Bears Run for Cover: Surveillance (11/19)

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Nov. 19 (Bloomberg) -- Full episode of "Bloomberg Surveillance." Guests: Bill Priest, Jonathan Golub, Clayton Christensen, David Magee, Michael Glimcher, and Michael Holland. (Source: Bloomberg)

This is "bloomberg surveillance." 2012 net income, j.p. morgan settles civil, state, and federal charges.

More settlements to come.

There is seek coverage as markets surge higher.

Is it helicopter janet, a record corporate profits.

A report on liberalization in china.

This is "bloomberg surveillance," i am tom keene, live from new york.

Tuesday, november 19. joining me, scarlet fu and cristina alesci on a tuesday, the holiday season, i am there.

Do you feel like getting?

-- giving?

I am ready to receive.

Overnight, european new car sales rose for the second consecutive month for the first time since 20 11. the surge after cash for clunkers in spain spurred vehicle purchases.

8:30 a.m. in the u.s., cost index.

I will unemployed -- i will interact you, home -- i will anorexia, home depot raising its full-year profit forecast -- i will interrupt you, home depot raising its full-year profit forecast.

Same store sales rising 7.4% in the third quarter.

Right above nominal gdp.

Dick's sporting-goods and saks.

Equities, bonds, currencies, commodities.

I am not sure what a benchmark means, there it was.

1800 on the s&p. 10 year yield, 2.70% down to two 2.68%. nymex crude, slipping below the $92 a barrel.

The vix, a little bit of tension off of the good news.

There is the dow under 16,000. there is your spread to march, the difference between american oil and european oil, 93 to 109. u.s. oil, the better feeling of that lower gasoline prices.

We're getting to the low end of this range, will see what this means for 2014. let's hit the front page, we scour the papers on the web.

Pretty much a done deal, jpmorgan resolving the last obstacles and its settlement of civil, state, and federal litigations in his sale of mortgage bonds.

This deal will likely be announced formally later today.

What we know so far, the total settlement is worth around $13 billion, $4 billion of which goes to aid distressed homeowners.

The last part held at the negotiations for weeks.

If it goes through, it likely will, it would mark the biggest settlement ever with the federal government.

Erik schatzker will join us in a bit.

How much says jpmorgan was bad?

Admission of guilt.

It feels like it is a backdrop.

More details from erik, including how much is going to be paid regarding the freddie and fannie park first is a cacheability versus just aid.

Getting credit for helping homeowners.

I want to know if jamie dimon is taking aspirin or if he has a bottle of champagne.

Champagne.

Our second story, no official: on this, bitcoin reaches -- no official on this, bitcoin has a rise after a senate hearing on whether to regulate this experimental currency.

Ben bernanke help, he said they pose risks but they also "hold a long-term promise of benefit ." the chart is from johns hopkins, one of those zimbabwe charts.

Inflation in zimbabwe.

What we can observe is is is not normal.

At what point are credit card companies going to get nervous about bitcoin?

The transaction costs for credit cards are so high, you don't have that for bitcoin.

Will see how it plays out.

Our third story, new tech companies and bubble proportions.

According to "the wall street journal," dropbox is raising money that would value it had more than $8 billion, double what investors put on the service in 2011. the figures reveal that revenue growth at dropbox is slowing down that well -- as well.

The euphoria in silicon valley, pinterest, snapchat turning down a $3 billion offer.

I am talking back to -- to bank ers, up, up, up.

There is no pessimism there, completely decoupled from the economy.

Rip up the script, is dropbox a big player?

It is going to be a symbolic player.

And a lot of other companies will derive valuation based on dropbox.

It is not likely to go public?

There is some discussion about the next year, that is far out.

Those of the front page stories, we will get to jpmorgan with erik schatzker.

William priest is with us, chairman of epoch investment partners.

He is definitive on cash flow.

We will get to that.

Chief u.s. market strategist at rbc capital markets joins us as well.

Bill priest, you are on the buy side.

What are you most worried about in this wonderful bull market?

As far as the bull market is concerned, it has largely been driven by a rise in price earnings ratio.

Earnings have grown little.

That ties into what is called zirp, zero interest rate policy, that has been driving valuations in equities.

We will enter a period, there will be a new normal with certain characteristics.

If you are an employee, it will be so good.

For employers, it will be very good.

He has just stolen the phrase, the new new normal according to bill priest.

John, can you buy securities this morning?

You can.

The fed has told you to buy securities.

They told you that in september.

The earnings are actually picking up.

As bill is saying, the backup is pretty positive for the intermediate term.

Fascinating.

Look at the balance sheet, the healthiness of companies versus the government, that is driving this.

People look at the price earnings ratio of the dow or the s&p, it does look to elevated compared to 1999. you have to compare stocks to the alternative, bonds or the discount rate on their cash flows.

When the discount rate is the slow, the pe should be high on stocks.

How high?

You get something like 18.5, i am not saying that is where we are going, but it does mean with a multiple in stocks of 15 and bonds telling you 18.5, there is upside to stocks.

At what point should investors -- what indicator should they look for to gauge whether or not they should be pulling out of socks?

-- stocks?

You have to earn money.

Bill said that the earnings have been slow, we have had a pick up this quarter especially in a cyclical companies.

We are going to live a good next several quarters -- those were the hardest hit yesterday.

You have to look at it beyond a single day.

You are seeing better earnings data coming out.

I want to get to this, bill priest, you have the definitive small book on cash flow.

It is then, readable.

It is on shareholder yield, the best book, i have read it twice.

You should, too.

Are corporations going to buy back shares and raise dividends or do we finally get investment that creates jobs in america?

You will have the former.

The trick in allocating capital, can you invest it at about above your cost of capital?

If you can improve your cost of capital, the best thing you can do is reinvesting your company or make an acquisition.

Final demand is still suffering.

We are going to live in a period where growth will be there but not be great.

It is tied to employment.

Employment in the developed world is not going to be groped that last -- going to be growing that fast.

Without employment and wage growth, you don't have consumption, that is 2/3 of the gdp in developed markets.

You will see this allocated to buying back stocks, paying down debt and raising cash flows.

A terrific show, bill priest, jon golub.

Clay christensen will join us, disruptive.

Speaking of disruption, apple getting a court victory in its battle against samsung.

Apple can pursue a ban on sales of some samsung smartphones.

The device is would be once found to infringe on apple patents.

Walmart said to have fired workers illegally.

They unlawfully disciplined or fired employees for protesting pay and conditions a year ago tied to black friday.

They may try to get the workers rehired with back pay.

Investigating tesla's model s after three fires in just five weeks.

The investigation will focus on the fire risk from the car's undercarriage striking objects.

This is a possible precursor to a recall.

Are jpmorgan's lega;l woes over.

What its settlement means for the bank and its shareholders.

That is coming up on "bloomberg surveillance," streaming on your tablet, your phone, and bloomberg.com.

? good morning, everyone.

"bloomberg surveillance," what is this?

How come schatzker gets gifts.

Laurence fink with erik schatzker this morning, "market makers," allies at 11:00 a.m. it is unfair.

We have got bill priest.

Is terrible.

Tom suffers, let's talk about jpmorgan.

Legal woes may be coming to an end for the time being.

The nation's biggest bank reaching a $13 million settlement over the sale of mortgage bonds.

This marks the largest amount paid by a financial firm in a settlement with the doj.

Joining us to discuss this is erik schatzker who will be speaking with larry fink later on.

Is this the end of jpmorgan's woes?

Not even close.

There is a criminal probe the doj is conducting into individuals at jpmorgan being led out of san francisco.

The government continues to investigate jpmorgan over manipulation of the energy markets, hiring practices and china, legal woes far from over.

How do they feel this morning?

Reallylieved.

Aba mimosa.

-- maybe a mimosa.

They had no leverage.

A bank cannot sustain a criminal charge or criminal indictment.

Let's say you are running a company like 3m were some manufacturer in san antonio, but the government sue me.

A bank cannot sustain a criminal indictment.

Jpmorgan, possibly banks down the line, bank of america, citigroup, wells fargo, no leverage.

Do you get $1 billion?

Split the $13 billion?

$4 billion in mortgage relief.

That goes to consumers?

In very.

$4.5 billion goes to the fhfa dir.

Even though they are in conservatorship, that is not going directly to the federal government.

$4.5 billion left to the fed.

On the civil side, how much does this open them up to civil suits from private investors?

All kinds.

There is no provision -- the settlement is basically to make them more vulnerable to this, the way it was worded.

That will come down to the language of the agreement.

There is no question that the general counsel for jpmorgan and dimon himself labored over the language to leave as few openings as possible for those seeking civil -- do you think they were successful?

I have not seen the agreement.

Bill priest, chairman of epic investment partners, is this good news?

They will continue to be under attack.

It has to be a scapegoat for these issues.

Unofficially, the banks are it.

-- unfortunately, that banks are it.

Does this clear the air for banks to be able to focus on building new businesses and generate revenue growth?

I agree with erik, this is not over.

There will continue to be additional suits filed.

Who is next?

Jpmorgan, the reason that jpmorgan faced this action by the doj is mostly because of the acquisition of bear stearns, which was a holding company and washington mutual, which they bought and only require the banking operations of.

Bank of america and bought countrywide and merrill lynch, both holding companies.

Holding companies -- in the case of washington mutual, this was a thorny issue, jpmorgan wanted to use some of the indemnification that is received as part of that deal, if you don't buy the holding company, you are not responsible for all of the company's liabilities.

Jpmorgan lost that battle.

Bank of america cannot even wage that, it bought the holding company.

I want to go back to the motion.

Use a jpmorgan has a sigh of relief.

$30 million, -- $13 billion, sure.

Dimon is dying to get this behind him.

They want to get this done before the end of the year so they can have a claim first quarter, fourth quarter is going to be messy.

Erik schatzker.

Look for his interview with lawrence think at 11:00. waiting for confirmation that the settlement is still something that will be reported.

Coming up on "surveillance," the dow jones broke the 16,000 yesterday.

Is it now headed for 17,000 or 15,000? this is "surveillance," streaming on your tablet, your phone, and bloomberg.com.

Finally, i can buy.

? good morning, everyone.

"bloomberg surveillance," i am tom keene with scarlet fu and cristina alesci.

We start in europe, new car sales rose for a second straight month in october.

That is the first back-to-back increase in two years.

Registration for cars increased 4.6% this month, the big winner was spain where a program for a 34% jump.

Spending on prescription drugs will troop $1 trillion, a jump in spending in china and emerging orchids is pushing sales -- emerging markets is pushing sales higher.

In tokyo, caroline kennedy passed through the city as part of a ceremony on her first day as ambassador.

She was welcomed at the imperial palace and presented her credentials.

A lot of drama.

It is a huge deal in japan.

I am sure it is.

An american being in front of the emperor is not a light issue.

It is a big deal.

Morning must reads, two interesting ones.

Extreme weather we have been seeing, the typhoon in the philippines, tornadoes in the midwest, they hurricane in the new york area last year.

It is from an author who writes that climate change makes any disaster global.

Tougher building standards are not enough.

Haiyan is just the beginning of the new extreme weather regime our planet is entering.

Regional economies get hammered.

He says it is a global story, beyond the images that get transmitted through the effects on the economy and public finances.

We saw this in illinois.

To the east coast as well.

They change.

A piece from the new yorker on the fact that innovation is not counted in gdp.

A lot of these companies are giving away their services and it becomes really hard, if not impossible, to actually count them in gdp.

We have a quote from the m.i.t. economist, out of this story it says -- you may think wikipedia, twitter, snapchat, and so on are valuable.

But as far as gdp is concerned they barely exist.

According to statistics, the information sector of the economy has barely grown since the late 1980's, even though we have seen an explosion in the amount of formation and data -- information and data that individuals and businesses consume.

William priest of epoch brought along his new book.

I spoke to the professor yesterday, see that at bloomberg radio plus.

"race against the machine." why is this the one to read?

There is a trade-off between labor and technology.

He talks about race with the machine.

There is a substitution of technology for labor.

He has a great line at one point, he talks about a discussion between henry ford and the head of the labor union.

Henry ford says listen, i can get machines to do the work of your people.

The response of the labor union is, yeah, but will machines by your cars?

Bill priest with us.

Racing against reality.

China and policy reforms, coming up.

? good morning, everyone.

"bloomberg surveillance," i think the $30 million richer -- $13 billion richer.

The capital considers companies on jpmorgan, $13 billion is the top number on that announcement made last night.

It may go to homeowners.

There will be more penalties down the road.

In a check, equities, bonds, currencies, commodities.

Futures flat, and little bit of a risk off trade in oil, under $93, slipping down cap and $92.70 a barrel.

Let's look at big movers.

Clear channel was a big game -- gainer, up more than 4%. the dow closed at a record high, just shy of 16,000. tesla losing a 10th of market value, auto regulators investigating the model s after three fires within five weeks.

This may be the precursor to a recall of it -- of the model s. in israel, what is the next one?

There was a big run-up -- it is real, what is the next one?

There was a big run-up in the stock, two hundred percent.

Investors will buy anything that has growth potential.

It does not matter what the business model is.

We will see if they can survive the recall if there is one.

We will keep an eye out.

Something else, china's planned reforms to reshape its economy and industry.

These long-term promises, whether it is easy the one child policy or speeding up the ipo registration policy are acting as a mini stimulus.

Joining us from beijing with perspective.

A lot of reforms announced from the third plenum, will is the one that got investors excited?

Investors here are excited by the whole range of reforms that came out of the four-day meeting.

Partly because over the last decade under the previous president, hu jintao, there was talk of reform but nothing happened.

60 measures come out of this meeting have promised you a rose for private enterprise -- greater role swap private enterprise and less role for the government in the market.

One thing that got headlines is loosening the one child policy.

That will not take effect until 2020. we have seen some concepts stocks move on the news.

People are calling it second child concept stocks, makers of contraceptives falling, baby formula makers rising.

It seems like investors are responding to this even though the effective date is not for years to come.

That's right.

Investors are expecting a mini baby bill.

-- baby boom.

A dairy company here promises to make more infant formula.

A lot of companies involved with children's products have risen.

It is a big change socially.

The policy was put in place after mao zedong in the 70's. we have our stereotypes of china.

Tell me about the new china and what this liberalization will be to the china we do not know.

If you look at china of the last decade, state companies and local governments, the state in general, became very involved in the economy.

Almost acting in a monopolistic fashion.

These reforms are trying to push china towards a market economy, a more open, innovative, efficient economy.

You are going to see a series of companies that could benefit from this opening up.

Companies he would not expect to come out of china, perhaps, over the next decade.

Some execution risk here, especially looking at some of the land reform proposals.

Local governments have been against those reforms.

How likely is it that the government will be able to execute?

That is a good question.

In china, they have a slow -- the mountains are high, the emperors are far away.

It is a different world from beijing on the local level.

Local governments have benefited hugely from the control over land, the property market has risen.

They do not want to see this right taken away.

Same for local, state owned companies, they have benefited from control on resource prices.

The communist party is saying it is going to be a market-based system, that could threaten all these groups.

That could be -- there could be a lot of pushback on these measures.

Stay with us, speaking about market solutions, we saw that in the u.s., the dow breaking 16,000. can this momentum sustained?

Oppenheimer studios, i spoke with chief u.s. economist at morgan stanley and head of research for alan greenspan.

I asked about his current call on u.s. growth.

In the neighborhood of 2% in terms of our potential.

In our own forecast, 2014 is going to see the cyclical rebound.

Lots of policy accommodation, we have made a level adjustment associated with the financial crisis, politicians will get out of the way.

It is a year divisible by 2. we will pick up to something like 2 3/4%. jon golub, can we have the equity markets with that kind of subpar economic growth?

In the short run, a cyclical pick up where you are looking at something more like 2.5% to 3% over the next couple years.

In the short run, that is all the market will care about.

It is an issue longer-term if we are stuck in a slower trend line.

How important is a boy and china -- a buoyant china to optimism about investing in the u.s.? i think we care, i just got back from toronto and montreal.

In canada -- canada, not china.

There was more focus on china . or focused than we are.

Our economy is so much broader.

It matters, but not as much.

Henry sanderson in beijing.

Looking at china and the commodity take up, is our reporting in beijing optimism about use of commodities in china of the next number of years?

I think people are optimistic.

The economy is slowing.

As part of these reforms, they want theories of resource prices to be based on the market.

That should improve efficiency and stop things like big pileup of aluminum or excess capacity.

People are hopefully market can take a bigger role in our kidding resources.

-- in allocating resources.

Bill priest, what do you glean from china as you invest with a domestic portfolio?

More than half of our mandates are global and non-us what is going to happen in china is positive.

If you think you are only going to have 2% real growth, i think you are going to have the tapering issue off the table for longer than people think.

One of the big issues in emerging markets, the minute they came out with the view that there was going to be tapering, if you had a current account deficit funded externally in an emerging market, you were doo med.

This is circuitous and comes right back to your optimism.

Janet yellen will keep the party going.

The fed has made it so clear, they were talking in september about 2016, 2017, 2019 before they get to something that looks like neutral policy.

From an inequity investor point of view, free money forever.

Janet yellen has made it very clear with your comments about structural unemployment and things like that that she thinks this will be a lot of capital going into the market.

Henry sanderson, bureau chief in beijing.

Jon golub and william priest will continue with us.

Bill priest on cash flow.

Disruptions in china, the u.s. with balance sheets, that brings us to our twitter question of the day.

What business needs to be disrupted in 2014? we have seen pcs, tech companies, retail disrupted.

Bow ties?

Tweet us @bsurveillance.

? good morning, everyone.

"bloomberg surveillance," i am tom keene.

Scarlet fu and cristina alesci.

Top headlines.

Jpmorgan, jpmorgan, jpmorgan.

We will start in lebanon, two blasts near the iranian embassy, 23 were killed.

The third attack in beirut since has the 00 -- hezbollah joined the war in syria.

Mckinsey and company warned the white house about problems with healthcare.gov, warnings were delivered late last spring.

The world economy will expand 2.7% this year according to the oecd.

That is down from a previous forecast of one point -- 3.1%, cooling economy's in brazil and india are among the reasons for the change.

Picks up on the imf, the tep id global economy as a backdrop.

Makes home depot baltimore amazing, same store sales of seven percent.

And raising its forecast as well.

The secular stagnation that larry summers highlighted in a speech given at the imf economic forum last week.

This chart was first published in the financial times.

It shows aggregate gdp, the actual line is a white line.

The forecast is in yellow.

The trend line is the blue line.

The pink line shows the estimated potential.

Gdp, the actual gdp has stagnated and fallen below the long-term trend line, the blue line.

Gdp is still way below potential.

The red pink dotted line -- the blue line.

Interest rates stay near zero, the fed and central banks keep monetary policy still loose.

Chart of the week.

Bill priest with epoch investments and jon golub with rbc.

The stock market is the only thing i feel good about.

Why are stocks doing so well if scarlet is showing as a white line off the game?

Because of zirp, zero interest rate policy.

The fed policy pushes that up.

You have a present value equation.

Can we do math on tuesday?

A numerator is growing at a very modest rate, you have an artificial influence on the denominator with qe.

If that numerator is a long- duration asset or has auction like qualities, it goes through the roof.

If you look at the present value of the dollar, if you want out 10 years and discounted at 10%, the present value of a dollar is about to the -- 38 dollars.

When i discount rate is zero, the 10 year is $100. all the junk goes through the roof.

Can you invest in this market,, jon?

What you have seen with the highflying internet stocks and biotech stocks, chipotle, amazon, they are doing well -- there is not growth elsewhere.

You pay anything for growth in a world where there is no growth.

That is what has been happening.

If the economy picks up state quickly -- picks up cyclically, there are more options to invest in companies we know and value.

In absence of that, highfliers keep running.

A soup going into 2014. i will be in chicago tomorrow for our bloomberg event on the year ahead, 2014. a shameless plug.

What do companies do in the year ahead with their cash?

$1.54 trillion, that is how much cash held by companies in the s&p 500. 10 years ago, they had half of that.

What they should do with all that cash, right here on "bloomberg surveillance," junior tablet from your phone, and bloomberg.com.

? this is "bloomberg surveillance," i am scarlet fit with tom keene and cristina alesci.

Some company news.

T-mobile raising money, planning to issue $2 billion.

The wireless carrier is stockpiling cash in the event that airwaves, not as spectrum, -- known as spectrum, becomes available.

Sony hiring bain.

Cost reductions will include reducing jobs.

Sony trying to lower costs after a second-quarter loss with moody saying it might lower their rating.

Paypal has been slow to move into newer markets that cater to mobile users.

Have you used uber?

Only in san francisco.

In new york, it is very expensive.

The s&p is kind of expensive.

80 it is cheap, depending who you ask.

Record highs, 4/5 of the companies are within 10% of their 52-week high.

Companies are reporting record amounts of cash -- hoarding record amounts of cash.

Apple and microsoft are holding cash.

What is the most effective way to use this?

Buybacks, dividends, r&d? william priest manages money.

His book "free cash flow and shareholder yield" is definitive on use of cash.

Corporations are minting money, the bears are in defeat.

Mr.

priest, are they going to make a movie out of this?

It would be nice.

You were out in front.

Have you been surprised by the religion of stern buybacks -- share buybacks and getting out dividend growth?

It is common sense, if you are a cfo with cash that has not been allocated from taxes are -- or capex, if you cannot reinvest that, give it back.

Is carl icahn right, apple should do more?

Apple could do more, i agree with carl in that respect.

By keeping cash on the balance sheet, you preserve an option.

You keep the option open.

There is so much cash on the balance sheets, payout ratios are kind of low, i expect continued growth in dividends and share buyback.

What kind of returns are companies getting on vivax?

-- on buybacks?

It has not helped microsoft's stock price.

If you take a look every a -- over the last 1.5 years, capital utilization has not been a problem for microsoft.

How do you discern in a shareholder report, the guys that do not have the religion?

They are not dedicated to intelligent use of cash flow.

You ask them about their business model and what they expect to do.

You keep going back and say have you done what you said you're going to do?

The market pays for cash dividends.

More than buyback?

You spend buybacks fairly quickly.

They do not often recognized the effect of paying down debt.

Paying down debt is the equivalent of a dividend.

The company's value is a function of cash flow.

The ownership is split between a debt holder and an equity holder.

When you pay down debt, there is an effect on the business.

I have a chart that put this together.

Since 2011, the best return for excess cash is to buy back stock.

19% annualized return.

15% annualized return.

Capex and m&a are not being rewarded.

Jon golub, what is the cause and the effect?

Companies do not bend on capesx and m&a and they do not get rewarded, or vice versa?

People ask me all the time what is going to reward me more.

Use the cash to its best use.

The market gets this, they see through it.

Companies that pay out a ton of money to jimmy their stock up do not get rewarded.

You need underlying growth, it is simple.

It is not is counted cash flows.

-- about discounted cash flows.

For a complete with a lot of innovation like apple, they are credited for putting money into r&d, not cutbacks and defense -- buybacks and dividends?

There are times when your next innovation cycle does not work, you need money set aside -- you are conceding that your innovation cycle is not working.

Companies that take more risk need more of a cache buffer.

-- cash buffer.

The year ahead in 2014, let's ask the basic question of bill priest.

He has written the book, he is real smart, how do you define a yield hog?

Yield hog?

Mia pig when i went yields instead of growth.

It is not enough to be a high dividend payer.

The dividend has to have a growth rate associated with crack how do you balance that -- a growth rate associated with that.

How do you balance that?

The fastest way to grow shareholder value is reinvest or make acquisitions.

An individual company.

Bill priest -- general electric.

Spinning off ge capital, is that an industrial company that meets criteria?

What he is doing, he started many years ago.

A problem with ge is no one could ever believe the earnings, mixed accounting standards and whatnot.

He is heading off in industrial company, much more transparent to an outside investor.

Bill priest with us.

The book has my highest recommendation, a great fireside read on operating, investing.

Jon golub.

This is brilliant.

Come back when the market goes down.

It may be a while.

Forex report.

Very british this morning.

A fake british accent.

Sterling, 1.61, euro/sterling.

Sterling/yen.

There is sterling.

? it is a phrase of the decade -- disruptive.

Disruptive innovation.

Clay christiansen is with us.

Microsoft faces disruptive.

State -- steve ballmer faces shareholders for the last time.

Best buy reported a disruptive earnings report.

'tis the holiday season, your shopping mall goes head to head with the king of disruption -- amazon.

Good morning, everyone.

It is "bloomberg surveillance." i am tom keene.

It is tuesday, november 19. joining me as always, scarlet fu and cristina alesci.

We are bringing you clay christiansen.

Someone said to you -- he invented the word.

We are thrilled to have a look forward to 2014 with clay christiansen.

Great to have you here.

Let's get to our morning brief.

European new car sales rose for the first time since 2011. the surge after a cash for clunkers program spurred vehicle purchases.

A big day in retail earnings before the bell.

We had best buy -- let me disrupt you for a minute.

$.18 a share for adjusted earnings as we are looking for $.12 a share.

A big beat on that front.

Revenue coming in line with estimates.

The number that we want to pay attention is same-store sales -- comparable sales for the.

Period increase.

That is a recovery from second quarter.

Domestic same source sales increased 1.7%. best buy is doing good on its show warming -- show rooming concept.

Game consoles should also in short traffic into the store.

It is such a mixed opinion on best buy.

We are going to have to get clay christiansen to weigh in on best buy.

We also have dick's sporting goods and tjx at a: 30. -- at 8:30. jpmorgan could announce a deal as early as today and would resolve civil, state, and federal investigations.

Of the total $4 billion would go to aid depressed homeowners.

It would be the biggest settlement of a financial firm with the federal government.

The nlrb says walmart fired workers illegally.

They threatened the discipline, -- threatened, disciplined, or fired workers.

Omar denies the allegations -- walmart denies the allegations.

Dropbox raising money.

The online service is looking for funding according to the wall street journal.

That would drop -- value dropbox at more than a billion dollars.

Dropbox is going to make a jazillion dollars.

Jpmorgan in its settlement.

William cohen, he has been involved with litigation with jpmorgan and we go to him right now.

Wonderful to have you on this morning.

Give us a sense of the mood at jpmorgan as they approach a $13 billion settlement.

Are they effervescent, are they gloomy?

The best thing you can say about the settlement is that it will be behind the jpmorgan.

This is something they have been working on for months.

$13 billion is a large number, even at jpmorgan.

It has to hurt.

Everybody on the street says why should banks come to the rescue of the u.s. government, given financial crisis?

Does going after jpmorgan after bear stearns, after washington mutual, does it change the appetite for banks to acquire, given massive crisis?

Absolutely not.

Jpmorgan got a great deal on bear stearns, a great deal on washington mutual.

It would not be jpmorgan chase without each other -- without either of those acquisitions.

They got a great deal on those companies and when they signed those agreements, they assumed that the liabilities, potential and real, that were existing.

These were among them.

This is the price of doing business.

Do we assume this is a fourth-quarter -- it is a kitchen sink quarter for jpmorgan and that they move onto a better, cleaner 2014? that is the hope.

Their stock price is 54, 55. it is unaffected by this.

They're glad to have this behind them.

It is a big, a huge and number -- a huge number.

Read his books on the culture and soul of wall street.

He has the word of the year, the word of the moment.

When something tells you the red sox are disruptive or house republicans are disruptive, it is grand theft from clay christiansen.

We are thrilled to have you here as we begin.

Did you think when you wrote the word disruptive that everyone in bars would be using it and stealing it from you?

No idea at all.

I didn't understand how much people would misuse the word.

Why do we misuse it and how should we use it?

Most people, when a study a problem, they want to find validation for what they decided to do.

The word disruptive has so many connotations in the english language, that if they call it disruptive, they think people will assume it will be successful.

We have a specific meaning and people use the word to justify whatever they want to do.

It makes me cringe whenever i hear.

Best buy earnings just came up.

They are not circuit city, they are not going under.

Are they a good example of disruptive innovation?

It is.

They started at the bottom of the market with a model that allowed them to come in with lower prices than anyone else.

They progressively move upmarket as they change the merchandise mix around to achieve higher margins.

The company reported -- we want to get reaction from david mcgee -- and he has a buy rating on a stock.

When you look at the results, we can see that the prophet beat analyst estimates, sales were in line -- we can see that it beats analyst estimates and had profit.

Sales were in line.

I beg to differ a little bit.

This was a challenging quarter in terms of the macro being uneven.

The overall same-store sales numbers was 0.3. their domestic same-store sales were 1.7. that is pretty decent given the environment they came out of any third quarter.

A question on the goals -- he wants to mark -- match the market share to what you are going to see online.

He wanted to be 18%. right now, it is seven percent for the company.

How realistic is his goal?

I think it is realistic.

This has been a year-long process in terms of getting price down to match that of discount competition.

The services better in the stores and the website.

-- the service is better in the stores and the website.

The website is becoming more functional.

Once consumers are aware of the package, it should be the best solution for a lot of folks out there.

It is a realistic goal.

They are committed to being competitive on price, but they may seem negative -- they may see negative growth margin fx.

-- effects.

As an economy, we are limping into the fourth quarter.

They have said they plan to not be out priced by the competition.

They have to be the best solution for most consumers.

I think most of us have some degree of that in our forecast right now.

We are looking at best buy shares trading lower in the premarket.

David mcgee, on the latest with best buy.

Best buy, home depot out with earnings.

The future is soggy after the 16,000 and 1800 rain yesterday.

-- print yesterday.

Crude is slipping under 93. distant from $100 a barrel.

It is spread between american and european oil, as wide as it has been.

We are going to talk about shopping malls.

They are gearing up for holiday shopping.

? good morning, everyone.

"bloomberg surveillance." i am tom keene.

Our guest host is clay christiansen.

There is a timeless debate on the benefits of capitalism.

There's a separate debate on how we measure our economic success.

Is the way we measure our success, is it pleasing -- is it leading to fewer jobs?

Why aren't we creating jobs right now?

Somewhere in the financial system, it was decided that you should measure profitability by internal rate of return and return on capital and floyd.

-- capital employed.

When you decide how you're going to measure success, everybody lines up to maximize and what it causes us to be unable to do is invest in innovations that create jobs.

Daily organs and -- dale joregensen walks with you.

Labor doesn't matter.

As part of our dilemma that labor no longer matters?

-- is part of our dilemma that labor no longer matters?

The way that they measure almost everything is a ratio.

There is a numerator and a denominator.

If you want to get productivity up, you can get rid of people.

You have momentum of revenues that continue, even as your people are dropping off.

It looks like you are becoming more productive with your people.

The numbers -- they do not tell the truth.

Are our big tech companies going to disappear in the future?

There are difficult problems ahead for some of the best of them, like intel.

They go up market, making bigger and faster chips, what is disrupting the whole world for them is mobile and smart phones.

Intel is not in that.

They knew it was coming.

They measure profitability the wrong way so they could not go after what they needed to do.

Clay christiansen with us.

If we get time, we will talk about apple computer as well.

The dow breaking through 16,000 yesterday.

? good morning, everyone.

"bloomberg surveillance." our twitter question of the day -- what business needs to be disrupted in 2014? what business needs to be disrupted in 2014? our twitter question of the day.

This is "bloomberg surveillance." i am tom keene.

With me, scarlet fu and cristina alesci.

Our guest host today is clay christiansen.

Let's get to cristina alesci.

We start with cars -- new car sales in europe rose for a second straight month in october.

That is the first of back-to- back increase in two years.

Registration increased 4.6% in the month.

The big winner was spain where a cash for clunkers program fueled a jump.

Mckinsey identified problems in the white house's website.

In tokyo, a cheering crowd greeted caroline kennedy in her first day as ambassador.

She was welcomed as the impact -- at the imperial palace where she presented her credentials to the emperor.

What you think they talked about?

It is very formal.

Our office building for bloomberg, we used to have two buildings, it looks right out at the imperial garden which is spectacular.

I would be doing "bloomberg surveillance" in tokyo, any day of the week.

He is trying to get a field trip to japan.

I'm going to write about it this week.

We look forward to that.

From japan to something you know well, shopping.

Yes.

Bowties.

Cannot get enough of those bowties.

With fewer shopping days between thanksgiving and christmas, malls are pulling out the stops to attract shoppers.

Mall of america in minnesota is offering valet parking and complementary coffee at certain times.

One of my children is lost in mall of america.

Each store is considering the mystery that is the american consumer.

What is the new mall look like?

It is not just about buying things or dropping the kids off.

It is about doing things.

Going to your spinning classes, having your makeup done, going out to eads, shopping for -- going out to eat, shopping for shoes and purses.

Are we shopping and then going home and buying off the internet?

Sometimes, yes.

How do we embrace the internet.

That had we embrace the internet?

You-- how do we embrace the internet?

Shopping is a social experience.

Our mall in new jersey is the second most visited tourist site behind atlantic city.

People want to get out.

Did you hear that?

It is a tourist site.

That explains why people avoid my -- malls.

There is intense competition from e-commerce and online retailing.

What are malls doing to take on the new competition?

It is about the experience.

We have done major innovations.

The mall in new jersey is modern.

It has discount outlet pricing, but a fashion molly spear answered -- a fashion mall experience.

We want to make the experience better so you want to come shop.

Are you helping retailers blend brick-and-mortar with online?

We are providing a great environment and a place where people want to get out and socialize.

You cannot go out to eat online.

You cannot have your hair done online.

I understand the distractions, i think they're great.

Does it drive revenue at the stores so they can pay their lease?

We are seeing high sales.

Our occupancy is sitting at 95%. our operating methods are better than they have ever been.

The knock against malls is that they seem to have the same stores and resemble one another.

They all have j.crew, michael cors.

How do you make each one distinctive enough so that the younger generation wants to hang out?

We try to balance between national retailers and local favorites.

We are seeing a shift in food.

We are doing a lot of regional chains, organic food.

Give us an example.

There is a restaurant, true food.

It is all organic.

This is something that does not taste good?

It tastes great, it is very healthy.

It feels like a local restaurant, doing local food.

It has been a positive.

What is the downside?

What is the big worry?

The idea that people are not going to go to the mall.

People want to go out.

How they evolve -- i do not know.

Michael glimcher, thank you very much.

We are going to talk about steve ballmer and the stacked ranking at microsoft.

? this is "bloomberg surveillance." i am scarlet fu with tom keene and cristina alesci.

Let's get company news.

The program on test low's model -- on tesla's model s is a possible precursor to a recall.

An appeal judge ruled that apple can pursue a ban on some samsung smartphones.

Campbell soup says that a late thanksgiving her glass quartering -- hurt last quarter's earnings.

It was just one of the reasons behind the company's profit shortfall.

They reported $.66 a share.

That is company news.

Would you pass the campbell's tomato soup?

Who is admitting to using campbell's soup on thanksgiving day.

? the dow industrial average exceeded $16,000 for the first time yesterday.

Party at tom's house.

It failed to hold this record until the close.

We cannot go down.

Some suggested a modest melt up.

Michael holland is with holland and company and enjoys it years of perspective and enjoys years of specific -- of perspective.

I know it is a benchmark, but we have done a double since february of 2009. is that a surprise?

Given the extreme fear and pessimism in 2008, 2009, i do not think so.

It is the classic worn buffet -- war and buffet -- warren buffett . i do not think it is over yet.

I think we have plenty of people saying it is over.

It is important to take investment advice from an english major from harvard.

We are doing that right now.

You have a broader perspective.

How they respond to the numbers -- how do you respond to the numbers?

I have a lot of very smart and long-term successful friends . they are negative for plausible reasons.

When i look at the facts as i see them, jpmorgan is that nine times earnings, we are talking about a less from the atmosphere.

I understand twitter and amazon and tesla, but you do not have to own those.

The clunky stocks in this market continue to grow and are good value, even today.

Rounded numbers spark people to buy more because it reminds them that they want in on the market.

Which sectors get the big lists?

Unfortunately, they really turn off the computer and stop listening to cable because they are not about to go back in.

The numbers are not showing.

There is some return to equity mutual funds, but overall, the only big buyers of u.s. equities has been the companies themselves.

You are the defender of the house of diamon.

Can they grow the dividend over the next few months?

If they write the $13 billion check, it will have the ability -- they will have the ability because the government will allow them to continue to increase their dividends as they grow their earnings.

I think the answer is yes and therefore these companies -- we are looking at a few years from now four percent plus on what you buy to date.

That is attractive growth.

For somebody who has missed the boat, how do they get in?

Did they jump right in to try to recover lost gains?

You know your stuff.

Dollar cost average makes sense since they began this game of investing.

If you put a little bit in and do it on a regular basis, even when things get dicey.

Michael holland, not a raging bull, not a permabull, we need a patient data check.

The dow closed at a record high.

S&p futures are down by four points, mirroring a decline across global markets.

European stocks have retreated from a five-year high as well.

Euro-dollar is unchanged at 1.3506. crude oil is falling by half a percent this morning.

"bloomberg surveillance." we are on bloomberg television.

Bloomberg radio plus, on itunes.

I am tom keene.

Scarlet fu with me and cristina alesci as well.

Our guest host is clayton christiansen of harvard university.

In our cover story of the day, microsoft faces off against shareholders.

Steve ballmer announced plans to retire and shares have been on a roll.

It has been late to the biggest shift in technology and it needs to play catch-up.

Clay christiansen is here to give microsoft's next ceo some free advice.

The meter is ticking.

Is changing the ceo enough for this company?

No.

they had a great ceo who was good about running the existing business.

What they did not understand or appreciate is that when you want to catch the next wave of disruption, you cannot do it from within the existing business.

You cannot beat existing players in their own game.

They invested over and over again in sustaining innovations, trying to make better products than their competition rather than disrupting them.

You are wonderful about the geography and landscape of a how you do not set it up in silos.

Does microsoft have to set up a separate j.v? you can do it within the corporate umbrella.

The business unit has to be completely different because they need to earn profitability through a different formula.

Different margins, different kinds, different channels to the market.

You cannot do it from the monolithic market that has brought you to success at this point.

Now they have dropped the ranking system, does that bring in the kind of fresh talent and a viewpoint the company needs to start new businesses and products?

I do not think the problem is with the people.

The people who are they are are bright people.

It is the system in the company and the resource allocation process that says we will put this much behind this initiative and this much around another one.

The system is more powerful than the ceo.

What is a successful system now?

Isn't alan mullally at fort?

-- is it alan mullally at ford?

Which one has a system clay christiansen can believe in?

There are not many.

Give me a name.

Give me some help.

Clay christiansen it's a build by the syllable.

Give me a company that seems to be doing the right thing.

I think salesforce is doing a great drop -- great job in catching the next wave.

I think into it does -- intuit does a great job.

I think ge has a tough time ahead because they grew by disrupting wall street through ge capital.

They run resources out of the industrial businesses.

Now they have to rebuild it.

That is right.

It is from the bottom up.

How do we suicide -- how do we decide where the capital goes in?

Is the disruption happening at the big companies?

We have not seen the kind of disruption that you're talking about at the big companies.

Why spend money there?

Is it for cash flow reasons?

Wall street decided that they will measure profitability by internal rate overturn and return on net assets or any of its cousins.

When you measure profitability that way, you cannot invest for the long-term.

Once you disecide, you have to go back to that is not the right way to measure things.

Steve ballmer is heading out.

The big question is who is in at microsoft?

? good morning, everyone.

Bloomberg surveillance.

Scarlet fu and cristina alesci with me.

Are you buying into bitcoin?

Not at all.

We have ron johnson from homeland security committee.

He was on the committee that was questioning these witnesses on bitcoin.

Jim yong kim will be joining us as well.

He has been big on climate change.

The second thing -- they came out with a report saying the cost of natural disasters has quadrupled in the last three decades.

What can countries do about that?

"in the loop" with betty liu.

We have amazing pictures.

Let's take a look at those.

The very literal path of destruction is clear to see in this image of the to of it -- tornado ravaged town of washington, illinois.

The extent of the damage is still being assessed.

Six people died in illinois and in the town of washington, over 500 homes were severely damaged.

Mount aetna continues to spurt and bubble after a massive disruption over the weekend.

Locals are used to it.

Is that the volcano from pompeii?

I believe it is.

There is another one i saw this weekend in asia or someplace that is doing the same action.

Look at that.

It is incredible.

Airports remain open through that.

London's modern museum unveils renovations to the museum.

That is beautiful.

That looks like the old tape.

-- old tate.

One of the more drastic changes is a brand-new central spiral staircase.

We mentioned mt.

Etna.

It was mount the cbs.

-- mount vesuvius.

Clay christiansen, i know that you have had a lot of thought on geek squad and why that could be a point of distinction for best buy.

The only way your share price can beat the market is if you surprise the investors that there is more growth than they thought.

The only way to do that is if you are disrupting someone above you.

The analysts look at the way things are today.

The structure and look set the market to say what can we disrupt above us tomorrow?

The retailing of commodity products is commodity business.

We have a lot more to discuss.

We are going to talk about that and jpmorgan and its settlement next.

? good morning, everyone.

"bloomberg surveillance." tomorrow, he is caution on the reason -- cautious on the retail season.

Howard david ovitz -- davidowitz . i think he is little more colorful than cautious.

I don't like what i see.

He will be here tomorrow.

Tom keene as howard davidowit z. i am scarlet fu.

Our guest is clay christiansen of harvard business school.

T-mobile is raising money.

The phone carrier plans to issue $2 billion.

They are stockpiling cash in the event that spectrum becomes available.

Sony is hiring bain capital to hire -- help out with expenses.

Sony is making this move after posting a second-quarter loss that led moody's to downgrade the debt rating of the company.

Paypal is teaming up with uber.

They will be able to pay for the car service ride with pay paul.

-- paypal.

That is today's company news.

After square, everyone went to credit card.

I am not sure why you need paypal with uber.

People don't want the credit card at all.

They want to make all of their transactions or -- should i try it?

You should try it.

Try it in the rain.

It is time now for the agenda.

Christina, what is on your agenda this morning?

The fed.

Ben bernanke is scheduled to speak tonight in washington.

What is interesting is that i was speaking to michael mckee and he was saying that despite the fact that he was -- is on his way out, people are paying close attention to ben bernanke and what he says.

He is starting to look back.

He is reminiscing?

Not reminiscing.

It is the transition to janet yellen.

I wonder if she will do anything disruptive.

I think she will.

The process of greenspan is very different.

The goal will be to not be disruptive.

The goal is to appear in control but at the same time, it will be a yellen fed.

I suggest it will be different.

Jpmorgan is set to settle civil, state, and federal charges.

The legal woes may be coming to an and for the time being -- and end for the time being.

I thought erik schatzker was great and in hours -- great in our 6:00 hour.

There is a sense of celebration for jpmorgan to celebrate -- to move on.

Jpmorgan shares are up marginally.

Michael holland reaffirming his belief that the year forward will be good.

Education in america.

It is front on anybody's agenda.

The word of the moment -- disruption.

We are lacked you have clay christiansen with us.

-- we are very glad to have clay christiansen with us.

The bright and the a lee at harvard -- and the elite at harvard, how are you teaching them differently than you did 10 years ago?

It is hard to say that the institution is doing anything different.

The professors are trying to make a difference.

Kids are smarter now.

They are grabbing information.

Are they not focusing enough on longer-term reading?

The problem with doing that -- data is only available about the past.

As we focus our students to be data-driven and fact-based, we condemn them to take action when the game is over.

The only way you can look into the future is if you have a theory of causality.

It can also be called the consultants dilemma.

The disease of consultants is a lot of people want to go into mckinsey.

How do they help corporations find the new new?

I'm not sure they do it well.

They are outdated.

They're looking backw and not getting data real-time.

They are effective in helping establish companies do better in the near future.

Those are big projects.

To start new companies requires a sense for how to understand what customers want tomorrow.

Starting new companies is easier than fixing old companies entrenched in their ways.

What does apple need to do to take it to the next level?

They have to set up separate business units to go after new opportunities.

The existing business is not broken.

It is a great business.

They ought to keep going at it for a long time.

Does google do this well?

Is google the leader in the apple/google/twitter space?

Innovation isn't just the new product.

You wrote about this in terms of the first mover, the pie any areas often the one that ails.

-- the haiyan he or -- pioneer often is the first one that fails.

You have to go somewhere.

You need to go into the market with an understanding that we are probably wrong.

We cannot spend all of our money in the pursuit of the wrong strategy.

Figure out what works.

The book of the moment is -- it is a small school down the road.

It is about new technology.

What is the new technology?

I cannot explain it.

It is an extraordinary view of where i.t. is going in the future that i have never seen before.

What is the next industry that needs to be disrupted in 2014? commercial banking is in for big trouble.

The reason why is we are awash in capital and the cost of capital is zero.

If you are in the business of commercial banking, what does that cause the world to look like?

Revenues, returns on lending is going to be zero.

The cost is zero.

Revenues are zero.

The margin is very thin.

Do you make your money with services?

I do not think they have figured out that there is a job out there people need to pay a bank to do for them.

They are not getting loyalty from their customers, the customers all want lower fees.

They are going where they can get the best price.

Commercial banking is clay's answer to what needs disrupting.

Some of the answers to what businesses need to be disrupted -- revamp health care with mobile fitness and tracking apps.

Central banking needs disruption.

It plays into the bitcoin debate, right?

Absolutely.

Feature films.

Stop with the superhero, comic book, $300 million assembly-line garbage and make more low-budget movies.

The social network was a little more than a $3 million budget.

Who played you?

Justin timberlake.

Com

This text has been automatically generated. It may not be 100% accurate.

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