Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller. Every business day we bring
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
Speaker 1: at Bloomberg dot com slash podcast. Let's do some tech
Speaker 1: talk here because there's a lot of earnings coming out
Speaker 1: of Silicon Valley. We got the Bloomberg Intelligence Technology team
Speaker 1: with us men Deep sing here in Bloomberg Interactive Broker
Speaker 1: Studio on a rock Rona phoning and if god knows
Speaker 1: where but on Rod let's start with you. You know,
Speaker 1: I get it that digital ad spending slowing. We'll go
Speaker 1: over that with man Deep. But Microsoft a little bit
Speaker 1: weaker in their guidance that I would have anticipated, and
Speaker 1: I think the street as well, judging by the stock
Speaker 1: What did you take away anticipated? We were looking for
Speaker 1: the slowdown somewhere from you know, sixteen percent constant guard
Speaker 1: and see growth rate to let's say around ten to
Speaker 1: twelve percent, and these guys said they were going to
Speaker 1: be somewhere around eight nine um that was a bit
Speaker 1: of a surprise to us. Now with this, you know,
Speaker 1: in our view tells that enterprise spending is starting to
Speaker 1: hold back. Now, this does not mean, you know, this
Speaker 1: is not a good sign for all the enterprise companies,
Speaker 1: both in the software world as the services world, and
Speaker 1: so man deep. Let's also tie in what we heard
Speaker 1: from Alphabet. If I look at the shares right now,
Speaker 1: I see them down about seven percent. They've clawed back
Speaker 1: a lot of their losses, but still seven percent loss
Speaker 1: on the day. What was the biggest headline there to
Speaker 1: explain this market reaction? I mean, across the board, they
Speaker 1: validated the weakness on the AD side. What we heard
Speaker 1: from Snapchat, Alphabet said search at revenue growth is slowing,
Speaker 1: YouTube is slowing. And look, I mean except for search,
Speaker 1: none of their other segments make any money. So if
Speaker 1: you're an investor in this dock and you're looking at this,
Speaker 1: you know management saying search is slowing, but we are growing.
Speaker 1: Our employee had come by t You're questioning, you know,
Speaker 1: what is it that they're hiring all these people for
Speaker 1: and when will that translate into profits? And I think
Speaker 1: that is what they need to address. So I don't
Speaker 1: know if there's no reason for anybody to think that
Speaker 1: big text spending is anything but a short term cyclical
Speaker 1: pull back right here, because I mean, this is the
Speaker 1: only reason we talk to people like you and men, Deep,
Speaker 1: is because your businesses that you cover continue to grow
Speaker 1: all the time. That's still the case, right Yeah, yeah, definitely.
Speaker 1: You know, I'll give you a very easy example. Cloud
Speaker 1: is something that everybody's talking about today. Slow down in
Speaker 1: that you know, if you go back and look at
Speaker 1: during the pandemic, we saw a similar slowdown for four
Speaker 1: waters in a row, and then the year after growth
Speaker 1: rates improved, which is very unusual for these large businesses.
Speaker 1: And we expect a similar trend here. The end markets
Speaker 1: are so large and we are still in very very
Speaker 1: early innings in this case. So even if we see
Speaker 1: slowdowns in the next two to three quarters, we expect
Speaker 1: a massive bounce back in the year after that. And
Speaker 1: that's a true tech analyst right there, the amountsive bounce back.
Speaker 1: It's not it's not just Dan Eyes. All these tech
Speaker 1: analysts massive bounces. They can see the future, they can
Speaker 1: I know, yeah, and it involves technology that makes sense
Speaker 1: to me. But I mean, Deep, I want to go
Speaker 1: back to the social media names, because we still have
Speaker 1: two biggies left. We got Twitter, we got Meta, both
Speaker 1: interesting for their own reasons. But given what we saw
Speaker 1: from Snap, like you mentioned, given what we saw from
Speaker 1: Alphabet most recently, are we just going to be talking
Speaker 1: about ad spending? Is it going to be another gloomy
Speaker 1: two reports to sit through? I think so. But look,
Speaker 1: I mean to an ugs point, you know there is
Speaker 1: a cyclical element even in ads. Things will come back,
Speaker 1: the growth rates will improve. The problem for Meta specifically
Speaker 1: is you know, there is a question mark around how
Speaker 1: sustainable their business model is, given what has transpired with
Speaker 1: Apple's privacy changes, and you know TikTok taking share, so
Speaker 1: they have a real challenge ahead of them. I'm not
Speaker 1: worried about search. Search will come back. YouTube growth rates
Speaker 1: will be after this downturn. So there is a lot
Speaker 1: of cyclical element within ads. But then I think the
Speaker 1: key to watch out for is what happens to Meta.
Speaker 1: All right. We actually had an i p O today,
Speaker 1: which is a rarity in UH mobile. I I PO
Speaker 1: at twenty one per share, giving it a eight sixty
Speaker 1: million dollar I p O. M. Bloomberg News is reporting
Speaker 1: that the Mobili has not traded yet, but it's indicated
Speaker 1: to open at twenty five men deep. What is Mobile
Speaker 1: I and what's the street call on this company? Well,
Speaker 1: Mobile I is one of the segments within Intel, a
Speaker 1: company that they bought, and it focuses predominantly around autonomous driving.
Speaker 1: They make chips and they have embedded software for driving,
Speaker 1: you know, level two three for autonomous driving. So very
Speaker 1: hot space given what we have seen from Tesla this year,
Speaker 1: and it made sense that Intel went ahead and you know,
Speaker 1: I p out this company. Uh. The valuation, clearly, I
Speaker 1: think was pulled back from the initial discussions, and I
Speaker 1: think it was priced well enough that you know, there
Speaker 1: was receptivity around uh investors looking to get that initial
Speaker 1: trancho of the allocation. But look, I think it's still
Speaker 1: small when it comes to the capital race here. Million
Speaker 1: isn't going to make a difference in Intel's fortunes. UH
Speaker 1: and UH. I think what Intel wants to do is
Speaker 1: really to showcase, you know, that they have exposure to
Speaker 1: a top like automotive sector, which is a high growth
Speaker 1: sector within semis Alright, good stuff. I'm just you know,
Speaker 1: as a former banker, I'm just happy that somebody got
Speaker 1: a deal done. So let's see how this thing trades
Speaker 1: today are right, good stuff talking technology and no two
Speaker 1: better people to do it within Anaragrana and Man Deep
Speaker 1: Seeing from Bloomberg Intelligence their tops tops in the business.
Speaker 1: We are in the thick of earning season. We had
Speaker 1: the US banks last week, a lot of the European
Speaker 1: banks reporting numbers this week, and we want to talk
Speaker 1: euro banks. We talked to John Tasy, has been covering
Speaker 1: the European banking sector for decades. He joins US. He's
Speaker 1: Bloomberg Intelligence senior banks analysts. So John, thanks so much
Speaker 1: for joining US year. I want to talk with about
Speaker 1: Deutsche Bank. It looks like, you know, they're bigger business,
Speaker 1: which is their trading business. Their FICK business did actually
Speaker 1: pretty well. It was just kind of the bankers didn't
Speaker 1: have a lot of stuff to do during the quarter. Yeah,
Speaker 1: High Paul Um completely agree. Fick as expected has beaten
Speaker 1: expectations pretty much across the board. And actually, if you
Speaker 1: look at Barclays today, up sixty in dollar terms, so
Speaker 1: comfortably better than um Deutsche. But yes, the advisory very disappointing.
Speaker 1: And as you will know from your many years in
Speaker 1: the investment banking world. What pays bonuses, It's the investment
Speaker 1: banking fee. And I mean Deutsche was down eighty five,
Speaker 1: so um, the market's clearly looking at results through a
Speaker 1: bear market lens. At the moment, prettyfficult to catch break
Speaker 1: even if you look at Standard Charter or SEB or
Speaker 1: something today, down four or five, even with massive revenue upgrades,
Speaker 1: purely because the markets worried about bad debt. It's worried
Speaker 1: about cost inflation, slump in investment banking revenue. I mean,
Speaker 1: just the worst of any of the large Wall Street firms.
Speaker 1: And John, what is the light at the end of
Speaker 1: the tunnel for Georgia Bank? Because Paul I were talking
Speaker 1: about how use I mean use it's a shadow of
Speaker 1: its former self? Uh, how does it get there? Or
Speaker 1: is that such a lofty goal at this point that
Speaker 1: it's not even on the radar? Well, I mean, I
Speaker 1: think that you're used to looking at American banks because
Speaker 1: I think think HSBC. HSBC was one of the sort
Speaker 1: of global leading banks. It's trading at a discount to Europe.
Speaker 1: Now it's trading on five times next year's earnings with
Speaker 1: massive revenue upgrades. Deutsche Bank is actually more expensive on
Speaker 1: p So when you say light at the end of
Speaker 1: the tunnel, clearly the one thing they've been waiting for
Speaker 1: is revenue to recover. And the NI side of it,
Speaker 1: the fixed income side of it's in proved. We know
Speaker 1: that fees advisory originations quite syctical. Last year, it was huge.
Speaker 1: This year it's down a lot um. But I guess
Speaker 1: the light at the end of the tunnel is getting
Speaker 1: through the next two or three years of economic pain
Speaker 1: in Germany, because don't forget, they've got a very large
Speaker 1: corporate loan book there as well. And Germany is at
Speaker 1: the epicenter of all the issues you've got with Ukraine, Russia,
Speaker 1: the gas issues. So we're still working our way through that. Yeah, John,
Speaker 1: I don't think that you know, our listeners here in
Speaker 1: the States have a full appreciation of how difficult the
Speaker 1: economic conditions are in much of Europe for a variety
Speaker 1: of reasons. So as you think, as you assess the
Speaker 1: European banks, how are you thinking about credit quality and
Speaker 1: right offs? And I mean, how much of a headwind
Speaker 1: is that going to be? Do you think? Well? I mean,
Speaker 1: the funny thing is it's not just about being a
Speaker 1: headwind at the moment because because banks have become so
Speaker 1: much more profitable purely mechanically, because rates have gone up,
Speaker 1: You've got the ECB and the Bank of England beginning
Speaker 1: to think, hang on us that you guys are now
Speaker 1: reporting double digit r oees simply on the back of
Speaker 1: us having to raise rates. So how do we crimp that.
Speaker 1: The banks are thinking, you know what, let's get ahead
Speaker 1: of the curve. Let's IFRS non as the accounting standard.
Speaker 1: A bit boring but quite important. They're taking more reserves
Speaker 1: and setting aside more provisions, and they will do more
Speaker 1: in the fourth quarter to get ahead of this and
Speaker 1: also to damp reported profits. They don't want the regulators saying, right,
Speaker 1: we're going to put a cap on bonuses. We want
Speaker 1: to put a cap on capital returns. So it's an
Speaker 1: interesting trade off, a bit like you saw, um the
Speaker 1: US banks being told, well, let's let's just calm down
Speaker 1: on the buy backs. The same as coming in Europe,
Speaker 1: but but more of a revenue question. Okay, a lot
Speaker 1: of gloom and doom in this conversation so far. Let's
Speaker 1: get some good news in here. If we look at
Speaker 1: Barclay's results on a dollar basis a U S dollar basis.
Speaker 1: You did have thick up sixty three per cent equities,
Speaker 1: but let's talk about thick. That seems like an undeniable
Speaker 1: bright spot. It was, and Barclays has been investing very heavily,
Speaker 1: and obviously the dollar going the way it has has
Speaker 1: really flattered that. But i'd point to the share prices down,
Speaker 1: and what did the call focus on? The call focused
Speaker 1: on the underlying outlook for credit um and the UK
Speaker 1: and credit impairments and pointing to things like in the
Speaker 1: US their credit card book early warnings, so thirty dead
Speaker 1: delinquencies are beginning to rise quite quickly. So the market
Speaker 1: is looking through all of the good news on the
Speaker 1: top line and focusing on are you doing good enough
Speaker 1: job on costs, which Barclays is at the moment, and
Speaker 1: are you setting inside enough and are you being realistic
Speaker 1: about where the bad debt goes? So yes, obsolutely a
Speaker 1: good number, but when you look at what the market's
Speaker 1: focusing on, unfortunately it looks straight through that. So Jonathan,
Speaker 1: as as we are globally deal with, you know, slowing economy,
Speaker 1: give us let us step back, you know, And I'd
Speaker 1: love to get your view on kind of the structure
Speaker 1: of the European banking market. Will there be any change
Speaker 1: going forward, any m n A. I know, the cross
Speaker 1: border m n A is very difficult to to do.
Speaker 1: How do you think that European banking sector may evolve
Speaker 1: just structurally going forward? Well, consolidation cross border is needed,
Speaker 1: but we're still a long way from that. I mean,
Speaker 1: if you think the most things the ECB is debating
Speaker 1: at the moment isn't the seventy basis point rate high,
Speaker 1: which they almost certainly will do. It's what do you
Speaker 1: do with the two trillion euros of loans that you
Speaker 1: made to the banks during the crisis, because at the
Speaker 1: moment they're now making money for the bank's handover fist
Speaker 1: and if you're Italy, the Italian banking sector needs that.
Speaker 1: If you're Deutsche Bank or if your BMP and you've
Speaker 1: got hundreds of billions of these loans, you're being given
Speaker 1: free money. But the ECB has to make a change,
Speaker 1: and so as with the sovereign crisis, it's faced with
Speaker 1: the what do we do about Italy where there's still
Speaker 1: a lot of risk and stop the largest banks just
Speaker 1: being given free money. So I think consolidation cross border
Speaker 1: is still a long way away. Um. The likes of
Speaker 1: b MP will be at the forefront of it, but
Speaker 1: it's still gonna be more piecemeal. And I suspect we've
Speaker 1: got more domestic M and A over the next year
Speaker 1: or two. Particularly is would you buy a bank right now,
Speaker 1: even on a depress multiple if you know that bad
Speaker 1: debt is going to go up and you don't know
Speaker 1: how much The answers no and John before we let
Speaker 1: you go, I am I am curious to hear in
Speaker 1: your opinion how much reorganization we should expect to see
Speaker 1: in the next couple of months. I mean to pick
Speaker 1: on Deutsche Bank a little bit more. There's been a
Speaker 1: lot of shuffling around there. Have we seen most of it?
Speaker 1: Or do you think there's more to come as we
Speaker 1: had into these hard winter months. Well, I mean, it's
Speaker 1: difficult to say with Deutscha, but obviously we've got credit
Speaker 1: Swiss the next day or two. And that's the interesting
Speaker 1: that we get a Reheork tomorrow. Right. The question is
Speaker 1: a right, we'll be on standby for us tomorrow. John.
Speaker 1: Have they have they raised enough money to avoid a
Speaker 1: capital raise? Um? And the other issue they will have.
Speaker 1: Is it's one thing making cost promises, but in an
Speaker 1: environment where you've got so little visibility on revenue and
Speaker 1: clients are probably showing away, how do you present a
Speaker 1: credible plan? So Deutsche where it was three years ago,
Speaker 1: Credit Swiss is at the moment. That's good stuff. I
Speaker 1: remember those Deutsche Bank days. And again tomorrow, I guess
Speaker 1: is when we get the plan from Credit Swiss. So
Speaker 1: again another plan, Jonathan Tyson, you start senior banks analyst
Speaker 1: covers all the European a lot of the global banks.
Speaker 1: He's based in London and he does a great job.
Speaker 1: So we always appreciate getting a few minutes of his time.
Speaker 1: So there at Bloomberg Intelligence. So again some pretty decent
Speaker 1: numbers from some of the European banks. But again it
Speaker 1: all comes down um as it does for a lot
Speaker 1: of industries, particularly this quarter, are on their guidance, and
Speaker 1: I think their guidances cautious at best. I'm not even
Speaker 1: say cautiously optimistic. They've got some challenging economic times ahead,
Speaker 1: particularly in your exacerbated in large part by the war
Speaker 1: in Ukraine. So we'll stay on top of all those
Speaker 1: europaining banks, all right, Katie are you a homeowner. I'm not.
Speaker 1: I have visions of beings. Okay, it's kind of tough
Speaker 1: out there. I think the US thirty year fixed mortgage
Speaker 1: right top seven percent. That's the highest since two thousand one,
Speaker 1: that's reported by Bloomberg. That's a far cry from I
Speaker 1: think Matt got his mortgage, you know, less than a
Speaker 1: year ago. Three and a quarter. Maybe is that amazing
Speaker 1: that jump in such a short timeframe. Uh so that's
Speaker 1: a big deal. And then we have new home sales today,
Speaker 1: and I guess you see it in that number, those numbers,
Speaker 1: six hundred three thousand new home sales. Uh that's better
Speaker 1: than the consensus of five thousand, but that's below last
Speaker 1: month five thousand. So it's starting to really slow the
Speaker 1: growth in new home sales here at the time. Maybe
Speaker 1: it's good for people like me. I mean, I'm not
Speaker 1: imminently looking to purchase a home, but I know some
Speaker 1: people that are, and they're just waiting for the market
Speaker 1: to turn enough. Or it makes sense again, all right,
Speaker 1: let's talk to somebody who does this for a living,
Speaker 1: Erica Heidelberg. She's a mortgage backed security strategist for Bloomberg
Speaker 1: Intelligence Erequity make that that new home sales data we
Speaker 1: got today, how did you read it? Well, you know,
Speaker 1: it looks like we're continuing. I think a lot of
Speaker 1: people didn't expect last month's little surge to last because
Speaker 1: mortgage wits are going up, and if anything, the new
Speaker 1: home sales number is probably still a lagging indicator because
Speaker 1: rates have risen a lot this month as well. Overall,
Speaker 1: we're down around eighteen per night year every year, and
Speaker 1: I think that's not to be unexpected. At the same time,
Speaker 1: we are seeing new homes under construction going up, so
Speaker 1: there's a continued kind of stabilization and prices and new
Speaker 1: home sales, but that may not last as well. And
Speaker 1: let's talk about what US mortgage rates are doing. I
Speaker 1: have to imagine that's trickling through into some of that
Speaker 1: new home sales data. US mortgage rate it's topping seven percent.
Speaker 1: That's the contract rate on a thirty year fixed mortgage.
Speaker 1: What's the ceiling here? It seems like it's lifted every
Speaker 1: single week. You know. It's it's really quite related obviously
Speaker 1: to where treasuries are going. And I know that our
Speaker 1: economics and our Treasury team both expect that Treasury shood
Speaker 1: be leveling out soon because even though we do expect
Speaker 1: sure rates to continue to have to rise to fight inflation,
Speaker 1: I think the economy will start to slow in response,
Speaker 1: and therefore that will start putting a limit on how
Speaker 1: high treasury als will get. And mortgage spreads are also
Speaker 1: very wide treasuries right now, we actually think they're probably
Speaker 1: wider than fundamentals suggest. I think there's just a lot
Speaker 1: of digestion going on as the TED pulls out of
Speaker 1: the market. But even take into account kind of you know,
Speaker 1: where we take the bed holdings as the percentage of
Speaker 1: the market will be, we think spreads are probably a
Speaker 1: little wide. So we're seeing some strong buy just in
Speaker 1: the past couple of days by mortgage investors who say
Speaker 1: spreads are wide enough. Um, so, you know, presuming the
Speaker 1: money and the dry powder is there to kind of
Speaker 1: stabilize the mortgage market, it's it's looks promising at least
Speaker 1: the last in the most ucent trading sessions. That's kind
Speaker 1: of where I wanted to go, h Erica. In the
Speaker 1: kind of the market you cover, the NBS market, I'm
Speaker 1: looking at the Bloomberg u S MBS index total return
Speaker 1: and year to date minus fifteen point three percent, and
Speaker 1: don't worry, you have lots of company in that type
Speaker 1: of performance across the fixed incomes specter segment. Do your
Speaker 1: clients you talk to are any of them saying, boy,
Speaker 1: this is A it's historic in terms of underperformance, and
Speaker 1: B can't get that much worse? Maybe now is the time? Um? Yeah, well,
Speaker 1: I definitely have a lot of clients talking to me
Speaker 1: and saying, you know, at what point are spreads wide enough?
Speaker 1: And of course I can't fully answer that question because
Speaker 1: there's always unknowns and we're not really allowed to do that,
Speaker 1: but I will say that when we run aggressions and
Speaker 1: look at where spreads are relative to fundamental economic variables
Speaker 1: as well as the housing market variables, and even you know,
Speaker 1: our expectations for FED holdings as a present of the index,
Speaker 1: spreads look wide. Now. One of the things is keeping
Speaker 1: spreads wide is the fact that volatility both in terms
Speaker 1: of return, so you know, from a fear versus reed standpoint, um,
Speaker 1: but also just in terms of how it affects mortgage
Speaker 1: valuations because there's make into convexity and the mortgage sector inherently,
Speaker 1: so high levels of spread volatile the actually do reduce
Speaker 1: the value of the mortgage overall fundamentally. But that being said,
Speaker 1: even taking those into account, spreads look wider than they should,
Speaker 1: wider than our models think they should. So then it
Speaker 1: just becomes a matter of who who can fill the
Speaker 1: fens um void as as they step out of the market.
Speaker 1: Right Well, Erica, that's what I wanted to ask you.
Speaker 1: How much of that maybe unjustified spread wideness can we
Speaker 1: just blame on the FED pulling back from the market.
Speaker 1: I think we can blame the bulk of it on that,
Speaker 1: but we also complain the high volatility overall in the
Speaker 1: market and uncertainty about the direction of rage and the
Speaker 1: magnizument of FED tightening policies which has related all the
Speaker 1: unknowns about inflation. So you know, it's not as as
Speaker 1: you guys said. It's it's not only mortgages that are
Speaker 1: into performing to perform. Obviously, equities of end to perform.
Speaker 1: So it's a global asset class um risk off phenomena.
Speaker 1: But at the same time, I will add the interesting
Speaker 1: fact that as of this month, mortgages and an access
Speaker 1: return basis, which is considering hedge returns, are actually the
Speaker 1: worst performing sector in the Bloomberg Aggregate Bond Index, so
Speaker 1: we we've taken that dubious crown and have been corporates
Speaker 1: until September. So you know that also points of the
Speaker 1: fact that mortgage mortgage cheapening maybe overdone even relative to
Speaker 1: the other risk products. Seconds Erica, what's the credit risk
Speaker 1: for mortgages right now? I'm getting that question a lot.
Speaker 1: My opinion is it's very low. Letting standards very high,
Speaker 1: and the amount of equity most homeowners have in their
Speaker 1: homes is very strong. So I'm not a concern for
Speaker 1: me at this point, but obviously we will be looking
Speaker 1: for any science pointing in the other direction. Alright, great,
Speaker 1: great stuff. I'm so glad we have somebody like Erica
Speaker 1: Ittelberg with us because the only thing I know about
Speaker 1: the mortgage securities market is that what I learned in
Speaker 1: the Great Financial Crisis. I'm probably everybody else there, which
Speaker 1: is why we had to get smart quickly on that.
Speaker 1: And it's a very complex business. But fortunately have pros
Speaker 1: like Erica Heidelberg, mortag back security strategist for Bloomberg Intelligence. Yes,
Speaker 1: we have an MBS strategist at Bloomberg Intelligence because it's
Speaker 1: a huge market Uh. It touches pretty much everybody out there,
Speaker 1: the housing market. Uh. And it is certainly interest rate
Speaker 1: sense that to say the least. And we're seeing that
Speaker 1: in the performance as John was just mentioning some disappointing
Speaker 1: tech numbers last evening. More to come reports after the
Speaker 1: closed today. Waiting on the market here, but we've seen
Speaker 1: SMP and doubt turn positive, so go figure maybe this
Speaker 1: market wants to move a little higher. We check in
Speaker 1: with somebody who does this stuff for a living. Quincy Crosby,
Speaker 1: chief global strategist at LPL Financial as a publicly traded
Speaker 1: company on the NASDAC. You can put lp l A
Speaker 1: the ticker into your Bloomberg terminal. Check that out. Uh, Quincy,
Speaker 1: thanks so much for joining us here. What do you
Speaker 1: make of this market? Bloomberg News is out reporting on
Speaker 1: on a Goldman sax called Golden Sex as US equity
Speaker 1: bottom conditions are not there yet. Do you agree with
Speaker 1: that or how do you think about it? Well, you know,
Speaker 1: statistically it's probably not in What you now have is
Speaker 1: the market transitioning from you know, concerns over inflation to recession.
Speaker 1: I mean, you you've seen much made of the three
Speaker 1: months Treasury note inverting with the ten year hasn't pretty
Speaker 1: pretty strong track records that excellent track record predicting a recession.
Speaker 1: The question will be what kind of recession, and that
Speaker 1: is going to affect how the market reacts, because you know,
Speaker 1: if if market starts discounting uh and and concerns over
Speaker 1: over earnings, that's going to matter for whether or not
Speaker 1: we've reached the bottom. Quincy, I want to get your
Speaker 1: thoughts on the concept of bad news being good news
Speaker 1: as we, you know, continue this conversation about earnings. That
Speaker 1: mantra has typically applied to economic data, but I mean
Speaker 1: many have made the case that when you see lower
Speaker 1: ad revenue, especially for some of these tech companies, that's
Speaker 1: a read on the economy, that's a read of cooling demands.
Speaker 1: Maybe that's good news in the eyes of the Federal Reserve.
Speaker 1: What are your thoughts on that? Well, yeah, absolutely, I
Speaker 1: mean the market has been taking the data and then
Speaker 1: you know, filtering it through the perspective from the FED,
Speaker 1: and it's exactly that the bad news is good news
Speaker 1: because what the market is hoping for is that the
Speaker 1: FED begins a transition. I mean, I do most want
Speaker 1: the FED to stop or to pause, but you know,
Speaker 1: most likely it'll be a transition to a lower rate
Speaker 1: and less hawkish rhetoric as it moves towards the towards
Speaker 1: the terminal rate. But that's what the market wants. In
Speaker 1: the market understands that the more the these the economy slowing,
Speaker 1: especially because it's become much more embedded in the broader economy,
Speaker 1: the labor market for example, then the said understands his
Speaker 1: campaign is working. So that's why, right, bad news is
Speaker 1: good news. Good news at this point is bad news,
Speaker 1: so Quincy. Last night, Microsoft, like many other companies, called
Speaker 1: out the stronger US dollar as as a headwind and
Speaker 1: impacting their reported results. As a professional investor, Quincy, do
Speaker 1: you look past, you know, the swings and currencies and
Speaker 1: try to focus more on the underlying business or do
Speaker 1: you have to take the reported numbers as they are?
Speaker 1: How do you how do you deal with that? Well,
Speaker 1: you know, you're you're always looking at guides. You've heard
Speaker 1: that over and over again that when we're going through
Speaker 1: the earning season and listening to the guidance, and you
Speaker 1: could see a number of analysts, especially Microsoft, and said, hey,
Speaker 1: this is this is a buying opportunity. The stronger dollar
Speaker 1: has been an important headwind, There's no doubt about it,
Speaker 1: particularly amid about back drop of a weaker demand as
Speaker 1: the global economy flows down. But that is going to change.
Speaker 1: I mean that you're looking ahead three months and expectations
Speaker 1: are that the dollar will have weekend because the FED
Speaker 1: eases off, and that is very helpful for UM, for
Speaker 1: the you know, the global footprint for a good portion
Speaker 1: of the S and p if. I've heard at the multinationals.
Speaker 1: So there's no doubt about it. The guidance is crucial.
Speaker 1: Isn't as if Microsoft came in with a you know,
Speaker 1: terrible guidance the end of the Earth guardance. You know,
Speaker 1: it wasn't that at all, but it missed in terms
Speaker 1: of the guidance, and that should change. Similarly, we're waiting
Speaker 1: tonight you hear from Apple, and Apple, you know, has
Speaker 1: a major fourth print globally. The dollar is going to matter.
Speaker 1: And so Quincy put this onto a portfolio for us,
Speaker 1: what's your highest conviction position at the moment, Well, right now,
Speaker 1: where we tend to be more conserve rid of at
Speaker 1: this point, and we like healthcare and energy has been
Speaker 1: a top performer healthcare is moving in that direction. That
Speaker 1: has moved in that direction, including its riskier UH compatriot,
Speaker 1: which is biotech. On moving on moving UH A nice
Speaker 1: nice games for the advisors. Another thing that we're looking at,
Speaker 1: and that's important, and that is move in um UM industrials.
Speaker 1: It's like green shoots. A lot of that has to
Speaker 1: do with the defense component of industrials. The defense stocks
Speaker 1: very important for for the overall industrials. They're moving inch
Speaker 1: by inch higher. The other thing that we're looking at
Speaker 1: is the bond market. We've been saying for some time now,
Speaker 1: the bond market has come back and offering UH investors
Speaker 1: a return, a return that they haven't seen in a
Speaker 1: long time. And to take advantage of that, the short
Speaker 1: duration we're moving a little bit longer, but investment grade
Speaker 1: short duration again moving a little bit longer. This is
Speaker 1: going to help until the market realizes that the rates
Speaker 1: are going to come down as recession fears are introduced,
Speaker 1: and then obviously the rates will start to pull back.
Speaker 1: All right, Quincy, thank you so much for joining us.
Speaker 1: Always love getting your perspective there. Quincy Crosby, chief Global
Speaker 1: Strategist for LPL Financial NASTAC traded company lp l A
Speaker 1: is the ticker symbol there. Just talking about earnings and
Speaker 1: kind of how the markets digesting those earnings. And you know,
Speaker 1: when I was an analyst, I tend to try to
Speaker 1: look through some of the fluctuations on FX and try
Speaker 1: to look at the underlying business to say, hey, how
Speaker 1: are things going. But again, it can have big moves
Speaker 1: in the currencies, can have big moves on some of
Speaker 1: these multinational UH companies, And we're really seeing it, uh,
Speaker 1: you know, in a big way this quarter again Microsoft
Speaker 1: last night Apple as Quincy was mentioning huge global company
Speaker 1: after the clothes tonight along with the Facebook slash Meta.
Speaker 1: Let's get fright to our next guest, Brian Whalen. He's
Speaker 1: a co c I O and generalist portfolio Manigmate TCW
Speaker 1: Fixed Income Group. Ah. He went to some college in
Speaker 1: Connecticut that's best known for its pizza. But what really
Speaker 1: gets my attention he was a former VP at Donaldson,
Speaker 1: Lufkin and Jenrette and Flux that don't know that was
Speaker 1: one of the premier firms on the street before Credit
Speaker 1: Swiss bought it and kind of destroyed it. But what's
Speaker 1: really good about the d l J people as they
Speaker 1: trained some of the best analysts on Wall Street. So
Speaker 1: keep that in mind, Brian, I got double digit declines
Speaker 1: everywhere I look in the fixed income space. People are
Speaker 1: telling me this has never happened before, So of course
Speaker 1: I want to jump in with both feet and start
Speaker 1: buying everything. What do you think of my strategy? I
Speaker 1: like it. You had me at the intro and and
Speaker 1: now you've got me with the support for the bond market.
Speaker 1: Completely agree. We're at such a different place right now.
Speaker 1: I mean, you know, we started a year of the
Speaker 1: ten years at one and a half percent. You know,
Speaker 1: you look at your your kind of standard bond fund
Speaker 1: today you're looking at a yield of somewhere between five
Speaker 1: and a half and six percent ends. Um. You know,
Speaker 1: there's there's plenty of opportunities around, not only just the yield,
Speaker 1: but you know, the potential opportunities you can get in credit.
Speaker 1: Not to say there won't be more, but it's a
Speaker 1: different conversation about the bond market today, and not only
Speaker 1: get the yield, you know, but there's a strong argument
Speaker 1: to be to be made that you know, bonds can
Speaker 1: be what they're supposed to be in your portfolio, which
Speaker 1: is a diversifier versus other assets like equities. It's amazing
Speaker 1: to me how quickly uh tina went away. There is
Speaker 1: no alternative now. It almost feels like there's too many alternatives.
Speaker 1: There's so much opportunity, uh so many juicy yields in
Speaker 1: the bond market. I mean, where do you see the
Speaker 1: most opportunity at this point? Yeah, good question, you know,
Speaker 1: for for us this first, you know, the first ten
Speaker 1: months of the year, it's been a kind of we've
Speaker 1: called it a high quality sell off. You know, so
Speaker 1: where have you seen most of the repricing. You've seen
Speaker 1: it obviously in treasury rates. We just talked about that,
Speaker 1: and then other higher quality, larger parts of the bond
Speaker 1: market like agency mortgage backed securities, like investment grade corporate bonds.
Speaker 1: You know, those have kind of repriced the most and
Speaker 1: looked the most attractive at this point. But you know,
Speaker 1: if our outlook is right, and it's you know, it
Speaker 1: seems to becoming more consensus, which is that we're clearly
Speaker 1: heading into a deep slow down and recession, you're probably
Speaker 1: gonna want to keep some powder dry for credit opportunities,
Speaker 1: meaning that you know, areas of the bond market like
Speaker 1: leverage and dance, you know, high yield leverage loans. Parts
Speaker 1: of the bond market where you're exposed to kind of
Speaker 1: lower quality uh types of borrowers in the commercial real
Speaker 1: estate area or the residential mortgage area, You're gonna want
Speaker 1: to keep that powder dry because you know, those parts
Speaker 1: of the market really have not repriced. The spreads of
Speaker 1: the prices you see in those parts of the market
Speaker 1: are not reflective of a recession. And so that's you know,
Speaker 1: with regards to our strategies, we've you know, we've jumped
Speaker 1: with both feet into the former into the kind of
Speaker 1: higher quality parts of the market, um, but still being
Speaker 1: cautious on the lower quality parts. So you know, I
Speaker 1: spent a couple of years earlier in my career that
Speaker 1: v Chase Manhattan Banks, so doing credit analysis. So I've
Speaker 1: got some chops there. I'm just an equity, simple equity guy.
Speaker 1: But my question is, you know, I'm concerned if we
Speaker 1: go into this recession about credit quality. UM. So you're
Speaker 1: suggesting that is in fact a risk, and that is
Speaker 1: suggestive that maybe focusing on quality right now as opposed
Speaker 1: to maybe trying to grab for some extra yield. Yeah,
Speaker 1: I mean, look, you know, when we look at, let's
Speaker 1: feel good like corporate balance sheets, you know, they're actually
Speaker 1: not as levered as we saw them in late two
Speaker 1: thousand and nineteen. And part of that is, you know,
Speaker 1: it's the upside inflation. Right, you know, debt is a
Speaker 1: nominal problem. And so when you have inflation, uh and
Speaker 1: debt stays relatively constant, your ability to service that that
Speaker 1: actually looks it looks fairly healthy right now. It doesn't
Speaker 1: look bad. That said, if we enter a recession, they'll
Speaker 1: certain be some you know some uh, you know, some
Speaker 1: things that go bang in the financial markets that will
Speaker 1: dry up liquidity, and you will see that reflected in
Speaker 1: wider spreads, higher yields in those parts of the corporate
Speaker 1: bond market. It doesn't necessarily mean we're going to see
Speaker 1: the faults the same types of the fault levels that
Speaker 1: we saw in the Great Financial Crisis or you know,
Speaker 1: during the kind of the two thousand one two thousand
Speaker 1: two tech bubble burst. But there could be a period
Speaker 1: of time and it could last, you know, months where
Speaker 1: you know, the high yield market is priced like that
Speaker 1: and now and now that would be a buying opportunity
Speaker 1: because you could get prices reflective of a high default cycle,
Speaker 1: but in reality, over the ensuing to three years, you
Speaker 1: may not get or most likely will not get, those
Speaker 1: types of peak default rates, and that will lead to
Speaker 1: the very good returns. Fry. Let's wrap the FED into
Speaker 1: this as we count down to next week's meeting. I'm
Speaker 1: gonna ask you a version of a question I'm obsessed
Speaker 1: with this morning, which the idea that bad news is
Speaker 1: good news. You have, you know, signs of cooling economic data,
Speaker 1: and I know you're a credit guy, but you look
Speaker 1: at what we're seeing in the corporate earnings results, the
Speaker 1: impact of a higher dollar, slowing ADS demands. When you
Speaker 1: add all that together, what do you think it means
Speaker 1: for the FED? And what do you think that means
Speaker 1: for the fixing communiverse at large? I think the I
Speaker 1: think that we think the FED is going to go
Speaker 1: as far as the mark it allows them, meaning that
Speaker 1: you know, if this you know, it's been fairly surprisingly
Speaker 1: orderly kind of year to date, like we haven't really
Speaker 1: I mentioned those bangs in the financial market, we haven't
Speaker 1: seen them. So you know, the Fed's gonna get They're
Speaker 1: gonna try to get well north of four percent, you know,
Speaker 1: the market's got it priced in somewhere between a four
Speaker 1: and a half and a five percent funds right. You know,
Speaker 1: what might stop them from getting there is something that
Speaker 1: goes you know, really goes bang. Um. It's kind of
Speaker 1: the equivalent or even larger of that kind of UK
Speaker 1: pension LBI problem. You know we were here in the States.
Speaker 1: You know, that may cause them to kind of stop
Speaker 1: or you know, let's say, you know, unemployment jumping up
Speaker 1: surprisingly or a little more quickly, you know than the
Speaker 1: markets anticipating. But long story short, the modern market right
Speaker 1: now is allowing them, you know, it's kind of pricing
Speaker 1: and allowing them to get north of four and a
Speaker 1: half percent. And if they're giving it to them, they're
Speaker 1: going to take it. All right, good stuff as always
Speaker 1: Brian Well and coc I go in generalist portfolio manager
Speaker 1: TCW Fixed Income Group and manage like two billion dollars.
Speaker 1: How do you even do that? Looking at the Bowing today,
Speaker 1: the stocks down about two and a half percent. They
Speaker 1: reported some numbers. I kind of went through it. It It
Speaker 1: kind of looked like a mixed bag. Revenue, uh EPs
Speaker 1: missed estimates. On the one hand, all that are they
Speaker 1: hand had a ton of free cash flow, and I
Speaker 1: know that's what analysts and investors for Boeing focus on
Speaker 1: a lot. So let's break it down with George Ferguson.
Speaker 1: He's a senior aerospace, defense and airline analysts for Bloomberg Intelligence,
Speaker 1: has been doing this stuff for decades and of course
Speaker 1: the highlight of his life is easy proud graduate of
Speaker 1: the Penn State University. Uh, George, kind of a mixed
Speaker 1: bag there for bowing. What did you take away from it? Yeah,
Speaker 1: so thanks for having me on you. I mean the
Speaker 1: takeaway was that even though cash was cash and global services,
Speaker 1: I think we're the two standouts in the quarter and
Speaker 1: a really ugly muddy quarter. Um, cash wasn't as good
Speaker 1: as uh as it look. You know, the cash generation
Speaker 1: was largely driven by a tax refund and then um
Speaker 1: some pre payments on airplanes actually accounts receivable going up yere,
Speaker 1: which I think is has a lot to do with
Speaker 1: the defense businesses that they took charges on, but there's
Speaker 1: some other moneys in there. So you know, when when
Speaker 1: I look at cash floy like core cash flow like
Speaker 1: you generated from operations, You don't generate it from working
Speaker 1: account changes and tax refunds that were just it's just
Speaker 1: not not not good, just doesn't not good, not good. Uh.
Speaker 1: Let's let's move from cash flow and talk about the
Speaker 1: seven thirty seven delivery goal cut again. Uh. It reduced
Speaker 1: its forecast for deliveries uh to about three seventy five
Speaker 1: for this year. Again, just another cut there. How surprising
Speaker 1: was this? Are are you pretty used to seeing these
Speaker 1: cuts at this point? Yeah? I think we are unfortunately
Speaker 1: getting used to seeing these cuts. And you know the
Speaker 1: noise we heard about next year wasn't good either, uh.
Speaker 1: And I think that's really the challenge, right. I think
Speaker 1: UM build rates have to be higher than you know,
Speaker 1: they're not even achieving the thirty one they say is
Speaker 1: their stated rate UM. But I think they even have
Speaker 1: to get above thirty one to keep the company healthy,
Speaker 1: to generate cash, to absorb all that overhead, and to
Speaker 1: keep their supplier base in decent shape. And I think
Speaker 1: everyone is scratching their heads about this. Hey, it's the
Speaker 1: engine makers that can't get US engines. You know. The
Speaker 1: Boeing management kept going through a number of analysts and
Speaker 1: the call question that you know multiple times, and you know,
Speaker 1: when we look at Airbus, they're building eight to ten
Speaker 1: more airplanes a month and they're getting engines, So what's
Speaker 1: what's the difference? Right? What's going on? So I guess
Speaker 1: you know, one of the issues is then seven the Dreamliner,
Speaker 1: which is one of my favorite aircraft in the sky. Um,
Speaker 1: how's that doing? So I know it's not just a
Speaker 1: seven thirty seven then we have to worry about. But
Speaker 1: I know there's some issues with the seven eight seven
Speaker 1: as well. Yeah, so seven, you know, they they've got
Speaker 1: the FAA to sign off on on the six on
Speaker 1: those and they're starting to move them out of inventory,
Speaker 1: which is you know, that's a that's absolutely a positive story.
Speaker 1: The challenges that the SEV seven doesn't make much margins,
Speaker 1: so you know, the contribution to profit isn't isn't large,
Speaker 1: But there's a lot of money in inventory that I think,
Speaker 1: you know, Boeing needs that cash, needs to needs to
Speaker 1: get it into the into the balance. She shipp those
Speaker 1: airplanes and that's going to give them some comfort going forward.
Speaker 1: Um you know. So, I mean again, I think seventy
Speaker 1: seven improving story, but just not not a lot of
Speaker 1: profitability in that program. And so when you think about
Speaker 1: Bowing and the different struggles that the company is dealing with,
Speaker 1: supply chain issues, labor shortages. What do you think is
Speaker 1: the biggest hurdle that the C suite is talking about
Speaker 1: right now? You know, I think that, Um, I'm not
Speaker 1: going to limit it to one story. I'm gonna go
Speaker 1: for two. First, I think they should be talking every
Speaker 1: single day again about what it's going to take to
Speaker 1: get seven thirty seven max production up UH and sustained
Speaker 1: at a higher level so they can generate profits. And
Speaker 1: they should be talking each and every and actually, part
Speaker 1: of that discussion is going to be they've got to
Speaker 1: be going to the White House and trying to figure
Speaker 1: out what is going on with China trying to either
Speaker 1: going to open or not open. And if it's not
Speaker 1: going to open for them, they got to go sell
Speaker 1: those airplanes that they've already built and get that cash
Speaker 1: again into their coffers. And the second thing is that
Speaker 1: defense business. That defense business has rolled over. Now we
Speaker 1: look in we're not going to generate cash in that
Speaker 1: business that was you know, that is supposed to be
Speaker 1: one of the stabilizing factors at this company and now
Speaker 1: it's and you know, now it's not performing for them.
Speaker 1: And they've got to get into that defense business, get
Speaker 1: these charges behind them, get that supply chain right size,
Speaker 1: even potentially go to Congress and talk about adjusting some
Speaker 1: of these fixed price contract because it's not just Boing
Speaker 1: this losing money a fixed price contracts. Everybody's having a
Speaker 1: problem with it. They've got to work that issue hard.
Speaker 1: That's an important part of this business. Uh, George, you
Speaker 1: mentioned China. What is the state of Boeing's relationship with China?
Speaker 1: Can they in fact are they allowed to sell this
Speaker 1: China just not buying? What's going on? So China has
Speaker 1: approved the Max to fly in the country, but they
Speaker 1: are not taking delivers of the airplanes. And so of
Speaker 1: seven thirty seven Maxes that have been built in and
Speaker 1: are sitting on the tarmac out and you know, out
Speaker 1: at different bowing facilities around the world. So as near
Speaker 1: as we can tell, this looks like part of a
Speaker 1: you know, part of the US China trade fight that
Speaker 1: bowing is kind of stuck in the middle of um
Speaker 1: there's a hunderd and thirty eight airplanes waiting to be
Speaker 1: delivered into China. And you know what part of what's
Speaker 1: boosting air buses deliveries is the fact that they're still
Speaker 1: delivering into China um and that's giving them eight to
Speaker 1: ten a month again, So Bowing's got to go to
Speaker 1: the White House, I think, and start getting this figured out,
Speaker 1: like where are we in relations with China on trade? Interesting?
Speaker 1: All right, let's switch heres just real quickly to the airlines.
Speaker 1: What's the top line story? What's the story here for
Speaker 1: the airlines that we know, like consumers, they came back,
Speaker 1: maybe they paused a little bit. Is where are we
Speaker 1: in terms of demand there on that for the airlines? Yeah?
Speaker 1: I mean demand has continued to improve and revenues have
Speaker 1: looked very good during earning season. Costs are still elevated.
Speaker 1: They're not getting twenty levels of profitability. Wasn't the toptick?
Speaker 1: Was the top tick? So will they will managements tell you, hey,
Speaker 1: it's great, revenues are coming in. We think there's a
Speaker 1: huge amount of demand for air travel there clearly is.
Speaker 1: But the question is why can't they get us back
Speaker 1: to margins that look like against labor costs, it's fuel costs.
Speaker 1: So my sense is there's still some weakness at the
Speaker 1: low end of leisure and business isn't back fully. So business,
Speaker 1: we think it is about back and the low end
Speaker 1: of leisure I think is going to struggle with higher inflation,
Speaker 1: and especially because we go into you know, economic slowdown,
Speaker 1: whatever you think is coming just over the hill, that's
Speaker 1: going to be the challenge for them. All right, Good stuff,
Speaker 1: George Ferguson, He covers the airlines, He covers the airspace
Speaker 1: and defense companies all tied in, of course. George Ferguson,
Speaker 1: Senior aerospace and Defense analysts at Bloomberg Intelligence, calling in
Speaker 1: from our Princeton office. Thanks for listening to the Bloomberg
Speaker 1: Markets podcast. You can subscribe and listen to interviews with
Speaker 1: Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller.
Speaker 1: I'm on Twitter at Matt Miller, three pen On fall
Speaker 1: Sweeney I'm on Twitter at pt Sweeney. Before the podcast,
Speaker 1: you can always catch us worldwide at Bloomberg Radio.