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 get to another
Speaker 1: name reporting numbers, A T and T mob Bell. The
Speaker 1: numbers I kind of thought were okay, maybe a little
Speaker 1: disappointed about the stocks up six point two per cent.
Speaker 1: So let's break down what's going on with Big T
Speaker 1: buying some telephone? Is what we used to say on
Speaker 1: the trading desk, shares a telephone for sale and you
Speaker 1: know T. Yeah, John Butler, he's he knows back, he
Speaker 1: goes back that far. John talks to us about A
Speaker 1: T and T. What did they report and kind of
Speaker 1: how did you and in the market take their numbers? So, Paul,
Speaker 1: I think you, I think you characterized it correctly. The
Speaker 1: numbers for the quarter largely in line. It's all about
Speaker 1: is coming right the streets, very forward looking, and I
Speaker 1: thought management's tone on the coming year and beyond was confident.
Speaker 1: You know, they very they do a very good job
Speaker 1: of sort of managing the narrative. A T and T
Speaker 1: right now is transitioning to you know, a connectivity company.
Speaker 1: They're moving beyond that, you know, media and telecom conglomerate.
Speaker 1: They've sold off Warner Media in April of last year,
Speaker 1: and they're and they're moving forward, I think ahead into
Speaker 1: pushing into fiber and five G and they're doing you know,
Speaker 1: it's steady as she goes. They're really doing a very
Speaker 1: good job there of building out that fiber network and
Speaker 1: standing up news spent spectrum for five G and again
Speaker 1: management's tone around the whole project, if you will, was
Speaker 1: very confident. Well, what does that mean for the share
Speaker 1: price here? Because AT and T has consistently actually outperformed
Speaker 1: some of its peers here Hoizon T Mobile as well.
Speaker 1: What are we looking at when it comes to the
Speaker 1: future of the share price. So I can't really speak
Speaker 1: specifically to the price action, but I can talk about sentiment.
Speaker 1: So if you wind back the clock even six months,
Speaker 1: I seem I think people were very worried about the
Speaker 1: cash flow outlooking can they cover the dividend and can
Speaker 1: they really pull off this fiber build out at a
Speaker 1: time when the overall broadband market is maturing, just like
Speaker 1: wireless did a couple of years ago. And I think
Speaker 1: the answer to all that is yes, you know, they're
Speaker 1: beginning to execute well. The visibility on that on that
Speaker 1: build out, and their prospects in that market have improved,
Speaker 1: and so overall we're seeing a shift in sentiment from
Speaker 1: negative to wow. I think this actually is becoming a good,
Speaker 1: you know, stable story with um you know, the on
Speaker 1: the call, management said, look, we feel we're going to
Speaker 1: generate more than enough cash flow to cover the dividends.
Speaker 1: So anyone holding the stock for for the income, I
Speaker 1: think is going to feel better coming out of this call.
Speaker 1: So John, and it's you know, if you're a long
Speaker 1: time a T T shareholder, you've just been whipsawed. Here.
Speaker 1: You were, you know, kind of a tired old telephone
Speaker 1: company getting into wireless, and then boy they did this
Speaker 1: one a D and got to loaded up in the
Speaker 1: media business with Direct TV and then Time Warner, and
Speaker 1: they you know, almost as quickly unloaded those businesses. So
Speaker 1: if I buy a T and T today, what am
Speaker 1: I buying and what am I hanging my hat on?
Speaker 1: I think you're hanging the hat on the dividend partly,
Speaker 1: and you're hanging your hat on them getting into the
Speaker 1: broadband business, but doing well in that business, taking share
Speaker 1: in that business. You know, I think CEO John Stankey
Speaker 1: nailed it when he said, you know, ultimately data finds
Speaker 1: its way to fiber. And you know, with the growth
Speaker 1: in data coming out of five G right with with
Speaker 1: video streaming in particular, you need a lot of capacity
Speaker 1: to support that traffic flow. And I think fiber is
Speaker 1: the right answer for that. And uh, you know, the
Speaker 1: cable companies are all scrambling to upgrade their networks, which
Speaker 1: are mostly coaxial cable, and so I think a T
Speaker 1: and T has an inherent advantage with fiber. They see
Speaker 1: that and they're kind of pressing their bet there. Not
Speaker 1: only are they building the fiber in region and hitting
Speaker 1: their targets there UM, but they're building out a region now.
Speaker 1: They partnered with UM with black Stones to begin to
Speaker 1: build fiber outside the network. So or there could be upside,
Speaker 1: if you will, to this broadband bed. And I think
Speaker 1: that's what you're hanging your hat on that and the
Speaker 1: dividends story, So is this something is the R word,
Speaker 1: the recession word, something that a T and T really
Speaker 1: has to worry about here when we're talking about this
Speaker 1: kind of build out. You know, it's moving around the
Speaker 1: numbers modestly, I would say this year. But I think
Speaker 1: the investment community, based on where a sentiment is around
Speaker 1: these names, appears to be looking beyond any recession this year.
Speaker 1: And um and I say that because Verizon reported a
Speaker 1: choppier quarter and a choppier outlook yesterday, and yet the
Speaker 1: investment community seemed to be looking beyond all that. So
Speaker 1: you know, yes, telecom is a g d P plus business,
Speaker 1: so if you move into recession, it can crimp growth.
Speaker 1: But um, again, managements com men surround it, we're like, look,
Speaker 1: you know, we're looking at the economy and we're seeing
Speaker 1: a relatively stable economic environment right now. We're not seeing
Speaker 1: that down draft that everyone's bracing for. And they did say, look,
Speaker 1: things can change and there right on that things can
Speaker 1: change on a dime. But I'm sort of in alignment
Speaker 1: with what they're seeing. Based on what I'm hearing from companies,
Speaker 1: I'm seeing modest softness emerged, but not not anything I've
Speaker 1: seen with recessions past. All Right, John, great stuff. Always
Speaker 1: appreciate getting your perspective. You've seen a bunch of cycles
Speaker 1: over the years. We appreciate getting you perspective. John Butler,
Speaker 1: he's a senior analyst covering telecoms for a Bloomberg Intelligence.
Speaker 1: He's based in our lovely Princeton, New Jersey offices. All Right,
Speaker 1: I'm an equity guy. I just tell a story forecast
Speaker 1: and earnings. I slap a multiple onnament and my job's done.
Speaker 1: I go on. But the fixed income folks, that's a
Speaker 1: whole another game. They have to dive deep. But boy,
Speaker 1: they had a brutal year last year. I mean, returns
Speaker 1: that they've never seen before. So let's figure out where
Speaker 1: we are now, what do we do going forward? Uh?
Speaker 1: And for that, we're fortunate to have Stephen oh in
Speaker 1: the Bloomberg Interactive Broker studio. He's not mailing it in
Speaker 1: from l A. He's here in New York. And why
Speaker 1: wouldn't he be. It's the world's capital. Uh. He's a
Speaker 1: global head of Fixingcome for Prime Bridge Investment. Steven, thanks
Speaker 1: much for joining us here today. When you look back
Speaker 1: on two now you have some perspective what happened well
Speaker 1: on the one hand, I think it was largely anticipated
Speaker 1: that the FED would start to normalize policy going forward.
Speaker 1: I think what was the unexpected portion was really the
Speaker 1: strengthen the resistance of inflation, which forced the FED and
Speaker 1: other central banks to be much more aggressive in their
Speaker 1: actions in order to rein in future inflationary pressures. And
Speaker 1: so we're at a turning point right now. But we
Speaker 1: always said that entering that fixed income was largely unattractive
Speaker 1: give the fact that duration was extended. Fields were very
Speaker 1: low and there just wasn't much upside, and we were
Speaker 1: recommending that fixing come be reduced in portfolios. But we
Speaker 1: finally have some yield in fixing come, which is providing
Speaker 1: a new opportunity. Stephen, do you care at all about
Speaker 1: the debt ceiling? You know, I think it's very important
Speaker 1: and something that we need to pay attention to. But
Speaker 1: it's a repeat process, right, and so we seem like
Speaker 1: we're always here At some point. It would be great
Speaker 1: to get a resolution which is quasi permanent in nature.
Speaker 1: But I think from the period when we had a
Speaker 1: semi mini crisis back in with the issue, we've sort
Speaker 1: of navigated from there with the market largely ignoring the
Speaker 1: worst case outcomes where any type of a theoretical default
Speaker 1: would be short lived in nature. So that's seems to
Speaker 1: be the consensus on on Wall Street and around the world.
Speaker 1: But I'm curious, though, in that worst case scenario, do
Speaker 1: we then see the treasury market have a much bigger
Speaker 1: dislocated nation than perhaps in the team saga that you
Speaker 1: are referencing. Simply because we are now in a tightening
Speaker 1: era as opposed to an easy era, I would say
Speaker 1: a combination of factors could result in higher levels of
Speaker 1: treasury volatility. It's not only that component that you alluded
Speaker 1: to where we are in a tightening era, but volatility
Speaker 1: has risen significantly as the buyer basis diminished overall, and
Speaker 1: we've seen that even without any of the issues over
Speaker 1: the course of the past year. But again, any type
Speaker 1: of volatility that results in yields spiking up would be
Speaker 1: more of a buying opportunity because it's hard to see
Speaker 1: a scenario where that last or any period of time.
Speaker 1: All Right, you're fixing the guys. You blew it in two,
Speaker 1: here's your chance to redeem yourself in three. What do
Speaker 1: we do now? Well, I'm not expecting fixed income to
Speaker 1: produce tremendous returns in a rebound. We're not going to
Speaker 1: go back to ultra low rates. In fact, we're probably
Speaker 1: out of consensus from the market that we do not
Speaker 1: believe that the Fed will cut rates later this year uh,
Speaker 1: and the market is pricing that in. So the way
Speaker 1: we look at fixed income outcomes for this year is
Speaker 1: that because yields have peaked last year, we don't see
Speaker 1: the risking fixed income, but we see more of a
Speaker 1: coupon clipping from here on out, and most of the
Speaker 1: price action that may have been anticipated has already played
Speaker 1: out in the first three weeks of the year. So
Speaker 1: if you are at a consensus then from the market,
Speaker 1: does that then mean that you are selling the front
Speaker 1: end of the curve? Blooming Intelligence, Chief Rate Strategy Ira Jersey,
Speaker 1: He says, look, yield are so low on the front
Speaker 1: end simply because of those FED cuts being priced in.
Speaker 1: Is that the trade you'd make? Well, we think it.
Speaker 1: Barbell strategy makes sense because if you look at the steepness,
Speaker 1: you know, being in T bills is not a bad
Speaker 1: place to be right now and rolling that over because
Speaker 1: we do think it will hold up and the yields
Speaker 1: that you're getting our superior rather than selling the front.
Speaker 1: Then the curve. We like the approach of owning ultra
Speaker 1: short and then owning about the twenty year part of
Speaker 1: the curve in the Barbell approach, where that's going to
Speaker 1: be more reflective of a longer term normalized yield curve.
Speaker 1: That's a very wide range. It is what you're but
Speaker 1: you want to set your duration target. But that's where
Speaker 1: we see the two ends of the value. Interesting all right.
Speaker 1: Back in the day, you were a vice president on
Speaker 1: doing some high yield stuff a Bank America Securities, and
Speaker 1: that was the security's arm of Bank America before they
Speaker 1: bought Merrill Lynch in two thousand and eight. What do
Speaker 1: you think about the high yield market here? I mean,
Speaker 1: people tell me I got a recession coming. Do I
Speaker 1: even think about venturing into high yield? Well, high yield
Speaker 1: on surface to yields are very attractive. But from a
Speaker 1: spread standpoint, we always have to think about what is
Speaker 1: the fundamental outlook for both earnings, for defaults and so forth,
Speaker 1: and what is the valuation to reflect that. And right now,
Speaker 1: high yield spreads on the low four hundreds right now,
Speaker 1: it is not reflecting any type of a recessionary outcome.
Speaker 1: So from a tactical standpoint, we are cautious on high
Speaker 1: yield right now. The case where high yield isn't is
Speaker 1: it an attractive part of fixed income credit markets right now,
Speaker 1: because we don't believe it is. The case where high
Speaker 1: yield is that it makes a lot of sense of
Speaker 1: relation to equities as a d risking approach. If you
Speaker 1: can get north of eight percent high yield lot de
Speaker 1: risking from equities, that trade off to us is very attractive.
Speaker 1: But within fixed income we prefer to stay within investment
Speaker 1: grade right now. Let's talk about then, uh, the story
Speaker 1: when it comes to geo political risk as well. If
Speaker 1: you weren't worried about the debt ceiling, are you all
Speaker 1: worried about the bond market? Looking at the war in
Speaker 1: Ukraine as an ongoing issue, that is something that should
Speaker 1: factor into the decisions. The war in Ukraine has impacted
Speaker 1: UH global financial markets, not so much directly, but really
Speaker 1: the residual impact that it's having commodities, energy, certainly within
Speaker 1: Europe overall, although the male winners seems to have participated
Speaker 1: that somewhat. While there is a scenario of sort of
Speaker 1: a severe terror, risk that the war could become a
Speaker 1: catalyst for broader geopolitical tensions and spreading that war, which
Speaker 1: could have a cataclysmic effect. You know, we believe that
Speaker 1: the probability is very low, although we're not political analysts.
Speaker 1: Ironically in some respects from a risk standpoint, as a
Speaker 1: extinct come in a credit manager. There's the other side
Speaker 1: of that risk, from the standpoint that what if there
Speaker 1: is a peaceful resolution and outcome. Again, it's not something
Speaker 1: that we're predicting, but it represents a risk that you
Speaker 1: could have a tremendous rally in the markets, and we
Speaker 1: do not have enough risk within the portfolio. So we
Speaker 1: always think about risk, not only toward one end, but
Speaker 1: what can go wrong relative to our personfolio positioning. Well,
Speaker 1: speaking of portfolio positioning, let's talk a little bit about
Speaker 1: the cross acid moves here, because when you're looking at
Speaker 1: the bond market, I'm curious, so what specific, uh kind
Speaker 1: of leading indicators you're leading market action you're really looking at.
Speaker 1: For example, I will clarify, uh if you went back
Speaker 1: to say, just pulling up the chart on my handy
Speaker 1: dandy Winberg terminal. Right now, going back into early two
Speaker 1: and the war first broke out, you start to see
Speaker 1: oil prices rise, commodity prices rise, and yields rise in tandem.
Speaker 1: So the correlation between bond yields and commodities really quite
Speaker 1: strong and went hand in hand. That correlation has now
Speaker 1: been inversed, and I'm curious if you think that correlation
Speaker 1: will snap or perhaps just get more and more negative. Well,
Speaker 1: we're in markets right now where traditional relationships don't necessarily
Speaker 1: work out because it's really about where central banks are
Speaker 1: heading that's driving markets, and that necessarily does not pretend
Speaker 1: that historical correlations and relationships will work out in the
Speaker 1: same manner overall. So what we focus on, of course
Speaker 1: are all of the leading indicator of economics, but we
Speaker 1: also are very cautious about where do we think policy
Speaker 1: path is going to go, and again, what our markets reflecting,
Speaker 1: and do we have a view that differs in any
Speaker 1: way from the market, and that what really frames our
Speaker 1: positioning overall. But there's clearly indications right now of a
Speaker 1: soft landing or a perfect lie pass scenario that the
Speaker 1: FED is supposed to engineer. We don't believe that that
Speaker 1: would necessarily be the case, and so that creates more
Speaker 1: caution in how we're positioning relative to what the market view.
Speaker 1: Maybe Okay, so I get to feel that maybe you're
Speaker 1: a little bit more cautious than the average fixed income manager.
Speaker 1: That being said, where are you if you had capital
Speaker 1: allocate today? Where would you go? The areas that we
Speaker 1: are being cautious of our incredit markets that in our
Speaker 1: your trading type to a mild recessionary type of scenario,
Speaker 1: and those are going to be developed market fixed income.
Speaker 1: The area where fundamentals are improving is in Asia, credit
Speaker 1: in China in particular with the reopening, and so where
Speaker 1: we see the fundamental opportunity is really more so in
Speaker 1: emerging market credit opportunities right now, and so it may
Speaker 1: be a little bit early or late, depending on your
Speaker 1: view of China property and so forth. But we think
Speaker 1: that gliding the portfolio more towards emerging market in the
Speaker 1: coming year, based on the differential and fundamentals h makes
Speaker 1: a lot more sense this year. We've heard that. And
Speaker 1: my concern, not just about thir thirty seconds, is isn't
Speaker 1: there recession risk outside of the US more pronounced than
Speaker 1: here from a lot of emerging markets. I think it
Speaker 1: depends on how you define recession. There is certainly a
Speaker 1: correlation of what happens with developed markets versus emerging markets.
Speaker 1: The other component that support of the fundamentals in emerging markets,
Speaker 1: although there's certainly flashpoints and we're seeing some of the
Speaker 1: political risk and latdown so forth, is the fact that
Speaker 1: the dollar strength, which was an inhibitor and a headwind
Speaker 1: to emerging markets. We don't necessarily believe that the dollar
Speaker 1: will weaken significantly, but the headwinds of strengthening is abating,
Speaker 1: and we don't expect that to re emerge great points.
Speaker 1: Really appreciate it, Steven Oh. He's a global head of
Speaker 1: fixed income at pine Bridge Investments. He's based in Los Angeles.
Speaker 1: I'm looking at the office is about halfway between Beverly
Speaker 1: Hills and Santa Monica. If I had to guess center
Speaker 1: it is. It's a good place to live, you know,
Speaker 1: New York Center. But it's not a bad place. A
Speaker 1: good stuff, Steven. We appreciate it. Stopping into our studios here,
Speaker 1: the markets down at one point six percent today. Did
Speaker 1: we focus on the Fed? Do we focus on earnings?
Speaker 1: Do we focus on inflation? Do we focus on recession?
Speaker 1: I don't know. I buy him when they're low and
Speaker 1: I pelomone they're high. That's what I was told my
Speaker 1: first day of paint Warber on the block trading desk,
Speaker 1: and it's worked so far. But Gina Martin Adams, she
Speaker 1: takes a much more analytical approach. She's a chief equity
Speaker 1: strategist at Bloomberg Intelligence Joint US here in Bloomberg Interactive
Speaker 1: Broker Studio, which we always appreciate. So, Gina, what am
Speaker 1: I focusing on this year in when I think about
Speaker 1: what where these markets are going to go? Well, I
Speaker 1: think the investor base is really focused predominantly on recession
Speaker 1: and what recession really means. If the US is in recession,
Speaker 1: is European recession? Are they? Are? They? Are? Are they not?
Speaker 1: When are they going to fall into recession? You know?
Speaker 1: I think frankly some of this intense focus on recession
Speaker 1: is really just misplaced. Because earnings behave differently in every
Speaker 1: kind of recession. We won't know we're in recession until
Speaker 1: probably when it's nearly over. If the official dating process,
Speaker 1: you know, follows it's normal historical trend. So what I
Speaker 1: think that we should be focused on is not always
Speaker 1: the same as well, we're focused on, And what we
Speaker 1: really should be focused on is the depth and duration
Speaker 1: of this earning cycle. Earnings peaked a year ago, they
Speaker 1: peaked at the end of one. They've contracted on an
Speaker 1: unadjusted basis seven percent so far. The analyst community is
Speaker 1: anticipating a ten peak to trough drop at least will
Speaker 1: probably end up somewhere closer to twelve if our work
Speaker 1: is correct. And that's what's gonna matter. It's timing the
Speaker 1: end of that earning cycle. When are we going to
Speaker 1: start to see improvement. How will the economy impact earnings
Speaker 1: is critically important for sure. Um And then also this
Speaker 1: the show, the show going on in FED policy, right,
Speaker 1: you can't get away from FED policy as a driver
Speaker 1: of valuations. So those are the two things. So if
Speaker 1: I look at the spars looking at the Bloomberg terminal
Speaker 1: like bucks or something, should they be more like two? Yeah?
Speaker 1: So this is an operating earnings number, right, And I
Speaker 1: think the construct is really difficult because when we look
Speaker 1: at the long term historical earnings trend, operating earnings have
Speaker 1: only been around for about thirty years. When you look
Speaker 1: at the long long term, we have to think about
Speaker 1: unadjusted earnings and how adjusted earnings behave during recession on
Speaker 1: an operating earning spasis, I do think we probably see
Speaker 1: about a five percent decline in EPs. But you've got
Speaker 1: to remember companies are sitting on just boatloads of cash.
Speaker 1: They're going to continue to buy back shares, They're going
Speaker 1: to continue to deploy that cash, and that's going to
Speaker 1: make adjusted earnings probably fall less than many people are anticipating,
Speaker 1: or fall less than your traditional recession decline on an
Speaker 1: on an unadjusted basis, though there is some evidence of distress.
Speaker 1: We're seeing it in margin contractions year over year, which
Speaker 1: are anticipated to finally bottom within the first half of
Speaker 1: this year. We're certainly seeing some distress evident in tech,
Speaker 1: particularly relative to expectations which were extremely high for that space.
Speaker 1: So I think you do need to sort of read
Speaker 1: between the lines and really articulate the details, because you
Speaker 1: can get a very confusing picture depending upon what you're following. Well, Gina,
Speaker 1: you sund I think maybe either Monday or Tuesday on
Speaker 1: Limerick surveillance in the morning. Something that really stuck with
Speaker 1: me with was sales are slowing down. Earnings on the
Speaker 1: top line perhaps aren't as much, but the sales is
Speaker 1: really a reflection of the macroeconomics slow down that you're seeing.
Speaker 1: At what point is that really punished more severely by
Speaker 1: the stock market as opposed to the expectation of that
Speaker 1: happening that we really perhaps priced in in the back
Speaker 1: half last year. Yeah, it is. It's an interesting complexity
Speaker 1: right now because sales, remember in two, were held up
Speaker 1: by this idea of inflation. So even though volume sales
Speaker 1: were clearly decelerating throughout two, we had inflating prices, in
Speaker 1: particular in the commodity space, energy and utilities mostly, but
Speaker 1: also you know, some other peripheral commodity segments where sales
Speaker 1: growth was very profoundly positive. And now, for the first
Speaker 1: time in a very long time, in the fourth quarter,
Speaker 1: in any season, it looks like sales growth is going
Speaker 1: to miss expectations. So we are seeing this inflation shift
Speaker 1: play out on the top line. Now, how much does
Speaker 1: that impact bottom line is really interesting to think about
Speaker 1: because so far bottom line is actually beating expectations because
Speaker 1: companies are enjoying the deceleration and commodity prices to produce
Speaker 1: stronger margins than anticipated. And that give and take is
Speaker 1: really important to consider because what happens with energy and utilities.
Speaker 1: As you know, commodity segments is meaningful for the overall
Speaker 1: headline index, but it also is meaningful for the rest
Speaker 1: of the constituents. And generally, what's great for energy is
Speaker 1: not so good for everybody else, and what's bad for
Speaker 1: energy is great for everybody else. And that dynamic is
Speaker 1: playing out right now. So talk to us about like
Speaker 1: the discounting mechanism that is the stock market. When do
Speaker 1: you think the stock market starts to say, I've seen
Speaker 1: the worst of inflation, I've seen the worst of rate increases,
Speaker 1: I've seen the worst of earnings reductions. I can now
Speaker 1: start discounting some better stuff going forward. What do you
Speaker 1: think that happens. I think it's been happening. I think
Speaker 1: that we got to our point of maximum pessimism back
Speaker 1: in September October, and since that period we've been starting
Speaker 1: to think about, Okay, how much worse can it get?
Speaker 1: How much did we already price? And even more importantly,
Speaker 1: what does the next cycle look like? And that's where
Speaker 1: I think we have this sort of really opaque challenge
Speaker 1: right now, is what is going to look like? Because
Speaker 1: we spent so much time of the last year talking
Speaker 1: about the recession coming. The market has certainly prepared to
Speaker 1: at least a moderate degree for this recession that we've
Speaker 1: all been talking about waiting for, trying to time. What
Speaker 1: I think we're going to continue to struggle with this
Speaker 1: year is what does the recovery look like in an
Speaker 1: environment where the FED probably doesn't backpedal to the normal degree,
Speaker 1: where they don't reduce rates to a lower level than
Speaker 1: they were at the end of the last cycle. That's
Speaker 1: impossible unless they go into negative territory, and so it
Speaker 1: seems also incredibly unlikely given the inflation dynamic and the
Speaker 1: general resilience of demand that we're experiencing. So I think
Speaker 1: that is the challenge. I think that's where the market
Speaker 1: is headed already, and we'll continue to head through. It's
Speaker 1: really pricing that outlook for recovery emerging in. Is there
Speaker 1: a threat here that sell off was overdone by any
Speaker 1: margin if you indeed get a soft landing from the Fed. Yeah,
Speaker 1: it does seem like, you know, at least the market
Speaker 1: seems to think that we overdid it. The market has
Speaker 1: had a very robust recovery from that that mid October low,
Speaker 1: So the market does seem that we overdid our expectations
Speaker 1: on at least the FED and probably the economy. But
Speaker 1: we're going to continue to argue about that creaty, I
Speaker 1: don't I don't think we know for yeah, we're going
Speaker 1: to continue to argue about that for a couple of
Speaker 1: quarters yet, because the FED seems to be pretty committed
Speaker 1: still to maintaining this high rate and yet the market
Speaker 1: is saying, oh, no, no, no, you're going to reduce
Speaker 1: interest rates like you always do in recession. And you know,
Speaker 1: to the market's credit, we haven't lived through that kind
Speaker 1: of environment. Right, For every recession experience going all the
Speaker 1: way back to the nineties, we've seen the FED reduced
Speaker 1: rates two lower levels than they ended in the last cycle.
Speaker 1: This is different, and you know, you hate to say
Speaker 1: that time that this time is different in this business.
Speaker 1: But from a policy perspective, the FED is definitely behaving
Speaker 1: quite differently than they have in recent recessions and we'll
Speaker 1: probably continue to do so, and that's going to continue
Speaker 1: to create friction, to say the least for the equity market.
Speaker 1: All right, good stuff, Gina Martin Adams. He's a chief
Speaker 1: equity strategist for Bloomberg Intelligence. Joining us here live in
Speaker 1: our Bloomberg Interactive Broker Studio. Always love getting Gina's perceptions
Speaker 1: of the market, where we think we are, where we've
Speaker 1: come from, and where we're going, so we appreciate her
Speaker 1: getting some time there. Another earning story in the news
Speaker 1: today Boeing. And this is a name I like the
Speaker 1: follower we're talking to, giant aerospace company, goes to the
Speaker 1: airline business, to travel business, all kinds of stuff. Here
Speaker 1: the numbers, it kind of looked in line to me.
Speaker 1: I know there's another loss, but let's put it in
Speaker 1: perspective here. The stock trading off about two point eight
Speaker 1: percent today is Boeing. It's got a hunter twenty three
Speaker 1: billion dollar market cap, so it's it's a big one.
Speaker 1: George Ferguson, Senior industry analyst at Bloomberg Intelligence. He covers
Speaker 1: the airspace companies as well as the airlines the end customers. George,
Speaker 1: thanks so much for taking the time to join us here.
Speaker 1: I know you're busy talk to us about Boeing here.
Speaker 1: What's your takeaway from what we heard from the folks
Speaker 1: that are based in Point I guess they're Washington now, right, George.
Speaker 1: Actually I think they're based out of yes, sorry Washington,
Speaker 1: d C. Right, Virginia, Virginia. But we know they build
Speaker 1: all those great airplanes. It's still Seattle for me, dude.
Speaker 1: The worst worst decision you ever made was leaving Seattle.
Speaker 1: So yeah, so we um, we saw them, you know,
Speaker 1: bring earnings today and yeah, the markets off, but remember this,
Speaker 1: the stock has seen a lot of rally over um,
Speaker 1: you know, through the fourth quarter at the end of
Speaker 1: the year a bit so um. I don't know that
Speaker 1: I'd get too excited yet. I think, you know what
Speaker 1: I think we've heard so far. They're just a huge
Speaker 1: amount of new details we're getting out of them. But
Speaker 1: you know, I think the bigger thing is that by
Speaker 1: chain is still going to be a problem in three right,
Speaker 1: But I think we all kind of knew that, but
Speaker 1: we were I think maybe hoping we'd hear better discussion
Speaker 1: about how supply chains were turning the corner. And there's
Speaker 1: visibility on that improvement, you know, And so some of
Speaker 1: the some of the guidance for the year, it's like
Speaker 1: on seven thirty seven, right, but they're saying, look, the
Speaker 1: low end of our guidance means we're gonna deliver thirty
Speaker 1: one seven thirty seven's a month throughout the year and
Speaker 1: on the high end means we break to like a
Speaker 1: forty one, you know, maybe sometime in the back half
Speaker 1: of the year. But they don't know because they just
Speaker 1: don't know if they can get supply chain stabilized enough
Speaker 1: to do that. And and that's key to this company,
Speaker 1: right The key to the company is getting commercial airplane
Speaker 1: that division moving profitable um and that really takes that,
Speaker 1: you know, that stabilization in the supply chain, higher rates,
Speaker 1: which absorb the overhead better, you know. So again, I
Speaker 1: think visibility kind of lacking on that, and I think
Speaker 1: the market wants more visibility and that supply chain, hoping
Speaker 1: it would be a better story. We hear the same
Speaker 1: from raytheon yesterday, So I think it's it's you know,
Speaker 1: it's a wait and see on supply chains. George, to
Speaker 1: what extent is that going to prolong the backlog that
Speaker 1: we're seeing for Boeing, Because if correctly, if I'm wrong,
Speaker 1: really the fourth quarter was when they really stepped up
Speaker 1: some of their jet deliveries. What kind of pressure does
Speaker 1: that supply chain issue put on the backlog? Yes, So
Speaker 1: I mean what we one it extends you know, the
Speaker 1: existing backlock of airplanes they've they've sold UM and Bowing
Speaker 1: has a little bit of a catch up to do
Speaker 1: against Airbus still, and I would think they could break
Speaker 1: to m They'll be breaking rates or you know, moving
Speaker 1: to higher rates UM probably easier than Airbus because Airbus
Speaker 1: is at higher levels already. So I don't I don't
Speaker 1: think it hurts the ability to sell airplanes, is what
Speaker 1: I'm sort of getting out. They may even have a
Speaker 1: better they may maybe have a better position to sell
Speaker 1: airplanes than Airbus because I think there's more near term
Speaker 1: delivery spots that you could probably get if you're a customer.
Speaker 1: But again, I think, you know, we all saw kind
Speaker 1: of December deliveries. They were strong, they were they were
Speaker 1: they were really nice, right and they and they led
Speaker 1: to the I think, you know, better than expected results
Speaker 1: in four que and I think the market, you know,
Speaker 1: I thought the story would continue like that and it
Speaker 1: would be more of it today where we're just hearing yep,
Speaker 1: you know, challenges in supply chains. So we're specifically are
Speaker 1: the challenges because I think I'm at the point of
Speaker 1: saying I'm calling bs on the supply chain. Excuse I
Speaker 1: don't care what kind of company you are. So where
Speaker 1: are they seeing it from? In particular the brutal Sweeney call. Yeah, well,
Speaker 1: I mean so you know, engines are one that everyone
Speaker 1: points to. And you know, yesterday Raytheon on their earnings
Speaker 1: called cited castings and forgings. Right, we've heard castings and forgings.
Speaker 1: They were the limited at the at the tail end
Speaker 1: of the last decade when we were breaking direct levels
Speaker 1: of aircraft production for the seven three, seven and h
Speaker 1: V twenty castings and forgings. There is no no no, no, no, no,
Speaker 1: no no no. It's a U it's a US Europe thing.
Speaker 1: But it's very skilled labor, right, And so to the
Speaker 1: extent you lost any of that skilled labor during the
Speaker 1: pandemic and said, hey, we're cutting rate, we don't need
Speaker 1: all you folks. People walked away, retired, whatever, you've got
Speaker 1: to bring new people back in and teach them how
Speaker 1: to do castings and forgings. I wish I knew even
Speaker 1: more about it, and about to go, you know, get
Speaker 1: a job a volunteer to be like an intern in
Speaker 1: the casting and forging the department that the Raytheon to
Speaker 1: figure out more. But we keep hearing that and the
Speaker 1: other and the other truth I think is I think
Speaker 1: the smaller the supplier is and remember the supplier base
Speaker 1: can be quite small for aerospace because volumes in some
Speaker 1: programs just aren't that large. And the smaller the supplier,
Speaker 1: I think, the less visibility, right that sort of the
Speaker 1: following an airbus have they got to really dig deep
Speaker 1: because they're multiple tiers down and those people are having
Speaker 1: problems hiring people still, right because they're not offering the
Speaker 1: best wages. They're not offering the best um uh you know,
Speaker 1: incentive packages. So raytheon Boeing Airbus they can fill their
Speaker 1: factors and people ready to do work. But when you
Speaker 1: get down to those lower tiers, they're still scrapping to
Speaker 1: bring people in it and then train them to do
Speaker 1: the job they got to do, right, So that's a challenge. Well, George,
Speaker 1: when we're talking about Bowing specifically as a company, the
Speaker 1: supply to an issues aside to what extent is it
Speaker 1: turning in away from defense more to in line with
Speaker 1: the airline industry when it comes to exposure in a
Speaker 1: ton when it comes to industry, it feels like in
Speaker 1: the last couple of years it's doing less and less
Speaker 1: with government contracting. Yeah, so I would say, um, what
Speaker 1: we saw at the tail end of the last decade
Speaker 1: was definitely the company was moving more commercial. I think
Speaker 1: commercial the challenge in these businesses, or maybe it's you know,
Speaker 1: it's a it's a benefit, it's a it's a balance er.
Speaker 1: I mean, commercial can take off right there, you know
Speaker 1: what you're get in this situation, and so to speak,
Speaker 1: right where airlines just start to need a lot more airplanes.
Speaker 1: Global air growth, air travel growth is taking off, and
Speaker 1: they're booking all these orders and the commercial side really
Speaker 1: outweighs defense. The beauty of these companies is usually that
Speaker 1: when that when that commercial cycle goes, you know, goes
Speaker 1: into a relaxation mode, is less less intense. The defense
Speaker 1: helps keep the lights on. It's a very stable business.
Speaker 1: It usually very profitable, good cash flows. So you know,
Speaker 1: we kind of in the beginning of the pandemic we
Speaker 1: saw some of that defense stabilizing a Boeing. But what
Speaker 1: I'd say where they are right now is they I
Speaker 1: don't think they've de emphasized defense at all. I think
Speaker 1: part of that move to Washington was about getting back
Speaker 1: in touch with their defense customers a bit better. They
Speaker 1: have some great products. Case. The tanker is very important
Speaker 1: for US, uh, you know, it's power projection ability. Tankers
Speaker 1: are just hugely important. That the current fleet's fifty years old. Um,
Speaker 1: you know, they've got some great products in there. But
Speaker 1: right now, margins are hurting bad. They bit a bunch
Speaker 1: of projects, um that were fixed cost that they took
Speaker 1: serious losses on. You know, so we're down the down
Speaker 1: in the low single digits on margins in a business
Speaker 1: that should just traditionally should be tennish. But I still
Speaker 1: think the company sees the value of that portfolio. They
Speaker 1: continue to talk about it. But I would expect as
Speaker 1: we get into another commercial upswing, which I think we're
Speaker 1: kind of going to get here, that they commercial Eclipse Defense.
Speaker 1: But I think it's still super important, and it's embedded
Speaker 1: in global services as well, which is a which is
Speaker 1: a nice cash generator. All right, George, great stuff as always.
Speaker 1: George Ferguson, senior Airspace, Defense and Airline analyst for Bloomberg Intelligence,
Speaker 1: former military intelligence officer in the U. S. Army. So
Speaker 1: we thank him for service. Maybe most importantly, he's a
Speaker 1: proud undergraduate of the Penn State University. He's a proud alumni.
Speaker 1: They're talking about Boeing. Uh commercial business got some challenges
Speaker 1: near term, of long term sounds pretty solid. One of
Speaker 1: the few few areas that did well last year, and
Speaker 1: I mean really well, is energy. Um Why did they
Speaker 1: did rip it last year? The question is what do
Speaker 1: we do from here? Like that? I missed that trade,
Speaker 1: like I might have missed a few other trades in
Speaker 1: my career. Ben Cook, he knows all about this stuff.
Speaker 1: He's a portfolio manager at Hennessey Funds. So Ben, again,
Speaker 1: did Sweeney miss the energy trade here? That just ripped
Speaker 1: in two? Yeah? Good morning, Paul, thanks for having me.
Speaker 1: I think three stands to be another good year for energy,
Speaker 1: and you consider continued improvement in the commodity markets UMU,
Speaker 1: continued favorable valuation across much of the hydrocarbon sector, and
Speaker 1: of course the continued allocation of capital back to investors
Speaker 1: and former share repurchases and dividends. All those combined make
Speaker 1: for a pretty attractive investment case. So I think twenty
Speaker 1: three is going to be another good year. I don't
Speaker 1: think you missed out. Are we looking at a hundred
Speaker 1: dollar oil again? In Yeah? It's very likely that we
Speaker 1: see improving commodity fundamentals, including crude oil fundamentals, in the
Speaker 1: coming twelve month period. I think, you know, the reopening
Speaker 1: of China, easing of COVID lockdown policy. As recent as
Speaker 1: the Chinese lunar New Year, we saw rebound and dramatic
Speaker 1: rebound and jet travel and that a bodes well for
Speaker 1: increased consumption across the region and passenger mobility. And I
Speaker 1: think you know, if we continue to see growth there
Speaker 1: and modest GDP growth here, uh, we could very easily
Speaker 1: see oil over a hundred dollars over the next twelve months.
Speaker 1: So Ben, I know, what's worked for energy equity investors
Speaker 1: creditors has been what the energy folks like to call discipline,
Speaker 1: not taking advantage when it's eighty or abound and started
Speaker 1: drilling holes in the ground, which is what I instinctively
Speaker 1: would do. UM talk to us about that. I mean,
Speaker 1: you know, I mean, it seems to me there seems
Speaker 1: to be I don't know if energy shortage, but certainly
Speaker 1: there's a shortage in Europe. But it seems like we
Speaker 1: still need more carbon energy out there in the marketplace
Speaker 1: while we make this transition to um greener energy. But
Speaker 1: I guess there's just no real incentives for the energy
Speaker 1: guys to build a new refinery or or you know,
Speaker 1: kind of drill more wells. Where are we on that
Speaker 1: whole front. Yeah, the whole capital discipline phenomenon really, you know,
Speaker 1: it's been a part of the investment narrative for the
Speaker 1: large cap integrated group for some time, but the E
Speaker 1: and P companies here in the US have really adhered
Speaker 1: to this dramatically over the last eighteen months, close to
Speaker 1: two years. And you know, I think historically the industry
Speaker 1: has ramped spending in a procyclical manner, meaning, you know,
Speaker 1: spending would rise as commodity prices, prices would increase, and
Speaker 1: ultimately as the cycle would turn and commodity prices would
Speaker 1: go lower, many of the companies would be left with
Speaker 1: significant debt and their equity values would come under pressure,
Speaker 1: uh during a downturn. And rather than do that, what
Speaker 1: we've seen recently are these companies have become smarter about
Speaker 1: spending their money. They realize that equity values can rise
Speaker 1: without the expansion and production and development activity, and it's
Speaker 1: it's the return of capital that actually the shareholders are
Speaker 1: rewarding them for and so we see that that persisting.
Speaker 1: I'd say the other part of it, too, is just
Speaker 1: the uncertainty associated with government policy. The regulations typically come
Speaker 1: in the form of a character stick, and here in
Speaker 1: the US, over the last several years we've we've had
Speaker 1: more of a stick as opposed to accarrot with the
Speaker 1: traditional hydrocarbon sector. So it's been a combination of a
Speaker 1: couple of things. But Fay capital discipline is all well
Speaker 1: and good, and of course the stick coming from Washington
Speaker 1: as well. But I'm curious how much of this was
Speaker 1: simply a function of what Paul doesn't like to talk
Speaker 1: about supply chain issues. Um, but when it comes to
Speaker 1: some of these oil companies, were they being capitally disciplined
Speaker 1: or were they being restrained by some of the supply
Speaker 1: lighting issue that they have or both? Yeah, I think
Speaker 1: to a degree there have been some supply chain issues
Speaker 1: when you talk about the oil field service industry. Certainly
Speaker 1: capital equipment is a necessity in terms of being able
Speaker 1: to employ the machinery that goes to work, to to drill,
Speaker 1: to to develop frac, etcetera, ultimately expand the capacity. So
Speaker 1: there was some of that. I don't feel as though
Speaker 1: the industry is dealing with dramatic challenge associated with supply
Speaker 1: chain issues today. I think the more pressing issue for
Speaker 1: the upstream sector here in the United States and maybe
Speaker 1: to a lesser extent abroad, is the lack of availability
Speaker 1: of of of workers. UM. You know, whether it's you know,
Speaker 1: driving trucks to handle water or uh, you know, operating
Speaker 1: frack machinery. Uh, there is a shortage of available of workers,
Speaker 1: skilled workers to to put to work in in the
Speaker 1: oil field service business and in the integrated and the
Speaker 1: mp UH sectors as well. So that that's a real
Speaker 1: challenge the industry is going to have to contend with it. Ben,
Speaker 1: what does China reopening mean for the energy space both
Speaker 1: from a supply and demand perspective, It would seem to
Speaker 1: me would be positive on the net. Yeah, there's no
Speaker 1: question the reopening of China is a positive on on
Speaker 1: a net net basis. UH. In terms of incremental growth,
Speaker 1: Southeast Asian demand is is the largest component of the
Speaker 1: expansion in the world's growing appetite for crude oil demand.
Speaker 1: And you know it's it's um when you think about
Speaker 1: transportation that the jet fuel demand, the passenger mobility associated
Speaker 1: with rail and cars. There's no question that that's going
Speaker 1: to going to create a major tail win for demand
Speaker 1: going forward. And it's not just China, it's neighboring countries
Speaker 1: as well. Um, there's a significant appetite. I think the
Speaker 1: the i e. A recently published some forecasts of significant
Speaker 1: growth in on the back of Chinese demand. You know,
Speaker 1: in terms of our view, we expect global demand growth
Speaker 1: on the order of two to two and a half
Speaker 1: million barrels this year, partly on on base effects associated
Speaker 1: with slowdown in China last year. But that's a meaningful
Speaker 1: incremental uh, you know, incremental growth amount of crude oil
Speaker 1: demand that should come this year and end up again
Speaker 1: provide a tail win to pricing. And again on the
Speaker 1: supply side, you know, capital discipline here a very steady
Speaker 1: opeque uh supply policy. I think the combination of those factors,
Speaker 1: you know, could easily send prices over a hundred dollars
Speaker 1: as we as we just discussed ben can the world
Speaker 1: live without Russian crude in In the long term we
Speaker 1: seem to be doing okay now, but long term, yeah,
Speaker 1: longer term rush is a major supplier to the global market.
Speaker 1: Producing roughly ten eleven million barrels a day. You know,
Speaker 1: whether it's price caps or embargoes or sanctions, that industry
Speaker 1: is going to face some challenges. In the world experienced
Speaker 1: supply disruption, There's no no doubt about that. We would
Speaker 1: anticipate over the coming years that as embargoes and sanctions
Speaker 1: kick in, that capacity will will begin to shrink in
Speaker 1: that country and it will diminish. In the meantime. UM
Speaker 1: supplies coming from Russia are making their way to India
Speaker 1: and China. Um. You know that that's important volume that
Speaker 1: you know, without those supplies, prices would be much much higher.
Speaker 1: So on a on a short term basis, we still
Speaker 1: need to live with Russian crude, and even on a
Speaker 1: longer term basis, it's hard to envision the scenario, a
Speaker 1: global supply picture without Russian crude. It's just kind of
Speaker 1: the dumb question today. Is China a net importer or
Speaker 1: exporter of oil? They are a net importer? Uh, significant
Speaker 1: net importerer? Yes, they are the Middle East? Uh? And
Speaker 1: what a Russia's best clients got you? Okay, interesting to
Speaker 1: see how that reopening plays in this marketplace. Ben Cook,
Speaker 1: He's portfolio manager at Hennessey Funds. Over the Hennessey Funds,
Speaker 1: he manages Hennessy Energy Transition Fund and Hennessey Midstream Fund,
Speaker 1: so kind of in the UH, you know, the old energy,
Speaker 1: the new energy. They invest in both. So it's great
Speaker 1: to get bens perspective on all things energy. Talking about
Speaker 1: maybe another move back to a hundred dollar oil w
Speaker 1: T A crude oil right here is eighty dollars cents
Speaker 1: a barrel, a little bit off the lows we saw
Speaker 1: recently when't got down to about seventy dollars about Thanks
Speaker 1: for listening to the Bloomberg Markets podcast. You can subscribe
Speaker 1: and listen to interviews with Apple Podcasts or whatever podcast
Speaker 1: platform you prefer. I'm Matt Miller. I'm on Twitter at
Speaker 1: Matt Miller three. Put on false Sweeney I'm on Twitter
Speaker 1: at pt Sweeney Before the podcast. You can always catch
Speaker 1: us worldwide at Bloomberg Radio