WEBVTT - Boeing Latest, Lennar Earnings 0:00:02.920 --> 0:00:12.600 Bloomberg Audio Studios, podcasts, radio news. This is Bloomberg Intelligence 0:00:12.640 --> 0:00:14.400 with Alex Steinhl and Paul'sweenye. 0:00:14.520 --> 0:00:17.720 The real app performance has been in US corporate high yield. 0:00:17.880 --> 0:00:20.239 Are the companies lean enough? Have they trimmed all the fats? 0:00:20.320 --> 0:00:23.880 The semiconductor business is a really cyclical business. 0:00:23.600 --> 0:00:27.200 Breaking market headlines and corporate news from across the globe. 0:00:27.240 --> 0:00:29.880 Do investors like the M and A that we've seen? 0:00:30.080 --> 0:00:31.000 These are two. 0:00:31.040 --> 0:00:33.159 Big time blue chip companies. 0:00:33.320 --> 0:00:36.920 The window between the peak and cut changing super fast. 0:00:37.080 --> 0:00:41.680 Bloomberg Intelligence with Alex Steinhl and Paul'sweenye on Bloomberg Radio. 0:00:43.080 --> 0:00:46.040 Today's Bloomberg Intelligence Show, we dig inside the big business 0:00:46.040 --> 0:00:48.080 stories impacting Wall Street and the global markets. 0:00:48.159 --> 0:00:50.040 Each and every week we provide in depth research and 0:00:50.120 --> 0:00:51.919 data on some of the two thousand companies and one 0:00:51.960 --> 0:00:54.480 hundred and thirty industries our analysts cover worldwide. 0:00:54.600 --> 0:00:56.800 Today we'll look at how Japan is dealing with rising 0:00:56.920 --> 0:00:59.680 cases of a flesh eating bacteria X plus. 0:00:59.520 --> 0:01:01.840 World, Let's go how electric vehicle markets around the world 0:01:01.840 --> 0:01:04.320 are not all traveling in the same direction or at 0:01:04.319 --> 0:01:05.800 the same speed in twenty twenty four. 0:01:06.120 --> 0:01:08.840 But first we dive into the airline industry and Boeing. 0:01:09.040 --> 0:01:12.160 A Boeing quality inspector recently alleged that the plane maker 0:01:12.640 --> 0:01:15.759 mishandled and lost track of hundreds of faulty parts, some 0:01:15.800 --> 0:01:17.760 of which he said may have been installed on new 0:01:17.840 --> 0:01:19.360 seven three seven maxplanes. 0:01:19.560 --> 0:01:22.039 The claims were detailed in a complaint by Boeing inspector 0:01:22.080 --> 0:01:25.600 Sam Mohawk with the Occupational Safety and Health Administration, and 0:01:25.640 --> 0:01:28.600 they deepen the pressure that Boeing already faces from Washington. 0:01:28.800 --> 0:01:32.360 The company's under investigation by multiple federal agencies, including the 0:01:32.480 --> 0:01:33.200 Justice Department. 0:01:33.440 --> 0:01:35.240 For more on to all Things Boeing, we were joined 0:01:35.280 --> 0:01:39.399 by George Ferguson Bloomberg Intelligence, senior Aerospace, Defense and Airlines analysts. 0:01:39.440 --> 0:01:41.440 We first asked George about some of the challenges that 0:01:41.480 --> 0:01:43.880 Boeing is now facing with its outsourcing strategies. 0:01:44.280 --> 0:01:46.959 So in that same report, right, they talk about inspections 0:01:46.959 --> 0:01:50.400 at suppliers, they talk about monitoring quality suppliers better. 0:01:51.000 --> 0:01:51.800 Yeah, I just think. 0:01:51.640 --> 0:01:54.640 This is a it's a wholly different industry, right. I 0:01:54.680 --> 0:01:56.880 think there's a bunch of people that have come to 0:01:56.960 --> 0:02:03.760 the aerospace world from auto backgrounds and other mass production backgrounds, right, 0:02:03.800 --> 0:02:08.079 and in those worlds, safety isn't as important. Volume is 0:02:08.120 --> 0:02:11.640 a lot higher. You can get multiple suppliers to provide 0:02:11.680 --> 0:02:14.840 products to your production line, you can work cost on 0:02:14.919 --> 0:02:18.360 those suppliers, and I think that whole game plan is 0:02:18.440 --> 0:02:22.320 really really difficult to do in aviation. And I think 0:02:22.720 --> 0:02:25.000 this is part of what we're seeing, right. I think 0:02:25.639 --> 0:02:29.680 you can outsource, but I think if you outsource, you know, 0:02:29.960 --> 0:02:32.760 you know, to your supplier base, I think it's still 0:02:32.800 --> 0:02:35.959 got to be you know, a pretty strong relationship with them, 0:02:36.560 --> 0:02:40.320 not a combative relationship where it's always about price, because 0:02:40.360 --> 0:02:43.040 it really matters the quality you get to your line, right, 0:02:43.240 --> 0:02:46.320 safety is dependent upon it. And so I think what 0:02:46.360 --> 0:02:49.079 we're finding out as this sort of you know, whole 0:02:49.160 --> 0:02:54.480 Boeing saga unravels, is outsourcing and banging up your suppliers 0:02:54.480 --> 0:02:57.080 for price just isn't a winning strategy in aviation. 0:02:57.680 --> 0:02:59.839 Have they course corrected enough or can? 0:03:00.639 --> 0:03:00.839 Look? 0:03:00.880 --> 0:03:03.560 I think they can. Everything can be fixed. I think 0:03:03.560 --> 0:03:05.959 if you look at their competitors across the pond, Airbus, 0:03:06.080 --> 0:03:08.160 they're not having these problems. I think Airbus has been 0:03:08.200 --> 0:03:11.520 less combative with some of their suppliers. They're in the 0:03:11.560 --> 0:03:14.880 middle of this correction. We know they want to buy 0:03:14.960 --> 0:03:18.240 Spirit Aerosystems. We're still waiting to hear news on that. 0:03:18.280 --> 0:03:21.000 There's still, you know, the challenge of getting some of 0:03:21.000 --> 0:03:25.000 the other companies that Spirit supplies, to name the Airbus 0:03:25.000 --> 0:03:29.399 probably out of the portfolio so they can recover. It's 0:03:29.440 --> 0:03:32.240 gonna take some time and it's gonna take a lot 0:03:32.240 --> 0:03:33.360 of work with their suppliers. 0:03:34.120 --> 0:03:38.440 So, George, if I think about, you know, rethinking my 0:03:38.480 --> 0:03:42.200 strategy with my suppliers and maybe focusing less on price 0:03:42.240 --> 0:03:44.800 competitives maybe a little bit more on quality, does that 0:03:44.800 --> 0:03:48.920 imply that Boeing's profit margins will be under pressure going forward? 0:03:49.560 --> 0:03:51.840 I think for sure, right, I think you're you're not 0:03:51.920 --> 0:03:54.960 going to receive a return to the Boeing margins you 0:03:55.120 --> 0:03:59.640 saw at the end of last decade. I'm not gonna 0:03:59.640 --> 0:04:02.920 say in time, perhaps they could get back to that. 0:04:03.320 --> 0:04:06.000 It's going to take a bunch of work here near 0:04:06.200 --> 0:04:09.880 term to improve the quality, and that's going to cost money. 0:04:10.160 --> 0:04:12.160 Plus we already know that some of the business they 0:04:12.240 --> 0:04:14.960 put in the books, right, they had some challenges delivering 0:04:15.000 --> 0:04:17.520 into China. That was kind of the one two whammy 0:04:17.640 --> 0:04:20.599 after they had the grounding of the Max and the crashes. 0:04:21.600 --> 0:04:23.880 We know they probably sold a bunch of airplanes for 0:04:24.240 --> 0:04:28.440 some pretty good prices to really core customers like United, 0:04:28.560 --> 0:04:31.440 like Southwest. So I think that I think both, you know, 0:04:31.520 --> 0:04:34.839 both on the cost side again, given this correction to 0:04:35.120 --> 0:04:39.080 improve the supply base, improve production, get capacity rolling again, 0:04:39.839 --> 0:04:41.919 as well as some of the pricing they gave away 0:04:41.960 --> 0:04:46.200 on backfill for orders means you're not looking at a 0:04:46.480 --> 0:04:49.120 Boeing that's going to get those margins fore you through 0:04:49.160 --> 0:04:49.760 this decade. 0:04:49.760 --> 0:04:52.280 I think if I look at Boeing stock, then I 0:04:52.320 --> 0:04:55.880 mean it's down from December. Does that accurately reflect then 0:04:56.360 --> 0:04:59.800 this tighter profit margin world to sort of revamp and 0:04:59.839 --> 0:05:01.280 the course correct and that they have. 0:05:01.240 --> 0:05:04.480 To do so, you know, I think when you look 0:05:04.520 --> 0:05:08.719 at their valuations, you know, their historical valuations, One, they're 0:05:08.760 --> 0:05:11.400 really high right now, right because earnings are so low, 0:05:12.120 --> 0:05:14.279 you know. So I think that there is a little 0:05:14.279 --> 0:05:17.680 bit of investor look through at this point, you know, 0:05:17.760 --> 0:05:21.400 on the current problems they have. But whether or not 0:05:21.480 --> 0:05:24.640 they're properly positioned for the out years right now, I 0:05:24.680 --> 0:05:28.040 think it's all a function of if they can quickly 0:05:28.160 --> 0:05:31.800 improve the build rate so they can improve economies of 0:05:31.839 --> 0:05:34.719 scale and start to get more profitability back into this 0:05:34.800 --> 0:05:37.320 business and that you know, really remains to be seen. 0:05:37.640 --> 0:05:40.560 George, you mentioned China. Where is Boeing in terms of 0:05:40.560 --> 0:05:42.840 getting the seven three seven macs in the air and 0:05:42.920 --> 0:05:45.720 China kind of how's that business looking in terms of 0:05:46.040 --> 0:05:47.080 sales and deliveries. 0:05:47.720 --> 0:05:51.280 So their deliveries going into China, right and uh, it 0:05:51.320 --> 0:05:55.880 looks to us to largely be deliveries that were you know, built, 0:05:56.640 --> 0:05:59.599 you know, when the seven three seven was grounded, and 0:05:59.600 --> 0:06:01.880 they're started to get some of those back into the country. 0:06:02.240 --> 0:06:04.320 But China's also has this problem now with. 0:06:04.279 --> 0:06:09.359 The flight recorder that's been authorized by other jurisdictions, including 0:06:09.400 --> 0:06:12.840 the US. So I mean it feels to me like 0:06:13.839 --> 0:06:17.799 China's allowing deliveries, but you know, they're still not maybe 0:06:17.920 --> 0:06:20.719 keen on taking a lot of deliveries from Boeing. I 0:06:20.760 --> 0:06:23.040 haven't seen a bunch of orders come in from China, 0:06:23.400 --> 0:06:25.680 you know, for Boeing, And so I would say that 0:06:25.760 --> 0:06:30.919 relationship still, while it's maybe thawing a bit, is nowhere 0:06:30.920 --> 0:06:33.839 near where it was in the last decade. And they 0:06:33.920 --> 0:06:34.760 have their problems too. 0:06:34.800 --> 0:06:35.080 Right now. 0:06:35.120 --> 0:06:38.080 I think they don't need as many airplanes, their economy 0:06:38.160 --> 0:06:41.160 isn't growing as fast. Air travel isn't growing as fast. 0:06:41.240 --> 0:06:44.560 But I still think that relationship is not in the 0:06:44.640 --> 0:06:47.039 right place where it should be, where you'd like it 0:06:47.080 --> 0:06:48.920 to be. I think for Boeing before I let. 0:06:48.760 --> 0:06:52.039 You go, any word yet on the replacement for Dave Calhoun. Like, 0:06:52.040 --> 0:06:52.640 how's that going? 0:06:53.680 --> 0:06:54.200 He laughed? 0:06:54.600 --> 0:06:55.400 Answer is laughing. 0:06:55.600 --> 0:07:00.000 Yes, what I hear from news reports is picking up still. 0:07:00.279 --> 0:07:03.599 But gee, I mean, I don't know, it's been a while. 0:07:04.000 --> 0:07:07.960 There's a lot of conjecture. It's a hard job. There's 0:07:07.960 --> 0:07:09.720 probably a lot of people that just aren't willing to 0:07:09.760 --> 0:07:12.560 take it. I don't know, you know, they got to 0:07:12.600 --> 0:07:14.080 the end of the year, and so maybe they're going 0:07:14.120 --> 0:07:15.160 to use it all. I don't know. 0:07:15.920 --> 0:07:18.280 I mean, and anyone but Larry Culp that you keep 0:07:18.320 --> 0:07:19.440 hearing about, that's for real. 0:07:20.160 --> 0:07:22.160 So I don't really track the people that's you know, 0:07:22.200 --> 0:07:24.960 that's kind of hard for me. I do know, like 0:07:25.000 --> 0:07:29.160 it said, it's got to be a rock star manufacturing, 0:07:29.760 --> 0:07:32.240 you know, sort of CEO. I don't know that there's 0:07:32.280 --> 0:07:34.640 a lot of them left in America. I think we 0:07:34.720 --> 0:07:37.600 do a lot of outsourcing now, so maybe that makes 0:07:37.600 --> 0:07:38.720 it a taller order too. 0:07:38.840 --> 0:07:39.240 I don't know. 0:07:39.440 --> 0:07:42.760 Our thanks to George Ferguson, Bloomberg Intelligence Senior Aerospace, Defense 0:07:42.760 --> 0:07:43.720 and Airlines analyst. 0:07:43.920 --> 0:07:46.840 We move next to big tech and alphabet's Google. Google 0:07:46.880 --> 0:07:49.960 has faced immense pressure to keep pacing artificial intelligence with 0:07:50.000 --> 0:07:52.480 Open AI and other companies, and in April of twenty 0:07:52.480 --> 0:07:54.800 twenty three, the tech giant announced it would combine its 0:07:54.800 --> 0:07:58.400 two elite AI teams, Google Brain and deep Mind. 0:07:58.560 --> 0:08:01.360 Google would form what it described as an AI super 0:08:01.520 --> 0:08:04.640 unit called Google deep Mind. This is the subject of 0:08:04.680 --> 0:08:08.080 a Bloomberg BusinessWeek story this week entitled Google deep Mind 0:08:08.120 --> 0:08:11.000 shifts from research lab to AI product factory. 0:08:11.080 --> 0:08:12.680 For more. We were joined this week by one of 0:08:12.680 --> 0:08:15.840 the stories authors, Bloomberg Tech reporter Mark Bergan. We first 0:08:15.880 --> 0:08:17.880 asked Mark about Google's AI strategy. 0:08:18.120 --> 0:08:19.560 I think, you know, the good way to put their 0:08:19.640 --> 0:08:23.200 their strategy in some ways is they're trying to longer 0:08:23.200 --> 0:08:24.680 be in their back foot. But I think that with 0:08:24.760 --> 0:08:26.880 the past two years and that our story looks at 0:08:26.920 --> 0:08:30.360 how Google and deep Mind really set the infrastructure and 0:08:30.360 --> 0:08:32.680 then the base layer for this sort of AI boom 0:08:32.720 --> 0:08:35.160 that we've had, and then Chatgebt kind of took all 0:08:35.200 --> 0:08:38.400 the glory in some ways, and so in their playing 0:08:38.480 --> 0:08:41.520 ketchup in you'd say, not necessarily on the technical side, 0:08:42.000 --> 0:08:44.920 but there's certainly now you know, chat, scheebt and all 0:08:45.040 --> 0:08:49.000 iterations from the different companies building language models like anthropic 0:08:49.080 --> 0:08:52.440 and cohere, they're all sort of threatening Google Search in 0:08:52.480 --> 0:08:55.280 a way that really hasn't happened in almost two decades, 0:08:55.679 --> 0:08:58.800 and so their strategy is I would say defensive at 0:08:58.840 --> 0:08:59.240 this point. 0:08:59.640 --> 0:09:02.040 How does does it get on the offense? What does 0:09:02.080 --> 0:09:03.840 it need to do to sort of change that narrative? 0:09:04.080 --> 0:09:05.600 Yeah, I think you know the story. We looked at 0:09:05.720 --> 0:09:08.080 a lot about this mergers that they that Google put 0:09:08.160 --> 0:09:10.040 in place a year ago so they've had out here 0:09:10.040 --> 0:09:12.959 in London is Deep Mind, which is widely consider like 0:09:13.000 --> 0:09:15.839 the world's leading AI lab and has for the past 0:09:15.880 --> 0:09:19.960 decade effectively been the best funded university running in the world. 0:09:20.200 --> 0:09:22.839 They basically been a research lab. They put out some 0:09:23.440 --> 0:09:28.040 great breakthroughs like alpha go alpha fold around protein folding, 0:09:28.200 --> 0:09:31.240 but they've not been deeply integrated and connected with kind 0:09:31.240 --> 0:09:34.720 of Google's commercial and profit center, Google Brain, which was 0:09:34.760 --> 0:09:37.559 the competing AI lab or that they also had in 0:09:37.880 --> 0:09:40.160 California that was a little bit more tied to a 0:09:40.200 --> 0:09:42.880 lot of the popular Google services, and they've been all 0:09:42.960 --> 0:09:46.240 merged that for the past year under demosacibus here who 0:09:46.280 --> 0:09:48.920 runs all of Google AI. It's had kind of a 0:09:48.960 --> 0:09:51.560 bumby road so far, but I think their plan is 0:09:51.600 --> 0:09:55.520 to continue to ship things like Gemini their big foundational model, 0:09:55.800 --> 0:09:58.840 tweak that and start kind of integrating a lot of 0:09:58.840 --> 0:10:01.280 this research directly into commercial services. 0:10:01.520 --> 0:10:04.800 Mark what does Google say about that chat GPT and 0:10:05.320 --> 0:10:10.040 just as a fundamental threat to the core Google search business? 0:10:10.040 --> 0:10:11.000 How do they respond to that? 0:10:11.280 --> 0:10:14.120 Yeah, I mean, you know, Google publicly is great about 0:10:14.240 --> 0:10:17.600 never talking about their rivals by name. Anyways, they say nothing, 0:10:17.600 --> 0:10:19.199 And I think that something they've talked about for a 0:10:19.240 --> 0:10:21.520 long time is that sort of their their token phrase 0:10:21.520 --> 0:10:23.760 that soon they're but cha uses is that the search 0:10:23.880 --> 0:10:27.000 is the last kind of biggest moonshot for Google. I 0:10:27.040 --> 0:10:28.840 think they are thinking, and you know, they're thinking a 0:10:28.840 --> 0:10:32.319 lot about what that search interface looks like. You know, 0:10:32.360 --> 0:10:35.120 how they're going to adapt to if consumers move to 0:10:35.240 --> 0:10:38.200 things like Chat, schipt and Gemini. What does that mean 0:10:38.360 --> 0:10:42.160 for Google Search ads business, which is still the line's 0:10:42.160 --> 0:10:45.840 share of its revenue. They've had some some clear mishaps. 0:10:45.920 --> 0:10:49.120 I've looked pretty ugly snaffoos, and since the launch of 0:10:49.679 --> 0:10:51.319 Gemini or this year, right, like there was that kind 0:10:51.320 --> 0:10:54.000 of famous incidents where they were some of the responses 0:10:54.040 --> 0:10:58.000 were encouraging people to put glue on pizza, right, there 0:10:58.000 --> 0:11:00.360 were these They've described this as sort of like this 0:11:00.600 --> 0:11:03.840 is kind of early stage in this technology and some 0:11:03.960 --> 0:11:06.320 stumbles that they've had, but you know, they are the 0:11:06.360 --> 0:11:09.840 world's leaders in search and this is something where you 0:11:09.880 --> 0:11:11.559 know they have a lot of deep responsibility to get 0:11:11.559 --> 0:11:14.880 this right, not just for their business but for people's 0:11:14.920 --> 0:11:16.320 trust in using Google. 0:11:16.400 --> 0:11:18.200 Well that's what's so difficult, right, It's like all the 0:11:18.240 --> 0:11:21.200 technology is changing so fast, but you still need to 0:11:21.280 --> 0:11:23.240 like do it. So it's it's you're like we're watching 0:11:23.280 --> 0:11:25.440 it in real time. Paul and I were just talking 0:11:25.440 --> 0:11:27.679 about a Washington Post article and then talked about how 0:11:28.040 --> 0:11:31.559 all the AI models cannot answer who won the presidential 0:11:31.559 --> 0:11:34.400 election in the US in twenty twenty. And I'm just wondering, 0:11:34.480 --> 0:11:38.920 like how these advanced technologies solve for problems that they're 0:11:39.000 --> 0:11:41.520 using these large language models, which is basically like, you know, 0:11:41.679 --> 0:11:44.360 me and Paul talking are regular people talking, does that 0:11:44.400 --> 0:11:45.920 also mess them up? 0:11:46.280 --> 0:11:48.400 It reminds me a little bit of it's a slightly 0:11:48.400 --> 0:11:51.240 different technology obviously, but you know they're In twenty sixteen, 0:11:51.280 --> 0:11:54.720 Google had this big mess where if there was a 0:11:54.720 --> 0:11:56.880 popular or there's a blog or this kind of fringe 0:11:56.920 --> 0:11:59.480 blog that said that if I remember this correctly, it's 0:11:59.480 --> 0:12:01.760 been a long time, it was that Hiller Clinton won 0:12:01.800 --> 0:12:03.640 the election in twenty sixteen, right, and that was a 0:12:03.760 --> 0:12:06.559 top of for briefly and momentarily top of Google News results. 0:12:06.559 --> 0:12:09.319 And they've dealt with this sort of problem around misinformation, 0:12:09.840 --> 0:12:13.319 around totally not credible sources being at the top of 0:12:13.640 --> 0:12:16.400 Google Search. You're seeing problems that are now dealing with. 0:12:16.400 --> 0:12:20.280 I saw a story about Google images and like consensual porn. 0:12:20.280 --> 0:12:22.600 I mean, these problems I think are being multiplied because 0:12:22.640 --> 0:12:25.520 with these tools of that generative AI do, which Google 0:12:25.559 --> 0:12:27.760 talks a lot of as being revolutionary, it also just 0:12:27.880 --> 0:12:31.440 makes content production so much easier. And so there's this 0:12:31.559 --> 0:12:35.160 multitude of content now and Google has been this sort 0:12:35.160 --> 0:12:38.760 of their primary services to organize this, and that has 0:12:38.800 --> 0:12:42.600 a lot of messy problems, especially what OpenAI has kind 0:12:42.600 --> 0:12:44.800 of forced and Microsoft as forced Google is to move 0:12:44.840 --> 0:12:47.040 a lot faster than they have been in years past, 0:12:47.040 --> 0:12:48.680 and we've seen some clear stumbles from that. 0:12:49.000 --> 0:12:51.679 Our thanks to Mark Bergan, Bloomberg Technology Reporter. 0:12:51.920 --> 0:12:53.880 Coming up, We're going to break down my recent guidance 0:12:53.880 --> 0:12:56.199 from the home old Leonard disappointed investors. 0:12:56.400 --> 0:12:59.480 You're listening to Bloomberg Intelligence on Bloomberg Radio, providing in 0:12:59.559 --> 0:13:02.640 depth and data on two thousand companies one hundred and 0:13:02.640 --> 0:13:05.640 thirty industries. You can access Bloomberg Intelligence be a B I, 0:13:05.760 --> 0:13:06.600 go on the terminal. 0:13:06.720 --> 0:13:09.520 I'm Paul Sweeney and amlex Deal and this is Bloomberg. 0:13:14.440 --> 0:13:18.319 You're listening to the Bloomberg Intelligence podcast. Catch us live 0:13:18.400 --> 0:13:21.480 weekdays at ten am Eastern on Apocarplay and and broud 0:13:21.480 --> 0:13:24.600 Auto with the Bloomberg Business App. Listen on demand wherever 0:13:24.640 --> 0:13:29.000 you get your podcasts, or watch us live on YouTube. 0:13:29.640 --> 0:13:31.960 We move next to the home builder Lenar. This week. 0:13:32.000 --> 0:13:35.000 The company reported better than expected orders in the second quarter, 0:13:35.080 --> 0:13:37.600 but it's forecast for deals in the current quarter missed 0:13:37.600 --> 0:13:39.880 analyst expectations, and Lenar shares fell. 0:13:39.920 --> 0:13:43.120 After the report, Lenar said that affordability continued to be 0:13:43.160 --> 0:13:47.439 tested by interest rate movements and simultaneously challenged consumer sentiment. 0:13:47.640 --> 0:13:49.160 For more on this and the latest in the home 0:13:49.200 --> 0:13:52.040 building space, we were joined by Drew reading Bloomberg Intelligence 0:13:52.160 --> 0:13:53.240 US Homebuilding analysts. 0:13:53.240 --> 0:13:55.520 We first asked Drew for his key takeaways and why 0:13:55.559 --> 0:13:58.400 investors were so unhappy after Lenar reported its results. 0:13:58.720 --> 0:14:01.640 It's so much about what's happened with the volumes they 0:14:01.679 --> 0:14:04.440 deliver good orders. They're up nineteen percent. They maintain their 0:14:04.440 --> 0:14:07.679 full year guidance for eighty thousand home closings. It has 0:14:07.720 --> 0:14:10.439 to do with their outlook for gross margin. They guided 0:14:10.480 --> 0:14:12.640 to about one hundred basis points below what the street 0:14:12.720 --> 0:14:15.760 was looking for, and as you mentioned, that would require 0:14:15.760 --> 0:14:18.680 a ramp in the fourth quarter to about twenty five percent. So, 0:14:18.720 --> 0:14:22.040 like you said, there's definitely some skepticism in their ability 0:14:22.040 --> 0:14:25.200 to meet their full year outlook. The reason for that 0:14:25.320 --> 0:14:27.560 is because we saw rates move up as high as 0:14:27.600 --> 0:14:29.920 seven and a half percent during the quarter. You know, 0:14:29.960 --> 0:14:32.200 they've come back in a little bit, but we're seeing 0:14:32.240 --> 0:14:35.600 their need to incentivize buyers remain elevated, and that's what's 0:14:35.640 --> 0:14:36.880 impacting profitability. 0:14:37.160 --> 0:14:39.520 So where are we in that activity there? If I'm 0:14:39.560 --> 0:14:41.600 looking at of seven percent mortgage, what are they going to. 0:14:41.600 --> 0:14:41.920 Do for me? 0:14:42.640 --> 0:14:45.520 Yeah, So typically what we're seeing is that the builders 0:14:45.600 --> 0:14:47.920 will maintain a spread versus the headline rate. So if 0:14:47.920 --> 0:14:49.960 you're seeing seven and a half percent in the market. 0:14:50.520 --> 0:14:52.880 Typically you're going to get six percent from a builder. 0:14:53.720 --> 0:14:55.440 You know, there are some other builders, and depending on 0:14:55.480 --> 0:14:57.800 the market, depending on how strong the market is, what 0:14:57.880 --> 0:15:00.520 the man looks like, they could get you into the fives. 0:15:00.920 --> 0:15:02.720 But obviously that's going to cost them on the gross 0:15:02.720 --> 0:15:06.080 margin line. So the incentives they're using are certainly working. 0:15:06.160 --> 0:15:08.160 It's just what's the cost so. 0:15:08.120 --> 0:15:11.040 That one percent the hundred basis point missed, but then 0:15:11.200 --> 0:15:13.360 keeping their guidance for gross margin for the year, that 0:15:13.440 --> 0:15:15.720 must imply that they're looking for rake cuts. 0:15:16.080 --> 0:15:18.320 Yeah, I think a lot of it has to do 0:15:18.400 --> 0:15:20.360 with what they're doing on the cost side. One of 0:15:20.560 --> 0:15:23.800 you know, Lenar's emphasis for their business over the last 0:15:24.120 --> 0:15:27.600 several years has really been running a more efficient manufacturing 0:15:27.680 --> 0:15:31.880 based business where they're not necessarily just chasing volume, but 0:15:31.880 --> 0:15:34.160 they're doing it the right way. They're fine tuning their 0:15:34.160 --> 0:15:37.000 floor plans, they're pushing back on their suppliers. You have 0:15:37.000 --> 0:15:39.600 to remember they're one of the second largest builder in 0:15:39.600 --> 0:15:41.800 the country, but they're one of the only builders who 0:15:41.800 --> 0:15:44.920 has scale at the national level, so they're able to 0:15:45.040 --> 0:15:47.320 leverage that and kind of push back a little bit. 0:15:47.360 --> 0:15:49.600 So certainly some of the benefit that they expect in 0:15:49.640 --> 0:15:51.600 foro Q, I would assume is going to come from 0:15:51.680 --> 0:15:53.720 what they're doing on the costs side, as well as 0:15:53.760 --> 0:15:57.400 fixed leverage from higher deliveries. But nonetheless that's still going 0:15:57.440 --> 0:15:59.280 to be the focal point for investors is how do 0:15:59.320 --> 0:15:59.880 they get there? 0:16:00.120 --> 0:16:00.480 How much? 0:16:00.560 --> 0:16:02.360 I mean, I remember this back in the beginning of 0:16:02.400 --> 0:16:06.160 the pandemic, lumber went crazy, Where are we in lumber? 0:16:06.160 --> 0:16:08.360 And how is that a part of their gross margin? 0:16:09.600 --> 0:16:11.880 Sure so numbers about ten percent of the cogs for 0:16:11.960 --> 0:16:14.640 a builders, so it's certainly the most important input costs. 0:16:14.680 --> 0:16:17.920 As you would expect, you know, lumber prices have come 0:16:18.000 --> 0:16:20.960 back down a lot, so builders have been benefiting on 0:16:21.000 --> 0:16:24.520 the margin side. I think we've seen more stabilization of late, 0:16:24.600 --> 0:16:27.240 perhaps a little rise to the upside, but really lumbers 0:16:27.280 --> 0:16:30.240 not impacting the business in as significant a way as 0:16:30.280 --> 0:16:31.840 it was over the last couple of years. 0:16:32.160 --> 0:16:36.040 What the companies tell you about their expectations for interest rates, 0:16:36.040 --> 0:16:37.640 mortgage rates, what are they think is going to happen? 0:16:38.080 --> 0:16:41.320 So I think the expectation broadly is that mortgage rates 0:16:41.360 --> 0:16:42.920 will start to come in a little bit as we 0:16:42.960 --> 0:16:44.840 get through the end of the year. I don't think 0:16:44.840 --> 0:16:48.120 they're managing their business for any you know, significant and 0:16:48.200 --> 0:16:50.800 dropping rates back to you know, where we were previously. 0:16:50.840 --> 0:16:53.800 But I think as a builder from a demand perspective, 0:16:53.840 --> 0:16:55.720 if we get rates coming back to the six and 0:16:55.760 --> 0:16:58.640 a half percent range, you know, that's that's pretty much 0:16:58.640 --> 0:17:01.200 a sweet spot for them. You know, we've heard that 0:17:01.600 --> 0:17:03.320 as you get to five and a half percent, that's 0:17:03.360 --> 0:17:05.920 really when demand in the market starts to move. So 0:17:06.480 --> 0:17:08.280 the fact that if we could get to six and 0:17:08.320 --> 0:17:10.520 a half they're buying down rates one hundred basis points, 0:17:10.520 --> 0:17:12.800 I think they'll continue to do well. And you know 0:17:12.960 --> 0:17:16.800 what's interesting is the public builders are kind of at 0:17:16.800 --> 0:17:19.119 the top of the food chain as it comes to housing. 0:17:19.200 --> 0:17:22.840 You have to realize they're generating about fifty percent market 0:17:22.840 --> 0:17:25.760 share compared to call it thirty eight percent prior to 0:17:25.800 --> 0:17:28.960 the pandemic. Really, so they've really leveraged that lack of 0:17:29.040 --> 0:17:32.199 inventory in the resale market and the struggles among some 0:17:32.240 --> 0:17:35.199 of the smaller private piers, and they've capitalized on it. 0:17:35.560 --> 0:17:37.240 So when you say we have to the five and 0:17:37.280 --> 0:17:38.960 a half percent is kind of a nice sweet spot. 0:17:39.359 --> 0:17:41.520 So that implies the Fed funds rate a six and 0:17:41.520 --> 0:17:43.560 a half percent and the home builders still give that 0:17:43.640 --> 0:17:46.400 hundred basis point discount. When the Fed funds rate gets 0:17:46.400 --> 0:17:49.000 to five and a half percent, do the builders still 0:17:49.000 --> 0:17:50.840 offer that one hundred basis point discount. 0:17:52.240 --> 0:17:54.760 I think it's going to depend on what the broader 0:17:54.960 --> 0:17:58.480 macro economic situation looks like. If we get a pool 0:17:58.560 --> 0:18:02.199 back in rates, you know, a modest pullback, and we 0:18:02.240 --> 0:18:05.879 are still dealing with a pretty solid labor market, I 0:18:05.920 --> 0:18:08.200 think that you know, builders will be able to definitely 0:18:08.200 --> 0:18:11.040 pull back on their use of incentives. I don't know 0:18:11.080 --> 0:18:13.360 that they'll go away altogether, because at this point that's 0:18:13.400 --> 0:18:16.000 something that buyers are looking to and it certainly made 0:18:16.080 --> 0:18:19.800 their product more attractive. If we get a significant pullback 0:18:19.840 --> 0:18:22.640 in rates and it's because you know, the economic situation 0:18:22.800 --> 0:18:26.359 has deteriorated further, that's obviously more of a concern and 0:18:26.440 --> 0:18:29.119 we would see them probably pushing centives even harder. 0:18:29.520 --> 0:18:31.879 Our thanks to Drew Redding Bloomberg Intelligence at US home 0:18:31.880 --> 0:18:32.960 building analyst. 0:18:32.880 --> 0:18:35.000 Moving to Japan, we hear the country is now dealing 0:18:35.040 --> 0:18:37.800 with rising cases of a disease caused by a rare 0:18:38.000 --> 0:18:42.080 flesh eating bacteria that can kill people within forty eight hours. 0:18:42.400 --> 0:18:45.600 Health authorities have reported over one thousand cases of strip 0:18:45.680 --> 0:18:49.120 to cockle toxic shock syndrome in the first six months 0:18:49.119 --> 0:18:51.840 of twenty twenty four. At the current rate of infection, 0:18:51.920 --> 0:18:53.920 experts fear the number of cases in Japan could reach 0:18:53.960 --> 0:18:55.160 twenty five hundred this year. 0:18:55.359 --> 0:18:56.960 For more on all this, we turned to one of 0:18:57.000 --> 0:19:00.480 the experts, Amshidalgia, Senior Scholar at the Center for Health 0:19:00.480 --> 0:19:03.720 Security at John Hopkins Bloomberg School of Public Health. He's 0:19:03.760 --> 0:19:05.400 also an infectious disease physician. 0:19:05.760 --> 0:19:08.000 We first asked Amash to tell us more about the 0:19:08.040 --> 0:19:09.439