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Speaker 1: This is Bloomberg Surveillance. We have been using the rally

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Speaker 1: that we've seen since the loads of February to lighten

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Speaker 1: up on some of the more risky investments. I think

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Speaker 1: the best measure of how the economy is performing, you know,

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Speaker 1: gives us the best sense of what's going to just jobs,

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Speaker 1: because we can measure jobs whether you're talking about breakfast,

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Speaker 1: whether it's the next you to drop. Across the Middle East,

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Speaker 1: there's just a lot of churn gire politically. It's going

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Speaker 1: to make life more difficult economically. Bloomberg Surveillance your link

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Speaker 1: to the world of economics, finance, and investment on Bloomberg Radio.

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Speaker 1: Good morning everyone, Michael McKee and Tom Keith, Bloomberg Surveillance worldwide.

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Speaker 1: Good morning all of you in Europe in this hour,

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Speaker 1: all of a sudden, our most important interview of the day,

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Speaker 1: David Harrow, International investor out of Chicago, the first place Cubs.

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Speaker 1: David Harrow looking at the dilution and shares. We'll look

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Speaker 1: at that for a moment of course. Bayern mon Santo

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Speaker 1: leading headlines today. Coming up. David Harrow on international UH

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Speaker 1: investment futures. Well, they're flat. I'm gonna call it Dow

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Speaker 1: futures negative one. Not much going on there, watching commodities

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Speaker 1: with a modest implosion and commodities off of Friday Bloomer surveillance.

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Speaker 1: This morning brought you by kone Resnik Accounting, Tacks, Advisory,

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Speaker 1: look Ahead, Gain Insight, Imagine More. The professionals at Cone

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Speaker 1: resident can help your business breaks and find out more

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Speaker 1: at Cone Resnick dot com. Michael A. Merger. We spoke

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Speaker 1: to the chief executive officer Chairman of the management board

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Speaker 1: a bear earlier. I took two aspirin to prepare for

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Speaker 1: this interview yet and they just solicited yeah. Many Cento

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Speaker 1: has not responsed well, they said earlier they didn't like it,

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Speaker 1: but then now the details are out, we haven't had

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Speaker 1: a response. Thank you to the teams at City Group

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Speaker 1: in Barrenberg Capital for their smart research this morning on

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Speaker 1: is looking for higher prices. What a perfect time to

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Speaker 1: speak to David Harrow, who does international investment and has

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Speaker 1: been doing it large cap international Investment with Harris Associas. David,

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Speaker 1: Good morning, Good morning, Tom. How are you well. I'm

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Speaker 1: very good. I've done a clinic earlier. Odd this all

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Speaker 1: cash deal which is Bologny. They have to go out

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Speaker 1: to their shareholders and do something in the form of

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Speaker 1: offer with share dilution, which frankly goes over to your

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Speaker 1: ownership of Swiss banks and French banks. Do you just

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Speaker 1: assume Europe is going to be on one big cash

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Speaker 1: call asking shareholders for for for issuing new shares for cash.

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Speaker 1: Is that the Harold plan for the next twenty four months? Uh?

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Speaker 1: I sure hope not. Uh. In this particular case, they

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Speaker 1: think they could buy a good company at a reasonable price,

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Speaker 1: and therefore, yes, you're exactly right. They said it's a

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Speaker 1: cash issue, but they're gonna have to get the cash

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Speaker 1: from somewhere and there will be a share placement. And

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Speaker 1: I think this is why the stockets reacting the way

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Speaker 1: it is. What about credit sweets, I mean the banking

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Speaker 1: industry beleaguer unit credit. Maybe the CEO is out in

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Speaker 1: the next couple of days. I just mentioned Deutsche Bank

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Speaker 1: with a challenging chart to say the least. Do you

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Speaker 1: assume a cash call by the Swiss banks? Yeah? I

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Speaker 1: would not expect either Ubs or Credit Suites, the two

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Speaker 1: big huge banks in Switzerland to need cash. They have

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Speaker 1: done this already. They should be fine. If you look

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Speaker 1: at their leverage ratios. If you look at their capital ratios,

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Speaker 1: they're actually ahead of where they need to be in seventeen.

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Speaker 1: So in both in those cases, I do not believe

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Speaker 1: they need cash. They're well capitalized. In the case of

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Speaker 1: Deutsche Bank is a different story. But I think overall,

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Speaker 1: excuse me, if you look at the European banking scenery,

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Speaker 1: for the most part, the big non kind of co

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Speaker 1: op government involved banks are sitting pretty strongly in terms

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Speaker 1: of capital position. It's some of these smaller banks, these

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Speaker 1: coop kind of non for profit entities that seem to

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Speaker 1: need still need a more cash. Well, they may not

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Speaker 1: need cash, but they do need profits. Um, what say

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Speaker 1: you to President CEO t Jm's plans get out of

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Speaker 1: invested banking and go heavily into wealth management. Well, he's

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Speaker 1: not going to get out of investment banking completely. He's

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Speaker 1: gonna try to keep kind of the lighter capital service

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Speaker 1: arm of that. And what they what he's noticed that

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Speaker 1: he's almost been at the bank now a year. He

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Speaker 1: hasn't been there, he's probably been there about ten eleven

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Speaker 1: months now that when you look at the capital deployment

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Speaker 1: of credit suis far too much of it was focused

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Speaker 1: on recycling the free cash into the investment bank where

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Speaker 1: it was not able to earn a through cycle return.

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Speaker 1: And then he looked at his private bank and certain

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Speaker 1: areas like Asia Wealth Management that we're earning great returns

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Speaker 1: where they have critical mass, where they're the leader was

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Speaker 1: being starved of capital. And really what he's doing is

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Speaker 1: turning enough to capital allocations to the trading operations and

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Speaker 1: the areas in the investment bank where they cannot earn

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Speaker 1: that through cycle return, to funnel that over to where

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Speaker 1: there are hungry mouse. Just think of the birds chirping

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Speaker 1: and then ust it's spring here in Chicago, and give

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Speaker 1: those give the host birds some worms. And that's exactly

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Speaker 1: what he's doing. Now, when you do this, it doesn't

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Speaker 1: come without a little bit of friction. There's a lot

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Speaker 1: of people in the investment bank or saying, hey, what's

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Speaker 1: going on here? But this is really the right thing

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Speaker 1: to do is to deploy capital in any business, by

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Speaker 1: the way, in any business, deploy capital where you have

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Speaker 1: the best through cycle return, not where you're earning returns

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Speaker 1: to stay or tomorrow, but through the cycle. Mike, did

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Speaker 1: you notice how Harold got that shameless plug in for

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Speaker 1: it's spring in Chicago. Do you note that both of

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Speaker 1: their baseball teams are in first place? Yeah, and in

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Speaker 1: the Zurich teams, you know, just nothing. And the Cubs

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Speaker 1: have the best record in baseball. Yeah, so that's why

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Speaker 1: you're it's extort. I mean, Harold's like eight days a week.

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Speaker 1: He goes from Ridley Field down to Chemiskey Park that time. David,

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Speaker 1: everybody wants to know your thoughts on Glencore. Remind us

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Speaker 1: when you bought Glencore and why you purchased shares in Glencore. Well,

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Speaker 1: we were a little too early. We bought it in

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Speaker 1: our international portfolios. Now the domestic portfolios and some of

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Speaker 1: the global ones had earlier, but in our international portfolios

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Speaker 1: we bought it in June or July of last year.

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Speaker 1: And the reason why we bought it is the price

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Speaker 1: that dropped completely based on what had happened at Copper.

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Speaker 1: Copper basically went from ten thousand dollars to at a

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Speaker 1: low of four thousand. Today it's at about um and

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Speaker 1: and I think what people were really fearing is that

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Speaker 1: there was just some black hole. This thing's going to

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Speaker 1: get flushed down the drain. When we looked at it,

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Speaker 1: we did our work. We first thing we looked at

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Speaker 1: was their trading operation, which reliably produces say thirty of

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Speaker 1: their ebit uh uh. Now this is they are, in

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Speaker 1: many many cases the top trader of many of these commodities,

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Speaker 1: whether it be some medals, agricultural commodities. So this is

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Speaker 1: a very strong position to be and they're the ones

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Speaker 1: between the producer and the user. Uh. And they know

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Speaker 1: it's not a risk taking, so they buy to facilitate orders.

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Speaker 1: And then then we looked at their other operations, copper,

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Speaker 1: zinc and coal. Now coal is the one we are

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Speaker 1: the most concerned about, but coal, of course is making

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Speaker 1: lots of money, helped by the low Australian dollar. Let

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Speaker 1: me interrupt, if I can just cut the time. I

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Speaker 1: think this is so important, Margaret Capps. Going from sixty

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Speaker 1: eight billion down to twenty seven billion, Okay, we all

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Speaker 1: know that revenues imploded two and thirty three gazillion dollars

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Speaker 1: down to a hundred and seventy one. We all know that.

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Speaker 1: But as you point out, but down the income statement

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Speaker 1: and cash flow has been relatively resilient. That's where a

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Speaker 1: value guy like you comes in. Why are you so

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Speaker 1: lone on this trade? Well, because it's not a good

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Speaker 1: environment for commodity. And what people do is they throw

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Speaker 1: it in with all the other commodity companies and you

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Speaker 1: really can't do that. And this provides an opportunity because

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Speaker 1: each commodity has a different supplying demand curve. They each

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Speaker 1: commodity has a different cost curve. For instance, iron ore

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Speaker 1: has a very flat cost curve, and you know there's

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Speaker 1: three or four producers who could keep producing this stuff

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Speaker 1: at thirty dollars a ton. Copper, which is the biggest

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Speaker 1: commodity that Glencore makes, it's just the opposite. It has

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Speaker 1: extremely steep cost curve. It has slow and steady demand.

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Speaker 1: And by the way, if you believe everyone's going to

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Speaker 1: start buying hybrids and electric cars, those those vehicles who

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Speaker 1: more copper than a regular automobile. But the fact is

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Speaker 1: you have to look at each each company separately. You

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Speaker 1: have to look at where they're exposures. You can't just say, oh,

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Speaker 1: Glencore is in the commodity business. Short and in essence

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Speaker 1: is what happened. You saw these big baskets of businesses

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Speaker 1: and commodities being shortened by those who are against commodities. Well,

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Speaker 1: to us, there's an opportunity in that if when you

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Speaker 1: just have blind selling without looking at what you're selling,

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Speaker 1: it's like getting on a train not knowing where the

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Speaker 1: train is. Well, we've only got a minute before the break,

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Speaker 1: so let me just ask you a quick question. We'll

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Speaker 1: get back to Glencore in a moment. Five years ago

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Speaker 1: they went public at about five dollars a share um

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Speaker 1: now one how long till they get back to what

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Speaker 1: people got into this stock it? Yeah, I I don't

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Speaker 1: believe that's going to happen anytime soon. We believe it

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Speaker 1: is substantially worth more than it is today now. Also

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Speaker 1: note that in September they raised capital at one and

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Speaker 1: to us this was the right thing to do because

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Speaker 1: it gave the balance sheet strength and certainty in this

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Speaker 1: uncertain commodity you don't want. So we're a little bit

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Speaker 1: above that price, but I think it's you know five

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Speaker 1: this sitting and we're not getting there anytime David Harrow.

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Speaker 1: This will continue this discussion in Glencore. To be clear,

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Speaker 1: Glencore off London priced and pence from that five level,

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Speaker 1: and it's very confusing where the decimal point goes there

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Speaker 1: the way the London Stock Exchange does it. All you

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Speaker 1: need to know is it's moved from five on down

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Speaker 1: to one and that gives you this scope and scale

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Speaker 1: of the decline. Will come back from Mr Harrow, not

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Speaker 1: only on Glencore, but maybe we could even touch on

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Speaker 1: a little roast belt politics, which is more than up

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Speaker 1: to speed upon as well. We've covered cup We checked

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Speaker 1: the box of cubs and white socks. Michael, Yeah, you

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Speaker 1: can never talk enough about it. If you can't, that'll

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Speaker 1: be true. We've learned that. Interview after interview after interview,

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Speaker 1: the yield one point eight three futures flat. This morning

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Speaker 1: Checking with Michael got the latest world in the national headlines. Michael,

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Speaker 1: Mike time, thank you very much. A submarine is being

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Speaker 1: used in the search for the black boxes from eagyp

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Speaker 1: the flight eight oh four. The sub from Egypt's Oil

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Speaker 1: Ministry will be at the scene where searchers continue to

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Speaker 1: scour a section of the Mediterranean for wreckage, especially the

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Speaker 1: black boxes. Each of the President continues to caution against speculation,

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Speaker 1: but mounting evidence points to a sudden and dramatic, catastrophic failure.

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Speaker 1: President Obama has lifted the sale of arms to Vietnam.

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Speaker 1: The President made the announcement in Hannoi today to win.

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Speaker 1: Suicide attacks on the southern Yemen city of Aiden left

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Speaker 1: at least forty five army recruits dead. Global News twenty

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Speaker 1: four hours a day, powered by our twenty four hundred

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Speaker 1: journalists and more than a hundred fifty news bureaus around

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Speaker 1: the world. Michael bar My, Tom Michal, thanks so much.

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Speaker 1: Oil sells. Don't want to make a big deal about it,

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Speaker 1: but it's been a trend for a few days. Brand

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Speaker 1: European Oil six the barrel down fifty six cents, West

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Speaker 1: Texas seventy six, Gold down three dollars fifty then, but

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Speaker 1: David Herrow of Harris Associates, Michael McKee and Tom Keane

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Speaker 1: stay with US bird surveillance worldwide. The news update brought

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Speaker 1: to you by Bank of America Mary Lynch is Global

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Speaker 1: Cash Management Solutions, helping you manage, protecting, and invest your

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Speaker 1: global cash. Wherever the road the growth leads. That's the

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Speaker 1: power of Global Connections. Bank of America member. Remember f

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Speaker 1: G I C Global Business News twenty four hours a

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Speaker 1: day at Bloomberg dot Com, the Radio plus Global lapp

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Speaker 1: and on your radio. This is a Bloomberg Business Flash

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Speaker 1: and I'm Karin Moscow. US DOT Index futures they are

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Speaker 1: a little changed this morning. Let's go to the First

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Speaker 1: Word Breaking news desk for today's morning call, and here's

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Speaker 1: Bill Maloney. Good morning Bill, Good morning Karen. US futures

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Speaker 1: have improved since the last time we spoke. Doubt futures

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Speaker 1: now down four points. S and p s are unchanged,

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Speaker 1: and now as the futures are higher by four US

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Speaker 1: ten yeld at one point eight three percent. Taiwan rose

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Speaker 1: two point six percent overnight. That's the most since September,

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Speaker 1: helped by apples pliers, while up markets remain lower, led

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Speaker 1: by two point three percent declines in Italy. On the

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Speaker 1: US economic front, FEDS Williams said he expects GDP growth

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Speaker 1: of about two percent. Said two to three sixteen rate

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Speaker 1: hikes three to four and twenty seventeen is about right

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Speaker 1: market US Manufacturing p m I. In dealing THEWS Bear

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Speaker 1: offered to buy him on Santo for a hundred and

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Speaker 1: twenty two dollars a share in cash. Tribute Publishing rejected

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Speaker 1: revised Genett takeover proposal, and Aria's Capital by American Capital

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Speaker 1: for three point four billion or fourteen ninety five a share.

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Speaker 1: Finally some of your wall sheet upgrades and downgrades at

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Speaker 1: Bank of America, Staples, Allegheny Technologies, and al CoA all

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Speaker 1: raised to buy Universal Display, raised to buy A Coleman Sachs,

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Speaker 1: Mosaic cuts reduced at HSBC, enabled Midstream, raised OVOD, h JP,

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Speaker 1: Morgan and US Silica raised out perform at r b C.

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Speaker 1: And that's your Bloomberg first Word Morning call for Monday,

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Speaker 1: two thousand and sixteen. Thanks building your live breaking news

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Speaker 1: over your Bloomberg type squawk go in your terminal. That's

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Speaker 1: s U U A w K go and it's a

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Speaker 1: Bloomberg business flash, Tom and Mike Karen, thanks so much.

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Speaker 1: Bloomberg Surveillance this morning and brought you by Investco. Do

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Speaker 1: the day's headlines have you searching for more investment ideas?

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Speaker 1: Investco's experts can help find out the latest thought leadership

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Speaker 1: at the Investco block. Visit investco dot com slash us

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Speaker 1: to subscribe. I n V s CEO investco dot com

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Speaker 1: slash us to subscribe. We've been making headlines, having a

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Speaker 1: good time here with David Harrow talking about investment. David,

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Speaker 1: one of the great themes of your Glencore investment is

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Speaker 1: how the top of the income statement rolls over, but

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Speaker 1: the bottom of it down the income statement and in

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Speaker 1: free cash well does not or doesn't roll over as

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Speaker 1: much nearly as much. Can The same thing we said

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Speaker 1: in banking about the trading persistency of cash flows and

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Speaker 1: mining being asset management is there is there a legitimate

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Speaker 1: underpricing the asset management right now? Yeah? I think there is.

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Speaker 1: I mean, we are in a cycle where equities globally

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Speaker 1: been a little stagnant over the years. We are in

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Speaker 1: a low interest rate environment. If your Swiss space, you've

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Speaker 1: been in a strong Swiss franc based environment. So all

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Speaker 1: these things as headwinds to kind of mute what's happening

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Speaker 1: with some of these asset management businesses. And so we

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Speaker 1: take over time. Equity markets go up anywhere from seven

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Speaker 1: eight nine percent a year through time. Of course, it

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Speaker 1: depends your basis where you start, and that no money

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Speaker 1: comes in. So when you add those two things together,

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Speaker 1: you generally get a good mid to high single digit

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Speaker 1: revenue growth even with the pressures were seen on feest today.

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Speaker 1: So this is a good business to being. You don't

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Speaker 1: want to overpay for anything, including this. But it's a

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Speaker 1: good business to be in. And and yet a lot

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Speaker 1: of these companies have been ext really stignant. We've keep

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Speaker 1: increasing our exposures, prices stay weak and low, because when

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Speaker 1: global equities do pick up and Answest rates do perk up,

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Speaker 1: these asset managical companies will do much better. You uniquely

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Speaker 1: positioned maybe to answer this question because you guys had

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Speaker 1: a very rough year last year, probably Glencore being the

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Speaker 1: biggest reason. But when somebody says to you, why do

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Speaker 1: I want an active manager? Now, what do you say, Well,

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Speaker 1: you want a little bit of everything. When you're building

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Speaker 1: your wealth portfolio, you should have quality active managers. You

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Speaker 1: should have probably some some index funds as well. But

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Speaker 1: what what happens is we can demonstrate that some active

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Speaker 1: managers have all performed over the medium and long term.

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Speaker 1: Passive investment just simply puts money into stocks because they're there,

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Speaker 1: because they're part of an index, because they are a

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Speaker 1: certain size or in a certain region. Whereas active management,

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Speaker 1: if you find an active manager that has a good approach,

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Speaker 1: which is underpinned by a sound philosophy, over the medium

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Speaker 1: and long term, you can significantly outperform if you look

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Speaker 1: at our meetium and long term international numbers, we've outperformed

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Speaker 1: by three or fourner basis points per year over almost

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Speaker 1: twenty four years. So someone would have put their money

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Speaker 1: in the world as the U s funderneath a fund,

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Speaker 1: you would have lost three to four percent a year

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Speaker 1: over twenty four years. So there are certain managers and

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Speaker 1: I think it's predicated on them following their investment philosophy

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Speaker 1: and a discipline fashion. What that means, by the way,

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Speaker 1: is when you're a little bit out of favor over

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Speaker 1: the short term, you don't just switch act. You have

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Speaker 1: to stick to what you do, and in our case,

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Speaker 1: it's valuing businesses and buying them low and selling them

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Speaker 1: there within. That is the idea of what to do

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Speaker 1: with the emerging market right now. You're a large kept guy.

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Speaker 1: Can you buy large cap M? Can you buy Petro Bross? Well,

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Speaker 1: I could buy Petro Bross, but I wouldn't. Uh you know,

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Speaker 1: e M requires Uh, yes, they are the basics. You

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Speaker 1: value cash flow streams and you put a price on

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Speaker 1: those cash flow streams. But an e M often you

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Speaker 1: have a lack of transparency and ownership structure and corporate

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Speaker 1: governance issues. And things that may prevent the cash that

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Speaker 1: has been generated by the business the getting uh down

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Speaker 1: to the shareholders. And so you have to really analyze

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Speaker 1: structure and rules and regulations. In Brazil, Petro Bross this

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Speaker 1: is a perfect example you bring up Tom because here's

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Speaker 1: the company that's strongly influenced by the government, both in

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Speaker 1: terms of the ownership basis, so maybe the government wants

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Speaker 1: a different capital structure than one that's optimal for the

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Speaker 1: other shareholders, and also in rules and regulations. There's price

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Speaker 1: caps on what Petro Bross is able to sell gasoline

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Speaker 1: had in Brazil, so base they lose money on every

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Speaker 1: gallon of gasolene they bump. So when when you have

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Speaker 1: that type of government interference and our view, that is

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Speaker 1: something that we just can't value, we can't handicap, we

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Speaker 1: can't deal with the other emerging market businesses um of

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Speaker 1: course have good exposure to growth and for the right price,

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Speaker 1: will invest in them. In the nineties and we're way

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Speaker 1: overweighting today we're trickling back up again as prices drop.

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Speaker 1: David Thinkings was David Harroll with Harris Associates. That was

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Speaker 1: an interesting like calling Glencore and you know you correctly

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Speaker 1: stated one challenging year for David. But but the three

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Speaker 1: and five year track record that uh, particularly five year

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Speaker 1: track record better than good to say the least, but

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Speaker 1: interesting on the banks and on mining. David Harrol of

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Speaker 1: Harris Associates futures negative one day, futures negative ten the

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Speaker 1: the end. One that's a stronger yen right now dollars

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