tv Bloomberg Daybreak Americas Bloomberg October 16, 2018 7:00am-9:00am EDT
bank ceos flee from saudi arabia. they are the latest to pull out of the initiative investment. europe,showdown with they stand firm to the 2.4% deficit, setting a collision course with the eu. david: i am david westin right here with alix steel. board, they exceeded expectations. this was not up or down. alix: it's a blue pass with estimates that $1.29 billion. i haven't seen the breakdown of the equity trading. overall trading was slightly above last year. the equities will stiff-armed morgan stanley. david: there is a goal for return on equity. alix: it's hard to find something bad so far in this report.
they are optimistic. let's hear from allison williams. what stood out to you so far? equity is right on the nose, fixed income is flat. that's a good result given the environment. i haven't dug into the investment banking numbers. equity, capital markets, that's something we looked at to be strong. i'm guessing if there's an upside surprise, it's there. the debt capital market, they've been outperforming the traditional bankamerica and jpmorgan. on mored to focus vanilla issuances. they've been outperforming in that business so far this year. wealth management is important to james gorman. they continue to show steady growth there.
alison: they are delivering on the pretax margin. to some extent, we saw this with bank of america and wells fargo getting a lift to the business, that has been helped prices. we had some give back on that. cost control also helps. atx: equities are trading 2.0 billion dollars. that is trump in investments. it is lower sequentially. that's geeking out a little bit of again versus the estimates. what's going to be the question on the call? the numbers look solid. alison: the question is the outlook. that's always the question with earnings. a lot of the strength in this equity trading is very strong. we have the wealth business that has been helped by equity prices. we saw some reversal of his quarter. what does that mean for the
outlook going forward western mark -- forward? they are raising the bar a little bit before goldman. are more optimistic on equity trading and equity fees. commodities hurt goldman sachs laster. it helps this year so far. we will look to see if that will continue. jpmorgan talked about normalization of that business helping them. david: what does this say about bank of america? part of it is the non-banks are taking on way too much leverage. are they taking on more leverage risk? alison: it's interesting, the talk about shadow banking. we will see if they echo some of the comments happening in those businesses. with bank of america, the disappointment is the m&a business. that is where morgan and goldman sachs are leaders.
bank of america had a great year last year in m&a. this year, not so much. they said the pipeline looks good going into the fourth order. is there something more systemic going on? alix: thank you very much for joining us. argan stanley, it looks like killer quarter across the board when it comes to revenue and earnings. equities trading is coming in at over $2 billion. investment banking is delivering it, coming in at $1.57 billion. they are optimistic in the earnings release. we will day through the numbers and update you as we go. that capital underwriting, up 15%. bank of america, down 29%. that's some perspective. david: the contrast is interesting. , adding somehold
kind of risk on it feel? by 11. are up the euro dollar is a mixed dollars story. the currency pair is mixed despite italy passing a budget. the 10 year yield is higher by one basis point. the budget deficit is the highest since 2012. david: it's going only one direction. getting a little bit of a rally as mike pompeo lands. david: let's turn to taylor riggs. she has first word news. taylor: mike pompeo is in saudi arabia with a meeting with the king over a dissident journalist. the trump administration is deciding whether to take part in the upcoming saudi investment conference that has been thrown into turmoil. there are reports that they will admit he died under interrogation.
the saudi's had planned to kidnap him from turkey. the u.s. budget deficit hit a six year high in donald trump's first full year as president. tax cut in spending increases boosted it to $779 billion. it is 17% wider than a year ago. revenue was up just .4%. bill gates said personal computing would not exist without paul allen. the billionaire cold founder -- cofounder of microsoft died. he was 65. he stepped down for health reasons. he turned his stake into a $26une valued at more than billion. global news 24 hours a day powered by more than 2700 journalists and analysts in more than 120 countries, this is bloomberg. i am taylor riggs.
david: thank you very much. we got the news last night about paul allen, he was an extraordinary man. we wouldn't have personal computing without paul allen. he did that at an early age and then he went on to invest in philanthropic causes around the world. alix: i forgot this. he was the first to put money into private space travel. he dropped out of college while bill gates was in harvard. eastern working with bill gates. that's a true grassroots story. david: he some test saw something on popular electronics magazine. we want to hear now from a man who is a venture capitalists in ai. he is worked with google. the new paul allen.
this is what he had to say about the values of paul allen. >> it felt like it was about sharing, it was not about building an empire. he did it quietly. it wasn't like he was beating his chest and telling the world what a great person he was. it was the right thing to do. he hired great people. hopefully they will continue. david: it's important, this was a quiet man. he was an introvert. we see ceos that are larger-than-life, he was smaller than life and he had a major impact. alix: he was the brains behind the operation. it's a big loss for the second philanthropic communities. david: we will bring you more on paul allen's contribution to his industry in the world. paul allen was 65 years old. ♪
taylor: we have your business flash. walmart expects some of the fastest sales growth next year. the largest retailer said it they are getting more digital customers. sales grew 3% as expected. that would be the fastest pace since 2008. the largest health insurer added hundreds of thousands of customers and raised the forecast. united health is providing most of the insurance customer growth. they operate medical services and run drug benefits.
johnson & johnson posted -- posted earnings that beat estimates. they raise the profit forecast for the year. they beat the average analyst expectations. that is your bloomberg business flash. alix: it's time for the first take. morgan stanley is crushing it, what does that say about other banks. bank ceos flee from saudi arabia. tracy, it's good to see you. let's pick it up with thanks. what we are learning is the have and have-nots in individual banks, morgan stanley versus bank of america. tracy: it's tricky to predict who is doing the best. shares are up 2.4% in premarket. what we see is the strength of
some of the franchise. dcm underwriting did pretty well for morgan stanley. revenue was up 15%. that's a surprise given the bond issuances that are down in recent weeks. that speaks to the strength of morgan stanley and whatever people are talking about is comparing them to goldman. they love it when they do that. brooke, what strikes me is normally they go in one direction. this time they are dispersing every which way. there isn't a through line the bank earnings. brooke: it's been a mismatch. one thing that's interesting is investment making revenue is up. that's not something you saw from the other big banks. ast's a key point to watch we get to the earnings call and here the qualitative commentary on what they see.
an issue for some the other banks getting regulatory approval, some of these are very into transactions running national security review. it's interesting how they claim that out and what they see coming in the pipeline. our trade tensions having an effect? david: italy came up with a budget on schedule. yet hit 2.4% deficit compared to gdp. theyve the outline of what put up. the retirement ages 62. it sounds pretty good. they have that big deficit. the e.u. gets to come back to them and respond. tracy: we have italian assets rallying. that is some relief in the market. we have some big hurdles coming, the need to get confirmation of
the budget. they have a week to do it. looking at the analyst commentary, it's pretty negative. it's pretty negative. the budget is clearly not compliant with eu rest of the nations. -- recommendations. it's entirely driven by higher spending. goldman sachs is pointing out that the hurdle might not be the eu compliance now. it's the rating downgrades in a potentially coming up. if you got a two knots down downgrade, that would lead to forced passive selling. idea of some of the headwinds that might be coming. alix: euro is going nowhere armite the eu executive facing a revolt if it would give approval to the budget plan submitted by the italian
government. this is how you might not be compensated for risk. brooke: how is the market going to react to the plan? could force their hand or italy's hand, depended on the way they treat the budget itself there. if a car -- they are concerned about the selloff, they could go back to the table and rethink some of these campaign promises. time inou have spent that part of the world. mike pompeo is in saudi arabia now. he is meeting with the king. he wants an internal investigation. president trump said i don't want to put words in his mouth, it was rogue killers. what happened in that consulate? i think we will find out. this may affect the crown
prince's overall plan. -- doing thatat well to begin with. i was at the conference last year. it's hard to overstate the importance of that moment for saudi arabia. it was about opening up to outside capital and a coming out party for the 33-year-old crown prince. he was taking selfies with the attendees and making speeches about how this is a new saudi arabia. this puts that all in doubt. the most interesting thing happening is the report from cnn saying they might be getting ready to say that the journalists death was the result of a boxed interrogation. that's them changing their story. is that enough to save face in the eyes of the outside world?
does it indicate we are starting to get dissent among the ranks of the saudi royals? the crown prince was very hard in denying any involvement. david: a variety of media there.s were we pulled out with the other media partners. we put up numbers about foreign direct investment. .hey are falling well short this development cap help them attract investment into the kingdom. it's interesting how the western partners are bending over backward to come up with this solution for saudi arabia. a lot of businesses see this as an opportunity. they of been willing to make certain trade-offs along the way. when you look at their track record with women, what happening in yemen, there have been some ethical decisions made there on the part of businesses. this comes up with some sort of
face-saving narrative. it's very interesting. alix: wasn't it going to be held at the ritz-carlton? which they have used as a jail. thank you very much. on theirr, g tv has all the features. ,, they be estimates. we will discuss the third quarter results. johnson & johnson's cfo. more companies are reporting third-quarter earnings. morgan stanley continues to hold on to the gains after beating across the border. this is bloomberg. ♪
shares are up as you can see in premarket trading, .5% now. we are welcoming joseph, the cfo. it's great to have you, joseph. you be on top line and earnings per share. joseph: it's great to be with you. another strong quarter. we had strength across all three segments. we relaunched our baby franchise to make it more responsive to millennial moms and dads and the needs they have. that complements our strength and over-the-counter medicine and beauty and skin care. in medical devices, we broaden our portfolio. we had strength get stronger and we improved areas that were weaker. our pharmaceutical union across neuroscience in oncology, we are transformational medicines. pharmaceuticals drive so much of your earnings. you had great success.
you have generics and things competing. once coming next that excite you? joseph: great question. the strength of our portfolio, we have products where we expand the label. reaching more patience, we had a big approval for our blood thinner. that's for coronary artery disease. 8at could lead itself to million more patience in the u.s.. we have an exciting new medicine , 14 million people suffer from major depressive disorder. to third are nonresponsive two types of treatment available. we think this it's that population very well. it's great for business, it's better for patients. it's a new treatment for 20 years. david: why is it so revolutionary?
we have other drugs out there. how far along are you? we filed for approval. it has breakthrough designation. it reconnects in iran's in the brain, which suggests improve the outlook for patients who suffer major depressive disorder. it's very controlled in terms of the dosage. it's very fast acting. many of the medications, it could take weeks before it becomes effective. here we see reaction within days. what about med tech question make are you taking -- tech? are you making purchases? frankly, we look at her businesses on a weekly basis. in terms of managing our portfolio, med devices is an attractive area. where the bodice -- fronts
manufacturer. there are some areas we would like to shore up. we need to make sure it's a great strategic fit. we are going to create value for the company and shareholders. david: should we keep a lookout for you? joseph: crossover segments. about 40% of our growth has been in organic. david: this has been up-and-down and down, you invested in that area. you are seeing results. do you see pressure on margins? joseph: no. we are improving our margin profile. we had an initiative a couple of years ago where we want to get back to a competitive benchmark level and beyond. we are currently on that footprint. we are improving our cost of goods and being more effective with sales and marketing. david: let's talk about geopolitics.
it affects your finances. we heard about the trump administration making a new requirement that you publish prices for all pharmaceuticals. would that affect you? joseph: i applaud the administration coming up with that announcement. the spirit of it is seeking more transparency and information. we want to make sure there is clarity with that information. we've been about transparency. we offered a transparency report two years ago. we showed that price declining. cfo, once the biggest risk you see on the horizon? it's a continuing cadence of innovation. it's not a risk and we have great scientists in our company. making sure that we are up to the competition, getting our
political milestones across our segments, improving our medical device business. david: thank you for spending time with us today. the: i love when you do stress because we're awesome. that's a perfect job interview. david: they seem to have it together. alix: morgan stanley is leading equity markets higher. up 14. is european stocks are getting a boost. italy is up 1%. they have a budget deal passed in italy. now that leads to hurdles in the eu. you can see the non-reaction of the currency market. euro-dollar is trading nowhere. the pound is surging against the dollar. it's up .5%. brexit talks continue to break down. sterling is higher.
david: why would the pound be a? alix: wages. you did not see rate hike expectation. it was a wage number. yield, we dide have two months notes for the first time. it's injuring to see what that's going to be. brett is up. italy cobbled together a budget accord, including an income for the poor and retirement at 62. they kept the deficit target for 2019. that sets it on a collision course with the eu. italian bonds gained on the news. securitiesis the td had it. it's great to see you. where is my risk premium? >> is already in the price. if you look at what would be driving the euro relative to
ten-yeart's the german . it's also european growth dynamics. market seen a classic pressing in stress. we've seen it waffle around that 300 basis part -- point mark. bad news is priced in. the markets are coalescing around the idea we will see a rating downgraded from some of the agencies later in the month. there is bad news priced into the euro. alix: play this out with me. are basically saying the eu executive arm would face revolt if they approved the budget. let the seam they don't approve this budget plan. it happens? mark: that's tricky. if you don't get the budget plan, there are a host of things that could happen. we could see another election
and the government start to dissolve. a lot of this is the brinksmanship the gets played through. issues that are more sticky is where it has over the next three years. stresses come through in the markets are, with the idea you are going to get more spending next year and less over the following years. what you see is both of these positions staking out the government trying to get as much as they can. they are trying to signal from brussels and offset to spending italy will do that shakes up whether or not they will hit that red ceiling on the deficit level. alix: what needs to happen? the average yield needs to drop a lot for italy to get some relief from the debt issue. there is an issue is coming out soon.
what is the ideal yield needs to get to. how does it get there? mark: for the euro, it boils down to what the actual sensitivity to drivers for the euro matter. what we have seen over the last couple of months is the btb spread has contaminated the euro and been a major driver. years, thest two euro cared about the german ten-year bund yield. we don't need anything specific to have a view on the euro. that,y i would highlight if you look at euro swiss, it's a barometer for risk issues. it's actually rising the last couple of weeks. it signals that the euro is not really totally a b2b trade anymore. what you have seen is a lot of stress priced in.
in the euro beta, that's the elevated level. slowlyexpecting this to fall off. it's going to be pushed to the back burner. downgraded,the that's what i think markets of and pricing in. david: let's talk about the dollar. given all of the geopolitical uncertainty around the world, what do you see for the dollar? with the fed hiking in december, but the market did it for them. that's equivalent to a 25 basis point increase. hold off for now. do we see market tightening conditions regardless of the fed? mark: that's an important part. is aon bloomberg, there
financial conditions plus. that captures some of the market dynamics. the fed is trying to target that, tech stocks, housing. the other things that while the fed can look at interest rates and financial conditions from a standpoint, credit these other elements that look frothy are elevated. ist you have seen recently you have finally seen global stress come back into the u.s. that's a point we been highlighting the last couple of months. the dollars not trading on interest rate diversion. short-term at correlations and empirical has ralliede dollar versus the rest of the world. in terms of what we've seen year to date, the high-yield credit, the s&p 500 are the best
performing assets against emerging-market equities and currencies. focus onclearly this u.s. assets outperforming the rest of the world. this is what we are starting to see. the vix is rising. the u.s. is seen higher interest rates. these are signs that financial conditions will be tightening. for us, if you go back to the equity story, they have outperformed the rest of the world. alix: fair point. you mentioned real yield. david has a chart you can pull up on the terminal. we have a budget deficits number this year. it's the highest since 2012. what is the potential downside? mark: in terms of levels? alix: levels. how have we beat in the dollar?
mark: i would take us back to a couple of different ways of looking at it. emerging markets, reserve currencies, we see the dollar against major reserve currencies swiss, isuro and the unchanged. it has not been a big driver. emerging markets of the bigger. the point i would stress here is the euro is probably cap. alix: i'm sorry. wants to get in here. about,bers we care that's coming in late from estimates. investment banking is come in very strong, almost $2 billion. that is trumping estimates. remember, it was jpmorgan that said they did well in
commodities, but it was fixed income that they struggle with. i wonder how that will parse through four goldman sachs. it looks like a huge beat. common in light. that is where we sit right now. investment banking is continuing to blow it out. is $.90.rnings that is coming in light. that's been an ongoing issue. the headline numbers, no surprise in terms of investment banking. far, that's not great. that's been an area of disappointment. the had done better in first half. we are going to want to hear about what's going on. we know that competition remains very intense.
equities are marginally better. investment banking fees are better. we just see that headline now. we will want to know where that came from. we saw this across here. that's the business that they are a leader in. they were a leader nit owes year today. capital markets are better at morgan stanley. we expect to see some outperform set goldman. david: it's just a coincidence. this is david solomon's first quarterly announcement. his first announcement comes out well. upequity capital markets are 70%. that's the strongest result in terms of growth we've seen. it will be interesting to hear from solomon, not just today,
but in the coming months. fixed income trading, there was a $1 billion target. they called it an opportunity over time. there is an opportunity from the market business. they are pulling back their target next year. that makes sense given the cycle we are in. is there going to be some kind of change to this target that was set out under lloyd? say the loss in fixed-income trading was lower revenue from interest-rate products. that sounds similar to what we heard from jpmorgan. they did see higher in commodities and currencies. want to go back to the advisory feed. those revenues look pretty good. they came in a $916 million.
when you look at m&a, there has been a lot of the virgins. bank of america was down. you had morgan stanley down 8%. bank of america was down 30%. what do you make of that? >> one of the things we saw this quarter was a lot of strength in announced deals. pushed might have gotten to the fourth quarter. lumpiness ine more the numbers. bank of america is the outlier just because they had such a strong yet last year. now it looks like there is some give back. the pipeline looks good heading into the fourth quarter. there could be some recovery there. it's more important for goldman sachs. they are a leader in m&a business.
that's a good result for the leader in the business. capital markets are down 6% year over year. it looks like morgan stanley has the biggest increase in that business. overlooking the investment banks? they have jumped up over some of the big banks. to what extent could bank of america be losing business? >> that could be part of it. the advisory firms of gained share. over the last 15 years, more of these are striking out on their own. they want to be in a business that is tied purely to m&a and not the big trading businesses. those banks have been gaining share.
the boutiques have been gaining share. alix: let's get through some of the underwriting fees. debt underwriting came in at $632 million. downer on quarter, it was from $750 million. the equity business crushed it. if they didn't, that would not be good for them. >> they are gaining share in a business where they are strong. this is been a longer-term story. they may a focus on improving shares and collecting different pockets. they are not necessarily going after the bread-and-butter business and the issuance of the biggest banks. finance.focused on the even though the debt capital market is down, they are still gaining shares. david: going into these earnings, what do we see in the next year?
>> vasso we will look forward to hearing on the conference call. a lot of the strength we are seeing, we ipo's double in the u.s.. we are off to a tougher start in october. that determines what happens to the business. the wealth and asset management business has to perform for morgan stanley and goldman. it was a bigger contributor at morgan stanley. what does it mean coming into this quarter? david: thank you so much. it's always great to have you. goldman sachs announced it been across the board except for fixed trade. -- trading. out, they showed increased revenue and the
high-frequency trading firms. funds stepped off the break. hedge funds could be deleveraging. the madea wine was discovered during a renovation. they are discovered and drinkable. david: they say it's the lucius. alix: christmas is coming. david: joining us now is jason kelly. millennials,for they started with 500 million dollars. i couldn't figure out, is it wrong or right? jason: they have positioned themselves like the name would suggest. it's very millennial. fees, we are not big old bad wall street. they were inspired by the
financial crisis. they are getting a huge trunk of money from high-frequency trading. these are the guys who embody all this. this is flash boys at large. alix: it reminds me of the wall street movement 10 years ago. you see these kids with their ipads. occupied walls an street element to this. jpmorgan thinks they found some of the blame and that goes to some long short equity hedge funds. they basically had to do risk and the lever. jason: i love this because it's all hedge funds. it's amazing when you look at the names that were sold off last week, the names behind them, it was all the blue-chip hedge funds.
lots of tech, there was a big tech selloff last week. they were behind it. its entrance seen to see if that is in fact over and if that was the trigger. we are back to a nice upward trend. david: it was hedge funds. my favorite, madeira wine it. there's this old mansion in new jersey. they decided to turn into a museum. they come across these old bottles of madeira wine. he's about to give the bottles away. let's take a look at it. they googled it. this is serious madeira. jason: and they are going to sell it. summit --y sampled some of it.
other thing reported is there was some bourbon and there. you can't go wrong. it will be a day great christmas party. wine sot's a fortified it doesn't go bad. many thanks to jason kelly. you can listen to him on business week on bloomberg radio from 2:00 until 5:00 eastern time. while peoplerrives pull out of davos in the desert. this is bloomberg. ♪
underwriting numbers from goldman sachs. they did particularly well. they are obviously competing for business. why would they want to go public? david: they will sooner or later. wantly, it's because they to cash out. alix: that makes a good point. softbank'snked by $100 billion, which is backed by saudi arabia. david: well done. let's turn to saudi arabia. i didn't know where you were going. joined by the projects for middle east and south africa. aslain what playing out secretary mike pompeo is over there. he is trying to find a
diplomatic solution to the crisis so the u.s. and saudi arabia relationship does not move in a direction no one wants. the effort here is to find an explanation to the disappearance and what happened. this is all in a matter that avoids putting everybody in a corner. this, at a way out of way that signals that something has happened, but in a manner that doesn't create a diplomatic crisis here. david: is the path becoming clear from your point of view? reporting is there will be an internal expert -- investigation. the king says we are not responsible. saya reports say they may
yes he was killed in the consulate, but it was a mistake. ayham: absolutely. i don't think the senior leadership in saudi arabia is going to say they are associated with this at all. we are moving in a direction with the saudi's where they may have to admit that they were involved at some level. the disappearance, they will blame it on an operation that was unauthorized. this has to be investigated. i think that's why mike pompeo was there, to make sure everyone is on the same page. you look at direct investment that has been at the for 2030,s vision does that change the situation? is he going to be more aggressive? ayham: we have a real diplomatic
crisis. this is the first time we've faced challenges when it comes to saudi arabia. i don't think there is one way to interpret what they are doing. they are trying to constrain freedoms of home. they are trying to liberalize economically. tolerance than we have to except over here. the challenge is how do you attract foreign investors to saudi arabia with all of the negative media headlines around the kingdom? that is something they have to deal with in a more strategic way to avoid putting themselves and difficult positions. david: that's the question. can they do both of those things at the same time? can they take various actions?
we had the instance with the prime minister of lebanon who was detained and kidnapped. there have been a series of incidents before we get to yemen. ayham: when it comes to foreign borders, withits its foreign relationships, lebanon is one example, you need an adjustment. we will probably get that over the long term. david: thanks so very much. alix: more on bank earnings. morgan stanley and goldman sachs are crushing it. this is bloomberg. ♪
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they trump estimates. what is the outlook? bank ceos lead saudi arabia. the latest to pull out of the future investment initiative. pompeo arrives. paul allen, the cofounder of microsoft eyes. he leaves behind a legacy of sports, a, and innovation. glad you mentioned jimi hendrix. he had a jimi hendrix guitar. he was a real renaissance man. he revolutionized not just gates, hewith bill gave us all the precursor to the iphone. he revolutionized the world of media. alix: i forgot that he controlled that in 98. he owned it ticketmaster before was sold to the home shopping
network. he was a profound a man who did a lot with his fortune. alix: a big loss for sports, space, across the board. david: we are going to be told -- joined by jonathan klein. we are going to talk about netflix and streaming. alix: morgan stanley and goldman sachs have gains after earnings and helped the s&p. it's up 15 points. euro-dollar is flat. italy gets a budget and they approve it for next year. it would be horrible if the eu actually approved it. that is not reflected in the fx market. the 10 year yield here is up by 1%. what will the takedown be? brent crude is down .6%.
you have mr. pompeo over in riyadh. thirdsthey came out with quarter results. to take it through us is allison williams. on the phone is gerard cassidy. let's start with you. we haven't heard from you. what you take from all of these earnings. gerard: what we saw today stanleythe two morgan numbers were better and more broad-based. they had decent to good numbers. morgan stanley was better. they were strong for shareholders. than fiveve had more seconds to dig through the numbers. what are the details we noticed? alison: strength in the equity business, we've been wondering if that continue. we have an announcement from uber.
alix: the journal is reporting they might want to go public. morgan stanley and goldman sachs are pushing that. alison: the question is we have had a tougher start with equity prices volatility. cycle,here we are in the could that push more companies to go public? could we get strength in those fees? speaking broadly, numbers are coming in and line. due tore a few surprises a shortfall it goldman sachs or the client focused, getting more activity with the corporate clients. perhaps that hurt them the score. the economy is supporting the traditional lending business. we have had a solid credit and good cost control. banks,owth for the big
can we get some trading revenue going forward due to volatility? can we see strength? m&a is strong this quarter. that was an area of weakness. we could get that pushed in the fourth quarter. david: where is the great performance coming from? is it increased risk? you see performance, even bank of america earnings were record increases. gerard: the group as a whole is not taking anywhere the risk that they took prior to the financial crisis. that's because the regulations have changed so dramatically. it limits their ability to take excessive risk. quarter,aw in this equity capital markets are stronger for all of these banks
against last year. there has been a strong ipo market. the area where we saw weakness was in trading. on the banks traded except citigroup. underwriting was weaker. the equities side was very strong. they are not taking the excessive risk. for goldman sachs, they were down sequentially 53 million. when it comes to going forward it, who is in best position in the new environment? gerard: is the universal bank model. you touched on the tank america numbers. that is mainly due to their traditional commercial lending
and consumer lending products. when we go forward, you are looking at jpmorgan and a citigroup as better positioned to capture more growth because of the diversity of revenue. goldman sachs is more concentrated, especially goldman sachs. that's an issue david solomon is going to address, how do we diversify the revenue growth? david: that's a lot of good news for all the major banks. how much of this is because of tax cuts? we just had a report of an increased federal budget deficit. how much are we financing the baxter tax cuts? alison: it's been on the bottom line. goldman is operating year to date above its range. all the banks show a big leg up. the other part of it is we of
been disappointed with the low growth side. there has not been investment as we would expect. bank of america talked about the cash getting back through rate patriots and. we get a lot of different companies. atsaw some relative strength goldman and morgan stanley. that is more their type of business. banks, wer all the will turn toward the election. that is what's next. we did it get the big pop a couple of years ago. we are anticipating good news this year. what's going to happen this time around? is there risk to the good news? shadow banking is something we heard a lot about this quarter. since the crisis with the
regulation, is risk being pushed into shadow banking. we are hearing more about this heading into the election. yes, thanksswer is a lot. thank you as well. joining us from philadelphia, it's good to see you jason. i think this is an interesting environment. this is an ongoing economic expansion, one that is inching toward the federal reserve being on the side of being neutral to rates.ven in that cycle, the financial industry does a little bit better because of the spread of borrowing on the short side and lending on the long side.
that tends to be better for the more commercially oriented banks. it's less good for the investment oriented. about been talking goldman sachs and morgan stanley, they are more on the investment banking side. they won't feel much of that tailwind. they are tied to the capital markets. i think we are ok on banks. valuations a reasonably good. they are the flip side of the tech versus financials trade going on for the majority of the year. they are favored on near-term windsas that tech trade down a little bit and deflates. alix: it raises a question of the profitability. you can see why. these are sales and earnings estimates for the s&p. if this is as good as we are going to get, where do you want
to the investing? jason: it's an interesting time. we are on the back part of the economic cycle. it looks like a peek at this point, it can last for a considerable amount of time. we are looking for the excesses that creep into the system. we think the expansion could continue. you want to stay with equities. you want to build in some defense along the way. we are not that dramatic. we don't have that much economic access in the system. we will continue along a trajectory like this for a prolonged time. you will want broad allocation of stocks. alix: jason will be sticking with us. what happens when financials tighten? this is bloomberg. ♪
taylor: this is your business flash. uber reportedly has received proposals up to $120 billion in an ipo. goldman sachs and morgan stanley's deliver the valuation proposal last month. the price tag is more than general motors, ford, and chrysler combined. growth nextcts year. of the largest retailer said it is drawing in more digital customers against amazon. sales grew 3%. that would be the fastest pace since 2008. johnson & johnson beat
estimates. they raised the profit forecast for the year. they beat the average analyst estimate. that's your bloomberg business flash. alix: financial conditions have tightened last week. then furman pointed out market just did it for them. the 10 basis point margin is equivalent to a 25% increase in the rate. inflation is on the downside. hold off for now. you can see those conditions on the right side of the chart. with us is jason. hike, real yields are lower and they get a lot of freedom in the markets. that's changing. jason: i think you are right on this. the fed has changed the paradigm a little bit from a an easier
paradigm to one where markets aren't sure where they are going. they are vague in the communication. rates continue to inch up. what that tends to look like is the later stage of the economic cycle. the fed is tightening monetary policy enough that we start to question if it's really easy anymore. maybe it's inching toward being tight. you will eventually be doing too much. stayink it's better to within that framework. that we are in the late stage of the economic cycle. equity, youto your shift the portfolio to a different stance. that means more stable businesses, companies with more
consistent earnings. that means consumer staples or even atare, maybe utilities of all things. just to stabilize the portfolio and keep yourself in a good position. does,, yoururn portfolio where's that better. david: what about the fiscal side. we had numbers about the budget deficit and will continue to keep growing. how does that limit the optionality for the fed it? that's much't think of a deal right now. the main reason is our total debt balance at the federal level is still not in that upper limit where we tend to run into issues. largest is the world's reserve in trading currency.
we get more leeway than other countries. having said that, budget deficits are not something you want to sustain forever. you will eventually want to contain your spending. it's better to do that sooner than later. to have that be something we get in place now rather than later, it will make the path sooner -- smoother later on it. to tune intoforget balance of power. there is such a thing as a commission for a responsible federal budget. that's at noon eastern time. at some point, they do matter. alix: you pointed out this chart, the growth for vision might be over a little bit versus the rest of the world.
conversation, the the u.s. is coming down to the rest of the world. a budget deficit doesn't help that. that's going to be higher interest payments on the that. when it gets up to 5%, it becomes crushing at some point. common up, ibm has revealed his latest crowd -- cloud strategy. that's coming up next. this is bloomberg. ♪
david: it's time for the bottom line, three companies worth watching. volvo trucks came out with an announcement. there is a problem with the missions devices. it will affect the results. it has to do with nitrous oxide. they don't keep it out of the atmosphere. that's the worst gas you can have. shares were down 3.3 quarters
percent. that's not good. walmart,e good it is u.s. iscast for the going to be 3%. that's pretty solid. since the fastest pace 2008. they can benefit from the closing of sears stores. commerce sales could comment up 35%. these are some solid numbers coming out. david: that's interesting. ibmfor our third story, announces earnings today. they unveiled three new offerings to help companies unleash the full potential of data and artificial intelligence on the cloud in the most secure way possible. this is the senior vice president of research.
give us a snapshot on this. this is where revenues come from. you are different from amazon and microsoft. it's more the services. cloudbelieve the world of is a hybrid multi-cloud world. it has to be open and secure. there will be private and public clouds. every company is going to offer multiple clouds. 90% of companies will be on clouds. you need offerings that go across the cloud and across the private and public world. that's the nature. david: is that overly simplistic? >> this allows you to deploy your applications on any cloud. we have our own public cloud.
all of the open technology of the world now. alix: we look at the infrastructure of cloud, ibm is far behind amazon and microsoft. is this a defensive move? >> offensive. 20% of thely about journey into cloud. it is because we are offering multiple clouds. they need to go across these clouds in a way that they can manage. we believe in accelerates the option of clouds and allows them to do it for mission-critical applications. david: who is your competition? is amazon provide this? >> the big public cloud players don't provide these all. bere are others who might
coming after this. it's minor. and providers are waking up to hybrid. we have a leg up in terms of the technology. david: is this a service? >> as clients would like. if you want to run it on your premise, you pay a software. i think of ibm, i don't think of cloud. >> we are up there. we are over $18 billion. alix: i think old-school blue-chip. they provide services. how do you change that? >> you got to be looking at what the clients are doing. like lloyd's.ks when you look at american it is doing all of
that for the clients. we don't bring a service like surge with our name on it. enterprises bring technology to customers directly. david: how big is this market? i'm talking about the cloud translator. >> i believe that's a fundamental problem for multi-cloud. the ultimate market is going to be over $1 trillion in the next three years. if you look at that growing in double digits and it's a critical enabler of the market, it allows off to claim our share of that market. it's a highly accelerating market. today, it's total today. david: let's driving it? is it artificial intelligence?
>> ai is the biggest ever. if we look at the data being produced, only 20% of data gets value. deriving value from the data requires cloud and artificial intelligence. you can't have enough people running analytics. that's the single biggest driver of cloud computing. alix: was the biggest risk? >> cybersecurity. it's reached the point where it's not just a hacker, it's organized crime. the amount of impact is $2 trillion today we believe. 80% of that is driven by organized crime. ,n order to get away from that you've got to integrate across all of these. having an open security
platform, that allows you to go across multiple clouds and leverages ai to unlock value. that's the fundamental we are after. david: this is the day after paul allen passed away. allen,ild gates and paul this is a big picture capitalists about his contribution to artificial intelligence. >> he hired one of my friends, one of the best people in ai. we went to school together. he had about these excellent people working on research to be open for positive benefits of humanity. i wish there were more people who would support ai in this manner. was for an open
aisuit of alix: paul allen is a god figure in our industry. going from there to his own thought it -- philanthropic work in his founding of those things, he was for dancing the science in bringing this vision of computing home. the people he hired in the work he has done is certainly great work. alix: is there another paul allen out there? >> on 100% sure. when you look at the top inversities and the work montreal or toronto or m.i.t., a am hesitanteople, i to put names on the table. david: will the next paul allen work at ibm? >> absolutely.
we need researchers who win awards and do encryption and computing. they do wonderful work. alix: thank you so much. it was great to get your perspective. markets, morgan stanley and goldman sachs are splitting the market. around the highs of the session. italian equities are up 1.3%. there is a budget deal in parliament over in italy. what happened to the european commission? euro-dollar goes nowhere. sterling continues its climb higher because wages came in and did it really well. expectations did not increase. you still have the brexit risk.
crude is up by .6%. the story remains of the tightening financial condition and the real yield is going higher. david: and there is the geopolitical risk of saudi arabia. those have ramifications through the market. bloomberg's gulf economy reporter. thank you very much for being with us. explain was going on with mike pompeo and the king. secretary pompeo arrived in riyadh and he had a meeting with the king. and the foreign minister of saudi arabia as well as the ambassador of saudi in the u.s. the brother of the prints. -- prince. we know this meeting was very quick. agencies as --
estimated it was around 15 minutes. pompeo will stay there until dinner tonight and tomorrow he is scheduled to meet with officials in turkey. far nothing has been discussed about if they agreed on anything and they did not put on what they discussed and what they will do. there's reporting in the united states that there will be an internal investigation and it may proceed very quickly. we may have an answer from that internal saudi investigation about what happened very quickly. is that consistent with what you are hearing in riyadh? >> basically it seems it's going this way. the entire meeting came after president trump floated this theory whichillers was met with ridicule from lawmakers in the u.s. -- talks between surrogate
turkey and saudi arabia, with as say it's coming plausible story and a united story from all sides. alix: what's the reaction to companies pulling out of the davos in the desert? what's the reaction in the saudi n government when the whole point was to open investment? ? weird. so far the organizers are talking about the conference that's going ahead. many are saying basically they are surprised that so many people have decided to pull out of it. the website took out all of the names of the people who were supposed to be there. it seems they are still insisting on holding it and we really don't know if this will be canceled last-minute. david: thank you.
now it's time to find out what's going on outside the business world. taylor riggs is here. >> u.s. defense secretary james mattis is laying down tensions with beijing. he told reporters that the u.s. is not out to contain china and was cooperating whenever possible. he said there would be time when other'sld step on each toes. china canceled high-level security talks with matus that were set for this month. theresa may will address european leaders on brexit before their dinner tomorrow. over theke down weekend and one eu official says things are trickier than they had expected. the stumbling block is what happens to the irish border after the split. bill gates says personal computing would not have existed without paul allen. the billionaire cofounder of microsoft died yesterday from
complications of non-hodgkin's lymphoma. he was 65. allen stepped down from microsoft in 1963 for health reasons. global news 24 hours a day on air and at tictoc on twitter powered by more than 2700 journalists and analysts in over 120 countries. i'm taylor riggs. this is bloomberg. david: one of the things we might not have but for paul allen's work with bill gates is --flix will be returning today. we are joined by jonathan klein. great to have you. you know streaming well. give us a preview of netflix. they disappointed the street last quarter. they took their estimates down. where they headed? -- where are they headed?
>> netflix has to worry about becoming the aol of ott. popularized streaming video the way aol popularized surfing the web. as soon as people figured out how to surf the web, aol wasn't needed anymore. netflix may not be that defensible. it's a library of movies and tv shows and originals. hbo has that. pbs all access has that. disney is yanking all of its content away from netflix and is launching their own streaming service. so what does netflix have left? they have international growth that has really driven their stock price the last couple of years but comcast just bought comcasth gives international growth possibilities with premium growth content as well. for netflix are questionable. then there's the technological advantage that netflix had.
they were playing moneyball for media. a were into artificial intelligence way before anybody else. now ai is very accessible. it's cheaper, it's faster and it's taking a leap beyond where netflix started. so they may have to catch up in the realm of ai. david: we just have some of the competitors. espn and disney. walmart says they are going to start going into the business as well. at&t. which can haven you not only watch shows but by things as you watch them. david: this is partly a result of the enormous success of netflix. particularly raising capital. does that give them an advantage? they are playing with capital that is cheaper than what disney is playing with. they are able to amass the huge treasure trove of content for cheaper dollars and disney. >> the question is how long can netflix devalued as a startup
against the traditional media companies that still are expected to show more traditional earnings trajectories and the like? that has been the tough thing for time warner with hbo. now that they are part of at&t does that problem go away or is it exacerbated? that has been netflix's big advantage all along. alix: having been the former head of cnn and looking at content, what is the content upside for netflix? where did they win where the other guys can't? >> it has been sheer volume of until now. but volume is easy to match. look at the volume that disney can deliver with the star wars franchise and the avengers and the x-men. avatar. they just bought the entire fox entertainment library. the volume advantage goes away. it has been target ability. no one has been better than netflix at telling you what you should be watching next just the
way amazon uses ai to tell you to buy this toothbrush when you just bought that toothpaste. netflix does the same thing with your favorite british crime drama. the others are quickly catching up to that. the company i run powers over the top services to enable them to tell you what you ought to watch and what you would like. david: what is the role of the brand loyalty in all of this? you came out of business at cnn. that was terribly important to cnn. does netflix have an advantage because there are people who used to streaming their video through netflix? >> trust and loyalty are very important in the news business. not personal loyalty. in the entertainment business it's what have you done for me lately and by lately i mean in the last 10 seconds. you got facebook users and twitter and snapchat users and they just want the instant gratification. everyone knows there is something better right around the corner.
contents pressure on creators and distributors to keep that consumer happy. are a lot of horses either in the race or about to get in the race. who would you back among the horses? amazon has a multifaceted business. the video is only part of their business. they can cross subsidize. any entertainment company that can also get you to buy products at the same moment has a huge advantage. i also would not ignore apple which has been successful at everything they've done. and they are getting heavily into the streaming business in ways that we don't really even fully understand yet. alix: which is interesting on the content level. amazon prime has been overlooked for their original content versus netflix. amazon's end goal is to make you buy stuff on amazon. the end goal for apple would be the same. keep you in the universe. what is the end goal for at&t time warner?
selling subscriptions, selling advertising for some of the businesses. they all want to keep you in their universe moving around. eyeballsselling your and they are trying to sell you on buying subscriptions more than ever. alix: is that a harder end goal? it is moreuse fungible. that is hit driven. if you have game of thrones you are hot today. if you lose game of thrones what are you doing to replace it? quickly they will leave. david: i used to work for bob iger. it's not just the in parks and the cruise ships and the princess memorabilia. there's an ecosystem with disney. >> keep your family here. we are all you need. coming up, an exclusive
>> this is bloomberg daybreak. i'm taylor riggs. el-erian, mohamed bloomberg opinion columnist. we are going to erik schatzker who is joined by barry sternlicht, starwood capital ceo. erik: it's always great to have barry sternlicht here at bloomberg. you are in the real estate business. let's talk about real estate in the context of rates.
rate says everybody nervous. but in real estate rates aren't supposed to be that bad because if the economy is growing and it is, you are supposed to be able to raise rents. tell us about the balance between the rising financing cost in the pricing power. >> good morning. you dove in on the number one issue for all investors not just real estate. the direction of rates and competition for capital. if you had your choice you certainly would have higher rent growth. it is more important than interest rates. if you think rents are going to go up 20% or 30% whether the 10 year goes from three to three and a half dozen matter. but on the margin for levered they certainly should impact prices. there's two ways rates will go
up. one is economic growth. if there is economic growth, job growth, wage growth, i really like that scenario for real estate. especially for things like apartments because people will have more money in their bank accounts. pay more be able to rent. businesses are expanding. industrial is being absorbed by companies. if rates rise because it's a buyer strike and because we have become so undisciplined in our spend at the national level that we are printing more paper than there are buyers for, that is negative. what you saw last week was rates aved very quickly into almost vacuum. probably a bit destabilized. the italian bond meltdown. and signs of inflation. economy here that would overheat and go negative. i think also the yield curve. the fact that short rates and long rates were flattening out to me is a sign that i'm not
thinking this is the only time that doesn't signal a slowdown. i think this is likely to see a slowdown not immediately. it should be because all of the spending. it will roll over in 2020. so on balance right now clearly we have a growing economy. rising revenues, the expanding bottom line. >> with a few holes. you think we are going to have a fiscal problem? >> i think our largest hans arrested the chinese and we are not exactly penpals. i think there will be a competition for capital. the deficit is rising rapidly. thank god the economy is growing that onyou can't spend top of a tax cut every day. i think in general the economy and the real estate markets are very sound. people are nervous about runaway rates. of goode thing is sort for real estate in a strange way
because labor costs are rising. commodity prices are rising. steel prices rose dramatically with the tariffs. the cost of new construction, this doesn't work anymore. that's good for existing real estate. >> does that make you a seller? talents,d say there's -- balance -- a buyer in the u.s. and a seller in europe. situation scares me on rates and our policies towards our international partners worry me about buyers for our bonds. the deficit will end up close to a trillion dollars next year if not higher. 800 billion this year. and we are in a boom time. this is really unusual. so we are really excited. we have 3.5% unemployment but it's coming at a price. >> you are one of the first people i have heard to actually worry.
the chinese are going to exercise the nuclear option. nuclear option would be stop buying u.s. treasuries or lower their stocks. then it's only domestic people that could really buy. we saw some purchases by belgium in years past. that wasn't the belgians. it was the chinese through belgium. i think they were a bigger force in the marketplace. they will have less dollars if there's less exports. >> you sold a lot of property in the last six months. probably $5 billion or $6 billion worth of assets in the last six months. >> will you do that again in the last -- next six months? >> no. we were weeding out the portfolio. second largest owner of apartments. we sold a couple billion apartments and a big office portfolio on the west coast to an asian buyer. we sold a hotel company we built in the u.k. to a french buyer. we have sold all of our scandinavian exposure.
we are weeding through the portfolio. kind of just offense and defense. -- offensive defense. we have hit our target performance. >> is that also because there are some undisciplined buyers in the market? buyers are shifting. the chinese obviously have left the table. we had a hotel we were selling to the chinese. and it fell out because they ss off thet to pi chinese government even though the money was coming from another area. you have seen the southeast asians, the singaporeans and money from hong kong. middle eastern investors are kind of showing up. and i think you are seeing a return of the high net worth to the markets which are looking at the inflation pressures on the horizon and thinking real estate
is a good place to park capital. on the other hand you do have a lot of undisciplined money. hedge funds that are maybe having trouble with their core business doing some crazy things. >> why buy in europe with the overhang of brexit? >> i didn't say we were buying in the u.k. our focus in europe is sort of continental europe. we have big investors in norway and sweden. german just topped by a property company. we just took control of a german property developer. why europe? yields in europe are very close to u.s. yields. interest rates are substantially lower. and the tenure german bond was like 60 basis points. so the spread between yields and property is wider. and likely to stay wider. there is less pressure on rates in europe than here.
europe is think attractive. and it's harder to add supply in europe. >> are you worried about italy? >> yes and no. i'm worried about the you -- the eu. i'm worried the germans have to basically be the net supporter. the british and french have been the net supplier and i wonder how long this will go on. you have to put that against took as situation which turn for the worse. i am generally a little nervous about europe right now on a political level. the largest alternative asset managers are putting a big emphasis on three things. scale, diversification and permanent capital. bigger you arehe the fewer competitors you have. diversification because you want to be able to win the wallet share of the biggest institutions and permanent capital because you can hold assets to recycle and create
fixed income substitutes. you've got a permanent capital vehicle. but you don't have the scale and you don't have the diversification. >> we are 64 billion. would we likeing to be another alternative businesses, yes. private equity, venture. and credit. we sort of are in the credit business and our public company just bought an energy lending business. and we are looking at other -- i hope it was a good deal. we will see. analysts got confused because we are doing energy lending. but we want to withstand any be times there may not to make real estate loans and there are times to do energy loans. they are not related to each other. >> you want to be in corporate private equity. >> we are starting with venture.
there's all this real estate technology that we can apply to .ur own portfolio for example, ways to handle security deposits in apartments that are internet-enabled. there's all kinds of crazy companies that are doing things. and defensive. we want to know how we can be heard and helped with new technologies in the property space. >> how do you saw those other problems? -- solve those other problems? over 400 investors and we do manage 64 billion. we have a fairly sizable renewable energy business. returns have been really good. we have an oil and gas business. kind of small but very successful. obviously we have a hotel business. have seriously are you
thinking about a merger? >> we get approached all the time. our last fund was -- i think it's 11. we really have done 14 funds. that's why i hesitated. we had no problem raising capital. 7.5 billion. my partners are like, we don't want more money. we are not an asset gadara. there will be times when we shouldn't invest in being public and you are really talking public companies, they have to keep up. they have the lianting problem. every time they harvest a deal they have to match at the next year. you want to sell and harvest everyone edits time. i don't really want the pressure of sea driven growth. i would rather just do well for our clients overlong period of time and sell when it's the
right time to sell. what about selling agp stake? >> i have a public company. andave sold 20% of our firm that has allowed the company to have a balance sheet so we went out and bought a company management who manages the 60,000 apartments now and we are looking at buying other businesses which basically including starting another business. and we will use that money to seed a new article from the parent. and not because we need to. i like being a sharpshooter. debt is nestedur helps our equity business. in real estate. i think having other ways to deploy capital is a good thing. right now we want to see the
midterms. we want to see brexit. we would like to see may some fashion of equilibrium in rates. >> that is a very nice place to end our conversation. barry sternlicht, ceo of starwood capital. worried about those rising rates. morgan stanley call happening right now. the cfo saying maybe we will see investors get nervous. maybe in investment banking when it comes to geopolitical risk. watching banks as it heads into the open. mohamed el-erian will be joining jonathan ferro. this is bloomberg. ♪
coming up, fund managers increasingly bearish. showing global growth expectations. the lowest since 2008. the focus turned to take. netflix the first bank stock out of the gate. reportedly receiving monster ipo proposals valued the company at $120 billion. that proposalnd set to be goldman sachs and morgan stanley. euro-dollar 115.89. futures of the big this morning ahead of the open with investors turning their attention to the next batch of corporate earnings. >> earnings growth and revenue growth are slow. >> scarily high. >>