Transcripts For CNBC Squawk On The Street 20240714

Expectations china vowed to retaliate against u. S. Tariffs set to go into effect september 1 were now on track for a higher open lighthizer said its not possible given your past behavior so an awful lot to absorb today. Very interesting that the futures are up exactly the amount they are right now. They issued a very strident set of words toward us at the same time, announced stick l stimulus for hong kong where is what the president said on twitter what happened and without that, i think theyre going to view the olive branch of moving back to december as an illadvised move because the chinese arent playing ball were going to have Chuck Robbins later on this hour the chinese derailed their outlook. Asking them not to bid on business things are getting very, very tense. If we let that dominate the headlines and forget to look at what walmart said today, i think well have a false narrative because of how bad things are. Remember, we are not a big export nation. But yeah, the gloom is pretty palpable this morning on today show you said we need to dial back hysteria, this does not have to end poorly, we can avoid recession. Yes, janet yellen had calming words yesterday. Basically saying, look, just because we have the yield curve do this does not mean its etched in stone. This is not a train wreck that has to occur its manmade if it were involving credit and you and i not being able to credit along with the rest of america, it would be different if it was involving derivatives that we didnt understand, it would be different if it were involving a crisis of confidence that made it so no one wanted to spend, different but we have high employment. We are still spending. Im getting that from numbers that came out today. So i absolutely dont like the tenor of the discourse, but i also am not oblivious. I called it chernobyl yesterday in a talk i gave on the street we dont know. There are people who said chernobyl had to spread to sweden and therefore germany then theres what happened, which is that somehow the bumbling soviets stopped chernobyl, but it was scary. Fukushima, scary it got under control this is one of those thing where is it can get under control, but it doesnt look like it. I was talking to some bond traders last night they said, you know what, jim, we dont know what it is, but its bad thats how people are reacting when you see bonds doing crazy things and the bond market is twice the size of the equity market wow, i dont know, but im going to be nervous. Do you think the 30year below 2 is crazy yes you do . Does it not deserve to be below 2 . No, it doesnt because theres got to be money coming in from overseas janet yellen talked about that i do think that what it does say lets say it is socalled for real because it is a trilliondollar market then jay powell should come out today and say, i see these things im going to take back what i said about midcycle adjustment as long as hes being taubtntedb the president , its hard to say, you know, im going to give him what he wants. Im going to protect the institutions but if he came out right now, as Alan Greenspan did october 8th of 1998 and said, you know what, ive got your back, then i think a lot of this hysteria would go away there are people who say it doesnt matter what he does. Thats total false narrative of course it matters i think this would be a once in a lifetime opportunity for the United States to take advantage of these i remember, a hundredyear Russian Railroad buy we want a 50 year. We want a 50 year. Give it to us. How does he say, ive got your back, when weve just had the biggest jump in retail sales in four months you have got productivity 2. 3. Philly fed double the estimates. Whose back does he need to have . He needs to react to what the bond market is saying, not to that data. Or he could come out very easily and say, okay, look, the data looks really great right now, but we dont know whats going to happen. Im a student of the bond market im wary i like whats happening right now. But you look at walmart and walmart had amazing numbers, but i have to tell you, i think walmart is responsible responsible for the lack of inflation in this country. Of course and its a broad base hundreds of millions, people go there. I say, look, theres no inflation. So its no harm if powell comes out and stop the rhetoric we may tighten, we may not. Just say, look, were cognizant. We like the numbers, but were cognizant things could go off the rails. We certainly dont think they will, but were ready. Youve got to say those things if youre just quiet speak softly and no stick, i dont care for that. Well, jackson hole is around the corner, but well see if he needs to speak before then my daughter went to jackson hole its an instagram its heaven for instagram. If the fed chief were a little lighter, he could also deal with the criticism of the president hes a little too and i dont want to give him acting lessons, but hes like the early fonda before he got his game theres some performance to the job. You know. Hes not olivier for certain jim mentioned walmart one of the bright spots today on better than expected quarterly earnings, revenue, and comps company also raising their fullyear guide for u. S. Comps and earnings jim, the Economic Health remains strong some discussion about obviously security in their stores given the events in the last couple weeks, the degree to which theyre a supplier of guns and ammunition too dramatic guide up, really strong samestore sales. A refutation of what happened with macys yesterday. Remember, every day low price is a winner when youre running full price the way macys is, whos a loser, its a shame. This kind of quarter where you see amazing ecommerce growth, 37 . I mean, that is a rival to amazon i would call my team and say, we got to step it up. Were not going to let them beat us of course, walmart is still behind this was a remarkable quarter. A reminder that the hysteria that some may want to spread, which by the way is happening in some quarters. They should look at this theyre looking macro. To look at walmart for some of the people who spread hysteria is to say, you know what, im not going to look at that. I know better. Let me tell you, walmarts numbers are more informed, quicker, and more on point than anything we get from the government this is a very good report i want them to concentrate on the noinflation component there are many people who say with tariffs, there has to be inflation. This company uniquely is able to battle inflation because of how good its supply chain is and how good Doug Mcmillen is. It gives powell the cover to say, look, ill do whats necessary. He didnt say that last time do i want him to say, i was a knucklehead and shouldnt have raised in december no, thats for me to say he doesnt have to have that so youre going with walmarts quarter is a signal of consumer strength, not of the consumer searching for bargains or graduating down its consumer strength. As a walmart shopper, i can tell you theyve got some things that are inexpensive that are expensive in other places. So the answer is the consumer has this, okay, and knows value. This is producing walmart. You press ive got my walmart app. When they started the walmart app, it was like best price for cheezits and velveeta it was a suboptimal site now its gotten much better. Its a goto place just like amazon americans have to recognize, they should check the app. Its a good app. It would be better, obviously, if macys had a different print and if tapestry today did not have kate spade. Revenue below Specialty Stores are doing quite bad. Mallbased stores obviously terrible that macys quarter was really a shocking, shocking quarter you also had bad execution Urban Outfitters has always talked about this. If you get fashion wrong, youre really finished. They got fashion wrong, inventory wrong. It was really hard to unfortunately, im going to say this really hard to do worse and yet still might have to cut your earnings that much that was a false hell. But those Big Box Department stores are not in favor. Look at nordstrom. Remember nordstrom said they didnt want to pay more than 50 to be private. Well, that was where are they nordstrom by the way, of the list of s p names off from their 52week high, its in the top ten. Oh, yeah. So is kohls i thought kohls cash, not being facetious, was good, but theyre not every day low price. They have a really good deal with amazon where you can return goods there. Thats not mattered at all you need to deliver a walmartlike quarter i think target is going to have a good quarter because the stock is so down, that may be the opportunity. Theyve got a good yield stores are beautiful but right now, were looking at a market that is certainly better than we had, with the exception of our interview with Chuck Robbins. Chuck has some explaining to do. Chuck knew china was weak. I think were going to hear chucks explanation that china did fall off a cliff even if its only 3 of your business, thats 3 too far. Its down in the premarket. Current quarter guidance below expectations at this level, it would be the biggest gap down on earnings since 2013 according to bespoke. You mentioned guiding below for the quarter. China down 25. Right they have a lot of business in telco. Theres a moment in a Conference Call where they were told to not bid. The chinese said dont be id were going to unbid you that was a breathtaking moment but the rest was very strong and i think theyre practicing i think theyre underpromising so they can overdeliver. I think anyone who thought china, even at 3 , couldnt hurt them was, lets just say wrong i was part of that i didnt think that i didnt anticipate china would just basically end for them but the reason the stock isnt down more is because i think people are starting to look and say the jpmorgan piece, which is very good, just says, okay, look, they have an abundance of caution. Kelly cramer had so many good things there were a hundred words that were wrong, i mean, a hundred words that were negative chuck had this amazing moment where he said, hey, listen, what are you doing . I thought china was small. China is small, but its small on a big mosaic. Were going to talk to chuck in a moment. And i think chuck is going to illuminate things. When you point to things about the bidding process over there, do you think its a canary in terms of the qualitative measures chinaing sti china could still take in retaliation . Yes on the Conference Call, you had hints of the idea that theyre getting what we used to call the heisman. Theyre really being told, look, were going to use all commodities made in china, even if it may not be the best. Commodities are supposed to be, whats the difference . I think theres a qualitative difference between a lot of chinese equipment and american equipment. Obviously but theyll switch to chinese. Look, theyre not just doing the rhetoric theyre saying, hey, listen, we dont want you so its kind of if youre over there, they dont want you and the president doesnt want you vietnam is open for business 100 Million People, but vietnam is, theyre getting there. Youve talked about the logistical capacity, worries these nontariff countries still have they just dont have the supply chain to get the big ships there and send them to san francisco. Vietnam is anamazing country anyone who remembers certain operations they did during the war and i know a lot of millennials dont even know this they can accomplish great things, greater things than the chinese. What youre saying reminds me of Tom Friedmans call this week quote, i suspect chinas leaders are drawing up a list of Industrial Products for which theyll never allow themselves to depend on america for again think thats true . I think if they dont care about quality of materials, yeah there are instances in the steel theyve sent us that was subpar. They seem to not care as much about precision. If you decide youre not going to use emerson, a huge business over there, 3m, if youre not going to use honeywell, what are you going to do . Yes, maybe you can make it why . Because youve stolen so much of our intellectual property. If you steal it, then i guess you can make it. But i think that the rhetoric i think in its entirety, people think that china is equal to us. Its an economic power i think the chinese are doing many things that projects power, not unlike people dont like it, but i use the analogy. Not unlike the soviet union. It was 28 Million People in world war ii a lot of people would say they won the war, even though we know the great sacrifice our country made people should remember they had the hbomb not long after we had it thank you, some americans who gave it to them. Were getting strul production as we speak Rick Santelli, lets get that number we had a lot of really solid data unfortunately, Industrial Production isnt one of them Industrial Production a minus sign, down 0. 2 were expecting a number up 0. 1, up 0. 2 however, we have a mitigating factor here. Last month was technically zero. Really, it was a minus number. If you rounded it off, it was zero heres the part i dont like utilization, i guess we shouldnt be surprised at this considering whats going on in the world. 77. 5, carl that is the slowest rate of production since october of 17 when it was 77. 3 so want to Pay Attention to that unlike Industrial Production, utilization actually had a downward revision in the Rearview Mirror but only subtle. 77. 9 to 77. 8 so that didnt match up with some of the earlier stats, and the bond market itself is holding the tens to twos rates barely above where they were yesterday, not reflecting the fundamental move they should have had on earlier data carl, jim, back to you all right, rick aerospace yeah, big piece and look, a shutdown of the line of the 737 max is something that would impact. We are a great exporter of airplanes. Theyre delaying the latest 777 long range today i emphasize there are a lot of people who think boeing skimps on safety ill take every one of them on well get cramers mad dash, countdown to the opening bell. Obviously weve got to get to ge this morning on this report from Harry Markopolos well do these s. E. C. Filings, buffett on amazon. Were back in a minute hey im bill slowsky jr. , i live on my own now ive got xfinity, because i like to live life in the fast lane. Unlike my parents. You rambling about xfinity again . Youre so cute when you get excited. Anyways. Ive got their app right here, i can troubleshoot. I can schedule a time for them to call me back, its great you have our number programmed in . Ya i dont even know your phone anymore. Excuse me . what . I dont know your phone number. Aw well. He doesnt know our phone number you have our fax number, obviously. Todays xfinity service. Simple. Easy. Awesome. Ill pass. Cramer watching some new takes on apples phone cycle two positive reports. Im going to do the headline despite china worries, iphone demand cycle looks stable heading into fiscal year 20 thats rev la story, actually. Then a good piece by davidson. Lots of people cover apple lots of people do quality work heres a review of their 10q, which is a statement they publish for the s. E. C. , talking about how its a very good projection for Gross Margins and talking about authorization of more buybacks. One of the things i think these reports are explaining again is that there is that Service Revenue stream i do think that they have to when the card and weve seen the card comes out, we need to know if people are using the card we need to know about other streams theyve added. If they can get more of a razor blade model, they can do the unthinkable and take out this level. It is amazing that china could be strong for them, and these two pieces indicate its not bad given everything we hear and its counterintuitive. When are they going to tell apple get out of china the answer is are they going to take away 2 million jobs the Stateowned Enterprises there are showing declines in unemployment theres a camp that says china is invincible. Theres a camp that says china is falling apart im saying theres a camp im in this camp its decelerating and the party doesnt want it to decelerate. By the way, i think they think that the president uniquely believes that theyre the pajama party. I mean, when you make fun of the party, which i do feel that sometimes he does, when he takes them on, it is discouraging because that should be done away from twitter, i think. Its illadvised to make fools of them in the public. You sound a lot like the journal oped page today telling the president to stop with the basically call a trade truce. I mean, i think that wouldnt be so bad. He should go the way of musk when it comes to twitter we dont talk about musk anymore. You know why he doesnt make stupid tweets. Not to say the president makes stupid tweets. Its just not a great way. I think if jefferson had twitter, i just dont think hed go at it jim, were going to watch apple. Obviously in the green along with futures well talk to Chuck Robbins of cisco as well when we get the opening bell in seven minutes. As you know, coming off not just the worst percentage decline of the year but the first close for the dow below its 200 dma since june futures are green as were riding the coat tails of walmart. Back in a minute you should be mad that this is your daily commute. You should be mad at people who forget theyre in public. And you should be mad at simple things that are unnecessarily complicated. But youre not mad, because youre trading with e trade, which isnt complicated. Their app makes trading quick and simple so you can strike when the time is right. Dont get mad, get e trade and start trading today. But were also a company that controls hiv, fights cancer, repairs shattered bones, relieves depression, restores heart rhythms, helps you back from strokes, and keeps you healthy your whole life. From the day youre born we never stop taking care of you. Youre watching cnbc squawk on the street. Live from the Financial Capital of the world the opening bell in just under two minutes. Its been a heck of a week and remains so today cisco and walmart are going to counteract each other on the day today. I think thats right. I think cisco gives you a good read of international. There are places, pockets not good initially, i thought europe was good walmart obviously is the country. When we think about walmart when i worked with larry kudlow, he used to talk about 100 Million People going to walmart. Well, its a lot more than that now. Its a lot more people who do it online it shows, one, the health of the consumer, and two, a company thats managed to make it so prices dont go up its still every day low price how can they do that because theyre brilliant. Thats a Brilliant Company run by Doug Mcmillen whos really attuned to the future with a fantastic online offering. I have to tell you that was a quarter that makes you feel that things arent so bad in this country. Its not dollar tree by the way, dollar tree totally underlooked. Dollar tree has a lot of big National Brands now. I like shopping at dollar tree youre saying this is a good thing. Dollar tree has got National Brands cheaper than walmart. Theyve just converted my bad Family Dollar into a good dollar tree im going down there to do a segment, to show people this is the asbury park Family Dollar that no one wanted to go to. The dollar tree is so good but you can hear the people responding by saying, are we in a dollar tree economy . Ive been in a dollar tree economy all my life. Maybe them to wake up and smell the 5 sunglasses. Thats five pairs for 5 theres the opening bell. On the big board, Disaster Relief and Global Health organization americares. At the nasdaq, bio company gossamerbio. Look, there was a lot of people felt that walmart would miss that was just based on this is that fear concept that worries me so much there was nothing in any aspect of what walmart had been saying in the last few months that would have indicated theyll miss then macys just its really the antiwalmart again, regular prices, which are considered to be high. And mall, not strip mall weak where we can go in and go out. By the way, walmarts it incredibly their online offering is really extraordinary. I think the snobs on wall street, of which already a legion, do not shop at Walmart Dollar tree, they would rather hang from a dollar tree than enter a dollar tree. I think people know what youre saying. Others are going to argue the retail sales for july was about prime day and maybe the halo effect on walmart, ecom growth. Others will argue anything. Im on twitter today, and people are arguing my basic existence, not unlike what elon musk did when he was convinced i might be a hologram if you prick me, do i not bleed . But i think people can take the same day it and spin it negatively im not going to play that when it comes to walmart. Thats the health of the American Consumer and a Great Company keeping inflation in check. Which is contingent on employment youre going to wait to see if employment changes then the walmart quarters will change too i will tell you that i will start agreeing with the naysayers the moment that we see sefr several weeks of bad claims numbers. Up to 220k this week. Thats obviously amazing yes, the big issue in the country remains trying to find people to work, not trying to find people on the unemployment line its finding people who are willing to work and paying them more Small Business really hasnt slipped yet into im afraid because of what i hear about the yield curve. Theyre still, i dont know if i want to expand because it costs so much money to expand because theres not enough labor thats a different story from big layoffs. Were going to talk to Chuck Robbins. Theyve made layoffs according to a filing, nearly 400 jobs, mostly engineers theres lots of talk about big layoffs. Obviously Marvin Ellison at lowes investment banks, talking about 50,000 layoffs those are people who are highly paid and may struggle. But then there are all the people who managed to switch to the giga economy i spent a lot of time with the door dashes of the world i know those jobs are not considered to be the cream of the crop jobs. Lyft, uber i think a job is what you make of it. Those are good jobs, much better than the jobs that existed before that. Im not saying if youre a Vice President at bank of america and you get laid off you necessarily want to work at lyft its certainly available if you need the income. You mentioned amazon, jim we havent covered berkshires 13f, taking their stake and amazon to more than half a million shares at the end of q2, which is a little in the Rearview Mirror. True. I think that amazon had a down tick in web services, but it was minuscule. I think that its a highly unusual buy for warren buffett, whos spending so much money buying the banks the antithesis of amazon, theyre just slow and plotting they believe in americas stories. Hes got a barbell thing going there with amazon and bank of america. And ackman, of course, new purchase into berkshire. What do you think hes thinking . I think hes thinking, im having a real good year, im going to buy stock of a good man. It has been a good year yeah, for nelson peltz. By the way, procter does not come down during this period i am im not flummoxed, carl. I am fluk moxed mmoxed by the rc that says things are far worse its generating fear because people are looking at a trilliondollar market well, multiple trillion, and saying it acts like a smallcap stock. That is worrisome. My friends who are bond traders are saying, ive never seen anything like it and when youve never seen Something Like it, you dont react positively my friends in the Mortgage Bank business are saying, this is just nirvana are you going to refinance i thought everybody thought that they were brilliant last couple of years just not as brilliant as i have a 3. 3 i might take a crack at if someone were to offer me a thousanddollar fee refinance, im there. What do you make of some technicians, chartists who are arguing ten year needs to go back and retest 1. 3 . These 2016, 2012 lows. I think thats true really . Yeah, i do. Well, thats not good look, im not i think the market can come down you said this youve been responding to people on twitter up a great deal it certainly could happen. I think were taking a breather, but i think that the ten year is going up in price and down in yield. I think you look at the nasdaq where the real damage is occurring. Yet, the nasdaq up 17. There are wags who say, yeah, but if you look at it year over year no, as a fund manager, you look at those numbers, and the nasdaq has a lot to give up. If people were to take Chuck Robbins view of the world, i think they would do some selling. Thats not illadvised i think this makes sense if youre nasdaq companies. It makes no sense to Sell Companies that are yielding a three, which by the way cisco is when you can get a yield at five, six, seven is that your point i met with dow chemical this morning. I felt dow was not a good stock to own are you really going to look at dow chemical and say, you know, jim doesnt know what hes doing, which is untrue he knows a great deal what hes doing. And say, okay, 6. 3 yield, of which he has the cash flow it might go to seven you would buy it its at 44 if it got to 41, would it be a gift is that dividend trouble no, because its got giant cash flow jim will pull this out its got auto, and auto is whats choking the system. If you have a lot of auto, you really got youre not making the playoffs basf and a bunch of other Companies Going to test it out oh, geez, basf. Lets cover ge, down this morning after this madoff whistleblower, Harry Markopolos, releases a report that ge has masked the depths of its problems in fraudulent financial filings. Ge saying it has not been contacted by him and the report was produced to help short sellers profit by creating volatility in the shares were going to talk to Harry Markopolos in the next hour of squawk on the street. He is working with a hedge fund whom he refuses to identify to the journal today. Thats not cricket. I would say in the times ive met with larry cole and with the previous administration, i have pointed out over and over again that it is really hard to quantify longterm care policies that were written when Life Expectancy may have been just 75, and now people are living to 86 my father had longterm care, and he paid he bought the policy, and the policy was very little he had fulltime, roundtheclock help we priced out at 200,000 a year believe me, he did not spend 200,000 and he was not unusual because those policies, those were poorly written and i think its fair to say that ge did not disclose them properly, but thats not larry larry has done his very best, the ceo, to put the longterm care in a way that everybody agrees is as kosher as it can be carl, the problem with longterm care is that until a generation of people die off, it is going to be called into question because of the incredible cost of health care so when markopolos argues that the Insurance Unit needs to boost cash reserves by 18 billion, do you think i mean, do we know if that number is anywhere near legitimate its very fungible. I once used a similar number to john flannery. They were doing their best at all times to agree with what the regulators say now, the rap that a lot of people have is, well, the regulators dont know either i agree with that. But i think that the idea that larry hasnt been transparent and forthcoming, i think, is unfair i dont hear you saying that about any of his predecessors. Say, the past two. I think that the previous one didnt understand the depth, and thats fine because it was really incredible. And the one before that i think was whistling past the graveyard. Not necessarily trying to obscure everything i told larry the first thing he should do is fire the orders change the audit group on the board. They were way too rosy but lets just back up so was aig so was genworth. Everyone who wrote these policies, because the Life Expectancy who knew that health care would go up so much . Who knew Life Expectancy would be as good and the policies were totally written wrong. It would be like lets say you wrote a policy for a very expensive boat and you paid them 20,000 and they had to pay you back 200,000 there you go thats that policy john hancock, again, everybody wrote the policies wrong it wasnt like they were glib, and it wasnt like they were dishonest. Its just that they mispriced the merchandise. It happens and ge mispriced a lot and didnt disclose it properly. They had a little footnote im a student of footnotes because im a little, lets say, a. D. D. About footnotes it was in immelts queue but not in a way it would stick out. Well address all of this in our interview in the next hour obviously weve lost our gain on the dow. Were down 14 points there we go lets get to bob. Morning, guys its a mixed open. Walmart is a big, big help overall. Lets take a look at the dow components well start here walmart is a nice help here. There you got a nice move up jpmorgan, banks on the upside. Consumer stocks generally on the upside staples. Industrials are mixed to slightly down. General, caterpillar, and what else, the Energy Stocks are down this has been a headspinning morning. 40point high to low in just a few hours. Futures, at 5 00, we had that comment about china retaliation potentially coming moved down 40 points in the next hour or so around 7 30 or so, we had chinas comments from the ministry of Foreign Affairs saying meet us halfway on trade negotiations we started moving up 8 30, we got better economic data, we started moving up you get the point here its a headspinning morning 40 points from the high to the low. Thats what you call a vshape, folks. Its Little Wonder people are confus confused about whats going on its difficult to have an opinion on the market. I keep hearing, bob, were going to be range bound. Whats your opinion on whats going on is there going to be troops in hong kong, or is there not going to be troops in hong kong . Is there going to be progress on trade talks, or is there not going to be progress on trade talks . How about the fed getting more aggressive are they going to get more aggressive or are they not going to get more aggressive . And most importantly, what about the Global Economy is it going to be more stable at end of the year, or is it going to be less stable . This is an awful lot to deal with, and its impossible to model. So Little Wonder everybody in the last week has been talking about, oh, were going to be range bound at best. Remember, most of the strategists were at 2800 or so most of the strategists are 2800 to about 3,000 this is year end thats what everybody is looking at, where are we going to be at year end look at some of the strategists out there. Citigroup, this is walmart were talking about. Most of the strategists are 2800 to about 3,000 so were right in that particular range that weve seen right now. Thats where the debate is going to be. Do we need to lower those overall estimates . Put back walmart i want to show you the tale of two different companies, two different countries. The health of the American Consumer, walmart. Very importantly, they had very good commentary on their guidance they raised their comp guidance. Instead of 2. 5 to 3, theyre talking about the high end of 2. 5 to 3 thats a lot the American Consumer is very important here then we had alibaba, the health of the Chinese Consumer. Did you see the alibaba numbers here revenues up 42 . Those are absolutely amazing numbers. They said we have 300 million Chinese Consumers in the middle class now. And were selling to all of them so just remember here, 42 and 34 gains on a company of alibabas size the Chinese Consumer is still fairly healthy two different companies, two different economies. Guys, back to you. Thank you thank you very much. Ive got to tell you that i listened to what bob just said i find it calming. Honestly, puts it in perspective. Not that bad heres one where its not great. Were talking about shares of cisco, which are down 10 in the last two days after issuing Current Quarterly guidance that was below what i was looking for. Cisco has slower demand from china, among other things n wake of the trade dispute they did beat both of the top and bottom lines handily so we have a tale of two stories. Chuck robbins, cisco ceo, welcome back to the show hey, jim. Nice to be here. Thanks for having me all right, chuck. I know there was, to me, puzzle element in the sense that this was a blowout quarter. As you said, strong end to a great year but then very abruptly, you talked about this quarter really not a shining at all maybe you can explain to our viewers how a juggernaut like cisco can turn into a company that is really kind of fretting about this next quarter. Yeah, jim, first of all, i appreciate you acknowledging the great performance that our teams put forward last year, particularly in q4. They really did a great job. We had a phenomenal year and a phenomenal quarter you know, as we look at what happened in the last quarter, you know, we saw two things really we saw our Service Provider segment continue to be weak as many of those players contemplate 5g architectures and thinking about how theyre going to build that out over the next few years, and then we did see some weakness in china i think carl mentioned it earlier in the show. I think kelly said on the call that we were down greater than 25 in china and you made this point earlier, while its a small part of our business, when it falls off that precipitously, it creates a challenge. The rest of our business, if you look at all our orders, which is the vast majority of our business, is outside of Service Provider, those orders were up midsingle digits with Public Sector occupy 13 and commercial up 7 we saw strength in other parts of the business, but during july, we felt a slight change in sort of the overall macro versus what wed experienced in the prior months that gave us a little caution. When we finish our quarter, we know how that feels. It just felt a little different. That just gave us a little caution. Chuck, also, there was a moment where you could hear a pin drop on the call where you described again, only 3 of your business but what the chinese are doing when you went to bid for business. Fill us in on that well, jim, in china, i think as we have been operating there, clearly theres a lot of tension between the two countries. Ive always said that the trade tensions and the tariffs can impact us in three ways. It can impact us on our business in china we can have direct impact from the tariffs. Or we can, you know, obviously be impacted if it bleeds into the global macro environment we certainly saw an impact on our business in china this quarter. A lot of the Stateowned Enterprises, i think where they have optionalty, theyre choosing local manufacturers you know, were just being told in some cases that theyre going to favor local vendors thats just the way it is right now. We dont know if thstats a shortterm thing, a locker room thing. Were hoping its temporary and once we get to some resolution, well gain more robust access there, but thats what were experiencing right now before i let carl have the podium, let me just say youve got a gigantic buyback you put the limits on about what youre going to spend, but was last quarter you spent a lot stock is down 10 very quickly if you were to be your corporate treasurer with a 3 yield, is this a good level to start coming in and buy . Well, i think kelly would tell you if she were here that were going to be very opportunistic, meaning looking for opportunities where we think the stock is at reasonable price. So ill leave that with them, and the team will do a great job as they always do. Buybacks are an interesting point to jump off there, chuck, because there has been some discussion of the pace of buyback growth this year slower than last year, obviously. Were farther away from the tax cut. But if, in fact, margins or profitability are pinched in the second half, how less likely are you to want to play in the market well, i think, carl, what we talked about yesterday relative to our guidance, we actually took up our q1 operating margins. We guided strong Gross Margins so the health of our business is still very good. Again, as we think about the markets, we focus on what we can control. Were focused on our innovation. If you look at what weve built over the last few years, you look at the Successful Transition weve made relative to our software portfolio. We talked yesterday about the fact that 70 of our Software Business now is coming from subscriptions, and that were on track with what we laid out at our financial Analyst Conference relative to the transition of the software and content of the software our teams are executing really well our portfolio is better than it ever has been. These shortterm issues will come and go, but longterm, i feel very good about where we are. Chunck, i got to prez yoss y this you say you continue to see Strong Performance with broadbased growth. That just does not jive with a zero to two growth pattern youre predicting. I come back to a jpmorgan piece that i think is excellent, which im sure youve seen, where this was regarded as being overly cautious guidance. Chuck, this is more cautious than ive seen you, and it makes me feel like maybe im too optimistic about the future of cisco. Well, jim, if you think about it, we just came off a year where we grew revenue 7 were talking about one quarter. As i look at my level of optimism about the next year, the next two years, the next three years, i feel very good about where we are were going to have these shortterm blips we have huge customers when they pause, we may see a shortterm issue but this doesnt change my outlook about where we are it doesnt change my outlook about how i feel about what weve accomplished i remain very optistic were not going to do anything crazy because we have a shortterm blip from a certain set of customers we are going to keep executing the way we have been. I wish you said it like that last night i would not have felt like, holy cow, down six. Now, here is something i know we think alike here is one that, you mentioned it, some slight early indications of some macro shift. Can we get a sense of what you think is the reason why thats occurring . Is it tariffs . Is it Political Division is it the fed . Because i know that i have felt that july was pretty good, but maybe things are less rosy overseas or even in the United States well, jim, i mean, your show actually spiends a great deal of time talking about the dynamics that could be impacting the global macro i said for the last year i have been amazed at the resilience in the face of brexit and in the face of other european political issues, in the face of the trade situation that we have, you know, the fed is another issue weve got, you know, uncertainty that arose this week in germany. As mohammed said earlier, singapore. We have the argentina issue. So there is a lot of things going on that are creating a complicated environment. I am not declaring we have a major micro shift going on we had slight headwinds in july that we hadnt felt prior. I dont know if its a temporary thing or the beginning of something bigger but we saw it, we called it, and it didnt feel like the normal end of a year for us. Well, certainly understandable i like your largest Security Company in the world buried within cisco, and i like the fact that you have got a great voice activation kind of zoom business, web x. These are great secular themes, as is 5g you did not discuss any of the secular themes that could override shortterm blips. Is that because of caution because i think that people should see through this 3 yield value you give them and recognize that 5g beckons, zoom beckons, security beckons, so maybe they should hold on. Well, jim, if you look at our portfolio today, our core networking business is going through the biggest transition with our customers that we have in the history of the company. We have every product in that portfolio which is our biggest business thats going through a refresh at the same time we have never had that before. We added more catalyst 9,000 customers last quarter than in any prior quarter. We are in the second inning of that transition. Our collaboration business is doing great. Our security business continues to perform in doubledigit growth again iot is coming 5g is coming thats why over the long term i am very optimistic we are not going to get too wound up about these shortterm situations we feel very good about where we are and the opportunities ahead of us. Chuck, let me go back to macro one more time. I know you go to the white house and you are very attuned overseas i know you travel too much, frankly. I wanted to get your view whether there is anything that could change it, rhetoric, decline, less tweeting, a belief that businesses could be force for change if they were allowed to be more unfettered and governments would step back and be so interfering. This is i believe a man made moment of negativity can the man made moment of negativity be undone well, i think that everything that we have accomplished over the last decade relative to the interdependencies we have created around the world are Super Critical to how we solve this problem today thats what i think we are seeing as that unwinds mohammed talked about it earlier. And what we need to do is we need to get some of these issues resolved we need clarity. You guys said it markets hate uncertainty our customers dont like uncertainty. And so however its been created, thii think its importt to get to the right outcome. We need to get to the right outcome and as expeditiously as we can i know thats stating the obvious. But i think thats where we need to focus we need to try to get that done and hopefully not allow the political system or the political processes to impede our intent to get to that outcome as soon as we possibly can. Excellent, chuck. I dont think that that is stating the obvious, unfortunately. I dont know how thats not obvious anymore. Chuck robinson, chairman and ceo of cisco down 10 i think is an opportunity. I am a little more bullish thank you so much. Thank you, guys. You have to appreciate chucks candor and how he brought this to the street. Whats extraordinary is that 3 of the business, which is quite small because he moved a lot out of china, was enough that part dropped so precipitously. Mid doubledigit what happened is that it was a shutdown they said, listen, youre done youre done in china and china is a big market. You listen to fred senamith fro fedex. He says its too big to ignore there is a difference between a trade war and deciding there should be no trade with china. I think we have to keep track that our country will be weaker if there is no trade with china. I think everybody understands that dows up 80 points, jim. You want to talk about tonight well, yeah. I mean, i have a how did this hour end, for heavens sakes jim fish, i know people dont understand Waste Management is a construction play. Susan salka, temporary employment in the health care industry, lets find out about it you have to have a big mosaic, carl, to be able to determine how bad or good things are and you have to focus less on washington no sooigt on kash. I wish they would take a vacation play some golf. He is on vacation. Play some golf with some world leaders. Play a little golf president xi, whats his handicap jim, see you tonight. Mad money 6 00 p. M dow is up 71 when we come back madoff whistleblower Harry Markopolos says ge has masked its problems with fraudulent filings. Back in just a moment. Welcome back to squawk on the street. Im Carl Quintanilla with leslie picker, wilfred frost. Sara eisen and david faber have the morning off. Wild swings today as were now back up almost 90 points more data crossing the tape. We start with santelli in chicago. The june read on business inventories, up changed. We were looking for a slight rise no big revision gdp issues there, but there is breaking news in the Housing Market for that we turn to diana olick. Builder confidence for singlefamily homes rose one point to 66 in august according to the National Association of home builders. Thats one point more than expected but down from 67 in august 2018. Sentiment has kind of swayed between 64 and 66 for the past four months. Anybody above 50 is considered positive sentiment the index has three components current sales up two points. Buyer traffic up two points to 50 sales expectations the next six months fell one point to 70. Falling Mortgage Rates are boosting builder confidence. Single Family Housing starts in the first half the year 6 lower than last year rob dietz says it is due to trade concerns one other piece of data. Mortgage applications to buy newly built homes in july jumped 31 . A sharp jump likely due to that drop in Mortgage Rates back to you guys. Our roadmap today, stocks coming off the worst day of the year how you should be protecting your portfolio. Plus, a bigger fraud than enron . Madoff whistleblower Harry Markopolos calling out ge in a new report he will join us later this hour. Walmart spiking on strong earnings we will dig through those numbers coming up next. Back to the markets this morning. We are up 100 points on the dow. Reacting to comments out of china on trade today eunice has that for us live from beijing. We got two conflicting statements out of different parts of the Chinese Government today. One sounded belligerent and the other one conciliatory so the Foreign Ministry said we hope the u. S. Side will meet china halfway. But just for some context, we hear this phrase quite often from chinese officials this is boilerplate standard fare when describing beijings position so the other statement that we heard was through the finance ministry website, and this one warned that china would take countermeasures for the u. S. September tariffs. The authorities said the u. S. Move seriously contravenes consensus at g20 meetings, that the u. S. Deviates from the correct tract of dialogue and china must take necessary countermeasures. There are no specifics of the two, this is the one thats more meaningful because the point is that even though President Trump had decided to partially delay the tariffs past september, that at the end of the day the chinese dont believe this was a concession to them in fact, ways speaking to a source who advises policymakers, and he said that the view is this was more of a concession to u. S. Business and not a change of the u. S. s position there is also a feeling here that President Trumps position is becoming much more precarious because of the concerns about the u. S. Economy and also about the u. S. Elections so the approach will continue to be, im told, that china should just continue to wait. That they are in no rush guys thank you very much for that. Lets dive a little bit deeper on what this means for the markets. Joins us from First Republic private wealth management, Christopher Wolf and from bank of america, travis wood ward. Good morning spoken like a closing bell anchor. Good morning to you both. Chris, to start with you, can the u. S. Consumer with the data we have seen this morning, the water main numbers, offset the Global Growth sentiment we have got . Up to the point where sentiment is affected by trade, where jobs start being lost. Thats the key, job numbers. Thats driving sentiment and the income we see the average Hourly Earnings a change in percent thats helping to boost the income and spending. There also a trading effect. Some of the higher end stores, muse mee macys, for example, really light. The inversion that we saw yesterday and the ongoing kind of bearish sig false from the bond market, do they concern you . Yes we call it the great divide. So thats a symptom of companies doing two things one trading robots for people, keeping their Profit Margins high, they benefitted from the tax changes recently on the same side, the bond market is pushing yields lower 16 trillion of negative yielding debt. Its going to be hard we think to escape the gravity of bond yields going lower, stock markets trading off high margin, high profitability i think the recession is off to 2020. What are you looking out for to see more meaningful reprieve in markets as opposed to a shortterm bounce . We think we are twothirds of the way down to however deep this correction gets the catalyst will be some kind of policy easing from a bigger cut from the fed, from xi, from trump on trade, or number two, that macro data and markets will sort of force the issue on a much sooner timeframe. Key things to watch in the calendar are the jackson hole meeting coming up. The decision about huawei exemptions the bank of japan and the fed not too far away obvious catalysts for investors in the next few weeks. Even if you cant close your eyes and buy today, you are getting near that point. Within the next few weeks it will be a great entry point to what should be a much more bullish period later this quarter. And to that point, chris, since 1978 the s p 500 has risen on average about 13 from the time that the yield curve inverts to the beginning of a recession according to dow jones data does that mean now is a buying opportunity, or is that a risky strategy for investors i read it a little bit as the stock market parties right up to the end. Thats typically what happens. One is the profit story is still pretty good. Companies are doing a great job managing their margins for all intents and purposes, the u. S. Is a big market the big multinationals will suffer in the trade situation. If profits turn up 5 next year, thats not so bad. We think its prudent given the political dynamics, you have to see a 50 basis point cut in september, thats big, and noise around budget battles. Time to take a little bit of risk off the table. Why isnt russell having so many issues . Index comp compositions they have realize, banks, financially sensitive companies. The yield curve is punishing the Financial Sector at this point you need a positive slope. We dont have it it will be a tough time. Not as much of an issue of Domestic Versus International . The domestic story is pretty good some of the discretionary names, those doing pretty well. The Banking Sector dominating the profit story. Even if some of the Bigger Companies have more international exposure, you like them provided they have market power, is that right thats right. I think i will give you two ideas, ways to position. Number one, i think you want to look for what we could call the sort of quiet monopolies, large firms that have pricing power, low Political Risk Like National defense, Waste Management, even Global Beverages and some of the more defensive sectors if you screen for quality, thats a great way to position right now. Number two, you can barbell that with income. Cyclical value stocks, especially outside of the u. S. , those have been bombed out our survey this month showed you how apologies we are going to interrupt to get to this tweet from the president saying, quote, if president xi would meet directly and personally with the protesters, there would be a happy and enlightened ending to the hong kong problem i have no doubt. Clearly, having tried to strike a tone on trade of late, guys, to be a little bit more amenable this is probably not going to be the same tone. Clearly, the chinese messaging of late is whether its to europeans or to the u. S. To stay out of hong kong issue they see this as totally separate and unrelated to trade. The president trying to stick his paw in, as it were. Yesterday, people werent sure who he meant. Clearly now we know he means xi and protesters. Right, as opposed to xi and rump. Yeah. Sticking to twitter, to intervene as opposed to actual political intervention at this stage. Of course, i think the u. S. Response is most as long as there is no violence, bloodshed, they are kind of monitoring that situation. Certainly a long way from formal intervention from the u. S. Nonetheless, this will be seen by the chinese as giving the protesters hope that they can get a big democracy on their side i dont think this will help the tone of negotiations chris, how important that the market doesnt see worsening tone on trade negotiations again . We think its very important. There is a lot of conflicting signals inside the u. S. And inside china we have seen that clearly over the last couple of weeks the market hates the uncertainty, number one. Number two, a simple way to think about, you have two elephants fighting in the forest a lot of trees are going to break. A lot of damage comes from the two biggest trading partners having incongruous discussions with each other. We think that is the central issue that needs to be resolved. That probably puts a bit of calm back in markets. We think thats a ways away. For clients, stay close to their advisers this trade by tweet, you know, market volatility by tweet means you can overreact. And thats a pretty important message. Well leave it at that. Thank you very much. Shares of ge, meantime, down on this report released by madoff whistleblower Harry Markopolos stocks down to the lowest level in a few months of the dom chu has details. 7. 5, 8 on the downside if you look at whats being alleged by markopolos, he is saying that this team has found one of the biggest Insurance Frauds he has uncovered, bigger than what he says is the size of enron and worldcom he says this is the ninth Insurance Fraud case this the past nine years. Bigger than enron and worldcom combined the Analyst Community fell for ges accounting tricks by priding themselves and coming one methods to allocate ges corporate overhead he says the longterm business are under reserve and liabilities will persist and cost more down the line. Ge has responded to these allegations by saying that, again, we have never met, spoken to, or had contact with this person we cannot comment on the detailed content of the report the allegations are entirely false and misleading its widely known and the wsj reported that he works and is compensated by unnamed hedge funds. I point this out, on a stock for ge down 7. 5 we will continue to monitor this, guys back to you. Thanks. In a few moments, we will speak with Harry Markopolos about his report thats coming up on squawk on the street. Still ahead also, a day after shares plunged on the companys first Quarterly Results before going public. Major averages here. Dows up 90. Back to 2855 squawk on the street is back squawk on the street is back after a break. You have to know the individuals youre serving to understand their needs. Working with ibm watson we can bring together data spread across dozens of departments. That gives us a fuller view of the people we serve. Dear tech, dear tech, we need to look after everyone in our community. And we want to help our fellow human beings. Shares of starbucks rival Luckin Coffee rebounding a bit following the first Quarterly Report since going public. They had seen their stock tumble after a widerthanexpected loss currently up about 4 . Joining trust hong kong the ceo joins us appreciate your time very much i wonder if this strategy of aggressive spending and aggressive discounting on the product is paying off or not thank you, first of all, for having me on the show. Good morning i think, first of all, we reported yesterday our Second Quarter results. I think across the board we are very happy with the results. You saw that revenue was up close to 700 . Very importantly, i think we reduced our store level profitability significantly. You look at our strategy of acquiring customers, retaining customers and increasing the effective selling price, i think we have done a very good job in q2 and we are very happy with the position we are in today. Whats happening with share between you and, say, starbucks . Obviously, thats the rivalry everybody is watching. Are you, in fact, taking share from them in china yes, thats an interesting question i think china is a big market. We have 300 million sort of middle class consumers its a big market. The coffee penetration is underpenetrated. Its a market big enough for two players. I think our position is slightly different than starbucks we are very focused on quality coffee for take away and also delivery, and i think that is the market where we play and gain a lot of share. I think overall the market is growing quite significantly ad i i think we are doing pretty well today. Have you been surprised by the way that the trade war between the u. S. And china seemingly thus far at least hasnt hurt starbucks image brand in the eyes of the consumer yeah, look, i think again china is a market that is, in terms of opportunity, very big we are talking about 300 million sort of middle class consumers its a resilient market. I think sort of the impacts of the overall macroeconomic situation are starting to be felt more. I think with our model and we are focused on our model a combination of convenience, quality, and also affordability. I think the point around affordability will help us a lot in sort of gaining moehring market share Going Forward you told reuters you believe you can get to ebit breakeven next year. In doing so, cutting costs and relieving some of your discount opportunities, does that sacrifice your ability to take on starbucks in any way and are you looking to do this at a time when the chinese economy could be facing a confluence of other factors on a macro scale yeah, i think the position we have is slightly different because we are focused on convenience, affordability and quality. I think its very important for us that some of the price points that we are looking at is going to be maybe half of the price point from some of our competitors, including starbucks. I think that will true a lot of the consumption, mass market consumption for coffee, which were seeing today as well in terms of our forecast for profitability, i think what we have been guiding the market is to get to store level break even by q32019. And for us overtime we want to increase the store level profitability and also reduce the sort of further operating expenses i think in q2 we spent a lot of money on sales and marksing. For us its important to continue to build that strong brand. I think the ipo helped us a lot. These are expenses which are discretionary that we can dial back once we have sufficient scale. Could you expound on the christchurch macro environment clearly, we have seen the data slow done a bit in china are you suggesting that the consumer remains pretty strong regardless of the trade war . Look, i think china, again china is very resilient. I think overall there will be a bit of softness across the markets you will feel. It will hit sort of Consumer Confidence at some point, i think. Again with kind of our positioning, which we are very focused on is making sure sort of that people need to drink coffee, will need to drink sort of tea and have their lunch. What were trying to to is help people save money. So they come to our stores, which are very, very close to where they are working, and drive that consumption Going Forward. So again eastbouven if there is little bit of softness in china, which i think everyone will expect, i think with our model and positioning i think we are in a very good place. Next time i look forward to talking to you about the situation in hong kong, too, where you are joining us from. Thanks for your time. Sure thing. When we come back, walmart shares surging and tapestry getting hammered we will dig through those results. Shares of ge falling on a report claiming them to be a, quote, bigger fraud than enron. Madoff whistleblower Harry Markopolos is with us at post 9 when squawk on the street returns. Is your daily commute. You should be mad at people who forget theyre in public. And you should be mad at simple things that are unnecessarily complicated. But youre not mad, because youre trading with e trade, which isnt complicated. Their app makes trading quick and simple so you can strike when the time is right. Dont get mad, get e trade and start trading today. We believe in education built for all people. , [woman] snhu was the best experience of my life. [man] without snhu, i wouldnt be the leader i am today. [woman] i graduated high school 19 years ago. I still finished. [man] in the military, you feel that sense of accomplishment. Thats what snhu is. You will march from this arena and say to the world. I did it. [woman] you did it. I love you. [graduate] i love you too. Time now for our etf spotlight. Taking a look at the big banks, rallying today after yesterdays massive selloff. The kbe up today, on pace for the third negative week in a row. Also down 7 in just the past month. Speaking of banks, Warren Buffetts 13 f revealing onefifth of berkshires market cap has financials, including bank of america, wells fargo, jpmorgan compared to 12 in 2010 bill acman taking a stake in Berkshire Hathaway b shares buying nearly 3. 5 million of Berkshire Hathaways shares, guys. Coming back to the acman point in a moment. Warren buffett, its a vote of confidence for the longterm shareholder and where they stand for valuations we have heard him talk about this to our becky quick in a recent interview if you are looking at a three or fiveyear view, its not so much whether or not you are going to get a recession. Its to say if we get one, the banks are going to fair a lot better this time than last time. You are not going to have them as the epicenter for the cause of the recession their capital levels coming in are much higher than last time and you are not going to get the same level of regulatory kickback afterwards. I think buffett, with his time horizon, thats one of the factors he thinks about. The other is valuations. Again last time becky asked him about this, trading around book value depending which stock you are looking at with doubledigit roes after the crisis, roes fell to single digits. You are trading alt book value if you look through whether or not there is going to be a recession, which would clearly drag the stocks down, its cheap. In a previous quarter he has been a much more aggressive buyer of bank stocks than this time around. This time we saw small incremental increases in bank of america and u. S. Bank corp he has a wide spectrum of Bank Holdings he pretty much remind his position this time around. Previously, you can see that from the change over time, he has been a much more aggressive buyer of bank stocks i think we should take that as a signal that perhaps taking the approach of lets wait and see what exactly happens on the macro side. The other point id say, all of these are the Money Centers if you are arguing, oh, those exposed to Net Interest Income are the ones that will be hit worst by the yield curve those are the ones he is buying. He is not buying Goldman Sachs and morgan stanley. Going back to the acman point, he charged 2 and 20 to buy somebody elses hard work. Ironically, someone that criticizes hedge funds for charging that. If you recall, there was that infamous forbes cover where he was on it. They called hip tm the baby buffett, saying he was trying to turn pershing squaring, his hedge fund his returns have not proven to be in line with where about you have fets returns have been he is up about 50 to your point, no, he doesnt charge two and 20 anymore. He hasnt reached that High Water Mark in order to pay an Incentive Fee in some time because of those negative returns he has had we are getting solid reporting regarding the degree to which potus and a halfaro are driving the bus on trade and the fed. Lets get to kayla well, carl, i did some reporting this morning about exactly what the white houses view is on the market volatility and whether this antipowell, antifed view is widely held within the white house what i learned is it is not, most white house advisors believe that trade uncertainty is the culprit of the market volatility here, but the general understanding is that the president will not back down from his hard line on china, and the phrase that two different Senior Administration officials used in a conversation was, it is what it is. That being said, President Trump and Peter Navarro both are very, very critical of the Federal Reserve and chair jay powell they continue to truly believe that he is at fault and they want to see rate cuts. They believe that previous rate hikes were a mistake that being said, that is not the widely held view within the white house. I am told next week there are meetings on the calendar about gun control, Student Loans and drug pricing whether i asked why there wasnt a meeting about the economy, one official said the schedule fluctuates on an hourly basis and there almost certainly will be a discussion about this. That is good color, kayla certainly the market is attuned to every bit of reporting you bring us. I look forward to jackson hole even more next week. Now over to sue herera for a cnbc update. Good morning, everyone. Heres whats happening at this hour the big moving parts right now. Jib ralter has just moved to release the iranian tanker grace one, which was seized on july 4th on suspicion it was shipping 2. 1 Million Barrels of croyude i to syria that goes against the u. S. Move which was to halt the release of the iranian supertanker, which was detained in gibralter. In other news, a Law Enforcement official has identified the suspected gunman who wounded Six Police Officers in an hourslong standoff last night as 36yearold maurice hill he has a criminal history that includes firearm charges i did not think that this guy was going to come out alive. After several conversations with him and hearing a bunch of information throughout the afternoon, he cwas indicating h was not going back to prison. Former Colorado Governor John Hickenlooper is expected to drop out of the democratic president ial race according to sources close to the campaign. There is talk that hicken luplor is considering a run for the gop seat in colorado up for election in 2020. Thats the news update at this hour. Squawk on the strts ck tea ryuick break see thats funny, i thought you traded options. Im not really a wall street guy. Whats the hesitation . Eh, it just feels too complicated, you know . Well sure, at first, but jj can help you with that. Jj, will you break it down for this gentleman . Hey, ian. You know, at Td Ameritrade, we can walk you through your options trades step by step until youre comfortable. I could be up for that. Thats taking options trading from wall st. To main st. Hey guys, wanna play some pool . Eh, im not really a pool guy. Whats the hesitation . Its just complicated. Stepbystep options trading support from Td Ameritrade how you watch it does too. Tv just keeps getting better. This is xfinity x1. Featuring the Emmy Awardwinning voice remote. Streaming Services Without changing passwords and input. Live sports with realtime stats and scores. Access to the most 4k content. And your movies and shows to go. The best tv experience is the best tv value. Xfinity x1. Simple. Easy. Awesome. Xfinity. The future of awesome. Ge shares down sharply on a scathing report alleging the company masked problems with an accounting fraud bigger than, quote, enron and worldcom combined ge responded saying ge stands behind its financials. We operate to the highest level integrity in our financial reporting. Joining us this morning in a first on cnbc interview the author of that report, Harry Markopolos Morgan Brennan also joining us on set definitely making some waves the journal piece this morning, this would go a lot farther if you would say who you are working for and what the positioning is on the stock. I cant i promised confidentiality its a midsized hedge fund, u. S. Based. Do you want to talk about how you first came to realize this issue . Everybody would talk about g and how they were cooking their earnings they mefr missed earnings under jack welch. And then . Everybody said 3 of the s p 500. We should benchmark it if we have 1 , we are short 2 and we would underperform because ge took off like a rocket on fake numbers. Here is the thing we have had two different executive teams come in, take over they said they lifted the veil, there is more transparency here. What you are essentially alleging in this report is that there is still issues here, there they are still not reporting correctly raising red flags around the Current Executive Team what are you seeing right now that no one else or most other people on wall street have missed i mean, everybody has been looking at this stock and the numbers. The numbers are missing they report top line revenues, bottom line profits and nothing in between like expenses, research and development its all missing, including cash flows. They dont provide working capital. Its the only kp in that industry that doesnt provide working capital. Ges capital is minus 23 billion. Their Current Ratio is 0. 67. If you research it, it doesnt appear name a company that does that. Thats accounting 101. How severe is the problem that you are alleging . Is this a question they need to raise a bit of capital or if everyone was aware of the issue they would go bankrupt they took a 15 billion reserve hit in january 2018 for longterm care they have another 18. 5 billion in immediate cash needs for reserves we proved that in our report they have a 10. 5 billion noncash reserve hit they need to take on the garoppolo books thats going to desstery their equity ratios. They need to that by the First Quarter of 2021. You say this is akin to an enron and worldcom combined. Obviously, a lot has changed since those two scandals what do you believe is the role of the Public Company accounting Oversight Board . Whats the role of their external auditors . All were all of these people missing the mark yes the gatekeepers consistently failed wall street look at the financial crisis all the big banks got a clean bill of health turns out they had hundreds of billions in toxic assets sitting offshore that no one saw, including the rating agencies. You didnt speak with the company. Why not . I prefer just to use the Financial Statements i didnt want them to know whats come, have them engage in a coverup and destroy documents. There is going to be criticism out there that given the fact that you are working with an undisclosed hedge fund, the stock is 6 lower today, even if those allegations dont turn out to be true that there is a conflict of interest here how do you counter that . I needed to get my team engaged and i put a team of experts on this. The public deserves to know. The shareholders deserve to know i am an advocate for Investor Protection i did cases against many ponzi schemes, including Bernie Madoff and several billion dollar plus hedge funds. I put a lot of people in prisons over the years i have a family to support i need to get paid. In terms of the longterm care business, that has been raising eyebrows a huge skeleton that came out of the closet in march they had their quote unquote teach in it was seen as something of a turning point for the stock. How did you get to your numbers and why do you think the current numbers are wrong . We wasnt to the statutory filings of eight ge parties for longterm care and pulled the Regulatory Filings for the years 2013 to 2018 and we saw all of the losses falling on to ges books and we saw how much premium dollars they were taking in and what the loss ratios were they are losing 5. 27 for each dollar of premium income they are taking in. Those losses are unsustainable and growing at an exponential rate its growing exponentially and its going to make this company probably file for bankruptcy. Two things. The dynamic is not specific to ge, right . Its an industry dynamic, the way people live longer we have been over this already they telegraphed this to a large degree how is it durn than unu m a ig why wouldnt you be able to take a charge of that over time usually you reserve in advance so you can invest the money in the bond market and earn returns on it so you have the money to play claims when they come due. Ge hasnt done that. If you want to compare it to unum, their loss ratios for 2018 were 90 they took in a toller and paid out t90 . Prudential 81 ge 527 . Many times grater. Its unsustainable and growing. Did you look at gen worth as well that was a company sfpun at of e in 2004 and some of that lt esurance business is stied to there. They took a 600 million reserve increase the difference between the garoppolo filing numbers and the statutory reserve requirements are now zero that company came clean a year ago. They took the best longterm care off of ges books and the toxic stuff remained back at ge in 2004. One of the things thats surprising to the street right now is the claims you are making around money and the way the company is accounting for baker hughes. Baker hughes is a veritable interest and accounting requirement. Ge owns 54 . They control the voting. They dont control the cash flows and assets ge put it on their books on a consolidated basis they should not have they should have taken a 9. 1 billion noncash hit to earnings in 2018 they need to restate they are not allowed under the rules to consolidate those cash flows they do not control the money. Stepping back to the initial findings, you mentioned it started in the 90s. Were jack we will everybolsh in . They started to find some of the problems given the writedowns weve seen, given the adjustments weve seen anybody who signs the financials as a ceo or cfo a culpable. You are coming after the Current Management Team right now . March 7 they had a teachin they could have come clean they did not it would have been easy to do. I did. The losses increased 60 year over year and they are growing rapidly. Your relationship with the hedge fund manager, why promise confidentiality . Whats the point in keeping that secret it was their request, not mine. How much of a benefit we are letting wall street vote on our research they can read the report, decide for themselves. Whats the percent ang of profits . Its decent a good size. If they release you from anonymity, will you disclose who is paying you . Of course. Awill you be taking your findings to the authorities . All right done. Whats been their response . I prefer not to comment its been favorable. I do a lot of good cases for the government. So what do you think happens next in terms of the timeline here is it a Capital Raise on the offer . What do you predict . Worldcom and enron lasted about four months once their accounting frauds were exposed we will see how ge does. Are they going to come clean provide usable statements to the financial community. You are looking for a broad reinstatement of years going back how far at least the last three, preferably the last five with transparency a totally clean set of books with lots of details like expenses, r d, sg a, everything. A big part of your complaint is the degree to which they changed their reporting format over the years, right . It makes it difficult to go back and have comps they dont provide things like profit percentages for the Aircraft Leasing unit. They dont provide the off Balance Sheet financing in t leasing unit there has to be tens of billions that arent being taken into account. Ge came out with a long statement explains why they dont agree with your assessment one of the things they point out is liquidity i want to get it on the record as well that contrary to the allegations ge continues to maintain a strong Liquidity Position committed credit lines, several executable options to monetize assets. 16. 9 billion of industrial clash, excluding baker hughes, in the Second Quarter. 12. 5 billion in liquidity. 35 billion in credit facilities. It goes down the list. Are you saying those numbers are wro wrong or fudged . What are the allegations here . They dont agree with your assessment here, obviously. If ge had cash in january 2018 when they took a 15 billion reserve hit with the Kansas Insurance department, they would have been able to fund 15 billion at once. They had a request of special forbearance from kansas to pay that money over seven years. They couldnt afford 15 billion. I dont think they can afford 18 18. 5 billion i think they are cash poor. You think thur going bankrupt i think thats going to happen. What is the level of leverage is properly stated and have you been in touch with the banks that they have i dont work por to tfor thei work for the american investor fwe is leasing aircraft. They are showing Profit Margins 24 over the last three years. You cant do that without a lot of off Balance Sheet i think the numbers are very fudged. What has the reaction been with these numbers coming out . Very favorable from the wall Street Community that i know the people in the Hedge Fund Business i have been getting a lot of texts. I shut that off. I want to answer questions for the American Public and educate them. People paying you, lets be honest about that. But the question, i mean, some will ask how you outsmarted analysts on the buy side and sell side who have had access to a lot of this information for years. I think the difference is im a certified fraud examiner im trained in forensics i have studied the big cases like enron and worldcom, afell fee a. I have met the ceos that dookd the books. I studied under them i know what questions to ask and what to look for in the balance and income statements. Wall street, the analysts, many of those guys and gals cover a dozen or two dozen stocks. They dont have time to spend seven months studying one company. If all of this is true, when we dont know if it is, with all due respect, is a failure of the Research Community it is a failure on the part of the he can external auditors and acuaries and the rating agencies. Just coming back to the timeline, you said you got into this in the 90s this has been a sevenmonth process more recently. Why the time gap in between . What catalyzed you to work on this in the last seven months . The sin tentative from the hedge fend no, they completed a move in 2018 when you move to my hometown and you are running a scam, i am going to come after you. It was that simple because they moved to boston . It was that that was the imp u us to for me. I like to take a personal interest into my cases. So but with all due respect again, harry, you framing it this is the work done for American Public at large, american investors, and then you play theburn caboston card and getting renum rated, there are mixed messages in terms of what your ultimate mow vagss are. Ge was the biggest employer in pennsylvania where i grew up. I have relatives that work there and are on pension from General Electric i have a lot of friends as well in my hometown getting those pensions there is a Million People that rely on ge for a paycheck or pensions or Health Care Benefits they need to know. What is your message to them right now today . I mean, we know quite a number of people, cnbc, nbc used to be owned by ge. We know a lot of people will be impacted by this report as well and the allegations in it. What would your message be to them as we see the stock fall 6 right now . Read the report and demand accountability you will come back and update us definitely. I am happy to be on your show anytime. Harry, thank you. We continue to work on getting a response beyond the statement out of ge as well. As we go to break, take a look at shares of cisco sinking after Current Quarter guidance below estimates. Slowe they beat the top and bottom line stock closer to session lows, down 7 plus percent. The dow up 46. Dont go away. [spokesman] if youve tried college but never finished, group cheering snhu lets you transfer up to 90 credits toward you bachelors degree. [woman] it doesnt matter how old you are, you can do it, you can finish. [spokesman] finish your degree at snhu. Edu doprevagen is the number oneild mempharmacistrecommendeding . Memory support brand. You can find it in the vitamin aisle in stores everywhere. Prevagen. Healthier brain. Better life. Recession fears hitting stocks one top Economist Says thats not the only storm cloud on the horizon. Find out nor on resqwkn e re cnbc. Com mo ua othstet coming up. In the last 12 hours, a number of back and forth headlines regardingregarding cha and the United States on trade, on tariffs, and now the unrest in hong kong our Brian Sullivan is on the ground there help us make sense of whats turning into a bit of diplomatic pingpong, brian reporter have you ever been to the u. S. Open, carl wimbledon, Something Like that yes reporter yeah, thats how it feels here im doing this i think our neck hurts i was going to ask you to help make sense of it, because i know youve been in this region recently in vietnam. By the way, great stuff, carl. It has been a crazy 12 hours the protests have actually accustomed down, but the politics has actually ramped up, right . 12 hours or so ago, you had President Trump saying that he hoped theres a humane or that president xi jinping will answer the protests humanely. Then, of course, this morning, you had china saying they were vowing to regulon those 10 tars then the Hong Kong Government said they were cut tharg economic forecast. You saw futures move that was premarkets future move on this. Then you had the headlines coming out of china, where i know that kala tauchy and others the dow is still down about 8 since trump announced those tariffs on august 1st. Now youve got less than an hour ago President Trump coming back out and saying if president xi would just meet personally with the protesters, that it would be what did he say . It could be a happy and enlightened ending so it either, carl, feels like the calm before the storm or the storm before the calm. I dont know, because theres still the underlying protests. Theres still the macro trade war. Theres still talk about, you know, chinese Army Vehicles just over the border in shenzhen on the other side of calloo nyet the two sides are kind of talking. And thats where we stand round. Oo wherever these types of things break out, we always see the most evaluated flashpoints here on the other side of the world. How representative have those extremes have been from the environment youve experienced in getting on the ground is that a focal point or representative of the broader environment . Reporter fair point. We know the media does like to go to things that have pictures and video. I get that and i fully i completely accept what youre saying i guess in some ways, its a little and listen, ive only been here 12 hours its a little bit like occupy wall street in the sense that if you were down in that region, you couldnt escape it but if you were sort of, you know, on the Upper West Side of manhattan, its do was down the. We obviously got to the airport. The airport had been closed we were surprised we took off, will, out of newark airport. We landed. There were a few hundred protesters they had established a protest zone but our fantastic producer, justin solomon here had pointed out to us that there was all of this orange tape all over central, which is kind of their wall street or the city of london all of this orange tape around the sidewalks. I mean, miles of it. And he said, that tape is where fences used to be and the protesters had removed the fences literally come in like socket wrenches and drills, removed miles of fencing so that they could put it where they wanted and kind of use it as protection for themselves so you dont see the protests everywhere, but you see sort of the remnants of it and certainly the posters and the signs. Okay. Brian, well leave it there. Thank you very much. Great reporting. Well see you again later in the day, Brian Sullivan for us in hong kong. Lets get to the cme group in chicago Rick Santelli has the Santelli Exchange for us. Hi, rick hi, wilf. Thank you. Its been a very interesting morning. A litany of data in the form of industrial capacity utilization, everything was solid. Maybe even a little better than solid. The retail sales numbers, the control number, these were all very good metrics. But yet, markets didnt seem to pay a whole lot of attention we had kneejerk reactions in treasury rates that popped up a little bit, but basically, they cant escape, even into the bottom end of yesterdays range, which was an historic low point. But something did happen today look at some charts. Look at the intraday bound chart. About a half hour ago, boom, really takes a nosedive. The euro versus the dollar, also a bit of a nosedive. And treasuries were affected, because, we all know, all stimulus is fungible what does that really mean ill tell you what it means. Ecb meets on the 12th of september. And ali ren, who is a member of the ecb ratesetting committee and a governor of the bank of finland just did an interview with the wall street journal and basically what he says is, whoa, im paraphrasing wait until they see this stimulus package we unveil otherwise, theyre going to be surprising well, listen, its all about follow the leader. And in this case, this is the leader were following ira harris and i have talked about this for a while we heard a very eloquent mohammad say much of our markets controlled by the ecb, because its front running, not the illegal kind the whatever it takes mentality kind everybody is going to jump in front of what theyre going to buy, hence all stimulus is fungible but the problem is, the more that dynamic occurs, the more untethered markets get to the reality of the underlying economies. Just like ours and the inverted curve and oh, my god, that means a recession. Ill tell you something. Every day the s p 500 closes at an even number on a wednesday after a snowstorm. Within 15 years, youre going to get a recession. Think about that for a minute. Carl, back to you. Rick santelli, what a day today is turning out to be major averages obviously hanging on to gains. Dows up 55 and we are stuck right at 2850. Squawk alley starts in just a few moments. Good morning it is 11 00 p. M. At alibaba headquarters in china. Its 11 00 a. M. On wall street and squawk alley is live good thursday morning. Welcome to squawk alley. Im Carl Quintanilla with Morgan Brennan and jon fortt at post 9 of the New York Stock Exchange the dow is coming off the worst day of the year. The fourth largest point drop ever Interest Rate concerns, trade tensions, and Global Concerns are worrying for everyone. Not good you have me on i disagree okay. Dont backtrack. So weve got a rally, but its pretty darned tentative, let me look at it i look at some internal numbers. Very high put call ratios. Investors are definitely buying a lot more put and calls than normal thats usually a good sign usually a sign of shortterm bottoms. We dont know for sure the yield curve is not inverted today, but were also not getting much of a rally in yields at all, which is what we need obviously, we move in relation to the yields and if