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Speaker 2: Let's head over to talk about what's happening and our
Speaker 2: good friends at Walmart again, a really good quarters and
Speaker 2: revenues beat the earnings, talking pretty I think people again, people,
Speaker 2: I think really look at Walmart is kind of a
Speaker 2: read on the US consumer and that was kind of,
Speaker 2: I guess, a pretty good report there. Let's check out
Speaker 2: Jen Bartashes. She follows all the retailers for Bloomberg Intelligence.
Speaker 2: She is in Prince, New Jersey. I'm guessing, Jen, what's
Speaker 2: your takeaway from our good friends in Bettonville.
Speaker 3: Yeah, good morning, Paul. When I look at today's results,
Speaker 3: I think one of the striking things that is a
Speaker 3: takeaway that is beyond just the story of the higher
Speaker 3: income consumer which everyone is focused on, is that the
Speaker 3: multiple year strategy that Walmart's been employing to change their
Speaker 3: business mix is really starting to yield results, and that's
Speaker 3: allowing them to grow operating income ahead of revenue. That's,
Speaker 3: you know, driving profitability, and it's driving that long term
Speaker 3: margin expansion that they think they can sustain. So to me,
Speaker 3: this is a great quarter, and yes they do have
Speaker 3: a great read on the consumer, but it is also
Speaker 3: starting to show that all of those investments are really
Speaker 3: paying off in the way that they're evolving the company.
Speaker 2: So, Jen, I'm vowing to do a store walk this
Speaker 2: Saturday for the Walmart near here.
Speaker 4: How do I do that?
Speaker 5: Would?
Speaker 6: How would you do it?
Speaker 7: Like?
Speaker 3: What do I do?
Speaker 6: Will you drive there?
Speaker 2: And I'm going to get there? There's a million aisles.
Speaker 2: These things are huge, they are you know.
Speaker 3: I mean, what I would say, Paul is wander around
Speaker 3: a little. But what I do when I go into
Speaker 3: stores is I find one of the people who are
Speaker 3: picking the online grocery orders or they're online orders, and
Speaker 3: I follow them around and that way I get a
Speaker 3: sense of what it is, what is it that people
Speaker 3: are actually buying, what are they putting in their basket?
Speaker 3: And how are employees actually effectively navigating that big store.
Speaker 3: So that would be one tip I have for you.
Speaker 6: That's very cool. Okay, you definitely should be doing. Get
Speaker 6: that guy Jen, when we look at the areas of
Speaker 6: mix that you were mentioned that they sort of were
Speaker 6: changing their business mix, that huge part is e commerce,
Speaker 6: right it is If their main competitor though, is Walmart
Speaker 6: for e commerce, how does that evolve?
Speaker 3: Well, you know what Walmart's been doing is they've added
Speaker 3: a lot of sellers to their marketplace. It's unlocking ad
Speaker 3: revenue growth, it's unlocking the ability to charge for fulfillment services. Now,
Speaker 3: these are all things that sound very familiar because they
Speaker 3: are things that Amazon, for example, is very strong at.
Speaker 3: But that doesn't mean that it can't help Walmart evolve
Speaker 3: and it can't help make Walmart a much stronger company
Speaker 3: in the long term. I think the advantage that Walmart
Speaker 3: has is because they have that strong store base, they
Speaker 3: can help keep some of the costs to fill digital
Speaker 3: orders down, which helps them with that overall profitability profile
Speaker 3: as well.
Speaker 2: When you talk to investors about Walmart, again, it's stock
Speaker 2: hitting an all time high here today.
Speaker 5: It ain't cheap.
Speaker 2: How do you talk to them about valuation? I had
Speaker 2: like twenty six twenty seven times on a pe basis,
Speaker 2: how do you talk to them about valuation?
Speaker 3: To get to your question, Paul it's really when I'm
Speaker 3: talking to investors, it's you know, about where is the
Speaker 3: company headed? Right. So I think one of the things
Speaker 3: that's admirable about the company, or that is is really
Speaker 3: something they just do so well, is they keep their
Speaker 3: cooperation tight. They're good at controlling costs, but they are
Speaker 3: not They don't hesitate to invest in opportunity, but they
Speaker 3: also will walk away from things that don't pan out.
Speaker 3: So I think, you know, you saw that with the
Speaker 3: announcement earlier this month about closing health clinics. At one
Speaker 3: point they thought they might be able to you know,
Speaker 3: drive a big business out of that realistically couldn't make money,
Speaker 3: closed it down. So I think that that spirit of
Speaker 3: trial and or the willing to the willingness to actually
Speaker 3: try to flex, but then know when to say, Okay,
Speaker 3: this isn't this isn't what we wanted. It's something that
Speaker 3: has become a strength of the company and helps, you know,
Speaker 3: helps put it up as a as a company that justifies,
Speaker 3: you know, potentially a higher valuation versus some other strict
Speaker 3: retail peers that are really just focused on growing a
Speaker 3: retail business.
Speaker 6: I think she's gonna think and ask one more question. Yeah,
Speaker 6: I am gonna do it. What Amazon has, though, that
Speaker 6: Walmart doesn't is a w S. That's where they're going
Speaker 6: to get their bulk of their margin. That's where they
Speaker 6: get all the juicy, sexy revenue. Walmart doesn't have that.
Speaker 2: So is that so?
Speaker 6: So how does it sort of ramp up other revenue
Speaker 6: streams that can yield that kind of growth and margin.
Speaker 3: That's a that's a that's the question of the day,
Speaker 3: right because you don't actually want Walmart to be another Amazon.
Speaker 3: You want Walmart to be Walmart. And so I think
Speaker 3: that when you look at some of the areas that
Speaker 3: they're doing well, especially in some of the international markets
Speaker 3: where they're they're playing around with it in things like fintech,
Speaker 3: you know, those are areas where I think that there's
Speaker 3: some great opportunity for the company without them having to
Speaker 3: try to be a cookie cutter of Amazon and you
Speaker 3: know and have some you know, have something like an
Speaker 3: AWS that is not natural to their their current operations.
Speaker 2: All right, Jen, thanks so much for joining us. I
Speaker 2: appreciate it. Jen Bartasha. She covers all the retail stuff
Speaker 2: for Bloomberg Intelligence, including Walmart again, which had a really
Speaker 2: good Quarterstock up six percent here, all time high. So
Speaker 2: good stuff for that, I think a good you know,
Speaker 2: a little just kind of a bullet point there. For
Speaker 2: if you're trying to get a sense a beat on
Speaker 2: how the consumer's doing, doing fairly well.
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Speaker 6: I'm Alexei alongside Paul Sweeney. This is Bloomberg Intelligence Radio.
Speaker 6: We are live interactive broker studio right here in midtown Manhattan.
Speaker 6: So here was the front page of the Ft today
Speaker 6: when I logged in. Apparently, Starwood Real Estate Investment Trust
Speaker 6: CREATE is one of the largest unlisted property funds, and
Speaker 6: it has drawn more than one point three billion dollars
Speaker 6: of its one point five to five billion unsecured credit
Speaker 6: facility since the beginning of twenty twenty three. That sounds bad.
Speaker 6: That sounds like they're in a cash crunch kind of scenario.
Speaker 3: Poul.
Speaker 6: And as we keep hearing, commercial real estate isn't a
Speaker 6: really tough spot. But yet I haven't seen a lot
Speaker 6: of shoes dropping.
Speaker 2: I haven't either. I don't know how this is going
Speaker 2: to play out. Maybe our next guest I'll help us
Speaker 2: out with that. Rich Hill, head of real Estate Strategy
Speaker 2: and Research at Cohen and Steers, joining us here in
Speaker 2: our Bloomberg Interactive Broker studio. Why because we're here every
Speaker 2: day m hm, And that's how we roll. Rich, I
Speaker 2: walk from Penn Station to Hear every day, all through
Speaker 2: Midtown Manhattan. Now, I know this is not the world,
Speaker 2: it's only Midtown Manhattan. But there's a lot of vacant
Speaker 2: real estate. People aren't coming back. I saw via Twitter
Speaker 2: yesterday via a report Bank Bank of America research report
Speaker 2: that kind of showed vacancies, and it seems like they're
Speaker 2: calling this new normal, which is about fifty percent of
Speaker 2: commercial real estate properties. They're calling that the new normal,
Speaker 2: just because that's kind of what the date is showing. A.
Speaker 2: Do you agree with that? And B what does it
Speaker 2: mean for the owners and the lenders and all that
Speaker 2: kind of stuff?
Speaker 7: The new system?
Speaker 8: First of all, thanks for having me in this morning.
Speaker 8: It's good to see you guys. Look, I'll begin by
Speaker 8: saying people like to talk about commercial real estate as
Speaker 8: a big, singular asset class, but in reality, it's actually
Speaker 8: eighteen different sub sectors under a big umbrella, and those
Speaker 8: eighteen sub subsectors can behave very differently in very different
Speaker 8: market environments. So you're leading with New York City, You're right,
Speaker 8: New York City office vacancies are high, retail vacancies are high.
Speaker 5: Leading with maybe.
Speaker 8: Retail, that doesn't actually tell the whole story, because if
Speaker 8: you actually look at what's happening with retail real estate
Speaker 8: across the United States, it's actually really strong footing. For
Speaker 8: two reasons. I think, you know, you rewind ten years ago.
Speaker 8: Everyone was talking about the retail apocalypse, so no one
Speaker 8: really was building new retail properties over the past ten
Speaker 8: to fifteen years, so you had no new supply coming.
Speaker 8: And then COVID was a great Darwinistic event where it
Speaker 8: actually sort of right sized all the retail properties that
Speaker 8: were maybe on the edgines. You couple that with the
Speaker 8: fact that e commerce companies realized that physical retail real
Speaker 8: estate can provide micro fulfillment to their customers. The retail
Speaker 8: real estate market is actually on pretty strong footing, particularly
Speaker 8: open air shopping centers, whether it be community centers, neighborhood centers,
Speaker 8: or even power centers.
Speaker 6: That's a really interesting point, and you're right, we kind
Speaker 6: of lump it all in in commercial real estate. We
Speaker 6: think office, So is that is that troublespot office commercial
Speaker 6: real estate? And again like when is that shoe dropping?
Speaker 8: Yeah, Look, it doesn't do any good to say anything
Speaker 8: other than the facts about office. Office is struggling nationwide,
Speaker 8: by the way, we probably built too much of it
Speaker 8: prior to COVID. Work from home dynamics have have tipped
Speaker 8: that nationwide, office vacancies are twenty percent and they're increasing
Speaker 8: from here. And so there's a lot of ways you
Speaker 8: can unpack office. Though, just like I said, you know,
Speaker 8: maybe the truth is somewhere in the middle. It's not
Speaker 8: as bad as everyone fears, and it's not as good
Speaker 8: as everyone fears. If you look at office, new, clean
Speaker 8: and green office even in New York City is doing exceptionally.
Speaker 2: Well, like Hustin Yards is doing well, right, and that
Speaker 2: one Vanderbilt thing.
Speaker 8: One vendor Bilt least up to almost one hundred percent
Speaker 8: during the middle of COVID. So class B and C properties,
Speaker 8: Class B and C properties are properties that were built
Speaker 8: in the nineteen seventies and nineteen eighties with no cop
Speaker 8: X put CAPEX put into it over decades and decades
Speaker 8: and decades.
Speaker 5: I get it.
Speaker 8: No one wants to work there. So we're sort of
Speaker 8: in this weird time period where office is struggling. I
Speaker 8: want to be clear. Office is only around twenty percent
Speaker 8: of the serie market. It's only around three percent of
Speaker 8: the US listed rate market. But look, everyone loves a
Speaker 8: great Greek tragedy.
Speaker 5: I get it.
Speaker 8: Like it sells clicks, it sells papers. It is a
Speaker 8: really challenging asset class. And so I don't want to
Speaker 8: belabor that.
Speaker 2: What's the lending environment like now for real estate investors?
Speaker 2: What are the banks doing where they were the real
Speaker 2: estate investors sourcing their capital.
Speaker 8: Yeah, so this is probably the single most important topic
Speaker 8: when we talk about commercial real estate. The reason being
Speaker 8: that commercial real estate isn't inherently a levered asset class.
Speaker 8: When people buy a commercial real estate property, they put
Speaker 8: debt on it. There's not very few properties that don't
Speaker 8: have debt on it. So it is a levered asset class.
Speaker 8: And so that's actually why valuations are being pressured so much.
Speaker 8: We think property valuations generically are down around twenty percent.
Speaker 8: Office valuations are probably down thirty five percent. The reason
Speaker 8: they're down so much isn't necessarily because of fundamentals. Fundamentals
Speaker 8: ex office are on pretty strong footing. It's because the
Speaker 8: right side of the balance sheet is repricing. Both financing
Speaker 8: cost higher and the availability of debt much lower than
Speaker 8: it where it used to be. So look, lenders aren't
Speaker 8: lending as much as they used to. If you look
Speaker 8: at the Mortgage Bankers Mortgage Bankers Association Senior Loan their
Speaker 8: Loan Origination Index, it's close to the lowest level since
Speaker 8: we've been in twenty fourteen.
Speaker 1: I get it.
Speaker 8: A lot of people have loans on their balance sheet
Speaker 8: and they're working through those. But you made a really
Speaker 8: good point. Distress hasn't really come about yet. And I
Speaker 8: think there's a really important point. And I'll pause here
Speaker 8: for a second. Lenders and borrowers are in a pretty
Speaker 8: challenging position. So they're actually solving the prisoner's.
Speaker 6: Dilemma, meaning that a bank doesn't want to own an
Speaker 6: office space.
Speaker 8: So a bank doesn't want to own it, they're not
Speaker 8: in the business of it. And guess what the regulatory
Speaker 8: capital charges for owning a property on your balance sheet
Speaker 8: are actually higher than if you were just to modify
Speaker 8: the loan at say a ninety nine percent LTV BLTV.
Speaker 6: Ooh, okay, break it down for US loan to value. Okay,
Speaker 6: So what would that mean if you if you brought
Speaker 6: that down to nine nine percent LTV.
Speaker 7: Yeah.
Speaker 8: So let's assume ten years ago you did a loan
Speaker 8: at a fifty percent and LTV. So you had a
Speaker 8: property that was worth ten dollars and you put a
Speaker 8: loan on it was the worth five dollars, so fifty
Speaker 8: percent LTV. Fast forward ten years, the value of that
Speaker 8: property drops from ten to five, and you still have
Speaker 8: five dollars of loan. That's one hundred percent LTV. The
Speaker 8: regulators are actually incentivizing the banks to actually modify and
Speaker 8: extend loans. So some people might call it kicking the
Speaker 8: can down the road. I don't necessarily think it's kicking
Speaker 8: the can down the road. I just think borrowers and
Speaker 8: blenders are incentivized to figure out way out of this
Speaker 8: of this environment. It's a pretty challenging environment for everyone
Speaker 8: right now, and so they are coming to a less
Speaker 8: bad situation modifying extending these loans.
Speaker 2: One of the things I've seen in the last ten
Speaker 2: years and been amazed about. Alex n I talk about
Speaker 2: it a lot, is the growth of private credit. Is
Speaker 2: private credit coming into the real estate space to maybe
Speaker 2: just find some opportunity here.
Speaker 8: Yeah, it has been for some time. Okay, twenty fifteen,
Speaker 8: private credit market share of total lending was probably ten
Speaker 8: percent plus or minus, and I'd probably say it's a
Speaker 8: little bit less than that. At the peak of the
Speaker 8: market it was around twenty percent or so. But look,
Speaker 8: there is something to be said for private for private
Speaker 8: credit finding a home within commercial real estate. There's forty
Speaker 8: two hundred banks across the United States. Bank share is
Speaker 8: around forty percent of total lending. There will be some
Speaker 8: banks that pull back for various different reasons. There has
Speaker 8: to be a home for those additional loans, and I
Speaker 8: do think private credit, if you have the expertise not
Speaker 8: to just underwrite the loans, but work out the loans
Speaker 8: when some of them inevitably go bad, there's a home.
Speaker 8: There's a home for private credit. Do I think it's
Speaker 8: going to fifty percent market share? No, I sort of
Speaker 8: think the upper limits is around twenty percent. We're probably
Speaker 8: a little bit less than that right now. But there's
Speaker 8: a home for private credit.
Speaker 6: So when we talk about the shoe and commercial and
Speaker 6: office commercial real estate not dropping, it sounds like maybe
Speaker 6: it won't drop at all. It'll just be sort of
Speaker 6: John Tucker's doing the wave and I don't really know
Speaker 6: why that is, but get oh, we hit it.
Speaker 8: That person just came back down number for a moment,
Speaker 8: doubt the tick up counts.
Speaker 5: Yes it does.
Speaker 6: That was amazing. This is not maybe going to drop.
Speaker 6: It's just going to be worked out and then no
Speaker 6: one's going to be sitting with really terrible loans forever.
Speaker 8: So this is going to take longer than what was
Speaker 8: feared a year ago. A year ago when you had
Speaker 8: banks coming under stress, I think a lot of people
Speaker 8: were fearing a quick collapse in commercial real estate lending.
Speaker 4: That has not occurred.
Speaker 8: This will be a slow burn over a number of years.
Speaker 8: I want to be clear, though, we are not calling
Speaker 8: for no distress in the commercial real estate market. I
Speaker 8: mentioned to you that property evaluations are down around twenty
Speaker 8: percent right now. We are expecting them to be down
Speaker 8: peak to trough around twenty five to thirty percent, So
Speaker 8: around two thirds of the way through the next leg,
Speaker 8: lower is going to be rising distress. And by the way,
Speaker 8: that actually might be a contrarian bullish sign.
Speaker 2: So what do I mean by set at the bottom?
Speaker 8: Maybe exactly exactly. It basically means sellers are finally capitulating
Speaker 8: and knowing where buyers want to buy. That's a healthy
Speaker 8: contrarian signal.
Speaker 2: See Richel Like, I think half of the real estate
Speaker 2: finance people in the business came out of Morgan Stanley.
Speaker 2: It's like a mafia there, those guys that are all
Speaker 2: over the place. Richard is off one of them. Richiel,
Speaker 2: head of real estate strategy and Research at Cohen and Steers,
Speaker 2: joining us here in at Bloomberg Interactive Brokers Studio, talking
Speaker 2: about the overall commercial real estate business, not just office
Speaker 2: and octimity. But that's a one of them. I can't
Speaker 2: wait to see what some of these buildings on Third
Speaker 2: Avenue when they change hands, what the discount is going
Speaker 2: to be. I think it's gonna be huge, like the
Speaker 2: Lipstick Building, just to pick one, that iconic building, but
Speaker 2: it's not an a property.
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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Speaker 5: On YouTube.
Speaker 6: From Alex Steel alongside Paul Sweeney and John Tucker. This
Speaker 6: is Bloomberg Intelligence Radio. We bring you all the top
Speaker 6: news and economics and finance all around the world. But
Speaker 6: they're great Bloomberg Intelli Legends analysts. They cover two thousand
Speaker 6: companies and one hundred and thirty industries worldwide. What's not
Speaker 6: at a record it's small caps. So they pushed higher
Speaker 6: yesterday they were near a two year high, but not
Speaker 6: yet at a record, and today they're a little bit softer,
Speaker 6: So you have to wonder if that whole rally broadening
Speaker 6: out thing is still on the docket. Let's get more
Speaker 6: here with David Kudla, founder's CEO and chief investment strategist
Speaker 6: at Mainstay Capital Management. He's on Zoom from Naples, Florida.
Speaker 6: So that's not too shabby. Yeah, nice job on that one, David.
Speaker 6: Forty thousand for the Dow. It's a nice round number.
Speaker 6: We like nice round numbers.
Speaker 4: You buying it, Yeah, I'm buying it. Good morning, Alex
Speaker 4: and Paul. You know, the market just has a lot
Speaker 4: of things going for right now. There are things that
Speaker 4: were tailwinds or were headwinds have become tailwinds. We've got
Speaker 4: strong earnings, we've got a fed that you know, I
Speaker 4: think Jay Pal's looking for a reason to cut, and
Speaker 4: I think the jan Ellen once Jay palett cuts so
Speaker 4: that you can afford the service the debt our national
Speaker 4: debt better. And we we look at we look forward
Speaker 4: at at market fundamentals. We look forward to what's happening
Speaker 4: with generative AI and what that means in terms of
Speaker 4: what we're calling the next industrial revolution. Uh, this deal
Speaker 4: with Apple and open AI and the power that people
Speaker 4: are gonna have in the in the holding their hand
Speaker 4: at a handheld device. Yeah, there's there's some things that
Speaker 4: can trip us up. But you know, the market's really
Speaker 4: really in good shape right now. On market sediment has
Speaker 4: changed so much investor sediment from just two weeks ago,
Speaker 4: it's incredible.
Speaker 2: So, Uh, David talks about earnings. What are your takeaways
Speaker 2: here for this earnings which have generally been pretty solid
Speaker 2: across the board, what are your takeaways?
Speaker 4: Well, you know, we went through their earnings trough and
Speaker 4: you know, we've emerged from that, and now when we
Speaker 4: look at first quarter earnings, we're coming in well ahead
Speaker 4: of expectations. Profit margins are the best in two years,
Speaker 4: and that's really the key, you know, when when there's
Speaker 4: a questions, so many questions about the FED. Look, we've
Speaker 4: been just since the beginning of the year, we've been
Speaker 4: all over the map on how many FED rate cuts
Speaker 4: we'll get this year, anywhere between zero and seven or
Speaker 4: even a rate hike. But when we look over at fundamentals,
Speaker 4: just corporate earnings are coming in better than expected, and
Speaker 4: you know that's that's obviously positive for stocks and one
Speaker 4: of the most important long term factors. And we're looking
Speaker 4: for double digit growth and earnings down the road this year.
Speaker 4: So it's a it's a scenario that if we continue
Speaker 4: with some multiple expansion, earnings continue to do well. The Fed,
Speaker 4: if anything that is looking to show that they're on
Speaker 4: a cutting cycle, they want to cut at least once
Speaker 4: to show they're on a cutting cycle. It's just they're
Speaker 4: having trouble. They got help with non farm payrolls, they
Speaker 4: got help with retail sales CPI. You know, we're going
Speaker 4: to see an opening here and that'll just be more,
Speaker 4: you know, another catalyst, more horsepower for the bulls out
Speaker 4: there to take the market higher. So does that mean
Speaker 4: that is coming I'm sorry, I was going to say,
Speaker 4: with it coming on more in the spirit of a
Speaker 4: normalization of FED policy, not because the recessionary forces out
Speaker 4: there are becoming overwhelming and we're seeing a slow economy.
Speaker 4: We're not seeing that GDP has remained quite strong.
Speaker 6: So when you talk about the AI and New Industrial Revolution,
Speaker 6: what's so interesting is that utilities over the last few
Speaker 6: weeks in may have been the second best performing sector
Speaker 6: in the S and P along with tech. Can utilities
Speaker 6: be a growth sector in this environment that you're outlining.
Speaker 4: I think that's yet to be seen. You know, the
Speaker 4: belief there are the thesis there is that there is
Speaker 4: going to be so much demand for all these super
Speaker 4: chips and and all the the the the energy required
Speaker 4: for this revolutionist implementation of of general of AI. I
Speaker 4: think it's also investors looking for more areas they can
Speaker 4: diversify into. But I think it's you have to be
Speaker 4: seen how much that really translates. You know, that that
Speaker 4: demand for energy translates into actually pushing utility stocks higher.
Speaker 4: It's not it's not a typical reaction function we've seen
Speaker 4: in the past, but we can see how it could
Speaker 4: be one going forward.
Speaker 2: David, you know, aside from the AI play, you know,
Speaker 2: a lot of investors feel like maybe they've kind of,
Speaker 2: at least in the short term, missed some of the
Speaker 2: Big seven Magnificent seven plays. What are some other areas
Speaker 2: that you think there's maybe value out there in the marketplace?
Speaker 4: Yeah, well we we you know, we've been saying this
Speaker 4: for a while, even when we've had these sell offs
Speaker 4: in the Magnificent seven or the Fabulous for or really
Speaker 4: just megacap tech, to stay with them because you know,
Speaker 4: they're really becoming all weather stocks with these fortress balance
Speaker 4: sheets and wide boats around them and uh, you know
Speaker 4: they're balance sheets that you know, companies like Apple, it
Speaker 4: doesn't Microsoft, doesn't matter what rates are doing. So so
Speaker 4: it's it's such a good place to have a good
Speaker 4: Porsche or portfolio and large caps, specifically large cap tech
Speaker 4: with that focus on AI. But yeah, we can we
Speaker 4: look to other areas that have done well, and it
Speaker 4: will depends how the economy moves forward. There's still this
Speaker 4: risk we move into a stagflationary environment, which might lead
Speaker 4: US towards commodities. Uh, there's also you know, do we
Speaker 4: have a hard landing, soft landing or no landing. We've
Speaker 4: been calling for the no landing scenario. I think we're
Speaker 4: somewhere between soft landing and no landing. But clearly I
Speaker 4: think golden locks economy. So a lot of different sectors
Speaker 4: are looking good and overseas, you know, there are even
Speaker 4: some areas there that.
Speaker 6: Are attractive well well where over seeds. I know that
Speaker 6: the NK in Japan has been a huge hot spot,
Speaker 6: particularly with the weaker yen.
Speaker 4: Yeah, that's that's really our main play is Japan. You know,
Speaker 4: we've a lot of it is is in fact the
Speaker 4: currency play, and you need if you invest in Japan
Speaker 4: do with a currency hedged vehicle.
Speaker 5: But you know, the the the.
Speaker 4: Rally in the in the EK two twenty five, I mean,
Speaker 4: we reached a high here here that we haven't seen
Speaker 4: since nineteen eighty nine when I was walking around the
Speaker 4: campus at Stanford learning how to invest in learning about business, right,
Speaker 4: I mean, it's been that long, and so there's you know,
Speaker 4: with corporate reforms, things that still are bringing true from abbynomics,
Speaker 4: Japan is in a position struggling with monetary policy obviously,
Speaker 4: but with that week currency, they're just they're a ne
Speaker 4: ex supporting country. Their products are so competitive abroad, and
Speaker 4: so that's why they've done so well. You've just got
Speaker 4: to hedge that bet. Europe is starting to look a
Speaker 4: little bit better too, from where they were a year ago.
Speaker 5: Uh.
Speaker 4: The concern here is where rates go, you know, when
Speaker 4: you come to emerging markets and some of those some
Speaker 4: of the other more interest rate sensitive economies like you know,
Speaker 4: we we've seen China researchs in China earlier but or recently,
Speaker 4: but we would continue to avoid there for now because
Speaker 4: of the structural problems they have. But it's really right
Speaker 4: now for US. It's America first. The US economy is
Speaker 4: on is still rolling, you know, in a in a
Speaker 4: pretty strong manner. The consumer is still strong. We're wondering,
Speaker 4: you know, how many times have we heard the consumers
Speaker 4: running out of money? The consumer is gonna they're going
Speaker 4: to run out of pandemic money, They're running out of money,
Speaker 4: they're borrowing. But the consumer's still strong. And that's that's
Speaker 4: the mainstay of our economy. So no pun intended. That's
Speaker 4: the main stay of our economy. And you know we're
Speaker 4: we're America first with looking for some opportunities to tactically yeah,
Speaker 4: out to some other areas to manage portfolio risk.
Speaker 2: All right, David, I always appreciate checking in with you.
Speaker 2: David Coodley, he's a founder and he's a chief executive
Speaker 2: officer and he's a chief investment strategist over at Mainstay
Speaker 2: Capital Management based in Michigan, but smartly right now in Naples, Florida,
Speaker 2: coming at us from zoom all right, the Naples days
Speaker 2: a kind of done. It's going to get like unbearably hot.
Speaker 2: Where you want to be from now on Jersey Shore, baby.
Speaker 6: Yeah, you kind of do. Also, like today it's not
Speaker 6: that nice in New York. It's rainy and grows, but
Speaker 6: man is it humid? Yes, So henceforth the Jersey Shore,
Speaker 6: the Paulsweeni House. We're all waiting for our invite. I mean,
Speaker 6: John Tecker and I were like, I don't really need
Speaker 6: one down there too. I guess I haven't. Okay, I'm
Speaker 6: waiting for an invite to y'all house. I guess that's
Speaker 6: not gonna happen.
Speaker 1: You're listening to the Bloomberg Intelligence Podcast Catch us Live
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Speaker 2: Deer is one of those names that reported earnings, and again,
Speaker 2: when I think about Deer, I think about it in
Speaker 2: the context of being a really good snapshot of where
Speaker 2: the US farmer is in terms of their economic well being.
Speaker 2: Chris Chilo, he follows Deer, He follows all those industrial
Speaker 2: companies for Bloomberg Intelligence. He joins us here, Chris, what
Speaker 2: does it takeaway from Deer this quarter in the outlook?
Speaker 2: You're right, it's all about the outlook.
Speaker 9: We expected them to cut their twenty twenty four outlook.
Speaker 9: You saw that from their peers at CNACH and Aco.
Speaker 9: They both lowered their expectations this quarter. But the haircut
Speaker 9: this quarter for Deer was more than we had anticipated.
Speaker 9: They actually took net income down. So we're looking at
Speaker 9: nettingcome around seven billion dollars this year, which would imply
Speaker 9: earnings a little north to twenty five dollars a share,
Speaker 9: or roughly eight percent below the street. And really there's
Speaker 9: two things for the reduction and the outlook. One, farm fundamentals,
Speaker 9: farm economics continue to deteriorate, so we're seeing weaker, broadly
Speaker 9: weaker demand across the globe. And then two, they're going
Speaker 9: to have to underproduce retail demand here because inventories continue
Speaker 9: to pile up given the softer demand backdrop, So production
Speaker 9: will be down significantly in the back half of the year.
Speaker 9: But I think now the question becomes, is this cut
Speaker 9: going to be enough to de stock the channel moving
Speaker 9: into twenty five?
Speaker 5: Is it?
Speaker 9: I don't think so, no, because I think we're going
Speaker 9: to see further degradation and the retail demand environment. You know,
Speaker 9: the backdrop isn't particularly encouraging for farmers. I mean, we're
Speaker 9: still looking at lower crop prices, you have higher production expenses,
Speaker 9: interest rates, they're still quite elevated, so net farm income
Speaker 9: is going to be double digits for a second straight year.
Speaker 9: On top of that, you have broadly weaker farmer sentiment.
Speaker 9: They went out and bought a lot of equipment over
Speaker 9: the last three years, so there's really no impetus to
Speaker 9: go out and start spending again. And this is an
Speaker 9: election year, so add another layer of uncertainty on top
Speaker 9: of that, So I guess really struggle to see a
Speaker 9: catalyst at least in the near term that's going to
Speaker 9: really really accelerate demand.
Speaker 2: Well does that mean is that good news for the
Speaker 2: John Tuckles of the world who want to go out
Speaker 2: and buy it John dear tractor. Are they can get
Speaker 2: a deal here? Are they going to get some competitive pricing?
Speaker 9: You certainly can get a deal. We're starting to hear
Speaker 9: more and more about competitive pricing, particularly in South America.
Speaker 9: But there's too much inventory globally. We heard that from
Speaker 9: Deer on the call, at least for particularly for North America.
Speaker 9: That seemed to be a change intra quarter here where
Speaker 9: they're going to have to underproduce for the back half
Speaker 9: of the year. So both new and use too much inventory.
Speaker 9: That being said, a lot of this equipment, even though
Speaker 9: it's sitting on lots, does come at an a significantly
Speaker 9: higher price point than even just five years ago given
Speaker 9: all the technological advancements.
Speaker 6: So basically this is still a cyclical business and we
Speaker 6: haven't hit the bottom of the cycle. Let yet. Do
Speaker 6: you have visibility on when we may do that? It's
Speaker 6: a great question.
Speaker 9: No, I'm one in the camp that thinks that we're
Speaker 9: in a little bit more of a prolonged downturn. You know,
Speaker 9: historically downturns in this business don't last one year. And
Speaker 9: if you look at you know, consensus expectations are for
Speaker 9: roughly flat sales and earnings for deer and that the
Speaker 9: ag equipment peers for next year. Historically, downturns last two
Speaker 9: to four years. We typically look at peak to truck
Speaker 9: the clients north to thirty percent. We'll be down roughly
Speaker 9: fifteen percent in terms of volume this year. Historically speaking,
Speaker 9: that tends to accelerate in year two. So it really
Speaker 9: ultimately comes down to I think what are crop price
Speaker 9: is going to do? I think that would be probably
Speaker 9: the early sign that maybe we're approaching a bottom. But
Speaker 9: we're looking at another bumper crop this year bearings adverse weather,
Speaker 9: then I think you're going to see continued downward pressure
Speaker 9: there though.
Speaker 2: Chris, what are the what are the crops that you
Speaker 2: look at and investors look at they see whether it's
Speaker 2: gonna be a good year or bad year for farmers?
Speaker 2: Is it soybeans?
Speaker 10: Corn?
Speaker 2: What do you look at?
Speaker 9: So there's three that matter. It's corn, It's soybeans, and wheat.
Speaker 9: If you think about in the US, those three crops
Speaker 9: alone account for roughly fifty five percent of farmer cash
Speaker 9: receipts or farmer crop cash receipts, which are essentially farmer revenue.
Speaker 9: So those are the ones that really move the needle,
Speaker 9: particularly for the large, high horsepower equipment which really you know,
Speaker 9: drive the earnings power.
Speaker 6: For deer, this may be a really weird question, but
Speaker 6: the used tractor business DoD Deer and Caterpillar, etc. Do
Speaker 6: they own the resale the secondhand business or is it
Speaker 6: a different type of dealer that does that and is
Speaker 6: there any sort of benefit to be made for them
Speaker 6: on that level.
Speaker 9: So, generally speaking, dealers independent businesses. That being said, the
Speaker 9: OEMs do have pretty significant influence there, so they do
Speaker 9: make their own business decisions. But you know, like I said,
Speaker 9: it's both a problem in the used market as well
Speaker 9: as that there's too much inventory out there, and until
Speaker 9: you could start maybe clearing some of that out on
Speaker 9: the second and third hand market, it's really tough to
Speaker 9: re accelerate demand for new equipment because most new equipment
Speaker 9: purchases typically will involve a trade in of older equipment
Speaker 9: and really the second and third buyers tend to be smaller,
Speaker 9: mid sized type farmers. So unless there's some kind of
Speaker 9: improvement in farmer profitability, particular for those those farmers that
Speaker 9: are more pressured, it's really tough to you know, accelerate
Speaker 9: that demand.
Speaker 2: So soybeans, wheat, corn, When does that stuff like get planted, harvested,
Speaker 2: all that kind of stuff.
Speaker 9: Right now, we're right in the heart of planting season.
Speaker 9: I think about roughly fifty percent of the corn crop
Speaker 9: is in the ground. Yeah, particularly in North America, this
Speaker 9: is the planning season. South America a little different. You
Speaker 9: get multiple growing seasons down there due to the to
Speaker 9: the climate. But really we're squarely focused in on corn, corn,
Speaker 9: and soybeans right now. And really, you know, if you
Speaker 9: look at soil moisture, it's actually quite favorable. So there's
Speaker 9: really expectations that this is going to be another bumper crop.
Speaker 2: So you think you're can get a bumper crop because
Speaker 2: the soil is moist.
Speaker 9: We have moist soil now, so you know, like I said,
Speaker 9: bearing some kind of drought, I think you probably see
Speaker 9: more downward pressure on crop prices, which kind of leads
Speaker 9: us to be probably a little bit more cautious heading
Speaker 9: into twenty twenty five, just because farmer incomes are still
Speaker 9: going to be under tremendous pressure, really what we think
Speaker 9: will be for at least a third straight year, and
Speaker 9: that's really just going to you know, temper buying the expectations.
Speaker 6: All right, Chris, we really appreciate it.
Speaker 9: Chris.
Speaker 6: You'll you know, joining us bloom We're gonna tell legends,
Speaker 6: senior US machinery analysts. But it keep you two moist,
Speaker 6: like you can't have floods and you can't have drought.
Speaker 2: You know, John, your assignment today, Go home and feel
Speaker 2: your soil. See how moist it Isn't I don't, but
Speaker 2: you run the danger of the seats rotting before they
Speaker 2: sprout if.
Speaker 5: It's two moist.
Speaker 2: So exactly too much moisture gonn to be a problem
Speaker 2: with farming businesses.
Speaker 5: Top Oh my god, at least with my pegonias.
Speaker 6: I mean, that's why you have crop insurns, like you
Speaker 6: really need it because you're just I mean, even though
Speaker 6: you might complain about all the handouts, et cetera, but
Speaker 6: like it's huge, it's big.
Speaker 1: You're listening to the Bloomberg Intelligence podcast Catch us Live
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Speaker 1: You can also listen live on Amazon Alexa from our
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Speaker 2: If you remember, about a week ago, I attended the
Speaker 2: Boston Consulting Group Edge Expo in Boston, Massachusetts. Had the
Speaker 2: opportunity to chat with a lot of smart people top
Speaker 2: execs at BCG. One was with Global Chair Rich Lesser.
Speaker 2: He engages with CEOs, boards of directors, and senior leaders
Speaker 2: around the world on critical topics, including climate change and
Speaker 2: artificial intelligence. I began the conversation by asking Rich what
Speaker 2: he spends the most time talking to clients about. Let's
Speaker 2: take a listen.
Speaker 10: So it's been a remarkable decade and it's not even
Speaker 10: half over yet.
Speaker 5: And I think the two.
Speaker 10: Characteristics that we are living with right now to a
Speaker 10: very high degree is uncertainty and change, and they're not
Speaker 10: the same thing. Uncertainty causes you to want to hunker down,
Speaker 10: you know, just get through it. Change forces you to
Speaker 10: be bold, to invest, to take some risk. And right now,
Speaker 10: more than I can remember, CEOs get pooled in both
Speaker 10: directions how to navigate, particularly if you're like a European CEO.
Speaker 10: You've got two wars not so not so far away,
Speaker 10: and you've got all the pressures of energy costs and
Speaker 10: all the uncertainty of all these elections this year and
Speaker 10: so forth. You've got an enormous amount of uncertainty. But
Speaker 10: of course, just like CEOs everywhere in the world, you've
Speaker 10: got rapid technology evolution, and you've got to prepare for
Speaker 10: climate change, all sorts of things. So I think that's
Speaker 10: the tension point, is how to balance.
Speaker 2: Those Let's talk about climate change a little bit here.
Speaker 2: It feels like maybe we're at a little bit of
Speaker 2: an ebb here in the US. I'm not sure if
Speaker 2: I don't think that's necessarily case in Europe, but I'm
Speaker 2: feeling a little bit here. How do you engage with
Speaker 2: your clients about climate change? What's the challenge these days?
Speaker 2: Is it convincing them that it's there, that it's an issue,
Speaker 2: convincing them that they need to maybe invest in getting
Speaker 2: to a cleaner economy. What are some of the challenges
Speaker 2: you guys have seen.
Speaker 10: I think it's really important to separate what people want
Speaker 10: to talk about publicly and what they do. Many many CEOs,
Speaker 10: particularly of leading US companies, have made pretty substantial commitments
Speaker 10: over the last two to three years.
Speaker 5: But in making those commitments, they were.
Speaker 10: Very, very visible and public about it a couple of
Speaker 10: years ago, and I think right now the sense is
Speaker 10: you don't walk away from your commitments. And I know
Speaker 10: very few CEOs, very few that I think are really
Speaker 10: trying to walk away from their amendments. I think most
Speaker 10: of them have tried to put them in their processes
Speaker 10: and sure they get delivered. But at the same time,
Speaker 10: it's become such a politicized topic. We're all going to
Speaker 10: live on this planet, we're all going to bear the
Speaker 10: consequences of climate change, but unfortunately, in the public discourse
Speaker 10: and in a very you know, it's an election year.
Speaker 5: It's just become very political.
Speaker 10: And I don't think CEOs want to be so public
Speaker 10: on these very difficult, divided, divisive topics.
Speaker 5: So they're much quieter.
Speaker 10: They're not walking away from their previous commitments, but they're
Speaker 10: also being careful about new commitments, partly because of the
Speaker 10: public attention and partly because they don't know where the
Speaker 10: policy environment is going next year.
Speaker 2: And you know, I guess an example that is ESG.
Speaker 2: It was the termed for so many years and now
Speaker 2: it's really fallen out of favor here in the US
Speaker 2: in particular. But again I guess the underlying commitment for
Speaker 2: many of those folks are still there.
Speaker 5: Well. The problem is ESG.
Speaker 10: Even people who were committed weren't always sure exactly what
Speaker 10: ESG was and what it meant. It was initials that
Speaker 10: were bundling three very different kinds of attributes together, and
Speaker 10: then it got politicizes a term without even people knowing
Speaker 10: why they shouldn't like it sometimes, so I think very
Speaker 10: few CEOs are using ESG language right now. You talk
Speaker 10: about your climate and sustainability commitments, you often talk about
Speaker 10: diversity and inclusion, good governance. I don't think anybody questions
Speaker 10: makes for stronger companies. But when you put it together
Speaker 10: in ways people don't understand, you're just almost looking for trouble.
Speaker 10: And I think CEOs the last thing they want to
Speaker 10: do is look for trouble.
Speaker 2: You know, when you look at the economic data, which
Speaker 2: is what we get Boomberg do all the time, and
Speaker 2: we talk about it all the time. For a lot
Speaker 2: of smart people, what are you hearing about the economy
Speaker 2: from some of your CEO clients out there, seems again
Speaker 2: there's some shifting wins out there for a lot of people.
Speaker 2: Those that won't assets, life's good. Those that don't maybe
Speaker 2: not so much. That inflation thing, for example.
Speaker 5: Is a real problem. What are you hearing?
Speaker 10: So, Look, we've been on the more optimistic side of
Speaker 10: the economic outlook for a while back, when everybody was
Speaker 10: saying recession or super high inflation. We were of a position,
Speaker 10: led by our chief economist Philip Carlson, that we could
Speaker 10: get to a soft landing and that that was not
Speaker 10: as low a probability scenario. Now we're living in a
Speaker 10: soft landing world. But one soft landings for companies have
Speaker 10: hard edges. You still have wages growing faster than your
Speaker 10: power to raise prices. You still have low growth, not
Speaker 10: super high growth. It's hard to drive your own growth
Speaker 10: agenda without doing a lot of innovation, and so it's
Speaker 10: not so easy. And second, we're finding actually the glide
Speaker 10: path for the last thousand feet to the ground. We
Speaker 10: got a glidepath from thirty thousand feet of risk down
Speaker 10: to a couple thousand. But you know, getting from a
Speaker 10: world of high two s low threes down to a
Speaker 10: well below two and a half. Approaching two is proving
Speaker 10: to be tricky, and the consequence of that, as you say,
Speaker 10: is that interest rates are high and there's much less
Speaker 10: sign of them coming down, and in that environment it
Speaker 10: makes a couple things hard. First, for many many consumers,
Speaker 10: you don't have much in the way of savings, buying
Speaker 10: a car, buying a house, renovating a house, all of
Speaker 10: those things go up much more than the underlying prices
Speaker 10: do because of the interest costs. And second, for many
Speaker 10: of the capital investments we need to make, including climate
Speaker 10: and sustainability, things that look like they made a lot
Speaker 10: of economic sense a couple of years ago are much
Speaker 10: harder to justify now. So if you have a lot
Speaker 10: of assets, you're right, it's not bad right now you
Speaker 10: can get good value on But if you've got to
Speaker 10: make investments, take on debt, do things, that is trickier.
Speaker 2: We spent a lot of time at your conference here
Speaker 2: talking about AI and the investment needed in AI and
Speaker 2: the commitment needed and the ethics around AI. How prevalent
Speaker 2: is that in your discussions with your declines at the
Speaker 2: CEO level, the board level.
Speaker 10: I am blown away by how much energy CEOs are
Speaker 10: putting into thinking this topic through. But for me, the
Speaker 10: big difference between the last six months and say the
Speaker 10: first nine or ten months since the big announcements. The
Speaker 10: last six months people are less focused on thinking it
Speaker 10: through in the sense of understanding the technology and more
Speaker 10: about how they can drive business impact at scale. And
Speaker 10: for us, it's been honestly one of the most exciting
Speaker 10: periods I can remember on something where we went from
Speaker 10: less than twenty clients a year ago to day working
Speaker 10: on this to three hundred and fifty. I mean, we've
Speaker 10: never had something like that. And I think that for us,
Speaker 10: there's a lot of opportunity that we're seeing now get
Speaker 10: materialized versus theorized, and CEOs are realizing it. They have
Speaker 10: to balance it, they have other priorities they have to do.
Speaker 10: They have to do it in a responsible way. To
Speaker 10: your point, be careful, there aren't hidden biases. Be careful,
Speaker 10: they're not misusing the technology. But the underlying sense of
Speaker 10: opportunity right now has gone up quite a lot. And
Speaker 10: I think the more they see other companies delivering actually
Speaker 10: putting it into results, that they post deeper customer relationships.
Speaker 5: The faster we'll see that come along.
Speaker 2: Yeah, we met with well the goodness for BCGS. You
Speaker 2: have a lot of smart people on this topic here,
Speaker 2: we've met them here today. One aery was the ethics site,
Speaker 2: your chief ethics officers talking about that. Yeah, that's got
Speaker 2: to be front and center. I would think for total
Speaker 2: discussions before you start thinking about putting dollars to work,
Speaker 2: you have to have a commitment, it seems like, to
Speaker 2: try to do this as responsible.
Speaker 10: As Yes, and it has to be owned by the CEO,
Speaker 10: not owned by the technology team.
Speaker 5: Right, this is a CEO level issue.
Speaker 10: What are the governance frameworks, What are the kind of
Speaker 10: biases to look out for? How do you have a
Speaker 10: process where you don't just put technology into the wild
Speaker 10: and hope you did a good job, but you're monitoring
Speaker 10: it in an ongoing basis, figuring out what the risks are,
Speaker 10: escalating the things to the right level, intervening in the
Speaker 10: right ways. That is a CEO and a top leadership agenda,
Speaker 10: and it's really important. But we are seeing companies navigate
Speaker 10: that really well. And so yes, you have to be
Speaker 10: really careful, but that can't be the reason you don't
Speaker 10: choose to act.
Speaker 2: Yeah, all right, You've been in this consulting game a
Speaker 2: while here, how has it changed? You know, certainly before
Speaker 2: the pandemic. I'm guessing the business models for a lot
Speaker 2: of companies have changed.
Speaker 10: Here.
Speaker 2: How how is your day to day house and consulting
Speaker 2: business evolved in over the least?
Speaker 10: Right, So, I'd say there are two massive changes over
Speaker 10: the last five to ten years. Until five or ten
Speaker 10: years ago, it was very clear, get to the right
Speaker 10: answer for very difficult problems. Make sure the change really happens.
Speaker 10: I think the focus right now on driving real lasting
Speaker 10: impact goes up and up and up. We see it
Speaker 10: in so many clinident discussions. They don't just want partners
Speaker 10: to give them good ideas or give them a page
Speaker 10: of recommendations. They want impact partners that can team with
Speaker 10: to drive stuff through. And two, they need an enablement focus.
Speaker 10: They need a focus on building because the world's going
Speaker 10: to keep changing, So making change once, however successful, is
Speaker 10: not sufficient. What you need to do is enable your organization,
Speaker 10: the people and the technology to keep learning, to keep growing,
Speaker 10: to keep evolving. So the role of people like us
Speaker 10: are not just to make great change happen one successfully,
Speaker 10: but to build skills within the organization, so in the
Speaker 10: organist and keep growing and learning and evolving, and those
Speaker 10: two things have grown dramatically over the last five years.
Speaker 5: All right.
Speaker 2: That was Global Chair Rich Lesser of BCG Boston Consulting Group.
Speaker 2: I was up there attending their Boston Consulting Group Edge
Speaker 2: Expo in Boston, talking to a lot of their leaders
Speaker 2: senior partners there at bcgpas some of the issues they
Speaker 2: are working with their clients are on. A lot of
Speaker 2: it was about competition, global competition technology, particularly AI as well.
Speaker 2: So a lot going on there and they're getting more
Speaker 2: and more engaged with their clients.
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