Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside
Speaker 1: my co host Matt Miller. Every business day, we bring
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
Speaker 1: at Bloomberg dot com slash podcast. So you know, I
Speaker 1: got lead class cow here in the studio. He covers
Speaker 1: all the transportation, all the logistics, so he's the blame
Speaker 1: for all the supply chain stuff. But he does that
Speaker 1: for Bloomberg Intelligence. And I was just telling him, I
Speaker 1: just read this book book Everything, which is a book
Speaker 1: basically about the global container shipping business. And it was
Speaker 1: a summer beach read on the Jersey Shore because you
Speaker 1: look at these big ships off the coast of the
Speaker 1: Jersey Shore and you think about it, and it got
Speaker 1: me thinking, that's a tough business. Boy, I mean, that
Speaker 1: is a tough business. And I saw that Marsk, you know,
Speaker 1: one of the biggest container shipping companies. They reported some
Speaker 1: numbers today. Lee, talk to us about Marsk and then
Speaker 1: help us think about where we are in this global
Speaker 1: supply chain challenge that really is a global sure shures
Speaker 1: omarics because like the number one and number two global
Speaker 1: container liner depending on the day in the month. Um.
Speaker 1: But you know, they reported great earnings and a lot
Speaker 1: of that had to do with going on their ocean business,
Speaker 1: which is really cool to what they are, and that's
Speaker 1: been driven by really really strong contractual rates. Um. You know.
Speaker 1: What we have seen though, is that you know, we're
Speaker 1: probably at peak earnings for these kind of container liner
Speaker 1: companies and rates are gonna get a lot weaker. And
Speaker 1: the spot market rates are down around seventy eight percent
Speaker 1: year of a year, where at levels that we haven't
Speaker 1: seen since they move a lot, don't they do. It's
Speaker 1: it's and its because it's it's a really common I mean,
Speaker 1: the liners won't tell you this, but it's a commoditized business.
Speaker 1: You know. They they ship a box from point A
Speaker 1: to point b uh, and the lower price, the lowest price,
Speaker 1: that's the new price. And so it's it happens to
Speaker 1: be a very irrational market because a lot of the
Speaker 1: players are are subsidized if you will, by uh, you know,
Speaker 1: the country of origin of where they are. Because most
Speaker 1: of the players are the major players are based out
Speaker 1: of Asia. There's a couple of large European players that
Speaker 1: are a little more I would call them disciplined and
Speaker 1: rational when it comes to pricing. So you know, we
Speaker 1: expect like we're sailing past peak earnings. Uh, and you
Speaker 1: know next year is going to be a lot more
Speaker 1: challenging because of that irrational behavior. There's a great chart
Speaker 1: rolling around in the Bloomber terminal somewhere the shows these
Speaker 1: container freight rates just completely making a U turn and
Speaker 1: they're now back to I want to say, pre pandemic
Speaker 1: levels are almost there. Um what happened to where in
Speaker 1: a supply chain crisis Bush, by the way, has not
Speaker 1: been fixed yet as far as I as far as
Speaker 1: I understand, So why are these freight rates coming down
Speaker 1: if there's still this premium in theory to to bring
Speaker 1: things from abroad? Yeah, I mean it really has. It
Speaker 1: stems first and foremost from demand. So demand is off.
Speaker 1: So typically around now is what we call the peak
Speaker 1: season for freight as like retailers get ready for Christmas
Speaker 1: UH and the holidays, and as you know, a lot
Speaker 1: of like large big box retailers are complaining about their
Speaker 1: inventory is a little too high. Uh and then you
Speaker 1: have that you throw on top of that high inflation. Uh.
Speaker 1: So the you know, the consumer has been relatively uh resilient.
Speaker 1: But the reality is is this peak season is going
Speaker 1: to be very muted. There might be a little bit
Speaker 1: of of of a benefit not for the liner industry,
Speaker 1: but maybe for the trucking industry, um, you know in December.
Speaker 1: But you know, all expectations are is the peak is
Speaker 1: pretty much a wash this year. And some of that
Speaker 1: has to do with, um, you know, the demand trends
Speaker 1: that I talked about, but also a lot of it
Speaker 1: has to do with last year. The comparables were just
Speaker 1: off the chart. So all right, you covered not only
Speaker 1: you cover the whole transportation supply chain, if you will,
Speaker 1: the big uh ocean going ships that the railroads, the trucks,
Speaker 1: the whole thing. Let's talk about the railroads here. I
Speaker 1: get my container into a port, Um, are the rails
Speaker 1: prepared to get it to where it needs to go
Speaker 1: in a timely fashion and in a way that they
Speaker 1: can make money. Yeah? So the rails are you know,
Speaker 1: one of the one of the best businesses in my opinion,
Speaker 1: with freight transportation. You know, they have really high margin business.
Speaker 1: I've to see the barrier's entry are pretty high. No one,
Speaker 1: no one laying down track in North America. But what
Speaker 1: the Rails they're the problems that they were facing really
Speaker 1: has to do with labor. Uh. You know, a they
Speaker 1: had a tentative agreement that wasn't ratified by two unions
Speaker 1: and there's a true there's a real risk of of
Speaker 1: of a of a strike in mid November. We think
Speaker 1: that risk is pretty darn low. Um. And what the
Speaker 1: Rails have been doing over the last i'd say, since
Speaker 1: the depth of the pandemic, is trying to resource their
Speaker 1: networks through hiring and training new employees. And what they
Speaker 1: found is, you know, in in cycles passed, they would, uh,
Speaker 1: they would furlough their employees and they call them back
Speaker 1: up and the employees whould want to come back. But
Speaker 1: this time around, for some reason, the employers are like, yeah,
Speaker 1: I've had enough of being a railroader. I'm gonna go
Speaker 1: work in a warehouse, or I'm gonna go do something else,
Speaker 1: or maybe I'm gonna retire early. Who knows, because you know,
Speaker 1: you know, it is a hard job. It's outside, so
Speaker 1: you're in the hundred degree heat, the zero a degree cold, UM,
Speaker 1: but you know it is is a very well paid, unionized,
Speaker 1: unionized job. Thank you, Paul coming to my rescue with
Speaker 1: the mike. UM. Some of these issues that haven't been
Speaker 1: solved yet from from the rail strike perspective that UM
Speaker 1: that we were just talking about. I believe, correct me
Speaker 1: if I'm wrong. I think November nine, the next day
Speaker 1: that we're looking for. Um, if the kind of voting
Speaker 1: and negotiations don't fully go through, what are the ripple
Speaker 1: effects here? How bad could it get? I mean, you
Speaker 1: know the stats that I've seen, and I'm sure a
Speaker 1: lot of people have seen that are listening to this,
Speaker 1: it's it could cost the economy two billion dollars a day.
Speaker 1: So no one wants that. I mean, the unions don't
Speaker 1: want that, the railroads don't want that, our politicians don't
Speaker 1: want that. I don't want that. UM. You know, so
Speaker 1: it will really muck up supply Chaine, just at a
Speaker 1: time when supply chains are trying to normalize, UM, and
Speaker 1: the speed of that normalization is really being driven by
Speaker 1: labor availability. And you know that's why we're you know, uh,
Speaker 1: you know, Paul, we're talking off the air before like
Speaker 1: why We're not using the R word. It is because
Speaker 1: you know, the consumer is still pretty resilient. Um. You know,
Speaker 1: you might get a recession that is shallow uh and short,
Speaker 1: but the end of the day, you know, freight demand
Speaker 1: doesn't look terrible. Over the next twelve months, it may
Speaker 1: not be as great as it was last year, which
Speaker 1: again right reopening, it was a real, real tough comp Alright, Lee,
Speaker 1: great Stuff has always loved getting you here in our
Speaker 1: Bloomberg Interactor broken studio. Even better to get a gold
Speaker 1: star for that, Lee Glasgow, sector head senior annalys He
Speaker 1: comes all the freight transportation logistics, think freight containers, railroads,
Speaker 1: trucks and everything uh in between. He does that for
Speaker 1: Bloomberg Intelligence to be doing that on Wall Street four decades,
Speaker 1: so we appreciate getting his insights here. All right, this
Speaker 1: is what you do or this is what I do?
Speaker 1: What I want to talk fixed income? I go, I end,
Speaker 1: go on the Bloomberg terminal. That gets me the Bloomberg
Speaker 1: Index browser. I scrolled down to the Bloomberg u S
Speaker 1: Aggregate Total return Value unhedged index four bonds. It's a
Speaker 1: fifteen point five percent this year and fixed income nerves
Speaker 1: tell me that has never happened. So of course I
Speaker 1: feel like I got to jump in the deep end
Speaker 1: of the pool both feet and start buying. But let
Speaker 1: me check with the professional before I do that. Natalie
Speaker 1: treviorth I, head of investment grade credit Strategy of Paident
Speaker 1: and Regal, joins us. So, Natalie, it's got to be
Speaker 1: the mother of all times to buy fixed income today?
Speaker 1: Am my writer wrong on that one? I think you're
Speaker 1: absolutely right. It's never been more attractive. The only issue
Speaker 1: is that keeps getting more and more attractive every day,
Speaker 1: so you continue to see these negative returns roll in.
Speaker 1: So what's kind of just give us as we now
Speaker 1: have you know, nine ten months of hindsight here for
Speaker 1: the fixed income market. How did we get to this
Speaker 1: point here and how did it become like? Again, smart
Speaker 1: people like you tell me we've never seen this in
Speaker 1: fixed income before. Yeah, so we are priced for the
Speaker 1: perfection and credit at the end of two thousand and
Speaker 1: twenty one, weet very anemic credit spread, particularly in the
Speaker 1: front end of the curve. It was hard to even
Speaker 1: get half a percent and yield, and this forced some
Speaker 1: investors down the credit spectrum from investment grade down to
Speaker 1: high yield to clos. But what we see now is
Speaker 1: really a rate driven move by all of the said
Speaker 1: hikes so far that has driven these negative returns, and
Speaker 1: I think it's gone a lot further than people were
Speaker 1: anticipating at the beginning of the year. And as we
Speaker 1: get closer to the end of the hiking cycle, it
Speaker 1: feels like investors are getting a little bit more confident
Speaker 1: about wanting to redip their toes into the fixed income market.
Speaker 1: To know, the two year at four and a half
Speaker 1: to send is looking pretty attractive. Natalie, I love that
Speaker 1: you brought up the negative yielding debt because it really
Speaker 1: wasn't that long ago. Is only a year and year
Speaker 1: and a half ago. Now you can actually make money
Speaker 1: by having the privilege of lending to a lot of
Speaker 1: these sovereign at governments. But I have to ask, in
Speaker 1: this year and year and a half the amount of
Speaker 1: bond volatility, is that not discouraging in itself to hop
Speaker 1: into the bond market. Yeah, that bond volatility that we've
Speaker 1: seen in spreads has been a little bit discouraging, But
Speaker 1: you would think that as the absolute yield rise as
Speaker 1: an underlying treasury rates that investors should demand a higher
Speaker 1: risk premium for dipping down from treasuries into corporate. So
Speaker 1: I mean, I look at the two year here four
Speaker 1: point five. There's no real reason to take any extra
Speaker 1: risk by going out on the yield curve? Is there? Well,
Speaker 1: there is if you think things are going to get
Speaker 1: better and with the said is able to walk a
Speaker 1: straight of soft landing because you can get six percent
Speaker 1: by staying in pretty high quality front and investment, great corporate.
Speaker 1: So if we were to get a pause soon in
Speaker 1: the SuDS hiking cycle, and if credit spreads were to
Speaker 1: um tight and next year, you could actually get incremental
Speaker 1: positive return by taking that extra risk by moving into
Speaker 1: credit as opposed to treasuries alone. Well, Paul brings up
Speaker 1: the two year, and if actually look at the two
Speaker 1: year in the ten year and they kind of overlay
Speaker 1: it would say the terminal rates of what five percent,
Speaker 1: which is now being priced in peak in March three,
Speaker 1: it kind of seems like there's still a long way
Speaker 1: to go when it comes to the yield. How high
Speaker 1: can it go? Well, we think the curve can remain
Speaker 1: inverted for a while, so it wouldn't be too surprising
Speaker 1: to see the two year move up higher to that
Speaker 1: five percent, particularly, we think that that's gonna pause at
Speaker 1: this higher range. But we are seeing some investors who
Speaker 1: are anticipating cuts eventually, maybe not next year but the
Speaker 1: following year, and think locking in four percent on the
Speaker 1: ten year plus adding some credit spread on top of
Speaker 1: that is still attractive to locking longer term higher yields
Speaker 1: rather than before the reinvesting in a couple of years. Natalie,
Speaker 1: I started my career and as a credit research guy
Speaker 1: at the Chase Manhattan Bank. Do I have to break
Speaker 1: out some of my old credit models if I'm worried
Speaker 1: about a recession here and credit quality and all that stuff. Well,
Speaker 1: the good news is credit fundamentals are still actually pretty strong.
Speaker 1: Some of the negative news that we're seen in the
Speaker 1: equity market, such as dividend cuts are slowing down a
Speaker 1: share buybacks are actually positive for bondholders. Companies are really
Speaker 1: focused on managing their balance sheets and want to keep
Speaker 1: leverage and checked, so we don't think there's actually going
Speaker 1: to be a big downgrade wave here um as companies
Speaker 1: really want to make sure that they're maintaining their investment
Speaker 1: grade ratings. I thought we were done. We're not. Let
Speaker 1: me ask you about simply the high yield market here,
Speaker 1: there seems to be some divergence in terms of the
Speaker 1: commodity moves and commodity forecasts. If you are perhaps forecasting
Speaker 1: a recession, a lot of these oil prices and oil
Speaker 1: contracts were the first to fall, of the first to collapse.
Speaker 1: What does that do to high yield? Yeah, we think
Speaker 1: that could be a little bit challenging for high yield,
Speaker 1: but we are not forecasting the collapse. And the energy
Speaker 1: prices we think they stay kind of in this a
Speaker 1: D range or higher, and at this level of these
Speaker 1: companies are still are still throwing off quite a bit
Speaker 1: of free cash flow. We do think a lot of
Speaker 1: energy bonds of already priced in these um strong markets,
Speaker 1: So we think there could be some potential downside, but
Speaker 1: we don't think there's gonna be another wave of down
Speaker 1: grades like you saw immediately post the pandemic. All right, Natalie,
Speaker 1: great stuff. Really appreciate getting some of your time this morning, Natalie.
Speaker 1: Natalie Trevis, head of investment grade credit strategy at Paid
Speaker 1: and Regals. All right, let's talk technology here. You know,
Speaker 1: we had tech earnings over the last week. Broadly defined,
Speaker 1: they were disappointing particularly have any advertising exposure. And it
Speaker 1: kind of got me thinking, is there's gonna be a
Speaker 1: little bit of a reset in this market about how
Speaker 1: the market thinks about technology. So let's bring an Anora Rana.
Speaker 1: He's a senior software I T Services animlysts for Bloomberg Intelligence,
Speaker 1: joining us here in our Bloomberg Interactive Broker studio. So
Speaker 1: you know, I think really antorwag. Since the Great Financial Crisis,
Speaker 1: tech broadly defined has led this market higher. It's been
Speaker 1: the leader. It's had the premium valuation, the premium performance.
Speaker 1: Is that narrative? Is that changed in the last week
Speaker 1: to ten days. Yes, I think the biggest thing is
Speaker 1: way does it welcome from evaluation interview. We have seen
Speaker 1: massive spending in technology over the last five years. The
Speaker 1: pandemic spread it up, so companies were spending quite a
Speaker 1: bit on that. Then now when you see a recession
Speaker 1: on the horizon, you do pull back a little bit.
Speaker 1: Now you pull back, you sage, you put back hardware,
Speaker 1: equipment upgrades, you pull back software. All of those things happened.
Speaker 1: But you know, one of the things we would say
Speaker 1: is our biggest thing has been in the last six
Speaker 1: months we saw no revision estimates. That was our biggest
Speaker 1: complaint going in that we have not seen any revision
Speaker 1: of estimates. And one of the numbers I will highlight
Speaker 1: is in November of last year, when market was really
Speaker 1: at top, market was expecting let's say, for Microsoft, two
Speaker 1: thirty six billion dollars in revenue for calendar of three
Speaker 1: Tell about a month ago. Tell about I would say
Speaker 1: three weeks ago. They were still expecting that number too
Speaker 1: to be there. And I checked it last night. It's
Speaker 1: gone down to ten billion dollar reduction about a four.
Speaker 1: So so we are seeing numbers come down now. I
Speaker 1: think this is the time when side is going to
Speaker 1: take the numbers down, and I think that's what will
Speaker 1: drive the reset. Well, if you what does what does
Speaker 1: the reset look like? Then? I mean, are we looking
Speaker 1: at valuations that are coming back to I wanna perhaps
Speaker 1: even then we were thought that tech was borderline in
Speaker 1: a bubble. What does it look like? I would argue
Speaker 1: that now we are well below our pre pandemic levels
Speaker 1: at this point for all the technology stocks, including software,
Speaker 1: you know, Microsoft, Apple, all these companies. The thing that
Speaker 1: I do want to highlight is, let's say, for the
Speaker 1: sake of argument. For a company like Microsoft that has
Speaker 1: grown three to five years at about fifteen six in
Speaker 1: constant currency, they're still going to grow eight to ten
Speaker 1: percent over the next twelve months too, and then the
Speaker 1: year after that when it rebound comes back, it's going
Speaker 1: to come back actually stronger, because you just cannot live
Speaker 1: without upgrading some of this stuff. So it's a pause
Speaker 1: we're going to see for the next twelve months, but
Speaker 1: you know, I'll be a very optimistic about a bounce back.
Speaker 1: How about you know, I know the backbone of Bloomer
Speaker 1: Intelligence research is the data. We have the best data
Speaker 1: on Wall Street. We spend a lot of money for
Speaker 1: this data. And for you guys in the tech space,
Speaker 1: one of your sources, I knows I d C and
Speaker 1: they've got just kind of industry leading data as it
Speaker 1: relates to all amounts of spending across the technology stack.
Speaker 1: What are they saying over the next several years in
Speaker 1: terms of tech tech span given what we've just experienced
Speaker 1: over the last few years. So, I mean, I've built
Speaker 1: my own mental model which I can explain, and I
Speaker 1: think I DC is, you know, somewhere plus or minus
Speaker 1: two percent on that. The way I look at it.
Speaker 1: If the if the global world is going to grow
Speaker 1: at two to three, technology spending is going to be
Speaker 1: two to three times. So that so let's say four
Speaker 1: to nine pc um in that hardware is going to
Speaker 1: be low single digits. Software is going to be ten
Speaker 1: percent plus, and service is going to be around five
Speaker 1: to seven percent. So software is the key driver there
Speaker 1: in double digits. And and in fact, you could look
Speaker 1: at any company today's salesforce service now you will still
Speaker 1: see estimates above for this service now above, so we
Speaker 1: have a long way to go before we reach maturation
Speaker 1: in the software growth rates. What about kind of great
Speaker 1: sensitivity here? A lot of these big tech names were
Speaker 1: kind of the poster child of if the Fed hikes,
Speaker 1: these are the first names you sell. And and although
Speaker 1: that made sense when you have these massive balance sheets
Speaker 1: and all this cash and all this liquidity, what happens
Speaker 1: now some of that cash has been deployed and the
Speaker 1: rates market is kind of peeking and kind of stalling out.
Speaker 1: Doesn't that mean that tech should be now? I would
Speaker 1: say that the day we get this news that the
Speaker 1: pivot is there, we're gonna have one hell of a
Speaker 1: tech rally. Now, I don't know when that day. I mean,
Speaker 1: I don't know, I don't That's the thing I cannot predict.
Speaker 1: But um, that's gonna happen. I mean, it may not
Speaker 1: happen now, six months, twelve months, even longo, but that's
Speaker 1: the day we're going to have this conversation because all
Speaker 1: these companies are very resistant to any kind of a
Speaker 1: downtown and because of the work that they do. But
Speaker 1: we're already there. If you're looking at the market expectations,
Speaker 1: they're already stalling out at five in March. And there's
Speaker 1: an argument here that that's going to create some sort
Speaker 1: of floor for the equity market. But does that mean
Speaker 1: that tech leads that, Oh, it has to there is
Speaker 1: no no other way because that has the highest beta.
Speaker 1: Those are the ones that were killed more. That's where
Speaker 1: the discount rate really, you know, completely demolished the valuations
Speaker 1: of it. But I think, in in conjunction with what
Speaker 1: I said to Paul earlier, the revenue estimates and and
Speaker 1: and profit estimates needs to come down, and I think
Speaker 1: they started to come down. I think, you know, it
Speaker 1: could be another month or so when we see a
Speaker 1: bottom for that. I think that couple with the rates
Speaker 1: is what drives the market. Opted all right, let's talk
Speaker 1: about Microsoft um sat Natla Nadella, I think is one
Speaker 1: of the most under believe it or not, you know,
Speaker 1: the undervalued or under recognized folks out in silicon value
Speaker 1: what he's done with that company. But I'm looking at
Speaker 1: the f A function for Microsoft and a little bit
Speaker 1: of a slow down and growth in the twenty three
Speaker 1: consensu assessments eight and a half percent, presumably bacon in
Speaker 1: some type of recession. But then you look at six
Speaker 1: Wall Streets still predicting thirteen percent revenue growth. That's pretty
Speaker 1: darn good, is that. I would argue that it's going
Speaker 1: to be better than that, because it's going to be
Speaker 1: close to six. If I do not look at any
Speaker 1: effects headwinds at that point, we are assuming, you know,
Speaker 1: dollar cannot get stronger, you know, forever at that at
Speaker 1: that end. But even if I was to exclude this,
Speaker 1: because we saw this during the pandemic, if you were
Speaker 1: to go look at the data during the pandemic, and
Speaker 1: we published a note on this yesterday, that cloud growth
Speaker 1: rates dipped quite a bit in the four quarters since
Speaker 1: the pandemic started, and the year after that growth rates
Speaker 1: picked up. In that cloud business, which is very unusual
Speaker 1: because the size of that business is very large. So
Speaker 1: for growth rates to accelerate, and we think that's going
Speaker 1: the same thing is going to happen going into twenty four. Well,
Speaker 1: talking about cloud adoption here because I think, um, your
Speaker 1: colleague Man deep Thing actually talked about the fact that
Speaker 1: this is a market. I don't want to mess up
Speaker 1: the numbers here, but this is a market that has
Speaker 1: I want to like four or five, like a billion
Speaker 1: or trillion or some sort of big, big, big number,
Speaker 1: but that only a fraction of it has really been unlocked.
Speaker 1: But a lot of that is because a lot of
Speaker 1: these companies haven't actually adopted it fully. About thirty seconds here,
Speaker 1: how long is it gonna take to adopt fully? It's
Speaker 1: it's just going to be taken a lease to decade
Speaker 1: to get dinner. So we are looking at a decade
Speaker 1: of very strong cloud growth. The growth rates will be decelerate,
Speaker 1: but but it's going to take at least to decade.
Speaker 1: All right, I don't know great stuff, appreciate it always.
Speaker 1: We let to getting the overview of the text base
Speaker 1: and then digging down into some individual names. I guess
Speaker 1: the key issue for a lot of people, is will
Speaker 1: the tech sector continued to be a leading sector in
Speaker 1: this equity market when we get a turn upward or
Speaker 1: has that been rerated? On a Rock still feels bullish
Speaker 1: about the text space on Rock Ron senior Software and
Speaker 1: I T Services analyst for Bloomberg in intelligence. I'm gonna
Speaker 1: mis some ignorance here. C v S Healthcore, not CBS Television,
Speaker 1: which is a company I've followed forever, but CBS the
Speaker 1: healthcare company. I did know how big this company is.
Speaker 1: I mean it's a hundred and thirty billion in market capitalization.
Speaker 1: I mean it's got like three hundred thousand employees. Uh.
Speaker 1: Just a huge company, and it's just a big, big
Speaker 1: player in the healthcare space. And I need to do
Speaker 1: some more work on this thing. But anyway, they reported
Speaker 1: some numbers today, some good numbers. There's also some news
Speaker 1: out there about an opioid uh tenant to twelve billion
Speaker 1: dollar opio a pack. So we need to get a
Speaker 1: little bit smarter on this company. Uh, And so we
Speaker 1: asked Jonathan Palmer to come in near. Jonathan Palmer is
Speaker 1: a senior equity research analysts and team leader for the
Speaker 1: healthcare team at Bloomberg Intelligence. He's been covering the stock
Speaker 1: in this sector for decades. Here, Johnathan, give us you
Speaker 1: know again, I don't know anything about this company. What
Speaker 1: do I like? One or two sentences? What is this company?
Speaker 1: Why do I need to know more about it? Sure, Pauls,
Speaker 1: thanks for having me on. So CBS has really transformed
Speaker 1: itself for the last two decades. I mean, traditionally it
Speaker 1: was a retail pharmacy and that's what I called a
Speaker 1: PBM to help manage drug benefits. And then a couple
Speaker 1: of years ago they purchased the big insurre at to
Speaker 1: now become this three legged stool of healthcare retail PBM insurance.
Speaker 1: And really what they're trying to do is become, you know,
Speaker 1: a provider of healthcare services across the spectrum and and
Speaker 1: you know, come into people's home and provide them services
Speaker 1: at these retail locations. And they have a really big
Speaker 1: push lately, although they haven't executed on this plan. They
Speaker 1: want to move into primary care visa V like Amazon
Speaker 1: and one Medical. Well, what is the difference then, I mean,
Speaker 1: in our commercial break, you're just talking about how we
Speaker 1: all kind of think of CVS is still the pharmacy business.
Speaker 1: It's evolved from from that vision. What could it turn into? Sure?
Speaker 1: So I think their their vision is that they want
Speaker 1: to be a provider of healthcare services across the spectrum
Speaker 1: and continuum, and you know, they want to have you
Speaker 1: in their network in one form or another, whether that's
Speaker 1: in their pharmacy, you know, hopefully down the road in
Speaker 1: one of their doctor's offices and really help, uh, you know,
Speaker 1: manage that evolution of a patient's care. So they reported
Speaker 1: num Is today stock is trading up, uh IT stocks
Speaker 1: only down like four this year, so out performing the market.
Speaker 1: Talk to us about kind of what they reported today
Speaker 1: and kind of what's the call on the stock. Yeah,
Speaker 1: so the numbers today were pretty good. There was each
Speaker 1: of the three businesses performed pretty well, a little bit
Speaker 1: above expectations. Really, the big question coming into today was,
Speaker 1: you know, what does their outer year growth profile look like.
Speaker 1: They have had a plan in place where they expected
Speaker 1: to get to double digit EPs growth by two thousand
Speaker 1: twenty four. They've had a couple of setbacks lately. Uh
Speaker 1: they had some unfavorable rankings in their medicare plans and
Speaker 1: um More recently, they lost a big PBM contract u
Speaker 1: from one of their peers, UH Sentien, And so there
Speaker 1: was a question whether that double digit EPs targets still stood,
Speaker 1: and they released guidance this morning on a permanent guidance
Speaker 1: on on two thousand, twenty three. Um, they're gonna be
Speaker 1: high single digit EPs growth, which is in line with
Speaker 1: what they said, and they still planned to reach that
Speaker 1: double digit target in twenty four and it might come
Speaker 1: through a couple different flavors. It might be through acquisitions,
Speaker 1: or they might be buying back a lot of stock
Speaker 1: to get to that. I'm just looking at the f
Speaker 1: A functional on the Bloomberg terminal kind of gives you
Speaker 1: the consensus of what's out there from all the sales
Speaker 1: side UH and four it's eight point seven EPs scrolls
Speaker 1: in the streets a little bit cautious. They're also a
Speaker 1: story out today. You want to get your comment on CVS, Walmart,
Speaker 1: Walgreens reach tentative twelve billion dollar opioid pack. Give us
Speaker 1: the background here and and kind of this good news
Speaker 1: for the company. This is great news for the company.
Speaker 1: You know, the opioid issue has been overhanging, not so
Speaker 1: much for the pharmacies but the drug distributors for really
Speaker 1: the last almost five to ten years, and they were
Speaker 1: really the first targets of these legal actions. And so
Speaker 1: the distributors settled at the beginning of this year for
Speaker 1: about twenty billion dollars between the big three three like
Speaker 1: their McKesson, Amerisource, Bergen, and Cardinal Health. And so it's
Speaker 1: interesting to think about, you know, the the d a
Speaker 1: s and attorney generals in these various states. You know,
Speaker 1: we're going after people who could pay. And my thinking
Speaker 1: always that, well, we have CBS, we have Walgreens, we
Speaker 1: have Walmart. These are all pretty big companies in their
Speaker 1: ability to pay is there, And and now we've turned
Speaker 1: around and we've got a settlement, and so you know,
Speaker 1: I think what was an overhanging and unknown for a
Speaker 1: little while now has some clarity and visibility. And for CBS,
Speaker 1: it's five billion dollars over ten years. That's a very
Speaker 1: manageable number. Well, you mentioned Walmart as well. Walmart is
Speaker 1: not the only company to want kind of their their
Speaker 1: foot in healthcare. We've got Amazon, We've had Berkshire Hathaway
Speaker 1: as well, JP Morgan. I think at one point, is
Speaker 1: it fair to compare CBS is kind of broader vision
Speaker 1: to some of these um MAYA capped companies. It's interesting
Speaker 1: because I think everybody who is looking at the consumer
Speaker 1: is thinking that healthcare is there, you know, next obvious extension,
Speaker 1: and that's why you have Walmart and Amazon going there.
Speaker 1: I think CBS sees that that same vision as well,
Speaker 1: the consumer driven healthcare piece. But I think you know
Speaker 1: where they're a little bit different. Is there a more
Speaker 1: traditional healthcare provider Visa v their PBM and ensure and
Speaker 1: they look at their peer United Healthcare, which is the
Speaker 1: biggest insurer, and how they've more moved more to become
Speaker 1: more ingrained into the healthcare system, buying practices, buying facilities,
Speaker 1: you know, really managing patient end to end. So real
Speaker 1: quicker thir thirty seconds. If we're going into a recession,
Speaker 1: do I want to own healthcare stocks? You're asking a
Speaker 1: healthcare analysts health care of the tagline is healthcare is
Speaker 1: extremely defensive, and I mean, I think we've seen that
Speaker 1: play out in a number of recessionary environments. You know,
Speaker 1: people still get sick, they still go to the doctor,
Speaker 1: they still take drugs. You know that these are all
Speaker 1: pretty defensive sectors of the healthcare space. All right, good, stuff. Yeah,
Speaker 1: I mean, you know, Bloomberg Intelligence folks, B I go
Speaker 1: on the terminal. If you've got a terminal in front
Speaker 1: of you, B I go, and what you're gonna get
Speaker 1: there is world class investment research, equity research, credit research,
Speaker 1: and lots lots more. And we've got people like Jonathan Palmer,
Speaker 1: each a season Wall Street anald's standing behind this research,
Speaker 1: writing this research. They have some of that this best
Speaker 1: data in the business that informs their research. So, uh,
Speaker 1: if you need to get real smart on a topic
Speaker 1: on a stock like I do on CBS, b I
Speaker 1: go is your place to go. And we thank Jonathan Palmer.
Speaker 1: He's a senior equity research channels. He's a team leader
Speaker 1: leading our healthcare research at Bloomberg Intelligence and ed joined
Speaker 1: us here in a Bloomberg Interactive broker studio. So what
Speaker 1: does he get a gold star just talking to Shannali
Speaker 1: Bassk Bloomberg News. She covers all things Wall Street. Course
Speaker 1: she would talk on and choose down at Miami to
Speaker 1: private equity sware down there. So we're talking private equity,
Speaker 1: private credit. Uh So our next guest fits right in
Speaker 1: their Randy Swimmer, co head of Senior Lending and senior
Speaker 1: managing director at Churchill Asset Management. They do that private
Speaker 1: credit stuff over there. So, Randy, how does your business
Speaker 1: perform in a world of rising interest rates? You're in
Speaker 1: the credit business, So senior dead is floating great instrument.
Speaker 1: So it improves let's go up, total yields go up.
Speaker 1: We've been waiting for this moment for a long long time.
Speaker 1: But it's also less volatile because these are smaller companies.
Speaker 1: They don't trade, so it's obviously an improvement with higher rates,
Speaker 1: but it's also great for the kind of headline volatility
Speaker 1: that we've been subject to for a long time. That's
Speaker 1: also something that investors appreciate because when you look at
Speaker 1: public UH assets such as fixed income in public equities,
Speaker 1: they have been very correlated, which is not helpful. If
Speaker 1: you're sixty forty allocated portfolio. Everything's going down together. And
Speaker 1: you've seen the other asselete classes performance here today, it's
Speaker 1: been in the red. It's it's kind of ugly. Private
Speaker 1: credit in general has been doing really well UM and
Speaker 1: so that's that's the advantage. Floating rate, less correlated, better structure, security, security,
Speaker 1: and so forth. Randy, it is FED day, Happy FAED day.
Speaker 1: UH do we see a pivot today? I don't think so.
Speaker 1: There's been so much invested by the Fed in keeping
Speaker 1: on and and making sure that the market believes that
Speaker 1: their fight against inflation is real. Um. The data that
Speaker 1: has been coming out has been pretty bullish in terms
Speaker 1: of the economic strength. You're you're talking about GDP for
Speaker 1: the third quarter of two point six percent. That's pretty strong. Yeah,
Speaker 1: there were some export data that helped that. Job openings
Speaker 1: continue to go up. Unemployment, you know, still is low,
Speaker 1: the labor market is tight, wages are going up. I
Speaker 1: mean you're talking about you know, I've been calling it
Speaker 1: a precession all your Well, you're welcome to you that
Speaker 1: term because yeah, thank you. UM. But because in a precession,
Speaker 1: we think that a recession is coming. Everybody's predicting something
Speaker 1: next year. But the economics right now are too strong.
Speaker 1: So your business, you tend to finance, you know, private
Speaker 1: equity deals, mid market type of deals. Give us a
Speaker 1: kind of typical deal for Churchill Asset Management. Sure, so
Speaker 1: we have private equity sponsor relationships that come to us
Speaker 1: for UH to solve multiple of variety of solutions up
Speaker 1: and down the capital structure. So they'll come to say, hey,
Speaker 1: we're looking at a very interesting commercial landscaping business. You know,
Speaker 1: thirty five million, but the revenues um. The great thing
Speaker 1: about commercial landscaping is in real estate, even if there's
Speaker 1: no one in the building, somebody has always got to
Speaker 1: be cutting the lawn, mowing the grass, hedge hedge clipping,
Speaker 1: by the way, different kind of hedge fund uh and
Speaker 1: and uh snow plowing. And so that's a kind of
Speaker 1: business that is steady eddy throughout any season and any cycle. Um.
Speaker 1: And with a good sponsor that's going to put in
Speaker 1: fifty equity into the deal below you, it's an attractive
Speaker 1: investment for our investors because they're protected and then the
Speaker 1: debt itself has covenants, so if the performance deteriorates, we're
Speaker 1: back at the table negotiating. Plus, the private equity sponsors
Speaker 1: that we deal with, they focus and specialized in defensive sectors,
Speaker 1: so healthcare, technology, business services, all of which have been
Speaker 1: doing very very well through COVID and we expect would
Speaker 1: do well during recession. So just ask this Questiontionale, but
Speaker 1: I'm gonna ask it to you is won't get your take.
Speaker 1: I believe there's a consensus that the private markets operated
Speaker 1: a little bit of a lag relative to the public markets.
Speaker 1: If there is a reckoning in the public markets, which
Speaker 1: arguably there already has been for the past ten months
Speaker 1: of equity carnage, does that mean the private markets are
Speaker 1: due for one as well. Yeah. I don't think it's
Speaker 1: so much a lag. It's that it's operating um with
Speaker 1: with different parameters. Because these companies are private, unrated, and
Speaker 1: the debt doesn't trade, you don't see the obvious reaction.
Speaker 1: So if you know the markets public equity markets are down,
Speaker 1: you see an instant reaction in the bond markets, for example,
Speaker 1: you don't see that. It's not that it's lagging, it's
Speaker 1: just that it responds to different things. Because these companies
Speaker 1: are private, and the advantage of private credit, which is
Speaker 1: what the issuers and investors are seeing right now, is
Speaker 1: headline risk will go up and down, and you'll see
Speaker 1: the public equity markets, for example, go up five hundred
Speaker 1: points one day, down five the next day with no
Speaker 1: discernible diff for instant data. The private private credit markets
Speaker 1: and private equity are much more stable, so they tend
Speaker 1: to respond more to long term changes in the economy
Speaker 1: in markets um but that makes them in this world
Speaker 1: of high voltility of very favorite asset class. Um. You know,
Speaker 1: we look at our portfolio right now, it's actually doing
Speaker 1: really well. We have we're three hundred companies in the
Speaker 1: portfolio and and the vast majority of them are performing
Speaker 1: well in terms of revenues and earnings, again because of
Speaker 1: the sectors that they're in, which are defensive. I hear.
Speaker 1: Maybe it's just me, but it seems like over the
Speaker 1: last couple of years, I've heard more and more and
Speaker 1: more about the private credit business and how it's such
Speaker 1: a good business. Um, what's the fundraising environment out that.
Speaker 1: I'm not sure if you guys are in a fundraising
Speaker 1: mode or not, but what's the environment out there for
Speaker 1: raising private credit capital? So we just publicly issued pressure
Speaker 1: release saying that we had raised twelve billion dollars over
Speaker 1: the last twelve eighteen months. So the fund fundraising environment
Speaker 1: for us has been very good. Um. Look right now,
Speaker 1: investors like you all are cautious. They're looking at the signs,
Speaker 1: the kinds of signs that we talked about with the
Speaker 1: economy potential recession, and so everyone's kind of taking that
Speaker 1: extra layer of due diligence of time and thinking, hey,
Speaker 1: what's the rush to do this? Now? We're not market timers.
Speaker 1: We're basically we've been doing this, you know, close to
Speaker 1: twenty years at Churchill or the long track records successfully
Speaker 1: over many cycles are are basically stories. Do this with
Speaker 1: us for the long run because we don't know and
Speaker 1: you don't know when the next recession is going to come.
Speaker 1: So want to you know, hit your wagon to affirm
Speaker 1: and to an asset class that is going to be
Speaker 1: here for the long run, that performs well during all
Speaker 1: the downturns. You know, we had positive returns during the
Speaker 1: o idline crisis. Why not you know, be in that
Speaker 1: and then benefit right now to what I think is
Speaker 1: the best market and private credit for over a decade.
Speaker 1: We're seeing yield to leverage at record highs. We're seeing
Speaker 1: um structures tighter, we're seeing leverage or by a turn
Speaker 1: or more of the Badah. I actually think this is
Speaker 1: a great time to be investing, but you have to
Speaker 1: do it with someone who's been through the downturns before successfully. Well,
Speaker 1: speaking of downturns, go about thirty seconds here, when do
Speaker 1: we see the next one? Well, we were not in
Speaker 1: the business of predicting. We have to predicts. Now. We
Speaker 1: we are always saying it's coming next year. In fact,
Speaker 1: we model a recession in every deal we do for
Speaker 1: next year. So in our investment committee, and we've got
Speaker 1: one this afternoon, I'm sure that will show we're going
Speaker 1: to be intercession next year. If it doesn't happen. My
Speaker 1: personal belief is that it's going to be a softer
Speaker 1: recession than a harder recession. I think it's gonna be
Speaker 1: more like two thousand, two thousand one than O eight
Speaker 1: oh nine. Because the banks and the finishing systems good shape.
Speaker 1: We'll be in good shape no matter what kind of
Speaker 1: recession it is. All right, Randy, good stuff is always
Speaker 1: really appreciate. Making the long commute, oh from your office
Speaker 1: is over here to seven thirty one Lex Randy strmercoh
Speaker 1: Had of Senior Lending. He's a senior managing director Churchill
Speaker 1: Acts Asset Management. Talking about the private credit business, and
Speaker 1: again maybe it's to me, but I've been hearing a
Speaker 1: lot more about the private credit business. It's a good business,
Speaker 1: it's attracting a lot of capital. I'm seeing more and
Speaker 1: more big names kind of get into that space. Thanks
Speaker 1: for listening to the Bloomberg Markets podcast. You can subscribe
Speaker 1: and listen to interviews with Apple Podcasts or whatever podcast
Speaker 1: platform you prefer. I'm Matt Miller. I'm on Twitter at
Speaker 1: Matt Miller three. On Fall Sweeney, I'm on Twitter at
Speaker 1: pt Sweeney. Before the podcast, you can always catch us
Speaker 1: worldwide at Bloomberg Radio