Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller.
Speaker 2: Every business day we bring you interviews from CEOs, market pros,
Speaker 2: and Bloomberg experts, along with essential market moven news.
Speaker 1: Find the Bloomberg Markets Podcast on Apple Podcasts or wherever
Speaker 1: you listen to podcasts, and at Bloomberg dot com slash podcast.
Speaker 1: Let's bring in some smart people here to talk rage,
Speaker 1: to talk banks, to talk to you know, where things
Speaker 1: are going here, Ira Jersey, He's a chief EOS interest
Speaker 1: rates strategist. He's phoning it in and I love that
Speaker 1: about him. From somewhere in Jersey, Herman Chan in the
Speaker 1: Bloomberg Interactive Brooker's studio. So, Ira, you know, I typed
Speaker 1: in FED go into my terminal, and I see we
Speaker 1: got a FED meeting on May third, give us a preview.
Speaker 3: Yeah.
Speaker 4: So, after today's GDP report, which showed, you know, slightly
Speaker 4: higher than expected inflation data, I think that that Wednesday's
Speaker 4: FED is definitely gonna Hi. I think that that's almost
Speaker 4: a gift. And I think the question now is under
Speaker 4: what circumstances might they go further? Because we still have
Speaker 4: some of these concerns, and I'm sure we've talked about
Speaker 4: this with Herman about credit potentially starting to contract in
Speaker 4: a pretty meaningful way and that could have serious effects
Speaker 4: on the economy in the second half of the year
Speaker 4: and going into twenty four. So I do suspect that
Speaker 4: this might be the last hike. It's not a given
Speaker 4: that'll be the last hike, but I do think that
Speaker 4: the FED is much closer to being done than they
Speaker 4: are to continue hiking.
Speaker 1: So, you know, hermit hanging.
Speaker 2: Can I correct myself because I was far off the
Speaker 2: average US home price and immediately got a couple of
Speaker 2: listener emails. Oh good, Okay, But so I did actually
Speaker 2: put it into being and Bing tells me that the
Speaker 2: average US home price varies depending on the source and
Speaker 2: the type of measurement used, but the medium home median
Speaker 2: home sales price, which is the middle point of all transactions,
Speaker 2: is reported to be between three hundred and twenty one
Speaker 2: thousand and four hundred and forty thousand dollars as of
Speaker 2: twenty two.
Speaker 1: And then and then they gave me.
Speaker 2: Four sources that they used, which is I love this
Speaker 2: new chat search function.
Speaker 1: It's I mean, I just think it's cool.
Speaker 2: Because they give you pretty decent answers and then they
Speaker 2: source so so I can dig in if I want
Speaker 2: to know. But yeah, so between three twenty and four
Speaker 2: forty three seventy it's still far lower than sixteen million. Yes,
Speaker 2: it's right, it is. So I guess our good friends
Speaker 2: on hampsons are not necessary. Let me let me ask
Speaker 2: Herman Chance. So, Herman, how were these mortgage products? First
Speaker 2: of all, thank you for giving us some of your time.
Speaker 2: I know how in demand you are. Herman Chand covers
Speaker 2: regional banks for us at Bloomberg Intelligence Inteligence and is
Speaker 2: now the most famous person in the building. What what
Speaker 2: were the mortgage products? I know I flubbed that as well,
Speaker 2: But was it you get interest only rate for ten
Speaker 2: years and then you trip into a normal thirty year
Speaker 2: fixed mortgage.
Speaker 5: Usually it's the io period. It's just only period either
Speaker 5: five years or ten years, and then you wouldn't go
Speaker 5: to a normal interest rate. You would refinance that loan
Speaker 5: again and then do another loan, maybe the same sort
Speaker 5: of product, but then start the start the interest only
Speaker 5: period all over again.
Speaker 1: All right, So Herman, just looking at these banks, Paul,
Speaker 1: did you get that kind of rate? When you bought
Speaker 1: your I did not your lat Jersey state on the
Speaker 1: Jersey Shore, No I did. I did not. Unfortunately, apparently
Speaker 1: so Herman, I'm done with FRC. I'm done.
Speaker 2: I mean, dude, Ben Emmon said said out a note
Speaker 2: last night or two nights ago, saying that FA flight
Speaker 2: is now a huge problem for them.
Speaker 1: So I think, what flight financial advisor flight?
Speaker 2: So basically they lost one hundred billion dollars of assets
Speaker 2: in Q one and then they said in their call
Speaker 2: in which they took no Q and a deposit, flight
Speaker 2: was only one point seven percent in April. So I thought, oh,
Speaker 2: that's right, that's tapering down to nothing. But I think
Speaker 2: after the huge stock crash two days ago, a lot
Speaker 2: of financial advisors or those who are still left, said listen,
Speaker 2: I'm gonna take all my clients, all their assets, and
Speaker 2: we're going to Morgan Stanley, We're going to JP Morgan,
Speaker 2: We're going to Goldmansax.
Speaker 1: They're leaving.
Speaker 5: That's the risk that all the productive folks at the
Speaker 5: Biggs now try to find greener pastures. The earnings released
Speaker 5: earlier in the week had mentioned that of the financial
Speaker 5: advisors that had left prior to earnings, they represented less
Speaker 5: than twenty percent of assets in their management, but you
Speaker 5: can presume that that number is only growing by the day.
Speaker 1: I'm talking soccer with you. I have had enough of you two.
Speaker 1: I mean, we're gonna have a fed on, you know,
Speaker 1: May third, and I'll raise twenty five basis points and
Speaker 1: we'll get you then, to read the tea leaves so
Speaker 1: man City for one over arsenal John Farrell's telling me
Speaker 1: I had to make time on my day yesterday to
Speaker 1: watch that. Of course I did not. What did you
Speaker 1: take away?
Speaker 4: I actually have not seen that. I tried to avoid
Speaker 4: watching Manchester City.
Speaker 1: Really why is that?
Speaker 4: You know, evil empire kind of stuff? The because I
Speaker 4: support a team that that is their arch enemy.
Speaker 1: Who do you support? Who's your team?
Speaker 2: So?
Speaker 4: Why support Afton Villa in the Premier League?
Speaker 1: But okay, now, why do you now, as an ugly American,
Speaker 1: how do we pick teams to follow?
Speaker 6: Like?
Speaker 1: How did you pick Aston Villa? I couldn't pick that.
Speaker 4: I have a well, I had a close connection. So
Speaker 4: I did a postgraduate degree at the University of Birmingham
Speaker 4: in the Midlands of England, and Afton Villa was the
Speaker 4: closest Premier League team to where I was so so
Speaker 4: this was back in nineteen ninety three, ninety four, and
Speaker 4: when I was there, we you know, I went to
Speaker 4: like eight or nine matches, and so I just became
Speaker 4: a Villa supporter. People would say like, hey, Liverpool's come
Speaker 4: into town, let's go to Villa Park to watch a match.
Speaker 4: And I just wanted so many matches. I became a supporter.
Speaker 1: That's how it happens. Man. Yeah, very cool, the ugly
Speaker 1: American in England. I actually heard last night.
Speaker 2: A very cool interview Carol Masser had on Alexis Ohanian.
Speaker 2: I don't think that's too far off the beaten bank
Speaker 2: rates path. But Alexis o'hanian, who of course made his
Speaker 2: money I think originally from Reddit, but he's super rich
Speaker 2: from other stuff. Married to married Divinus william Serena Serena Williams.
Speaker 7: Sorry.
Speaker 2: He he bought women's soccer team in Los Angeles, Angel City.
Speaker 2: I think or went in to start it right, and
Speaker 2: he was saying the coolest the coolest part of what
Speaker 2: he was saying, I should say, is that he didn't
Speaker 2: do it because now he has a wife and a daughter,
Speaker 2: and all of a sudden, like he realizes the importance
Speaker 2: of equity equality, gender equality, but because he looked at
Speaker 2: their Twitter following and the deals they were getting as
Speaker 2: individual players, the popularity of these women, So many people
Speaker 2: are interested in what they had to say and are
Speaker 2: paying money for their the goods that they're selling. And
Speaker 2: he said the collective value of the team was far
Speaker 2: less than even one player. Yeah, you know, interesting. Yeah
Speaker 2: for him, he said, it's a huge business opportunity. And
Speaker 2: he also bought a little piece for his now five
Speaker 2: year old daughter. She's the youngest sports own owner in America.
Speaker 1: All Right, I were real quick third thirty seconds, twenty
Speaker 1: five basis points on the third. Are we done then?
Speaker 6: Yeah?
Speaker 4: I think we very well. Maybe, but obviously, if we
Speaker 4: keep on getting inflation data that creeps higher and higher,
Speaker 4: it's possible that they go another twenty five in June.
Speaker 4: But I think after that that they'll be done because
Speaker 4: the Fed is worried about going too far and they
Speaker 4: don't want to plunge the economy into a recession.
Speaker 1: All right, Ira Jersey, he's our guy on the rates.
Speaker 1: I mean, we'll talk to him next week. Of course,
Speaker 1: we'll see what this Federal Reserve is going to do again.
Speaker 1: Twenty five basis points kind of priced in IRA Jersey,
Speaker 1: Chief US and straight strategist. Thank you so much, Herman
Speaker 1: Chan in the studio. This man does not mail it in,
Speaker 1: he does not phone it in. He's at his post
Speaker 1: every day and he's been very widely needed here over
Speaker 1: the past month and a half as we try to
Speaker 1: navigate some of the turmoil, some of the stress in
Speaker 1: the banking system, particularly on some of these regional banks.
Speaker 1: And we also have the credit Swiss ubs thing, so
Speaker 1: there's been some challenges there in the banking space and
Speaker 1: that's spoop the market a little bit. So we're appreciative
Speaker 1: of getting Herman's expertise.
Speaker 7: You're listening to the Ken's Our Line program Bloomberg Markets
Speaker 7: weekdays at ten am Eastern on Bloomberg dot com, the
Speaker 7: iHeartRadio app and the Bloomberg Business App, or listen on
Speaker 7: demand wherever you get your podcasts.
Speaker 1: All right, let's be honest, folks. Bond Guy screwed up
Speaker 1: bad last year. I mean, double digit declients everywhere across
Speaker 1: the fixed income space. But they're making up for it
Speaker 1: a little bit here. In twenty twenty three, the Bloomberg
Speaker 1: u US Aggregatortal return value unheedged index whatever that is,
Speaker 1: is up three point four to six percent year to date,
Speaker 1: so that's pretty good. So let's bring in George Bori.
Speaker 1: He's a chief investment strategist covering fixed income space for
Speaker 1: all Spring Global Advisors, who are located just outside of
Speaker 1: Lovely Milwaukee, Wisconsin, but he's based here in New York.
Speaker 1: He joins us here in our Bloomberg Interactive Broker Study.
Speaker 1: We appreciate you coming in, George. You get a gold
Speaker 1: star for showing up and not phoning it in. Talk
Speaker 1: to us about the difference between this year to date
Speaker 1: and what you guys had to do with last year.
Speaker 8: Yeah, well, good morning, thanks for having me on the show.
Speaker 1: We're a very different.
Speaker 8: Point in the economic cycle. You know, the Fed's obviously
Speaker 8: much more advanced in terms of rate tightening, and although
Speaker 8: we continue to see, you know, some ongoing inflation pressures.
Speaker 8: What we like to say is, you know, inflation's off
Speaker 8: the boil, but it's still still pretty hot and coming down.
Speaker 1: So you need it to come down.
Speaker 2: So you think, then we're set up for one more
Speaker 2: hike and then hold. I mean that's pretty much consensus.
Speaker 2: But if we have financial stability, assuming we don't have
Speaker 2: a banking industry and crisis. I can't imagine why the
Speaker 2: Fed would hold at you know, still between five and
Speaker 2: six percent of sticky inflation.
Speaker 8: Now today's data makes it tricky, and you know, I
Speaker 8: think the bias is to move to a pause, but
Speaker 8: you know, they don't have the all clear. They certainly
Speaker 8: don't have the cover to do it without some risk.
Speaker 8: And so you know, yes, raising rates one more time
Speaker 8: certainly makes sense. You know, we need to see in
Speaker 8: FED funds rate above the level of core inflation. At
Speaker 8: that point, you know, the Fed can be a little
Speaker 8: bit more disciplined, but we're simply not there yet, and
Speaker 8: with core inflation showing some signs of moving up, that
Speaker 8: may keep pressure on them.
Speaker 1: Yeah, we're at four point nine percent.
Speaker 2: The core PCEE quarter of a quarter came in at
Speaker 2: four point nine percent today, so we were looking for
Speaker 2: four point seven percent. Yeah, that's going the wrong direction essentially.
Speaker 1: Yeah, all right, So George, I'm not sure if you
Speaker 1: can't keep a job or you just like working all
Speaker 1: over Wall Street JP Morgan Ubs Securities, Wells Farger. You've
Speaker 1: been doing is for a long time. Where are you, guys?
Speaker 1: Given where we are in cycle. Given where we are
Speaker 1: with the FED, where are you guys at offspring thinking
Speaker 1: about the best opportunities at fixed income right here?
Speaker 8: So these were all tactical moves, just to be very
Speaker 8: self initiated, not firm initiated, at least not yet.
Speaker 1: So hopefully that continues.
Speaker 8: But I think if I've learned anything over thirty plus years,
Speaker 8: you know, as a fixed income investor, income matters. You know,
Speaker 8: that's ninety plus percent of your return as you move
Speaker 8: through time, and your best forward looking indicator or predictor
Speaker 8: of returns is just your simple starting yield. So beginning
Speaker 8: of the year, yields are pretty high. You know, that
Speaker 8: was sort of a good entry point from our perspective
Speaker 8: to certainly make a meaningful move into fixed income. You know,
Speaker 8: as the year has unfolded, you know, with all these
Speaker 8: sort of conflicting economic signals and really sort of the
Speaker 8: reminder that yields are relatively high, adding duration to your
Speaker 8: portfolio is effectively the kicker. That's really where you're gonna
Speaker 8: get a little bit of extra return in the portfolio.
Speaker 8: And we've seen that so far year to date. As
Speaker 8: you mentioned the ag up, you know, let's call it
Speaker 8: three and a half percent year to date. That's pretty
Speaker 8: good by bond in bond terms for three months or
Speaker 8: four months of effort. And so to the extent, you know,
Speaker 8: expectations are that number could probably double over the course
Speaker 8: of the year. You know, seven percent return doesn't necessarily
Speaker 8: earn back everything from last year, but gets you, you know,
Speaker 8: almost half of what we love. And so as we
Speaker 8: move through time, you want to compound at the highest
Speaker 8: rate possible, and we're doing that basically in just about
Speaker 8: every strategy that we manage.
Speaker 2: What's on your dashboard, George, when you look especially at
Speaker 2: you know, the try to engage the health of corporate
Speaker 2: America or you know, corporates globally, it seems from looking
Speaker 2: at spreads to.
Speaker 1: Me like they're pretty healthy.
Speaker 2: But if I look at other interest rate indications, we're
Speaker 2: headed for a recession. So how do you what's the
Speaker 2: data that you look at every morning to do your job?
Speaker 8: Yeah, I mean, I think what's unique about this cycle?
Speaker 8: You know, it's not a great surprise, but inflation is
Speaker 8: both you know, it's it's a it's a double edged sword.
Speaker 8: You know, it generates a lot of nominal income for
Speaker 8: both individuals as well as companies, and that nominal income
Speaker 8: is ultimately used to pay back debts. So when we
Speaker 8: see companies that have good, solid balance sheets, ones that
Speaker 8: are pretty well funded, not a lot of immediate borrowing needs,
Speaker 8: and relatively low cost of debt, they're in a good
Speaker 8: position to kind of weather a lot of economic volatility.
Speaker 8: And that's really what we're seeing, and that kind of
Speaker 8: moves up and down the rating spectrum. That's not just
Speaker 8: you know, the very highly rated triple A rated of
Speaker 8: the few that exist companies in the world, but that
Speaker 8: can kind of go all the way down kind of
Speaker 8: the credit spectrum. And so what do I worry about.
Speaker 8: I worry about companies and individuals that are attached to
Speaker 8: floating rate debt costs because they've gone up, they've gone
Speaker 8: up a lot, they've gone up quickly, and they are
Speaker 8: now sort of working through and we're seeing it in earnings.
Speaker 8: You're seeing you're seeing margin pressure. You're seeing now that
Speaker 8: a reduction in capital spending and all that has to
Speaker 8: do with the cost of capital. So that is working
Speaker 8: its way through the system. But we don't have the
Speaker 8: same kind of pressures in say one specific sector like
Speaker 8: we had in eight or even in the dot com
Speaker 8: bubble back in two thousand and so this is kind
Speaker 8: of a long drawn out exercise, and for us as
Speaker 8: bond investors, you know, sort of that quality that that
Speaker 8: company analysis becomes absolutely critical. We can build good portfolios
Speaker 8: with good companies that have very strong predictive paying power,
Speaker 8: and that's where you sort of grab today's yields. You
Speaker 8: capture it, and you continuously compound it through time. If
Speaker 8: you can avoid permanent impairment, you win.
Speaker 1: George, I know you've got a lot of experience in
Speaker 1: a high yield space here. You know, if I'm staring
Speaker 1: down our recession, do I allocate capital incremental capital to
Speaker 1: the highild space or might just too worried about again
Speaker 1: the potential recession and credit quality and all that kind
Speaker 1: of stuff.
Speaker 8: I think that the basic, you know, sort of assumption
Speaker 8: is avoid high yield going into a recession. You know,
Speaker 8: it's a good rule of thumb, but it's not exclusive.
Speaker 8: And as I mentioned, you know, what's unique about this
Speaker 8: cycle is we have a wide range of companies that
Speaker 8: have very very well funded capital structures that includes high
Speaker 8: yield companies. I mean, if you just simply avoided the
Speaker 8: lowest and riskiest sectors of the market like triple c's
Speaker 8: that that you've already taken out, like the line's share
Speaker 8: of default risk in the universe. You haven't eliminated it,
Speaker 8: but you've taken most of it out. And so just
Speaker 8: moving a little bit up in quality and focusing on
Speaker 8: say triple b's, double B single bee companies. Those are
Speaker 8: the ones that are kind of hovering between investment create
Speaker 8: and high yield companies that are paying six, seven, sometimes
Speaker 8: eight percent yields and have good earnings transparency as well
Speaker 8: as a well funded capital structure. To us that those
Speaker 8: are very attractive opportunities, So our messages don't throw the
Speaker 8: baby out with the bathwater, you know, be willing to
Speaker 8: sort of look for those high quality companies regardless of
Speaker 8: their rating, and then stick with them as you move
Speaker 8: through time. So, you know, we like that segment of
Speaker 8: the market. We like it in the front end of
Speaker 8: the curve, so shorter duration, so constrain some of that
Speaker 8: interest rate sensitivity and sort of capture that sort of
Speaker 8: seven percent running yield and just try and compound it
Speaker 8: and use that income to fund other parts of your strategy.
Speaker 1: All right, So I mean, in your high yield models,
Speaker 1: are your analysts what are they kind of modeling in
Speaker 1: here for top line? I know it varies by industry,
Speaker 1: but I mean, are you guys, is your base case
Speaker 1: a recession model that you guys have had in your
Speaker 1: back pocket for several years? Are you bringing that recession
Speaker 1: model out? And that's my base case.
Speaker 8: Our base case is no growth. Okay, so high nominal growth,
Speaker 8: zero real growth. In that world, companies still make money.
Speaker 8: It's just in real terms, who has pricing power, who's
Speaker 8: keeping pace with sort of the economic backdrop that we're seeing,
Speaker 8: and so we're sort of seeming to be sliding in
Speaker 8: that direction. Today's data tells us that we're in a
Speaker 8: what we'd call kind of a slow flation world. You know,
Speaker 8: maybe we're sliding towards stagflation, but we're not there yet.
Speaker 8: But in a world of slow flation, there are companies
Speaker 8: that are keeping pace with kind of pricing pressures. They're
Speaker 8: maintaining their margins and for the most part, you know,
Speaker 8: as a debt person, they don't have big borrowing needs.
Speaker 1: They might have a lot of.
Speaker 8: Debt to begin with, but they don't have a lot
Speaker 8: of borrowing needs going forward. So from that perspective, we
Speaker 8: can find good companies, and you know those are that's
Speaker 8: what's in our high yield bond fund, that's what's in
Speaker 8: our short duration high income fund. That's in kind of
Speaker 8: our more aggressive fixed income strategies. And you know, those
Speaker 8: prices move around, but the paying ability of those companies
Speaker 8: is pretty strong.
Speaker 1: All right, George, thanks so much for coming in. I
Speaker 1: really appreciated George Borri. He is the chief investment strategist
Speaker 1: covering all the fixed income stuff for Allspring Global Investments.
Speaker 7: Here.
Speaker 1: We appreciate them coming into the Bloomberg and Actor Broker studio.
Speaker 1: Just looking at the yield right here in the treasury market,
Speaker 1: we've got the ten year treasury up about seven basis
Speaker 1: points three point five to one percent, a little bit
Speaker 1: more action there, and movement in the two year space.
Speaker 1: We got it up ten basis points four point zero
Speaker 1: five percent on your two years, So getting paid the
Speaker 1: kind of weight there in that short term paper that
Speaker 1: kind of gets your attention.
Speaker 7: You're listening to the Take kens Are program Bloomberg Markets
Speaker 7: weekdays at ten am Eastern on Bloomberg Radio, tune in app,
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Speaker 7: York station, Just say Alexa play Bloomberg eleven thirty.
Speaker 1: We got Mara Goldstein. She's a biotech analyst at miss
Speaker 1: Zuho and she joined us share Mara, thanks so much
Speaker 1: for joining us. You really appreciate it. I know you
Speaker 1: upgraded recently. Hang on, what go Mayra?
Speaker 2: Before we get to the world of drugs, we got
Speaker 2: to talk about your resume.
Speaker 1: Go Alex Brown. I love Alex Brown.
Speaker 9: Yeah, yeah, yeah, you're publicly outing me. But yeah, Alex Brown.
Speaker 1: Was that in Baltimore? Or is that was that in Baltimore,
Speaker 1: New York?
Speaker 9: So I was here in New York, based in Baltimore.
Speaker 1: All right, Yeah, Drew Marcus was my arch competitor at
Speaker 1: alex bid.
Speaker 4: Yeah.
Speaker 1: Now we're good, good buddies. It brings me back to
Speaker 1: my days at Tucker Anthony. Yeah, go back, back back.
Speaker 1: I know you upgraded Merk recently. What's the call there?
Speaker 1: I mean this is a big company. I forgot it's
Speaker 1: so big, two hundred and eighty billion of market cap.
Speaker 1: The stocks kind of unchanged here to date. What's your
Speaker 1: call here on MERK?
Speaker 9: So we upgraded Mark at the end of last year,
Speaker 9: and it was based on our view that so Tattertep,
Speaker 9: which is a product that the company acquired to the
Speaker 9: acquisition of accelera On, would be a great product. We
Speaker 9: saw the data, the Phase three data earlier this year.
Speaker 9: It looks like it's it looks like it's going to
Speaker 9: be a fabulous product. That's for an indication called pulmonary
Speaker 9: arterial hypertension. It's a rare disease and the exists in
Speaker 9: the cardiovascular space, but opportunity to expand out from there.
Speaker 9: And then secondarily on the basis of the potential for
Speaker 9: the company to offset some of the key trudea loss
Speaker 9: of exclusivity that could happen later in the decade with
Speaker 9: a subcutaneous formulation, and that process is underway right now.
Speaker 9: Those clinical trials are underway. We only converted part of
Speaker 9: key Trudi sales to the subcutaneous formulation in our model
Speaker 9: in the app years, so there's definitely flexibility there. And
Speaker 9: in general, our belief that the company would continue to
Speaker 9: acquire and develop and have solutions, maybe not exactly dollar
Speaker 9: for dollar, but that's already in the stock. For the
Speaker 9: loss of the key Tete exclusivity, I mean Kytuta is
Speaker 9: a fabulous, you know, oncology product. It's going to be
Speaker 9: twenty you know, it's twenty billion dollars. So it's a
Speaker 9: big you know, it's a it's a huge concentration of
Speaker 9: revenue for the company.
Speaker 1: Twenty billion dollars annually.
Speaker 9: That'll be a twenty billion dollar product.
Speaker 2: Unbelievable. Maybe they are charging too much for this stuff.
Speaker 2: I mean, how much did they pay for it?
Speaker 9: So Key Trudah came to the company shoot the acquisition
Speaker 9: of sharing Plow, and it was something that sharing Plow
Speaker 9: wasn't working on. Mark found it in the sharing Plow
Speaker 9: sort of back office, if you will, to sort in
Speaker 9: the back of the lab and developed it and it
Speaker 9: is approved in you know, many many cancer indications. It
Speaker 9: was originally approved in late stage disease. The company is
Speaker 9: migrating it to use an earlier state disease. Some of
Speaker 9: the biggest indications, or where most of the sales get
Speaker 9: generated from, are things like non small cell lung cancer,
Speaker 9: which is a very deadly disease and really allowing patients
Speaker 9: truly to live longer lives. I mean, it's you know,
Speaker 9: it has it's part of the handful of drugs the
Speaker 9: im you know, oncology drugs that work by basically redirecting
Speaker 9: the immune system in cancer, and it's been transformational for
Speaker 9: a lot of late stage disease and now they're moving
Speaker 9: it earlier. Just was approved in breast cancer for an
Speaker 9: earlier form disease. So you know, there's a there's a
Speaker 9: long way to go here, and they could continue to
Speaker 9: see additional indications, additional combinations, things like that.
Speaker 2: You know, every morning, I come in marat three and
Speaker 2: I start looking on the Bloomberg I type in most
Speaker 2: space U four to see the big movers in the market,
Speaker 2: in the pre market, and there's always a company that's
Speaker 2: up or down, like eighty ninety percent, it's inevitably a
Speaker 2: biotech that either yeah.
Speaker 1: Is going to get bought or didn't get bought.
Speaker 2: What are these big companies looking for when they, you know,
Speaker 2: screen for these little biotechs that may have a one
Speaker 2: hit wonder.
Speaker 9: Sure, I mean, companies acquire for a variety of reasons, right,
Speaker 9: and so there are some reasons that aren't particularly connected
Speaker 9: to the company's immediate top line. Right, there's some kind
Speaker 9: of technology that they're interested in. Maybe there's also something
Speaker 9: that we don't readily see like an intellectual property estate
Speaker 9: that they want access to. But the other piece of it,
Speaker 9: and this is where you see Merk doing acquiring and
Speaker 9: variety of other large cat pharmists, is either a product
Speaker 9: that could be meaningful me and fills a hole in
Speaker 9: their own portfolio, or something that can be a companion
Speaker 9: product that can also help develop the portfolio. Like if
Speaker 9: you look at Merk for a second, they have a
Speaker 9: joint venture with Astrosenica and they market to Astrosenica cancer
Speaker 9: drugs alongside their own cancer portfolio, and through that process
Speaker 9: they've been able to expand not just those drugs, but
Speaker 9: but Kei truda because they've done combination trials and things
Speaker 9: like that. And so but if you look, I think
Speaker 9: more to your point at merged acquisitions over the course
Speaker 9: of the past you know, year two years they've bought
Speaker 9: accele on, which had a product in phase three, so
Speaker 9: you know reasonably the risk, you know the mechanism works
Speaker 9: at that point, you don't know if the trial is
Speaker 9: going to work, but you know the mechanism works. You know,
Speaker 9: you have a sense of what the activity is that
Speaker 9: can really come into a therapeutic area and be meaningful,
Speaker 9: or a company like a Mago, which Merk just recently
Speaker 9: closed the acquisition on that company, and that's a pre
Speaker 9: revenue company and has a really interesting technology developing a
Speaker 9: drug in an area where Merk does not have, where
Speaker 9: work does not have a huge presence in and it's
Speaker 9: a it's a new and it's a new drug with
Speaker 9: a new mechanism. So there's a variety of reasons why
Speaker 9: companies do these acquisitions. Sometimes they work, sometimes they don't.
Speaker 1: Hey, Marik, just kind of like thirty seconds left here,
Speaker 1: you know. I always joke that my next life I
Speaker 1: want to come back as a healthcare M and a banker.
Speaker 1: Should we expect more healthcare M and a going forward?
Speaker 9: I think there's a couple of things. I think absolutely
Speaker 9: companies will continue. There is a patent cliff, you know,
Speaker 9: coming in this decade, so companies will continue to acquire.
Speaker 9: The other piece of it is that the cost to
Speaker 9: compete is so much higher than it used to be,
Speaker 9: and the time frame in which drugs get to and
Speaker 9: in which competitor drugs get to market has collapsed over
Speaker 9: the last ten years or so, so the competitive environment.
Speaker 9: So I think, you know, you need to have the scale,
Speaker 9: and you need to have distribution and investors also, you know,
Speaker 9: want to see. I think we prefer that then continuing
Speaker 9: to invest in a company, because if you have one product,
Speaker 9: it's very hard to be profitable company.
Speaker 1: All right, Marek, great stuff. I really appreciate you taking
Speaker 1: the time. Maraeric Goldstein, she's a biotech analyst at Mizuho,
Speaker 1: joining us to talk about Merk and some of the
Speaker 1: other healthcare and biotech companies out there. It just seems
Speaker 1: like almost every Monday we come in and there's another
Speaker 1: healthcare m and a trade. So lots of our ne
Speaker 1: going on in that space, but also lots of acquisitions
Speaker 1: to acquire drugs, different therapeutics. Really interesting, fascinating to follow.
Speaker 7: You're listening to the team Ken's Are Live program Bloomberg
Speaker 7: Markets weekdays at ten am Eastern on Bloomberg dot Com,
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Speaker 1: All right, let's talk fixed income here, folks. John Talker,
Speaker 1: thank you very much. A fixing of twenty twenty two
Speaker 1: brutal year. I don't care. There was no place to
Speaker 1: hide equities or fixed income and really not too many
Speaker 1: places in the fixed income space to hide it either
Speaker 1: a little bit better this year. The Bloomberg Aggregate US
Speaker 1: aggregatoral return value is up about three point five percent
Speaker 1: this year, so they're doing a little bit better. And
Speaker 1: when you want to talk fixed income, you need to
Speaker 1: go talk to the folks at TCW. They're pretty big
Speaker 1: in that biz. Steve Kine, co CIO and Generalist portfolio
Speaker 1: manager for TCW Investment Management Joints is, Steve, you guys
Speaker 1: are doing a little bit better this year than last.
Speaker 1: What's kind of driving or what are the areas of
Speaker 1: opportunity you guys see in a fixed income space this year.
Speaker 10: Well, we're seeing quite a bit of opportunity. Actually. First
Speaker 10: of all, sort of getting at your general point of
Speaker 10: returns being positive is we think we're getting towards the
Speaker 10: end of the FED hiking cycle and the market's beginning
Speaker 10: to anticipate that, and that means that rates are likely
Speaker 10: to be coming down. So the first thing we like
Speaker 10: is the overall rate market, and specifically the front end
Speaker 10: of the market where you're getting the highest yields, and
Speaker 10: we expect that part of the market to rally the
Speaker 10: most going forward. And then beyond that, I think we're
Speaker 10: rather pessimistic about the economy. We think that the reason
Speaker 10: rates are going to be going down is because you're
Speaker 10: going to be entering a recession sometime later this year
Speaker 10: early next year, which means we're defensive on lower quality credit.
Speaker 10: But we like lots of areas of the high quality
Speaker 10: parts of the fixed income market away from treasuries. You've
Speaker 10: heard us talk at nauseum about the agency mortgage market.
Speaker 10: We think that's very attractive. That continues to lag recently.
Speaker 10: It's lagging due to the fact that the FDIC, through
Speaker 10: Black Rock, is selling agency mortgages that were taken over
Speaker 10: through the SVB and signature bank takeovers, if you will,
Speaker 10: by the FDIC. But we like that area. We're modestly
Speaker 10: constructive on investment grade corporate credit. We think that's fair.
Speaker 10: And then we like high quality parts of the securitized market,
Speaker 10: including non agency residential mortgages.
Speaker 2: Why do you think, I mean in light of today's
Speaker 2: inflation data, which I realize is only one point, but
Speaker 2: core PCE quarter over quarter up to four point nine
Speaker 2: percent from four point four percent in the last reading,
Speaker 2: and more than economists had estimated. We were looking at
Speaker 2: four point seven, so we're going back to five and
Speaker 2: it looks like climbing. How can fed even consider lowering
Speaker 2: rates in that type of environment.
Speaker 10: It's a really good question, and the answer in the
Speaker 10: short tenments, they can't cut rates. As a matter of fact,
Speaker 10: the market's pricing this in. They're likely to hike next
Speaker 10: week at their meeting, and maybe even another time. I
Speaker 10: think we're the view that the market's getting a little
Speaker 10: ahead of itself in terms of expecting easing as early
Speaker 10: as September of this year. But we do think, whether
Speaker 10: it's one or two more hikes, that the cumulative effects
Speaker 10: of all the tightening five five and a half percent
Speaker 10: is ultimately going to slow the economy down. We're beginning
Speaker 10: to see signs of it in various areas housing. Certainly,
Speaker 10: the business investment part of the GDP report suggests that,
Speaker 10: you know, businesses are pulling back in a fairly significant way.
Speaker 10: The last thing to go, and it's still hanging in
Speaker 10: there is labor market, and we do think that it's
Speaker 10: just a matter of time before you know, you start
Speaker 10: to see bigger and bigger layoffs and loosening in the
Speaker 10: labor market. And that's sort of the key part of
Speaker 10: the equation that's going to get overall inflation heading towards
Speaker 10: that two percent turn.
Speaker 2: I mean, we I'll just repeat the GDP numbers that
Speaker 2: we got this morning for our listeners. We got annualized
Speaker 2: GDP quarter over quarter of one point one percent. That
Speaker 2: compares to two point six percent in the previous reading,
Speaker 2: and we were looking for one point nine So much
Speaker 2: worse than expected, much worse than the previous number, a
Speaker 2: real decline. What happens if we get into a situation
Speaker 2: where GDP is coming down, unemployment is going up, and
Speaker 2: inflation is stuck at five percent?
Speaker 1: Is that something you could imagine?
Speaker 10: Yeah, yeah, certainly. As a matter of fact, it's it's
Speaker 10: very typical at the beginning of a recession because inflation
Speaker 10: lags that you get this sort of temporary period of
Speaker 10: stagflation where kind of economic activity is declining on it's rising,
Speaker 10: but inflation is yet to adjust to kind of adjust
Speaker 10: with a bit of a lag. So, yeah, it's gonna
Speaker 10: there'll be a period of time where it looks like
Speaker 10: a real conundrum for the FED because inflation will be lagging,
Speaker 10: and the risk is that they are too focused on
Speaker 10: that lagging indicator stay too tight for too long and
Speaker 10: worsen the recession instead of you know, sort of looking
Speaker 10: forward and understanding that you know, inflation trends are heading down.
Speaker 1: Hey, Steve, unlike my colleague Matt Miller, I'm willing to
Speaker 1: take some risk in life, and I'm willing to go
Speaker 1: out to the high yield space here. You know, I'm
Speaker 1: not really in that recession camp, or if it is one,
Speaker 1: it's going to be pretty shallow. So I'm willing to
Speaker 1: take on some some credit risk here. Can you steer
Speaker 1: me somewhere? Says the guy who has the bulk of
Speaker 1: its well, his wealth and munis exactly.
Speaker 10: Yeah. Yeah, here's you know, high yield. You know, there's uh,
Speaker 10: there's a wide variety of risk within high yield. There's
Speaker 10: you know, the double b's down to the triple c's,
Speaker 10: things trading at par yielding, you know, seven eight percent,
Speaker 10: things trading fifty cents on the dollar and likely to default,
Speaker 10: so big range. I think what I would advise you, Paul,
Speaker 10: you know, is your financial advisor for the day. You
Speaker 10: stay in the high quality parts of the high yield market.
Speaker 10: Stay in those double b's and you know, high single bees.
Speaker 10: The things that you know, the economy does take a downturn,
Speaker 10: even though it sounds like you don't think it's happened happening,
Speaker 10: that you'll be protected, you know, And that part, most
Speaker 10: of that double bee single bee market really is fairly
Speaker 10: default resistant. And I would say, you know, to make
Speaker 10: a general statement about high yield is that part of
Speaker 10: the market is pretty sound fundamentally from a leverage standpoint,
Speaker 10: liquidity standpoint. You know that the fundamentals for the high
Speaker 10: yield market look pretty good, you know, going into this recession.
Speaker 10: So we don't expect a huge default cycle. I think
Speaker 10: our cautiousness is we just think you're going to get
Speaker 10: better entry points. We just think spreads are going to widen.
Speaker 10: Even if it's a relatively benign default cycle, we still
Speaker 10: think spreads are going to get a couple hundred basis
Speaker 10: points wider. So we're keeping our powder dry. But you know,
Speaker 10: I do think that you know, if you've go outen
Speaker 10: buy how yield today, you're you'll underwrite a little bit
Speaker 10: of volatility, but you're certainly not going to lose money.
Speaker 1: Hey, Steve, just real quick twenty seconds. What are your analysts,
Speaker 1: what's what's a recession model look like for your analysts,
Speaker 1: no revenue growth, declining growth.
Speaker 10: You mean for our credit analysts?
Speaker 1: Yeah, what are they wrong?
Speaker 10: Oh it's oh, it's kind of it's really industry by industry.
Speaker 10: I mean, the disparity of industry trends is significant, although
Speaker 10: a lot of them are starting to shift in the
Speaker 10: negative direction. So what we've seen thus far is relatively
Speaker 10: decent revenue trends YEA, and very negative earning strengths, meaning
Speaker 10: you're seeing a lot of cost pressure, mrgin pressure and
Speaker 10: that type of thing.
Speaker 1: Steve, great stuff. Always appreciate getting a few minutes of
Speaker 1: your time. Steve Kane Key's a co CIO generalist portfolio
Speaker 1: manager TCW Investment of Management. They're based in La. They
Speaker 1: got like two hundred and twenty five billion massive under management.
Speaker 1: Not bet it's worth the trip to La.
Speaker 7: You're listening to the tape. Cat's are live program Bloomberg
Speaker 7: Markets weekdays at ten am Eastern on Bloomberg Radio, the
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Speaker 7: flagship New York station, Just say Alexa play Bloomberg eleven thirty.
Speaker 1: Let's talk industrials Industrial America. We had Caterpillar reports and numbers, say,
Speaker 1: we want to break that down, So we're gonna welcome
Speaker 1: Chris Gielino. He covers all the largest maker of earth
Speaker 1: moving equition. Isn't that cool? That is awesome? So Chris Giuliano,
Speaker 1: he covers those stocks. From Bloomberg Intelligency joins us on
Speaker 1: the phone from Princeton and brook Sutherland in our Bloomberg
Speaker 1: Interactive Broker studio. She's Bloomberg Opinion calumnists and she covers
Speaker 1: all things industrial. So Chris, let's start with you here.
Speaker 1: Catcat is a symbol. What did they tell you on
Speaker 1: their earnings release?
Speaker 6: You know, it was really an impressive print across the board. Beat,
Speaker 6: very strong pricing again in the quarter, better than expected
Speaker 6: sales and margins really across all segments. That being said,
Speaker 6: there's a lot of negative sentiment out there around the name,
Speaker 6: and I would say even just more broadly in cyclicals
Speaker 6: in general, just giving concerns over recession. So not only that,
Speaker 6: we saw orders decline in the period, and then dealers
Speaker 6: also built more inventory than we expected. So if you're
Speaker 6: in that bearish camp and you kind of believe that
Speaker 6: we're heading into a downturn. Those are kind of two
Speaker 6: data points out there that will certainly concern you, and
Speaker 6: I think that's part of the reason you're seeing the
Speaker 6: stock trade off.
Speaker 2: Didn't we just have a giant trillion plus dollar infrastructure deal.
Speaker 1: Don't we need this stuff to fix America?
Speaker 6: We certainly do. And really you're just starting to see
Speaker 6: those numbers from the Infrastructure bill come into the backlog.
Speaker 6: You still have the IRA, you still have the Chips Act.
Speaker 6: There's trillions of dollars of money coming into the system,
Speaker 6: but there's just more near term concern and around commercial
Speaker 6: construction tightening credit standards that have certainly kind of spooked
Speaker 6: investors here. We still see, you know, a multi year
Speaker 6: runway from a lot of these recently past legislations.
Speaker 1: I mean, I think Bloomberg News Mats got one of
Speaker 1: the great headlines. Heies it relates to Caterpillar, cattle pillar drops,
Speaker 1: mid worries. Quote, it's as good as it gets and
Speaker 1: those things are kind of creeping in. So I think
Speaker 1: that's kind of what we're hearing. So Hey, Brook Yet
Speaker 1: have a great column out recently talking about deal making
Speaker 1: and more. I know this Comerson caught my eye a
Speaker 1: couple of weeks ago. And then.
Speaker 2: A Carrier, which is a Utex spin off buying a
Speaker 2: German company buying Viisman climate Solutions. And when I started
Speaker 2: to see these deals, Honeywell announced six hundred and seventy
Speaker 2: million dollar acquisition, the the Utex or the Carrier purchases
Speaker 2: a thirteen billion dollar acquisition. Emerson was what was it,
Speaker 2: eight billion? So these numbers are getting big, and I
Speaker 2: started to you know, I was going through these stories
Speaker 2: like now I ten pm at night, and I was thinking, Wow,
Speaker 2: there's a pickup in M and A.
Speaker 1: But then I looked on MA Go and there really
Speaker 1: isn't a pickup.
Speaker 7: In M and A.
Speaker 11: There's not across the board. I mean, we are seeing,
Speaker 11: you know, we're in a tighter lending environment, and the
Speaker 11: macro outlook is concerning. But I think what's interesting is
Speaker 11: that you're seeing a revival of these industrial two industrial deals.
Speaker 11: And actually on that front, April was the biggest month
Speaker 11: for industrial to industrial deals outside of a couple of
Speaker 11: outliers that were really dominated by single mega transactions in
Speaker 11: the last couple of years. So you are seeing a
Speaker 11: real pick up there, and I think you know, honeywell,
Speaker 11: and it's called today. The CEO said, there's never been
Speaker 11: a better time to be a buyer, which I think
Speaker 11: is a really striking state.
Speaker 1: That's interesting.
Speaker 2: Private equity has like two point seven trillion dollars. I
Speaker 2: can't remember the exact number, but it's always mind blowingly high.
Speaker 2: How come they're not competing with these industrials for these deals.
Speaker 11: Well, I think they have been the last couple of years,
Speaker 11: but I think it's getting harder for them to do so,
Speaker 11: just because of the you know, tighter credit environment that
Speaker 11: we're seeing. And so I think you're seeing these industrial
Speaker 11: companies feel a little bit like they have the advantage
Speaker 11: again and going after some of these strategic assets, especially
Speaker 11: if you're going to take a longer term outlook in
Speaker 11: terms of the robustness of some of these markets in
Speaker 11: light of all of the stimulus funding and some of
Speaker 11: the mega project trends that we're seeing.
Speaker 1: Hey, Chris, I'm just looking at the PGeo function PGeo
Speaker 1: function for Caterpillar and it says, you know, roughly forty
Speaker 1: percent of their business is outside of the US. I'm sorry,
Speaker 1: sixty percent of their businesses outside the US. What are
Speaker 1: they saying about some of their US markets versus their
Speaker 1: international markets.
Speaker 6: You know, US continues to be remarkably strong. We continue
Speaker 6: to see some of the strongest growth rates in North America,
Speaker 6: even with that region being the most supply constraint. Still,
Speaker 6: Latin America continues to be quite well, and Europe is
Speaker 6: actually holding up a little better than they anticipated. I
Speaker 6: guess the one pocket of weakness is Asia and more
Speaker 6: specifically China. China is the largest equipment market in the world.
Speaker 6: You know, historically it's been you know, five ten percent
Speaker 6: of consolidated revenue at Caterpillar. It's below five percent and
Speaker 6: will be this year. So relatively small and the big
Speaker 6: scheme of things. But you know, like I said, it's
Speaker 6: it's been holding up, I think better than most had anticipated,
Speaker 6: including Caterpillar.
Speaker 2: Brook in terms of you know, the boost in industrial
Speaker 2: m and A. How much is on shoring or friend
Speaker 2: shoring had to do with this, you know, Chris Menson
Speaker 2: mentions China, and I just see a spate of stories about,
Speaker 2: you know, things we're no longer buying from China, Things
Speaker 2: were no longer sending to China. So does it make
Speaker 2: sense that industrials are trying to you know, bring back
Speaker 2: production and then also do M and A in order
Speaker 2: to aid that.
Speaker 11: Sure, we haven't seen any big deals in the name
Speaker 11: of reshoring. You've seen some sort of smaller incremental investments
Speaker 11: of companies buying parts of their supply chains. I think sure,
Speaker 11: when Williams bought a coating ingredients maker, Hershey bought a
Speaker 11: pretzel factory, and so smaller things like that around the edges.
Speaker 11: But these deals, did you.
Speaker 1: Brought it back from Germany? Was it Bavaria? No?
Speaker 11: But in terms of just like building up the robustness
Speaker 11: of their North American supply chain and being you know,
Speaker 11: less dependent on sort of sprawling parts, networks or even
Speaker 11: just third parties. But I do think, you know, that
Speaker 11: some of these deals fit within some of the secular
Speaker 11: trends we're seeing, whether that's automation, whether that's the energy
Speaker 11: transition or positioning for you know, greater investments in industrials.
Speaker 11: I do just want to make one point on Caterpillary,
Speaker 11: you know, I do think it's interesting all the negativity
Speaker 11: around their order backlock today. If you look at another company,
Speaker 11: Rockwell Automation, which is positioned with some of the same
Speaker 11: trends around mega projects construction spending, and you have investors
Speaker 11: being a lot more forgiving on that front, even though
Speaker 11: they are also talking about a similar moderation in their
Speaker 11: orders for the vary same reasons. The Caterpillar gives that
Speaker 11: you have a supply chain normalization and sort of a
Speaker 11: reset of ordering patterns, and you just see a really
Speaker 11: lopsided reaction from investors just depending on where these companies
Speaker 11: sit in these secular themes.
Speaker 1: You know, we had I'm Fazelli on yesterday. He's a
Speaker 1: biotech analyst for Bloomberg Intelligence. He lives in France on
Speaker 1: a farm. He just bought like a big tractor, like
Speaker 1: not like a little tractory due to your lawn in suburbia,
Speaker 1: like a tractor tractor. I mean, he's an outlier.
Speaker 11: He's an outliers, very popular during the pandemic. Actually, hobby tractors,
Speaker 11: We're like a huge business.
Speaker 1: I would love to have a tractor.
Speaker 2: But I can imagine that's exactly the kind of spending
Speaker 2: that I'm going to be curtailing, soiting into this recession.
Speaker 1: Right, So Chris, Let's say, let's say I go onto
Speaker 1: a Caterpillar a lot here and I want to buy
Speaker 1: of these big tractors for my farm. A. Do they
Speaker 1: have them in stock? B? Do I have to pay
Speaker 1: over the MSRP like I do for an automobile?
Speaker 6: Yeah? Yeah, yeah. So inventories are getting better. We're still
Speaker 6: below historical average is pretty significantly, both a new and
Speaker 6: used equipment. Things are progressively improving though, and you've heard
Speaker 6: that echoed in some of their commentary. Supply chain normalizing
Speaker 6: in the quarter, but pricing continues to surprise to the upside.
Speaker 6: We were up almost fifteen percent in the quarter, which
Speaker 6: was an acceleration from what we saw in four Q.
Speaker 6: So inventories are still tight and they're able to push
Speaker 6: price because of a lot of the productivity improvements that
Speaker 6: these new equipment. The new equipment has and you know,
Speaker 6: underlying demand is still quite good and you have all
Speaker 6: these infrastructure built, you know, coming through the pipe.
Speaker 2: You know, Brooke brings up rock well and in the
Speaker 2: sense that it differs investor reaction is different from what
Speaker 2: investors are doing with Caterpillar. Next week, I'm going to
Speaker 2: talk to the CEO of Mac Trucks, the maker of
Speaker 2: Mac trucks. Right, it's a private company, but do you
Speaker 2: think they're facing the same kind of problems as Caterpillar,
Speaker 2: What do you think I should ask him?
Speaker 6: You know, one thing that's interesting about the truck sector
Speaker 6: is you have this bifurcation of what the customers are
Speaker 6: saying and what the OEMs who actually make the equipment
Speaker 6: or saying. If you look at all the truck makers
Speaker 6: this past quarter, complete blowouts of their early results, way
Speaker 6: better than anyone had anticipated. As a supply chain has
Speaker 6: kind of loosened up, and they've got some operational efficiencies
Speaker 6: and you know, backlocks already extended to next year. But
Speaker 6: if you listen to the commentary coming out of any
Speaker 6: transport company, any of the freight carriers, it's doom and gloom.
Speaker 6: And we're heading into a freight recession. So any insight
Speaker 6: that we could glean into twenty twenty four and how
Speaker 6: deep of a decline we could be seeing on the
Speaker 6: freight side, we'll have certainly have a big impact on
Speaker 6: demand there.
Speaker 2: Brook do you think we're going to see more consolidation
Speaker 2: if we had into a recession?
Speaker 1: Is that sometimes what happens.
Speaker 11: I think we could. I mean, I think you know,
Speaker 11: these industrial companies have been so preoccupied the last couple
Speaker 11: of years of breaking up or buying software companies that
Speaker 11: I think they're now starting to look back at the
Speaker 11: core of their business and you know, like I said,
Speaker 11: with a longer term view towards this coming investment wave.
Speaker 11: I think people are looking for opportunities. They are trying
Speaker 11: to position themselves to better take advantage of these trends.
Speaker 11: So certainly, if you see, you know, a meaningful downdraft
Speaker 11: and valuations, companies will take advantage of that. Most large
Speaker 11: industrial companies are in pretty good shape as far as
Speaker 11: their balance sheets are concerned, so even in a tinder
Speaker 11: lending environment, they have some flexibility.
Speaker 1: Dude brook has her own NI ticker. Oh she's special, and.
Speaker 2: That Bloomberg terminal that that explains.
Speaker 1: That explains a lot, all right, The aforementioned Brooks Sullyn
Speaker 1: she covers all the industrial stuff for Bloomberg Opinion, and
Speaker 1: Chris Chilian when he covers the industrials for Bloomberg Intelligence,
Speaker 1: looking at the equities and the financials of those industrial companies.
Speaker 1: We are fortunate to have both of them join us
Speaker 1: here to talk about Kat and all things industrial America.
Speaker 7: You're listening to the tape Cat's are Live program. Bloomberg
Speaker 7: Markets weekdays at ten am Eastern on Bloomberg Radio, the
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Speaker 7: You can also listen live on Amazon Alexa from our
Speaker 7: flagship New York station Just Say Alexa playing Bloomberg eleven thirty.
Speaker 1: Good Day in the Market, SMP up one point two percent.
Speaker 1: Let's think bringing a professional who does this investing stuff
Speaker 1: for a living, Brian Smaller, piece of CEO and principle
Speaker 1: of hood River Capital Management. And despite the name hood River,
Speaker 1: you're based in Florida, right, Brian.
Speaker 3: Correct, we moved here around three years ago.
Speaker 1: That's such a scam, this whole Florida my grade. I've
Speaker 1: had enough of it, you guy. You guys only because
Speaker 1: you haven't been able to do it yourself, exactly right,
Speaker 1: you guys, can I hope your summer is just gonna
Speaker 1: be sweltering and then you guys are gonna say, what
Speaker 1: was I think?
Speaker 2: So?
Speaker 1: Anyway, Hey, Brian, thanks for joining us. We love yeah, exactly.
Speaker 1: I love talking to Brian because he's a former analyst.
Speaker 1: That Salomon Brothers my my place I used to work
Speaker 1: way back in the day, and you got his NBA
Speaker 1: some trade school alma mater. Yeah, so he went to Boston, Yeah, Boston. Yes.
Speaker 1: So anyway, Hey, Brian, what do you make of kind
Speaker 1: of these markets this year? I mean kind of yes,
Speaker 1: and P's up seven eight percent year to date. I mean,
Speaker 1: if you look on a trailing twelve month basis, yes,
Speaker 1: and p's almost flat. I mean, so a big rally
Speaker 1: off of that October lower. Are you guys buying it?
Speaker 3: We're constructive when you look out twelve month it's probably
Speaker 3: gonna be a little bit bumpy here for the next
Speaker 3: three to six given all the macro headwinds that everyone's
Speaker 3: talked about at nauseum. But when you get through that,
Speaker 3: and if you just have a mild recession, then most
Speaker 3: earnings estimates have been taken down for most companies. And
Speaker 3: when you look at the twenty twenty four stocks are
Speaker 3: pretty cheap. So I think that's why the market's okay here.
Speaker 3: It doesn't mean that there can't be some downside volatility
Speaker 3: if you have some negative earnings revisions from lots of different.
Speaker 2: The macro picture looks kind of like it's coming in
Speaker 2: as expected, right. Inflation is sticky, growth is slowing down.
Speaker 2: Maybe we're headed for a recession, the Feds in a
Speaker 2: tough position. What about earnings?
Speaker 1: Does that turning out as we expected?
Speaker 3: We're generally in an earnings recession, I would say yes.
Speaker 3: I would say generally it's about as expected or a
Speaker 3: little bit better in terms of companies being able to
Speaker 3: control margins cut cost. So if you ask me twelve
Speaker 3: months ago, the big negative surprise was companies couldn't really
Speaker 3: manage the cost situation very well. Now that's pretty much
Speaker 3: under control. Margins aren't really an issue in the near term.
Speaker 3: It's really end market demand in lots of different areas,
Speaker 3: and you're seeing softening there. But the market for the
Speaker 3: most part, is expecting it, and that's why I think it's worse.
Speaker 3: In the back half we be in more trouble, but
Speaker 3: right now it's about as expected. Which letter market's acting.
Speaker 1: Okay, Hey, Brian, I want you to sell me on
Speaker 1: small cap growth here. What's the play?
Speaker 3: So small cap tysically trades at a premium, given that
Speaker 3: the names usually grow faster than their large cap brethren.
Speaker 3: Right now they're at discount. They've been through a rough
Speaker 3: two year past here, and usually it's risk off when
Speaker 3: the markets are tougher. If you think you're going into
Speaker 3: a mild recession and the stocks at discount that for
Speaker 3: the most part, then you're set up for griding provisions
Speaker 3: in twenty four and a lot of multiple expansion, and
Speaker 3: then stock pickers and small cap tend to outperform the
Speaker 3: media manager's beaten the benchmark over most time periods, so
Speaker 3: it makes sense to look in that area too.
Speaker 2: How much cash do you have on hand in order
Speaker 2: to take advantages take advantage of things like small caps?
Speaker 2: I mean, how did you prep and what are you
Speaker 2: looking at?
Speaker 3: So our clients want to make the market calls, not us,
Speaker 3: So we're typically more than ninety five percent invested. Our
Speaker 3: job is to stock pick within the universe, in any
Speaker 3: sort of environment and outperform. And right now we're trying
Speaker 3: to concentrate in names where we feel like the irving
Speaker 3: provisions are going to be good. You can defend evaluations
Speaker 3: and they don't have a demand problem. Looking out six
Speaker 3: to twelve months.
Speaker 1: Hey, Brian, I know you've got to name on your list.
Speaker 1: Fortress Aviation. I got my attention. FAI is the ticker.
Speaker 1: It's hitting a fifty two week high today. We had
Speaker 1: a gentleman here earlier this week, and he's in a
Speaker 1: business of leasing aircraft to the big airlines, and his
Speaker 1: problem is he just can't get enough planes from Boeing
Speaker 1: and Airbus. Talk to us about Fortress Aviation and kind
Speaker 1: of what's driving that stock. Why you guys own that one.
Speaker 3: So they benefit from those trends. Because of the supply
Speaker 3: chain issues that Boeing and Airbus are having, they're able
Speaker 3: to lease out engines, that's the primary part of that business,
Speaker 3: and then they also repair the engines and provide parts.
Speaker 3: The utilization levels are moving up, the prices of the
Speaker 3: engines are moving up, which is good for the underlying asset.
Speaker 3: Travel in general needs to still recover because of the
Speaker 3: weakness that you've seen in Asia. In Europe, US has
Speaker 3: been good for a while now, but worldwide we're only
Speaker 3: about ninety percent of where we were pre pandemic. So
Speaker 3: you layer in the demand getting better with Tigner reopening,
Speaker 3: plus the supply chain situation, someone like Fortress can actually deliver.
Speaker 3: They've had a really rough fundamental pass in COVID and
Speaker 3: the company has gone from being an lc C corpse.
Speaker 3: That's good for multiple expansion. That's why the stock has
Speaker 3: been good. The reason why it stocks up today is
Speaker 3: because they had a really good quarter and all those
Speaker 3: demand drivers I just mentioned are intact and so and
Speaker 3: we still like the stock here given the evaluation.
Speaker 2: What's the what's a reason that you wouldn't convert to
Speaker 2: an ETF? If you if I look at say the
Speaker 2: Hood River Small Cap Growth Fund, why not.
Speaker 1: Convert?
Speaker 3: Why not?
Speaker 7: Why not?
Speaker 3: Why not convert to an ETF?
Speaker 1: Yeah?
Speaker 3: Well, part of it is we don't want to have
Speaker 3: to dispose our holdings every single day, and there's kind
Speaker 3: of a transparency issue there, and our clients are good
Speaker 3: in the regular mutual fund structure, so we'd rather not
Speaker 3: tell them Mark what we're doing every single day.
Speaker 1: That's good good enough for me.
Speaker 2: I mean, since I anchor an ETF show, I just
Speaker 2: hear so much about these conversions, and I hear every
Speaker 2: day arguments for why convert?
Speaker 1: So why not? Is ye one of the thing that's
Speaker 1: a good good answer. Hey, Brian, I missed this whole
Speaker 1: energy drink thing. I mean, if I want an energy
Speaker 1: to drink, I get a shot of expresso like like
Speaker 1: adults do. But I know it's the thing. You guys
Speaker 1: own this company Celsius tell us about.
Speaker 3: That so Celsius currently has about four percent share of
Speaker 3: the overall energy market. It's been growing about one hundred percent.
Speaker 3: It's going to slow down a little bit this year,
Speaker 3: but they just partnered up with Pepsi and that gives
Speaker 3: them around fifty percent more doors in twenty twenty three
Speaker 3: to sell in versus twenty twenty two. So the demand
Speaker 3: is definitely there. People are going to keep buying their
Speaker 3: energy drinks in a recession. It tastes better than the
Speaker 3: other products that are on the market. It's the better
Speaker 3: It's generally just a healthier, better prodit product. I don't
Speaker 3: like drinking the other one that I like. It actually
Speaker 3: like drinking Selsius, and most customers do too. And the
Speaker 3: stock is only discounting right now around six and a
Speaker 3: half percent market share, and we think the success for
Speaker 3: the product house and House designed and the partnership with
Speaker 3: Pepsi should allow them to eventually get to twenty percent share,
Speaker 3: and that gives you a lot of upside in the
Speaker 3: stock from here.
Speaker 1: You know. I just I pulled up the holder's list
Speaker 1: for Fortress Aviation and Celsius and hood River. They're in
Speaker 1: the top ten holders of these names. So when they
Speaker 1: go into a name. Brian, you guys go into in size,
Speaker 1: so you got it like that, So that's conviction. Brian
Speaker 1: Smallocky is the CEO and principle of Hood River Capital Management.
Speaker 1: Like so many others, he's headed south, down to South
Speaker 1: Beach or down to Miami. You're just doing what all
Speaker 1: the cool kids do and we're stuck here in the
Speaker 1: upper side. I'll stick here. I would like to be
Speaker 1: down there, to be honest with you. Yeah, it's it's
Speaker 1: a pretty good gig for a lot of those folks.
Speaker 1: No taxes right now, about that.
Speaker 2: Thanks for listening to the Bloomberg Markets podcasts. You can
Speaker 2: subscribe and listen to interviews at Apple Podcasts or whatever
Speaker 2: podcast platform you prefer. I'm Matt Miller. I'm on Twitter
Speaker 2: at Matt Miller nineteen seventy three.
Speaker 1: And I'm Paul Sweeney. I'm on Twitter at pt Sweeney.
Speaker 1: Before the podcast, you can always catch us worldwide at
Speaker 1: Bloomberg Radio.