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Speaker 3: at Bloomberg like, if the economy is slowing down, someone
Speaker 3: may want to tell the consumer, because really retail sales
Speaker 3: didn't point to that, So I thought that was quite
Speaker 3: a good point, and you look at equities just flying higher.
Speaker 3: Here joining us now is Mariy Shore, Senior Equity Analystic Columbia,
Speaker 3: Thread Needle Investments. Marie, what good news good news for stocks?
Speaker 3: Is that a fair statement? We get good news by
Speaker 3: the equity market.
Speaker 1: Absolutely, yes. I think the results today show us that
Speaker 1: the consumer is more stable versus what was feared. We
Speaker 1: had heard more throughout the month of July that there
Speaker 1: was a slow down happening, but in my view, the
Speaker 1: consumer backdrop remained stable, and the different results that we
Speaker 1: see between different retailers just shows you know who's gaining
Speaker 1: share and who's losing share. But when I looked at
Speaker 1: the trends today, I think although the high level retail
Speaker 1: sales number was better than feared, I would say when
Speaker 1: you dig a little deeper, the trends are still mixed.
Speaker 1: On the one hand, we see the consumer still choiceful
Speaker 1: in their spend, spending more on services over goods and
Speaker 1: needs over ONTs. At the same time, within discretionary we
Speaker 1: do see some signs of life in categories like apparel
Speaker 1: and even electronics. So still a very mixed print, but
Speaker 1: certainly better than feared.
Speaker 4: Back to school holidays.
Speaker 5: What are some of the retailers telling me about some
Speaker 5: of the big events coming up here for the retail
Speaker 5: sales number?
Speaker 1: These events are very important because, as we've heard from
Speaker 1: every retailer for years now, the consumer is shopping very
Speaker 1: close to need.
Speaker 4: So you know the.
Speaker 1: Tone from Walmart in terms of the trends they saw
Speaker 1: ending the quarter and in August today, we're very positive
Speaker 1: again they've seen very consistent results. I think the consumer
Speaker 1: will show up for back to school in the same
Speaker 1: way that they showed up for holiday, and again I
Speaker 1: think we're seeing that in some of the data today
Speaker 1: with the strength and electronics and even in apparel where
Speaker 1: there are some new trends that are resonating now.
Speaker 3: So in the equity market, then, is it difficult to
Speaker 3: pick the winners and losers? Because it does feel like
Speaker 3: it's hard to get a broad back or read like
Speaker 3: the data slowing. We know that check, check that Bucks,
Speaker 3: but in terms of what they're buying, I would have
Speaker 3: thought the tapestry would have struggled, right, I would say, Okay,
Speaker 3: at some point the coach passing on price increases was
Speaker 3: going to max out consumers. It doesn't look like that's
Speaker 3: actually happening. How hard is it to do your job?
Speaker 1: It has become more challenging, especially because the markets are
Speaker 1: so volatile right and head funds and macro funds are
Speaker 1: just having such a large impact in how the stocks
Speaker 1: are trading. But we are seeing a very clear difference
Speaker 1: between shared gainers and losers at this point, and so
Speaker 1: what we're really trying to do is focus on the
Speaker 1: companies that are gaining share where we see the potential
Speaker 1: for positives positive earnings revisions.
Speaker 4: The problem is a lot of those stocks.
Speaker 1: Are screening is pretty expensive, you know, names like Walmart
Speaker 1: and Costco. On the other hand, there are names where
Speaker 1: even with more modest revenue growth assumptions, there is a
Speaker 1: real margin in free cash flow growth story there. So
Speaker 1: that is like the other group of stocks that we
Speaker 1: are trying to focus on. But to your point, it's
Speaker 1: very hard to listen to what one company is saying
Speaker 1: and extrapolate that because it really feels like within a
Speaker 1: kind of lackluster consumer or retail backdrop, there are still
Speaker 1: some companies like Walmart is a perfect example, that are
Speaker 1: able to do very well right now, Hey.
Speaker 5: Mari, what kind of deals can I get if I
Speaker 5: go shopping at there? How promotional are retailers out there?
Speaker 1: You as for me?
Speaker 6: So sweet?
Speaker 4: Yeah?
Speaker 1: I think we talked about this last time. So since
Speaker 1: the holiday season of twenty three, the retailers inventory levels
Speaker 1: have been much better positioned, not perfect, but much better positioned.
Speaker 1: So while the retailers remain aggressive on promotions to drive traffic,
Speaker 1: you're not going to see the crazy promotions that they
Speaker 1: had to run when they were heavy on inventory. And
Speaker 1: we should also see fewer markdowns, which will be very
Speaker 1: good for margin. But at the same time, everyone recognizes
Speaker 1: that the consumer is stretched, and I know both like
Speaker 1: the consumer staples companies and a lot of the retailers
Speaker 1: and brands are talking about needing to promote to drive
Speaker 1: volume and traffic.
Speaker 3: I was reading an article the other day that retailers
Speaker 3: are already buying their inventory for the holiday, which totally
Speaker 3: makes sense. I mean, a lot of cargoes were coming
Speaker 3: into ports, etc. How confident do you think retailers are
Speaker 3: in their inventory build up for the holiday?
Speaker 1: They seem pretty confident.
Speaker 6: You know.
Speaker 1: What we've seen on the freight side is a recent
Speaker 1: rise in ocean freight rate, So that's something we've been
Speaker 1: talking to the retailers about. Right now, a lot of
Speaker 1: them are locked into their contract rates, so it doesn't
Speaker 1: sound like that as a near term risk to margin,
Speaker 1: but definitely something we have to monitor for next year.
Speaker 4: There's also been some disruption in the Red Sea.
Speaker 1: We've heard about recent protests in Bangladesh, which could impact
Speaker 1: companies that are sourcing from there, But so far, in
Speaker 1: our conversations with retailers, it doesn't really feel like any
Speaker 1: of those things are going to result in any real
Speaker 1: near term disruption to the business, and it sounds like,
Speaker 1: you know, the outlook for a holiday in terms of
Speaker 1: getting the inventory that they want and need is pretty
Speaker 1: consistent and stable.
Speaker 5: And Mari, when I was looking at the Walmart numbers again,
Speaker 5: what jumps out of me is it does so many quarters?
Speaker 5: Is there e commerce up twenty two percent? Yes, boy,
Speaker 5: they've They're right there with Walmart, aren't they. They don't
Speaker 5: take it, I mean from with the Amazon. They don't
Speaker 5: take a step back from Amazon at all, do they?
Speaker 7: Right?
Speaker 4: No, absolutely not.
Speaker 1: I mean, remember, Amazon is still clearly the dominant player
Speaker 1: in this category. I mean, overall e commerce is about
Speaker 1: thirty percent of total retail sales, and Amazon is almost
Speaker 1: half of that. So Amazon is obviously operating off a
Speaker 1: much larger base. Having said that, Walmart is now growing
Speaker 1: faster than Amazon. I think the only other company I
Speaker 1: follow that is growing at a similar rate is actually Costo.
Speaker 1: And I think what's happening specifically in the case of
Speaker 1: Walmart is a lot of their new initiatives, building out
Speaker 1: their marketplace, building out fulfillment, building out their membership model,
Speaker 1: building out advertising. All of those initiatives are finally coming
Speaker 1: together and really driving their e commerce business and So
Speaker 1: the thing that's so impressive about Walmart as we look
Speaker 1: at their results is it is very clear that they
Speaker 1: are gaining share across channel, across category, across income demographic,
Speaker 1: and that broad based strength I think will drive strengthen
Speaker 1: their results for the foreseeable future.
Speaker 3: All right, make we appreciate that. Thank you so much.
Speaker 3: Mario Shore, Senior equity analyst over at Columbia Thread Needle Investments,
Speaker 3: joining us from Boston, Massachusetts. And again, now I'm addicted
Speaker 3: to this altd go scream and I'm looking at sort
Speaker 3: of the estimated sales we're looking at here, and they're
Speaker 3: still beating competitors.
Speaker 6: I know.
Speaker 3: Anyway, altd Go really cool function on the termin You
Speaker 3: should definitely check it out.
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Speaker 5: Let's get back to the story of the retail. Is
Speaker 5: today's the story about the consumer. We had retail sales
Speaker 5: coming a little bit better than expected. We had Walmart
Speaker 5: reports some numbers at the street like this SoC is up.
Speaker 5: So Jen Bartasha's storyin so she's bloomerg Intelligence retail analyst
Speaker 5: covering all the retail space, including Walmart. Hey, Jen, what
Speaker 5: did you take away from these Walmart numbers? The streets
Speaker 5: certainly like them?
Speaker 8: Yeah, Actually, Walmart had a great quarter. I think most
Speaker 8: people expected it because they do tend to do well
Speaker 8: when the consumer's under stress. But some of the things
Speaker 8: that were interesting takeaways were things like the amount of
Speaker 8: generative AI that they're using in their business to close
Speaker 8: the competitive gap to peers like Amazon, especially in e commerce,
Speaker 8: the idea that their growth is being led by volume,
Speaker 8: which is a very different story than we're hearing from
Speaker 8: most retailers. And finally, one of the other remarkable things
Speaker 8: is that they sort of issued a little bit of
Speaker 8: a warning shot to package food companies about still wanting
Speaker 8: to try to pass through price increases and that Walmart
Speaker 8: is really focused on bringing prices down instead.
Speaker 3: So does that bode well? So here's what I'm trying
Speaker 3: to understand what the volume side. Does this mean that
Speaker 3: this is good news for like a costco or Target?
Speaker 3: Or is Walmart taking share from the likes of Target.
Speaker 8: Well, I would say I would argue that Walmart is
Speaker 8: probably taking some share and that they're translated that into
Speaker 8: volume gains because they're very focused on offering value, whether
Speaker 8: it's from a price perspective or from a convenience perspective,
Speaker 8: and that seems to really be resonating with consumers. Right now.
Speaker 5: Are people coming down who maybe we're not Walmart shoppers,
Speaker 5: but now they're coming to Walmart. Is Walmart seeing that
Speaker 5: they are.
Speaker 8: They talked last quarter about bringing in hiringcome households, and
Speaker 8: that trend seems to be continuing. You know, in the
Speaker 8: last year and a half or so, Walmart has invested
Speaker 8: in improving and renovating their stores, which is particularly important
Speaker 8: for hiringcome households, because when you walk into a store
Speaker 8: and it's kind of dingy or grungy, it doesn't make
Speaker 8: for the best shopping experience. And so part of that
Speaker 8: investment is resonating with those hiring consumers. But also people
Speaker 8: are becoming more practical about where they're seeking value. And
Speaker 8: I think I've used this example before, but if you
Speaker 8: can buy a box of cereal, which is a standard
Speaker 8: box for you know, fifteen or twenty percent less at
Speaker 8: Walmart than you can at your grocery store. Even that
Speaker 8: speaks to hiringcome households that are looking to save a
Speaker 8: little bit here and there as well.
Speaker 3: Also just in comparison of just how expensive regular and
Speaker 3: grocery stores have gotten to just in terms of that. Also,
Speaker 3: what about their e commerce because basically another perk for
Speaker 3: Walmart is there just basically like a giant warehouse.
Speaker 8: Also, yeah, I mean their e commerce operations are continuing
Speaker 8: to grow. I think one of the things that that
Speaker 8: investors are finding very encouraging is that the losses associated
Speaker 8: with e commerce aren't narrowing. Originally, Walmart said that they
Speaker 8: actually thought that it would generally be profitable in the
Speaker 8: next year to year and a half. Now today Doug
Speaker 8: McMillan kind of backed off and said, you know, don't
Speaker 8: focus so much on just one metric, but that those
Speaker 8: losses are easing and that really is a good indicator
Speaker 8: for Walmart as well with regards to its overall profit
Speaker 8: profile and where it's developing as a company.
Speaker 5: We're it just wrote thirty seconds, where does growth come
Speaker 5: from Walmart? Is it just a GDP top line story?
Speaker 8: It is in part Paul. But at the same time,
Speaker 8: they really are pulling more people into it. They're kind
Speaker 8: of with their their overall ecosphere, and so it's also
Speaker 8: through variety. So it's not just the store, it's you know,
Speaker 8: an increasing marketplace where they're becoming more competitive with the
Speaker 8: likes of Amazon. But it's also things like financial services
Speaker 8: or vet services or things that they're exploring that help
Speaker 8: bring people in for more than just shopping.
Speaker 5: All right, that's I tell everybody My next gig is
Speaker 5: I'm going to be a greeter at Walmart. I'm not kidding.
Speaker 5: Jen Bartash, just thanks so much for joining.
Speaker 3: That would be entertaining or weird.
Speaker 5: That would be you would loved and you walked in
Speaker 5: to see me. Wouldn't that be great?
Speaker 3: I don't know how people were dressing walking into the
Speaker 3: I'm really trying to absorb what this would look like.
Speaker 5: I We're gonna have more coming up. That was Jen
Speaker 5: Bartash's given us the latest on Walmart.
Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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Speaker 3: Alex Steel here alongside Paul Sweeney. This is Bloomberg Intelligence Radio,
Speaker 3: where you bring you all the top news in business
Speaker 3: and economics and finance through our lens of our Bloomberg
Speaker 3: Intelligence folks, because they cover two thousand companies and one
Speaker 3: hundred and thirty industries worldwide. So back to that retail
Speaker 3: sales data. Good news, good news. I guess you look
Speaker 3: at the two year though bonds yields are up by
Speaker 3: about twelve basis points, which is a head scratcher for
Speaker 3: me because the news is good. So good news is
Speaker 3: good news. That's at least what the equity market is saying.
Speaker 3: But then the bond market, what is that telling me? Luckily,
Speaker 3: we're going to talk to Vanir buan Shalli. He's founder
Speaker 3: and chief investment officer of long Tail Alpha. Hey, Vanier,
Speaker 3: are we looking at the bond and equity market telling
Speaker 3: us the same thing about retail sales right now?
Speaker 6: I think they're slightly different. I think this has been
Speaker 6: a problem, not just this year, but for a couple
Speaker 6: of years now. I think the equity markets are being
Speaker 6: driven by a lot of cources externals, buybacks from large
Speaker 6: corporations retail buying a lot of stock. The bond market
Speaker 6: is not that convinced. I think the inverted youth curves,
Speaker 6: certainly we can talk about it, is telling you a
Speaker 6: very different story. I think long term meals are too
Speaker 6: low here, which is part of the reason why retail
Speaker 6: sales and the economy is strong and keeps getting stronger.
Speaker 5: What do you make of a week ago Friday that
Speaker 5: was a real shock to the marketplace and we see
Speaker 5: it saw dislocations. I mean, we had the VIX, which
Speaker 5: is now below fifteen was above sixty five. What do
Speaker 5: you make of that training activity we saw a week
Speaker 5: ago Friday even here?
Speaker 6: Yeah, so you know I wrote about this last week.
Speaker 6: What we've observed over the last few years is that
Speaker 6: the intensity at which markets are selling off and the
Speaker 6: big spikes is getting bigger and bigger. It happens over
Speaker 6: a very short period of time. And you know, going
Speaker 6: back town two thousand and eight, where he used to
Speaker 6: take a months and quarters, now it's just taking weeks
Speaker 6: and days and maybe hours. And last Monday was again
Speaker 6: you couldn't have done anything except if you did something
Speaker 6: in the pre market. You know, Nick was down twelve
Speaker 6: percent we were up that night all night, and you know,
Speaker 6: again it was just an air gap. There was absolutely
Speaker 6: no liquidity. And I think that's just one of those
Speaker 6: warning shots that tells you how lever the system is
Speaker 6: and how ill liquid the system is. And I don't
Speaker 6: think that was the end of it. I think even today,
Speaker 6: the massive valley we're seeing is happening on extremely in
Speaker 6: ill liquid conditions.
Speaker 3: I thought positioning, though, if we just stick with the
Speaker 3: mom market Verzayonna, I thought positioning was all cleaned out
Speaker 3: now that after the turmoil last couple of weeks, now
Speaker 3: you have a cleaner read. Is that not the case?
Speaker 6: I don't think so. I think what happened was people
Speaker 6: try to get out. I mean it's like a very
Speaker 6: big elephant trying to get through, you know, the eye
Speaker 6: of a needle. I think some people got out, maybe
Speaker 6: in Tannic on Monday and Tuesday, and then a lot
Speaker 6: of systematic strategies started to reverse as BIS dropped, Like
Speaker 6: Paul just mentioned, from sixty five pre market to about
Speaker 6: you know twenty, many systematic strategies that are index to
Speaker 6: the volatility market have to re lever, and I think
Speaker 6: that's what you're seeing today. Very ill liquid billions and
Speaker 6: billions coming back into the market, and there's really very
Speaker 6: little liquidity for them to buy the risk assets back.
Speaker 5: Vinyar, What do you think our Federal Reserve is going
Speaker 5: to do next month?
Speaker 6: Well, I think they have to ease now that they've
Speaker 6: conditioned the market, they have to ease, and I think,
Speaker 6: you know, that could be a twenty five. I don't
Speaker 6: think they're going to do fifty will be too aggressive.
Speaker 6: My senses, they're going to do a hawkish ease. They'll
Speaker 6: do twenty five, and like the ECB, they'll say we'll
Speaker 6: wait and see what happens, which is exactly what they
Speaker 6: should do at this stage. And I think, you know,
Speaker 6: that could set the stage for the next round of
Speaker 6: the carry trade unwined. I mean, it's trillions out there,
Speaker 6: trillions that have been accumulated over yeah, I don't know,
Speaker 6: two decades or so. Because US rates going down, Japanese
Speaker 6: rates going up compresses the yield spread, meaning a stronger again,
Speaker 6: which could generate the next round.
Speaker 3: So you think that we'll see a hawkish ease in September.
Speaker 3: But a hawk ish use doesn't seem to me. A
Speaker 3: carry trade unwined, it would be more than more dubish
Speaker 3: they are.
Speaker 6: No, yeah, possibly, it depends on again the carry trade online.
Speaker 2: Right.
Speaker 6: The currency markets is driven by the short trade differential. Right,
Speaker 6: So US rates come down twenty five basis points unless
Speaker 6: the Japan has to raise another twenty five basis spin
Speaker 6: that fifty basis points have a very significant magnifier effect
Speaker 6: on things like the cost of carry and so on,
Speaker 6: And I think that's what's going to drive things in
Speaker 6: the short run. So when I say hawkish ease, I
Speaker 6: mean they're going to ease, but then they're going to
Speaker 6: try to manage expectations for rates, call it two years
Speaker 6: out or five years out, that this is not the
Speaker 6: beginning of ten ease cycle, which is typically what you know,
Speaker 6: what happened, and most of the markets are going to try
Speaker 6: to build in right away.
Speaker 5: If you're in a fixed income space, where do you
Speaker 5: see value here? Do you should I just stick with
Speaker 5: my two year treasury north of four percent?
Speaker 4: Here?
Speaker 5: Should I take some credit risk?
Speaker 8: No?
Speaker 6: I like the two year note. I think, Paul, the
Speaker 6: two year note and T bills. You know, just a
Speaker 6: month ago the auction cleared at close to five percent.
Speaker 6: So I think if you can get a four percent
Speaker 6: yield on two year notes or five five uarter percent
Speaker 6: on T bills without taking any risk, duration risk or
Speaker 6: credit risk. I think that's a great place to be.
Speaker 6: And I'm talking about credit. Yes, it could tighten, but
Speaker 6: I mean it's trading at basically all time tights right now.
Speaker 6: I mean investment great credit and highield credit. You really
Speaker 6: have to bet that there is nothing on the horizon
Speaker 6: that could upset the Apple card and I believe there's
Speaker 6: a lot out there, so you have to be careful
Speaker 6: right now.
Speaker 3: Well, yeah, that was an interesting That's an interesting point
Speaker 3: because when we saw the VIC spike, we didn't see
Speaker 3: the blowout and credit spreads in a way that one
Speaker 3: might have thought. Why do you think that was?
Speaker 6: Yeah, I think the market was waiting, right. So we
Speaker 6: were here early in the morning, you know, and we
Speaker 6: were watching the VIX at sixty five and the futures.
Speaker 6: The VIX future is only getting up to about thirty something,
Speaker 6: and the credit market waits and sees right because the
Speaker 6: credit you can think of it as a long term
Speaker 6: put on the equity market, and the fact that the
Speaker 6: vics came down was a breath of relief or the
Speaker 6: credit markets. President did white out, and CD Express did
Speaker 6: widen out about fifty seven or actually mid sixties from
Speaker 6: fifty to fifty three the week prior. But then as
Speaker 6: the VIX came down, people basically said, Okay, this vigpike
Speaker 6: is not translating into long term equity volatility rise because
Speaker 6: the VIC curve was inverted and so on, and credit
Speaker 6: markets watched that pretty carefully, and basically that was the
Speaker 6: reason for the credit markets to kind of settle down again.
Speaker 6: If you believe like I do, that that was only
Speaker 6: the first round, I do think you have to be
Speaker 6: careful because the next time around, if there's a big
Speaker 6: shock to the system, great spreads could widen then stay wide,
Speaker 6: not even widen more.
Speaker 5: Finear, how do you guys? Do you guys have exposure
Speaker 5: to alternative investments? Is that part of your outlook?
Speaker 6: So we're direct investors in the market, so we don't
Speaker 6: allocate to other funds. Obviously we're creating, you know, all
Speaker 6: the futures and options and so on for our investors.
Speaker 6: But yes, we are looking at all the alternatives as
Speaker 6: signals on what might be happening. So you have to
Speaker 6: be pretty hooked onto what everybody else is doing.
Speaker 3: In today's market, What do you think is going to
Speaker 3: be the trade around the elections? Like, I get the FED,
Speaker 3: we got to get through that, right, But there's got
Speaker 3: to be some political and geopolitical risk hedging that we're
Speaker 3: going to see crop up. How do you think about that,
Speaker 3: particularly when it doesn't really matter who's going to be
Speaker 3: in the White House in that it feels like deficits
Speaker 3: are just gonna be blown out no matter what.
Speaker 6: Yeah, I think the a lot of it is priced
Speaker 6: in right. A couple of months ago when I was
Speaker 6: talking with someone the colleagues at Boomberg, you know, my
Speaker 6: view was that, you know, mister Trump was probably going
Speaker 6: to win, was pretty much baked in, and then you know,
Speaker 6: with everything that's transpired, it's very close raiseds. We know,
Speaker 6: And one of the big shocks from the twenty sixteen
Speaker 6: elections was that a the market got who was going
Speaker 6: to win wrong until the Florida returns were coming in
Speaker 6: and then second conditional on who won, the direction of
Speaker 6: the market got completely wrong. You know, it sold off
Speaker 6: limit down and then limit up. And I think that's
Speaker 6: the possibility here. So the elections could be extremely volatile.
Speaker 6: One is we don't really know who's going to win,
Speaker 6: and secondly, we don't know conditional on who wins what
Speaker 6: the market does. And I think that's the surprise that
Speaker 6: you've got to be prepared for. And given that, we
Speaker 6: believe there's a very good opportunity generally to be long volatility,
Speaker 6: right because volatility vixes back to below sixteen fifteen almost
Speaker 6: it's a great time to bet on the unpriced event
Speaker 6: possibility of something that market is not discounting actually happening.
Speaker 6: You know, one of them could be Kamala Harris wins
Speaker 6: and instead of the market selling, oh, there's a massive
Speaker 6: upside rally in the market because that's really not a
Speaker 6: priced outcome in the market today.
Speaker 3: All right, Vaniir, we really appreciate, thank you so much.
Speaker 3: Really great to get that perspective, very helpful of Viner
Speaker 3: buon Shali. He's joining us, founder and chief investment officer
Speaker 3: of long Tail Alpha. Don't you kind of wish if
Speaker 3: you're a market participant, you could like put in a
Speaker 3: position and then like go away for eight months and
Speaker 3: then come back and see if it made money.
Speaker 4: What's called it?
Speaker 5: You know, you know, again investing in the S and
Speaker 5: P five hundred that's why you see those index ETFs. True,
Speaker 5: we're just getting so much fun flows in there because
Speaker 5: a lot of people are saying, you know, for most
Speaker 5: of folks out there, just buy an ETF that mimix
Speaker 5: the market and just go away. I mean, from a
Speaker 5: cost perspective and a return perspective, probably a good strategy.
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Speaker 2: Say Alexa playing Bloomberg eleven.
Speaker 3: Let's go to Deer So I mentioned it. It's up
Speaker 3: over six percent. It wound up cutting costs, but its
Speaker 3: earning is also kind of less bad than feared. My
Speaker 3: question though, always if you have corn like at four
Speaker 3: dollars a bushel or under which, because conditions are so
Speaker 3: good for corn right now, that's gonna be really tough
Speaker 3: for farmers, and then how do they go buy all
Speaker 3: the fancy equipment And.
Speaker 5: You're right, you're right, I didn't look at corn bushel.
Speaker 3: Yeah, And there was a great piece I forget where
Speaker 3: I read it that talked about how it's actually technology
Speaker 3: and innovation that's allowing American farmers to do so well
Speaker 3: as in have so much crops, but then that hurts
Speaker 3: on the price side. Very cyclical industry there. So Christopher
Speaker 3: Chelino is Bloomberg Intelligence Senior US Machinery analyst, and he
Speaker 3: joins us, now give us your take on deer.
Speaker 9: Earnings, Alex. I mean, the results really weren't as bad
Speaker 9: as many had feared going into the quarter, both from
Speaker 9: a top line perspective, margins, earnings all kind of better
Speaker 9: than what we had to expected in what is a
Speaker 9: pretty challenging environment given the commodity price backdrop. I think
Speaker 9: one thing to take away from the quarter is that,
Speaker 9: you know, pricing really continues to be remarkably resilient. We
Speaker 9: actually saw pricing accelerate here in the quarter in their
Speaker 9: agg businesses, and then really they kept their twenty twenty
Speaker 9: four guidance unchanged for the most part. After all, their
Speaker 9: peers cut during the quarter. So while we're not quite
Speaker 9: out of the woods yet and there's certainly more headwinds
Speaker 9: from a demand perspective moving into twenty twenty five, I
Speaker 9: think this probably just you know, alleviates some of the
Speaker 9: concerns over a more severe down term in the near term.
Speaker 5: You know, growing up in my lawnmowing days, I always
Speaker 5: wanted a deer tractor, but my dad would never go
Speaker 5: for it. So I had to push mow our lot
Speaker 5: which is a little over an acre, I mean something
Speaker 5: that was a lot, and I'm like, for three bucks
Speaker 5: by the way, and I'm like, can you kick in
Speaker 5: for a deer tractor? No, what's the thing now? I
Speaker 5: got the vestmuscooter, so that's one of the is off
Speaker 5: my bucket list, but not the deer tracktro I'm still
Speaker 5: working on.
Speaker 3: I feel like, what would you do with that?
Speaker 5: Exactly? I have met it drive around town. So talk
Speaker 5: to US Chris about what deer's saying about the the
Speaker 5: US farmer, because it just feels like that's a deer
Speaker 5: is a real proxy for the US farmer.
Speaker 9: Yeah, and certainly nothing runs like a deer, Paul. Yeah,
Speaker 9: the backdrop isn't really favorable for the farmer, at least
Speaker 9: for the balance of this year and probably into next year.
Speaker 9: You know, Commodity prices continue to be under significant pressure.
Speaker 9: If you look at corn, soy wheat all down, you know,
Speaker 9: fifteen twenty five percent plus year to date, farming come
Speaker 9: is going to be down north of twenty five percent
Speaker 9: this year. New and used inventories are still quite elevated.
Speaker 9: We don't have these big pricing tailwinds that we had
Speaker 9: over the last three years, so it's certainly a challenging market,
Speaker 9: and input costs are relatively elevated, so farmer incomes are
Speaker 9: going to be under pressure. Really, the focus with Deer
Speaker 9: and really all oeams now is really to try to
Speaker 9: kind of right size the inventory in the channel. Inventories
Speaker 9: are too high, so there's gonna be a lot of
Speaker 9: focus in on underproducing retail demand for the balance of
Speaker 9: this year with the hopes of producing in line with
Speaker 9: retail demand and then you know where the retail environment
Speaker 9: shakes out for next year. It's still a little bit
Speaker 9: up in the air, but certainly from a commodity price
Speaker 9: perspective and a farm fundamental perspective, certainly no signs of
Speaker 9: a bottom yet.
Speaker 3: Well also I should point out too, and we say
Speaker 3: like less bad than feared, like North American sales we're
Speaker 3: still down about or lower by fifteen percent, and revenue
Speaker 3: in South America down by fifteen to twenty percent. Do
Speaker 3: we feel like this is definitely the trough though.
Speaker 9: Yeah, I think it's it's a story of the nicest
Speaker 9: house on a bad block, right. I mean, it's still
Speaker 9: a pretty difficult environment and it's still pretty fluid. I
Speaker 9: don't have a ton of sense if we have really
Speaker 9: good visibility on a trough yet. I think that's what
Speaker 9: investors are, you know, starting to co lesson around twenty
Speaker 9: twenty five will be a trough earnings year, but it's
Speaker 9: still kind of a little too early, I think to
Speaker 9: draw any conclusions. I think we'll have a better idea
Speaker 9: probably at the end of next quarter and how we
Speaker 9: exit the year in terms of an inventory perspective, And
Speaker 9: if they're able to kind of get through those inventory
Speaker 9: cuts and we're kind of more aligned with the demand environment,
Speaker 9: then I think it's even possible to see earnings growth
Speaker 9: and margin expansion even if we're looking at a lower
Speaker 9: or slightly lower retail environment.
Speaker 5: Chris we heard from I guess Home Depot says some
Speaker 5: of their customers were deferring big projects waiting for interest
Speaker 5: rates to decline, and as Deer said, anything about that, like,
Speaker 5: if I'm a farmer, do I say, man I'm need
Speaker 5: the tractor this year. Maybe I'll wait next year when
Speaker 5: maybe my financing rate will be a little bit lower.
Speaker 9: You know, the large ag, the large professional farmer a
Speaker 9: little less sensitive to the interest rate narrative. It certainly
Speaker 9: has more of an impact on their molag and turf
Speaker 9: business and utility customers. They are much more interest rates sensitive.
Speaker 9: But that market has now been weak for multiple years,
Speaker 9: so I think we're at a trough or coming into
Speaker 9: a trough on that market. And then I think, you know,
Speaker 9: some new information that we got this quarter is that
Speaker 9: particularly on the construction side of the business. Now they
Speaker 9: took down some of their numbers for the year, and
Speaker 9: actually construction was one of the disappointments in the quarter
Speaker 9: as some of the rental fleets and construction equipment customers
Speaker 9: slowed some of their order velocity and they pulled back
Speaker 9: on some of their capital spending. So and the higher
Speaker 9: rates were a contributing factor to that. So I think
Speaker 9: that's where you're seeing more of the impact less so
Speaker 9: on the large professional farmer.
Speaker 5: You know, I hired out of Global data at Bloomberg
Speaker 5: Intelligence twelve thirteen years ago. I didn't know anything. Now
Speaker 5: he's a rock Star, and he talks to people all
Speaker 5: over the globe, talks to these companies. He knows what
Speaker 5: he's talking about. Christ Gielino, one of the good ones
Speaker 5: in Bloomerg Intelligence, covered some of those industrials off along
Speaker 5: with Karen Ubelheart talking about deer some better than expected earnings.
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Speaker 5: Dalex Steel, Paul Sweeney live here in our Bloomberg Interactive
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Speaker 5: you find is here. You know, thinking about where we
Speaker 5: were a week ago Monday, the Vicks over sixty, big
Speaker 5: sell off in the markets, it's almost like, please look
Speaker 5: at the markets today. It's almost like it never happened.
Speaker 5: Our earnings. That good is economic data? That good. Let's
Speaker 5: chicken with a professional. David Kodlak, Founder, Chief executive Officer
Speaker 5: and chief investment strategist. He kind of does everything there
Speaker 5: at Mainstay Capital. He joins us from Troy, Michigan via zoom. David,
Speaker 5: what do you make of a week ago Friday, what
Speaker 5: we saw, particularly in the morning, to what we've seen
Speaker 5: since then?
Speaker 7: Right? Yeah, so we you know, we had that growth
Speaker 7: scare because of an ism and poor ism and a
Speaker 7: non farm payrolls number two weeks ago, and that was
Speaker 7: aggravated by.
Speaker 4: The yen carry trade issue. With a week ago.
Speaker 7: With job as claims, we got a little bit of
Speaker 7: help there, and of course the data today with retail sales,
Speaker 7: jobs claims a little better than expected. But I think
Speaker 7: look at the data yesterday or let's say Tuesday through today.
Speaker 7: Tuesday we had PPI coming in well below expectations. Yesterday
Speaker 7: we had CPI coming in slightly below expectations, Headline inflation
Speaker 7: is below three percent for the first time in a
Speaker 7: long while. And now today we have retail sales kind
Speaker 7: of blowout number when we're expecting four tenths and get
Speaker 7: one percent, which says the consumer is still strong. You know,
Speaker 7: if I'm going to loosely borrow a Mark Twain quote,
Speaker 7: reports of the consumer's demise have been greatly exaggerated. We
Speaker 7: need the consumer to stay strong. It's two thirds of
Speaker 7: our economy. They were certainly strong last month.
Speaker 4: So look what we have. We have growth with lowering inflation.
Speaker 7: I don't want to overstate it that it's a Goldilock's
Speaker 7: economy because we do have a real fear of recession.
Speaker 4: We need the FED to get started on.
Speaker 7: Their easing cycle and I think it'll be twenty five
Speaker 7: basis points at not fifty in September that many are predicting.
Speaker 7: But they need to get going and they have the
Speaker 7: room to do it. We're on a good glide path
Speaker 7: on inflation. And you know, when we have growth with
Speaker 7: inflation inflation slowing.
Speaker 4: That's a pretty good scenario for the economy.
Speaker 3: Why are rates up then right now? In that scenario
Speaker 3: just lined up?
Speaker 7: Yeah, Well, rates are up today because the retail sales
Speaker 7: number came in so strong, right, more than double expectations,
Speaker 7: and you know kind of you know the growth scare
Speaker 7: of two weeks ago.
Speaker 4: It's it's really been a significant change, you.
Speaker 7: Know, the Harrison that Paul was talking about from two
Speaker 7: weeks ago to so alex we've really seen you know,
Speaker 7: a terrific number that tells us the consumer is still
Speaker 7: out there buying, and that's all important, right for the
Speaker 7: US economy, The consumer is all important. It's two thirds
Speaker 7: of consumers, two thirds of our economy, and that was
Speaker 7: a very reassuring data point. But it means the economy
Speaker 7: is a little bit stronger than we thought. Bond yields
Speaker 7: go up five or seven or nine basis points.
Speaker 5: So what type of stocks, what type of sectors work
Speaker 5: in an environment David, where you know the economy is
Speaker 5: hanging in there, maybe slow, but hanging in there, but
Speaker 5: we now have the prospect for lower rates. What kind
Speaker 5: of sectors screen well for you guys.
Speaker 7: Yeah, So, first of all, you know, we we liked
Speaker 7: the secular growth stories like megacap tech for a long time,
Speaker 7: and we still believe in the AI plays, but now
Speaker 7: we can look at cyclical plays. Take financials you know
Speaker 7: that have struggled so much.
Speaker 4: Over the past years.
Speaker 7: Now, you know, we actually had the yield curve uninvert
Speaker 7: briefly last week. We're but we're certainly seeing a steepening
Speaker 7: of the curve, and as the FED starts to cut rates,
Speaker 7: we'll see that steepening of the curve, which will be
Speaker 7: good for financial is because nim nedis interest margin improof,
Speaker 7: so we like financials or an extending bond duration. We
Speaker 7: had for a over a year and probably fifteen months
Speaker 7: had been an ultra short term bonds because we just
Speaker 7: wanted to capture the yield and we didn't want the.
Speaker 4: Interestraight rest and that was a good play.
Speaker 7: But now it's time to be extending duration because we
Speaker 7: know the FED is going to be cutting. Forecasts are
Speaker 7: still about one hundred basis points by the end of
Speaker 7: the year. That's you know, with that easing in place,
Speaker 7: that means we want to lock in rates and extended duration,
Speaker 7: and we also are broadening. It gives us an opportunity
Speaker 7: to broaden portfolios into small caps, value cyclicals, mid caps,
Speaker 7: you know, areas that we had been mostly vuoid in
Speaker 7: favor of large cap and large cab megatach.
Speaker 3: But what about the idea that with small caps the
Speaker 3: pe ratio, so the P part wound up rerating enough
Speaker 3: that okay, maybe you want to buy it, but maybe
Speaker 3: that thesis is out the door of it because small
Speaker 3: caps did have a run before the growth scare, but
Speaker 3: that the E part isn't really holding up. That's what
Speaker 3: I hear a lot about the small caps and these airs.
Speaker 4: Yeah, forty two percent of the small cap stocks in
Speaker 4: the Russell two thousand aren't profitable. You know, it's it's
Speaker 4: a struggle.
Speaker 7: You know, if a small cap stock does well, it
Speaker 7: grows into the MidCap region, it leaves the Russell two thousand.
Speaker 7: So what Here's what needs to happen for small caps,
Speaker 7: is we really ne what's coming. The rate cuts that
Speaker 7: are coming avoid a recession. And the PE multiple of
Speaker 7: small caps is so attractive compared to large caps at
Speaker 7: this point. You know, we were hitting earlier in the
Speaker 7: year historical highs multi year delta of PE of large
Speaker 7: caps versus versus small caps. So the attractiveness is there,
Speaker 7: but we need the right kind of environment data like today.
Speaker 7: We've seen what the Russell two thousand did today in
Speaker 7: early training, up over two percent. And if we get
Speaker 7: the rate cuts, the economy can can be slowing a bit.
Speaker 4: But no recession. That's a that's a good environment for
Speaker 4: small caps, for value, for cyclicals.
Speaker 5: Do you think the FED is going to go twenty
Speaker 5: five or fifty basis points? And do you even care?
Speaker 7: The first of all, that's you know, that's a good way,
Speaker 7: that's a good way to ask that question do we
Speaker 7: even care? The most important thing is is they get started.
Speaker 7: The first cut means they switched from a neutral stance
Speaker 7: to an easing bias, right from neutral to easing. So
Speaker 7: the first cut is symbolic in that regard if we
Speaker 7: I think.
Speaker 4: That they will go twenty five basis points, because.
Speaker 7: If they go fifty, and I know what the case
Speaker 7: is for that, for the case that others are making.
Speaker 4: But then it raises a question, are they are they
Speaker 4: doing fifty because they're behind. I mean, they've still got
Speaker 4: November de Son, They've still.
Speaker 7: Got more meetings to achieve seventy five hundred basis points
Speaker 7: by the end of the year, maybe even do a
Speaker 7: half cut later. I just wouldn't start there again for
Speaker 7: symbolic reason. So I think they do twenty five. But
Speaker 7: you know the part about do we even care? The
Speaker 7: main point is is they get started. Let's get let's
Speaker 7: get going, fad, Let's get the first cut in there
Speaker 7: and established where you have changed your bias to an
Speaker 7: easing cycle.
Speaker 3: But to that point, you know something that I feel
Speaker 3: like is becoming more of the conversation. I think it
Speaker 3: was Bostic that mentioned this when he was speaking to
Speaker 3: the ft is that you had a delayed reaction and
Speaker 3: transmission mechanism of policy on the way up with rate,
Speaker 3: So why not expect that then on the way down,
Speaker 3: which implies that we do need to see sort of
Speaker 3: a little faster, more aggressive cut so it filters through
Speaker 3: the economy a little faster. What do you think about
Speaker 3: that part?
Speaker 4: I think that's actually it's absolutely right.
Speaker 7: I mean, when we talk about FED policy and the
Speaker 7: mistakes they've made, they made the mistake of twenty twenty
Speaker 7: one of staying easy for too long, continuing to buy
Speaker 7: mortgage backed securities, making mortgages so attractive people saw their
Speaker 7: house price one and a half times are double in
Speaker 7: a couple of years, and they created they helped create
Speaker 7: the problem of inflation with the first policy here by
Speaker 7: staying easy for too long. And they probably are going
Speaker 7: and when we look back, they probably will have stayed
Speaker 7: tight for too long. Five and a quarter is a
Speaker 7: restrictive policy. See inflation is on a glide path to
Speaker 7: their target. It's time to get on with cutting rates.
Speaker 7: Probably should have.
Speaker 4: Cut twenty five in hindsight, you know.
Speaker 7: They probably should have cut twenty five in July and
Speaker 7: then they'd be ready for another twenty five in September.
Speaker 7: And that's what might beg the question they need to
Speaker 7: do fifty to get caught up. But yeah, our concern
Speaker 7: is they made the same mistake on easing as they
Speaker 7: did as they did on or easing now as they
Speaker 7: did on. They were easy for too long, went way
Speaker 7: up to it, you know, drove it up to illustracted policy,
Speaker 7: and now they got to get on with it, all right.
Speaker 5: David, thank you so much for joining us. Always appreciate
Speaker 5: getting your views. David Coodley's a founder of mainstay at
Speaker 5: Capital Management, joining us from Tory, Michigan via zoom.
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