Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller.
Speaker 2: Every business day we bring you interviews from CEOs, market pros,
Speaker 2: and Bloomberg experts, along with essential market moving news.
Speaker 1: Find the Bloomberg Markets Podcast on Apple Podcasts or wherever
Speaker 1: you listen to podcasts, and at Bloomberg dot com slash podcast.
Speaker 1: I tell you this auto strike just it ain't going
Speaker 1: away here. It seems like it's getting even worse. The
Speaker 1: UAW just came across the Bloomberg terminal around ten to
Speaker 1: fifteen Wall Street time. The UAW says five thousand members
Speaker 1: at GM Arlington Assembly join strike. So this is kind
Speaker 1: of going the wrong way, and it got to the
Speaker 1: point now where General Motors today I have to putt
Speaker 1: out some good numbers removes guidance because of the strike.
Speaker 1: So I don't know what's going on there. But I
Speaker 1: know who does know, Kevin Tyne, and he's a senior
Speaker 1: automotive analyst for Bloomberg Intelligence. He joined just via zoom
Speaker 1: from our Princeton office. Kevin, tell us what GM said today,
Speaker 1: you know about the strike and how it's impacting their
Speaker 1: I guess operations.
Speaker 3: Yeah, well, look that was strike started late late in
Speaker 3: the third quarter, so it would be the impact. I
Speaker 3: mean every day of the fourth quarter so far has
Speaker 3: been impacted by the strike. But you know, the backwards
Speaker 3: looking results were actually pretty good, better than expected, and
Speaker 3: just show the profitability that the company can produce and
Speaker 3: the you know, removing some guidance. There is just an
Speaker 3: issue of not flaunting that you're going to make fourteen
Speaker 3: billion when you're trying to negotiate with the union. But
Speaker 3: you know, it could mean it's close, right that this
Speaker 3: is the final turns of the screw that kind of
Speaker 3: gets the manufacturer to give what the union thinks they deserve.
Speaker 3: I think they're probably close on the wage, the increase,
Speaker 3: the percentage, and probably the ratification bonus. I think it's
Speaker 3: all the sort of secondary issues there in terms of
Speaker 3: headcount capacity, you know, new product plants and things like that,
Speaker 3: that are the sticking points this late in the negotiations.
Speaker 4: Why are only some plants on strike?
Speaker 3: Well, you know, it looks bad for everyone, and it's
Speaker 3: very difficult to put out that many workers, right because
Speaker 3: then they go to the strike fund and then you
Speaker 3: completely shut down everything. And I think it's just counterproductive
Speaker 3: to say, you know, we're not going to produce anything
Speaker 3: at all, then you're putting the host in real danger.
Speaker 1: All right, So, Kevin, I guess the big issue, as
Speaker 1: I understand it, is, you know, as the industry, I
Speaker 1: guess he continues its evolution in the EV front, there's
Speaker 1: a real question as to how many jobs are going
Speaker 1: to be needed and where those jobs are going to be,
Speaker 1: and they're going to be different types of jobs, to
Speaker 1: the point where I guess the companies are saying, hey,
Speaker 1: we can't guarantee X number of positions because quite frankly,
Speaker 1: we don't know what positions we're going to need. Is
Speaker 1: that kind of where we are? And if so, I
Speaker 1: don't know how you resolve that.
Speaker 3: Yeah, And look in the other issue too, is that
Speaker 3: as labor costs increase for those union shops, they're only
Speaker 3: GM Ford and STILLANTIS brands. So even if there were
Speaker 3: no EV transition, the domestic manufacturers and their brands are
Speaker 3: going to be less competitive against even you know, Honda
Speaker 3: in Ohio, or Nissan and Tennessee or any of the
Speaker 3: plants down in the South that are not unionized. Never
Speaker 3: mind the EV manufacturers who are not unionized.
Speaker 1: As well.
Speaker 3: So you know, there's the EV transition is part of it.
Speaker 3: But the manufacturers have been very profitable on internal combustion,
Speaker 3: but by making fewer vehicles. So I think that's where
Speaker 3: the capacity and the headcount uncertainty comes in as well,
Speaker 3: where you're saying, you know, yes, we're making money, but
Speaker 3: we're doing it on fewer units. We can't be behold
Speaker 3: into these capacity you know, in footprint requirements going forward
Speaker 3: when we don't know that we're actually going to need
Speaker 3: that much.
Speaker 4: What are the UAW members being paid and what are
Speaker 4: they asking for?
Speaker 3: Yeah, so you know, when you look at it all
Speaker 3: in as the cost to the manufacturer, it's probably in
Speaker 3: the sixty dollars per hour range, and it'll go up
Speaker 3: into the nineties and maybe even higher depending where the
Speaker 3: contract is ultimately done.
Speaker 4: You know.
Speaker 3: And then you compare that all in to the transplants
Speaker 3: of European or Asian manufacturers or EV manufacturers and there there,
Speaker 3: you know, the cost to the company is significantly less,
Speaker 3: you know, And that's what probably needs to be reconciled
Speaker 3: and what the domestic manufacturers are saying, Look, if you
Speaker 3: want to increase your membership, you can't just keep coming
Speaker 3: back to us, right, you take your twenty five percent
Speaker 3: increase and go show it to some of these other
Speaker 3: manufacturers and try and build your base that way, because
Speaker 3: we don't have much more to give.
Speaker 1: So, Kevin, when we do get a resolution, is it
Speaker 1: going to be are we just assuming that it's going
Speaker 1: to apply to all three of the big three automakers?
Speaker 5: Oops?
Speaker 1: Kevin hears uh, I think we lost Kevin. All right,
Speaker 1: Well that was my big smart question the day, and
Speaker 1: we need to know. I think we lost the audio
Speaker 1: with Kevin, so we'll have to go back to that.
Speaker 1: But again, you know, it's serious here for these automakers
Speaker 1: because you know, I mean Jim again pulling its guidance.
Speaker 1: But as Kevin said, maybe that just might be a
Speaker 1: negotiating tactic here. You don't want to say, oh, yeah,
Speaker 1: we we reiterate our profit guidance of fourteen billion dollars
Speaker 1: or something like that when you're trying to plead, you know,
Speaker 1: and trending to negotiate salaries.
Speaker 4: And especially given what we were talking about earlier, GM
Speaker 4: beating a third quarter estimates despite losing two hundred million
Speaker 4: dollars from the walkout during that quarterly period. But then
Speaker 4: also what it means for when it comes to a
Speaker 4: automaker like that that has been rethinking its growth plans
Speaker 4: for EV sales because those sales have plug in have
Speaker 4: been actually slower than anticipated. So a lot of different
Speaker 4: moving pieces there.
Speaker 1: All right, let's go back to Kevin Tyne and we
Speaker 1: got them back, We got the audio back. So Kevin,
Speaker 1: my question was, just, when we do get an agreement,
Speaker 1: is it going to apply to all three automakers just
Speaker 1: kind of automatically?
Speaker 3: Yeah, Well, typically what would happen. Historically you'd have negotiation
Speaker 3: between the union and one manufacturer, usually the most financially sound,
Speaker 3: and then the other deals fall into place. This has
Speaker 3: been unique in that the union has been negotiating with
Speaker 3: all three at the same time. So yeah, this one
Speaker 3: would probably happen amongst all three and one shot, and
Speaker 3: then it'll just be a matter of catching up on
Speaker 3: production over the subsequent quarters going into twenty twenty four.
Speaker 6: Yeah, as far as looking ahead and what could all
Speaker 6: this play out, what exactly do you think would be
Speaker 6: the remaining timetable for how long this actually.
Speaker 4: Could continue on for?
Speaker 3: Yeah, I think it's close, you know, I think people
Speaker 3: look at it like this is a lot of pressure
Speaker 3: on the manufacturers, and it certainly is, but it's also
Speaker 3: pressure on the union as well. You know, you have
Speaker 3: a lot of people that aren't earning what they're used
Speaker 3: to earning, and they're in the strike fund, and everybody,
Speaker 3: I think wants to move forward. So I would say
Speaker 3: we're probably closer. And this is based on nothing than
Speaker 3: just what we're hearing in the rhetoric is that it's
Speaker 3: probably closer than it isn't, And I think it's the
Speaker 3: wage number is probably there, and then it's just some
Speaker 3: of these other secondary issues that just need to be
Speaker 3: hammered out in terms of details, because manufacturers, again, they
Speaker 3: want that flexibility to say, what this industry looks like
Speaker 3: in three four years from now may not be what
Speaker 3: it is today, and we need the flexibility to rationalize
Speaker 3: cost if that's the case.
Speaker 1: Hey, Kevin, A big picture. I just replaced the twenty
Speaker 1: fourteen BMW with the stick shift, and I got the
Speaker 1: twenty twenty four BMW X three, extraordinarily happy. Didn't even
Speaker 1: think about getting ev because it was such the premium price.
Speaker 1: So is the world rethinking, Are you guys as industry
Speaker 1: rethinking what the ultimate end market is for evs, I mean,
Speaker 1: it seems like it's not as strong as I maybe
Speaker 1: once thought.
Speaker 3: Yeah, I think so. And that's playing out in a
Speaker 3: lot of different ways. You know, dealers were you know,
Speaker 3: the manufacturers are going to the dealers and saying, look,
Speaker 3: you need to fit your outfit your stores for this,
Speaker 3: and now they're kind of holding back a little bit,
Speaker 3: and the dealers are waiting it out and not being
Speaker 3: the first ones to move. But I think if the
Speaker 3: demand and profitability profile of EV doesn't improve significantly through
Speaker 3: twenty twenty four, and we've already seen it, right, Ford
Speaker 3: pushed out its building its battery plan, General Motors put
Speaker 3: another year on the timeline. I think if not by
Speaker 3: the end of next year, there will be some of
Speaker 3: those one hundred percent by twenty thirty five, and the
Speaker 3: longer term goals are going to start to be walked
Speaker 3: back because the addressable market might not be what it
Speaker 3: seemed to be when it was first going. And ultimately,
Speaker 3: when you look at it, you know, on the one hand,
Speaker 3: you have everybody saying how Tesla dominates an EV, but
Speaker 3: if demand goes away, you know, then you're questioning really
Speaker 3: everybody else, Right, If there's no demand for Tesla. What
Speaker 3: is the demand for a forty V or GMEV, which
Speaker 3: don't even exist yet in any kind of volume.
Speaker 1: Yep, very interesting. It seems like the market's changing a
Speaker 1: little bit. And again I went internal combustion engine in
Speaker 1: old school. Kevin Tony, thanks so much for joining us.
Speaker 1: Kevin is the senior automotive analysts for Bloomberg Intelligence. He's
Speaker 1: a sconce down in our Princeton, New Jersey headquarters. Down there,
Speaker 1: great lunches down there by the way.
Speaker 7: Ooh, you're listening to the team. Ken's are live program
Speaker 7: Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot com,
Speaker 7: the iHeartRadio app, and the Bloomberg Business app, or listen
Speaker 7: on demand wherever you get your podcasts.
Speaker 1: I want to continue talking about these markets here because
Speaker 1: again we are right in the middle of earnings. We've
Speaker 1: got yields moving all over the place, kind of, as
Speaker 1: Gina said, kind of dictating the market to a certain degree.
Speaker 1: Let's bringing Liz Young, she's head of investment strategy at
Speaker 1: so Far and Liz, thanks so much for joining us.
Speaker 1: I know you cut your teeth on small caps. And
Speaker 1: Gina Martin Adams and Bloomberg Intelligence was just talk about
Speaker 1: kind of the tough headwinds they face. How do you
Speaker 1: think about the small cap space right here?
Speaker 8: Yeah, Hi, thanks for having me.
Speaker 9: So I did cut my teeth as a small cap analyst,
Speaker 9: and I have a soft spot in my heart for them,
Speaker 9: and it does pain me at a time like this
Speaker 9: to say, I just don't think that.
Speaker 8: They're a goodbye yet.
Speaker 9: And you look at where we are in the economic
Speaker 9: cycle and where yields are. Many small cap companies, because
Speaker 9: they're new and because they're growing, need financing in order
Speaker 9: to produce that growth. So as yield rise, as borrowing
Speaker 9: costs rise, and capital is constricted, small cap companies feel
Speaker 9: that much more than large cap companies do, who can
Speaker 9: usually find announce their growth internally. So small caps are
Speaker 9: probably feeling the pain of capital constriction much more. Also,
Speaker 9: just where you are in the economic cycle, I still
Speaker 9: think there are many many signals telling us that we
Speaker 9: are late cycle. Small caps tend to outperform in early cycle,
Speaker 9: so we would need to finish late cycle, get through
Speaker 9: probably a bit of a slowdown, and then restart the
Speaker 9: early part of the cycle, which I just do not
Speaker 9: think is where we are today.
Speaker 4: What are small cap stocks in the technology sector telling
Speaker 4: us at this point, because typically if they're holding up better,
Speaker 4: that couldn't mean brighter times ahead for small caps or
Speaker 4: we see any indication of that right now.
Speaker 9: Well, I think sectors as a whole. As you move
Speaker 9: down the market cap spectrum, the makeup is very different.
Speaker 8: So technology is one of those.
Speaker 9: Obviously you're not seeing big tech stocks, and the behavior
Speaker 9: that we're seeing in big tech stocks, you're not going
Speaker 9: to see that in the small cap space. Generally speaking,
Speaker 9: in small cap tech, you're seeing things that are down
Speaker 9: the supply chain, so they're making components or maybe they're
Speaker 9: early software companies, so they're still going to be quite
Speaker 9: sensitive to moves in the market and probably quite sensitive
Speaker 9: to yields as well. Small cap is actually quite dominated
Speaker 9: by things like healthcare, and the differences in industry makeup
Speaker 9: of healthcare can affect the performance of small caps tremendously.
Speaker 9: As you move down the market cap spectrum, beta in
Speaker 9: general is increased, so I would be careful in a
Speaker 9: rising rate environment, I would be careful with really growthy names,
Speaker 9: particularly in the small cap space, and generally speaking, even
Speaker 9: when you do enter that early cycle behavior, and small
Speaker 9: caps tend to outperform. What usually tends to outperform is
Speaker 9: small cap value because a lot of those are dominated
Speaker 9: by the financial space. So it really does make a
Speaker 9: difference when you look at the sector makeup of different
Speaker 9: size categories, and investors should keep that in mind as
Speaker 9: we move through these different parts of the business cycle.
Speaker 1: Hey, Lis, I wonder just kind of stepping back here,
Speaker 1: you know, in a world where you've got you know
Speaker 1: that the ten year at four point eight seven to
Speaker 1: thirty year, boy, it's at five percent. Haven't seen that
Speaker 1: in a while, and of course a two year at
Speaker 1: five point one percent and that kind of world, can
Speaker 1: equities perform?
Speaker 8: Well, so far they've done okay.
Speaker 9: I mean we've seen we've seen yields be pretty volatile
Speaker 9: all year since the end of July, so that local
Speaker 9: equities top in July July thirty first. Obviously we saw
Speaker 9: quite a swift rise in the ten year since that point,
Speaker 9: and equity saw a down draft. That's logically and rationally
Speaker 9: how I think it should work. You should see some
Speaker 9: pressure on valuations as yields rise. So I think that
Speaker 9: that's actually been a pretty rational change in tone in
Speaker 9: the market, and it's been quite orderly, I mean the drawdown,
Speaker 9: although it feels like it's been prolonged because we were
Speaker 9: used to such a strong up up movement in the
Speaker 9: beginning of the year. It feels long, but it really
Speaker 9: has not been that.
Speaker 8: Long, nor has it been that terrible.
Speaker 9: I mean, it hit maybe seven and a half percent
Speaker 9: down on the SMP at worst, so not even in
Speaker 9: correction territory. Now, as yields stay high, I think that's
Speaker 9: where valuations really come into question. And as we go
Speaker 9: through Q three earning season, obviously looking out into Q
Speaker 9: four and into twenty twenty four, expectations are really high,
Speaker 9: and I think the market is priced for those expectations
Speaker 9: to come true. So as we get more information from
Speaker 9: CEO th than guidance, if we find out that those
Speaker 9: earnings are not realistic to achieve, we're probably going to
Speaker 9: see more pressure on valuations, and yields are not necessarily
Speaker 9: helping that story. So I don't think that stocks can
Speaker 9: maintain these valuations if we keep yields this high for
Speaker 9: a very very long period of time. But it's not
Speaker 9: going to happen in a broad swath across the market.
Speaker 9: You're going to see probably discerning choices in each sector
Speaker 9: of companies that are less sensitive to rates doing better.
Speaker 4: What's the make or break lef in the ten year
Speaker 4: treasury yield to where there would be a potentially bigger
Speaker 4: calibration in the broader US stock market.
Speaker 9: I don't know that there's necessarily a level that's going
Speaker 9: to send it all one direction or another. Five percent
Speaker 9: was clearly a very mental threshold for people.
Speaker 8: I still think that that's probably the case.
Speaker 9: There's still people out there calling for six percent and
Speaker 9: maybe even seven percent and higher. So I think when
Speaker 9: you look at it from the investor standpoint, you have
Speaker 9: individual investors or retail investors who are going to be
Speaker 9: more sensitive to hearing about mortgage rates going up. So
Speaker 9: as mortgage rates crept towards eight percent, I think that
Speaker 9: gave people a lot of pause about whether or not
Speaker 9: they wanted to be throwing all their money at risk assets.
Speaker 9: And then you've got institutional investors and money managers who
Speaker 9: are watching yields and the inversion much more closely, and
Speaker 9: they're watching the cost of capital much more closely. So
Speaker 9: the ten year treasury at five percent or above gives
Speaker 9: them a little bit more consternation. So I don't think
Speaker 9: that there's a magic number that you know, oh my gosh,
Speaker 9: if we get to that, everything changes. But as it
Speaker 9: gets higher, it does get more difficult to sustain.
Speaker 8: And as you have corporate debt coming due next year.
Speaker 9: In the year after, many corporations have to renew their debt,
Speaker 9: and those corporations took that debt out when rates.
Speaker 8: Were much lower.
Speaker 9: So I think we're slowly going to hear about things
Speaker 9: being unsustainable at this level of rates. I'm not entirely
Speaker 9: sold that we're going to be able to stay this
Speaker 9: high for very, very long, because I just don't think
Speaker 9: the economy can withstand it.
Speaker 1: Hey, Liz, Tech is going to take center stage here
Speaker 1: after the close today with Microsoft and Alphabet. How do
Speaker 1: you guys think about tech right here?
Speaker 9: Tech is definitely going to take center stage this week,
Speaker 9: and I think everybody's going to be watching and listening.
Speaker 8: I would say this tech has.
Speaker 9: Been the darling this year, and almost as if it
Speaker 9: can do well in any environment. If rates are going up,
Speaker 9: it's suppose to do well. If they're going down, it's
Speaker 9: supposed to do well. Sideways, up, down. Everything has been
Speaker 9: true at certain points that's not typically how an asset
Speaker 9: class will work. So I think we're going to start
Speaker 9: seeing separation, especially among big tech and we talk about them,
Speaker 9: whether you want to call them the Magnificent seven or
Speaker 9: just big tech stocks in general. We talk about them
Speaker 9: as a homogeneous asset class, but they're really not, and
Speaker 9: many of them are dependent on different parts of the consumer,
Speaker 9: on different parts of the economy, and I think we're
Speaker 9: going to start seeing some divergence in performance among those
Speaker 9: names where it's not just okay, you win because you're
Speaker 9: in that big tech basket. So this week, I think
Speaker 9: is really important, not just for the results, because interestingly,
Speaker 9: as earnings have come in so far, we're seeing even
Speaker 9: companies that have beat still be punished.
Speaker 8: So it's not just about the results.
Speaker 9: It's about the sentiment and the commentary that comes out
Speaker 9: of those companies, because that's what we'll send the market
Speaker 9: in a different direction.
Speaker 1: Thank you so much for joining us. We really appreciate
Speaker 1: getting some of your time. Liz Young. She's head of
Speaker 1: investment strategy at SOFI.
Speaker 7: You're listening to the tape. Cat's are Live program Bloomberg
Speaker 7: Markets weekdays at ten am Eastern on Bloomberg Radio, the
Speaker 7: tune in app, Bloomberg dot Com, and the Bloomberg Business App.
Speaker 7: You can also listen live on Amazon Alexa from our
Speaker 7: flagship New York station, Just say Alexa play Bloomberg eleven thirty.
Speaker 1: Sony Challa joins us. She is a portfolio manager partner
Speaker 1: at times Square Capital Management located guess where Jess, Time Square.
Speaker 1: How about that go figure some good naming rights there,
Speaker 1: So no, thanks so much for joining us. You're live
Speaker 1: here in on our Bloomberg Interactive Broker studio, so we
Speaker 1: appreciate you making the time here. What you call on
Speaker 1: technology here, boy, I hear some big, big numbers in
Speaker 1: terms of Capex the cloud, and then the kids are
Speaker 1: talking about this thing, AI. How do you put that
Speaker 1: all together and have a tech call?
Speaker 10: Yeah?
Speaker 11: Sure, I would say the investor sentiment positioning is broadly
Speaker 11: cautious as we head into Q three earning season, as
Speaker 11: there's angst building around twenty twenty four outlooks and whether
Speaker 11: we will get a Q four budget flush. If we
Speaker 11: look at channel checks and alternative data providers, they're painting
Speaker 11: a conflicting message on the health of IT spending environment.
Speaker 5: And I would.
Speaker 11: Describe the visibility as clear as mud at this point.
Speaker 11: And what I would say is that today's tonight's earnings
Speaker 11: calls from the megacaps like Google and Microsoft will give
Speaker 11: us a better understanding of whether the public cloud consumption
Speaker 11: headwinds or abating or not, and the trajectory of the
Speaker 11: hyperscale or capex into twenty twenty four. You know, the
Speaker 11: thing is that if you rewind to the start of
Speaker 11: twenty twenty three, as cost of capital has risen, you know,
Speaker 11: all these companies went on an endeavor to become financially fit.
Speaker 5: So we've seen.
Speaker 11: Significant positive earnings and free cash revisions upwards. Margin expansions
Speaker 11: have taken place, but what has been pressured is the
Speaker 11: net revenue retention rates as expansions have slowed as customers
Speaker 11: have cut back on spending and optimized their budgets with these.
Speaker 5: Big megacaps and other software providers.
Speaker 11: So the question is going forward into twenty twenty four
Speaker 11: with genai products from all these software companies ramping, whether
Speaker 11: that will serve as an incremental monetization driver into twenty
Speaker 11: four to drive you know, better revenue growth, especially given
Speaker 11: that the macro environment continues to be broadly stable and
Speaker 11: the comps are going to be easier into twenty twenty four.
Speaker 11: Point I would highlight on this front is that we
Speaker 11: should not overlook the lapping of the precipitous decline in
Speaker 11: ventor capital funding that started in two Q of last year.
Speaker 11: If you look at the trailing twelvemonth VC funding, it
Speaker 11: is sitting at two hundred and sixty two billion, which
Speaker 11: is down a little over fifty percent year of a
Speaker 11: year from five hundred and thirty.
Speaker 5: Eight billion last year.
Speaker 11: And the biggest negative step step down occurred between Q
Speaker 11: two and Q three.
Speaker 5: Of last year.
Speaker 11: And you know, assuming a certain percentage of these VC
Speaker 11: funds end up as public cloud revenues, the drag from
Speaker 11: that collapse in VC funding exactly a year ago, by
Speaker 11: our estimate, is, you know, is a drag of about
Speaker 11: ten percent of public cloud revenues.
Speaker 5: So I think the.
Speaker 11: Comps are are easing into into the back half. So
Speaker 11: that's the backdrop, and you know, we're very interested to
Speaker 11: see how the revenues flow are reported tonight.
Speaker 4: Something I'm keeping a close eye on is buybacks because
Speaker 4: we know that technology companies in particular have been a
Speaker 4: key pillar of support when you think about the broader
Speaker 4: stock market in last year with those buybacks being at
Speaker 4: a record, but they did slow in the first half
Speaker 4: of the year. As technology companies, obviously we're going through
Speaker 4: a lot of cost cutting efforts. What are you expecting
Speaker 4: to hear on that front from some of these big
Speaker 4: tech companies.
Speaker 11: Yeah, we expect capital allocation to be an important top
Speaker 11: and going forward, given the cost of capital is higher,
Speaker 11: and so I think expect a similar strategy going forward
Speaker 11: in terms of buybacks as.
Speaker 5: Free cash flows have ramped up.
Speaker 11: I do expect, I do expect a balance between investments
Speaker 11: and buybacks, and I don't expect any major surprises on
Speaker 11: that front going forward.
Speaker 1: So now, for the first half of the year, we
Speaker 1: all learned a new term AI, and every company that
Speaker 1: reported earnings for two or three quarters, whether they may
Speaker 1: dog food or where they may, you know, missiles talked
Speaker 1: about how AI is transforming their business in the supercharge
Speaker 1: at Kroger Croker when they's McDonald's. What is AI to
Speaker 1: you and is it incremental to spending?
Speaker 5: Yes, it's an interesting uh.
Speaker 11: You know initially when uh, if you look at the
Speaker 11: equity performance between me and July, we got we were
Speaker 11: in the hype cycle of AI, and in general, I
Speaker 11: would say investors generally overestimate the impact of new technologies
Speaker 11: like jen ai and the near term, but under estimate
Speaker 11: the longer term impact. So what is jen A I definitely,
Speaker 11: I think, you know, we've been, as part of our
Speaker 11: ongoing due diligence, talk to a lot of customers. We've
Speaker 11: spoken to leaders of IT departments at big financial institutions, industrials,
Speaker 11: and healthcare companies, and there is definitely a view internally
Speaker 11: that GENI could be a meaningful productivity enhancer, and all
Speaker 11: these companies are exploring different GENI use cases within their organizations.
Speaker 11: Our senses that the first use cases for GENI are
Speaker 11: probably going to be internal use cases to improve productivity improvement,
Speaker 11: be it in a call center agent, for a marketing professional,
Speaker 11: for a software developer. These tools, anecdotally, what we've heard,
Speaker 11: increased productivity by twenty five to thirty percent, so they're
Speaker 11: definitely pretty impactful. There's a lot of interest within organizations,
Speaker 11: but they're also mindful and want to understand the data
Speaker 11: privacy issues around GENI, security issues around GENI, and the cost,
Speaker 11: you know, the cost of implementing JENI. So they're moving
Speaker 11: thoughtfully and conservatively. That's why I said we overestimate the
Speaker 11: impact of the near term but underestimate the longer term impact.
Speaker 11: So as GENI products from software vendorors become generally, you know,
Speaker 11: more generally available. Microsoft's is coming out on November first,
Speaker 11: for example, a lot of these tools will be rolled out.
Speaker 11: Then the enterprises will, you know, decide whether it makes
Speaker 11: sense for them at the cost at the price points.
Speaker 5: That they're being delivered.
Speaker 11: But from our vantage point, it's more of twenty twenty
Speaker 11: four twenty twenty five revenue growth.
Speaker 4: Through did we only have about a minute left. But
Speaker 4: if you are able to join the earnings call for
Speaker 4: Microsoft or Alphabet, what question would you ask for each company?
Speaker 11: Yeah, the number one question is what is happening on
Speaker 11: the consumption optimized optimization? Have customers optimize the spend or
Speaker 11: is there more to go on that front? And the
Speaker 11: second is the trajectory of the capex spending. You know,
Speaker 11: that's an important tell for future demand that may be
Speaker 11: coming on the GENI front.
Speaker 1: Because the expect I mean the understanding or a least
Speaker 1: my understanding is jen Ai is incremental to existing budgets.
Speaker 1: Is that true in your mind?
Speaker 11: So there will be definitely repurposing off budgets, So savings
Speaker 11: in some parts of the budget will be repurposed to JENNI.
Speaker 5: But you know, I do believe that.
Speaker 11: You know, our conversations are suggesting that the IT budgets
Speaker 11: are looking to go up mid to high single percentage
Speaker 11: points in twenty twenty four. So and part of that
Speaker 11: is Jenny I related. And that view is that budget
Speaker 11: outlook is slightly better than what we've seen in twenty
Speaker 11: twenty three.
Speaker 1: Okay, very good. We'll certainly be paying attention to the
Speaker 1: Microsoft and to the Google numbers after the closed tonight.
Speaker 1: So neutrala partner and portfolio manager at Times Square Capital Management,
Speaker 1: timely discussion here as we get ready to kick off
Speaker 1: some big, big tech earnings.
Speaker 7: You're listening to the Team Ken's live program Bloomberg Markets
Speaker 7: weekdays at ten am Eastern on Bloomberg dot com, the
Speaker 7: iHeartRadio app, and the Bloomberg Business app, or listen on
Speaker 7: demand wherever you get your podcasts.
Speaker 1: Ank Rate dot Com US homeworkers thirty year fixed seven
Speaker 1: point ninety eight percent. Just extraordinary. That is the high
Speaker 1: since March of two thousand.
Speaker 5: Wow.
Speaker 1: Makes me feel less dumb for my six percent mortgage
Speaker 1: I got back in March of this year. I did
Speaker 1: feel a little like a knucklehead back then. Six percent,
Speaker 1: but not too bad. But that can't be good for
Speaker 1: like the housing market overall. Let's check in with somebody
Speaker 1: who knows this stuff, Brad Dilman, Chief Economists, RPM Living
Speaker 1: is the firm. Hey, Brad, we got a mortgage RDE
Speaker 1: up there at eight percent on the thirty year fixed man,
Speaker 1: what's that mean for the residential real estate market?
Speaker 12: Well, I think we can see that in the existing
Speaker 12: home sales.
Speaker 13: Right If that number is now at four million seasonally annualized,
Speaker 13: that's pretty ugly that we got to go back to
Speaker 13: the Great Recession to see a figure that bad.
Speaker 12: So it translates into low volume, that's for sure.
Speaker 4: And we're going to get a batch of housing data
Speaker 4: throughout this week, so starting tomorrow will have us new
Speaker 4: home sales for the month of September. When we did
Speaker 4: get August data, it did fall to a five month low.
Speaker 4: What are you thinking that we'll end up seeing from
Speaker 4: this data tomorrow?
Speaker 13: I think the the consensus figure I had in front
Speaker 13: of me was six eighty six.
Speaker 12: I think we may actually beat that.
Speaker 13: AT's say, six hundred eighty six thousand seasonally, just at annualized,
Speaker 13: I think it will come in seven hundred, but I
Speaker 13: think it'll have a little bit more strength to it.
Speaker 13: New home sales obviously came down from their peak, but
Speaker 13: you know, if you compare them to pre COVID era,
Speaker 13: they're still pretty strong.
Speaker 4: Also, though, another data point that will get later this week,
Speaker 4: which is important to look at the future direction when
Speaker 4: it comes to the housing market is also when you're
Speaker 4: looking at housing starts and building permits, and when you're
Speaker 4: looking at pending home sales. Obviously a leading indicator of
Speaker 4: existing home sales, given typically they're going to go under
Speaker 4: contract a month or two before they're end up being sold.
Speaker 4: What are you seeing on that end, and is that
Speaker 4: showing any sort of promising signs? More broadly for the
Speaker 4: housing market, You know, I.
Speaker 13: Really look at the builders when I think about this,
Speaker 13: and what I saw with them was really in the
Speaker 13: last ninety days or so, the reporting of a material
Speaker 13: slowdown in community traffic that's very clearly tied to the
Speaker 13: recent move in the ten year treasury rate. I think
Speaker 13: when we look at the existing home sales side and
Speaker 13: pending home sales and how that may move. We really
Speaker 13: end up with a question of geography here, and it
Speaker 13: translates to what we see on the rental market too.
Speaker 12: The areas that are really strong thing.
Speaker 13: It's Madison, Wisconsin, Maha, Nebraska, Urbana, Champagne, Illinois. It's markets
Speaker 13: that really haven't been in the spotlight in terms of
Speaker 13: housing in quite some time. And these may be the
Speaker 13: kinds of areas that actually lead even in this high
Speaker 13: interest rate environment.
Speaker 1: So, Bret, I've heard, I've heard from real estate folks
Speaker 1: like yourselves that there's just not enough housing in the
Speaker 1: United States And A Tory, how did that happen? If
Speaker 1: that's even true? And I mean, b how do you
Speaker 1: fix it?
Speaker 12: So A, Yeah, I think it is true.
Speaker 13: My own analysis shows that we're under built by about
Speaker 13: six hundred and fifty thousand units right now. How that
Speaker 13: happened really goes all the way back to the Great
Speaker 13: Recession and really our efforts to stimulate home prices for
Speaker 13: about five years by.
Speaker 12: Increasing affordability on the margin.
Speaker 13: Back then, it resulted in less affordability and subsequent time
Speaker 13: periods and therefore lower construction volume, particularly in single family
Speaker 13: where it took more savings and migration to affordability for
Speaker 13: people to own. Now we are closing this gap. The
Speaker 13: degree to which we're underbuilt has been made up four
Speaker 13: in two parts. One has been that we have seen
Speaker 13: a de facto housing supply stimulus in terms of COVID
Speaker 13: era response. We saw fiction moratoria translates to high rank
Speaker 13: growth and that into high multifamily starts. And then of
Speaker 13: course the really low interest rates that we had back
Speaker 13: then in terms of mortgages translating to home price appreciation,
Speaker 13: which translated into a lot of single family starts. We're
Speaker 13: closing this gap. I think we're under built by six
Speaker 13: hundred and fifty thousand units today. Let's put that in context.
Speaker 13: There's nearly one point seven million housing units under construction
Speaker 13: right now, so that means we've just by today's figures. Yeah,
Speaker 13: you've got to figure in obsolescence and such. But if
Speaker 13: we finished everything that's under construction right now, we'd be
Speaker 13: overbuilt by a million units.
Speaker 4: What about when it comes to particular home builders, because
Speaker 4: dear Horton Lenard, they have a particular demographic when it
Speaker 4: comes to that, But when it comes to housing affordability
Speaker 4: for lower income demographics, what builders do you think are
Speaker 4: out there that could help this particular segment of the population.
Speaker 13: I just think it's going to be smaller builders, some
Speaker 13: of which may not even be publicly traded, right These
Speaker 13: are going to be folks who are in these much
Speaker 13: smaller markets that actually have a pretty.
Speaker 12: Good land basis.
Speaker 13: If we look at the big builders that focus on
Speaker 13: that move up buyer, that's really where a lot of
Speaker 13: the pain is right now. These people can't sell their
Speaker 13: existing home at an attractive enough price really because of
Speaker 13: mortgage rates, and then they can't turn around and get
Speaker 13: the discounts that they'd really need into the home that
Speaker 13: they would move into.
Speaker 12: So the move up buyers really hurt.
Speaker 13: Right now, we're seeing a little bit of a shift
Speaker 13: i'd say to you know, call it C locations, not
Speaker 13: so much in the D locations anymore, but a shift
Speaker 13: back in to see a focus on kind of smaller
Speaker 13: and higher quality product that really might kind of reflect
Speaker 13: a bumping down effect when it comes to ownership. We
Speaker 13: can flip that to the rental side, where it looks
Speaker 13: like supply, you know, is siphoning demand from Class B
Speaker 13: and providing a lot of alternatives now for renters who
Speaker 13: look to more affordable but still quality options.
Speaker 1: Are you? Are you down in Atlanta, Bread?
Speaker 12: No, I'm in Clintonville, Wisconsin.
Speaker 1: Clinton.
Speaker 12: I'm remote.
Speaker 13: I work for a company that's based out of Austin,
Speaker 13: and I spend time there, but I'm in rural Wisconsin,
Speaker 13: which is where the wife is from.
Speaker 1: Clinton. Where's Clinton, Wisconsin?
Speaker 12: Clintonville is about forty five five minutes west of Green Bay.
Speaker 12: They make fire trucks out here.
Speaker 1: So how's the winter treating you so far?
Speaker 12: It's not too bad. Yeah, I got a little bit
Speaker 12: of a storm right now, but.
Speaker 8: It's actually a beautiful fall.
Speaker 13: But may we talk in a few months when it's
Speaker 13: you know, dark at four o'clock contea?
Speaker 4: Right?
Speaker 10: All right?
Speaker 1: If I want so, if I want to buy a
Speaker 1: four bedroom fairly new construction, Clintonville, Wisconsin, what's that going
Speaker 1: to run me?
Speaker 12: Well, there's not too much supply out here, I'll tell
Speaker 12: you that.
Speaker 13: But you know, we I think we can say that,
Speaker 13: you know, on the on the new home side, prices
Speaker 13: are down from their peak.
Speaker 12: I would think if you wanted to build.
Speaker 13: In rural America, if you wanted to go build, and
Speaker 13: you know Urbana Champaign, which is is rural enough for
Speaker 13: anybody who's sitting in New York or a major metropolitan
Speaker 13: area and you want your four bedroom house.
Speaker 12: That's really nice. You've been looking anywhere from three fifty
Speaker 12: to four to fifty.
Speaker 4: Do you talk to brokers often and if so, what
Speaker 4: are they telling you about what they're hearing anecdotally from
Speaker 4: potential buyers.
Speaker 13: You know, I don't talk to brokers personally. I'm a
Speaker 13: data guy, right, so I see through this in data
Speaker 13: and reading reports.
Speaker 12: But what I am hearing from the home builders.
Speaker 13: Has been this really this decline in community trap that
Speaker 13: you know, the builders have been buying down rate for people.
Speaker 12: They're really getting to the end of that. They're not
Speaker 12: wanting to cut their asking price yet, and so they're
Speaker 12: turning around.
Speaker 13: They're trying to make up margin by basically going after
Speaker 13: the trade so labor and materials cost and trying to
Speaker 13: get concessions on that front.
Speaker 1: Dude, you're not kidding, man. I just popped up Clintonville
Speaker 1: on the Google Maps. You are west of Green Bay,
Speaker 1: northwest of Appleton. That, dude, you are like the center
Speaker 1: of American No, no question, right, what's it? How's life
Speaker 1: out there?
Speaker 13: Oh?
Speaker 12: I've only been out here for about a month and
Speaker 12: a half in California.
Speaker 13: I was in Seattle, I was in Boston, I was
Speaker 13: in London, and then I was in Atlanta.
Speaker 12: All for me, it's the holy region of the country,
Speaker 12: and it's.
Speaker 4: Still neat all right, look at less about like the economy, Like,
Speaker 4: what are you seeing out there?
Speaker 12: Some growth? Right, you know, an area like this. HA
Speaker 12: had a tough time coming out.
Speaker 13: Of the Great Recession for quite a long time, and
Speaker 13: I'd say really around twenty eighteen twenty or nineteen or
Speaker 13: so things started to pick up awesome, and then of
Speaker 13: course the pandemic led to enough remote work and then
Speaker 13: some continued growth out here. You know, out here though
Speaker 13: it's a lot of farming, it's manufacturing, right, We build
Speaker 13: fire trucks and a little.
Speaker 12: Bit in terms of wind turbines and things like this.
Speaker 1: Awesome, all right, Brad, Great chatting with you. Great getting
Speaker 1: the local color from Clintonville, Wisconsin. Bradilman, he's the chief
Speaker 1: economist RPM Living.
Speaker 7: You're listening to the tape Cat's are live program Bloomberg
Speaker 7: Markets weekdays at ten am Eastern on Bloomberg Radio, the
Speaker 7: tune in app, Bloomberg dot Com, and the Bloomberg Business app.
Speaker 7: You can also listen live on Amazon Alexa from our
Speaker 7: flagship New York station, Just Say Alexa, play Bloomberg eleven.
Speaker 1: Thirty, Coley Smith plus twenty live here in our Bloomberg
Speaker 1: Interactor Broker Studio Earnings Here, we're all been focusing on
Speaker 1: the tech earnings coming out after the close. We had
Speaker 1: some good industrial earnings out three M and Gee Boast
Speaker 1: had some pretty good numbers, boosted the profit outlook. The
Speaker 1: stocks are up five or six percent. We said we
Speaker 1: got to get Brook Sutherland in here. She is the
Speaker 1: Bloomberg opinion person who covers industrial America like no one else. Hey, Brook,
Speaker 1: I don't know, it seems like industrial America is doing Okay,
Speaker 1: what are your takeaways from three M? Do you know
Speaker 1: what THREEM stands for? This is an awkward mining and
Speaker 1: manufacturing three M? And GE?
Speaker 14: What G stands for General Alegen?
Speaker 1: There you go, got one of us exactly what your
Speaker 1: takeaway brooks from some of these companies here.
Speaker 15: Sure, So there's unique stories happening at both GE and
Speaker 15: three M, and so you know at GE it's really
Speaker 15: a story of just the aerospace market is continuing to
Speaker 15: boom and there is a supply problem there rather than
Speaker 15: a demand problem that the airlines of the world air
Speaker 15: lessers want more aircraft, more jet engines than these companies
Speaker 15: can produce, and demand is really fair to robust still.
Speaker 1: So GE, do you not have the supply chain product
Speaker 1: in I guess the stuff to make them, or you're
Speaker 1: just a capacity.
Speaker 15: It's a little bit of both. And so what was
Speaker 15: interesting in the US is that while we extended payroll
Speaker 15: aid to the airlines during the pandemic, we did not
Speaker 15: do that the aircraft manufacturers, and so all of these
Speaker 15: companies slashed their workforces very aggressively, and then when they
Speaker 15: tried to rehire them, they found that that was more
Speaker 15: difficult than they thought it was going to be. That
Speaker 15: a number of people had sort of retired. There was
Speaker 15: obviously a lot of competition for skilled labor. That is
Speaker 15: particularly true this labor shortage issue at the smaller supplier.
Speaker 15: So if you're a company like GE, your ability to
Speaker 15: compete for top talent is better than somebody further down
Speaker 15: the line. But of course GE depends on these smaller
Speaker 15: suppliers to be able to churn out jet engines. I
Speaker 15: talked with Larry Cole this morning actually, and the CEO
Speaker 15: of GE and talked about how they're still seeing supply
Speaker 15: chain constraints and the delinquent trees were up in the
Speaker 15: third quarter relative to the second quarter. They're working hand
Speaker 15: in hand with their supply chain to try to really
Speaker 15: ramp up output, but it is it's challenging.
Speaker 14: How much has a story of materials versus labor issues.
Speaker 15: I think it's more on the labor front at this point.
Speaker 15: That's really where the constraints are.
Speaker 1: All right, So three M what's the story there? Three
Speaker 1: at the Saint Palm, Minnesota, great town by the way,
Speaker 1: if you.
Speaker 15: Haven't been, it is it is not a demand story.
Speaker 15: At three AM to the same extent as what we're
Speaker 15: seeing in GE, they actually cut their organic sales growth
Speaker 15: outlook for the year. They're continuing to see a lot
Speaker 15: of weakness and consumer markets, electronics, some spottiness in industrials
Speaker 15: amid a slow down in Europe, and you know, less
Speaker 15: robust performance in China than I think a lot of
Speaker 15: companies were hoping for. As we came out of the
Speaker 15: other end of the COVID lockdowns there, they did raise
Speaker 15: their profit guidance and that reflects very aggressive cost cutting
Speaker 15: actions that they're taking. Now, this is not the first
Speaker 15: restructuring effort by three AM under any stress of the imagination,
Speaker 15: but this one does appeal appear, excuse me, to have
Speaker 15: a little bit more heft to it where it is
Speaker 15: actually showing up on the bottom line. One of the
Speaker 15: long standing complaints that analysts have had about three M
Speaker 15: is that it announces is restructuring programs and then we
Speaker 15: just never really see any kind of impact. That it
Speaker 15: appears to be different this time around, and I think
Speaker 15: that's why you're seeing some enthusiasm around the stuff today.
Speaker 14: Well, tell us a little bit about the restructuring efforts
Speaker 14: that three M has made. I got a little loss
Speaker 14: trying to get ready for this to see just how
Speaker 14: many job cuts they've made and what kinds of different
Speaker 14: stages it's come in. So if you could give us
Speaker 14: a little bit of the backstory there, sure, it's been.
Speaker 15: Going on for a few years now. I mean, the
Speaker 15: bigger issue with three M, apart from arguably a bloated
Speaker 15: cost structure, is that they have these legacy liabilities hanging
Speaker 15: over their head that involve Forever Chemicals or pfas and
Speaker 15: also ear plugs that they sold to the military that
Speaker 15: veterans have alleged contributed to hearing loss. So those have
Speaker 15: really been weighing on the company because they were somewhat
Speaker 15: open ended. It was not really clear what was going
Speaker 15: to happen. Now three M does have a settlement for
Speaker 15: the public water claims related to PFAS that which is
Speaker 15: working its way through the court, and it also has
Speaker 15: a settlement for the combat arms the ear plugs issue,
Speaker 15: which is also going to work its way through the system.
Speaker 15: So they've made progress in certain terms of clearing out
Speaker 15: some of these legacy issues, but there are still some
Speaker 15: p fast items outstanding that I think will continue to
Speaker 15: make this a tricky stock to own for investors because
Speaker 15: you're not really just betting on industrial markets or costcut.
Speaker 1: That's what I was just going to ask you about,
Speaker 1: because I'm looking at the stock price performance in three
Speaker 1: M is down about twenty five percent year today, but
Speaker 1: GE is up about seventy five percent year to date.
Speaker 1: So when I think of GE, I'm back. I go
Speaker 1: back to the day's when it was everything it was
Speaker 1: GE was the economy, including the financial system. Obviously, they've
Speaker 1: paired it down dramatically over the last ten fifteen years.
Speaker 1: Is Larry Colp to see are they done. Do we
Speaker 1: have the new ge ors. There's still stuff to sell
Speaker 1: or spend offers.
Speaker 15: So their plan is to spin off ge Vernova, which
Speaker 15: will be the energy businesses, so that's their gas turbines,
Speaker 15: but also the renewable energy the wind turbine businesses. They
Speaker 15: said today that that is going to happen in the
Speaker 15: second quarter of twenty twenty four, which is around the
Speaker 15: sort of general timefirme that they've given before, but a
Speaker 15: little bit more specific in detail. And then once that happens,
Speaker 15: you're mostly done as far as the streamlining process. It's
Speaker 15: an aerospace and defense company with some legacy insurance liabilities
Speaker 15: that they likely will want to sort out sooner rather
Speaker 15: than later, just to really clean up the story. And
Speaker 15: then I think the conversation really shifts to do you
Speaker 15: start looking at acquisitions really, which is crazy to think
Speaker 15: about after you know, the dark days of ge and
Speaker 15: cash flow burn and all of that. But the balance
Speaker 15: sheet is in a much better place.
Speaker 1: And I'm just I was just going to point that out.
Speaker 1: You talk about the balance sheet, I'm looking for on
Speaker 1: my FA function and back in twenty nineteen they had
Speaker 1: ninety four billion of debt. That's down to like twenty
Speaker 1: three twenty four billion of debt.
Speaker 15: That's pretty good, right, because they've sold off all these
Speaker 15: businesses and so they've been able to bring in money
Speaker 15: and really ship away at that debt load, and that
Speaker 15: puts the company in position where we can't have these
Speaker 15: conversations about you know, what kinds of acquisitions might make sense.
Speaker 15: You know, GE will be once they've spun off the
Speaker 15: energy business. It will be somewhat unique in that the
Speaker 15: aerospace business will be highly focused on engines. You don't
Speaker 15: really have a comparable raytheon of course produces the GTF
Speaker 15: out of its Pratt and Whitney unit, but they have
Speaker 15: a much more robust defense business. So that raises a
Speaker 15: question of would g you want to get, you know,
Speaker 15: deeper into defense or are there other parts of aerospace
Speaker 15: that might be appealing to the company, whether that's avionics
Speaker 15: or other types of aircraft parts.
Speaker 14: This is all really impressive for Larry Culp, you'd think, right,
Speaker 14: I mean, look at like the story that he's inherited. Obviously,
Speaker 14: like there's been a bit of turnover at the top,
Speaker 14: but he's been really you know, the man of the
Speaker 14: past couple of years here at the top of the
Speaker 14: GE ladder. I mean, what kind of legacies that mean
Speaker 14: for him? And like all that he has done to
Speaker 14: turn this company around. I mean I used to cover
Speaker 14: it back when the bonds were not trading so well.
Speaker 14: I mean, this is like you were saying now, the
Speaker 14: deleveraging story has been incredible, but it's got to be
Speaker 14: like I mean, he's got to be like CEO of
Speaker 14: the century.
Speaker 15: Sure, he's certainly being paid a lot of money to
Speaker 15: do this, but he really has accomplished a lot at GE,
Speaker 15: and it's really been impressive to see. It's been a
Speaker 15: long process with some stops and starts, but to make
Speaker 15: this kind of progress on the debt load particularly gives
Speaker 15: GE a future that really just was not, you know,
Speaker 15: conceivable a few years ago. And I think that's really
Speaker 15: to Larry's credit.
Speaker 1: Yeah, and to even have the discussion, which I can't
Speaker 1: remember the last time we didn't with G about growing.
Speaker 1: I mean it's been almost twenty years. I mean, I
Speaker 1: think since Jack Welch left it's been at a The
Speaker 1: conversation has been.
Speaker 15: Folks, and well, they did some acquisitions in the in
Speaker 15: the era that didn't work out so much kind of
Speaker 15: but yes, correct.
Speaker 1: All right, brook thanks so much for joining us. Brooks Souther.
Speaker 1: Then she's a columnist for Bloomberg Opinion, covering all the
Speaker 1: industrial America, some great companies, some great industries. She covers
Speaker 1: the deal. She kind of does it. Also, we appreciate
Speaker 1: getting a few minutes of Brooks time here in our
Speaker 1: Bloomberg Interactive Broker Studio.
Speaker 7: You're listening to the tape Cat's are live program Bloomberg
Speaker 7: Markets weekdays at ten am Eastern on Bloomberg Radio, the
Speaker 7: tune in app, Bloomberg dot Com, and the Bloomberg Business App.
Speaker 7: You can also listen live on Amazon Alexa from our
Speaker 7: flagship New York station. Just say Alexa, play Bloomberg eleven thirty.
Speaker 1: Right now, people want to talk big, big media. We're
Speaker 1: talking music, can talk Hollywood and all that kind of stuff.
Speaker 1: There's lots to talk about, and we go to our
Speaker 1: go to analyst, Keitha Ranganathan. She is the media analyst
Speaker 1: for Bloomberg Intelligence, joining us via zoom from the headquarters
Speaker 1: of BIATDN in Princeton, New Jersey. Keitha, let's start with Spotify.
Speaker 1: Good story, some good numbers. Tell us what we got
Speaker 1: from our friends at Spotify.
Speaker 10: Yeah, excellent story. Paul at Spotify when they reported their
Speaker 10: three Q today, so they beat on almost every metric
Speaker 10: that we were looking at. User numbers came in really strong,
Speaker 10: premium subscriber momentum will continue into four Q. They said
Speaker 10: that they expect their monthly active users to reach the
Speaker 10: six hundred million mark by the end of this year.
Speaker 10: They're targeting about a billion in the next three to
Speaker 10: four years time. But I think most important for this
Speaker 10: story was really the inflection in the profitability metric. I mean,
Speaker 10: this is this is a streaming company that has plenty
Speaker 10: of subscribers. Before, for some reason, they haven't been really
Speaker 10: able to generate profits and that really kind of goes
Speaker 10: to their business model. But for the first time in
Speaker 10: two years, they actually generated a nice surprise profit, which
Speaker 10: is I think what is really driving most of that
Speaker 10: stock reaction today and.
Speaker 14: Tell us, Githa, is that profitability because Spotify was raising
Speaker 14: prices in the period or like more to the strength
Speaker 14: of the business that you're talking about.
Speaker 10: That's a great point. Yes, they did raise prices, and
Speaker 10: I think what it tells us in terms of their
Speaker 10: you know, not just their the operating income number, but
Speaker 10: the fact that they were able to gain subscribers even
Speaker 10: as they increased prices, it just tells us that they
Speaker 10: have a lot of pricing power. There's obviously a lot
Speaker 10: of stickiness for the product. But in terms of the
Speaker 10: margin story itself, they have really been looking at cost
Speaker 10: discipline very very carefully, and so they have been able
Speaker 10: to finally cut down on their marketing spend. They've been
Speaker 10: able to cut down on personnel costs, which is what
Speaker 10: drove that operating profit as well as a slight mode
Speaker 10: margin expansion.
Speaker 1: All right, Githa, you cover everything. We can go many
Speaker 1: different directions. Right now, we're going to switch gears and
Speaker 1: go to Hollywood. The actors. What's going on? They're still
Speaker 1: on strike, don't they know? They don't live in the
Speaker 1: real world. What's going on with the actors?
Speaker 10: Yeah, I mean, you know, a few days ago, actually
Speaker 10: maybe a couple of weeks ago, you know that they
Speaker 10: you know, they had been talking to the studios, but
Speaker 10: then everything kind of hit a stalemate again when they
Speaker 10: basically said that they wanted a viewership bonus. I think
Speaker 10: they said the industry basically said it would cost them
Speaker 10: something like about a billion dollars and I think that
Speaker 10: was kind of a no go. We had, you know,
Speaker 10: the Netflix CEO kind of talk about it at the
Speaker 10: Bloomberg screen Time conference, and that's where kind of things
Speaker 10: have have been left out so that it's supposed to restart,
Speaker 10: I think today, but we'll see where it goes. In
Speaker 10: the meantime, studios are really kind of facing a difficult situation.
Speaker 10: There's a lot of uncertainty in terms of the twenty
Speaker 10: twenty four content slate. We just saw that Paramount pushed
Speaker 10: out Mission Impossible eight by a whole year now to
Speaker 10: twenty twenty five. You know, we know Disney pushed out
Speaker 10: Dead Poultry. So yeah, the film slate, especially for twenty
Speaker 10: twenty four looks really really shaky.
Speaker 13: Paul.
Speaker 14: Can you tell us either what the studios and the
Speaker 14: actors want that is maybe if it's different, or how
Speaker 14: does it compare to the writer's strike that has already resolved.
Speaker 10: Yeah, so, you know, with the writer's strike, of course,
Speaker 10: a lot of it was in terms of remuneration. A
Speaker 10: lot of it was in terms of transparency in terms
Speaker 10: of viewership metrics, and I think the studios have promised
Speaker 10: to do better both in terms of paying them as
Speaker 10: far as residuals are concerned, as far as releasing you know,
Speaker 10: some of the viewership numbers, as well as some more
Speaker 10: guardrails around kind of the use of AI. I think
Speaker 10: what the with the actors, it's a little bit of
Speaker 10: a different situation though. First of all, there are four
Speaker 10: times the number of actors that there are writers, and
Speaker 10: so the whole calculus kind of changes from an economics perspective,
Speaker 10: and it's going to be pretty onerous for the studios
Speaker 10: to kind of accept all of the actors' conditions. And
Speaker 10: so that's where I think there is you know, a
Speaker 10: lot of you know, the differences of opinion kind of
Speaker 10: creeping up on top of that. I think the actors
Speaker 10: are getting I don't know if greedy is the right
Speaker 10: word to use, but they definitely want a lot more
Speaker 10: so for shows that are being viewed, probably more often
Speaker 10: they want, you know, what the studios are calling this
Speaker 10: viewership bonus kind of a payment is almost like a
Speaker 10: little bit of a tax. That's how you know, death
Speaker 10: Serrando's kind of called it. So they're not happy with that.
Speaker 10: So we'll have to see, I mean, somebody has to
Speaker 10: cave there has to be some compromise.
Speaker 1: All right, pivot yet again, Disney they're looking to kind
Speaker 1: of I don't know restructures are right word, but certainly
Speaker 1: looking at all their assets. And one of the big
Speaker 1: assets is their satellite business in India, which I think
Speaker 1: they got from the Fox acquisition. I'm not sure talk
Speaker 1: to us about what's going on there that there's a
Speaker 1: story that they may be looking to sell some or
Speaker 1: all of it.
Speaker 10: You know, you're absolutely right. So when they paid the
Speaker 10: seventy one billion dollars for a huge chunk of the
Speaker 10: Fox assets, a big part of that actually Star India
Speaker 10: and Star India is really a collection of plenty of
Speaker 10: local TV networks, about sixty TV channels and a very
Speaker 10: very robust streaming service which was called hot Star. And
Speaker 10: this was really one of the crown jewels that Disney
Speaker 10: thought they got when they kind of acquired when they
Speaker 10: made that acquisition, because Hotstar really had a lot of
Speaker 10: users on its streaming platform, over about one hundred hundred
Speaker 10: and fifty million, and so it kind of really helped
Speaker 10: them juice that Disney plus subscriber number because they were
Speaker 10: selling it as Disney plus Hotstar. And so when subscriber
Speaker 10: numbers were the main metric of success. I mean, this
Speaker 10: was this was the huge story for them. Of course,
Speaker 10: all of that changed because the main problem with hot
Speaker 10: Star was, yes, subscriber growth was good, but the revenue
Speaker 10: that a hot Star user brought in was very, very
Speaker 10: low compared to a US subscriber, but only about one
Speaker 10: tenth the revenue that a US Disney Plus subscriber would
Speaker 10: bring in, so it obviously was kind of really hurting
Speaker 10: the bottom line. There was this additional issue with you know,
Speaker 10: sports rights and you know, the rights of cricket, which
Speaker 10: is really important in a country like India, but Disney
Speaker 10: didn't want to pay up and so they started losing
Speaker 10: subscribers and eventually Disney kind of came to a point
Speaker 10: where they decided that the best thing to do in
Speaker 10: terms of, you know, the business and the overall strategy
Speaker 10: would be to kind of get rid of the whole
Speaker 10: Star India operation. And so right now they're looking to
Speaker 10: talk with one of the biggest telecom operators in India,
Speaker 10: which is Reliance. I think the sticking point right now
Speaker 10: is really the price. It ranges anywhere from about seven
Speaker 10: billion to ten billion. I think Disney wants ten billion,
Speaker 10: Reliance probably wants to pay closer to seven to eight billion,
Speaker 10: so they're looking to probably not sell the whole thing
Speaker 10: to still kind of keep some kind of steak. But
Speaker 10: definitely any progress there and any influx of cash would
Speaker 10: I think be great for Disney, which has a lot
Speaker 10: more strategic kind of decisions to make, especially with the
Speaker 10: purchase of Hulu. They still have to buy out Comcast
Speaker 10: thirty three percent stake, so that's hanging in the balance
Speaker 10: along with all the other things in terms of their
Speaker 10: linear TV network as well as ESPN.
Speaker 1: All Right, Gith, I think we kind of got through
Speaker 1: everything in which we can do with you. Keith Ranganathan.
Speaker 1: She is the media analyst for Bloomberg Intelligence breaking it
Speaker 1: all down. We've got Spotify, good numbers, Hollywood actors in
Speaker 1: the studios, still at an impasse and dizzy thinking about
Speaker 1: what to do with her assets.
Speaker 2: And thanks for listening to the Bloomberg Markets podcasts. You
Speaker 2: can subscribe and listen to interviews at Apple Podcasts or
Speaker 2: whatever podcast platform you prefer. I'm Matt Miller. I'm on
Speaker 2: Twitter at Matt Miller nineteen seventy three.
Speaker 1: And I'm fall Sweeney I'm on Twitter at pt Sweeney
Speaker 1: Before the podcast. You can always catch us worldwide at
Speaker 1: Bloomberg Radio