Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Thanks for joining us on this special holiday edition of
Speaker 2: Bloomberg Daybreak. US markets are closed for President's Day. I'm
Speaker 2: Nathan Hager, and coming up this hour, we will get
Speaker 2: a read on the energy market after a winter that
Speaker 2: has seen wild swings in the weather, and on trade.
Speaker 2: Plus we'll look ahead to one of the biggest earning
Speaker 2: stories of the week as Walmart gets set to report
Speaker 2: results from the holiday quarter. First, though, we want to
Speaker 2: take a look at the broader investment landscape how it
Speaker 2: may be changing with a new president in office. I
Speaker 2: think it's pretty safe to say it was a pretty
Speaker 2: tough environment as far as regulation goes when Gary Gensler
Speaker 2: was head of the Securities and Exchange Commission under then
Speaker 2: President Joe Biden. Now with a new SEC chief on
Speaker 2: the way under current President Donald Trump, are things starting
Speaker 2: to change for investors? Let's get some answers on this.
Speaker 2: Joining us on this holiday is Eric Balchunis, ETF, analyst
Speaker 2: for Bloomberg Intelligence. Thanks so much for being with us
Speaker 2: on the holiday. Eric, and I know we've got a
Speaker 2: lot of acting commissioners acting chiefs on the way as well,
Speaker 2: But are things starting to change now as far as
Speaker 2: where things sit in your world and ETFs.
Speaker 3: Uh.
Speaker 1: Yeah, There's been a couple of small things that we've seen,
Speaker 1: nothing major, But I think one of the big things
Speaker 1: is esther purse, which she was a commissioner. She is
Speaker 1: a commissioner, and she was in the minority during the
Speaker 1: Gensler era and she had a lot of opposing opinions
Speaker 1: that she would write about. And now she's working one
Speaker 1: of the two commissioners of the Act, is helping the
Speaker 1: acting commissioner. And some of the things we've seen, for example,
Speaker 1: they approved options on some precious metals ets that have
Speaker 1: been waiting ten years. It's a minor thing, but it
Speaker 1: just shows I think she just wants to get stuff
Speaker 1: out the door in the end. You know, she was
Speaker 1: very big on the SEC being a merit based regulator meeting.
Speaker 1: You just want to get the disclose out and then
Speaker 1: let the consumers pick. You don't want to play nanny
Speaker 1: too much in sort of saying.
Speaker 3: This is bad, this is good.
Speaker 1: So I think what you're going to see is just,
Speaker 1: you know, a little bit of Pandora's box opening up
Speaker 1: with products and I think some will be really good
Speaker 1: and successful. Some are going to be a little wild
Speaker 1: and we'll cause some head scratching maybe, but this is
Speaker 1: the ETF industry always pushes the envelope, and they're just
Speaker 1: gonna be able to push a little further. I think
Speaker 1: under this SEC chair, who hasn't been confirmed yet, but
Speaker 1: assuming he is Atkins, he'd be working obviously with Hester Purse.
Speaker 1: And the other thing they did was they moved a
Speaker 1: bunch of people who were on a crypto fraud. They
Speaker 1: moved some people out of that team, and that again
Speaker 1: was another sign that in terms of the crypto, which
Speaker 1: was I think Gensler is like you know, he was
Speaker 1: both known for being tough on that. It's going to
Speaker 1: be more lenient for sure. I would look for a
Speaker 1: ton of new coins and tokens to be etfised, and
Speaker 1: I would look for the industry also to push the
Speaker 1: envelope and some other things like share classes and maybe
Speaker 1: even some things like trying to put private equity and
Speaker 1: private credit into ETFs.
Speaker 3: Knowing they have a more liberal regulator.
Speaker 1: I mean, the regulator is more conservative, but I'd say
Speaker 1: they're more liberal in terms of what they'll approve.
Speaker 2: Well, let's dig into those broad strokes just a little bit.
Speaker 2: What kinds of products are you looking forward to that
Speaker 2: could find some success among investors.
Speaker 1: Yeah, so I think the first two are ets tracking
Speaker 1: Solana and XRP, which are two different networks. They're cryptocurrencies,
Speaker 1: and those two in particular have been the industry has
Speaker 1: been trying to get those approved for like five years.
Speaker 1: And even though Gary Gensler approved Bitcoin and ether, he
Speaker 1: basically said everything outside of that is a security and
Speaker 1: therefore it cannot be put into an ETF under the
Speaker 1: thirty three Act. And they even called XRP and Solana
Speaker 1: securities in lawsuits. And so the fact that the Salana
Speaker 1: ETF was acknowledged recently there was a new filing. They
Speaker 1: got acknowledged. They never acknowledged one of the pasts. Acknowledged
Speaker 1: just means the sec is like, Okay, we know you filed.
Speaker 1: We're going to let people comment on it. It's part
Speaker 1: of the normal process. In the past, when someone tried
Speaker 1: to follow Solana or XRP ETF, they would literally call
Speaker 1: the issuer and say get this out of here. It
Speaker 1: wouldn't even last three days. But this they've been filed
Speaker 1: now for two weeks. They've been acknowledged they're moving along
Speaker 1: the normal past. Doesn't mean to be approved, but it's
Speaker 1: a good sign. That probably indicates that they may actually
Speaker 1: rescind some of the lawsuits, because it would be weird
Speaker 1: for them to approve these while having a lawsuit and
Speaker 1: saying and writing that these are securities. So that's something
Speaker 1: to watch right there. And if Solana and XRP are
Speaker 1: put into ETF form, they have I think a decent
Speaker 1: chance to get some assets. Now, once you get out
Speaker 1: of there, you're going to get into some weird stuff
Speaker 1: like dose coin, Polka Dot bonk. They even filed for
Speaker 1: a trump Coin ETF, a Milania ETF, and a double
Speaker 1: leveraged Malania. So here's the thing though, even if all
Speaker 1: that gets out, most of it will just live in oblivion.
Speaker 1: I think you've got think about the precious metals. Gold
Speaker 1: is the stud, Silver's got a good living, platinum, pladium,
Speaker 1: And then once you get to commodities like coffee, nickel, aluminum,
Speaker 1: some ETFs are tried and failed. I think you'll see
Speaker 1: the same thing here. I think Bitcoin will get like
Speaker 1: seventy five percent of the assets, Ether ten percent, and
Speaker 1: then XRP Solana will you know, fight over the other
Speaker 1: eight or nine percent, and then we'll see one wacky
Speaker 1: one get lucky for a minute, and then you know,
Speaker 1: rise and fall. So I think even though we will
Speaker 1: see a ton of stuff approved, most of the assets
Speaker 1: from the big money in America are they're not going
Speaker 1: to go crazy. They're gonna stick to bitcoin as they're
Speaker 1: that's crazy to most people, to be honest. So they're
Speaker 1: gonna stick to bitcoin, and that's where most of.
Speaker 3: The assets will go.
Speaker 1: But look for some really interesting things. And the thing
Speaker 1: about a Trump and Malania coin etf is I was
Speaker 1: that this was going to be interesting, is that these
Speaker 1: are pretty fringe.
Speaker 3: I mean, they just launched.
Speaker 1: It made clear to everybody that the Trump coin was
Speaker 1: you know a lot of even if the crypto people
Speaker 1: didn't like it. It kind of they call it a
Speaker 1: rug pull. You know, you put a meme coin out
Speaker 1: and then all of a sudden, the people who started
Speaker 1: leave and then the people who came in late.
Speaker 3: Hold the bag. It's like, you know, kind of a
Speaker 3: short term Ponzi effect.
Speaker 1: Now that's Trump is the boss of the sec chair,
Speaker 1: so it'd be weird if you didn't approve a coin
Speaker 1: based on his coin, given that he's the boss that.
Speaker 3: Isn't the work.
Speaker 1: It all gets a little It's going to be interesting
Speaker 1: to see how they deal with this, because we do
Speaker 1: think some of the main coins will be approved. But
Speaker 1: once you get to this really outskirtsy meme coin world,
Speaker 1: will the.
Speaker 3: SEC just sort of let it out?
Speaker 1: That's a question we don't quite know, but if I
Speaker 1: had to guess now, I'd lean towards they've probably let
Speaker 1: most stuff out. But for people worried about how this
Speaker 1: will be bad, most of this stuff will be ignored
Speaker 1: by investors.
Speaker 2: Speaking with Eric Balchuna's ETF analysts for Bloomberg Intelligence, Eric,
Speaker 2: if we're expecting these kind of approvals, what are you
Speaker 2: expecting when it when it comes to enforcement of some
Speaker 2: of the potential risks around some of these new products.
Speaker 1: This is where the big debate on what should the
Speaker 1: SEC behold Should it really police the products, invest them
Speaker 1: and say is this really safe for retail?
Speaker 3: It's sort of I guess like the FDA, at.
Speaker 1: Some point, you know, there's a line between what is
Speaker 1: safe versus Hey, let's just disclose all risks and let
Speaker 1: people have a choice and they if they want to,
Speaker 1: you know, you know, if someone wants beat McDonald's every day.
Speaker 1: It's really their choice, even though that's not healthy, and
Speaker 1: you could argue the government should ban McDonald's. But this
Speaker 1: is the same deal. And I think this sec with
Speaker 1: this chair is going to be a little more like, look,
Speaker 1: just let this stuff out, let people choose, but just
Speaker 1: we're going to put a lot of the risks in
Speaker 1: the perspectives. Now nobody reads the perspectives, that's the problem.
Speaker 1: But I think most people if they see a two
Speaker 1: X Smulania ETF, they're probably going to know it's wacky,
Speaker 1: like they're going to know there's some that it's not vanguard. Okay,
Speaker 1: But this whole thing is why we and BI have
Speaker 1: something called the traffic light. It's based on movie ratings.
Speaker 1: I always thought ETSD movie ratings that way, you know,
Speaker 1: if the name sounds innocent, maybe you know, you know,
Speaker 1: if the if the ETF has some stuff you need
Speaker 1: to know about, you know, just sort of like a
Speaker 1: nasty surprise indicator system. And so we would give most
Speaker 1: of these yellow lights. The two X millennia would be
Speaker 1: read because it's leverage. One ex millenni would be yellow
Speaker 1: because its kind of extra volatility, and there's really no
Speaker 1: cash flows backing any of this. It's like just it's
Speaker 1: like a commodity. So I just think that would be
Speaker 1: helpful for investors to have. Like imagine if you went
Speaker 1: on your Schwab account, you pulled up any ticker and
Speaker 1: it said you know, rated g PG, PG thirteen or R.
Speaker 1: You get a very good idea of like, okay, if
Speaker 1: this is our y and here's the three reasons they
Speaker 1: got rated R tag. To me, that would be awesome.
Speaker 1: We try to create this. We did create the system.
Speaker 1: It's on the terminal. But that's I think how you
Speaker 1: should think as an investor if you're looking at this stuff.
Speaker 1: If it sounds wacky, you know, read the fine print.
Speaker 1: If it sounds innocent, like the Vanguard is some P
Speaker 1: five hundred, that probably is. But every now and then
Speaker 1: there are some with innocent names that are a little
Speaker 1: more involved, like the oil ETF. But I think most
Speaker 1: of these are.
Speaker 3: Going to sound wacky, and they are wacky, so but
Speaker 3: always I would read the perspectives if you can. And
Speaker 3: that's what the SEC is going to say.
Speaker 1: Just put all this stuff, all the risks in the documents,
Speaker 1: and that's that's the kind of you know, because they
Speaker 1: want innovation, and they want things to be out there
Speaker 1: for consumers. But there is a point where you can
Speaker 1: put something out that, you know, is somebody could lose
Speaker 1: money on. But I you know, this is again the
Speaker 1: debate on what a regulator should be.
Speaker 4: Eric.
Speaker 2: Now that we do have a new administration in office,
Speaker 2: have you seen some interesting shifts in ETF flows now
Speaker 2: the there's new leadership in the White House.
Speaker 3: Yeah, it's interesting.
Speaker 1: You know, I think ETF investors over the years, you know,
Speaker 1: we wrote a piece saying the S and P five
Speaker 1: hundred doesn't care who.
Speaker 3: The president is.
Speaker 1: It's almost like the US stock market. We call it
Speaker 1: the eighth Wonder of the World because it's just so relentless.
Speaker 1: It's almost like immune to any of this. And I
Speaker 1: think over the years, even if there has been drama
Speaker 1: and maybe a pullback, it goes right back up. And
Speaker 1: so we have seen no change in the flows from
Speaker 1: like last summer into fall, into the winter into this
Speaker 1: twenty twenty five. It's it's basically been a lot of
Speaker 1: people continue to buy what we call beta, the S
Speaker 1: and P five hundred, the bond ETFs, you know, the
Speaker 1: sixty forty people are just continuing to buy now on
Speaker 1: the fringes. There is some stuff that we see moving, like,
Speaker 1: for example, in the bond space, we do see people
Speaker 1: moving towards the shorter end of the curve, more towards
Speaker 1: like a money market type deal, and I think that's
Speaker 1: a little protection. We've seen obviously money go into the
Speaker 1: bitcoin ets and some into gold. There's some thought that
Speaker 1: that is, you know, an inflation hedge. And then the
Speaker 1: stock market. Sometimes we'll see some flow like try to
Speaker 1: bet on small caps having a rebound or.
Speaker 3: Europe, but those are usually short lived.
Speaker 1: So you do sometimes see people trying to bet on
Speaker 1: some kind of a rotation or regime change.
Speaker 3: So again they're on the outskirts.
Speaker 1: We see bets being made, but for the most part,
Speaker 1: the sort of mainstream flow of money continues to buy
Speaker 1: us stocks, you know, at a breakneck pace, and it's
Speaker 1: going to take more than just like a you know,
Speaker 1: a scary tariff headline to get these ETF investors to
Speaker 1: to change direction. And you know, and why would they.
Speaker 1: They've they've almost been conditioned like Pavolovian dogs to just
Speaker 1: keep buying because it's worked out.
Speaker 3: If you've ever read a.
Speaker 1: Scary headline pulled your money out put in cash.
Speaker 3: You're basically filled with a ton of regret.
Speaker 1: And so this is where we're at. Why I think
Speaker 1: that it will take like a black Swan event in
Speaker 1: my opinion, to really see anything shift, something like the
Speaker 1: COVID something we're not not tariffs, you know, not a
Speaker 1: crazy tweet Like it has to be something like really
Speaker 1: major that nobody's even looking at in my opinion, for
Speaker 1: the general blob of money to like stop investing or
Speaker 1: to move out of stocks.
Speaker 2: Really appreciate this. Eric, thanks again for coming on with us.
Speaker 3: You got it anytime.
Speaker 2: That's Eric Baluchunis ETF, analyst for Bloomberg Intelligence, and coming
Speaker 2: up next on the special holiday edition of Bloomberg Daybreak,
Speaker 2: we're going to take a look at the oil market
Speaker 2: how that may be shifting under the new administration. We'll
Speaker 2: be speaking with Stephen Schork, president of the Short Group.
Speaker 2: It's twenty minutes past the hour. I'm Nathan Hager, and
Speaker 2: this is Bloomberg. Welcome back to this special holiday edition
Speaker 2: of Bloomberg Daybreak. US markets are closed for President's Day.
Speaker 2: I'm Nathan Hager, and we want to take a look
Speaker 2: now at the oil market, commodities across the board have
Speaker 2: been rocked with President Trump threatening and in some cases
Speaker 2: imposing tariffs on friend and foe alike. Here to give
Speaker 2: us a sense of the energy outlook as we make
Speaker 2: sense of this new tougher trade policy is Stephen Shork,
Speaker 2: president of the energy analysis firm the Short Group. Thanks
Speaker 2: again for being with us, Steven, And we have seen
Speaker 2: oil prices really take a hit on the tariffs that
Speaker 2: President Trump is already imposed and the threat of more
Speaker 2: to come. How do tougher trade policies affect your outlook
Speaker 2: for the months to come?
Speaker 4: Yeah, absolutely, Nathan. So what I like to do, of course,
Speaker 4: is always look at the market's term structure or its
Speaker 4: forward curve. And with all of the rhetoric and some
Speaker 4: of it has made good on with regard to the tariffs,
Speaker 4: when it comes to oil, we have to think about
Speaker 4: this logically. A lot of this is bluster. The United States,
Speaker 4: and specifically our refineries in the Upper Midwestern the Chicago
Speaker 4: market area, are wholly dependent on importing crude oil from Canada.
Speaker 4: These refiners are geared specifically to refine Canadian heavy crude oil.
Speaker 4: So with regards to the terrifs, when it comes to oil.
Speaker 4: I think it's a bit of brinksmanship so far. I
Speaker 4: think the administration has blinked on that matter, because the
Speaker 4: last thing the administration wants to do, of course, is
Speaker 4: drive up oil prices, which consumers will begin to feel
Speaker 4: immediately at the pump. So that said, when we look
Speaker 4: at the term structure, the market has been fairly stable
Speaker 4: non ex WTI has been ranged bound in between about
Speaker 4: seventy dollars and seventy five dollars a barrel for this quarter,
Speaker 4: which is in perfect agreement with our modeling that we
Speaker 4: came out. We entered this year with oil at about
Speaker 4: sixty nine dollars fifty cents. The midpoint for this quarter
Speaker 4: based on our model is about seventy one dollars and
Speaker 4: sixty cents. And as they said, the market has pretty
Speaker 4: much been ranged bound in between seventy and seventy five.
Speaker 4: Most importantly, a recent survey put out by the Dallas
Speaker 4: Federal Reserve to oil executives in the oil patch down
Speaker 4: in Texas, Oklahoma, Kansas, and so forth, or asked what
Speaker 4: they were planning oil prices based on their capital spending
Speaker 4: and as long as the oil prices hold in that
Speaker 4: seventy seventy five dollars range. Not coincidentally, the industry will
Speaker 4: continue to invest. So from this standpoint, the teriffs the
Speaker 4: talk their rhetoric, Yes, it makes a lot of noise,
Speaker 4: but when you look at the relatively lack of volatility,
Speaker 4: So we're looking at a market when we look at
Speaker 4: whether it's range bound, there's a lack of volatility. The
Speaker 4: market has been relatively stable as far as looking at
Speaker 4: the spreads, the spreads are indicating. That is to say,
Speaker 4: as we look at prices along the forward curve, the
Speaker 4: market is well balanced. No one is clamoring for product.
Speaker 2: So do you see any factor breaking the oil market
Speaker 2: out of this range, and if so, is it going
Speaker 2: to go up or is it going to go down?
Speaker 4: I think the risk is certainly to the downside. Of course,
Speaker 4: the big two geopolitical headlines out there are sanctions and
Speaker 4: a harder stamps on Russian and Iranian oil, and of
Speaker 4: course that is a potential uptick that would propel oil
Speaker 4: prices higher. But again, looking at the forward curve, in
Speaker 4: the turn structure in oil markets all around the world,
Speaker 4: traders are placing a maximum of minimum concern on these
Speaker 4: geopolitical events. So just as we've seen over the past
Speaker 4: two years when more in the Middle East broke out,
Speaker 4: it's less about supply more about demand. So the supply
Speaker 4: issues will always okay, supplies out of the Middle East
Speaker 4: transiting through the Red Sea with all the attacks and shipping,
Speaker 4: that's a supply issue, but it had not impact prices.
Speaker 4: So the concern now is more of global economic growth.
Speaker 4: And when we say that when it comes to oil,
Speaker 4: of course we're talking about China. But we've been waiting
Speaker 4: for bide when it comes to China for the past
Speaker 4: three years with this demand to hit, it has not hit.
Speaker 4: I don't think it's going to hit in this year.
Speaker 4: So certainly, if there is a risk of breaks out
Speaker 4: of that range, Nathan, it is certainly oil prices below
Speaker 4: seventy dollars a barrel rather than oil prices above eighty
Speaker 4: dollars a barrel through the first at least six months
Speaker 4: of this year.
Speaker 2: To your point about waiting for that demand shift to
Speaker 2: change coming out of China, it gets us into the
Speaker 2: next OPEC Plus meeting and the decision on whether to
Speaker 2: continue with the delayed production increases from the oil cartel.
Speaker 2: What's your expectation there.
Speaker 4: Yeah, exactly, so there's speculation, of course, if we're tougher
Speaker 4: on Russia, we're tougher in Iran the other OPEC members,
Speaker 4: primarily the Arab oil producers who don't have a lot
Speaker 4: of love loss with between the Arabs and the Iranians,
Speaker 4: that Saudi Arabia and so forth will increase production. But
Speaker 4: that is just trying to play geopolitics.
Speaker 3: One oh one.
Speaker 4: What we have to look at again is the spread,
Speaker 4: the spread between Brent Dubai, the Dubai spreads, the Middle
Speaker 4: East spreads, and what we're indicating here is once again
Speaker 4: a market that is relatively stable on a global standpoint.
Speaker 4: So once again OPEK is going to look rather than
Speaker 4: look at the potential, they're going to look at what
Speaker 4: the market's telling them. Their analysts are excellent at looking
Speaker 4: at this. So I would suspect there's a fifty to
Speaker 4: fifty chance that they'll they'll maintain the status quo i e.
Speaker 4: They'll kick the production, you know, the quota adherents, they'll
Speaker 4: kick that can down the road until their next meeting
Speaker 4: unless they see something that happens in the spreads. And
Speaker 4: right now that the spreads are telling OPEK, they're telling
Speaker 4: traders that the market is in balance at this point,
Speaker 4: regardless of all these known unknowns of geopolitical events, be
Speaker 4: it Iran Russia, the war between in Gaza between Iran
Speaker 4: and Israel basically, and certainly the situation in Ukraine. So
Speaker 4: until we see something hard tangible to trade on the
Speaker 4: spreads is telling us no OPA will maintain the status quo.
Speaker 2: We're speaking with Stephen Schork, president of the Short Group,
Speaker 2: energy analyst with us on this special edition of Bloomberg Daybreak.
Speaker 2: I know you said we should look past the noise
Speaker 2: when it comes to the oil market, Stephen, but if
Speaker 2: you'll indulge me for a minute, we have heard noise,
Speaker 2: if you want to call it that, from President Trump
Speaker 2: on the campaign trail, now in office saying drill, baby, drill.
Speaker 2: He wants to boost energy production in this country. Is
Speaker 2: that something you're thinking about when it comes to the
Speaker 2: outlook for crud?
Speaker 4: Of course, and that really hammers home the point of
Speaker 4: the rhetoric. So yes, the president, we'll want to talk
Speaker 4: about drill, about baby drill, But guess what we are drilling, baby,
Speaker 4: and we are drilling a lot of oil at this point.
Speaker 4: So again i'll reference that the response is to a
Speaker 4: survey to E and T executives put forth by the
Speaker 4: Dallas said, and the response that is, the industry response
Speaker 4: is relatively lukewarm to the idea of drill baby drill.
Speaker 4: Why because we're already drilling more oil than we ever had,
Speaker 4: and we are by far drilling the most oil than
Speaker 4: any country in the world. So there really is a
Speaker 4: lot of neat left on that bone for us to
Speaker 4: drill even more so, according to those responses, you only
Speaker 4: have fourteen percent of the responses come from these executives
Speaker 4: that said they planned to increase capital spending significantly. The
Speaker 4: majority of the executives at these current prices are comfortable
Speaker 4: with drilling at current rates, i e. There is no
Speaker 4: need the market is telling them. They're not getting any
Speaker 4: signal from the market to drill. So yes, President Trump
Speaker 4: or President ex Monacle and the President Tariff will certainly
Speaker 4: beat the drums about drill baby drill, But the bottom
Speaker 4: line is we're already drilling and there's just not that
Speaker 4: much more at this juncture. Given this price a range,
Speaker 4: for us to drill even more, it does not make
Speaker 4: any economic sense for any producer out there.
Speaker 2: We've been talking about the price range for crewe the
Speaker 2: term structure. How does all this feed into where the
Speaker 2: rubber literally meets the road in terms of gas prices
Speaker 2: that we should expect to pay as we head into
Speaker 2: the spring and summer months.
Speaker 4: Yeah, absolutely so. Right now, accordingly surveyed by TRIPLEA, the
Speaker 4: national average is about three fifteen cents a gallon, slightly
Speaker 4: higher three dollars and twenty cents in the metro New
Speaker 4: York City area. But that three fifteen cents is no
Speaker 4: I take that back. That was three thousand and fifteen
Speaker 4: cents today compared to three dollars twenty cents a year ago.
Speaker 4: So so basically we're on parts a year ago adjusted
Speaker 4: for inflation, three and fifty cents, as we can all imagine,
Speaker 4: is a very cheap price. With the oil remaining stable
Speaker 4: a low volume utility, we can maintain that status pro
Speaker 4: But let's keep in mind we are in February. Once
Speaker 4: we get into March April, may we start burning in
Speaker 4: our cars a different type or boiling, I should say,
Speaker 4: a different type of gasoline, a summer grade gasoline which
Speaker 4: is more expensive to blend and market and transport and
Speaker 4: so forth. So we will see a natural increase in
Speaker 4: gasoline prices. Typically that would be about between fifteen and
Speaker 4: twenty cents between winter gasoline and summer gasoline. So, giving
Speaker 4: the current price environment, that range amount of seventy seventy
Speaker 4: five at three thousand and fifteen cents. By the time
Speaker 4: Memorial Day to fourth of July rolls around and we're
Speaker 4: all going out the beach up to the Poconos, gasoline
Speaker 4: prices would naturally at this range b probably three dollars
Speaker 4: and thirty cents. Three dollars and thirty five cents in
Speaker 4: the current environment.
Speaker 2: Okay, Now where the environment is right now, and with
Speaker 2: crude prices in this range, how does that affect the
Speaker 2: energy transition? I mean, we've seen the talk of the
Speaker 2: end of the electric vehicle mandates. There's a new administration
Speaker 2: that is very bullish on crude. Where do you see
Speaker 2: the energy transition going forward?
Speaker 4: Basically where I saw going backwards. I think the whole
Speaker 4: concept of the energy transition it made great, you know,
Speaker 4: it was great for PowerPoint presentations in global economic forms
Speaker 4: and so forth, But the industry understood that demand for
Speaker 4: fossil fuels was not moving anywhere, that fossil fuel demand
Speaker 4: will continue to grow India just came out and said
Speaker 4: they expect fossils field growth to continue until twenty fifty.
Speaker 4: The same goes for China and so forth. So what
Speaker 4: we're seeing now here is more of an economic even
Speaker 4: playing field where these mandates. If there's economically viable for
Speaker 4: full eds or for any of the energy transitions, then
Speaker 4: we wouldn't need the government, that is, wouldn't need to
Speaker 4: underwrite it. So what we're seeing now here is a
Speaker 4: transition that is more of an all inclusive And I
Speaker 4: always go back to President Obama's twenty twelve re election platform,
Speaker 4: where he recognized that there was a need, a growing
Speaker 4: need for renewables, of course, but equally he also and
Speaker 4: I encourage our listeners to go back and reread his
Speaker 4: twenty twelve platform because it also embraced nuclear, it did
Speaker 4: embrace clean coal, it embraced natural gas and fossil fuels.
Speaker 4: So we're going back to this. Any transition is moving
Speaker 4: more from a binary transition, that is to say, I
Speaker 4: have to kill all of my dispatchable energy and now
Speaker 4: I have to have it all replaced by intermittent weather
Speaker 4: related BTUs. We're moving away from that, and we're moving
Speaker 4: more towards an all inclusive policy where renewables, of course
Speaker 4: will play a role in this, but so too will
Speaker 4: natural gas, nuclear energy, and other fossil fuels. And it
Speaker 4: will be in all of the above approach to our
Speaker 4: energy needs going forward for at least the next four years,
Speaker 4: as opposed to the zero sum game where we have
Speaker 4: to kill fossil fuels and we can only use renewables,
Speaker 4: which was always has been known to be untenable. We've
Speaker 4: just we're now seeing the quipout part out loud.
Speaker 2: Really appreciate this, Stephen, thanks again for coming on with us.
Speaker 4: Absolutely always enjoy being back here.
Speaker 2: That's Stephen Schork, president of the Short Group. And straight ahead,
Speaker 2: we'll look ahead to earnings from Walmart this week as
Speaker 2: this special edition of Bloomberg Daybreak continues. It's thirty eight
Speaker 2: minutes past the hour. I'm Nathan Hager, and this is Bloomberg.
Speaker 2: Welcome back to the special holiday edition of Bloomberg Daybreak.
Speaker 2: US markets are closed for Presidents Day. I'm Nathan Hager
Speaker 2: closing out this hour with a look ahead to one
Speaker 2: of the big earning stories of the week coming from
Speaker 2: one of the world's biggest retailers, Walmart reports results from
Speaker 2: the holiday quarter this Thursday. But what can we expect
Speaker 2: from the outlook for this retail giant with so much
Speaker 2: uncertainty around the economy, not to mention trade policy. Here
Speaker 2: with some insights for us is Aroune Sundorum, Senior vice
Speaker 2: president for Equity Research at CFR. Thanks for being with us, Aron.
Speaker 2: We'll look at at the chart right now Walmart stock.
Speaker 2: It's up more than ten percent year to date. Can
Speaker 2: we expect that kind of bowl run to continue when
Speaker 2: the retail giant posts those earnings this week?
Speaker 5: Walmart tends to guide conservatively to start the year, so
Speaker 5: don't be surprised if you do see a softer than
Speaker 5: expected outlook. But I think investors typically look at the
Speaker 5: outlook with the grain of salt because Walmart tends to,
Speaker 5: at least over the last few years, they have raised
Speaker 5: their outlook as the year progresses. So expect to be
Speaker 5: on top of bottom line potentially a weaker than put
Speaker 5: the outlook, But you know, I don't think that should
Speaker 5: send tend the stock that much lower.
Speaker 2: What's going to drive the beat? Do you think? Is
Speaker 2: it just going to be about the bounce that we
Speaker 2: tend to see for retail around the holidays.
Speaker 5: Well, yeah, I mean for Walmart. Yeah, their in their
Speaker 5: US business. Yeah, the strong holiday season should drive a
Speaker 5: beat to the top line when they report a Q
Speaker 5: three result. They even know that back then that early
Speaker 5: results for their holiday season was encouraging, and we do
Speaker 5: know that the overall Hollay season was pretty strong. And
Speaker 5: I think one thing we often overlook with Walmart too
Speaker 5: is that they have a very large international business that
Speaker 5: has been growing in a high single digit percentage range
Speaker 5: over the last few quarters. They're doing well and regions
Speaker 5: like Mexico, China, Canada, all those regions are doing pretty well.
Speaker 5: And then lastly, you know, Walmart also has their club business,
Speaker 5: sam Club, and that's also been performing really well. We
Speaker 5: talk a lot about Costco and how well Costco is doing,
Speaker 5: but sam Club, you know, it seems to be a
Speaker 5: formidable competitor to Costco and it's also growing at a
Speaker 5: mid to high single digit percentage range.
Speaker 2: Interesting to hear you single out China, Canada, and Mexico
Speaker 2: as far as growth drivers in internationally. Those are the
Speaker 2: three countries that have been targets of tariff threats from
Speaker 2: President Trump. How could that affect the outlook if we
Speaker 2: start to see trade uncertainty creeping into these earnings.
Speaker 5: Yeah, so that's that's another reason why I do think
Speaker 5: the outlook could be more conservative than usual. We saw
Speaker 5: that with with Amazon when Amazon reported recently that there
Speaker 5: is more uncertainty this year than than previous years. We
Speaker 5: have potential tariffs, we have inflation that looks like looks
Speaker 5: like it's going to accelerate this year. We still have
Speaker 5: high interest rates and and and all that kind of
Speaker 5: clouds and already pretty cloudy outlook. So I do think
Speaker 5: we'll see, you know, a conservative outlook in that regard.
Speaker 5: But regarding its international businesses, although they're a global company,
Speaker 5: they do have pretty like localized supply chains. A lot
Speaker 5: of what they uh supply and produce and sell, a
Speaker 5: lot of it is located domestically. So yeah, I mean, yeah,
Speaker 5: they're going to face tariff. If there are tariffs, it's
Speaker 5: clearly going to be a win for Walmart. But I
Speaker 5: think they can they'll be able to mitigate that headwin.
Speaker 5: And again, this is not their first rodeo with tariffs.
Speaker 5: Walmart experienced the tariff the trade war with China back
Speaker 5: in twenty eighteen twenty nineteen, So I think generally retailers
Speaker 5: are better prepared for tariffs this time around, So.
Speaker 2: You don't expect to see much of a shift in
Speaker 2: the supply chain flows for Walmart, even if we do
Speaker 2: see even more aggressive tariffs than the President has telegraphed.
Speaker 5: Yeah, so I think from the first trade war with
Speaker 5: China back in twenty eighteen twenty nineteen, since then, all
Speaker 5: retailers have diversified their supply chain a bit more, and
Speaker 5: a lot of them have moved out of China, went
Speaker 5: to regions like you know, Vietnam, Cambodia, India, places like that,
Speaker 5: and so I think generally we're seeing a much more
Speaker 5: diversified supply chain.
Speaker 4: So that does help reduce tariff risks.
Speaker 5: And Walmart US about two thirds of the items of
Speaker 5: cells in the US are made, grown, or assembled domestically
Speaker 5: in the US. That is a lot, I mean a
Speaker 5: large percentage of of their products. So there's only about
Speaker 5: one third of their goods that are imported, and a
Speaker 5: lot of that is in China. So I think because
Speaker 5: Walmart is predominantly a food retailer, I think they're better
Speaker 5: and and a lot of food products are you know,
Speaker 5: domestically produced. I think they face less care risks than
Speaker 5: you know, general merchandise retailers. To retail is like a
Speaker 5: target for example, that UH sell predominantly general merchandise items,
Speaker 5: a lot, a lot more of those goods are imported
Speaker 5: from other countries.
Speaker 2: So it was curious whether we could see something of
Speaker 2: a of a trade impact on food when you think
Speaker 2: about Canada and Mexico being you know, agriculture suppliers to
Speaker 2: some extent into the US. Could could that be a
Speaker 2: headwind for Walmart.
Speaker 5: Yeah, so yeah, there's potential places in food with tariffs especially,
Speaker 5: I think a lot more agricultural commodities, things like fruits
Speaker 5: and vegetables that we often import from, you know, places
Speaker 5: like Canada and Mexico. So yeah, that's an area where
Speaker 5: I mean, we're watching closely and we could we could
Speaker 5: see inflation accelerate in a lot of those fresh categories.
Speaker 5: Ian Walmart's still the leader in price, and I think
Speaker 5: they typically have more levers than others to absorb some
Speaker 5: of these cost increases. But then of the day, there's
Speaker 5: only so much that they can absorb, and anything incremental
Speaker 5: that they can't absorb will likely be passed on, passed on,
Speaker 5: to the consumer. But again, you know, Walmart being the
Speaker 5: value retailer, they tend to have, you know, the lowest
Speaker 5: prices in town. And yeah, that's why I think Walmart
Speaker 5: typically does well in inflationary environments because they can provide
Speaker 5: that value that you know, other retailers, you know, can't
Speaker 5: necessarily do the same.
Speaker 2: We're speaking to Aroun Sundram, Senior vice president for Equity
Speaker 2: Research at CFR looking ahead to those Walmart earnings coming
Speaker 2: up later this week. Ahead of these earnings are and
Speaker 2: we've heard from companies like McDonald's talking about pressures that
Speaker 2: they see on the low end consumer. And we've seen
Speaker 2: this phenomenon lately, as inflation is stayed elevated, a lot
Speaker 2: of higher end consumers have been shopping for value at
Speaker 2: places like Walmart. How do you see that feeding through
Speaker 2: potentially into what we get this way.
Speaker 5: Yeah, that's that's been a theme for the past year
Speaker 5: or two, and I think that's a thing that's going
Speaker 5: to continue in twenty twenty five. Yeah, clearly the lower
Speaker 5: income consumer is feeling a bit more stress right now.
Speaker 5: And you would think that, you know, Walmart, you know,
Speaker 5: you think this would be hurting Walmart. They wouldn't be
Speaker 5: seeing these strong results, but I think they've been able
Speaker 5: to offset that by bringing in incremental middle to upper
Speaker 5: income consumers. And I think one of the reasons they've
Speaker 5: been able to do that is because of the new
Speaker 5: subscription model, Walmart Plus. Walmart Plus is a direct competitor
Speaker 5: to Amazon Prime. You get fast, free delivery on groceries,
Speaker 5: and I think that Walmart Plus business has done really well.
Speaker 5: And they don't disclose the exact number of members that
Speaker 5: are signed up, but from from our channel checks, it
Speaker 5: seems that it's growing at a pretty good rate. I mean,
Speaker 5: even Walmart's e commerce business, it's growing out about twenty
Speaker 5: percent clip year every year. I think a lot of
Speaker 5: that is because they've been able to bring in more
Speaker 5: of those Walmart Plus members in there. And I think
Speaker 5: Walmart Plus is great because that helps also retain those
Speaker 5: higher income households and even even when inflation does come down,
Speaker 5: you know, now you know once you once you lock
Speaker 5: these customers in, you drive more conversion. So that's why
Speaker 5: we're pretty optimistic here because Walmart's always been known for
Speaker 5: a value retailer, but they're actually now being better known
Speaker 5: for convenience that's usually a title that's held with Amazon
Speaker 5: as the leader in convenience, but now Walmart I think
Speaker 5: it's doing better in the convenience factor. And if you
Speaker 5: combine value and convenience, it's a pretty strong proposition for
Speaker 5: the for the consumer.
Speaker 2: Sort of fed into my next question thinking about how
Speaker 2: Walmart stacks up against Amazon with this this kind of
Speaker 2: subscription model, I guess, a consumer loyalty program. You might
Speaker 2: think of Amazon as as sort of a first mover
Speaker 2: with Amazon Prime. Is Walmart chipping away at Amazon Prime
Speaker 2: with its offering?
Speaker 4: Yeah?
Speaker 5: So Walmart, I mean Walmart Plus is is a direct
Speaker 5: It's a dire direct competition against Amazon Prime. But I
Speaker 5: think where Walmart has always had a stronghold is in grocery.
Speaker 5: That's an area where Amazon has struggled over the last
Speaker 5: several years. Amazon bought Whole Food several years ago.
Speaker 3: That business is.
Speaker 5: Doing well, but they're local business or their their own
Speaker 5: business called Amazon Fresh and hasn't performed up to expectations.
Speaker 5: And I think Amazon has really struggled in the grocery arena,
Speaker 5: which is where Walmart has always shined in grocery and perishables.
Speaker 5: So I think a lot of I mean from a
Speaker 5: stat I saw earlier, a large percentage of Walmart Plus
Speaker 5: subscribers are also Amazon Prime suscribers. So people tend to
Speaker 5: have both subscriptions, and they use Walmart Plus for groceries
Speaker 5: and they use Amazon Prime for everything else. And the
Speaker 5: Walmart Plus is a little bit cheaper. It's ninety eight
Speaker 5: dollars per year in the US. Amazon Prime is about
Speaker 5: one hundred and forty dollars per year in the US,
Speaker 5: And I think you get because of the different offerings
Speaker 5: you get, you tend to see consumers sign up for both.
Speaker 2: It's also curious to to get your thoughts on whether
Speaker 2: we could see wage pressures from Walmart coming down the
Speaker 2: linecause I'm thinking about Costco coming out where it's thirty
Speaker 2: dollars an hour wage for workers. There. Is that going
Speaker 2: to put pressure on Sam's Club, the subscription service the
Speaker 2: Walmart offers.
Speaker 5: Yeah, yeah, so I mean wage investments, wage pressures. That's
Speaker 5: been a headlind for several years now. Sam's Club they
Speaker 5: actually just recently announced a wage increase back in September
Speaker 5: of last year, but that's going to be another continued
Speaker 5: trend this year. We'll likely see more wage pressures this year.
Speaker 5: The good news is that, you know, when you have
Speaker 5: a company growing sales, you know, mid to high single digits,
Speaker 5: you can absorb some of those costume increases and it
Speaker 5: doesn't really impact the overall bottom line. But when you
Speaker 5: struggle to grow sales, like some other retailers there are
Speaker 5: right now, it's very difficult to also grow margins because
Speaker 5: of all these added wage pressures. So at the end
Speaker 5: of the day, I'm not overly worried about these wage
Speaker 5: investments as long as Walmart is able to grow their
Speaker 5: sales at amid single distrect percentage range, which we do
Speaker 5: expect will happen in twenty twenty five.
Speaker 2: In terms of Walmart's stock performance, it's hard to see
Speaker 2: a lot of pessimism around the stock, a lot of
Speaker 2: buy ratings on Walmart. Are there risks to that momentum?
Speaker 5: Yeah, I mean, I mean, the number one concern I
Speaker 5: get with investors on Walmart is not anything about the fundamentals.
Speaker 5: It's about how expensive the stock has gotten. From a
Speaker 5: four pe perspective. It's trading nearly forty times.
Speaker 4: Of a forward pe.
Speaker 5: Historically it's traded about twenty five times for p so
Speaker 5: a pretty significant premium. But you know. The one thing
Speaker 5: I'll note is that you know, Walmart shares used to
Speaker 5: be even more expensive back in the day, back in
Speaker 5: the late nineties early two thousands. When they're significantly expanding
Speaker 5: their super center's footprint, the share is traded above forty
Speaker 5: times forward earnings. And I think right now that the
Speaker 5: shares do deserve this this hefty premium because of all
Speaker 5: the things we talked about already, but also they're also
Speaker 5: growing their store footprint right now, they're growing more supercenters
Speaker 5: across the country. They're growing they're also growing SAMs Club
Speaker 5: locations across the country. They're targeting thirty new Sam's Club
Speaker 5: locations across the country. And then last thing, this is
Speaker 5: the most important thing I think, is that Walmart's business
Speaker 5: is diversifying. We talked about Walmart Plus and the subscription
Speaker 5: revenue they're getting from that. They're also generating a lot
Speaker 5: of advertising revenue as they grow out their e commerce market.
Speaker 5: Marketplace in advertising, as you know, is much higher market
Speaker 5: business than selling groceries.
Speaker 4: It's out of a store.
Speaker 5: So as as this advertising business continues to grow, I
Speaker 5: think you can see Walmart's overall margins continue to expand
Speaker 5: and when you have when when you're a retailer generating
Speaker 5: you know, six hundred billion dollars per year and nearly
Speaker 5: seven hundred billion dollars per year in revenues, every percent,
Speaker 5: every basis point of margin translate into into uh into
Speaker 5: a lot of profits. So that's what I'm pretty excited
Speaker 5: about is I think over the next few years, and
Speaker 5: Walmart has many levers to expand margins because of you
Speaker 5: know things we talked about, but because of their subscription revenue,
Speaker 5: their advertising revenue, they're growing their general merchandise sales. They're
Speaker 5: also introducing automation and robotics, and they're in their fulfillment
Speaker 5: centers and all of that they can translate into pretty
Speaker 5: operating marketing expansion over at least I think the next
Speaker 5: three years. And that's why I think the happy premium
Speaker 5: can hold. And I think there's still upside to the
Speaker 5: stock from here.
Speaker 2: Lots to consider as we wait those earnings from Walmart
Speaker 2: due out this Thursday. Thank you for this, Arun, again,
Speaker 2: great having you on with us.
Speaker 4: Yeah, thank you.
Speaker 2: That's Arun Sundram, senior equity research analyst at CFIRA. Want
Speaker 2: to deliver thanks as well to Stephen Shork of the
Speaker 2: Short Group and Eric Balchunis of Bloomberg Intelligence. Thanks to
Speaker 2: you as well for joining us on this special hour
Speaker 2: of Bloomberg day Break for this president. Stay, I'm Nathan Hager.
Speaker 2: Stay with us. Today's top stories and global business headlines
Speaker 2: are coming up right now.