Bloomberg Markets (07/12/2022)
From the financial centers of the world. This is Bloomberg Markets with Alix Steel and Guy Johnson. It is 30 minutes into the US trading day on this Tuesday July 12. Here are the top market stories that we're following for you at this hour. Big test for margins. Financials kickoff earnings season this week with margins and growth. Question marks. We got you covered. Morgan Stanley's Betsy Gray sic and Peter Oppenheimer of Goldman Sachs Euro's parity play. Eurodollar trades near one to one curve stays inverted. Tech though finds a bottom. Now what your playbook. Into earnings. And I'm definitely not visiting guy anytime soon. London's Heathrow Airport will ask airlines to stop selling tickets for summer
travel. The latest pain for carriers from New York. I'm Alix Steel of my coast in London. Guy Johnson. Welcome everyone to Bloomberg Markets. Just in case I was gonna buy that ticket this summer to come visit Cornwall. I'm not doing it because that is crazy. I think I've ever heard of an airport asking carriers to shut down like that. Yeah I think going to see more of it. To be fair though if you were to come and see me you would get quite a good deal inasmuch as the currency is definitely in your favor. The dollar is going up up up piracy against the euro. We're not too far away in some ways on the pound ISE just making you try
to change money at Heathrow. You probably get it. So yeah you could have a great time over here. Well I'm going to get a Paris man. I'm not going to UK and avoid Heathrow altogether and then take advantage of parity and buy all the croissants in Rio and in Paris. How about that. Yeah. Okay. That would be where I would splurge my money in terms of the shopping trip that I'm sure you're planning in the back of your mind. We are we are certainly watching that story develop very very quickly. The
question we're asking today though Alex because you've taken us in a completely different direction. You're is what is happening with the margin story. We're about to get into earnings season. We're about to see potentially a margin meltdown due to a not completely unrelated. We are going to see Cooper results being very much affected by the strong dollar. But the multi-storey I think is going to be front and center. We get into the banks first of all clearly. So what does that
mean. That means we need to ask this question of course to our Wall Street correspondent Sonali Basak. We've got our cross asset reporter and yesterday's anchor did a great job yesterday. Katie Greifeld joining us as well. Sonali let me ask you the question. First of all what does the margin meltdown look like at the banks. We are very worried. We are watching carefully to see what's going to happen with loan loss provisions. What the macroeconomic environment is going to look like. But how will it actually crystallize into
this bank reporting season. It's a great question guy because even though net interest income is expected to rise and banks are supposed to make more money on trading desk. Given that the volatility is higher but not stifling. You still have that issue that that volatility really starts to stifle deal making and equity and debt issuance. So if you take a look at it high yield spreads have already blown out quite a bit. They've come in a little bit but they're still two percentage points higher than you've seen on average. That means when they're pumping the economy with money when they are lending to
clients it is already getting significantly more expensive to do so. So you have a very double edged sword here even though they are supposed to make money in some places will they make enough money to really want to take on a lot more risk especially when it comes to clients across different parts of the bank. I would also mention that this earnings season is starting at a base of a two 10 yield curve that is inverted significantly enough to make people worried about the future.
And so all of those future comments about how willing they are to lend to less risky clients and how much risk they're willing to take on into the future. Everyone we'll be reading those tea leaves. Yeah and it's kind of the same thing with other companies as well. Katie right. I mean we all know the margin pressure has come but it's how strong that top line will be and then how confident the CEOs have in their business model for the rest of the year knowing that that consumer demand can be very unpredictable and we aren't gonna get these numbers. We know they're probably going to be terrible even though if you look at some of the sell side estimates not really coming down but just listening to the mood music coming from C Suite executives over the past few weeks it feels like some of this has already been priced in. I mean if you look at the S&P 500 down about 19 percent year to date the NASDAQ 100 down 27 percent.
I mean the question is out there have we already priced in what we're about to get. We know the numbers are going to be really bad. But yeah I mean the markets are forward looking vehicle. We'll see. There probably will be headline risk. And I would expect these single stock equities. This was the story last season that there was so much volatility in the single name spot on the index although I mean maybe you're already there. Katie
younger trend we've seen where Alix Steel where it sort of Alix Steel which is on what's happening at Heathrow. Heathrow has a labor problem. Which parts of the equity market also have a labor problem. Bloomberg Intelligence ran the numbers and they're looking at stocks that have greater labor inputs into the bottom line. Suffering the most. Is that why we should be looking for the distinction here. If you are capital intensive if you are labor intensive that's going to be the distinction here in terms of the margin squeeze. I feel like the labor car costs are the wild card here because
we've been talking about the input costs the price of everything going on. But labor costs I feel like that was the wild card last season. When you think about Amazon coming out and saying that they were overstaffed that took a lot of people by surprise especially traders. Just looking at the reaction. And Amazon I believe we got something similar from Wal-Mart or Amazon or Target can't quite remember. But the degree to which some of these corporations both in the tech sector as we learned and in the retail space staffing I'm trying to account for some of the incredible demands.
Now we're sort of seeing the other side of that where these companies have had to pull back on that. And that is going to be something really to watch in the next few weeks. Yeah. And guide to your point. You know if I look at the NFIB that came out earlier today it was a terrible number. But specifically if you looked at those recipients that are looking at a better business environment over the next six months that dropped by seven points. Now to a negative sixty one percent. And those are the guys that are really hiring all the people. So if you make stuff maybe it's OK you're selling the stuff. Maybe that's when we run into more problems. Well I just think I think the smaller the business the less the
less opportunity has to deal with the deal with the problem of the labor market. If you're a bigger company. You have maybe more opportunity to hire hire more easily. That's going to be a huge challenge for smaller companies. I think it's going to be the toughest the toughest place is going to be right at the bottom in terms of the size of the business if you're kind of 50 or 100 person business. That's where I think the real pain is going to be felt here. Yeah. And I wonder sort of the distinction then to be made between big banks then and regional banks then the credit card companies because those guys the two letters are gonna be much more exposed to this kind of risk than say the JP Morgan's. It's an amazing question to ask because you look at how stocks already trading. If you look at JP Morgan Morgan Stanley these tend to have not only large clients but
also high net worth clients. You have to ask yourself is it just big companies or big companies that are also serving wealthy customers that are shielded from some of these inflationary concerns. Those two banks are trading well above book value. While many of the others are either at or below Bank of America. Also they say their consumer is in good shape. But what about to your point the rest of the country's banks. When you look at the loan officer data already you see that in the first quarter there was a lot of types of lending that was unchanged and that was before the economic situation started to do deteriorate more significantly and rates started to rise more significantly. So to your point guys you know can companies not only withstand some of the margin pressure that they're seeing. Can they get the things that they need the revenue that the loans at a
habitable price to make it towards the next step of this this economic cycle. Teddy Flynn a quick question to you. If I strip out energy how different does the picture look. It looks pretty different. I mean just in the last few weeks it feels like the bloom has come off energy stocks. But if you look at the sector level it's stuck out to me this morning that if you look at consumer staples they are the the outperform or other than energy only down 5 percent only 5 percent. You compare that again to the S&P 500 down 19 percent. It really shows you what is front and center in investors minds. It's what each of these companies can actually pass on these higher costs protect their margins a little bit. And it seems like it's consumer staples. And then last call question for me and Katie I'll leave this to you. The
other wildcard seems to be what happens with the dollar. We already saw Microsoft warm with that. The Bloomberg dollar index up by about five and a half percent in the second quarter. Have we already priced in that dollar strength or do you expect kind of more potential downgrades or warnings to come. I would expect that we're going to see it a lot in earnings calls talking about those ethics headwinds. I mean Microsoft kicked us off early with that warning back in May. But I would expect there's going
to be a common theme as we really dig into some of these reports. It's gonna be fun. I'm excited. All right guys thanks a lot. Bloomberg Sonali Basak and Katie Greifeld for joining us. We appreciate it. Coming up warning continue the theme. Second quarter earnings starting to roll out. Goldman's chief global equity strategist Peter Oppenheimer expects profit margins to contract. By how much. We'll break that down. He joins us next. This is Bloomberg.
I think the story for the next year is gigantic margin compression from really extraordinary levels which obviously poses a question for equity investors because of earnings compression from the Fed's perspective from a market perspective. What it means is that the pace of disinflation over the next year I think is likely to be quite a lot quicker than markets expected. Now as part the ISE Ian Shepherdson earlier on Bloomberg Television that takes us back to our question of the day. Are we about to see a margin meltdown. Want to put that question to Peter Oppenheimer chief global equity strategist at Goldman Sachs. Peter it's lot to break down. Let's just start in the U.S. for a moment. Are we prepping for a margin meltdown. Is it going to happen. Well I think we will get margins coming down and that's typical as you get economic downturns. Margins are very sensitive to
that. And in a sense really the surprise of the last quarter was how well both revenues and margins held up. Some of that was because actually nominal GDP which companies are making a claim on has being quite strong because of higher inflation. But it's also because you had a lot of pent up demand and savings following the pandemic. And many companies were able to pass on those higher costs. And that's beginning to weigh in I think. So certainly it's not just the earnings are going to be weaker. The market is expecting that even though consensus numbers have yet to come down. But it's really the forward guidance and the margin that I think is going to be of greatest interest. And that's the area of greatest vulnerability I think.
Is that price do you think. Peter. It's price to the extent that for the best we can tell. Looking for example at how the most economically sensitive companies have been performing relative to those that are quite defensive. For example a mild recession is being priced on both sides of the Atlantic a slightly deeper one in Europe. But I don't think
the market is poised for any significant or prolonged recession now. To be fair there are some important support. Private sector balance sheets are quite strong banks households and corporates. And in the case of Europe at least there is quite a big fiscal boosters helping to support growth as well. But I do think earnings numbers will still come down quite a bit and whether we end up with a recession or not. I think there's a good chance that markets will price that probability as being higher than they have done as yet. So does your best case incorporate a potentially recessionary or slowdown in that. We get the margins we have now and then we get weaker demand later. Is that your base case right. Yes it is. Our base case is based on our
economist's central forecast where they have only a 50/50 probability broadly of recession as they define it. But we are expecting much lower numbers than the consensus. As I said the consensus numbers really typically are quite slow to come down at turning points. Markets tend to move a lot quicker. And we should say also that equities tend to start to recover from bear markets six to nine months before earnings begin to improve. So as you said earlier they are about anticipating the future and
some of this downturn has been priced but not enough. And I think as perhaps you were saying earlier valuations are not really yet at levels consistent with recessions particularly in the US. And I think there's probably more valuation compression that can come through. Peter good. Can you just do with the top line and what happens in the middle of the panel and the sequencing as to how this is going to unfold. At the moment we're starting to see margin
pressure coming through. Costs are rising be it labor costs be a sort of input cost more broadly. So that's starting to impact what is happening in the middle at the top. Inflation is supporting a top line. Plus as you say actually the macroeconomic backdrop with savings relatively strong continues to support the top line. Are we though as we go through into the recession going to see the top line weakening. But the margin squeeze easing. Or does the margin squeeze continue. Because actually the pressure on the labor market is going to be maintained and actually the supply chain story doesn't ease. And
you end up with the worst of both worlds. The top line comes down but the margins continue to. The input cost story remains relatively high but that's a one two punch that is going to really have a big impact on the bottom line. Yes. And that that sequencing is not unusual going into downturns. It's really a question of to what extent do you get top line and margin moderating which sees the greatest pressure. Now I would say actually revenue growth top line is not likely to be so weak. And that's partly because inflation is higher and nominal GDP is higher. Also remember there still is a lot of pent up demand that we're seeing. The discussion you've just had about airports and is a very good example. It's not that there's
a lack of demand. It's really an issue of supply. So really that can hold up that costs. But spare the feelings. But but if I just could just jump in here. The fear for Heathrow here the fear for European airlines is that you have this huge surge this summer. Nobody can cope. Margins get squeezed. Unions get decent pay rises.
Those are sticky. But come the autumn actually demand collapses. But the costs are still there. That's the that's the fear. How big a risk is that for equities. Well it's a risk from a structural perspective because I think you have to look at where we've come from. Context matters masses a lot. If you look at profit margins they've been rising relentlessly for the last 20
years and reached all time record highs in the US and close to that and other regions as well. And there's lots of reasons why margins have done well and uncontained. Globalization very plentiful and cheap commodities and labour for a long period of time have contributed to that as well. And as we get more regionalization less growth in world trade and as you say energy
and labor is more scarce and more expensive we would expect margins to begin to come down. Part of that is cyclical. You tend to get margins weakening in an economic slowdown. And part of it is probably structural as well. And that's why we've been arguing that investors should be focusing less on revenue growth which was what they rewarded above all else in the decade after the financial crisis supported by very very cheap interest rates and focused more on the policy balance sheets and margin sustainability within and across sectors because I think that will become more valuable as an attribute if we're all for the possibility here that we get too pessimistic when we look at all the challenges like you said and I understand the sequencing into a slowdown but JP Morgan strategist led by Marco CAC I talked about how most investors are already positioning for a recession and sentiment is weak and an economic disaster doesn't materialize. Risky assets can substantially recover. What would be your take on something like that. And if there is a recovery where may we see it first. Yes. Well I would agree that the markets and most investors are increasingly anticipating or positioning for the worse for a recession. It's not inevitable that we get recessions or certainly deep and prolonged ones. Bearing in mind some of the
other supports that I mentioned you know labor markets are still very strong. Private sector balance sheets are healthy in the areas that are most at risk like Europe. You're also getting fiscal support. So if a recession is not as bad as investors you eventually end up pricing. There will be a good recovery. And typically the recovery from a bear market is triggered by a
clear peak in inflation and interest rates. So that will be one of the important things to look for. And initially it would likely be rebound the strongest rebound by the areas that have fallen the most and the areas that are most levered to an economic improvement. I think what happens after that is going to be a different story with slower returns for some time to come. Peter a final quick question for me. Europe. Basically we're waiting we're watching we're trying to understand what a rush is going to do and B what China's going to do in the meantime it looks like a very bleak environment. So the question we've been asking a lot of our guests today I am life question of the day is is a recession in Europe inevitable. What's your perspective. Again I don't think it's inevitable. We're of our economists are basically looking at stagnant growth in the second half of the
year with Germany and Italy that are more exposed to Russian gas in particular being in recession. A lot will depend on what happens to gas supplies as we move forward into the latter part of the summer and beyond. And that will determine whether there is a broad recession. And I think how deep one of the benefits is I would say of Europe though is that there is a fiscal
expansion coming through and many governments are already intervening to try to reduce the negative shock moderate the it's from a real income squeeze to protect consumers to some degree won't prevent a recession. It may moderate the extent of it. And do bear in mind at least that European markets are much cheaper. They're trading roughly at around 10 to 11 times P. That's below the long run average. Maybe not at at really stressed valuations but certainly starting to look quite attractive. And we think the dividends broadly are sustainable over time. So there is some value beginning to come through there. Peter great to have some of your time today. Thank you very much for sharing it with us. Peter Oppenheimer chief global equity strategist joining us from Goldman Sachs. Thank you very much
indeed. This is Bloomberg. It's time for the Bloomberg Businessweek to look at some of the biggest business stories in the news right now and where you could get to. American Airlines is sticking with its expectations for a jump in second quarter sales despite rising costs. In a filing American said total revenues expected to be up 12 percent in the period compared with the same quarter in 2019. Meanwhile costs for each seat flown a mile will also rise about 12 percent. IBEX has raised its outlook for the second quarter in a row. The maker of Mountain Dew Fritos and Quaker Oats
expects revenue to grow 10 percent this year as consumer demand remains resilient. PepsiCo's North American food and beverage business remains strong during the quarter. Meanwhile demand for convenient foods help international markets continue to perform. And Peloton is taking one of the most dramatic steps yet to simplify operations and reduce costs. The company will quit building exercise bikes and treadmills at its own factories as will now handle manufacturing. Proton is making the change after several months of turmoil. The company cut nearly 3000 employees earlier this year and shuts down some 75 percent this year. And
that is your latest business Sky. All right. Thanks so much. So this could actually go a long way in helping gold if its cash reserve guy. And at the same time they're trying to like move people more. It is subscription model. They have two point six six million subscribers. So they could do that. Cut their costs there and still only hike membership fees a little bit. Like maybe they have a chance to really grow their subscriber base here. When you think about it what would you want to do right now if you were a company that was struggling. You'd want to provide as
much simplicity as you can. And simplifying the supply chain looks like a really logical thing to do. Why would you have an internal and an external supply chain. Why would you go with that dual structure. Why don't you just go with one of them. For instance an external supply chain removes the risk from you. Put it somewhere else. As you say focus on the service side of the business that that's ultimately in theory where the value is. I appreciate that some technology companies like Apple do very well off the hardware but a lot of value has been created in services recently. Yeah. You also do wonder too like how much has the pandemic boost been wrung out. Like hasn't all been. Can we now really value the company and its fundamentals rather than
rather than Covid. No. I think you're going to ask me what would I rather do. Being a palatine or gopher or something. I was like I'd rather nap. Thanks. Well yeah of course it goes without saying. Yeah. All right. Coming up U.S. bank Marines taking off Thursday. We'll look ahead with that secret thing. This is Bloomberg. I also think that interest rates could go up a couple hundred basis points and not throw us into recession because I think that there's been just so much capital last year around that I think you know the first kind of major swallows of reducing that the excess flow. I don't think you're going to
have quite the impact that this stock market is reflecting. That was David Rubenstein exclusive interview with real estate titan Sam Zell. Always fun to get his perspective. Catch that full interview tonight at 9:00 p.m.. All right. We're about an hour into trading. I guess it's hard to find a direction here. Bloomberg's Abigail Doolittle is tracking some of these wimpy moves today. Well Alex you're right about that. It certainly is hard to find a direction. This is an entire day an overnight chart of the Nasdaq 100 futures. And you can see for the most part down starting slightly higher though last night. And then
around the time they open up sharply and now back down. So net net a small loss but lots of moves to get there. As for a pocket of strength we have lots of names trading in the green. So let's not see. Let's see whether or not we can see the major indexes go up here. Return to the upside. American Airlines up 9 percent. Absolutely soaring after they preannounced to the upside. The current quarter excuse me the last quarter the second quarter 12 percent revenue growth over the previous year.
Plus they're holding the outlook. Investors really cheering that Herbalife also being cheered by investors up 15 percent. Jefferies has upgraded it to a buy peloton up four point six percent as the company is going to outsource the manufacturing of the bike. So traders investors saying that could help this company's margins and also the turnaround they're trying to make. And the Norwegian cruise lines up four point three percent a bit of a big travel bit here. As for a mixed bag on the year some big moves to the upside and big moves to the downside. It of course is currencies and one of them being the dollar. The
dollar on the year up for a second year I believe it is up double digits. I could be wrong on that. I know that the dollar against the yen is certainly up double digits the most since 2013. But you can see that this is really pushing down commodities and closing including oil. In fact let's take a closer look at oil in the Bloomberg terminal. We're going to see that oil has a pretty good shot of going back down to its 200 day moving average. We've been talking about that for quite some time even when the two day moving average was below 80. Now it's right around ninety three. It seems all but certain technically
that you will see oil go back down to that 200 day moving average. If that's the case it happened late last year. How much further below that 200 day moving average will go in guy. The question is how much will that play through to the economy providing relief for consumers and businesses. Frankly everybody if the price of oil goes down maybe group some relief around the
recession call. We'll have to see whether all of this happens. But it is certainly an interesting factor to keep an eye on. Yep it's gonna be a huge subject later on this week as we watch what happens with the president's trip to the Middle East and again thank you very much indeed. Let's turn back to the earnings season. Wall Street bank earnings kicking off of course Thursday. We've got J.P. Morgan and Morgan Stanley. It then gets pretty busy on Friday. Betsy Gray SEC who heads Morgan Stanley's banks research team downgrading some names due to rising recession risks ahead of those earnings. Betsy joins us now. Betsy what are you looking for. What is the standout story going into this earnings season. Well thanks so much Guy for having me
on. And I would say there's gonna be like we've seen in the past couple of earnings seasons some positives and some risks on the positive side. Rates are higher. That's a plus loan growth is off the charts really hot. But there are negatives out there. Number one deposit betas are rising in particular online savings accounts. Check your website. Bank rate dot.com. It has you know
the most recent numbers. And we've had really rapid hikes in deposit rates. We think deposit outflows at some banks are likely to come through and that's a function of what the Fed's doing. Kuti. We've got expenses on the rise with inflation pressures. And frankly at some of the institutions we're expecting some buybacks to stop. In particular at B of A city and JPM after the Fed did effectively what is a capital call by driving up their required regulatory requirements on capital. A couple weeks ago. So there's a lot at the same time. We've had a lot of volatility which can help trading revenue. And I wonder is this like the last quarter or that good part can outweigh the rest of the bad stuff that you kind of laid out.
Alex I totally agree that trading is going to be a bright spot. Our estimates are for trading to be up year on year in the double digits. That said there is some pressure on investment banking fee revenues we're talking about here things like underwriting and a which is well known in the stock. You could argue but the question is when's the uplift going to come. Will it be second half this year or will it be into next year. I think some management teams we'll talk about really strong pipelines. But the question is the execution when does that really start to accelerate our estimates. We have to wait for 2023. In terms of what they're going to see going forwards what do you
think the tone is going to be. What do you think the fear around credit lending etc. is going to look like. Didn't these banks are going to signal that we're heading towards a recession. So it's a great question guy I think for the most part the commentary around credit will be very benign. Why do I say that. We look at the delinquencies every month and you can see
delinquencies are very low and delinquencies today are your losses. Six months out. So losses are probably set to be fairly modest over the next six months. The question is the stocks look forward more than that right. The stocks are looking forward one year to year. And as we look into 2003 we have to get through that really cold winter with still high energy prices. And you have a lower savings rate savings rate. Now is that hovering around 5 percent. It is at 12 year lows. So how are we going to get through the not the next six months but the six to 18 months. Our expectation is that we will have some pressure
during that period. OK. So Betsy you cover literally anything that's exposed to the consumer like American Express. You also do regionals and big banks. There's gonna be a case like big wins like big banks and then regionals and then and then the credit card companies as that's how we're going to see that kind of a difficult environment play out. For the consumer I think we're talking about look the the consumer with the lowest income level is the most stretched by inflation. I think know we're all aware of that and it's tough for them. Ally Financial had a great chart in their slide deck last earnings which showed you that the lowest 10 percent of the income earners has a big piece of their disposable income of their income going to gas at the pump something like 15 16 percent. So I think it's going to play out with regard to your
portfolio. Where are you most exposed to subprime. You're going to have the highest degree of pressure. Where are you most exposed to super prime. You'll have a lower degree of pressure. That said we did downgrade Amex today in part because we're anticipating through our Alpha Y survey that our research teammates did. High end consumers pulling back on spending over the next six months due to concerns around inflation and the impact on the economy. So I think you'll be seeing it over the next six months. But at earnings this week and next week I think the management teams will be very benign on their credit
commentary with the caveat that look reserving reserve releases are over and reserve ratios need to stay flat here. So your provision numbers will be a little bit higher. But it seems impossible at this stage to quantify the effects of cutesy quantitative tightening on the banking sector. It's an estimate. I don't think we can quantify it with specifics. Just looking at the H eight that's coming through we do see that deposit growth is slowing and it's running at about half pace of loan growth. So you know the way I've been positioning it is inflation is a capital call. Your borrowers need more money to do what they've been doing all along. And Kutty is slowing your access to
funding. So it's a pressure point for the banks. And I think we see Kutty come through first. We'll be in the trust banks B State Street Northern Northern Trust in our conference last month said that they are expecting deposits to be down roughly you know mid single digits. So we did get some word from them. But for the system overall it's really hard to see right now. IBEX we can't let you go without making your case for your top bank right now. What would you be. What's a buy right now. Wells Fargo is our topic and that is a function of two things one. They are the most benefited from rate rises and and to put a point on that.
We do expect most banks will be raising their NYSE guide because of the forward curve in how much the Fed's already raised so far to to date. Secondly since they do have the asset cap they did not accept as much deposits as peers during QE. So they have less excess deposits leaving them. Third they do have a plan to bring down expenses. And you know they're still on the fifty one and a half billion for this year.
Our expectation is they will hit that. So you do have actual dollars coming down this year which puts them in a category pretty close to one. That's the group. Such great stuff. We love talking to you. Wonderful insight. Good luck this weekend. Betsy great said Morgan Stanley global head of banks and diversified financial research. Thank you very much. All right. Coming up the drama that will never end. You got Twitter versus Moscow. The legal maneuvering very much under way. So who is the stronger legal case. We're going to ask the man considered as the dean of U.S. security
law. John Coffee of Columbia Law School. This is Bloomberg. This is Bloomberg Markets I'm rich. To you're looking at a live shot of the principal room coming up Nathan Sheets city global chief economist joining about the power noontime in New York. This is Glenn Beck. Keeping you up to date with news from around the world. Here's the best word answers you get to the Conservative Party wants to narrow a wide field of contenders to be Britain's next prime minister. Everyone quiet candidates have the initial support of
20 Tory members of parliament. Nominations will open and close today with the first ballot to be held on Wednesday. The party's new leader and therefore the UK's next prime minister will be announced September the 5th. President Biden and Mexico's president Andres Manuel Lopez Obrador will discuss ways to expand legal migration and improve security when they meet today at the White House. They'll announce joint actions to improve infrastructure and cooperation along the almost 2000 mile border. Lopez Obrador says increasing immigration would strengthen the U.S. labor force and help curb inflation. In
Shanghai there are fears the city is heading back into a locked out a little more than five weeks after exiting what was a two month ordeal. The city reported 59 new coronavirus cases on Monday. That is the fourth day in a row that the case numbers have been above 50. The detection of a new substrate and the McCain variant triggered two more rounds of mass testing in Shanghai. News 24 hours a day on air and on Bloomberg Quicktake powered by more than twenty seven hundred journalists and
analysts and more than 120 countries. I'm there to pick up and back out. All right. Thanks so much. Riddick it. So Twitter down about 10 percent just in the last two days. The company is expected to file suit this week over Elon Musk's decision to terminate his 44 billion dollar takeover at the company's lawyers. Call that move invalid and wrongful. Joining us now the
man considered the dean of security law in the US. John Coffee of Columbia Law School. Professor. It's great to get your perspective legally as you are to be here legally. What's the strongest case that must can make. And what's the strongest legal case that Twitter can make. I think everyone agrees that Twitter has the much stronger legal case. Their case is he can't complain about all these risks because he is suing them. He could have done due diligence back before he signed a deal on the box. He could have put representations and warranties into the contract. He did none of
that. And therefore he's deemed to assume the risk. Buskers saying that well this is a huge risk but actually it's not a material adverse effect because there's been no change. Whatever that percentage of bots is which no one knows it's that's something you can show he's changed in a way that materially worsens his position from what it was before when he didn't investigate there and behind all this. I've got to point out there is a mystery. We all agree. Every professor every
practitioner that Twitter's case is stronger. But if that's true why hasn't the Twitter stock come up significantly. It fell last night to under thirty three dollars. Thirty three dollars versus the fifty four twenty. Musk has offered. It's a Delaware court is going to order him to. Perform is deal it's going to give specific performance. He's gonna have to pay 50 20 and all the ARBs are missing something by not buying the stock in the interim. Get up to 40 45 maybe even higher. That's the mystery. Makes you wonder. Professor it makes you wonder what it's worth if on a standalone basis what the basis would be worth. Maybe there's significant downside that is offsetting that risk. The upside. Here we sags. Nobody around. Lester you're an investor
you haven't done is going to order him to pay you 50 20. You don't have a long term view about Twitter. You're gonna take the money and run. Do you think that is really going to happen though. Do you think that is the most likely outcome. Because if it's not and I appreciate whatever he says about the stronger hand. But if the
ultimate result is that we still get a negotiated deal i.e. that we settle for less than that then that price is then that price is probably IBEX. I think that is quite correct. But I think the market is betting predicting what the negotiation will be more than that. Fifty four twenty to thirty three is that stock up 15 17 billion dollar difference. It's a huge amount to be at stake in one litigation. And I think the real concern is whether or not Delaware will grant something called specific or performance. Specific performance is like an injunction. It requires you to perform the deal as it was originally contracted and not just to pay damages. Right Professor. To pay damages. It's much less if. Is there
precedents for Delaware doing that. I'm just trying to understand how a court can force somebody to plop down like 33 billion of their own money and force them to buy company. What's the precedent. Courts are good at that. If you disobey an injunction you are in contempt and the court can use a number of remedies. If someone who is in contempt it is rare but they can send someone to prison until he does comply with the court's order. Have journalists to get sent to prison when they refuse
to testify when they have valuable evidence that the prosecution wants. So while I say it's very rare Mr. Musk is the one person I can think of who can be so flamboyantly defiant that a court might do that. He can't continue to present himself as above the law which is the image he usually gives. So we're going to be watching not just the arguments in court but what the market price is doing because if the market price of Twitter starts coming up it suggests that the market together has learned that the negotiations are getting closer to a deal and maybe what the deal is. Or did they think that this will go to a decision and the court's going to impose specific performance on him. It's going to be a day by day negotiation both in court and in the private negotiations. I'm just trying to work out what the impact on Twitter would be if Elon Musk was in jail. That would certainly change the
narrative. I think Mr. Musk I don't think you lecture. I think pretty quick you'll decide he will comply. But what's always said about someone who put to jail for contempt is that the prisoner holds the courthouse keys in his hands. All he's got to do is comply. And if it's complying with him do although it really destroyed the price of Tesla if he has to make those kind of sales he can get himself out of jail. I don't think he's been much. That's like a. Yeah these. This is. This is a pretty extreme scenario we're painting here. Professor just talk me through how you would if you were Twitter and you were trying to get the best deal for your shareholders presumably you wouldn't want to take any deal to lower price because you'd expose yourself to legal risk there as well. Sure
could. But let me see. Let me see that. Yeah. Let us see that you couldn't let us in. We didn't think you're gonna get the 54 as well. How do you run it internally. Do you think you've got a negotiating team. You've got a legal team. How much interplay do you think there would be between those two teams. We can talk to each other but usually they're going to keep their own negotiations going. I think by the way the board is protected by the business jargon rule. If they decide the best deal they can get is forty seven dollars. I don't think a court is going to second guess them but they've got to do something. They can't
sit there with the price at 33 and Matsu and they've got to pursue that suit. Yep. Otherwise they're exposed on the other side. Professor. Always a pleasure. Really interesting conversation. I read your notes with a great deal of enthusiasm this morning. John Coffee Columbia Law School. Thank you very much indeed. Coming up what did Donald Trump know about the role of the proud boys in the attack on Capitol Hill the January 6th committee. We'll be asking that very question today when public hearings resume. More next. This is Bloomberg.
The January 6 committee resumes its public hearings today in D.C. to find out if extremists like the proud boys were encouraged by or even conspired with Donald Trump former president Donald Trump. Joining us now Bloomberg Washington correspondent Joe Matthew on Capitol Hill. Hey Joe give us the lay of the land and what to expect today. Well you just said it in a nutshell here. Today is about the process of connecting the dots. We've heard that the Trump ecosystem if you will those who were in his orbit were in touch with those groups the proud boys and the Oath Keepers. But who was it. And did Donald Trump have plausible deniability. Was Rudy Giuliani speaking with them. Others in the president's orbit like Roger Stone. These are some
of the questions that we hope will be answered today as we explore the term convergence. As Jamie Raskin the congressman Democratic congressman on this panel likes to call it they want to make it at least build the case at least to show that the White House knew that there were in fact armed militias here in Washington on the day that the president predicted that it would be wild. We were also expecting prime time hearings Thursday. They looked like they've been postponed. I'm trying to understand why what does happen what what was expected Thursday that now can't
happen. Well this was going to be the grand finale on Thursday. And we expect to see a testimony even potentially from Steve Bannon. But things changed at the last minute at least yesterday. We understand that they postponed it likely for a week though they could wait more time than that. This was supposed to be the grand finale in primetime much like this series of hearings began. Keep in mind Steve Bannon now has been cleared by the former president Donald Trump to testify before this committee. He's essentially lifted executive privilege even though Steve Bannon is still going on trial next week for initially refusing to testify under that subpoena. He's been indicted and nobody would like him to testify more than Donald
Trump as he feels like there's no one there to defend him on this panel. And of course that was a decision by the minority leader in the House Kevin McCarthy to pull out of this committee. And in the meantime we're looking at President Trump still tweeting on his own platform about this. What kind of reaction do you expect from him. A predictable one. And he takes every opportunity to tell people to sign up for truth social his his platform knowing well that
he'd prefer to be on Twitter with tens of millions of followers here. But of course the president is thinking about his own brand as we head for the midterm elections here noting that there's a new poll out today by The New York Times and Siena College that shows a good number of Republicans nearly half of Republicans in this poll would rather see someone other than Donald Trump seek the nomination in 2024. Joke. We'll leave it there. Thank you very much indeed for updating us Joe. Matthew joining us from Capitol Hill. Don't miss the cool sound out on Bloomberg Radio weekdays 5:00 p.m. Eastern with Joe. Interesting times. Let's talk about where we are in the markets and shrink times there as well. Euro dollar
company trading at 1 0 0 5 2. We got 2 1 sports 0 0 0 3 at eleven forty six. We're going to talk about that story next. Janet Henry is going to be joining us from HSBC global chief economist. That's next. This is Bloomberg.
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