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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Daily

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Speaker 1: we bring you insight from the best in economics, finance, investment,

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Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. In

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Speaker 1: honor of our Waltz to May and the Final Crunch.

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Speaker 1: To get to the cif A exam seven eight weeks, Gina,

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Speaker 1: Martin Adams darkins the door, Gina, Level one, definitely, Level

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Speaker 1: two exam c f A. You get up to a

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Speaker 1: compare in contrast of what a company makes down the

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Speaker 1: income statement as compared to their debt. And right now,

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Speaker 1: with all of the changes, the de interest rates are

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Speaker 1: going higher. What about the economy? How are companies doing

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Speaker 1: that are at that tippy tippy point of saying ibadatta

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Speaker 1: debt or whatever other ratio of of cash flow to

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Speaker 1: debt you want to look at. What do you see?

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Speaker 1: Uh yeah, really interesting transition in how stock prices of

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Speaker 1: heavily indebted companies are performing relative to those that have

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Speaker 1: less debt. In the equity market here in the US

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Speaker 1: right now, certainly leverage is becoming a much bigger driver

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Speaker 1: of equity market performance. When we look at things like

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Speaker 1: cash ratios. For example, the highest cash ratio companies in

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Speaker 1: the SMP five are outperforming their low races counterparts. Cash

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Speaker 1: is very good UH debt relative to IBADA. The companies

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Speaker 1: with lower debt relative to IBADA, lower debt relative to

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Speaker 1: market cap are dramatically outperforming their high debt counterparts as well.

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Speaker 1: So certainly investors are looking for stability and looking for

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Speaker 1: capacity to pay and debt ratios to guide them regarding

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Speaker 1: UM company allocations in the equity market. Mr Diamond had

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Speaker 1: a forty six page love note in there. In the

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Speaker 1: middle of it was textbook Jamie, which was Fortress Diamond,

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Speaker 1: How Fortress he is? Fortress Diamond is he? Is he

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Speaker 1: too conservative? Well, when it comes to the financials, I

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Speaker 1: think that the FED is now pointing to the fact

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Speaker 1: that maybe that they have been forced to be too

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Speaker 1: conservative over a long period of time, and they're starting

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Speaker 1: to consider easing some requirements such as the supplemental leverage

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Speaker 1: ratio and the like. So I do think that we

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Speaker 1: are starting to recognize institutionally that the banks have become

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Speaker 1: extremely conservative. Um, there is a movement to start to

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Speaker 1: maybe unlock some of that trapped capital. You know, there

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Speaker 1: is question markets to whether this is the right point

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Speaker 1: in the cycle to do this. Some FED folks such

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Speaker 1: as Layle Brainerd have suggested, maybe we don't want to

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Speaker 1: do this at the tail end of the cycle. Just

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Speaker 1: unlock all this capital, unleash the capital for the banks

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Speaker 1: to start lending in mass. But nonetheless, um, I think

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Speaker 1: that the banks, especially the largest banks, have generally been

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Speaker 1: extraordinarily conservative this cycle, and some of that is due

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Speaker 1: to simple regulation. Yeah. And the thing for the banks

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Speaker 1: this quarter is going to be a big test for them,

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Speaker 1: generous to to who actually has a really good trading business? Yeah,

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Speaker 1: because volatility was the thing that wasn't there and the

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Speaker 1: thing that everybody complained about. And then in the first

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Speaker 1: quarter of this year they've got what they've been asking for.

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Speaker 1: Can they deliver? Yeah, it's going to be interesting to see.

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Speaker 1: I mean, one of the things that we've noted persistently,

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Speaker 1: Jonathan over the last couple of weeks is there has

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Speaker 1: been no negative guidance from the banks, So that would

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Speaker 1: lead you to suspect that they are going to beat expectations. Um.

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Speaker 1: That may have put the bar too high. On the

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Speaker 1: other end, of the spectrum. I think bar none volatility

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Speaker 1: has extreme has exploded higher. That should be good for

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Speaker 1: the trading businesses. Um, what we're missing is really stronger

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Speaker 1: loan growth, which is a bigger part of bank income

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Speaker 1: as a general sense. So maybe the investment bank UM

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Speaker 1: investment banking centered groups in the SMPI outperform the traditional

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Speaker 1: banking groups and that kind of environment. Uh generally, though,

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Speaker 1: what I will say most importantly for the financial sector

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Speaker 1: at large is these companies have got to reduce top

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Speaker 1: line growth. Investors are already expecting a beat on the

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Speaker 1: bottom line. They know that tax reform is going to

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Speaker 1: benefit these guys more than most of the rest of

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Speaker 1: the SMP five D. Where we're starting to see performance

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Speaker 1: differentials evolve is on top line growth. We've got to

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Speaker 1: see the sales lines follow through. So for our listeners,

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Speaker 1: I think many of us has become accustomed to a

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Speaker 1: tradition of the last few chords where these executives come

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Speaker 1: out a couple of weeks before rarnings and they almost

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Speaker 1: all off a negative guidance at the same time. So

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Speaker 1: we haven't had that gene and we talk about this

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Speaker 1: top line growth, where does the growth actually come from.

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Speaker 1: What are the areas that you can grow? And Tom

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Speaker 1: mentions Jamie Diamonds annual letter and the JP more Can

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Speaker 1: CEO pretty much said everything in everywhere, and I imagine

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Speaker 1: that's not the case for everybody, right Well, I think

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Speaker 1: it's complicated at this stage of the cycle because the

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Speaker 1: yield curve is flattening, consumer debt levels have already exploded.

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Speaker 1: Where we're missing a lot of growth is really in

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Speaker 1: commercial industrial loans. So we almost by default need a

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Speaker 1: capital spending recovery. We need the traditional commercial and industrial

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Speaker 1: companies to spend a bit more fuels some economic growth,

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Speaker 1: demand more loans so that they can spend. That's the

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Speaker 1: area that's been missing this entire cycle. It seems to

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Speaker 1: be the one area of potential growth going forward. When

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Speaker 1: the consumer frankly has already done their spending. They've already

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Speaker 1: bought houses, they've already bought cars, they've done a lot

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Speaker 1: of spending already, and they've loaded up on credit card debt. Again,

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Speaker 1: this is the area that's missing. Let's think about a

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Speaker 1: potential expense just to wrap things up and deposit bad

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Speaker 1: has been very low. In very simple terms, that just

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Speaker 1: makes the fetest heighted interest rates, but the banks haven't

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Speaker 1: passed that onto anyone that's got a depulsit at a bank.

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Speaker 1: Um is that going to change? Yes, this is one

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Speaker 1: of the things we're looking for later this year. I

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Speaker 1: think second and third quarter this is going to be

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Speaker 1: a big issue. Certainly the analysts are going to look

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Speaker 1: for guidance on this with this earning sea and when

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Speaker 1: are you going to start to pay more on your

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Speaker 1: deposits and what will that mean for margins at the

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Speaker 1: banks is a huge question. Mark, Jinna Martin Adams, thank

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Speaker 1: you so much and particularly your patients here within all

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Speaker 1: the international relations we've got to go to and tweets.

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Speaker 1: This morning, I think the President will start tweeting about em.

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Speaker 1: Down to deck. We'll get you in here right away,

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Speaker 1: writing with all of our equity covers from Bloomberg Intelligence,

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Speaker 1: Gina Martin Adams, John, I want you to bring in

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Speaker 1: our next guest because his English accent is clearer than yours.

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Speaker 1: It is I'll give him that. It's Jeffrey, You's ubs

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Speaker 1: private bank ahead of the UK Investment Office. I always

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Speaker 1: enjoy catching up with Jeff to frame what's happening in

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Speaker 1: markets and gets it room real deep inside as well.

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Speaker 1: Jeff told me about what's going on, and while we're

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Speaker 1: switching from one narrative to another so quickly, Well, we

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Speaker 1: were having a few discussions about the today and just

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Speaker 1: wondering and there should there be some kind of as

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Speaker 1: allocation framework, you know, to trade on the back of

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Speaker 1: certain tweeting going around the world, and that it's just

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Speaker 1: be a pace at this point and investors actually just

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Speaker 1: spinding it hard to keep up and oddly enough some

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Speaker 1: have you looked a bitcoin for example, you know, so

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Speaker 1: some clients actually starting to ask that about again. So

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Speaker 1: it's about out the noise right now in terms of

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Speaker 1: determining what we should be focusing on and what not

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Speaker 1: to be focusing on. And then after that you know,

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Speaker 1: how to make decisions on where to invest in how

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Speaker 1: to invest. So a lot of noise right now, but

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Speaker 1: doesn't seem to be too much risking puts on back

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Speaker 1: of that actually, and Jeff, I guess trying to work

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Speaker 1: out where you find that uncorrelated hedge that's stabilizer for

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Speaker 1: your portfolio. Because treasuries have have sort of provided that

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Speaker 1: through the week, but not in a material way. Yields

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Speaker 1: have creeped lower by a couple of basis points. What

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Speaker 1: are you saying to clients when they ask you about it? Well, so,

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Speaker 1: firstly the diversification, you know that's the easier stanta, but

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Speaker 1: also diversification by extension, diversification between listed assets an unlisted assets.

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Speaker 1: So you know, right now it's a great time for

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Speaker 1: hedge funds without performers, a great time for private equity

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Speaker 1: to our perform as well. Find where there's a correlation

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Speaker 1: breakdown or there's no correlation between market volatility. That's where

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Speaker 1: clients want to be, and you know there's increasing interest

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Speaker 1: in that. Jeff. The big question I think for many

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Speaker 1: people over the last couple of months is all exploded

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Speaker 1: in the equity market, was whether val would die down

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Speaker 1: or whether it would bleed into rates, bleed into effects.

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Speaker 1: It hasn't really bled into rates or effects. Are you

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Speaker 1: anticipated it will? And I would add a third category,

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Speaker 1: bleed into credit? Right so you know that's what people

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Speaker 1: are watching for as well. Um so on the FX side,

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Speaker 1: and I still think it's a bit isolated at this point.

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Speaker 1: You know, we're looking at rubal, you know that is

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Speaker 1: probably the big driver right now flows out of EM

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Speaker 1: But right now, treat things videos andcratically a few. I

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Speaker 1: think our audience has a real understanding of the rated

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Speaker 1: change of the equity markets, the idea of you know,

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Speaker 1: you move every day, the drift of every day, and

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Speaker 1: there's corrections of bear markets. Yield in price are different

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Speaker 1: in bonds, and as we know, they can get convexity,

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Speaker 1: they can get acceleration. Are we anywhere near where normal

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Speaker 1: linear function in band yield becomes more aggressive towards higher yields.

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Speaker 1: I don't sense that tipping point at all. Um. I

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Speaker 1: don't think we're where they're either. And there may have

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Speaker 1: been like a false start for false stall and however

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Speaker 1: you want to call it towards the end of January

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Speaker 1: early February. But for that to happen again you need

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Speaker 1: fundamental drivers, and that you could sort of say with

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Speaker 1: a fundamental trigger, maybe positioning in short um short treasury.

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Speaker 1: You've got a bit heavy after that. But Ryan, now,

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Speaker 1: these are not fundamental drivers. We're about to move on

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Speaker 1: to the earning season nowhere by and large and people

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Speaker 1: are expecting um strong results, but there's still a great

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Speaker 1: reluctance to trade off on the back of that. So UM,

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Speaker 1: you know it's this collection of one off idiosyncratic event

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Speaker 1: and it's just very difficult to put in together co

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Speaker 1: here and framework. And then as you and I have

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Speaker 1: talked about, the one off event for me was drag

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Speaker 1: these headlines the last go around the LASS Press conference,

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Speaker 1: where once again the illusion was, well, we're stealed for inflation.

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Speaker 1: But are we going to see that from America's Central Bank?

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Speaker 1: Where even if we get the gyration and base effect

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Speaker 1: and all that, we're stealed for inflation. But is that

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Speaker 1: where we're going? Um? I think markets want to feel

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Speaker 1: that way, and you know, we are getting questions now

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Speaker 1: on like what's the stripe price of the Powell put? Right?

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Speaker 1: So it's not is there a power that what is

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Speaker 1: the stripe price of the power put? So? If if

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Speaker 1: that is the question, then you can see, you know,

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Speaker 1: how the so how the narrative has Yeah, it's a

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Speaker 1: whole lot deeper, isn't it that stripe price? It does

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Speaker 1: seem to be, and there's general but there's general acceptance

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Speaker 1: of that. But the fact that there is a put

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Speaker 1: in place at least and how that markets are are

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Speaker 1: perceiving things, that's a stabilizing element. I think that's why

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Speaker 1: VIX is twenty give will take rather than forty give

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Speaker 1: or take it if you bring up the earnings and

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Speaker 1: it's really curious and quite unique in many ways that

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Speaker 1: we've had the route that we've had over the last

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Speaker 1: couple of months, yet earnings forecasts have increased at the

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Speaker 1: same time. How weird is that? Well, I think you

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Speaker 1: know two things. You know one, so you know, there

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Speaker 1: are discussions about, you know, how much of the tax

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Speaker 1: windfall is really going to start to come through, Um,

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Speaker 1: is there going to be a multiplier effect now whereby

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Speaker 1: the tax win windfall non corporate sides that have trickles

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Speaker 1: down in the famous last words, and how that's going

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Speaker 1: to lift demand. But on the other side of things again,

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Speaker 1: if you look at growth, you know, if you look

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Speaker 1: at pricing power, and that still is in place, and

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Speaker 1: the energy element is actually quite interesting. Look at why

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Speaker 1: uk is are performing right now because of energy right, so,

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Speaker 1: quite a few different positives actually still in markets. Okay, Jeff,

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Speaker 1: it's April. I'm behind. Where is a tradeable pair in

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Speaker 1: currencies right now? Well, believe it or not, still still

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Speaker 1: eurodollar right now looks quite favorable. Just look at the

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Speaker 1: reaction after the Watney's comments and saying what a lot

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Speaker 1: of people have been suspecting for, Well, does the easy

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Speaker 1: to be want to sneak in a depor rate hike

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Speaker 1: towards the end of the year. First time we've had

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Speaker 1: some explicit comments on that. People are still anticipating it

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Speaker 1: because ECB could still surprise to the upside. Okay, so

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Speaker 1: then what's your target there? Four? Now can you go

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Speaker 1: large up? Five? Six? Big figures? There is a more

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Speaker 1: nuanced We can absolutely actually think about heading towards one thirty,

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Speaker 1: but at one thirty or higher we will over a

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Speaker 1: six month rison and beyond that then we start to

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Speaker 1: look at evaluations. Argument would that be where he could

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Speaker 1: be said, okay, let's hold on for a second. Inflation

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Speaker 1: still not high enough? Jeffrey, you were this with you bs.

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Speaker 1: We have habits on the Bloomberg that we develop over

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Speaker 1: the years, and one of mine is when I want

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Speaker 1: to see long term practice and equities, I go to

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Speaker 1: a mutual fund. It's it's I want to keep the

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Speaker 1: name of the fund out of it. We're jes Is

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Speaker 1: about as Grandma widows as you can get, and I

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Speaker 1: see how they've done and what Scott Wren knows with

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Speaker 1: Wells Fargo and with decades of experience with the pressures

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Speaker 1: of what should Grandma do? Grandma has had a heck

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Speaker 1: of a run. One year percentile return eighty nine percentile,

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Speaker 1: three year percentile return percentile, five year percentile return percentile.

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Speaker 1: Scott Wren. It doesn't get better for blue chip stocks

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Speaker 1: than what I just talked about with this, you know,

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Speaker 1: well known American mutual fund. It's actively managed. In all that,

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Speaker 1: What does grandma do if it's been this good for

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Speaker 1: five years? Well, Tom, I think Grandma needs to get

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Speaker 1: ready for some lower returns over the course of the

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Speaker 1: next certainly over the next ten years on average. So

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Speaker 1: you know, as you said, I mean, this has been

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Speaker 1: a big run, it's been long lasting. Um, everything looks good.

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Speaker 1: I would say that, you know, the returns have looked good.

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Speaker 1: But but you know, it's tough if you're a value

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Speaker 1: guy or something like that. I mean, you know, there's

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Speaker 1: not really really any value much value left here. I mean,

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Speaker 1: weren't We're probably the last third of the cycle. Um,

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Speaker 1: if it hadn't been for the tax cut, going through

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Speaker 1: growth for the SMP five, earnings would have been less

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Speaker 1: this year, based on our analysis than last Um. You know,

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Speaker 1: i'd make the argument that uh, organic organically, you know,

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Speaker 1: growth probably peaked in in seventeen and I certainly don't

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Speaker 1: think that, you know, I mean, we're not there yet,

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Speaker 1: but it's going to be a lot slower than Yeah.

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Speaker 1: You know, you know we've been talking about the reach

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Speaker 1: we have, Scott run across this nation. You're in St. Louis,

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Speaker 1: and I noticed the reality of Scott Rin's world that

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Speaker 1: you've got to fly out the Little Rock on Southwest Airlines,

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Speaker 1: am one of the few NonStop flights out of St. Louis,

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Speaker 1: Too Little Rock to talk to people in Little Rock.

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Speaker 1: Good morning Arkansas again, Scott Wren. Those people out there

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Speaker 1: that have had a good run or have missed the

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Speaker 1: run and been in cash. What are they saying to

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Speaker 1: you right now? What are you hearing uh in your

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Speaker 1: many travels for Wells Fargo. Well, Tom, I I have

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Speaker 1: to say, that's that's odd that you mentioned is actually

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Speaker 1: tomorrow morning. I am flying too Little Rock. Um the

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Speaker 1: Arkansas Derbys this weekend, but it's not having it. I

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Speaker 1: am going to the Arkansas Derby. I do it every year.

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Speaker 1: We have about thirty forty people that go and I

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Speaker 1: leave morning but but those people on a little Rock, Um,

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Speaker 1: they have been sitting on their hands. They are concerned,

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Speaker 1: they are are they are confused, and they what they

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Speaker 1: are not doing. The bulk of them, UM is stepping

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Speaker 1: in here to the market on this pullback, and I

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Speaker 1: think they will regret that a year from now. UM

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Speaker 1: that concerned about a lot of things going on out there.

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Speaker 1: You and I were advantaged years ago Scott ran by

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Speaker 1: a brilliant guy named John ber Bussy on little Rocks.

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Speaker 1: Tyson's Food. You know, you know another company out there

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Speaker 1: that did so well, did so well Tyson's Foods right now,

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Speaker 1: and it's a very change company is trading at a

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Speaker 1: normal multiple of like thirteen times versus the nose bleeds

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Speaker 1: of everybody else. Do I buy the growthiness of the

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Speaker 1: loved or do you go buy something like Tyson's Food

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Speaker 1: which is priced like you and I remember it. I

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Speaker 1: think there will be a time to buy tyson Food.

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Speaker 1: I just don't think that Staples is the place you

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Speaker 1: want to be right now. We were underwege, Staples were

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Speaker 1: underweight utilities. Um, you know we're at the wrong part

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Speaker 1: of the cycle. I think to hide, I think we

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Speaker 1: want to be a little more assertive and leaning towards

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Speaker 1: the cyclicals at least for a while longer UM. And

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Speaker 1: then plus you know, you add in you know, staples

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Speaker 1: that sector and good paying a good ind rate. Now

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Speaker 1: utility is good diving end right. But you know when

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Speaker 1: when rates are inching higher and they are only inching

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Speaker 1: slowly higher, that's just another head one. So I think

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Speaker 1: we're at the wrong point in the cycle. UM. At

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Speaker 1: some point out on the horizon, it'll be time to hide.

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Speaker 1: But I don't think that times. Now, let's go rent

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Speaker 1: seeing a global equity strategist for well Fonco Investment. I

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Speaker 1: cannot believe this. I'm just taking the rest of the

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Speaker 1: day thing. Let's dive now into a lengthy conversation with

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Speaker 1: Craig MOFA. Nathanson. We can divide this maybe into his

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Speaker 1: world of wireless and mobile phone value, and then maybe

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Speaker 1: also his colleague Mr. Nathanson's area of content. Craig once

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Speaker 1: again T mobile Sprint, I'm exhaust Are you exhausted? Just

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Speaker 1: what's the backstory of this ballet? Well? Look, these are

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Speaker 1: these are companies that have have been talking about getting

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Speaker 1: together since about or so um in the first time

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Speaker 1: they danced back in fourteen, they concluded that that under

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Speaker 1: a Democrat administration, there was no way that they were

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Speaker 1: going to be able to get from four to three

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Speaker 1: players in the wireless industry, so they shelved the plans

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Speaker 1: until last year. Last year, from what we understand, it

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Speaker 1: fell apart over evaluation and control issues. But the you know, uh,

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Speaker 1: desperate timeline focuses the mind. And we're what two and

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Speaker 1: a half years away from the next presidential election, a

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Speaker 1: year and a half away from from primary season, and

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Speaker 1: you've got it. It takes a year to get one

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Speaker 1: of these deals through the d o J and FCC,

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Speaker 1: so you don't have that much time left any way,

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Speaker 1: and we're going to go into an FCC auction that

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Speaker 1: will include a quiet period where the companies wouldn't be

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Speaker 1: able to talk to each other, fall into the winner

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Speaker 1: of this year. So now it's now or never. How

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Speaker 1: is this mating process going in your land of telecommunications?

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Speaker 1: I think a Verizon with a big fat five percent yield,

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Speaker 1: but basically it's gone nowhere for five years. Are these

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Speaker 1: mergers adding value? Well, remember we haven't had these mergers.

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Speaker 1: We've we've talked a lot about these mergers but we

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Speaker 1: haven't had any mergers. Um. It was funny a year

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Speaker 1: ago the consensus was that we were going to see

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Speaker 1: a tsunami of different deals, and we saw A T

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Speaker 1: and T announced the acquisition of Time Warner, but nothing

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Speaker 1: else has had and that was actually now goes all

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Speaker 1: the way back to October that that was announced, and

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Speaker 1: we haven't seen anything of any size since then. So um.

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Speaker 1: But but look, I the Verizon and A T and

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Speaker 1: T are are primarily on proxies, right. They're as equities,

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Speaker 1: they're they're a little bit different animal than the typical equity.

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Speaker 1: And and for a lot of investors, the five percent

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Speaker 1: yield is fine as long as they don't um, as

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Speaker 1: long as they don't shed any material amount of value.

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Speaker 1: These deals that get done at that restaurant, Michael's Restaurant

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Speaker 1: in Midtown, is that where all these deals? No, No,

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Speaker 1: that that's that's no. That's the place you go after

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Speaker 1: you've done the deal so you can spend the money. UM,

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Speaker 1: media deals, not the telecomry. Michael's is for media. Thank you,

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Speaker 1: Thank you, Craig, m craig. How much is Sprint worth

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Speaker 1: right now? It's six dollars and a penny to share.

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Speaker 1: They've got some decent spectrum, but they need some money.

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Speaker 1: And also soft Bank, which has the big steak. They

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Speaker 1: just raised the money. Tell me how much Sprint you

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Speaker 1: think could be worth? Yeah, you know, that's that's the problem,

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Speaker 1: right is when they tried to merge a year and

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Speaker 1: a half ago, the exchange ratio, just the ratio of

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Speaker 1: the of equities UM the stock prices was about eight

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Speaker 1: to one and by all accounts UM T Mobile and

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Speaker 1: Deutsche Telecom. Deutsche Telecom is the parent company of T Mobile. UM.

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Speaker 1: We're very unhappy with press reports that they were going

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Speaker 1: to do a deal at market because Sprint trades at

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Speaker 1: a huge premium to T Mobile, and it's always a

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Speaker 1: head scratcher for everybody in the industry. I think to

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Speaker 1: wonder why Sprint trade at such a premium UM, given

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Speaker 1: that its performances poor, it doesn't have any real visibility

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Speaker 1: to being free cash flow positive UM, and it has

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Speaker 1: a tremendous amount of debt not just on the balance sheet,

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Speaker 1: but also off the balance sheet. And yet it traded

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Speaker 1: a big premium to the growth engine of the industry

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Speaker 1: UM T Mobile, and and that ironically makes it much

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Speaker 1: harder to do a deal um Now, the exchange ratio

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Speaker 1: it had widened to as much as twelve times. That's

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Speaker 1: presumably somewhat more palatable to T Mobile and Deutsche Telecom shareholders,

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Speaker 1: but even that may not be enough. And ironically, because

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Speaker 1: there's always so much short interest in Sprint, as soon

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Speaker 1: as the story came out that they were talking about

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Speaker 1: a merger earlier this week, Sprint stock price rose by

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Speaker 1: and and the exchange ratio dropped by a full turn

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Speaker 1: and we're down to ten and a half. And again

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Speaker 1: it's not clear that that's interesting to T Mobile and

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Speaker 1: Deutsche Telecom. And remember, even at eight times, um Soft

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Speaker 1: Bank finally walked away from the deal and said they

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Speaker 1: weren't happy with that exchange ratio because they'd be seeding

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Speaker 1: too much control. So you shouldn't look at this and

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Speaker 1: say that it's going to be easy just because there

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Speaker 1: is a gun to their head with respect to timing.

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Speaker 1: They still have to agree on valuation, and it's not

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Speaker 1: easy because Sprint stock price is so overvalued. Thank you

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Speaker 1: for the briefing, Craig Mopic. Thanks for listening to the

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Speaker 1: Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple podcasts, SoundCloud,

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Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at

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Speaker 1: Tom Keene before the podcast. You can always catch us worldwide.

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Speaker 1: I'm Bloomberg Radio