tv Bloomberg Daybreak Americas Bloomberg April 25, 2017 7:00am-10:01am EDT
announcing the big tax plan, president trump set to announce -- 15%. intensifying the dispute with canada. the market might be pricing le pen 10 -- pricing out 's presidential dreams. this is "bloomberg daybreak." yesterday was a big squeeze, this morning, the calm. futures up about four points higher. andold on to 108 treasuries, this time last week we posted a 2017 low. alix: you got the price index coming in and 10:00 a.m. you get a bunch of data. april consumer confidence and the richmond fed manufacturing
index. 1:00, the thing i am most looking forward toward is treasury -- two-year note to get supply coming this week. what will it take up>? onid: there is an impasse friday over whether they are going to keep the government open down there and yesterday, president trump signaled there may be a way out. here to take us through the latest back-and-forth between the white house and capitol hill is kevin cirilli. what did president trump tell journalists yesterday? kevin: he told a bunch of journalists that in terms of border funding along the u.s.-mexico border, a.k.a. "the wall. this is not something the president is saying will shut down the government. they will have this fight later on, kicking the can down the road. of course, this comes as democrats are united against to the opposition to any type of wall funding. it also comes as republicans look to make a calculated move
from a political standpoint of keeping the government open. as you know, having control of the house and the senate and the aite house, a would not be good look, politically speaking, to shut down the government carried -- government. i am not sure they can declare victory because this budget is temporary at best. i think all of them will unite in voting against. hostadministration has a of other issues they are focusing this week as we near the 100th day of president trump's time in office. david: before we get to 100 days, we get the tax plan. yesterday we heard 15%. president trump is saying he will deliver on it. how can he pay for that sort of cut? kevin: there is an interesting story in which they say president trump said he is not going to -- he is going to argue
that economic growth would pay for it. that would put him at odds with conservative members again in his caucus. when you talk about tax reform, there's a meeting today on capitol hill with treasury secretary steven mnuchin and republican leadership in the senate and the house. this plan that is going to be released has caught several folks off guard. we are going to be getting some details tomorrow on taxes. david: thank goodness for dynamic scoring. thanks so much, we will come back to you later. alix: in the treasury market, 2.3 on the 10 year. what about positioning? shows five year net position said and they have reduced. a lot of the shorts have been taken off in that you have two and 10 positioning now turning long. great to see you, michael.
$40 billion fund here. what do you do with treasury? are you shorting right now? michael: in our view, it is one of the against financial bubbles out there right now. when you look at growth and financial and foreign buyers walking away, these numbers don't make sense. it's kind of like walking on a lake in april and it's still frozen, but eventually it will crack. alix: so you got burned. that short position was real rough and everyone thought they were going to go short. what is it going to take for your bet to pay off? michael: our timeframe was always longer-term. we don't worry about a quarter. we think over the next year, inflation in the u.s. continues to rise. we have a full label -- labor fedet and eventually, the will either have to reject or the market will do it for them and i think the danger is increasingly that the market
will view the fed as behind the curve. you've even heard some serious circles talk about that we should raise the inflation target to 4%. this could really be the credibility the fed has earned through decades very quickly and i think it is just a matter of time. jonathan: can the treasury market recover with domestic forces? michael: rates in japan have been zero for decades and u.s. rates have been much higher. i think that is about the only factor that people are sort of hanging their whole -- risking all their capital on is that rates in other parts of the world are low and therefore, they will keep buying our treasuries. if you look at the actual data treated chinese to be a huge buyer of u.s. treasuries, has cumulateded -- dec their reserves. you have a lot of buyers being pulled out of the market.
i think it is a very tenuous sicu -- situation. jonathan: the structural forces is going to keep downward pressure, you don't buy into the sharks role story either question -- structural story either? michael: as you were talking earlier, the deficits are continuing and there is funding the needs to go on and inflationary pressure is rising and that is why a think we keep coming back to the growth dynamic and inflation dynamic. we are beyond full employment. it's the first time we have had the number of job openings is exceeding the number of hires going on. if you look at some of these immigration policies, but those are also going to put pressure on the labor markets to increase labors as shortages is a labor come about. those factors at some point will price into the market. the back to october last year and everyone is -- was convinced in september that rates cannot go higher and it didn't take
much and you had a huge backup. i think that was the first warning and one of many to come. david: go back to the chinese experience. why doesn't that prove the reverse? if you asked what would've happened to treasuries in the u.s. if the government got rid of that many treasury bonds, you would have predicted it would be really dire. doesn't that prove that there are other factors and demographics that support u.s. treasury department the -- despite the chinese government selling off? michael: u.s. investors have confidence to buy these even though they are in a bubble. i think we have seen a meaningful move since six months ago higher in treasuries and i think part of that is you have a buyer base that is weaning off the market. david: people have been buying treasuries since -- consistently despite what is happened. how much of this is the reflation trade?
they are looking for opportunities to invest in safe returns and they are getting safe returns. -- they did didn't get didn't get safe returns last year. most investors lost about 10% of their capital in a heartbeat. i think the reality will set in that this is not necessarily a safe haven asset because there's a tremendous amount of principal risk when you are buying a u.s. treasury 2.5%, three and a half percent -- 3.5% and you have lost 10% of your principal. alix: what happens to the curve? michael: two scenarios. one is that if the market starts to think the fed is really behind the curve and inflation picks up, you could see the whole curve steepen because those long-duration assets could come under pressure. if the fed starts to get -- not ahead of the curve, but starts to be a bit more appropriate from the rate hikes, then you
could see the whole curve normalized whether it is a flattening, but probably rates go higher across the curve. help me understand how your view fits into the fed and when they sort of end the reinvestment policy at the same time treasuries have to issue because we have a deficit here, had is that scenario view -- fit into your short view? michael: it will be one of two ways, either the fed starts to data is what economic telling them to do and they will have to hike and that moves they don't door anything and at some point the market loses confidence and there would be a far worse scenario. jonathan: the final question, what is more of a value, treasury or bond? michael: probably treasury right now. jonathan: we will get into that in a moment. an all-star lineup of guest today, dave cody of -- david
pen isn: marine le stepping down, saying she wants to campaign as an "free candidate" who can represent all the french people. for more, mark dean joins us from paris. right to have you on the program. a lot of people are confused. walk me through if it has any significance whatsoever for the next two weeks. mark: which headline, sorry? jonathan: the headline that she stepped down on the national
front. mark: sorry, this is a tactical ploy. i think it does have an impact at the margin, but it doesn't change anything. french people say murder -- see marine le pen as the heir to the national front and that will continue, it will not change massively that adamic -- the dynamic of the campaign. you do not see anywhere on her campaign posters the national front and it is all about the strategy to reassure people and say i am not the bad, far right party you have heard about for 40 years. jonathan: the markets in the last hours are pricing out her presidential dreams carried what's in -- dreams. what can she do to turn around? mark: she is out there doing exactly what politicians do and campaigning and in the meantime, emmanuel macron has gone strangely quiet. what can marine le pen do?
she needs to continue going forward and reassuring people and doing her job. the thing that has to work in abstention and it is a little bit about what her , too and what the country does. i think that will be the question two weeks from now. jonathan: the story with emmanuel macron is that nobody can seem to find where he is. he hasn't made many appearances. is that his biggest task to keep his head down to stay where he is in the polls? it is a bite to say puzzling. he has announced he is going to visit a hospital near paris this afternoon. in the north and he will be visiting the .outhwest on friday
as i say, he has been strangely quiet so far. he should absolutely win, there is not a massive question about 60-40 margin is what polls are showing and that is pretty large. he needs to get out there and get back to work. jonathan: thank you. michaelhas in part -- is still with us from europe. give me the thesis on the last 24 hours or so. michael: it is not just about one election. the challenges there is incredible frustration about the immigration crisis and that led to extreme right and extreme left candidates getting 40% of the vote, very extreme candidates, which is going to make it very hard for even the centrist candidates who might likely get elected to govern and it will make it very hard for them to move toward this fiscal
union of greater integration. all the forces are spinning countries away from integration and this goes at the very pillar of the euro project. jonathan: the redenomination risk was driven by market forces. names --now is in the hands of the electorate. not clear to me where there is an electorate that exist that does want redenomination. michael: i think the problem is if everyone -- everything is going ok globally and growth is ok, the ecb has enough power to kind of hold the project together. the problem comes if they are forced with another global recession. italian debt is still way out of control and there are huge imbalances between germany and italy, none of that has been solved. you go into the next global shock at some point in the future without the ability to
like happened in 2011. 2011, angela merkel was able to take bold steps and take german taxpayer savings and bailout greece. that is no longer possible because of that were to happen again, her and her party would be completely voted out. david: how much of this is priced into the bond market already over there, particularly as you look at peripherals? is it fully priced in or not? other bargains to be had? michael: given the political landscape, i do not think there are bargains. i think there is an adjustment of the yields the needs to go higher. david: so you would not be investing in the peripherals at this point? michael: we have a very minor position in one country, but not in italy or spain. jonathan: give me details of that country. michael: we have a small position in portugal. it is one of the come -- countries that wasn't quite to
the ireland story, but it did make progress and the yields there were compensating you for some risks, but very minor position. jonathan: do you worry about the ecb removing support for them if they lose their investment grade? michael: that is a risk and one of the ways we hedge that is a large short euro position. we have exited almost all of our european holdings. we sold out of poland, hungary, ireland, and deployed those assets into other parts of the world, latin america for example. alix: before we go, there have been calls for -100 basis points in the two-year bund yield. do you see that as a reality? michael: i think we are dealing with such distorted financial markets given central-bank intervention that we should not and go intot markets just because of central-bank intervention. it is a very dangerous game
because there is only so much central banks can do and i think they shot most their bullets -- most of their bullets at this point so making an investment thesis that a negative yield would go even more negative and see a little capital gain is a very risky venture. jonathan: i wonder whether there is an island -- ireland-type possibility that exists anywhere that you are you excited about? where is it? michael: one of the most exciting investment is argentina. the president has taken a country that was completely dysfunctional and given it a industry life, allowed and financial markets to function again, put in a very prudent central-bank, prudent ministry of finance to really correct the ills of overzealous populace for the last decade and to us, i would not call it exactly ireland, but has the potential to be. david: we will come back and have more on emerging markets with michael hasenstab.
emma: this is "bloomberg daybreak." -- received interest for the atversal music group valued $14.7 billion. no word who the potential buyer was. fourth-quarter sales that universal music rose slightly less than 2%, but earnings were down 14%. posting higher sales in the agriculture division while it waits for regulators to approve the megamerger with dow chemical. dupont has been relying more on farm products after separating the auto, paint, and chemical
units. that is your bloomberg business flash. alix: thank you so much. uncle happens -- michael hasenstab is still with us. you described how argentina could be the next ireland investment for you. michael: we have been investing in the local currency market. when you have 40% inflation, this company did not -- country do not have a market. by starting to build the market out, they can get capital disintermediation going and lending going and investment going and they can breathe life back into the country that had been dysfunctional for a decade under populism. that is one of the things we're looking for in emerging markets that is quite interesting in latin america in particular, both brazil and argentina. there has been a move away from populism while in the u.s. and europe we are moving toward populism. the tables have turned and if you can move toward orthodox
policy, inflation can come down, fiscal accounts are better, both the bond market and the currency market can benefit. most emerging markets guy's a, brazil, and argentina are what -- areas i like. michael: mexico is the one that has been the focal point, but in our view, it has been completely discounted and over discounted. nafta is not going to get ripped up. maybe chapters are negotiated and may be updated terms, it's a pretty old contract the probably does need to be updated, but trade is not going to stop touring mexico and the u.s.. there are too many vested interest in the u.s. that depend upon exit count as an expert -- prices canport adjust, but i think people got overzealous in shorting the so against this and
we have seen that reverse quickly. david: everyone talks about mexico, roseville, argentina, other places they get overlooked? michael: columbia is one we are excited about. when you end the 50 year civil war, the peace dividend and the positive dynamics that unfold are very real. columbia is one that we think is also attractive. and liquidhat a big enough market that you can invest in quickly? michael: it is reasonably developed. they have a very good, credible central bank and ministry of finance. they dealt with the fall in oil price. i think this is one thing we have looked at in emerging markets, there are some countries that the oil prices fell and they did not react or adjust whereas columbia did a just and i think approved their credibility. jonathan: one of the things you have done is go in whilst everyone is running in the other direction.
venezuela, when you get excited about kansas -- venezuela? michael: it has gone from financial crisis to humanitarian crisis. no one even knows what they're assets are anymore. no one knows what they promised to the chinese to keep the system afloat. we were hearing statistics that 70% of the population lost 20 pounds in the last year. that is not a place you want to invest in right now because who knows if the debt is worth zero or 30 or 50. no one knows. jonathan: always appreciate your insight. coming up, an all-star lineup from new york city. you are watching bloomberg. ♪ jonathan: this is "bloomberg
the best day in the united states since early march and the best day in europe since last june, we come up a big squeeze -- session.'s facet four straight days of euro strength. we hold on to the 108. .6% anden up by treasuries, what a turnaround. on the 10-year. yields up by three basis points. let's get breaking news right here in new york. >> caterpillar out with first quarter earnings. $1.28 a coming in at share. the estimate was $.62. revenue at $9.8 billion. the estimate was $9.2 billion. we heard yesterday machine sales rose 1% for the first time since 2012. there was improvement in china, energy, transport, and
construction. they do to their guidance. jpmorgan said they will have to lift that to get some boost. waiting for numbers to trickle out. a huge beat on top of the bottom line. jonathan: one of the proxies for the materials, global trade, mining, the u.s. and canada, those coming a bit strange. president trump announced a 4% on canadian softwood lumber. this is been going on since the 1980's, it is not new. what happened specifically. david: the government particularly the provincial government in canada claims subsidizing -- they are subsidizing lumber because they are charging too little for lumber companies to take it because they own the land. more important, this is a nafta shot. there have been cases like this and there has been a nafta panel that rejected the u.s. jonathan: 24% is one thing.
anti-dumpinge duties on top of that? david: there is a further proceeding saying that the government is subsidizing you and anti-dumping is saying beyond that, the company is charging below cost. there could be an anti-dumping duty in addition. jonathan: the headline strikes me as we were expecting some sort of protection. you may say this is an protectionist and is just leveling the playing field, but we were expecting action south of the border. wasd: we thought everything fine with canada. turns out, not so much and there is another dispute involving dairy products. the u.s. is unhappy with canada about curtailing our exports of dairy products. would've thought that. we are expecting china, china, china. jonathan. is
we expected china and we got canada. >> i think it is sector specific. we are not going to see these across the board tariff measures, particularly in asia. it is disappointing that the u.s. is not following through on tpp, which would've liberalized trade. right now, the global cyclical environment is so strong that all the countries i cover in asia are reporting strong export growth. jonathan: do they start doing the same thing sector specific in asia as well? >> we have been seeing this in sectors like steel or aluminum. on the chinese side, they look at agriculture and they would argue the agriculture sector in the u.s. is overly competitive. seems as though the tension may have decreased from what is expected. at the same time, there was this action where they started proceeding under national security provisions that haven't been used since the 1980's about chinese steel.
the u.s. seemed to be serious about reducing capacity. 7 >> and the chinese do have capacity.el they have been whittling it down and they have probably 300 million tons and probably down to about 180 million tons now. that is definitely an example of what i was talking about, sector specific areas. alix: how do you wind up investing in it? you want to look at companies that have exposure in europe or companies specific coming out of china or japan? >> the target market is japan right now. , ass typically late cycle is europe. japan has been lagging this year . we think earnings growth in japan will be almost 25% this year and really not just this recovery in global trade, but , wageic recovery reflation in japan is kicking in. they have a 25-year low on the unemployment rate and a rising labor force participation in the
actual economic agenda from the perspective -- labor market perspective is starting to work. alix: it seems you need to call, one that you will have a lot of buyback, and to that the yen will be weaker. >> we are back beyond 110 today. it is not the only factor. it is the domestic reflation story that is important and the sectors that have the most opposite of -- positive provisions are real estate and insurance. david: i am interested in the labor participation rate. >> female labor force is patient rates are raising strongly and that is a challenge the united states has, reversing declines in participation. this is part of the economic agenda that people do not actually understand as eating successful. -- being successful. jonathan: how to like it to the
china growth story without having to buy chinese equities? everyone will be focused on asia and the turnaround in the china story, do i want to get exposure to that? >> we would say by asian equities. -- buy asian equities. they tend to be more actually in europe than the u.s. market. europe has a lot of mining exposure, energy exposure, things like large asthmatics and pharma.- cosmetics and that of urgency between s&p and shanghai is pretty extreme. what do you make of that ? >> we have to remind clients that there are multiple china markets. shanghai tends to go its own way. at the moment, domestic liquidity is tightening and
.racking down we tend to find it is the offshore market that does a better job of editing china macro -- predicting china macro. alix: thank you very much, jonathan garner of morgan stanley. .e've got m&a tyson foods is buying advanced pierre foods in cash. advanced year foods is owned 42% by oakmark. the cost will be about $200 million and tyson said it will 3m also reporting earnings, top and bottom line raising the full year earnings outlook by $.25. also see a full year organic
local currency sales growth of 2% to 5%. caterpillar, big move up 5%. earningse four-year guidance midpoint. is $3.75.t midpoint on the downside, they are saying they will have substantial restructuring costs, so watch the margins numbers. you get a higher materials cost and restructuring costs. updating their for your forecast. they say there will be continued uncertainty and volatility for the rest of the year. this is a huge day for earnings. it is pivotal to see where we are in the global growth story. davidl talk to about cote. david: it is really great news, but they have been waiting for a while. alix: stabilization versus how much growth. let's get an update on what is making headlines outside the business world. president trump is setting
up a potential battle over taxes with house speaker paul ryan. resident will report cutting taxes for individuals and slashing the corporate rate to 15%. ryan warned that cutting taxes would add to the deficit and he is opposed to that. the u.s. and north korea are flexing military muscles today. a submarine arrived at a port in sort -- south korea. south korea says there are no for the naval forces. north korea reportedly celebrated the founding of the army with the largest ever five -- live fire exercise. the prime minister in turkey warns the country is tired of the way it is being treated by the european union. he spoke to bloomberg in an exclusive interview. we see finger-pointing in turkey. we have instructions to do this and not to do that as if they are the teachers and turkey is their student.
that kind of thing will not be expected by this nation. e.u. needs tothat decide whether it is open to non-christian members like turkey as members. then they can determine their own path. global news 24 hours a day, powered by more 2600 journalists and analysts in more than 120 countries. i am emma chandra. this is bloomberg. coming up, eli lilly reported first-quarter earnings early this morning. dave ricks, the president and ceo will join us next. live from washington and new york, this is bloomberg. ♪ ♪
hewlett-packard enterprise green room. this is bloomberg. ♪ now tear bloomberg business flash. the third largest wireless -- carrier in the u.s., t-mobile maintained profit outlook. that suggests the cost to get new customers will offset the earnings they generate. they main airline may be on verge of collapse. workers voted against the restructuring plan. the plan calls for salary reduction and hundreds of job cuts. meanwhile, an italian newspaper reports that the state in alitalia -- stake will be sold. exxon has slowed dividend growth the last two years in the midst of the worst oil price slump in a generation.
exxon will announce a four cent increase tomorrow. david: eli lilly announced first-quarter earnings over an hour ago and reported revenue a bit better than expected. the midpoint of the guidance for the year was just a little bit .ess than analysts predicted joining us is the president and ceo, dave ricks, who took over earlier this year is it about to add -- and is about to add chairman to the war to his title. thank you for being with us. give us your take on this first quarter. estimates onu beat earnings per share and revenue. how do you earn -- view it? dave: it was a strong operating quarter. we have launched seven products over the last couple of years and we are writing those two success -- riding those two cess in q1.o suc
controlled expenses at 3%. the team is working hard and we have good momentum with innovation strategy behind the new product. david: before we get into specific drugs, take us into the specifics of operating expenses. where are you on achieving your goal? dave: we make good progress, we need to continue to make progress. we improved operating expenses by 220 basis points and gross margins by the same number. that is one of the reasons you see these 18% growth for the year and 20 plus percent operating income growth. we are pleased with that and we need to keep that path going. the biggest driver of our operating marketing -- market expansion story will be revenue growth and we had a solid revenue growth with 7% on the top line. david: i think the 50% goal is to the other 19. are you going to make that -- is
2018. are you going to make that? dave: we like to make our commitments. i'm very focused on that. threw we won't go everyone of your drugs, but what are the top earners and the ones you missed on? --e: i think treeless city -- gop1 class this keeps growing, we are excited about performance. i think one of our drugs was under street estimates. there are always ups and downs, but we were happy with that performance. diabetes is a core engine for us. psoriasisnew drug for performing well and we are excited by the uptick.
under streetbit estimates. we are seeing pressure from viagra and the generic form that is being used in the u.s. market as a substitute for branded agents. those are some of the dynamics in those businesses. oncology had a good performance on a new drug and at the same drug an old chemotherapy was down below street estimate. david: you mentioned diabetes and being poor to your business -- core to your business. can you go too far with that? does that pose risks for you? to ouriabetes is core history. about eight years ago, we set our minds to improve competitiveness. that is not the only strategy, it's just the one that is farthest advanced. in biomedicine, we are committed to the bio immune business.
earlier we had disappointing news on another key product in immunology. it was improved in qi. in oncology, we are coming with a new wave of innovation. we also have positive news on a breast cancer drug at the indy of march and just yesterday, another study being stopped early because of advocacy. we have that three-pronged approach and we're also interested in pain management along with alzheimer's. david: we have a new administration in place, to what plans are eli lilly's affected by what you expect to come out of the trump administration? dave: the u.s. market is about half our business. government policies can affect our business. we are carefully watching tax reform and the repeal, replace debate, maybe part two now and how that might shape and effect
insurance market in the u.s. and the fda matters a great deal in terms of their posture on improving new innovation and probably a new commissioner coming soon. all those are matters of deep importance. david: on repeal and replace, one part is the reform that was attempted in the president said there will be a second and a third wave in one of those will deal specifically with drug pricing and bringing drug prices down. even -- do you expect that would affect the business? dave: it could. we are advocating for policies that improve competitiveness. we think the way to manage cost government intervention. we have seen a shift in insurance design which is shifting the cost of medication to consumers. they are paying out-of-pocket at the pharmacy counter. we do not think that is a good idea for chronic medicines and can -- in particular. it is unfair. people pay four times as much for drugs as they do for any other part of health care under
plans -- insurance plans today. we are in washington talking about those and hopefully we can end up for a system that rewards innovation and supports health care for americans. david: thank you so much for being with us. alix: if you have a bloomberg terminal, you can watch us online, click on charts and graphics and interact directly. if you miss any of our interview with dave ricks, feel free to watch it again. this is bloomberg. ♪ ♪
drama not with wells fargo, but with a dramatic investment bank. what is at stake here? big day foris a wells fargo. this is a meeting where all the shareholders will be allowed to come in and cast a vote for whether they want to keep the 15 directors on the board. this is not coming that happened even in the financial crisis. there really weren't any banks -- shareholders that decided we really need to kick out all these directors. what we have heard so far from these different investors, a lot of pension funds, is that they believe some of these directors should go and they have voted them out, up to 10 different directors of the 15 we have heard about. alix: where does warren buffett stand? do you ever want to bet against warren buffett? fruitfuldon't know how some of this will be. warren buffett holds around 10% of the stock, the largest holder
by far and if you don't have support from some of those large investors like blackrock and vanguard, you may be sort of putting a note confidence vote -- no confidence vote. even that will be something we don't normally see. anything below a 90% for any of these directors is going to be news. some people think they could even go to 60% or 70%. that really means shareholders are expecting a meeting when we get percentages that low. jonathan: outside of the board room drama, the other thing investors will be focused on is the trajectory of earnings and what is happening with the underlying company. where -- what is happening right now? laura: it's a little hard to hear you, but i think you asked about where the company is going in terms of revenue and growth? jonathan: yep. call: analysts on the last had asked tim sloan, the ceo and cfo, john screws very --
john shrews very -- john about growth. none of those executives wanted to talk about it on the first quarter call. alix: thanks so much. laura keller from bloomberg news. and now we want to earning numbers of the day. -- big moves happening in caterpillar. earnings the midpoint guidance to $3.75, almost two dollars more than the previous guidance. looking at $41 billion. they did warn they will see current volatility for the rest of the year. nonetheless, a solid quarter, sales up 1%, the first time since 2012. on the top and
bottom line. expect local, organic sales growth to come in -- forecasting they will not meet their contractual requirements again. it did not deliver nine of the fighter jets, only 57. he had the good and the bad. jonathan: the good is helping us big-- from yesterday's sweep. coming up, dave cote, honeywell executive chairman will be joining us. from new york city, you are watching bloomberg tv. ♪
announcing his big tax plan, president trump is said to call for the corporate tax rate to be slashed to 15%. the u.s. intensifies a dispute with canada, slapping a tariff on lumber. nationalists in france. good morning, you are watching bloomberg daybreak. i am jonathan ferro alongside david westin and alix steel, and this tuesday, a little bit of risk. ,utures up on the s&p 500 yields higher three basis points . the dow getting a big lift in the premarket. on the back of caterpillar and mcdonald's. alix: people like those burgers again, revenue beating estimates and much higher than estimated, coming in at 1.7%. international sales higher than
estimated. caterpillar, mcdonald's all boosting the dow. at 9:00 a.m. we get the latest read on home prices and 10:00 a.m., confidence from the richmond fed. at 1:00, u.s. treasuries selling $106 billion in two-year notes. what will that take down be? jonathan: someone take alix steel for lunch at 1:00 p.m. david: to mcdonald's. take her to mcdonald's. let's get back to washington. we are starting to get a peek at what president trump may have in mind for taxes. with us is kevin cirilli. what is the president talking when it comes to rates? : he will advocate for a 15% corporate tax rate, in line
with what he settled a campaign, but all of this is being worked out as we speak. he will be releasing tomorrow new details about his tax policy program but it will not be that specific, at least that is what i am gathering. treasury secretary steve mnuchin will head to capitol hill to meet with top republicans in congress, including paul ryan, but there are a host of issues there is not consensus on amongst the republican caucus including the border adjustment tax and whether or not this will be revenue neutral. all of this will be discussed, and new details expected tomorrow but we do not know how specific. david: the 15% number gets your attention because you have to ask, how on earth can they pay for it? border adjustment tax, is it cutting out all deductions? they will have to give some hint. kevin: ryan has been arguing the
border tax will bring in close to $1 trillion in revenue, but a very aggressive lobbying push in washington against that, and the votes are not therefore it in the senate when you break down the math in terms of a border tax. they are starting to signal there may be a way around whether or not this is going to be a revenue neutral plan. there are ways they can toy with the numbers in washington to get them to say what they want. either way, tax reform underway but this will not be addressed in the short-term, definitely addressed in several months out. david: thank you very much, kevin. now we will turn to a very special guest, dave cote, chairman and ceo of honeywell for 15 years when the market capitalization went from $20 billion to $90 million. that is too in a half times the
return of the overall -- two and a half times the return of the overall s&p 500. welcome to the program, impressive numbers. david c.: we are breaching 100 million now. david: i am sorry i sold you short. washington, you were ceo of honeywell for 15 years and you have at least 15 annual budget meetings where you sat down and looked at your company, where the revenues and costs, how do we plan? take a look at the u.s. government as a business and say, on the revenues and costs, what makes sense? david c.: this is a very interesting topic, and i was one of the president's appointees to the simpson bowles commission so i got to see some of this up close. the problem is relatively simple from a mass standpoint. if you look at -- math
standpoint. a you look at taxes, over longer. time the total tax rate is about 19% of gdp. you will see recessions change it and so on, but it is about 19%. our spending is running more like 22% to 23% gdp and that difference creates the gap that we call the deficit and accumulates into debt, about $17 trillion. if you start to break it down and say the revenue comes from taxes, to do something in a way that is not revenue neutral, and counting on growth to make up the difference i think is really difficult. that is just much more difficult than people think. , you can dohe 15% it but you have to eliminate a bunch of deductions, so the net take overall is the same.
the problem on the spending side is straightforward, medicare and medicaid. people will talk about grab social and security because that is the easiest one to discuss, but for every dollar people put in they take out $1.10. it is not crazy, you can adjust the formula. the problem with medicare, between desk every dollar people put in they put -- every dollar people put in they take out four dollars or five dollars. the spending is tremendous, and the demographic bubble, my generation, will crush the system. the sad part is we have known this for at least 25 years, that this bubble was coming in the spending bubble was coming. it is exacerbated by the recession that we had where there was huge deficit spending,
so it is straightforward. you have got to address medicare and medicaid on the spending side,and on the revenue you have to find a way to make it revenue neutral. david: a number of people in washington, and some people around the president are talking about this dynamic storing. if we do the right thing with the revenue, it will grow the economy faster, increase our revenue, and take care of the deficit or start to address it. does that make sense? david c.: kind of. i believe you get some growth effect from it. a territorial tax system, for example, all the money u.s. companies have outside the u.s. that we do not repatriate because of the tax burden, that would be helpful overall. it is not so much a tax cut because you can offset that in places. things can be done on the tech side, but to think we can reduce
taxes by one third and the economy will grow that much bigger by consequence, i have my doubts. jonathan: let's get you back to being a ceo of honeywell. talk 15% and how that would change the way you would think about spending going forward several years. david c.: in terms of the internal investments we do, it probably would not change that much. i have always felt like if you are investing based upon tax policy, it is probably not a smart thing. you want to make sure it makes sense regardless of taxes, because when it comes to taxes what the government gives it can take away. i have never felt comfortable with it. it could impact how we think about capital employment. my predecessor made this point. if all of a sudden we can repatriate cash, then you have
got a lot more flexibility when it comes to buybacks or dividends. those are the sort of things you can do, and while some politicians think that is an evil thing, it is a way of putting money back into the system, returning it to investors and shareholders and pension funds. jonathan: are you confident that is good for the general economy? david c.: i am. our policy is really really stupid and we have had it for a long time. people tend to look at a global company and say that is evil because you should be in the x -- in the u.s. and export everything, that you will not be successful in europe, china, by just being an exporter. you have to be there. there is nothing if areas going on. nefarious going on. alix: i am going to give you does go options like i do my
toddler. -- two options like i do my toddler. what would you prefer? david c.: the border adjustment tax makes me nervous. if i was doing something that big in the company, i would pilot it in a plan for a business first to make sure it actually works, because this whole idea that the currency will revalue, i can understand the economic logic, but economics is not like mass. -- math. it is not as precise and you can do this stuff but it does not always work that way. if they do a border adjustment tax -- and we would benefit from it because we are a net exporter -- it would still make me nervous. i would like to see it done over time and have off ramps so they do not get hung up on something they cannot get out of.
it is an interesting idea worth testing but we have to be smart. david: what about expensing capital investments? that is something being talked about. with that change your capital investments? david c.: no. david: the same rate? how about interest rate reduction, does it affect your business? david c.: you have got to look at the totality of whatever they are planning so i would want to look at the total package and say, how does this affect us in total. we have been investing for the , 160 percentrs depreciation with a current tax policy because we have some good investments to make, and we would not have just did that -- adjusted that on a 50% or 40% tax rate. on interest rate, we do not pay that much in interest to begin with because we do not have all that much debt and the rates have been extremely low. jonathan: david cote of
honeywell. questions like a toddler, alix steel. alix: do you want a cookie? david c.: she obviously understands my family. david: toddlers are adorable, so that as a compliment. up, deutscheing bank chief global strategist will be joining us this morning. some big beats for mcdonald's and cala pillar, -- caterpillar. futures up 2/10. from new york, you are watching bloomberg. ♪
get back in as saudi arabia changed the reform system. advisor onhe lead the first international bond sale that raised over $17 billion, and now citigroup gets the investment banking license. cap -- caterpillar jumping over 16% and raised their full-year earnings and revenue guidance. they sought better work in china and energy, transport, and construction. for some insight, david cote from honeywell is still with us. where are we in the industrial recovery? we have hit the trough, that is obvious. david c.: i think there is still a ways for this to go. the last three to four years have been difficult. it has been a growth recession,
if you will. downare growing 1%, others , and that has been true for at least three years. we are starting to come out of it and you are seeing it in about every sector. yet, with anming exception of oil and gas that is bouncing back a little stronger. everything is starting to come back. we see it in building stuff, aerospace, autos, everything seems to be coming back. alix: what kind of a mixture do you see for industrials? for honeywell we have to look at warehouse automation systems. is everything getting better or will one area lead that organic growth? david c.: i will think everything is pretty much on a growth path with the exception of business jets. they are lagging this year and may be lagging next year.
everything else is going pretty well. we have positioned our selves to improve the overall growth profile of the company. we keep adding to the top and taking off the bottom. warehouse automation is going to be tremendous. the acquisition will pay off extremely well. in the first quarter they were up something like 20%. david: everything you are talking about is fundamentals. that a add on top of potential infrastructure initiative at the federal government level, as much as $1 trillion? does that change the glide path? david c.: it might someday. i think there is a tendency that washington is going to act and it will be fast, and once they .ct things will happen i think we have some experience
with that with shovel ready projects where seven years later shovels are hitting the ground. at some point it affects the glide path but i think that is a while. , youall in favor of it just have to drive around the ark a little bit to say, we could use some paving. david: one of the things -- david c.: one of the things that is frustrating, or publicans and democrats for at least three years have liked the idea of repatriating cash, taking that tax benefit and using it to invest in infrastructure. both parties like the idea yet they still cannot get it done, so there is a way to do it. the glide pathat aside from an infrastructure bill, how much is global growth as opposed to u.s. domestic growth? how much are you supported by the global growth picture?
david c.: about 55% of our sales are outside the u.s., so that does help. .hina is continuing to do well india has been doing well for a while and i think they will continue to. europe is ok. sometimes ok plus, most of the time ok, but it all contributes. jonathan: 25% revenue through 2016 in europe, our numbers. look at the situation because we had an investor who stated the political risk in france has gone. you are thinking about a different set of things. what would it take to look at europe and be more confident, the things they need to do? david c.: they have to address their social systems and labor laws because it is too inflexible. when you look at a place like france, it is difficult to do business there. if you ever tried to lay
somebody off or make an adjustment in business, all that teaches you is i am not hiring here anymore because it is too difficult. those are the changes that need to be made but the population does not seem to recognize or want it. being unable to let go of the security they feel they have creates a problem where they cannot get the big things that are possible. jonathan: have you had those conversations on the border taking a look at potential acquisitions in europe and have thought better of it? david c.: those kind of concerns do not make it to the board room. if there is too much country risk or we are concerned about where labor laws are going, it does not get that far because when it comes to acquisitions i have voice felt when you are doing things of consequence you have to be 10 for 10. i would rather passed on a good deal then do a bad deal because they just kill you.
i think it is one of the reasons we have done so well. alix: what kind of good deals will you be looking at? it looks like you will be $4 billion to eight billion dollars from organic growth short next year. is that from m&a? david c.: m&a does not count in organic growth until you have passed a year. , the aeroe doing deals to improve conductivity, conductivity will be a tremendous place because you will soon be able to be on a plane live streaming bloomberg, watching it live from the plane. david: sounds pretty good. david c.: it will be pretty cool. that will definitely add to our overall growth profile. david: we hear about this sort of internet of companies. will people make real money off of it, is that a revenue driver? david c.: you will still have to
be smart, and i liken this to the 1990's when the internet was the thing. a lot of companies did very stupid things. we all hired a bunch of young kids, gave them ping-pong tables and said we will give you an hour a week to tell us how stupid we are. the internet was real but there was a lot of bad investing. we are kind of going through that same time now and too often, the internet of things, we have got to put money into it without saying what is the business model, and will the consumer really pay a buck a month? just saying, we have a lot of data, is not enough. just because you have a pile of data, it may be a pile of dirt. you still need to be thoughtful. toid: as the ceo you have think about the overall business climate and economic climate. the president wants 3% to three
and a half percent growth. is that doable? david c.: it will be tough. i believe there is a chance we will get closer to 3%, which would be wonderful. the old joke if you go from 2% to 3% how much of an improvement is it? 50%. especially with compounding. i think there is a chance we could get there. the animal spirits clearly improved with the election, no doubt about it. no doubt it improved, but government needs to do something to follow up and show it is real, to add to the animal spirits. that part we are not seeing. david: what does the government need to do? david c.: tax reform. david: is that number one? david c.: it is a big one. if they could do something that addresses affordable care so the ceos feel like government is moving.
the regulatory reform side is a hot button for everybody, and to the extent they can show we have removed these regulations that caused no harm to anybody, and make it easier for a business to get business done, those are the sorts of things businesses need to see to feel this is real, there is a reason i feel animal spirits. jonathan: there's a difference between the bond bear who needs to hear about it and the ceo who needs to see it. capex to increase, what specifics do we need to see come from d.c. for you to feel confident enough, i'm going to go out and spend? david c.: we are a unique case because when it comes to, we have -- capex, we have reinvested because we had some big investments in our chemical business we think will pay off 30% to 40%.
regardless of the tax plan we would do it. in general, tax planning would not be what drives my capex. i would not say just because of this investment change i can now afford to do a project. i have always felt like if we had a project that was that marginal that we required a faster write off to make it useful, it is probably not a good investment. alix: it does lined up igniting final demand. becauseemand goes up they are picking up extra cash, it does. david c.: but now you were talking about a tax-cut and you have to say, how do i do that and not create a debt problem? , as incut taxes overall less revenue coming in, that debt problem, the debt timebomb timebomb, we are about
80% debt to gdp. nonfinancial companies, that has come down. government debt has exploded and at some point that becomes a problem, so are you accelerating that problem without making fixes? david: you are an animal, how are your spirits? david c.: i feel pretty good. i tend to be an optimist and i feel like there's a chance that if you take a look since the recession, corporate consumer, balance sheets are the best they have been, this is a spark. jonathan: david cote, honeywell executive chairman. you are watching bloomberg. ♪
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decent earnings from caterpillar and mcdonald's, up three quarters of 1%. futures are your guide for the cash open. the s&p 500 comes in at a march 17 high, futures up one third by 1%. you see the risk picture involving, treasuries hard by three basis points. a weaker japanese yen, a firmer euro. it is up about a quarter of 1%, gaining for a fourth straight session. let's get you up to speed on the headlines. emma: in the u.s., president up a potentialg battle over taxes with house speaker paul ryan, calling for cutting taxes on individuals and slashing the corporate rate of 15%. ryan has warned cutting it to less than 20% would increase the deficit.
theresa may will try to do something her party has not on in a century, win in wales. , ands campaigning today the conservatives could take 21 of the 40 welsh seats in parliament. in france, marine le pen keeps touting the way -- pounding away at her arrival, saying her campaign is about protecting the french while macron is about what she calls savage -- and mass immigration. global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. i am emma chandra. this is bloomberg. jonathan: winning in wales. if anyone is wondering why she may be having an election, maybe that is why, taking things to scotland potentially? a whitewash i think is what we might see.
france, looks like an easy second round for emmanuel macron. joining us is bloomberg executive editor john frager. -- freire. aher. le pen stepping down as the leader of the national front. john: i would not make too much of it. herself as present the candidate of national unity and there is an implicit recognition about the fact that the national front is an extremely divisive party, vilified still in some parts of french society. what she is trying to do really is dressing up her candidacy to a certain extent, saying i am not the candidate of the national front but for all french people. jonathan: the market is quite clearly pricing out her presidential drain.
for her -- dream. ,or her to turn things around we talked about political fatigue and the u.k. will we see that in france? john: if you are emmanuel macron, that political fatigue is the one thing you will worry about. no one is talking about the absentees, potential absentee rate being a threat to macron. seens two problems, he is as a done deal so a lot of people will stay home and there are huge sections on the left and right that really do not have much appetite for either candidate. if you look at the 19% who voted on,communist act melenchon it will be difficult for him to endorse macron. macron is not an appealing candidate to those people. right, le pene
might want to try to see if she can pick up some voters from fi llon, but her party is so tainted i historical baggage it will be difficult. for macron, the big risk is that people will stay at home and that will compress his lead where he really needs to show he can win a massive victory against this divisive candidate. jonathan: this is stage one for macron. let's say he has to try to govern. one of our colleagues right "france might really reform this time." will they reform and can he govern effectively without parliament? john: that has been the question hanging over french for the past 20 to 30 years. you cannot reform without parliament, that is a fact. he does not have a base parliament. , toink what macron needs
come out and tell voters and the political system what he actually stands for. ityou look at his manifesto promises a little bit of something to everybody and no clear sense of direction. if you compare it with the economic risk for missed agenda -- reformist agenda of francois fillon, there's not much there. macron is a bit of a mystery, a blank state, which allows people to -- slate, which allows people to project on him. he needs to come out and show his colors to the mass so he can claim a mandate which right now, you can have question marks given we do not know what he stands for. jonathan: thank you very much. york andty is in new has dropped into cs. the first question -- do you need the reforms paris to buy
europe or do you need to get the politics out of the way so you can play the valuation story? it is you need both, but the political uncertainty we need to get out of the way. france has been the political overhang for europe. the spd maybe has more influence, if macron wins the second round, which it looks likely, one of the most remarkable things about sunday was how close the results were to be opinion polls. you take comfort in the fact that he is pretty much 60/40 ahead of le pen. what we would like to see from a financial market perspective is reform and france. corporate tax reform, some of the things he has talked about are going in the right direction. jonathan: for bank of america merrill lynch, is this a blanket by europe story or du go on the
periphery? buys: i think it is blanket europe. people of been uncertain about the political risk. you saw italian spread widening out and they have narrowed back in. if le pen had one, or were to frexit, we talk about the damage is mostly to the periphery. out onyou have a note the comparison of u.s. versus you up in securities. , reallyean securities striking about the differential. the red line is price-to-earnings ratio u.s. versus europe and the white line is price for volume -- blue line is price for volume. it is actually 30% below on the price by volume. what accounts for that
differential in valuation? james: european earnings have barely grown since the global financial races. -- crisis. the broad case for europe is that earnings can start to recover and we are starting to see that. the first time we are seeing earnings revised up as opposed to the normal path where the analyst revised down to zero. if we look at our numbers for a moment, we are on about 11% earnings growth. david: what is the discount you calculate now? friday, there is room for about 5% catch up on your. the question -- on europe. to go andere is more we can start to close some of that gap. thethan: do you still see risk premium built into places expectedy, and you are
to stay around until we get another election potentially? james: one of the first questions i was asked yesterday was what about italy? the italian elections are not until next year because renzi lost the referendum, and it is unlikely that five-star would form a government. the markets, you are likely to say for the rest of the year the past is reasonably clear -- path is reasonably clear. unlikely marine le pen would have parliament to get through her referendum. will we see the same thing for or will we face what we are seeing for france, risk off? james: there is a difference with france because you have this first round second round, and there were four candidates. given the rise of melenchon in the polls, there was a risk of having le pen versus melenchon,
and that is when the markets got concerned. it was that rise of melenchon and uncertainty in the first round that started to play through, and the fact that the opinion polls were so accurate is what had people relaxed yesterday. david: could a strengthening euro put a damper on earnings growth in european stocks? james: it depends on how far it goes. we have had some big figures on the euro since friday. if we go to 115 headed to 120, that would be a dampener. we could possibly see the euro at 110, 112, and that does not really change the picture. onathan: if you went in friday and he did ok, you could sit back as a small investor. pick out a sector that bank of america, you are confident about through 2017. james: the big winner was the
banking sector to get you took away some of the uncertainty, reticular leave the peripheral banks. can the -- particularly the peripheral banks? can the ecb start to taper further and raise the rate? that is the question for the banking sector. as the market starts to factor in the ecb normalizing monetary policy, you can get more for the banks. david: james barty, thank you for being with us. on friday, on the eve of president trump's 100th day in office, trent lott and tom daschle will be with us here. for our viewers worldwide, this is bloomberg. ♪
♪ emma: this is bloomberg daybreak. i am emma chandra. p.m., wilbur12:00 ross, the u.s. commerce secretary. this is bloomberg. now to your bloomberg business flash. plans to slim down its operations and is squeezing profits. they missed estimates. their estimate -- attempt to spin off sales hurt sales. a new ceo takes over on may 1. mcdonald's ramped up its iconic big mac and saul results in third-quarter estimates -- earnings. -- saul results in third-quarter estimates. sales at u.s. locations unexpectedly rose.
analysts had forecasted a decline. tyson foods has agreed to buy advancedpierre holdings. they produce and distribute ready-to-eat sandwiches and other snacks. that is your bloomberg business flash. david: looking live at the white house, which is trying to work things out with congress to keep the government open past friday. the last time we shut down the government we saw a two-point drop in the consumer sentiment index. joining us is gregory dayco. i have changed my question, -- nowto my quest -- my he has tweeted out "do not let the fake media tell you i have changed my position on the how do youhis world, even assess the probability of the government being shut down?
gregory: it is difficult to give a probability for anything with the trump administration. the risk of a government shutdown i think israel. progress -- is real. progress was being made to find government funding through fiscal 2017, but there is a risk the funding is not found in the legislation is not passed, which would mark the 100th day in office for the trump administration on friday. david: it might be the first time ever that a party shuts down its own government. usually democrats and republicans have fought with each other. are there issues beyond the wall that could keep this resolution from going through? madery: progress was being on both sides of the aisle and that was encouraging. the administration put forward its priorities, funding the wall.
i think if we do not have government funding by the end of this week we risk a real economic impact. you mentioned the effect on consumer sentiment and business sentiment, but even macro economically. it is significant. alix: in 2013 the markets rallied during the government shutdown. gregory: right now we are seeing valuations that are quite high and in this environment where there is a lot of policy uncertainty, there is a big risk that if we end up in a government shutdown that is assigned a sign the government is not able to pass funding through the rest of the year, and that could have a negative effect on private sector confidence. might we learn something about tax reform and health care reform? gregory: they said tomorrow we might hear something. i do not think we should expect too much. alix: i meant if we get a
government shutdown or it gets messy on friday, this is his own party, not like 2013. can we learn they will not be able to agree and come to the table on health care and tax reform? gregory: if we see more and more infighting that is a sign it will be difficult to pass anything for tax reform were lowering corporate and household taxes. that is important for the business environment and final demand in terms of consumer spending. if these private sector actors do not know what the outcome will be they are unlikely to go out and spend like crazy. we will still be a modest growth economy. david: there is a third way between shutting it down and funding it through the end of the year. how will consumers respond to that interim? gregory: that would not change
much in terms of policymaking. you would still have this last-minute type of deal in this environment where there continues to be lingering uncertainty on the policy front. if we have a last-minute agreement on friday to extend funding at another week, that would give a little more time for both parties to agree on funding for the rest of the year. overall there is this environment where the lack of certainty is not benefiting the business sector, or the household sector. investors bank on policy promises, lower taxes, increased infrastructure spending, but doiness people tend not to that. animal spirits are better and people are fearing -- feeling optimistic but there is not spending. david: who has the leverage? gregory: i think the democrats have somewhat of increase leverage, but we know that holding the party hostage,
holding the government hostage is not beneficial. the republicans learned in 2013 the hard way, and there is no single party that wants to take that risk again. alix: thank you so much, sticking with us. you can watch us online with the bloomberg terminal and interact with us directly. just go to tv . you can ask a question during a segment. this is bloomberg. ♪
mexico and well below china. why go after canada in this way when you have "worst offenders is quote in the market? michael: it is their turn. is 100 day anniversary coming up and trump is looking for a course of victories so he is moving ahead with things that have been in process for a while. the lumber debate has been going on since 1981. canadian lumber producers harvest their timber from government owned land and it is largely private in the united states. the u.s. has charged the provincial governments charge more than they should and that is an unfair subsidy. there have been tariffs and agreements reached, and the 2015t agreement expired in , a one-year grace period ended in october, they have been unable to come to a new agreement so u.s. lumber producers are asking for tariffs
and getting them. low hangings just fruit into the 100 days, or can we read into this? gregory: i think it shows kind of a pragmatic approach when it comes to the trump administration. we have had a pullback from the presidential promises that there would be blanket tariffs, and instead we are seeing a targeted approach that looks at specific sectors and industries where there are large trade imbalances . that is what we are seeing in terms of the trade policy driven by commerce secretary wilbur ross. jonathan: this is not necessarily blanket per section is him -- protectionism or targeted protectionism, it is about leveling the playing field and making things equal. the likes of canada, in many people's minds, that is not a free market. china, that is not a free
market. this is not protectionism per se , this is about leveling things out? gregory: i think that is what i mean by a pragmatic approach. direct anti-trade measures or more protectionist measures. they are measures to level the playing field in sectors where there are strong imbalances like steel and lumber. it is a targeted approach that prevents blanket tariffs from inducing trade wars. michael: if i could speak for the canadians, their argument is this. they have been fighting for years and every time the u.s. puts on so-called countervailing duties it is gone to nafta and the wto, and those organizations have ruled against the u.s. david: is this about software and lumber or dairy products? a are notent tweeted
letting farmers export dairy. michael: the u.s. has a little bit better of a case to make. it is not about darius such but something called -- dairy as such, but something called ultra filtered milk. the canadians use it to make cheese and they do not have enough of it. the u.s. has it and the canadians are putting tariffs on that. lumber prices will still go up. gregory daco, thank you. counting you down to the opening bell, you are watching bloomberg tv. ♪
tax reduction, the president is said to call for the corporate tax rate to be slashed to 15%. mcdonald's has its first double-digit gain since january. analysts say it is time for europe to outperform. a warm welcome to bloomberg daybreak on this tuesday, april 25, i am jonathan ferro alongside david westin and alix steel. futures bid. 154 on the dow on the back of some strong earnings, futures on the s&p up eight, one third of 1%. yields higher by three basis points, 2.30 on the 10 year. that is the story cross asset. let's get your movers. alix: 10% of the s&p reporting today, 52, and good numbers from
the big guys. caterpillar up almost 6%, a blowout quarter on the top and bottom lines. restructuring costs will be higher and they warned of continuing volatility for the rest of the year but you have child's -- china sales good, latin america sales good, and the united states is a little bit soft. mcdonald's beat on estimates and up sales up 4% -- cop sales -- comp sales up 4%. game was know if the for people going more frequently or spending more while they were there. 1%, earnings of down 20% year on year, revenue down 11%. u.s. soda consumption at a 31 year low. coke will continue to cut more
costs as it spins off its handling operation, a huge earnings day. caterpillar, 3m, and mcdonald's boosting the dow. we are about 24 hours away from the white house tax plan we have been promised. very own preview is our chief washington correspondent kevin cirilli. tell us what you think we know. kevin: what we know is that treasury secretary steven mnuchin we'll head to capitol hill to meet with top republicans including the house leader to talk about this tax proposal, which we are anticipating sometime tomorrow. willtedly president trump advocate for a 15% corporate tax rate, consistent with what he said on the campaign trail. when you get into the weeds of whether this plan will be thisue neutral or whether
administration will support the border adjustment tax, which speaker ryan has said will bring in on trillion dollars in revenue but other republicans balk at, particularly in the senate and tea party, there are a couple of items within the tax policy plan that we are eagerly awaiting to see where he will weigh in. willar to health care, he have to play a political referee of sorts to unify the republican party. david: if he comes in with something as specific as 15% corporate tax rate, does he have to give us some hint of how he will pay for it? will the american people and companies be satisfied without some sense of what is going on with the deficit? kevin: they will have to risk alienating the base of the conservative party if they do not come up with a way to pay for it because prominent tea party members and others calling for them to do that. on the flipside, this is an
administration that has gotten away with not being specific on a host policy issues, and another big regulatory reform tomorrow, how up to regulate on dodd-frank. jeb hensarling will be hosting his first hearing on that tomorrow. david: i almost forgot dodd-frank. the government shot down -- shut down and the tax plan, i most forgot. kevin: and north korea. alix: joining us is binky chadha. awesome to see you. are you chasing the rally? binky: i think u.s. equities, it is time for a pause and going a little bit slower, still see a grind higher but we are overdue for a phase of growth data surprised. that is just as it go -- how it goes after you get positive phases.
i would argue you want to be long european equities, at least for the next two weeks. u.s., doterms of the you want to be selling into the rally and you buy it back when we get that pause or is it a real rotation? binky: i would argue you just want to hold on. i do not think you want to be too overweight right now. we have earnings coming in, i would argue much stronger than even we expected. the headline number and s&p 500 and 14% per share. we have not seen a double digit number for more than two years. jonathan: we were expecting a health care vote and we did not get it and everyone came on and said it is significant. if it does not pass we will get a correction. did not get one, did not happen. same thing tomorrow, we are waiting for this tax reform, we
need to see something material. do we? binky: for the market, we do not necessarily need to and everything is priced in. the points i would make about the market rally since the fall of last year, number one, what the market has done at the market level, it has been a typical close presidential election rally. there is nothing to distinguish it or suggest the market is not pricing in expected policy changes. if you take a look at the composition of the rally, it has mostly been about u.s. rate rather than anything else, not about tax rates were any sort of offset, not about infrastructure spending. it has really been about u.s. and global growth coming back from the u.s. dollar and oil shock. the rebound in growth, most of it happened before the election. jonathan: where we have seen the
biggest consolidation is with financials, revaluation and repricing despite the earnings, some of them being terrific. what do you think about the financials as a second? binky: it is our biggest overweight, and the reason for being overweight is a view that rates are completely mispriced. rates moved up along with equities rates peaked in december and have been flat and moved down. i would argue that is very much a positioning story and most of the story has run its course. every once in a while in an asset class you will start from a mispriced level, and have a series of catalyst that will take you in one direction so the market starts to position for it, pays for it, positions even more. if you look at the positioning in bond futures, by december-january we were at
weeks in terms of shorts that were two times to two and a half times the peak. i think that number speaks for itself. it looks like a lot of that positioning has been worked off, expect treasury yields to continue to move up. i am at three and a quarter for year end. david: when it comes to the equity market you have written that every two to three months we get a 3% to 5% correction. we have not gotten not, why? binky: it is very unusual. we are in the 96th or 97th percentile when it comes to duration of rallies. the norm is 3% to 5% every two months and we are now running on five and a half month. out, the health care reform not going through, basically the repeal, should
have seen a pullback. we expected one. -- at we managed to do that intraday but not on the close. there are two reasons why we have not had the typical pullback. keep in mind that starting in the middle of 2014 for about two years, we had a continuous period as the u.s. dollar and oil shocks appeared through the system, consistently negative data prices. as growth has come back with a long lag, you start to see basically forecast move up. we have been in a period a five-month data surprises and that is the most important reason. david: the longer we go without the correction, does it increase the chances that when there is one it will be deeper? binky: i think it increases the
probability that we will get one. it is the expectation we will return to normal. callhan: within that 3.25% , we will be talking about that coming up on the program, wilbur ross, u.s. trade secretary. some things to say about china and steel. this friday, bloomberg real yield, 30 minutes dedicated to fixed income, a choppy we over the past -- week over the past 10 years. from new york city, this is bloomberg. ♪
rallied to their highest level since august 2015, a five day winning streak after the biggest day of gains since june. emmanuel macron on his way into round two, and the polls say he will sale into being the president of france. france removed some of the tail risk. will they follow the course with the money over the next couple of months? binky: i would argue that most important thing to keep in mind is how the market is positioned. this is sort of the fourth rerun ,f the same movie, with brexit the u.s. presidential election, and briefly with the italian referendum. vol,u look at the implied you will see a huge disconnect
that pointed to upside in the cac of 8% to 10%. we got 4% to 5% yesterday so we are halfway there. when you have these calendar date risk events, unlike general risks like slower growth or higher growth, when you have risks around a calendar event and the market takes out protection around those events, when that event passes, even if the tail risk is realized you have to cash in the options to make money. when you cash in the options you are basically buying the market and it goes up. i would argue there is good reason to believe over the next two weeks, and the second round is not over yet, this positioning unwind has further to go. jonathan: how much was yesterday a renewed appetite to put money in europe? binky: i would say it was all a
positioning unwind and is not about risk appetite. the outcome of the elections was exactly the market's big case, so that should not have been a surprise. it is a relief that you got the base case and the betting came out almost exactly. if you listen to any commentary about the elections, what comes out clearly is that the outcome was very close to the polls. everything suggests very little surprise and very little surprised does not lead to a rally unless the market's position that way. jonathan: when does the flow start to pick up to match the rhetoric of the headlines we are hearing from a bunch of analysts? binky: in an environment where the u.s. has been having outflows, europe has been having small inflows so on a relative basis that is already happening. i would argue it is not
happening in and a big way. so far it is really the squeeze and eventually will happen but will take a while. keep in mind, europe has been growing, european earnings have been growing in line with the u.s. that valuations of stock at the bottom of the band for quite a while. getting rid of this tale risk and positioning, european equities are rising but they would've been much higher. if you look at the cac versus the french pmi's, you will see there is a strong correlation. the current french pmi pre-election is pointing to the cap being 10% higher -- cac being 10% higher so yes, the market is going higher but it should have gone up higher. in europe, what regions, what sectors? theme remainsrall about the rebounding growth,
mispricing of rates so what should be this cyclical sectors, the financials in particular. it would be the industrials and consumer discretionary. jonathan: rates have been mispriced for such a long time. you could've told me that last year. we are still deeply negative at the front end of the bond curve. why will it support your thesis anytime soon? binky: it is like all other things, i would call it a bubble. the thing you have to ask on,self, the longer it goes does the probability that it will burst go up or down? i would argue the evidence is incontrovertible that the longer it goes on, the probability is rising that it will burst. alix: when will that happen? if you were short treasuries you were in a lot of pain over the last few months. are you positioned for that
bubble? binky: yes, we are. nds andou are short bu treasuries? binky: yes, and i would argue that the first quarter was in unwind of what we had. since then it has been coming off. buathan: can you be short nds, characterize them as a bubble, expected to burst, and still belong european equities? binky: absolutely. you just saw the reaction of the european financials yesterday, and exactly the same story. the immediate electorate rods the market to move up with the the market to move up with rates. i argue that low rates are just an enormous tax so normalizing rates is what the world needs.
jonathan: financials with the built likethey have 100 basis points, 150. the speed changes. binky: but the baseline view is that it happens very gradually, with a couple of short spikes. we have had a couple of sharp spikes in equities. if you look at u.s. yields or global yields around the u.s. election we got a spike and equities did fine. david: there was a spike in the and, the euro jumping up you have the ecb potentially tightening monetary conditions. is that a threat? binky: i would say no. i would say it is one of the amest reactions and that is reflection of the extent of the positioning. it was much bigger in equities
♪ alix: big oil earnings kickoff on friday with exxon short, that is a call from binky chadha. lineis a chart, the yellow is the big oil energy etf. the white line is wti, they are diverging in a significant way. why is that? binky: why is that? alix: why are they diverging in such a significant way? binky: what i would argue is it is a clear dislocation.
viewld sort of refine our relative to that chart in a small way. i would argue that you want to look at energy stocks relative to the s&p 500 and then oil prices, so oil prices today in round numbers are at $50. we would argue fair value, based on the u.s. dollar and global $40, and iround would argue that energy stocks on a relative basis to the s&p 500 are pricing in something like $30 or less. dislocation,, good relative arbitrage story we are talking about. why are they much more negative? i would argue it is partly to do with the earnings story. remember when we had the decline in oil prices, i would argue that more important than the decline in oil prices which was a move closer to fair value, was the speed with which they went
down. companies have got to respond and realigned with the new oil price, and they are doing that. if you look at energy margins going from very high levels when oil was north of $100, we had negative margins for a while, and now moving into the low single digits. once earnings deliver, i would argue energy stocks start to outperform because it will then no longer be only about the oil price. they would basically have started to adjust. alix: you could make the case that u.s. bmps are in that case right now. do you make a distinction between subsectors? binky: at this stage, no. the easiest and best way to play it, what happens within the sector will depend a lot basically on what happens with oil prices. i would argue you want to be mindful of that.
higher oilo you need prices to justify what we have seen in the end? -- in em? oil and think high generally and more widely, commodity prices, which the call is the same, or a risk to emerging markets but u.s. glows, -- growth, global growth have been coming back so i think of oil and commodity prices more as a risk. you want to be careful of your regional exposures so why would argue you want to be long em in asia until oil prices -- as the dollar falls so the current level is more justifiable, or oil prices go down. the oil prices have moved down some and have not caused any way . i call it a quiet correction and
we just need it to go little further. alix: if you have oil and iron or rolling over is it e.m. exporters you need to lay off of? binky: that is correct, but it should not be that bad for all of them as a group because growth is really turning outside. jonathan: binky chadha with us, one of the biggest bulls on the street. in the markets, ahead of the opening bell. cross asset market action looks like this, futures with a decent did at 161. strong earnings for caterpillar and mcdonald's. from new york city, the risk rally continues. you are watching bloomberg. ♪
index. s&p 500 futures, positive almost nine points. sincewe are not seen march 17. that picture for risk evolves in the following fashion, yields a three basis points. this time last week, reprice of yields higher over the last week and the dollar goes nowhere. after breaching that 200 day moving average very gently yesterday on the dxy. let's get you up to speed on the market action. alix: we have a new record intraday and closing high for , up bydaq, over 6000 about 20 points. the dow up high about 150 points. the s&p up seven. today's story is less about relief rally we saw in france but more about underlying earnings. the dow up 7/10 of a percent
outpacing gains in other sectors. about 10% of the s&p reporting just today. you have mcdonald's and caterpillar, 3m also has good earnings. caterpillar to meet the highlight. the stock up 6% keeping gains we premarket. it also raised its outlook for 2017 for earnings and revenue. they did warrant volatility but it was the revision of the full year that propelled stock higher. people are eating burgers again. .cdonald's up 3m also be on top and bottom line and did raise its forecast for 2000 and 17. stock slipping into positive territory. earnings coming in hard. wiki. about fundamentals are good. the data today shows some fundamentals are actually good. jonathan: i'm not eating burgers. david westin might be.
david: i will buy you one. jonathan: done. binky chadha is with us. michael shaoul is with us. let's begin with you. much has been made about 18 times earnings. 16 times forward earnings of the s&p 500 next year. the story in the earnings, it validates the price? michael: once you have a high multiples are veterans are continuing to get better. s&p sensitive groups of the , it looks as if the strength in global economic data, i would focus on the global part of that , is turning into a better earnings season not just in the u.s. but in global equity markets as well. jonathan: looking at the same numbers? binky: absolutely. we are pretty constructive. some pretty good expectations. i would say so far earnings are coming in better than we expect.
jonathan: we talk about this disconnect between what happening with treasuries and what's happening in equities. equities are not -- treasuries are not pricing in the kinds of numbers caterpillar is bringing in. michael: i think the bond market at the end of a long bull market and bull markets take a long time to die. takes an awful lot of bad news to really shake it out. i think we saw the bottom in yields at the exit low last summer. i don't think you will see global yield get down to that point. i think we have started a long march higher. i'm not surprised that today the 10 year jonathan: is at 230. is to 16 the low for 2017? michael: maybe not. we are not going back to 140. i'm happy to stick my neck out. alix: is there going to be a risk that we go to 3.5 if we get the kind of growth we see from earnings? michael: i'm of the view that by the end of 2017 it is going to be fairly obvious that's what is
liked of slack in the u.s. economy and labor markets and to beal markets is going utilized. it's around that point that i think you will see a different rhetoric come out of the federal reserve and other central banks which are in the emergency camp are going to be talking about normalizing policy. i think later than 2017, perhaps early 2018, you have the potential for a fairly significant adjustment of global monetary policy and i think that would be terminal for the bond market. right now -- we broke down below the low end of the range. i don't think it matters much where the tenure is at 220 or 230 today. alix: if you wind up looking at the global growth story, you like europe, where are you going to get the most upside as we hit a global synchronized recovery? industrials are so diversified. binky: i like the global portions of the s&p. caterpillar is a global company.
i think asia is part of the world you have to keep an eye on. you have key global markets such benchmarks index -- taiwan's benchmark index. japanese equity market which is knocking on the door of 20,000 again. a time to have a globally diversified portfolio. i think not learning the u.s. dollar is starting to help you. againstar is down virtually all currencies. non-us returns are starting to help. jonathan: out of all the convictions that you have this year what do you think the most difficulty convincing investors of? binky: including you on 10 year yields.
[laughter] binky: like i said since last summer yields began to rise and we had this extended cause and any extended pause of any retracement bid leads to an excess of narratives i'm just not partaking. i would agree it is painful and i would argue the rebound in go.ds has a long way to i think there is one number you need to look at on the 10 year. take the 10 year yield, take out the inflation rate, the core inflation rate, so you have a rear tent -- a real 10 year yield. what is that number today? about 20 basis points this morning. -- are we in december 2008? that seems a bit extreme. you look at that number and you say what is it strongly
correlated with overlong kudos period's ofver time? it should still be at 2.5%. i would argue real 10 year yields are off by two percentage points. david: that's a big number. alix: that's a big bubble. do you agree with that kind of call? michael: i try not to use the term bubble. the one thing i say about u.s. yields, real yields are generous compared to real global yields. the real question is, has the global economy started a prolonged period of economic growth? i believe it has. it looks better than any point before the financial crisis. we have a rebound in acid price inflation -- asset price inflation. global ppi is going up. if we see a transition into cpi , 2% level globally and
continuing to march higher come i think you have the stage set for a repricing of global yields. i think a slight area of confusion where everybody looks right. shaoul, thank you very much for being with us. we turn to industrials. it looks like caterpillar may be emerging from a four-year slump in part because of boosts from china. announcing earnings this morning caterpillar took the full-year sales numbers up even as it beat estimates in sales and earnings. we spoke with dave cody, honeywell executive chairman of his outlook and he says he is seeing organic growth. >> you are seeing it in just about every sector. it's not really taking off yet. maybe with a minor exception of oil and gas where it is bouncing back up a little stronger. but everything is starting to come back. is carol youg us
generally is going forward and growing just not dramatic? carol: the cyclicals like caterpillar, one of the big surprises was there mining business was up 16%. people thought aftermarket would grow. extraordinary. growth numbers are coming in higher and companies are raising them and they have cut costs particularly the cyclical that they're getting a bounce and earnings. david: caterpillar has had a long period here. karen: there mining business went down 70%. it's still not good numbers but nobody expected them to double expectations in the quarter. .hey've done a lot on cost in a downturn they have done well so now they would get the benefit of that on the way up.
alix: it was not like an all clear sign. can you talk about the reticence you heard? karen: it is still spotty. china is driving the construction market but the rest of the world construction equipment is not very good and the u.s. it is flat. that is one area that is a problem. the energy markets saw better demand but they have capital equipment so it's later in the cycle. the equipment side of mining will be later but the optimism is feeding on itself. the multis are more measured because they are not seeing the cyclical pop but they too are raising organic growth numbers. david: what is your view on the sector, binky? binky: very positive. i would argue that a large part of industrials are capital goods. ap x, we have been talking for some time about the balance of growth.
the most important thing to keep in mind about cap x is it always lags and that is a strong argument for a pickup in cap x. the sector as a whole or capital goods looks to be in line with global pmi's. a little higher sundays, a little behind other days that in terms of the bounceback in this sector it's very much in line with the rebounding global growth. the real kick in terms of capital expenditures picking up usually takes two to three quarters. i would stay with trade being overweight. alix: caterpillar highest level since november 2014. best performer in the dow. talk about optimism, karen. ,hen you talk to dave cote honeywell would use that money for buyback and dividends. for industrials is that a risk that the use extra money for safety things and they do not
put it to work as much? karen: i think it will be a balance despite what trump says i don't know that a lot of industrial c companies are going to spend a lot of money investing in the u.s.. the factor growth is outside the u.s.. i think that is where dollars will be spent. be dividende would increases and buybacks and other things rather than investment in the u.s.. jonathan: always appreciate your time. thank you very much. we are about 12 minutes into the session. let's get you up to speed on what the global picture looks like. the dow almost 200 points up three . the s&p up 0.5%. you're watching bloomberg. ♪
>> coming up at noon eastern , stay with ross bloomberg. alix: tech stocks steal the spotlight as some of the biggest names in the sector reporting after the close on thursday like microsoft come out for that and amazon to read one of them got hit with its first downgrade in more than a year. amazon cut to market perform but not doing too much damage on shares. joining us is the analyst downgrading the shares, aaron kessler of raymond james. date. 21% year to we think risk reward is more
balanced given all of the continued high levels of investment. we would like to see graber offering leverage for the stock to move higher at this point. alix: so the margin improvement we are expecting the second half of the year, is that priced in? aaron: that is our point. we expect improvement in the second half on largely easier comps. with the stock of 20% year to falling key core results which were somewhat mixed. we think the stock has recovered and anticipating second half improvement in margins. alix: margin improvement comes from the cloud service, amazon web service. do you not see that kind of upside this quarter? aaron: less likely to see a w s upside. we think revenue is in line this quarter on aws and that has been a big catalyst the stock. we think there has been investor
concerned with increasing competition from google. david: that is what jumped out at me. the cloud matter. that is where you are seeing competition in terms of price? aaron: some competition in price . market share as well. the recent deal between google and snapchat. competition for pricing as well -- moree across competition in the days of cloud getting 10 times revenues for amazon may be over. more in the seven times revenue range but i could be pressure in the future. alix: what about retail sales? revenue growth? aaron: still expecting strong results. mid-20's unit growth. last quarter was about 24%. to see that rebound closer to about 25% plus unit growth. we think that is achievable. focus on the retail side would be more in the margins.
our concern is q2 operating margins look aggressive. we are looking for 1.2 billion street sale. we think there's some risk to q2 guidance from amazon. alix: thank you very much target of 90741 -- 907.41. chadha.th us is binky what is your call on tech earnings? , i wouldch earnings say the most important thing to lookin mind is that if you at s&p 500 earnings for the quarter i think i may have mentioned latest read suggests on a per-share basis we should be getting about 14% year in year earnings. the first double-digit quarter. about six percentage points of that is due to the bounceback in oil prices and energy earnings. you've still got a solid 8% elsewhere. amongst the rest, so outside of energy and financials, the
strongest earnings for quite a while now are coming from the tech sector. remained very constructive. some of the balance is to eliminate extent -- to a limited extent, the dollar shock or appreciation of the dollar coming out. still points to strong earnings growth. it's really a secular story. david: within that sector how much is b2b and how much is be 2c? binky: i would argue it is broad-based. the industry goes through late 90's phase and then actually after the financial crisis earnings for the tech sector as a whole were disappointing. for the last couple of years coming back steadily. what's most important here is the relative that i would emphasize, the one very clear
example that we have of secular growth. alix: great stuff. real pleasure to have you here. the nasdaq hit another record high. binky chadha of deutsche bank. check out to be go. watch us online and look at our charts and graphs. go to tv go on your terminal. send a question to us and we will ask it for you. this is bloomberg. ♪
david: this is bloomberg. we have just over three days before saturday when president trump will have been in office 100 days. according to the administration we have an awful lot to get done before that date. we are supposed to get a tax plan tomorrow, possible government shutdown on friday, they are working on dodd-frank legislation and the president will be meeting with all the hundred senators to go over north korea. only one person up to the task of sorting this out, al hunt,
joining us from washington. david.pressure, it seems like 1000 days but you're right it is only 100. i think there will not be a government shutdown. they will do some bickering and may have a one-week extension but i think they will avoid a government shutdown. it is not in anyone's interest particularly the republicans who control all branches of government. health will not occur in the next month or two and the corporate taxing is interesting. i think what happens when you governed by cable television. attract saw stories three or four days ago and said they are saying we're not getting anything done, let's prepare something dramatic. cut the corporate rate to 15%. they have not put that together. the don't have offsetting revenues so they will send it up, it's not going to happen. there may well be a corporate tax cut this year and individual tax cut but is not going to be the 15% because they had not prepared for that.
david: how can he maneuvered his way through this? one of the founding members of the freedom caucus are it he's got speaker of the house who is not for increased deficits. doesn't he run into troubles if he suggests -- he sure does al: which is why did will be less than what he wants and others want. you run into arcane rules of the congress which if it loses any tech -- any tax cut that loses revenue has to expire after 10 years. re-create 1985, 1986, the bradley reagan baker bill requires a lot of work and patience. i think what they will probably end up doing is they have to cut individual taxes every bit as much if not more than corporate taxes for political reasons. i think there will be a tax cut focusing the middle class, small of the president would like.
a cut in the corporate rate, i don't know to what. maybe 25%. it will not be permanent. that, for some people is a problem. you can make a case that individual taxes will be temporary but corporations like the plan long-term. david: at the very least can't they get all that money repatriated sitting offshore? tax on allput a 10% offshore income you bring back to a $50 billion. probably less than 10% of taking the corporate rate to 15%. david: are we going to get a wall? al: no. we are not going to get a wall. after all, the candidate told us there would be a wall but who was going to pay for it? mexico. maybe there will be increased money for the border. there may be more fences but i don't think we're going to get a wall. i doubt we will get it in the fall.
david: i said you were the only person who could do this for us. i was right. thank you. jonathan: he makes it sound very easily. are we going to get a wall? no. alix: special coverage speaking with fed chairman alan greenspan on friday. jonathan: it's basically david westin in d.c. and everyone takes a day off. alix: i actually am taking a day off. jonathan: here's the market action. followthrough from yesterday's big session. it continues by 200 points on the dow. fueled by decent earnings from caterpillar and mcdonald's. the s&p 500 up 0.5%. you're watching bloomberg. ♪
♪ vonnie: we are going to take you from new york to london this hour and cover stories out of washington, paris and turkey three at first we have breaking new u.s. economic data. bigail: sales for the month of march looking at a big beat. the number came in at 621,000 new homes in the month of march versus the survey of 584,000. month over month growth at 5.8%. it had been expected to decline more than 1%. according to bloomberg intelligence this is another example of demand outstripping supply. to consumer confidence of the month of april we're looking at a small miss. the survey had been looking for a reading of 122.5. it came in at 22.3. relative to the month of