Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Farrell and Lisa Brownwitz Jaily, we bring you
Speaker 1: insight from the best and economics, finance, investment and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com
Speaker 1: and of course on the Bloomberg terminal. Maria Gabelly with
Speaker 1: us right now, needs no introduction with Gabelly Funds and also,
Speaker 1: of course is wonderful individual stock work sometimes see it
Speaker 1: in Baron's were thrilled at Mr Gobelly could join us
Speaker 1: this morning. Mary, I'm gonna stay in a stock theme
Speaker 1: and I'm gonna start out with your wheelhouse long agoing
Speaker 1: far away. You knew where spark plug went. You knew
Speaker 1: the carburetors. You know the automobiles and the tractors. Case
Speaker 1: Holland is a bet on the American agriculture. You go long,
Speaker 1: Case Holland, Why, well, I've got Let's assume the stock
Speaker 1: markets flat for the next two years. Assumed that the
Speaker 1: ten year bond is two and a half of two
Speaker 1: corporate taxes. How do you make so I look for
Speaker 1: companies that can benefit from infrastructure? Case knew how even
Speaker 1: if there isn't any, the construction business will boom in
Speaker 1: part because of the tailwind up CAPEX from corporation. Secondly,
Speaker 1: the agricultural ecosystem farmers have underspent, but more importantly than that,
Speaker 1: tom more importantly, they want precision farming. That's the name
Speaker 1: of the game. Less water, more precise, less labor because
Speaker 1: your factors can do it autonomously. And then what you
Speaker 1: want to own is a company, uh that basically also
Speaker 1: has an ability to do s G. A new CEO
Speaker 1: Scott Wine came up from Fars and so case New
Speaker 1: Holland a fifteen and a half dollars with a bucket
Speaker 1: of quarter and earnings in two years and a spinoff
Speaker 1: of their Ibico business, which is financial engineering. That's enough
Speaker 1: reasons done it and buy it. Well, let's continue the
Speaker 1: theme here. Heister. Yeah, most of our viewer and listeners
Speaker 1: don't know Hoister h y s t R. Heister Yale.
Speaker 1: That's not Amazon. What's the risk here of missing out
Speaker 1: on Amazon and Apple if I go into a gabelly
Speaker 1: case Hollander Heister Yale. Well, the notion is that you
Speaker 1: basically have choice in life and choice in making another
Speaker 1: one of my fifty per centers. Tom is a company
Speaker 1: called GROUPO Televisa. But going back to Hister Yelle, the
Speaker 1: stock seventy three, the sixteen million chairs Rankin, who's a
Speaker 1: young guy at seventy nine, same age as Biden. He
Speaker 1: basically is running the company and they put too much
Speaker 1: money without demonstrating the success in creating a hydrogen fuel
Speaker 1: for their forklift trucks and then taking that skill set
Speaker 1: and moving it elsewhere. You know, it's a it's a
Speaker 1: good bit on the recovery of their business, which benefits
Speaker 1: from the change in the logistics and the stock seventy
Speaker 1: three we thought they would earn five dollars in two years.
Speaker 1: Were still sticking with that. But the it's not one
Speaker 1: of my nifty fifty for the moment, but it's an
Speaker 1: okay play from here and we own it. We're nibbling
Speaker 1: at it again and we own it and we haven't
Speaker 1: sold much. It went from sixty to a hundred back
Speaker 1: to sixty five or seventy where it's training. Now, let
Speaker 1: me on a bigger thing for you in the grants
Speaker 1: you at the line, and this is from your notes.
Speaker 1: I just want to say one word to you. Plastics
Speaker 1: today you say he would have said batteries why marriage.
Speaker 1: Well that's a great point, John, Let's go back one
Speaker 1: giant step. What we have to do is love the planet,
Speaker 1: love the people in our planet, and look at the
Speaker 1: potential in that regard. Climate change requires renewables, that's wind,
Speaker 1: solar transmission, where I have a bunch of companies that
Speaker 1: I like, uh, cybersecurity because there's some crazy organizations around
Speaker 1: the world that are unfettered, but also battery storage. And
Speaker 1: then on top of that you have the E V dynamic,
Speaker 1: and that is do you do lithium eye line or
Speaker 1: do you lose solid state or which of those two
Speaker 1: will work? How do you get fast charged, how to
Speaker 1: get longer distance, how do you recycle it? So the
Speaker 1: battery is an important element in that ecosystem. We're having
Speaker 1: our forty six forty six years of an auto conference
Speaker 1: this time. Last year was featuring three years ago autonomous vehicles,
Speaker 1: last year with pre owned cars, uh, and this year
Speaker 1: it's gonna be batteries. So I like that over the
Speaker 1: next three or four years, how do we get a
Speaker 1: major battery breakthrough? And companies like Berkshire have to we
Speaker 1: understand that what they're doing in their and their field,
Speaker 1: and companies that provide lithium like album mall In Live
Speaker 1: and and so on a benefit from that, And how
Speaker 1: do we do it in the US. Are you more
Speaker 1: interested in doing it then through the batteries, through the
Speaker 1: technology that goes into the car, or can you do
Speaker 1: which one is in Mariott, I've the answer is that
Speaker 1: we look at the entire ecosystem. I'm just picking batteries
Speaker 1: because it was if you saw The Graduate, which was
Speaker 1: at R rated probably at the time, it was that
Speaker 1: scene in there where Dustin Hoffman has to confront the
Speaker 1: husband or is conf unted by the husband of um
Speaker 1: end Up without getting into details for this is a
Speaker 1: next family program, I think that's it. So it's batteries
Speaker 1: is a good sound, like you could have said removal
Speaker 1: of plastics, recycling of plastics on it, but I just choice.
Speaker 1: I chose batteries because I spent my fifty five years
Speaker 1: in the auto industry. So Mario, there is a question
Speaker 1: if we want to go to the Graduate graduating parallels
Speaker 1: where Dustin Hoffman was under the water, blowing bubbles and
Speaker 1: sort of trying to reset his life, and there is
Speaker 1: a question as you try to look for bottom up
Speaker 1: opportunities about how you even evaluate what's been priced in,
Speaker 1: because a lot of the companies that you're talking about
Speaker 1: the industries, particularly within renewable energy and batteries, have been
Speaker 1: incredibly highly bid up because people agree with you, at
Speaker 1: what point is it too much and has it been
Speaker 1: priced in? You always look at value versus price. I
Speaker 1: think you'll make a significant of fifty and four years.
Speaker 1: I'll give you the four names and then you can
Speaker 1: pick whatever you want. I gave it case to Holland,
Speaker 1: I give you Group of Television because the Spanish market
Speaker 1: is doing well, the good management, the financial engineering. They're
Speaker 1: converting it with univisual Univision, and Univision is going public
Speaker 1: sometime in the next six months. And then you have
Speaker 1: in addition to that, a company that's buying at a
Speaker 1: bargain price. Going back to your E D notion Electric
Speaker 1: Vehicles for the last smile electric Vehicles period. Electric Trucks
Speaker 1: Company and UH Volkswagen spun off their truck business traded on,
Speaker 1: but they have a lot of at that intellectual capacity
Speaker 1: and they're buying at a bargain price. Navistar, which is
Speaker 1: closing shorely Tradon is selling at twenty eight euros. They're
Speaker 1: gonna earn four dollars plus and you've got a good play,
Speaker 1: and you know the stock is a fifty in two years.
Speaker 1: So you know, there's a lot of ways to participate
Speaker 1: at the margins on some of these stocks. And uh,
Speaker 1: you know that then obviously you gotta play baseball at
Speaker 1: this time of year, so you don't need to say
Speaker 1: what's over priced in this market? What happens when the
Speaker 1: government comes in with a six point two trillion dollar
Speaker 1: expenditure and and raise only four trillion and we've gotta
Speaker 1: increased deficit. You know, we think about those things, but
Speaker 1: we look at companies Lisa with a microscope, and then
Speaker 1: we look and step back with a telescope and say,
Speaker 1: what's gonna work two years from now? Uh? You know,
Speaker 1: in some of these stocks we don't chase and nor
Speaker 1: that we go short Nicola or al R and so on.
Speaker 1: So I will let you talk about the opportunities in
Speaker 1: baseball with Tom, and I'm sure that you have things
Speaker 1: to sell him for his triple average cash fund. There
Speaker 1: is a question though, about concentration, especially as someone who
Speaker 1: has been bottom up for so many years. Do you
Speaker 1: have more confidence in a higher degree of concentration your
Speaker 1: portfolio if you can do the analysis, then you have
Speaker 1: in the past, just based on where we are in
Speaker 1: the credit cycle. Well, you take our small cap front. Okay,
Speaker 1: we love the ignored and unloved. And so when we
Speaker 1: go see a company, and that, by the way, finally
Speaker 1: getting out to see three or fourth companies, I saw
Speaker 1: one that's not in small cap I, T and T.
Speaker 1: You listen to that story. You listen to how management
Speaker 1: is executing. You listen to how every day they come
Speaker 1: in and work and they worked at fanties off for
Speaker 1: the for the economy, for the company, for the shareholders,
Speaker 1: and for their constituents. So there's a lot of companies
Speaker 1: that are not fully understood because you have the new
Speaker 1: dynamics in the market, MOBI al goes obviously and so on,
Speaker 1: and then there's a lot of risks. The risk that
Speaker 1: you point out, I worry about the high margin requirements.
Speaker 1: Should we increase the margin requirement? I worry about shadow
Speaker 1: banking the dot Frank Today you guys are talking about
Speaker 1: the huge amount of money coming in by the banks
Speaker 1: this afternoon tomorrow. But it's in part they were reined
Speaker 1: in by dot Frank if DoD Frank some credits in
Speaker 1: addition to that. Uh So, we look at the valuations
Speaker 1: and we look at what is the present value of
Speaker 1: the future stream and who's gonna buy the company. Lisa
Speaker 1: think about SPACs, thinks about strategics, buying companies with their
Speaker 1: stocks at these prices using it as a currency. And
Speaker 1: even companies that we like are selling converts when a
Speaker 1: one percent coopon up to raise money. Mario, I want
Speaker 1: to talk about the heart and soul of the matter,
Speaker 1: particularly going into this earning season. And this goes back
Speaker 1: to the wonderful Jack Welch. The idea of pricing power.
Speaker 1: Revenues are made up of a unit dynamic and a
Speaker 1: price dynamic. Are we gonna have pricing power and unit
Speaker 1: growth to go with it? That's a good question. Talk.
Speaker 1: The way we look at the model is everybody talks
Speaker 1: seven percent GDP growth, but that's not that's real. You've
Speaker 1: got three percent inflation. Revenues are gonna grow ten percent.
Speaker 1: So if I was the only company in the United States,
Speaker 1: I'm gonna have temper cent revenue increase and I'm gonna
Speaker 1: basically look for improvement in two in part because of
Speaker 1: the leg effect of certain companies coming through. But if
Speaker 1: I have a surgeon my cost which is crimping my
Speaker 1: gross margin, can I pass through my cost with the
Speaker 1: margin maintained. There are companies that can do that. Sdn
Speaker 1: A is not gonna rise temper cent, so I have
Speaker 1: an increase in pretax mode and then I'm gonna get
Speaker 1: hurt by taxes and I'm gonna be hurt by uh
Speaker 1: an increase the multiple. But but the heart of the
Speaker 1: matter here, and this goes back to the religion of Gabelly,
Speaker 1: is I want my cash back. I want dividend growth.
Speaker 1: They want share buy back. Do you see any change
Speaker 1: in use of cash dynamics. Yeah, I got a big
Speaker 1: fan of cash buy back. And if corporate dipp and
Speaker 1: you're gonna pay on dividends and you've got a soul
Speaker 1: tax that adds thirteen and then you've got the Obama
Speaker 1: tax on top of that you're gonna keep and that's
Speaker 1: a triple tax on childers. No, I'm not a big
Speaker 1: fan of dividends. I like the buffet approach, get good
Speaker 1: managements that compound. Yes, he's buying backstock because it's really
Speaker 1: well below intrinsic value. But but Tom, a year ago,
Speaker 1: when I was on a program, we had shortage people
Speaker 1: who were concerned about financial liquidity. Today they're not as
Speaker 1: concerned about that. They want supplied their overordering, and you're
Speaker 1: gonna see some double some of that and the surgeon prices.
Speaker 1: You saw Lumba come down from seventeen eight hundreds. But
Speaker 1: you're gonna have wage increases because there's a shortage of
Speaker 1: lay and that gives you your wage push element to inflation.
Speaker 1: And that's what we have to be sensitive about. And
Speaker 1: one of my directors call out to Perl when he
Speaker 1: was headed the Bundesbank, said it's like inflations, like two paste.
Speaker 1: Once it gets out, it's very hard to put it
Speaker 1: back in the tube. So we have to be super sensitive.
Speaker 1: At what point does Powell lift this foot off the
Speaker 1: accelerator on financial dynamics in terms of pumping money into
Speaker 1: the system, and how will the market react. But that's
Speaker 1: just a short term pothole in the next ten year
Speaker 1: voyage for stock ownership. Mario, let's not wait another year
Speaker 1: before we talk again. It's got a catch up, sir,
Speaker 1: as always, Mario Cavelly There Caveelli Fund CEO and sharemon
Speaker 1: I want to send to Lori Canvasy, to Tim obviously
Speaker 1: Capital Market's head of US equity strategy, and Laurie let's
Speaker 1: start there. Do we want to stick with what's worked
Speaker 1: so far this year energy the banks for the second
Speaker 1: half too. It's a great question, John. We spent a
Speaker 1: lot of time on that in medias and Look, I
Speaker 1: think that the leadership backdrop is getting a little bit choppier,
Speaker 1: but I think at the end of the day, there's
Speaker 1: still a lot of room in the cyclical value trade UM.
Speaker 1: So your your your poster children of that are going
Speaker 1: to be things like the financials, energy materials UM. I
Speaker 1: might be a little bit cooler on the industrials. I
Speaker 1: don't think you have the same valuation opportunity and industrial
Speaker 1: so you arguably have some you know, catalysts from the
Speaker 1: from the infrastructure bill UM, but I think that you
Speaker 1: still have a lot of room in these banks, in particular,
Speaker 1: it's regularly one of the cheapest sectors in the market.
Speaker 1: We've got catalysts now in the form of what are
Speaker 1: probably gonna be pretty buy back at big, big buyback
Speaker 1: announcements CUP coming, and I think that the underlying economic
Speaker 1: data is going to continue to run pretty hot. I
Speaker 1: think they're gonna be some wobbles here, which might you know,
Speaker 1: kind of keep some of that leadership, you know, moving
Speaker 1: back and forth day to day, week to week. But
Speaker 1: at the end of the day, this economy is running very,
Speaker 1: very hot above long term averages, and that should push
Speaker 1: you into the cyclicals for a while longer. Lore readjust
Speaker 1: market cap right now, do you go to MidCap small
Speaker 1: cap or you barbell and MidCap small cap with selected
Speaker 1: big cap So I think that you want to go
Speaker 1: down into MidCap if you're a large cap manager, and
Speaker 1: if you're a multi cap manager, you do want to
Speaker 1: go all the way down into smaller cap stocks. And
Speaker 1: you know, there are a couple of reasons for that one.
Speaker 1: If you just look at it at the broader index level,
Speaker 1: these companies are still inherently more cyclical than the big
Speaker 1: cap companies, so you're getting more exposure to that, you know,
Speaker 1: kind of hot US domestic economy um. And also, frankly,
Speaker 1: the valuation appeal is there. We've been in this world
Speaker 1: for the last decade or so where large cap growth
Speaker 1: megacap growth has dominated. If you look at the relative
Speaker 1: valuation multiples between mid and large or small and large. Frankly,
Speaker 1: I mean there's still pretty astounding. There's still a lot
Speaker 1: of valuation runway here. LORI, How do you make sense then,
Speaker 1: given your call on the rally that we've seen in
Speaker 1: the tenure, notwithstanding last week where we saw the sell off,
Speaker 1: the idea here that the balance seems to be towards
Speaker 1: lower yields, how does that cohere with his view towards
Speaker 1: cyclicals like financials, which depend on higher yields. Look, I'm
Speaker 1: an equity strategist, but you know, when I talked to
Speaker 1: my friends in the fixed income world, they a very
Speaker 1: good job of convincing me that the yield is not
Speaker 1: necessarily reacting only to macroeconomic conditions, that there's also a
Speaker 1: positioning issue um at play. And I know that in
Speaker 1: my work whenever I look at anything from a tactical
Speaker 1: asset allocation perspective, so I look at the healthhold balance sheets,
Speaker 1: for example, I if I look at tactical assid allocation
Speaker 1: funds tracked by morning Star, I see very very low
Speaker 1: bond exposure and very very high equity exposure. So I
Speaker 1: do think that there is a lot of truth to
Speaker 1: the idea that there is some positioning um at play
Speaker 1: in the in the yield. Let's talk about the positioning
Speaker 1: in your world energy by more than on sp energy.
Speaker 1: On that sect. We talked about the banks briefly a
Speaker 1: couple of moments ago. Laurie, you do some tremendous work
Speaker 1: on ownership. Who owns this story? How well owned is it?
Speaker 1: How well owned is that story right now? So let's
Speaker 1: take energy first, because I think that's a little bit
Speaker 1: different from the financials or the materials. If we look
Speaker 1: at energy, it's actually hilarious, at least if you're a
Speaker 1: data nerd like me, because every positioning study I run,
Speaker 1: everybody does their best to stay neutral the end energy sector.
Speaker 1: Whether I'm looking at large cap value funds, growth funds,
Speaker 1: small cap funds, hedge funds, SMP five, benchmark funds, everybody
Speaker 1: just hugs the benchmark waiting here. And I think that's
Speaker 1: because commodity prices, you know, are difficult for equity folks
Speaker 1: to predict um. And I think frankly, a lot of
Speaker 1: equity folks have been burned over the years trying to
Speaker 1: make big bets on commodity prices. So they try to
Speaker 1: you know, just really hug the benchmark. If you look
Speaker 1: at the Russell reconstitution. One thing we've heard sort of
Speaker 1: forecast season, um, was certain managers were seeing energy going
Speaker 1: up in their benchmark waiting. They're like, well, you know,
Speaker 1: I don't want to be overweight this sector, but I
Speaker 1: need to own another stock. You know, I may have
Speaker 1: one a small position, I need to add a little
Speaker 1: bit more. I think if you look at the financials,
Speaker 1: it's entirely different. The large cap long only to have
Speaker 1: been there for a long time. Frankly, it's something that's
Speaker 1: really impeded their performance in recent years, and it's working
Speaker 1: out for them now. Um. But if you look at
Speaker 1: hedge funds, I mean they were deeply, deeply underweight at
Speaker 1: the end of one que and they actually got more underweight,
Speaker 1: which is the exact opposite of what you would have expected.
Speaker 1: So the financials, if the hedge funds ever come back in,
Speaker 1: I mean, get out of the way. They're going to
Speaker 1: bid this space up in a hurry. Laurie is Amazon, Apple,
Speaker 1: the rest of them? Are they part of your valuation runway?
Speaker 1: So look, when we look at sort of the tech
Speaker 1: space or the communication services space, I actually have a
Speaker 1: basket of T I MT tech, Internet media, telecom. I
Speaker 1: grew up in the kind of aftermath of the tech
Speaker 1: bubble on the street. Uh, you know, we we started
Speaker 1: out thinking it would be the craziest thing, you know,
Speaker 1: we've ever seen in our careers, and it just has
Speaker 1: gotten crazier and crazier. But that's a that's another tangent um.
Speaker 1: But look at the end of the day, you know,
Speaker 1: I think the fundamentals in that space are unbelievably strong,
Speaker 1: and I think the secular growth appeal is there. I
Speaker 1: think that there are two problems with that space today.
Speaker 1: I think number one, you just don't have the same
Speaker 1: valuation opportunity. Now you've gotten better valuations as the year
Speaker 1: has progressed, UM, but we just don't see cheap valuations
Speaker 1: versus the S and P. And that's important because for
Speaker 1: much of the big bull run in that T I
Speaker 1: M T space from the financial crisis up to kind
Speaker 1: of that pre pandemic era, UM, we did cheap relative
Speaker 1: p S. A lot of people forget that it wasn't
Speaker 1: just about the secular growth narrative. And I think the
Speaker 1: problem today when you think about the fundamentals, the fundamentals
Speaker 1: are fine. They're just not all that special. They're just
Speaker 1: just not all that unique. And that's where I go
Speaker 1: back to this idea of a hot economy and the
Speaker 1: aftermath of the financial crisis. We really didn't get a
Speaker 1: lot out of Washington, and we had an economy that
Speaker 1: ran cool below average, below the two and a half
Speaker 1: percent long term run rate for quite some time. And
Speaker 1: that's really the kind of environment that secular growth does
Speaker 1: well in. But right now I'm looking down the barrel
Speaker 1: of you know, kind of six seven percent GDP this year,
Speaker 1: four percent plus next year, getting back closer to average
Speaker 1: frankly in three. But it's you know, it's just not
Speaker 1: the same kind of post crisis environment that we had
Speaker 1: back then. And these secular growth names, they're just not
Speaker 1: that special anymore. That's the problem with them. Right now,
Speaker 1: you're special. We love catching out right now in the
Speaker 1: infrastructure bate debate. It would be good to get a
Speaker 1: little experience. We can do that with decades of work.
Speaker 1: William Hoglan joins us the Bipartisan Policy Center Senior vice President,
Speaker 1: with all sorts of tangible work over the decades with
Speaker 1: Capitol Hill, with the House, and with the Senate Bill Hoglan,
Speaker 1: we don't want to pay for our infrastructure. At what
Speaker 1: point did we decide the gas tax was a bad idea?
Speaker 1: I think that we decided. I think the President decided
Speaker 1: that when he decided that he would not want to
Speaker 1: raise taxes on anybody with incomes less than four hundred thousand.
Speaker 1: I think that was the mark that resulted in their
Speaker 1: not being any increase in the gas tax. I agree
Speaker 1: with you, Tom, I think that's an obvious one. In
Speaker 1: the past, that's been one that we've used to fund
Speaker 1: our fund, our Highway Trust Fund. But it obviously it
Speaker 1: was tied up with the politics of not taxing anybody
Speaker 1: with incomes under four Okay, But the critics here Bill
Speaker 1: Hoglan say, simple, the gas tax goes to other programs.
Speaker 1: Can they in a bipartisan agreement if they say the
Speaker 1: gas tax increase will all go to bridges, etcetera, etcetera.
Speaker 1: Is that doable? Yes, it's absolutely doable, and you can
Speaker 1: define where you want that revenue to go. It goes
Speaker 1: right now, goes into the Highway Trust Fund, and you
Speaker 1: can make certain that that money is spent specifically on
Speaker 1: highways and bridges as example, without having to go to
Speaker 1: other things that you have a transit tax tax also
Speaker 1: that goes into a transit fund. So there are ways
Speaker 1: to handle that bipartisan wise. I think that's a that's
Speaker 1: a bogus argument that you can't you can't do what
Speaker 1: you've just outlined. Tom. But Bill, there is this larger argument,
Speaker 1: which is do we really have to pay for anything
Speaker 1: anymore given the fact that benchmark yields are so low
Speaker 1: and they are around the world. And this goes to
Speaker 1: your more than three decades of service for the government
Speaker 1: crafting budgets. Have we rethought the need to repay or
Speaker 1: actually work over the asked for some of these programs
Speaker 1: based in the fact the bigger deficits haven't proven to
Speaker 1: be a liability for the nation. Well, Lisa, I'm sorry,
Speaker 1: but I'm one of those who still believes that deficits
Speaker 1: and debt matter, and that while interest rates clearly are
Speaker 1: low right now and this is a good time in
Speaker 1: terms of investments and going forward for from the federal
Speaker 1: government's perspective long term, I am not of the mindset
Speaker 1: that those interest rates won't climb back up. And once
Speaker 1: they climb back up, when you're running a debt, total
Speaker 1: debt a well over thirty trillion dollars. Then the fastest
Speaker 1: growing component of the federal budget will not be Social
Speaker 1: Security or Medicare, but it will be just paying the
Speaker 1: interest on our public debt. So I'm sorry, I'm of
Speaker 1: that mindset. Still believe that you have to pay for
Speaker 1: what you have to pay for this, even with the
Speaker 1: low interest rates that we have, and I think, uh,
Speaker 1: in many ways, the bipartisan agreement that was reached over
Speaker 1: last Thursday, off track on Friday, back on tracks yesterday
Speaker 1: and Saturday on Sunday, I think that there was an
Speaker 1: indication there's some desire to try to pay for it,
Speaker 1: even though the pay for us I think are somewhat soft.
Speaker 1: Do you think among the Republican members who still do
Speaker 1: keep in contact with do you think that they have
Speaker 1: rethought whether it's proper to have this low tax rate
Speaker 1: for corporations, whether they actually would be more amenable to
Speaker 1: the idea of raising those based on the steady trajectory
Speaker 1: downwards that we've seen over the past few decades. Yeah,
Speaker 1: I think that. I think that depends what Republicans I
Speaker 1: talked to and their staffs particularly. I think there are
Speaker 1: some who would agree that there is a need for
Speaker 1: a readjustment of the corporate tax I think we're probably
Speaker 1: if we get to it, uh in another bill called
Speaker 1: the Reconciliation Bill. I think you're going to see a movement,
Speaker 1: particularly in the area from going up to not on
Speaker 1: the corporate tax rate that the President's proposed, but I
Speaker 1: think you're going to find that there is going to
Speaker 1: be some pressure here to increase uh, increased taxes and
Speaker 1: corporate taxes. I mean, John, it's in the United them
Speaker 1: as well. The Hammersmith Bridge back to eight seven or
Speaker 1: whatever is basically completely broken down, and they can't get
Speaker 1: it done there, can they. I love how you're confined
Speaker 1: about this is if you've ever been south of the
Speaker 1: river in London, you ever been on that bridge? Time? I?
Speaker 1: I maybe, I don't know. I went to the Imperial
Speaker 1: War Museum, did you. Okay? Yeah, I think that was
Speaker 1: south of the river. Belle. Let's go that not on
Speaker 1: this particular self topic of the Hammersmith Bridge. But defining
Speaker 1: infrastructure seems to be a struggle right now. If we've
Speaker 1: done that, now, have we agreed on what infrastructure is?
Speaker 1: I think we've agreed in a bi person manner that
Speaker 1: it's basic physical infrastructure that has a bipartisan support. There
Speaker 1: still is a lot of discussion and will be continue
Speaker 1: to beat this h about other forms of what's called
Speaker 1: individual or personal infrastructure, childcare, family paid lead UH, these
Speaker 1: kinds of provisions that some of the progressives in the
Speaker 1: Congress want to define and which would would which has
Speaker 1: been one of the issues over the weekend about the
Speaker 1: dividing the Republicans and the progressives from the Republicans in
Speaker 1: terms of what they want to put in. But I
Speaker 1: think for right now, for now, for the current and
Speaker 1: hopefully we'll be able to put this bill together. The
Speaker 1: Republicans and Congress, along with the Democrats and the leadership
Speaker 1: and Congress and the President, I think they've pretty well
Speaker 1: defined it as physical infrastructure UH, bridges, waterways, highways, h
Speaker 1: I think it has been expanded to include, of course
Speaker 1: issues associated with the broadband but but but the individual infrastructure,
Speaker 1: the family UH plan that the President put forward, I
Speaker 1: think it's still up in the airs to whether that
Speaker 1: should be defined as infrastructure or not in the minds
Speaker 1: of a number of individuals within the Congress. But I
Speaker 1: was gonna see you we appreciate venty times bill hugand
Speaker 1: Biess and Policy Santa Snia, Vice President. Let's bringing Tavanka Sho.
Speaker 1: We come toto fe to see and David, if I may,
Speaker 1: I want to start right there. Is there still a
Speaker 1: big beat on something big happening down in Washington. I
Speaker 1: don't know about. I mean, it looks like we'll have
Speaker 1: some type of infrastructure playing. John. They have to deliver
Speaker 1: a plan. It won't be as big as anticipated, and
Speaker 1: it will have all kinds of changes in it. That's underway.
Speaker 1: Biden wants to complete something. The Republicans don't want to
Speaker 1: be the obstacle that nothing. So it would look to
Speaker 1: me as if something will happen, and whether it's a
Speaker 1: billion or nine d billion or trillion or whatever the
Speaker 1: number will be, we'll got to find out. David, um,
Speaker 1: I want to talk about marcuts first, we'll do COVID
Speaker 1: here and David, you went to some cash here. Everybody
Speaker 1: follows your often allocations of E T F Cumberland Advisors.
Speaker 1: You're sitting on cash. What are you gonna do with it?
Speaker 1: What is your re search on sectors? Tell you right now? Well,
Speaker 1: our largest sector tom is a health care sector. We
Speaker 1: have maintained that as a strategic position. That group did
Speaker 1: very well and then sort of leveled off except for
Speaker 1: a couple of biotechs. We believe the COVID shock is
Speaker 1: a strategic shock that will take years. And the health
Speaker 1: care sector in the United States and the various component
Speaker 1: parts of it, are they beneficiaries in a business sense.
Speaker 1: Wish it were otherwise. We don't want pandemics, but that's
Speaker 1: what we have. So the health care sector is probably
Speaker 1: four of the SMP five in our shop. We're closer
Speaker 1: to double that around. It's the highest wait for a
Speaker 1: large sector I have I have ever been, So, David,
Speaker 1: I want to go back to this idea that Tom
Speaker 1: raised about higher cash allocation. What are you seeing not
Speaker 1: being fully invested that other people are not well. We
Speaker 1: had a position of Lisa in in materials commodities to
Speaker 1: E t f s. We sold them and we are
Speaker 1: not ready to redeploy that cash. We are not going
Speaker 1: to put any more into healthcare. So we have to
Speaker 1: look at the sectors very carefully. As you just said
Speaker 1: in the beginning, we're slowing from a peak. So if
Speaker 1: you're going down the highway at sixty miles and you
Speaker 1: slow to forty miles, an hour. At the time you're slowing,
Speaker 1: you don't know. It feels the same as if you're
Speaker 1: going to slow to zero. I don't believe we're going
Speaker 1: to go to zero, but we are slowing. We cannot
Speaker 1: maintain this six seven percent GDP growth rate in the
Speaker 1: United States. It's not there to be had. So the
Speaker 1: slowing is going to reveal something. The second thing that's
Speaker 1: going to reveal a lot are the earnings reports, which
Speaker 1: are going to start in the next couple of weeks.
Speaker 1: We're going to get a handle on earnings capacity in
Speaker 1: this quarter of such robust recovering. David, because the time
Speaker 1: John lies and I have like six things to talk
Speaker 1: to you about. I know you're in Breckon Ridge, where
Speaker 1: the Blue River moves north to the Colorado. We could
Speaker 1: do the western drought. We'll do that in another time.
Speaker 1: David Kotak, you were the absolute national leader in Wall
Speaker 1: Street on the bird virus of years ago. Everybody thought
Speaker 1: you were nuts, and now in hindsight, you look like
Speaker 1: an absolute genius. Your thought and how we're going to
Speaker 1: adapt to COVID, the delta variant, and how we get
Speaker 1: out of this pandemic. I I think I'm very pessimistic
Speaker 1: about it because of the political divide in the United States.
Speaker 1: Town and we see it happening. We see for you,
Speaker 1: Bloomberg reported four eighty two counties which have low vaccination
Speaker 1: rates and they all have rising alter rates. Pandemic isn't over.
Speaker 1: It's going to be over sometime. It will take a while.
Speaker 1: Do you fold that into your investment Outlook? Absolutely, we
Speaker 1: have a million excess deaths. We have three and a
Speaker 1: half million long haul disability, partial or full disability COVID cases,
Speaker 1: and we have more of it coming. So that's what's
Speaker 1: happening in the United States, and then it's worldwide. So
Speaker 1: we don't even fold in the global impact yet, but
Speaker 1: that's coming to well specifically then, David just quickly linked
Speaker 1: to that is in your market code. Well, I want
Speaker 1: some cash. I want the healthcare sector. And the second
Speaker 1: overweight sector, John is defense because of what the world
Speaker 1: looks like. You just reported a run you've gotten to
Speaker 1: air strikes. I mean, defense is a big issue in
Speaker 1: the United States. I don't see a defense budget cut
Speaker 1: or any anywhere near and any impairment of defense. The
Speaker 1: United States has a very heavy defense load now in
Speaker 1: this world, David got to leave it there. Small stuff,
Speaker 1: interesting provocative thoughts. David kot there come to devise a
Speaker 1: see io, Lisa, I'm gonna have you asked the first
Speaker 1: question to Mr Brill, but it's got to be on
Speaker 1: the supply or the so called dearth of it coming up. Well,
Speaker 1: the idea here being that our company is actually deleveraging.
Speaker 1: Are they actually becoming more credit worthy and perhaps justifying
Speaker 1: the tightening and spreads? Matt Brill of Investo ahead of
Speaker 1: US investment Grade and senior portfolio manager, do you think
Speaker 1: that that's what's going on here, that they're actually becoming
Speaker 1: more credit worthy companies? Hey, good morning everybody. Yeah, I
Speaker 1: do think that you're seeing just the fundamentals get better
Speaker 1: and better with the U. S economy, but you're also
Speaker 1: seeing corporations really trying to figure out how to get
Speaker 1: rid of last year's debt. And last year's debt was
Speaker 1: all out survival, and this year they're really kind of pivoted.
Speaker 1: And so we've seen a T and T, we've seen
Speaker 1: g e ups are all big names looking to pay
Speaker 1: down debt. So overall that that's pretty good for the market.
Speaker 1: Um I would say he's evaluations are very very challenged though,
Speaker 1: but the fundamental fundamentals are going to keep getting better. Here,
Speaker 1: what is the maturity probabfile of these massive companies look
Speaker 1: like now, Matt, So, most of these companies have actually
Speaker 1: termed out their debt. We call this, you know, kind
Speaker 1: of kicking the can down the road, or or really
Speaker 1: just making sure they don't have any near term debt maturity.
Speaker 1: So the average duration of the US corporate market continues
Speaker 1: to get longer. Um. That's bad from a mark to
Speaker 1: market standpoint, that's because it means there's more duration, more
Speaker 1: volatility potentially, but it's very good from a fundamental standpoint
Speaker 1: because it means they don't have near term debt maturities
Speaker 1: that they have to worry about if the market were
Speaker 1: to seize up again. So all in, you know, I'd say,
Speaker 1: that's really in that positive. Do they play into this
Speaker 1: theme if the same is true, if how yield that
Speaker 1: was stripping out the sick locality from this market, just
Speaker 1: how sensitive these markets are to a given turn of
Speaker 1: the economy. I think so from from from the turning
Speaker 1: out of maturities, but also at least it was mentioning
Speaker 1: which just the Federal Reserve and that all the FED
Speaker 1: didn't really buy high yield, they did buy some crossover names. Really,
Speaker 1: just the fact that the FED was there, I think
Speaker 1: eliminated tail risk to the corporate credit market. And so
Speaker 1: whether or not this will be permanent, it is certainly
Speaker 1: up for debate. But we do believe that from an
Speaker 1: overall beta standpoint, um, you know, it means that you're
Speaker 1: you're more comfortable investing in investing in the investment grade
Speaker 1: market and a little bit in the aield market as well.
Speaker 1: Matt bro I, I look at all this and I go,
Speaker 1: is this two thousand six? Is this two thousand six?
Speaker 1: It's not. It's it's two thousand one, just to be clear.
Speaker 1: But it has some resemblances to it, but but not
Speaker 1: really so two thousands six, two thousand seven, you had
Speaker 1: the t x U l B OH just a few
Speaker 1: weeks ago you had the medline LBO, and the medline
Speaker 1: LBO it has about fifty equity so t x U,
Speaker 1: I can't remember the exact number, it is around fifteen
Speaker 1: percent equity, So you went from fifteen to fifty. So
Speaker 1: there's a lot more equity um private equities having to
Speaker 1: put up more more more equity into the deals to
Speaker 1: get these deals done. They don't want to go through
Speaker 1: t x U. T XU they made some money off
Speaker 1: of but at the end of the day, you know,
Speaker 1: the market wouldn't fund a deal like that today. I
Speaker 1: really don't think they would. They did, however, fund a
Speaker 1: five hundred million dollar micro strategy deal to buy bitcoin,
Speaker 1: so you know, maybe that's a little different. I like
Speaker 1: to say though, that there is a lot more prudency
Speaker 1: in this market. There are people that are really not
Speaker 1: going to make dumb decisions. I don't think on the
Speaker 1: on the investor side of things, but they are being
Speaker 1: forced to invest, and they are being forced to invest
Speaker 1: at a rich evaluations, but not into bad companies, just
Speaker 1: necessarily maybe not as much yield as they would like.
Speaker 1: So where's the opportunity? I mean, you know, I know,
Speaker 1: we're sixty forty in my portfolio, I mean John's portfolio.
Speaker 1: Excuse me? If I got two percent and fixed income,
Speaker 1: what do I do? Well? John is a really young guy,
Speaker 1: so he doesn't really need a lot of good Yeah,
Speaker 1: there is opportunities still in the reopening trade, where we're
Speaker 1: seeing names like Boeing today get a large deal from
Speaker 1: from United that they have some negative news out as well,
Speaker 1: But for the most part, the reopening trade lives on
Speaker 1: the reflation trade. You're calling, well, maybe not calling for
Speaker 1: a hundred dollars there, Tom, But we do think that
Speaker 1: that that that commodity prices go higher, and with that
Speaker 1: there are certainly opportunities with the emerging market world as well.
Speaker 1: So emerging markets um that that have more correlation to
Speaker 1: commodity prices and asset prices overall going up um you know,
Speaker 1: we think is good. So there are ways to make
Speaker 1: money in the in the corporate market right now, particularly
Speaker 1: in investment grade around the globe. But it's a lot
Speaker 1: more selective and it's it's not the two thousand and
Speaker 1: twenty trade of just riding the beta. You have to
Speaker 1: really look under every stone to find to find value
Speaker 1: out there. It's interesting, there's sort of contradictory messages here.
Speaker 1: On one hand, you have to look under every stone
Speaker 1: and be idiosyncratic and and and select securities. In the
Speaker 1: other hand, it's a macro trade. I mean, at a
Speaker 1: certain point, credit trades in tandem with treasuries rate full stop,
Speaker 1: because ultimately it's whether the Fed comes in and backs
Speaker 1: things and how duration sensitive some of these bonds have become. No, yes,
Speaker 1: that's right, and so duration has really been the the
Speaker 1: you know, the the key theme of the year. And
Speaker 1: you look up and and and you know, we don't
Speaker 1: have equity like returns this year. But if you look
Speaker 1: at most corporate bonds that they're essentially flat on the
Speaker 1: ear in terms of total returns. So it hasn't been
Speaker 1: the disaster that many might have predicted um at the
Speaker 1: start of the year when we were seeing interest rates
Speaker 1: go higher. UM. So I would say, if the all
Speaker 1: eyes are on the Fed in terms of tapering, all
Speaker 1: eyes are on the Fed in terms of whether they're
Speaker 1: going to have lift off. Um, the foreigners continue to
Speaker 1: buy a lot of bonds. And if the Fed does
Speaker 1: lift off, that makes makes hedging costs go higher. If
Speaker 1: hedging costs go higher, the foreign buyers will buy less.
Speaker 1: So to us, that's really the key thing to watch
Speaker 1: is is when will the Fed hike because when they do,
Speaker 1: that will likely make it more expensive for foreigner buyers
Speaker 1: and and and and less attractive to them to buy
Speaker 1: our our higher yielding bonds here versus their negative yielding
Speaker 1: bonds back home. Prey small funnel point them. Matt's going
Speaker 1: to catch up. Matt bro investa had a fe s
Speaker 1: investment cried, It's welcome back any time. This is the
Speaker 1: Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays
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Speaker 1: Tom keene In. This is Bloomberg