quarterly results missed estimates and said compensating victims for defective ignitions will cost at least $440 million. matt miller joins me along with chuck stevens. matt, take away. >> thank you. about the costsk you have set aside or the cost you pay for the actual recalls. it was $1.3 billion in the first quarter, $1.2 billion in the second quarter, and a lot of analysts do not seem to have accounted for that in their forecast. why do you think that is, and how much do you think it is going to be going forward? >> before i get into questions specifically arm the recall, if i could talk about overall performance, i think it is an important message to get out. we continue to have strong twolts, especially in our key markets, north america and china. recallexclude the campaigns, earnings on a year-over-year basis were up 20% with margins of about 9.2%. 14%hina, earnings were up year-over-year with margins of 10%. specifically to north america, despite the challenges related to the recap campaign, we continue to put up strong results. relative to your earlier question -- go ahead. >> we have been talking about your strong results for a few quarters now, and every day leading up to the earnings this has been the headline. everyone knows this because you are selling a lot of trucks and getting great reviews on cars like the impala. why do you think customers continue to buy so much of your product despite almost 30 million recalls? >> i think it is a testament to the products that are on the road today, the most recently launched products. they are specifically -- significantly better than the products we use to produce. they provide great value with reliability, the the quality, that customers are asking for. that is reflective of the products we have been launching most recently. >> so, in regards to the retail feinberg'se from ken compensation fund, which he will decide himself, how much are you budgeting for continuing recall costs going forward in the next two quarters? and i talked about earlier in june, our expectation was we would substantially complete the work, the redoubling of our efforts around cleaning up and closing out some of the old, outstanding issues we had in the first half of the year, and we have fundamentally done that with the $1.2 billion we took to earnings in the second quarter. on a prospective basis, we expect recall expense to be up, but not materially versus the historic run rate we had prior to the first half. the about the exposure that we 2013.n 2010 to on a go forward basis, we expect recall expense to come down and be more in line with our historic run rate. willt me ask, ken feinberg decide what he decides within special compensation fund, but you have set aside $400 million and it could go up to $600 million. how do you come to that number? >> first, it is important, and you pointed it out, ultimately the cost of this compensation program will be determined by ken feinberg. secondly, there is no cap. the $400 million estimate is our best estimate based on the data that is available to us and using outside experts and outside actuaries to evaluate a range of outcomes. the $400 million, as i indicated, is our best estimate. based on a range of outcomes, it could be possible that it is $200 million higher, but ultimately, the cost will be determined by ken feinberg, and what we want to do is make sure that we take care of all of those people that have been adversely impacted by the ignition switch issues. as we move through the rest of the year, we will make the appropriate just -- adjustments, either up or down, and at the conclusion of the program, we will share the appropriate data around the ultimate disposition of the claims program. 9% andk, we talked about then some margins in the u.s.. you have had good success and great margins in china as well. the business in europe still putting up a pretax loss. when do you expect to surprise us with a profit over there, because i know a lot of the cost are residual and you must be almost finished paying for that stuff now. >> let's talk specifically about the second quarter. $300 million loss. in that was $200 million of restructuring. excluding restructuring, the core business lost $100 million, consistent with the first quarter and with last year. included in the 100 million were significant headwinds associated with the russian operations. , the coreerspective business continues to improve. we are on a solid path. our expectations are we will be profitable by middecade. >> hopefully those europeans are buying a lot of corvettes. [laughter] -- alix steel, back to you. >> thank you, matt miller. we will stick with earnings. brian nowak at susquehanna financial group increased his price target on facebook to $84 a share. we know the headlines. the big number for facebook was the adjusted margins up to almost 68%. what makes you think they are sustainable? >> good morning, alix. the advantage that facebook has is they continue to get a bigger share of advertising budgets from brands, small, medium sized businesses, direct response advertisers, and through their app installs. what percentage of advertising dollar that flows through the da are typically over 86% and that is what the company is benefiting from. >> the company has a lot to integrate going forward based on acquisitions. does that put pressure on their bottom line margins? >> it pressures them a bit, but advertising budget gets bigger, they can focus and still put up growth. >> who is facebook stealing advertising dollars from. google is still the master. is it google? >> i do not think there are a lot of dollars moving out of google to facebook. the other bases you see losses are from smaller online display players. there are more dollars coming off line from print, moving to facebook. there are some dollars on the margin moving out of television, but it is very small and most of displayis play and -- and print. >> the price-to-earnings ratio the industryble average, but you made two upgrades, one in july, and one this morning. why do you think it is worth the price? is a cleaner number to value the company on an earnings at this point, and when you step back and say what kind of multiple should this company trade at, it is still growing topline at 60%. if you look at what google traded at when it was the size and growing this fast, it traded at 22 times ebitda. if you really think that facebook should trade at the ate people that google did that point and its length, you would actually argue that it is a $100 stock. that parallel to google gives people confidence there is still more runway for facebook. >> thank you. a lot of jargon there with ebitda, but thank you to brian nowak. u.s. carriers are resuming flights to israel after the faa .ifted and almost two-day ban let's get the details from elliott gotkine in tel aviv. what will it take for airlines to fully implement their airline schedules to tel aviv? x, we have heard from the american airlines in the last few minutes saying they are looking at the safety and security issues surrounding flights to and from tel aviv, and they will make those decisions on the basis of their conclusions. of course the lifting of the federal aviation administration ban does not mean the flights will come straight away. other people who knew the band was in place might have put off their plans. it will certainly take time to get back to normal, assuming, of course, those people have not been -- let's not say permanently put off, but put off for a reasonable amount of time. >> what i take a look at the impact on, say, equities in israel, you do not see a huge amount of movement, but what about the economy -- torres, technology startups that cannot leave or get business in and out of the country -- what is the impact their? >> it depends on the industry and geographically what you are to look at. they invested in bomb shelters. we had to go to the shelter three times. missile inron dome the sky. it hit a rocket and part of the shrapnel fell through a greenhouse. nobody was injured because they have these things in place to protect their workers, and they are still fulfilling workers. one company i went to in the south, 90% or more of the revenues come from overseas, and overseas countries do not care there is a war, they want their orders fulfilled. >> it seems like cease-fire talks are going nowhere fast. is anyone that can be instrumental in moving it forward? >> egypt would still be your best bet, one imagines, for a cease-fire. john kerry was back in cairo. hamas wasem that digging in its heels. there is no cease-fire inside, i'm afraid. in sight, i'm-- afraid. ,> thank you, elliott gotkine joining us from tel aviv. moving and shaking this morning, president barack obama. in a speech expected around 4:00 p.m., he plans to go on the offensive against the pennies who use cross-border deals -- companies who use cross-border deals to avoid taxes. the actions come understood me after a number of companies have paid big premiums in deals that allow them to pay lower rates. president obama will urge congress on curbing such avoidance is, while republicans maintain he is not done enough to negotiate with them. republicans say blocking inversions would help $17 billion from escaping the u.s.. coming up, with sanctions against russia, we have a look at how it will affect visits is operating within the country. back at home, we will look at builders like d.r. horton and look at the state of the housing recovery. stay "in the loop." ♪ >> you are watching "in the loop ," live on bloomberg television and streaming on your phone, tablet, and on bloomberg.com. what is the real deal with the housing market? permits and sales are weak, but existing home sales rose two and anght-month high -- rose to eight-month high. how would you categorize this? >> recovering. >> really? spike in interest rate last may and weather impact earlier this year. activity inwed down the market, but we are starting to see things pick back up. >> but the stars on the permits were worrisome. that is where you will see the growth. what happened? >> housing starts and permits are a measure of supply. builders are faced with challenges -- limited with the amount of lots they can build and they are also facing labor shortages in some markets. you have to take government that with a grain of salt. most of the decline was in the southern region. it might be an anomaly. building data has been relatively strong in the south, single-family up for the month. ?> who are the buyers first home buyers, second-home buyers, investors, or does it matter? >> the majority of the buyers in the existing home market are in the move-up segment and we have seen that for a couple of years. coming out of the recovery, builders deemphasize the reliance on the first time home builder -- buyer because the demand was not there. they are focused on the move-up homebuyer. >> first time homebuilders were up 20% in june. -- 28 percent in june. we are expecting to get a decline. what was that about? >> we're talking about a 5% decline month over month. we are coming off of last month's spike, so i am not surprised if we have a decline. typically demand slows down in the summer season. >> how affordable is it to buy a house? >> you have to look at the markets. in some markets, owning a home is cheaper than it is to rent. that will help the homeowning equation. when you look at northern and southern california, ownership is very expensive. >> some part of that, it seems, would be distressed sales, and that accounts for 11% of the market. paris recession we were talking about 2%. pre-recession, we were talking 2%. fewer distressed properties. investors have taken their foot off the gas pedal a little bit. >> are you a homeowner? >> i am. i am afraid of these rates. i have 3.2 5%, and i would be scared to give that up. >> thank you, -- well -- >> thank you, drew reading. check out the newest edition of "bloomberg businessweek." the cover story titled "young aboutfeatures a story burger king and what happened when a bunch of kids to go over the chain. it is a good read and it kind of makes you hungry. coming up, from housing to implement, will break down the weekly jobless claims and what they tell us about the state of the economic recovery. we will be right back. ♪ >> first. bloomberg. >> you are watching "in the loop ," live on bloomberg television and streaming on your phone, tablet, and on bloomberg.com. for bettysteel, in liu. here are the top headlines at this hour. authorities in africa are trying to find out what happened to in air algeria plane. it vanished from radar less than an hour after leaving burkina faso. caterpillar says it is being helped by the rebound in u.s. construction. the world leader in building and mining machinery is raising its earnings forecast are this year. cup looksoks -- half-full at dunkin' donuts. quarterly net income is up 13%. they have more than 11,000 shops in 33 countries. donuts. it is 26 minutes past the hour. bloomberg tv is on the markets. you are seeing equity futures trying to claw their way higher, up by about three points, but this is after the s&p hit a record high yesterday, a record close, i should say, of 1987. we have expected earnings from caterpillar, american airlines, and killer numbers from facebook. you also had good data from china. there was an 18 month high. we have a lot of economic data today like the government's weekly job report. i would like to bring in the chief economist at the consulting firm ihs, who is also the author of "spin free economics." thank you for joining us. great to have you with so many pieces of economic data. we were talking about the housing recovery. at what point does that boost gdp? >> certainly in the second quarter we will see the positive effect of the housing rebound, if you will, and in the third and fourth quarters for sure. we believe second-quarter numbers will show between 3.5% and 4% growth, and housing will be part of that. >> 4% growth is aggressive. is that payback from the first quarter, or is it sustainable. -- sustainable? >> it is not sustainable. absolutely, the second quarter will be a bit of a payback, but that we will settle into the 3% range. the first quarter was weird. >> i like it. rates lowuld keep past 2015 if the outlook holds. what is your take? >> it is entirely possible. the fed is keeping an eye on a lot of things, but in particular wage inflation, which is at some fundamental sense the core of inflation, really the driver. if that starts to pick up, and it has not yet, i think the fed will get worried and start to raise rates. our best guess is the first rate hike will be in the third quarter of next year, but obviously will be data-driven. we will see how the economy does, how inflation does. see low productivity. you have to wonder at what point does this are triggering wage inflation down the road. >> again, those very low productivity numbers are by some extent distorted by that strange first quarter number. we will have to wait and see what the second quarter productivity numbers and the third quarter productivity numbers look like. my guess is they will bounce back a little with a bounce back in growth. obviously, if productivity growth continues to do very badly, that is a reason to be concerned. >> what is the biggest risk from where you sit, because you sound relatively optimistic in this "new normal" that we end up seeing in the economic data? accepting the biggest risk is continued corporate caution, i would say -- >> the biggest risk is continued corporate caution, i would say. companies that are reluctant to hire, spend on capital goods. outside, you have geopolitics, the middle east and the ukraine, and those could come back and haunt us at some point. >> that is a question, will the company spend on -- what could the company spend on capx? >> it depends on what the economy is doing. if the economy is growing at 3%, you could see topline growth and companies will spend more aggressively. , --nariman behravesh, stay with me. we have jobless claims numbers breaking, and scarlet fu is joining me. practices a better-than-expected read, and unexpected decline of 284,000. the estimates were a slight increase of 300 and 7000. lastly, -- last week, it was revised higher, and it was already at a seven-year low. we are at a psychologically important level. on a continuing basis, the number below the continue to receive jobless benefits dropped 2.5 oneillion from million the previous week. june, at the lowest since 2007. they continue to get more encouraging. how would ward who was on "-- howard ward who was on "bloomberg surveillance" this morning said this is the magic is focused on, weekly jobless claims and how it continues to show improvement and to the extent that the fed pays attention to it. >> scarlet fu, you are sticking with me. as is nariman behravesh. what do you make of this, good enough? >> it is very good and consistent with the numbers we see on implement front. things are improving -- employment front. things are improving, and improving nicely, one has to say. in terms of the trend, we have now had five months of job growth over 200,000. we will probably get another one very soon, the next time we see the payroll numbers. so, i think we're on a good track. the economy is on the mend. this little hiatus we had earlier in the year seems to be behind us. this just confirms the fact that the employment situation is definitely improving. >> i wanted -- nariman behravesh, i wanted to pick up on something you talked about earlier, jobless claims show that companies are not firing as much as they were, but not firing is not the same as hiring. what will it take to move the 200,000 two additions that are high quality as opposed to low-quality, low-paying jobs? >> you touched on an important issue in this recovery, there have not been enough jobs on the high-end, but you have to be careful about that. the companies that we talk with, the ceos, they worry they do not have enough high skilled workers. they have jobs at the high-skill level, and plenty of workers at the low-skill level. you have the two level job market, and that is probably the bigger issue. , stay withbehravesh me. we'll be talking about the world economy, but i want to get to breaking news -- walmart is ofing greg foreman as ceo walmart u.s.. it also says bill simon will transition out of the company. foran succeeds bill simon. his annual salary, not hundred $50,000. $950,000., he was -- previously he was ceo of walmart asia. scarlet fu, actually -- no, ok. coming up, we went to talk about sanctions and how they weigh on companies that do business overseas. chipotle hit all-time highs after the restaurant chain reported better-than-expected earnings. we will hear from the companies -- from the company cfo. you not want to miss this conversation. stay "in the loop." ♪ >> i want to get more on that breaking news on walmart. scarlet fu is at the breaking news desk. >> let's recap the headlines. walmart has named greg foran president and ceo of walmart united states, succeeding bill simon on august 9. the number, simon lost out to doug macmillan, the current ceo of walmart, in a bid to succeed michael duke. bill simon had been at walmart since 2006. he had previously been in the food and beverage industry. a lot of people say he did a in theb and the -- business and did a good job on the low-end consumer was struggling with discretionary income. simon lacked the international stream. transition out of the company. heelys august 9, and greg foran, -- he leaves august 9, and greg foran will take over as president and ceo. >> the eu and the u.s. are threatening stricter sanctions on russia following the attack on the malaysian air flight. the u.s. is considering restricting access to the capital market for russian-state owned banks. for more, i am joined by ryan chilcote, who is in london. honestly, these potential sanctions sound devastating for russia. are they? >> i think that is right. it is wanting to restrict access for russian companies to european capital markets. a member, the u.s. did just that for four companies just last week. it is another thing for other companies to restrict european investors from buying russian stocks and russian bonds. this would be only new issuance, but all the same, if you think about it, the investor base is quite immature. russians are not used to buying stocks and bonds. foreigners account for an awful lot when it comes to the russian market, and if they were taken out of the picture, yeah, i think it would be devastating. >> that is not it, really. there are also conversations about restricting the exporting of technologies, and that has to do with the oil and gas sector, and oil is pivotal to russia's growth. >> that is an interesting one. the idea is the eu would ban sensitive technologies for oil and gas -- specifically oil discovery, i should say, which would not hurt the europeans a lot. really 150 billion euros a year, really, peanuts. the argument would be there would be no other place for the russians to get it. they do not make it themselves, and that technology is not made anywhere else, and if the europeans were to deny the russians of it, it is perfect, because it does not hurt them, but it could hurt the russians and oil and gas account for a huge chunk of the russian economy. then you have the weapons stuff. not only would it and europeans from selling russians weapons, but it would ban russians from selling their weapons to europeans. >> interesting point. ryan chilcote, joining us from london. for more on how the sanctions could impact does this is operating in russia and the russian economy, i want to turn back to nariman behravesh, chief economist at ihs. my biggest question -- he is also the author of "spin-free economics," either the way, so is a good perspective. do u.s.ion is when companies pull out, wash their hands of russia and walk away? >> to some extent, russian -- u.s. companies have already pulled out. russia, ub for this entire thing with crimea and the you -- even before this thing with crimea and the ukraine, they discouraged foreign companies coming in and doing business. they are protective of their resources. resource nationalism, if you will. the business environment has already discouraged u.s. companies from going back in, and they have not been doing that much. >> sure. >> once the whole thing with ukraine, the conflict started, the annexation of crimea occurred, you started to see capital leaving russia. we have had over $65 billion in capital leaving russia over the last six months, the same as 2013 so it has accelerated. these particular sanctions add to that, and, in effect, they are hitting russia where it hurts, there is no question about it. they are meaningful sanctions. point, it being heard on that front, in particular we 800 $90rd that norway's billion sovereign wealth fund is reassessing holdings in russia. dollar sovereign wealth fund is reassessing holdings in russia. explain what that means? desperately needs foreign capital to finance a lot of the projects, oil expiration and activities, and if they do not get this, whether it is directly in the capital markets or to investment from the sovereign wealth fund, in the ,ase of norway, they are sunk basically, because it will mean a big drop in capital spending, and it will mean they will go into a deeper recession they -- than they are already in. they are a shallow recession right now. this is bad news for the russian economy. the russians will pay, economically, a very heavy price for this. >> what will russia do? will they look to the east and china? how much will this isolate them? >> china is interested in working some kind of a relationship with russia, but china will not replace the west. it will not be on the -- able to replace the amount of capital that has been coming from the u.s. or europe. it just cannot do that. it will not do that. it has other agenda items. it will, for political reasons, positioning reasons, maybe try to help russia a little bit, but even the deal they worked out last month is fairly small potatoes in the whole scheme of things. >> sure. >> there are strict limits on what china can do. referring toou are is exporting natural gas to china, really just a fraction of what it exports to europe. over the longer term, if we see economic ties between russia and china, what does that mean for the global economy in terms of trade? >> i do not know that it is necessarily bad for russia in the long haul to trade more with china than it has been. the issue then becomes where does europe get its natural gas? does it get it from north america? does it get it by allowing fracking, if you will, the exploration of the show -- i thinkn europe europe will have to depend on other sources natural gas. >> we were talking about other companies, and you said already it is unfavorable to do business in russia, but we have exxon, bp, profit-sharing, finance agreements there -- what happens when that unravels? will that unravel, i guess? >> i think it will, probably, and you are absolutely right, alix, a number of companies will take a bit of a hit, although companies like exxon have operations in a lot of parts of the world, but they will take a hit as the sanctions tighten further. i am not pretending that it will not hurt some companies. it will. but the bigger hit, the bigger hurdle will be on russia itself. ,> thank you, nariman behravesh for your perspective this morning. might have seen its value cut in half, but its name is still worth a pretty penny. the latest on the controversial digital currency -- they "in the loop." ♪ >> it is time for today's $750,000 big number -- , how much is hopes to reap from a sale of bitcoin, but that will not happen with the restraining order. sued the company in may, 2013, alleging breach of contract over the partnerships and asked the court to preserve the domain name until all the assets could be accounted for. of the restraining order, 14 days. for more on this, i am joined by "bloomberg businessweek," brendan greeley. >> i think we have reached a very boring period in the development of bitcoin, where this libertarian idea where it could replace the fed -- i think the money going into this, the 240 billion dollars in venture capital is not buy into this at all. they are thinking at -- of it as a simple way to lower margins for market transactions. >> that means companies like dell and expedia want to use it because they make more money off of it than if i just use my visa card. >> exactly. bitcoin is assumed to have a transaction cost of zero, and i do not think that is right. the problem is i have to hold bitcoin and you have to hold bitcoin for the transaction cost to be zero. people do not want to take the $100,000olding $100 or in terms of the business in bitcoin. if i do not have the currency, i have to pay for it to send you money. thenat is the cost really, ? >> right now it is number 1%, but we're not even paying the fdic for insurance on bitcoin deposits right now. it is going to climb up. some are it will be a high of 1%, but probably cheaper than that 2.5% you pay with credit cards. two hundredoned the $40 million of venture capital funding going in this of the shutter play. where is it going? -- this $240 million of infrastructure play. where is it going right now? >> right now, and for the next two years, they are figuring out a way to get people in and out of bitcoin without ever having to hold it. it is the basic coming that sits on top of the protocol. there is another level of services on top of that, like, maybe, micro-payments for magazine articles, one machine transactions, that need that first is the structural level to be complete. again, where we are right now is not replacing the dollar or the euro. it is a very boring process of building out the infrastructure. it is a land grab. >> sure. ,t might be a boring process but obviously there are going to be expectations of sustained interest in order to support that kind of money flowing into the infrastructure at the end of the day. >> i think we are starting to see that change. bitcoin transactions are still increasing exponentially. people are not buying and holding as a speculation, but they are actually using it to make payments. >> to your point about why you care about the inventory. >> that is changing. you see the slow drip of companies excepted. dell is accepting it. air'm sure you know, baltic is accepting it. >> of course. >> but they are still charging a transaction fee. you member when it was news on major media organizations opened a website? that was a big deal. i think we will slowly start to see that dell or apple is taking bitcoin as a nonevent. >> thank you, brendan greeley, who probably flew baltic air on bitcoin. we'll be back in two minutes. ♪ it is 56 minutes past the hour. bloomberg tv is on the markets. that means bloomberg television is on the markets. futures are continuing to climb a little bit higher. the s&p is up by almost four points after a record day yesterday when the s&p closed at 1987. they are picking steam up from asia as we saw a better-than-expected manufacturing read for july in china, and we also have initial jobless claims here in the u.s. falling to an eight-year low last week. plus, new home sales coming out at 10:00 a.m. foreign policy and global risk expert ian bremmer will join me to talk about policy overseas, and chipotle is making a huge leap, trying its hand at asian food and pizza. we will talk to the company's cfo about that strategy. ♪ >> we are 30 minutes from the opening bell. you are "in the loop." i am alix steel, in for betty lou. -- betty liu. of the -- upbeat earnings from automakers are driving futures higher and jobless claims drop to an eight-year low. ford in the fast lane, posting its 21st straight profitable facing a costly ignition crisis fell a little short. walmart will have a new u.s. chief next month. 53-year-old greg foran is taking over as president and ceo of the u.s. unit, succeeding bill simon. for more on the story, julie hyman, who has been following walmart quite closely. why is simon leading? >> it is interesting. on one hand, walmart has been flagging, and u.s. revenue is a huge part of what walmart is. on the other hand, bill simon was recently passed over, essentially, to become ceo of the entire company. doug macmillan got that job. it might be that he is leaving for that reason. came from walmart in asia, and now is going to the u.s.. what do we know about him and his style, and his turnaround success that? >> he has not had experience in the u.s.. >> that might not be a bad thing. >> i believe he is a new zealand native, though i have not confirmed that. he is 53 years old. first he was running the walmart china business and was promoted to run walmart asia overall, and has not been with the company for very long, only since 2011. he is not a veteran, but within the walmart organization, apparently, leadership, according to analyst i was speaking with, is prized over expertise in the region and he is seen as someone that is a good leader that has a good relationship with ceo doug macmillan, so that might be behind his promotion here to this very important part of walmart's business. >> and like you said, simon was passed over. >> exactly. situation isitical as volatile as it has been in recent memory. of course, we're talking about russia. european officials are weighing sanctions on banks. former secretary of defense robert gates spoke about the sanctions with charlie rose. >> i applaud the administration of applications and sanctions, but what i was just describing in terms of the need of a broader, long-term treasury to putinr the -- pretend -- does require the cooperation of the europeans, and frankly, i have not seen their willingness to step up to the plate to the extent, for example, president obama has. >> joining me now, eurasia group president ian bremmer. ray to see you and get your perspective. are you in favor of more sanctions against russia? what is the risk there? >> it depends on what you want sanctions to accomplish. if you are trying to get the russians to back down as a consequence of those sanctions, the answer is no, they will fail. if you are trying to show that you have resolved and back with the united states will be cost for russian policy as an example for other countries, those sanctions have some meaning, but the problem is, even since the crash of mh17, the willingness of the europeans, who have asked more economic leverage and therefore more economic exposure to the russians then the united still unwilling to engage in the kind of sanctions that would have very negative effects on both parties. >> we hear eu officials floating capital market sanctions or technology sanctions so that they could not get parts that they need for the energy development there. does it seem like it is sort of shifting in europe? >> it is shifting a little bit. i think it was shifting even before mh17 came down, it was just taking time. i think we have sped up a little bit. we probably would not have gotten this until the fall if the plane had not been shot down. there are still big differences between the british and, of course, the dutch, taking a very hard line. this attack was like 9/11, if you're living in the netherlands, frankly, but if you look at the italians, the spanish, the french, they are in a different place. the germans are in between. right now, there are expansion of sanctions to a bunch of individuals that are close to the kremlin, and they are certainly talking about moving towards potential sector sanctions on the finance sector in the fall, but i assure you when those sanctions likely, the -- likely come, europeans will look considerably weaker than the americans will at that point. >> you have spoken to senior american officials. i am curious about what their stomach is for tougher sanctions without europe following. to show therly want united states has international community behind us. kerry secretary of state and others continuously use these notions that we are isolating the russians and the international community is outraged. that is one of the reasons they have said privately we do not want to use level-three sanctions. we want to call them sector sanctions because that makes it easier to put together a package from the marketing perspective that shows that the europeans and the u.s. are closer together. we never talk about china. the chinese response to mh17 in the chinese media was almost identical to the russian government, really blaming the west. kind of astonishing. nobody has been talking about that, but china is the world's second-largest economy, and the major response of china to sanctions has been signing a 30-year, $400 billion gas bill, the largest in history. debt tomind, russian gdp is very low compared to the rest of the world. their reserves are very hard. , an economyke iran that we can punish and suddenly it will collapse. that will not happen. >> we saw two ukrainian military jets get down. does ukraine get more aggressive, does russia send in troops, then either more sanctions as russia patriots to the east question -- patriots to ots to the east? what are the longer term scenarios? .> it is important to ask there is nothing about the downing of the flight that has changed the calculations of mr. putin and the kremlin, but having said that, putin does not want to invade directly because it is not popular in russia, not popular among southeast ukrainians, and it is certainly going to make the europeans harder line. he would like to still play this out over a longer period of time, but the big question will be the ukrainian government under a lot of pressure. economic pressure is going to grow because the gas is not coming from russia as a get into the colder months. will they start upping military efforts against the russians on the ground, the separatists in the southeast ukraine? if they do, and if this had to be successful, russia will absolutely respond. we are moving toward escalation. i think it's still underestimates the impact it is likely to have, both in the region, and of course, on the europeans, who have all of this exposure. the big story, of course, is that the united states is vastly less impacted by this by other countries in the world, just like the u.s. is less impacted by what is happening in the middle east. >> it seems like the u.s. is much more impacted on the events i want your quick take on what is happening in gaza. cease-fire talks have broken down. what kind of back channel conversations are happening with hamas to get them at the table? >> are not many people talking to hamas these days, and that is why israel thought this was a better time than most to engage in a ground invasion. the egyptians, where hamas used to get most of their military equipment as well as economic support through those tunnels -- the president in egypt is pretty much an ally of israel on this issue. he considers hamas a terrorist organization. he shut down the tunnels. -- batteries who used to qatar, who used to send money that way, have been chased by the saudis on this issue and also because they have not done much for their money. hamas is really isolated. this is more of a question of when the israelis feel they have done enough damage to hamas' military and they are under significant pressure to back down. the ball is in their court. the willingness to respond to secretary john kerry is limited right now. >> have to leave it there. he and grandma of the year age -- ian bremmer of the eurasia group, talking about all these geopolitical issues. we appreciate it. "in the loop" will be back in two minutes. ♪ >> two stocks we are watching this morning, ford and general motors, both driving and somewhat different directions. ford leading estimates and gm falling short. joining me now is michelle krebs, senior trader at auto trader.com. we look at gm in particular, yes, they missed on the top line, but we can really blame recall-related costs. is the work over? >> there will be more costs going forward, but the underlying strength is terrific. at gm not had those recall costs, they would have had an outstanding quarter. -- whatis what is charles stevens, cfo of general motors, said earlier to matt miller. let me play you what he said about recall expenses. >> we expect recall expenses to be up, but not materially versus the run rate -- the historic wrong rate we had prior to the first half, to think about the exposure to the run rate that we had in 2010 and 2013. we expect recall campaign expense to come down significantly versus the first half of the year and be more in line with our historic run rate. >> so, trying to be a little more optimistic there, michelle. too much? do you believe him? >> we will see. we do not know the entire ken feinberg competition plan, what that will cost, because there is no cap on that, but the underlying strength of gm is quite amazing, frankly. consumers are not scared of buying general motors cars, and they are buying more expensive ones. if you look at the transaction rate on pickup trucks, they are way up. they're having success with sports utility right now. that generates a lot of profit. there is a lot of strength underneath. >> it also seems that gm is providing less incentive versus ford, which is stopped providing more incentive. can you talk us through that a little bit? >> yes, general motors has cut way back on incentives. ford is up in large part because of lincoln. they are trying to get the lincoln restarted. ford is selling down the current f series. they are in the same position gm was in trying to sell old trucks to make way for the new ones. ford will have a new truck coming out in the second half, so there is always that balance. andyes, gm is way down, that is why transactions are up, as well as having product people really want to buy. >> let's talk about weak spots in these countries -- ford says they are seeing a larger loss from south american operations. americanaid south sales fell 18% in the second quarter. how much does the u.s. and europe have to be to offset? >> well, for the past few years, the u.s. has been the bright spot. it will continue to be. we expect sales to be stronger this year than last, and we still see really good discipline in terms of supply and demand. so, you know, north america was southcarry the load, and america has forward guidance that it will not get a lot better there. europe is a weak spot, but ford certainly showed a lot of improvement with their first profit there in three years -- small, but a prophet. the prophet is a prophet. a profit.is thank you, michelle krebs. we will look at the initial offering. how will it stack up to competitors of amazon? ♪ >> amazon reports earnings after the closing bell. they are known for razor thin profit margins thanks to big spending on performance centers to big television studios. jon erlichman caught up with the man leading amazon's studio. he joins us from los angeles. how much is amazon spending on this concept? >> they are shy when it comes to sharing the actual numbers, but they are spending a substantial amount per series, and it does not come cheap when you want to get into the business of hollywood, alix. you are right, every amazon earnings report we talk about the profitability problem for amazon because of the spending on fulfillment centers, and conversations in the past were as they rolled out new devices, selling those that cost, but this is changing to being a story, not unlike netflix, of spending millions of dollars per episode for these different shows. roy price, who is running amazon studios, set the record straight recently on their budget. here's what he has to say. >> people seem to have the idea that these shows have lower budgets that maybe the shows that they enjoy on tv now, or the cast was taking significant pay hits to work on amazon shows or these shows. i can assure you that is deathly not the case. the priority for us, as i say, is creating shows that our quality, that people will care about, and shows that are going to last. i think we have stepped up to really do that. between devices, fulfillment centers, and original shows, all of it, in a lot of ways, is about keeping you in the world that is amazon and continuing to shop with amazon. >> actors taking a pay cut, please. is there any talk about spinning out the film and television unit ? >> some people were wondering because they rolled into their prime two-day membership program, why not make it like a netflix and then get people to upgrade to the full-time prime program. he poured cold water on that idea. >> i think we are focused on making prime fantastic, which i think we are doing pretty successfully, so we are morse focused on that instead of subdividing it -- more focus on that instead of subdividing it. >> i think you are right. we will hear more about prime. they have been highlighted. -- therebout content was speculation that it amazon buys time warner, perhaps they could buy electronic arts to help original content? >> the name will grow. we saw microsoft pulled the plug on their xbox original series strategy. >> jon erlichman, thank you. we are a few minutes from the opening bell. we have the top 10 trades you not want to miss after -- at the opening bell. keep it right here on "in the loop." ♪ >> first. bloomberg. >> welcome back. you are "in the loop." i am alec still, unit four betty liu. -- i am alix steel, in for betty liu. it is 26 minutes past the hour. bloomberg tv is on the markets. we had better than estimated earnings from facebook as well as a slew coming from ford, gm, and american airlines -- you name it, things are looking good. also, china parliament during manufacturing data coming in at 52, and 18-month high, and jobless claims last week fell to the lowest level since 2006, helping to prop up a market that closed at a record high yesterday. we are on the markets again in 30 minutes. down to let's counted the open with the top 10, the only stories you need to know today. witha sterns joins us scarlet fu. under armour, raising its full-year revenue forecast after second-quarter earnings topped estimates. revenue rose by more than one-third as warmer spring weather helped to drive up arrow for teens.rel byd.r. horton was hurt charges tied to asset in the chicago area where the housing market is still pretty weak. >> and the south, two. >> number eight, skechers. at an all-time high, reporting second quarter profit that rose nearly five-folder. nearly $.68 a share. >> number seven, dunkin' brands. the company that owns dunkin' donuts and baskin-robbins cut its full-year outlook after reporting disappointing second-quarter sales, but net income was up. >> they need healthier options. >> can you make that healthier? >> i am waiting for the gluten-free donuts. >> that is an idea. >> i do not know, you have to stick with the fat and the sugar. >> sure. >> number six is angie's list. they reported a larger than estimated second-quarter loss and offered a bearish forecast for this quarter. a number of firms are cutting their ratings on angie's list following the report. shares are trading at all-time low. >> number five, american airlines, flying high, soaring to a second-quarter profit with earnings topping estimates this morning and they also said they are paying their fair shareholder dividend in 34 years as part of a new capital deployment plan it gained from the merger with us airways. annual you believe it, american airlines finally in the black. >> after all that drama, the bankruptcy, paying a dividend and everything. >> one company still struggling with the cycle, caterpillar. thanngs will be lower analysts were estimating. they see no signs of an upturn in the industry as mining companies have cut lines of dollars in spending. would pickaying capx up, and you hear this from caterpillar. >> same old song. a strong performance for ford help to offset costs from introducing 23 numeral's. i think matt miller as every one of them. >> number two, general motors, missing second-quarter estimates with earnings falling 30% from last year. gm set aside $40 million to pay victims of faulty ignition theches, and they say numbers might rise another $200 million. >> your number one stock of the your number one stock of the day, facebook. they are poised to open at an all-time high. the social network posting a 61% surge in second-quarter sales, powered once again by mobile ads. facebook has rallied 170 3% in the past year, making it the best performing stock in the s&p 500. i've seen a slew of price tag it upgrades this morning. -- a bring in missing and senior portfolio manager at american century investments. he oversees $23 billion in assets. he says diversification is investors' only protection from geopolitical shocks. when you look at this global instead, it is a complete mess, from the middle east to russia and ukraine. catastrophes, whether they are natural or man-made, generally have significant negative impacts in the markets, but short-lived. unless you can see some economic ramifications, like in the case with russia with oil prices, not much you can do after the fact. your only protections, your best friend, as you said it, is diversification, geographically across asset classes. one thing is clear from historical analysis, and that is reacting to these types of crises after the fact that a knee-jerk reaction is rarely a moneymaking strategy. >> i want to break in and update everyone. facebook actually climbed above its record intraday high. it is able to beat its record high from previous on that killer earnings report we saw on the closing bell. of almost 100% in the past 3 years. i note -- up almost 100% in the past 2 years. are you a fan of that? is that where the risk should be? >> well, that is one of the sectors we are overweighted in -- growth stocks in general, technology, industrials, commodity-related stocks. basically, we see this recovery, as slowing grinding as it has been, as consuming but decelerating. this recovery is long in the tooth. you have evaluations in the equity market that are much less compelling. earnings growth this season is coming in positive but decelerating, as is topline growth. short-term interest rates are about to rise. the whole tenor of this bull market is changing. you have to move in the mid-to-late cycle sectors and we will see utilities take over as the lead sector and then you know it is all over. >> you mention how short-term interest rates are going to rise. i want to bring the banks because you are a little bit less excited about this sector. bank lending is about to pick up some steam. citigroup, wells fargo, jpmorgan, reported on average 3% increase in total loans. bank of america reported a drop off because of products the bank no longer offers. with interest rates starting to head higher, should and that boost margins for these things? >> not if short-term interest rates rise faster than long-term rates. that will compress and that interest margins in particular. reits,rally speaking, financials, banks in particular, the valuations are fair and fully discounted. we have seen a nice quarter pop in earnings because interest rate rises have not come as soon as most people expected. that is a sector where we are shying away along with other value-related stocks. >> i saw a new know that you prefer credit risk to interest-rate risks. i wonder where you are searching for yields. if you look globally, years are near an all-time low. 1.7% globally. if you look at higher-yielding things come even janet yellen, head of the fed, says we might be in a bubble year. if you like credit, where are you going to find your return? >> geographically, it is all over. they have taken some high-yield exposure, they have taken international exposure at the margin. it is not about what the absolute level of yields are. it is a horserace, it is a relative game. at the margin we have been able to add a significant amount of the value at the indices and a commit is others just by eking out a little extra yield in these credit issues, rather than extending durations and betting on interest rates staying lower. >> we spoke with mark mobius of templeton, the emerging markets guru. olivia, you had asked him in the past who he admires and he said putin. >> can you believe that? >> he is not alone there. there are other leaders who have said that. >> true, but he says that putin has shown remarkable restraint. take a listen to what he said. >> the whole strategy is to take as much as you can without any consequences. if there are consequences, to logically pull back. that is the reason why sanctions are so important, if a impact on the russian economy. there is a good chance that if the europeans pull off a very strong set of sanctions, then logically putin will pull back. >> tensions could rise, the water could get a little hotter. he looks at all crises as opportunities to buy in. don't just have a knee-jerk reaction. perhaps mark mobius does have that knee-jerk reaction, he is a knee-jerk bull. >> what do you think about that? weat the margin we'd say agree. as tough as it is from a visceral reaction to jump in timesa crisis, nine out of 10 that is the right way to go. when i talk about knee-jerk reactions, most people's initial reaction is fight or flight and they run from the latest trouble. but the groups -- gurus are right on that one, you have to jump in on these types of incidents, if you have the intestinal fortitude. >> thanks so much. we covered a lot of ground there . senior portfolio manager at american century investments. olivia and scarlet, thanks for joining me on this. cfo, we- chipotle's will talk about the company's move into non-mexican cuisine. >> intestinal fortitude. [laughter] >> to early in the morning for that. ♪ chipotle reported earnings with impressive results and plans for hundreds of new restaurants. carol massar is with me to look at the numbers with the chief financial officer. thank you so much for being here. carol, thank you for being here as well. >> great to be here. jack, you guys had a phenomenal quarter. revenues up 29% from the year before. earnings for 24% from the year before. same-store sales jumped 17% from the year before. this is the high water mark for the company or can you guys continue these kinds of numbers? >> we are proud of more than just the numbers. we were super proud of our team. all the numbers you just talked about, all of that happened at the frontline in a restaurant. have beenrs and crews a great job and we are super proud. in terms of what is ahead, no, we think we can get better. we can do better in terms of -- we are constantly trying to find better ingredients. we think we can do a better job of having better employees with better cultures so they can rise up to the future leaders of our company. if you like our future is really bright and we don't think this is a peak for us. >> i spent some time with your co-cfo and you guys don't really have a specific culture and you really cultivate -- you guys do really have a specific culture and you cultivate your workers. let me talk about the increase in numbers. how much of that was a result of the increased you did in many prices? -- menu prices? >> very small. we did raise prices during the quarter but we only got a partial effect. most of that is from additional transactions. if there are additional customers -- either additional customers or existing customers coming more often. >> many restaurants are looking for local, sustainable, non-gm out ingredients. at the end of the day they are a lot more expensive, and with you expending so much, as another price hike on the rise for 2015? >> no, this price hike was the first one unit 3 years. we have a history of sourcing high-quality ingredients and our food costs are either at or among the highest in the entire restaurant industry. we tried to build our business model to find efficiencies so that we can find them and have a smaller restaurant and be efficient in the way we maintain the restaurant. we are really efficient in the way we deploy our resources so we can invest more in food. i'll everyone else is raising prices over the last 3 years, we are continuing to invest in food. in movingen investing gm outs and that raising prices and that is something we want to source, high-quality food, remain accessible. only some people can enjoy aaa and we want everyone to come. >> you guys are spending what you do beyond chipotle. you are doing southeast asian food and are looking into a pizzeria. you are building a second location and looking at a third. talk to me about the extension of the brand and how the growth is going nose areas. -- growing in those areas. isalways felt that chipotle in the special because of burritos and tacos, is special because of our approach to food and food culture, and especially because of the business model, which allows us to invest in food and people. we are super excited about where we are so far. the pizzeria, i had lunch there yesterday and it was absolutely delicious. our second restaurant is under construction and we think it will open later this quarter or early in the fourth quarter. both of theve restaurants -- the teams are great, the food is delicious. we think it is a bright future >>. > what part of that is to offset market penetration for chipotle? are you forced to go into other cuisines? >> we are not near market penetration for chipotle. we have about 1700 restaurants right now and we could have 4000. we thought we could have 4000 restaurants years ago when we went public. the awareness and economics were not where it is today. so likely that number is credited higher. we don't call these growth strategies, because we don't need to the growth right now. we are not enamored with growth for growth's sake. we want to nurture these brands and allow customers to discover them and allow them to become hipotl.efriends like cjo we don't need growth in any way right now. >> but you will take the growth. >> we will take the growth. some companies put growth as their primary objective. we want to change the culture and source quality ingredients and if we do all that well, the growth will be there and it will be easier for the growth to happen if we do all the nurturing of the brand along the way. >> you guys have come under criticism, some of the senior executives, for executive compensation plans. you guys do pay above minimum wage to a lot of your workers and restauranteurs. some would say this quarter justifies what the executives are being paid. but you guys are reviewing that executive compensation package. any progress on that? >> it is in the hands of our comp committee right now. they are making progress. they still have work to do. nothing to report yet, but our committee is working on something. > thank you so much, really you to get -- really glad you joined us today, and of course, carol massar. coming up, we have a lot more. ♪ bracing forys it is a terrorist attack. officials revealed a threat was uncovered and the chief says it is from suspects linked to this. conflict. an air algerie flight disappeared en route from burkina faso to all jeers -- to algiers to avoid a storm. it probably crashed and mali. there were 116 people on board. -- a key measure of manufacturing in china is at an 18 month high. expansion in factories and output and orders are up, reversing a slow start for the year. we do have breaking news to report. barclays is planning to file a motion to dismiss a lawsuit brought by the new york attorney general. of course, the issue there was wooly did barclays try to clients saying they were going to protect them from high-frequency traders, but high-frequency traders were welcomed into their dark pools. the controversy is it dark pools can wind up surviving. credit suisse is one of the largest indoor pool operators. barclays filed a notice that it will seek a dismissal of the new york lawsuits. we are looking at shares here. not a lot of movement happening. we are still seeing barclays stock rise ever so slightly, up 2%bout three points, about today. moving a little bit on the news, but not a ton. the question becomes what kind of case will they have. has been a lot of negative press about dark pools and high-frequency trading in particular with michael lewis' boys" and that has been a real negative for these kinds of movements could barclays and credit suisse trading is dropped off ever since this allegation. let's go to hans nichols. what kind of taste is barclays really have here? -- what kind of case does barclays really have your? >> in a way this was respected. they signaled they were to do this. surprise.massive when the attorney general of new york hits you with the kind of suit they were hit with, you expected their lawyers, especially when their stock has been clobbered, to respond. what we have seen with the dark pools over the last couple weeks, massive amounts of withdrawals coming out of them. legalway this is the stage of this fight, only in the second or third inning. there is a long way to go. >> in the meantime, we're seeing trading drop off in those dark. in with. hans nichols, thanks for the perspective. that wraps it up for "in the loop." tomorrow i will be joined by 's chief investment strategist could we will talk about how central banks are able to keep the markets quiet despite the turmoil in the middle east and ukraine. happy thursday, everybody. ♪ >> it is 56 minutes past the hour and a bloomberg television is "on the markets." i am scarlet fu. stocks are rising in tandem with stocks around the world. you have global data showing manufacturing strengthen. that gave stocks a lift coming in. we had a jobless claims that showed an unexpected drop to below 3000. 284,000 last week. that was a positive read for the labor market. in the last 15 minutes or so the consumer comfort index showed a slight uptick. in a couple minutes we will get new home sales numbers as well. looking outside equities, you have treasury yields higher. copper futures are flying, up 1.5%. chinese manufacturing numbers helping copper there. we are also watching shares of dow chemical. the company reported results yesterday. their earnings exceeded analyst estimates and are trading at record highs of the moment. what does this mean for one key investor, warren buffett? you cover warren buffett and berkshire hathaway. this goes back to investment he made in dow chemical during the financial crisis. >> he committed before the fall to help them with their takeover. the deal actually got done in 2009. this was a classic buffett deal. he was able to in exchange for committing a large amount of period ofor a long [ time able to get an 8.5% of it -- >> 8.5% dividend. >> yes. he has been getting that the last several years. there is a part of these contract that basically said that now could convert buffett 's shares into common stock if they traded above $52.72 for a 20-day window in a 30-day period. it is a little complicated but basically warren buffett tied up this money for a long time and he got a nice dividend for a while and that could be coming to an end with the dow shares trading up so i. >> he is making more than a penny. this is something that no one else can really get. buffett can come in and demand of these. >> he did a lot of deals during the financial crisis. he did a deal with goldman sachs, he did a deal with general electric. he has done many of these kinds of things over his career. the philosophy is to have money when others don't and be willing to make a big commitment, oftentimes on very short notice. >> he is not the only one who came in to dow chemical. >> berkshire hathaway has about 3 billion of these preferred shares. >> is that the sovereign wealth fund? >> exactly. >> and it has to do with dow chemical, facing pressure from activist investors. >> there have been a number of actions the dow has taken this year to boost the share price. also, a lot of investors in dow chemical knew this was coming. the company was buying back a lot of shares to offset the dilution expected when these preferred shares converted. >> thank you so much. this story is available on bloomberg.com. we are back "on the markets" in 30 minutes. "market makers" is up next. live from bloomberg headquarters in new york, this is "market makers," with erik schatzker and stephanie ruhle. >> cracking the code on mobile -- mark zuckerberg delivers another record quarter for facebook and the stock hits a new high. russia'snaire blues -- oligarchs are nervous about how theident putin is handling crisis in ukraine. just don't expect them to say so publicly. we will tell you what they are revealing and private. >> under attack -- israel has one of the world's most thriving tech economies. here on"market makers" bloomberg television. good morning. i'm erik schatzker.