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Speaker 1: Broadcasting live to New York, Bloomberg to Washington, d C,

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Speaker 1: Bloomberg to Boston, Bloomberg twelve hundreds to San Francisco, Bloomberg

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Speaker 1: to the country sees Exam Channel one nine and around

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Speaker 1: the globe the Bloomberg Radio plus Bloomberg dot Com. This

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Speaker 1: is Bloomberg Surveillance. Good morning, everybody. At seven thirty on

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Speaker 1: Wall Street. I'm Michael McKee along with Tom Keene and uh,

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Speaker 1: this is Bloomberg Surveillance. We have news out from j

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Speaker 1: P J C. Penny, the latest retailer to report bad news.

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Speaker 1: First quarter adjusted lost per share of thirty two cents.

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Speaker 1: The net sales come in at two point eight one billion.

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Speaker 1: The forecast was for two point nine to billion. Of course,

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Speaker 1: nords from last night reporting disappointed news. Penny shares at

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Speaker 1: the moment are rising, though in the pre market they're

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Speaker 1: up about five per cent. We'll see if that continues. Uh,

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Speaker 1: Nortom shares down sixteen percent. In everybody watching Apple billion

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Speaker 1: dollar investment. Indeed, that's the Uber of China. Giving the

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Speaker 1: Chinese right hailing start up a powerful ally delivers a

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Speaker 1: blow to Uber. They're gonna build up their ride sharing

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Speaker 1: platform US authorities, by the way, investigating more than a

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Speaker 1: dozen companies as part of the bribery scandal down in

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Speaker 1: Brazil involving Petrol bra Uh. They are looking at any

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Speaker 1: company in the US that's been named publicly in that

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Speaker 1: Brazilian investigation, So keep an eye on that. Now to

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Speaker 1: check in with Michael Barr at the latest World and

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Speaker 1: National Headlines Bible. Mike, thank you very much too. Troopers

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Speaker 1: have been relieved of duty following an arrest caught on

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Speaker 1: video in New Hampshire, a show police pummeling a suspect

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Speaker 1: in the high speed chase who appeared to be surrendering.

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Speaker 1: One trooper was with the New Hampshire State Police, the

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Speaker 1: other was with the Massachusetts State Police. The Obama administration

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Speaker 1: is releasing a directive today to US public schools across

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Speaker 1: the nation involving transgender rights. It calls for the schools

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Speaker 1: to allow transgenders students to use bathrooms and locker rooms

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Speaker 1: based on their gender identity, and the statement released by

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Speaker 1: U S Attorney General Loretta Lynch there was no room

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Speaker 1: in our schools for discrimination of any kind, including discrimination

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Speaker 1: against transgender students on the basis of their sex. Hasbell

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Speaker 1: lost top commander in Syria was killed in an explosion

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Speaker 1: near the Damascus International Airport. The depth of fifty year,

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Speaker 1: wrote Mustafa Badredine, is a major blow to the Iran

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Speaker 1: backed Lemonies militant group fighting alongside Syrian president Assad. Global

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

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Speaker 1: four hundred journalists and more than a hundred fifty news

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Speaker 1: bureaus from around the world. I'm Michael Barr, Mike. Thank you, Michael.

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Speaker 1: Time now for the Landrover Parcipani Bloomberg NBC Sports Update

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Speaker 1: CHET Station. Thanks Mike. Last time the Mets faced Clayton

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Speaker 1: Kershaw in LA, they were able to beat the Dodgers

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Speaker 1: as that started last year's postseason. Last night, they did

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Speaker 1: nothing against them, three harmless singles. They struck out thirteen times.

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Speaker 1: Dodgers won five nothing has Monty Grandalla three run home

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Speaker 1: in a four run first inning against part total Glogne.

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Speaker 1: So they slipped the four game series. Yankees took three

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Speaker 1: or four from the slumping Royals. They won seven three

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Speaker 1: is three infielders, Homeward Starling, Castro, d d Gregorious and yes,

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Speaker 1: even Chase Headley raising his average the one ninety four

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Speaker 1: and his ninety feet at bat of the season, Headley

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Speaker 1: got his first extra base hit. Oklahoma City Thunder won

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Speaker 1: two straight in San Antonio. They did not want to

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Speaker 1: have to go back there and try and win a

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Speaker 1: third in a row. They ended the series at home

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Speaker 1: game six, one thirteen to ninety nine. Okay C was

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Speaker 1: up by twenty four at halftime. Kevin Durant scored thirty

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Speaker 1: seven points. Thunder and Warriors in the West Finals starting

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Speaker 1: Monday in Oakland. Stanley Cup playoff St. Louis and San Jose,

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Speaker 1: two teams we've never won the Cup, will face off

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Speaker 1: in the West. Night after the Blues won Game seven

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Speaker 1: by five goals, the Sharks to Game seven from Nashville

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Speaker 1: five nothing. Opening round Players Championship World number one Jason

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Speaker 1: Day tied the course record at saw Glass the night

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Speaker 1: under sixty three two shot lead. With Bloomberg NBC Sports Update,

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Speaker 1: I'm John Stanshi, Thank you John Well. We are looking

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Speaker 1: at j C Penny shares. They have turned around as

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Speaker 1: the company reports a lost down four in the pre

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Speaker 1: market trade. Nordstern remains down by seventeen percent this morning.

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Speaker 1: This is s Bloomberg Surveillance. I'm Michael McKee along with

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Speaker 1: Tom Keene, and we are not looking at a good

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Speaker 1: start to the day. Future is lower across the board,

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Speaker 1: with SMP futures down four points, STOLE futures down fifty one.

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Speaker 1: They're trading lower. In Europe. Stock six is down by

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Speaker 1: a point three tense of eight percent. Time now for

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Speaker 1: the Bloomberg n j I T STEM Report, brought to

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Speaker 1: you by a New Jersey Institute of Technology investing more

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Speaker 1: than a hundred and ten million dollars a year in

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Speaker 1: applied research to solve problems and to improve life. Learn

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Speaker 1: more at Stories of Innovation dot m j I T

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Speaker 1: dot e DU. Here's Bob Michael, good morning. Here's what's

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Speaker 1: making news in science, technology, engineering and math. If you're

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Speaker 1: looking to fund the tech startup, you should know that

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Speaker 1: new crowdfunding rules taking effect Monday will allow anyone to

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Speaker 1: invest in startups, not just wealthy people. The change over

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Speaker 1: rides alongstanding Securities and Exchange Commission requirement that investors backing

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Speaker 1: private companies be accredited, meaning they make at least two

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Speaker 1: hundred thousand dollars a year and have a net worth

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Speaker 1: of one million or more including their home. Now, startups

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Speaker 1: raising money through online crowdfunding portals will be able to

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Speaker 1: sell shares to people regardless of their wealth or income,

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Speaker 1: so long as the founders have submitted annual financial reports

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Speaker 1: to the SEC. In exchange, companies can raise up to

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Speaker 1: one million dollars. Swift, the Inner Bank messaging system embroiled

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Speaker 1: in one of the largest cyber heights in history, warn

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Speaker 1: customers that hackers have struck again, attacking a commercial bank

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Speaker 1: client that it didn't name. The tales of a second

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Speaker 1: hack follow a cyber theft in February when more than

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Speaker 1: eighty million dollars was stolen from Bangladesh's account at the

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Speaker 1: Federal Reserve Bank of New York. Facebook is offering an

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Speaker 1: insider's look at how it comes up with its trending

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Speaker 1: topics feature. This in response to acclaim the social networking

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Speaker 1: site shunts conservative news stories away from readers. They book

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Speaker 1: says there are a number of checks and balances using

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Speaker 1: both algorithms and humans to make sure there's no bias

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Speaker 1: in the trending topics section. Still, CEO Mark Zuckerberg says

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Speaker 1: in a post that he will host open discussions with

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Speaker 1: conservative leaders and other politicians about how the company can

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Speaker 1: avoid appearing biased and that's this morning is Bloomberg and

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Speaker 1: j I T. Stumm reboards. Thank you, Bob. Well, it's,

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Speaker 1: as we mentioned, not a good start to a day

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Speaker 1: after a couple of bad days in the market. So

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Speaker 1: we're gonna turn to somebody who's used to stuff like that.

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Speaker 1: David Sowerby as a portfolio manager vice president at Loomit Sales,

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Speaker 1: and he comes from Detroit where he was involved in

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Speaker 1: the financial system there, the retirement system bankruptcy. Yeah, Michael,

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Speaker 1: you know what negative numbers look like. Yes, I yes,

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Speaker 1: I do. And I've seen a few movies are two

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Speaker 1: on up and down market? All right? So, um, the

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Speaker 1: question that the discussion we were having earlier today and

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Speaker 1: I was talking to Bloomberg. First word Europe's John Farrell

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Speaker 1: about this is that there doesn't seem to be a

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Speaker 1: theme in the market, So it doesn't seem to be

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Speaker 1: something that everybody can invest on, that everybody can get behind.

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Speaker 1: So every day we get a new piece of news

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Speaker 1: on something and that drives training. It doesn't whether it's

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Speaker 1: my institutional clients or or private clients. They always want

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Speaker 1: to know what's what's the soup of the day that's

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Speaker 1: driving the market, and sometimes We simply don't know. We

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Speaker 1: never try to fabricate an answer. But at the end

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Speaker 1: of the day, it's gonna be our our companies generating

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Speaker 1: solid earnings and especially even better cash flow from operations.

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Speaker 1: Do they have a good business model? Am I paying

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Speaker 1: the right price for them? And then that's the micro perspective.

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Speaker 1: And then from the macro, do we have enough of

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Speaker 1: a macro tail wind and not a incredible headwind that

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Speaker 1: can make the market compound? Is somewhere between seven and

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Speaker 1: eight percent annualized rates over the next two or three

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Speaker 1: years between now in the election, I have no idea,

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Speaker 1: But over the next two or three years, I think

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Speaker 1: stocks are the asset class of choice. That's an interesting call.

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Speaker 1: This wasn't where I was going to go, But um,

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Speaker 1: there are two very different political viewpoints at play in

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Speaker 1: this election, whether it's Hillary Clinton or Bernie Sanders on

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Speaker 1: the Democratic side versus the Donald How can you be

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Speaker 1: so confident when you have no idea which will prevail.

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Speaker 1: Maybe it's because in the years of investing, I've watched

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Speaker 1: Wall Street right tons of research on who wins, who loses,

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Speaker 1: What does it mean to the market, what does it

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Speaker 1: mean to this industry? Or that industry, and probably of

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Speaker 1: the time the research does not prove to be correct.

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Speaker 1: Companies will still find a way to generate respectable growth

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Speaker 1: even in the face of miss Guy did fiscal policy,

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Speaker 1: which we're still seeing at the federal level, whether it's

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Speaker 1: directly in taxes or indirectly in regulation. And I think

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Speaker 1: it's a portfolio manager if I always work under the

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Speaker 1: assumption of government will do the least amount to fix

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Speaker 1: a problem compared to the private sector. That'll be my

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Speaker 1: axiom for managing money. And we will get through this

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Speaker 1: even amid this incredible, unprecedented uncertainty in this election year. Well,

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Speaker 1: nobody will accuse the US government of doing anything over

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Speaker 1: the last four or five years to particularly benefit corporate

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Speaker 1: earnings and the and the economy. Um. But companies haven't

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Speaker 1: been generating anything for the last year. I mean, we've

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Speaker 1: had four negative quarters. We have and the best you

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Speaker 1: can say is the the disappointing news has gotten less disappointing,

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Speaker 1: and it's probably going to witness an inflection point in

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Speaker 1: the current quarter where we bottom on on earnings growth

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Speaker 1: and we can re accelerate to the to the seven

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Speaker 1: six percent growth rate in in corporate earnings, and I'd

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Speaker 1: go even a little deeper on on company's cash flow growth.

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Speaker 1: That's where I spend more of my time hunting and fishing,

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Speaker 1: and I think that can can be at least a

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Speaker 1: movement in the right direction, particularly if you look over

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Speaker 1: the last month at guidance. I think guidance on the

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Speaker 1: margin has gotten somewhat better from Corporate America, that they

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Speaker 1: will benefit now from some depreciation in the dollar, that

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Speaker 1: they're still benefited thing from low interest rates, and we'll

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Speaker 1: get the selection behind us in earnings will re accelerate. Well,

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Speaker 1: we'll continue that conversation because people don't know it, but

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Speaker 1: Tom Keane's parents named him cash Flow Keen. He just

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Speaker 1: goes by Tom. So we'll come back and talk about

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Speaker 1: free cash flow with David Awerby from Loomas Sales and

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Speaker 1: what it's, what it looks like, and what the outlook

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Speaker 1: is for American corporate earnings. Coming up here on Bloomberg Surveillance.

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Speaker 1: Bloomberg Surveillance brought you by Sector Spider e T S

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Speaker 1: Radio plus mobile app, and on your radio. This is

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Speaker 1: a Bloomberg Business Flash and I'm Camra at Moscow. There

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Speaker 1: J C. Penny down thirteen and a half per cent

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Speaker 1: after first quarter same store sales spell for tense percent analysts.

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Speaker 1: We're looking for a game. Nordstrom also lower in early trading,

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Speaker 1: down sixteen and a half percent after cutting its annual forecast,

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Speaker 1: adding to evidence at the department store industry is mired

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Speaker 1: in a deep slump. U s Dock index futures are falling,

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Speaker 1: signaling equities will open lower as investors turn their focus

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Speaker 1: to data for clues on the health of economy of

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Speaker 1: the economy following a lackluster earning season. We checked the

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Speaker 1: markets every fifteen minutes throughout the trading day on Bloomberg

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Speaker 1: smp EMNY futures down six points now EVENY futures down

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Speaker 1: sixty and nasdac emity futures down towelve that acts in

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Speaker 1: Germany is up to tenths per cent, while the CAC

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Speaker 1: in Paris and FT one hundred are moving lower. Ten

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Speaker 1: year treasury of eight thirty seconds, he yeld one point

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Speaker 1: seven two percent. Now I'm x screwed oil down one

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Speaker 1: percent or forty six cents to forty six twenty three.

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Speaker 1: A barrel comes gold up half per cent or five

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Speaker 1: dollar seventy cents to twelve seventy six ninety announced the

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Speaker 1: Euro at dollar thirteen forty nine agin one oh eight

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Speaker 1: point nine two. That's a Bloomberg business flash. Tom and

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Speaker 1: Mike parents, thank you very much. We're talking with David

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Speaker 1: Sowerby of Loomis Sales. He's vice president and part of

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Speaker 1: the firm's investment counseling group, and just before the break um,

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Speaker 1: he was talking to us about the import of looking

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Speaker 1: at cash flow to identify good investments. And since Tom

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Speaker 1: Keen is the for years, Tom has been pounding into

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Speaker 1: me free cash flow, free cash flow. I'm gonna let

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Speaker 1: YouTube discuss. Let's yes, I've drink I've drunk the kool

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Speaker 1: aid um. You know, I look at Apple with modeled

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Speaker 1: cash from operations of something in the vicinity of seventy billion,

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Speaker 1: and they're going to spend eleven billion of that feeling good,

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Speaker 1: which means free cash flow a fifty five billion dollars.

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Speaker 1: What has changed the mandate of what to do with

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Speaker 1: that money from ten years ago or from twelve years ago, David?

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Speaker 1: What's the new new of what any given corporation should

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Speaker 1: do with that operations less capex number? That The best answer,

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Speaker 1: Tom is it's fluid. Do do I as the the

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Speaker 1: senior management? Do I decide to increase the dividend? We

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Speaker 1: purchase shares? Decide that capital spending will give me positive

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Speaker 1: return on invested capital? Uh? Do a sensible not of

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Speaker 1: value destroying acquisition. It all speaks to that wonderful book

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Speaker 1: The Outsiders by Thorndyke, which would recommend to anybody not

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Speaker 1: The Outsiders by S. E. Hinton and Pony Boyle. But

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Speaker 1: I think those CEOs that have proven to be effective

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Speaker 1: allocators of capital are the ones that which are best

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Speaker 1: at increasing shareholder value. That's the best answer I can

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Speaker 1: give is it's always fluid on how you deploy your capital. Michael.

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Speaker 1: The Outsiders Eight unconventional CEOs and their radically rational blueprint

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Speaker 1: for success. And what's interesting about that within the rationality,

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Speaker 1: it's it's just a sick book. Tom Murphy is you

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Speaker 1: know chapter one, Mr Buffets Also in their Richard Smith

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Speaker 1: Good Morning Bloomberg Boston in there's a chapter on Richard Smith.

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Speaker 1: We he's been on a show I think twice with

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Speaker 1: General Cinema and what they did. What is that model

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Speaker 1: that makes a Richard Smith or the iconic Henry Singleton different,

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Speaker 1: Singleton being the key at Teradyne that was so effective

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Speaker 1: as the first chapter they I think one of the

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Speaker 1: themes I got out of the reading the book was

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Speaker 1: good CEOs, low profiles, uh not not very large headquarters

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Speaker 1: and empower their division heads too to make good decisions

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Speaker 1: and then to deploy that capital. And to the broader

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Speaker 1: aspect of free cash flow. I'm still amazed that when

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Speaker 1: you survey a Wall Street analysts and he asked him

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Speaker 1: what's the best valuation tool to look at its traditional

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Speaker 1: price to earnings, price to book, price to fails. Yet

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Speaker 1: any any analytical work you do suggests that valuing companies

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Speaker 1: on a free cash flow basis is the best sort

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Speaker 1: trying to find good companies, then you do that, or

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Speaker 1: can our listeners, either as amateurs or pros, do that

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Speaker 1: where I don't know where the risk free return is

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Speaker 1: or I can't do and that present value analysis taking

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Speaker 1: the future cash flows bringing them back to the present

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Speaker 1: when I don't know what my discount rate is because

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Speaker 1: the negative interest rates QI this and q E that.

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Speaker 1: It can certainly get complicated. But if you just differ

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Speaker 1: back to the company's free cash flow divided by its

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Speaker 1: market capitalization gives me free cash flow yield. I'll look

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Speaker 1: at the portfolios that I work with, and they're generating

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Speaker 1: a six percent or better free cash flow yield that

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Speaker 1: compares quite favorably to historically to high yield bond yields

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Speaker 1: and certainly the low yields and the tenure Treasury. And

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Speaker 1: if your typical listener can do that, I think relatively

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Speaker 1: simple calculation, you're well on your way to finding good

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Speaker 1: long term investments. How's the number of companies who fit

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Speaker 1: your profile changing? Are we seeing companies more companies starting

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Speaker 1: in that direction? I think so. When you anecdotally, data

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Speaker 1: is the plural of anecdote, as I've often heard that

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Speaker 1: when you roll up CFOs who talk about their dedication

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Speaker 1: to generating cash flow from operations and free cash flow

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Speaker 1: that number is higher because they're better at at using

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Speaker 1: capital discipline compared to some of the questionable acquisitions of

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Speaker 1: fifteen years ago. I think that exists more and off

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Speaker 1: the markets. February eleventh, Lows. I think that will be

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Speaker 1: a meaningful inflection point. You certainly had greater opportunity to

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Speaker 1: buy companies with free cash flow yields that were attractive

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Speaker 1: if you looked out two or three years. Is that

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Speaker 1: because companies are doing a better job now or because

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Speaker 1: there's something changed in the economy? In other words, are

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Speaker 1: we seeing a shift that we can take advantage of.

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Speaker 1: I don't think it's a it's a shift as much

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Speaker 1: as companies are maybe have listened to the other side

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Speaker 1: of the table, the investment side, whose question that the

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Speaker 1: previous value destroying acquisitions and thought about how do I

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Speaker 1: allocate my capital better and how do I focus on

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Speaker 1: generating sensible cash flow from operations. I don't think it's

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Speaker 1: anything great with the economy. We're still growing at about

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Speaker 1: two thirds the normal speed limit. I don't know if

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Speaker 1: that's the new normal, but it certainly is unacceptable. So

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Speaker 1: do I understand that Apple has a free cash flow

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Speaker 1: yield of fifty five billion divided by four hundred and

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Speaker 1: ninety five gazillion, and I believe my math is eleven

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Speaker 1: point one percent. You are correct, and that says of

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Speaker 1: the most recent period ending March. And for the question

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Speaker 1: for the person who naturally questions Apple's long term growth

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Speaker 1: rate compared to its glory days, it makes Apple still

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Speaker 1: a very interesting idea. Interesting you know, is that too

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Speaker 1: much math for Friday? Mike? No, No, never enough. I'm

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Speaker 1: just curious about Apple because for whatever, is this a

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Speaker 1: kind of an odd situation where the numbers you use

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Speaker 1: add up that there's just some something psychological going on

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Speaker 1: and people have decided to hate Apple. I don't know

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Speaker 1: if it's anything more simple than one chart I like

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Speaker 1: to see from Ned Davis that shows any time of

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Speaker 1: stock gets to be the biggest stock in the index. Yes,

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Speaker 1: it's usually a time to be more hesitant in owning it.

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Speaker 1: You can, but more hesitant in owning it. And if

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Speaker 1: you just look at that twenty year pat or any

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Speaker 1: time of stock it's to be the biggest in the index,

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Speaker 1: it's time to be cautious. I find it interesting that

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Speaker 1: you move the decimal point on Twitter, the free cash

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Speaker 1: flow yield of Twitter calculated off the Bloomberg is one

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Speaker 1: point two, so eleven point one versus one point two Twitter,

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Speaker 1: which makes Twitter, if you've checked the filings, we we

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Speaker 1: do not own it. It makes Twitter more questionable compared

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Speaker 1: to other social media bocks such as a Facebook. Where's

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Speaker 1: your opportunity in financials right now? That's a little bit

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Speaker 1: different calculation, isn't it. I've owned a matter prize for

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Speaker 1: a number of years. It's been a good long term

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Speaker 1: wealth creator. It hasn't been in the last twelve months

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Speaker 1: the overhang of federal regulation, but that has been removed.

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Speaker 1: The trades at about ten times earnings free cash flow

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Speaker 1: yield than quite enviable. I think valuation will go higher

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Speaker 1: on a cash flow basis. That there's an idea that

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Speaker 1: there was overhang from the federal government. This is a

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Speaker 1: long term UH Sensible company that operates both in asset

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Speaker 1: management and in individual brokerage UH Financial Advice. That there's

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Speaker 1: an idea that's not a traditional bank, but one that

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Speaker 1: I think has sustainability. This has been great. David Sarby

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Speaker 1: think is so much a little mathematics folks to get

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Speaker 1: you going through the weekend. Major shout out to those

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Speaker 1: of you studying for the Chartered Financial Analysts exams plural

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Speaker 1: c f A exams. They're big test my coming up

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Speaker 1: in three weekends. We have our own proxy here on

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Speaker 1: Team Surveillance one. T Rigs is studying for level two.

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Speaker 1: It's changed her complexion. She's a little bit you know,

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Speaker 1: more sallow, sallow and panicking. And the fact that you

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Speaker 1: shout and give her a shout out on the ear

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Speaker 1: does not put any additional pressure. No, it does not

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Speaker 1: at all. She killed it on level one and and

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Speaker 1: and she walks around she's saying, like a leasing equipment,

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Speaker 1: leasing indirect cash flow. Yeah, but you know she's young,

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Speaker 1: she's single. That's the way to get guys talk about

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Speaker 1: leasing equipment. It is I mean, I mean, come on,

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Speaker 1: the way to stop a bar, Come on, be serious now,

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Speaker 1: A way to stop a bar conversation is to talk

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Speaker 1: about discounted cash flow. Taylor Riggs and all of you

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Speaker 1: worldwide studying for level one, two, three, four of a

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Speaker 1: cf A exam, we wish you best of luck. Early June.

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Speaker 1: Bloomberg Surveillance