Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller. Every business day we bring
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
Speaker 1: with essential market moving news. Fund The Bloomberg Markets Podcast
Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
Speaker 1: at Bloomberg dot com slash podcast. All right, we got
Speaker 1: earnings kicking off later this week. We want to get
Speaker 1: a sense from some professionals like, how should we think
Speaker 1: about these these earnings? What should we be looking for?
Speaker 1: What are the risks out there? So let's bring in
Speaker 1: Gina Martin Adams. She's our chief strategist at Bloomberg Intelligence
Speaker 1: and she joins us here on our Bloomberg Interactive Broker studio.
Speaker 1: So we appreciate that you get the gold star. You know,
Speaker 1: we've dealt with a lot until last time we talk
Speaker 1: to you. It seems like it's been a little bit Gina.
Speaker 1: We've had a banking crisis, we've had a FED continuing
Speaker 1: to raise rates, market pricing in rate cuts. Let's get
Speaker 1: back the fundamentals stocks earnings. What are you looking for
Speaker 1: this earnings period? Well, I think it's going to be
Speaker 1: a pretty ugly earning season. Remember, at the beginning of
Speaker 1: the year, analysts we're anticipating about a two percent drop
Speaker 1: in first quarter earnings. They're now anticipating an eight percent decline.
Speaker 1: They are also anticipating at least a three quarter earnings
Speaker 1: recession that began with a fourth quarter of twenty twenty
Speaker 1: two will extend through the first half of this year.
Speaker 1: At the very least, probably by the end of earning season,
Speaker 1: we'll find that it will be a full four quarter
Speaker 1: earnings recession extending through the third quarter, because the third
Speaker 1: quarter estimate is on the verge of decline already. Wait,
Speaker 1: these are your analysts. Is this is the consensus of
Speaker 1: Wall Street analysts? Ah, well, what do you think. Look,
Speaker 1: our model says we get a five percent earnings contraction
Speaker 1: that was as of Our model is suggesting we were
Speaker 1: headed into earnings recession as early as the middle of
Speaker 1: last year. It currently says somewhere between a five and
Speaker 1: seven percent earnings contraction overall on a trailing twelve month basis.
Speaker 1: If you look at the trailing twelve month numbers as
Speaker 1: implied by the analyst consensus, it's closer to a three
Speaker 1: and a half percent earnings recession. That's very similar to
Speaker 1: the twenty fifteen twenty sixteen earnings recession, which was a
Speaker 1: midscal recession, but certainly very light relative to your typical
Speaker 1: earnings recession was about fifteen percent. I think what everyone
Speaker 1: is struggling with right now, as everyone says the market
Speaker 1: is fully unprepared for this recession. Unfortunately, I think that
Speaker 1: the timing is a little bit messy because as of October,
Speaker 1: our models would suggest actually the market was pricing for
Speaker 1: up to a fifteen percent recession emerging in twenty twenty three,
Speaker 1: so we already priced the earnings down draft that we're
Speaker 1: going through right now. You have to get to a
Speaker 1: point where the consensus capitulates so far, so fast that
Speaker 1: they're now starting to say, look, this could be even
Speaker 1: worse than fifteen percent before the market even need go
Speaker 1: lower than it was in October. And I think that
Speaker 1: that is what is creating a lot of confusion on
Speaker 1: the part of investors is are we ready for this?
Speaker 1: Are we not ready for this? I think the market
Speaker 1: is very well prepared for this, and that's why it's
Speaker 1: been able to look through a lot of this weakness,
Speaker 1: so stocks can perform. The market can perform in a
Speaker 1: period where earning are coming down yep, And essentially we
Speaker 1: already priced this in, We've already dealt with it, and
Speaker 1: we've already recovered on the market, even though you haven't
Speaker 1: seen it hit the street. Two conditions that need to
Speaker 1: happen that we need to see happen for that to
Speaker 1: remain the base case. The first is estimate revision momentum
Speaker 1: cannot go lower than it was in October. So intriguingly,
Speaker 1: estimate revisions reached the worst of their worst momentum in
Speaker 1: the October November time period as well, So even though
Speaker 1: analysts are marking down expectations, they're not marking them down
Speaker 1: as fast as they were in October and November, and
Speaker 1: that momentum is really critical to driving price. So yes,
Speaker 1: you can absolutely see earnings continue to remain weak, and
Speaker 1: as a matter of fact, on average, stock prices bottom
Speaker 1: two quarters before earnings ultimately find their bottom. We can
Speaker 1: continue to see earnings remain weak in stock prices move higher,
Speaker 1: but we need to see that momentum remain a little
Speaker 1: bit less bad, if not start to improve. The second
Speaker 1: thing that is absolutely critical to maintaining I think market
Speaker 1: momentum going forward is these do need to continue to
Speaker 1: cut cost to the point where we can get confident
Speaker 1: that margins will bottom in the first half of this year.
Speaker 1: This is something we've been talking about since twenty twenty one.
Speaker 1: When margin weaknesses started to emerge on the index. It
Speaker 1: was a very critical sign of weakness coming for the
Speaker 1: index itself, and we need to see margins bottom. Now.
Speaker 1: The analyst consensus says, hey, margins are going to bottom
Speaker 1: in the first quarter. We're going to see the worst
Speaker 1: of the worst in the first quarter. It's going to
Speaker 1: get slightly less bad going into the second quarter, in
Speaker 1: the third quarter because finally all these cost pressures are
Speaker 1: starting to abate, and that is really quite a critical
Speaker 1: to forming that ultimate earnings turn around to twenty twenty four.
Speaker 1: Who don't get enough cost cuts. It's a problem when
Speaker 1: you look across the university of companies that you and
Speaker 1: Bloomberg Intelligence covers, do you see that happening? I mean,
Speaker 1: you can tell right before you really get earnings if
Speaker 1: they fired enough people, if they've so it has it happened.
Speaker 1: It has happened for some sectors. It has absolutely happened
Speaker 1: within the communication services space. This is at the forefront
Speaker 1: of everything. This is the world, This is Paul's comfort zone.
Speaker 1: These are the companies that are really at the forefront
Speaker 1: of this. Yeah, even though this used to be a
Speaker 1: meta free zone. Yeah, trying to get with the kids.
Speaker 1: You can't help himself. Netflix, those Disneys of the world.
Speaker 1: Those companies were at the forefront of the massive margin
Speaker 1: problems that emerged in twenty twenty one. They are now
Speaker 1: at the forefront of finding some margin lows through their
Speaker 1: cost cunning endeavors. You're also seeing tech start to get
Speaker 1: in on this game some select consumer discretionary stocks. We're
Speaker 1: not seeing it end mass, and we may need to
Speaker 1: see it in mass before we can really create that
Speaker 1: margin low. You know, you've had very few layoffs in
Speaker 1: the financial sector, very few layoffs and industrials there are some,
Speaker 1: but perhaps not enough to create those really solid margin lows.
Speaker 1: I would anticipate we continue to hear more news about
Speaker 1: layoffs over the JIL. Corporate America has more work to
Speaker 1: do into Q two. As your mentor, yeah, I think
Speaker 1: a little bit more. They also have a lot of
Speaker 1: cost rationalization they can do, though, just in just general
Speaker 1: marketing and expenditure you know, the general expenses can come
Speaker 1: down as well, which would help that operating leverage. I
Speaker 1: think the investor relations people like across the corporate America
Speaker 1: have said to their CFOs and CEOs, cost cuts the
Speaker 1: market likes, oh yeah, yeah, the stocks go up when
Speaker 1: you talk about cutting costs. That's kind of the market
Speaker 1: right now, as opposed to the market wants to see
Speaker 1: top line both. So anyway, Gina has been talking about
Speaker 1: and her team I've been talking about watch those margins
Speaker 1: for years and been spot on there. Gina Martin Adams,
Speaker 1: chief equity strategist for Bloomberg Intelligence, joining us here in
Speaker 1: our Bloomberg Interactive Broker Studio again. Ernie's kicking off later
Speaker 1: this week and we'll have full coverage from the bi analysts,
Speaker 1: from the strategists, and from external analysts, as well as
Speaker 1: some Sweet Suite people coming in as well. You're listening
Speaker 1: to the team can'ser Line program, Bloomberg Markets weekdays at
Speaker 1: ten am Eastern, Bloomberg dot Com, the I Heard Radio app,
Speaker 1: and the Bloomberg Business app. We're listening on demand wherever
Speaker 1: you get your podcast. We got interest rates rising early
Speaker 1: over the last twelve months. A rate we've never seen before.
Speaker 1: That can't be good for real estate. So how do
Speaker 1: you in your world look at real estate today? What's
Speaker 1: your call? First of all, Paul Mcko morning, thank you
Speaker 1: again for having me. You're talking about our home Green Street.
Speaker 1: I hear the kind of David here. I'm fine. Oh okay,
Speaker 1: there we go. Headphone problem, David, We hear you. Good
Speaker 1: man sound check successful sound check before the show. Um,
Speaker 1: you know and appreciate the Green Street mentioned my farm
Speaker 1: home and yeah, you're right. Definitely the pre eminent reet
Speaker 1: and research shop. You know, when we talk about the
Speaker 1: current environment of reets in a rising at just rate environment,
Speaker 1: my approach is to focus on the fundamentals. We are,
Speaker 1: you know, with us focused on the residential reet income
Speaker 1: et FR ticker as house h a US. We're looking
Speaker 1: at the residential reads focused on that rental income. So
Speaker 1: from a fundamental perspective and a strong employe in an
Speaker 1: environment that we're experiencing, the rent is paid. A lot
Speaker 1: of the rental players have tailwords in their favor, which
Speaker 1: should lead to a pretty decent first quarter earning season
Speaker 1: for many of these single family rental players. The multifamily
Speaker 1: reats and other players that are in the sector. Well,
Speaker 1: so everything's good now, but what happens when they have
Speaker 1: to refi at these rates, Well, that's a great question, Matt.
Speaker 1: And you know what's interesting is we published a blog
Speaker 1: recently looking at the balance sheets of our top ten constituents,
Speaker 1: and what we've noticed is that, first of all, we're
Speaker 1: operating in a ten year environment right now, looking at
Speaker 1: my Bloomberg of three forty two, much different than what
Speaker 1: we experienced during COVID, when the ten year was training
Speaker 1: around one and a half percent, Much different than just
Speaker 1: a few months ago when we were training near four percent.
Speaker 1: And so, as a result, because of what happened during COVID,
Speaker 1: many of these reats were able to take advantage of
Speaker 1: basically unprecedented lending conditions to really well capitalize their balance sheets.
Speaker 1: And then our blog that I mentioned, we talk about,
Speaker 1: you know, the top ten holdings are looking at their
Speaker 1: debt maturities pretty much across the board. We say that
Speaker 1: right now, for our guys, right now, the average debt
Speaker 1: maturity over the next three years, it's about twenty percent
Speaker 1: of the stack. No more company is rolling more than
Speaker 1: thirty percent over the next three years. We say, right now,
Speaker 1: the weighted average debt maturity is about eight years with
Speaker 1: an average weighted interest rate about three points six percent
Speaker 1: of pretty much right online. With the tenure where we're
Speaker 1: at right now. Result, you know, with many of these guys,
Speaker 1: you know, predominantly with fixed rate debt, I don't see
Speaker 1: it being into at this point, and hopefully by the
Speaker 1: time that it really comes into play, we will see
Speaker 1: you know, federal reserve interest rates being in a more
Speaker 1: manageable level. And David, I know you guys focus on
Speaker 1: a residential real estate biz. So that's regional big time Reasonal,
Speaker 1: I guess the pandemic has just exacerbated the regional differences.
Speaker 1: So is it just as simple as go along the
Speaker 1: sun Belt? You know, I wish they were that simple,
Speaker 1: because if that was the answer, Matt, you and I'd
Speaker 1: be traveling cross country on my G five, going to
Speaker 1: see all the shows we want to see. Unfortunately, you know,
Speaker 1: first of all, location matters. You know, we have firms
Speaker 1: that are out there, we all see them every day,
Speaker 1: Coast Stars, Zilo, Real Page, redfin et cetera. That are
Speaker 1: telling where those migration trends are going. And one of
Speaker 1: the key takeaways here is that if you were called
Speaker 1: during COVID, pretty much there was this massive exodus from
Speaker 1: the coast, from New York, San Francisco, LA. And what
Speaker 1: we're seeing, especially out of companies like F six, which
Speaker 1: is a West Coast based apartner route, people are coming back.
Speaker 1: And so as a result, though the Sun Belt remains
Speaker 1: very resilient, you are seeing pockets of strength happen again
Speaker 1: back in certain parts of New York City, San Francisco, LA,
Speaker 1: some of the southern parts of California where there are
Speaker 1: tenants that are moving back into those properties. Interesting. So
Speaker 1: people are well capitalized, they got right with race during Zerpe,
Speaker 1: and the tenants are moving back into the you know,
Speaker 1: properties they abandoned on the coasts. What about costs? You know,
Speaker 1: we were just talking with Gina Martin Adams from Bloomberg
Speaker 1: Intelligence and she was saying, the market, you know, broadly
Speaker 1: priced in or accession last year, and so we just
Speaker 1: need to see that hit the street. But the only
Speaker 1: concern she has when we get earnings this quarter is
Speaker 1: that companies need to deal with costs. They should hopefully
Speaker 1: already have taken care of them, but maybe they had
Speaker 1: need to into the second quarter. What about reets. Great question,
Speaker 1: and obviously Gina always delivered the goods when she's either
Speaker 1: on TV or radio. Super you know, top guests for
Speaker 1: me to follow up on. You know, a couple of
Speaker 1: takes here from a cost perspective that is always in
Speaker 1: the wheelhouse of every single reef management team trying to
Speaker 1: focus on can we maximize our revenues through growth? And
Speaker 1: how can we minimize our expenses through a spect control
Speaker 1: of about utilizing smart technology a Podding concept, you know,
Speaker 1: a Podding concept would be, let's say you have three
Speaker 1: residential properties within a two mile radius. You could use
Speaker 1: let's say one or two maintenance guys across all three properties,
Speaker 1: opposed to planting one at each location. So I think
Speaker 1: with these guys focused on trying to minute maximize the
Speaker 1: bottom line, the NI number, you know, that's expense control
Speaker 1: plays into it. But from a very high level. You know,
Speaker 1: right now, the rental market remains strong. You're talking about
Speaker 1: thirty your mortgage rates that are above seven percent. Housing
Speaker 1: affordability is out the window, especially if you're in one
Speaker 1: of these desirable markets. So for those factors alone, that
Speaker 1: benefits the rental landlord. Remember we're focused on rental income.
Speaker 1: That rental income that you pay to the landlord as
Speaker 1: your monthly rent payment goes into investors pockets in the
Speaker 1: form of dividend income. And that's what we're focused on,
Speaker 1: is the rent goes up, that dividend hopefully should go
Speaker 1: up at the end of the day as well. So
Speaker 1: I'm looking just at the SP five real Estate Investment
Speaker 1: Trusts index, and year to date it's kind of flat
Speaker 1: up a little bit. Where are the riets stocks relative
Speaker 1: to say navs right here's or value in rates or
Speaker 1: in a rising in real real estate or a rising
Speaker 1: interest rate environment, just maybe don't want to get near them.
Speaker 1: Let me get a little pedestal here and give you
Speaker 1: the four one one on four to eleven. There, public
Speaker 1: traded roets are trading at a massive discount to net
Speaker 1: asset value. That soundlike some of the private vehicles that
Speaker 1: are out there talking about them trading at premiums to
Speaker 1: net asset value. Historically though, and if you go back
Speaker 1: to some mayreet the National Association or real Estate Investment
Speaker 1: trust some of data over the long term and rising
Speaker 1: periods of rising interest rates. Rates are the sector that
Speaker 1: you want to be invested in, you know, Traditionally, reets
Speaker 1: have been that usual go to during flights to safety
Speaker 1: because again of that dividend income stream, and so you know,
Speaker 1: until we do see a major reset in this interest
Speaker 1: rate environment, we're focused on those strong pockets and fundamentals,
Speaker 1: you know. Taking it outside of residential, there's a reason
Speaker 1: why company sectors of industrial reefs or different rets and
Speaker 1: tower reefs continue to remain very strong because these are
Speaker 1: properties and sectors that are being used every single day.
Speaker 1: Self storage there's a there's a merger that's going on
Speaker 1: right now between extra Space Storage or tickers EXR and
Speaker 1: Light Life Space Storage tick LSI, and so there's some
Speaker 1: tail ones in that storage space. Remember we're all holding
Speaker 1: more and more stuff. You know, Matt, I can't go
Speaker 1: to a show without buying another T shirt or a magnet.
Speaker 1: So you know, that just adds up into the storage unit.
Speaker 1: And so as a result, these are sectors that are
Speaker 1: just going to continue to grow. It's those other sectors
Speaker 1: that are right now. You know, everybody tech heres about
Speaker 1: offices and malls and what's the long term future for
Speaker 1: those sectors. I wish I knew the answer to that,
Speaker 1: but I can tell you that they're definitely long road
Speaker 1: ahead for residential reefs as far as that, you know,
Speaker 1: maintained strength. Don't get me started on malls, dude, When
Speaker 1: we recently got the summer tour schedule, what are the
Speaker 1: what are the must see shows? What are the shows
Speaker 1: that you can't miss? Are you coming back to MSG?
Speaker 1: I'm hopeful to be at ALL seven MSG. I will
Speaker 1: be seeing my two hundred show next week at the
Speaker 1: Hollywood Bowl in La. Sorry, we can't be together, but
Speaker 1: if all goes well, yes you will. I will be
Speaker 1: at ALL seven at MSG again. Vernado, you know, big
Speaker 1: New York office and plaza, big major redevelopment going on
Speaker 1: in the area. Currently on pause, I believe, But you know, again,
Speaker 1: it's hard. You can't walk around New York City without
Speaker 1: being hit in the face. Buyer reets at pretty much
Speaker 1: every single intersection. All right, David, good stuff. Appreciate that.
Speaker 1: David auerback, managing director at Armada ETF Advisors. So you
Speaker 1: were talking fish fish. I want to an amazing fish
Speaker 1: show with David and I guess I hope I'll be
Speaker 1: doing it again. And they just tour all the time,
Speaker 1: just like the Dead did they tour? Yeah? Pretty much.
Speaker 1: I mean they've had hiatuses. I don't know the plural
Speaker 1: of netword, but they're on tour again and I'm ssighted
Speaker 1: to see them this summer. This is the last summer
Speaker 1: for the Deadenco. By the way, is that right? If
Speaker 1: you want to see Bobby and Mickey play with John Mayer?
Speaker 1: This is it? All right? I'll make a note. All right,
Speaker 1: very good this mister Weir. By the way, do we
Speaker 1: not believe he's seventy seven? Maybe you're listening to the
Speaker 1: tap Can's are Live program Bloomberg Markets weekdays at ten
Speaker 1: am Eastern on Bloomberg Radio, tune in app, Bloomberg dot Com,
Speaker 1: and the Bloomberg Business App. You can also listen live
Speaker 1: on Amazon Alexa from our flagship New York station. Just
Speaker 1: say Alexa play Bloomberg eleven thirty. All right, we got
Speaker 1: some m and A out there, folks. Gold Giant numont
Speaker 1: raises new Newcrest bid to nineteen point five billion dollars.
Speaker 1: Some movement there in the gold space. Grant's spa, Spora?
Speaker 1: How do I do that? Grant? Grant? How do I
Speaker 1: pronounce your last name? Spora? It's Spora. Yes, he's a
Speaker 1: metals of Mining Senior an also Bloomberg Intelligence. So Grant
Speaker 1: talk to us about this, uh, you know Newmont deal
Speaker 1: for Newcrest, what's going on there? M yeah, thank you
Speaker 1: for having me on. Firstly, in the gold space, I
Speaker 1: mean they're two drivers for M and A. One is,
Speaker 1: every year these gold companies eat up their reserves and resources,
Speaker 1: and if you're of a certain scale, you really struggle
Speaker 1: to replace those reserves and resources. So the one way
Speaker 1: to do that quickly and you know arguably well it
Speaker 1: depends on your valuation, but hopefully not too expensively is
Speaker 1: through M and A. So that's the one reason. And
Speaker 1: in this case Newcrest does have a particularly good or
Speaker 1: large reserve base. Um, so that's what Newmont are after.
Speaker 1: And the second reason, or the second rational is there
Speaker 1: is a school of thought it's the bigger you get
Speaker 1: in gold, the more you likely to attract the generalist shareholder,
Speaker 1: as opposed to staying in an inner sector, which is
Speaker 1: often perceived by mainstream investors as a bit niche. So
Speaker 1: you know, if you become the let's say, the the
Speaker 1: Xon of the gold sector, that'll that'll get you a
Speaker 1: premium because people will naturally gravitate towards you, so that
Speaker 1: both of these are at play here. For for new
Speaker 1: month's bid for New Crest, so nonetheless the shares are
Speaker 1: down today they were down yesterday. Um, is this price
Speaker 1: too much? So if it depends on which way you
Speaker 1: look at it, So if you look at it on
Speaker 1: an earning is multiple, the answer is possibly. Um, the
Speaker 1: implied sort of valuation bid in terms of EVT but
Speaker 1: dies around nine point six times for New Crest, which is,
Speaker 1: you know, way more expensive than its next most expensive pier,
Speaker 1: which is a Nico Eagle at around eight point eight times.
Speaker 1: So on near terms earnings basis, you know, one would
Speaker 1: say Newmont is paying up. If you look at it
Speaker 1: from another perspective, if you look at it in terms
Speaker 1: of reserve value, then it actually isn't you know? Then
Speaker 1: then for instance, Agnico Eagle is you know, is around
Speaker 1: five hundred and thirty dollars per ounce of reserve, whereas
Speaker 1: the New Crest but is only around two hundred dollars
Speaker 1: an ounce. So on that basis, you know, Um, future
Speaker 1: future reserves or future growth is not that expensive today's
Speaker 1: earnings are, so I guess investors today you're saying, well,
Speaker 1: in the near term that looks a bit expensive, given
Speaker 1: that that Newmont's shares about the only gold sector gold
Speaker 1: stock that is down today. So grant in the space
Speaker 1: is here. I mean, is the scale matter? I mean,
Speaker 1: when I'm digging the stuff out of the ground, the
Speaker 1: scale matter? Why do this gale anything? Well again, it's
Speaker 1: it's it's in fairness. You know. My initial reaction would
Speaker 1: be would be to say, look, it's all about quality, right,
Speaker 1: It's how much value are you adding? What's your your
Speaker 1: cash flow to share things like all the good good
Speaker 1: metrics if we look at UM. But so far Newmont,
Speaker 1: which has built some scale, UM it does trade, also
Speaker 1: traded a premium versus many of its peers, including Barrick
Speaker 1: which is his nearest, its next biggest competitor. So let's
Speaker 1: pulled the valuation gap on its on its nearest competitor.
Speaker 1: And you know, in terms of quality, I wouldn't say
Speaker 1: Newmont is necessarily a better quality company than Barrick UM.
Speaker 1: But the market seems to um, you know, be wanting scale,
Speaker 1: So that the market seems to has seems to be
Speaker 1: indicating that, yes, scale does matter. Um, you know, my, my, my,
Speaker 1: I would the opposite side of it, and say, you know,
Speaker 1: I'd rather see the value add in terms of you know,
Speaker 1: are you able to take those reserves and resources and
Speaker 1: actually develop them and deliver the cash flow out of
Speaker 1: those ouncers. And this deal will will take some time
Speaker 1: before that comes to light. You know, you could be
Speaker 1: two to three years before we actually see the benefit
Speaker 1: of the deal coming out. So how have grant these
Speaker 1: gold miners then in general traded next to gold? I mean,
Speaker 1: we've seen the underlying commodity breeds two thousand dollars and
Speaker 1: get pretty close to an all time high. So in
Speaker 1: terms of if you look at year to day performance,
Speaker 1: most of the certainly the more leverage names have done
Speaker 1: very very well. So some of your your South African stocks,
Speaker 1: you know, up fifty percent here to date, really really
Speaker 1: done very well, massively outperformed gold. Some of the larger
Speaker 1: cap plays of have marginally outperformed gold. Because of course
Speaker 1: you still have lingering cost inflation, so that you know
Speaker 1: what you what you gain on the top line, you're
Speaker 1: also giving away on the on the bottom line to
Speaker 1: a certain extent. And and Newmont because it's in a
Speaker 1: you know, it's it's the aggressor in a bidding situation
Speaker 1: has that's kind of underperformed a little bit. So it's
Speaker 1: the one stock that has actually underperformed slightly. UM. So Yeah,
Speaker 1: in general, you know, the gold stocks and the more
Speaker 1: leveraged ones have done very very well here to date.
Speaker 1: So grant, what's the Is this a space, the mining space,
Speaker 1: something across all metals. Is this a space that is
Speaker 1: ripe for consolidation, has already consolidated? Give us a sense
Speaker 1: of how that space looks. So I think I think
Speaker 1: to sort of before I answer that question directly, I
Speaker 1: would say that the miners are definitely tilting from UM
Speaker 1: cash returns to too much more growth, so you'll see
Speaker 1: capital spend rise as well as the sector being much
Speaker 1: more willing to look at M and A as a
Speaker 1: growth angle. So I mean, for the past, i'd say,
Speaker 1: you know, since about twenty twenty thirteen or so, they've
Speaker 1: been in the in the sin bin um for for
Speaker 1: overpaying at the top of the cycle in past them
Speaker 1: and A transactions. So they've kind of redeemed themselves by
Speaker 1: by paying lots of you know, good dividends and doing
Speaker 1: share buybacks and being very very disciplined with their capital.
Speaker 1: So they've kind of earned the right to go out
Speaker 1: and grow again, and we are starting to see that
Speaker 1: slowly emerge UM, and and so is gold is I
Speaker 1: would say, is right for consolidation. Some of the other
Speaker 1: sectors are it's a little bit more challenging UM. But
Speaker 1: in in base metals, you know, the battery metals, particularly copper,
Speaker 1: is very sought after and it's quite difficult to get
Speaker 1: your hands on on really good assets. Gold. Is gold
Speaker 1: set to keep rising? I mean two thousand and five
Speaker 1: dollars a troy ouns right now two thousand and six
Speaker 1: as the FED taps out at the terminal rate, which
Speaker 1: is the expectation, and then goes on pause. Are we
Speaker 1: expecting gold to continue to climb? Oh wish? A good
Speaker 1: gold looks quite expensive to me at the moment. So
Speaker 1: at the moment you are, it's kind of anticipating that's
Speaker 1: fed on pause. And it's also it's also pricing in
Speaker 1: quite a hefty let's call an insurance premium against any
Speaker 1: sort of tale risks that are out there in the
Speaker 1: financial in the financial system, you know, more banks potentially
Speaker 1: in trouble. So for me, gold looks expensive, but it's
Speaker 1: certainly in a bold market. So I wouldn't rule out
Speaker 1: that it continues to climb, but you know, it's getting
Speaker 1: more and more expensive versus a whole raft of other
Speaker 1: financial metrics. All right, Grant, thanks so much. We appreciate
Speaker 1: you coming on here talking to us about this deal.
Speaker 1: In the gold space and kind of the gold market overall.
Speaker 1: Is Matt was saying, golds north of two hundred dollars
Speaker 1: lots here and it's yeah, it's pushing up towards all
Speaker 1: time record grants for he is a metals and mining
Speaker 1: senior analyst at Bloomberg can tell just looking at a CV.
Speaker 1: He was a head of euromining and research at Macquarie,
Speaker 1: at Deutsche Bank, he did a stint at UBS and
Speaker 1: he's been at Bloomberg Intelligence now for about three years.
Speaker 1: You're listening to the Team Cancer Line program Bloomberg Markets
Speaker 1: weekdays at ten am easting on Bloomberg dot com, the
Speaker 1: I Heart Radio app, and the Bloomberg Business app. We're
Speaker 1: listening on demand wherever you get your podcast. We're waiting
Speaker 1: some comments from Washington, d C. Secretary at Jennet Yellen
Speaker 1: scheduled around the bottom of the hour. We'll see how
Speaker 1: that goes. When she does speak. We'll bring those comments
Speaker 1: to you. I want to talk about this economy. I
Speaker 1: want to talk about the FED. So I want to
Speaker 1: talk to somebody who kind of knows what they're talking about.
Speaker 1: Here Neil Grossman, co founder and former CIO of t
Speaker 1: k n G Capital Neil while the rest of us
Speaker 1: word and an advisor to the Norwegian Central Bank. Oh nice,
Speaker 1: How did you actually live in Norway? Fortunately, no, you
Speaker 1: did it from over here, because Norway's pretty nice. Actually,
Speaker 1: they usually only invited me to come visit in February, right, exactly.
Speaker 1: You get some you get some deals there. I guess. Hey,
Speaker 1: you know, you know, last Friday most of us were
Speaker 1: not here. Weird markets were closed. We're celebrating Good Friday
Speaker 1: or however you do that thing. We had another good
Speaker 1: jobs number. You know, Payrolls are still strong, unemployment rate
Speaker 1: is low. Can you have that and this greatly anticipated
Speaker 1: recession at the same time. It's going to take time
Speaker 1: to evolve into what I would guess the number. By
Speaker 1: the way, a couple interesting things about the number, two
Speaker 1: hundred and thirty six thousand jobs. The trailing twelve months
Speaker 1: was about three hundred and forty two thousand and that's
Speaker 1: the weakest since we've started the real recovery. But if
Speaker 1: you go back pre COVID, the single strongest twelve month
Speaker 1: period going back into the eighties, it was three hundred
Speaker 1: and thirty two thousand jobs over a twelve month period
Speaker 1: on average. So we're still creating jobs in a sense
Speaker 1: at a rate that's very, very strong. To get the
Speaker 1: unemployment rate up is going to be tremendously difficult. I mean,
Speaker 1: the one hundred one hundred and twenty five thousands usually
Speaker 1: viewed to be at break even, So you're going to
Speaker 1: have to go below that to start to push the
Speaker 1: rate up. Does this fed have the I don't know
Speaker 1: if courage is the right word the metal to push
Speaker 1: through that point, because it's going to be painful for
Speaker 1: Americans and not politically palatable at all. Well, I mean, again,
Speaker 1: the question is going to be how you balance that
Speaker 1: with inflation. I think most, for the most part, Americans
Speaker 1: would probably tell you that the inflation they've experienced has
Speaker 1: been horrifically difficult for them. True, but those who I mean,
Speaker 1: if you're faced with rising prices are losing your job?
Speaker 1: I think I know what most Americans, So the question
Speaker 1: matters how far below. First of all, one hundred and
Speaker 1: twenty five thousand jobs a month is still not losing job.
Speaker 1: Even going down to zero job creation is not fully
Speaker 1: losing your job. It means, of course, the unemployment rate
Speaker 1: will be rising. In the background, I think the question
Speaker 1: is going to be a couple of things. First of all,
Speaker 1: there is no way to keep adding jobs at this
Speaker 1: rate unless the workforce starts so expansing the you're going
Speaker 1: to hit a limit where there's just no jobs available.
Speaker 1: I actually think in the background this is what could
Speaker 1: be the Fed's biggest problem, because if you're not really
Speaker 1: losing jobs, which are probably likely to find, is that
Speaker 1: the competition for good employees is going to push wages up.
Speaker 1: And that's where the FED, I think, is worried. That's
Speaker 1: the wage price spiral that they want to avoid. We
Speaker 1: did just talk with Gina Martin Adams, who runs our
Speaker 1: equities coverage for Bloomberg Intelligence, and she said, what we
Speaker 1: need to see, what investors need to see to justify
Speaker 1: these valuations is real cost cutting and that maybe we
Speaker 1: haven't seen enough in the first quarter. Corporate America needs
Speaker 1: to do more in Q two. Yeah, you haven't seen
Speaker 1: much and Again, the other interesting feature of what's going
Speaker 1: on is I think people scratched their head why the
Speaker 1: economy has tended to remain strong. But what we've had
Speaker 1: as a very strong nominal economy for the less several years,
Speaker 1: and what's been coming down is real growth is real
Speaker 1: growth because inflation has been going up. We're now starting
Speaker 1: to see inflation come down. Even though nominal growth is
Speaker 1: coming down, that will still support the real number. The
Speaker 1: real problem is going to come. And this is what
Speaker 1: I'm I've started in a position for for whatever it's worth,
Speaker 1: I'm beginning to buy protection into the fall because I
Speaker 1: think in the fall you're going to see the consequences
Speaker 1: of falling earnings what will be weaker growth, not only nominally,
Speaker 1: but I think you're going to start to see inflation
Speaker 1: actually rise as we move into the fall. Wait, before
Speaker 1: we get further into the economics of it, give us
Speaker 1: the structure the mechanics of that trade. How do you
Speaker 1: buy protection? Well, for me, I'm well, first of a
Speaker 1: couple of things are interesting, and we've talked about this before.
Speaker 1: What I've been doing for the last let's say half
Speaker 1: a year to year, because volatility is high, I'm very
Speaker 1: I've been very happy writing optionality and getting paid to
Speaker 1: take risk. Volatility has come down significantly, So I've started
Speaker 1: actually by way out the money puts, and I'll build
Speaker 1: a structure where I can have a fairly significant size,
Speaker 1: either outright or a spread trade designed to you know,
Speaker 1: to benefit if we have a fairly sizeable move. I'm
Speaker 1: not really as worried about a five or six percent move.
Speaker 1: Those are not the type of things that cause problems.
Speaker 1: You're protecting against a big ten to twenty percent drop, ye,
Speaker 1: or yeah, it could be thirty. I mean, you know
Speaker 1: some of the streets analysts are looking for three thousand,
Speaker 1: thirty two fifty that type of drop. I want to
Speaker 1: make sure I'm making a lot of money on my hedges.
Speaker 1: How the market drop or do you risk that much
Speaker 1: in the face of declining interest rates? That story, well,
Speaker 1: interest rates have fallen, you're talking about the front end.
Speaker 1: But the problem is if inflation starts to rise. Listen,
Speaker 1: remember we had a period less fall where the average
Speaker 1: inflation rate headline CPI use it was at point one percent.
Speaker 1: That's fairly low, and so it's going to be a
Speaker 1: very easy situation for the year on your numbers to
Speaker 1: start to push up the year on year inflation rate.
Speaker 1: So if inflation is rising while you're getting slowing earnings
Speaker 1: and slowing growth, the Fed's hands are still tied functionally.
Speaker 1: And that's really the situation I think we have to
Speaker 1: be worried about. So no cuts at the to the
Speaker 1: target rate. I mean they've told us time and time again.
Speaker 1: Jerome Palace said, don't expect any cuts in twenty twenty three,
Speaker 1: but the market is still pricing in four From the
Speaker 1: way I read the WORP page, the World Interest Rate
Speaker 1: probability page, and you're probably someone who's much better at
Speaker 1: reading that kind of stuff, I'm not sure it really
Speaker 1: means that the market believes the FED is going to
Speaker 1: cut rates four times. Maybe they're hedging as well well.
Speaker 1: I mean that's where the three month live or or
Speaker 1: the sofa, you know, futures are priced for. So people
Speaker 1: are actually out there putting on positions that are directing
Speaker 1: these these these yielding you know, break evens. I think
Speaker 1: the answer to all this is and the last time
Speaker 1: I was on, I think Paul asked me, do I
Speaker 1: think they're gonna cut rates? The answer is generally know unless,
Speaker 1: and the unless is a really is a stocking marker
Speaker 1: comes apart. I see no wonders. I don't understand why
Speaker 1: anyone thinks if you're near full employment and the economy
Speaker 1: is still doing okay, why the FED has any reason
Speaker 1: to cut rates. And it's the equity market that feels
Speaker 1: it needs lower yields to push prices up in this
Speaker 1: type of environment, the FED, I think, if you're looking
Speaker 1: at a longer term, you know, a dynamic stochastic process
Speaker 1: or whatever you want to call it, the FED needs
Speaker 1: to ring out inflation to actually maximize the outcomes over
Speaker 1: a long period of time, not just in the next
Speaker 1: three year six. Do you think is materially coming down
Speaker 1: or is it just kind of stuff we see maybe
Speaker 1: I think some of it is and some of it isn't.
Speaker 1: If you go into a restaurant and try and right,
Speaker 1: or you fly or you go to I mean, I
Speaker 1: can tell you stories about hotel prices just you fall,
Speaker 1: you fall off your chair. If you look at some
Speaker 1: of the things, for example, some of the union issues
Speaker 1: that are going on now, I think you know, if
Speaker 1: Rutgers just went on strike, I mean, this is not
Speaker 1: the type of behavior in a weak economy where you're
Speaker 1: worried about your job. This is I think you deserve
Speaker 1: to pay me more. And the question is if we're
Speaker 1: going to continue to see upward pressure, I think the
Speaker 1: doc workers are threatening or on strikeout West again, that
Speaker 1: by the way, has much more of a flow through impact.
Speaker 1: You know. Then then you've got the issues that it
Speaker 1: makes it harder and harder to you know, to look
Speaker 1: at say commodity price inflation and ignore the other stuff.
Speaker 1: What do you pay attention to the Jolts data? Yes,
Speaker 1: why is it now? I went back and just looked,
Speaker 1: and it usually is like four to five million, six million.
Speaker 1: We've been sitting around ten or eleven million openings for
Speaker 1: a long time. What's happened our workforce world? Well, it's not,
Speaker 1: by the way, Number one, it's not clear that those
Speaker 1: are all real jobs. I mean, sometimes if you need,
Speaker 1: if you need workers, you may be spreading out more
Speaker 1: job requests and you don't know if that people are
Speaker 1: on multiple I'm not an expert on the dynamics that's hot,
Speaker 1: but that's for sure true. I mean I can just
Speaker 1: tell you looking for used Hellcat online, use what dodge
Speaker 1: Challenger Hellcat. A lot of the ads there are no
Speaker 1: longer relevant, you know. And it's the same thing with
Speaker 1: job with job openings. Right. You're listening to the team
Speaker 1: Ken's her live program Bloomberg Markets weekdays at ten am
Speaker 1: Eastern on Bloomberg dot Com, the I Heard Radio app
Speaker 1: and the Bloomberg Business App. We're listening on to mand
Speaker 1: wherever you get your podcast. What did tree here? We
Speaker 1: got a new contributor to Bloomberg News in New York.
Speaker 1: I mean, just been your fault. I was gonna say,
Speaker 1: not new to me. I've been interviewing her since before
Speaker 1: she left, then while she was gone, and now she's
Speaker 1: come back. She's back, Simone Foxman. She is a reporter
Speaker 1: for Bloomberg News, joining us here in our Bloomberg Interactive
Speaker 1: Broker studio. So you get a gold star for coming
Speaker 1: in not phoning it in, Matt Night. We may we
Speaker 1: keep notes of that, Simone. You were in Qatar for
Speaker 1: like how many years? For three and a half years
Speaker 1: and covering all things, covering all things geopolitics, energy, a
Speaker 1: little sports. Yeah, I remember we talked to her. We
Speaker 1: talked to her during the World Cup. That's right, that's right. Oh,
Speaker 1: that's oh boy, what a great time with or soccer.
Speaker 1: Still it's still soccer to me. Good all right, But
Speaker 1: and you also did energy in a big way, right, yeah, yeah, absolutely, So.
Speaker 1: I mean you know OPEC plus what was it a
Speaker 1: week or so ago of yeah, it was it was
Speaker 1: Sunday before last. Okay, OPEC plus comes in and cuts production.
Speaker 1: What do you make of that? I mean it sounded
Speaker 1: pretty coordinated to me. Absolutely. I mean, look, we clearly
Speaker 1: have golf producers, especially Saudi Arabia, wanting oil prices higher.
Speaker 1: You know, they're looking for eighty dollars of barrel and
Speaker 1: that's largely because of the economic transformation that Saudi Arabia
Speaker 1: is pursuing. It has these you know, trillion dollar projects
Speaker 1: right like Neiom and needs the money and needs the
Speaker 1: money in order to is what. That's the that's the Drey,
Speaker 1: It's the dream city on the Red Sea. Yes, this
Speaker 1: is extremely exciting really building it. They are absolutely trying
Speaker 1: to build it. They are hiring lots of people, slow process.
Speaker 1: They have big targets for twenty thirty. Actually, so we're
Speaker 1: gonna try and see. We're gonna see how this goes
Speaker 1: over the next course of the cut, next couple of years.
Speaker 1: This will be the biggest master plan community in the world.
Speaker 1: When they're really and if you if you check out
Speaker 1: so the projections, it's this line. I believe it's like
Speaker 1: fifteen hundred kilombs. There's a very law I don't want
Speaker 1: to say the wrong number here, extremely length, the massive project,
Speaker 1: super futuristic. But you know, in order to do this,
Speaker 1: they need oil prices at eighty dollars a barrel because
Speaker 1: you know, their break even is something like seventy dollars
Speaker 1: a barrel, so they need that extra to balance there. Well,
Speaker 1: they got it there, right, I mean, WTI trades for
Speaker 1: around eighty Brent trades for eighty five and yeah, right now.
Speaker 1: But I mean I think that's why you see a
Speaker 1: move from OPEC plus you know, this time really led
Speaker 1: by Saudi Arabia cutting five hundred thousand barrels a day.
Speaker 1: That's why you're seeing this because they need that oil price.
Speaker 1: And so if there's any concern about demand from China
Speaker 1: going you know, rebounding slower than expect it, concerns about
Speaker 1: recession in the United States and Europe, you're going to
Speaker 1: see them be really proactive about this to try and
Speaker 1: keep those prices high. I think that's just the way
Speaker 1: they've come out on this so far, it looks good
Speaker 1: in terms of the European and US economies. Right the
Speaker 1: China reopening, is that still the big question mark? I
Speaker 1: think it's a little bit of everything. I think there's
Speaker 1: just a broader concern that you know, you're going to
Speaker 1: see the FED continue to tighten because of things like
Speaker 1: inflation remaining high, and I think energy doesn't probably help
Speaker 1: that kind of conversation. But yeah, I mean, look, you know,
Speaker 1: I think the markets are just jittery and they haven't
Speaker 1: kind of landed on an ultimate explanation, and you know,
Speaker 1: unless things turn around in China, then you know, the
Speaker 1: whole question is bigger. If you're so for the Qatar economy,
Speaker 1: is it all energy? A lot energy? I forget the
Speaker 1: exact breakdown, but they have tried to grow their um
Speaker 1: non energy sector, tourism, tourism. Wealthy people that are going
Speaker 1: to be arrested everywhere else in the world love to
Speaker 1: go to Qatar. Right, Hey, I mean I feel like
Speaker 1: I feel like you can lump a couple well I
Speaker 1: shouldn't say this, but there's a lot of things that
Speaker 1: are the same among these Gulf countries, and there's reasons.
Speaker 1: Clutter is no longer part of OPEC, but there's reasons
Speaker 1: for all of them. No, no geopolitical, but but there's reasons.
Speaker 1: They all want to keep oil prices relatively high. You
Speaker 1: look at the UAE as well. I mean, these are
Speaker 1: all places that see the end of hydrocarbons eventually down
Speaker 1: the road, and they say, this is our moment to
Speaker 1: really capitalize on this, to try and build non oil
Speaker 1: economies that haven't existed before, with the exception maybe of Dubai,
Speaker 1: which really largely is moved through its oil. And so
Speaker 1: again that's why you've seen them act in conjunction. So
Speaker 1: the place to go a really hot place if you're
Speaker 1: an international fugitive billionaire has been Dubai. Right, But isn't
Speaker 1: Saudi Arabia trying to get some market the boost the
Speaker 1: profile of RIAD to get some of those people. Okay,
Speaker 1: not the fugitive billionaires. I don't think anyone particularly is
Speaker 1: excited about hosting them. But maybe the former king of Spain, right, Okay, Well,
Speaker 1: Yad's plan is say everyone move your global headquarters here
Speaker 1: if you want contracts with Saudi Arabia over the coming years.
Speaker 1: And they've said, you know, a deadline. I believe it's
Speaker 1: twenty twenty four. But you've got to move here if
Speaker 1: you want our contracts. You can't have your regional headquarters
Speaker 1: and somewhere else like Dubai. So this has been a
Speaker 1: real challenge to Dubai. You know, the problem with Saudi
Speaker 1: Arabia is the standard of living is different than you
Speaker 1: might expect. It's very it's very different from the West.
Speaker 1: Still feels foreign despite all the reforms that you've seen
Speaker 1: there in the last couple of years. You know, the
Speaker 1: looser dress codes, you can find alcohol even though it
Speaker 1: continues to be illegal. You know, but there's various reasons
Speaker 1: people don't want to live in real Okay, so where
Speaker 1: they still do want to live in places like the
Speaker 1: UAE or even though hot for that matter. Okay, Well,
Speaker 1: I guess you know it's interesting here because the Journal
Speaker 1: had a story out recently, Saudi led oil cuts hit headwind.
Speaker 1: Some small producers have boosted their output, threatening to undercut
Speaker 1: the effort. I mean, how powerful is OPEC and OPEC
Speaker 1: plus today versus I don't know twenty thirty years ago,
Speaker 1: because it seemed pretty like they still kind of have it.
Speaker 1: If you will, they can still move the markets. Obviously,
Speaker 1: well absolutely, they can still move the markets, but I
Speaker 1: think the US supply is a real challenge to them.
Speaker 1: And notably, the US has increased its output by more
Speaker 1: than a billion barrels a day over the past year.
Speaker 1: But the Washer Journal story it points out something very
Speaker 1: interesting that even members of OPEC the issue. Part of
Speaker 1: the reason that we had really you know, tight markets,
Speaker 1: high prices for a little while was because even members
Speaker 1: of OPEC, like Nigeria, for example, they were overcomplying so
Speaker 1: weren't producing as much as the quota that they had.
Speaker 1: So the issue for places like Saudi Arabia is now
Speaker 1: they're actually producing much closer to the quota they had.
Speaker 1: You know, they'd shut down some of their mining and
Speaker 1: production for COVID nineteen and it was a slow start
Speaker 1: for them. They there was some theft issues, particularly in Nigeria,
Speaker 1: but you know, Nigeria adding three hundred fifty thousand barrels
Speaker 1: per days in September, you know, that erases about half
Speaker 1: of the Saudi cut at that time. So it's not
Speaker 1: just the overall OPEC plus move, it's you know, working
Speaker 1: against these even small players one hundred thousand barrels a
Speaker 1: day here, two hundred thousand dollars a day there. You know,
Speaker 1: that erodes the overall power of someone like Saudi Arabia, Russia.
Speaker 1: Let's broaden it out to a globe conversation about gas prices,
Speaker 1: because we were freaking out. We were a year ago,
Speaker 1: and especially Europe was not in a good place. But
Speaker 1: they've done relatively well, helped by I guess a milder weather. Right,
Speaker 1: how does it look now we're heading in the summer,
Speaker 1: so we're gonna be okay, but going in the next winter. Yeah,
Speaker 1: they got super lucky with the weather, and it really
Speaker 1: meant that storage was not eroded by as much as
Speaker 1: it could have been. I think we ended the season,
Speaker 1: the overall season around sixty percent of storage still remaining full.
Speaker 1: And we heard a lot of folks, you know, I
Speaker 1: think coming into this, you're saying, well, the twenty twenty
Speaker 1: three twenty twenty four winter, that's gonna be the main concern.
Speaker 1: But now you have Morgan Stanley's saying that they believe
Speaker 1: that European storage is gonna be a one hundred percent
Speaker 1: full by late August. That's not so far off from
Speaker 1: our BNF forecast. Of a couple of weeks ago, ninety
Speaker 1: percent at the end of September, and this really sets
Speaker 1: them up for a very positive year here. A lot
Speaker 1: of this, however, is demand destruction. You know, industry not
Speaker 1: seeing much higher prices still and therefore you know, slower
Speaker 1: European economy. That said, you know, if the concern was
Speaker 1: that Europe's going to fall apart because there were decline
Speaker 1: and supplies from Russia, that's just not really what we're seeing. Again.
Speaker 1: We got a couple of winters here though, to get through.
Speaker 1: All right, So you've been when you should move back
Speaker 1: to New York, like two weeks ago? What do you
Speaker 1: miss most of Qatar? The pool in my building? The pool? No,
Speaker 1: I miss my friends too, but but you know you
Speaker 1: live in New York City. Yep, I don't know how.
Speaker 1: I mean, there are handful of people who probably have
Speaker 1: a pool in their building. But you know, good upstairs
Speaker 1: and what and what were you looking forward to most
Speaker 1: coming back to New York? Oh, my friends and family
Speaker 1: we live we live around here. But you know, also
Speaker 1: good pizza, great pizza. I mean there was good food
Speaker 1: in cluts are too, but um, you know the differences.
Speaker 1: It's not walkable in the same way. It's very new,
Speaker 1: it's very fresh, and I think it is going to
Speaker 1: take them time to kind of build more cultural cachet.
Speaker 1: That's just that's just my opinion. Well, welcome back to
Speaker 1: the capital of the world. All right, Simon Foxman. She's
Speaker 1: a reporter for Bloomberg Television and News. Joining us here
Speaker 1: in a Bloomberg in Actor Broker studio. You're listening to
Speaker 1: the tape cans are live program Bloomberg Markets weekdays at
Speaker 1: ten am Eastern on Bloomberg Radio, tune in app, Bloomberg
Speaker 1: dot Com, and the Bloomberg Business App. You can also
Speaker 1: listen live on Amazon Alexa from our flagship New York station.
Speaker 1: Just say Alexa play Bloomberg eleven thirty. Looking at the
Speaker 1: shares of CarMax about eleven percent today, put out some
Speaker 1: pretty good numbers. Let's get break it all down. We'll
Speaker 1: talk all things auto. Since Matt Miller is not here,
Speaker 1: he went over to the TV studio to get ready
Speaker 1: for his show. So let's talk cars. Kevin Tyne and
Speaker 1: Cedar auto analysts for Bloomberg Intelligence. So Carmack's big moving
Speaker 1: to stock here today. Kevin, what's the story with their earnings. Yeah,
Speaker 1: you know one of the companies that just given the scale,
Speaker 1: the experience, the market positioning that you did a decent
Speaker 1: job with controlling costs in a market where volume is
Speaker 1: going to be low for a while. Gross profit per
Speaker 1: unit was strong, but you know, this is a company
Speaker 1: that's going to be dealing with a much lower volume
Speaker 1: environment for probably quite a while, and that's really what
Speaker 1: derailed you know, some of the pure play online only
Speaker 1: used sellers like Carvana and Shift and Room and companies
Speaker 1: like that. So you know, just their market position was
Speaker 1: was a big advantage to them in this kind of
Speaker 1: environment where we're just not going to sell as much stuff.
Speaker 1: And Kevin I remember just you know, putting in the
Speaker 1: context when the pandemic hit, you know, Detroit shutdown its
Speaker 1: lines and so people in the car they had to
Speaker 1: really start looking at the used car market, and as result,
Speaker 1: used cars went prices went through the roof. Are we
Speaker 1: now lapping that? And that tough tough comps? Now, well
Speaker 1: here's a problem. And you know, everything you hear about
Speaker 1: the used car market is like, oh just wait, here
Speaker 1: comes prices just tumbling down, and you know that volume issue.
Speaker 1: On the news side, I think bleeds into the use
Speaker 1: side as time goes by, and especially like in areas
Speaker 1: like leasing. You know, so when we prior to the pandemic,
Speaker 1: if you're talking about a seventeen million unit market at
Speaker 1: thirty percent lease penetration, you know, we had five million
Speaker 1: off lease vehicles coming every you know, every year. But
Speaker 1: the pandemic hits and we go down to fourteen million
Speaker 1: unit market. And then on the news side, you're not
Speaker 1: incentivizing those sales because there's so much lower right selling
Speaker 1: over sticker, no more incentives, no more discounting, so prices
Speaker 1: are high. So you're getting a market or you had
Speaker 1: a market that didn't need lease incentives. So leasing goes
Speaker 1: down to twenty percent in twenty twenty two, and we
Speaker 1: only did fourteen million units. So you're talking about a
Speaker 1: world where we're going to see instead of five million
Speaker 1: off lease vehicles, two and a half. And so that
Speaker 1: kind of situation, you're saying, like, Okay, well, how do
Speaker 1: prices come down if we're going to cut the off
Speaker 1: lease supply in half? Yep? Yep. So I mean maybe
Speaker 1: we've seen the declines we're going to see. So so
Speaker 1: if I'm CarMax am am, I like the new, like
Speaker 1: the new model year guys. If I'm at like CarMax
Speaker 1: selling used cars, am I selling fewer units but maybe
Speaker 1: at a higher gross margin? I think so. And I
Speaker 1: think like you said, you know, new vehicle dealers, and
Speaker 1: I mean full line dealers that are doing new use
Speaker 1: part service financing Church. All those guys and then they
Speaker 1: used only and the online used only, like, all those
Speaker 1: dealers or all those retailers should be prepared in all
Speaker 1: those business units to be doing less volume except for
Speaker 1: probably you know, your service bays, your parts counters. Right
Speaker 1: as people are going to be holding onto their vehicles
Speaker 1: longer because of pricing or interest rates, you know, you
Speaker 1: can expect you know, more wear and tear maintenance. So
Speaker 1: the full line dealers probably have a little bit of
Speaker 1: advantage in that business unit specifically, But anybody's selling vehicles
Speaker 1: new or use prepare for a much lower volume environment.
Speaker 1: All right. So again, in my lifetime, the Detroit you know,
Speaker 1: the auto guys will crank out seventeen million units a year.
Speaker 1: You're telling me that's kind of a thing of the past,
Speaker 1: that these guys are going to have the discipline to
Speaker 1: keep production down at I don't know, fourteen or fifteen
Speaker 1: million a year. Yeah, I think so, And I don't know,
Speaker 1: it's so much discipline. I think, you know, this is
Speaker 1: where the market or the industry has wanted to be forever,
Speaker 1: and it all comes down to rationalizing those costs. You know,
Speaker 1: it was a world where it had to be seventeen
Speaker 1: million units because you know, there was a lot of
Speaker 1: fixed costs in their legacy costs, you know, pensions, union,
Speaker 1: labor related costs. So it's really a different environment now
Speaker 1: on the on the cost side of the ledger that
Speaker 1: you just don't need to produce that many vehicles. And
Speaker 1: I think the other thing that's nice too, when you
Speaker 1: look at it from that perspective, you got all the
Speaker 1: transportation costs, the carrying costs for the dealers. So it's
Speaker 1: not just the manufacturers that are okay with this lower volume,
Speaker 1: richer margin mix. It's also the retailers. Right. You don't
Speaker 1: have you don't have logistics and floor plan expense on
Speaker 1: a sea of vehicles that you're not going to move
Speaker 1: for months at a time. Yeah, I guess so. I
Speaker 1: mean it sounds like, you know, this is the best
Speaker 1: spot the industry has been in from just a profitability
Speaker 1: perspective that I can remember. I mean, is that am
Speaker 1: I overstating it? No, not at all. And I think
Speaker 1: that's the thing is everybody goes, oh, you know, are
Speaker 1: they going to have the discipline? And you say, well,
Speaker 1: you know, it's where you want it to be. So
Speaker 1: it's it's not an accident that the industry is here.
Speaker 1: I think, to their credit, manufacturers and even retailers have
Speaker 1: moved their businesses to a point where it's it's more efficient, right,
Speaker 1: fewer years now, you don't have to worry about tacking
Speaker 1: on those extra two and a half three million units
Speaker 1: by throwing money at the problem. Right, So hey, if
Speaker 1: I only need to get my market share of a
Speaker 1: fifteen million unit market, that's a lot easier than trying
Speaker 1: to get that same market share and create a seventeen
Speaker 1: million unit market. And it's you know, it's it's better
Speaker 1: for the income statement, it's better for your retail network.
Speaker 1: So it's a much organically healthy environment. But I think
Speaker 1: people look at things from the consumer's perspective and say,
Speaker 1: you know, where do those two and a half million
Speaker 1: units go? The market is rolling over, it's you know,
Speaker 1: it's it's it's devastated. It's and it's really not. It's
Speaker 1: because the revenue pool is actually larger. How come it
Speaker 1: seems like maybe this is a sector that should be
Speaker 1: rerated from an investment perspective, stock perspective, a multiple perspective.
Speaker 1: Are you surprised we haven't seen these stocks move higher
Speaker 1: because it sounds like a lot better business than it
Speaker 1: ever has been. Yeah, I think I think the way
Speaker 1: it's looked at is that, right, you're either a growth
Speaker 1: industry or you're a value play. And you know, I
Speaker 1: think the problem is that when you go, well, how
Speaker 1: do you explain being a growth industry going from fifteen
Speaker 1: million years? You know, from seventeen to fifteen, Right, that's
Speaker 1: the opposite of growth. But you know, people aren't really
Speaker 1: looking at what that means for you know, the revenue
Speaker 1: and profit contribution from fewer units. So, and I think
Speaker 1: what we're on the verge of is, look this, this
Speaker 1: industry couldn't grow total volume, so it became about mix
Speaker 1: shift to truck from cary. Now you have a lot
Speaker 1: of automakers that can't shift anymore truck for it is
Speaker 1: like ninety eight percent already and most are already there.
Speaker 1: So what you're getting now is that the next growth
Speaker 1: opportunity comes from the mixed shift to electrification. Problem is
Speaker 1: it's not profitable yet. And ultimately thirty seconds left, Kevin, Ultimately,
Speaker 1: what do you think the profit margins on an EV
Speaker 1: vehicle will be versus an ice? Well, you know, the
Speaker 1: idea is that simple manufacturing, simpler manufacturing process, which I'm
Speaker 1: not sure. I think if we look at the way
Speaker 1: Tesla does things, there's a lot of copy and paste,
Speaker 1: and you know, the models look the same, and you know,
Speaker 1: I'm not sure that a full line portfolio is as
Speaker 1: efficient in terms of production, but fewer moving parts, and
Speaker 1: you know, the whole idea of it. Look, it's a
Speaker 1: skateboard of batteries and then you're just going to flap
Speaker 1: a different body on it. You know it can get there,
Speaker 1: but you know you're talking about a whole different menu
Speaker 1: of materials too. Yep, all right, Kevin. Always a pleasure
Speaker 1: to speak with you, particularly when Matt's not here, because
Speaker 1: I could get a question two in their Usually Matt
Speaker 1: just goes all over the auto story. Thanks for listening
Speaker 1: to the Bloomberg Markets podcast. You can subscribe and listen
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Speaker 1: I'm Matt Miller. I'm on Twitter at Matt Miller nineteen
Speaker 1: seventy three. And I'm fall Sweeney. I'm on Twitter at
Speaker 1: pt Sweeney. Before the podcast, you can always catch us
Speaker 1: worldwide at Bloomberg Radio