tv Bloomberg Markets Bloomberg August 25, 2015 2:00pm-3:01pm EDT
selloffina has a market , but is the buying here to stay? olivia: and you will be interested to see what heavyweight banking analysts mike mayo has to say about jpmorgan. mark: in pimco twitching of how he executives. -- pimco is switching up how it pays its executives. more on those details next. ♪ mark: good day from bloomberg headquarters here in new york. i'm mark crumpton here with olivia sterns. olivia: a little bit of a relief rally, but stocks are off session highs. the dow of 240 points. or 1.5%.f 28 point in the nasdaq up the most, of by
2.3%. seeing treasury yields of for the first time in five days. , 10 basisyear points. also, we want to show you what is happening in the commodities rockets. in thel is catching -- commodities markets. even oil is catching a bid. trading at 1.7%. -- up 1.7%. mark: let's take a look at the stories we're following this hour. olivia: china says the benchmark rate will be cut to 4.6%. the one-year rate for deposits will fall by a similar margin, three quarters of 1%. jason: china does not seem to be compounding some of the policy
missed takes and i would argue their embrace of the stock market was a policy mistake. to the extent to which they are making good policy decisions now, it perhaps brings september back on the table. olivia: the chinese central bank has increased the amount of money available by reducing the minimum banks are required to hold. the shanghai deposit index fell more than 7% today since last thursday. the chinese stock market is now down 22%. mark: moore signs of progress in the u.s. housing market. according to case-shiller index, housing prices road -- rose by 20% in june. robert shiller, nobel laureate and economics professor at yale talked with us about housing and the possibility of a recession. robert: i have not been predicting a recession in 2015 -- 2016. it would not be surprising if there was one, but i don't know
if there would -- if it would be strongly connected with the housing market at this time. home prices have been going up for builders and existing houses. if there is a recession, it would probably come from tumor fromdence flagging, -- consumer confidence flagging, from a general lack of can't. -- lack of confidence. the consumer index came in higher than expected. olivia: and the gunman accused of trying to attack passengers on a train in france had just watched a jihadi video just before the attack. >> we are always exposed and friday of aggression on on the train from amsterdam to paris, which could have been reduced to massive carnage
without the actions of the american military present that day. olivia: mark moogalian was was savedd his life by others who came to his rescue. he is a teacher and artists who has lived in france for more than 20 years. he will also receive the legion of honor medal when he is released from the hospital. still to come in the next half hour of the bloomberg market day, jpmorgan gets an upgrade, but the biggest honor is perhaps being compared to basketball great lebron james. we will explain coming up. mark: we will need a declaration for that. followed at manager -- followed suit with his bonds and beat 90% of his competitors by doing so. olivia: all that and much more coming up.
the s&p 500 clause is way back from its steepest today dropped the financial crisis -- two-day drop since the financial crisis. olivia: our next guest joins us from virginia with his perspective on the market. rod, you had the foresight to cash out some positions in the past couple of months. what are you buying today? rod: let's look at that foresight and it wasn't complete, far from it. but i think it is important to separate where there is a bear market and where there is a recession from what the market has been doing recently, which is assuming that there might be. where there is a bear market and where there is a recession is in everything that relates to china's investment spending. there is a bear marketing
commodities. there is a bear market in emerging markets. there is a bear market in the stocks. you will hear from bhp. the stocks that are tied to commodities and chinese investment. a lot of these have been leading indicators of a slowing economy or even a recession in the past. but what we think is different is that bear market is not completely isolated from what is going on in the rest of the world. and one of the consequences of oversupply in all the commodities is what we are seeing at the pump, which is low gasoline prices. the judgment you've got to make today and that we are seeking to make is, is this an isolated bear market in the commodities or will ittch, spillover into the world at large? all itgment, and that is can be of this point, but our judgment is that the data will continue to support a continuation of growth.
mark: you talk about what is going on in the commodities sector, chinese investment spending is slowing as well. what effect is that having on the commodities? rod: it is everything, to be honest. that investment spending was the marginal capitalist -- catalyst that created a huge boom in commodities for 10 years. and the overspending following the 2008 global economic decline where china got so afraid and just poured money into infrastructure spending created a quick recovery in commodities. they almost got back to their old hide, but could not keep it going. and china is now making a painful transition. the consumer companies are having a different experience. apple was saying iphone sales
were very good. it is very different if you are supplying the commodity patch versus supplying the consumer. if you look at it the way we were -- the way we look at the world, which that this is a fears, but there are ultimately unwarranted fears of a recession next year. then there will be a buying opportunity. olivia: so which will it be? rod: we believe it is unwarranted fear. one of the betting -- better leading indicators is the collapse in oil prices, which has always when it has been did driven -- when it has been driven by supply shock and not an over supply shock will start to live. that is a judgment call we have to make. about one minute left. where are you seeing earnings opportunities to be recovered?
rod: not only opportunities, but actual reality. despite thepanies relatively sluggish growth in japan have out earned the u.s. since the recession. the next when it has the most opportunity is continental europe, because that cycle is only beginning to turn up. and are the places, japan think youne, where we will see the best earnings in the next couple of years. olivia: is this the right time ?o buy back rod: this unquestionably has been one of those corrections that has eventually dragged everything down. but if you look at what was strong immediately before the correction, the markets will get back to that and germany is part of that. what was leading us down?
that was emerging markets and energy. to be smart, we sold the stuff that wasn't working and we will look to buy into the stuff that was working prior to this correction. no one knows exactly when this correction will end, but prices are falling enough that it is giving you an opportunity for entry. to ask you quickly, in about 15 seconds, the magnitude of what we are seeing, did that take you i surprise? surprise? rod: yes, it did. but once you start to break a level, everybody piles on and now the rubber band is very he getsd and when stretched, it will bounce around a while like a rubber band does when it gets retched. -- when it magnitude gets stretched. so yes, the magnitude will be
major averages, indeed we are down off the highs, but till recovering some. take a look at the averages and the nasdaq is still doing the best. it has achieved a percentage , up almost 3.3%. over the course of the day you can see this trajectory that we are talking about. we started out higher, so even though we are trending lower, still higher on the day. movers, banke up of america, apple -- these are the most actively traded companies. so not only are they higher, but higher volumes. we are seeing this relatively broad-based rally. there are a few dan -- a few down numbers to mention.
this is one that has a relatively high ownership. the stock is down another 11% today. ubs downgraded it to neutral. it is not rebounding with the rest of the market. in addition to not recouping the other highs, we are also looking at a decline ratio that is not as impressive as the advanced ratio yesterday. the amount going up is not as impressive as the selloff. 14.5 stocks were declining to everyone increasing, so if you look at it at that ratio basis. now look at the inverse ratio.
about 2.7 today in terms of the advance decline ratio versus 14.7 yesterday. not only are we seeing the rally sort of give up a little bit of its momentum, but it is not as broad as it was yesterday. olivia: thank you for highlighting that. we've been talking for the last couple of weeks that the rally we had in the s&p was also very shallow. what do jpmorgan and lebron james have in common? , also ag to mike mayo university of maryland fan, jpmorgan and lebron james all caps and offenses and defense strategy. mark: jpmorgan has a brazilian balance sheet, that's the defense. and tailwinds from its expense savings, that is the offense. here to break it down for us is mike mayo.
egyptgive us the church -- the strategic thinking that went into this. mike: what is more important in this game, so to speak, is to have a good defense right now. like lebron james has been named to the all nba defensive team, we want a bank with good events. jpmorgan excelled during the financial crisis. they have navigated the last several years, the european sovereign crisis, russia, greece part 1, 2, and three, and they have the least volatile earnings over the last 10 years among the global banks. and they have a dividend yield close to 3%. that spread over the 10 year treasury over 2%, that predicts outperformance historically. mark: they say offense wins games and i would imagine in the market that is short-term thinking, but defense wins championships, and that his
long-term investing will stop -- investing. mike: exactly and you have to think about your risk to reward ratio. and by the way, understanding how much these balance sheet are stress tested by the federal reserve. assumes 10%ss tests dowployment, -6% gdp, and a at 8600. you don't even want to compare the current scenario to the fed's stress test scenario. to jpmorgan are only allowed bring returns above that. if we are in this tough interest rate environment longer, then the dividend yield should keep growing and jpmorgan. it would be at 3.4% by 2017 based on our estimates. what we would say is, i'm not sure what you are getting your bank account right now. not much is the answer. so take your money out of the
bank account and put it into jpmorgan.. you get a better yield. noticed you said jpmorgan is like lebron james, not jamie dimon will stop -- not jamie dimon. a that has the ability to compete offensively and defensively. get -- think jpmorgan jamie dimon gets credit for setting the tone at the top. he is the one that gives the warnings, look over your shoulder, things can go wrong. olivia: we are really extending this allegory. the: but it applies to banks that we cover. what if the ceo job? -- what is the ceo job? olivia: coach. about don'tvice mess up, don't break the law anymore, he sets the right tone at the top. having said that, i think jpmorgan is a lot more than jamie dimon. that is just the defense.
the offense is almost $5 billion in expense savings. they have extra earnings leverage that not every bank has and they have gained market share when competitors and markets have been tough. this is the ideal environment for jb morbid try to get additional share in asia, for example. mark: who are some of the other mortgaget have steady streams? been wells fargo has stable. if you look at the earnings report from wells fargo from two decades ago, it is consistent. consistency of strategy has led to can see of earnings. -- has led to consistent of earnings. i think you will be seeing more of jpmorgan and wells fargo. olivia: the only bank you have a higher rating on is citigroup. why is citigroup ahead of
jpmorgan -- why is citigroup ahead of jpmorgan? mike in this low rate environment and that seems to be in citigroup's, climbing out of a hole and has a lot more restructuring than jpmorgan, but they still have a lot. mark: we would be remiss if i did not asterisk odds on what we are going through in wall street in the last 24 hours with the in a downy s&p into correction territory. what are we to make of this -- the dow and the s&p into correction territory. what are we to make of this? of all oft a lot -- out of office
president obama within five votes of the total needed to keep congress from blocking the agreement with iran. senator patty murray said she withfrank conversations" vice president biden and secretary kerry who brokered the deal. fans -- theyedge hedge fund manager who is noticeably against the deal said biden in abacking bid for president. he said if he is going to run i would give money to him personally. hadle close to biden pointed to october 1 as the deadline for whether or not biden will run for president. national security advisor susan rice is headed to china.
she will help lay the groundwork 's visitident xi jinping to washington next month. with a tumbling stock market there despite massive attempts to stop the slide. they will meet at the white house in late september. those are your top stories at this hour. here,: great having you mark. a little bit of a relief rally, but as julie -- julie hyman was 20 oh, a much bigger selloff -- was pointing out, a much bigger selloff than yesterday. coming up, we will speak with one fund manager who says high-yield in bonds is the place to look. ♪ the only way to get better is to challenge yourself,
it's our promise to you. we're doing everything we can to give you the best experience possible. because we should fit into your life. not the other way around. tand that's what we're doings to chat xfinity.rself, we are challenging ourselves to improve every aspect of your experience. and this includes our commitment to being on time. every time. that's why if we're ever late for an appointment, we'll credit your account $20. it's our promise to you. we're doing everything we can to give you the best experience possible. because we should fit into your life. not the other way around. olivia: welcome back. i'm olivia sterns. let's get straight to stories making news at this hour. a new jersey judge has brokered
a $225 million case between chris christie's administration and exxon mobil. the christie administration hailed the deal as the second-largest of it time against a corporate polluter. critics say the settlement is a fraction of the nearly $9 billion new jersey should have recovered. and a deal that would make exelon the biggest utility in the u.s. by customer accounts now appears to be in jeopardy. regulators voted against their bid to buy pepco unanimously. didattorney general said it not provide enough benefits for consumers. regulators in four state had already okayed the takeover. and saudi arabia plans to cut billions of dollars from next year's budget because of the slump in oil prices. bloomberg news is reporting that the saudi government may delay or cutback infrastructure projects. oil accounts for nearly 90% of saudi arabia's revenue. petri, ofith thomas
petri partners about the collapse in the price of oil. thomas: it really turns a lot on what the saudi's do. the report you just had was an important one this morning, the cutting of capital and infrastructure programs. that does suggest they intend to stay the course longer. olivia: since june, crude has lost one third of its value. numbers out tomorrow are likely to show that stockpiles rose once again in the u.s.. and the usda has ruled that hampton creek just mail isn't. , isn't.ayo vegannot be called a friendly mayonnaise spread because it isn't mayonnaise without eggs. coming up, we will hear from the
ceo of bhp coming up next. and oil is at $47. argentina is playing by its own set of rules. will break down what the new pay structure is with mary childs. all of that is still to come. it is hard to find safety in the market these days, particularly this week. the markets are in disarray, but one hedge fund manager seems to have figured it out, beating out 99% of his peers. his winning strategy is featured in the october issue of bloomberg magazine online. he joins us now online. you say at the root of your strategy when you borrow money, you pay it back. how does it work? sandy: it is a pretty simple strategy.
the strategy itself is rooted in the discipline of paying back. we try to go with those that have done it good job being fiscal stewards of the balance sheet. those that have access to capital, but over a long time have actually been paying the debt back down. the debt we are talking about is generally bank debt. the debt disappears quarter after quarter and as that happens, the profile of the company improves, in some cases getting rating upgrades. olivia: because as the company decides to pay down debt further down the road, it can lead to paying out a higher dividend or paying back stocks -- buying back stock. sandy: generally what we are looking for is a company that has a deep desire to pay down debt. we are looking for free cash flow. and that has an unexpected use,
2-d lever the balance sheet -- to delever the balance sheet. we are looking for free cash flow generating stories thereby being used to pay down debt. olivia: the article is quoted as saying you are looking for the perfect balance sheet. what does that look like to you? sandy: what i mean by the perfect balance sheet is that you have yields the higher market, and you have used those proceeds. and at some point you have done a good job of managing leverage expectations and money has fallen off the balance sheet. company can relax covenants. that can happen in one of two ways. a company can relieve themselves of a covenant that might be onerous, which precludes them from buying stock back or paying a dividend or doing an
acquisition. the other that is common in the last several years is to simply go into an open market and do a neil the -- a new deal. low,ith interest rates so the appetite has been great. it is simple to come into the marketplace and issue a new bond with less of a package, solid collateral, and essentially do something shareholder friendly changing their attention toward the stockholders rather than the debtholders. olivia: are there certain sectors that you avoid or certain sectors that the strategy works better than others? sandy: good question. going back all the way to my janet days with my bond fund -- fund, days with my bond we have long cleared -- steered clear of paper and chemical and
auto retailers, largely because of the balance sheet at the top of the cycle. i have a risk that i end up with an overleveraged balance sheet at the top of the cycle. we stay away from those sectors. olivia: where are you looking right now as it stands with sector forces? sandy: we have long look at something doing his own thing, the funeral services, movie theaters, cable sector, health care. historically we have been focused on gaming, although not as much in the last recent years. but generally, sectors that can weather the storm and not be dependent on the leverage to frankly, can manage that leverage because they have predictable cash flow streams and the economy does not interrupt those. olivia: a final question on rate, currently rates have a big
impact on your strategy near zero. if that changes, how do you change your strategy? rising yield rates in our income fund, we have dealt with that by having extreme duration and high quality. by thehas been driven ability to finance a lot of paper in a lot of sectors in a lot of different -- a lot of different companies. that said, i'm not looking for a ,assive rise in interest rates and even to the degree that it happens we think it will eat up the process whereby companies want to get to a particular debt deal before interest rates go up. if interest rates go up, it will create volatility. on the other side of that, debtholders will have the strongero structure covenants. it is a cycle and something you have to wait through. through.
-- wade through. thank you so much, sandy. you can read the full story in the bloomberg markets magazine. akila fund hashe outperformed in an percent in the last few years. it is up 19% on average. so to come, if you want to -- still to come, if you want to see the effect of plunging prices in china, we will look at the world's biggest mining company. ♪
olivia: welcome back. i'm olivia sterns. and the chinese economy stutters, there are big repercussions for mining and natural resource companies. bhp awarded a 52% drop in underlying numbers. bhp up today after being hit hard in yesterday's global selloff. we asked andrew mckenzie, the ceo, what gave him confidence that the chinese economy could actually grow 7% this year. dataw: we have a lot of theying up to see where are growing. it pretty much matched up with what they were saying. and our data would say that they are growing around 7%, and
therefore you can trust their numbers. 7% will believe that last forever because they are transitioning to a more consumption-based economy that will grow at a low rate. years, that will tend to trend down. some of the numbers we are seeing at the moment, rather than being a traumatic effect will be a -- more of an inevitable shifts. they are managing pretty well. you coordinate that to bhp billington's growth? what does the chinese economy mean to their earnings? andrew: we are looking at things like iron and coal and copper. now, we are seeing
reasonable trade flows into china. it matches some of the things that apple has said that despite some concerns, product is getting placed. you are selling production a few weeks ahead and there is no inventory build. it is steady as she goes. here is one thing investors ask when a look at a company like bhp billington, or the competitors, glencore, fortis q. why maximum involvement? why not leave the higher cost reduction in the ground? theew: we don't have highest cost production of iron ore. we have the lowest. this is a great business for us. even greatere is than 50%. all of the production we are
getting at the moment is because we are running our business better. it is to productivity. we are not having to invest any money -- any more money. therefore we have gross margins of 50%. it is a logical thing for us to do. in a free market, the lowest cost producer generally has the right and the opportunity to continue to produce. in thee is a reduction growth of demand, it is up to the highest cost producers, not the lowest cost. means they will be delivered more securely and we get at a profit for our shareholders. saudi's are trying to do the same thing in their market. andrew: i would say that is near identical. i think they have woken up to the fact that i feeding -- by feeding market share, they are actually losing more than they might have gained by reducing the market share and hanging on
to a higher price, certainly when they take a long-term view. and we would agree with them. that is exactly the game we play in copper and oil and other commodities. bhp made some $2 billion in petroleum and an average relies price of $68. no one is getting that price today. what happened to your petroleum business? can it be average of all if profitable ift be brent averages where it is now? andrew: yes, it can be profitable and it is. makes decentness returns on prices of over 30%. our business strength, if you like, is the quality of our assets. we stress operational excellence. generally when we run a business, we have some of the best resources and we run them better than anyone else. we make money in this
environment across all our businesses. ceoia: that was bp -- bhp andrew mckenzie speaking with erik schatzker. we have andrew mckenzie thing see it -- bhp is still profitable. alix that is what is happening: in many companies right now, that they are profitable at $45 or lower because income costs have come down so much. cost of inflation is anywhere from 10 and depending on the company and that is kind of the point that eric was talking to him about as, yes, you are leading oversupply versus lower prices in the market. i want to show you in my terminal the damage that has been done to oil prices over the last six months. what you are looking at is the
forward curve of a six month, about a year ago, and currently. you can see expectations for right around here for june of 2016, $45. one euro ago, that was near $65. if you look out at 20 -- 2023, $60 oil versus $72 oil. it shows the deterioration in the prices has been quite severe. the reason is, as we have rallies and higher prices down the curve, produces come in and hedge and pay off debt. --t leads to lower supply more supply and lower prices that we have seen. how about gold? gold prices have seen a big move in the past week and a half. they are bigger today off of the
lows of the session. is this fundamental or mostly technical? ubs had a note out today saying there was a lot of positioning going into this and you have been market conditions. really, the 100 day moving average is cap as gold waits for a fresh catalyst. go back to the last hike in the interest rates of 2004 or 2005, gold rallied. maybe the interest rate will not be a shock for gold. but we did have better inflation apectations and there were different set of circumstances surrounding it, so that may not happen as much this time. olivia: any other commodities you are watching? watching oil in argentina, by the way. there is a whole different market. much?n get oil for how $77 per barrel. it is the second-largest in
shale gas and oil reserves and the fourth-largest shale oil in the world. part of this goes back to the government saying we will cap the price of how much you can pay for oil. are $120 pers barrel, good for the consumers. if it drops to $45, good for the producers. the assumption is that consumption will be at the higher price than what the market is actually paying for the oil and it is working. the country has operated -- has added 94 operating rigs where globally it has been about 34. that is why this is working. that is why we continue to sit the -- we continue to see this non-opec supply continuing to improve. olivia: interesting. i always love him so much when you are here. alix steel will be back in 10 minutes. thehe meantime, looking at stories across the bloomberg terminal at this hour. sports,s, dueling -- in
dueling letters challenging tom brady's suspension. they suggest they are no closer to agreement. the judge has ordered roger goodell to appear in court just the suspension is to begin. today if you are mad about madden. madden nfl 16 is now on sale. it has fantasy and draft features and even lets you act like a franchise owner will stop franchisealth for -- owner. it retails for $60. setting clock chimes for big ben. it has recently been slow by as much as six seconds.
olivia: in an effort to retain employees, pimco is changing its way it pays its executive. the company depended on earnings growth by offering more stable cash incentives. >> clients are very nervous that they have wrought in a ton of thailand -- brought in a ton to assuage concerns, but it has brought in increased concern. the top-level guys are like, liver? i, chopped
this kind of addresses that. pimco had this very lucrative option program until july. basically, if they had this kind of ridiculous growth target for profits they would make a ton of money. those paid out and were very valuable. but now they are saying, here, hassan cash. stick around for this -- have some cash. the ground for something like three years and we will pay you. we are just not going to pin it to this profit growth because we are not likely to profit anymore. if i was a client i would be concerned. olivia: what does it say about the health of the company? is a smartnk it move. growth has not been crazy. in 2008 and 2009, pimco exploded. and they are out of the money options more or less, so you end up with this great payout. that is not likely to continue. we have the great rotation out of fixed income because of
rates, and all these things we talk about. that is likely to go away. it will not be as boisterous growth as it had been. going forward, this is more stable. obviously, a couple of pimco.go, the heyday of they had bill gross and mohamed el-erian. recruit still able to -- is pimco still able to recruit and retain the kind of talent they were able to when those two were at the helm? mary: that is a great question. it always took a little more cash to lure people to newport beach. it is not quite the cultural it was. there is still this academic
leadership, intellectual place, and that attracts a lot of like-minded people. but how do they continue to attract those people if the muted?prospects are olivia: promised them they will make a lot of money whether or not they perform. what are you looking at next for the company? mary: i think they are trying to kind of lay low and let their performance speak for themselves -- for itself. will look at how they are read shaving their thinking for the next however many years. thank you, mary childs. still ahead, a look at the markets in the last hour ahead of the close. don't go away. ♪
they are all well into the green. netflix is making a comeback. some changes that may put investors on it. olivia: we will hear from robert shiller on his outlook for housing. good afternoon, i'm olivia sterns here with alex deal. we want to take a look at the markets. were looking at a rebound of 100 points but we are off the highs of the session. part of the reason is this oil chart that we're looking at. you saw oil rollover a little bit. oil stocks have been holding up, but oil coming under pressure and dragging the market with it. olivia: that always
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