Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: This is the Bloomberg Surveillance Podcast. Catch us live weekdays
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Speaker 3: Julian Emmanuel with us right now.
Speaker 4: I can't let me frame this for you folks about
Speaker 4: how I cheat every day is as widely understood. I
Speaker 4: don't have an original thought. I read and read and read,
Speaker 4: and when earning season starts, there's not a second or
Speaker 4: a third read. Julian Emmanuel is the first read of
Speaker 4: the moment is he parses out earnings. It's what it's like,
Speaker 4: an evercore ISI thing. It's like two paragraphs log. That's
Speaker 4: all he speaks English. It's great, he joins us in
Speaker 4: the studio. Right now, everybody's double digit earnings twelve present.
Speaker 4: But come on, it always ends in tears. You're beneath that?
Speaker 4: How beneath double digit earnings forward?
Speaker 3: Are you?
Speaker 5: So we're forecasting nine point six percent.
Speaker 6: But the good news is is that when you look
Speaker 6: at the way things tend to progress, you're always over
Speaker 6: optimistic in terms of bottom up estimates at the start
Speaker 6: of the year or the year prior, and they tend
Speaker 6: to fall. They haven't the last few years because of
Speaker 6: sort of close pandemic effects. But we think this is
Speaker 6: going to be part of the return to normal.
Speaker 7: Paul wants to.
Speaker 4: Jump in here, but I gotta ask, were you at
Speaker 4: ten point one and Hymen got out the black the
Speaker 4: little black panem just crossed it out and rode it
Speaker 4: nine point six?
Speaker 5: We don't round.
Speaker 7: We don't round, all right.
Speaker 8: So, Julian, given that kind of earnings, I know you
Speaker 8: just I'm sure you put out your twenty twenty five
Speaker 8: out look.
Speaker 7: Put you're kind of your twenty twenty five SMP.
Speaker 8: Target sixty eight hundred, and how do we get And
Speaker 8: that's just how do we get there?
Speaker 6: We get their combination of things, the things that have
Speaker 6: led this bull market cycle are going to continue to lead,
Speaker 6: albeit with more volatility than we've seen because at twenty
Speaker 6: five times earnings in the aggregate index, there's going to
Speaker 6: be more volatility. By definition, the Trump administration will cause
Speaker 6: more volatility as they did in twenty eighteen when we
Speaker 6: were talking about taxes, tariffs and the border and small caps.
Speaker 6: For US small caps are under loved, overlooked. There have
Speaker 6: been flows. We think there's further to go.
Speaker 4: So like at sixty one hundred year, you're going to
Speaker 4: sixty eight hundred. How does your equity analysis dovetail in
Speaker 4: to Edward S. Hymen's economic analysis right now?
Speaker 6: So ed is basically been very consistent on his inflation call.
Speaker 6: He continues to think that the trend of inflation is
Speaker 6: lower now. The way we'd think about the day of
Speaker 6: the last couple months, and you'll remember, going back to
Speaker 6: March and April, you had that spicky, sticky patch where
Speaker 6: there was skepticism that inflation would continue to move lower.
Speaker 6: It royaled the stock market briefly. That's how we see
Speaker 6: the next number of weeks evolving. But that course is
Speaker 6: set towards two percent.
Speaker 8: Did you guys change your alter your outlook the date
Speaker 8: after the election? Did that change anyway you're thinking about
Speaker 8: twenty twenty five?
Speaker 7: We did, Okay, we did.
Speaker 6: And it's less about Republican or Democrat, though you know,
Speaker 6: the evidence is relatively clear that certainly from the deregulation standpoint,
Speaker 6: that the Trump administration is likely to be more business friendly.
Speaker 6: But the biggest thing for us was the clarity of
Speaker 6: the outcome, the fact that we weren't having contested politics
Speaker 6: or anything that freed up the animal spirits.
Speaker 8: What sectors do I need to lead? I've had two
Speaker 8: years where the SMP has grown twenty percent. I mean,
Speaker 8: do we not take a brether or do the AI
Speaker 8: tech continue to lead us forward?
Speaker 6: So we think that what has led will continue to
Speaker 6: lead consumer discretionary communications services and info tech.
Speaker 5: It is part if you.
Speaker 6: Think about how bull markets developed. What this bullmarket is
Speaker 6: missing that you have in every bull market is a
Speaker 6: sense of, you know, sort of wild eyed enthusiasm. You
Speaker 6: can argue that there are parts of the market that
Speaker 6: we've seen in recent weeks that have had that kind
Speaker 6: of wild eyed enthusiasm, certainly anything to do with cryptocurrencies
Speaker 6: or anything like that, but those are small in market cap.
Speaker 6: And a way to think about that is like the
Speaker 6: meme stocks, spas and profitless tech in twenty twenty one,
Speaker 6: those can top, but the bull market leaders continue to
Speaker 6: lead through thea which.
Speaker 4: Fact, don't give me this momentum stuff. Julian Emmanuel's is
Speaker 4: far away from momentum as I've ever seen. Is there
Speaker 4: a factor that sticks out right now or is just
Speaker 4: earnings and cash flow.
Speaker 6: So actually the factor work that we've done on is
Speaker 6: the biggest sort.
Speaker 5: Of long term theme is.
Speaker 6: Stocks that are able to buy their stock back, but
Speaker 6: high buy back, because if you think about it, is
Speaker 6: regardless of how this landing unfolds, if it becomes your shares,
Speaker 6: it works right and you have the cash to actually support,
Speaker 6: you know, cushion the volatility in your stock.
Speaker 4: Julian Emmanuel darkened the door and had the privilege of
Speaker 4: working for Bill Priest years ago. How does he treat
Speaker 4: free cash flow versus different from your mortals?
Speaker 6: It is literally the bible of the rationale for investing
Speaker 6: in corporate America. And it's actually more than that when
Speaker 6: you think about it. I worked at a company called
Speaker 6: Bea Associates, which Bill Priest was one of the founding
Speaker 6: partners in the late nineteen nineties. And the interesting confluence
Speaker 6: of that is you've had two back to back twenty
Speaker 6: percent plus years for the first time since the late
Speaker 6: nineteen nineties. And that's the kind of environment that we're in,
Speaker 6: and that's the kind of environment that dictates an even
Speaker 6: greater focus on the idea of free cash flow.
Speaker 4: How do you tell good free cash flow from bad
Speaker 4: free cash flow that basically is one third of his book.
Speaker 6: Well, in my opinion, is the way you do it
Speaker 6: goes back to buybacks. If companies are actually making the
Speaker 6: statement that they're able to buy back their stock, then
Speaker 6: you know that the quality of the cash flow in
Speaker 6: aggregate is better than not.
Speaker 8: Which brings me to my interesting free cash flow buyback conundrument.
Speaker 8: If from Apple computer and i got gobs and gobs
Speaker 8: of free cash flow, yet I've got a dividend yield
Speaker 8: less than one percent?
Speaker 7: What's up with that? What's Tim Cook thinking over there?
Speaker 6: So the academic literature is mixed. Okay, you can and
Speaker 6: you can make the case that an environment where the
Speaker 6: FED has restored a price of money, that there may
Speaker 6: be a greater premium in the future for dividends, at
Speaker 6: least psychologically, But that's not the case for now. And again,
Speaker 6: when we think about it, and we think about what
Speaker 6: the last couple of years have entailed, and that has
Speaker 6: been twenty twenty three, we all thought the recession was coming.
Speaker 6: It didn't twenty twenty four. It seems like there's soft lending,
Speaker 6: is the mantra. But we know that recessions happen cyclically,
Speaker 6: whether you're in the Roaring nineteen twenties, the nineteen fifties,
Speaker 6: the nineteen nineties really the only period where you had
Speaker 6: a prolonged time without a recession. That's where you want
Speaker 6: to know that you're able to buy your stock back,
Speaker 6: that you're able to be creative in the ways that
Speaker 6: you compensate shareholders.
Speaker 8: Is AI still a trade for you? And if so,
Speaker 8: had he a play it or has it already been
Speaker 8: played out with envidiaes Alord? But Broadcoms kind of showing
Speaker 8: you less few days it maybe there's still lenks to it.
Speaker 6: Well, so our view is it actually isn't a trade.
Speaker 6: It is buy and hold secular theme. And what the
Speaker 6: interesting thing is is that if you look at the
Speaker 6: last year or two, we've had this bump in productivity
Speaker 6: that really hasn't been attributable to AI.
Speaker 5: And it's our view that when you think about twenty twenty.
Speaker 6: Five, the upside surprise is likely to come by how
Speaker 6: much and in what kind of creative ways corporate America
Speaker 6: actually deploys AI.
Speaker 8: So is it still kind of I mean, some people
Speaker 8: are just feeling like, all right, I kind of got
Speaker 8: the efuria of boy, that people are gonna spend a
Speaker 8: lot of money on this AI thing, and there's a
Speaker 8: lot of capex. But now the question is are some
Speaker 8: of these companies getting a return on this capital spending
Speaker 8: that could that be a headwind for just the theme.
Speaker 6: Well, when you think about our thesis of volatility in
Speaker 6: and up market, there will be times when the perception
Speaker 6: is that and the AI leader, the leading stock as
Speaker 6: we all know, has really not been performed Waring terribly
Speaker 6: well the last couple of months, so that encourages that
Speaker 6: kind of psychology. We think those are temporary potholes with
Speaker 6: a long term trend that's got a lot further to run.
Speaker 4: Brian Belskin the other day, like you you have to
Speaker 4: participate in the market.
Speaker 3: You've got to be in the market, You've got to
Speaker 3: enjoy the bull market.
Speaker 4: Belski OFBIMO makes the distinction of a cyclical bull market
Speaker 4: versus something most people without gray hair don't know, which
Speaker 4: is a structural bull market. Ed Heiman and I of
Speaker 4: a vintage remember structural bull markets?
Speaker 3: Do you agree there's a permanence to this?
Speaker 4: Just based on American GDP, our nominal GDP and the
Speaker 4: productivity that Lisa Monteo just mentioned, So.
Speaker 6: It is certainly what the ongoing tailwind into twenty twenty five.
Speaker 6: But I will say that a lot of our client
Speaker 6: conversations center around, you know.
Speaker 5: The durability of the.
Speaker 6: American pre eminence and how and when do you reallocate
Speaker 6: towards the rest of the.
Speaker 4: World international, How could you do that with a strong
Speaker 4: dollars that we've got, Well, because I'd say.
Speaker 5: Can't, you can't. We are waiting for two things. A
Speaker 5: turn in the.
Speaker 6: Dollar, which perhaps a geopolitical resolution between Russian Ukraine catalyzes.
Speaker 6: The other thing that we're waiting for is a turn
Speaker 6: higher in China bond yields. China bond yields should be
Speaker 6: worrying people because it looks a lot like Japan in
Speaker 6: the nineties.
Speaker 4: I retweeted that last night it was shocking, the second
Speaker 4: derivative of the deflation. Mohammedalarian featured it this morning at Cambridge.
Speaker 4: I mean, what does the China second derivative of yields
Speaker 4: signal to Julian Emmanuel.
Speaker 6: Well, Well, in fact, as it's been for the most
Speaker 6: part for a number of years, it could actually be
Speaker 6: the thing that causes the catalyst that causes the resumption
Speaker 6: of inflation to continue falling in this country, although you
Speaker 6: know in in large part to us, it really is
Speaker 6: something that's more concerning because it's clearly we'll get one
Speaker 6: more spot.
Speaker 3: All right.
Speaker 7: Do I have a valuation concern here? Is that a
Speaker 7: headwind for me? Or do I strip out the mag
Speaker 7: seven and them? I'm okay.
Speaker 6: If you don't have evaluation concern, that's where we want
Speaker 6: to start being defensive.
Speaker 7: Okay.
Speaker 6: A lot of our clients are really focused on that,
Speaker 6: as they should be, as they should have been the
Speaker 6: entire year. But again, valuation alone doesn't end the bull.
Speaker 6: It's either recession or irrational exuberance, and we don't see
Speaker 6: either of those on the horizon.
Speaker 3: This has been great, don't be a stranger. Thank you
Speaker 3: so much for all your work for.
Speaker 4: Surveillance, and sure Julian Emmanuel I can't say enough about
Speaker 4: his work. We protect the copyright of all of our guests.
Speaker 4: Evercore Isi literature.
Speaker 3: From Hymen and Emmanuel. Go to them for it.
Speaker 4: They are the great, great shop over there in the
Speaker 4: vicinity of Fifth Avenue.
Speaker 3: You go from Julian Emmanuel to William Priest.
Speaker 4: Is what's it's about. Mister Emmanuel. He's chairman at td Epic.
Speaker 4: I don't know if he's emeritus or whatever. You know,
Speaker 4: he's like Bill Priest. I can't see Bill Priest doing
Speaker 4: anything but working your basic seventy hour work week.
Speaker 3: I mean, that's the.
Speaker 9: Way he rolls.
Speaker 4: But I just put the book out on Twitter, on LinkedIn,
Speaker 4: free cash flow and shareholder yield. It is a rite
Speaker 4: of passage. It's short.
Speaker 3: It's not, you know, eight hundred.
Speaker 4: Pages of Fibosi calculus. It's really short, really direct, and
Speaker 4: also somewhat controversial. I really want to point that that out.
Speaker 3: But to have Bill.
Speaker 4: Priest with us after Julian Emmanuel is what the show's about.
Speaker 2: You're listening to the Bloomberg Surveillance Podcast. Catch us live
Speaker 2: weekday afternoons from seven to ten am Easter Listen on
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Speaker 4: Megan Robinson has no idea Who robbed Thomas is her
Speaker 4: Matchbox twenty and joins us some BMB perry by today.
Speaker 4: Your note clearly doesn't say six percent. We're here at
Speaker 4: higher yields. What events would it take to get a breakout?
Speaker 4: Really back to two thousand, two thousand and four yields.
Speaker 3: What would be that cataclysmic event?
Speaker 10: Good well, first of all, good morning, thanks for having me.
Speaker 10: I think that the scenario. I haven't read the report.
Speaker 6: But.
Speaker 4: It's Bloomberg surveillance we don't read.
Speaker 10: I think that you know, we're looking a lot at
Speaker 10: the risks of potential tariffs, and I think that seeing
Speaker 10: a reacceleration of inflation if we see a spike in
Speaker 10: in break even yields as a result of new tariffs.
Speaker 10: But then additionally that causing the FED to either pause
Speaker 10: or resume a hiking cycle would cause even rise in
Speaker 10: rise in real yields. So I think that's really the bear,
Speaker 10: the bear case for next year. At B and P.
Speaker 10: We're not as severe as that, but I think we
Speaker 10: are out of consensus. We're calling for a pause and
Speaker 10: FED rate hikes all throughout twenty twenty five.
Speaker 3: I want to make some news.
Speaker 4: A pause on Wednesday, please help, Not.
Speaker 10: A pause on Wednesday. So we still think a twenty
Speaker 10: five basis point cut, but they set the stage for
Speaker 10: an extended pause into twenty twenty five. I do think
Speaker 10: that this would be cause a credit spread widening, but
Speaker 10: one that we would buy, whereas the other scenario you
Speaker 10: painted would likely be the start of a new bear
Speaker 10: market for credit if we did see rates that high.
Speaker 8: US corporate high yield up eight point eight five percent
Speaker 8: year to day total return. US leverage loan indexes are
Speaker 8: the Bloomberg indexes in which we paid good money for
Speaker 8: eight point six y nine percent. Man, that's great returns
Speaker 8: in the high yield leverage loan market. Does that continue
Speaker 8: in twenty five?
Speaker 7: Do you think so?
Speaker 10: We don't think that you're going to duplicate that positive
Speaker 10: of returns, but we do think it's a carry year
Speaker 10: for credit. So I think that you have a couple
Speaker 10: of tailwinds that you're back. The first is still this
Speaker 10: yield story, So yields are high. We're forecasting the four
Speaker 10: to sixty five on the ten year next year. That
Speaker 10: means that yield demand, pension funds, insurance companies, some foreign
Speaker 10: buyers are still going to come into the credit market.
Speaker 10: At the same time, you can see supply accelerate as
Speaker 10: a result of some of these pro business policies we've
Speaker 10: seen from Trump, but not to a degree that you
Speaker 10: really see in it ambalance. So carry story I think
Speaker 10: continues for next year.
Speaker 3: You sound like you're from Brown and Columbia. Nobody understands it.
Speaker 10: What is a carry year carry so yield? I think
Speaker 10: you know spreads. We're forecasting just to go slightly wider
Speaker 10: ten basis points and investment grade to a level of
Speaker 10: eighty five yield. Take the yields, so clip the coupon.
Speaker 7: You know.
Speaker 10: Places in credit, like leverage loans where you have an
Speaker 10: elevated level of yields right now compared to high yield
Speaker 10: and IG we think are a great spot to be
Speaker 10: We also like long duration investment grade, so ten years
Speaker 10: and beyond, where you'll have this elevated yield and issuers
Speaker 10: will still be hesitant to cell supply with longer dated maturities.
Speaker 10: We think those those two spots are a great place
Speaker 10: to step into yield next year.
Speaker 8: Know in your notes, I've read something that I don't
Speaker 8: think I've seen and I can't remember how long globally
Speaker 8: we like Europe to outperform in the US.
Speaker 10: Why yes, So this is it does seem an out
Speaker 10: of consensus view. I think that in Europe we have
Speaker 10: slower growth obviously, but that will allow the ECB to
Speaker 10: continue to be dubbish and a lot of the bad
Speaker 10: news is priced into European credit spread, So we're trading
Speaker 10: a lot wider in Europe compared to the US, and
Speaker 10: then US were at all time tights and spreads, and
Speaker 10: then you have this risk of reacceleration, the FED potential
Speaker 10: has to pause. We think that's not priced danger.
Speaker 4: Your economistcy inflation out there. I mean, you got a
Speaker 4: government in Germany Toast, a government in BMP Perry Baz,
Speaker 4: Paris and France sort of kind of like Toast. I
Speaker 4: got the shock or Christian Friedland in Canada yesterday going
Speaker 4: to a possible election early next year. I mean, with
Speaker 4: all that tumult, can we really give way to a
Speaker 4: new inflation regime?
Speaker 10: I think it's I think it's certainly possible in the US.
Speaker 10: I think it will depend a lot on what we
Speaker 10: see happening with with with President Alex Trump's policies, and
Speaker 10: if we do get some of the tariffs that he's
Speaker 10: talked about, I think that could be certainly a catalyst
Speaker 10: for a reacceleration in inflation.
Speaker 7: Sectors.
Speaker 8: Are there sectors that screen well for you guys from
Speaker 8: a credit perspective these days?
Speaker 10: So we like we do like taking some pro growth policy.
Speaker 10: We think that you know, less regulation next year does
Speaker 10: warrant stepping into some of those areas. But where where
Speaker 10: you can also avoid the tariff risk. So we like
Speaker 10: transportation and investment grade, and then in high yield. Our
Speaker 10: favorite sector is still cruise lines where you're you have
Speaker 10: low exposure.
Speaker 4: What's your favorite cruise line, I mean size on a
Speaker 4: celebrity cruises.
Speaker 10: Okay, so you have you have low exposure to lower
Speaker 10: income consumer where we have seen risk and it's a
Speaker 10: leisure it's a leisure sector. So if we do see tariffs,
Speaker 10: we can see that that sector is less vulnerable to
Speaker 10: to goods goods risks.
Speaker 4: Some question of the day our airlines Investment Grade, Delta United.
Speaker 4: We've got Jeff Blues executive coming up here today, I believe.
Speaker 10: Yeah, yep, so we have we have airlines in bo
Speaker 10: in both markets, but but in in investment grade also
Speaker 10: we have rail, so rail transportation a major part of
Speaker 10: the sector, and then a handful of airlines as well.
Speaker 7: How about my old stomping arounds cable cable Yeah, so
Speaker 7: harder issued debt by the bolot. I made a small fortune.
Speaker 9: With those guys.
Speaker 10: So this is sector continue. I think we have to
Speaker 10: be a lot more selective, more selective industries what she said,
Speaker 10: despite despite the fact that IG spreads are very tight,
Speaker 10: that is a sector where we've seen more single name volatility.
Speaker 10: So that's a place we'd be cautious. Another place we'd
Speaker 10: be cautious is is in building products. I think there
Speaker 10: you see sort of a trifecta of risks in twenty
Speaker 10: twenty five immigration, So building products, home building, it's a
Speaker 10: sector that really relies more so on undocumented labor. If
Speaker 10: President elect Trump is going to go after that issue
Speaker 10: in a hard way, I think that home building home
Speaker 10: builders would be very vulnerable there. And then also this
Speaker 10: risk of rates high for longer could still sort of
Speaker 10: damp in some demand in housing.
Speaker 4: My chart of the year is the price recovery of
Speaker 4: the blended Bloomberg bark Lace Lehmann Index. I don't think
Speaker 4: anybody saw this coming, where we've really migrated from a
Speaker 4: horrific six standard deviation move up into a better place.
Speaker 4: Can you actually say price appreciation within bonds for the
Speaker 4: next twelve months.
Speaker 10: We're not expecting that. So when we talk about coon,
Speaker 10: when we take about clipping coupons, exactly I think the
Speaker 10: story is you just want to protect your capital, and
Speaker 10: a good place to do that, we think is investment
Speaker 10: grade the long end leverage loans. But to find price appreciation,
Speaker 10: I think is much more challenging just giving the starting
Speaker 10: point for valuations.
Speaker 3: I brought this up. I didn't even know how to
Speaker 3: do this on the Bloomberg. The munich key. Yeah you know.
Speaker 4: Fred Corkoran taught me to Munich key on the Bloomberg
Speaker 4: with Charlie Gogelac. And the answer here is I brought
Speaker 4: up the Delta Airlines LaGuardia Airport Terminals CND redevelopment piece.
Speaker 4: By it, you get a five percent coupon. I don't
Speaker 4: have a price. I can't figure out how to read
Speaker 4: the screen. But you get to pick up your Uber
Speaker 4: closer to the gate than if you don't own this credit.
Speaker 3: That's that's worth doing it.
Speaker 4: Megan Robinson, thank you so much to BMP perie By
Speaker 4: on transportation and investment grade quality.
Speaker 2: This is the Bloomberg Surveillance Podcast. Listen live each weekday
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Speaker 2: Just say Alexa playing Bloomberg eleven thirty Joiningston.
Speaker 4: William Priest identified with Epoch for Hears You Just hear
Speaker 4: Julian Emmanuel with Raves about.
Speaker 3: The privilege of working with mister Priest years ago. In
Speaker 3: two thousand and.
Speaker 4: Seven, Bill Priest released the definitive short read on free.
Speaker 3: Cash flow in Shareholder Yield.
Speaker 4: It's in English, it's short. DiCaprio was awesome in the
Speaker 4: movie Unbelievable. In two thousand and seven, Apple was five
Speaker 4: dollars a share, It's now two hundred and fifty dollars
Speaker 4: a share. The growth of Apple revenue iPhone, this and
Speaker 4: all that it was mostly Bill Priest, just growth the
Speaker 4: free cash flow.
Speaker 9: Right, that's the truth.
Speaker 11: They also had a lot of new products that took
Speaker 11: big market shares.
Speaker 4: How do you determine good free cash flow in twenty
Speaker 4: twenty five from troubled free cash flow?
Speaker 11: Well, it all starts with the allocation of free cash
Speaker 11: flow and the methodology thereof. So, for example, in any
Speaker 11: business that could be a lemonade stand, who don't left
Speaker 11: time go through the lemonades stand?
Speaker 9: Example, But at the end of the day, you have
Speaker 9: to define it.
Speaker 11: So free cash flow is the cash available for distribution
Speaker 11: to shareholders after all planned capital expenders and all cash taxes. Now,
Speaker 11: once you get that number, there's only five things you
Speaker 11: can do with it. And if you cannot earn an
Speaker 11: amount of money above your cost of capital. Let's say
Speaker 11: for the sake of argument, your cost of capital is eight, nine,
Speaker 11: ten percent, you have to earn more than that otherwise
Speaker 11: you are taking value away from your entity. So there's
Speaker 11: only five things you can do with this dollar cash flow.
Speaker 11: You can pay a dividend, buy backstock, pay down debt.
Speaker 11: Those are forms of capital return to the owners of
Speaker 11: the business. Or you can reinvest in acquire. Now, we
Speaker 11: built two products around this. One was our shareholder Yield product,
Speaker 11: which the book was all about. That was the identification
Speaker 11: of those companies who basically say, you know what, we
Speaker 11: can't earn our cost of capital with all of the
Speaker 11: cash flow that we have, and we're giving it back
Speaker 11: through one of these three forms. That became right, that
Speaker 11: became a any billion of dollar product.
Speaker 4: I mean, Paul's to getting We're having a duke love fest,
Speaker 4: your folks, priest and Paul Paul jump in here. But
Speaker 4: the heart of the matter is Bill Priest was lonely
Speaker 4: when that book came out in seven.
Speaker 8: Well, being a former corporate lender. Free cash flow is
Speaker 8: important because that's what pays me back. So are there companies.
Speaker 8: What's a company that in your career has been really
Speaker 8: good about managing their free cash flow?
Speaker 9: Well, it comes and goes.
Speaker 11: There are times when a company should be giving back
Speaker 11: the money because they don't have the reinvestment or the
Speaker 11: acquisition targets that make sense or it's fantastic.
Speaker 9: For them to do acquire.
Speaker 11: We we did the other side of this recently. We
Speaker 11: have what we call a capital reinvestment product where those
Speaker 11: companies who you can identify and the secret sauce there
Speaker 11: is this. We have data on thousands and thousands of
Speaker 11: companies and the trick is to look at the return
Speaker 11: on incremental capital what's called ROIC ROHIC, and look at
Speaker 11: that compared to the cost of capital, the WHACK weighted
Speaker 11: average cost of capital, the spread between rock and whack.
Speaker 11: It turns out in a good company, it persists and
Speaker 11: you can look at it all the data we have
Speaker 11: we have going back decades, those companies continue to be
Speaker 11: top quarto.
Speaker 4: Okay, so we do that in the Bloomberg on the
Speaker 4: WACC screen. We're not going to turn this into a
Speaker 4: CFA lesson. But the bottom line, Bill pres is everyone
Speaker 4: listening and watching is living. MAG seven they didn't exist
Speaker 4: in two thousand and seven. You got let's say you
Speaker 4: got the eighth edition coming out your chapter on MAG seven,
Speaker 4: Free cash flow, WACC and ROC.
Speaker 3: Can they sustain that?
Speaker 9: Many of them? Can?
Speaker 11: CAM don't know for sure all of them. The secret
Speaker 11: sauce though, is the substitute of bits for atoms. So
Speaker 11: let's take information it comes to you in the form
Speaker 11: of bits. Atoms would be the desk in front of me,
Speaker 11: this microphone. We're made of atoms. If you run a
Speaker 11: company and you can substitute technology in the form of
Speaker 11: a bit for labor which is a form of an atom,
Speaker 11: and hold your revenue.
Speaker 9: Is constant, your margins go up.
Speaker 11: And if you can substitute a bit think selling something
Speaker 11: over the internet as opposed to a physical store, and
Speaker 11: hold your revenues constant, your sales for dollar assets go up.
Speaker 11: So if you were to go back and just look
Speaker 11: at return on equity, if I can substitute technology for
Speaker 11: labor and physical assets and hold my revenues constant. Myriic
Speaker 11: goes through the roof, and you need every company should
Speaker 11: be focusing on that gap. And how do I substitute
Speaker 11: technology for labor and physical assets.
Speaker 8: Are those returns on invested capital relative to the cost
Speaker 8: capital today enough to support this market? We've had two
Speaker 8: years of twenty percent returns.
Speaker 9: Totally agree with you.
Speaker 11: I think the market has a real valuation issue. We've
Speaker 11: had two back to back years of over twenty percent
Speaker 11: in the market, and I think that's very difficult. So
Speaker 11: the question is can you sustain the discount rate? Is
Speaker 11: a discount rate going to go up or down? It's
Speaker 11: going to be a struggle in my view. For when
Speaker 11: you think of when the Brilliant Wall fell in nineteen
Speaker 11: eighty nine, for over twenty years, we created the most
Speaker 11: efficient supply chain the world has ever known.
Speaker 9: Now we wanted to go to Onshore.
Speaker 11: We want security supply chains, not efficiency. You can't do
Speaker 11: that without inflation. You can't bring all that manufacturing capacity back.
Speaker 9: Here without inflation.
Speaker 11: That's going to be a burden for the new administration
Speaker 11: to deal with as well.
Speaker 8: You've been around the block a few times. Bill, what
Speaker 8: do you make of this crypto stuff. Tom Keen is
Speaker 8: all over bitcoin.
Speaker 7: I mean he's been day one on top of it.
Speaker 11: What do you think, Well, I've always been suspicious and
Speaker 11: I've been wrong with regard to owning bitcoin. I've never
Speaker 11: thought of bitcoin as being money. So there's a really
Speaker 11: good guy you should get on your show sometime. Azuar
Speaker 11: Pissard EESWRPR a.
Speaker 3: Very familiar with. He's been a huge supporter.
Speaker 9: Okay, he's fantastic. He is the best guy in money
Speaker 9: in the.
Speaker 3: Okay he went to Cornell on that Duke.
Speaker 11: Yes, it's perfectly fine, perfectly fine, but money does three things.
Speaker 9: To be money, you have to do three things.
Speaker 11: Medium of exchange, you have a medium of exchange. Value
Speaker 11: has to be a way to measure value. And the
Speaker 11: problem the problem with money it is a unit of
Speaker 11: With bitcoin, it is a unit of account and it
Speaker 11: is a medium of exchange. But it is not a
Speaker 11: store value. That's the problem. And so you're not going
Speaker 11: to see trade, legal trade done much in anything other
Speaker 11: than dollars.
Speaker 4: One of your epic portfolio is number one holding JP Morgan.
Speaker 4: How's mister diamond doing?
Speaker 6: Is?
Speaker 3: JP Morgan is an.
Speaker 4: Entity showing good use a free cash flow in good
Speaker 4: use of shareholder yield.
Speaker 11: Well, I would defer to my analyst to a large
Speaker 11: extent on that, but he probably is one of the
Speaker 11: great managers in the banking business, There's no question about that.
Speaker 11: And anyone that's owned his stock over the last ten
Speaker 11: twenty years very happy.
Speaker 4: Are we dealing with monopsimistic tendencies in this country? Where
Speaker 4: are just doing a big net will roll up into
Speaker 4: large cap large cap large kip Ola Max seven, Olive Banking,
Speaker 4: dominance of JP Morgan and Bank of America and the rest.
Speaker 11: Consolidation is always if has always been there. The question
Speaker 11: is does it is it value AD to the buyer?
Speaker 11: And if you can demonstrate value AD is probably going
Speaker 11: to continue. But we have lots of new companies being
Speaker 11: formed every year, so we're not without innovation.
Speaker 3: Can you ask Priest how you and s got Belichick and.
Speaker 7: Do you know, I'm happy with our coach.
Speaker 9: I'm happy with it.
Speaker 11: I Belichick going to five years and fifty million dollars
Speaker 11: or something like that. I kept going, Well, I think
Speaker 11: I think what's interesting is will he be able to
Speaker 11: relate to the players. That's a big, big difference relating
Speaker 11: to undergraduates and then.
Speaker 4: Yeah, it's like when Bill Priest with as Julian Emmanuel,
Speaker 4: He's like, who is this tour?
Speaker 3: Get one more question in here?
Speaker 4: Bill?
Speaker 8: Did you and your team change your investment outlook the
Speaker 8: day after the selection? Did anything change for you guys
Speaker 8: in terms of how you think about out asset allocation
Speaker 8: or investment opportunity?
Speaker 9: No, we haven't changed anything yet.
Speaker 11: It's all about finding the companies that are good capital allocators,
Speaker 11: and I think they will see us through good times
Speaker 11: and bad times.
Speaker 4: Missus Keen email said, she goes, how come Bill, Bill
Speaker 4: Priest is so and chiseled.
Speaker 3: What's a secret vitamin D three?
Speaker 9: What do you do?
Speaker 4: You're still working in seventy hour work week.
Speaker 9: I wouldn't say it's seventy anymore, but it's a lot.
Speaker 9: I love the game. The game is. This is incredibly challenging.
Speaker 3: It's a game fair for our listeners and viewers.
Speaker 9: Yes, but you're gonna have to do your homework.
Speaker 11: You're gonna have to do your homework when you get
Speaker 11: into the private equity private credit world. The one thing
Speaker 11: there is the mark the market problem. You're never sure
Speaker 11: what those marks are. And look, having been chairman of
Speaker 11: a number of mutual funds who also did do private placements.
Speaker 11: The accounting firms will never sign off evaluation. What they
Speaker 11: do is they sign off on the process that you
Speaker 11: use for valuation. So they may say yeah, so you
Speaker 11: they can't. They don't want to get sued from his valuations.
Speaker 11: But going way back to my days when Julie and
Speaker 11: I worked together, this is a long time ago, we
Speaker 11: had a number of closed end funds in South America
Speaker 11: and they did private placements. So as chairman of the
Speaker 11: board when we had we were going over values. The
Speaker 11: accountcil committee say, the valuation used by in those days
Speaker 11: be associates, those valuation methodologies are valid, but they never
Speaker 11: signed off in the valuation.
Speaker 9: Smartself smart, Bill Priests, brilliant.
Speaker 4: Thank you so much, folks out on Twitter, out on LinkedIn,
Speaker 4: Free cash Flow and shareholder Yield. DiCaprio will do the
Speaker 4: movie It's Looking two thousand and twenty seven for Bill
Speaker 4: Priest's classic Free cash Flow. Can't say enough about that effort.
Speaker 2: This is the Bloomberg Surveillance Podcast. Listen live each weekday
Speaker 2: starting at seventy Eastern on applecar Play and Android Auto
Speaker 2: with the Bloomberg Business app. You can also watch us
Speaker 2: live every weekday on YouTube and always on the Bloomberg terminal.
Speaker 4: It is that time, the daily look at the front pages,
Speaker 4: the Lisa Mateo minute, Lisa's on the clock.
Speaker 3: What do you have?
Speaker 1: I have those outlet malls. They're drawing a lot more
Speaker 1: luxury brands. I thought this was interesting and I've seen
Speaker 1: Actually you seen this.
Speaker 7: You did it on Black Friday.
Speaker 5: I did.
Speaker 1: It's the outlet malls because shoppers looking for bargains, right,
Speaker 1: but they still like the luxury goods, so more a
Speaker 1: headed to the outlet malls to get those designer shoes, clothing,
Speaker 1: handbags at more affordable prices. The Wall Street Journal says,
Speaker 1: even though food traffic still below pre pandemic levels, retailers
Speaker 1: are leasing more space at outlet shopping center so they're
Speaker 1: starting to grow. There's more than two hundred.
Speaker 7: Of them in the US.
Speaker 1: I didn't even realize that a lot of the more
Speaker 1: for this affordable luxury we're talking about coach Mark, Jacobs, Gucci, Prada.
Speaker 1: And what I noticed from going to these like Woodbury
Speaker 1: Commons or Jersey Shore outlets is that the longest lines
Speaker 1: are at these stores. I mean just wrapping around outside,
Speaker 1: so more people are doing it.
Speaker 7: They're saying.
Speaker 1: The reason why is because a lot of these luxury
Speaker 1: retailers are selling their excess products to places like TJ Max,
Speaker 1: and people are reals realizing, hey, you know what, I
Speaker 1: can afford this high end stuff.
Speaker 4: The Economist was an article. I actually read every word
Speaker 4: of it, and I think they had Versace. I do
Speaker 4: not have the number in front of me, but I
Speaker 4: was stunned what percentage of Versace is on sale right now?
Speaker 4: Because it used to be they were never on sale
Speaker 4: ever ever, you know.
Speaker 1: Right, sometimes it was so that they wouldn't like shred
Speaker 1: them or do something else.
Speaker 8: They would rather do.
Speaker 1: That than put it on sale. So that was something else.
Speaker 3: Well, still a thing like when you go where they've packed.
Speaker 1: The malls not you know what. I've been to the
Speaker 1: mall even during the holiday and it's not that packed.
Speaker 7: But it's the.
Speaker 1: Outlet malls that people are like flocking to it. It's
Speaker 1: crazy and it's interesting. Next time we have a luxury person,
Speaker 1: I'm got to ask them about this, about the outlet malls,
Speaker 1: luxury cent It's.
Speaker 4: Michael Barber this almost every day, he's a luxury here.
Speaker 4: It is why Lewisviuton is struggling, but Arimez is not.
Speaker 4: Somewhere in here. This is the Economist magazine. There's you
Speaker 4: know how much of Versace's on sale? I was blown away.
Speaker 4: It's like a big deal. Next, what do you got go?
Speaker 1: Since we're sticking with shoppers who love deals. No, we're
Speaker 1: not doing the drones. I still have not seen one
Speaker 1: in New Jersey. But sticking with the shoppers who love deals.
Speaker 1: So Business Insider says, who is the you know, the
Speaker 1: top downloaded app of twenty twenty four, and they say
Speaker 1: it's actually Chinese owned e commerce discount retailer Temu. It's
Speaker 1: the most downloaded for the first ten months of twenty four,
Speaker 1: beating out TikTok chat GPT all that it sells everything tech, gadgets,
Speaker 1: apparel at a cheap cost.
Speaker 7: Owned by PDD Holdings.
Speaker 1: Particular, among the gen Z consumers eighteen to twenty four,
Speaker 1: they love it. They've been downloading it. The big problem though,
Speaker 1: is that president like Donald Trump, you know, threatening with
Speaker 1: the high tariffs on Chinese goods. So people are wondering
Speaker 1: are they going to start raising their prices to kind
Speaker 1: of offset that levy.
Speaker 7: But this is like the big thing.
Speaker 4: Thing where it's Chinese owned and we're worried that Temu
Speaker 4: Timu is gonna know what.
Speaker 3: A checkbook is.
Speaker 7: Not so much.
Speaker 1: They haven't actually brought that up. That's that's true.
Speaker 7: So has invested in millions to market to American shoppers.
Speaker 7: Three tu ads aired it during the Super Bowl. Oh
Speaker 7: you remember those?
Speaker 6: Wow?
Speaker 1: Yes, they did three they're like seven billion busters.
Speaker 7: Yeah, exactly, it's.
Speaker 3: Crazy to seven billion.
Speaker 7: Okay, next, okay.
Speaker 1: The world's busiest airline routes in twenty twenty four. This
Speaker 1: is a travel comeback for Asia. This is actually a
Speaker 1: report on Bloomberg Aviation data provider o a G. Seven
Speaker 1: of the world's ten busiest international routes are largely in Asia.
Speaker 1: This was taken from January to December of twenty twenty four,
Speaker 1: only included the round trip flights. The busiest international flight
Speaker 1: route was Hong Kong to Taipei six point eight million
Speaker 1: available seats. Then you had Cairo to Jetta of Saudi Arabia.
Speaker 1: We talked about Saudi Arabia yesterday. That's the second place,
Speaker 1: and then third place sold to Tokyo Narita.
Speaker 7: That was third place.
Speaker 1: But it's like it's a mix. It's a mix of leisure,
Speaker 1: a mix of business destinations. So they're starting to see that.
Speaker 1: And if you want to look trans atlantic, the only
Speaker 1: place in that top ten was actually New York JFK
Speaker 1: to London Heathrow. But it just does show.
Speaker 8: Well, see what I what I don't think we're seeing
Speaker 8: yet is just broader China to the US. I still
Speaker 8: think those you know, you don't you hear from the
Speaker 8: luxury folks that you're still not seeing the Chinese consumers
Speaker 8: coming here into the US and shopping. And I think
Speaker 8: part of that is because there's just not a lot
Speaker 8: of flights, you know, it's kind of a post pandemic thing.
Speaker 7: I don't know.
Speaker 4: And those fascinating yesterday with Stephen Trent of City Group,
Speaker 4: people's leading Delta but he's got Panama.
Speaker 7: Yeah, this is.
Speaker 3: Yep, you got one more?
Speaker 4: I do?
Speaker 6: I do?
Speaker 1: Okay, so start January.
Speaker 3: I say, oh, whoa, whoa, whoa, whoa.
Speaker 7: Yes, is it the red one with the rock? No
Speaker 7: it is not.
Speaker 1: I have to I actually fell asleep during the movie.
Speaker 7: It's really bad, and.
Speaker 6: I love the rock.
Speaker 1: But this is about your other, your other favorite topic,
Speaker 1: people coming back to the office, right, So starting January second,
Speaker 1: A lot of companies are doing that five days a week.
Speaker 1: Everybody has to come in, including Amazon. But Amazon is
Speaker 1: running into a problem. They actually don't have enough space
Speaker 1: in the office for all these people to come back,
Speaker 1: So they're running into this problem. It was seen in
Speaker 1: this like internal memo. You have workers Atlanta, Houston, Nashville,
Speaker 1: and New York. They're saying they can continue following the
Speaker 1: three day rule until they can find enough space for them,
Speaker 1: and these delays could go.
Speaker 11: Out to like May.
Speaker 1: That's what they're saying. So this is the problem they're having.
Speaker 1: It's actually not the first time when they actually announced
Speaker 1: the three day week coming back.
Speaker 8: So just take me clear, just be clear. We're not hybrid,
Speaker 8: are we? We're back every day, aren't we.
Speaker 1: We're that's a good question for you and I are here.
Speaker 8: And I Truman hasn't missed a day like since the pandemic.
Speaker 8: I mean the kid came in every day.
Speaker 3: Talker took a day off. I think it was after Lehman.
Speaker 9: Okay, you know that.
Speaker 4: Was like just twenty ten, is well, Lisa Mateo, thank
Speaker 4: you so much.
Speaker 3: The newspapers.
Speaker 2: This is the Bloomberg Surveillance podcast available on Apple, Spotify,
Speaker 2: and anywhere else you get your podcasts. Listen live each weekday,
Speaker 2: seven to ten am Eastern on Bloomberg dot Com, the
Speaker 2: iHeartRadio app, tune In, and the Bloomberg Business app. You
Speaker 2: can also watch us live every weekday on YouTube and
Speaker 2: always on the Bloomberg terminal