Survival Strategy: Market Makers (07/10)

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July 10 (Bloomberg) -- On today's "Market Makers," Erik Schatzker and Stephanie Ruhle use analysis, insights and A-list guests to help set up your daily market trades. (Source: Bloomberg)

We are a half hour into the trading session and we have you covered on bloomberg television.

"market makers" starts right now.

How to survive the bloodiest bond market in decades.

The ceo of blackrock.

Stop the presses.

So much for selling newspapers.

The tribune wants to make like murdoch and spin them off.

Can fedex deliver what bill ackman wants?

He may have found his newest target.

Good morning.

It is wednesday in new york city.

You're watching "market makers." i'm erik schatzker.

As you probably know, i am not a big fan of the term special guest unless the guest truly is special.

Our guest today qualifies.

Larry fink runs blackrock which puts them at the center of the global business and economic unity.

Who has a better idea of where both are headed then him?

We will dive into a number of topics.

I want to get you caught up with market makers newsfeed.

The tribune company will spin off its newspapers into a separate business.

The publisher of the chicago tribune will focus on the more lucrative television business.

They agreed to by 19 more stations and that would make it the country's guest tv station owner.

Apples tim cook arrives at the conference in sun valley with an unexpected guest.

He does the company's licensing deals and that has fueled speculations that apple wants to do deals for apple tv.

Tim cook said we will see if we have plans.

A federal judge ruled that apple broke antitrust laws involving price-fixing.

The judge has ordered a trial on potential damages.

Carl icahn has not given up his fight for dell.

He is urging shareholders to seek an appraisal of their stakes in a blatant -- bid to block michael dell's buyout.

Shareholders will vote next week.

Carl icahn says michael dell's offer undervalues the company.

That saga is not over yet.

Let's begin our conversation with larry fink, the ceo of blackrock.

His firm has almost $4 trillion under management.

You heard me right.

Here is what i would like to begin with.

You talk to world leaders and bank president and the ceo of the world's largest and most powerful corporations.

When they want to understand what is going on in the financial market, they turn to you.

Would they want to understand the impact -- what are they asking you?

In a most cases, i am asking them a lot of questions.

In terms of regulators and political figures, they're asking me what we are seeing.

I think the biggest question being asked today is working interest rates go.

Another question is where is china going?

Those of the two biggest uncertainties in the marketplace.

It is funny -- most people don't ask the question about europe.

I would.

Europe is now third or fourth on the list of worries.

Let's start to answer those questions.

The bond market has become very treacherous.

Where are interest rates going?

Interest rates have backed up about 90 basis points.

We have seen a drought on mutual funds in the past few days.

We are still at a historical low.

This is a problem that i see for bonds.

We were at such historical low rates.

Normalized rates are higher.

Even government estimates for treasuries for 2015 is 5%. we talk about about deficits -- interest rates over the course of years will be higher.

There are people out there who are scared right now.

I don't get frightened when you could forecast this out over years.

To me, it should not be a shock to anybody.

To me, you know, rates are going to go higher.

How far and how fast?

It will be dependent on economic information.

So we're going to see a buy towards higher rates.

We may be in a trough where we will sit here for a while.

250 to 275. over the course of time, my view is the economy will continue to improve.

Implement will continue to improve.

Europe is stable in my view.

We are going to see a rising interest-rate environment.

. can you be 100% in equities in a timeframe of sustained higher interest rates?

We need to see earnings for this quarter.

It is my view for many reasons that being in equities and the suggested is the right trade.

We have seen some very large moves.

The long u.s. treasury market is down close 10% year to date.

S&p is up 16%. we have had a 26% change in valuation in six months.

Obviously, a lot has occurred.

For me to tell you equities will rally, i need to be certain that earnings are going to remain strong.

From my conversations with many people, i believe earnings are not going to be missing estimates.

Earnings will come in by and large bias.

We saw that already with alcoa yesterday.

Within the framework you just outlined, what is the survival strategy and what should people be doing?

So for those who have the ability to lose equities -- i am using that as a mouthpiece to try to have people think about that.

Most people cannot do that and most people should not do that.

Insurance companies cannot do that.

They're not allowed -- if you compare 1994 to this, it is different.

There was much more flexible to he -- flux ability.

-- fle xibility.

You had a 6% increase in interest rates.

Much of the reason why it is muted today, most institutions are inhibited to own equities.

Is there anywhere that looks safer or to be a better bet?

I believe there is going to be a great rotation and bonds.

It is going to be within the bond universe.

We have been talking to many pension plans, insurance companies to start thinking about moving away from bond funds that are targeted to duration.

Most bond funds are core that are targeted to the berkeley aggregate index.

The problem of being targeted to this index, we have an aggravated problem.

Extended duration.

At the beginning of the year, it had a duration of 4.8 years of risk.

The mortgage prepayment issue that is embedded in the aggregate index is now five and a half years.

It is riskier to own that bond fund today than it was in june wearing.

What we are is -- in january.

We suggest to move to unconstrained bond funds were duration is not targeted to the index.

There is a well-known bond fund manager on the west coast who has lost a lot of money betting on duration and betting on inflation.

Is there any hope for that trade in what you just outlined?

Is my view -- i am not going to discuss -- it is my view that inflation will be very muted.

I don't see any inflationary risk at all.

I view the -- i agree with that.

I have a different outcome in terms of the economic future.

I think we are going to be in a two percent or three percent economy.

We are going to have improving liquor -- labor markets.

Much as to do with energy in this country where we see a change in manufacturing in this country.

We have huge opportunities for job growth in the manufacture and sector.

That same bond fund manager declared a couple of months ago that the bull market in bonds was over.

It has been 32 years.

Do you feel the same way?

Are we in a -- is what we have seen over the past little while a correction during the late stages or have we seen the fundamental shift?

I think i said that two years ago when i said you should be in 100% equities.

It is my strong view that we are going to be in a cycle now -- whether it is five years or 10 years we are going to have rising rates.

You just said is that for a great conversation.

We will talk about fed policy and big questions about china.

The trade data showed weakness for exports and imports.

We will be back with our conversation with larry fink right here on "market makers" on bloomberg television, streaming on your tablet, your phone, and bloomberg.com.

? this is "market makers." we are speaking with larry fink, the blackrock chairman and founder.

We have got to talk about fed policy.

Tapering is the buzzword.

Scaling back quantitative easing that we have seen.

Do you worry about a market that some say is addicted and hooked on quantitative easing?

I think the two things that have happened why the statements aggravated the market so much.

It is the change of direction.

It is the beginning of a major change.

We were accustomed to the old.

That is upsetting to the world when you have a major policy change.

I don't think it will be as bad as people fear.

The markets are not giving enough attention to this.

I will be very surprised if the treasury in the next few weeks those not announce a huge reduction in their need for bond issuance.

At the same time, we may see a change in fed policy where they will reduce the amount of bond purchases.

At that same time, the treasure is reduce it -- reducing its issuance.

That is not on the market yet.

There may be a. -- a timeframe for stability.

We could see a significant 20% or 30% reduction in treasury instruments.

They will announce in the next few weeks or so.

The cbo are confirming what other estimates came up with, a reduction.

I would have been just as worried if the fed does not slow down bond purchases at the same time treasury reduces issuance.

The fed would then be buying 130 % pfof new issuances.

The other thing we have to be aware of, one of markets are so disrupted.

The same time the fed is changing policies and people started running to reduce exposure in bonds, we have had regulations inhibit and in some cases prohibit activities by the market makers.

So the volcker rule is inhibiting positioning by broker-dealers of bond holdings to capital charges -- it makes it even more restrictive for these situations -- institutions.

If you look at the footings of these market makers their bond holdings are down 70%. is that an unintended consequence that we're going to regret?

I think it is an intended consequence.

We can show everybody was happening.

I think we have a short -- a chart.

Here it is.

Look at this.

This is what i have been talking about.

What this tells me is there is a faster development for electronic bond trading.

We are going to need a vehicle in which there are better exchanges of buyers and sellers.

I see this evolving towards an electronic market.

Here is a question for you -- i requirements are making it more difficult for the big banks to maintain -- liquidity.

That is more important than almost anything we'll talk about.

Is there room for firms like blackrock to be market makers?

No.

there may be but i will not do that.

Blackrock will remain percent fiduciary to our clients.

If i were a market maker, it changes my role with my clients.

When we were taking about doing electronic bond trading -- we were not going to take any commissions.

We found a better solution by partnering with the market and they will do the market maker.

If it is not the banks and not by kwok, who backs of the bond market?

I am not suggesting he was going to be the owners but there will be bit winners.

-- bid winners.

Hopefully he will have more liquidity.

More and more businesses will be moved away from them if they don't own these trading platforms.

Fixed income is still the single biggest business.

Jpmorgan, goldman sachs, bank of america, make -- merrill lynch.

What happens to that business?

They will still be committed to that business.

They do a very good job.

We will like to see 10 more firms be committed as those three firms.

That is why we have the shrinkage in inventory and that is why we are experiencing at this moment some stress in the markets of buying and selling bonds, especially corporate bonds.

We will come back and talk with you about the most important issue of the day and that is a regulation.

The latest message out of washington to the big banks.

We are back with our conversation with the blackrock chairman and founder, larry fink on market makers.

? you're watching "market makers." larry fink is here.

The ceo of blackrock.

You raised this point about bank relation and the consequence is of bank relation.

-- regulation.

Yesterday there were tougher rules proposed, a five percent leverage ratio.

Those that take too big to fail off the table?

The capital rules only did have only protection that i think regulators are looking for.

If you want to tackle the too big to fail, you will have to do it through leverage.

You don't trust them to rate their own assets?

Basel does not impact government security.

Institutions could have leveraged balance sheets and spoken form -- conform.

That raises a huge issue.

If this goes through, these institutions have two ways to mitigate the problem.

They could raise more equity to keep the balance sheets or they are going to have to shrink their balance sheets.

By selling off?

Or not investing in treasuries were mortgage securities.

You could have a bank selling off of the same time the fed is tapering off?

Yes.

This is perfect -- proposed for 2018. the market is very demanding.

I would not be surprised that earnings are going to being coming out this week and next week where the financial analysts will ask the leaders of these farms what are you going to do about -- of these firms what are you going to do about it?

Would you shrink your balance sheet or are you going to differ dividend payments?

It is either capital or retained earnings or striking the balance sheet.

If they balance sheets, we will have a more aggravated problem in the future.

Banks are the largest owner of u.s. treasuries.

What is an aggravated problem look like?

The fed has taken their foot off the pedal and buying assets.

At the same time, you would have banks also not buying, rolling over into new treasuries.

Then we would hope the deficit reduction is larger.

We may have an imbalance.

This could be another reason for a rise in interest rates.

How destabilizing is that for the economy, if it happens?

If interest rates go up fast enough that in pairs the -- and payers and opportunities you have an equity -- impairs opportunities.

Equities still present a better risk return.

Much more to come with larry fink, the ceo and founder of blackrock.

We will be back in two minutes.

? live from bloomberg headquarters in new york, this is "market makers" with erik schatzker and stephanie ruhle.

We are back with larry fink talking regulation and also another question that you raised that i am sure investors have, what is going on in china?

We are seeing signs of a slowdown with exports and imports coming in week.

What is your view on china?

China has had a role of having cheap labor.

As a result, the economy has moved itself to the largest economy in the world.

China has done it cheaply on the back of exports to parts of the world.

And i economy as large china cannot grow at 8% or number nine percent when trade partners are growing at zero or two.

With the size of the economy, china has to be more dependent on domestic consumption.

We are not seeing the increase in consumption domestically to keep the economy growing.

The question is, we are seeing a decelerated economy.

Is a decelerated to low 7? this has been consequences for an emerging world and other trading partners.

I believe there are two structural things that china needs to address.

I believe party leadership has mentioned this so i'm not saying anything that is new.

China is living with a one child family policy.

Also, china has no safety net for retirement and healthcare.

A working couple now with the presumption that the grandparents are alive are caring for the twos of the parents because there is no safety net.

They are caring for their one child.

Here we are, to working people trying to help five other people.

There is no safety net.

What is going on is, their saving more and more and more to prepare themselves for retirement.

Demographic issues in china are getting bad.

A problem is you're not seeing consumption because people are frightened about the future.

They are saving more.

What you're talking about our major structural -- it is going to take time.

Right now, there are imminent concerns about the stress in the banking system.

What regulators -- the party is trying to cut that corruption.

They are being aggressive with corruption and aggressive with conspicuous consumption.

That is another reason why there is slowdown.

People are not buying watches and those cars that they were because they don't want to be showing off as much.

That is slowing down the economy a little bit.

The other issue is we have seen a lot of the provincial governments building more factories, roads and more things without having the necessary demand for that.

You have a growing excess of housing and other reform -- forms of construction in china.

The central bank started pulling back liquidity as a warning.

You just can't do this.

Once the warning was loudly heard and you had the rates pop up, they reasserted liquidity.

I think what they are warning banks, slow down.

That is another reason why the economy is slowing down.

You cannot be dependent on a public spend.

The with that china becomes that -- more powerful economy is to -- private consumption, not public consumption.

Is the world right now overestimating or underestimating the speed in which china is slowing down and the consequences that these policies may have in the short run?

We may have a slower china economy and people have forecast.

We started the year thinking the economy will be at 7.5% and it may come in at seven percent.

I don't think it will penetrate under seven percent.

If you look at the aussie dollar, these indicators -- are they pricing it accurately or overshooting or undershooting?

That is what people are trying to figure out.

I have said enough to invest in emerging markets by owning companies like united technologies and nestle that is a great amount of business there.

You could invest in multi- capitals and still do well.

In terms of economies like the aussie and like brazil, what i would suggest a growing chinese economy is going to put a limit to growth and other economies.

What we see in china like what we see in brazil?

Protesting?

Protesting is the middle class.

Chinese has the middle class also.

Turkey has the middle class.

You have a very rapid advancement of middle class in the emerging world.

Tremendous changing -- changes in the demographics of the world in terms of the rise of the middle class.

In the last few years, that rise has stopped.

Whether it is building better education, better opportunities -- they're saying you're supposed to help us rise more.

This is a very interesting moment in world history that we are not seeing the poor being the protesters.

We are seeing the middle-class saying we want more.

It is one thing for the middle-class to rise up rise up in a democratic country like brazil and another thing entirely for the middle class which is far larger now in china to rise up against the central government.

And control it.

The answer is, i don't see that being a social issue.

You will have protesting.

There is a large publishing that is still underserved in china.

If they don't see advancement in their opportunities -- can use to look at emerging markets as the next hop growth opportunity -- hot opportunity?

Over the next six months?

I don't believe anybody should be investing in emerging market in the next six months.

Over 10 years, the valuations have changed dramatically.

We are talking about a 40% change.

Over an investment cycle, could you see further weakness?

Absolutely.

I don't think you should have an horizon of six months for emerging markets.

For long-term investors, i think emerging markets represent value -- in a valuation today, emerging world economy markets are cheap but they could get cheaper if there is further weakness.

We will continue the conversation.

We are here with the blackrock chairman and founder and ceo, larry fink on "market makers." coming up, we will talk about deals in media.

Or the deals that did not happen and what companies are doing as a result.

? this is "market makers." this year has brought lots of high-profile media deals.

This morning, the spinoff of a publishing and broadcast business that is reading to companies.

Scarlet fu is following the tribune and all the media companies closely.

The tribune is trying to sell its newspapers.

Does the spinoff -- isn't going according to plan?

Pretty much.

Both said this means the tribune does not have a buyer for its use of a person which includes the l.a. times, the staccato tribune -- the chicago tribune.

Looking to pick up distressed assets.

Their prices probably too low.

It is separating the utility part of the business from the growth part of the business.

The tv stations, advertising that comes with it and the lucrative retransmission fees.

The licensing fees the cable operators pay local tv stations.

We know it has been beefing up that part of the business.

Michael wolff talked about this earlier.

Let's listen.

The tribune company has two legs.

There is a broadcast leg and a newspaper leg.

By getting rid of the newspapers , pushing them out, the broadcast leg is eminently stronger.

-- immediately stronger.

They picked up local tv for billions of dollars, adding 19 stations and beefing up the operation.

After the split, details are pending.

Each of the companies would have revenue about $1 billion.

Larry, you are a california boy.

You grew up reading the los angeles times.

Is it better at the end of the day -- do you think a newspaper is better owned by a public company, the kind of which the tribune will spin off or in the hands of a rich individual?

The fact that i was born in analyte is not have impact on that answer.

-- in los angeles does not have impact.

They have to not just be local but they have to be national.

They have to be global.

The biggest problem is they are not competing with a 24/seven news cycle.

These entities are going to have to compete with global sites in terms of the news cycles.

It is that cut -- that type of company is now being stressed.

It is a wrenching change.

We are witnessing its with the new york times.

It is trying to make the transition from paper to the digital world.

Is it a viable business?

I subscribed to the new york times visually and many of the news sources digitally.

For those that are in need of information for the 47, it -- 24/7, it is necessary.

A lot are not going to pay for that and they will go to free news sources to get information.

That is a structural issue they are competing with.

Have you change your habits?

Yes because most of us what they're going to say by 10 p.m. i am still old-fashioned.

I actually read every newspaper physically every morning.

I have read many of those stories the night before digitally.

Call me old-fashioned.

I know you read your bloomberg on your ipad.

@10:00 at night, i am reading all these newspapers.

Scarlet fu, thanks for bringing up that.

More of our conversation with the blackrock ceo when we come back.

Perhaps changes in the etf business with fixed incomes.

More on "market makers." ? this is "market makers." ben bernanke is set to speak later today.

The futures market is one step ahead.

Dominic chu has the story.

Let's go to the rbc capital trading floor to talk to futures specialist.

Ed, it seems like the futures market has been all over this.

Everything that is happening with interest rates.

What are you seeing in the futures market for interest rates like fed funds?

Is is great to be on the show with you.

What we have seen is the market has -- the futures market has made a significant adjustment.

It is where the increase we have seen in the treasury market as well.

What is happening, the futures market has brought forward expectations of the first hike from the later half past latter half -- latter half to 2015. you are looking at futures going up to 2015. i want to show you a chart.

This is the chart of june 2015 fed fund futures.

What this tells you is as the chart goes down lower, the expectation is that interest rates for overnight lending rates in the u.s. will rise.

Is that right?

That is correct.

The price of the future is inverted to the yield.

It is 100 less of the price of the future.

As the futures price declines, the fed fund yield is rising.

That gives an indication of what the market is beginning to think in terms of forward pricing of when prices will adjust.

What will you be listening for today in the fed statement or remarks later this afternoon?

I think two things.

I am not sure that we will see a significant surprise for the markets.

The most the fed has communicated -- it could be too clearly.

That also falls upon a later this afternoon -- i there should be some effort made about how much the market has risen in terms of anticipating the adjustment in terms of the fed posture.

We have to keep an eye on those particular things in this afternoon's report.

Thank you.

That is why futures are in focus with interest rates.

Back to you.

It is time that ben bernanke is set to speak later today.

Larry fink is with us from blackrock.

Communication has been a hallmark of this fed chairman's tenure.

How has he done as a communicator of monetary policy?

I was surprised at how negative the market reaction was to the chairman's speech in the past meetings.

I thought he was very good, very open, very transparent and terms of where the fed reserve is thinking.

I applauded him for what he said.

I actually did not think you said as much as the world thought he did.

He said there is a change in policy, but he also talked about we will have a lot of options.

If the economy deteriorates, he's adjusted i would buy more.

If the market improves, he would accelerate the slowdown.

Is his voice above?

There are so many other voices coming out of the fed.

It is no easier to understand now than it was under rain span -- greenspan.

That is true.

I would also argue -- i would listen to the chairman more than the other governors.

More importantly, we are talking about tight changes in opinion.

We are not talking about that much differences.

In reality, if you're a long- term investor -- it will not mean that much.

Do you have an idea of what you would like to see?

All the candidates are capable.

We hear about janet yellen and larry summers even tim geithner.

All our confidence and capable -- all are confident and capable.

I believe he has the good fortune of having choices.

We have a few minutes left.

We will take a quick commercial break and come back with larry fink and a couple of minutes here on "market makers." ? we are back in two larry fink, the ceo and founder of blackwater.

We were talking just a moment -- blackrock.

We were talking about how fortunate the president is to have all these choices.

The president is in his second term is not going to be there forever.

You were a loud voice in the debate leading up to the fiscal cliff.

You had a lot to say.

As we look towards the end of the president's term, do you plan to get more politically active?

I don't think of myself as a political active ceo.

I think of myself and i think of blackrock's role -- their need to be more spokespeople for issues like retirement.

A big issue for you.

Big issue on what we do with social security fund, what we do related to the new security laws and how that impacts favors.

I am putting myself in a more public position.

I do believe there is a role to be played, helping investors and retirement.

Would you support hillary clinton for president in 2016? i have three years to the decision.

A very interesting candidate.

How is the president doing?

I am not here to talk about the president.

I am your stock about the economy.

-- i am here to talk about economy.

Thank you.

Larry fink, the chairman of blackrock.

We have more "market makers." intimate.

? ? . . from bloomberg world headquarters in new york, this is "market makers" with erik schatzker and stephanie ruhle.

Here is all the news that's it to print -- tribune is not selling newspapers.

It is spinning them off instead.

A sun valley surprise -- apple's licensing boss shows up with ceo tim cook.

Should china be living high on the american hog?

We will talk to a senator who is investigating china's lance to buy the biggest u.s. pork producer.

You are watching "market makers." i'm erik schatzker.

I'm sara eisen, filling in for stephanie ruhle.

Tribune will spin off its newspapers so it can focus on the more lucrative television stations.

Tribune publishes "the chicago tribune" and the "los angeles times." this would make them the biggest television owner in the united states.

We will talk to one of the potential buyers.

Walmart and other retailers say they are planning to spend 42 million dollars to improve factory safety in bangladesh, where a lot of their apparel is made.

This comes in the wake of the factory collapse that killed almost 1200 workers.

European retailers have announced a similar plan.

The parent company of standards and pores has been sued by a bear stearns fund.

-- tarrant company of standard and poor.

In 2008, they bet heavily on asset-backed securities.

The changing face of the media world -- a company that began with the newspaper is spinning off its print assets so it can focus on television.

In a few minutes, we will talk about tribune's move with a media banker.

And the u.s. and china are sitting down in washington for what is "an economic and -- for what is being called an economic and strategic dialogue.

Will the edward snowden case have an impact?

Media and technology moguls aren't lathering -- aargh gathering.

Jon erlichman has look.

A rest taking backdrop for perfectly groomed golf courses and a boatload of tech and media moguls.

The annual conference in sun valley may be the perfect base for billionaires to do business.

Much of the deal buzz this year surrounds hulu.

Hulu is going to be the thing everyone is talking about.

In the driver seat is rupert murdoch of news corp.

And disney's bob geiger.

Their companies are controlling share owners, each owning one third of the business.

Interesting bidders include directv.

The ceo is often spotted a sun valley.

This is not the first time hulu has been a hot topic at the gathering.

Hulu was up for sale two years ago before they decided not to sell.

It will come down to what rupert murdoch and bob eichert think is the best deal.

If no deal can get done, they can at least work on their golf games.

You have more details about potential hulu bidders, now that some of the owners will be there behind you?

The auction has come down to direct tv, which has a bit in the neighborhood of a billion dollars.

At&t teamed up with a well-known hollywood executive for a similar bid.

Time warner cable is looking to become a strategic investor area it's as if all of these players want to hedge the future of television.

That is certainly what it's about.

I also want to ask about apple.

Why has this peak your interest?

He is the deals guy for apple.

It's an interesting day for him to be here considering the big loss for apple in its e-book price-fixing trial.

He's somebody who took the stand during the trial because he was a key negotiator with the publishers.

He is also a negotiator with the music labels and the guy who deals with tv executives.

Maybe there is more to come on apple tv.

But they would not comment on that of course?

No comment, just excited about the week ahead.

You also spoke with the head of espn about bringing one of its apps to apple tv?

Yes.

With our conversation, he said eddy cue was the point i to bring the espn application to the box today area -- today.

It's a reality for players like espn who is about to get into a big battle with fox to find new ways to get their content in front of people.

The winning strategy right now is cable is still around, pay tv is there and this process of, getting these other services, boxes if you will, being able to watch the content on those devices if you are a cable subscriber.

Lots of conversations on that front.

We are looking forward to your coverage today.

Jon erlichman, our senior west coast correspondent in sun valley, idaho.

We will have more from him on "bloomberg west yuriko -- "bloomberg west." bill ackman says he's ready to raise new funds that would invest in a large u.s. company.

That has spurred speculation in particular that he has one company in mind -- fedex.

Dominic chu is again into the package shipping giant.

I guess we should ask why would that xp a candidate for bill ackman?

You said the key word there is speculation.

There are all kinds of candidates, but he'll ackman laid out what he is looking for.

He said a number of different things.

First of all, the business is simple.

Transportation has complexities, but it is getting something from point a to point b. it is also free cash flow generative, enjoys high barriers to entry, and has substantial pricing power.

These are all criteria?

These are all criteria.

Fedex has substantial pricing power -- ups is there.

It's not custom-made to this criteria but it speaks to the idea that fedex might meet some of them.

One analyst at edward jones said this could be a candidate.

One thing they are looking at overall is whether or not fedex has so many of these attributes and whether this could be a candidate because of things like valuation.

Activist investors like to go into companies where they feel they can unlock some kind of value.

The reason fedex is interesting is because they are going through their own operating efficiency revamp.

That's long overdue.

Over the past five years, fedex has radically underperformed ups.

Ask and its stock has dramatically underperformed.

It's about 16% on a price-to- earnings basis.

If he gets to trade the same multiple at a ups does, maybe that's the reason an activist investor would want to come in.

If they could get that, that would be a substantial move.

He says he's thinking about a single company.

Why?

His last single company fund, target, was a disaster.

There have been some single company funds that have not done well.

But what is interesting -- let's not forget herbalife area jcpenney has also not been doing great.

He made a concentrated that there.

Often times, investors will know this is a concentrated bet on a particular strategy.

When you look at a situation like target, investors might have had an idea that this would either be a real boom or real bust depending on whether this investment works out.

He has to take a more sophisticated approach than just buying or selling the stock.

The investors in these funds would understand this is the strategy.

If you are a qualified investor that knows a little more about the markets than we do, then you should know some of these investments could be boom or bust area -- room or bust.

A little of the air is coming out of the balloon today.

And fedex has declined comment.

Dominic chu at the latest speculation on what bill ackman will do next.

Coming up, it is front page news -- tribune decides to spin off its newspapers.

Was it because it couldn't sell them?

Plus, we will be talking a little more about the u.s.-china trade talks today, potentially overshadowed by edward snowden and a slowdown in that economy.

? this is "market makers" and i'm sara eisen.

The u.s. and china have become a dialogue in washington, with secretary lew trying to urge china toward a more moderate rose past.

We've heard this before, more market reform, less intellectual property taxes, what is different about these talks?

This is the first time we have had this new group together.

We've -- they have all been on the job for a very short time.

John kerry and the chinese vice pamir and the state counselor . the economic situation has changed a little bit when you look about where we talked about it in the past.

The u.s. growth hasn't been great and now u.s. growth seems to be a little better.

It is the fifth meeting, and there's a certain amount of diplomatic protocols, so you can't expect a whole lot of fireworks.

But jack lew did urge china to do that.

Listen to what he had to say.

I will urge china to follow through to a more balanced and sustainable pattern of growth.

This transition will be critical to china's success and consequential to the world economy.

That's the same argument president obama has made, that for china's sake that they need to let their currency appreciate.

They need to have more market growth and more domestic demand.

When you look at the growth rejections, they seem to be tapering off a little bit.

7.6% is expected growth for china in 2013. the dynamic has changed a little bit, but the dynamic is basically the same.

And we don't know how the nsa is going to cloud the ip conversation.

I would like to bring a former official in.

There was a point about how the economic tables have turned.

China certainly not growing at the rate it once did and people are talking about the united states economy attaining a sort of escape velocity.

How does that affect the conversation?

It is significant because the united states has been saying you need to change and china has been a resistant.

Now china is seeing they are facing big structural problems and china needs to reform itself or is not going to be able to grow the way it has in the past, or worse.

There are huge inefficiencies in the chinese system, huge amounts of debt, overcapacity, china is open to change in the united states has a real opportunity.

Is the united states missing the opportunity?

You hear the treasury secretary talking about this and the chinese currency has appreciated four percent against the u.s. dollar since one year ago.

It is moving ahead with market- based reform.

What should we be focused on?

Currency is not the most important issue, but the biggest issue is china needs to reform its economy.

The united states can help.

It's a very difficult and tense relationship at times, but china knows what it needs to do.

The chinese leaders about light plans in their five-year plan, but their problem was getting from here to there.

We have an interest in china successfully reforming.

And they have an interest -- let me put it this way -- do the chinese leaders understand the feedback loop, that if they don't engineer the transition successfully and the u.s. suffers as a result, it will feedback in a further negative fashion?

They understand that, but it is more of an internal issue.

They have said the right things but they have structural resistance.

And you've been talking about that for years.

They have powerful people and powerful interests who are resistant to change.

So what does a guy like jack lew do to change the way the chinese are thinking?

We've mentioned currency, market access, intellectual property theft is enormous, when he to stand up for our issues.

At the same time, we need to have a dialogue about how to reform and how we can help them and help each other.

Our economies are interdependent.

I wonder if we are not hearing more about cybersecurity, that's one of the priorities of the administration, because of the recent revelations of edward snowden.

Perhaps it is a little critical?

You could make the hypocritical argument, but the white house would say these are two different baskets.

What happened with the nsa is intelligence gathering and the president very bluntly to his chinese counterpart talked about a few weeks ago is the stealing of intellectual secrets for financial advantage.

Those seem to be two different topics and i suspect the chinese will try to cloud them, but there is no indication the u.s.. pressing their case to china, which is essentially stop stealing.

The rhetoric has heated up on this very how much stronger is it from president obama now than it was in his first term?

Certainly it is a lot stronger.

When the reports came out about this unit in shanghai, there was -- that was massively stealing u.s. secrets and intellectual property of some of our most important firms, that has changed the debates in many ways.

The u.s. is leading into sunnyvale where president obama and the chinese president meeting, there was a lot of that, but with the edward snowden thing, it has pulled back.

The united states needs to be pressuring china and china needs -- and china will continue to be evasive.

Rex what is the number one priority we need from them and what do they need from us?

China wants access to our markets.

China has a huge amount of resources and there is a big out low from resources coming out of china, some of the most powerful people in china are biting real estate all over the world, they are sneaking money out of the country.

There is a pool of money and china is insecure about its future.

The more they can by real assets in other parts of the world, the better off they will be.

That should be coming here and it's not.

They want access to our market.

That smithfield deal on the weather that gets approved, that will be a big deal.

Thank you.

A great roundtable.

When we come back, the billionaire who represent everything the protesters hate.

He's making a killing off the upcoming summer olympics in brazil.

? it is why brazilians are pouring into the streets in protest -- the government is spending billions for the world cup and summer olympics and the building boom has been a real room for a few people.

We have a look at a newly minted billionaire.

He has a company that won the contract for two of the 12 world cup stadium projects for next year's soccer tournament.

The name of the company started appearing on protest placards last month.

I was covering a protest in sa o paulo and saw a sign that said the money for education went to oas, kind of expressing the feeling that the cheap loans for building the stadiums is coming at the cost of better public services.

It is more than the cheap loans.

There are accusations and, do they seem credible if they exist, that he is, there is some sort of corrupt element to this?

His business is legitimate . from what we can tell any information we have, he bids for contracts with the government and executes them and benefits from very favorable terms.

I think what protesters are questioning even more of the question of is he corrupt or not is is this system good for the average brazilian?

Clearly that has been an issue.

What about the attention on other issues of brazilian economic life, like the lack of spending on education and infrastructure.

Fairly big issues.

Coming up, we are going to talk about a spinoff for the owner of the "chicago tribune" and the "los angeles times." what's up for them?

? from bloomberg world headquarters in new york, this is "market makers" with erik schatzker and stephanie ruhle.

If you can't beat them, join them.

Tribune's owners say they wanted to sell the company's newspapers.

Now they are pulling a murdoch and owning the assets off into a separate company.

We will talk about that with the managing partner and founder of muslims capital and advisers.

He's a former cohead of lazar's media practice.

The tribune papers have been on the block.

We have been speculating as to who might buy them, whether they could buy an individual paper or not.

Now they are being spun off.

Why couldn't they find a buyer?

That's a good question.

I don't think the actual process of offering them up really got a lot of legs.

There was never a book sent out, there were overtures made.

That would suggest the disposition of assets like this is complicated.

What does the spinoff allow them to do strategically?

A spinoff is a very useful tool.

You can separate assets so the marketplace can value that particular class of asset in a particular way.

A few weeks ago, they made statements and have new leadership and want to be valued as a public entertainment and broadcast company.

By getting the papers, it gets rid of the theoretical drag on value.

These are companies that are valued at considerably lower multiples, so that is probably the key goal.

I have not seen the announcement, but i hope it's done in such a way to maintain the ability for the papers to ultimately be bought by someone because i think the new leadership and investment in those assets is needed.

It was clearly not going to happen inside tribune in its current configuration.

It is the long-term gain, that the spinoff will lead to something?

There is not yet a lot of data in their announcement.

People don't understand that -- as john malone knows well, it has huge implications.

In some instances, when you do spinoff that are tax-free, you create the necessity for that entity to be stand-alone for a number of years so the irs does not treat it as a disguised sale.

When you do taxable or broken spends, the asset can be sold quickly afterwards.

That is a function of tax bases that i think would serve tribune well, to do what is called a broken spend where the asset can still merge with someone else.

Now that mr.

Murdoch as an independent company and newspapers, if this asset was out there on its own, i think it might enhance the ability.

You say it is a politically contrived deal?

I said that?

It has been said.

The "l.a. times" and the " chicago tribune" are very important papers.

There's a lot of questions about who would be there as an acquirer of those.

There are some who hate the idea of rupert murdoch owning them and there are some who hate the idea of them staying in their current farm, in a company that does not want them.

One of the things we have talked about is the difficulty of disaggregating the tribune newspaper empire.

Yes.

Could this be a gestation time for that?

Well they are separate public entity, they could reduce the structuring and get rid of the tribune and get rid of the "l.a. public hands as they go through the changes newspapers are going through.

Not immediately.

Maybe not immediately.

Thank you very much grade -- thank you very much.

We know "lunch money" is starting an half an hour, but we are going to talk about lunch in today's options update.

Tacos, pizza and chicken -- yum!

Brands.

Dominic chu breaks down how options traders are playing this golden restaurant barometer ahead of earnings.

All eyes will be on the sales numbers of china because that is yum brands largest market.

Sales in china were nearly double that of the u.s., which is the company second-biggest market.

Sales in china have been rocked by the deadly outbreak of bird flu.

After a former supplier was probed for selling chicken with too much antibiotics.

There are more than 400 kfc and pizza hut stores in china.

They dropped nearly 20% in may.

Despite the problems, the stock is up over 8% this year.

The sentiment in the options market is a little on the bearish side.

Some traders are basically saying that the stock is overvalued.

Bearish put options are changing hands at twice the rate of call options.

The most actively traded options are on the bearish put.

The most active is the july $65 put option which expires this week.

If used alone , the contract would bet on a nearly 10% drop in the stock in just a couple of days.

The cfos is the company expects a trunk -- a strong bounce back in 2014. it will be interesting to see if any of those signals emerged today in their commentary and earnings.

Keep an eye on yum!

Brands and the earnings around them.

We are also looking for clues on china after the week trade data.

Dom will be back for another options report during "lunch money." when we come back, we will talk about the battle over immigration reform.

It has caused a big split among republicans.

? you are watching "market makers." i'm erik schatzker.

Immigration has been a big deal.

One sticking point is migrant workers.

The concern among many republicans, not all is that if you allow these people into the country, they're going to steal jobs from americans.

Is there any truth to that aced on the work you've done taking a look at the issue?

The immigration policy in the united states is fundamentally flawed.

Ideally, you want the best and brightest talent globally to come to the united states to innovate, create jobs and spur economic growth.

But our policy doesn't allow for that as fully as it could.

That's because the immigration policy is funneled through a visa program tied to specific employers and let allows the government to decide market wages for these people instead of the markets themselves.

For that reason, it is fundamentally flawless and -- an immensely flawed and does not hold up to the promise of what immigration could be for this country.

This is an important issue for technology and some of the jobs related to computers and computer technology.

How else is it important in this economy?

Four computer -related jobs, about 50% of all the workers involved in the program, engineering and what's known as the stem jobs, they have been the primary recipients of these people.

Yet we often see evidence that wages are not holding up to what americans would be paid for it.

So the program has a lot of protections, to protect american workers while at the same time help foreigners.

But what it ends up doing is helping neither and basically gives employees bargaining power to suppress wages and keep them below market wages for americans, while at the same time it discourages firms to train american workers to do these same jobs.

We have to know that no immigration bill is going to be perfect.

Immigration policy by necessity, given the way washington works, is going to be an imperfect instrument.

If there is one way you could influence policy makers to differently, what would you have them do?

I'm an economist, so my answer is easy.

I would let the market determine the wage.

Instead of letting congress have a pre-existing formula set on local wages or prevailing in -- prevailing wages, i would allow for a free and fair economic competitive market that attracts the best global talent and let's markets and employers compete for talent instead of having these arbitrary quotas that basically lead to indentured servitude for foreign workers.

Let's hope washington is listening.

Think you for joining us.

Is coming up , these hogs might stink, but what about the deal on capitol hill?

Taking a closer look at china's plan to buy smithfield food, the biggest american pork producer.

We will talk to the chairwoman of the senate agriculture committee holding hearings on the deal as we speak.

? this is "market makers." i'm sara eisen.

The senate will review the chinese takeover of -- the largest takeover of an american company in history.

The sale involves smithfield to a chinese meat processor.

Peter cook is on the hill with a lawmaker who called the hearing.

Peter?

I am joined by the senate agriculture committee chairwoman, debbie stabenow of michigan.

Thank you for the time.

What are your questions today about this deal and what is it you need to hear to be convinced this is a deal in america's interest?

Food security is national security, so we have asked the folks in the treasury that overview foreign investments and have to determine whether or not it's in the national security interest to look at food safety and food security.

Once we finished the briefing, we will go into a private session.

I've asked the banking and finance to meet members to join us as well.

We are concerned -- this interagency process that reviews these foreign transactions -- the company submitted voluntarily?

Yes, they did.

There is another issue that is long-term.

Short-term, it looks like a good deal, but long-term, china has five times more hog production than we do.

What they are behind on his technology.

They are paying a premium of about 30% to buy this company and get 20 years of technology, which has had about $800 million in investment from taxpayers and food safety, breeding, and management efficiencies.

They will be able to get that by buying our technology and know- how.

Rex to be fair, we are talking about pork and bacon -- to be fair, we are talking about pork and bacon, not nuclear missiles.

We are talking about food security.

One of the great things about our country is we don't go to war over food like other countries and civilizations about our history have done.

That is because we have the safest, most affordable food supply in the united states.

But here's my concern -- our largest export market is japan.

This is an export-driven industry.

China is right next to japan.

Dewey lose that market?

Dewey lose the industry or market share?

I think there is a good likelihood that we will.

This is erik schatzker in new york new york.

If you don't get what you want, if you don't give the fda and department of agriculture a say in this transaction , what are your options?

First of all, this is about being responsible and asking questions about the long-term.

It's easy to say this is just one company and just one deal.

Our job is to look at long-term implications as relates to food safety, food security as part of national security.

We have asked the group that looks at that to include the fda and usda, which they have the problem -- which they have the ability to do.

We will be asking them long- term if there are other situations or deals like this that involve the food industry that they routinely include.

I'm not sure why they wouldn't. but we want to also lay out some parameters to look at whether or not we need legislation to be able to address broader concerns of what national security is other than just the military or intellectual property issues.

We have a lot of questions.

We have not come out opposed.

It's our job to make sure this is done right on behalf of the american people and the american economy.

What is the message it sends about investment?

We want foreign direct investment.

Aren't we sending a message if we block this deal that america is not open for business?

I think everybody knows america is open for business.

The unfortunate part is china is not open for business.

The company originally tried to do a deal where they were buying a 20% of the business and they would buy 20% of smithfield.

That's not allowed in china.

China blocks most of our producers just from getting in china.

You could not do this deal in china.

Smithfield could not buy this company.

I'm a huge proponent of exports and opening up markets.

We don't have a problem with open markets.

China has a problem with open markets and i think that raises a lot of other issues.

Are you satisfied that the process will include your concern about food safety question mark we have not gotten the answer yet.

That's one of the things i will be asking today in the private reefing and i think it is a fair question.

Do you think it is possible for this to be rejected without triggering a trade war or the escalation in rhetoric that was just referenced?

For us, this is about looking at the long-term.

We will see what the answers are.

For me, this is not about one business and one purchase of a business, this is about where we are going as a country and it's our job to look long-term.

On the farm bill which you passed in the senate and sent over to the house, they failed to pass the farm bill the july 4 recess.

Where do things stand right now?

Would you be willing to consider splitting food stamps from farm policy?

First of all, we passed the farm bill twice with over two thirds of the senate on a bipartisan basis.

We will deal with whatever they sent to us.

I think it's a serious mistake to begin to unravel what has been the coalition of urban and rural americans to come together on food security and supporting our farmers and ranchers.

But whatever they send us, we will deal with that and do it in a bipartisan basis as we have done in the senate and send them something responsible back.

Thank you for your time.

Chairwoman of the senate agricultural committee.

The hearing begins at 2:00 eastern time on the hill.

Thank you for bringing us that conversation.

Our chief washington correspondent and clearly a lot of questions about this proposed deal.

Coming up, we will bring you the highlights and predictions from larry fink of blackrock.

? a great show.

We spoke with the founder and ceo of blackrock, larry fink.

He talked a lot about regulation, china and the u.s. economy and where we are right now.

We are going to be in a 2 % two 3 % economy.

We will have improving labor markets and much of it has to do with my view in the labor market where we have a seachange in manufacturing in this country.

We have huge opportunities for job growth in the manufacturing sector.

He is very encouraged by the oil boom.

He's worried about the impact of an agile regulation on the market larry is very articulate on this point.

This has come down to intended versus unintended consequences.

He says regulators intended to take liquidity out of the bond market and sort of called me out on that one.

He says regulators may not understand bank relation in respect to interest rates.

If you raise the capital requirements as they are doing now, you may force banks to sell off on to meet those capital requirements, exacerbat

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

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