Lenovo Made in America: Surveillance (07/11)

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July 11 (Bloomberg) -- On today's "Bloomberg Surveillance," Tom Keene, Sara Eisen and Scarlet Fu bring insight on the state of the market getting you ready for the day ahead. (Source: Bloomberg)

Chairman bernanke back stimulus for the foreseeable future, giving stock markets the all clear for record highs this morning equities are on the move.

Made in america, the nova sets up shop in north carolina as the people's republic loses its cost advantage.

The fortress don't sheets, while they maybe hurting, want have taken a hit, how bad will it be this earnings season for diamond and company?

Good morning, this is "bloomberg surveillance." i am tom keene live from new york this thursday, july 11, joining the as always, sara eisen and scarlet fu breed our guest host this hour on a wide number of topics . remember tarp?

Is it all paid back?

I don't think so.

They have done pretty good.

We also have markets on the move this morning following ben bernanke's talk yesterday.

We will be speaking with the chief investment officer at strategic research partners.

That get you caught up with a morning briefing.

Bank of japan yesterday deciding not to add to its monetary stimulus but it did upgrade his assessment of the economy, referring to a recovery.

Stateside this morning would get import prices in the weekly jobless claims number, another weekly weed -- read to measure consumer confidence.

The first thursday of the month which means retailers report that same-store sales numbers.

They will announce figures for june.

Cosco already out with its numbers.

Progressive will be reporting before the bell.

Tomorrow we see jpmorgan.

And wells fargo.

Let's look at the data check.

Boy, is it different than at 3:00 p.m. yesterday.

Celebration futures up 17%. jason trenton looks like a genius.

I say genius as we look at bernanke tapering until 2022. weaker dollar, much stronger currency.

What a reversal that was.

My backstory is oil.

That is west test -- west texas intermediate, not brent.

A lot on the front pages this morning.

Let's get started.

There could be a front page from boston.

Or 90 spoke yesterday at the fed's 100th birthday.

He reassured everyone while the central bank and start tapering bond purchases, it is not abandoning the easy monetary policy.

These comments come after the minutes from the last hollis emitting showing there was a divide among policymakers among went to top this bond buying program.

What is critical is who he spoke to.

This was not a normal ben bernanke moment.

The news was really on the minutes.

That is what confuse the market, the notes from the last fed meeting, a big split inside the fed about when to taper, how much to taper, and what sort of signals to look for like the jobless rate of when they start to do it.

He said the fed will not raise short-term rates right away.

As i've said before, 6.5% is a threshold him and not a trigger.

It will not be enough automatic increase.

He will be a time instead think about the situation a new.

That is not good news for the banks.

I thought the press conference was fascinating.

Jason, i am fed up with threshold and trigger.

I went back and forth last night.

Would you please define what a trigger is?

There is no definition.

We are in uncharted territory in terms of monetary policy.

I feel very strongly about this that the back of interest rates is not the death knell for equities.

It is mainly because interest rates have increased only in real terms to which is to say that inflation and the inflation expectations have continued to come down.

Five year forward pass traditionally come down.

This is suggesting stronger growth or it is ephemeral.

The yesterday, the head of the nber -- jason, there is a major argument here on economic growth.

John silvia came out yesterday at wells fargo and simply said the chairman is wrong, we're not going to get three percent gdp.

There are more optimist than pessimists including ben bernanke who sounds a little different than the past.

I guessed yesterday is relatively optimistic on stocks.

-- our guest yesterday is relatively optimistic on stocks.

A one thing i do know is this is the first time in a time where people are picking up their statements and sing losses on their bond portfolios.

The start of the year there was talk of great rotation and the idea was retail investors will sell their bond funds and by equities.

That did not happen until june because until june, investors basically sold or money market funds and bought both bonds and stocks.

Right now my view is, if you're going to be making those changes, you want to wait it much more toward stocks and bonds.

As a layperson, this is terrifying to a certain degree.

You have this massive distortion of the market that is been going on year after year after year.

Is he or isn't he tapering and the impact he has.

No one can truly know how this is going to turn out.

Neil borofsky put it, trigger threshold.

On the front pages, new numbers on the slow death of the pc business.

Shipments dropped for a fit quarter in a row.

This is the longest losing streak on record in the decline really comes as consumers continue to favor touchscreen tablets, smartphones.

This is the way they're going to the internet.

Second quarter global ship lease falling nearly 11% to $76 million.

Evidence suggesting pc makers are still struggling.

We're watching this to find out what happens with the dell deal and watching this because we're focused today on lenovo read wringing some of its production -- they're the biggest pc maker in the world and they see opportunity.

They have been posting growth.

I'm on my tablet bringing up bloombergtv plus live.

Jason -- i think we sped your name wrong.

That is ok.

I've been called worse.

The tablet is what we use on set.

We want to talk about the big business in book business, big changes taking place.

A judge ruled apple illegally conspired with big publishers to raise prices on e-book.

We know the ceo of barnes & noble quit and the company says it will not appoint a new chief executive.

It seems like when you add this up, it is a big victory lap for amazon and their ceo.

He loves disrupting markets and this one is clearly up for grabs.

They set the tone with e-books.

I have read five articles on this ruling and i don't get it.

Help me.

Amazon is a good guy and the publishers of the bad people, right?

It is hard.

The apparent monopolist emanating the -- dominating had 90% market share.

The idea is we were all victims.

That amazon was pricing below cost at times and consumers were benefiting from that as they were chasing market share pre- and --. . apple conspired according to the judge.

Amazon was able to set its own price, buying e-books essentially from the publishers and reselling them at any price they want.

Apple supposedly has been found by the judge to have conspired with publishers to change it where the publishers set the price another retailers.

Amazon has 90% of the market.

Itunes is miniscule?

Apple doesn't get a lot of money from itunes right now.

The bulk of the sales comes from its devices.

The monopolist is the good guy.

Sort of how the department has found it.

It is not so much the good guy -- the good guy is the purchaser.

What the judge found was apple had conspired in order to drive up prices.

Amazon was having low prices, setting their own prices, flipping the industry to put the pricing in that control of the publishers who then raised prices.

We will have more on this where i will be as confused -- i just don't get it.

Amazon victory lap?

Anyway you look at it, it has big implications for the business and potentially ford -- for apple.

Securities and exchange commission is allowing hedge funds to advertise.

Regulators lifted an 80-year-old ban on ads that was intended to protect investors, the little guy read now it allows startups, other small-company zen hedge funds to use advertising to raise money.

This has been the big discussion because the question is, are there enough protections in place to protect the little guy investor who may not know the risks of advertising?

No, clearly not.

This wasn't the sec's choice.

Covers acquired this when they passed the jobs act.

Sooner or later the sec was going to have to implement this rule.

It was not necessarily them deciding this was terrific.

They could've built in better consumer protections within this.

Their hands were a little bit tied.

The problem is this is going to open up a tremendous opportunity for fraud.

There are some good aspects of this.

They will have good companies that will be able to have a broader base rate capital access, more access to a diverse group of potential investors, but it is also going to enable the fly-by-night, the ponzi schemes, to really victimize unknowing investors, especially at the bottom end of what the so-called qualified investors are.

Are they going to have to show track records as they advertise?

I'm not sure.

I wonder if it will be like the medical commercials with the drug commercials -- with the disclaimers.

Get ready to be flooded with your linkedin accounts.

Lots and lots of advertising.

If you have a fraudster running it, it is going to be fraud.

We have a busy morning.

Adam parker will join us in the 7:00 hour.

This leads us to our twitter question of the day -- you do not want to miss the new issue of bloomberg business week.

We will show you the most provocative cover.

Stay with us.

? good morning.

"bloomberg surveillance." 4:00 p.m., carl icon, -- carl icon on "streetsmarts." good morning.

We're keeping an eye on this major story, the surprising setback in the courts for apple, the world's biggest tech company found guilty of negotiating illegal tries fixing agreements with book publishers.

We're looking at the impact on what it means for apple, amazon, and the entire business.

This really goes back to steve jobs.

Its early does.

The judge ruled against apple basically brought up some e- mails that steve jobs had sent to his executives and the publishers come arguing steve jobs was targeting amazon, the dominant leader here.

Apple was targeting higher prices and excepting a 30% commission, but also wanted this provision where they could match amazon's prices.

The publishers settled the whole thing.

They did not go to trial . the judge has ruled against apple and apple says they will appeal the ruling in a separate trial will be held on damages.

The late steve jobs did not happen the -- help the cause.

Books are cheaper today?

Amazon made them really cheap, $9.99, below cost in many cases.

Apple wanted it higher and say $12.99. we should mention neq.

Jon erlichman told us he was at sun valley perhaps indicating a deal could be coming for apple but he was also involved in this case because he was part of the -- he was the negotiator.

He was testifying and did not help apples cause because he said he felt he was pressured by steve jobs demise, his health, to negotiate something on this book deal ahead of the release of the ipad.

Here is amazon's track record, better than good to say the least.

It is a true for performing stock.

You can take that back from 2007. neil borofsky with us this morning.

Within your study of law and how washington dovetails with new technology, is this just a question in washington and our federal law not knowing how to deal with the barriers being blown apart by modern technology?

I don't think so.

Putting aside the department of justice's action, this is a judge who is a very widely respected judge, very experienced, very smart.

She wrote a very detailed opinion, 160 pages -- she is not an oddball.

Not by any means.

This is a detailed written opinion, detailed findings of fact.

Air was no jury.

-- there was no jury.

Would the judge finds this, and it is interesting going to your point, she made adverse credibility findings against serious people including cue, which is another way of saying, i think they lied.

What is in adverse credibility issue?

The judge basically saying, i did not believe this witness.

Wow.

That is kind of a big deal for a senior executive for finder of fact to say, not just i believe what you're saying but you're wrong in the law, it is, i don't think you presenting accurate fax to the jury.

It has implications for how they will negotiate content in the future, but it doesn't make that big of a difference for apple.

Apple only gets about 10% of its sales from itunes, which is how its books are sold -- but it will have to negotiate as it pursues apple television and the content providers they are.

Potentially, the department of justice looking over its shoulder.

The department of justice, the federal government is looking for monetary damages, the 33 states will be looking to impose penalties on apple for what consumers lost.

The department of justice is looking for how obligation it's further deals, whether they can use -- 20 seconds, buy apple or amazon?

I am a buyer of apple.

Legal headaches are a challenge.

It is a challenge.

The stock is trading at 10 times earning and three percent yield.

That was crystal clear.

Adverse in jumped of -- buying.

Buying.

That was just outstanding.

No borofsky, much more.

Much to talk about this morning.

I still don't get the story.

They are trying to explain it to you, tom.

Coming up challenges at sears for the ceo's management style.

We will take you inside this company, inside his management style, how he runs it a little bit like a hedge fund on "bloomberg surveillance." ? this is "bloomberg surveillance." i and sara eisen here with tom keene and scarlet fu.

Bank of japan issuing an update view of the country's economy.

Recovering for the first time in more than two years.

The boj stuck with its plan to expand the monetary base by more than 700 billion dollars a year.

Foreclosure filings in the u.s. have hit their lowest level since before the housing crisis.

Filings dropped 35% in june from a year earlier, all according to realogy track.

-- realogy track.

Shipments of personal computers dropped for a fifth straight quarter.

Longest losing streak on record.

Shipments fall in almost 11% in the time according to research firm gartner.

Those are your top news headlines.

The morning must read.

We were fighting over which one.

My morning must read is on the reality of lawmaking in washington with the least productive congress, at least so far, tackling immigration reform . the white house needs to take itself out of the process according to this.

By contrast, situations where there are not enough bills to pass something, the president has free reign to rail and public, for instance, global warming.

The backdrop the last 24 hours is immigration has run into challenges.

Rocks the house is putting up a fight.

They're trying to figure out what the republican response is going to be because it does not sound like they're going to take up the senate immigration plan as it stands.

My morning must-read comes from the always influential economist jim o'neill, the man who created the brick term.

He is giving advice for the brick.

Writing on what they need to do to get out of the spiral.

He is obviously pro-bric and emerging markets.

This has hit the nail on the head.

This came up last night over a beverage of my choice.

Jason trennert, is the dollar threatened?

No.

i agree.

I think what has happened in the past few months has been positive for the dollar.

We're not talking about the dollar's value, but the dominant, political international currency.

I would say it is part and parcel the same thing.

I would say right now people in emerging markets, generally speaking, want as many dollar assets as they can get.

But is it changing?

I think it is getting worse.

There was a time when a move that way, but at this point, i think the u.s. has seen its first -- not among equals, but more of a reserve currency that it has ever been.

Thank you, jason.

Chinese computer makers are cropping up in the u.s. lenovo planting roots in north carolina.

We will tell you about the strategy, especially in light of the week pc sales, coming up on "bloomberg surveillance." ? this is "bloomberg surveillance." guys, bloomberg businessweek new issue is out and the cover is a doozy.

It is all about hedge funds.

Whoa!

It is a controversial one.

Everyone is going to be talking about it.

Is that tasteless?

Sorry, mother bloomberg.

On the side of the table, is it tasteless?

I think it is provocative.

Hedge funds have been sluggish.

Sluggish?

There is the return at the bottom.

It is a chart, you like charts.

Jason trennert is with us.

You have a lot of hedge fund clients.

It has been challenging.

You are not kidding.

I would add, if there is an alternative universe in terms of investments, so private equity i would say is part of that.

What is interesting about this year from an asset allocation view, in 2008 drops off the five-year projection.

From three year to five year basis, there's going to people that are wondering, i'm paying one and 20 or two and 20 to underperform the market by a large market.

Let's talk about this article . a nice summary of the huge challenges.

This is called "hot car." john templeton was really big on this concept.

You get an idea, it works, then everybody piled in and the information advantage disappears.

If you look at the growth in the past 20 years of the hedge fund, it has been -- there might have been -- 20 three of the $20 billion in hedge funds in 19, three dollars trillion now reedit -- there is three chilean dollars now.

By definition it almost has to be less.

It is our twitter question of the day borofsky is nodding his head.

Tweet us with your answers and your thoughts on the cover.

I think it depends on what hedge fund reedit -- find.

Two percent gross is what, five times more expensive than typical mutual fund?

It is not quite that bad, but it is certainly a lot more expensive.

I think it does really depend on what you are getting and who you're investing with and there is a certain -- it is difficult to find.

Certainly everybody is going to be talking about the cover.

We will talk about it a lot more.

Tom will close his eyes.

In the meantime, we are to talk about lenovo.

Just one of the latest technology companies to reassure employees.

Carol massar toured the pc plant in north carolina.

A time nearly forgotten.

We are thrilled to be making computers in the u.s.. we are the first to have done in over a decade.

Lenovo is part of a growing trend as companies are slowly bringing manufacturing jobs back to the u.s. we literally could get closer to the consumer.

The benefit of this facility is the locality and being able to get it there quicker.

We are importing components, which is much cheaper than the fully built boxes, so we're saving there, paying a bit more in labor.

Overall, there is an in criminal cost of manufacturing in the u.s.. but higher labor wages and shipping goods from china has made manufacturing in china more expensive.

Lenovo is the second biggest pc maker in the world.

Headquartered in beijing, it employs over 35,000. one of --115 will be in the u.s. we consider ourselves to be a global company and this is one part of the globe.

They have made leaps and bounds since 2000 five, revenue increasing 10 times.

Look at your latest quarterly results.

You know what the numbers say.

It is a mark of -- market people are not interested in.

They want tablets, smartphones.

Is crucial for us to move in that direction.

We want to win in pcs, expanding to tablets more aggressively, then maybe eventually smartphones.

Expanding the brand is important.

It is not so easy considering the company is not a household name.

Lenovo is not a brand that people say, "i have to have a lenovo." a lot of customers don't know as.

The good news is, our brand does not have any baggage.

But lenovo brand is recognized in china, recognized as number two in the market.

In the u.s., smartphones are not on the table -- yet.

We have to build our brand and a solution network and ultimately our manufacturing capabilities make that a reality.

We did not make this multilane dollar investment thinking it was an experiment.

We would like to believe.

It is an interesting story that lenovo is going into north carolina for factory production.

Scarlet, it is a broader macro same, less production in china.

Chinese factory wages have been climbing 15% to 20% and the tipping point for china losing its competitive advantage to the u.s. is around 2015, when the cheap labor costs in china shrinks to 39% from 55% as recently as 2011. the production you see in china will increasingly go toward serving those customers in those markets.

We're talking about and u.s. markets, they they will be increasingly making those out of the u.s. dural massa running an overnight some breaking news that lenovo actually -- carol massar reporting an overnight breaking news that lenovo is now number one.

It has dual headquarters in beijing and north carolina.

It has r&d and manufacturing all over the globe.

The top 14 executives come from seven different countries.

It is amazing how ambitious this company is.

There is a lot of talk it is looking to buy blackberry.

When was the last time you saw lenovo on the street?

I'm sorry, adam parker is on in the next hour and flat out says there's no manufacturing renaissance, it is just a fiction --jason trennert, that is a beautiful one-off case of lenovo coming to north carolina.

Do we have a renaissance?

I don't know if it is full- blown renaissance, but it is moving in that direction and i think it could be enhanced by natural gas, shale.

Dow chemical, four years ago said it would never build another plant in north america ever again and broke ground in texas last april.

That is a specific case for a chemical company that uses natural gas as an input, so it is natural, but i do think there's something happening here.

I was adjust the labor arbitrage is going to go to mexico much more than the u.s. when the fact or in duty and tryst rotation cause, there is a case to be made for building in the u.s. -- when you factor in duty and production costs, there is a case to be made for building in the u.s. what is new?

Bond prices are down and that could really blur the outlook for earnings.

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

In egypt, and arrest foreign has been issued for the leader of the muslim brotherhood.

Prosecutors believe the head of the brotherhood and other in the organization encouraged violence last week that left dozens of people dead in cairo.

In china, the missiles program has the ability to hit the united states this according to a pentagon intelligence report free at the report says china's military has the world "most most active and diverse ballistic military system." it has expanded as the defense spending has doubled in china since 2006. home prices in brooklyn surged to a record.

The median price of condos, co- ops and one to three family homes in the borough, 500 $50,000 in the second quarter, up 15% from a year earlier.

-- $550,000 in the second quarter, up 15% from a year earlier.

I have no clue with this chart is about.

My single best chart proves jay-z is telling the truth free of -- truth.

This is from bloomberg businessweek shows the alleged wealth of various stars.

See what happens when we reveal their actual net worth.

It is a very different story.

They bragged in their lyrics about making a billion dollars, only making about $9.5 million, $15.5 million.

Jay-z is fairly honest.

What is surprising to me, diddy is worth more than jay-z. who knew?

This comes from investigating the lyrics?

They went through the lyrics and found out what these guys say they make.

But that sounds like a lawsuit.

I think you could put the clever -- put that on the cover of businessweek.

I think you breaks it in from the backside, producing.

Some are in debt, right?

$.50 is not doing too well.

-- 50 cent is not doing too well.

He is in debt.

He needs a new single.

It needs to be a red bar to the left.

Where is run dmc?

They bill illin'. where are the stones?

They are known for minting money.

Mr.

jagger is known to know data the pinnie.

We're going to talk about hedge funds.

We want to hear from you.

You can tweet as for the question of the day -- it gets to the very provocative bloomberg businessweek.

They have been underperforming.

Should you still be investing?

We will be right back.

? this is "bloomberg surveillance." we have your company news this morning, starting with sprint nextel, dropping nextel from its name as prince completes a deal with softbank, giving the japanese company majority ownership in the wireless carrier.

It will keep its ticker symbol on the new york stock exchange.

Get ready for mac is -- massive marketing push.

500 million dollars to market the smartphone according to the wall street journal.

It was the first phone for motorola mobility since acquired by google.

It is believed all four major u.s. carriers will carry it.

Popularity among yahoo slipping, 84% of the staff approved of her last month.

It was her first full quarter on -- as ceo.

Interesting, especially since investors seem to like what she is doing.

Other companies we are following, the banks.

They kick off second quarter earnings for the big angst tomorrow.

On average, thanks are projected to rise 20% when it comes to earnings but it is a mixed picture for the banks as they enter the second half, especially in light of the market action.

We could do but the entire hour to this.

In a boring conversation about what we are going to start to see tomorrow.

-- an important conversation about what we're going to start to see tomorrow.

How much did they lose as yield rose?

We will try to figure out the mystery of this.

It is not a normal season.

It's not.

Earnings will be up 20% that laster was a really bad year.

The second quarter, jpmorgan had $4 billion in losses on the oil trade, bank of america had more than $20 billion in mortgage losses.

You had any unusual bad quarter for them last year that they're coming off of, so earnings will look at anyway.

Are we going to see like the wall street journal had yesterday, 10, or 12, or $4 billion hit to the balance sheet?

We might.

In certain portfolios, commercial loans and industrial loans are going to take a very large hit.

The reason being, those loans are funded on short-term duration, funding devices him and the fed is keeping interest rates really low on that so their net interest margins on those types of loans and securities are down a lot.

Plus you have the bond prices tanked this last quarter, so that is going to hit them on a market to market basis in there available for sale portfolios.

That is what i want to get at.

They keep saying every quarter it is getting thinner and thinner.

You would think with the rising bond yields it would help them.

On shorter duration -- also, they have these 30-year mortgages.

Who is going to refinance when rates are over 4 %? no one is going to refinance.

They will be on the ballot sheet for a long time, but they're getting less money on the commercial loans.

Within his complexity, we have neil borofsky, he had a book i'm going to say two years ago, the movie is out memorial day, 2016, we knew this was coming.

At some point, bond prices go down.

What uncle sam gives, he takes away.

Or really, uncle ben.

Massive distortion in the market caused by the government which was the policy was to recapitalize the banks by creating profitable opportunities for them to interest rates and other types of programs.

Sooner or later, that was going to taper off.

That is what is happening right now.

This is not like the government is striking at the heart of the banking industry, but this is the beginning of a return to normalcy and the supercharged profits generated from government policy are going to wane a little bit.

Do you invest, jason trennert , in banks?

I am interested in banks on the positive side and i would say one of the things that is going to happen as a result of what he is talking about, in my view, is banks might start to make loans.

How original.

Not pay out dividends?

This is a key issue for the overall economy, though, because the set has literally been dumping money out of helicopters but it has been going directly into bank vaults.

The velocity of money has collapsed, so no multiplier.

If banks start to make loans, that changes.

Then a lot of the questions we have had as people have been passe about inflation and these other things are to come to to fruition, but that could be the positive result of some of these pressures we are talking about.

And we cannot forget about the basel capital rules going into effect starting next year.

With u.s. regulators pushing for even higher -- they have adopted the basel, but it starts in 2014, but then there is the leverage ratio that goes into effect over the next several years.

Even though the leverage ratio doesn't go into effect until around 2018, banks will have to forecast -- i want to bring in one thing.

Blackrock talked about this yesterday.

Larry was adjusting intended or unintended consequences is staffing the liquidity out of these markets for the banks, exacerbating the problems for these rising interest rates.

You're getting ready in the face.

I don't think we have a real danger of a quiddity problem.

The fact things are going to have to have more capital is a very good thing.

I think these numbers, including the leverage ratio of five percent is probably way too low compared to what is necessary in order to protect us as taxpayers.

I think the impact is going to be minimal.

Anytime there's anything that makes inroads in their ability to monetize, we hear cries of this guy is going to fall, yet it really never falls that much.

I believe in the concept of too big to fail.

But by the same token, only 30% of the rules that have to be written for dodd frank have been completed.

70% are still yet to be written.

That is a problem.

That hampers the credit creation process.

I want to be sure we get this in, what are we going to see tomorrow?

We are going to see a really hot headline numbers that probably mean nothing.

We will see a big boost in earnings for jpmorgan, wells fargo's projected to go up by nine percent, but those numbers are probably not going to mean anything.

You might see a pop in stock prices initially when investors see those initial numbers, or then you might see them settle back as they have time to digest.

And we always hear from jamie diamond.

What are you hoping to hear from him?

He has guided the market saying trading is going to be of more than 50% over last year because they have such a block esther april and early may.

-- blockbuster in april and early may.

Investors will eat that up.

It will be the first quarter really where jamie doesn't necessarily need to talk about the whale loss in a very long time.

Thanks as a group, 20% profit growth.

Is a sustainable beyond this one quarter?

I think banks are going to have to take more risks.

The irony is there going to have to take more risks in order to do that.

I know that is precisely what we don't want them to do, but i think the idea of playing the yield curve, it is clear that is largely over.

At the risk is making more loans, i think that is something we want to have.

If it is making multi-hundred billion dollar bets on synthetic derivatives over in london, not so much.

I was stunned this week at the consolidation of big banks.

We have become more consolidated, haven't we?

We are on that path.

Because of the incredible advantages of having that moniker of being too big to fail and the implicit government guarantee in the lowering of borrowing costs that come with it.

All of the incentives are still in place to get bigger.

This is fascinating.

This is going to be interesting.

Thank you, all of you, this was fantastic.

Is a great question for our guests in the next hour, we will talk to congressman where they have been holding hearings on this issue of too big to fail.

What is taking so long to implement dodd frank?

Also, adam parker from earnings matter.

? equities decidedly on the move.

Kmart, it was a disaster.

So was sears.

After going through four ceo's, edward lambert takes the reins and runs the company -- well, maybe the phrase is "into the ground." and the verdict, steve jobs overplayed his hand on e-books.

Now jeff bezos owns the category.

Good morning, everyone.

This is "bloomberg surveillance ." i'm tom keene.

Live in our headquarters in new york.

Joining me as always, sara eisen and scarlet fu.

Our guest host this hour, morgan stanley chief u.s. equity strategist.

He has been cautious on the market.

Lots to talk to adam about.

Also, bloomberg contributing editor neil barpf ofsky.

We will talk to him about hedge funds, but first i will get you caught up with the morning briefing.

A news overnight, bank of japan decided not to add its monetary stimulus.

It did upgrade its assessment of the economy, referring to recovery.

In the united states, we have import prices and weekly jobless claims.

9:45, also a weekly read.

This is -- you love this one.

Drew matus at ubs adores this index, and this is important in this gdp guess.

A big deal, more than the usual big deal.

Retailers are reporting same- store sales all day -- cap, macy's, announcing figures for june.

Costco also came out.

It has been on a roll, all thanks to scarlet fu.

I do like shopping there, sara.

Let's get to company news.

Lenovo says it will stay number one in pc's. investment in the ran will boost half it margin -- will boost its profit margin.

Get ready for a massive marketing push.

Google will spend as much as $500 million to market its smartphone, according to "the wall street journal turcotte moto x. it is believed that all five major carriers will sell it this fall.

Regulators are lifting and 80- year-old ban on ads that were protected to -- projected to protect investors.

Using advertising to raise funds.

This week only, hedge funds on sale.

I can see it now.

We will get into a discussion on hedge funds, but our top story -- confusion about the federal reserve.

Ben bernanke trying to -- saying that the central bank could start tapering it's buying program, and interestingly enough, his comments came after minutes from the last fed meeting showed a sharp divide among policymakers about when to stop the bond buying program.

Have a listen to what ben bernanke said last night.

I think the 6.5% is a threshold, not a trigger.

There will not be an automatic increase in interest rates went unemployment dips below five percent, instead it is a time to think about the situation anew.

It is a good thing we have adam parker here.

I am sure hanging on every word at morgan stanley.

Is this market rally for real, or is it a ben bernanke rally?

I think the regime changed a couple weeks ago.

We were bullish in the first half because good news was good, bad news was bad, there would be more tapering.

They said there was diminishing returns on the efficacy of this qe.

The change in the fed balance sheet just doesn't coordinate with the s&p. i think now the regime is good, -- good is good, that is bad.

That sounds crazy.

Good for markets, that equity, bad for markets.

What about earnings?

Some days it will look ok, some days not so good.

People did not say it is bad, they are going to pull the punch bowl away.

They said good news is good.

The dow is at, what, 15,291. i think the rap on you is wrong.

You are what i would call cautious.

Are we going to see record highs, and are they of an appropriate quality?

I think the market will go higher because the earnings growth will be positive second half of year to next year.

The rates are improving but not at the rate the consensus expects.

It is all about how it acts with guidance.

Ms.

on the revenue and guide lower.

I don't think the markets will absorb that quite as well this time because people know the qe cannot be incremental.

They will not do more.

The distraction of qe over fundamentals, people have missed out on the cyclical rally taking place.

Just like i am trying to make the simple call of good news will be good, that news will be bad, there are good cyclicals and bad cyclicals, good defenses and bad defenses.

People saying i don't want any of these defensive or high- yielding names when things rise, i think that is too extreme.

I think there will be a lot more down revisions.

You have to be balanced.

The classic strategy barbell -- some good defensive, some good cyclicals to try to outperform.

We have seen this nicely.

Where are you on the petroleum stocks now?

For those that don't follow it, there is a future price for oil and the current price.

That gap is wide today, about a $20 to $25 gap.

People think oil will be lower in the future, and that is where you have to value the stock thomas not on today's prices.

That brings us to a discussion on those have been underperforming the hedge funds, and is the subject of the brand- new "bloomberg businessweek e this is one cover you want to check out.

Everyone will be talking about it.

The idea that there is a perception about hedge funds and and ego and a high fee, that the performance does not match up.

The sec dovetailing that with the announcements today.

Neil barofsky --here we are, tom on down, hedge funds.

Where is the track record for so many of these people?

When i first became a securities prosecutor, the small cases that we did would be based on -- the first cases we did would be based on advertising.

False advertising that was basically selling nothing, and there is a problem when you have investment deals -- and i am not saying big hedge funds will go out and rip off investors, that is not what i am suggesting.

But it gives an opportunity for bad guys, that players to victimize investors who may be meet the thresholds but don't have the sophistication.

We focus on 20 hedge funds.

There are thousands of sort of, kind of like hedge funds out there.

We look at the performance of the big guys in the big names.

The question is why people still demand hedge funds, why investments have not dropped off one year but a few years of underperformance.

There are some good hedge funds, there are some good opportunities, and there are those who have great trading strategies that can deliver a return.

There are just a lot more that are losing.

This is critical, the search for return given the assumption of a five percent world.

I think there are plenty of brilliant people that do great work in the hedge fund industry, plenty who have great returns.

Some of them offer that hedge that you can be sure stocks and long.

The industry will underperform by definition.

When you get down markets, you should be protected on the downside.

People who are asset allocators, you want to put money in that bucket because if the market goes down they will not be down as much as the people who are -- we should be fair, some of your clients are hedge funds, right?

Of course.

Anybody who invests money of any kind will stop -- of any kind.

This is the subject of our twitter question of the day.

Is investing in hedge funds for suckers?

You don't want to miss this week's issue of "businessweek." we want to hear from you.

Treat us at -- tweet us @b surveillance.

Coming up, the iconic business now managed by eddie lampert.

Times have certainly changed, not necessarily for the better.

This story really goes inside the management style.

The management styles eddie lampert.

It is is eye-opening, and we will bring it to you with the reporter who went inside sears.

Bloomberg television, bloomberg radio, streaming on your phone and bloomberg.com.

? good morning, everyone.

"bloomberg surveillance." i'm tom keene.

Get out your pad and paper.

Adam parker is with morgan stanley and he is looking at executive compensation and accounting in the 7:00 hour.

Ok.

restrictive stock versus stock options, and this is a use of cash example.

Obviously there is lots of cash on the ballot of the company.

I think one of the key indicators is just how the management teams, the c level executives, are compensated.

The big trend is to pay more in restrictive stock and lesson options.

So if you have restricted stock and you increase your dividends, you will get the dividend on that restricted stock, on the unvested part, the part you are not allowed to have yet.

If you have options, you don't want the dividend.

That devalues them by definition.

We will see more dividend growth.

Hugely incentivized to go for the dividend, and it is almost a double-dip, isn't it?

You are paying it to all the shareholders, you just happened to be one yourself if you are a big shareholder as an executive.

It probably means people are too negative on dividend yielding stocks for those company's where the management teams have paid themselves a lot in restricted stock.

Do you work within the framework that the high amount of cash will always be there, that we will have cash up to our eyeballs, big companies?

If interest rates change dramatically, that could change.

You are talking about washington reform and repatriation and stuff.

You guys have talked about that a lot on your show over the years.

There is not anything imminent there.

You will stay with cash as long as rates stay relatively low.

If you have much higher rates, people would say i have to do something with that.

Quickly, your and the day appetite in the second half of the year.

Does it pick up with all that cash?

It will be slow improvement.

Ceo confidence in all the surveys is still only around average, even though the market is one percent from its all-time high.

You need more confidence that conditions will stay strong before you get the am and a -- big m&a. also coming up, more tech and media moguls have arrived in silicon valley.

Numbered talking to hollywood.

Why is it so hard to make a walk muster these days?

This is "bloomberg surveillance." sara eisen with tom keene and scarlet fu.

With us this hour, adam parker.

The bank of japan issuing in a the view of the country's economy, saying conditions are recovering for the first time in two years.

Video -- the boj rip -- the boj expanding its monetary base.

An arrest warrant for the leader of the muslim brotherhood.

Prosecutors's believe violence was encouraged last week in egypt that left dozens of people dead.

Foreclosure filings in the united states are the lowest.

Filings now at their lowest level since december 20,006 -- since december 2006. michelle meyer talking about 11% year-over-year price increase in houses.

The pieces are coming together.

That is the big bat at the chairman has.

From chairman bernanke each eddie lampert, the ceo of sears.

His leadership may be the biggest problem for the retailer.

The story is out in this week's "bloomberg business week." dozens of businesses competing for his attention and money, and before we get into the story, some background because sears certainly does not have much to show for the strategy if we look at the numbers.

Ever since eddie lampert bought sears and 2000 survive -- in 2005, its income has plunged.

The company has reported a loss in eight of the last nine quarters.

Especially when you compare it to target or the notoriously thrifty walmart.

It lost market share to a lot of these other players.

The stock has tumbled 2 /3, and cash flow has tumbled to a 10- year low.

More ceo's leaving the company so eddie leopard is running the company.

What is the new news here?

The news is that eddie is the ceo, so we want to see how he is going to do it.

We found that thomas one, he has already's -- he has always been running the company.

He is chairman, he was not there, but he was calling the shots.

So you have looked inside his performance, at heckscher -- at how he runs the company.

It is fascinating, not your particular -- not your typical retailer.

Kind of like a hedge fund.

Instead of an integrated model, where all the different divisions are supposed to work together and under the same leaders.

They are almost like autonomous businesses.

Their own board of directors, too.

They have to meet constantly.

So it is not working.

Why is he doing it?

He believes it works.

He has had so much success in investing, so you can almost see why he thought the same approach would work in this industry.

I found it interesting what you said that he has always in there, but physically is not at the store.

He is running the company from his home office somewhere else, now florida.

He recently moved to a $30 million mansion in florida.

He only goes to the headquarters a couple times of year.

Who does he delegate leadership to?

Who does he delegate authority to?

To dozens of independent businesses.

They each have autonomy and are accountable for their own results.

So appliances, i go to sears to buy a washer and dryer, there is one separate business for that.

That it's is -- that is its own business, yes.

Within a typical sears, how many separate businesses are there?

Over 30. the knock on mr.

Lampert is he has no retail experience.

Has he hired people with retailers.

? he has attempted to at times, but oftentimes it has not worked out.

I find that he tends to get along with better -- get along better with people from the finance and technology world.

Give us an example of how running the businesses as autonomous businesses changes things up.

A classic thing for a big-box retailer is for some departments offer consumables to create loss leaders.

The profit margin benefits the whole store.

Adam parker, you cannot talk about individual securities, but your team is looking at management.

How unusual is the unusual in management?

Most companies run the same, don't they?

Sometimes the difference is great.

It is hard to tell if it is just that it doesn't matter that the boxes are not good, people do not want to go there and it is not the management style but something else.

It depends on the circumstance.

Normally people look at the numbers, the change in offering profit versus the capital employed, stock performance.

It probably will take more time to make a judgment call.

What is one thing that eddie lampert has done well?

What is he getting credit for?

Technology.

He has been an early mover on technology, integrating their website with their stores.

The problem is that is a tiny fraction of overall sales.

We appreciate it.

"bloomberg businessweek ," the new issue now out on the iphone and the ipad.

A lot of provocative pieces on hedge funds.

As apple and amazon continue to battle for content yield, there is way more at stake for apple than the cost of the e-book.

? good morning, everyone.

An important interview this afternoon, r.o.i. con, yes, -- carl icahn, yes, on dell.

In the meantime, sara eisen with tom and scarlet.

We need a data check, a post ben bernanke speaking data check.

We had jobs move on friday, churned along and went the other way yesterday.

The yield was off 2.70. now at 2.57%. hydrocarbons near 106 dollars a barrel.

Hollywood moguls are meeting at the ultra-exclusive allen company conference in sun valley.

Some of those executives need to cut their trips short, go back home to hollywood.

Jon erlichman joins us live from sun valley.

Why all the hollywood headaches?

What are they saying about it out there?

These executives, the entertainment, hollywood executives, love to talk about content being king.

You just know -- you just never know which content will be king.

Earlier this summer, "ironman three," massive box office hit.

"monsters university." we had a chance yesterday to talk with michael eisner, the former disney ceo, a regular at sun valley, who said it is challenging to pick the winners over time.

They did not know that "pirates of the caribbean" was going to become the franchise it did.

He says the nice thing about disney is its size and scale.

The great thing about disney is it is such a big company as opposed to what it was when i went to it.

A movie like "the lone ranger" will have no effect.

Jon erlichman, mr.

Eisner is there.

Mr.

eiger is there.

Does he have to hide because of the challenge of this of this movie?

They are already -- they are always happy to hang out and answer questions.

The media executives are good at handling the media questions thrown at them.

The other thing to know is that nobody is going to be trying to shoot down what any other studio is doing now because they know they could be in the same position.

You have executives from paramount and universal and time warner and cbs all in the same room.

So they will champion what they are doing at one point but not slam the competition.

What is the backstory at sun valley?

I think that you learn very quickly.

They talk about deals happening here, and they do.

With michael eisner, when he acquired cap city's abc, it basically closed in the parking lot.

But these deals happen over time because of the relationships that are filled.

You are seeing the potential for closure on some deals.

Hulu would be a great example.

You like getting smarter, tom, all the time.

A lot of these executives are worried about getting smarter, so they are worried about the other issues, too.

You are in sun valley, usually to be beautiful.

It is completely dark behind you, so we will superimpose a background on you.

There is the jon erlichman hollywood magic of "bloomberg surveillance" and a much more beautiful shot.

How do they do that?

It is just a miracle what they do.

The miracle of science.

This is interesting, sort of like, so what?

There has been deals made there before.

We saw giant deals, including time warner and aol.

And we saw hulu this time around.

Sounds like an eisen junket next year.

In the meantime, we have other company stores.

Dropping next tale -- sprint will keep its ticker symbol s on the new york stock exchange.

Some executives of glaxosmithkline have admitted to corruption in china, according to china's ministry of public security.

They are suspected of -- all of this according to the chinese government.

Melissa meyer -- melissa ma yer's popularity is slipping.

And in terms of big movers you should pay attention to, family dollar was a big gainer yesterday, down slightly this morning on a barclays downgrade.

Falling a little bit from its high earlier this year.

Good morning, everyone.

"bloomberg surveillance " on bloomberg radio, streaming from your tablet, your phone, and bloomberg.com.

Tom keene with sara eisen and scarlet fu.

Right now, dow futures up 135. all after the fed minutes released yesterday, when chairman -- when fed chairman ben bernanke spoke.

It turns out a federal court sided with the justice department that the tech giant inspired to raise the price of e-books.

The lawsuit raises the question just what is at stake for future media associations.

Somebody who has written on topics of this, our author, the author of -- stephen leavy -- steven levy.

Are you surprised by the judge's decision?

They really wanted to underline the bigger issue here, that these prices were in response to amazon, the real big player in e-books.

They could not get around the fact that -- prices ended up higher for consumers.

It is almost like antitrust flipped on its head.

The monopoly charged a lower price?

What happened was the monopoly subsidized books.

They made a vow, amazon, jeff bezos saying that we are not going to sell any bestseller for more than $10. apple said we do not want to compete with that, we have our own model.

30% of everything, and we want you to be in that realm there, and that will make prices higher.

Publishers were terrified of amazon, and they made a new model with prices not only on the apple side but on the amazon side.

Amazon could not discount the books like they did before.

Apple says they will appeal the ruling, but it made the point quite forcefully that it does not append -- it does not depend on e-book sales.

Services is really where it will get the bulk of the revenue in the future.

That is exactly the point.

I had another book about the ipod, how apple deals with the music industry to set prices there.

Anyone doing separate negotiations, they just wanted one price and had all the news accompanies, to herd them into specific prices.

That set the stage for the current situation with e-books, but we not as big a market for apple.

But there will be movies and all sorts of other things in apple's store.

Apple does not want its store to only be a little appendage, it is very central to where they are to having deep relationships with all the content companies.

What would you predict the size would be 10 years from now?

Will there be only one or two players?

It is kind of like the big bang.

You get fewer and fewer players, but it cannot hold an open platform like we have on the web.

Is the answer we are going to have cheaper book prices this summer?

We already have cheap book prices because when they set the prices high for an electronic book, it is not the same as a printed book.

Authors now can say, wait a minute, i can get the same deal a publisher can.

Why don't i publish my own book?

Brand x books.

Maybe they are not as good as the book that the publishers have, like a michael connelly or stephen king book.

People come out with their generic thrillers, and they cost two dollars and set of $12 or $14. the guy who negotiated all these deals -- will it be harder for him in sun valley this time around?

He might stay in his room for a while, but he will come out because he is with one of the most powerful companies in the world and everybody still wants to talk to apple.

Apple is still the big guy on the block.

That's right, everyone waiting for their biggest -- everyone waiting for the next step there.

Steve leavy with "wired" magazine.

15, passed by the least productive congress in u.s. history.

Good morning, everyone.

"bloomberg surveillance." cosgrove is one of the giants at davos.

Toby cosgrove of the cleveland clinic will be in sun valley with carol massar him and him for betty liu this morning.

Later this morning on bloomberg television.

I'm tom keene.

As always, with sara eisen and scarlet fu.

Futures up 15, now 18. dow futures up with some dollar weakness.

We have followed on from the bernanke shock of yesterday afternoon, which means a ton of morning movers.

Keeping an eye on all pc related shares.

This could be a number of movers.

Intel higher, even as pc shipments dropped for a fifth straight quarter, the longest losing streak on record.

Second quarter shipments down 11% to 76 million units.

If you look at the ramifications of this, michael dell's famous pc industry is dying, perhaps proof that it should be taken private.

I am watching facebook, an announcement by instagram, which is owned by facebook.

There will be a new service that lets users in bed photos and videos on outside websites, on blogs and news providers.

Basically what facebook is trying to do with instagram it spread its influence, get more customers, and the key, get more global engagements.

Steven levy, you have followed this.

Is this strategy going to pay off and bring in business and revenue for facebook?

And has already paid off by taking a huge competitor off the table.

What facebook wants to do is keep people within that facebook world, wherever they go there.

They were successful in creating this alternative universe inside facebook, and they really wanted it to spread throughout the web.

It is what youtube did, to let people go outside the youtube site to make youtube the foot -- the default way people share videos.

You are a journalist and not a securities analyst.

But there is huge division on the street over the future of facebook.

Many say success and earnings, but there is a select group saying this will not happen.

I feel there is a revenue model waiting to happen at facebook.

That will happen.

The people there, they have come up with ways to get these and revenue.

The big hit, the new product which is going to be ad words with google, it is out there lurking.

And they will find it.

It went 23 226 recently, so it is doing better.

Here is one that perhaps some instagram users will take a photo and start to post.

Protesters from greenpeace are scaling the heights in london today.

Six women climbing the shard, the tallest building in western europe, trying to protest oil and gas drilling in the arctic.

Keep it here on bloomberg.

? good morning, everyone.

Coming up to

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