home Improvement. They cut guidance in half. They talked about 59 to 6 1, and estimates at 90 cents. Everybody is stunned. Bears on this for a while, and they spotted this back in april, but nobody expected that kind of cut in their numbers. Heres what management said that got everybody talking. Improvement in customer demand experienced in mid march did not carry into june. Wait a minute, cant blame the weather. Clearly the remodel boom from last year is not carrying over that much into this year, and you see weakness in Home Improvement names, the whirlpool, mohawk, those things. Cyclical recovery, Home Builders stocks did well, and this year, not as after and we have an issue because its not moving quite as much, Building Materials weak, watch beacon, for example, Beacon Roofing there, usg i highlighted the other day, near the lows of the year, down another 2 today. Tractor supply, david, and i share your amusement of this. They called it the lows of rural america, obviously, a smaller scale, but people buy farm equipment, tractor supply, a small company, but they, too, came out lowering numbers dramatically overall. They tried to blame weather a little. Feeling is this is also part of the same story. Heres what the retailers need now, four things over and over heard since the market closed. Improvement in household formations, wage gains, home prices, and fewer stores. This is the one thing retailers can control, fewer stores. Lumber liquidators had 150 stores at 2008, now . 340, doubling the number of stores out there, and thats true with an awful lot of companies that are out there. They didnt close a lot of stores. They closed some and opened new ones. Youll hear that more in the next few days. Lets talk about the restaurants, fast casual, potbelly with negative comments, but its not moving dramatically. Theres the one fast casual stock doing well, noodles and panera bread not doing as much. I call this the momentum stucks of europe because bonds can have stupid valuations too. Just Like Companies like pandora and other ones in the group, internet names are silly, and so they can here. What we need here is some clarification on exactly what the debt holders are going to be responsible for because this still very fuzzy. They can lose money and should be clarified overall. Finally, guys, japan. I watch japanese brokers, mitts bits si, weak all week this week, down 7, 8, 9 , sometimes leading indicators of the japanese stock market. Back to you. Thank you very much, bob. Back to allergan, interesting conversation with cramer and pyott, the man who runs allergan, under siege from ackman. He seized on what it claims, and these are claims, of course, is the lack of ogranic growth from the Product Portfolio at valeant as a sign its a company desperate to do the next deal, and if unable to, stocks suffer as a consequence. Certainly well get Second Quarter numbers from valeant and may get Third Quarter numbers. They had questioning of stainability of the valeant Business Model. We really question the stainability of the valeant Business Model in entirety. We observed what happened to medicine when acquired atted end of 2012 and beginning to see same patterns of declining growth, and the cuts to allergan would be higher. Meaning the cuts in terms of what they would do for research and development and that nature and the inability, at least in mr. Pyotts view to continue to do the rd needed to extend and advance products they already have such as botox for other therapies. Of course, there was a significant sale by valeant, nestle of a number of drugs, the rights to restalin for 1. 4 billion in cash. That deal has got approval by the ftc, but have not seen the deal itself closed or even announced yet at this point. When it is, you can expect that allergan attacks, and, in fact, they choose to do so saying, yes, we granted approval to the potential transaction. This is what they have to say about the nestle deal, again, to the very point again. The disposition, the desperate attempt to disassociate itself from the rapid decline of the products, the ones i mentioned. Core performance, striking example of the weakness of rapid acquisitions under investment restructurings and said they should make a full disclosure of the performance hinted it. Its not a hint when you look at the june 18 about that divestiture. Now they dont have to show, but can be shown as a discontinued operation. More to come from this entertaining, not fascinating fight. Lets go to the bond pits now for a look from rick santelli. Whats going on at the cme group in chicago . Seems as though the fixed income market is, well, what we talked about really for most of the year. When things get questionable in the equity markets and even if the reason its questionable is a portuguese fixed income market, all roads leads to treasuries. Yeah, call it flight to safety, but in many ways, its not that. Its more of a hedge, but we could debate semantics. Look at the chart of the twoyear. Yesterday was intraday, popping up at 52 level, and challenge threeyear high yield closes. This chart did not challenge on a closing basis. The september of last year high yield closes, so the resistance just above 50 basis points remains in tact. Look at the intraday of 1 10year i referenced, we briefly traded under 250, settled, and now 255. That one low on the bottom there, may 28 th, i referenced it many times, 244 yield close, should we challenge that on a closing basis . Things could get rather exciting. If we look at whats going on in the boon, and this is key, this is key. Lets open that chart up to january of 2012. You see all those spikes there . They are all basically testing historic low yes, owl within a basis point of 116. We are now in the high 1teens. Pay attention to that. Go to the main protagonist as of late or antagonist, depending what market you trade. Thats the portuguese market, yes, only a flutter in the grand scheme of things, but we had flutters turn into something more, the butterfly effect. Yes, as you can see, definitely spiked up. The last chart, a lot of people are ignoring this chart, and its not a leading indicator, but nonetheless, dollar yen, it is challenging that february 3rd levelings about ready to break out. Technically, where it closes today will be significant, carl, back to you. Rick thank you so much. Rick san at thely. When we return, talking with alan and the talk on the crisis in the middle east and where thats going to go soon. Well continue to stay on top of the market. Again, dows down 165, s p down almost 19 points as weve seen as our first big selloff in basically a couple months. A lot more squawk on the street back in just a minute. F provokes lust. It elicits pride. Incites envy. And unleashes wrath. Temptation comes in many heartpounding forms. But only one letter. F. The performance marque from lexus. Markets, dows down 171, s p just about at a 1 move to the downside, well see if this holds as the bears can stand their ground. Meantime, not helping the market, israel escalating the air assault in gaza, targeting rocket sites and underground tunnels as the Group Continues to target sites in israel. Hamas reportedly firing more than 350 rockets since tuesday with one intercepted by israels Missile Defense system over telaviv. Joining us on the phone to share the perspective on the deteriorating situation, alan dershowitz. Good morning. Caller thank you, i just got back from dinner, having breakfast with binge binge, and they think they can really frighten the israel ris with the rockets that reach jerusalem. They were not aware how effective and sophisticated the iron dome developed jointly between israel and the United States has been in preventing rockets from causing casualties. Remember, the difference is that israel builds shelters for their civilians, hamas builds shelters for terrorists, not allowing civilians into the shelters. They use civilians as shields, putting them on the roof of buildings, forcing children and women to go in areas from which they are firing rockets, putting israel to the terrible choice of allowing rockets to endanger their own civilians or risking the lives of palestinians. To the point, alan, if the dome is effective, why continue the offensive . Its not 100 effective, just 90 effective, and theres going to be a rocket that will hit the parliament, a kindergarten, a school bus. Imagine the United States allowing rockets to hit new york city with a 90 effective system of rebutting them . Of course not. Any country in the world goes in to stop the rockets, but hamas tactic, the dead baby tactic, put babies and children in harms way to fire rockets from near babies and children in order to induce israel to fire back to kill babies and children to show the babies and children on television and claim that they are the victims. Look, this started many years ago when israel abandon gaza, there was no military presence, and there was no seize of the gaza, and then hamas fired rocke rockets, and then israel alan, while we have you, since there is no evidence of a cease fire right now, what is it going to take . Caller hamas stop firing. No country would have a cease fire while rockets are fired. If hamas stops firing, israel will, obviously, stop responding. When does that happen . I mean, is israel crippling the infrastructure inside gaza enough for that to happen any time soon . Caller not dleclear. If it does not happen, theres a ground attack, and thats why 40,000 reserves were called down. Ask what any country would do. Israel is the only country in the world sending leaflets warning, tvn calls, knocking bombs warning civilians to get out of the area. If they choose to be human shes, the responsibility is clearly on the shoulders of hamas. Israel has failed to take a lot of action against rockets and against terrorists because there have been civilians and children in the area. They are far less effective. In fact, theres a lawsuit now pending in israel asking the military to ignore human shields and to attack these targets, and so far, the Israeli Military and Prime Minister refuse to do that. Hamas is firing with impunity from certain areas where they have human shes, a double war crime, using human shields as a war crime and targeting civilians is a war crime. Certainly the situation in iran and syria not making it easier. Professor, well have you back as it develops. Thank you. Caller appreciate it, bye. His new book is available my life in law is available now. Good morning, carl, starting with Energy Prices because you talked about the conflict in israel. Actually, less concern about geopolitical events in the oil pits here today. West texas interimmediate dropping in the session under 102, and brent under 108. We are back up slightly now, but i want to point out that wti closed after a nineday losing streak, worst streak seen since 2009, and certainly today, prices are poised potentially to close lower again. Meantime, down 2 in a week, down about 4 on the west texas price over the last ten days alone. Now, as the geopolitical premium is off the table, they focus on the decline seen in u. S. Equities as one issue thats bringing oil prices down as well. Meantime, i want to point out that geopolitics and safe haven buying is boosting gold today. Earlier in the session, up about 20 flirting with 1350 level, backed off now, and, of course, the fed minutes yesterday boosting gold buying as well. Guys, back to you. Jackie, thank you very much. Up next, more on this mornings market sell off, talking about where we might be headed, particularly after europe closes at 11 30 a. M. Our time. Does that change the dynamic . Well see. Squawk on the street coming right back. Ty summary score consolidates the ratings of up to 10 independent Research Providers into a single score thats weighted based on how accurate theyve been in the past. Im Howard Spielberg of fidelity investments. The equity summary score is one more innovative reason serious investors are choosing fidelity. Call or click to open your fidelity account today. Smoking with chantix. For 33 years i chose to keep smoking. Because it was easier to smoke than it was to quit. Along with support, Chantix Varenicline is proven to help people quit smoking. Its a nonnicotine pill. 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Ask your doctor if chantix is right for you. Welcome back to squawk on the street, ten seconds away from breaking news, post sale invenn stories, drop in jobless claims, but the news continues to be europe as portuguese flutters seem to create bigger waves throughout the global system. Up half of 1 , up half of 1 on may post sale inventories, and the sale side, up seventenths. Those are close on the top line in terms of inventories, up half of 1 is expected, 7 10 is light on the sale side, no human revisions from last month. This is a Second Quarter number so well use the data to try to handicap whether the widgets add or subtract. Well monitor that and, of course, the notion we continue to flirt with 2. 5 on the u. S. 10year. Back to you. Rick, thank you very much. For more on the data and markets, bringing in senior economics reporter, steve, and, steve, we want to talk about the u. S. Data and fed, because europe is front and center right now, question on the ecb, does resurgence of concern here about the banging system in europe and impact on sovereigns make it likely well see a full on qe out of the ecb . I think thats got to be on the table, and thats an excellent question. Look what happened with the European Data, every single one of them had a negative number and sign put out, especially on industrial production, and all worst than expected by economists and by the street, and so all that is raising questions. I think what mario draghi said yesterday they would do all they could and promising dovish comments on bank policy and urging europe to get the act together on reform, something the central bankers had to do for quite some time and not got the response. A lot of commentary as to whether or not, you know, they use this time period here where there was stabilization in the system and didnt use it for reforms, and now thats coming back to haunt them with issues that we saw today, and if you saw what happened, you know, what happened with the portuguese bank, spanish bank, greek bonds, and so i dont think its a fullfledge element here, but something worth watching, a setback, especially when you look at the gdp numbers. Its funny, it takes the market, reaction of the market to get european policymakers, even the central bank to move. Thats a recuring theme. Steve, also i want to Say Something about that. You talked to the european guys as much as i have, and ive always been astonished how much less the Market Reaction matter to them than u. S. Policymakers. You think . Always my experience is they they the market is this crazy, volatile thing that doesnt really factor in in a major way. Record bond at italy eventually, yes. I do, steve, want to get on the digestion of the fed minutes, anything new there . Anything to trade off of Going Forward . The question at this point has to be, when are higher rates coming . I think thats right. There was not strictly speaking on anything new on the timetable for rates, but i think what that did for the markets, i think what people do is, well, no new information there, no attempt by the fed to change opinions, which means the consensus stands. If there was a reason to trade on it there, it was that. It was that were on track to end qe this year as planned, and, you know, not really new information on object being the date, but the fed made that more affi affirm, leaving in tact the notion of the market that the first rate hike coming sometime in the middle of next year, call it june, and then along with that, the fed is going to hold on to that Balance Sheet. All right, thank you very much, steve, senior economics reporter. Bringing to the markets now for reaction on the latest data, the chief equity strategist with fed rates, and jack, executive Vice President with cio. Good morning. Phil, you got 2100 target year end, looking for gdp to snap back . Ride it out, and for how long . Look, the concerns about europe are certainly legitimate. I agree with what they were talking about, this probably raises the need for draghi and ecb to do something. This concern issues in the middle east, et cetera, create some instability here near term . Absolutely. We use that as a buying opportunity, 5 pull back this summer is welcomed, and were very comfortable with the 2100 year end target on the s p. It seems like youre a lot more worried not just earnings subpoena but valuations too. Yeah, i think that the markets been fueled by just about every factor besides valuation and fundamentals, and i get a little concerned as we enter earnings season when we come face to face with the Earnings Results and realize we trade it at 18 times pe and maybe 17 times forward pe, and, you know, it does, you know, force us to tightens seat belts and wait until we are back to the, you know, trash is cash policy that the fed is perp perpetua perpetuating. Where do you park in the meantime . In the mean time, were in. You know, we have been in fully invested, continue to be fully invested, just ride through the rough patch, and i actually view the European Data as a positive. I think that this is finally going to get the European Central bank off their chair and stop talking and start acting, and, you know, i was a little concerned earlier. Maybe a month ago, and now i need qe in europe to make sure the story keeps moving forward. Nothing like a fire in the living room, phil, to get people to move. Do you believe portugal somebody sent me figures, total market cap of total public traded companies, 77 billion, s p 17 trillion, phil. How much an effect long term can the country have here . Next to nothing, that if you looked at, you know, greece, portugal, you know, some of the smaller countries, Economic Impact on the ecb or the United States is demin mus. Its a concern over a couple weeks in the summer, longer term, its really not a Material Impact on u. S. Gdp or market performance. Jack, i wonder your take on a 10year treasury yield below 250 and the pushpull relationship between stocks and bonds, which has not been that correlated so far this year. Remarkably, and, in fact, for the first time in 20 years, stocks, bonds, and commodities up for the first half of the year. Yeah, its remarkable how correlated everything is. Looks like we are starting to see correlations dispate some, and i would like to see correlations change. Im a macro invester, so i want to get between markets, not just necessarily buy everything and hope the whole thing goes up. How about i mean, would you be willing, phil, to maybe take some off the table when it comes to the smaller cap names . Russells going to have the worst week since may of 2012. We did that earlier in the year. It gets back to the march time frame we did raise a little cash, lightened up on economically sensitive areas, the small caps, a more defensive rotation in place right now. The plan is to rotate back in an aggressive sensitive rotation later in the year, but right now, i think we are comfortable with the defensive positions that weve got. Finally, jack i agree, i just want to weigh in on small cap. Yeah . I think small cap is probably the most dangerous major market in the world right now. I think its wildly over valued, huge expectations built in, and im max mali underweight and, you know, if i can short it, i probably would. People want growth. Finally, i was looking at, you know, the few stocks that are in the green today, guys. Verizon, walmart, coke, png, at t, right . People are looking for yield, not that they are cheap, right, phil . Exactly the point were making. If you got High Quality Companies that are, you know, paying 3 to 4 yields in Consumer Staples or health care or utilities, those are the areas you want to hide out here this summer in the instability. Theres another rotation later in the year, but, you know, we think, but where you want to be right now, we think, is taking a slightly more defensive position. Guys, thank you for that. Good to hear guidance on a day like today. Thank you very much. Thank you. Meanwhile out in sun valley, teaming up between tech giants and media moguls, we are live in the valley with more. Kayla, the question is will they team up and do deals . Reporter that is the question, and this is a breeding ground always for deal making. A couple companies in play we talk about throughout the week, but theres one situation in the current conversation talked about a lot, and that, of course, is a aereo, declared illegal under copy right law stealing broadcasterss signals. We caught up this morning with barry diller, a major investor in aereo, vocal about the investment in the company by a new plan filed yesterday to operate as a Cable Company, pay traditional fees to license some of the content, and a lot of the broadcaste broadcasters, as they said it, theyve said, were skeptical of this. Why wasnt it a Cable Company before . We posed that question to barry diller this morning and asked how he feels about aereos filing. This is what me said. I really actually have not read it. Why wasnt it a Cable Company before . This is a decision that the Supreme Court rendered which said that aereo was like a Cable Company. Beyond that i dont know. Reporter of course, as of last night, it is more like a Cable Company than ever. This plan b for it to operate as a new type of broadcasting company. Diller, for his part, said hes an investor in aereo, unclear the future of the investment, but for what its worth, he has money in that. Another invester of dillers in the press for legal snarls, tinder, an app criticized for being malicious, and they characterized the company throughout like that. I asked diller who owns tinder how he feels about the lawsuit. This is what he said. How do you feel about the lawsuit . Change your views on the company . Not at all, no. Not in any way. More in the service. Dupg the ceo needs to be replaced . No, i dont think the ceo weve. Doing an internal investigation that is not yet complete, but so far has not given us any reason to believe that the ceo was engaged in any negative practices. Of course, the lawsuit in question targets primarily one of the marketing executive, and so well see what happens with that situation, but barry diller who, this morning, has a presentation on communications speaking out about those issues. Guys, for now, back to you. I like the way diller kept distance from the camera. Seemingly unaware that the microphone could reach him from that distance. Reporter thankful for technology. We said thats probably the furthest sound bite weve gotten. Thank you so much, kayla, in sun valley where things are taking shape. Lets go to dom chu. The downward trend for the market, Airlines Report a 3. 5 increase in passenger revenue per available seat mile. Thats prasm, thats what its called, more than previously forecasted. Stock up 7 on the news. Heres how competitors fare. Off the session lows, delta, American Airlines, jetblue and southwest all at least trying to get up to the positive said of things, but jetblue is struggle in trade. Back to you. Dom, thank you so much. When we come back, Family Dollars stock falling, but whats that stay about the rest of the discount retailers . Talking about that when squawk on the street continues. The dows down 132. The cadillac summer collection is here. During the cadillac summers best event, lease this all new 2014 cts for around 459 a month or purchase with 0 apr and make this the summer of style. Shares of Family Dollar turning positive this morning in spite of the sell off following results that missed expectations. Conference call happening as we speak, and joining us is managing director with stern ag. Any ideas why the shares are now higher given what Family Dollar put out, disappointing, chuck. Caller i just hopped off the call, talking about how their sales trends in the quarter improved and were positive in the month or flat in the month of june, and, you know, they talked about potential sales driving initiatives later this year adding beer and wine, starting to do things from a Sales Productivity perspective. I believe thats sort of why the stocks rallying here over the past, you know, five or ten minutes. Really has done a uturn. Wonder if weak results put more pressure on the company to sell itself as investers like carl ica icahnme wants . Caller thats counterintuitive. If youre a bull, you want results to be bad as they could be, and results were in the middle, which is why the stocks in limbo. Theres not enough to get excited about fundamentally, but clearly, coming off multiple quarters of down 2 to 3 comps, talking about improvements of the flats, people get excited about that. What do you see as most likely outcome for Family Dollar . A tie up with Dollar General or david mentioned possibility of walmart buying the company. Yeah, i dont think walmarts interested in Family Dollar, and i think theres obviously a lot of speculation about that, but in my opinion with announcing retiring between now and end of may, i think that takes pg out of the equation. Chuck, how did the Container Store comment about the Consumer Retail funk ring in your hallways . Make sense to you . Caller you know, i think the consumer, frankly, has been in a funk for 18 months. I think we see ebbs and flows. I think we see winners. You see some losers. The reality is that the consumer continues to be under stress. Weve, we, meaning the analysts and companies, blame weather for a good chunk, but you cant blame weather for anything over 60 days. Consumers under a lot of stress. Why is it, though, they buy cars like no tomorrow . Buy furniture, maybe not Electronics Like they were buying, but, you know, its not translating down to the lower cost items. Caller yeah, thats the dilemma. Last year we heard about crowding out. I think thats why. If you have a reason to go to the store, theres winnerings like costco, that number was fantastic, ten its not retail across the board is weak, but spotty. Company based . In other words a management story, costcell phone o doing it right or the ma crow Consumer Recovery . Caller you know, normally the biforkation. Theres weakness at the low end, numbers like Family Dollar so i dont think its the consumer, but you got certain retailers that that give you a reason to shop at the stores, and for costco, its the low prices, and that is what that consumer wants whether its somebody who makes 30,000 a year or 300,000. People go there. Yep. Carl buys diapers in bulk. Chuck well, my kids are five, but they actually have matured somewhat since birth. So he buys toilet paper in bulk. Chuck, thank you for joining us. Chuck grom, managing director with stern ag. No matter what the outcome, turns out adidas claimed victory, arian gene tee that beat the netherlands who is spot sored by nike meaning arian gene tee that and germany in the final. The germany sponsor, of course, that would be adidas. Thats sales lift for the apparel winning country. Adidas winning big. We talked to both ceos with the world cup, and they both, carl, were banking spending so much money, no figures, but they spend a lot, seeing boost, and they both said they are sustained boosts. Adidas is the official sponsor, ensured to have the winning team, that is a big win. Nike, interestingly enough sponsored more teams, ten teams r for the first time. Interesting business battle to watch in the world cup. Back to the most recent nike quarter in the marketing costs, expensive to market these things and promote, but, obviously, you get it back with the global audience. I say theres a bright spot for nike in terms of their win, its been popular to watch the world cup in the u. S. , and nike, obviously, home market, soccer games and popularity has the opportunity. Well see how popular it stays after sunday. True. A different question. Even i watched this year. When we come back, banks hit hart in the sell off. Look at the big ones today, how to navigate that sector after a short break. I make a lot of purchases for my business. And i get a lot in return with ink plus from chase. Like 50,000 bonus points when i spent 5,000 in the first 3 months after i opened my account. And i earn 5 times the rewards on internet, phone services and at Office Supply stores. With ink plus i can choose how to redeem my points. Travel, gift cards, even cash back. And my rewards points wont expire. So you can make owning a business even more rewarding. Ink from chase. So you can. If yand youre talking toevere rheuyour rheumatologistike me, about a biologic. This is humira. 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You should not start humira if you have any kind of infection. Take the next step. Talk to your doctor. This is humira at work. Bank of america reportedly submitting a capital plan to the fed for a third time now asking permission to pay a dividend at five cents a share. First question rejected in 2011. Could this appease investors and the fed . Joining us on the news line Eric Wasserstrom from sun trust. Good morning to you. Caller thank you. Hard to read reception when the tape looks like this. Think it would be good news . Caller it is good news, but largely expected when the bac initially reported the error in their capitaling t accounting, indicated the need to resubmit. They indicated also they would be reducing their capital of return request for this year, and i think the way that the market largely interpreted that was that the dividend component would be stable at the five cents asked, but reduction in the asked per share return. Thats, at this point, is consistent with expectations. Percentage likelihood this goes through . Caller oh, high likelihood at this stage, i cant imagine thats what we thought last time. Caller they were approved last time. Right. Caller i cant imagine every single number has not bng vetted by multiple counterparties internally and externally. I would say, you know, high likelihood. Of course, entering a season where few people have good things to say what earnings look like as the markets they are, cost of compliance, who rises above that to the degree any of them can . Caller yeah, i would say our expectations for the Earnings Period are not particularly high, you know, kprt Capital Markets banks, a difficult quarter, not well reported, indicating that trading revenues under pressure between 15 to 25 , and so, you know, for the megabanks i think a very difficult period, and among some of the regional banks, i think there is some opportunity for upside beats coming primarily from loan growth, and but, you know, on the whole, an under realming earnings season. The banks are hit along with the broader market, worries surface about the portuguese Banking System, the european Banking System in general and how some of the problems were never really fixed. That has to be a concern. During the european debt crisis, u. S. Banks hit the hardest. Caller you know, absolutely right. I mean, i think the, you know, whats occurred in europe is different from whats occurred in the United States from a policy perspective in that europe, like the u. S. , has taken Central Bank Action to flood markets with liquidity and thats helped, you know, sustain the banks funning position, of course, the most critical things, but you have not seen Fiscal Consolidation that you have in the state, and even in the states, its just been soso. Very little results occurred in countries like italy, like spain, and like portugal, and so, ewe know, as people look beyond liquidity if, as they are based from comments yesterday, it raises whats done fiscally, and the answer is in portugal and other places, not very much. Eric, well see what earnings bring and what happens. Thank you so much for coming to the phone. Thank you very much. Eric wasserstrom from suntrust. Up next, dow down 124, was down 150 on the open. Well take a look closer of whats moving after the break. My motheits delicious. Toffee in the world. So now weve turned her toffee into a business. My goal was to take an idea and make it happen. Im janet long and i formed my Toffee Company through legalzoom. I never really thought i would make money doing what i love. We created legalzoom to help people start their business and launch their dreams. Go to legalzoom. Com today and make your business dream a reality. At legalzoom. Com we put the law on your side. Welcome back to squawk on the street, im jackie deangles reporting, and we have an injection of a hundred bcf, billion cubic feet. We looked to break the trep of triple digits this week. Doesnt look like it happened. Prices flat ahead of this 417. Actual, the board changed, in line now with the expectations. The hundred was from last week. Again, prices, 417, losing a penny today, the important thing to note here with natural gas is weve seen big declines in the last week and month, down 5 in the week alone, down nearly 8 in the last month, and traders are thinking that prices could go lower from here, saying if we dont see really extreme summer heat, were probably going to stay in line and 4 natural gas may not be out of the question. Guys, back to you. Pressure on oil for the tenth day in a row. Thank you. Stocks tumbling across the board, federal reserve, concerns on europe weigh on investers, ben willis from princeton security group, and we are cutting losses, down 1 at the open, and now its less than that. Nice bounce, great volatility, nice to have it back frankly, traders missed it. Something to look forward to. The story about the bank in portugal was in the market late yesterday. It took its toll early, but i think the chinese impact also is underrated. The trade data. No, it didnt impact local markets, but a europedriven move. Whats helping u. S. Stocks at the moment . I think the u. S. Economic data continues to point out that the u. S. Will, in fact, be a leader from the recovery in the world economy, and thats the reason we have a bounce after we digest this story from portugal. Not flash backs to european debt crisis, Bank Problems in portugal . A little flashback, but history just has a rhyme. Now that its out in the light of day, nothing to be afraid of. Well see how it plays out. We knew the market was mispriced when you can buy portugal or greece debt lower than american treasuries bob called it stupid. Hes allowed to say that. I cant. Return of volatility, you mentioned, what does that mean in terms of direction of stocks Going Forward . Well, it should aid to the volume of trading so what we do on the floor is different than most investers at home. I look at opportunities to sell this for investers a buying opportunity. From a trading perspective, its different. Align positions and decisions to buy and sell based on technical analysis, whether we held the 1949 level on the s p futures this morning, we had a slight break, but by the time it was opening, we seemed to hold that. We have this kind of sell off, i think that should be encouraging to the individual investor to come into the market, but for the traders with this move, it moves other products that surround markets with derivatives, options, and futures, more exciting to trade. A flight to safety, a demand for safe haven asset, treasuries now, hard to believe the 10year was below 250. The dlafr and yen stronger and gold with a pop. Currencies drive the market because the Central Banks throughout the world was race to devalue. Now theres an unwind of the trade, and who can slow their growth of their currency as well as somebody else. Thats the discussion we had yesterday with the United States having a discussion with china and their currency, so thats a ma crow effect on the global market. Most important. I agree, ben. Whats the reading right now on the fed, and its next move, and the whole idea the market moves faster than the fed on Interest Rates . The tendency 1 to believe the fed is behind the curve, janet yellen has to demonstrate what we see done by the fed is an art form, not a science. Theres no menu, no way to predict what should happen, so itll be a question of how well janet yellen steers what was created by ber nan ke. In terms of the catalyst earnings, what are you watching down here . Earnings, yes, again for particularly for the United States based companies, and whether or not thatll help revive the russell 2,000, negative territory tea. The bigger effect on the market to keep an eye on, Central Banks throughout the world, mr. Draghi and peoples bank of china to see, again, where they affect the currencies and therefore the global trade. A lot of moving pieces. Ben willis, good to check in. With that, the dow down 121 points, over to dom chu. Off season lows, but the Consumer Discretionary stocks, one of the worst performers today, second only to energy. You see they are down 8 10 of 1 . Tractor supply, which in the preliminary Earnings Report, Second Quarter profit results would be ble expectation followed by names like underarmor, cvs, l brands guiding comps to the lowest Single Digits. This calls into question, for some, carl, about whether the American Consumer is still spending in its environment. Back to you. Thank you, dom. When we come back, ibm with a multibillion investment in chip research. Well talk with the senior Vice President , director of research about the move joining us live at post nine for an exclusive interview. Dows erased, oh, 60 points of the losses, now down 12 2. Back in a minute. [bell rings] time and sales data. Splitsecond stats. Its so close to the options floor, youll bust your brainbox. All on thinkorswim, from td ameritrade. At every ford dealership, youll find the works its a complete checkup of the services your vehicle needs. So prepare your car for any road trip by taking it to an expert ford technician. Because no matter your destination good maintenance helps you save at the pump. Get our multipoint inspection with a Synthetic Blend Oil change, tire rotation, Brake Inspection and more for 29. 95 or less. Get a complete vehicle checkup only at your ford dealer. Welcome back to squawk on the street, time for science. Ibm investing 3 billion over five years in research and development of computer chips. The effort is amongst one of ibms Largest Research initiatives as it looks to advance the Underlying Technology of the hardware and software businesses. Joining us now, john kelly, senior Vice President and director of ibm research, a company that spends a loss, 6 billion a year or more on research and development. This is a huge outlay over five years. Why are you doing it . Well, as you said, david, we spend approximately 6 billion in research and development every year and always looking far into the future, one of the great Industrial Research organizations in the world thats not only survived, but prospering. We are looking out. What are the limits of the science and technology that were working on in our systems and software areas . We determined that, you know, clearly, as we shrink our chip technologies to make them faster, were approaching scientific and engineering limits that require Big Investments and very brilliant people working on these, and its really not just about Chip Technology, but the applications. So cloud computing, big data, analytics, we can see are going to require different kinds of differentiated systems and Different Technology than the Chip Technology we use today. Its a big bet, but a grand challenge to breakthrough the barriers over the next decade. Signs for signs are fine, but shareholders say, well, whats the commercial opportunity here for ibm . Youre not going to necessarily be making the chips, but i assume its a potential licensing fee arrangement down the road . Well, we develop our technology where we differentiate. The technology we embed in our systems. We make that capability available to the clients. Again, our clients are looking for in cloud computing, not just web serving, but Big Data Analytics types of applications, and todays systems of Commodity Technology just cant do the kind of performance and the kind of power thats required of this. All right. Now, give our viewers some sense here without confusing them too much about the detailed science as to what the goals are, if, in fact, youve been successful, what is the end result going to be . Right, right. So today in our most advanced technologies, were manufacturing with something called 22 nanometer, silicon technology. A nanometer is a billth of billi billionth. We reach the limits of that, and we are talking a few at ms, literally a few atoms new switching, so this investment is to do two things. Its to push shrinking technologies with new materials as far as we possibly can, and then replace the Underlying Technology with something other than silicone, which we cannot shrink beyond a couple atoms but go to carbon and quantum devices, orders of magnitudes faster. You dont know that itll work. Its not science fiction. We built protypes with all devices and all sorts of materials. I stopped by the lab. I anticipated youd ask me that, so i grabbed a chip we have built built on silicone, but bilt with carbon. It has very high speed carbon switching devices at very, very low power, so when this chip is slu shrunk, we can put it in your cell phone, web accessed device, and youll have higher performance and batteries would last for weeks, not a few hours. Really . All right. Theres one commercial application what were talking about. Why 3 billion . Where do you come up with the number . Why not more incremental, i wonder, some people ask, do 500 million, see how its going, why the big number up front . We have the confidence that we can do this. We have over a thousand of the brightest scientists and verge g i engineers working around the world and partners in academia and the industry. We believe it can be done and its important to make a statement to our clients that were going to achieve something that no other company can achieve, so its yes, 3 billion is a lot of money to invest, but its around a technical talent only ibm has and clients and employees should be proud of the day. Yeah, well, i can think back to a time, theres labs, lord knows how many patents they have, and xerox. They are gone. Not a lot of pure science going on forprofit, publicly held companies. . Right. If you look at our track record in Chip Technology, nearly every major invention in Chip Technology, nkting the underlying physics of moores law was from ibm research labs. We have a tremendous track record to being able to commercialize our technologies into our chips and our systems. Shareholders say, okay, great, if it works, great, but are will i see bottom line growth as a result of it . As a result of it, well have highly differentiated systems. Think about the watson computing technology. We remember defeated incredible human beings in jeopardy a few years ago. That system would have filled a room and took 85,000 watts of power, of electricity to power that system to beat two humans. Each human, our brains operate at 20 watts, so it says that if we could play advanced technology such as i showed you with watsons cognitive capabilities, think about something that has the power and performance more like a human brain and more of the size and Energy Efficiency of the human brain. Thats the kind of thing we get excited about. I get scared, artificial intelligence, all these things, and thats a conversation for another day, yeah . I was going to say it will be about these kinds of powerful systems with the new technologies that were going to invent and commercialize that will help us as humans make debtor decisions, perform better analytics on massive amounts of data. Think about doctors dealing with the explosion in health care information, trying to deal with that. These systems will help them make better decisions and help us in our lives. Thank you for joining us. Appreciate it. . Thank you, david. Your welcome. John kelly joining us there. Coming up, more on todays selloff, markets down 120 and s p down 12 points now. And squawk on the street will be right back. The gap begins to close. So lets simplify things. Lets close the gap between people and care. In india we have 400 Million People who dont have electricity and i just figured that its time i do something about it. What were doing right now, along with ibm, is to actually transfer data through a satellite from our wind farms directly onto the cloud. I think we could create a far more efficient system across the whole network where we could actually draw down different kinds of energy based on when its needed by the consumer. A smarter Energy System is made with the ibm cloud. In a we believe outshining the competition tomorrow quires challenging your Business Inside and out today. At cognizant, we help forwardlooking Companies Run better and run different to give your customers every reason to keep looking for you. So if youre ready to see opportunities and see them through, we say lets get to work. Because the future belongs to those who challenge the present. Lets get to the cme group, rick santellis santelli exchange. Good morning, rick. Good morning, carl. What a day it is, we have a perfect guest for a morning where our markets are asktsed by the european markets that are affected by the ever so construed and artificial fixed income market in the european countries. Andy, thank you for taking the time. Rick, thank you for having me. All right. Lets start at the top, a lot of comparisons going on in portugal. I actually dont think thats the case. I think the fat tales arent going to happen. Oooey think well continue to squeeze what type of future economic horsepower we can get and the reason wee squeezing it, because were basically mortgaging part of it in the future to do things like keep rates in the european southern economies artificially low and we see thats breaking down. Lets hear your interpretation, andy. Well, whatses going on, rick, the Second Largest Bank in portugal basically missed an Interest Payment sending bonds, trading a oneyear piece, trading par on june 23rd, trade as low as 32 this morning, and subordinated piece trading 85 last week, trading in Single Digits today. Youve had a collapse of a bank. That Center Portuguese Interest Rates up and thats pulled, you know, german rates lower, as well as other european highgrade rates lower, and thats brought the u. S. Ten year from 260, where it was after the auction yesterday, to 255 right now, right before a long bond auction. Is this a lehman moment . No. Yep. I completely agree. Now, theres three different ways we could look at this. The fact that the southern european markets yields were too low, the big trade was watching how they spread against the boons. Now we see boons under 120. They really havent changed in terms of how wide they are compared to u. S. Tens, but really now the game to watch is how the southern european spreads. Maybe tell us a little about that . What you have, look at spain, probably one of the more active ones along with italy, i mean, the spanish five year is roughly 25 through the u. S. Five year, and its, you know, a little cheaper right now than u. S. Ten years. So theres a lot of risk in spain. I mean, the whole idea is what is bringing portugal down, the fact the banks werent properly capitalizes. Looks like its the same in our opinion in spain, and i just dont think youre getting enough yield to warrant the kind of risk youre taking in spain right now. That goes for italy as well. Too up much risk, too little reward. All right. Now, many, on my channel today, obviously werent watching santelli exchanges a year ago, because theres so much shock and surprise that were dabbling under 2 50. But you and i see it different. Could see 2. 25 easy, based on a relationship, basis points to r45. The five year at 30 compared to our 163, 10 at 119 compared to our 250 and the final 30 seconds, elaborate. No question, rick. I mean, we talk about, you know, ten years being, treasuries a little over 2, maybe 2. 1. What you just mentioned, the five year. Our five year is 5. 5 times the rate of the bundt now. If youre an asian investor, why invest in bundts, invest in u. S. Treasuries. Im not a big fan of what the feds doing. Not a big fan where we are, but right now were going to continue to be pulled lower, just by comparison basis. You know, after listening to some comments about the minutes yesterday, i guess my question, andy, is really simple. Did jarnt yenet yellen, mr. Fis the entire committee not see dynamics keeping our rates down for the wrong reasons . Isnt this a great escape . Start removing zero Interest Rate policy . Is this going to be a missed opportunity . Yes, i think it will be. Based on what we saw out of the fed minutes yesterday, instead of encouraging the fact that unemployment has gone from 10 down to 6. 1, they focused on the fact there are just too many people unemployed and the Wage Inflation isnt there yet. I think Stanley Fischer sees it, but only on the fed a short period of time. Eventually i think hell convince yellen and the fed will raise rates sooner than the market anticipates. Always a pleasure. How do you spell central bank micromanagement . I spell it fde. Sara, back to you. Like a cheer. Rick santelli, thanks very much. Still ahead, andreesons partner jordan, also the former ceo of open table and president of paypal joining squawk alley live for an exclusive look at the tech investment landscape right now. Were back after a quick break. Really. So our business can be on at ts network for 175 dollars a month . Yup. All five of you for 175. Our clients need a lot of attention. Theres unlimited talk and text. Were working deals all day. You get 10 gigabytes of data to share. What about expansion potential . Add a line anytime for 15 bucks a month. Low dues. Great terms. Lets close. Introducing at t mobile share value plans. With our bestever pricing for business. The dow is down 180 points at the open this morning. As weve seen our worst selloff in a couple months for the dow 30. Down less than 100 points. 94, beginning to see a little repairing. Get closer to the european close, too. That might make a difference. Over to dominic chu and a quick market flash. Green on the board for trw as well. Stock surging on a bloomberg report the auto partsmaker approached for a possible takeover by German Company zf group. Talks in the prelim stage, but zf has been allowed to conduct Due Diligence and believed to value trw somewhere in the 11 billion, 12 billion range. Stock up 7 on the day. Sara, carl, back to you. Thank you so much, dom. All of that said, even though the market is not selling off as hard as it was, a lot of the same names are victim to the selloff. Tractor supply, worst performing. And housing and retail continue to be among the victims. Michael coors, urban, under armour, mohawk industries, housing, too. The flip side, working, two positive groups in the s p 500. Defensive group utilities, outperformer this year and telecom. Also interesting to note Consumer Staples fladoffl s f. The walmart of the world. More valuable staple companies. Across the board in gold, santelli was saying in bonds. In the dollar as well. Nasdaq, of course, continues to be lower. Russell is getting hit hard as well, and then gold, you mentioned, up a little more than it is now, but still 14. 90 to the upside and oil down at the open. Down ten straight days, some may or may not take as a sign of macro demand for energy. A lot of it, cutting losses, better economic data. Wholesale trade and jobless claims, came out better than economists were looking for. With that, dow cutting its losses in half. Good morning, its almost 9 00 a. M. At thes conference in sun valley, idaho. 11 00 a. M. Here on wall street. Squawk alley is live. Welcome to squawk alley. Got to start with the markets on this thursday. Sharply lower across the board, although the dow is now cut its losses by about 50 . A lot of concerns out you there regarding the fed, regarding portugal, regarding some macro data out of essentially all of continental europe. Some of the worst nushs on manufacturing output in a number years. Here to help us make sense of it all, the chief Market Strategist with alliance bernstein. Good to have you back. Thank you. My pleasure. What do you make of the open and what do you make of how the bulls are trying to make a bit of a stand here in the middle of the session . Look, i mean, you have incredible complacency in the financial markets. Youve had credit spreads that have collapsed. Volatility amohe