1 00:00:00,080 --> 00:00:02,680 Speaker 1: Let's get to our guest, Stephen Glass, Managing director and 2 00:00:02,720 --> 00:00:06,880 Speaker 1: analysts at Pella Funds Management. Stephen, one of my questions 3 00:00:06,880 --> 00:00:10,840 Speaker 1: would just be whether or not companies can surprise us 4 00:00:11,720 --> 00:00:15,280 Speaker 1: and and make good management decisions and get their earnings 5 00:00:16,120 --> 00:00:19,080 Speaker 1: to perform pretty well. We have Nike and FedEx today 6 00:00:19,120 --> 00:00:22,360 Speaker 1: telling different stories, but both of them in a sense 7 00:00:22,520 --> 00:00:27,440 Speaker 1: are successful. Nike in in simply lifting sales and and 8 00:00:27,560 --> 00:00:32,000 Speaker 1: FedEx in in cost cutting. It's got a billion dollars 9 00:00:32,040 --> 00:00:35,519 Speaker 1: of cost efficiencies carved out there. So do you have 10 00:00:35,600 --> 00:00:38,479 Speaker 1: confidence that companies will manage this or or or the 11 00:00:38,720 --> 00:00:43,519 Speaker 1: challenges is too too strong? Um? Yeah, Look, I guess. 12 00:00:43,560 --> 00:00:46,400 Speaker 1: I guess the starting point is to define what the challenges. 13 00:00:46,400 --> 00:00:48,479 Speaker 1: And I think one of the biggest challenges going in 14 00:00:49,200 --> 00:00:53,159 Speaker 1: next year for most companies, particularly in the US, is 15 00:00:53,159 --> 00:00:58,360 Speaker 1: actually going to be managing wage wage pressure UM. Since 16 00:00:58,440 --> 00:01:01,400 Speaker 1: two thousand and twenty one, real wages have actually declined 17 00:01:01,720 --> 00:01:03,880 Speaker 1: so as much wage pressure as they've been, and we've 18 00:01:03,880 --> 00:01:08,640 Speaker 1: actually seen the wage the various wage cost indices at 19 00:01:08,959 --> 00:01:11,440 Speaker 1: jumping at record highs. I think the last quarterly report 20 00:01:11,480 --> 00:01:14,240 Speaker 1: was up API and year on year UM, they're still 21 00:01:14,319 --> 00:01:17,760 Speaker 1: trailed inflation and that's going to that's really going to 22 00:01:17,920 --> 00:01:21,640 Speaker 1: come home through is probably next year. Labor can handle 23 00:01:21,760 --> 00:01:26,120 Speaker 1: one or two years perhaps of real wager declines, but 24 00:01:26,160 --> 00:01:27,880 Speaker 1: they're not going to They're not going to take three 25 00:01:27,959 --> 00:01:31,679 Speaker 1: or four years, and particularly when the labor market is 26 00:01:31,720 --> 00:01:33,959 Speaker 1: so tough. So we've seen we've had a bit of 27 00:01:34,000 --> 00:01:36,520 Speaker 1: a preview into that with what's happened in the UK 28 00:01:36,720 --> 00:01:40,440 Speaker 1: with their Winter of Discontent. There's been role in strikes 29 00:01:40,480 --> 00:01:43,520 Speaker 1: across several industries there. Um, it is a higher there 30 00:01:43,560 --> 00:01:46,000 Speaker 1: is a more unionized market the UK than the US, 31 00:01:46,120 --> 00:01:48,120 Speaker 1: but I wouldn't be surprised if we start to see 32 00:01:48,160 --> 00:01:50,880 Speaker 1: more wage pressure, which is rarely going to be difficult 33 00:01:50,880 --> 00:01:53,960 Speaker 1: for companies to pass on. So um, that's going to 34 00:01:54,040 --> 00:01:55,880 Speaker 1: be a very tough thing for them to manage. We've 35 00:01:55,880 --> 00:01:58,120 Speaker 1: seen companies like fed x I guess what they're going 36 00:01:58,160 --> 00:02:00,280 Speaker 1: to do. They're going to find ways to save money. 37 00:02:00,280 --> 00:02:02,720 Speaker 1: But you know, at the end of the days, it's 38 00:02:02,760 --> 00:02:05,000 Speaker 1: not that hard to cut costs. It's hard to cut 39 00:02:05,040 --> 00:02:10,000 Speaker 1: costs and still grow HP is HP provides a warning 40 00:02:10,200 --> 00:02:12,840 Speaker 1: tail of what can happen if you cut costs, cut 41 00:02:12,919 --> 00:02:16,840 Speaker 1: costs at so they have got Yeah, they've got real 42 00:02:16,880 --> 00:02:20,320 Speaker 1: issues next year, So what's the impact of rising wage 43 00:02:20,320 --> 00:02:22,120 Speaker 1: pressure going to be on corporate earnings? Then we had 44 00:02:22,160 --> 00:02:25,399 Speaker 1: a warning yesterday from Morgan Stanley of another twenty two 45 00:02:25,400 --> 00:02:28,639 Speaker 1: percent drop in the S and P because of slumping profits. 46 00:02:28,960 --> 00:02:31,960 Speaker 1: We often expect earning season to be awful and then 47 00:02:32,000 --> 00:02:35,120 Speaker 1: it ends up being kind of okay, what are your expectations? 48 00:02:36,800 --> 00:02:39,840 Speaker 1: Look at the moment the market is we we Pella 49 00:02:39,880 --> 00:02:43,919 Speaker 1: believe that the market is probably too optimistic. The last 50 00:02:43,960 --> 00:02:47,160 Speaker 1: I looked at earnings expectations that they're expected to still grow. Now, 51 00:02:47,200 --> 00:02:50,440 Speaker 1: one of the caveats there is that earning expectations are 52 00:02:50,760 --> 00:02:54,640 Speaker 1: the market offer takes out share based compensation, which Peller 53 00:02:54,720 --> 00:02:57,639 Speaker 1: believes is an absolute mistake. If if if share based 54 00:02:57,639 --> 00:03:00,600 Speaker 1: compensation isn't a labor expense, then what is it? And 55 00:03:00,639 --> 00:03:03,120 Speaker 1: if labor expense isn't a cost of doing business, then 56 00:03:03,160 --> 00:03:05,680 Speaker 1: what is that? So it definitely should be added back. 57 00:03:05,720 --> 00:03:09,799 Speaker 1: And we actually believe that companies have become quite adapt 58 00:03:10,040 --> 00:03:13,560 Speaker 1: at managing how they present earnings, and it takes a 59 00:03:13,600 --> 00:03:16,400 Speaker 1: bit of accounting work and effort, but if you go 60 00:03:16,520 --> 00:03:18,320 Speaker 1: through it that the results are often not as good 61 00:03:18,320 --> 00:03:20,720 Speaker 1: as they've seen. And also it's the game you can't 62 00:03:20,720 --> 00:03:24,200 Speaker 1: play forever. So yes, earnings have continued in surprise for 63 00:03:24,240 --> 00:03:26,880 Speaker 1: the upside for a for an extended period of time. 64 00:03:27,320 --> 00:03:29,400 Speaker 1: But we think when the wave turns, it could actually 65 00:03:30,120 --> 00:03:33,480 Speaker 1: supply to the downside for a material period of time. 66 00:03:34,000 --> 00:03:35,920 Speaker 1: So I guess the long and short of it is 67 00:03:36,040 --> 00:03:38,840 Speaker 1: what Heller is really focusing on at the moment are 68 00:03:38,880 --> 00:03:42,880 Speaker 1: companies with high earnings visibility, and that is the key, 69 00:03:43,280 --> 00:03:45,440 Speaker 1: because we do think the market has come some some 70 00:03:45,680 --> 00:03:49,520 Speaker 1: downgrades given the FEDS likely to hold interest rates higher 71 00:03:49,560 --> 00:03:53,080 Speaker 1: for longer to depress um demands in the economy. At 72 00:03:53,080 --> 00:03:55,760 Speaker 1: the same time, there's likely be wage pressure, and so 73 00:03:55,920 --> 00:03:58,600 Speaker 1: we think and yeah, we think there's a real chance 74 00:03:59,120 --> 00:04:02,080 Speaker 1: for material down grades. That's sad, you know, looking for 75 00:04:02,440 --> 00:04:05,280 Speaker 1: you high certainty of earnings. One of the examples you 76 00:04:05,400 --> 00:04:09,680 Speaker 1: say is SML And the issue there could be China. 77 00:04:09,720 --> 00:04:12,680 Speaker 1: I mean China, there's probably about fifteen or of the 78 00:04:12,760 --> 00:04:15,480 Speaker 1: business and they're going to be limited now that kind 79 00:04:15,520 --> 00:04:19,560 Speaker 1: of business that they can do with China, undoubtedly, but 80 00:04:19,600 --> 00:04:22,480 Speaker 1: the fact is their their audibook is still fully sold out. 81 00:04:22,600 --> 00:04:25,600 Speaker 1: There is enough demands out there that it's actually and 82 00:04:26,000 --> 00:04:30,120 Speaker 1: we speak with them extensively. They haven't looked they have. 83 00:04:30,200 --> 00:04:32,560 Speaker 1: There hasn't been a trilateral agreement with the Bride with 84 00:04:32,600 --> 00:04:37,600 Speaker 1: the Dutch governments Japanese in the US yet as are 85 00:04:37,600 --> 00:04:39,680 Speaker 1: related to China, but it kind of doesn't matter. If 86 00:04:39,680 --> 00:04:42,440 Speaker 1: the Chinese companies can't buy the US equipment, there's no 87 00:04:42,560 --> 00:04:46,480 Speaker 1: point buying the Dutch equipment. So we do think that 88 00:04:46,480 --> 00:04:50,080 Speaker 1: that market is facing some pressure, but you know that's 89 00:04:50,080 --> 00:04:52,000 Speaker 1: only at the very top ends. That's only for the 90 00:04:52,080 --> 00:04:55,520 Speaker 1: EUV machines. Um. They're still going to sell their their 91 00:04:55,520 --> 00:04:59,080 Speaker 1: more standardized equipment and those top ends EUV machines are 92 00:04:59,080 --> 00:05:02,240 Speaker 1: sold out, so flight constraints. So we think that's a 93 00:05:02,279 --> 00:05:05,080 Speaker 1: company with good earnings visibility because their backlock is sold 94 00:05:05,080 --> 00:05:09,400 Speaker 1: out to non Chinese companies. Yeah, we've We've got an 95 00:05:09,440 --> 00:05:13,440 Speaker 1: aggressively appreciating end today for reasons that we have explored 96 00:05:13,480 --> 00:05:17,080 Speaker 1: extensively earlier on. But how is this impacting your strategy, 97 00:05:17,080 --> 00:05:21,000 Speaker 1: particularly when it comes to looking at treasuries, um, Look, 98 00:05:21,080 --> 00:05:24,080 Speaker 1: it is another potential head wind for treasuries. There's there's 99 00:05:24,480 --> 00:05:27,800 Speaker 1: little doubt about that. The Japanese are the biggest external 100 00:05:27,839 --> 00:05:30,360 Speaker 1: holders of US treasuries. They hold about one point two 101 00:05:30,440 --> 00:05:34,480 Speaker 1: trillion of the treasuries, and if you take out the Feds, 102 00:05:34,880 --> 00:05:37,840 Speaker 1: say nine trillion out of the twenty four trillion outstands 103 00:05:37,839 --> 00:05:40,600 Speaker 1: in that there's fifteen trillion, so one point two is 104 00:05:41,000 --> 00:05:43,000 Speaker 1: it's not quite ten percent, but it's a big it's 105 00:05:43,040 --> 00:05:46,360 Speaker 1: a big chunk, so it should put upward pressure on treasuries. 106 00:05:46,640 --> 00:05:51,240 Speaker 1: The Japanese have actually already started accelerating UM, selling off 107 00:05:51,279 --> 00:05:53,520 Speaker 1: the more of the more short end, so well we 108 00:05:53,560 --> 00:05:55,840 Speaker 1: should see some of the pressure at the long at 109 00:05:55,839 --> 00:05:58,560 Speaker 1: the long ends. At the moment, that doesn't seem to 110 00:05:58,560 --> 00:06:00,159 Speaker 1: be too much of an issue because, as you know, 111 00:06:00,200 --> 00:06:03,080 Speaker 1: we've got a severely inverted yield curve, so the market 112 00:06:03,120 --> 00:06:05,599 Speaker 1: is expecting a recession and so a little bit of 113 00:06:05,600 --> 00:06:09,080 Speaker 1: pressure there won't matter that much. At the same time, 114 00:06:09,080 --> 00:06:12,800 Speaker 1: we think this is another reason why um why the 115 00:06:12,880 --> 00:06:16,360 Speaker 1: FED is unlikely to pursue it in a QT program 116 00:06:16,440 --> 00:06:19,640 Speaker 1: next year. So up to now, the Fed's QT program 117 00:06:19,640 --> 00:06:21,760 Speaker 1: has been quite benign, and I think this is another 118 00:06:21,800 --> 00:06:24,599 Speaker 1: reason why it will continue to be benign. So Peller 119 00:06:24,680 --> 00:06:27,320 Speaker 1: doesn't think that this necessarily is a huge issue, but 120 00:06:27,360 --> 00:06:30,200 Speaker 1: it does have the potential to cascade into something if 121 00:06:30,480 --> 00:06:35,520 Speaker 1: it continues. If people happen to be short on end 122 00:06:35,640 --> 00:06:37,760 Speaker 1: right now. I mean, would you advise people just in 123 00:06:37,800 --> 00:06:42,600 Speaker 1: diversifying their currency exposure anyway, maybe to to add end 124 00:06:42,640 --> 00:06:47,880 Speaker 1: to the portfolio. Um, yeah, I'll just have a caveat that. 125 00:06:47,960 --> 00:06:51,240 Speaker 1: Peller is not really a macro trader in that sense, 126 00:06:51,560 --> 00:06:56,160 Speaker 1: but we do believe strongly in diversitfication because it is 127 00:06:56,200 --> 00:07:00,279 Speaker 1: these these tail events that matter. Every any risk that 128 00:07:00,320 --> 00:07:03,400 Speaker 1: can be priced in is priced in. So Peller does 129 00:07:03,440 --> 00:07:05,839 Speaker 1: believe strongly in diversity caation and it's probably not a 130 00:07:05,839 --> 00:07:09,000 Speaker 1: bad idea for a macro trader to consider having some year. 131 00:07:09,560 --> 00:07:12,360 Speaker 1: Having said that, it's not something Peller is doing itself 132 00:07:12,440 --> 00:07:16,200 Speaker 1: because we are focused more on underlying stocks and currency. 133 00:07:16,400 --> 00:07:18,640 Speaker 1: God it. Stephen, thanks very much for joining as Stephen 134 00:07:18,640 --> 00:07:22,360 Speaker 1: Glass managing Director and Analysts at Peller Funds Management.