Grounded: Market Makers (08/14)

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Aug. 14 (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)

Can't and america and u.s. airways get their merger back on track?

Hedge fund humbling.

Bill ackman says he is getting too much of the flame for jcpenney and insists his billion dollar short on herbalife will pay off -- sunday.

-- some day.

Bill gross says there is a were coming in the bond market.

Why the world is unprepared for a fight he expects to win.

Good morning, everyone, i am erik schatzker.

This is "market makers." let's start as we always do straight with the newsfeeds, the top business stories from around the globe.

Ups cargo jet crashed just short of the airport in birmingham, alabama.

The two pilots were killed.

The airbus was on a flight from louisville, kentucky.

Ups is the largest package delivery company.

U.s. prosecutors have charged two former j.p. morgan in place of trying to conceal the london well trading loss.

Both former bankers worked in london and have been charged with wire fraud and conspiracy.

Prosecutors told a news conference at 2:00 p.m. eastern time and you can watch it right here on bloomberg television.

The eurozone has emerged from its longest recession on record.

Gdp in the 17 nations that use the euro rose in the second quarter and that is six straight quarters of contraction, the longest since the euro costs debut -- euros debut in 1999. time to pop the cork of champagne?

I'm not sure.

But things are looking up.

If you fall that far, there's nowhere else to go but up.

But there was a question as to what was help them emerge and it does appear the tables have turned.

One thing worth pointing out, eurozone unemployment, 12%. if you look in spain, 26%. that is not to say the unemployment rates can't go down.

We have seen unemployment go down in the u.s. coming out of our own recession, but they're in a much deeper hole than we ever were.


We're talking about 17 different nations and much of the gdp expansion has been driven by the stalwarts, not so much by the weaker nations.

We have a chart of italian gdp, for example.

That economy has been shrinking.

If you look at the trend, there is a sign of hope.

Mario draghi says in the second half we should see a acceleration.

It will not be supercharged, but this is an important bright spot for american corporations to do a great percentage of their business in europe and for the entire world economy.

As a whole, the 17 nations are the biggest economy in the world.

Moving on from economics to an exciting story that is been an epic week for bill ackman.

He quit jcpenney's board yesterday and then talk to charlie rose about the struggles that led to the resignation.

Tooley hyman has been following the story.

He says he is been getting too much of the blame for what is been going wrong at jcpenney.

He was talking specifically about the hiring of ron johnson.

That is the single thing that most point to as bringing in, ushering in disastrous period for jcpenney, making too many changes too quickly and alienating the or customers.

Ackman says, i just recruited the guy, it wasn't necessarily my idea to hire him.

I did help convince them, but the whole board agreed, he says three at he says, don't blame me entirely for what is been going on.

He also spoke to charlie rose generally about his investment.

Jcpenney has been a tough one for him.

He talked a little bit about herbalife.

He has remained steadfast in his short bet against that company and also talked about the idea of humility because this is a guy who has largely stuck to his guns, sometimes at a steep price.

When you invest in business, you need a high degree of confidence, but you also need high degree of humbleness and you have to balance those two don't. humbleness comes from mistakes three at you learn from mistakes.

-- humbleness comes from mistakes and you learn from mistakes.

You need to do sufficient amount of research and homework.

Investing is a business where you can look very silly for meaningful time before your proven right.

I looked very serious -- silly at mbia.

Did you ever doubt yourself?


or recently has been in the silly category than the smart category, according to a lot of people on wall street.

Humility is in a short supply in the hedge fund industry some would say.

Yes, i don't think that would be a controversial statement whatsoever.

You can look to his performance this year.

He is up about 3.7% for the year to date, so he is not in the red emma but he has trailed most of his peers.

Some are folksy has tussled with, whether you're talking about dan loeb who is up about 60% this year to the end of this year.

Perry partners, which recently disclosed the stake in jcpenney, up 11% through the end of july.

What bill ackman touted to charlie rose or his active investments and he said 23 of 26 of them have been home runs, have been successful.

He is more touting his performance over the life of his -- canadian pacific has been a home run for him, procter & gamble that has worked out well.

If you look at the sheer numbers, his hits have beaten his misses.

It's just that themisses had the more recent -- and memorable.

The other big story we're following, two of the world's largest airlines will have to 5'11 billion-dollar merger.

The department of justice is blocking the merger of american airlines and us airways saying it hurts consumers by decreasing competition.

Our next guest is credited with making the merger happened by bringing his clients and the american airline creditors, to the table.

What happens if the deal falls apart?

Let ask him.

Joining us now for an exclusive, great of you to be here with us on this day.

Jack, what exactly went wrong?

I think the government is entitled to its opinion and it sorts out what it wants to for revelatory perspective.

I think everyone needs to calm down a little bit.

The merger agreement signed back in february contemplated there could be a disagreement with the government and there is a timetable for resolving it echoes through the end of the fourth quarter this year.

There are almost always disagreements with the government when dealing with a case of this size and industry of this importance, jack.

Why did the government have to take it to a lawsuit?

What didn't happen behind closed doors that could've happened such this was resolved in the merger was approved?

I think what will come out in the courtroom is the fact the government changed the rules.

The government didn't pursue the normal analysis a day when it approved united and southwest -- by the government reserves the right to change the rules because it makes the rules.

Just because the government says something is right doesn't make it so.

They are bound by their own prior analyses and approach to things.

It is not fair to change the rules.

What if the government says, fine, you may not say it is fair, but we can still do it?

That is why we have court.

Under the merger agreement, airways and american will work closely together.

We have been involved in this sense the premerger days as part of the joint protocol for strategic alternatives.

We think the government got it wrong.

We think this is great for the stakeholders and consumers and we intend to stand side-by-side with them.

How much personal responsibility do you feel for the merger agreement itself and the prospects for this deal given the fact you have been given credit for making this happen?

I am one of a larger team.

The real credit has to go to the management teams at both airlines and the employees at both airlines who have been making a difference here.

True, but you brought the creditors committee to the table.

Your instrumental in persuading american to enter into a merger agreement before adding bankruptcy.

The irony of it is, we did it because of the complement three networks of these two carriers, which will be good for consumers and good for stakeholders.

What is the likelihood they can go back and renegotiate a make concessions, perhaps, and come up with a deal?

Yesterday, the government said everyone is open to talking to the government was fairly provocative and what it chose to characterize things.

We were in the meetings and understand what has taken place.

We have got to take patients the next couple of months and the whole story will come out.

Let's talk worst-case scenario.

What happens to american airlines and amr creditors if the two sides cannot resolve their differences and the work sides with the government?

In other words, the merger doesn't happen?

We go back to square one and sort out what makes the most sense and what maximizes value for creditors and what is good for the airline going forward.

That is a process that will go into 2014. can we say recovers for your clients, the creditors, will be better under a merger than they could ever be if amr were to do it on its own?

I think everyone believes that.

You push back on higher fair prices.


I think when you look at what american and airways are doing, purchasing more planes, unprecedented orders with airbus and boeing, increased capacity, rotter networks -- their whole approach with what they will do in one world.

This is a merger that is intended to drive the largest airline in the world in a manner that serves communities and customers and does its employees and stakeholders proud.

We think this is the right consolidation cap in the airline -- is this the biggest misconception the government has right now?

I think the biggest one is they have filed a complaint in our racing it on new theories -- are basing it on new theories that are untested and speculation which they won't be able, in our view, to be able to prove at the end of the day.

There were supposed to be hearing about the amr bankruptcy tomorrow.

What do you expect to happen?

That is the confirmation hearing.

All of the stakeholders in amr have voted overwhelmingly in favor of this transaction just like the u.s. airways shareholders did.

Tomorrow is the hearing for the judge of the bankruptcy court to address those issues.

Judge lane is a prudent jurist.

I will not try to speculate what he will do.

As we sit here today, that is scheduled to go forward and we will see what happens.

Will the creditors committee for amr take any action against the doj?

We are sort of in the mix already and we will stay in the mix and stay closely involved.

I think this will be a traditional litigation.

Jack, what are the odds this merger gets done?

I continue to be confident.

I'm not in the business of putting numbers on bloomberg.

Sorry about that.

We are in the numbers business, so i had to ask.

Jack butler, thank you for joining us today, leading lawyer for the committed or's -- editors committee.

When we come back, we will be talking to the man who led northwest during its 2008 merger with delta and the biggest airline merger in history.

To that point, don't go away.

? this is "market makers." american and u.s. airways to grade the worlds largest airline.

Our next guest is exactly what that feels like because he did it in 2008 merging northwest airlines with elta.

-- with delta.

He is the former ceo of northwest and executive advisor to blackstone and sits on the board of aig, chrysler, and hilton worldwide.

In your opinion, where you sit in washington watching this unfold, is this merger dead on arrival?

No, it's clearly not dead, but it has taken a very surprised turn.

I think everyone expected this merger to sail through, so the justice department action yesterday i think came as a real surprise.

I think the next sub -- step is the warehouse.

I think the challenge that will present is that this is likely to be a six to nine month undertaking and during that time, those companies will be in limbo, waiting for the outcome.

That is not bid for either, but i don't think there's any other recourse here other than to each conclude to not received, but i think the transaction is sufficiently important to each that they basically have no choice but to litigate the case and take it to conclusion.

You mentioned the surprise factor.

We were sitting at the desk watching the stock market reaction as this came through, this lawsuit hit the wires.

It wasn't just the stocks involved.

A lot of these airline stocks were getting hammered.

Is this negative for the industry at large?

No, i think if you look at it from a delta or united perspective, i think they do fine either way.

If the transaction will to millie is consummated -- is ultimately consummated, i think having three network carriers and southwest as basically being the structure of the business is one that is sustainable for earning returns on capital going forward.

I think of the transaction doesn't happen, then i think you have an industry structure where you have two very strong global carriers and then you have two smaller ones here in the united states.

Scale clearly matters in this business.

I think both delta and united will be able to do very well in either situation.

Having merged delta and northwest, you know a lot about the antitrust analysis the government puts to work in the context of that he'll print jack butler represents the amr creditors and was here a few minutes ago saying the government since your merger, since the united airlines continental merger, has changed the rules of the game.

Do you agree with him?

I'm not sure the rules of the game have necessarily changed.

I think what has changed are the underlying facts.

So we at northwest reached a conclusion early on that the industry needed to consolidate.

Once we reached a conclusion, we wanted to be the first mover.

We wanted to do that for two reasons.

One, we wanted to make sure we got the partner of choice.

Second, we wanted to make sure the industry structure from a competitive perspective was the most favorable for approving our transaction.

So when we presented our merger, you still had an independent continental, independent united, an independent u.s. airways, an independent american.

There are were virtually no competitive issues with respect to that.

United and continental when they merged, they had a slightly cover story because there were fewer competitors out there.

Obviously, american and us airways have the toughest story because now you're taking four network carriers and going down to three.

Frankly, we didn't want to be in that position, that's why we went first.

Do you think the department of justice concerns about higher kicker fails -- ticket fares are legitimate?

I think the other unique factor about this transaction was the highlighting of the historic pricing practices at airways.

What i think the justice department called their advantage fares.

That is been a practice that us airways has employed for a long time and makes economic sense for them to do it, given their network structure.

And it is also rational that a merged american us airways will probably behave differently.

As to the fares, i think you need to take a longer-term view.

Look back and remind oneself, over the last several years, this industry has gone through a very tumultuous perios d with bankruptcies twice at us airways, continental, united, northwest and delta and non- american all went through chapter 11. the industry was not sustainable.

It was not sustainable because it was too fragmented, there was too much capacity out there.

That capacity was driving fair levels to levels that wouldn't maintain a degree of profitability that airlines need.

In essence, customers were getting the benefit of that.

But it wasn't sustainable.

Shareholder value was going away and customers were getting the benefits.

So that had to be reset and consolidation was really the vehicle for resetting that.

Quick question before we have to go, if this merger doesn't go through, is that good for delta?

Is a good for united- continental?

Again, i think those airlines probably when either way.

If it doesn't go through, clearly, there will be a structure among the network carriers where there will be two large carriers and two smaller carriers.

In the network piece of the business, size and scale matter.

Delta and united will clearly have an advantage over a much smaller american and a much smaller us airways.

Terrific perspective, doug . a former ceo of northwest airlines, merged his company with elta to create what at the time was the world's are just airline.

And talk about the advantage of going first.

Speaking of airlines, smooth sailing for online travel agency trip advisor.

The stock almost doubled this year.

We will speak to the company's ceo coming up on "market makers." ? 26 minutes past the hour.

Look at the major equity indices, not a lot of action.

Slight declines across the board.

All showing red right now read the focus is still the fed and what they're going to do.

The meeting is not until september 18 or so, but i'm looking forward to talking to bill gross in the next hour about that three at envision healthcare, $23 a share, about $25 right now.

We will speak to the company ceo bill sanger in just about 14 minutes time.

The stocks seven riding high thanks to the president's health care legislation.

We will talk about that and the uncertainty.

? this is "market makers." apple's latest iphone is likely to have a new security device, a fingerprint reader.

People watching apple said the company likely will include the device because at least in part it's been more than half $1 billion to buy a fingerprint sensor maker.

The new iphone is expected to come out september 10. a chief executive officer apologizes for the when he publicly fired an employee during a conference call.

He calls it an emotional response during a difficult discussion.

Aol says the play will not be hired back.

Time warner cable is hurting cbs during prime time according to their ratings, they lost most five percent of viewers last week.

They could not come to an agreement with cbs over how much to pay for caring the broadcasters programs.

You know what that means, you won't be able to watch "big brother" tonight.

Coming up, making profits at the time of obamacare and managed care, we will talk to the ceo of a healthcare company that just begin trading today, and it is hot, hot, hot.

This is "market makers." it has been smooth sailing for trip advisor, luring customers in the booking travel online with a potent mix of prices and ground source reviews.

The company was spun out from expedia in 2011. since then, her stock is taking off.

With us, the ceo of trip advisor joining us from boston.

Good to see you, steve.

First, the news of the day, the department of justice trying to block the merger between american and us airways, complaining about higher ticket fares.

From your vantage point, what do they look like since consolidation in the airline industry?

Overall, we have noticed the cost per mile of the traveler having gone down over the decades of the airline industry.

We're not it starts -- experts, but we try to find the best fares for everyone, no matter where they travel.

Our flight search is international in scope and offers great opportunities for travelers with american or u.s. there were any other carrier to find the best price for where they want to go.

Let's get your business.

I mentioned the spin off from expedia about a year and a half ago, now worth 40% less than you are.

Why is that?

I think there's always some ups and downs for the different travel companies.

When we look at expedia, they are an incredibly strong company in so many markets.

Really, a dominant force when it comes to both air and hotel rooms and vacation packages.

They do do a great job of helping travelers find the right vacation package for them.

In terms of why this particular -- go ahead, i'm sorry.

There are some ups and downs, but no one has doubts of their staying power as a great company.

Over time, is it inevitable that you'll end up competing with each other?

I think from the beginning of time, trip advisor and expedia competed a bit in terms of where does the traveler first go to plan a vacation?

We have come at it from different quadrants are different perspectives.

Trip advisor is about the crowd sourced opinion, the hundreds of millions of reviews, to really help form that best opinion.

Expedia has phenomenal pricing and great packages and the ability to finish the transaction by booking.

There are two different parts of that vacation experience and i think both have a great part in the ecosystem.

Who do you look at now is a bigger threat, bigger and petted of comedy pricelines of the world or google?

Well, trip advisor has been blessed with a tremendous amount of success, of growing traffic, and really growing worldwide awareness.

When we look at the other big companies where people start their travel planning process, an awful lot of them still start at google just by typing in the travel phrase into the search engine.

We view our biggest challenges help people, travelers, around the globe that they will get a bigger -- better and so if they start on trip advisor.

From that perspective, i'm looking at, where is the first spot someone is going, and i think of google as bigger competition in our clients of the various agencies that will take a booking.

One thing google does, for example, get people all kinds of reasons to use it every day.

How does trip advisor give your users a reason to come to your site when they're not planning a vacation?

We certainly know from looking at our log files we have some people who come back every day, every week, because they're in love with the concept of travel.

They're taking what we call the armchair vacations.

We also have restaurants throughout the site and we have millions of restaurant reviews and that is something that while you may not be eating out every day, you might eat out once a week or once every other week, and we encourage you to use the website to figure out the best place to eat -- how do you make trip advisor -- the name alone suggests going somewhere, a trip, away from here, somewhere else.

How do you get people to think about trip advisor as a source for crowd -- as a place where you can find crowd sourced restaurant reviews?

Most people are going to gratitude -- gravitate toward yelp or urban spoon.

They don't necessarily equate your site with restaurants.

Yelp is a strong brand here in the u.s. trip advisor is global with less than one third of our traffic emanating from the u.s. so we have an awful lot of restaurant reviews that are really high quality and maybe the first time someone experiences picking a restaurant on trip advisor is actually when they are traveling, then they come home and use those same reviews in their hometown.

Again, it is not a core focus of our business, but it is a pretty important part to help the traveler have a full trip including the hotel, flight, restaurants, the attractions and everything.

What we are getting at, obviously, this has become competitive space from outsourced reviews and from online travel.

What is the single distinction with using trip advisor?

I would say it is the sheer scale of opinions that we have about everything travel.

If you're planning a trip, you really want to go where most people have left their two cents, their comments condor inspiration, their photos, their room tips.

Every thing we have about helping you to make the right decision for the best hotels, the best attractions, the best to her, the best restaurant, the best getaway, the best place to have the community answer their unique question that maybe only you have about a destination.

Trip advisor is that source.

Because we have been at it for so long, because we had generated 100 million opinions, because we are already the largest travel site, it just feeds upon itself.

It is a nice, free product for the traveler.

Or the worst, the places you don't want to go, because you have the negative reviews there as well.

Thank you for joining us here on "market makers." we are going to make a trip from travel to health care because invision health care went public today, released officially last night.

The company raised a must $1 billion in the largest ipo in more than a month.

It is a medical services provider and increase that offering by 20% because the deal priced at the high end of the targeted range.

Investors are excited about envision.

The question is, why?

We bring in our senior healthcare analyst.

Michael, what is it that people see when they see a company like envision?

I think investors are truly excited about the opportunity of finding a large cap opportunity , and outsourced medical services and ambulance services.

Frankly, a very intriguing offering that allows outsourced positions to go ahead and provide coordinated care.

This is really going to be a large cap opportunity to take a look at some several growth opportunities within the healthcare services banks.

Michael, what exactly does outsourced mean?

Outsource means that hospitals normally end up employing physicians to go ahead and have services.

Like indices yellow jeep or having physicians in emergency room -- like anesthesiologists were having physicians in emergency rooms.

They also outsource municipalities to offer endless services.

As a result of that, they have a very diversified stream of revenues that they can end up going ahead and encroaching within the healthcare space.

A lot of these companies and subindustries you follow in healthcare, michael, have been riding high off of this room from obamacare that the idea that the expansion is going to be helping.

How much longer can that last?

I think that a number of these companies are skimming the surface, just in terms of the obamacare benefits.

Invision is one of them.

More than 18% of their patient volumes are coming from people that have no insurance.

If obamacare is implemented, as we projected it will be, then that means those patients would end up having insurance in the amount of uncompensated care, the amount of care that invision provides, frankly, they don't have a lot of opportunities to go ahead and recoup him a would end up going down.

In 2012, that was around 40% of their gross revenue, so it really is significant.

Michael, good to see you, and thank you for putting envision healthcare into perspective.

Right now, we have the ceo of invision health care, bill sanger.

I will remind you, they raised august $1 billion in and overprescribed ipo just last night and the stock is trading up on the new york stock exchange.

Thank you for joining us.

Michael mann just made a case for why obamacare is good for a company like yours.

Is there anything about the introduction of obamacare and some of the controversy around it that may not work out as well as you might expect?

I think michael is fairly correctly -- correct when he looks at obamacare is being a tailwind opportunity for the company.

However, we have been operating for over a decade, continuing to provide care for those who have no means to pay for services.

Last year, we had over 13 million patient encounters, 2 million of those patients were unable to pay us anything.

Indeed, if obama care facilitates the entry of these folks into the system, with some means of payment, that would be a benefit to the company.

Do you worry the government is going to cut reimbursement to hospitals and other medical providers, and that will actually leave you a bit vulnerable?

Clearly, the money has to come from somewhere.

Don't forget i'm a what drives this economy in terms of cost is really healthcare.

We have to look at more effective ways to deliver healthcare.

Specifically, this is what envision is about, providing coordinated care so we can provide more care actually on lower-cost structure.

That effectively, as i understand it, is your sales pitch -- cost and some of the other words you used comic efficiency, productivity and the like.

The trend in healthcare costs has been up lately but still heading higher.

What can you do about healthcare costs that other providers cannot?

What is it that makes envision successfully keeping costs under control?

Perhaps we should start with what makes healthcare unsuccessful.

That really has to do with the way we care for patients.

We are reimbursed, unfortunately in this environment of ethical reimbursement, for activity, not outcomes.

Envision has been able to effectively care for the patient across the continuum, focusing on outcomes, not activity, but how well is a patient getting in terms of the care being received and what is the value proposition?

Value proposition talks about cost and quality.

Just to understand it a little bit better, you pay your physicians based on the quality of the outcome, not just on the services rendered?

It is a, nation.

Our positions, paramedics, art, faded a bit differently, but for providing care to the patient, focusing on outcome, patient satisfaction.

There is a whole host of metrics in which the physicians are provided to the patient, not sibley does care.

What about the bumping as when it comes to the healthcare exchange, for example, and the fact the business mandate has been postponed?

How does that uncertainty affect you?

If you look at healthcare reform, it is really about healthcare financing and expanding coverage.

As we look at the opportunity of the future, i would call four bite of the apple.

Number one, there will be medicaid expansion into the state, so more folks will be eligible for medicaid.

They're going to be expansion of exchanges, even though we believe that will slow down somewhat, we ultimately will see the exchanges expanding state- by-state.

There is what is called medicare/medicaid parenting where medicare patients and medicaid patients will have similar compensation.

Lastly, we know for a fact volume will go up.

Whenc romneyare was implemented in massachusetts, we saw volume go up approximately 9% in our merges the rooms.

People are seeking means and ways that provide care and emergency room and still today, unfortunately, means for those with out insurance to provide primary care.

Part of the success has been recruiting physicians.

The competition for doctors is getting more intense.

How do you continue to win on that front without driving up your own cost?

In this equation, it is all about your ability to recruit and train clinicians.

We have over 26,000 clinicians in our organization.

Good quality, good conversation structure, opportunity to excel within the organization.

No different than you would find it any good organization to provide an environment where employees can excel.

Bill, thank you for joining us on "market makers." bill sanger, ceo of envision, started trading today and the stock is up almost 9%. the biggest since home depot supply company.

Coming up, a new study says bill ackman and carl icahn may have it right.

Activist investing is good for you.

We will explain, next.

? this is "market makers." carl icon, bill ackman, try to boost returns untargeted companies.

Just how effective are they?

There was a recent study.

The bottom line, activism overall is good according to a study.

They looked at the return on assets, the roa, of 2000 interventions by activist inventions from 1994 to 2007. they found the average industry adjusted roa rises sharply in the first year and then he keeps rising in year to doug and three, then it dips slightly -- in your two and three, that it dips slightly.

Overall, it is still higher.

By the end of year five, most of the gap in performance of the targeted company with the industry areas has basically been made up.

So those findings would rebut the argument that activists are just in it for the short term, like, say, carl icahn, urging apple to buy back more shares.

They went into the study with the mindset of singh they could prove, they could test this claim.

What they found was the opposite.

What about specific strategies?

We know sometimes they employ hostile methods.

And levering up companies, it is the preferred way of doing things with interest rates so low and looking for ways to magnify the recurrence -- returns.

Carl icahn pushing apple to use its investment grade rating.

19% of activity is related to increasing leverage, boosting payments, hey out including dividends and buybacks and also reducing investment.

Adversarial interventions, the kind that carl icahn is join with dell for instance, using hostile tactics, makes up about 22% of activities.

When you look at return on assets, it is a somewhere path of what we just showed you before, higher after five years worth.

The hostility does pay off.

This is for 2000 interventions between 1994 and 2007. pretty good data.

But the overall investing environment has changed a lot since 2007. but many as we were showing earlier, many of those activist like nelson have done great, better the market return.

You could make the argument that that was a different era.

Some of the biggest companies in the world.

Now how do you do it in this kind of environment with retail investors pretty much out of the game?

A good charter for them to see, perhaps, not getting scared off by the activist.

We are almost at 56 minutes past the hour.

It is time for us to go on the markets.

We have a few market movers like macy's reporting earnings, missing on the top and bottom line, sales and profit missing.

A cut forecast for earnings this year for the first department store to report for the quarter and the soft sales may be a bad indication of what is to come for the peers.

Dillards, nordstrom and calls all moving -- losing ground.

Sea world, the biggest one- day drop ever for the ipo.

Dropped as much as 14%, now down only 3.5%. they cut their forecast for 2013. people are just not seeing shamu as much.

When was the last time you are at sea world?

That would be never.

Deere reported a pretty nice beat on better tractor sales.

A couple of market movers for you.

We will be back in two minutes.

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

Bill gross says it's war.

The bond king for a slaughter in the fixed income market and he will tell you how to survive.

Rex carl icahn takes a billion dollars taken apple and the band a bigger stock i back.

Is he in it for the long run?

Where's the beef?

Production hasn't been this low in two decades.

A top butcher in new york says prices are going up.

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

I'm sara eisen in for stephanie ruhle.

We are going to start with the newsfeed, the top business stories from around the globe.

Two former j.p. morgan traders have been trod with fraud and conspiracy in the london whale case.

Prosecutors to accuse him of trying to hide $6.2 billion in trading losses read the owner is cooperating with the government and was not charged.

You can watch that right here on bloomberg.

In birmingham, alabama, a ups cargo plane crashed while approaching the airport just before dawn.

The two pilots aboard were killed.

It came down in a field about half a mile away from the runway.

John paulson's had fund -- john paulson's hedge fund is buying steinway for $112 million.

Shares of steinway had gained 81% this year through yesterday's close area billionaire carl icahn has a billion-dollar stake in apple and called on ceo tim cook to initiate a larger stock buyback.

Trish regan got a call from carl and had a wide-ranging discussion with him.

Is he making a short-term trade or is this a longer-term play?

He likes this one for the long-term, at least for now.

He says it's more similar to his netflix investment as opposed to something where he would be more of an activist.

He likes it overall and thinks it is an opportunity.

If he's not an activist, why would he get on the phone with tim cook?

He said he had a very good conversation.

He said i think the company is extremely undervalued and had a good talk with tim.

I said i think a large buyback should be done now.

It's a no-brainer since they can borrow cheaply even if the earnings multiples stay the same.

According to my sources, he would like to see a buyback to the tune of $150 billion.

That's a sizable buyback.

Over and above the 100 billion they are already doing?


At roughly three percent interest.

They could are the money and go to the debt market, putting that on the company which he thinks given the low interest-rate environment makes sense to do.

That would bring the valuation higher on the stock.

You would get to roughly $625 a share.

If the iphone 5 turns out to be a blockbuster, you can get north of $700 a share according to my sources and his math.

He went to twitter with this and said it was going to be big.

And it is big, north of a billion dollars.

And he's not going after this for the dividend.

He wants the buyback.

I wonder what he will do if apple doesn't respond to his demands.

Look at what he is doing with dell -- right now things are amicable but we shall see.

One of the points my sources made is that they did have this number station.

It went well and tim heard him out, but they did agree to talk at a later date.

Let's find out what carl icahn's billion-dollar stake means for the company.

We are asking gene munster, one of the best analysts we've ever seen on apple.

How many accurate calls have you had on apple?

We can't even begin to remember.

But let talk about carl icahn.

Does it mean anything to you as an activist that an activist investor like this is playing in the stock?

He can inspire other people to get involved.

One of the issues apple has had is they can get more debt and they can do more things.

He is an inspiration to other investors and i guess their voice will be heard.

He owns less than one percent and has a history of being a shareholder activist but i think there's not a lot of substance.

It does play into investor psychology and a vote of confidence for other investors.

Trish was saying he's agitating for a larger share buyback funded with debt the way apple did the first announced buyback.

Whether it's an additional -- we had to talk in billions here -- how much of a difference does that make?

If you were to throw an additional $150 billion of debt on their balance sheet does that change anything about the company?

Rex it really -- it really doesn't. it's a smart thing for apple to do.

Your interest expense, they don't have a lot of interest right now, so that would go up.

As far as the substance to the numbers, it would be accretive.

The math on this makes a ton of sense, but the reality is apple moves very slow.

Like with their products.

They are slow incremental improvements.

It's the same way with capital distribution.

I wouldn't think anything big is going to come out for the next couple of years.

150 billion dollars -- can the debt market even take that on?

Sure, they can.

I'm not a debt guy, but given what apple is as a company, i think they could raise $150 billion.

You have start of the have no revenue and can raise $500 million.

-- you have startups that have no revenue.

He is pushing apple to return more to shareholders.

This is one of the common complaints when it comes to apple.

Is apple stingy with its cash?


Everyone knows about the near- death experience the company had and that culture is ingrained in the senior management.

I'm sure cook has a lot of that in how he thinks about the alan sheet grade i think they are stingy and i think that's one of the issues investors have had with apple.

Isn't that because apple sees uses with these cash that goes beyond earning .20 five percent of interest?

Didn't tim cook testify to congress that apple does things with the money overseas?

They do things with the money overseas, but i think it is more about this mentality that technology moves so fast and you can never have a big enough for just to defend yourself if the climate changes.

They could buy up a better part of the internet with their cash on hand.

I think it is to an extreme.

There's a logical part to it.

You have to think about the timing here.

I have a big announcement coming in september.

That is weeks away.

Do you think carl might benefit from some of the excitement we might see surrounding and iphone 5? he is playing us all here because he knows there are some events coming and he's probably owning this for the products over the next year and half.

Apple is going to have two new product categories, we believe, and i think that timing of this, the chart start -- the chart stop -- the chart starts working with these hot ex.

The reality is, the stock is going higher and he's smart to be there.

Aren't you hearing that the pace of apple isn't what it used to be?

We don't share that, but we monitor that.

The pace is similar to what has been the past.

Keep in mind two years ago when there was expectations that the iphone 5 was going to come out, and it was the 4s. there was a lot of criticism at the time that it was just incremental.

The iphone has been incremental for the past eight years, so the reality is this is apple's pace and they want to do things with intense detail and there are new product categories coming.

Let's talk in four quarters and see what the pace of innovation is because it's going to take a miserable step up.

I introduced you by trumpeting the good calls you've made on apple in the past years but it has been harder over the past couple of years.

In 2012, you had a price target of $912. now you are at $665. what is it going to take for apple to be that 1000 stock that they seemed to have a good chance of getting to.

I think there will be two phases.

Over the next six quarters, it's the product cycle phase and that's the easy one to get back to.

They're going to come out with the products we're talking about and people will will get excited and the numbers should go up.

To get back to that thousand dollar level is going to take the belief from the buy side that this is a longform story and can grow.

-- a long-term story and can grow.

Whether it's something around content or some form of a renewable revenue, i think it's going to be something in that tenure.

Do they need to make an acquisition to be able to deliver that?

I think they need to do a lot of little acquisitions but i don't think they'd need to do anything gang buster.

I think they've got the leases to get there.

Think you very much.

Gene munster is an analyst at piper jaffray.

Always good to see you.

When we come back, we will talk about a battle where only the strong survive.

We are talking about the bond market and the king of bonds himself will be with us and his survival strategy from pimco's bill gross.

From the king of bonds to the king of beef, we will find out why there hasn't been a shortage of beef like this in decades.

That's all coming up on "market makers ergo -- market makers." ? a call to arms from the king of the bond market.

Bill gross says there is a war coming.

A war of survival he intends to win.

He's back with us on "market makers" this morning and he runs the world largest mutual fund, the pimco total return fund.

Nice to see you this morning.

Good to see you.

You called it back in april, the end of the 30 year rally in bonds.

Now you are describing the market in military terms -- a war in which there will be many casualties.

Why do you see it being so bloody?

It is bloody if in fact the market has turned and interest rates have moved higher.

They've done that for the past three months and bond prices have gone down.

We know that bond mutual funds in the market itself is described in higher-quality terms and as slipped by about 2%. investors are worried and i'm suggesting there's a war on to retain assets and fight a future battle in which the return on bonds may be less than historic.

We've come up with some strategies that aren't necessarily durational or maturity related and can protect principle more than historic.

What i think of war, i think of fighting the fed.

That has been the regime, but we are talking about tapering in september.

Is september the time and does that mean the whole regime changes?

I think it is changing and i think september is probably the time.

We give it 80% and here's the reason.

We think the future fed policy will increasingly rely on what's being called forward guidance as opposed to asset purchases or quantitative easing.

-- to the fed's way of thinking, that is a tired horse which is inflated would -- which has inflated asset prices but has done little to stimulate growth.

In addition to that, according to some fed numbers, it puts the fed balance sheet at future risk with potential higher interest rates.

This implies to us our reliance on future guidance and forward guidance which is a reverse type of twist from back in september of 2011. this is a reverse twist in which the fed wants the market to buy securities with the comfort of forward guidance and withdrawing the purchasing of 85% of the gross issuance of 20 year and 30 year treasuries.

If this diagnosis is correct, long treasuries and long maturities should be sold in one to five years -- and one to five years and one to 10 year maturities should be brought great how certain are you about the direction of the bond market?

And to the degree that you are, how are you expressing uncertainty in a way you believe is going to deliver returns?

The way we look at it is a conceptual way, not subject to historical modeling.

In a highly levered economy, and we have a highly levered economy not just in the u.s. but globally, when there is a lot of leverage in the economy, the central bank must tread lightly in terms of increasing interest rates.

That's why you see the emphasis on forward guidance and that's why we see quantitative easing.

The store raising of interest rates to countermand higher inflationary threats is basically a thing of the past.

If the fed stays where they are, at 25 basis points for a long time, perhaps 2016 and beyond, what does it mean in terms of strategy?

It means that the five year and 10 year , they don't represent value relative to inflation but represent value relative to where they were three or four months ago at 150 or 160. it all depends on what the fed does in the central bank does and leverage and the associated increase which would slow and economy significantly and we think the fed understands that.

Where is the inflation?

Is it something to be concerned about, this lack of higher prices at the producer level and consumer level in an economy that is theoretically recovering?

Ben bernanke has emphasized this.

He says they will defend inflation not from the top side but from the downside.

The consumption deflator, so to speak, that is at 1.2% and they are targeting as high as 2.5%. this will argue for an aggressive easing -- aggressively easy fed policy going forward, keeping funds low to elevate inflation, much like the japanese are trying to do in their economy.

You made reference to a war to retain assets in the fixed income market.

You say trust me, no one has given this transition more thought.

The total return fund has suffered some redemptions.

Have you reversed the tide?

If so what is working?

It sure is working.

Our returns relative to the market were not only positive in terms of their real returns.

What the strategy is is to emphasize durational, longer maturities less.

The problem is you reduce it yields.

If you went to cash entirely, you would have a portfolio yielding 10 basis points and clients wouldn't want that grade you want to reduce aeration but substitute other areas in the bond market which provide what we call terry.

-- which we call carr y. that emphasizes yield but is less sensitive area we are talking about yield curve emphasis am a volatility and bonds and other currencies as opposed to dollar-related currencies.

There are other ways to defeat this army other than emphasizing duration, and we intend to move into other areas to do it.

Let's talk about an area that hasn't done to hot lately -- expansion for the euro area.

Is it time for you and pimco to get back into europe and start shopping there?

Perhaps not.

Not in the core countries like germany.

Yields are historically low, lower than even the united states.

If europe is improving, you would not look for the ecb to begin tightening.

They just gave us our guide's in terms of evening -- in terms of easing for an indefinite time area their yields are significantly lower in terms of the core.

In terms of the uk, they have adopted forward guidance which suggests, although indefinite in terms of a lag and unemployment, there policy is as easy as the policy in the united states.

I would look askance at german bonds.

Bill gross, he sees a war coming in the bond market, which he intends to win.

Rex from the bond king into the beef game -- the beef king.

Beef production is way down.

That story is coming up.

? here is something we never thought we would be talking about a year and a half ago -- a former brazilian alien air.

Has there ever been a rags to riches story like this one?

In march 2012 he was worth 30 poor -- 34.5 billion dollars and now he's worth less than a billion.

Now the abu dhabi sovereign wealth fund may come to the rescue.

There was word yesterday that a company from abu dhabi may by some of his assets.

Perhaps a silver lining for mr.


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

It's a fight between two groups that may never see eye to eye -- banks and retailers.

Two weeks ago, a federal court threw out the cap on debit card swipe fees, now they are back in court for the first time since the ruling.

Phil mattingly is in washington.

But start by giving people a sense of what is at stake here.

The debit card business is a big and growing business.

That's right.

We're talking about billions of dollars.

In 2000 nine, before these caps went into place, up to $16 billion came from swipe fees on debit card transactions.

You see two major money interests willing to do just about anything to get a piece of this pot of money and everyone was a little taken aback by the ruling two weeks ago.

Now it's up to the fed to decide what happens next.

How have the parties involved responded to the surprise ruling?

The fed on one hand, the retailers and the banks?

If you wanted to see a little this was expected to occur, just look at the markets.

These and mastercard had sharp drops.

For the fed, this is a difficult decision.

Top officials never made a secret that they did not want to have to make this rule.

The judge has requested they go back and rewrite this rule.

What we are waiting for today is the fed is going to appeal this or agree to do it.

From the bank perspective, there are two major problems.

One is the uncertainty.

They thought with the fed finalizing this rule, they could start to price it in.

The other is they don't know what happens if the fed goes to the drawing board.

While a cut in half the average for these transactions, it gives them room to move.

If they go back down to $.10 or $.12, it'll be a major hit to the bottom line.

What have the retailers been pushing for?

It's pretty simple.

A say the fed rulemaking from july 2011 it not in any way represent what lawmakers put into the dodd-frank act.

They said the cap was taking into account way too many issues that should have been much lower.

The federal judge in d.c. agreed and said the federal reserve ran completely afoul of the intent of lawmakers.

While we weren't expecting a ruling that was this straightforward, the retailers found an ally in the federal district court judge.

A great summary of what's at stake right now.

Phil mattingly of a joining us from washington.

It is a big issue so we are going to do dive into the issue of bank swipe fees.

Neil or richardson joins us -- nila richardson joins us.

Talk about some of the winners in this rule.

Definitely large retailers are going to win from any reductions in cap very banks are the clear losers.

But caught in the middle are consumers.

At most, this is going to have an ambiguous effect on consumers.

It's not clear that the winds gained by large merton -- large merchants are going to be passed on to consumers and in fact, banks may try to make up the $16 billion in lost revenue by increasing fees on other banking accounts which will have a hurtful impact on consumers.

How might they do that?

Let's talk about the strategies banks might employ and what the consumer protection bureau might have to say.

Have already started.

Before this ruling went into effect, 76% of all accounts were free checking accounts.

That number has dropped to 40% and there has been a clear increase in monthly fees on consumer checking accounts.

This hurts younger households and lower income people.

They are also encouraging consumers to use their credit cards instead of the cards and taking away all of the great incentives with debit card use.

So we are already seeing banks try to maneuver to gain some of this and come back.

It's been ready contentious.

Do you expect your lawmakers speaking up on this issue?

The whole point of dodd-frank was to protect the little guys.

But with this ruling, you get government involvement that hurts the little guy and hurts and banks.

The only clear winner is large merchants.

Even smaller merchants have been hurt by this new change in interchange fees because they no longer get discounts they were getting and have to pay the $.21 transaction fee for even small price things, under $10 like a cup of coffee.

That used to be dismissed under the old regime and now these small merchants have to pay that fee.

It is an important discussion.

Thank you for joining us.

The upscale auto factory where you will never see a robot or an assembly line.

Matt miller went to see how mercedes makes its high- performance amg, coming up on architectures.

? what a regular mercedes benz isn't fancy enough, customers turn to amg, the company's exclusive high-performance division, to customize their vehicles and pay an average of five percent more than a line produced mercedes-benz.

Matt miller visited amg headquarters to get an inside look at the automaker's booming luxury line.

It's the heartbeat of one of the most coveted high- performance vehicles.

The eight cylinder engine pumps out 591 horsepower , propelling it from zero to 60 in 3.7 seconds with a price tag of 200,000 -- $200 million.

-- $200,000. at this is in your typical plant.

The amg order ship with mercedes began in 1989. notably absent are the robots and assembly lines.

Each engine is assembled from start to finish by hand.

Amg's head of engine development calls the 11 man, one engine philosophy.

This is a perfect setting for a mechanic.

Much nicer than a conveyor belt.

Here, the mechanic is always responsible for the whole motor.

This is one of 80 skilled engineers and land specializing in the sls engine.

It's the first car built entirely by ang.

-- by amg.

How many of these do you build?

Three a day.

That pales in comparison to a standard bends production line where 725 vehicles are turned out every day.

At amg, it takes two and half hours to complete an engine, testing at every step of the way.

It's a painstaking process.

Check again and put it in.

You want to try one?

While the process is time- consuming, it is paying off for amg.

They are in 26 different models.

More customers off word -- opted for the luxury molden the previous year and a plan to sell 30,000 by 2017. here at amg, we have perfectly scaled up for bigger number motors to read but for the engineers, no matter how many engines a build, there's one part of the process that never gets old.

Is this your favorite part?

It is.

Putting that on a sure favorite part?

Yes great matt miller is back from germany.

That look like a fun piece to do.

That's a bucket list thing.

I got to build an sls engine and it was amazing to see the level of customization that is possible there.

At the same time, the level of quality is so high.

You don't normally see those two things in the same place.

What does a handmade car, which is effectively what the amg is, plus that level of customization cost?

For the sls, it is well over $200,000. that is the base price.

Every option costs more.

You could easily add 50% of the baseline price.

What would you put on the sls?

If i had enough money, i would pay $200,000 for the car.

Rex you are really working here.

You really put the engine together and learn a lot about how an internal combustion engine works.

It's a lot more fun than an electric car.

But they do much more.

They do the entry-level mercedes up to the g class read but they are not handmade.

They are not, but they take apart and rebuild almost 80% of the car.

And you got a motorcycle ride.

I wrote a bmw 1200 gs around germany visiting various different high-end auto plants

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


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