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Speaker 2: Cheers with Alphabet and Justice soaring in the after hours
Speaker 2: right now, Carol Hire after the company reported earnings up
Speaker 2: as we speak, another thirteen point six percent in the
Speaker 2: after hours right now. This after declaring a dividend, boosting
Speaker 2: a buyback, authorizing repurchase of up to an additional seventy
Speaker 2: billion dollars it shares first quarter ad revenue coming out
Speaker 2: above expectations first quarter. I also declared it cash dividend
Speaker 2: of twenty cents per share.
Speaker 3: All right, so let's get to it. James chalk Mak
Speaker 3: so much to talk about. He's partnering technology analyst at
Speaker 3: Clockwise KAPITALI joins us from my a me. First of all,
Speaker 3: Alphabet feels like I can't find anything wrong here, walk
Speaker 3: us through. Is this just kind of firing and all
Speaker 3: cylinders and if you will, and then just throwing on
Speaker 3: a dividend and then throwing on in an additional buyback.
Speaker 4: Yeah, first, thanks for having me. You know, for Alphabet,
Speaker 4: this was a tough one, you know, because we had
Speaker 4: the meta earnings last night. You know, uncertainty as it
Speaker 4: relates to the sustainability of the top line growth metrics,
Speaker 4: and obviously Alphabet via Google had you know, uncertainties around
Speaker 4: their search business. And at the same time, you know
Speaker 4: this growth and capex spend, you know, is that going
Speaker 4: to translate over So you know, we were kind of
Speaker 4: debating what to do and and going into the quarter.
Speaker 4: We actually rotated a portion of our Microsoft position to
Speaker 4: triple up our Alphabet position. But thankfully that worked out.
Speaker 4: But for Google, yeah, well yeah, they're both so yeah,
Speaker 4: I mean it worked out.
Speaker 5: So why did you do it?
Speaker 3: What was it that you saw, James in the in
Speaker 3: the Alphabet story that you said you wanted to do that.
Speaker 4: Well, the main thing was the relative valuations. I mean,
Speaker 4: the expectations for Microsoft were exceedingly hot and the expectations
Speaker 4: for Alphabet were exceedingly low. And you look at one
Speaker 4: trading at twenty two times earnings and the other ones
Speaker 4: at thirty five times earnings. So you know what kind
Speaker 4: of the risk reward is, and especially we had some
Speaker 4: sense of how things might trade if they came in
Speaker 4: on a bear kind of narrative, given how Meta traded.
Speaker 4: So it really just boils down to that. But the
Speaker 4: fact that Microsoft was able to exceed those nose bleed
Speaker 4: expectations and the testament to the trends and the force
Speaker 4: of trends that we're seeing in the shift of the
Speaker 4: cloud and aai more broadin.
Speaker 2: Hey, I just want to get your thoughts on Snap
Speaker 2: because it's the company you've been covering for years.
Speaker 4: You'd love to ask about that, Eric, through the.
Speaker 2: Good and the bad. Well, And the reason I'm asking
Speaker 2: is because shares are up, wow, surging as we speak,
Speaker 2: by more than twenty percent twenty five percent at this point.
Speaker 2: This is after the company reported.
Speaker 3: They are down thirty two here today they are.
Speaker 2: That's important context, Chris. The company is seeing second quarter
Speaker 2: revenue from one one point two to three billion to
Speaker 2: one point twenty six billion versus estimates of one point
Speaker 2: two one billion dollars. As Carol mentioned, it's been a
Speaker 2: brutal year so far for Snap. How are you reading
Speaker 2: into these results and do you still you don't own
Speaker 2: Snap anymore?
Speaker 4: Do you No, No, not for a long time.
Speaker 5: You know.
Speaker 4: With Snap, you know, they were supposed to be the
Speaker 4: camera company and transformed into you know e exactly what
Speaker 4: they were initially, you know, just messaging in some content initiatives.
Speaker 4: But at the end of the day, you know, I
Speaker 4: think it's really really hard for these niche platforms to
Speaker 4: scale in the manner in which is necessary to provide
Speaker 4: differentiation to advertisers and the return objectives in return enhancements
Speaker 4: on the on that ad spend. So I think that
Speaker 4: the disparity between these niche platforms like a Snap versus
Speaker 4: the likes of Alphabet and Meta will only increase from here.
Speaker 4: The caveat being that you have companies like Pinterest, which
Speaker 4: we used to own but sold, you know, just given
Speaker 4: the fact that they hit our target. You know, I
Speaker 4: have more opportunities because of the engagement that they bring
Speaker 4: that is likely to grow over time versus you know,
Speaker 4: stick to more static rates, which is from the likes
Speaker 4: of Snap.
Speaker 3: All right, we've got to go back to Google. Forgive
Speaker 3: me alphabet. I keep calling it Google, but I mean
Speaker 3: firs Alphabet. I know, I know, up twelve and a
Speaker 3: half percent here, folks in the aftermarket. This stock heading
Speaker 3: into it had about a twelve percent gain on the
Speaker 3: year here in twenty twenty four. The stock was up
Speaker 3: almost sixty percent last year. But you know, when when
Speaker 3: you look at Alphabet James, and you look at its
Speaker 3: business lines and its roles, and it's play, whether it's AI,
Speaker 3: whether it's still advertising in a big way. You know,
Speaker 3: our own man Deep Singh saying, you know, this company
Speaker 3: is all about that engagement that's kind of so valuable,
Speaker 3: and that's going to be valuable certainly in terms of
Speaker 3: machine learning and gen AI. This is really important stuff.
Speaker 3: I mean, how do you think about you know, Alphabet
Speaker 3: in kind of its future growth trajectory and kind of
Speaker 3: where it goes from here. I mean, these are this
Speaker 3: is a pretty impressive report, but it's also right appeasing
Speaker 3: investors of saying we're going to throw some cash back
Speaker 3: to you.
Speaker 4: Absolutely, I mean any anything with respect to returning capital
Speaker 4: to shareholders or you know, getting religion on the cost
Speaker 4: side of their business and utilizing their cash flow for
Speaker 4: more constructive purposes rather than throwing it into black holes,
Speaker 4: which is the way that they have been operating for
Speaker 4: as long as I can remember. That being said I
Speaker 4: think that the future for Alphabet and Google, you know,
Speaker 4: is still remains a question mark. We don't know, and
Speaker 4: I don't think anyone can definitively say what that search
Speaker 4: environment experience is going to look like in the in
Speaker 4: the future, you know, when if you look out five
Speaker 4: years down the road. Now, the good news is, all
Speaker 4: of this stuff seems to be like coming at you
Speaker 4: fast right all the AI over the since January of
Speaker 4: twenty twenty three, it's been coming hard and fast. But
Speaker 4: the good news is on the on the behavioral aspect
Speaker 4: and the consumer experience. You know, things have changed with chat,
Speaker 4: GPT and whatnot, but things aren't changing that fast overnight,
Speaker 4: which affords Alphabet time to really figure things out, whether
Speaker 4: it's cannibalistic to their existing search business or not. You know,
Speaker 4: I think we have time, So I think extrapolating too
Speaker 4: much too soon is a risk, you know, so as
Speaker 4: long as they can they have the time, you know,
Speaker 4: they might figure it out. They may not, but they might,
Speaker 4: But I look into twenty twenty four and twenty twenty five,
Speaker 4: that's it.
Speaker 2: Could Critics argue about Alphabet that declaring a dividend and
Speaker 2: boosting a share buyback potentially isn't the best use of
Speaker 2: money right now? Perhaps they should be investing more in AI.
Speaker 2: Perhaps they should be investing more and making sure this
Speaker 2: search product is bulletproof.
Speaker 4: Yeah. I mean they're throwing off tremendous amounts of cash
Speaker 4: as it is, and and they're investing a lot, and
Speaker 4: and you look at the margin disparity versus a meta.
Speaker 4: You know, they have a lot of cushion there, so
Speaker 4: and they're investing, you know, strongly as well. So I
Speaker 4: don't think it's mutually exclusive. So long as the ball
Speaker 4: continues to move forward, which is what we need to see,
Speaker 4: and we'll see what the color commentary is on the call.
Speaker 4: I think it'll be okay. I think the longer term
Speaker 4: is where the questions linger. Shorter term, it'll be fine,
Speaker 4: all right.
Speaker 3: So let's go to Microsoft, because it's also the other
Speaker 3: big one that are one of the big ones. After
Speaker 3: the close, it's up about five percent here in the aftermarket.
Speaker 3: This one. Sales and profit beat expectations on robust AI demand.
Speaker 3: That's the headline on our story. So quarterly sales and
Speaker 3: profit climbing more than rejected, lifted by corporate demand for
Speaker 3: Microsoft's cloud and AI offerings. Revenue, as we said, up
Speaker 3: seventeen percent in the third quarter, sixty one point nine
Speaker 3: billion profit two ninety four a share. Analyst on average
Speaker 3: estimated per share earnings of two point eighty three two
Speaker 3: dollars and eighty three cents excuse me, on sales of
Speaker 3: sixty point nine billion. So again outperformance here, and we
Speaker 3: know that such an Adella has been really infusing all
Speaker 3: of Microsoft's entire product line with AI technology thanks to
Speaker 3: its partner open Ai. So thoughts on Microsoft, what we
Speaker 3: got here in the quarter, what it tells you about
Speaker 3: their business today and going forward.
Speaker 4: Yeah, what's most amazing to me is the fact that
Speaker 4: they're able to maintain the growth rates no matter how
Speaker 4: big their revenue base gets, and the fact that they're
Speaker 4: able to deliver the numbers that you just cited and
Speaker 4: do so in an efficient way where earnings are continuing
Speaker 4: to grow at the same rate, So it's not a
Speaker 4: there's no contra indicators on and you know, sales versus spending.
Speaker 4: So I think that to me, the sustainability is the
Speaker 4: biggest and most impressive component of their operations. And and
Speaker 4: most importantly, you know, broadly, I think you can extrapolate
Speaker 4: that the themes on the data center spend and the semiconductors,
Speaker 4: like the nvideos of the world, and the direction of
Speaker 4: corporate enterprise and their appetite for shifting from analog to
Speaker 4: digital is as strong as ever. So I think it's
Speaker 4: a very very good omen for a lot of these
Speaker 4: companies and being at the center of it, because you
Speaker 4: can make an analogy that you want in the first inning,
Speaker 4: third inning, or whatever. But I think the main thing
Speaker 4: is that the world is going to I think Sam
Speaker 4: Altman has this quote that he said, the technological changes
Speaker 4: that we've seen over the last five hundred years, No,
Speaker 4: the changes over the next fifty years will be greater
Speaker 4: than the technological changes over the next last five hundred, right,
Speaker 4: you know. So that's the pace of change that we're
Speaker 4: talking and a lot of that's going to come in
Speaker 4: the first decade, and these companies aren't all at the
Speaker 4: epicenter of it.
Speaker 3: Just want to point out Azure Microsoft's cloud computing unit
Speaker 3: revenue gaining thirty one percent in the quarter, above an
Speaker 3: average prediction of twenty nine percent, so picking up slightly
Speaker 3: from the thirty percent growth in the previous period. So
Speaker 3: you know, that's a trend line. If you're following it right,
Speaker 3: you want to see I.
Speaker 2: Mean, there's a chance we see both of the depending
Speaker 2: on what happens. There's a chance we see both Alphabet
Speaker 2: and Microsoft hit new records tomorrow in today's trade, depending
Speaker 2: on what happens. Okay, I want to talk James just
Speaker 2: a little bit about Microsoft's legacy here and the way
Speaker 2: that it's been able to shift and embrace AI. Where's
Speaker 2: the most important part of looking at Microsoft's growth moving forward.
Speaker 2: I mean, I know, we obviously know Azure is incredibly important,
Speaker 2: but the company has made a huge, huge bet on
Speaker 2: AI with open Ai. Where do you start to see
Speaker 2: that investment and its relationship with open Ai manifest in earnings.
Speaker 4: I think it's going to be, you know exactly, You'll
Speaker 4: see it in the Azure business, but more broadly in
Speaker 4: the intelligent cloud segment. I mean, it just continued to
Speaker 4: translate on that front. But it's not just that segment.
Speaker 4: It's going to have It's going to feed into other
Speaker 4: parts of their business too, you know, on the subscription
Speaker 4: side of their software services and potentially even gaming and
Speaker 4: uh you know, so there's there's a lot of levers
Speaker 4: I think that will be pulled from that relationship. And
Speaker 4: as the world and the corporate enterprise continues to move
Speaker 4: in that direction, more data is going to feed into it,
Speaker 4: which is going to fuel even more efficiency with respect
Speaker 4: to the capabilities that they do. And you know, Copilot,
Speaker 4: you know, for instance, is just on the I don't
Speaker 4: want to use saying first ending of that day day
Speaker 4: two of its POTENTI so, and there's a lot of
Speaker 4: money to be paid there that you'll see that I
Speaker 4: don't think is being appreciated at all, virtually at all.
Speaker 2: Right now, these are all different companies, but they're all
Speaker 2: working on AI, and to a certain extent, they're competing
Speaker 2: with each other when it comes to that technology. No question.
Speaker 2: Given what we're seeing from shareholders in reaction to Microsoft
Speaker 2: and Alphabet today, and given what we saw today in
Speaker 2: the session from reaction from investors to meta platforms sending
Speaker 2: shares for their worst ten months, what did the two
Speaker 2: companies that reported today get right? Or maybe a better
Speaker 2: way to ask is what did meta platforms get wrong?
Speaker 4: What did meta platforms get wrong? I think what they
Speaker 4: got wrong was largely related to the management of the expectations.
Speaker 4: You know, there was no indication around the pace of
Speaker 4: investment that's necessary to sustain the kind of growth. I mean,
Speaker 4: they talk very qualitatively about this is a big opportunity ahead,
Speaker 4: you know, all the metaverse and YadA YadA, But you know,
Speaker 4: there was no pushback whatsoever on the questions and commentary
Speaker 4: with respect to you know, how we should expect the
Speaker 4: pace of investment to ramp to justify and capitalize on
Speaker 4: the trends that Zuckerberg talks about. So I think it
Speaker 4: was more of an expectation versus reality and mismatch that
Speaker 4: probably could have been better managed.
Speaker 3: All right, let's just remind everybody the big earnings after
Speaker 3: the close and those that have really outperformed here and
Speaker 3: showing some studying moves to the upside. Microsoft among them.
Speaker 3: That stock, as we mentioned, it is moving up just
Speaker 3: about four point four percent here in the aftermarket, and
Speaker 3: the company coming out sales and profit beating expectations, lifted
Speaker 3: by corporate demand for the software maker's cloud and AI offerings.
Speaker 3: We talked about Azure gaining revenue alone, gaining thirty one
Speaker 3: percent in the quarter that was above of analyst expectations.
Speaker 3: Revenue in the third quarter overall up seventeen percent to
Speaker 3: sixty one point nine billion dollars. Profit was two dollars
Speaker 3: ninety four cents a share. Analysts on average estimated per
Speaker 3: share earnings of two eighty three, so below what they
Speaker 3: actually came in with, and the estimate for sales was
Speaker 3: sixty point nine so again really hitting out of the
Speaker 3: park when it comes to those estimates. And that is
Speaker 3: certainly one reason why you're seeing the stock or a
Speaker 3: big reason why you're seeing the stocks up. The stock
Speaker 3: of Microsoft, I should say, up at the aftermarket.
Speaker 2: Okay, let's worth let's repeat a little bit of what
Speaker 2: we saw from Alphabet the company's first quarter Google AD
Speaker 2: revenue coming in at sixty one point sixty six billion
Speaker 2: versus estimates of sixty point one eight billion, and in
Speaker 2: the company author authorizing a repurchase of up to an
Speaker 2: additional seventy billion dollars worth of shares, also declaring a dividend,
Speaker 2: a cash dividend of twenty cents per share. First quarter
Speaker 2: revenue excluding traffic acquisition costs sixty seven point five to
Speaker 2: nine billion, beating estimates of sixty six point oh seven billion.
Speaker 3: To the downside, int Hell shares are down more than
Speaker 3: eight percent here, biggest maker of PC processors. Lack luster
Speaker 3: forecast from the company for the current quarter, indicating it's
Speaker 3: really still struggling to kind of find its way back
Speaker 3: to the top, if you will. Sales in the second
Speaker 3: quarter will be about thirteen billion. That compares with an
Speaker 3: average analyst estimate of thirteen point six billion according to
Speaker 3: our data here at Bloomberg. Profit again, the outlook will
Speaker 3: be ten cents a share of minus certain items versus
Speaker 3: a projection of twenty four cents, So that's a pretty
Speaker 3: big miss. We're talking with James Chockmock partner and tech
Speaker 3: analyst over at Clockwise Capital. James, is there's some underlying theme.
Speaker 3: We're not through all the MAGS seven companies. We've got
Speaker 3: what Amazon next week?
Speaker 2: Yeah, we've gotten video in a while, right.
Speaker 3: So we've got some other plays to get through. But
Speaker 3: is there any themes that you're finding, certainly for the
Speaker 3: investment community when it comes to especially these big tech names,
Speaker 3: the mag seven often who haven't always been so magnificent
Speaker 3: as of late, what they're saying and kind of their
Speaker 3: impact on the overall market, there's some big takeaway here
Speaker 3: for you.
Speaker 4: I think the biggest takeaway is that the sellers of
Speaker 4: these data center services are the best place to be,
Speaker 4: you know, from Navidia to Dell and the server side,
Speaker 4: like we own VRT which helps with the cooling systems,
Speaker 4: comfort systems, you know. So there's a lot of these
Speaker 4: companies that play into building out the companies that are
Speaker 4: selling to the hyperscalers. I think will continue to be
Speaker 4: in a great position now that as far as the
Speaker 4: Max seven is concerned, I do think, you know, the
Speaker 4: market is still in a state of shoppiness and volatility,
Speaker 4: and I think that's going to last until we have
Speaker 4: better clarity on what the FED is going to do.
Speaker 4: And you saw the GDP numbers today, So there's there's
Speaker 4: mixed messages as to which direction macro is going versus
Speaker 4: tech and which one to prioritize, because if you prioritize
Speaker 4: the economic cycle, then that means valuations are at risk.
Speaker 4: If you prioritiz is the text cycle, that means that
Speaker 4: earnings are the focus. And right now we're in this
Speaker 4: world where someday's valuations are in focus and other days
Speaker 4: earnings like today, Hey, so I think you just got
Speaker 4: to stay nimble at the end of the day.
Speaker 2: Hey, James, last question. Thirty seconds. Here, I'm looking at
Speaker 2: time US Equity on the Bloomberg terminal. This is the
Speaker 2: clockwise Core Equity and Innovation ETF. It is up this
Speaker 2: year a whopping eighteen point three percent, out performing all
Speaker 2: the benchmarks. Amazon is your second biggest holding after t
Speaker 2: bills make accounting for five percent of the portfolio. We
Speaker 2: got Amazon coming up. Thirty second preview of Amazon.
Speaker 1: Yeah.
Speaker 4: Amazon, it's the only of the mag seven that we
Speaker 4: feel that we haven't cut exposure to. You know, it's
Speaker 4: a five percent or give or take weight, and we're
Speaker 4: maintaining that. I think the data that you saw from
Speaker 4: Microsoft and today is really to the cloud is a
Speaker 4: very good omen. They're firing across all three other businesses,
Speaker 4: you know, on the on the grocery side, the retail side,
Speaker 4: the cloud side, and this is the first time in
Speaker 4: a while that you've seen everything going in the right direction,
Speaker 4: and most especially on the margin. So you know, we
Speaker 4: like the risk award here. You know, I think next
Speaker 4: year you could get the two twenty five. This year
Speaker 4: probably upwards of two hundred, So you know it's one
Speaker 4: that definitely keeping the portfolio for sure.
Speaker 3: All Right, we're going to leave it. On that note, Hey, James,
Speaker 3: thank you so much. James. Chuck mack partner and tech
Speaker 3: analyst at Clockwise Capital, joining us on Zoom from Miami.
Speaker 3: A lot of names moving here in the aftermarket.
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Speaker 3: All right, we're going to call this an unwelcome combination.
Speaker 3: You have Second AMIC gross sliding to an almost two
Speaker 3: year low last quarter, while inflation jumped to uncomfortable vels.
Speaker 3: John just talking about all of this interrupting a run
Speaker 3: of strong demand and muted price pressures that had fueled
Speaker 3: optimism for that soft landing side, that soft landing tim
Speaker 3: it feels like maybe not going to happen, at least
Speaker 3: not for today.
Speaker 2: At least not today. With more on today's data and
Speaker 2: the reaction in the US treasury market. Back with us,
Speaker 2: it's Bloomberg News International Economics and Policy correspondent Michael McKee,
Speaker 2: also Bloomberg News Rates reporter Michael mackenzie. Both here in
Speaker 2: the studio. Michael McKee. I want to start with the
Speaker 2: data on growth and inflation. Just just break it down
Speaker 2: for us and what exactly has folks so concerned.
Speaker 6: Well, the number came in worse than forecast and certainly
Speaker 6: down from the fourth quarters three point four We had
Speaker 6: one point six percent growth in the first quarter, But
Speaker 6: it really wasn't as slow as it appears, because at
Speaker 6: least as far as people like the FED would be concerned,
Speaker 6: because a lot of it was trade. We imported a
Speaker 6: lot more than we exported, partly because of the strong dollar,
Speaker 6: and it's cheaper to bring in imports, and if imports
Speaker 6: are coming in, it does suggest that retailers and others
Speaker 6: are anticipating this can sell the stuff. Consumer spending two
Speaker 6: point five percent, not as bad as it could have been,
Speaker 6: down from last quarter, but still reasonably good. Business investments
Speaker 6: still strong two point nine percent. Inventory is another problem.
Speaker 6: Inventories weren't as high, but inventories and trade are very volatile,
Speaker 6: so overall, it's not that bad a report. When you
Speaker 6: take out inventories and trade, you get a three point
Speaker 6: one percent growth rate, so not too bad. What worried everybody,
Speaker 6: and this is mikes people over there is the PCE
Speaker 6: inflation numbers. Now, the government calculates this number quarterly with
Speaker 6: average of the three months, and it also does a
Speaker 6: month by month, And what ended up happening is a
Speaker 6: big jump of three tenths of eight percent in the
Speaker 6: year over year numbers for both headline and core core,
Speaker 6: particularly concerning people. And so that's what the market's focused
Speaker 6: on and started falling out of bed because of now
Speaker 6: we get the monthly We've gotten the monthly figures for
Speaker 6: January and February. We get the monthly figure from March tomorrow,
Speaker 6: and the question is was this a problem all across
Speaker 6: the quarter, Was this a problem in January and February
Speaker 6: and they had to revise those numbers, or are we
Speaker 6: going to have a big negative surprise tomorrow.
Speaker 3: So if March comes down, we wouldn't be so worried.
Speaker 6: We wouldn't be so worried. If March comes in as
Speaker 6: forecast or goes a little bit lower, then you'll watch
Speaker 6: the market's melt up tomorrow.
Speaker 3: Probably well, I don't know if I want to say
Speaker 3: a melt up, but we definitely have seen a move
Speaker 3: up once again in terms of the treasury curve and yields.
Speaker 3: So Michael McKenzie come on in on this talked about
Speaker 3: talk to us about the rate moves that we saw today.
Speaker 5: It's a classic. You get some whole piece of data,
Speaker 5: another whole piece of inflation data in particular, which has
Speaker 5: been the story for all this year. And as Mike's
Speaker 5: just said, if you see some relief tomorrow from the
Speaker 5: March number, you might get some stability here in treasuries.
Speaker 5: It has been interesting this morning. We did get above
Speaker 5: two five percent of the twos, but the buyers came back.
Speaker 5: We're right around that five percent level still. Ten's got
Speaker 5: above four. Seventy came back a bit as well. The
Speaker 5: seven year auction nice concession, so they took down a
Speaker 5: forty four billion of seven year notes just now. So
Speaker 5: in general, the markets, the Treasury sold over one hundred
Speaker 5: and eighty billion of coupon debt this week twos, fives,
Speaker 5: and seven. There's a lot of supply. The problem is,
Speaker 5: of course, if the inflation numbers remained sticky tomorrow and
Speaker 5: it indicates that there is no relief near term, You've
Speaker 5: got a refunding coming next week, and that announcement's going
Speaker 5: to keep putting supply on the table, particularly because the
Speaker 5: refunding is quarterly, they set out what they're going to
Speaker 5: sell for the next three months, and I suspect the
Speaker 5: three year will be fine. It's the ten year and
Speaker 5: the thirty year, the longer date stuff, and that was
Speaker 5: selling off a lot today as well. So you could
Speaker 5: see a further test coming here of four seventy five
Speaker 5: and higher and tens for example, because we're pricing out
Speaker 5: the rate cuts for this year now we're down to
Speaker 5: just one. Must always been invested this morning. You always
Speaker 5: said it was going to be one this year, and
Speaker 5: they're feeling pretty cool good about this now and they're
Speaker 5: advising you should start scaling into into bonds at these levels.
Speaker 5: But as as she also said to me, don't go
Speaker 5: all in at these levels. At the moment, you still
Speaker 5: got it. There's still plenty of time to see just
Speaker 5: how the data turns and how the Fed's going to react,
Speaker 5: particularly next week when Powell gives his press conference. Is
Speaker 5: he actually now going to say potentially there could be
Speaker 5: some changes here and that's where the mark will be
Speaker 5: really focused on from here.
Speaker 2: Michael McKey jump in on that and what we do
Speaker 2: hear from Fed jo J. Powell with that me meeting
Speaker 2: next week.
Speaker 6: Well, everybody's gonna be looking for him to maybe put
Speaker 6: some time frame on it. He's already said we're not
Speaker 6: going to cut rates as soon as people thought, and
Speaker 6: we're waiting for more progress on inflation. I was laughing
Speaker 6: when Michael was talking there because the small I was
Speaker 6: looking at the the Fed funds futures and the swaps
Speaker 6: rate for when markets think we're going to get rate cuts,
Speaker 6: and they priced everything out until December, and just a
Speaker 6: moment ago they priced November back in by a basis point.
Speaker 6: Now it's going back and forth. This is what I
Speaker 6: predicted it this morning. It goes back and forth. And
Speaker 6: the funny thing is is, okay, people want to make
Speaker 6: a bet one way or another, that's fine, But the
Speaker 6: Fed doesn't know what it's going to do. And because
Speaker 6: they're data dependent and they're watching this data and it's
Speaker 6: not coming in as they thought, so they have to
Speaker 6: rethink what they want to do and when they want
Speaker 6: to do it, and they're just going to wait meeting
Speaker 6: by meeting to get a handle on it. So whatever
Speaker 6: the Fed funds futures or swaps say at this point
Speaker 6: isn't necessarily what's going to happen.
Speaker 3: But Michael, are the rate moves and the trader are
Speaker 3: they data dependent on? Thinking about what Luzianne Sanders or
Speaker 3: Swab said to us yesterday, and she's like, stop focusing
Speaker 3: on the debate about what's the Fed going to do?
Speaker 3: When is it gonna cut raise how many rates? Like
Speaker 3: just that's not what investors care about, Like, and she
Speaker 3: was tying, what's going on inequity markets is going is
Speaker 3: based on what's going on in the rates markets? The
Speaker 3: rates market. Are they taking their cues I mean, they
Speaker 3: do take their cues from J. Powell. They also, though
Speaker 3: do from data points, right, they help us understand they do.
Speaker 5: But you've got to remember there's different types of investors.
Speaker 5: I mean, the people who are trading is swaps whether
Speaker 5: and sort of trading between whether there's going to be
Speaker 5: a November cut, December cut, or maybe saying, actually November's
Speaker 5: two close elections, so maybe it's going to be a
Speaker 5: September cut, and they'll jump back in there if they
Speaker 5: get any kind of relief from the data side. They're
Speaker 5: the short term momentum players, longer term investors who you've
Speaker 5: been telling us for weeks. God, it's so nice to
Speaker 5: see yields finally getting into that four and a half
Speaker 5: five percent zip code. We didn't have that since two
Speaker 5: thousand and seven. And so their advice is, look, you've
Speaker 5: got to start strategically allocating more and more money and
Speaker 5: scale into the bond market as itselves off. The other
Speaker 5: point to make about all this, of course, is that
Speaker 5: the market priced in a lot of rate cuts at
Speaker 5: the start of this year, in part because Powell made
Speaker 5: the famous pivot in December. Now as the market takes
Speaker 5: that out, you're tightening financial conditions. If you keep pushing
Speaker 5: yields higher, you're going to keep tightening financial conditions, and
Speaker 5: therefore things will start to slow down again, and then
Speaker 5: the market will go back. It's kind of like a
Speaker 5: washing machine side.
Speaker 2: But that's kind of what we saw in like August
Speaker 2: September Olobra when we saw yields move higher.
Speaker 5: Yes, so at the moment, the Treasury Index is on
Speaker 5: course to have its worst month since last February, and
Speaker 5: in fact, it's not that far away from actually being
Speaker 5: the worst month since the dark months of twenty twenty
Speaker 5: two when things are really getting rocky. So that shock
Speaker 5: is coming through. Equities will probably take more of a
Speaker 5: hit two of yelds keep on going up, because ultimately,
Speaker 5: can this economy live with real yields going towards two fifty?
Speaker 5: I mean, that is debatable, but I think at the
Speaker 5: end of the day, as rights keep going, that's going
Speaker 5: to actually help slow things down. So ultimately you will
Speaker 5: get some kind of cuts from the FIT. I would
Speaker 5: think if this is the direction of trouble.
Speaker 3: What about the argument that, well, wait a minute, people,
Speaker 3: some investors are actually feeling, you know, wealthier that they've
Speaker 3: put money and you know, whether it's money markets are
Speaker 3: so and so forth, and they're getting some decent returns.
Speaker 3: Or you look at some of these megacap tech companies.
Speaker 3: You've got so much cash on their balance sheet and
Speaker 3: they're actually making money. We talked with our Bloomberg intelligence
Speaker 3: team and they said, they're actually making some real money
Speaker 3: on all of this. How does that impact things? Well,
Speaker 3: in terms of the economic impact and a slow down.
Speaker 6: There's a theory that the fed's high rates are actually economy,
Speaker 6: but nobody really at the FED would believe that the
Speaker 6: wealthfair And the fact is that people who have enough
Speaker 6: money to be really making money in the markets aren't
Speaker 6: going to just start spending more because the markets are
Speaker 6: going up, they're spending as they do. So I don't
Speaker 6: think there's a lot to that.
Speaker 3: What do you say to Michael saying, really yet, the
Speaker 3: two fifty? Can the economy live with that?
Speaker 6: It looks like it. I mean, that's the thing that
Speaker 6: the Fed is saying at this point is we don't
Speaker 6: have to because we have really yield at that level,
Speaker 6: and we have very low unemployment, and we have reasonably
Speaker 6: strong growth. Inflation is a bit of a problem, but
Speaker 6: we'll see how that goes over the next couple of months,
Speaker 6: so we don't need to react at this point. And
Speaker 6: when you go back in history and you look at
Speaker 6: what happened after previous recessions, when the FED started raising
Speaker 6: rates before we got into the Great Financial Crisis and
Speaker 6: went to zero, this is not an unusual rate level.
Speaker 6: You know, five and a half is maybe a little
Speaker 6: bit higher than you would have seen, but you're looking
Speaker 6: at four to five percent as a kind of a
Speaker 6: normal rate. Now, it's been twenty some years since we've
Speaker 6: been there, so people aren't used to that. But the
Speaker 6: how we function with that.
Speaker 2: Is that the feeling that you're getting right now talking
Speaker 2: to bond investors that this level of rates is the
Speaker 2: new normal.
Speaker 5: Yeah, they think it's a return to what we had
Speaker 5: before the financial crisis. I mean, the financial crisis was
Speaker 5: the biggest economic shot since the Group Depression. You had
Speaker 5: the biggest collapse of financial markets and of the banks
Speaker 5: since the depression era. I mean it came what ten
Speaker 5: years after the dismantled Class Steagle. So you know, again,
Speaker 5: it takes a long time to recover from those kind
Speaker 5: of huge balance sheet shocks, particularly when it's overlaid with
Speaker 5: a massive housing bubble bursting. So you had both households
Speaker 5: and banks taking a massive hit it. You know, it
Speaker 5: took a decade to get through. And then you get COVID,
Speaker 5: which is suddenly just is a massive infusion of cash
Speaker 5: into the broad economy. And so we now have, you know,
Speaker 5: inflation picking up. FED unable to be yet to be
Speaker 5: confident enough that it can start to ease back, to
Speaker 5: ease back on those brakes and start cutting rates again,
Speaker 5: because they don't of the confidence of inflation is truly
Speaker 5: under control. And it is a tricky period for the
Speaker 5: FED because whenever you do see a pickup in inflation,
Speaker 5: yes it will come down, but if it remains elevated,
Speaker 5: that means the economy is vulnerable to another inflation shock
Speaker 5: which kicks it back up into gear. But I think
Speaker 5: in general bond investors like what they're seeing. They do think, yes,
Speaker 5: there's potential for rates to go a bit higher from here,
Speaker 5: but in general they think we're pretty much near the top.
Speaker 5: But it's what it's very difficult to pick a top.
Speaker 5: So this is why a lot of the longer term
Speaker 5: investors are just scaling into the market, and in particular
Speaker 5: though they are not comfortable about debt beyond ten years.
Speaker 5: And that gets back to the spending that's going on
Speaker 5: in Washington. It gets back to the fact that whilst
Speaker 5: the tax receipts have come in strong this year, that
Speaker 5: will kind of push supply, eases the pressure on supply
Speaker 5: concerns next year and beyond, particularly given however the election
Speaker 5: shakes out, you can have another round of supply, another
Speaker 5: more pressure coming through. And the one thing I will say,
Speaker 5: if I look at the ten year and the third
Speaker 5: they really haven't truly come back to where we were
Speaker 5: before the financial crisis. Because if you look at the
Speaker 5: very geeky bond model that says what is the risk premium,
Speaker 5: it's only still around zero for ten years. That to
Speaker 5: me is a problem because you need to have a
Speaker 5: positive risk premium. Partly that'll come about if the curve steepens.
Speaker 5: But if you talk to investors, this is why they're
Speaker 5: a bit reticent about ten year and longer debt.
Speaker 3: I do wonder we've had a lot of guests. I
Speaker 3: feel like we've come on and just reminded us about
Speaker 3: the importance of US government debt and managing it and
Speaker 3: servicing it and the additional issuance that will be needed. Mike,
Speaker 3: I mean, go back, right, how many years that we've
Speaker 3: talked about this so much in the past and then
Speaker 3: it kind of went away. But concerns about the cost
Speaker 3: of the ballooning government debt and servicing that. How do
Speaker 3: you think about that in terms of the economic impact.
Speaker 6: Well, the way the FED looks at it is if
Speaker 6: it has an impact on the economy, they might have
Speaker 6: to react, but they really can't do a whole lot
Speaker 6: because the government the fiscal side is not there.
Speaker 1: Area.
Speaker 6: We have been talking about the problems of high debt
Speaker 6: forever and we've never hit the spot where it really
Speaker 6: affects the economy.
Speaker 4: Now.
Speaker 6: Economic theory tells you that it will, but we don't
Speaker 6: know where that is, and we don't know how it's
Speaker 6: going to play out. This is the biggest economy the
Speaker 6: world has ever seen. We have our own printing press,
Speaker 6: so there are ways you could deal with it. But
Speaker 6: you know, you don't want inflation to break out because
Speaker 6: of that, So there isn't much the Fed can can
Speaker 6: really do. They don't have a context for it because
Speaker 6: we haven't had the problem. They just think at some
Speaker 6: point it's unsustainable. Where that point is, we don't know.
Speaker 3: That's why I can kind of bring it up. I
Speaker 3: feel like we used to talk about it and then
Speaker 3: it went away. Final thoughts here, Michael just got about
Speaker 3: ten to fifteen seconds.
Speaker 5: I would think that pal speaking next week probably is
Speaker 5: more important than tomorrow's data. And then I think the
Speaker 5: job's number next week, if we still see a strong
Speaker 5: labor market that's not softening, I think the market could
Speaker 5: probably well take out rad cuts for this year in.
Speaker 6: Wednesday.
Speaker 5: And then you got the refunded but.
Speaker 3: Again market I round Michael McKee and Michael McKenzie, great duos.
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Speaker 3: All right, everybody, just about eighteen nineteen minutes left in
Speaker 3: today's trading session, getting ready to wrap up the Thursday trade.
Speaker 3: Bounce it around here. But we're definitely, as we keep saying,
Speaker 3: off our worst levels of this session down across the board,
Speaker 3: but nonetheless not as much of a risk off or
Speaker 3: negative tone as much as we saw earlier in the session.
Speaker 2: Well, let's hear what Melissa Outo has to say about this.
Speaker 2: She's head of TMT research at the fintech firm Visible Alpha.
Speaker 2: It provides it buy and sell side research. She joins
Speaker 2: us here in the Bloomberg Interactive Broker's studio. I want
Speaker 2: to talk tech because that's like your wheelhouse and it's
Speaker 2: a perfect data. Have you on, We.
Speaker 3: Really care about it right now in the week.
Speaker 2: I mean, first of all, everything's tech now, but you know,
Speaker 2: the big tech players are the ones that are reporting
Speaker 2: earnings this weekend next. So we had Meta Platforms yesterday,
Speaker 2: we have Alphabet and Microsoft after the bell today. First
Speaker 2: up is Meta platforms. Is this a selloff over so
Speaker 2: is this like overdone?
Speaker 7: First of all, thanks for having me on and what
Speaker 7: a wild day and the markets to be here speaking
Speaker 7: with you about tech. The backdrop is a jungle at
Speaker 7: the moment. I mean, there's so much happening, both from
Speaker 7: an earnings perspective and from a macro perspective. I think
Speaker 7: to address your question around Meta coming into the quarter,
Speaker 7: based on visible alpha consensus over the past couple of months,
Speaker 7: we didn't see numbers moving that much into the quarter,
Speaker 7: which suggested that consensus was fairly stable. So when they
Speaker 7: came out and said we're actually going to move our
Speaker 7: expense numbers, those expense numbers were actually higher than expectations,
Speaker 7: which the upper the upper range. The market did not
Speaker 7: like that. And it wasn't a one off because Mark
Speaker 7: Zuckerberg came out and said this is something longer term
Speaker 7: we're going to be investing for a while. It's going
Speaker 7: to continue, and I think we're What we also heard
Speaker 7: from him was about reality labs. Reality labs also continuing
Speaker 7: to see continued losses, and I think that was one
Speaker 7: area of the business where.
Speaker 1: That's not a surprise though.
Speaker 2: I mean, it's not where it wants to go, but
Speaker 2: it's kind of cost a lot of money and it's
Speaker 2: not like we're walking outside seeing people wearing these headsets around.
Speaker 7: The investment community was probably hoping for a bit more
Speaker 7: efficiency and discipline around that area, but he essentially came
Speaker 7: out and said, no, that's not happening. And I think
Speaker 7: those two the combination of those two things. So the
Speaker 7: market didn't like it.
Speaker 3: You know, it's interesting, right, and they certainly learned their
Speaker 3: lesson right prior to the year of efficiency, kind of
Speaker 3: get that and then kind of got their act together.
Speaker 3: A stock was often running big time last year, and
Speaker 3: we certainly have seen it move this year. You know,
Speaker 3: our own man Deep Singh saying, you know, there's a
Speaker 3: range there, and so it'll be interesting to see what
Speaker 3: they say about this quarter and whether or not they
Speaker 3: bring in that range and say, all right, so maybe
Speaker 3: it's going to be at the lower end. We got
Speaker 3: the message kind of thing.
Speaker 2: But I think what also Mandeep said that really stuck
Speaker 2: with me, Carol, was this idea that imagine the company
Speaker 2: making a fifty billion dollar investment or fifty billion dollar
Speaker 2: purchase of a company right and having nothing to show
Speaker 2: for it, because that's how much money it's going to
Speaker 2: end up spending in.
Speaker 3: This Indeed, it's a lot of money.
Speaker 7: Indeed, it's an incredible amount of money that has not
Speaker 7: really netted much ROI to shareholders.
Speaker 3: So the researcher that you are doing now around Meta,
Speaker 3: what are you saying, you know, what are you saying
Speaker 3: that it's not a buy at this point? Are you
Speaker 3: saying it's a moment where you maybe you take some
Speaker 3: off of your holdings in Meta? Like what is it
Speaker 3: that you are advising?
Speaker 7: The expenses around Meta and its investments in AI are
Speaker 7: going to be significant based on what the company has
Speaker 7: said and what we imagine for our consensus data is
Speaker 7: that there could be some additional upward revisions to expenses
Speaker 7: going forward this year and next year. So that's one
Speaker 7: area of the fundamentals that we're watching very closely.
Speaker 2: Okay, I want to shift now to what we have
Speaker 2: coming later today Microsoft and Google parent Alphabet, what are
Speaker 2: you seeing consensus over at Visible Alpha.
Speaker 7: It's a very interesting backdrop for both companies right now,
Speaker 7: and I think when we look at similarly coming into
Speaker 7: the quarter, we're not seeing a lot of movement around consensus,
Speaker 7: and that's you know, suggests from a top line and
Speaker 7: an EPs perspective that the market kind of has come
Speaker 7: out and said, Okay, this is what we think is
Speaker 7: priced in. However, when we dig beneath the surface, there's
Speaker 7: different things happening. For example, for the Azure business, the
Speaker 7: Intelligent Cloud operating profit margin has a massive range between
Speaker 7: either forty one percent on the bear side or fifty
Speaker 7: percent on the bull side, which gives us a consensus
Speaker 7: operating profit margin based on Visible Alpha consensus of forty
Speaker 7: five percent. But that's a pretty significant range in terms
Speaker 7: of what that business could deliver, and it's an enormous
Speaker 7: business for Microsoft, as your revenues based on Visible African
Speaker 7: sensus could be anywhere could be around seventy four billion
Speaker 7: dollars this year, ninety four billion dollars next year. And
Speaker 7: I think what we haven't seen is that any movement
Speaker 7: of that, and going into the quarter, I'm wondering what
Speaker 7: sort of commentary Nodella is going to come out with,
Speaker 7: and what's he going to say about the open AI business,
Speaker 7: about the open Ai partnership, about as your Ai, how
Speaker 7: that's ultimately going to start to deliver an ROI and
Speaker 7: have a real meaningful business impact on these fundamentals.
Speaker 3: So the consensus data is saying what basically that it's
Speaker 3: going to be hard for them to live up or what.
Speaker 7: There's a lot of debate out there. There's controversy in
Speaker 7: that range because of the significant range of the operating
Speaker 7: profit margin for the intelligent cloud business. It's not it
Speaker 7: means that there could be surprises, and so that's what's
Speaker 7: really interesting, because.
Speaker 3: What you look for is a tight range, right or
Speaker 3: as much or you know, in an ideal thing, it's
Speaker 3: one number basically. I mean, I don't know how often
Speaker 3: that happens. This is your world, how often does that happens?
Speaker 7: It does absolutely happen. So when I look at Microsoft's
Speaker 7: overall revenue, it's in a fairly tight range. But when
Speaker 7: I go beneath the surface and look at the details,
Speaker 7: you know, for example, the intelligent cloud business, the Azure business,
Speaker 7: within the intelligent cloud business, you know those that's where
Speaker 7: you see that nuance.
Speaker 2: How concerned should investors be about what these companies, these
Speaker 2: two companies tell us today about how much money they're
Speaker 2: investing and how much they're spending. Given what we saw
Speaker 2: from Meta, they've.
Speaker 7: Both been spending an outrageous ab out of money.
Speaker 2: Is it going to spook investors the way that Meta
Speaker 2: Platforms did or does Meta have that history of two
Speaker 2: years ago saying Hey, we're throwing in the towel on
Speaker 2: the Facebook product and we're switching totally to the metaphrse,
Speaker 2: So it's sort of a different type of investment.
Speaker 7: I mean, it is one area that we have been
Speaker 7: seeing clear trends in the numbers moving upward, is that
Speaker 7: CAPEX numbers for micro Soft have been steadily increasing over
Speaker 7: the next couple of years. Those estimates continue to creep
Speaker 7: up and have been really since last year, which yeah,
Speaker 7: which implies that, you know, the CAPEX expectations continued to
Speaker 7: be positive, and I think you know that's somewhat correlated
Speaker 7: to what we hear from players like Nvidia.
Speaker 3: Yeah, it's interesting, it's just a metric as people are
Speaker 3: building out their AI and all the players in it, right,
Speaker 3: like a different thinking about capex. You need the capital
Speaker 3: expenditors to do it. But is there a point where
Speaker 3: it becomes a little bit like, wait a minute, do
Speaker 3: we really understand are we outspending maybe the potential payoff?
Speaker 3: I guess we're kind of in that Noman's let. I'm
Speaker 3: trying to figure that out right now.
Speaker 7: Indeed, yeah, and I think you also mentioned alphabet. Alphabet
Speaker 7: is also another interesting one. Also, the top line in
Speaker 7: EPs consensus haven't moved much, but again going beneath the
Speaker 7: surface and really interesting movements. Also in their cloud business,
Speaker 7: the Google Cloud operating profit margin based on Visible Ephic
Speaker 7: consensus when for I'm eight point seven percent to seven
Speaker 7: point three percent the past couple of months, and that's
Speaker 7: a pretty big move one hundred and forty basis points
Speaker 7: in the virgin So it.
Speaker 3: Implies that we get to run. We got to run,
Speaker 3: forgive us lots of numbers, but lots of things to
Speaker 3: think about as the earnings come out. Melissa Outro, she's
Speaker 3: head of TMT research at the at Visible Alpha. And
Speaker 3: this is Bloomberg.
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