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Speaker 3: M and A talk just kind of coming across the
Speaker 3: tape here Boeing and talks to buy supplier Spirit Aerosystem.
Speaker 3: Spirit air System stock is higher Boeing a little bit
Speaker 3: lower here. But you know, one could argue this is
Speaker 3: a transaction that probably needs to happen for Boeing to
Speaker 3: address some of their concerns. Let's bring on them. George Ferguson.
Speaker 3: George Ferguson covers the aerospace and airlines of business for
Speaker 3: Bloomberg Intelligence. George tell us why Boeing would want to
Speaker 3: do this transaction.
Speaker 4: Good morning, Paul. Quality control. It's absolutely quality control. They
Speaker 4: must be looking inside Spirit. I know they've been looking
Speaker 4: inside spe for months. My guess is they've looked inside
Speaker 4: and they just feel like they can't control quality well enough.
Speaker 4: As an outsider. They used to own Spirit, not as
Speaker 4: it looks exactly now, but they used to own you know,
Speaker 4: those facilities. It makes a majority of the seven thirty
Speaker 4: seven fuselage, it makes the front portion of the seven
Speaker 4: eight to seven, two extremely important products. I think they've
Speaker 4: looked inside and they said, we can't control quality well
Speaker 4: enough from the outside.
Speaker 5: We've got to buy this thing.
Speaker 6: Do we trust Boeing to have the kind of quality
Speaker 6: control that Spirit needs?
Speaker 5: Bowe doesn't have a choice.
Speaker 4: Boone's got to get quality control or they.
Speaker 5: Got a major problem on their hands. And so I.
Speaker 4: Guess I think as an owner, I think it is
Speaker 4: the path, probably a good path forward. I do think
Speaker 4: they will get the quality issues in hand, but it's
Speaker 4: going to take some time, but they have to.
Speaker 5: They have no choice.
Speaker 3: Yeah, I'm looking at the stock A bug is pretty
Speaker 3: much unchanged on the news here. I think if I
Speaker 3: were an investor in Boeing, I would think I may
Speaker 3: or may it, may or may not make financial sense
Speaker 3: to own this Spirit thing, but I would say it's
Speaker 3: probably the best way to move forward here. And when
Speaker 3: you talk to investors Georgia, did they think that way?
Speaker 3: You know?
Speaker 4: I think investors, you know, I don't know that you
Speaker 4: could say they all monololiithically think that way. I think
Speaker 4: if there if there could have been a way to
Speaker 4: keep it outside not have to buy it, you know,
Speaker 4: I think they that probably would have pleased people more.
Speaker 4: I mean, there will be an unwinding required in this transaction. Right,
Speaker 4: So Airbus is a three twenty. Some of the components
Speaker 4: are made at Spirit. I'm imagining that Airbus is not
Speaker 4: going to be interested in having you know, Boeing as
Speaker 4: a subcontractor on their airplane, you know, and their their
Speaker 4: other defense products, you know, for lockeed things like that.
Speaker 4: It's going to require some work I think to unwind
Speaker 4: this thing a little bit in order to you know,
Speaker 4: in order to pull it inside of Boeing. Probably energy
Speaker 4: you would prefer not Boeing to spend. But again I
Speaker 4: think it's their most important products are flowing through Spirit,
Speaker 4: and Spirit's been a source of the problems in some
Speaker 4: of those products lately. And if Boeing is going to
Speaker 4: a much higher production rate, which is where they're going
Speaker 4: to generate the cash flow they need, the profitability they need,
Speaker 4: they've got to stabilize production. And I think, you know,
Speaker 4: they must have looked at it and said we got
Speaker 4: to own it. And so if you're an investor, I
Speaker 4: think you're okay, Yeah, it's the way forward. I'd rather
Speaker 4: not have taken this path, but it's the way forward.
Speaker 6: This is the leading question, and it could be very wrong.
Speaker 6: But does this tell us anything about how bad things
Speaker 6: are at Spirit that this is the option?
Speaker 5: I think it does.
Speaker 6: So how bad are things at Spirit?
Speaker 4: To me, it sounds like it's so bad they got
Speaker 4: to buy it, And I think that's bad. Right, If
Speaker 4: you're Boeing, you do want to preserve cash, right, you
Speaker 4: don't want to go make an acquisition. You got plenty
Speaker 4: of other things to manage right now. But I think
Speaker 4: it means that, yes, the turnover at Spirit's been bad.
Speaker 4: The quality control, I think that's led it to the quality
Speaker 4: control problems. You want to have your hand in how
Speaker 4: those line workers are being managed, how the quality control
Speaker 4: is being handled. Yeah, it means it was really bad
Speaker 4: at Spirit, all right.
Speaker 3: The shares of Spirit Error Systems SPR is a ticker
Speaker 3: for your Bloomberg terminal, up fourteen percent a year today.
Speaker 3: Trading has resumed here, so obviously the market signing pretty
Speaker 3: high probability that something will get done here. So George,
Speaker 3: just looking at Boeing holistically, you know, as you've told
Speaker 3: us in the past. You know, this is a scale business.
Speaker 3: You've got to make as many planes as you can
Speaker 3: for that over that fixed cost base. You have talk
Speaker 3: to us about the production goals, but taught to us
Speaker 3: where they are in production today and where do they
Speaker 3: want to get to and do you think that's a
Speaker 3: reasonable glidepath.
Speaker 4: So they are at thirty eight today, although they'll tell
Speaker 4: you even though their suppliers are building at thirty eight
Speaker 4: and delivering the Boeing at thirty eight, Boeing is not
Speaker 4: putting thirty eight out.
Speaker 5: So I don't know. There's somewhere between.
Speaker 4: They's somewhere in the high thirties.
Speaker 5: Let's say it depends what month it is.
Speaker 3: That that's you know, their mother base is just in general.
Speaker 4: Sorry, and that's on the seven thirty seven. Yep, that's
Speaker 4: the most important product. On the seven eight seven. You know,
Speaker 4: we're in the in the I think five is six
Speaker 4: ish area right now on seven thirty seven. You know,
Speaker 4: they've got goals to be into the fifties. They've and
Speaker 4: at the end of the last expansion phase before the pandemic,
Speaker 4: before the max crashes and groundings, you know they were
Speaker 4: they were in the sixties. They're not going to go
Speaker 4: in the sixties airbuses, you know, for the seven thirty seven.
Speaker 4: Airbus is talking about going to seventy five for the
Speaker 4: eight three twenty. So I think if you and I
Speaker 4: were inside the Boeing management meetings and they told you
Speaker 4: where they really wanted to go, they want to be
Speaker 4: up there near.
Speaker 5: Airbus.
Speaker 4: They're taking a fifty to fifty complement of this market.
Speaker 4: Is that the right place to go? Yes, they're talking
Speaker 4: mid decade. Yes, probably pulling Spirit inside. Timing probably had
Speaker 4: a lot to do with that too. They thought, look,
Speaker 4: how can we stabilize this the fastest, because we don't
Speaker 4: want to keep giving away share to air Bus.
Speaker 6: Going to Spirit back to just for one second. We're
Speaker 6: also reporting that Spirit is exploring strategic options. So that
Speaker 6: leads me to believe that if the Boeing thing doesn't happen,
Speaker 6: they're still in deep trouble and they got to get
Speaker 6: a buyer or do something else. What would be Plan B.
Speaker 5: For Spirit?
Speaker 3: Yeah?
Speaker 4: Yeah, I mean when we look at Spirit spirits, you know,
Speaker 4: you know, Spirit has has a bunch of debt coming
Speaker 4: do the capital markets haven't loved them as much. I
Speaker 4: think they've they you know that some of the debt
Speaker 4: they've placed has been up in the nine percent ish level.
Speaker 4: I think the capital markets, the debt capital markets especially,
Speaker 4: have looked at the Boeing relationship and that's given them
Speaker 4: more comfort probably to give them rates that perhaps were
Speaker 4: better than what Spirit should have got. I think it, frankly,
Speaker 4: would be strategic options, you know, away from Boeing are
Speaker 4: really difficult because again some you know, some fifty to
Speaker 4: sixty I'm talking off the Kuffey I have to go
Speaker 4: pull the exact number of their revenues flow through Boeing.
Speaker 4: What I'm guessing, and that's that strategic comment, is that
Speaker 4: Spirit is probably looking at how they would spin off
Speaker 4: portions of the business that are not Boeing focused, so that,
Speaker 4: you know, so that it could continue, you know, to
Speaker 4: serve those customers. Like I said, Airbus, Lockheed, other defense
Speaker 4: companies have products that are being built by Spirit. I
Speaker 4: think They're probably looking at ways to continue to service
Speaker 4: them in an entity that would be.
Speaker 5: Outside of Boeing.
Speaker 4: You know, the fuselage building business, which is largely what
Speaker 4: Spirit does, isn't one of the great money makers in
Speaker 4: the industry. And you know, we've seen it go to
Speaker 4: some you know, to go offshore. You know, the Koreans
Speaker 4: want to be in this business, the Japanese are in
Speaker 4: this business, the Chinese are in this business. There's a
Speaker 4: lot of competition in that space, and so I think
Speaker 4: it makes it a really hard part of the business
Speaker 4: to be in to make very good returns and looks
Speaker 4: it's a space, the fuselage building space that I think
Speaker 4: Airbus has kept more inside because again they want to
Speaker 4: control their quality. So, you know, I guess that's a
Speaker 4: lot a long way of saying, I don't know that
Speaker 4: options as a complete entity away from Boeing. I don't
Speaker 4: know the great ones exist and I don't see that.
Speaker 4: My guess is they're trying to spend parts of it away,
Speaker 4: all right.
Speaker 3: George, thanks so much for joining us on short notice.
Speaker 3: Really appreciate it. George Ferguson, he covers the airspace business
Speaker 3: was the airlines is the whole complex over there, including
Speaker 3: the defense manufacturers. Again, Wall Street Journal first reported, now
Speaker 3: Bloomberg News matching that Boeing is in talks to acquire
Speaker 3: Spirit Aerosystems Holdings SPRS.
Speaker 7: The ticker Spirit is.
Speaker 3: The stock is up fifteen and a half percent today
Speaker 3: right now, So suggesting to the market believes that there
Speaker 3: is something there in s George was suggesting, Alex, it's
Speaker 3: probably something they gotta do.
Speaker 6: George was awesome, Like that was great, that was great perspective, etc. Yeah,
Speaker 6: And I thought that it was really interesting that it's
Speaker 6: the fuselage business. So if you can spin off other stuff,
Speaker 6: maybe that's the profitable money maker. You can still keep
Speaker 6: the contracts with Airbus and Boeing, but it's the fuselage business. Like,
Speaker 6: that's the part that Boeing just has to basically absorb
Speaker 6: and suck up within its within its company. We'll see
Speaker 6: if that works.
Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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Speaker 6: Thirty New York Community Bank down twenty percent. All right,
Speaker 6: you know the story. It has discovered quote material weaknesses
Speaker 6: in how it tracks loan risks. They wrote down the
Speaker 6: value of the company that acquired years ago and replace
Speaker 6: its leadership to help grapple with the turmoil, there was
Speaker 6: a theory that maybe this kind of risk was idiosyncratic.
Speaker 6: They are one of the big exposures to rent control
Speaker 6: departments here in New York City that has been hurt
Speaker 6: by a revamp of some of those rent control laws.
Speaker 6: So when there's a banking potential crisis, we go to
Speaker 6: one guy, Herman cham Lumberg, Intelligence Senior analyst for US
Speaker 6: Regional banks. Herman, can we still call this idiosyncratic?
Speaker 7: It is a good question. I think it's the appropriate question.
Speaker 8: What's idiosyncratic is you mentioned the exposures to commercial real estate,
Speaker 8: specifically apartment lending in office. But what's also idiosyncratic is
Speaker 8: that it recently cleared the one hundred billion dollar asset mark,
Speaker 8: which ushers in higher capital liquidity regulatory issues.
Speaker 7: For the bank.
Speaker 8: And what's happening in our view is that it's easy
Speaker 8: to reach the big leagues of one hundred billion dollars,
Speaker 8: it looks like it's harder to stay there, right And
Speaker 8: what we're seeing is that they're facing growing pains and
Speaker 8: becoming such a bigger company, and these lack of material
Speaker 8: weakness and internal controls just reflects.
Speaker 3: That change in management. Is that usually doesn't look good, right,
Speaker 3: I guess that's contributing to the stock here today. But
Speaker 3: tell us about that.
Speaker 1: Yeah.
Speaker 4: Sure.
Speaker 8: So a few years back, the bank acquired another institution
Speaker 8: called Flagstar Bank, and the CEO of Flagstar Bank is
Speaker 8: now the CEO of NYCB. He was named the executive
Speaker 8: chairman back earlier in February once these issues became apparent,
Speaker 8: and it looks like the former CEO it just has
Speaker 8: been sidelined because of.
Speaker 7: The need for new management.
Speaker 6: Okay, So what's interesting is that if we rewind to
Speaker 6: when they were able to buy with a signature correct,
Speaker 6: some signature assets, right, it was like, oh, look, yay,
Speaker 6: they were the savior, et cetera. Is that gonna are
Speaker 6: regulator is going to rethink what being a bank savior
Speaker 6: is in that circumstance.
Speaker 8: Yeah, that's a great question, and I think it really
Speaker 8: poses a different question. Was New Your Community the right
Speaker 8: bank to acquire the signature assets and deposits if we knew,
Speaker 8: if the regulators should have known, that New Community wasn't
Speaker 8: really up to snuff up the speed on a number
Speaker 8: of these internal issues, capital issues, liquidity issues, and reserve issues. So, uh,
Speaker 8: does do the bank layers need to be more cognizant
Speaker 8: of what they're doing and anointing of potential savior and
Speaker 8: a year later, now this bank is in the crossairs.
Speaker 3: What one of the lessons I'd take away from this
Speaker 3: story is I think a basic fundamental investing lesson, which
Speaker 3: is kind of concentration risk. Look like, had so much
Speaker 3: exposure to this type of loan class i e. Loans
Speaker 3: to rent controlled apartments, that presents a whole level of risk.
Speaker 3: I either not diversified in their portfolio as much as
Speaker 3: maybe we would like. But I guess if you were
Speaker 3: investor in YCV, you knew that going in, right, Yes,
Speaker 3: you knew that.
Speaker 8: Going in that this was the bank that has historically
Speaker 8: focused on the rent regulated apartment lending sector. There they're
Speaker 8: the big ahuna in this niche business and they've been
Speaker 8: doing it for decades.
Speaker 7: So that's not new.
Speaker 8: And you should have known that a few years back
Speaker 8: when when New York imposed tougher regulations, that this was
Speaker 8: going to hurt their their main business.
Speaker 7: So it's taken a few years for just to really
Speaker 7: bore itself out.
Speaker 6: Also, maybe an investor should know, but the company also
Speaker 6: should have known, Like that part couldn't have come as
Speaker 6: a surprise from that end.
Speaker 3: No, but they're risking controls. That's a real problem exactly.
Speaker 6: And now they're trying to do what is this risk,
Speaker 6: synthetic risk something something. So basically the aesthetics sounds.
Speaker 8: Not great, but synthetic the rid of a transaction to
Speaker 8: help reduce their their loan exposures and improve their capital.
Speaker 8: So that's one way to get rid of or improve
Speaker 8: their capital without actually selling the loans.
Speaker 3: All right, for our listeners and viewers that are not
Speaker 3: exposed to New York RAN controlled real estate, talk to
Speaker 3: us about the regional banks in general. What's kind of
Speaker 3: the feeling. And you talk to investors today, are they
Speaker 3: warming up to this? I know it's bounced off that
Speaker 3: October low, right, but I'm not sure if that's a
Speaker 3: market bouncer. People are saying, I think I've seen the
Speaker 3: worst in regional banks.
Speaker 8: It's it's an interesting question. You're right that they've bounced.
Speaker 8: But now a number of folks in the market are
Speaker 8: saying potentially no rate cuts this year, which would be
Speaker 8: viewed as negative for the regional banks, just because the
Speaker 8: positive costs have risen.
Speaker 6: Yeah, cuts because the economy is good and accelerating, So wouldn't.
Speaker 9: That be good?
Speaker 7: There's two things that that weigh on that.
Speaker 8: Number One, there's not a lot of loan growth and
Speaker 8: rate cuts would improve loan demand. And number two, elevated
Speaker 8: interest rates is bad for credit quality and being able
Speaker 8: to refinance the existing loans.
Speaker 7: And the decline and value.
Speaker 8: In areas like office commercial real estate could hamper banks
Speaker 8: credit quality.
Speaker 3: So where are we all on that commercial real estate risk?
Speaker 3: I kind of feel like it's a time bombs still
Speaker 3: out there, and at any time over the next two
Speaker 3: or three or four years, maybe multiple times over that timeframe,
Speaker 3: we're gonna have bank a or group of banks are
Speaker 3: going to call out CIRI is a reason why they
Speaker 3: really missed or they have to really up their reserves or.
Speaker 5: Something like that. Where are we on that?
Speaker 8: Yeah, that continues to play out. We saw that with
Speaker 8: your community in the fourth quarter. We'd expect more of
Speaker 8: that going ahead in the coming quarters. That being said,
Speaker 8: the risk in our view is really relegated to the
Speaker 8: smaller banking institutions.
Speaker 7: We just looked at some data which I think was
Speaker 7: pretty interesting. Since the.
Speaker 8: COVID era starting in twenty nineteen, the top twenty five
Speaker 8: US banks have grown their commercial real estate loans by
Speaker 8: only two percent, and then the large the smallest banks
Speaker 8: have grown their commercial real estate by forty three percent.
Speaker 8: So that shows me that really the risk is comprised
Speaker 8: largely in the smaller bank cohort.
Speaker 6: That's interesting. So let me ask a question. Went back
Speaker 6: to the FED cut, So if we don't get a
Speaker 6: cut for this year, let's just pretend game out.
Speaker 3: Did that just Torton wor other people know it's just Torston?
Speaker 3: I think.
Speaker 6: I think a couple of weeks ago people were talking
Speaker 6: about the worry that we may have to have another
Speaker 6: hike because inflation was reaccelerating. But this is maybe the
Speaker 6: first I've heard of no cuts at all. So if
Speaker 6: that happens and there's no cuts, who's going to be
Speaker 6: under pressure? I mean, you mentioned the fact that a
Speaker 6: cut would help loan demand, So who's already seeing sketchy
Speaker 6: loan demand?
Speaker 4: Right?
Speaker 8: So that's an industry phenomenon where where we're not seeing
Speaker 8: loan growth across the group. The FED puts out weekly
Speaker 8: data and it shows that loans are down quarter to
Speaker 8: day in commercial loans, so that's a big driver of
Speaker 8: the regional bank the large region on bank balance.
Speaker 7: Sheets, so that's hampered. It's going to affect.
Speaker 8: Banks like probably New York community the most because any
Speaker 8: potential rate cuts review as a savior for them because
Speaker 8: then their borrowers could refinance at rates.
Speaker 3: All right, Herman, thanks so much for joining us. Hermy Chands,
Speaker 3: senior analysts for the banks, joining us here in our
Speaker 3: Bloomberg Interactive Broker Studio.
Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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Speaker 10: This is the.
Speaker 6: Bloomberg Intelligence Radio Show. We bring you great analysis with
Speaker 6: all our Bloomberg Intelligence folks. Two thousand companies, one hundred
Speaker 6: and thirty industries. You want to know about it, they
Speaker 6: cover it. We also like to give you a perspective
Speaker 6: of how to invest on a broader level, particularly on
Speaker 6: a day where the data My point to, maybe we're
Speaker 6: going to get some fed cuts, but then Tauris and
Speaker 6: Slackowapaula said, you're not going to get any cuts this
Speaker 6: year because the economy is just actually accelerating. Things are
Speaker 6: too strong. So Anna Rappern joins us now she is
Speaker 6: CIO at CBIZ Investment Advisory Service. Says Anna, do you
Speaker 6: agree with Torsten Slock maybe or what's the case for
Speaker 6: no cuts at all this year?
Speaker 1: I don't know about no cuts, but I think it's
Speaker 1: certainly difficult for the FED to raise rates at this
Speaker 1: time or at least looking out into twenty twenty four.
Speaker 1: And it's not just the inflation, it's their target of
Speaker 1: two percent. It has been really sticky. Sticky doesn't mean
Speaker 1: it's not falling sticky me that's falling very slowly and
Speaker 1: that it's very very bumpy. So either the FED is
Speaker 1: going to have to accept a higher than two percent
Speaker 1: inflation rate and call it maybe the momentum is heading
Speaker 1: down and start to normalize rates, or they may have
Speaker 1: to be higher for longer. That may be one cut,
Speaker 1: maybe two cuts, maybe no cuts. But I think no
Speaker 1: cuts is that's a pretty hockey shew.
Speaker 3: He's certainly got some airtime if nothing else today, Anna,
Speaker 3: what do you think about this kind of soft landing
Speaker 3: scenario that seems to be out there? People kind of
Speaker 3: feel like I think the Fed's doing a pretty good
Speaker 3: job here negotiating a soft landing. You buy into that, well,
Speaker 3: I think.
Speaker 1: You have to look at the underlying risks that are
Speaker 1: in the markets. I mean, there's the labor market. You know,
Speaker 1: weakness in the fringes that we've seen, and this is
Speaker 1: sort of like, you know, what would a recession look
Speaker 1: like if we didn't have external shocks? If you think
Speaker 1: about the last three recessions that we had, they all
Speaker 1: came from crazy external shocks. How often do you have
Speaker 1: a pandemic? How do you often do you have a
Speaker 1: global financial crisis? Maybe there's a tech bubble. I don't know,
Speaker 1: depends on who you asked, but that was in the
Speaker 1: late nineties. These are sort of triggered by outside factors.
Speaker 1: If you have a normal economic cycle where you really
Speaker 1: have like a natural boom and bust, you're going to
Speaker 1: see weakness around the fringes. And I think we're starting
Speaker 1: to see that and in the consumers labor market as
Speaker 1: well as delinquency rates, et cetera. And you're starting to
Speaker 1: see some cracks in the markets, especially with New York
Speaker 1: Community Bank, right, I mean, was news that came out.
Speaker 1: We started to see some cracks about a year ago,
Speaker 1: it's almost a one year anniversary, and here we are
Speaker 1: in twenty twenty four talking about banks again.
Speaker 6: So does that would that be a call then to
Speaker 6: sell the rally in small caps because what you're describing
Speaker 6: is really great for large cap companies and really bad
Speaker 6: for the small guys.
Speaker 1: Well, I mean, I think the small caps have been
Speaker 1: telling us that it's been pretty uncertain because.
Speaker 6: They've outperformed Anna and the short term they have outperformed.
Speaker 1: Yes, yes, so short term they've outperformed because the yields
Speaker 1: came down, right. So if we're talking about a higher
Speaker 1: for longer scenario, I mean, look at the ten year today,
Speaker 1: it's falling pretty dramatically and yesterday as well. I mean,
Speaker 1: small caps tend to like these things. But if we're
Speaker 1: talking about a higher for longer, we're talking about a
Speaker 1: pretty volatile rate environment where it can definitely go back up,
Speaker 1: and when it goes back up, it sort of supports
Speaker 1: that higher for longer narrative, and that's not as friendly
Speaker 1: for small stocks.
Speaker 3: How About on the fixed income side here, I'm looking
Speaker 3: at you know, just the to your treasure for example,
Speaker 3: what's pulling back today off a seven basis points but
Speaker 3: you know, you're still getting north of four and a
Speaker 3: half percent for a two years. How do you kind
Speaker 3: of advise your clients I think about the fixed income.
Speaker 1: Space, Well, so depending on why you're investing in fixed income,
Speaker 1: I think that that reason is very important. Look, I mean,
Speaker 1: yield is very, very attractive, and so even if you
Speaker 1: have some sell off on and some headwind on the price,
Speaker 1: there's enough yield there to cushion some of that below
Speaker 1: so that we're not talking about the same environment as
Speaker 1: before the FED started to raise rates, right, So we're
Speaker 1: less sensitive to price changes, so we do invest for yield,
Speaker 1: especially on the shorter end. We are keeping durraser a
Speaker 1: little bit on the shorter side because of some of
Speaker 1: the volatility that we were expecting on the longer end
Speaker 1: of the curve.
Speaker 6: So is that a steep Nerd trade then.
Speaker 1: Yes, I mean we're not like that.
Speaker 6: He doesn't like to talk about steepeners. But because a
Speaker 6: steep nerd trade has been real.
Speaker 10: Rough, Oh yes it has.
Speaker 1: And I think that's because every time the FED comes
Speaker 1: out and says, well, you know, we we're thinking about
Speaker 1: cutting rates, we're thinking about doing this, that I think
Speaker 1: the markets interpret that to be Okay, the FED is
Speaker 1: going to be dubbish and the financial conditions loosen and
Speaker 1: then it tightens again. I think it's that volatility that's
Speaker 1: very hard to stummch for some of our investors. So
Speaker 1: keeping duration a little bit on the shorter side to
Speaker 1: minimize some of that price impact is sort of our goal.
Speaker 3: How about on in the credit space here, should I
Speaker 3: be willing to go out there and maybe take some
Speaker 3: credit risk in in an effort to maybe goose up
Speaker 3: my yield here, So we're.
Speaker 1: Talking about credit spreads or every talking about treasure yields,
Speaker 1: because the treasury yields are very very attractive, and of
Speaker 1: course you put the credit spreads on top of that,
Speaker 1: it's even more attractive. But we are a little bit
Speaker 1: more careful on credit, especially on high yield. I believe
Speaker 1: our high yield is at the lowest that we're in
Speaker 1: tern a percentage that willing to go it is still
Speaker 1: a very attractive yield. Again, there's some cushion for some
Speaker 1: of the price volatility. But when high yield spread widens,
Speaker 1: that widens pretty quickly. There's a big price action there
Speaker 1: on the negative side that we don't necessarily want to
Speaker 1: participate in. So we're staying on the investment grade credit.
Speaker 1: As we all know, that market has been very very
Speaker 1: healthy in terms of new issuance, in terms of demand,
Speaker 1: and so we are there at the moment. I can't
Speaker 1: tell you that we'll be there next month, but we're
Speaker 1: certainly for now. We've been clipping very nice coupon on
Speaker 1: that on that front.
Speaker 6: Okay, So that's a good point because so you're you're
Speaker 6: in the investment grade market, but that's for the coupon.
Speaker 6: In the tragy market, are you there for price appreciation
Speaker 6: or are you there for the coupon.
Speaker 1: We're there for the coupon because again, rates are so
Speaker 1: volatile that we sort of have to ignore it as
Speaker 1: noise for the time being, and we're there to clip
Speaker 1: the coupon. So we were there for a while now,
Speaker 1: especially after let's say in twenty twenty three, about halfway
Speaker 1: into twenty twenty three, we increase duration, we increase our
Speaker 1: fixed income exposure to participate on that yield, and a
Speaker 1: lot of our clients are actually looking for that yield,
Speaker 1: so that made sense for us.
Speaker 3: So Anna, the issue here is for a lot of
Speaker 3: folks is what is our federal reserve going to do.
Speaker 3: And you know, again there's lots of competing calls out there,
Speaker 3: but overall, where do you think the risk profile for
Speaker 3: this market is? Do you think people are willing to
Speaker 3: take risk when when you talk to your clients, are
Speaker 3: they a little bit more risk adverse?
Speaker 1: It's mixed, So there's definitely fomo, but there are people who,
Speaker 1: especially small business owners, they see some of the you know,
Speaker 1: some of them see strength, some of them definitely see weaknesses,
Speaker 1: and a lot of them tell us that this market
Speaker 1: doesn't make sense to them. So what is priced into
Speaker 1: the markets right now is a lot of optimism, including
Speaker 1: the area where FED starts to cut, and if that
Speaker 1: doesn't materialize, I think that the markets may be in
Speaker 1: for a surprise, and a lot of our clients are
Speaker 1: definitely thinking in that way. The valuations, you know, the
Speaker 1: numbers don't sit very well with them. So certainly there's
Speaker 1: some fear, but you know, there's always a pusson pool
Speaker 1: between fomo and fear.
Speaker 6: Right, Yeah, I definitely have some fomo, but I'm also
Speaker 6: like soup cans under my bag kind of gal so
Speaker 6: Anna thanks a lot, really appreciate it. In a Rathburn
Speaker 6: cio at Sibiz Investment Advisory Services.
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Speaker 6: We did see paul A Spike once we got the
Speaker 6: ism and the you mish in the S and P
Speaker 6: like I get, we're only up one tenth of one
Speaker 6: percent and definitely buying coming into the front end. It's
Speaker 6: like buy everything. It's okay, the Fed's gonna cut not
Speaker 6: at all what torrest and slock was saying, No, no.
Speaker 3: Tors and side. We justaid Torson slock On saying economy
Speaker 3: is better than expected. Well, these numbers don't show that.
Speaker 6: They don't, so let's kind of understand what's going on.
Speaker 6: Tim Fiori is chair of the Institute for Supply Management,
Speaker 6: so he's the ISM GUYE. So he does all the stuff,
Speaker 6: He does all the surveys, he knows the things, and
Speaker 6: just to recap ism manufacturing coming in light of forty
Speaker 6: seven point eight the new orders, though slipping below fifty,
Speaker 6: All right, Tim, what happened.
Speaker 5: Was going on? So Alex, it was actually a pretty
Speaker 5: good month.
Speaker 9: So what's actually happening on the number side is seasonal
Speaker 9: adjustment factors. So we got a huge benefit in January
Speaker 9: from seasonal factors, and we got a huge deducted in
Speaker 9: February from seasonal factors. If you look at the raw numbers,
Speaker 9: we're actually positive in February compared to January, which you
Speaker 9: would normally expect to see anyway. So overall, you know, go,
Speaker 9: I go through the ten sub inducs, I categorize them
Speaker 9: as positive, negative, or mixed for the month, and I
Speaker 9: determined all the sub inducks were positive for the month.
Speaker 9: So let me let me support this whole thing on
Speaker 9: the demand side, because the new order number is the
Speaker 9: one that's going to really.
Speaker 5: Flash out of people.
Speaker 9: By far, the majority of our comments around softening demand
Speaker 9: is decreased in half, so many fewer panelists are commenting
Speaker 9: about softer orders, which is a positive thing. Our sentiment
Speaker 9: around future demand is still running at about two to one.
Speaker 9: You know, we peaked at ten or twelve to one,
Speaker 9: you know, many many months ago, but two to one
Speaker 9: still says we have a predominant amount of people saying
Speaker 9: that things in the future are going to get better.
Speaker 9: You know, I've been tracking the percent of respondents that
Speaker 9: are below fifty industry sectors and the ones that are
Speaker 9: below forty five, which is a real warning sign.
Speaker 5: So I think last month under forty five we were
Speaker 5: twenty seven.
Speaker 9: Back in January, twenty seven percent of manufacturing was contracting
Speaker 9: in forty five or less.
Speaker 5: This month is one percent.
Speaker 3: Wow.
Speaker 9: And then on the overall contraction under fifty last month
Speaker 9: was in the range of sixty five. This month we're
Speaker 9: in the range of forty. So overall we're moving in
Speaker 9: the right direction. This is going to be a slow recovery.
Speaker 9: I think the month of February indicated that, yes, January
Speaker 9: was a pivot month. We're starting to grow again. The
Speaker 9: headline number is and showing that with the detail underneath
Speaker 9: supports for sure. So I think the man is coming back,
Speaker 9: for sure, especially with the raw number being up.
Speaker 3: Okay, So how about so tim four us folks that
Speaker 3: just kind of look at the headline number, What am
Speaker 3: I going to see a I in manufacturing number north
Speaker 3: of fifty? When do you think we're going to see
Speaker 3: that and see a little bit of growth in manufacturing ecounomy.
Speaker 9: I think it's very possible in March. I've been saying
Speaker 9: that for the last three four months. It's very possible
Speaker 9: that we could see it over fifty in March. You know,
Speaker 9: you know, the seasonal factors are an interesting thing. I'm
Speaker 9: a big believer in seasonal factors. We had three years
Speaker 9: of no seasonality, and those three years are now factoring
Speaker 9: into our seasonal adjustment factors. You know, we had, for instance,
Speaker 9: on the new order side, we actually up the January
Speaker 9: new order number up four point two points in January
Speaker 9: and we're now deducting four point three. So there's some
Speaker 9: real voluti going in here because of what happened in
Speaker 9: the pandemic is your carryover effects. But so you look
Speaker 9: at both elements, look at the seasonal factor, look at
Speaker 9: the non seasonal factor.
Speaker 5: We're definitely heading in the right direction.
Speaker 9: And I think the other thing here is on the
Speaker 9: production side, we again were generally stable to the prior month,
Speaker 9: so revenue continues to be stable, which is good. We
Speaker 9: continue to take headcount out to match the future projections.
Speaker 9: At least within the next six months. We're running at
Speaker 9: about a one to one hired to force managed ratio,
Speaker 9: with half of the force managed activity being layoffs, so
Speaker 9: people are a little bit more urgent and eliminating the
Speaker 9: head count compared compared to where they were in September October.
Speaker 5: I think that's all positive.
Speaker 9: And then for the first time in many, many months,
Speaker 9: I think sixteen, the supply base is now stiffening up.
Speaker 9: For the first time in many months, we've now gone
Speaker 9: to an environment where the suppliers are struggling to deliver.
Speaker 9: So that's all positive. It means demand is aggregating at
Speaker 9: the lowest level and we're now starting to feel the
Speaker 9: impacts of it.
Speaker 6: So this is why we love having Tim on because
Speaker 6: you look at the headline number and we're all like, oh, oh,
Speaker 6: this isn't good here, and we get the idea and
Speaker 6: we get the real data behind those numbers. So maybe
Speaker 6: when Torston's Slock says the economy is better than expected,
Speaker 6: maybe that's true. Tim. I know you're not an economist
Speaker 6: or a FED official or Torsten's Slock, but is the
Speaker 6: economy better than we think?
Speaker 5: Well?
Speaker 9: I think Alix, you and I have talked about this
Speaker 9: for many months now, back in the August timeframe. I
Speaker 9: think in September, I came out with the declaration I
Speaker 9: think we're in the trough, and I think we've been
Speaker 9: in the trough since August. The thing I didn't have
Speaker 9: any insight into is when did we get to climb
Speaker 9: out of it. Then we did our forecast back in
Speaker 9: December before Chairman Powell releases predictions on twenty twenty four,
Speaker 9: the most important one being I'm pretty much going to
Speaker 9: cap out increases and then by the time we get
Speaker 9: to twenty twenty six, sometime I might get get to
Speaker 9: the two percent. So at that point we already had
Speaker 9: a very positive forecast of twenty twenty four and that
Speaker 9: just provided really good tailwinds to help us through. And
Speaker 9: then you know, last month I said, I think we've
Speaker 9: now started to climb out of the trough. And I
Speaker 9: think this month supports that it's unfortunate that the seasonal
Speaker 9: factors are so fluid here, but that will all stabilize.
Speaker 9: March and April are really strong manufacturing months. We probably
Speaker 9: will have significant seasonal factors to overcome. I think, like
Speaker 9: I said, we're not on a huge ramp up here
Speaker 9: in terms of the expansion. It's going to be slow
Speaker 9: and gradual, but we're going to be expanding nonetheless, so
Speaker 9: I think we'll probably break the fifty mark in March
Speaker 9: April for sure.
Speaker 3: Hey, Tim, any particular industry out there leading the way
Speaker 3: or is there any industry kind of holding back this
Speaker 3: US manufacturing?
Speaker 5: Yeah, thanks Paul.
Speaker 9: So, I mean the one I've been watching for three
Speaker 9: years now is chemical products coming back to an expansion
Speaker 9: mode because they support the other seventeen industry sectors.
Speaker 5: Chemical products is positive.
Speaker 9: It's expanding at about a fifty one to fifty two
Speaker 9: in the month of February for the first time in many,
Speaker 9: many months. But we've had five or six months of
Speaker 9: improving in chemical products, so that just continues to support
Speaker 9: the story. And then also in the month of February,
Speaker 9: fabricated metal products, which is another feeding industry sector. They
Speaker 9: generally don't sell anything direct to the consumers themselves. They
Speaker 9: sell it to other companies that then convert it and
Speaker 9: sell it. That's our strong that's one of our strongest
Speaker 9: industry sectors for the month of February. Two in the
Speaker 9: positive territory, I think the number was fifty one fifty two,
Speaker 9: So two of the big big feeder industry sectors that
Speaker 9: support growth overall are in the positive territory.
Speaker 5: I think that's a very good sign.
Speaker 9: Transportation has gotten a little bit weaker than it has been.
Speaker 9: We're still expanding at a fifty and some change. Okay,
Speaker 9: food and beverage is contracting. It's probably of our big
Speaker 9: six industries that we follow, it's the one that's probably
Speaker 9: the weakest. But I've come to learn that there's a
Speaker 9: real seasonal factor in the food and beverage industry, and
Speaker 9: we're at the bottom end of that seasonal factor.
Speaker 5: Now.
Speaker 9: They did really well in Q four, they've done really
Speaker 9: weekly in January February they expected to. That's our number
Speaker 9: three industry sector. So back by the time we heard
Speaker 9: April that's gonna come out of the it's going to
Speaker 9: pass fifty and move on, and that supports the whole
Speaker 9: PMI expansion over fifty in the March April.
Speaker 3: TIMEA Hey, Tim, thanks so much. You know what, I'm
Speaker 3: gonna give you an unsolicited room rader here, I mean
Speaker 3: your room raider in the background. It's fine, but the
Speaker 3: fact is you're in Miami, Tim, you should have we
Speaker 3: should have the background be like the ocean or your
Speaker 3: yacht on the inner Coastal Waterway. So if you can
Speaker 3: work on that that that'd be great.
Speaker 5: It's even better. I'm a Jupiter.
Speaker 3: Ah, there you go. That's what I'm talking about. Golf course.
Speaker 3: Then Tim Fury, thanks so much for joining us, Chairman
Speaker 3: of the Manufacturing Business Survey for the Institute for Supply Management. Again,
Speaker 3: headline numbers not looking so great, but if you go
Speaker 3: under the surface, Tim suggesting there's some strength out there,
Speaker 3: so I appreciate it his time.
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Speaker 6: Let's get back some of the ECO data. At the
Speaker 6: top of the ten University of Michigan sentiment, the final
Speaker 6: read for February coming in a bit lighter. Current conditions
Speaker 6: revised lower as well, and expectations revised lower as well.
Speaker 6: We want to get to the bottom of it. Joan Chu,
Speaker 6: University of Michigan Surveys of Consumers Director joins us. Now
Speaker 6: the revision lower. Joeanne, what happened there.
Speaker 10: You know, essentially it edged down just a little bit.
Speaker 10: It was not much of a change at all, and
Speaker 10: essentially we should interpret this as moving sideways between January
Speaker 10: and February. Essentially, consumers haven't really noticed any material changes
Speaker 10: in the state of the economy since the start of
Speaker 10: the year, and that comes through in our data. At
Speaker 10: the same time, it's also solidifying the really enormous games
Speaker 10: that we saw in December and January. We're still almost
Speaker 10: thirty percent above where we were in November. That hasn't
Speaker 10: really changed even with this little wiggle this month. So
Speaker 10: consumers feeling better than last fall, feeling about the same
Speaker 10: as last month.
Speaker 3: I guess a lot of folks, uh, Joanne, right now,
Speaker 3: given some of the inflation data we saw in January,
Speaker 3: CPI and PPI and so on, maybe concerned and maybe
Speaker 3: inflation's coming back into this economy. Are you seeing that
Speaker 3: in any of.
Speaker 7: Your survey work.
Speaker 10: No, Consumers broadly have felt pretty assured that the slowdown
Speaker 10: in inflation is going to continue. You know, the data
Speaker 10: that the that these new inflation numbers came from comes
Speaker 10: from consumer reflects consumers experiences last month. You know, it
Speaker 10: comes in at a lag, so consumers already notice those
Speaker 10: prices around them and any changes in prices. And you
Speaker 10: know last year we were seeing quite a bit of
Speaker 10: volatility see sawing and inflation expectations in January and February
Speaker 10: exactly the same.
Speaker 6: So, Joanne, what are we going to be looking for
Speaker 6: for the preliminary read then for March, like, what are
Speaker 6: going to be like the standouts that you're looking at.
Speaker 10: The main thing we want to look for in the
Speaker 10: months ahead is whether this thirty percent game that we
Speaker 10: saw in December and January, whether that's actually going to
Speaker 10: stick given how dramatic those increases were. You know, so
Speaker 10: far the February week confirm that. Let's see if that
Speaker 10: stays put in March and April. And you know, as mentioned,
Speaker 10: inflation expectations absolutely top of mind for consumers. Right.
Speaker 3: Very good at Joann, thanks so much for joining us.
Speaker 3: Really appreciate it. You inshoot Surveys of consumers Director hit
Speaker 3: there at the University of Michigan. We had some data
Speaker 3: come out there today.
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