WEBVTT - Tesla Won't Be Able To Paper Over Losses in 3Q: Gordon Johnson 0:00:01.360 --> 0:00:04.120 Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, along 0:00:04.120 --> 0:00:06.200 with my co host of Bonnie Quinn. Every business day 0:00:06.240 --> 0:00:10.360 we bring you interviews from ceo, market pros, and Bloomberg experts, 0:00:10.400 --> 0:00:13.600 along with essential market moving news. Find the Bloomberg Markets 0:00:13.600 --> 0:00:17.000 Podcast on Apple podcast or wherever you listen to podcasts, 0:00:17.000 --> 0:00:22.360 and on Bloomberg dot com. Tesla, that stock that everybody 0:00:22.400 --> 0:00:24.599 loves to talk about, up two thirds of represent in 0:00:24.640 --> 0:00:27.639 today's trading after earnings came out yesterday. Let's bring in 0:00:27.680 --> 0:00:31.760 somebody who says, maybe Tesla's, you know, just a little 0:00:31.800 --> 0:00:36.639 bit um not cooking the books. But well, we'll let him, 0:00:36.680 --> 0:00:38.559 We'll let him say it. Gordon Johnson is founder and 0:00:38.600 --> 0:00:43.040 CEO of g LJ Research. So Gordon, did Tesla or 0:00:43.080 --> 0:00:47.360 did Tesla not make a good profit? Uh? Put it 0:00:47.440 --> 0:00:50.040 this way, Um, if you look at their core auto segment, 0:00:50.120 --> 0:00:53.440 Tesla losses significant amount of money. So what Tesla does 0:00:53.479 --> 0:00:56.920 is every quarter they recognize a certain level of regulatory 0:00:56.960 --> 0:01:01.640 credits and these net income revenue that don't have cash 0:01:01.680 --> 0:01:04.840 tied to them. Um uh. And this quarter that number 0:01:04.880 --> 0:01:08.320 was million. Their net income that they reported was one 0:01:08.319 --> 0:01:11.720 oh four. So those credits, um. They lost a significant 0:01:11.720 --> 0:01:13.880 amount of money, and the CEO even said this on 0:01:13.920 --> 0:01:16.119 the call. He said, our business is not based on 0:01:16.680 --> 0:01:20.560 the assumption of continued credit recognition because these are temporary numbers. 0:01:20.560 --> 0:01:22.440 But what's key here is if you look over the 0:01:22.480 --> 0:01:26.559 past twenty six quarters um and only four of those quarters, 0:01:26.560 --> 0:01:30.120 if you take Testla's net income less regulatory credit sold 0:01:30.160 --> 0:01:32.479 has they have They posted a profit, the most recent 0:01:32.520 --> 0:01:35.679 of which was three to nineteen. But what's also interesting 0:01:35.760 --> 0:01:39.440 is their regulatory credit revenue jumped from about a hundred 0:01:39.520 --> 0:01:42.080 million Q four to three hundred four and Q one 0:01:42.400 --> 0:01:45.520 and four hundred eight million and Q two. The reason 0:01:45.640 --> 0:01:48.400 that significant is because that allowed them to report four 0:01:48.440 --> 0:01:52.480 straight quarters of profit, which basically allows them or makes 0:01:52.480 --> 0:01:54.600 them as eligible to be including in the SMC five 0:01:54.680 --> 0:01:57.760 hundred real quick what What's what's important here is they're 0:01:57.800 --> 0:02:02.840 effectively recognizing revenue on credit sells they have not yet 0:02:03.040 --> 0:02:07.440 made to uh FIAT Chrysler. The Chrysler said they're gonna 0:02:07.440 --> 0:02:10.480 buy credits essentially from Tesla at one point one billion 0:02:10.720 --> 0:02:13.440 over the next four years. In the first two quarters 0:02:13.440 --> 0:02:16.480 of this year alone, Tesla has recognized we believe eight 0:02:16.560 --> 0:02:18.960 hundred million of that one point one billion, So you 0:02:18.960 --> 0:02:21.920 can see they're significantly pulling forward revenues if they really 0:02:21.960 --> 0:02:24.680 haven't even sold yet to post the profits. We think 0:02:24.720 --> 0:02:27.320 it's not real. We think it's uh, you know, it's artificial, 0:02:27.320 --> 0:02:29.160 and we think they're gonna go back into severe losses 0:02:29.200 --> 0:02:32.040 in the back half of this year. So Gordon, why 0:02:32.440 --> 0:02:35.359 does the market not care about that? The stock is 0:02:35.400 --> 0:02:39.440 up two percent year to date, up over five on 0:02:39.480 --> 0:02:43.040 a trailing twelve month basis um, Why does a market 0:02:43.040 --> 0:02:46.600 not care? Well, Tesla is completely detached from reality. But 0:02:46.600 --> 0:02:47.720 if we have to put it on one thing, we 0:02:47.800 --> 0:02:50.560 put it on this Tesla stock in March essentially to 0:02:50.560 --> 0:02:53.600 get February. March fell from nine hundred and fifty dollars 0:02:53.639 --> 0:02:55.880 and three hundred and fifty dollars when the market collapsed, right, 0:02:56.280 --> 0:02:58.359 and then in late March the key that the federators 0:02:58.400 --> 0:03:02.080 serve announced Qui infinity. They essentially grew their balance sheet 0:03:02.120 --> 0:03:04.600 by three trillion dollars over a course of nine weeks, 0:03:04.600 --> 0:03:06.799 which is a four years worth of tax revenues in 0:03:06.880 --> 0:03:09.400 the US. The questions why are we even paying taxes? Right? 0:03:09.440 --> 0:03:11.440 That money is just going into stock market, and every 0:03:11.480 --> 0:03:14.560 speculative stock went to the moon. That's essentially the key 0:03:14.600 --> 0:03:18.560 reason why we'd say, um uh, people don't care, but 0:03:18.639 --> 0:03:20.720 we think they're gonna be forced to care. Because Tesla 0:03:20.840 --> 0:03:23.640 reiterated it's it's guidance for five hundred thousand cars sold. 0:03:24.000 --> 0:03:25.639 So in three two they're gonna have to sell roughly 0:03:25.639 --> 0:03:27.560 a hundred and sixty thousand cars. We think they're gonna 0:03:27.600 --> 0:03:29.720 fall far short of that. We think they're gonna report 0:03:29.760 --> 0:03:32.600 a big loss in Q three. They guided, Tesla has guided. 0:03:32.639 --> 0:03:34.760 Nobody's even talked about this on the South side, but 0:03:34.880 --> 0:03:37.280 Tesla guided on their call last night, they said, our 0:03:37.360 --> 0:03:39.640 credit cells this year are gonna be double last year. 0:03:39.920 --> 0:03:42.520 So if you take last year multiplied by two, subtract 0:03:42.560 --> 0:03:44.720 the first half of this year, they're guiding their credit 0:03:44.760 --> 0:03:47.840 cells down rough and the second half of this year 0:03:47.880 --> 0:03:50.360 that's a hundred percent gross margin revenue, it's gonna fall. 0:03:51.400 --> 0:03:53.920 So it's clear to us we believe right. Our opinion 0:03:54.040 --> 0:03:57.800 is they effectively pulled in a bunch of credit revenue 0:03:57.840 --> 0:04:00.400 to show profit to be including the SMP by hundreds, 0:04:00.480 --> 0:04:03.000 and they're gonna go back to significant losses next quarter. 0:04:03.080 --> 0:04:05.040 So given where the valuation is, not only do they 0:04:05.080 --> 0:04:06.880 need to show tremendous growth, which we don't think they're 0:04:06.880 --> 0:04:09.400 gonna do. Um. Their revenue is essentially peaked in the 0:04:09.440 --> 0:04:13.400 fourth quarter of eighteen UM and so did their deliveries. UM. 0:04:13.680 --> 0:04:15.760 But we also think they're gonna go show severe head 0:04:15.760 --> 0:04:18.080 income losses and cash burn. We think that's gonna push 0:04:18.080 --> 0:04:20.800 the stock down. But all of the analysts conceive that 0:04:20.839 --> 0:04:23.800 test Us sold almost eight hundre million dollars in regulatory credits. Right, 0:04:23.800 --> 0:04:25.960 They're not hiding it or anything. So why are analysts 0:04:26.000 --> 0:04:29.640 even not there is anymore? Well, I'll give you this, right, 0:04:29.880 --> 0:04:32.640 the consensus estimate going into last night's earnings was a 0:04:32.720 --> 0:04:35.240 loss of a dollar twenty Right. If Tesla would have 0:04:35.279 --> 0:04:37.720 lost money, that would have basically ended their ability to 0:04:37.839 --> 0:04:41.440 be included in the SMP five hundreds since must basically 0:04:41.800 --> 0:04:43.720 there was an email he sent out to his employees 0:04:43.760 --> 0:04:46.200 that was leaked to the um UH to the two 0:04:46.240 --> 0:04:48.960 news wires that they're close to propitibility. The stock has 0:04:48.960 --> 0:04:51.960 been on fire. If the street estimate, like, if analysts 0:04:52.040 --> 0:04:54.160 really thought they were gonna lose money yesterday, they should 0:04:54.160 --> 0:04:56.200 have downgraded the stock to cell because the stock would 0:04:56.240 --> 0:05:00.600 have imploded. I think they're select analysts that are complicit um, 0:05:00.960 --> 0:05:04.160 and and and and and essentially the pumps that are 0:05:04.200 --> 0:05:07.160 what Tesla consistently see. Um. What I mean by that 0:05:07.360 --> 0:05:10.359 is like the Street estimate for deliveries with seventy before 0:05:10.440 --> 0:05:12.799 the end of the before they even reported the deliveries, 0:05:12.839 --> 0:05:15.800 Tesla came out themselves effectively be another league and so 0:05:15.960 --> 0:05:17.480 we're gonna do you know, we're gonna be close to 0:05:18.000 --> 0:05:20.960 close to ninety thousand. So I think the Street and argue, 0:05:21.040 --> 0:05:23.479 this is our opinion some analysts are intentionally keeping keeping 0:05:23.520 --> 0:05:25.720 their numbers low in order to keep the barlow so 0:05:25.800 --> 0:05:28.600 Tesla can step over it. All. Right, let's step away 0:05:28.640 --> 0:05:32.080 just a second from Tesla and the quarterly earnings. What 0:05:32.279 --> 0:05:35.600 is your call as to how the other big auto 0:05:35.680 --> 0:05:39.600 manufacturers will step up? When they will step up in 0:05:39.680 --> 0:05:44.240 the EV market? Right, So, if you look at Tesla's 0:05:44.279 --> 0:05:47.920 revenue in Europe, um their market share rather, it's fell 0:05:48.040 --> 0:05:53.320 from to roughly from four Q two I'm sorry, from 0:05:53.480 --> 0:05:55.520 lun Q of last year to today. If you look 0:05:55.560 --> 0:05:58.359 at their market share in the most important global EV market, 0:05:58.360 --> 0:06:00.200 which is Norway. And why do we say that because 0:06:00.240 --> 0:06:03.720 Norway is subsidized of the cost of your electric car. 0:06:03.839 --> 0:06:06.440 So everybody who makes electric electric car sells in Norway. 0:06:06.680 --> 0:06:09.200 Tesla shares down from thirty seven percent in the fourth 0:06:09.279 --> 0:06:12.800 quarter to roughly five percent as of today. The point 0:06:12.960 --> 0:06:16.000 is just this year e the EU put in a 0:06:16.120 --> 0:06:18.679 rule that you had to basically sell a certain amount 0:06:18.680 --> 0:06:21.120 of electric car that a carmaker or you penalized. That 0:06:21.200 --> 0:06:23.719 wasn't the case last year. So in the markets where 0:06:23.760 --> 0:06:28.080 Tesla is facing competition now they're getting uh, they're losing 0:06:28.160 --> 0:06:30.040 in a big way. The other thing I will not 0:06:30.080 --> 0:06:31.760 it is a lot of people say, well tech Tesla 0:06:31.800 --> 0:06:33.920 is the technology leader, right, they lead in batteries and 0:06:33.960 --> 0:06:35.920 they lead in autonomous driving. Let me let me put 0:06:35.960 --> 0:06:39.200 some reality today. Tesla does not make batteries, right, They 0:06:39.240 --> 0:06:41.520 do not make batteries. They buy them from Panasonic and 0:06:41.600 --> 0:06:43.760 c A t O. Anybody can buy a loop AMN 0:06:43.800 --> 0:06:46.200 on batteries from those vendors. And Tesla's R and D 0:06:46.360 --> 0:06:48.520 right if they're gonna take over the battery space. Their 0:06:48.640 --> 0:06:51.680 R and D spin was down almost six in Q 0:06:51.839 --> 0:06:54.400 two year over year, um, so they're not spending on 0:06:54.560 --> 0:06:56.400 R and D and they five batteries from other people. 0:06:56.400 --> 0:06:58.760 So we think there's misconceptions. And then lastly, in full 0:06:58.800 --> 0:07:02.479 self drive navigant rank the Dead Last dead lest Gordon Johnson, 0:07:02.480 --> 0:07:05.200 thanks so much for joining us. A compelling bear case 0:07:05.279 --> 0:07:08.039 for what has been a rocket ship of a stock. 0:07:08.080 --> 0:07:12.840 We'll see how it plays out, certainly. You know, no 0:07:13.040 --> 0:07:16.600 sector has been hit harder arguably than the US airline business. 0:07:16.640 --> 0:07:19.760 They sold. The traffic just plummet with the pandemic, and 0:07:19.840 --> 0:07:22.880 it really hasn't rebounded that much, putting a lot of 0:07:22.960 --> 0:07:26.440 pressure on their balance sheets. UH, and they are coming 0:07:26.520 --> 0:07:29.520 to market left, right and center, trying to raise capital, 0:07:29.560 --> 0:07:32.720 mortgaging everything they can effectively. American Airlines is in the 0:07:32.800 --> 0:07:36.000 market right now. Let's talk about that deal. Molly Smith, 0:07:36.080 --> 0:07:39.720 corporate finance reporter for Bloomberg News. Molly, thanks so much 0:07:39.760 --> 0:07:42.320 for joining us here. Tell us about this one point 0:07:42.360 --> 0:07:46.800 two billion dollar financing that American is bringing the market. Yeah, 0:07:46.920 --> 0:07:49.400 so we're probably going to see at sometime at this quarter. 0:07:49.760 --> 0:07:52.920 American told us this morning when they reported earnings, and 0:07:53.040 --> 0:07:57.080 the idea is basically to mortgage the brand in uh, 0:07:57.440 --> 0:08:00.360 putting together a collateral package for this one point billion 0:08:00.400 --> 0:08:03.840 dollars debt financing that Goldman is going to be working 0:08:03.880 --> 0:08:07.600 with American on so that some of that collateral includes 0:08:07.680 --> 0:08:10.840 the American Airlines trademark, also the a A dot com 0:08:10.920 --> 0:08:16.160 website domain, as well as key airline plots at LaGuardia 0:08:16.280 --> 0:08:19.960 and Reagan National Airports. So it's really interesting on the 0:08:20.160 --> 0:08:23.480 I P side, at least, we haven't seen airlines yet 0:08:23.520 --> 0:08:26.360 putting up their trademark as collateral, so really shows you 0:08:26.440 --> 0:08:29.240 how they're really dolling out the kitchens things to get 0:08:29.320 --> 0:08:32.560 some of the secured financing. Yeah, how if you were 0:08:32.559 --> 0:08:34.199 a Goldman and you needed to would you sort of 0:08:35.280 --> 0:08:39.439 cash that in? So it's a it's a bit reminiscent 0:08:39.600 --> 0:08:42.199 for me, at least of when Ford had to do 0:08:42.360 --> 0:08:45.480 something similar to put pretty much all of its assets 0:08:45.559 --> 0:08:48.640 in hock to avoid filing for bankruptcy back in two 0:08:48.679 --> 0:08:51.880 thousands five, and including for Fords the blue oval logo 0:08:52.000 --> 0:08:54.959 at the time. So it's, uh, it's something that's not 0:08:55.520 --> 0:08:59.160 you know, unique to companies in general, but definitely have 0:08:59.240 --> 0:09:02.040 not seen this from the airline so far in putting 0:09:02.040 --> 0:09:05.680 together these collateral packages. Boy, here's a young corporate finance 0:09:05.679 --> 0:09:08.160 bankers the Chase Manhattan Bank. I could not even imagine 0:09:08.200 --> 0:09:10.680 going to my credit committee saying, you know, we lend 0:09:10.720 --> 0:09:14.800 one point two billion dollars against basically a logo. Um, 0:09:15.000 --> 0:09:17.839 but let's see if goldben can get it done. So, Molly, 0:09:17.880 --> 0:09:20.840 give us a sense of the cash burn for this industry. 0:09:21.000 --> 0:09:22.520 You know, I just reported a story in the last 0:09:22.559 --> 0:09:25.360 hour of Bloomberg News, reported a story about, you know, 0:09:25.440 --> 0:09:29.000 how the airlines are adding fewer than the expected flights 0:09:29.080 --> 0:09:31.760 here because the pandemic is kind of surging in in 0:09:31.920 --> 0:09:35.280 in key states. Here. What's the cash burn like for 0:09:35.280 --> 0:09:38.959 a lot of these companies right now? It's improving, but 0:09:39.120 --> 0:09:41.880 still negative. So I think they would take that as 0:09:41.920 --> 0:09:44.440 a general positive, and it seems that that's what investors 0:09:44.520 --> 0:09:47.040 are taking as a positive as well, that at least 0:09:47.120 --> 0:09:51.040 for American the cashman was nearly a hundred million dollars 0:09:51.120 --> 0:09:53.959 in April, pretty much a third of that in June. 0:09:54.200 --> 0:09:57.360 So again still negative, but improving. And we saw that 0:09:57.520 --> 0:10:01.439 also with Southwest and United. So they are attributing that, 0:10:01.600 --> 0:10:03.920 of course to you know, some increased revenue and that 0:10:04.320 --> 0:10:07.000 it does seem that passengers are more willing to fly. 0:10:07.240 --> 0:10:09.880 But of course, uh, there's still a long way to 0:10:09.960 --> 0:10:12.200 go in terms of coming back from this travel shutdown. 0:10:13.200 --> 0:10:15.520 It seems a little odd. So United putting up its 0:10:15.559 --> 0:10:19.200 loyalty points as collateral. You know American now putting up basically, 0:10:19.240 --> 0:10:22.560 I suppose that its logo, why go to the trouble 0:10:22.600 --> 0:10:24.319 of all of this, Why not just give them some 0:10:24.480 --> 0:10:26.959 cash to tie them over? If you're going to back them, 0:10:27.000 --> 0:10:30.520 why not back them? I think, you know, there needs 0:10:30.600 --> 0:10:32.959 to be some kind of security in these deals, and 0:10:33.080 --> 0:10:36.080 that of course, if any of these companies could borrow 0:10:36.200 --> 0:10:39.880 through the unsecured market at a reasonable cost, they would 0:10:39.880 --> 0:10:43.000 probably consider that. But if you're already looking at double 0:10:43.080 --> 0:10:46.600 digit yields on secured financing, then you can only imagine 0:10:46.640 --> 0:10:50.199 how much more painful or possibly not even it doesn't 0:10:50.240 --> 0:10:52.600 even seem possible to do it in the unsecured market. 0:10:53.040 --> 0:10:56.400 So and we've seen that investors are definitely assigning more 0:10:56.480 --> 0:10:59.920 weight to collateral too. I mean, remember United had try 0:11:00.160 --> 0:11:03.200 to previously secure a bond sale with some of its 0:11:03.280 --> 0:11:06.040 old aircraft, and investors were thinking that by the time 0:11:06.120 --> 0:11:08.360 these debts the debt matures, that a lot of those 0:11:08.360 --> 0:11:11.319 aircraft wouldn't even be in flight, so they then turned 0:11:11.440 --> 0:11:14.839 to the frequent flyer mile program. So it definitely is 0:11:14.920 --> 0:11:17.840 looking like the brands are getting more creative in terms 0:11:17.840 --> 0:11:21.280 of what they're putting up. So Molly, how's the market 0:11:21.320 --> 0:11:23.760 for some of these? I would call them quasi esoteric 0:11:24.000 --> 0:11:28.199 kind of credit facilities. Here are bond deals you have 0:11:28.320 --> 0:11:31.280 to pay a huge premium to get money based upon 0:11:31.600 --> 0:11:35.959 you know, with lateral clatteral being your logo. Yes, So 0:11:36.240 --> 0:11:38.520 we've seen a lot of other industries to like cruise 0:11:38.559 --> 0:11:41.400 lines um it's another big one that have also been 0:11:41.559 --> 0:11:44.720 very creative and some of these secured financings of believe 0:11:44.760 --> 0:11:46.640 it was Norwegian Cruise Line that cut up some of 0:11:46.720 --> 0:11:50.199 its islands believe it or not to borrow against and 0:11:50.720 --> 0:11:54.800 still paid um a ten percent plus fields in that deal. Uh. 0:11:55.080 --> 0:11:59.760 Carnival has also done some similar financings backed by its ships. 0:12:00.559 --> 0:12:03.240 So we definitely see that there is a price to play. 0:12:03.360 --> 0:12:06.280 But it seems like the idea on the investors side 0:12:06.360 --> 0:12:08.360 is that these companies are going to be around and 0:12:08.640 --> 0:12:11.679 come three five years whenever this debt matures, and that's 0:12:11.720 --> 0:12:14.040 why they're willing to lend. I mean, I can see 0:12:14.080 --> 0:12:16.440 the slots being worth something, but has it ever happened 0:12:16.480 --> 0:12:18.960 before that, For example, a new you know, an entity 0:12:19.000 --> 0:12:21.800 goes bust it it didn't make good on its in 0:12:22.679 --> 0:12:25.200 you know, and its promise to sort of pawn back. 0:12:25.280 --> 0:12:28.280 Basically it's logo, and then some other entity arrives twenty 0:12:28.360 --> 0:12:30.240 years later and takes the name or something. I mean, 0:12:30.320 --> 0:12:35.120 it could could have happened, Molly. I guess theoretically it's possible, 0:12:35.200 --> 0:12:38.880 suere though, I would think that whenever you are putting 0:12:39.000 --> 0:12:41.439 up these kinds of assets of collaterals, that there's a 0:12:41.960 --> 0:12:44.800 huge bedding process to make sure that the appraisal value 0:12:44.880 --> 0:12:47.160 is there and that it is something we should admit 0:12:47.280 --> 0:12:50.880 to borrow against. Yeah, it's so fascinating. It's a great story, Molly. 0:12:51.080 --> 0:12:54.120 I hope everybody listening to us reads it. Molly Smith's 0:12:54.160 --> 0:12:57.400 an American air borrows against Brandon one point two billion 0:12:57.480 --> 0:13:03.320 dollar Goldman deal. Let's take a look at the equity market, 0:13:03.360 --> 0:13:05.640 shall we. We had that, Let's just put it into context. 0:13:05.720 --> 0:13:09.920 We came into this pandemic, markets traded off about thirty 0:13:09.960 --> 0:13:13.719 four thirty five percent. We since retraced about that just 0:13:13.840 --> 0:13:16.800 extraordinary bounce back. The question is, as we head into 0:13:16.960 --> 0:13:19.880 and experience the second quarter earnings, where do we go 0:13:20.240 --> 0:13:23.319 from here? Tell us answer that we welcome Phil Orlando, 0:13:23.480 --> 0:13:27.120 chief equity market strategist ahead of client portfolio management at 0:13:27.160 --> 0:13:32.040 Federated Hermes. Uh, they are in uh sixty two sixty 0:13:32.120 --> 0:13:35.320 eight billion dollars in equities under management. Phil, thanks much 0:13:35.360 --> 0:13:38.080 for joining us once again. Here we're in I guess 0:13:38.160 --> 0:13:41.880 the second week of earnings here. Any takeaways you've had 0:13:41.960 --> 0:13:47.480 so far, the major takeaway is how much better the 0:13:47.520 --> 0:13:50.640 earnings have come out versus what we were expecting. So 0:13:51.400 --> 0:13:55.120 consensus going in was that earnings would be down about 0:13:55.280 --> 0:14:00.439 forty five year over year, UH, and that uh, you 0:14:00.520 --> 0:14:04.800 know or so of companies would would be withholding guidance. 0:14:05.200 --> 0:14:08.280 Now we're only about you know, fifteen or twenty of 0:14:08.360 --> 0:14:11.280 the way into the season, so it's still early. But 0:14:11.679 --> 0:14:15.800 the companies that have reported, three quarters of them uh 0:14:16.480 --> 0:14:21.160 beaten consensus earnings by about four which is the strongest 0:14:21.280 --> 0:14:25.680 beat we've seen in in ten years. So again, uh, 0:14:26.520 --> 0:14:28.920 there's still plenty of track left. But at least the 0:14:28.960 --> 0:14:32.160 companies that have reported early uh seem to be doing 0:14:32.200 --> 0:14:36.080 a lot better than than we had thought. How correct 0:14:36.280 --> 0:14:38.880 quote unquote our valuations right now? Pheel. There's a little 0:14:38.920 --> 0:14:41.440 talk in recent days about the you know, the top 0:14:41.640 --> 0:14:43.960 five companies in the SP five accounting for a fifth 0:14:44.000 --> 0:14:45.720 of the index. But if you actually look into it. 0:14:45.960 --> 0:14:50.280 Many of these companies you know have sold off. So 0:14:50.880 --> 0:14:54.640 there's no question that technology has been an important driver 0:14:55.080 --> 0:14:58.680 of UH this fifty percent rally we've seen from the 0:14:58.840 --> 0:15:02.320 bottom of the market on March twenty three. And there's 0:15:02.360 --> 0:15:11.000 no question that within technology, the fang stocks Facebook, Apple, Amazon, Netflix, Google, 0:15:11.440 --> 0:15:15.160 I'll throw Microsoft into that mix have have done heavy 0:15:15.280 --> 0:15:18.840 lifting in terms of technology UM and and this is 0:15:18.880 --> 0:15:21.520 a question that clients are asking a lot are in 0:15:21.640 --> 0:15:26.480 stocks expensive and on the basis of the reduction and 0:15:26.600 --> 0:15:29.480 earnings that we've put in place for this year UH 0:15:29.760 --> 0:15:32.840 SMP earrings last year or hiring sixty seven dollars. We 0:15:33.600 --> 0:15:36.800 initially had a hundred and eighty dollar estimate for this 0:15:37.080 --> 0:15:39.600 year at the beginning of the year, and then the 0:15:39.680 --> 0:15:43.720 pandemic hit. So we've taken our estimate down from a 0:15:43.800 --> 0:15:46.120 hundred and eighty dollars this year down a hundred and 0:15:46.160 --> 0:15:49.080 twenty five dollars. So on the basis of where stocks 0:15:49.120 --> 0:15:52.160 are now, on the basis of a HUD and earnings, 0:15:52.560 --> 0:15:55.720 you're trading at about twenty six times earnings, which which 0:15:55.840 --> 0:15:58.560 is very high by by any measure. But the point 0:15:58.640 --> 0:16:01.320 of issue that a lot of people don't understand is 0:16:01.360 --> 0:16:04.320 that because you're in the depth of the recession, and this, 0:16:04.640 --> 0:16:06.520 you know, the second quarter, this is the long the 0:16:06.600 --> 0:16:10.200 deepest recession we've seen in a really long time, it's 0:16:10.240 --> 0:16:13.880 inappropriate to value stocks off of the trough of the recession. 0:16:14.160 --> 0:16:16.640 You've got to look out to when you're gonna see 0:16:16.720 --> 0:16:20.240 some normalization in the economy, and in our mind that 0:16:20.480 --> 0:16:23.760 that's calendar twenty two. It will take us that long 0:16:24.640 --> 0:16:26.640 to get back to about a hundred and seventy five 0:16:26.680 --> 0:16:29.600 dollars in earnings. So if you're looking at today's stock 0:16:29.680 --> 0:16:33.040 prices on the basis of you know, normal earnings quote 0:16:33.080 --> 0:16:36.240 unquote in calendar twenty two, that you're looking at about 0:16:36.240 --> 0:16:40.080 an a team multiple, which is perfectly fine given the 0:16:40.160 --> 0:16:43.080 fact that treasury yields here at sixty basis points and 0:16:43.160 --> 0:16:47.760 the core PC inflation indicators at one. So it's really 0:16:47.840 --> 0:16:51.800 a function of your focus and your time horizon. Alright, Phil, 0:16:51.880 --> 0:16:54.600 So more near term here, I guess we're starting to 0:16:54.680 --> 0:16:57.320 hear a lot of conversation coming out of Washington, d C. 0:16:57.480 --> 0:17:00.440 We're getting to the short strokes here of potential fourth 0:17:00.680 --> 0:17:04.520 round of fiscal stimulus. How key is it that the 0:17:04.600 --> 0:17:07.919 stimulus package be, you know, as robust as maybe investors 0:17:07.960 --> 0:17:11.399 really hope for. Well. I think it's critically important that 0:17:11.960 --> 0:17:15.159 there is a package. I think it's important that it 0:17:16.119 --> 0:17:19.640 be done in a timely fashion, which is to suggest 0:17:19.720 --> 0:17:24.560 the window between this past Monday, when Congress returned from vacation, 0:17:25.119 --> 0:17:29.200 UH to August tenth, when Congress goes back on vacation. 0:17:29.520 --> 0:17:31.879 We've got to have a package in that window. We 0:17:32.240 --> 0:17:35.439 can't have Congress go on vacation and not get anything done. Now, 0:17:35.520 --> 0:17:37.680 the question is what's the size of the package, and 0:17:37.760 --> 0:17:41.199 what are the details going to be? And and Speaker 0:17:41.240 --> 0:17:44.600 Pelosi and the Democrats in the House have talked about 0:17:44.680 --> 0:17:47.800 something in the three trillion dollar neighborhood. I think the 0:17:47.880 --> 0:17:51.119 Republicans in the Senate have talked about something in the 0:17:51.160 --> 0:17:54.920 neighborhood and half that size. I'm less concerned about the 0:17:55.080 --> 0:17:59.200 size that I am. In terms of the components. I 0:17:59.280 --> 0:18:03.040 think we need to make sure that uh that there's 0:18:03.119 --> 0:18:07.280 more more money for hospitals and labs and testing. We've 0:18:07.320 --> 0:18:09.840 got to make sure that that cities and states are 0:18:09.920 --> 0:18:13.560 taken care of in terms of maintaining their their near 0:18:13.720 --> 0:18:16.439 term payrolls. We've got to make sure that businesses are 0:18:16.480 --> 0:18:19.160 taken care of. We've got to make sure that there's 0:18:19.160 --> 0:18:22.359 some liability protection for companies that have done the right 0:18:22.440 --> 0:18:26.760 thing in terms of keeping their customers and their employees safe. 0:18:27.080 --> 0:18:29.159 And we've got to get some money into the hands 0:18:29.320 --> 0:18:34.560 of of individuals. The sticking point up until now, and 0:18:34.640 --> 0:18:36.440 I don't know. I'm not in the room, so I 0:18:36.480 --> 0:18:39.399 don't know what the discussions are is how do we 0:18:39.600 --> 0:18:45.520 shift the incentivization from from staying home and and getting 0:18:45.600 --> 0:18:49.399 money as opposed to going back to work if your 0:18:49.520 --> 0:18:52.920 environment is safe and getting back on the payroll. And 0:18:53.000 --> 0:18:57.639 I think that that that six dollar extended unemployment bonus 0:18:57.720 --> 0:19:00.480 which is set to expire at the end of this month, 0:19:00.920 --> 0:19:04.880 that seems to be the key discussion point that's going on. Well, 0:19:04.960 --> 0:19:06.960 that's a long list of things that need to be 0:19:07.040 --> 0:19:08.879 in this package, and they have a week to do it, 0:19:09.040 --> 0:19:12.840 so I hope that some of them do actually materialize. 0:19:13.000 --> 0:19:15.320 Our thanks as always to fill Orlando for joining us 0:19:15.320 --> 0:19:19.600 from Federated Hermes Investors. It is time to check in 0:19:19.680 --> 0:19:23.680 with Bloomberg Opinion. Today we are looking at and Taylor's 0:19:23.760 --> 0:19:27.040 parent going bankrupt. Retailer's collapse has the potential to create 0:19:27.119 --> 0:19:30.679 more devastating ribble effects than were called by other COVID 0:19:31.000 --> 0:19:35.000 related watchouts that preceded it. According to Bloomberg Opinions, Sarah 0:19:35.040 --> 0:19:39.639 Holzac who joins US now Sarah, why is and Taylor 0:19:39.720 --> 0:19:43.280 and its parent more of a systemically important retailer or 0:19:43.320 --> 0:19:45.800 a group of retailers than, for example, a J. C. 0:19:45.960 --> 0:19:49.720 Penney or a Brooks Brothers or a J. Crew. Yeah, 0:19:49.760 --> 0:19:52.320 So as Tina is this quiet giant, and not in 0:19:52.480 --> 0:19:55.159 terms of sales, but in terms of how ubiquitous it 0:19:55.320 --> 0:19:59.399 is in US shopping center. So it has twenty hundred doors. 0:19:59.600 --> 0:20:02.760 Compare that to four hundred fifty stores for J. Crew 0:20:03.240 --> 0:20:05.919 or two hundred fifty stores for Brooks Brothers or eight 0:20:06.040 --> 0:20:09.400 hundred forty stores for J. C. Penney. It's just massive, 0:20:09.760 --> 0:20:12.080 And so all kinds of mall reefs have a lot 0:20:12.160 --> 0:20:15.520 of exposure to this company. Uh. It is the second 0:20:15.600 --> 0:20:19.359 largest tenant for Tanger Factory outlet centers, It's a top 0:20:19.440 --> 0:20:23.320 ten tenant for Brookfield and Acadia, and It's Simond property 0:20:23.400 --> 0:20:26.320 is a huge mall operator. Only Gap and L Brands 0:20:26.320 --> 0:20:30.119 are larger tenants than a Sena. So a Sena, I 0:20:30.119 --> 0:20:32.160 haven't eve heard about it until I read your column, Sarah, 0:20:32.200 --> 0:20:34.399 so full disclosure. So I learned a lot reading your 0:20:34.480 --> 0:20:36.840 column here. Uh. And how big they are in the 0:20:36.880 --> 0:20:40.640 world of retailing? How are they overall? How's their balance sheet? 0:20:40.680 --> 0:20:43.320 Has their capital structure? Is there a real risk here 0:20:44.040 --> 0:20:49.000 for these malls from this big group here? Yeah, so 0:20:49.400 --> 0:20:51.320 their balance sheet is not in great shape and that's 0:20:51.359 --> 0:20:54.280 been true since before COVID. Uh. This is a company 0:20:54.359 --> 0:20:58.000 that took on a significant amount of debt in when 0:20:58.040 --> 0:21:02.200 it bought an Taylor and Law and because of the 0:21:02.520 --> 0:21:05.600 business has been so unhealthy since then. It just hasn't 0:21:05.600 --> 0:21:08.640 been able to make much progress in bringing down that debt. 0:21:08.960 --> 0:21:11.359 So that was a key factor here and having to 0:21:11.600 --> 0:21:14.719 resort to bankruptcy. And it's just a company that's been 0:21:14.760 --> 0:21:17.720 really out of touch with consumer taste already. In the 0:21:17.800 --> 0:21:20.760 last couple of years, had to wind down its dress 0:21:20.800 --> 0:21:23.440 Barn chain, which was another huge chain with hundreds and 0:21:23.520 --> 0:21:26.600 hundreds of locations and it's sold it's more resist chain 0:21:27.320 --> 0:21:29.679 because again, it just couldn't find a way to generate 0:21:29.800 --> 0:21:33.440 consistently strong, comparable sales growth at these concepts because it 0:21:33.560 --> 0:21:36.720 was having so many fashion misses on Taylor and Taylor 0:21:36.800 --> 0:21:39.600 Loves Lane. Brian Lewin Gray, on and on and on. 0:21:39.760 --> 0:21:42.800