Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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Speaker 2: Big Big Earnings week This week, we've got Amazon Molly
Speaker 2: after the closed Thursday, So I think it's time to
Speaker 2: get a preview of what we might see from Amazon.
Speaker 2: And when we talk about Amazon these days, it's both
Speaker 2: a retail story etail and a text retailer with its cloud. Yeah,
Speaker 2: with its cloud. So what do you do?
Speaker 3: How do you get an expert on both?
Speaker 2: Well, you go to Bloomberg Intelligence because we have Punham Guoyle.
Speaker 2: She's a Bloomberg Intelligence senior analyst for e commerce and
Speaker 2: all that retail stuff. She joins us here, as does
Speaker 2: an Aragrana, senior analyst on a tech side for Bloomberg Intelligence.
Speaker 3: Pooham, let's start with you here.
Speaker 2: I'm gonna go back to the roots of Amazon as
Speaker 2: a retail story.
Speaker 3: Here.
Speaker 2: What do you expect to see and hear from Amazon
Speaker 2: this quarter about that core retail business.
Speaker 4: I think the retail business will be very strong for
Speaker 4: the fourth quarter. We already saw it in some of
Speaker 4: the industry numbers that were reported back in November and December,
Speaker 4: with really strong online sales, especially in November, and that
Speaker 4: momentum kind of continuing into December. So from the retail side,
Speaker 4: we expect Amazon to report a much stronger four Q
Speaker 4: and they'll still be driven Paul by the third party marketplace.
Speaker 4: So you know, Amazon's business is one P and third
Speaker 4: party where they sell stuff on their own and then
Speaker 4: they have sellers sell on the platform. We think the
Speaker 4: third party business will continue to outpace first party, but
Speaker 4: both will have strong growth rates.
Speaker 5: And that's just you know, that's just one piece of
Speaker 5: Amazon's business. I mean, granted a big piece, but just
Speaker 5: one of them. So An Rag, why don't you tell
Speaker 5: us a bit about the Amazon Web Service component and
Speaker 5: what that is going, what you were expecting out of that.
Speaker 6: Yeah, thank you. So, you know, AW is the biggest
Speaker 6: cloud infrastructure vendor out there, and what we have seen
Speaker 6: over the last two years, it has been a bit
Speaker 6: of slow down in the growth rates of AWS and
Speaker 6: the reason for that is it's a variable pricing model.
Speaker 6: You know, you pay what you use and in this
Speaker 6: economic downturn in the last I would say one and
Speaker 6: a half to two years. Companies are dialing back on
Speaker 6: their cloud usage. It's one way for them to control
Speaker 6: their cost. So that doesn't mean that they are not
Speaker 6: embracing cloud at the same pace. They're not just using
Speaker 6: as much. But we think that takes a u turn
Speaker 6: either in this quarter or the next quarter. We are
Speaker 6: fairly optimistic based on a survey we did. We think,
Speaker 6: you know, we are coming to a point with easy comparisons,
Speaker 6: so we are fairly optimistic that over the next twelve
Speaker 6: months we'll see rebound in growth rates for AWS and
Speaker 6: by default for for Microsoft also.
Speaker 2: So on our what's the I mean if I'm Amazon,
Speaker 2: Amazon Web Web Services, how do I position myself in
Speaker 2: this AI discussion here?
Speaker 3: I mean, if I'm the IR person, what am I telling.
Speaker 2: My executives to say when I get on this conference call?
Speaker 6: You know, one of the most important things. I think
Speaker 6: the message they have been telling people is, you know,
Speaker 6: you don't really need just open AI to go out
Speaker 6: and build your AI. You could say strategy. They work
Speaker 6: with a lot of open source companies or AI vendors
Speaker 6: that have the large language models. They work with Meta
Speaker 6: for example. They really promote a lot of Meta's large
Speaker 6: language model. So if I'm a company, you can go
Speaker 6: out and choose whichever raw material you want, whichever you know,
Speaker 6: large language model that you want, but you can host
Speaker 6: that on AWS. And that's how they're going to make
Speaker 6: money is by giving the building blocks of AI to companies.
Speaker 7: So, pun On, let's come back to the retail side
Speaker 7: of it.
Speaker 5: Obviously, the big news with Amazon today the termination of
Speaker 5: the one point for billion dollar deal with Irobod. I'm
Speaker 5: going to say, again, pretty sure Amazon's going to be okay,
Speaker 5: but maybe you could tell us a little bit more
Speaker 5: about like the you know, is this really material for
Speaker 5: them that this deal didn't go through? And of course,
Speaker 5: you know, we just keep hammering it time and time again,
Speaker 5: this m and A outlook.
Speaker 7: It's really tough.
Speaker 4: Yeah, you know, we talked about this a little earlier
Speaker 4: and it's non material to Amazon just looking at the
Speaker 4: size of it, right, a billion dollars a little more
Speaker 4: than a billion dollars on Amazon scale of over six
Speaker 4: hundred billion dollars in GMB. It doesn't move the needle
Speaker 4: at all. But that said, it just reinforces our view
Speaker 4: that we've had for a long time that acquisitions for
Speaker 4: these companies will be more difficult given the scrutiny that
Speaker 4: they're under. So we do think that organic growth is
Speaker 4: what Amazon is going to have to focus on, and
Speaker 4: we think there's plenty of it on the retail side,
Speaker 4: on the advertising side, and on the cloud side.
Speaker 2: Just a little redhead crossing the Bloomberg truminal bring to
Speaker 2: your attention Renault to cancel and peer.
Speaker 3: Ipo, So not good news for the IPO market.
Speaker 2: We'll get some reporting on that coming up and pun
Speaker 2: them with the e commerce side of Amazon. What's your sense,
Speaker 2: you know, talking to the Amazons of the world, the
Speaker 2: Walmarts of the world. How's the consumer these days and
Speaker 2: how's this spending out there?
Speaker 4: The spending is pretty good. Surprisingly, you know, we've been
Speaker 4: talking about the consumer possibly falling off and really slowing
Speaker 4: down their spend, but we haven't seen it. The holiday
Speaker 4: numbers suggests that spending is strong. I'd still say, though,
Speaker 4: I think people are picking and choosing where they spend.
Speaker 4: They're deciding where they want to spend their dollars, and
Speaker 4: Amazon has been a place where they're more likely to
Speaker 4: spend it, given the fact that they get speed, convenience,
Speaker 4: and really everything that they want from there. But that said,
Speaker 4: I do think that on the low end you could
Speaker 4: see some issues arise as inflation and other concerns really
Speaker 4: do hamper their spending power.
Speaker 5: So Ana Punam was just saying how the growth story
Speaker 5: for Amazon is really going to come more from organic
Speaker 5: growth rather than acquiring it. So tell us about on
Speaker 5: the cloud side, if you see a lot of organic
Speaker 5: growth opportunities coming from that business.
Speaker 6: Yeah, no, we expect actually growth to pick up. We
Speaker 6: think the growth is going to be closer to twenty
Speaker 6: percent by the end of this year. You know, this
Speaker 6: is a market that has a long, long I would
Speaker 6: say runway overall cloud spending, it's still less than twenty
Speaker 6: percent of total tach spending, somewhere in that twenty to
Speaker 6: twenty five percent range. I think we have a long
Speaker 6: way to go, and Amazon is right in the middle
Speaker 6: of it. They are the biggest cloud infrastructure vendor, as
Speaker 6: I said, with over forty percent of the market share.
Speaker 6: So I feel fairly optimistic that this year we're going
Speaker 6: to see a rebound.
Speaker 2: So in the cloud infrastructure side of it, who do
Speaker 2: they compete against and is that forty percent market share
Speaker 2: something that they have to defend. Is that something they
Speaker 2: can grow. How's the competitive landscape look in the infrastructure space?
Speaker 6: Yeah, in five years if they get able to maintain it,
Speaker 6: I'll be very happy with that. Because what has happened is,
Speaker 6: you know, Microsoft has really gone out big over the
Speaker 6: last you know, seven, eight, ten years, and it is
Speaker 6: now the second biggest vendor. Now, surprisingly enough, this is
Speaker 6: a space where the smaller vendors cannot really make a
Speaker 6: dent because you need a lot of capital expenditures to
Speaker 6: come up with a cloud model. You or infrastructure business
Speaker 6: US can't do it in your garage. You really need
Speaker 6: billions of dollars off data centers in order to you know,
Speaker 6: really be good at this business. So right now there
Speaker 6: are two big vendors. AT's aws and it's Microsoft Azure,
Speaker 6: and then after that we have Google and you know
Speaker 6: the likes of Oracle and IBM after that.
Speaker 7: So last one here for you, poone.
Speaker 5: I'm just quick on the thirty seconds looking at pharmacy
Speaker 5: and grocery for Amazon.
Speaker 7: What are the next developments there?
Speaker 4: There's a long way to go there. We think they're
Speaker 4: still in very early innings and it's a harder market
Speaker 4: for them to crack with grocery, they're trying to build
Speaker 4: out their fresh business, but we really haven't seen that
Speaker 4: much progress there. And on pharmacy they're still very very
Speaker 4: early on. So those are businesses that we haven't even
Speaker 4: factored into our growth scenario for Amazon.
Speaker 1: Wow.
Speaker 2: Yeah, that's it seems like a tough nut for them
Speaker 2: to crack and for a lot of people. All right,
Speaker 2: put them Goyle on a rag rana. Two of our
Speaker 2: best analysts at Bloomberg Intelligence also.
Speaker 3: Absolutely are some of our very first.
Speaker 2: Folks we brought on board to Bloomberg Intelligence many moons ago,
Speaker 2: but they cover it give us a little preview there
Speaker 2: of Amazon because it is the giant retailer and it
Speaker 2: is a significant player in the cloud business. So you
Speaker 2: got to bring the two expert areas together, which we.
Speaker 3: Can do with Bloomberg Intelligence.
Speaker 2: And you can find Punam's and on a Rog's research
Speaker 2: as well as the other four hundred analyst of Bloomberg Intelligence.
Speaker 2: B I go on the Bloomberg terminal, Best Research on
Speaker 2: the Street.
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Speaker 2: Big big news is several weeks ago in the crypto
Speaker 2: space because we finally they finally got approval from the
Speaker 2: SEC for a spot Bitcoin ETF and that was huge
Speaker 2: for the crypto space and big, big news for the
Speaker 2: ETF space as well. So let's dig in see how
Speaker 2: things are progressing there. Austin re joins us. He's global
Speaker 2: head of revenue and business at falcon X. What is
Speaker 2: falcons the largest institutional crypto prime brokeridge in the world. Austin,
Speaker 2: thanks so much for joining us here. Where are you based?
Speaker 2: Where is the falcon X?
Speaker 8: Yeah?
Speaker 9: First of all, thank you guys for having me so
Speaker 9: excited for the conversation. I'm actually based in San Francisco.
Speaker 9: The team has spread globally. We have an office in
Speaker 9: Silicon Valley, New York, Chicago, Singapore, Hong Kong, and London,
Speaker 9: so a little bit of everywhere.
Speaker 3: Who trades on your platform and what did they trade?
Speaker 9: Yeah, so we trade with a wide variety of institutional
Speaker 9: market participants, so that's everyone from today and topically ETF
Speaker 9: issuers who are active within the cryptocurrency space, to hedge funds,
Speaker 9: asset managers, venture capital firms, really anyone that's looking to
Speaker 9: access liquidity on the spot markets or in the derivative
Speaker 9: side of the cryptocurrency space. Our options business, it's the
Speaker 9: substantial growth over the past couple of quarters as well.
Speaker 9: So basically, if you're looking to get access to the
Speaker 9: asset class headge or exposure either in spot or derivatives markets,
Speaker 9: we work with a lot of those market participants.
Speaker 5: Yeah, tell us Austin, like, why that recent news from
Speaker 5: the SEC regarding the coinets was so important and what's
Speaker 5: that what that's meant for your business?
Speaker 9: Yeah, for sure. Look, I think if you look at
Speaker 9: what the ETF means in the mid to long term,
Speaker 9: really the unlock with the ETF is net new pools
Speaker 9: of capital that historically haven't had access to the cryptocurrency
Speaker 9: or digital asset market, specifically rias and financial advisors within
Speaker 9: the US so thirty trillion dollar markets roughly forty percent
Speaker 9: of US capital markets, and within that they haven't had
Speaker 9: an instrument to access this asset class yet. And so
Speaker 9: the thought is the ETF provides a regulated instrument through
Speaker 9: which these different market participants can get access and that
Speaker 9: will increase overall adoption over time. So in relation to
Speaker 9: our business there where we service where Spot liquidity provider
Speaker 9: to number the etf issuers within that we've partnered. We've
Speaker 9: partnered to provide liquidity and we did about thirty percent
Speaker 9: of the day one issuances. From a trading perspective itself.
Speaker 3: Interesting, Oh okay, very good.
Speaker 7: Ask.
Speaker 3: I wanted to know, like, how has that impacted your business?
Speaker 3: So you saw day one, we saw day one.
Speaker 9: Look, this is something we've been preparing for for years
Speaker 9: at this point, right in terms of building out the
Speaker 9: liquidity at scale ability to transact significant size within this market.
Speaker 9: And so we've been working with different issuers, larger asset
Speaker 9: managers that they've been preparing their crypto strategies and I
Speaker 9: think Day one saw significant amount of flows and we
Speaker 9: continue to basically see consistent trading activity from those issues.
Speaker 2: Right, So, just for our listeners and for me, you're
Speaker 2: a prime brokerage. You're not in exchange like FTX, correct?
Speaker 10: Correct?
Speaker 3: Now you traded on FTX at some.
Speaker 9: Point, yeah, correct, So we're a prime brokerage. What that
Speaker 9: means is we aggregate liquidity from a number of different
Speaker 9: liquidity pools globally, exchanges, proprietary trading firms, market makers, and
Speaker 9: so we trade with all major venues around the world,
Speaker 9: depending on the structure where the client is in some
Speaker 9: uh in the regulatory jurisdiction, and our goal is to
Speaker 9: basically provide our clients the most seamless trading experience possible
Speaker 9: and an aggregation of that global liquidity within.
Speaker 5: You want to get and your clients mostly institutional.
Speaker 7: Money, correct, all institutions.
Speaker 5: Okay, So tell me then about like where the retail
Speaker 5: bitcoin trader stands right now and like their access to ETFs.
Speaker 9: Yeah, so it's an interesting question, right, and I think
Speaker 9: with the initial ETF rollout, the perspective would be that
Speaker 9: this would give broader access to the retail side of
Speaker 9: the market as well as segments of the institutional side
Speaker 9: of the market. What I would say is we're still
Speaker 9: early in this ETF cycle though right it was approved
Speaker 9: earlier this month, and within that you're still seeing some
Speaker 9: platforms not actually allow their end clients to trade this asset.
Speaker 1: Right.
Speaker 9: Vanguard is an example, seven trillion dollars of assets that
Speaker 9: are invested there. You're not seeing them basically allow access
Speaker 9: to Bitcoin ETF vehicles. You've seen some of the other
Speaker 9: brokerages still working through that cycle, and so from a
Speaker 9: retail investor perspective, it should open up access. But I
Speaker 9: think it's also a longer term cycle as to know
Speaker 9: how these really open up over time.
Speaker 2: We had Bitcoin ETF, do you expect other crypto spot
Speaker 2: ETFs to get approved?
Speaker 9: Yeah? So I think the next ETF that the market
Speaker 9: is looking at right now is the Ethereum ETF, and
Speaker 9: specifically within that, there's a perspective from some market participants
Speaker 9: that you could see in eth ETF approved later this year.
Speaker 9: What I would say is, in contrast to the Bitcoin
Speaker 9: ETF that realistically through Q three and Q four the
Speaker 9: market consensus was this was likely to happen the eth ETF,
Speaker 9: there's not the same level of consensus right now. So
Speaker 9: I think what we'll see right now we have different
Speaker 9: Some clients that anticipate this happening later this year, others
Speaker 9: think it's a longer road ahead. I think that the
Speaker 9: market is still waiting to determine what ultimately happens here.
Speaker 5: It looks like another catalyst potentially that the SEC is
Speaker 5: seeking comments on a proposal to allow options trading on
Speaker 5: blackrocks ETF.
Speaker 7: So how do you see that one unfolding?
Speaker 9: Yeah, So, I think one of the interesting elements in
Speaker 9: relation to the ETF approval itself is the potential to
Speaker 9: catalyze greater options market activity domestically in the United States.
Speaker 9: We've actually seen substantial options growth in our own business
Speaker 9: just for context, Q three to Q four falcon X's
Speaker 9: options business group ten x quarter over quarter, and so
Speaker 9: currently one of the largest options market participants on the
Speaker 9: institutional side of the market. And if I look at
Speaker 9: why that matters, right, people are looking for different ways
Speaker 9: to express their views within this market as well as
Speaker 9: to hedge their exposure. And over time, what you see
Speaker 9: as these options markets evolve around ETFs is actually greater
Speaker 9: liquidity going into those ETF instruments itself and in the
Speaker 9: future potentially a lowering of volatility.
Speaker 1: Right.
Speaker 9: So, if you look at gold as an analogy, gold
Speaker 9: ETF options markets around those ETFs, what you saw is
Speaker 9: over time that's a more liquid market, lower volatility within
Speaker 9: that market itself, and that actually attracts more capital over
Speaker 9: time because it's a more investable asset that is less volatile.
Speaker 2: Largest institutional crypto prime brokers in the world.
Speaker 3: How do you define that?
Speaker 10: How do I define largest?
Speaker 4: Like?
Speaker 3: Is it five volume transaction volume?
Speaker 1: Yeah?
Speaker 9: So defined from a volume perspective there, Right, So, like
Speaker 9: I mentioned, we're active both on spot markets, derivatives markets,
Speaker 9: and partnering with clients both in the US and globally.
Speaker 3: So what are other Like who do you compete with
Speaker 3: for that market share?
Speaker 9: Yeah? So Look, if I look at the crypto market
Speaker 9: and where prime brokers sits within this ecosystem, you have
Speaker 9: different players that are providing different products and services across
Speaker 9: the board.
Speaker 1: Right.
Speaker 9: It's not like traditional financial services where you can go
Speaker 9: to Gold Midzas or JP Morgan and get basically most
Speaker 9: things that you need from an institutional market participation perspective,
Speaker 9: So where we're focused is trading spot and derivatives markets,
Speaker 9: the extension of credit and solving capital efficiency for our customers,
Speaker 9: and providing technology to facilitate risk management. As it relates
Speaker 9: to competition, what you see is we compete with different
Speaker 9: players in each of those different segments. Those could be
Speaker 9: some of the proprietary trading firms in one, it could
Speaker 9: be other trading market part participants in the other. But
Speaker 9: from my perspective, look, there's a huge market opportunity here.
Speaker 9: The question is how we grow this over time. I think, Uh,
Speaker 9: the ETF is a great catalyst, and we're excited to
Speaker 9: continue with partner with you know, wide write and market
Speaker 9: participants to grow the pie.
Speaker 5: So I know that you're working with institutional clients, but
Speaker 5: I got to ask on behalf of myself and maybe
Speaker 5: other you know, retail participants who are maybe a little
Speaker 5: bit hesitant to get into crypto. There's obviously, I think
Speaker 5: since it began, just been a lot of skepticism around
Speaker 5: the asset and obviously with FTX imploding, like a lot
Speaker 5: of concerns about.
Speaker 7: The viability of it.
Speaker 5: So what's your pitch to somebody who's like, you know,
Speaker 5: not involved in crypto why they should?
Speaker 8: Yeah.
Speaker 9: So I don't spend much time actually convincing people to
Speaker 9: be active within the crypto's base.
Speaker 7: Probably because they already are with the people.
Speaker 9: You people come to me, right, they're actually active already, Yes,
Speaker 9: But like look within that, if I think, what's the
Speaker 9: value within crypto? Right, and where's the value within bitcoin?
Speaker 9: And why are people excited about the ETF as an
Speaker 9: example here, what you're looking at as a non soft
Speaker 9: and stored a value that's digitally scarce and solving what
Speaker 9: many refer to as a digital goal. Right, why does
Speaker 9: that matter today?
Speaker 1: Right?
Speaker 9: We're looking at a macroeconomic landscape of seventy plus elections globally,
Speaker 9: not just in the US. Within that, we didn't anticipate
Speaker 9: loose in monetary policy that could lead to inflation. Do
Speaker 9: you want to protect your assets against that? And then
Speaker 9: the other area that we see, you know, our clients
Speaker 9: investing within crypto is some believe it could be a
Speaker 9: good geopolitical hedge over time and increasingly uncertain geopolitical landscape.
Speaker 9: As you guys know, question is is a portion of
Speaker 9: your portfolio makes sense to act to allocate to this
Speaker 9: asset class. But obviously, you know, always recommend people look
Speaker 9: at all the risks and of course body volatility is.
Speaker 7: So read the fine print. I'm sure.
Speaker 3: Austin Reid, thanks so much for joining us.
Speaker 2: Really appreciate Austin Reid, Global Head of Revenues and Business
Speaker 2: at falcon X. Falcon X is the largest institutional crypto
Speaker 2: prime brokerage in the world, and we again all getting
Speaker 2: a lot small arder on crypto.
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
Speaker 1: weekdays at ten am Eastern on Apple car Playing and
Speaker 1: broud Otto with the Bloomberg Business App. Listen on demand
Speaker 1: wherever you get your podcasts, or watch us live on YouTube.
Speaker 2: Adam Coons joins us from Winthrop Capital here. We talked
Speaker 2: at him about the markets and so forth going forward. Adam,
Speaker 2: you know, we had that big, big September, I mean
Speaker 2: really kind of November December last year that just ripped equities,
Speaker 2: just went through the roof bods actually turned in positive performance.
Speaker 11: For the year.
Speaker 2: You know, what do you tell your clients here as
Speaker 2: we kind of start off another year, do we just
Speaker 2: kind of start from zero and try to find some
Speaker 2: winners out there?
Speaker 3: What's the theme for you this year?
Speaker 10: Yeah?
Speaker 8: I mean I think this year is going to definitely
Speaker 8: be a stock pickers year. I think fixed income will
Speaker 8: continue to be a primary story for returns and that's
Speaker 8: going to come despite what the FED does, Even if
Speaker 8: the FED doesn't lower rates as quickly as.
Speaker 10: Some are saying, and we do believe that.
Speaker 8: What we're thinking really fourth quarter before they make any
Speaker 8: cuts at all. Yeah, So we're we're a little bit
Speaker 8: divergent from the consensus, and that's really driven by if
Speaker 8: you look at what the Fed has done through this cycle.
Speaker 8: They obviously got it wrong with the transitory nonsense, and
Speaker 8: we think they're going to act slow to do the
Speaker 8: same thing. Right, they were slow to raise rates, suddenly
Speaker 8: did it. We think they're going to be slow to
Speaker 8: decrease interest rates because they don't want to be wrong again, right,
Speaker 8: They don't want to lower rates and then see another
Speaker 8: flash of inflation. So I think that's really going to
Speaker 8: squeeze the economy, and so that's going to be good
Speaker 8: for long term bonds. I think it's going to be
Speaker 8: somewhat of a difficult year for stocks, and that's driven
Speaker 8: by two things. One is what I just highlight is
Speaker 8: you're going to start to see economic weakness. But secondly,
Speaker 8: I mean, coming to this year, you nailed it is
Speaker 8: we had that rally coming into the end of the
Speaker 8: year that that really drove valuations to some somewhat unsustainable
Speaker 8: levels for specific companies. And I'm highlighting your Teslas or
Speaker 8: in the videos, and obviously you're seeing the result of
Speaker 8: that with Tesla missing and dropping quite a bit.
Speaker 5: So you're saying it's going to be good year for
Speaker 5: long term bonds. I'm looking at the thirty year right now.
Speaker 5: Yield peaks a little bit above five percent in October.
Speaker 5: That's when the pivot story started to become a bit
Speaker 5: more clear, and now we're at four thirty five.
Speaker 7: I think that's still attractive to get get you.
Speaker 8: I mean, look, it's really asymmetric right now in bonds,
Speaker 8: which is the attractive part of it. The worst case
Speaker 8: scenario is you get a fairly high yield to carry
Speaker 8: until we'd start to see that. You know, this secular
Speaker 8: trend in rates is not changed. Rates are going to
Speaker 8: go back down. Demographics and all those things are pushing that.
Speaker 8: So worst case scenarios, I get to hold bonds and
Speaker 8: a pretty high yield, you know, corporate bonds. I'm getting
Speaker 8: five percent, So I get to hold that until and
Speaker 8: wait until I'm right. And so ultimately I think that's
Speaker 8: the easiest, Like I said, from a wrist standpoint, asymmetric trade.
Speaker 2: You know, I was surprised, you know, looking at the
Speaker 2: performance and can come last year in twenty twenty three
Speaker 2: that the best performing sector was high yield.
Speaker 3: And that's in a world.
Speaker 2: Where everybody kept talking about our recession. I would have
Speaker 2: would have thought going into the year that maybe high
Speaker 2: yield would not be the place to be, but it
Speaker 2: really outperformed it did.
Speaker 8: I mean, and I think that goes hand in hand
Speaker 8: with what the equity markets did, right. They tend to
Speaker 8: correlate in certain pockets of the market, and so I
Speaker 8: think when we saw that rally that that helped tighten
Speaker 8: credit spreads. I mean, we really aren't seeing big increases
Speaker 8: in delinquencies. Yes they're going up a little bit, but
Speaker 8: recovery rates are stable. So it's just, yeah, it was
Speaker 8: it was a place to be because credit markets still
Speaker 8: look pretty solid.
Speaker 5: So in a year when rates are broadly going to
Speaker 5: be coming down, you think that's pretty accommodative for everybody.
Speaker 5: Is there really a place that you would say like
Speaker 5: you would not benefit from that and to avoid.
Speaker 10: Well, I think it really comes down to commodities.
Speaker 8: I'd stay probably away from that in the in the
Speaker 8: short term, especially kind of the oil commodities. But if
Speaker 8: you look at stocks, I think, once again, I think
Speaker 8: you want to stay away from the narrative based companies,
Speaker 8: like I said in Navidio or where the AI narrative
Speaker 8: has really gotten over it yeah, I've been over there
Speaker 8: for a while, but.
Speaker 7: I feel like it's just starting.
Speaker 8: I think there's going to be a pause, right and
Speaker 8: then because everyone's going to figure out, well, there's no
Speaker 8: monetization of the story of AI right.
Speaker 10: Now, so I think there will be a little bit
Speaker 10: of a pause with that.
Speaker 8: You'll still see the companies like Microsoft and alphabet that
Speaker 8: have an AI component but have a real business model, those.
Speaker 10: Will still do it, still do well.
Speaker 8: But the companies that really just kind of got over
Speaker 8: their skis last year, that's where I would stay away
Speaker 8: from right right now.
Speaker 2: So big earnings week this week from a lot of
Speaker 2: the high profile names, including Meta and Alphabetters. I call
Speaker 2: them Facebook and Google. Why change a good thing? I don't, right,
Speaker 2: But in any case, I know there are names that
Speaker 2: you guys have an interest in.
Speaker 3: How do you think about Facebook.
Speaker 2: Google that whole I guess digital advertising space.
Speaker 8: Well, I think it comes down to you know, once again,
Speaker 8: these or business models that have been able to adapt.
Speaker 8: Meta has gone through a little bit of an identity crisis,
Speaker 8: but I think they're back on the right track where
Speaker 8: they're able to adapt to what the consumer behavior and
Speaker 8: those shifts are. We still think the consumer can kind
Speaker 8: of push this cycle out and that's what's going to
Speaker 8: drive stocks like that, where advertising is really you know,
Speaker 8: at the end of the day, that the revenue driver.
Speaker 8: So that's why we think those companies can outperform relative
Speaker 8: to some of the hardware type companies.
Speaker 5: All right, so those ones are the communication slash tech sector.
Speaker 5: How about healthcare looks like that's one that you've got
Speaker 5: your eyes on too.
Speaker 8: It is, I mean, if you look at valuations, and
Speaker 8: I keep saying that word, it's obviously something that matters
Speaker 8: to this year a company like merk where you know
Speaker 8: it is trading very attractively relative to other companies in healthcare,
Speaker 8: and then also just in the S and P five hundred,
Speaker 8: but you know, it ran up significantly through covid obviously
Speaker 8: with with their vaccine, and then basically has given away
Speaker 8: all those gains. So what we see here as a
Speaker 8: company that has a nice amount of cash flow. Yes,
Speaker 8: the pipeline and the short term is a little bit questionable,
Speaker 8: but we think that they can pull off an M
Speaker 8: and a strategy that will kind of help prop up
Speaker 8: their pipeline in the future.
Speaker 5: I don't know, I mean, we just had our anti
Speaker 5: trust expert in here, I wouldn't be trying to get
Speaker 5: at the mn A right, that's.
Speaker 3: Fair, that is fair. It's hard.
Speaker 2: Yeah, it still seems like you can get healthcare deals
Speaker 2: done because usually what it is is like a big
Speaker 2: pharma company buying a little guy who got some cool
Speaker 2: yeah new thing coming.
Speaker 5: So maybe just not in like healthcare as far as
Speaker 5: like insurance, you know, obviously like the humanist sigma that
Speaker 5: didn't go so well.
Speaker 2: I mean, does Mark have It seems like if I'm
Speaker 2: going to have exposure to healthcare, it's got to have
Speaker 2: a g l P one angle, a.
Speaker 3: B CD drug.
Speaker 2: I was going to say they need, because does MERK have?
Speaker 8: Then they don't, and I think that Lily would be
Speaker 8: behind that. The valuation is really what's giving me pause there.
Speaker 8: But I would still own Lily. I probably wouldn't add
Speaker 8: to it or you know, particularly an Indianapolis. Yeah, I
Speaker 8: get Yeah, I love Indianapolis because I know that because
Speaker 8: a lot of my friends from business school went to
Speaker 8: indian Aples and begrudgingly, but they went there because it's.
Speaker 10: Ei Lily, Yep, you know that's the place.
Speaker 2: Yeah, exactly so so, but so your highest conviction trade
Speaker 2: is that high grade long duration zond so so boring.
Speaker 3: I know.
Speaker 2: So what's like, like, what's a piece of paper that
Speaker 2: you guys hold that you feel really comfortable with?
Speaker 8: I mean, I look, I really do like tech TMT.
Speaker 8: When you're looking at corporate bonds, you can go out
Speaker 8: there and are.
Speaker 2: You buying like on the Comcast and yes, absolutely Comcast Charter.
Speaker 10: I like Cox.
Speaker 3: Communication, Yeah, I like Coxy Communications.
Speaker 8: Yeah, yeah, I mean Oracle. Oracle is honestly, honestly one
Speaker 8: of the cheapest. It's triple bu but you're getting a
Speaker 8: lot of spread, Like so you're getting well north of
Speaker 8: five percent for you know, a well cash flowed company.
Speaker 10: I just it's a no brainer for Cox Communications.
Speaker 2: Man, I made a lot of fees off of those
Speaker 2: good people, smart people. They made your work for it,
Speaker 2: but they paid and they paid on time. Adam Coons
Speaker 2: thanks so much for joining us. Adam Kuons is Cheap
Speaker 2: portfolio manager for Winthrop Capital Management located in Indianapolis.
Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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Speaker 1: Just say Alexa playing Bloomberg eleven thirty.
Speaker 2: You kind of think about, you know, twenty twenty three
Speaker 2: and the rip we had there at the end of
Speaker 2: the year. It's like almost he's coming to twenty twenty four.
Speaker 3: Now what do I do?
Speaker 2: It seems like I might have gotten all my performance
Speaker 2: at the end of twenty three. Let's check with Katerina Simonendi.
Speaker 2: She probably has some good views here. She's the senior
Speaker 2: vice president Morgan Stanley Private Wealth Management. So, Katerina, what's
Speaker 2: kind of the message you started off you know, twenty
Speaker 2: twenty four with with your clients here after you know,
Speaker 2: a pretty good twenty twenty three.
Speaker 12: Paul and Molly, thank you for having me on the show.
Speaker 11: Yes, you know, surprisingly good and off twenty twenty three
Speaker 11: where we investors seem to be so excited about the
Speaker 11: potential for the raid cuts.
Speaker 12: You know, we saw this, you.
Speaker 11: Know, pretty remarkable year end. And also, you know, somewhat
Speaker 11: unusual was the fact that the seven large stocks essentially
Speaker 11: carried the market. So if you look at the performance
Speaker 11: that investors experienced in the some of the broad indexes
Speaker 11: like S and P five hundred for example. You know,
Speaker 11: there were two stories of the index. There was a
Speaker 11: story of this magnificent seven stocks and then the rest
Speaker 11: of the market. So when we look at twenty four,
Speaker 11: it definitely continues being the story of the FED and
Speaker 11: it is really the timeline of the rate cuts that
Speaker 11: we're looking at, you know, first, and then of course
Speaker 11: the earnings, because to some degree it is a little
Speaker 11: bit confusing for investors to figure out what they're hoping for.
Speaker 11: Are they hoping that rates are going to start coming
Speaker 11: down soon and we have significant doubts that that is
Speaker 11: going to start cutting in March, or are they hoping
Speaker 11: for good earnings for the stocks that they have in
Speaker 11: their portfolio.
Speaker 12: We think it's a little bit of both.
Speaker 5: Well, let's solve into that timeline for the FED cuts,
Speaker 5: because I feel like, you know, you can ask five
Speaker 5: people and get ten different answers on this of when
Speaker 5: the FED cuts are going to start. We hear March
Speaker 5: the earliest. Our previous guest said, you know, fourth.
Speaker 7: Quarter the earliest. So where do you stand in all
Speaker 7: that categorina? What do you think?
Speaker 12: Well, we think that March is a bit aggressive, and
Speaker 12: in our view, we expect that the rates cuts are
Speaker 12: going to start in June, and of course economic data
Speaker 12: will be something that will have to support it. So
Speaker 12: we're going to have to see some weakness because after all,
Speaker 12: well we can't forget that the rate cuts, you know,
Speaker 12: is it's economic stimulus, you know, this is what we
Speaker 12: do to stimulate the economy. But the question of course
Speaker 12: also is would FED be willing to do something preemptively?
Speaker 11: You know, if this week is a huge week, we
Speaker 11: have earnings, we have job data, we have the FED
Speaker 11: meeting that is coming up, and perhaps they give us
Speaker 11: some guidance as far as what they think on the timeline,
Speaker 11: you know, because if economy remains strong, you know, is
Speaker 11: it something that they're going to be willing to do.
Speaker 11: In our view, we expect less rate cuts that market
Speaker 11: is pricing in.
Speaker 2: All right, Katerina, what are you telling your clients here
Speaker 2: in twenty twenty four in terms of maybe stocks versus bonds?
Speaker 2: Is a client specific or do you have a kind
Speaker 2: of a balanced approach you like to take?
Speaker 12: Our message to clients right now is get out of cash.
Speaker 11: We have we tend to have a little bit of
Speaker 11: get out of cash because we tend to have a
Speaker 11: little bit of a short term memory. And you know,
Speaker 11: when we think about it, it seems like we've been
Speaker 11: earning five percent on cash forever, but reality is that
Speaker 11: it hasn't been a year. And our biggest conversations right
Speaker 11: now is extending the duration of fixed income portfolios, getting
Speaker 11: out of cash, positioning both in high quality equity, not
Speaker 11: necessarily the stocks that have done so well in the
Speaker 11: previous year, but maybe taking some profits there, but making
Speaker 11: sure that we have a nice, high quality, well balanced portfolios.
Speaker 11: On the equity side, you know, we like healthcare, we
Speaker 11: like in austrials, so we see opportunities in financials. But
Speaker 11: on the fixed income side, even more importantly, we're looking
Speaker 11: at extending the duration and the quality because this is
Speaker 11: this remarkable opportunity of picking up some of these high
Speaker 11: quality bonds and enjoying that five percent yield for longer.
Speaker 7: Is there a lot of that out there?
Speaker 5: I mean, especially looking at corporate issuance, like you're seeing
Speaker 5: much in that longer duration tenor.
Speaker 11: Well, moly, there is longer duration, but there's also intermediate
Speaker 11: and when we're looking really about you know, that message
Speaker 11: of getting out of cash, you know, even getting a
Speaker 11: CD that is few years out, you know, looking at
Speaker 11: some corporate bonds, investment grade corporate bonds, you know, just
Speaker 11: kind of trying to get as much of that yield
Speaker 11: as possible. We might not be able to get that
Speaker 11: yield going out fifteen twenty years, but we when we
Speaker 11: look five years out, have seven years out. You know,
Speaker 11: this is really something that is still out there.
Speaker 2: Absolutely so on the equity side of the equation, here
Speaker 2: are there some sectors that you and your team like
Speaker 2: right here that you're trying to conveyed your clients.
Speaker 11: Well, well, the first message is, of course, you know,
Speaker 11: trying to again you know, getting away from the the
Speaker 11: tech names that did so well, right, and it's the
Speaker 11: hardest thing to do to know when to take a
Speaker 11: profit and to reallocate, you know, to the areas that
Speaker 11: maybe have not done well, but our positions in our
Speaker 11: opinion better. And when we look historically, usually you know,
Speaker 11: after the rate cuts, large cap is this sector you
Speaker 11: know that usually just performs better immediately, but small and
Speaker 11: mid cap stocks you know, are not that far after.
Speaker 11: And in our review, with the potential for rate cuts,
Speaker 11: but also with some of the geopolitical concerns that we
Speaker 11: are dealing with, especially you know, some of the news
Speaker 11: that came out over the weekend as example, you know,
Speaker 11: we really are our return expectations for this year, the
Speaker 11: risk reward are kind of low.
Speaker 12: You know, we are setting.
Speaker 11: Expectations to the clients that this is going to be
Speaker 11: the year will reposition where we get those quality position
Speaker 11: sort of make sure that our portfolios are well diversified.
Speaker 11: We do like healthcare, we like industrials, we like financials,
Speaker 11: you know, they we like just generally dividend being stocks
Speaker 11: as this poor building block of the portfolios.
Speaker 12: But we're also.
Speaker 11: Setting timeline expectations that this is the positioning that is
Speaker 11: going to be more for twenty five and even twenty
Speaker 11: six after the raid cuts, after that stimulus hits the market,
Speaker 11: you know, when there is another wave of growth that
Speaker 11: clients will be able to enjoy.
Speaker 5: So Paul is a huge fan of the Russell two thousand,
Speaker 5: and I know it is a burning question for him.
Speaker 5: Is there a magnificent seven of the Russell two thousand?
Speaker 12: Ah?
Speaker 11: That's you know, how many sevens would it take to
Speaker 11: really make an impact, you know, in the index that
Speaker 11: has two thousand stocks.
Speaker 12: You know, that's that's the question.
Speaker 11: So I think that the answer, there is just broad
Speaker 11: index versus stock picking. In in our view, this is
Speaker 11: very much the year for this where valuations and earnings
Speaker 11: and competitive positioning of these individual names, that the individual
Speaker 11: stocks will make all the difference in the world for
Speaker 11: the investment portfolios for that alpha that access return above
Speaker 11: the market, and we actually would encourage investors to, you know,
Speaker 11: some would take profits and decrease their positions in the
Speaker 11: broad indexes that benefited from some of the stocks that
Speaker 11: you know performed well last year.
Speaker 2: Katerina, one last question about thirty seconds. What do you
Speaker 2: do with alternative investments? How do you kind of position
Speaker 2: them for your clients.
Speaker 11: We think alternative investments, you know, as far as diversifier
Speaker 11: or even return amplifier play essential role in the portfolio
Speaker 11: where appropriate. You know, it just really takes time to
Speaker 11: get educated in that space, but we think that at
Speaker 11: least ten to fifteen percent of the portfolio, you know,
Speaker 11: could really benefit from some alternative exposure.
Speaker 2: Katerina, thanks so much for joining us. As always, Katerina siminating.
Speaker 2: She is a senior vice president of Morgan Stanley Private
Speaker 2: Wealth Management, joining us to give us her thoughts on
Speaker 2: these markets.
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