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Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim

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Speaker 1: Fox along with my co host Lisa A. Bramowitz. Each

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Speaker 1: day we bring you the most important, noteworthy, and useful

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Speaker 1: interviews for you and your money, whether you're at the

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Speaker 1: grocery store or the trading floor. Find the Bloomberg p

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Speaker 1: m L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com.

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Speaker 1: As we talk about China easing their monetary and fiscal policies,

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Speaker 1: there is a big question which is how much more

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Speaker 1: ammunition do they really have? Joining us now? I am

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Speaker 1: so pleased to say, as Victor she associate professor at

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Speaker 1: UC San Diego, a former principle for the Carlisle Group

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Speaker 1: and a former professor at Northwestern Victor, thank you so

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Speaker 1: much for being with us. I want to talk about

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Speaker 1: the composition of China's debt and how much ability they

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Speaker 1: have to lever up further. So let's first talk about

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Speaker 1: where do you see the biggest debt problem in China? Um,

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Speaker 1: thanks for having me on. So I think the biggest problem,

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Speaker 1: you know, obviously people have talked about the domestic debt,

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Speaker 1: which is you know, around three GDT. That's not good,

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Speaker 1: but domestically, They've got a lot of UH policy tools

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Speaker 1: to deal with that. I think the biggest trouble spot

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Speaker 1: that a lot of investors may not realize is China's

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Speaker 1: external debt. Among em countries, China is the largest that

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Speaker 1: are by far according to b i S data, and

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Speaker 1: if you include Hong Kong, which of course is a

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Speaker 1: part of China UM, China's external debt now stands around

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Speaker 1: two point five trillion dollars. So that's an enormous amount,

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Speaker 1: even given as three trillion dollars in point exchange reserved.

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Speaker 1: And doesn't about one point two trillion of that have

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Speaker 1: to be rolled over this year? Yeah? Well, actually, you know, uh,

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Speaker 1: hundreds of billions have to be rolled over every month

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Speaker 1: because a lot of it is is short term loans

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Speaker 1: that Chinese banks have borrowed to finance the foreign exchange

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Speaker 1: needs of Chinese companies and even China's overseas investments such

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Speaker 1: as part of the One Belt, One Road initiative. So

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Speaker 1: here's here's where I'm wondering. Where the concern comes in

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Speaker 1: is the fear basically that China is restricted in how

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Speaker 1: much it can weaken its currency because if it does

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Speaker 1: so overly then it will have a harder time rolling

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Speaker 1: over these obligations and repaying them. There there are many

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Speaker 1: different potential risks there. There's the evaluation risks because you know,

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Speaker 1: even though a lot of these loans is denominated in dollars,

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Speaker 1: of course the underlying assets that ultimately back a lot

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Speaker 1: of these loans are women be denominated um. The other

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Speaker 1: concern is that you know, of course the threat of

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Speaker 1: the trade war if it were to shrink China's trade

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Speaker 1: surplus and then meaningful way um because currently obviously the

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Speaker 1: trade surplus has been what China has been using the

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Speaker 1: services dead and if um the trade surplus would the

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Speaker 1: shrink in a meaningful way, then that that would be

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Speaker 1: a problem for China general e M. Panic. You know,

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Speaker 1: what China has done in the past couple of years

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Speaker 1: is to constantly increase his external debt in order to

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Speaker 1: roll over the existing debt and and to pay for

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Speaker 1: some of the interests even with new loans. And so

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Speaker 1: you know that pipeline were to freeze, that also would

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Speaker 1: cause a problem for China. I want to pick up

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Speaker 1: on the interest point because this was something that was

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Speaker 1: brought to my attention and I actually reached out to

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Speaker 1: about this, Uh, just how much money China is spending

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Speaker 1: on interest payments? Can you talk a little bit about that.

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Speaker 1: I don't think a lot of people are aware that

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Speaker 1: at this point, given its debtload, a substantial proportion of

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Speaker 1: of of its of the money that it borrows may

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Speaker 1: have to go towards just even repaying interest. Yes, so

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Speaker 1: domestically China has a has a really big debt problem. Um.

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Speaker 1: You know, when you have debt that is GDP, and

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Speaker 1: when you're interest rate is not zero like the case

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Speaker 1: of Japan and some of the European countries, um, you

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Speaker 1: end up spending a lot of the new credit just

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Speaker 1: to service uh the interest payment, which by my calculation

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Speaker 1: is something like nineteen trillion women b or you know,

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Speaker 1: roughly three trillion dollars per year. So every month the

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Speaker 1: monetary authorities have to come up with dollars just to

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Speaker 1: service the interests in the economy and it and if

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Speaker 1: it wants the economy to grow from investment on top

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Speaker 1: of that, it would have to provide even more money.

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Speaker 1: So that's why I think investors in China are very savvy. Now.

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Speaker 1: When the PBOC cuts reserve requirement ratio by one, the

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Speaker 1: market actually didn't really react to it, because you know,

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Speaker 1: it's just part of the course. That's the minimum amount

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Speaker 1: that the monetary authorities need just to roll over its

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Speaker 1: enormous debt pile. Uh, it would have to do a

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Speaker 1: lot more. It would have to deregulate the shadow banking industry,

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Speaker 1: which it just successfully regulated, would basically have to undo

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Speaker 1: all of that in order to get the economy going. Yet,

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Speaker 1: will the additional money that's necessary to finance either the

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Speaker 1: rollover or indeed new borrowing on the part of China,

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Speaker 1: will that compete for investor dollars who have to also

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Speaker 1: fund US treasury borrowings. Um? So I think, you know,

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Speaker 1: the the domestic and external part are relatively separate, um

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Speaker 1: and of course increasing them. And I think there's this

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Speaker 1: implicit competition in the sense that Chinese investors increasingly do

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Speaker 1: not want to hold their money in women b because, um,

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Speaker 1: they know that the monetary authorities would just have to

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Speaker 1: keep on printing money to to prevent a crisis, knowing

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Speaker 1: that they would rather hold foreign currencies, and so that

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Speaker 1: creates almost this sort of private demand for the U. S. Treasuries.

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Speaker 1: As a result, of course, the Chinese government has done

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Speaker 1: a lot to prevent domestic money from flowing overseas to

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Speaker 1: overseas assets. They've been relatively successful. Um. And so right

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Speaker 1: now that you know that, we were not seeing a

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Speaker 1: massive capital flight, but the temptation is there. Uh and

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Speaker 1: the moment that the regulators um looseness grips, so to speak. UM,

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Speaker 1: I think a lot of money would want to flow

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Speaker 1: out of China. Victor. I want to talk a little

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Speaker 1: bit about something that you mentioned that just servicing non

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Speaker 1: financial debt in China totaled about three trillion dollars. You

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Speaker 1: said that basically, Uh, that was roughly twenty two of

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Speaker 1: the gross domestic product of China. So this is a

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Speaker 1: significant headwing to economic growth at this point. Is that correct? Yes, Um,

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Speaker 1: it is a significant headwind. UM. And and we've seen that,

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Speaker 1: we've seen you know, so China actually did not de

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Speaker 1: leverage uh. It's it's a financial system in the past year,

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Speaker 1: despite the rhetorics, UM, it just slowed down the rate

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Speaker 1: of growth of credit UM from you sort of mid

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Speaker 1: teens to around ten percent. Uh. And that already in

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Speaker 1: itself caused a drastic slowdown of growth. UM. You know,

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Speaker 1: actual deleveraging would immediately cause a financial crisis. So going forward,

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Speaker 1: if it wanted growth to resume at at a at

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Speaker 1: a real rate of you know, six percent, seven percent,

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Speaker 1: which are the policy objectives still, then it would have

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Speaker 1: to pump a lot more money into the economy, and that,

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Speaker 1: of course will challenge people's confidence in the Roman b

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Speaker 1: I want to thank you very much for spending time

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Speaker 1: with us. A Vic She is the associate professor at

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Speaker 1: the University California, San Diego, joining us from La Joya

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Speaker 1: speaking about the need for China to service it's dollar

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Speaker 1: denominated debt and the amount of debt that it will

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Speaker 1: have to roll over this year. Big banks are pushing

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Speaker 1: back against the big equity exchanges. Basically, they want to

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Speaker 1: have their cake and eat it too. They want cheaper exchanges,

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Speaker 1: they want them faster, so they're going to create their own.

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Speaker 1: Joining us now to talk about that, Chris and Ag

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Speaker 1: executive editor focusing on equities for Bloomberg. So, Chris, what

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Speaker 1: exactly is this that a group of banks, Dine founders

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Speaker 1: including Morgan, Stanley, Ubs, Citadel, Virtue and others, were they

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Speaker 1: hoping to create here? Um, I think if you've got

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Speaker 1: to look at the US stock market structures. That's kind

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Speaker 1: of constantly evolving sort of Darwinian competitive arena, and there's

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Speaker 1: been there's been four or five waves of that over

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Speaker 1: the last twenty years. This is the latest sort of

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Speaker 1: you know, monopoly busting effort among in that in that cycle.

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Speaker 1: It's not exactly you know, a bunch of rag tag

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Speaker 1: up starts. You're dealing with the biggest financial institutions in

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Speaker 1: the country banding together, um to get some kind of

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Speaker 1: in road foothold in the not not really do opoly.

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Speaker 1: There's about there's about three companies to control most of

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Speaker 1: the the stock exchanges at the moment, and now there's

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Speaker 1: going to be there's gonna be four, and this is

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Speaker 1: going to be sort of mutually held thing by again

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Speaker 1: all of the biggest all of the biggest players in

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Speaker 1: the in the stock trading ecosystem, including interestingly the big

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Speaker 1: market makers which are really the power players in that

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Speaker 1: in that system, Virtue and UH Citadel, which are responsible

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Speaker 1: for or some ungodly number of trades in the in

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Speaker 1: the U S stock market. Chris, what did these banks

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Speaker 1: and brokerage firms object to when it comes to price? Um,

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Speaker 1: it's not I have to say not altogether queer frankly,

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Speaker 1: I mean they in some ways, A lot of these

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Speaker 1: a lot of these players are sort of they're sort

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Speaker 1: of the pantheon of villains and a lot of market

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Speaker 1: structure arguments, certainly Citadel and Virtue or not companies that

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Speaker 1: have enormous amounts of peers cried for them, um uh,

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Speaker 1: sort of straightforwardly one of the big cost centers. One

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Speaker 1: of the only things that anyone can make any money

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Speaker 1: doing in the stock market right now is selling data

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Speaker 1: on trades. This incredibly you know, this not enormous data

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Speaker 1: that is generated by the actual customers is then sold

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Speaker 1: back to those very customers. But at the same time,

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Speaker 1: don't these exchanges pay rebates to the brokers that send

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Speaker 1: them order flo that's right, and Virtue and Citadel or

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Speaker 1: presumably big collectors of those. So it's not entirely clear

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Speaker 1: what huge advantage they're hoping hoping to leverage out of

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Speaker 1: the existing should create for themselves by doing this. This

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Speaker 1: is not a hugely profitable business anymore. It's very low margin,

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Speaker 1: very extremely high volume. That's sort of been the direction

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Speaker 1: of market structure revolution over the last twenty years that

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Speaker 1: spreads on trades have gone ever ever slimmer, and the

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Speaker 1: amount of trades that happen by virtue of basically high

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Speaker 1: frequency traders computerized traders has gone way up. So what

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Speaker 1: they lack in profits they make up for in volume. So, Chris,

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Speaker 1: I wonder if there's a broader takeaway here about market structures,

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Speaker 1: since people are accusing the changes in market structure that

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Speaker 1: have moved trading towards a more electronic, faster, uh, you know,

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Speaker 1: less lucrative for the exchanges and others kind of model,

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Speaker 1: and that this is the reason why things are bouncing

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Speaker 1: around because there aren't humans in between. You buying that? Um,

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Speaker 1: I'm not sure that that. I totally buy that. I

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Speaker 1: feel like volatility we shall always have. I do think

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Speaker 1: that may be relevant to this, to the what's going

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Speaker 1: on here today, Like a lot of stuff that goes

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Speaker 1: on in market structure, if you look at it closely,

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Speaker 1: is a kind of big pr game, um and and

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Speaker 1: a serious one because uh, the regulatory sites for every

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Speaker 1: once in a while trained on high frequency trating. It's

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Speaker 1: I doubt this was the reason. But you had Stephen

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Speaker 1: nuch in three weeks ago talking about how high frequency

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Speaker 1: traders were responsible for all of the Volatili. They make

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Speaker 1: fairly easy targets. And one thing you get every now

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Speaker 1: and then is someone coming in saying sort of I'm

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Speaker 1: going to baptize the world and fire. I'm gonna simplify

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Speaker 1: everything and put out home homey sounding press release like

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Speaker 1: the one that went out this morning, saying look, we're

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Speaker 1: gonna come in and simplify everything. That's going to be cheaper,

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Speaker 1: you know, simple order types. You had a couple of

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Speaker 1: years ago with the Michael Lewis exchange of I E X,

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Speaker 1: the one profiled, and uh, flash boys, that this happens.

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Speaker 1: And this is a consideration where setting yourself up is

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Speaker 1: kind of a hero of market structure, however questionable what

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Speaker 1: ultimately is can be a worthwhile thing when regulators start

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Speaker 1: to get their dander up about stuff that may be

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Speaker 1: part of what's going on here. I mean, I don't know,

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Speaker 1: you know, I certainly it wouldn't be stated as one

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Speaker 1: of the goals of the thing, but it might be

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Speaker 1: nice to have, oh, we're coming in trying to save

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Speaker 1: everyone to point to in a couple months when Minuchin

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Speaker 1: starts setting up hearings and things like that. I don't

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Speaker 1: I don't know which occurs to me, it's not out

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Speaker 1: of the question that that's part of the motive here,

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Speaker 1: doesn't the security is an exchange commission really regulate how

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Speaker 1: much the exchanges can charge for their data? There's yeah,

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Speaker 1: and the exchange has recently lost uh uh some kind

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Speaker 1: of regulatory hearing where their their fees were sent back

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Speaker 1: to them for more explanation. Basically with the you know,

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Speaker 1: the expectation that they're probably gonna end up being cut.

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Speaker 1: At the same time, keeping exchanges, keeping the companies that

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Speaker 1: uh that are the sites of all trading in this

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Speaker 1: country is not totally bankrupt motive in and of itself.

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Speaker 1: It helps to have relatively profitable venues where you can

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Speaker 1: go and get your trade done in half a second.

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Speaker 1: It's not a completely bankrupt motive for the work for

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Speaker 1: you know, for capitalism, basically to have these things existing

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Speaker 1: so you know what of things to balance. Thanks very

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Speaker 1: much for being with us. Chris nig is Executive editor

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Speaker 1: for editor for Equities for Bloomberg, speaking about brokers forming

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Speaker 1: a new stock market to take on the New York

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Speaker 1: Stock Exchange, the NASTAC and the cbo E on Friday,

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Speaker 1: p G and E. This is the utility that supplies

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Speaker 1: electricity and power to most of northern California, said that

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Speaker 1: it is quote working diligently to assess the company's potential

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Speaker 1: liabilities as a result of the wildfires and the options

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Speaker 1: for addressing those liabilities, while those liabilities may lead to

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Speaker 1: bankruptcy filing and bankruptcy protection. Here to tell us more,

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Speaker 1: Kick Conoledge he is our senior Industrials and utilities analysts

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Speaker 1: for Bloomberg Intelligence Kit. Is this part of the negotiation

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Speaker 1: that goes on between the utility and lawmakers or is

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Speaker 1: there a serious issue here that PGNI could seek bankruptcy

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Speaker 1: protection because it needs it right? Well, I think him

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Speaker 1: there that it's both. Really, I think you can with utilities,

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Speaker 1: you can't separate, uh, the the financial condition from the

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Speaker 1: political condition that they are always dependent on what the

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Speaker 1: regulators and the legislators do. And of course that has

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Speaker 1: come to a critical situation in California, especially for Penny

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Speaker 1: and Northern California, because of all the wildfire. So you

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Speaker 1: have twenty five billion estimated or thirty billion. I saw

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Speaker 1: today somebody saying in liabilities for wildfire's potentially over the

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Speaker 1: next X number of years to be paid out. Somebody's

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Speaker 1: got to pay that, that would I mean, the whole

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Speaker 1: market cap of PG and E is only eleven billion

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Speaker 1: or ten billion now, so, uh, something's got to give.

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Speaker 1: So a bankruptcy filing as reported would would not I

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Speaker 1: think shock anybody, but whether it's needed at this point

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Speaker 1: is in question. So if its market cap is a

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Speaker 1: ten or a little bit above a billion dollars, just

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Speaker 1: give you a sense. It's total debt is more than

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Speaker 1: twice that at about twenty two billion dollars, and its

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Speaker 1: bonds have been plunging. I just have to wonder what

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Speaker 1: are the recoveries going to be like if they do

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Speaker 1: decide to declare bankruptcy or file for bankruptcy. Because this

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Speaker 1: is a company that is an investment grade credit rating,

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Speaker 1: right it is. Uh, it doesn't happen that much that

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Speaker 1: utility goes bankrupt, So we don't really know what would

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Speaker 1: happen in that situation. But uh, but interestingly, the one

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Speaker 1: that did go bankrupt, and oh one I believe it

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Speaker 1: was was p G and E. And I think the

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Speaker 1: you can go back and look at that, and the

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Speaker 1: recoveries were good for bondholders. I believe it was all

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Speaker 1: fully recovered. And you know, it's a while ago, so

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Speaker 1: I don't hold me to every detail, but I think

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Speaker 1: it was all fully recovered, and eventually the stock got

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Speaker 1: back to a point where it was higher than it

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Speaker 1: was before they went into bankruptcy. So but that took

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Speaker 1: four or five years. So it's a an extremely complex,

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Speaker 1: UH working out type of situation where of course everybody

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Speaker 1: wants to get paid, and the bond holders and the

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Speaker 1: stockholders and the UH trial lawyers and and the regulators

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Speaker 1: and so on. So it's it at least it will

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Speaker 1: take a long time to figure out who's owed what. UH.

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Speaker 1: But the bottom line is California. I think that the

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Speaker 1: cooler heads know that it only makes sense to have

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Speaker 1: an investment grade utility to run the polls and wires

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Speaker 1: and electrons in northern California. The shares of pgen E

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Speaker 1: are down a little bit more than today. What would

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Speaker 1: a bankruptcy filing do that would be positive for pg

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Speaker 1: n E. UH. What what it would do is it

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Speaker 1: would UH put the question of how you adjust the

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Speaker 1: debt to the amount of equity UH into a bankruptcy

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Speaker 1: court so that you would be relieved of the concern

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Speaker 1: that a sudden influx of demand for payment would immediately

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Speaker 1: tip over the company and lead to a liquidity crisis.

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Speaker 1: So you know, as with any bankruptcy, that's the kind

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Speaker 1: of situation. But overall the utility bankruptcy, the idea is

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Speaker 1: you take the piecemeal workout where as to the regulators,

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Speaker 1: back to the legislative, back to the regulators, and it

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Speaker 1: could just go on and on and nobody knows what's

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Speaker 1: going on. At least it gets organized in a bankruptcy

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Speaker 1: court and people start to say, Okay, what do you need?

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Speaker 1: What do you need? And the judge ultimately brings everything together.

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Speaker 1: And I think in this case, the state of California

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Speaker 1: would say what we need is a functioning utility. So

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Speaker 1: kid a lot of people are saying that this is

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Speaker 1: basically political warfare, and this is p g N saying, Okay,

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Speaker 1: you're not going to bail us out, fine world, file

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Speaker 1: for bankruptcy and put our credit rating in jeopardy and

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Speaker 1: throw the entire utility system, uh put it at risks.

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Speaker 1: So is this a dangerous precedent for other utilities. I

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Speaker 1: don't think any utility would uh lightly go into the

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Speaker 1: kind of situation that pg N is in so I'd

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Speaker 1: say I'm not aware of any other utility out there

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Speaker 1: now that has this kind of imbalance between as you

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Speaker 1: were discussing the debt and equity. Uh so, let's just

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Speaker 1: say it. You know, it's a very unpleasant situation, and

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Speaker 1: nobody wants to go through it if they don't have to.

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Speaker 1: But pg N is now in a situation where the

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Speaker 1: debt and the increased possibility of even much more debt

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Speaker 1: to pay the liabilities, uh is much more than they

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Speaker 1: can handle on their own at this point, and so

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Speaker 1: they have to look for more extreme out outcomes than

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Speaker 1: than you might hope for. Kick College, thank you so

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Speaker 1: much for being with us. Just to also note the

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Speaker 1: p g NI bonds that are maturing currently treating a

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Speaker 1: six and a half percent yield compared to a six

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Speaker 1: point one percent average yield on the junk rated bonds

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Speaker 1: with the top ratings of junk bonds. UM same about

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Speaker 1: average maturity, if not the p g ANY bonds are

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Speaker 1: actually maturing sooner, so they're being treated as junk in

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Speaker 1: the bond markets, even though credit rating companies are not

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Speaker 1: saying that that is what they are. Kick connle Edge,

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Speaker 1: thank you for joining us, Senior utilities industry in the

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Speaker 1: list for Bloomberg Intel legends he's bullish on markets for indeed,

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Speaker 1: he believes that stocks are currently undervalued. Here to tell

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Speaker 1: us more, David Cats. He's the chief investment officer for

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Speaker 1: Matrix Asset Advisors. He's got nearly eight hundred million dollars

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Speaker 1: of assets under management. David Cats a pleasure to have

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Speaker 1: you with us. Give us your thesis for for stocks. Well, basically,

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Speaker 1: you've just gone through the worst quarter in about a decade,

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Speaker 1: You've gone through the worst December in over uh ninety years.

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Speaker 1: We think stocks are now at a level that's pretty attractive.

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Speaker 1: The ultimate driver of stock prices is usually price earnings ratios.

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Speaker 1: The markets at about fourteen and a half times two

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Speaker 1: thousand and nineteen numbers, so that's a pretty good level

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Speaker 1: Historically you've done quite well from that, and we think

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Speaker 1: there's just much, much too much pessimism built into stock

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Speaker 1: prices right now, and there's a lot of room for

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Speaker 1: them to go high. There are a lot of great

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Speaker 1: businesses that are selling a ten eleven times earnings. Historically,

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Speaker 1: you're going to make pretty good money when you can

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Speaker 1: do that. Yeah, David is sort of highlight the pessimism

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Speaker 1: that you're talking about. Black Rocks annual survey of institutional

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Speaker 1: clients overseeing seven trillion dollars in assets globally came out

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Speaker 1: uh and more than half of them plan to cut

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Speaker 1: stock exposure this year, up dramatically from the proportion that

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Speaker 1: said the same thing last year. So where are you

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Speaker 1: adding opportunities and when did you start buying just one thing?

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Speaker 1: I'm at black Rock. What's interesting is probably if they

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Speaker 1: had done that Poul about six months ago, people were

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Speaker 1: universally bullish. So you've just had this really sharp sell

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Speaker 1: off and all of a sudden, sentiments turned pretty negative.

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Speaker 1: We think that's chasing what's happened rather than the future. Now.

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Speaker 1: What what we like here is we think there are

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Speaker 1: a wealth of industries and sectors that are pretty attractive.

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Speaker 1: We like the financials a great deal. Um Technology has

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Speaker 1: just been beaten up pretty badly, so we think there

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Speaker 1: are opportunities there. Communications services another area. Energy we think

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Speaker 1: it is poised to do a lot better. The stocks

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Speaker 1: have really been washed out, and select healthcare, so really

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Speaker 1: lots of different places to make money. The key driver

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Speaker 1: there is depressed valuation, good long term outlook. David I'm

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Speaker 1: assuming that everyone has access to more or less the

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Speaker 1: same information that you have access to so much it

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Speaker 1: must be your reading of the information that causes you

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Speaker 1: to be bullish and a bit of a contrarian. Maybe

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Speaker 1: you could just give us an example, whether it is

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Speaker 1: Comcast or whether it is Facebook or another stock, to

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Speaker 1: sort of highlight your strategy and why your perspective is different. Well,

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Speaker 1: our perspective is different because we try not to get

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Speaker 1: caught up in the day to day manias. So right

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Speaker 1: now the market is very, very focused on the negatives

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Speaker 1: associated with the trade war with interest rates. About six

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Speaker 1: weeks ago they were rising. Earnings are going to be

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Speaker 1: at a slower pace this year, so you hear that

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Speaker 1: from many strategists that how can the stock market go

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Speaker 1: up with slower earning space. We actually looked at the

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Speaker 1: period from nineteen thirty seven to two thousand and eighteen,

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Speaker 1: uh the level of earnings growth and its impact on

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Speaker 1: stock prices. How did the smp FI when earning s

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Speaker 1: growth was higher when it was lower, and we found

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Speaker 1: there was almost a zero correlation. So that really means

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Speaker 1: that that's not going to be the driver in aggregate

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Speaker 1: for stock prices this year. A lot of people are

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Speaker 1: getting caught up in that. We agree that earnings growth

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Speaker 1: is gonna be a lot slower than it was in

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Speaker 1: two thousand and eighteen, but you really can do pretty

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Speaker 1: nicely in a five or ten percent growth mode. In

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Speaker 1: terms of your question on individual stocks, Comcast has been

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Speaker 1: a great business that's growing at north of fifteen percent

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Speaker 1: a year for the last ten years. We really like management,

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Speaker 1: we like the acquisition that they made internationally, and you're

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Speaker 1: you're getting this wonderful business at about thirteen point nine

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Speaker 1: times earnings. UH Normally it'll sell UH at fifth seen

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Speaker 1: sixteen seventeen times earning, So you're getting a really good

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Speaker 1: business at a very attractive price. Another stock that you

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Speaker 1: find attractive is Facebook, which is kind of interesting because

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Speaker 1: there is a lot of pessimism around this one. Uh

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Speaker 1: the biggest bear on the street. Pivotal Research Group came

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Speaker 1: out today saying that Facebook is likely to see another

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Speaker 1: rough year and lowered their price target to a hundred

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Speaker 1: thirteen dollars from a hundred and twenty five dollars previously.

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Speaker 1: Currently shares it through a hundred and thirty eight dollars.

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Speaker 1: I'm just wondering where do you see Facebook shares going

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Speaker 1: and what gives you conviction that these bears are wrong? Well,

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Speaker 1: we're not that happy with Facebook management, and we really

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Speaker 1: do think that they run a business without a lot

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Speaker 1: of ethics. So we think regulation is going to be

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Speaker 1: a much better thing for them. We think they can

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Speaker 1: do a lot better in providing accurate information UH and

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Speaker 1: not chasing the dollar as their sole motivation. Having said that, UM,

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Speaker 1: they have a tremendous franchise, whether it's Facebook or Instagram

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Speaker 1: or What's app. UH, they make an enormous amount of

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Speaker 1: money advertise dollars are going more and more to social media,

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00:26:02,920 --> 00:26:05,320
Speaker 1: and it really is one of the best ways to

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00:26:05,359 --> 00:26:08,280
Speaker 1: target your ad and get the consumer to buy. So,

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00:26:08,600 --> 00:26:10,639
Speaker 1: even though they've got a lot of business problems and

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00:26:10,680 --> 00:26:12,960
Speaker 1: they're gonna have to spend a lot more money uh

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00:26:13,000 --> 00:26:17,000
Speaker 1: in terms of uh managing themselves better, they're still going

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00:26:17,080 --> 00:26:18,800
Speaker 1: to make a boatload of money. So for all of

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00:26:18,840 --> 00:26:22,080
Speaker 1: the negatives, right now, Facebook is telling it about sixteen

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00:26:22,119 --> 00:26:25,680
Speaker 1: point four times UH two thousand and nineteen earnings, they've

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00:26:25,720 --> 00:26:28,159
Speaker 1: got about fifteen dollars cash per share, So if you

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00:26:28,160 --> 00:26:31,120
Speaker 1: adjust for cash per share, it's at about fifteen times

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00:26:31,200 --> 00:26:34,720
Speaker 1: adjusted earnings, and historically, when you can buy a very

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00:26:34,760 --> 00:26:38,000
Speaker 1: good growth business at that type of price, you're gonna

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00:26:38,000 --> 00:26:40,720
Speaker 1: do very very well. Tell us about your call for

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00:26:40,760 --> 00:26:44,879
Speaker 1: the industrial sector, is that geared towards global economic growth.

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00:26:46,480 --> 00:26:49,119
Speaker 1: So we we think that the global economy is going

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00:26:49,160 --> 00:26:51,800
Speaker 1: to be okay. It definitely is going to be a

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00:26:51,880 --> 00:26:55,280
Speaker 1: lot less robust than it was in two thousand eighteen. Uh,

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00:26:55,320 --> 00:26:58,600
Speaker 1: Europe is struggling a little bit, China has slowed down.

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00:26:58,880 --> 00:27:01,000
Speaker 1: But having said that, a lot of these companies have

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00:27:01,119 --> 00:27:04,600
Speaker 1: sold off and are selling at twelve times earnings, and

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00:27:04,640 --> 00:27:08,399
Speaker 1: we think that, uh, it's an absolute imperative that the

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00:27:08,480 --> 00:27:10,639
Speaker 1: United States and China come up with some sort of

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00:27:10,640 --> 00:27:12,879
Speaker 1: a trade deal. It's in both of their interests. We

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00:27:12,920 --> 00:27:16,360
Speaker 1: think President Trump, while he might not like to do

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00:27:17,040 --> 00:27:19,440
Speaker 1: a deal, is going to have to in order to

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00:27:19,520 --> 00:27:22,679
Speaker 1: stabilize the US market. And if that's the case, we

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00:27:22,680 --> 00:27:25,879
Speaker 1: think industrials are very well positioned to start to grow again.

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00:27:26,200 --> 00:27:28,560
Speaker 1: And you're getting these companies at really good prices, whether

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00:27:28,600 --> 00:27:31,520
Speaker 1: it's a United Technologies or an Eaton Corps or a

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00:27:31,560 --> 00:27:35,679
Speaker 1: T Connectivity, really good businesses that will do better in

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00:27:35,720 --> 00:27:39,199
Speaker 1: a reasonable global economy. So just real quick, are there

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00:27:39,200 --> 00:27:42,840
Speaker 1: any stocks that you're staying away from. So the one

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00:27:42,840 --> 00:27:45,720
Speaker 1: group that actually did pretty well last year, even though

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00:27:45,760 --> 00:27:48,479
Speaker 1: the business was not that good were utilities. Uh, they

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00:27:48,480 --> 00:27:51,480
Speaker 1: were a flight to quality. As a result, they're selling

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00:27:51,480 --> 00:27:53,760
Speaker 1: at the high end of the evaluation range that we

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00:27:53,800 --> 00:27:55,919
Speaker 1: normally would like for such a slow growth group. So

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00:27:55,960 --> 00:27:58,080
Speaker 1: this is a group that we would be taking money

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00:27:58,119 --> 00:28:00,520
Speaker 1: away from and putting into all of these There areas

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00:28:00,520 --> 00:28:02,440
Speaker 1: that we just mentioned. So you're not buying pg N

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00:28:04,840 --> 00:28:07,120
Speaker 1: surely not. I mean, when you're when you're looking at that,

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00:28:07,119 --> 00:28:09,359
Speaker 1: that's just you're making a bet that they're not going

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00:28:09,400 --> 00:28:12,520
Speaker 1: to go bankrupt. And generally when you buy utilities, you're

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00:28:12,600 --> 00:28:15,080
Speaker 1: buying it for safety, So that would not fall into

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00:28:15,119 --> 00:28:18,400
Speaker 1: that category if you're trying to buy a utility for safety. Uh.

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00:28:18,440 --> 00:28:20,920
Speaker 1: Companies like Duke are very good companies, but we think

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00:28:20,920 --> 00:28:23,399
Speaker 1: they're pretty fully priced. David Cats, thank you so much

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00:28:23,440 --> 00:28:26,120
Speaker 1: for being with us. David Kat's chief investment Officer Matrix

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00:28:26,200 --> 00:28:31,439
Speaker 1: Asset Manage Advisors. Matrix Matrix Asset Advisor is based in

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00:28:31,480 --> 00:28:37,200
Speaker 1: New York. Thanks for listening to the Bloomberg P and

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00:28:37,280 --> 00:28:40,320
Speaker 1: L podcast. You can subscribe and listen to interviews at

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00:28:40,360 --> 00:28:44,800
Speaker 1: Apple Podcasts. SoundCloud or whatever podcast platform you prefer. I'm

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00:28:44,840 --> 00:28:48,280
Speaker 1: pim Fox. I'm on Twitter at pim Fox. I'm on

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00:28:48,320 --> 00:28:51,600
Speaker 1: Twitter at Lisa Abramo. It's One before the podcast. You

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00:28:51,640 --> 00:28:54,160
Speaker 1: can always catch us worldwide on Bloomberg Radio