Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller. Every business day we bring
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
Speaker 1: at Bloomberg dot com slash podcast. Looking at the Bloomberg
Speaker 1: let me call this here the Bloomberg US corporate total
Speaker 1: return value year to date minus twelve point five per cent.
Speaker 1: Haven't seen those types of performance numbers? A lot of
Speaker 1: these credit folks taught me, Like ever, so what do
Speaker 1: you do for the second half after that brutal first half?
Speaker 1: Natalie Trevithick, head of investment grade credit Strategy Paid and Regal,
Speaker 1: joins us. Natalie, I'm sure you and you're good folks
Speaker 1: at Paid in the Regal again had experienced what was,
Speaker 1: you know, a brutal first half of the year. Put
Speaker 1: that in perspective for us and and kind of how
Speaker 1: you're thinking about the second half. Sure, it was the
Speaker 1: very shocking first up as we had to underlying interest
Speaker 1: rates move up several percent as well extreads wide and
Speaker 1: by around fifty basis point, producing those first half negative
Speaker 1: total returns who are actually closer to negative fourteen and
Speaker 1: a half percent. As of the first half end of
Speaker 1: June thirte we've actually seen a recovery with total positive
Speaker 1: returns of two point two percent on that Bloomberg Corporate
Speaker 1: indexed UH month to date. So what that means is
Speaker 1: yield are now much higher levels. The index is yielding
Speaker 1: four and a half percent. You couldn't even get four
Speaker 1: and a half percent on the law to high yield
Speaker 1: bonds a year ago. So we think on a go
Speaker 1: for basis is a pretty attractive time to be answering
Speaker 1: credits at these much higher all in meals. Is there
Speaker 1: any concern um that if we go into a deep
Speaker 1: percession some of those investment grade credits become do you
Speaker 1: call them fallen angels? Fallen angels? Right, yeah, potentially, But
Speaker 1: companies are going to do whatever they can to maintain
Speaker 1: their investment grade credit ratings. So they may not mind
Speaker 1: following safe from single aid to triple B, but they're
Speaker 1: going to protect themselves from going from triple B down
Speaker 1: to a double be high yield status. And the good
Speaker 1: thing is over the past couple of years where we've
Speaker 1: had very cheap financing since the pandemic. A lot of
Speaker 1: companies took advantage of that to prefund their maturities and
Speaker 1: extend their that profile. So there's no looming maturity wall coming,
Speaker 1: so we don't think there is going to be a
Speaker 1: big wave of downgrades. Natalie, I gotta ask, because it's
Speaker 1: in your notes, why do you refer to these markets
Speaker 1: as Katie Perry markets. You know, they're hot when they're cold,
Speaker 1: they're up and there, down there, yes and there, no.
Speaker 1: You know, it's like each thing you's walk in and
Speaker 1: you don't know what to expect. It's been a pretty
Speaker 1: volatile relationship every day, so you don't know what you're getting.
Speaker 1: A lot of time seems to be the opposite, despite
Speaker 1: you know, expecting the FED to hikes seventy five basis
Speaker 1: points tomorrow, we're seeing rates rally today with a ten
Speaker 1: year down to two point seven five percent, twenty five
Speaker 1: basis points in burden with the two year. So what
Speaker 1: do you expect from the Fed? I mean tomorrow seventy
Speaker 1: five basis points. I'm going to assume it's just locked in.
Speaker 1: But what about the path forward? Yeah, the path forward
Speaker 1: I think we're expecting it to continue to be aggressive,
Speaker 1: with potentially another seventy in September, but the data is
Speaker 1: coming in much cooler the past few days. Just the
Speaker 1: Walmart profit warning, We're thinking the Fed may want to
Speaker 1: talk back some of those uh rate hikes which have
Speaker 1: already been priced into the market. Now, I mean, what
Speaker 1: are some of the sectors. I mean again, given that
Speaker 1: really uh, you know, terrible first half of the year,
Speaker 1: what are some of the sectors to the extent that
Speaker 1: your pm is want to dip their toe in some
Speaker 1: of these investment grade credit areas. What are some of
Speaker 1: the sectors that you're suggesting they look at. Yeah, we
Speaker 1: like some of the more defensive sectors right now. That's
Speaker 1: going to be utilities, Healthcare still doing quite well. We
Speaker 1: like the higher quality technology. Even though these higher rates,
Speaker 1: you know, are really hitting some of these tech companies
Speaker 1: earnings from a credit stand appoint these companies still have
Speaker 1: very very solid balance sheets intended and tend to trade
Speaker 1: at tight spread, so we don't expect them to widen
Speaker 1: as much as some of the more consumer driven sector.
Speaker 1: Some of the retailers were a little bit more cautious
Speaker 1: on We continue to like the energy sector, but it's
Speaker 1: office peaks and we don't think it offers as much
Speaker 1: value on to go forward DASA thanks of all to
Speaker 1: issue forty five billions over the past couple of weeks,
Speaker 1: and we're seeing definite pressure on that sector. Um So,
Speaker 1: While we like the US banks, we just think they're
Speaker 1: gonna be pretty volatile and to go forward data, but
Speaker 1: um SO, bottom line is after the horrible first half,
Speaker 1: now that yields are much higher, and the fact that
Speaker 1: you don't expect many defaults, you like investment grade credits
Speaker 1: um now despite the potential headwinds of recession, European crisis, etcetera. Yeah,
Speaker 1: we think it could be a good entry point, but
Speaker 1: we particularly like the front end of the curve. So
Speaker 1: more looking at the Bloomberg one to five year corporate
Speaker 1: index because still you're yielding over four percent and you
Speaker 1: don't go that much more for extending out to one
Speaker 1: to thirty year credit and then you're taking on all
Speaker 1: the spread duration list. If you keep your portfolio pretty short,
Speaker 1: you know, in that one to five year area, we
Speaker 1: think you're poised to get positive total returns, even though
Speaker 1: you may weather some you know, months and months and
Speaker 1: day to day volatility in pricing. Natalie Matt asked about,
Speaker 1: you know, investment grade bonds being you know, downgraded to
Speaker 1: junk does it? How often does it happen with a
Speaker 1: junk borrower gets upgraded to investment grade and then it's
Speaker 1: maybe it's something you can look at. Yeah, that's actually
Speaker 1: pretty frequent. We've had. We expect actually a few hundred
Speaker 1: billions to be upgraded from high yield to i G.
Speaker 1: We're already seeing it in some issuers here to day. Uh,
Speaker 1: you know, we saw Freeport, we saw Toll Brothers e QT.
Speaker 1: So we're seeing more upgrades from some of those names
Speaker 1: which were downgraded during the pandemic. Also on the horizon,
Speaker 1: a score that's probably not gonna get upgraded back to
Speaker 1: i G until two thousand and twenty four, and Occidental
Speaker 1: Petroleum is another one we're watching. It's interesting Ford being
Speaker 1: upgraded back into investment grade. That would be a notable
Speaker 1: move in the credit markets. Natalie trevith Iik thanks so
Speaker 1: much for joining us head of investment grade credit strategy
Speaker 1: at Peyton and Regal Red headline crossing the Bloomberg Terminal.
Speaker 1: European gas prices rise above two hundred euros per mega
Speaker 1: watt for the first time since March nine, and that
Speaker 1: is due in part to the ongoing war in Ukraine,
Speaker 1: which is a good segue to our next guest. Valentine
Speaker 1: now Yuchenko, member of the Ukrainian Parliament and ex head
Speaker 1: of the Security Service of Ukraine, joins us. Mr Noliachenko,
Speaker 1: thank you so much for joining us here. I would
Speaker 1: love to just get you know, kind of your quick overview.
Speaker 1: Awhere we are today, where you are today as a
Speaker 1: country in your ongoing war with Russia. What's the latest?
Speaker 1: Thank you the Lisa, but Dona to be with you
Speaker 1: with the all the US. So from Ukraine. News are
Speaker 1: still bad, still about war and this night and early
Speaker 1: morning south of Ukraine and the Islamic life cities. Again
Speaker 1: we're under the Russian missiles altogether eighteen Russian missiles world
Speaker 1: launched against like peaceful cities of Ukraine in the south,
Speaker 1: against civilians, against supports, so even a civilian infrastructure. As
Speaker 1: from the beginning of this war, Russia is still destroying
Speaker 1: and targeting intentionally these object objects and facilities. So that's
Speaker 1: for us, like today's picture of war which Russia wages
Speaker 1: against Iubraine, what is the latest in terms of your defense?
Speaker 1: How how is the Ukrainian army doing in terms of
Speaker 1: holding the Russian invaders off so far? Much improvements because
Speaker 1: and thanks to the United States, Canada, United Kingdom, European
Speaker 1: Union weaponry supplies. It increased a lot of capabilities of
Speaker 1: our armed forces both in east and south of Ukraine.
Speaker 1: And now our armed forces are capable to destroy Russian
Speaker 1: command centers, Russian weaponry at the temporarily occupied territories to
Speaker 1: hit in the response of their attacks on Ukrainians. So
Speaker 1: that's where we are united, and that's where Ukraine feels
Speaker 1: not alone alone against the Russian aggressor. That's, by the way,
Speaker 1: very much inspiring our armed forces, our people here in Ukraine,
Speaker 1: US members of parliament, and I think that's the strategy
Speaker 1: to win the world, to win Russian aggression. What is
Speaker 1: there a belief with in the leadership of Ukraine about
Speaker 1: how this war may play out, what would be an
Speaker 1: end game and then also maybe the timing associated with
Speaker 1: is there any growing consensus. Actually what we see is
Speaker 1: that Russia himself, Kramblin put In, they try to as
Speaker 1: much as they could use their forces efforts even waging
Speaker 1: against war against Europe, to attack not only Ukraine but
Speaker 1: the whole civilized war the world. That's so the Russian
Speaker 1: strategy again to use for instance, energy supplies as a
Speaker 1: weapon as a weapon against not only Ukraine, but European
Speaker 1: Union member states as well. Plus what we see at
Speaker 1: the temporal the occupied territories that Russia intentionally is destroying
Speaker 1: medical facilities, schools, all social infrastructure. That looks like real
Speaker 1: invasion with the very very one target to destroy normal life,
Speaker 1: to inflict terror on civilians, on Ukrainians, and even broader,
Speaker 1: to inflict her terror on the whole Europe. We got
Speaker 1: a headline a couple of I think a couple of
Speaker 1: days ago last week that Russia is preparing elections I
Speaker 1: think September fift um to basically annex parts of the
Speaker 1: down Bass region. Does that to you set a date
Speaker 1: for when the war could possibly end? Actually the date,
Speaker 1: what's a cain about dates? Or Russian's preliminary plans to
Speaker 1: hold so called referendums illegal of course and with no
Speaker 1: voters for June July. Now that it's at the end
Speaker 1: of July, and we hear from our intelligence that again
Speaker 1: again Gremlin NEPs. She has changed plans for August, maybe
Speaker 1: even September. So this old referendum or voting stuff. Russians
Speaker 1: understand very well now that in her song, for instance,
Speaker 1: in South Ukraine or other temporal occupied cities or like
Speaker 1: Mariuple almost destroyed city in the south, or the Nascut
Speaker 1: and Basque region of Ukraine, it's simply impossible even to
Speaker 1: show a picture as the Russian propaganda used to do
Speaker 1: it before in two thousands fourteen. It's impossible to show
Speaker 1: even now the picture of referenda because no people know
Speaker 1: voters guests. Today we've seen from one of Russian TV
Speaker 1: propaganda channel we they have collected up six people in
Speaker 1: her Son to issue for them Russian passports. Six not
Speaker 1: six hundred, not six thousand, but six people all together.
Speaker 1: That how that explains how it looks at the field. Uh,
Speaker 1: the real situation that all of Ukraine, I'm not willing
Speaker 1: to buy any means be under the Russian imperim and
Speaker 1: to live under the Russian founding. What amazes me beyond
Speaker 1: um the staunch defense that Ukraine has put up against
Speaker 1: this Russian invasion is that in many parts of the country,
Speaker 1: UM Ukrainian workers are still trying to produce products, um,
Speaker 1: you know, farmlands, export um things as if it's business
Speaker 1: as usual. I've talked to auto executives who say they're
Speaker 1: still getting you know, um parts and wire harnesses out
Speaker 1: of Ukraine. And of course many much of the world
Speaker 1: is still reliant on Ukrainian grains, especially when it comes
Speaker 1: to wheat and other grains. How are those exports going,
Speaker 1: You're right, absolutely, like I'm confirmed that in South Ukraine
Speaker 1: and Eastern and the harvest is going on this year,
Speaker 1: harvest with a lot of wheat, corn and other products.
Speaker 1: And our farmers are doing outstandable job. Even Russia's bombarding
Speaker 1: or using artillery, but the farmers continues to actually to
Speaker 1: pick up the harvest and it's not bad this year,
Speaker 1: by the way. So talking about grain experts, of course
Speaker 1: we Ukraine and again Parliament, government, the President of Ukraine,
Speaker 1: we all listening together, united to do whatever is possible
Speaker 1: to restart to resume grains experts from Ukrainian supports. And
Speaker 1: this is up to all together twenty million tones of
Speaker 1: grain ready to be exported to Africa, to other regions
Speaker 1: of the world. Ukraine ready and would and would like
Speaker 1: again to contribute to global food security by supplying as
Speaker 1: much as we can grains, fertilizers and others. All right, Valentine,
Speaker 1: thank you so much for taking the time to share
Speaker 1: the latest from Ukraine. To really appreciate your time. Valentine,
Speaker 1: now Yuchenko, member of the Ukrainian Parliament, getting a fascinating,
Speaker 1: uh real shot what is going on on the ground
Speaker 1: in Ukraine. We appreciate his time. Walmart off eight point
Speaker 1: eight percent today, folks, and that's a real market cap.
Speaker 1: This thing started to day with a three sixty billion
Speaker 1: dollar market cap, so that's real dollars being wiped out.
Speaker 1: Let's check in with put Him Boyle, Senior Animals for
Speaker 1: e Commerce at Leisure, off Price Retail for Bloomberg Intelligence.
Speaker 1: Basically she covers all things retail and she spends her
Speaker 1: life just walking around shopping malls. And that's kind of
Speaker 1: how there is not true. That's what they do. They do.
Speaker 1: They go and they check out, like what traffic and
Speaker 1: all all says you basically go shopping for a living.
Speaker 1: Is that true? Not for a living, but for definitely
Speaker 1: part of my job. Absolutely? All right, So wal tell
Speaker 1: us what's going on with Walmart here? You don't see
Speaker 1: this kind of misery often from Walmart, and now it's
Speaker 1: twice right, Yeah, exactly, Yeah, I think this is just
Speaker 1: showing consumers trading down. If you think about the Walmart
Speaker 1: quirk consumer, it is the low income shopper and they
Speaker 1: are pinched by the inflationary pressures that we have been
Speaker 1: seeing all year. So what you're seeing happen is them
Speaker 1: trade into more essential items like food, which are lower margin,
Speaker 1: and trading often away from more discretionary categories like apparel.
Speaker 1: That means that you're going to have lower margins, lower profitability,
Speaker 1: and that's why they're two key profit outlook mail calls
Speaker 1: for thirteen to fourteen present drop in operating income. So
Speaker 1: a concern previously for Walmart was that um, they had
Speaker 1: too much stuff in their warehouses. I guess their whole
Speaker 1: stores are warehouses, but that they have too much inventory
Speaker 1: coming in UM over ordered and not selling enough. Now
Speaker 1: out it seems that's still a problem. But also UM
Speaker 1: consumers who are struggling to afford food and gas are
Speaker 1: spending all their money on that stuff rather than the
Speaker 1: other stuff that Walmart has too much of. Do they
Speaker 1: get that right? Yeah, that's absolutely right. But Remember, as
Speaker 1: they spend money on other stuff, they're not buying that
Speaker 1: apparel that they had too much of anyways, So now
Speaker 1: they have even more apparel to career. So the problem
Speaker 1: hasn't gone away. And it's not a great time in
Speaker 1: retail to have a lot of inventory because in just
Speaker 1: a few months, retailers are going to be getting a
Speaker 1: new holiday merchandise and they need to make room for
Speaker 1: that promotions. This is maybe good news for the FED. Um,
Speaker 1: does that mean that Walmart is going to have to
Speaker 1: start cutting prices on that apparel? Absolutely? I mean they
Speaker 1: have to get rid of that inventory, so prices will
Speaker 1: drop on those items. So they'll have to promote clear
Speaker 1: liquidate however to get them out all right. Put Um,
Speaker 1: I'm not an expert in Walmart, but just as an outsider,
Speaker 1: I put a out of this on management. Management misgauged
Speaker 1: their consumer, mis mismanaged, or misgauged their inventory needs. Is
Speaker 1: that a fairer analysis? I mean yes and no. I
Speaker 1: mean think about where we're coming off of right So
Speaker 1: during the pandemic, we couldn't get the goods here so rightfully,
Speaker 1: So a lot of companies ordered goods in advance because
Speaker 1: they were sitting on ships or the factories weren't able
Speaker 1: to produce them. Now all that inventory has come on
Speaker 1: board and is getting off those ships. So yes, there
Speaker 1: is you know, some of that. But then also um inflation.
Speaker 1: I wouldn't have guessed last year the gas prices would
Speaker 1: be over five dollars a gallon. They were treated a little,
Speaker 1: but you know, no one would have predicted that. So
Speaker 1: some of this is just changing macro um variables that
Speaker 1: you just can't really predict. Are they able, by the way,
Speaker 1: to keep up um margins on the stuff that they
Speaker 1: are selling a lot of where inflation still is a
Speaker 1: problem food and does Walmart sell gas? They must have
Speaker 1: gas stations and costco very few, very few, I see,
Speaker 1: so they have some. But but food margins, are they
Speaker 1: able to keep those high or do they have to
Speaker 1: kind of eat some of those higher costs for their customers.
Speaker 1: It's it's a mix, really, right. So food inflation had
Speaker 1: been a top concern also earlier this year. Prices are
Speaker 1: retreating a little, like if you look at the cost
Speaker 1: of the it's come down, but um food inflations out
Speaker 1: there and food prices are rising, and that's part of
Speaker 1: the reason that you're seeing that low income shop, I
Speaker 1: feel even more pinched because you're having to pay five
Speaker 1: dollars for a gallon of milk, where last year you
Speaker 1: may have paid for it dollars for that same gallon
Speaker 1: of milk. And so there has been an increase. And
Speaker 1: by the way, a lot of those low income shoppers
Speaker 1: are also Walmart employees, right, are they demanding raises to
Speaker 1: try and keep up with inflation? They have been getting raises, right.
Speaker 1: I think that's the one thing that's been working well
Speaker 1: for the low income consumer is that minimum wage and
Speaker 1: what companies are paying has actually risen. So if you
Speaker 1: think about what Walmart workers are making three to five
Speaker 1: years ago, they're making anywhere from thirty to more than that.
Speaker 1: You can argue, I mean, you walk into any of
Speaker 1: these um stores and they're willing to pay you fifteen
Speaker 1: dollars or more an hour. All right, put him it's
Speaker 1: probably too early to ask. But here we are at
Speaker 1: the end of July. My son California actually goes to
Speaker 1: school like an first week of August at California, so
Speaker 1: it's not too early to talk about back to school.
Speaker 1: And then the dreaded holidays. What is the outlook. I mean,
Speaker 1: if I'm a Walmart any retail executive, I'm not sure
Speaker 1: how to gauge any of that stuff. Yeah, we're back
Speaker 1: to school. In all the retail data that we've seen
Speaker 1: so far indicates that back to school selling had been strong.
Speaker 1: The question is where are they spending Quebec to school?
Speaker 1: Are they spending on apparel? Are they buying their laptops
Speaker 1: and iPhones and just to supplies or are they spending
Speaker 1: on home furnishing for their dorm rooms? So I think
Speaker 1: I think most of them. You'll have to get your supplies.
Speaker 1: You'll need your laptop for school. But where you could
Speaker 1: pull back is on where you're buying your apparel. Do
Speaker 1: you need five pairs of Denom jeans or can you
Speaker 1: do it too? And I think that's where you could
Speaker 1: see some softness as consumers um are challenged with inflation,
Speaker 1: have to make trade offs. Are they Are they doing
Speaker 1: well in their competition with Amazon? I mean, we don't
Speaker 1: have a Walmart around here, but if we did, that
Speaker 1: would be the other place I would shop besides Amazon. Yeah,
Speaker 1: I think I think two different stories here. It really
Speaker 1: you know, we saw the Amazon shares pulled back last
Speaker 1: night after Wall March are coronets say, it's a little
Speaker 1: different at Amazon. Amazon has its own problems, they have
Speaker 1: too much warehousing space, but their customer is very different.
Speaker 1: It's a more affluent customer base. And I don't think
Speaker 1: that customer base is trading down. Yes yet. In fact,
Speaker 1: Amazon had its time Day just a few weeks ago
Speaker 1: and the sales were up nicely and people were out shopping.
Speaker 1: They were looking for deals. So I think the focus
Speaker 1: will be deal shopping as we move into even holiday,
Speaker 1: and that's not good news for margins. Uh, luxury, how's
Speaker 1: that doing? Buguri is doing great? I know what end
Speaker 1: the high end consumer is sending. I mean talk about
Speaker 1: the income inequality and the wealth inequality, and it's just
Speaker 1: getting exacerbated by this pandemic, as a lot of folks said,
Speaker 1: and you can see it in the numbers, as they say.
Speaker 1: All right, put him Goyle, thank you so much for
Speaker 1: joining us. Put them Oil covers all things retail for
Speaker 1: Bloomberg Intelligence. And yes, part of her job is walking
Speaker 1: around shopping malls and so particularly like that black we
Speaker 1: had a Walmart around here. Why don't we have a
Speaker 1: Walmart at the Jersey Dude, you guys, get off this island.
Speaker 1: We got cracker barrel too, So you do the Walmart
Speaker 1: and the cracker barrel and that is a big day.
Speaker 1: I might even do that this weekend. Come and think
Speaker 1: of it. Okay, I'm want to talk about small cap
Speaker 1: stocks now because they've been hit harder than the SP
Speaker 1: five hunter. When you look at the Russell two thousand,
Speaker 1: a lot of folks are saying there's opportunity in value stocks.
Speaker 1: There's opportunity and small cap stocks. Brad Evans, he does
Speaker 1: that for a living sup portfolio manager and senior VP
Speaker 1: at heart Land Advisors. Brad, I'd love to get your
Speaker 1: kind of thirty ft overview of kind of how this
Speaker 1: first six seven months of the year have been for
Speaker 1: the world where you live in small caps, value, that
Speaker 1: type of thing, and kind of what's your outlook for
Speaker 1: the remainder of the year heading into next Well, uh,
Speaker 1: Matt and Paul, it's a pleasure to be with with you, guys,
Speaker 1: say thanks again for having me back. Um, I won't
Speaker 1: I won't really regurgitate what everybody knows. Value has had
Speaker 1: a good run in the first half versus growth, and
Speaker 1: that's you know, a carry over from the end of
Speaker 1: last year, and I think you know it's it's there's
Speaker 1: an incredible amount of violatility in the marketplaces we all know.
Speaker 1: And I think you know what makes the current environment
Speaker 1: very unique is you know, every crisis that we've seen
Speaker 1: since is kind of in play today. Um you know,
Speaker 1: the Russian ruble default and the long term capital management crisis,
Speaker 1: of the Asian currency crisis, of the tech bubble, of
Speaker 1: OH one crisis, the global financial crisis, of the housing
Speaker 1: bubble that burst, and oh seven o eight, the pigs
Speaker 1: crisis and a live and and now the COVID black swan.
Speaker 1: Of all those dynamics are actually in play today, which
Speaker 1: makes the current environment particularly tricky when you when you
Speaker 1: overlay it with um an environment where there's just a
Speaker 1: lot of leverage in the system. So this is this
Speaker 1: is an environment that that I think from a small
Speaker 1: cap perspective, you know, should be good for an active
Speaker 1: manager versus passives, and should be good versus for value
Speaker 1: versus growth. But we are in a very very tricky
Speaker 1: environment today where it takes a very surgical approach to
Speaker 1: be able to navigate all the risks that are out there.
Speaker 1: Um well, that's a bummer. I was hoping I could
Speaker 1: just buy like a small cap value E T f
Speaker 1: UM and and and not worry about it. Why do
Speaker 1: we need to have you know, precision surgical active management.
Speaker 1: You know, I like to call the small captain to
Speaker 1: see is kind of the land of misfit toys. And
Speaker 1: the reason I say that is because you know we
Speaker 1: have we have, you know, the the arbiters of the benchmark.
Speaker 1: The folks at Russell have created a kind of a
Speaker 1: unique benchmark, especially in the value benchmark. You know we
Speaker 1: have we have seven percent of the benchmark which is
Speaker 1: in biotech, and almost a third of the induscry is unprofitable.
Speaker 1: And you know, the the the there's a there's a
Speaker 1: large negative survivor bias and the Russell indusease, especially value indusease.
Speaker 1: Where when I say negative survivor bias, these are companies
Speaker 1: that have not been acquired, They have not graduated, that
Speaker 1: have not been acquired by a larger company or private equity.
Speaker 1: They have not been they have not graduated or grown
Speaker 1: it to be a mid cap stock. So these are
Speaker 1: companies that have just have have become zombified. They just
Speaker 1: sit in these small cap indusease for for long periods
Speaker 1: of time. For that reason, if you were to attack
Speaker 1: this asset class with a passive benchmark, you're buying a
Speaker 1: lot of you're really subpart companies that I'll be polite
Speaker 1: about it. And and for that reason, our job at
Speaker 1: Heartland as a small cap equity boutique, UM, you know,
Speaker 1: my my fund being a high quality small cap fund.
Speaker 1: You know, our job is to find diamonds in the rough.
Speaker 1: And that's our job to build a concentrated portfolio of
Speaker 1: roughly fifty names of undervalued small companies with great balance sheets,
Speaker 1: which pay dividends and basically have been fallen, you know,
Speaker 1: fallen out of favor for reasons that we think are
Speaker 1: our temporary brat How do you do that? Um? You know,
Speaker 1: it's a it's a huge universe, and I guess you've
Speaker 1: been at this a long time. The Wall Street Journal
Speaker 1: recognized you as a category king in small caps. How
Speaker 1: do you screen for socks? Do you have a whole team?
Speaker 1: Do you have a special method? What is it? It's
Speaker 1: it's just hard work. Actually, my partner Andy Fleming, and I, um,
Speaker 1: you know, we we just we dig through earnings transcripts.
Speaker 1: We we talked to a lot of management teams. It's UM,
Speaker 1: it's it's really rolling up the sleeves UH doing our
Speaker 1: own model building and just getting to know management teams
Speaker 1: and understanding how they are intending to deploy capital. Because
Speaker 1: in small caps, Paul and Matt, that's the biggest thing
Speaker 1: that for us to understand is having a management that
Speaker 1: understands the problems that the company is facing and under
Speaker 1: ends the appropriate fix to get the company back to
Speaker 1: UH it's operating to a normalized operating environment where they're earning,
Speaker 1: you know, an acceptable return on capital. Oftentimes we find
Speaker 1: in these in small companies, they think the path to
Speaker 1: successes you know, M and A to grow in organically,
Speaker 1: and that often leads to balance sheet leverage and that
Speaker 1: usually ends in tears for shareholders. So we want we
Speaker 1: want to find companies who are focused on self help,
Speaker 1: that are internally focused, have understand understand the problems they have,
Speaker 1: and are going to deploy free cash flow UH to
Speaker 1: too in directions that are very shareholder friendly, meaning pay
Speaker 1: down debt, divesting non core assets they made that might
Speaker 1: be a drag to their operations, and then returning to
Speaker 1: capital shareholders through dividends and buy backs. All right, Brad,
Speaker 1: good good stuff. We appreciate getting your perspective on a
Speaker 1: part of the market. We should probably talk a little
Speaker 1: bit more about kind of the small cap. Yeah, we
Speaker 1: gotta get back on and get some picks. Yes, some
Speaker 1: value stuff will through that He's based another. This is
Speaker 1: the second guest I talked to you today from Milwaukee.
Speaker 1: So I'm telling you this. Does it remind you of
Speaker 1: the furniture? Is just me? But sure, who doesn't? I
Speaker 1: mean when you think about Milwaukee. Brad Evan's portfolio manager
Speaker 1: seen r VP Heartland Advisors. Brent Downley, president of Spectrum
Speaker 1: Markets Joints, is here. Hey, brand, I got my federal
Speaker 1: reserve tomorrow. It can be raising interest rates again. I
Speaker 1: look at the d X Y dollar index. It's as
Speaker 1: high as it's been for twenty years. Is there a
Speaker 1: bear case for the dollar here at all? Well, the
Speaker 1: markets tried it a few times, and I've tried it
Speaker 1: a few times to no avail. The the issue with
Speaker 1: the dollar right now is that it's really running from
Speaker 1: one side of the dollar smile to the other. So
Speaker 1: which means that when things are looking okay in the US,
Speaker 1: which they were for a while, as really the sole
Speaker 1: engine of growth. With China and Europe sputtering badly, the
Speaker 1: dollar was doing well. But now as we're transitioning to
Speaker 1: this growth fear in the US from Walmart, Snap, Twitter,
Speaker 1: all that stuff, um, and also job cuts all over
Speaker 1: the place. Now we're moving into a global recession fear trade,
Speaker 1: which again is bullish dollar. And then on top of
Speaker 1: that you have just this ongoing terms of trade gas
Speaker 1: shock in Europe that means anytime you try to buy euros,
Speaker 1: for example, when people tried to buy euros on the
Speaker 1: fifty basis point hike from the ECB, it works for
Speaker 1: about three hours and then the dollars comes raging back again.
Speaker 1: I was wondering who was defending the euro at parody,
Speaker 1: But it's been you know, it's held up, but it
Speaker 1: only briefly went down through it. Do we do? We
Speaker 1: see it, um, the euro going back below a dollar,
Speaker 1: So I do for now. However, they're the reason that
Speaker 1: it bounced so hard was that positioning kind of got
Speaker 1: a little bit over at SKIS and there's a ton
Speaker 1: of options expiries there. So if you look at it
Speaker 1: the same way that people were looking at equity positioning,
Speaker 1: they both kind of happened at the same time stocks
Speaker 1: were at the lows and euro dollar was at the lows,
Speaker 1: and then you had this squeeze. But it's been much
Speaker 1: more of like a tactical short covering kind of squeeze.
Speaker 1: And actually the data and the economic data has been
Speaker 1: getting worse as stocks were going up there, and part
Speaker 1: of that reflects there's a small contingent of people that
Speaker 1: still think that bad news for the economy is good
Speaker 1: news for stocks, and I very strongly disagree with that
Speaker 1: given the framework um that the Fed's operating under now,
Speaker 1: so that that was that was true from one very
Speaker 1: often bad economic news was good for stocks because it
Speaker 1: meant more easy. But the Fed just doesn't have room
Speaker 1: to to even think about easing now. And that that's
Speaker 1: what's interesting going into this fo MC meeting is that
Speaker 1: we have a lot of cuts price now fore, and
Speaker 1: to me, it's going to be very difficult for the
Speaker 1: math on CPI to work out in a way that
Speaker 1: the Fed will be able to cut early in simply
Speaker 1: because CPI is a lagging indicator and home prices and
Speaker 1: other past price rises are still going to pushing or
Speaker 1: putting upward pressure on cp I even as commodities start
Speaker 1: to put downward pressure on it. Yeah, that's kind of
Speaker 1: where I wanted to go, is kind of get your
Speaker 1: your inflation call here. The thing I look at almost
Speaker 1: every day is to the gasoline price, and we're now down,
Speaker 1: you know, all fifty sixty cents per gallon off off
Speaker 1: of the peak here. Um. But you think this, this
Speaker 1: inflation risk to the marketplaces maybe more persistent than the
Speaker 1: market's discounting. I do, but I mean I could be wrong.
Speaker 1: So one really interesting thing, really interesting dynamic is if
Speaker 1: you look on Bloomberg and look at the median economist
Speaker 1: forecast for U S c p I that comes in
Speaker 1: around three point five percent right now. But if you
Speaker 1: look at market pricing, because there's you can trade inflation
Speaker 1: in the market, it's pricing something closer to one point
Speaker 1: seven or two, depending on how you slice and dice
Speaker 1: the data. So there's a really big divergence right now
Speaker 1: between market pricing of future inflation and economist forecasts. Now,
Speaker 1: it's very difficult to get to one point seven or
Speaker 1: two quickly, just because of the housing pressure and and
Speaker 1: other pressures that are still exerting some upward pressure on
Speaker 1: the number. So I'm skeptical, but that that is what
Speaker 1: the markets pricing. So the market has priced an incredibly
Speaker 1: dubbish scenario for where CPI is below two and the
Speaker 1: Fed is cutting as early as March or May. I
Speaker 1: don't buy it. I think generally the FED has a
Speaker 1: bias to fight the last war, and that's because the
Speaker 1: politics drive a lot of what the FED does, and
Speaker 1: the politics now are just so squarely in on the
Speaker 1: side of fighting inflation because inflation affects everyone, and unemployment
Speaker 1: right now is affecting three point six percent of people,
Speaker 1: and inflations of affecting of people. Politics drive with the
Speaker 1: independ pendant Federal Reserve. Does it hurts, but I feel
Speaker 1: like such a dope, being such a sitting sarcasm is
Speaker 1: the lowest form of wit. I gotta drop that part
Speaker 1: of my personality. Yeah. All the institutions in the US
Speaker 1: that are supposed to be independent are actually full of
Speaker 1: nominees that are all political appointees. So make of that
Speaker 1: what you will, all right, Bred good stuff as always.
Speaker 1: Brent Dolly, president at Spectrum Markets. He's been in the
Speaker 1: FX trading arena for a long time. Looking at his resume,
Speaker 1: Marylynch City, I would say he's a category king as well. Yes,
Speaker 1: he's a category king in the current sias. And again,
Speaker 1: I I just don't see anybody given me a bear
Speaker 1: case for the U. S. Dollar. I've been saying that
Speaker 1: for a long time, and that seems to be the
Speaker 1: case right now. Thanks for listening to the Bloomberg Markets podcast.
Speaker 1: You can subscribe and listen to interviews with Apple Podcasts
Speaker 1: or whatever podcast platform you prefer. I'm Matt Miller. I'm
Speaker 1: on Twitter at Matt Miller and I teen seventy three
Speaker 1: and I'm fall Sweeney. I'm on Twitter at pt sweeney.
Speaker 1: Before the podcast, you can always catch us worldwide at
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