Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Daily
Speaker 1: we bring you insight from the best in economics, finance, investment,
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Speaker 1: we speak with Jonathan Gollob. He's a credit Swiss. He
Speaker 1: writes piercingly detailed sell side reports on the state of
Speaker 1: the market, and his state has been a state of
Speaker 1: optimism for ages. John Gollob, what is the tech afternoon
Speaker 1: of yesterday? What does that signal for America? You know,
Speaker 1: for the what is the signal for America? I mean,
Speaker 1: you know, I'm not sure that it represents the whole economy.
Speaker 1: But when you're investing in the stock market, you're investing
Speaker 1: in a basket of five hundred or a thousand, or
Speaker 1: however many socks are in your portfolio. And what it
Speaker 1: says is the companies that are in the public markets,
Speaker 1: that you invested in a mutual funder in your brokerage account,
Speaker 1: they are in extremely strong shape, even though the economic
Speaker 1: backdrop is much more troubling. So here's what I hear.
Speaker 1: We've got a lot of smart people saying sell the
Speaker 1: tech move here, hold the tech move here. Can you
Speaker 1: make a case this morning that you acquire more shares
Speaker 1: of these juggernauts? Absolutely, And I don't think that the
Speaker 1: cases because they delivered great earnings yesterday alone. I mean
Speaker 1: these companies if you look at the top five companies,
Speaker 1: and yesterday we've got four of the top five reported
Speaker 1: they returned in the last twelve months. The rest of
Speaker 1: the market delivered zero. But more importantly, these companies have
Speaker 1: no debt on their balance sheets, They're sitting with cash,
Speaker 1: they are less volatile than the rest of the market.
Speaker 1: They're growing. In the last twelve months, they've grown their
Speaker 1: revenues something like ten times faster than the rest of
Speaker 1: the market. The p of these companies relative to the
Speaker 1: growth rate is half what it is on the market,
Speaker 1: so they're trading at a premium stock market multiple. They're
Speaker 1: more expensive, but they're delivering so much faster growth that
Speaker 1: the pe relative to the growth rate is the rest
Speaker 1: of the market. I think the surprise is going to
Speaker 1: be that these five or seven or many companies that
Speaker 1: are leading the market are going to the gap between
Speaker 1: them and everything else is going to continue to watch John,
Speaker 1: You've done some tremendous research on this over the last
Speaker 1: couple of weeks and it's all helped made personally compare
Speaker 1: and contrast the top five now to the top five
Speaker 1: back in two thousand. Yeah. Well, first of all, all
Speaker 1: five of them are tech today, and you had companies
Speaker 1: like ex On Mobile and and some others in back
Speaker 1: at the peak of the uh you know, in March
Speaker 1: of two thousand. But the companies back then were much faster,
Speaker 1: I'm sorry, they were much more expensive than they are today.
Speaker 1: Um they were. They were less healthy companies. Their earnings
Speaker 1: growth rates um were not um so superior. Rather compared
Speaker 1: to the rest of the market the way these companies
Speaker 1: are today. They had the you know, the the profile
Speaker 1: of these companies, UM, just is is much stronger. And
Speaker 1: if I were to say to you that the market
Speaker 1: is growing this fast and has these margins and doesn't
Speaker 1: have any debt, and would you rather be in them,
Speaker 1: you'd say yes. And then I say, by the way,
Speaker 1: it's only five companies. People say, wow, that sounds a
Speaker 1: little bit risky. It's only five names. That's not the
Speaker 1: key point. It's how healthy the businesses are. How does
Speaker 1: it get better than this, I think is a question
Speaker 1: some people will be asking this morning relative to the
Speaker 1: situation we faced in Q two. John, A conversation, rotation on,
Speaker 1: rotation off. It's a conversation we've had repeatedly over the
Speaker 1: last several months. Is rotation off again? No? I mean,
Speaker 1: I think the real I think the real question though is,
Speaker 1: and I know that you guys have have been addressing this.
Speaker 1: The story that has me really concerned. You know, this
Speaker 1: this fall and interest rates is basically the market saying
Speaker 1: we don't think there's gonna be any economic growth over
Speaker 1: the decade. Forget you know, we're going to get a
Speaker 1: bounce off the bottom. I know it's kind of slowing
Speaker 1: down and stalling out a little bit, but really the
Speaker 1: question is what is the impact of all this over
Speaker 1: the long run and all the debt that we're accumulating,
Speaker 1: and it's going to be slower the this weakening of
Speaker 1: this this bounce is really problematic for industrial companies and
Speaker 1: um mining companies and retailers and banks, and so you
Speaker 1: have a chunk of the market, maybe a third of
Speaker 1: the market, that is really susceptible to some of the
Speaker 1: economic problems that we're having, and then you have probably
Speaker 1: about seventy of the market, not just five names, but
Speaker 1: at the market that appears to be really healthy if
Speaker 1: you look at healthcare names and consumer staples names. Um,
Speaker 1: so you have this real bifurcation not only between just
Speaker 1: the five, but those that are are super exposed to
Speaker 1: these economic woes and then everything else, which seems pretty
Speaker 1: good when you talk about that benefit dramatically from the
Speaker 1: lower interest rates because they can borrow money at record
Speaker 1: low costs. How much do you expect the trend of
Speaker 1: borrowing money to buy back shares, to reduce the equity footprint,
Speaker 1: to shift the capital structure into cheap debt. How much
Speaker 1: do you expect that to continue, basically the privatization of
Speaker 1: the biggest and strongest companies in America at least, I
Speaker 1: don't think that that's the way that that things actually
Speaker 1: play out. I think that what happens is these companies
Speaker 1: are generating a boatload of free cash flow from their businesses,
Speaker 1: and that's what they're returning. So when you talk about
Speaker 1: the amount that they're buying back, in the amount that
Speaker 1: they maybe pay out and dividends and things like that,
Speaker 1: it's the fact that they're just they're generating more capital
Speaker 1: than than they need to run their businesses, and so
Speaker 1: they spew it back out to two shareholders. And I think, um,
Speaker 1: I think that's the that's the big story. The rest
Speaker 1: the market that can necessarily do the same, John, I
Speaker 1: want you to fold in your equity call with the
Speaker 1: stunning caution I has heard from your colleague James Sweeney.
Speaker 1: I've done James Sweeney for ages. He's a brilliant economist
Speaker 1: and I was thunderstruck earlier this week whenever it was
Speaker 1: over his cautious view forward. Fold that into your optimism
Speaker 1: on holding equity shares. Listen, I I love James, and
Speaker 1: I think that his call right now is is smack on.
Speaker 1: We have to separate out what is going on in
Speaker 1: a number of public companies that have a certain type
Speaker 1: of profile, and what's going on in employment markets and
Speaker 1: the economic data. It's really clear, especially as we move
Speaker 1: into September and October, that we're going to see some
Speaker 1: of these brilliant numbers economically that we have bouncing. I
Speaker 1: s M is bouncing. It will probably bounce towards sixty
Speaker 1: and then it's going to roll back down. We're ready
Speaker 1: starting to see this with some of the employment numbers
Speaker 1: that have stopped improving, and I think that it's it's
Speaker 1: the reason that you're seeing interest rates UM slip the
Speaker 1: way that they are. And I think investors have to
Speaker 1: kind of separate out when they think about equities are
Speaker 1: not the economy. They're married to each other, or they're
Speaker 1: or their cousins of each other, but but they're not
Speaker 1: the same thing. And I think his calls right, which
Speaker 1: is why I wouldn't be putting money in industrial stock
Speaker 1: today and I wouldn't be calling for some kind of
Speaker 1: a rotation out of the winners. I love James to
Speaker 1: Jonathan gollip a credit swas, let's get to throw scot
Speaker 1: Bridge Capital cod C. I try fantastic to catch up
Speaker 1: with you, sir. How on earth do you make a
Speaker 1: macro called self to data and then make the right
Speaker 1: market called equities higher credit spreads Tita. Yeah, well, obviously
Speaker 1: it's very difficult if you were timing the contraction economy
Speaker 1: and set we're in March. You know, most macro managers
Speaker 1: had a very difficult time timing the recovery. UM. We'd say,
Speaker 1: look the trends that were in place before the pandemic
Speaker 1: have just been exacerbated by it, right, And you alluded
Speaker 1: to before that the stock market has become less and
Speaker 1: less representative of the real economy. And you still have
Speaker 1: arguably the greatest divergence between real economic outcomes and the
Speaker 1: stock market, right. And why is that? Right? Obviously, big
Speaker 1: tech is dominating more and more. You know, the top
Speaker 1: five names of the SMP. You guys had a great
Speaker 1: article on this yesterday, have a two since January the
Speaker 1: rest of the stock markets up. That's a historic divergence.
Speaker 1: The other key factor, of course, has been the FED, right,
Speaker 1: and their balance sheet. Even though it has contracted by
Speaker 1: about two or fifty billion dollars the past five weeks
Speaker 1: as they've taken repot down, it's still up two point
Speaker 1: seven five trillion. And so you know those two factors.
Speaker 1: I mean, you know, asset reflation is here, and really
Speaker 1: the only way to make money is to be along
Speaker 1: equities and also be on credit um and enjoy the
Speaker 1: FED support. And then you're hoping that the real economy
Speaker 1: catches up and that there will be another round of stimulus,
Speaker 1: because that is a necessity now in order to keep
Speaker 1: them economy. Okay, where that's the macro view. I want
Speaker 1: to know what alternative investments are doing now in the
Speaker 1: world of Skybridge Capital. Are they under owned or over
Speaker 1: owned in these glory names in general? You know, long
Speaker 1: short tech funds have been lightening up on big tap
Speaker 1: tech for the last three months. Yeah. Well, and the
Speaker 1: main reason for that is that they're obviously extremely crowded.
Speaker 1: It's most crowded trade argumently in history, and there was
Speaker 1: concern over elevated multiple given where earnings were expected to be.
Speaker 1: Now clearly the strength of their earnings continue and revenue
Speaker 1: continues to be exceptionally strong. And so it's really the
Speaker 1: story of hedge funds for the last ten years. Right,
Speaker 1: the best trade has been long tech and short nothing.
Speaker 1: The second best tradesmen, they'll be long tech and short
Speaker 1: everything else. But if you're trying to be an alternative
Speaker 1: to that, you know you're positioning yourself to be better
Speaker 1: than bonds, hopefully compete with high yield and have less downside.
Speaker 1: But at this point, going not overweight big tech has
Speaker 1: been a huge problem because they have proven themselves again
Speaker 1: and again. I go to buy the rumor by the
Speaker 1: news because they delivered in a big way, beating expectations dramatically.
Speaker 1: Why not just go into them given the fact the
Speaker 1: biggest risk is regulatory and based on the hearings that
Speaker 1: we heard this week, that doesn't seem to be much
Speaker 1: of a risk. Yeah, we would completely agree that. You know,
Speaker 1: we've for the last three years people have been talking
Speaker 1: about regulatory risk right in the thought that that could
Speaker 1: drive some type of breakup or some type of hyper regulation,
Speaker 1: but it just hasn't come to pass. And so you
Speaker 1: know that that's part of being investor managers choosing you
Speaker 1: know what you're trying to achieve, and anybody can own
Speaker 1: large cap tech for free basically, so you're trying to
Speaker 1: provide alternative sources of return that certainly haven't kept up
Speaker 1: in this raging bole market, particularly for tech, but I
Speaker 1: have had the chance to outperform bonds and other asset classes. Troy,
Speaker 1: what's the cleanest trite on the underlying economy? Well, from
Speaker 1: our standpoint, the cleanest trade is still long residential mortgage
Speaker 1: BacT securities because that's very representative of the consumer of area,
Speaker 1: presentative of the economy. Spreads are still materially wider than
Speaker 1: they were in March. You have had some normalization but
Speaker 1: certainly not to the same degree. Um So, if the
Speaker 1: economy continues to recover and for varians requests continue to drop,
Speaker 1: that's their best way, in our opinion, of playing a
Speaker 1: real economic bounce without having material down. So what's Troy
Speaker 1: I reckon some of that with what the banks of
Speaker 1: town against? JP Morgan's Jammie Tummond basically just telling us
Speaker 1: in the last quota that the back end of the year,
Speaker 1: that's when you see the recession. We haven't seen the
Speaker 1: recession yet. How do you reconcile those two things? Well,
Speaker 1: like he also said in his learning is called right,
Speaker 1: what type of recession do you have where you have
Speaker 1: personal incomes up by seven percent? And just like you
Speaker 1: least some very interested in the personal income and outlay report,
Speaker 1: and you have home prices up right, so that that's
Speaker 1: very different, right, And that's helped keep for beans requests
Speaker 1: delinquency is lower than they would have been otherwise. Obviously
Speaker 1: from a banking standpoint, they're gonna have to earn their
Speaker 1: way out of their long lost reserves, and delinquencies are
Speaker 1: going up across the board, but it appears that they're
Speaker 1: gonna end up being much lower than people forecast as recently,
Speaker 1: it's ten weeks ago before the full effects the SteamOS
Speaker 1: were felt. Are we also seeing particular strength in r
Speaker 1: mbs and residential mortgage backed securities because wealthier individuals are
Speaker 1: more likely to own homes that are less affected by
Speaker 1: this downturn. Yeah, well, there's there's two things going on,
Speaker 1: all right. So in the in the primary residential market,
Speaker 1: you had very limited supply coming in and obviously very
Speaker 1: good demographics to Skybridge Capital CIO with the Sea principal
Speaker 1: Global investors and should write brilliant, brilliant notes extending out
Speaker 1: not so much the strategy but the opportunities, and with
Speaker 1: it some caution, Seema, there is the August of our discontent.
Speaker 1: August is here. How rocky will August be? It's sound
Speaker 1: great to be with you. I think it's gonna be
Speaker 1: really rocky, you know. I I off my colleague the
Speaker 1: other day. When did the summer long come? It doesn't
Speaker 1: seem like it's coming. There's just too much with the
Speaker 1: fiscal cliff. You've got the coronavirus cases most importantly, and
Speaker 1: then of course there's going to be speculation about what
Speaker 1: the FEDIC going to be doing. The August of our memories.
Speaker 1: I remember around the beach, the smell of the sweat,
Speaker 1: and it wasn't the beach and the heat, it was
Speaker 1: outright fear in August. Is the financial system stealed for
Speaker 1: this GDP plunges? The financial system stealed with less leverage
Speaker 1: than what we've seen in other crises. Well, it's an
Speaker 1: interesting question. I mean, I think the GP plans that
Speaker 1: we saw in Q two, I don't. I don't think
Speaker 1: the markets could have reacted too much to it because
Speaker 1: it was all priced in. Our concerns are is that
Speaker 1: you know, along of that momentum has already started. The
Speaker 1: plateau when you look at the high frequency data is
Speaker 1: really worrying, and you can see that it's very much
Speaker 1: tied in with cases. So where can we look whatever
Speaker 1: out that we may have about Monty policy or even
Speaker 1: fiscal policy. Unfortunately, it's still tied into the health crisis.
Speaker 1: And until we can find a way of breaking the
Speaker 1: can extend between mobility in cases, then I think we're
Speaker 1: going to be in a very difficult spot. What's the
Speaker 1: argument to buy bonds here a second wave? I think
Speaker 1: I think that would have to be your your main
Speaker 1: reason um at this stage, you know, from what can
Speaker 1: the Fed really do? And actually what can most central
Speaker 1: banks do at this stage? I think their effectiveness is
Speaker 1: starting to run out, and yet they still have to
Speaker 1: keep plowing in, so that's going to keep it down
Speaker 1: the pressure on yields. But also if we start to
Speaker 1: see this recovery that we've seen um started tail off
Speaker 1: and actually turn into negative territory, and that's my essential scenario.
Speaker 1: But if you were to see that, then I think
Speaker 1: that the negative space becomes more realistic. One of the
Speaker 1: big arguments for equities right now is there there is
Speaker 1: no alternative. If you take a look at bonds, you're
Speaker 1: earning nothing to own them. And yet we have a
Speaker 1: situation where if we do get a second wave, the
Speaker 1: economy will sour considerably. Do you see an end to
Speaker 1: the Tina trade, to the sort of move into equities
Speaker 1: because yields are so low if we do get a
Speaker 1: second wave or can this continue indefinitely? Yeah, that's a
Speaker 1: really interesting question. So when we've been looking at this,
Speaker 1: you know, we have I think I could slightly negative
Speaker 1: out look on the economy given concerns around the virus,
Speaker 1: But with bond deals where they are, you know, we
Speaker 1: can't really conceivably see excs pushing and hitting their their
Speaker 1: previous lows. So in that space, yes, you know, actually
Speaker 1: it's a pretty decent place to be, but you've got
Speaker 1: to pick your space widely. And one of the reasons
Speaker 1: that we have, you know, we've got down slightly are
Speaker 1: exposure to US equities. But it's all been placed in
Speaker 1: in megaccount and we're really comfortable with that story and
Speaker 1: we think that's really there to run. As you're speaking,
Speaker 1: we're seeing the two year yield test new lows one
Speaker 1: point excuse me, zero point one zero seven three. I'm sorry.
Speaker 1: The bond market is speaking, and there seems to be
Speaker 1: a guarantee of yield curve control. Do you buy it?
Speaker 1: Do you buy that the central banks can be successfully
Speaker 1: manipulative given what the bond markets doing. I think what
Speaker 1: the central banks are able to do is literally just
Speaker 1: keep things where are you know, in terms of the
Speaker 1: bond market, it's tell you something that's concerns out there,
Speaker 1: But abfully, what would explicit yeld of control? Where they
Speaker 1: going to go down the road change? At this stage,
Speaker 1: you know, yields are very very depressed and it doesn't
Speaker 1: look like they're going any higher up any time soon.
Speaker 1: You know, that's a big difference between now and ten
Speaker 1: years ago. Tom. The last time we took FED funds
Speaker 1: rate down to zero, Tom, everybody thought then the next
Speaker 1: couple of years right to would start climbing again. It
Speaker 1: wasn't until eleven that the two year yield actually bottomed out,
Speaker 1: And that for me makes the important difference between now
Speaker 1: and back then that we believe it's a reserve now
Speaker 1: and we believe that they're not going anywhere for a
Speaker 1: long long time. Do you know where the two year
Speaker 1: yield was at the back end of eighteen Tom? Okay, Well, John,
Speaker 1: you know, as we had the excellent headline here on
Speaker 1: the Bloomberg Right now, folks and John go to SEMA
Speaker 1: on this the tenure tip negative one point zero zero
Speaker 1: three four, John, that is so important. You can do
Speaker 1: the real yield deserve Tonoon. I'm looking forward to that, Tom,
Speaker 1: Thank you, Seema. Inflation next vactations drifting a little bit higher.
Speaker 1: It's part of the story as the white negative yield's
Speaker 1: negative real yield to become that more dominant in the
Speaker 1: last couple of weeks. What's behind the higher inflation expectations?
Speaker 1: I think it's difficult to say. I mean, I think
Speaker 1: one of the things is that, you know, I think
Speaker 1: there's a lot of people out there who do believe
Speaker 1: within about two to three years UM, the effect of
Speaker 1: all of this Montre policy, this fistical spending will eventually
Speaker 1: play fruit, pay fruit, and you'll start to see inflation
Speaker 1: picking up, as well as all of the structural reasons
Speaker 1: around supply chain, the globalization, etcetera. Um. Now when we
Speaker 1: think about this, you know, what, are we talking about
Speaker 1: inflation of more than three percent? Absolutely not, because anthly
Speaker 1: it's going to take a really long time for the
Speaker 1: economy to get backwards feet and to reach its pre
Speaker 1: COVID levels. So yes, because the inflation returning to some
Speaker 1: some reality, but certainly not the kind of levels that
Speaker 1: maybe some people in the market half fears over the
Speaker 1: same we're looking at this bond market right now, How
Speaker 1: on earth do you buy the banks? You know, it's
Speaker 1: a difficult one I have. So we are not we're
Speaker 1: not big fans of financial this at this point, and
Speaker 1: we still think the trade Renagerica acts have to be
Speaker 1: in the texting. You know, where is the set for
Speaker 1: growth coming from? It's not from many places but you
Speaker 1: are seeing in technology, and you're seeing in make ups.
Speaker 1: But when yelps those flats so low, where can it
Speaker 1: play you through for financials? So I say, from from
Speaker 1: my perspective, from an after allocation exposure, financial doesn't really
Speaker 1: feature this stage, see my Meanwhile, it's Friday, and today
Speaker 1: is the day when the enhanced unemployment benefits run out
Speaker 1: if there is not an extension that's passed. And we
Speaker 1: get data out today ancient history June personal income and
Speaker 1: spending data, and it shows the results of the enhanced
Speaker 1: jobless benefits, the idea that personal income dropped one point
Speaker 1: one percent, personal spending rows five point six percent, people
Speaker 1: getting money that they can spend from the government. How
Speaker 1: big a hit to the US equity market will it
Speaker 1: be if there is not some sort of extension past today.
Speaker 1: I don't think it's been priced in sufficially by the
Speaker 1: market by any means. I think it can be catastrophic.
Speaker 1: If you look at the upturn and spending over the
Speaker 1: last two months or so, A lot of that has
Speaker 1: been driven by the fact that there's been so much
Speaker 1: fiscal help coming through. If you start to take that away,
Speaker 1: not only are you dealing with a coronavirus kit, which
Speaker 1: is already suppressing a lot of the activity and increasing anxiety,
Speaker 1: and then you're taking away the ability of people to
Speaker 1: go out and spend. So I think this is this
Speaker 1: is something that of course Congress must be taking note
Speaker 1: of and thinking they have to resolve this as quickly
Speaker 1: as possible. And Tom noticing that the personal savings rate
Speaker 1: is and this goes to the narrative that there's a
Speaker 1: huge wall of cash just sitting in people's bank account
Speaker 1: looking to spend as soon as they get a sense
Speaker 1: of the economy is stabilizing, seem would you buy that?
Speaker 1: You know? I think, I think what we have seen
Speaker 1: so I think there's a couple of things that play here.
Speaker 1: Over the last few months, you've had it, as I said,
Speaker 1: you said the paychecks incomjective coming in and of help,
Speaker 1: but also there's been a lot of pent up demand
Speaker 1: which has been used up and those are your easy winds.
Speaker 1: But unfortunately a lot about savings rate. People have to
Speaker 1: be sitting out there the dream that maybe they have
Speaker 1: a job to get back to you today, But is
Speaker 1: that going to be true in six months time if
Speaker 1: we've still got the same kind of challenges going ahead,
Speaker 1: So well, actually, I think something is going to stay high.
Speaker 1: I think spending has been satiated to some extent um.
Speaker 1: So this is going to be very very challenging time
Speaker 1: into the second half of the year. John Farah, we
Speaker 1: can close the loop of the personal savings are in
Speaker 1: which that means a few iPhones were brought. Well, that's
Speaker 1: the truth time around the fiscal plan same the Federal
Speaker 1: Reserve divorced financial conditions from the underlying economy, and Congress
Speaker 1: essentially insulated personal income from the job losses. So how
Speaker 1: on earth going forward you have any kind of calculation
Speaker 1: on what the economy is going to do for the
Speaker 1: back end of this year and what it means for
Speaker 1: the market. So we are a little bit negative for
Speaker 1: Q three. It seems like a lot of it is
Speaker 1: turning over. There has to be some concerns around the
Speaker 1: coronavirus and the way that people are going to go
Speaker 1: and spend from here. So we have got major concerns
Speaker 1: there in terms of how do the market response. You know,
Speaker 1: traditionally maybe you would expect markets to full pretty significantly
Speaker 1: on these kind of concerns going ahead, But as long
Speaker 1: as you have the Fed standing behind the market is
Speaker 1: difficult to see the market retesting its previous loads, and
Speaker 1: we have to make the assumption that the Congress steps
Speaker 1: up and provide all the money that is required. Without that,
Speaker 1: then I think you have a very different story. But
Speaker 1: I think we haven't seen that that they do the
Speaker 1: right thing. Still, everyone's assumption right now that they will
Speaker 1: do the right thing. We hope they do. Principal level investors,
Speaker 1: thank you. But then if you blocked them earlier, we
Speaker 1: did the view from sixty feet on technology, the cosmic
Speaker 1: realities of Tim Cook and others have to deal with.
Speaker 1: Now we look at the nuts and bolts, the the
Speaker 1: absolute reality and adjustment needed after the miracle that was
Speaker 1: witnessed yesterday, Gain Your Lives of web Bush has absolutely
Speaker 1: nailed the tech enthusiasm. He's frankly been a pinata on
Speaker 1: that the gloom crew has repeatedly gone after him as well,
Speaker 1: and we're thrilled that Dan Eyes could join us in
Speaker 1: web Bush this morning. Dan Eyes, your new price target
Speaker 1: gets us out to Apple near four written near two
Speaker 1: trillion dollars. Is Apple going to be a two trillion
Speaker 1: dollar company and a number of quarters I think by
Speaker 1: the end of this year to Scember thirty percent to
Speaker 1: two trillion hour mark cap. I mean, if you look
Speaker 1: going into the iPhone twelve product cycle, which I think
Speaker 1: is the supercycle, and need numbers, that's the one to punch.
Speaker 1: And I still tep Dock Middle inning Dan very importantly
Speaker 1: here the persistency of all that we saw, the persistency
Speaker 1: on the income statement, the persistency of free cash flow.
Speaker 1: To me, the foundational thing underneath the news yesterday was
Speaker 1: a stunning growth of the mac component and the iPad component.
Speaker 1: Nobody saw that coming. What does that signal for the
Speaker 1: next few quarters. I mean not just showed this work
Speaker 1: from home, that's just another talent that they were seen.
Speaker 1: The street was now factoring in combined with a four
Speaker 1: billion dollar iPhone indeed in China right now, this is
Speaker 1: something where if you're a bull in the story, this
Speaker 1: is never even on the spectrum in terms of the
Speaker 1: touches of numbers we saw last night a jaw dropper. Absolutely,
Speaker 1: Then good morning. Are these companies now at risk of
Speaker 1: a breakup because they're they're so powerful and they're doing
Speaker 1: so well well? I think for them it's better They
Speaker 1: did the tech hearing the day before they reported than
Speaker 1: the day after. And I mean look with that said,
Speaker 1: look for now we think less there's a legislative fix.
Speaker 1: It's it's most likely fines rather than a breakup or
Speaker 1: business model tweak. This will game momentum in to the fall.
Speaker 1: But for right now, in terms of in from an
Speaker 1: investor perspective, the streets viewing it, more's background noise and
Speaker 1: right now that digest these numbers, I think that the
Speaker 1: contain risk. What about higher texation if you have a
Speaker 1: new administration in the US. Yeah, and that's possible, and
Speaker 1: depending on you know, if it goes blue red or
Speaker 1: whether it's senator or presidential. But I think for right
Speaker 1: now investors, whether it's taxation or finds, these companies they're
Speaker 1: generating more cash in some countries, so that's not the issue.
Speaker 1: It's more about the business model changes and we don't
Speaker 1: think that that right now is in play. And I
Speaker 1: want to talk about the cash. They're obviously bringing the
Speaker 1: cash down from the lofty levels before. If they go
Speaker 1: from ex. Gazillion dollars of cash down to eighty gazillion
Speaker 1: wherever they are now, what's the dynamic forward? Do they
Speaker 1: extend more debt to buy back shares. Are you suggesting
Speaker 1: that there's pushing aside the idea of a ginormous acquisition.
Speaker 1: What does it signal that there's a lesser lesser ample cash. Yeah,
Speaker 1: it's a great question. I would say right now, the
Speaker 1: one thing from the anti trust and obviously the target
Speaker 1: on their back both in the beltways, wasn't you is
Speaker 1: I think you'll see m and a slow down because
Speaker 1: everything's going to get a second, third look, and you've
Speaker 1: seen that across the board. You'll see more toward buy backs.
Speaker 1: You will continue to see them take out debt um
Speaker 1: you know, just given what they could do in the
Speaker 1: balance sheet, and that's something from an invested perspective that
Speaker 1: they want to see. Right now. They stronger getting stronger,
Speaker 1: and if you look at these numbers, numbers continue to
Speaker 1: go higher if they can defend thirty eight percent and
Speaker 1: the tense of a decimal point of the margin expansion,
Speaker 1: which is surprised everyone. Do they have the price elasticity
Speaker 1: against unit growth to do that? What is the persistency
Speaker 1: of that expanding margin if they have to defend the
Speaker 1: unit growth or that's gonna be the question, especially as
Speaker 1: you're going to iPhone twaves and in why to what
Speaker 1: we're seeing from a consumer environment. I think they could
Speaker 1: defend it. But also I think you'll see lower price points,
Speaker 1: you know, in terms of sub a thousand on I phone,
Speaker 1: because right now it's about the in and defending their moat,
Speaker 1: especially in China and China that was the headline for
Speaker 1: Apple in terms of China that rebound that scene. They're
Speaker 1: just really a table pounder in terms of what we're
Speaker 1: seeing from China in the Apple story. Yeah, I was
Speaker 1: going to ask you actually actually down about Apple in China.
Speaker 1: Are are they going to have serious, you know, concerns
Speaker 1: of selling in China if the trade were escalates. Look,
Speaker 1: and that's been the issue, especially over the last year,
Speaker 1: where they're worried they'd be burning iPhones in the streets
Speaker 1: of Beijing, and instead they were actually going into the
Speaker 1: iPhone stores and behind them. And I think what you're
Speaker 1: seeing is it's iPhone sales they're going to be from China.
Speaker 1: That was up three four hundred bits higher than anyone
Speaker 1: thought in terms of these numbers. And this is now
Speaker 1: the drum roll into what I believe is their strongest
Speaker 1: product cycle. It's two thousand fourteen. Darn, I want to
Speaker 1: give you a sixty tho foot question. I want to
Speaker 1: flip it over to Amazon that don't cover Amazon. I mean,
Speaker 1: I get that, but I'm fascinated by Francine sees it
Speaker 1: on Instagram, Francine searches it on Google, Francine buys it
Speaker 1: off her iPhone and gets it in a cardboard box
Speaker 1: from Amazon. Tim Cook said yesterday, this is not a
Speaker 1: zero sum game where he's stealing for dollar for dollar
Speaker 1: from bricks and mortar and traditional retail America. Do you
Speaker 1: buy that that there's actually an expansion of society and
Speaker 1: the good of society from this exercise. I think if
Speaker 1: you look everything we're seeing in this pandemic and even
Speaker 1: look at these numbers, it's really food, water, and fang
Speaker 1: names in terms of the average consumer. And I think
Speaker 1: the stronger getting stronger as we're seeing, and I think
Speaker 1: that's something where that does become an issue obviously um
Speaker 1: as as we see from the anti trust perspective. But
Speaker 1: the one thing we're seeing is that that's it's a
Speaker 1: double edged sore. Then we're seeing investors like could the
Speaker 1: regulators will be focused on it? You raise your price
Speaker 1: target to four seventy five, cut to the chase. What's
Speaker 1: the sum of the parts if they have to go oh,
Speaker 1: I had a tarbell and break up like standard oil
Speaker 1: just to take Apple. I mean, how close is some
Speaker 1: of the parts to your new price target for seventy five? Yeah,
Speaker 1: for about a new bull case five fifty five fifty
Speaker 1: five kickty for bull Case. And if I kind of
Speaker 1: break that down, I believe the services business right now
Speaker 1: is worth potentially seven to eight billion. And then you
Speaker 1: look at the core iconic iPhone hardware business that could
Speaker 1: be worth one point five trillions. So you put that
Speaker 1: together and I think this is a three trillion dollars
Speaker 1: dock by the end of the year. Okay, unless what
Speaker 1: could derail is there one thing done that you worry
Speaker 1: about them? The mean thing that could derail it is
Speaker 1: the supply chain continues to tee mejor issues. iPhone twelve
Speaker 1: pushed out no further even past holiday season, but a
Speaker 1: definitely that looks like a very negligible chance happened. Why
Speaker 1: do we why do we need a new toy? I mean,
Speaker 1: let me speak for my children right now. They all
Speaker 1: just got new toys. When does the gravy train end
Speaker 1: that everybody needs an iPhone twelve or fourteen. Yeah, and
Speaker 1: really the number that that I think dictates why you
Speaker 1: own the stock. Three D fifty millions of nine million
Speaker 1: iPhones have not upgraded their phones in three and a
Speaker 1: half years. That's the supercycle going into what's gonna beet
Speaker 1: five G. And if you look in the US as
Speaker 1: well as in China from pcent, buy a new iPhone
Speaker 1: that already have one, and that continues to be why
Speaker 1: that's a golden brand, that cooking Coppertino built. Smart conversation, Dan,
Speaker 1: I thank you so much, thanks for listening to the
Speaker 1: Bloomberg Savannas podcast. Subscribe and listen to interviews on Apple podcasts,
Speaker 1: so in Cloud or whichever podcast platform you prefer. I'm
Speaker 1: on Twitter at Tom Keane before the podcast. You can
Speaker 1: always catch us worldwide. I'm Bloomberg Radio