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Speaker 2: Official dirge banks to limit purchases of US government bonds
Speaker 2: and instructed those with high exposure to pare down their positions.
Speaker 2: The directive, though, does not apply to China stateholdings of
Speaker 2: US treasuries, and this move, Carol framed around diversifying market
Speaker 2: risk rather than anything to do with geopolitical maneuvering or
Speaker 2: a fundamental loss of confidence in US credit worthiness.
Speaker 3: Yeah, it makes me think about this idea in this
Speaker 3: argument that the US is increasingly becoming uninvestable. But let's
Speaker 3: see what Stuart Kaiser has to say about all this.
Speaker 3: He's head of equity trading strategy over at City. He
Speaker 3: joins us here in studio. Stuart, good to have you here,
Speaker 3: welcome back, thank you, good to be here. Hey, we
Speaker 3: were just talking with our Stuart Paul about Kevin Walsh's
Speaker 3: past support of a new accord between the Treasury and
Speaker 3: the Fed. This has to do with the balance sheet,
Speaker 3: which sounds like increased cooperation. We know in the past
Speaker 3: that Kevin Walsh has wanted the FED to shrink its
Speaker 3: balance sheet.
Speaker 4: So we're trying to make sense of what it is.
Speaker 3: And then we just talked about the Chinese regulators advising
Speaker 3: their financial institutions to rein in the holding of US
Speaker 3: government bonds. Are treasuries undergoing a reboot in your view
Speaker 3: on the world stage when it comes to you know,
Speaker 3: the United States being kind of a sure thing, if
Speaker 3: you will, in the financial world, And if so, what
Speaker 3: are the implications of that?
Speaker 5: I mean, look, I don't know if there's any real
Speaker 5: alternative for a lot of these countries to invest their.
Speaker 4: Reserves and size and the liquidity right hands down.
Speaker 5: And look, there is a risk out there in the
Speaker 5: long end of the government bond curves.
Speaker 6: I think that that's globally.
Speaker 5: We've seen that happen in the UK gilts, we've seen
Speaker 5: the German bones, We've seen it happen in Japanese JGB.
Speaker 5: So I don't think really concerned about the impact of
Speaker 5: fiscal spending on the long end of the YEO curve
Speaker 5: is unique to the US, nor is it something that's
Speaker 5: kind of snuck up on people.
Speaker 6: But it is a risk, and.
Speaker 5: If you look at what has triggered those kind of
Speaker 5: events in other countries, it's generally been things related to
Speaker 5: fiscal policy, tax cuts, things of that nature. So it's
Speaker 5: something that's on our radar, has probably been our radar
Speaker 5: since about last July when all of those thirty year
Speaker 5: bonds globally got above three percent. You know, as an
Speaker 5: equity guy, I'm going to let the bond markets tell me.
Speaker 6: You know, when and if this becomes a risk.
Speaker 4: But for now, the equity guys keep a watch on
Speaker 4: the bond marsh.
Speaker 5: We do, but I would say if an equity guy
Speaker 5: knows when the bond auction is, you're in trouble. But
Speaker 5: big picture, in this case, I think, you know, we
Speaker 5: have not seen the long end of the curve move significantly.
Speaker 5: We haven't seen bond volatility increased materially either, So for
Speaker 5: now people seem pretty comfortable with things.
Speaker 2: Well, speaking of the equity side of things, you were
Speaker 2: plenty busy last week with the rotation that we saw
Speaker 2: the volatility that we saw the moves down, then the
Speaker 2: moves up. A week that's sort of ended really close
Speaker 2: to where it started, but a lot happened in between,
Speaker 2: with some big moves lower. When it comes to companies
Speaker 2: like software. What is your view on where where to
Speaker 2: be optimistic right now and where to stay away from?
Speaker 5: Yeah, I mean so we're still pretty positive US equity
Speaker 5: risks in general. We've been pretty bullish on the cyclical
Speaker 5: parts of the of the equity market since the beginning
Speaker 5: of the year. I think if you took a little
Speaker 5: bit of a step back, though, you'd see that this
Speaker 5: quote unquote rotation sort of add of tech and growth
Speaker 5: and into value and cyclicals actually started back in November.
Speaker 5: It's not a new phenomenon. What happened last week is
Speaker 5: the moves accelerated and it got quite volatile, and I
Speaker 5: think that impacted the way that folks matage risk. And
Speaker 5: it's also, to be honest with you, a pretty simple
Speaker 5: math question, right. You know, if you take the mag
Speaker 5: seven plus broadcomm and a few others, you pretty quickly
Speaker 5: get close to you about fifty percent of S and
Speaker 5: P market cap. So when you're selling those stocks, you
Speaker 5: have to find a home for them, and I think
Speaker 5: just the absolute size of the moves is really what
Speaker 5: concerned people last week rather than a change to like
Speaker 5: the underlying US ex The outlook, I mean, US GDP
Speaker 5: according to the Fed is tracking kind of mid four
Speaker 5: percent range. Our Economic Surprise Index is kind of off
Speaker 5: the chart. Earnings were solid, You're expecting some good tax
Speaker 5: refunds coming up. So the sort of fundamental underpaintings of
Speaker 5: the market look pretty good. What you're going through with
Speaker 5: some indigestion after two years of buying tech and growth stocks,
Speaker 5: you're now kind of repositioning not whether you want to
Speaker 5: own US equities, but how and that process has been
Speaker 5: a little bumpy at least.
Speaker 1: Well.
Speaker 3: We talked too about the overperformance or performance of small
Speaker 3: caps last week. They're up about two point two percent,
Speaker 3: certainly outperforming the large cap in disease. The other thing is,
Speaker 3: you know, if you look at the equal weight, S
Speaker 3: and P is easily outperforming the S and P five
Speaker 3: hundred and five and a half percent year to date
Speaker 3: for the equal weight to just under two percent for
Speaker 3: the widely quoted S and P five hundred. So again
Speaker 3: that plays into what you're saying that we're seeing money
Speaker 3: go elsewhere, but what's to stop the money going back
Speaker 3: to big cap tech or those hyperscalers, because it feels
Speaker 3: like the last two or three years, everyone's like no, no, no,
Speaker 3: time to diversify, and yet that's where the overperformance has
Speaker 3: been for outperformance.
Speaker 5: I mean, I think back in sort of October and
Speaker 5: November earning season, you started to see a little bit
Speaker 5: of a change in this reaction function. Meta back then
Speaker 5: was the key one where they announced this very large
Speaker 5: capex spending program and the stock sold off, and that
Speaker 5: was probably the first time in the last couple of
Speaker 5: years where a company had been punished for spending more
Speaker 5: on AI and look.
Speaker 6: Low and behold. This quarter we saw that repeat with
Speaker 6: a number of companies.
Speaker 3: So Meta did well right off of their earnings because
Speaker 3: they're showing the you know, the ROI on on this
Speaker 3: AI spend.
Speaker 5: They are, And that's that's the key, right This capex
Speaker 5: spending is undergoing an auditor or some other form of
Speaker 5: very invasive invasive examination. And but you know Microsoft and Amazon,
Speaker 5: we're both kind of punished for more capex spending this quarter.
Speaker 5: So I think what you're really seeing is within the
Speaker 5: tech trade the shift is moved kind of away from
Speaker 5: the spenders and to the beneficiarias of that spending. We
Speaker 5: like power generation and the AI data center build out
Speaker 5: as the way to express that. And then more broadly,
Speaker 5: to your point, you're also getting a little bit of
Speaker 5: a rotation out of growth into these cyclicals. So again,
Speaker 5: these things aren't necessarily negative for the market collectively, but
Speaker 5: they do cause a lot of pain in some positions
Speaker 5: that people have had in their portfolios for twenty four
Speaker 5: months minimum.
Speaker 2: Alphabet embarks on a global bond spree to fund records spending,
Speaker 2: borrowing far and wide to finance unprecedented spending plan on
Speaker 2: its AI ambitions. Twenty billion dollars a US dollar bond
Speaker 2: offering on Monday, more than fifteen billion dollars than initially expected.
Speaker 2: Is this a signal of something? I mean, it's the
Speaker 2: same thing you're just talking about.
Speaker 6: You know, it's a signal that they have a lot
Speaker 6: of spending to do. I think, you know, you must
Speaker 6: send a lot of money. They do.
Speaker 5: But you know, Amazon though, looks like free, negative free
Speaker 5: cash full after their announcement, So I think what folks
Speaker 5: are doing is you can generally carve out the mag
Speaker 5: seven and say their balance sheets are so big and
Speaker 5: strong that they can sustain their spending.
Speaker 6: They're all double A rated or better.
Speaker 5: You take a step, even a slight step down in
Speaker 5: credit rating to let's say an oracle that trip will
Speaker 5: be and that examination is a little more harsh.
Speaker 6: So I think what you're from Google.
Speaker 5: Frankly, Look, they're viewed us the current winner in the
Speaker 5: AI trade. Now clearly those winners are changing quarter to quarter,
Speaker 5: So I think folks are maybe a little more comfortable
Speaker 5: with them spending. Just to your point, they have the ROI,
Speaker 5: they currently have the best AI model. If you can
Speaker 5: demonstrate acceptable return on the investment, the markets are okay
Speaker 5: with this.
Speaker 6: If it looks like it's going to be roe.
Speaker 5: Destructive, then right now you're getting punished for that a
Speaker 5: little bit. And I wouldn't expect that to change as
Speaker 5: this year goes on. I mean there's a higher bar
Speaker 5: right now for what you're going to spend this money on.
Speaker 2: Stay with us more from Bloomberg Business Week Daily coming
Speaker 2: up after this.
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Speaker 2: With the rundown on the latest headlines and sizing up
Speaker 2: the competitive landscape on GLP one's our guru, Bloomberg News
Speaker 2: Health reporter Madison large Fazacy in the studio. I just
Speaker 2: want to start with the lawsuit because I was pretty
Speaker 2: surprised last week when we got the news that they
Speaker 2: were going to do this, because I thought there was
Speaker 2: no more It wasn't legally allowed by the FDA to compound,
Speaker 2: for companies to compound medicine anymore, well, not any medicine,
Speaker 2: but GLP one is because there's no longer a shortage.
Speaker 2: Wasn't that the loophole that these companies were using exactly?
Speaker 7: So it was a big, I mean, kind of a
Speaker 7: risky bet that Hyms was taking that the FDA just
Speaker 7: wouldn't do anything about it. But that is sort of
Speaker 7: what we've seen happen the last couple of years since
Speaker 7: the shortage ended. There's been really very little action from
Speaker 7: the FDA in terms of cracking down on this proliferation
Speaker 7: of compounded GLP one drugs, and so Hyms has continued
Speaker 7: doing it.
Speaker 8: A lot of other companies have continued.
Speaker 4: So they're breaking the law by doing it, that is
Speaker 4: the assumption.
Speaker 7: Yes, they but the problem is that the FDA really
Speaker 7: hasn't said much of anything, so it was kind of
Speaker 7: up to these companies to interpret the law themselves. So
Speaker 7: in this gray area they've continued doing it. And that's
Speaker 7: part of the problem is that it was a little
Speaker 7: bit unclear, at least to maybe the general public or
Speaker 7: to some people like what the FDA was really going
Speaker 7: to do, and so they've just continued to do it.
Speaker 7: Some companies have pulled back, like Row for example, stopped
Speaker 7: compounding after the shortage has ended, and Hyms has kept
Speaker 7: doing it. And so far, I mean until now, there
Speaker 7: has been really little action either from Novo from the FDA,
Speaker 7: And finally, I think both of them said enough is enough,
Speaker 7: all right.
Speaker 4: So NOVA files this lawsuit. All right, So I guess
Speaker 4: it's going to play out in the court. So there's
Speaker 4: going to be negotiating or what.
Speaker 8: We don't really know.
Speaker 3: The FDA have to come in here and make a
Speaker 3: ruling to like figure out what the real ruler law is.
Speaker 8: Right.
Speaker 7: So the NOVA is suing on the grounds of patent infringement,
Speaker 7: which is something we haven't seen before. Nova and Lily
Speaker 7: have both filed lawsuits against compounding pharmacies, telehealth companies, medspots
Speaker 7: that are selling these knockoff versions of the drugs, but
Speaker 7: they haven't gone after anyone for patent infringement yet. So
Speaker 7: this is actually the drug semaglue tide, which is the
Speaker 7: active ingredient in both Ozembic and wagov Nova saying that
Speaker 7: Hams is violating that patent in the United States.
Speaker 8: So that's a big deal. That's a big.
Speaker 7: Escalation, and it sort of shows the more aggressive strategy
Speaker 7: that Novo's taking because they really are under a lot
Speaker 7: of pressure right now.
Speaker 2: Why are they under pressure? And Eli Lilly is not
Speaker 2: as under much pressure.
Speaker 8: As much pressure, I mean Novo.
Speaker 2: So we're gonna talk about some deal news a little later,
Speaker 2: but yeah.
Speaker 7: Yeah, Novo, they've had different problems even though the market,
Speaker 7: you know, they're the only two players really in this market.
Speaker 7: Novo has had more difficulty because one, their drugs are
Speaker 7: a little bit older, meaning that they do come off
Speaker 7: of patent outside of the US sooner, whereas Lily has
Speaker 7: another decade of patent life on its drugs. Nova also
Speaker 7: has had more difficulties with these compounders because it did
Speaker 7: not get a handle on this supply shortage as soon
Speaker 7: as Lily did. So both companies drugs were in short supply.
Speaker 7: Novo had more issues, couldn't get a handle on it.
Speaker 7: Lily got a handle on it more quickly and was
Speaker 7: more aggressive really right off the bat, going after these compounders,
Speaker 7: whereas sort of I mean they're Danish, they're a little
Speaker 7: bit more less aggressive I think than an American pharmaceutical company,
Speaker 7: but they've had to change that recently. And then in
Speaker 7: terms of next generation drugs, their pipeline is not quite
Speaker 7: as exciting as Lily's, and so that doesn't set them
Speaker 7: up for the future quite as well.
Speaker 3: I am stuck that we're already talking about, like maybe
Speaker 3: a move towards generics or their patents coming up. When
Speaker 3: did they start, I'm like, I feel like it was
Speaker 3: just a few years.
Speaker 8: Ago, right, I mean, that's the thing.
Speaker 7: So Novo's drug Ozempic was approved I think in twenty
Speaker 7: seventeen twenty launched in twenty eighteen, and so that's the
Speaker 7: same drug technically as wov Wigov's, just a higher dose
Speaker 7: version of that. So it's that was the thing. It
Speaker 7: didn't really come onto the scene. People didn't start talking
Speaker 7: about it until a couple of years ago. But really
Speaker 7: the drug has been around for a while, and so
Speaker 7: the clock has been ticking in that time.
Speaker 2: So we talk about the Eli Lilly deal. Yeah, okay,
Speaker 2: so this is not a non GLP one deal, which
Speaker 2: kind of speaks to the idea of these companies diversifying.
Speaker 2: The company agreed to buy the closely held US biotech
Speaker 2: Orna Therapeutic up to two point four billion dollars in cash,
Speaker 2: second deal in as many days, as the country looked
Speaker 2: to expand its pipeline beyond zet bound. What does this do?
Speaker 8: I mean, this drug that found no like this.
Speaker 2: Like it kind of speaks to this idea of going beyond,
Speaker 2: of going beyond this industry because I kind of.
Speaker 4: Thought they were going to be living off this a
Speaker 4: long time.
Speaker 2: But I guess that's why we're not running a drug company.
Speaker 4: That's exactly why we're not.
Speaker 2: Because I had the same reaction as you did. I thought, like, Okay,
Speaker 2: there they got it.
Speaker 3: They're going to tweak it, they're going to make a pill,
Speaker 3: they're going to just kind of keep going.
Speaker 7: Well, Lily has learned the hard way that resting on
Speaker 7: your laurels, which is sort of the problem that Novo's
Speaker 7: facing right now, doesn't work. I mean, drug companies are
Speaker 7: always should always be looking toward the next big thing
Speaker 7: because patents expire, and that's the problem with you know,
Speaker 7: the drug industries. You always have to be thinking about
Speaker 7: the next thing. Lily is the one that brought Prozac
Speaker 7: to the market back in the nineteen nineties. That was
Speaker 7: a massive drug and for a while Lily was in
Speaker 7: a similar position where it was riding high on the
Speaker 7: Prozac fortune. And then after that they really were so
Speaker 7: ultra focused on like, we're going to be a company
Speaker 7: that develops neuropsychiatric drugs and for psychiatric conditions, whatever we're
Speaker 7: going this is what we're going to do. And then
Speaker 7: they didn't have a second act to follow it up.
Speaker 7: And so I've talked to the executives at Lily who
Speaker 7: have said they're really being purposeful about we have to
Speaker 7: be thinking outside of just obesity. They're looking at immunology, cancer,
Speaker 7: genetic medicines, a third of their portfolio as gene therapies now,
Speaker 7: so they're trying to they're still extremely focused on obesity
Speaker 7: and they have. They're testing drugs for basically like everything
Speaker 7: in the obesity landscape, you know, from five percent weight
Speaker 7: loss to thirty percent weight loss. They want to have
Speaker 7: something for everyone. But they're also looking outside of obesity,
Speaker 7: and that's a really important part of their strategy.
Speaker 3: Can I ask you something going back to because Nova's
Speaker 3: going to come off patent sooner, so should we assume
Speaker 3: that so then there'll be all these copycats that folks
Speaker 3: that maybe were taking zep bound.
Speaker 4: Or something like we've talked with you, that they're not
Speaker 4: all the.
Speaker 3: Same, that they're just going to run to the generics
Speaker 3: because they'll be cheaper, or they're not going to be
Speaker 3: able to medically because things are.
Speaker 7: Different, and say they hypothetically would be able to I'm
Speaker 7: consulting with their doctor. If their doctors like, yeah, you
Speaker 7: know generic semaglue tide is fine for you.
Speaker 8: Sure that's great.
Speaker 7: If that's the most affordable option, that's what your insurance covers.
Speaker 8: But we also have this other side of.
Speaker 7: This industry where there's a huge cash pay component, and
Speaker 7: the drug makers Novae Lily have both worked with the
Speaker 7: Trump administration to bring down prices for patients in Medicare
Speaker 7: and also cash pay prices. I think it's something like
Speaker 7: a third of patients in this market in general right
Speaker 7: now in the US at least are cash pay patients,
Speaker 7: so they're not going through insurance and they're paying these
Speaker 7: lower discounted prices that the drug makers offer through direct
Speaker 7: to consumer websites, and so the prices have come down much,
Speaker 7: much faster than we would normally see in such an
Speaker 7: ultracompetitive market usually that it doesn't happen this way.
Speaker 8: So patients maybe are already.
Speaker 7: Used to paying two hundred dollars a month for their
Speaker 7: zep bound and they don't want to switch because that's
Speaker 7: what works for them. Even though there's a cheaper option
Speaker 7: on the market. It's sort of a question mark as
Speaker 7: to what happens next.
Speaker 2: So we're talking about this in the context of the
Speaker 2: way that Americans are looking for ways to lose weight.
Speaker 2: We'd be remiss if we didn't talk about some of
Speaker 2: the messaging in the Super Bowl last night. Mike Tyson
Speaker 2: ad from It was like a Maha ye ad out
Speaker 2: there talking about how processed food kills and he's eating
Speaker 2: an apple at the end, and he talks about his
Speaker 2: own struggle his sister's struggle. Is there any I mean,
Speaker 2: I know it's kind of a crazy question, but is
Speaker 2: there any chance that the messaging with that starts to
Speaker 2: work and it attacks the problem that some argue is
Speaker 2: where it starts, right, this idea that we're not necessarily
Speaker 2: eating healthy and therefore there won't be as much of
Speaker 2: a demand for these trucks moving forward.
Speaker 7: I mean, it would be great if I think, like
Speaker 7: everyone hopes, even Lilyanovo say that they hope that people
Speaker 7: will eat healthier or move more, like they say that
Speaker 7: that's an important part of these drugs too. But I
Speaker 7: think it's hard because it does their obesity is a disease.
Speaker 7: And that's the message that these drug makers are also
Speaker 7: putting out, is that, like, this is a thing that
Speaker 7: for some people, eating healthy doesn't fix. And even if
Speaker 7: you eat healthy, exercise whatever, for some people that just doesn't.
Speaker 7: They have a certain genetic makeup or it's whatever, like
Speaker 7: they can't lose weight or it's really really difficult for
Speaker 7: them to lose weight. So I think it's like not
Speaker 7: an either or situation. Both things should be happening, and
Speaker 7: hopefully both things will help bring down the obesity rates
Speaker 7: in this country.
Speaker 3: But I wanted to ask you because I feel like
Speaker 3: when we started talking with you that we you know,
Speaker 3: are like, this is the drug that's.
Speaker 4: Going to solve everything. Can these drug makers get indigital
Speaker 4: indications for the medications that expands their patents or something like?
Speaker 4: Does that help?
Speaker 7: I mean it helps with getting more insurance companies to
Speaker 7: cover it so to pay for it. There are some
Speaker 7: things like if you have a different formulation for the drug,
Speaker 7: like those types of things. Sometimes pediatric indications will help
Speaker 7: give you a couple more years of patent life. But
Speaker 7: at the same time, it's like it's always the clock
Speaker 7: is always ticking. It's not going to add much at
Speaker 7: this point, and you have patents at least for some
Speaker 7: glue tyde for azempic, and we'll go be falling sort
Speaker 7: of all over the world within the next year, and
Speaker 7: so you will have those generic generics out there in
Speaker 7: the world, even if the US patent hasn't expired yet.
Speaker 7: It's kind of only a matter of time before we
Speaker 7: get there.
Speaker 3: I almost feel sorry, like I know it like the
Speaker 3: R and D that goes into this stuff, Like you
Speaker 3: kind of understand that argument. Having a brother that used
Speaker 3: to be in formal, like we used to talk about
Speaker 3: this all the time, but you.
Speaker 8: Know, right, and that's what I think.
Speaker 7: They're also like they've really had a hard time with
Speaker 7: the compounding because it's sort of circumvented that a little bit.
Speaker 1: You're listening to the Bloomberg Business Week Daily Podcast. Catch
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Speaker 2: I want to bring in Joy Swang, senior client portfolio
Speaker 2: manager at American Century Investments. The firm has about three hundred
Speaker 2: fifteen billion dollars in assets under management. She's back here
Speaker 2: in our Bloomberg Interactive Broker's studio. We haven't had a
Speaker 2: chance to speak to you since Kevin Walsh was announced
Speaker 2: as President Trump's pick to chair the FED. Perhaps he
Speaker 2: gets confirmed, perhaps he does replace j Powell. How does
Speaker 2: that change her outlook for the Central Bank?
Speaker 9: It doesn't really change her outlook because we did believe
Speaker 9: that it probably would have been one of the Kevins,
Speaker 9: and you know the other one was kind of eliminated
Speaker 9: a few weeks ago, so we did have a strong
Speaker 9: feeling that it would be Kevin Walsh. And the good
Speaker 9: thing is is, unlike some of the other candidates, he
Speaker 9: does have a pretty long public history of his views
Speaker 9: and things like that. So if we anticipate that he
Speaker 9: continues to follow some of those pads with maybe a
Speaker 9: little bit more of a dubbish bias, given.
Speaker 2: His history doesn't necessarily align with what he said over
Speaker 2: the last couple of years.
Speaker 9: Yes, but I do think that he is a pragmatic
Speaker 9: banker right. He has experience on both sides, so I
Speaker 9: do think that he will understand how the FED does
Speaker 9: have a pretty narrow, tight rope to walk. So we
Speaker 9: do believe that with him being confirmed as FED chair,
Speaker 9: he is likely to cause yield curve steepening. So we
Speaker 9: are cautious about being very long in the yield curve.
Speaker 9: But at the same time, I think the last time
Speaker 9: I was here, we were talking about being on the
Speaker 9: short end. Given that, we do think even with Kevin
Speaker 9: Walsh being confirmed, there probably won't be as many cuts
Speaker 9: as people are thinking.
Speaker 3: I think what was interesting is we've been talking about
Speaker 3: this most red story on the Bloomberg about Kevin Walsh
Speaker 3: and maybe kind of redefining the accord between the Fed
Speaker 3: and the Treasury, and that has been a little bit
Speaker 3: unsettling to the bond But what's interesting is it would
Speaker 3: basically involve, you know, the FED balance sheet and maybe
Speaker 3: being kind of a buyer when the Treasury needed the
Speaker 3: Fed to do that. At the same time, Kevin Warsh
Speaker 3: has been out there, as you say, there's a history
Speaker 3: where he has looked to reduce the FED balance sheet.
Speaker 3: So like, which is it, how do you read between
Speaker 3: the tea leaves about really what kind of a FED
Speaker 3: chair he ultimately will be yes.
Speaker 9: And also we have to put forth the fact that
Speaker 9: you know, since eight the Fed's balance sheet has grown many,
Speaker 9: many times, right, So it's not even just cutting back
Speaker 9: a little bit to pre COVID. Even going into COVID,
Speaker 9: the balance sheet was very bloated, right. So that's why
Speaker 9: it's kind of like I can see his point where
Speaker 9: previously he said some things, now he's saying something else.
Speaker 9: It kind of makes sense. So I think it's to
Speaker 9: be determined exactly how it's going to play out, But overall,
Speaker 9: I think it is still positive for yields. They should
Speaker 9: remain higher, and so from the investor's perspective, it's great
Speaker 9: time to buy bonds.
Speaker 4: Higher because inflationary pressures.
Speaker 9: So inflationary pressures, we do think that inflation, while it's down,
Speaker 9: you know, there's a chance it could remain closer to
Speaker 9: three than two. We'll see how January CPI comes out.
Speaker 9: Historically that's been a pot month, so you know, we'll
Speaker 9: see how that plays out. But we do think yields
Speaker 9: are going to stay higher for longer. Is it?
Speaker 3: Also some of it has to do with I feel
Speaker 3: like people keep coming in and talking about the US
Speaker 3: economy doing okay, and that with some of the stimulus
Speaker 3: that's coming as a result of President Trump's the tax
Speaker 3: cuts and so on and so forth, and that's just
Speaker 3: going to provide more stimulus into the economy, which also
Speaker 3: means probably some inflationary pressures. But an economy that's doing okay.
Speaker 9: Yes, it's actually shockingly okay. It's better than okay. In fact,
Speaker 9: it's pretty strong.
Speaker 4: It's not we expected probably a year ago.
Speaker 9: It is not so this time last year, American Center
Speaker 9: was definitely thinking more of a slowdown. Now we are
Speaker 9: sort of on the more positive side. We see, like
Speaker 9: you pointed out a lot of tailwinds for this reacceleration story. Yeah,
Speaker 9: I mean, especially you know it's tax season soon. I
Speaker 9: think a lot of people are starting to calculate how
Speaker 9: big of a refund they're getting. Yeah. I don't think
Speaker 9: I'm in that camp, but some people are. So those
Speaker 9: tax effects from one big, beautiful bill should start to
Speaker 9: flow through, and towards the second half of this year,
Speaker 9: I think there will be stronger growth.
Speaker 2: How do you look at companies such as Alphabet today
Speaker 2: embarking on this global bond spree of fund records spending,
Speaker 2: So Alphabet borrowing far and wide to finance the unprecedented
Speaker 2: spending planned to its AI ambitions. Set to raise twenty
Speaker 2: billion dollars from a US bond offering on Monday, more
Speaker 2: than fifteen billion dollars initially expected. It's also a rare
Speaker 2: sale of one hundred year bonds. It's the first time
Speaker 2: a tech company has tried such an offering in the
Speaker 2: dot com since the dot com frenzy at the late
Speaker 2: nineteen nineties. How do you look at that?
Speaker 9: I think that speaks to the fact that companies also
Speaker 9: see yields possibly moving up right because they want a
Speaker 9: lot They're issuing and coming to the market now because
Speaker 9: they anticipate in a year, two three years it'll be higher.
Speaker 9: And one thing that we're thinking about is certainly Alphabet
Speaker 9: has the business and the cash flows to repay these bonds. However,
Speaker 9: we have seen a lot of AI related names making
Speaker 9: loans in the COLO market. In the private debt market.
Speaker 9: A lot of those loans are going to technology companies,
Speaker 9: which may not be a solid.
Speaker 2: I don't know, maybe you can convince me just twenty
Speaker 2: billion dollars it's it's a lot of money, but if
Speaker 2: they're spending last week, Alfabet said it's planning as much
Speaker 2: as eight one hundred and eighty five billion dollars on
Speaker 2: capex this year, So that's like, it doesn't seem a
Speaker 2: small part.
Speaker 3: Well, it just shows that they're using the debt market
Speaker 3: to do a.
Speaker 4: Little bit of it.
Speaker 9: Kind of like during COVID when yields were basically at zero,
Speaker 9: Apple went to the bond market borrowed. They had plenty
Speaker 9: of cash on hand, but when the market is going
Speaker 9: to rearge it, you might as well borrow.
Speaker 3: Well, my money costs so little, right, Like, why not
Speaker 3: why not tap into what do you think is the
Speaker 3: best play in the fixed income world right now? And
Speaker 3: I am also curious. We were talking before we got going,
Speaker 3: you're traveling. I am curious what clients and investors are
Speaker 3: kind of saying. Here's what I want to know about
Speaker 3: right now.
Speaker 9: A lot of investors are being opportunistic. So while I
Speaker 9: think passive investing has made significant headwinds in the fixed
Speaker 9: income space, a lot of investors are seeing historically tight
Speaker 9: spreads across investment grade corporates, highyield corporates, securitize credit. It's
Speaker 9: all very tight. So active managers really have the edge here.
Speaker 9: We're thinking this year you're not going to see a
Speaker 9: big credit event where you're going to have this obvious
Speaker 9: opportunity to add lots of risk. So we're being strategic
Speaker 9: and when you get little blips, we have a shopping
Speaker 9: list ready to go. So our portfolio managers are being active.
Speaker 9: They're being opportunistic at these small spread widenings because, like
Speaker 9: we said, over the course of this year, I think
Speaker 9: that will be rewarded.
Speaker 3: So are they largely in a wait and see mode
Speaker 3: at this point, ready to act if things start to.
Speaker 4: Targets scenario.
Speaker 9: But we still favor higher quality corporates over high yields.
Speaker 9: But strategically adding to some of the high yield names
Speaker 9: SaaS names.
Speaker 4: Do you like no, I mean the SaaS company goes
Speaker 4: to the debt market. Are you a little bit more suspect?
Speaker 9: Yes, yes, for sure. No, it doesn't have the same effect.
Speaker 9: We haven't seen the same spread windening is on the
Speaker 9: equity side. But of course, again, there are tech names
Speaker 9: we feel comfortable with and there are some that we don't.
Speaker 2: Stay with us. More from Bloomberg Business Week Daily coming
Speaker 2: up after this.
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Speaker 2: I'm looking at shares of Sally Beauty. They climbed as
Speaker 2: much as nine point three percent earlier in the session,
Speaker 2: close hire by five point two percent after the company
Speaker 2: reported it justin internings per share net sales for the
Speaker 2: first quarter that beat the average analyst estimate. Gross margin
Speaker 2: came into fifty one point two percent. That's what analysts
Speaker 2: we're expecting. We got with us. Denise Palonis, president and
Speaker 2: CEO of Sally Beauty Holdings, it's the one point seven
Speaker 2: billion dollar market cap company. She joins us from Plain Out, Texas. Denise,
Speaker 2: Welcome back, Welcome back. We spoke to you a few
Speaker 2: months ago. Just remind everybody professional beauty supplies products for
Speaker 2: hair color, hair care, skincare, nails and more. You've got
Speaker 2: a team that does direct sales. You've got stores to Armstrong,
Speaker 2: McCall cosmoprof. We like talking to you because you've got
Speaker 2: a really good idea of what this economy looks like
Speaker 2: in many parts of the country. Just give us what
Speaker 2: you're seeing.
Speaker 10: Yeah, thanks for having me back on you know, first
Speaker 10: of all, I think we're seeing a very resilient customer base.
Speaker 10: Right for all the trials and tribulations, they are still
Speaker 10: spending and in our world, they're buying a lot of
Speaker 10: hair color. Hair color was up eight percent for us
Speaker 10: in our Sally business, So our retail business in the
Speaker 10: quarter and campaigns like save some money, Skip the salon
Speaker 10: are really resonating with customers out there who are trying
Speaker 10: to stretch their dollar.
Speaker 4: That's interesting.
Speaker 3: So you said revenue was up because there's more being purchased,
Speaker 3: or because the cost is higher, or is it a
Speaker 3: little bit of both.
Speaker 10: Now on the color front, it's actually more being purchased.
Speaker 10: Units are up. It's not an au R challenge, it's
Speaker 10: more people are out there and engaging. We see growth
Speaker 10: in vivid colors as well as great coverage and a
Speaker 10: lot of people figuring out that they can DIY it
Speaker 10: themselves and save some money versus the salon.
Speaker 3: I am curious does weather matter for you guys, Like
Speaker 3: do people then order stuff and say I'm just going
Speaker 3: to do stuff at home.
Speaker 10: Yeah, we don't get We don't get a lot of
Speaker 10: help from the weather. We get some hurt from the
Speaker 10: weather when our stores are closed, so you know, we're
Speaker 10: not one of those big benefitters. But we do see
Speaker 10: a little bit of mix of maybe people getting ready
Speaker 10: to do their treatments while they're stuck at home.
Speaker 2: Can you explain the proprietary brands you have and sort
Speaker 2: of the relationship that you have with the companies that
Speaker 2: that make the other products that you sell, because you
Speaker 2: have this interesting model where you do you have your
Speaker 2: own brands Ion, bondbar Strawberry, Leopard and others, but then
Speaker 2: you also sell some of the other name brands that
Speaker 2: people recognize in your stores. Like what's the relationship there
Speaker 2: and what are you seeing with what people are buying?
Speaker 2: Are they trading up? Are they trading down? You say
Speaker 2: they're resilient, but talk to us about like actually what
Speaker 2: they're buying.
Speaker 10: Yeah, On the own brands front, about thirty eight percent
Speaker 10: of our business is our own proprietary brands. You just
Speaker 10: listed a few of them, and so then the rest
Speaker 10: of our branded business on our retail side certainly comes
Speaker 10: from great partners like Wela and others. It's a good relationship.
Speaker 5: You know.
Speaker 10: We play in a specific niche in space where we
Speaker 10: can bring value and give people a convenient set of
Speaker 10: solutions with some great products, great prices. But we grow
Speaker 10: our with our vendor partners as well, so they when
Speaker 10: they bring great innovation, we love getting behind that and
Speaker 10: growing that for us. The benefit with our own brands,
Speaker 10: it's a nice gross margin business for us that comes
Speaker 10: through and our stores really know those products well to
Speaker 10: sell them to our customer and offer value. You know,
Speaker 10: we see customers really sticking with most of their routines.
Speaker 10: The one place where we've seen them trading down a
Speaker 10: bit is shampoo and conditioner. When you're that lower middle
Speaker 10: income consumer, you might not trade out hair color. It's
Speaker 10: really important to you, but you might trade out a
Speaker 10: little bit more of the basics where you can fill
Speaker 10: in with other things.
Speaker 3: Where's the growth in the business the most, And I'm
Speaker 3: just curious because you play into the commercial side, you
Speaker 3: have your stores. I'm just I'm trying to understand exactly
Speaker 3: where the growth is.
Speaker 10: Yeah, the growth is in the retail business right now.
Speaker 10: Our pro business that we operate is a great, steady
Speaker 10: eddy business, great business, great profitability. Also saw nice growth
Speaker 10: in color, but the outsize performance really was with our
Speaker 10: Sally US business. It grew one point three percent in
Speaker 10: the quarter, which might not sound like a lot, but
Speaker 10: we did go through a government shutdown that wasn't the
Speaker 10: easiest time period for some of our customers. So that
Speaker 10: growth in Sally is we see it. We also entered
Speaker 10: the fragrance category in Sally in one thousand stores last quarter.
Speaker 10: Our e commerce business at Sally is up twenty percent
Speaker 10: in the quarter. And then we continue to grow on
Speaker 10: programs like licensed Colorist on demand, which is really a
Speaker 10: free one on one consultation to get the right color
Speaker 10: for your hair. And we saw color customer count up
Speaker 10: three percent in the quarter. So lots of great strength
Speaker 10: on that sali retail side.
Speaker 3: So the probe is is just like a nice steady Eddy, right,
Speaker 3: And you just like, what percentage is that of.
Speaker 4: The business you said outside is the retail correct?
Speaker 10: Yeah, so the pro business is about forty five percent
Speaker 10: of our business, Steady Eddy being a nice single digit grower, good,
Speaker 10: good profitability, a lot of innovation there. So our stylists
Speaker 10: really love hair care innovation in particular. So we continue
Speaker 10: to see growth with brands like K eighteen as well
Speaker 10: as strongholds like Moroccan Oil and color Wow, where that
Speaker 10: set of product and portfolio and newness is really important
Speaker 10: to them.
Speaker 2: But again, you don't own Moroccan Oil. You you team up,
Speaker 2: you know, you distribute or or sell their products.
Speaker 10: We do on the pro side of our business. It's
Speaker 10: one hundred percent of vendors supported. That own brand is
Speaker 10: only on the retail side of our business.
Speaker 3: What it's interesting is like color Wow, where full transparency,
Speaker 3: it's something we use in our makeup room. Like but
Speaker 3: you know, and it's certainly something I've used and I
Speaker 3: feel like a newer product. But these products are constantly
Speaker 3: changing and I see it, like I said, in our makeup,
Speaker 3: hair room like things just kind of all right, we're
Speaker 3: in this, and we're that for a couple of months
Speaker 3: or something, then something new comes out. You know how
Speaker 3: competitive this landscape is. I mean the business too though
Speaker 3: in retail is having a relationship with your suppliers, But
Speaker 3: are you constantly having to kind of flip and change
Speaker 3: and just go kind of where the consumer's going.
Speaker 10: We always are following the consumer. And the great news
Speaker 10: is many of our suppliers are the suppliers who keep
Speaker 10: bringing out new innovations. So Shortstof, one of our great
Speaker 10: color suppliers on the pro sides, has fantastic product lineup
Speaker 10: has been growing like crazy with us, and we're really
Speaker 10: excited to keep that partnership going. We certainly introduce new
Speaker 10: brands and new partners, whether that be through a color
Speaker 10: Wow or a Moroccan oil or K eighteen and the
Speaker 10: parent companies behind all of those. So it is a
Speaker 10: constant chasing of innovation, just like you think across the
Speaker 10: cosmetic space that exists in hair as well. And the
Speaker 10: key is maintaining great partnerships. It's win win relationships. When
Speaker 10: we grow, they grow, and all of that translates into
Speaker 10: good business.
Speaker 2: You know, looking at the fagopage on the Bloomberg terminal
Speaker 2: where I can see a breakdown of geographies in terms
Speaker 2: of revenue, the US and other countries has really stood
Speaker 2: kind of totally stable really since twenty eighteen. Eighty one
Speaker 2: point eight percent of revenue last year came from the US,
Speaker 2: eighteen point one eighteen point two coming from outside of
Speaker 2: the US. Are you looking to grow your business outside
Speaker 2: of the US.
Speaker 10: You know, we have good business outside of our outside
Speaker 10: the US that we're looking to grow where we are. So,
Speaker 10: we have a great business in Mexico and in Chile
Speaker 10: that we continue to grow, and we see store expansion
Speaker 10: in our Mexico market in particular, and then our European business.
Speaker 10: We play mainly in the UK, Belgium, France, and we
Speaker 10: like those businesses quite a lot. That business is very
Speaker 10: different where the pro and the retail customers shop in
Speaker 10: the same store for the same product, a very different
Speaker 10: demand profile than the US. We'll keep growing those businesses
Speaker 10: in place, versus necessarily expanding into more countries.
Speaker 3: Hey just got about twenty thirty seconds here. I'm just curious, Denise,
Speaker 3: I'm looking at about eighteen percent of your float is short,
Speaker 3: so it looks like investors are betting that your stock's
Speaker 3: going to go down. It's up almost twenty percent year
Speaker 3: to date. What do investors kind of press you on
Speaker 3: the most as quickly?
Speaker 10: You know, I think they're looking for top line growth.
Speaker 10: They absolutely want to see us low, mid single digit growth.
Speaker 10: That's what we're very focused on driving and what we
Speaker 10: want to deliver in coming quarters.
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