Speaker 1: This is Bloomberg Business. Wait inside from the reporters and
Speaker 1: editors who bring you America's most trusted business magazine, plus
Speaker 1: global business finance and tech news. The Bloomberg Business Week
Speaker 1: Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
Speaker 2: We'll talk about the Walt Disney Company, my company in
Speaker 2: a Stockmere and dear to my heart, I've covered the
Speaker 2: stock over thirty years. It is at a place in
Speaker 2: time that that they'd never found themselves in. They're really
Speaker 2: trying to figure out they and all the media industry
Speaker 2: trying to figure out how they manage just pivot the
Speaker 2: streaming and away from the traditional media distribution bundle that
Speaker 2: was so lucrative. And then I got some changes at
Speaker 2: the top. Here Chris Palmery joins us. He's entertainment editor
Speaker 2: for Bloomberg News. He joins us on Zoom from our
Speaker 2: LA bureau. And it is a awesome office out there.
Speaker 1: Yeah.
Speaker 2: The last one they had was not great, I have
Speaker 2: to tell you, but this one is smoking. It's in
Speaker 2: What's so great about it? Oh, it's just it's in
Speaker 2: a great part of town, Century City, right, Chris, And
Speaker 2: you got smoking office. I think you overlook the bel
Speaker 2: Air Country Club or something correct.
Speaker 3: Yeah, it's just a Los Angeles Country.
Speaker 2: Los Angeles Country, major upgrade. So when I went out
Speaker 2: there the first time, I kind of talked to somebody
Speaker 2: back here in New York. I said, we need to
Speaker 2: upgrade our friends out in LA. Yeah, and then they did.
Speaker 4: And it sounds like a missed opportunity that I did
Speaker 4: not get there when I was there for forty eight hours.
Speaker 2: Last week, Chris talked to us about Walt Disney here.
Speaker 2: They're getting themselves a new CFO.
Speaker 5: What do we know, very experienced executive in three decades
Speaker 5: at Pepsi, where he's done a lot of businesses, run
Speaker 5: their e commerce business, ran the Quaker Roads business in
Speaker 5: North America's obviously been the CEO as the CFO for
Speaker 5: since twenty ten, done mergers and acquisitions, been the face
Speaker 5: of the company to the finance community. Is known for
Speaker 5: being sort of conservative guidance and over delivering on the
Speaker 5: financial targets. So just a real experienced hand at a
Speaker 5: time of great turmoil.
Speaker 3: She mentioned that Disney.
Speaker 4: Yeah, you know, I'd love for you to tell us
Speaker 4: a little bit more about that. And this is Hugh Johnston,
Speaker 4: who we were talking about. If you didn't get his name,
Speaker 4: that's who the CFO is at PEPSI right now, who's
Speaker 4: coming into Disney. So Chris tell us a little bit
Speaker 4: about the board right now at Disney at the c
Speaker 4: suite level, that we have the CFO who vacated due
Speaker 4: to a medical absence I believe it was. And what's
Speaker 4: going on with Bob Iger. How much longer is he
Speaker 4: going to stick around at the top.
Speaker 5: Well, of course, brought back now one year ago after
Speaker 5: the tumultuous reign of Bob J. Peck and Bob Iger,
Speaker 5: known historically as the steady hand, has had his own
Speaker 5: shaky first year back. There's been There's really so many
Speaker 5: things in the air, and I think that's one of
Speaker 5: the things he'll have to address on Wednesday when they
Speaker 5: do the earnings call. We've reported they're potentially selling their
Speaker 5: India media business. They've announced they're going to buy back
Speaker 5: the one third of or buy the one third of
Speaker 5: Hulu the Comcast owns, so potentially ten billion dollar deal.
Speaker 5: He's talked I talked about selling their traditional DV channels
Speaker 5: like ABC. He's looking for a strategic partner at ESPN.
Speaker 5: There's so much going on outside of the normal course
Speaker 5: of business there. So you know, they obviously need somebody
Speaker 5: who can talk to the financial community and help raise
Speaker 5: money and all that.
Speaker 2: Hey, so, christ you've covered the Walt Disney Company probably
Speaker 2: as long as I have. You're right out there in
Speaker 2: La You're you're in right the right where the entertainment
Speaker 2: industry really lives here. Talk to us about kind of
Speaker 2: where are they are on the actors strike. That seems
Speaker 2: like something that should be a quick fix relative to
Speaker 2: everything else that this industry is facing.
Speaker 5: It certainly seems like we're very close on settling the
Speaker 5: actors strike. But we've been hearing that for a couple
Speaker 5: of weeks now. Bob Iger's been personally involved in both
Speaker 5: with the actors and the writers.
Speaker 3: He's one of the quote Big four studio.
Speaker 5: Executives that's been in the room or at least on
Speaker 5: Zoo during these negotiations. It seems like the actors are
Speaker 5: going to get a pretty good deal, not everything they wanted.
Speaker 3: But sizeable increases in pay.
Speaker 5: And so we're all just sort of waiting when that
Speaker 5: news comes and if there can now sort of pivot
Speaker 5: to salvage the TV season, which was supposed to start
Speaker 5: in September, and now is earliest maybe in February.
Speaker 4: So tell us then, Chris, given all of these things
Speaker 4: that you just mentioned, we've got the the actors strike,
Speaker 4: We've got the new CFO coming in. There's also you know,
Speaker 4: the potential sales of certain units or buying back some
Speaker 4: other ones. How are how's the analyst community sizing up
Speaker 4: Disney's earnings? You said we've got that coming on Wednesday.
Speaker 5: I believe surprisingly given all we talked about, I think
Speaker 5: it's actually supposed to be a good report.
Speaker 4: That is surprising.
Speaker 5: Yeah, there's been a lot of cost cutting at Disney
Speaker 5: this year, remember seven thousand, you know, layoffs all of
Speaker 5: these media companies have been surprising, both because of cost
Speaker 5: cutting and the fact that there's no production going on.
Speaker 5: They're saving a lot of money on those TV shows
Speaker 5: and movies they would otherwise be spending money on. And
Speaker 5: of course everyone will be looking at the streaming business
Speaker 5: and how big the losses are. If making any progress
Speaker 5: and reducing that. Disney has had said they're going to
Speaker 5: break even by next year in that business, which has
Speaker 5: just lost billions of dollars over the recent years.
Speaker 2: Yeah, Chris, I mean again, you're right out there in
Speaker 2: La you go to all the Cocktait parties with the
Speaker 2: power players, they've got to be really scared, I mean,
Speaker 2: because they just don't know how their business is going
Speaker 2: to evolve. It was such a good business where everybody
Speaker 2: made money. The cable companies made money, the programmers made money,
Speaker 2: the advertisers made money. Now this streaming model has really
Speaker 2: upended all the economics that a whole couple of generations
Speaker 2: of people have kind of grown accustomed.
Speaker 1: To out there.
Speaker 2: What's the feeling out there in terms of angst?
Speaker 3: H It is anxious? You know, it's funny he mentioned
Speaker 3: got two part as.
Speaker 5: I went to an event the La County Museum on
Speaker 5: Saturday night and and Bob Auger's wife Will Bays on
Speaker 5: the board, and we kind of expected. It's literally right
Speaker 5: next door to the SAG. The screen actors build building
Speaker 5: too to put it all in contact. So we just
Speaker 5: assumed he's been there, he was gonna be there, he's
Speaker 5: been there in the past. Did not show up, So
Speaker 5: whether I shouldn't read anything into that, but but but
Speaker 5: definitely everyone was Everyone was talking about the strike. It's
Speaker 5: a big deal, uh, And everybody just really wanting to
Speaker 5: return to work. There are shows that are just you know,
Speaker 5: waiting to get restarted, and uh and and and we're
Speaker 5: seeing it in what we watched too. I mean there's uh,
Speaker 5: there's reruns that are now the hottest shows on Netflix.
Speaker 1: Uh.
Speaker 5: Movies are getting postponed in some cases by years. Uh
Speaker 5: So it's just it's really your beginning to see the impact.
Speaker 4: Chris, I wanted to come back to Hugh Johnston here
Speaker 4: for a minute, the incoming CFO, a longtime executive at PEPSI.
Speaker 4: You know, my first thought, and maybe this is a
Speaker 4: bit elementary, but maybe if I'm thinking it, someone else's too.
Speaker 4: This is a guy who's working out a company who's
Speaker 4: famous for soda and snack food and you know, more
Speaker 4: like consumer discretionary goods of that nature, like what does
Speaker 4: consumer staples rather? But I mean, how does that then
Speaker 4: work for him coming into a company that is so
Speaker 4: vastly different than that obviously still in the consumer space,
Speaker 4: but on the media side of the business. And if
Speaker 4: he could be potentially a CEO candidate down the line,
Speaker 4: does he really have the background that Disney might be
Speaker 4: looking for.
Speaker 5: It's an issue I'm old enough to remember John Scully
Speaker 5: coming from Pepsi Cattle and it was not a great
Speaker 5: run he had there, And you know, there are some
Speaker 5: interesting echoes here at Pepsi. They also faced a sort
Speaker 5: of proxy fight with Nelson Peltz, activist who's now also
Speaker 5: active in trying to get board seats at Disney. So
Speaker 5: that may come in handy.
Speaker 3: If you do some.
Speaker 5: Research, you'll find it. When Hugh Johnson joined the Twitter
Speaker 5: board a few years ago, there was a lot of
Speaker 5: commotion because it was the first time he actually signed
Speaker 5: up for a Twitter account. So, yeah, does he have
Speaker 5: the media experience to lead one of the largest media
Speaker 5: companies in the world. No, it doesn't seem that way,
Speaker 5: but as we were talking about earlier, he is a
Speaker 5: very seasoned corporate executive with a lot of experience in
Speaker 5: consumer products.
Speaker 2: All right, Chris, thanks so much for taking the time.
Speaker 2: Appreciated as always, Chris Palmary. He's the entertainment editor for
Speaker 2: Bloomberg News, joining us on Zoom from our La bureau
Speaker 2: in Century City. Again a great office there, but again Disney,
Speaker 2: it'd be really interesting for their earnings because they have
Speaker 2: so many questions. As Chris was just talking about, so
Speaker 2: many challenges ahead of them, as do most media companies
Speaker 2: and investors are just like, I can't really own your
Speaker 2: stock in size until I get a better sense of
Speaker 2: where your industry is going.
Speaker 4: I mean, you've got to feel for this, Paul, you
Speaker 4: said you covered it for yeah, you know, more than years,
Speaker 4: and maybe you'd want to sail out.
Speaker 2: But I'm glad that I'm not covering it or having
Speaker 2: to come up because I just don't see it. I
Speaker 2: don't see a clear path through this industry, at least
Speaker 2: not right now, so I have to see how it plays.
Speaker 1: App you're listening to the Bloomberg Business Week podcast. Catch
Speaker 1: us live weekday afternoons from three to six Eastern Listen
Speaker 1: on Bloomberg dot com, the iHeartRadio app, and the Bloomberg
Speaker 1: Business app, or watch us live on YouTube.
Speaker 2: All right, said, who is that band? I know that band?
Speaker 2: Steve Miller band, Thank you very much, A great band
Speaker 2: from back in the day. All Right, who releases earnings
Speaker 2: on a Saturday? You know who releases earnings on a Saturday?
Speaker 2: Somebody who can? Yeah, and that's Warren Buffett. He can,
Speaker 2: I mean, and so he does it. And all these
Speaker 2: insurance people Warren Buffett followers that say set it up
Speaker 2: their day to follow it. One of those people is
Speaker 2: Matt Palizola. He covers all the insurance stuff for Bloomberg Intelligence.
Speaker 2: He joins his life here in our Bloomberg Interactive Broker studio.
Speaker 2: We appreciate that he got the memo about four days
Speaker 2: a week. What do we learn from Berkshire Hathaway from
Speaker 2: the earnings announcement maybe kind of what we heard from
Speaker 2: mister Buffett.
Speaker 1: Yeah, so.
Speaker 6: Headline big gap loss. Okay, that is because that's accounting convention.
Speaker 6: They run the changes in their equity portfolio through the
Speaker 6: income statement. So Apple had a bad quarter. So you
Speaker 6: see this top line number come through as I think
Speaker 6: it was like twelve billion dollar.
Speaker 2: If I look at the A or the be stock watch,
Speaker 2: I look.
Speaker 6: Either are they move They moved tandem. Okay, so headline
Speaker 6: loss there, but the operating company earnings up like sixty percent,
Speaker 6: and that was mostly on the insurance segments. The insurance
Speaker 6: segment rebounds. It had a beadquarter in the year ago
Speaker 6: because of Hurricane Ian. This quartery saw reinsurance underwriting booming.
Speaker 6: Interesting come booming. You guys were just talking about the consumer.
Speaker 6: Their consumer businesses actually did a little bit better. I'm
Speaker 6: an insurance guy, so you know, it's not exactly my
Speaker 6: forte it was. The top line was down like twenty
Speaker 6: percent for that business in the second quarter, so I
Speaker 6: expected that it to be down again, but it actually wasn't,
Speaker 6: So I was kind of a positive surprise. But maybe
Speaker 6: it might not look so good going into the fourth quarter.
Speaker 4: And just tell us mac because Bruce Year is such
Speaker 4: a massive congloborate of god knows how many businesses. What
Speaker 4: exactly is the consumer business?
Speaker 6: So they manufacture consumer products I don't have them all
Speaker 6: in my head, and then they sell consumer products the
Speaker 6: retail and sales. So you know, one interestingly they just
Speaker 6: acquired with the Allegheny business was Jazzwares, which is a
Speaker 6: toy maker.
Speaker 3: I know that. You know.
Speaker 6: When I told my kids that this company makes squish mellows,
Speaker 6: they were over the moon, like it was the best
Speaker 6: thing ever. So you know, perhaps that'll do bode well
Speaker 6: going into the holiday season.
Speaker 2: All right, cash, they got one hundred and fifty seven
Speaker 2: billion in cash. What are they going to buy? I mean,
Speaker 2: this is we've been asking.
Speaker 6: This question for a long time a while, so.
Speaker 2: But now the indust rates are up, I'm not that
Speaker 2: I'm sure shareholders is like, not as concerned.
Speaker 6: That's exactly right, Paul. So you know they have a
Speaker 6: problem I wish I had. As they generate more money
Speaker 6: they can actually spend.
Speaker 4: It's a good problem.
Speaker 6: Yeah, my wife might test it out on Amazon Prime
Speaker 6: if we did. But yeah, they're just generating more money
Speaker 6: than they than they know what to do with. The
Speaker 6: great thing is the rise in interest rates, especially in
Speaker 6: the short end, has helped them a ton. They were
Speaker 6: earning about fifty million a year an interest income. Now
Speaker 6: they're earning over five billion, wow, just on just on
Speaker 6: interest on their cash.
Speaker 2: So that's that's a model.
Speaker 6: That's great.
Speaker 2: I mean, why is the stock not ripping on rates?
Speaker 6: Then it doesn't, it doesn't last forever.
Speaker 1: I think it was.
Speaker 6: I was honestly a little bit of surprise to me
Speaker 6: that they benefited that much from it. I guess it
Speaker 6: could have seen it. Maybe people expecting them to do
Speaker 6: something with that cash, but you know, they keep it
Speaker 6: liquid and that's been okay, won't be you know if
Speaker 6: we start going the other way obviously yep.
Speaker 4: Have there been whispers of what Burgs Year could possibly buy,
Speaker 4: like what deals might be out there? I mean, like
Speaker 4: we just said, this is a massive company, so many
Speaker 4: businesses they're already involved in, Like, what more do they
Speaker 4: possibly need?
Speaker 6: So my big thing is I really thought they were
Speaker 6: going to buy Occidental. They it was seemed out of
Speaker 6: their playbook the way they were approaching it, taking kind
Speaker 6: of little snips. Buffett was very positive on the management publicly,
Speaker 6: which is things he had done before. Then at the
Speaker 6: annual meeting, they came out and said, we have no
Speaker 6: interest in owning this entire company. Then Chevron became one
Speaker 6: of their biggest holdings, and I thought, okay, so they're
Speaker 6: big energy players. Maybe maybe it's an energy business. They've
Speaker 6: paired their holdings in Chevron. You know, I don't know.
Speaker 6: I think it's going to be something we never heard
Speaker 6: of that they end up buying.
Speaker 2: Did they buy non US companies inside?
Speaker 5: They haven't.
Speaker 6: You know, Buffett made some investments in the Japanese trading
Speaker 6: houses and that was I forget the exact number, but
Speaker 6: it was in the billions of dollars. They didn't acquire them,
Speaker 6: they just put the stocks of them.
Speaker 5: Uh.
Speaker 6: And they have some businesses with foreign operations, but because
Speaker 6: they usually stick to the USA.
Speaker 2: You know, with Tim craik Head, a Bloomberg intelligence you know,
Speaker 2: explained to me years ago about the European stock index
Speaker 2: doesn't have a lot of tech. Okay, what they have
Speaker 2: is like they make stuff over there in your German
Speaker 2: like Semens, and they make big stuff equipment and everything.
Speaker 2: That seems like a play for a warn Buffett, go
Speaker 2: buy a big machine company here.
Speaker 6: I wouldn't be surprised. I mean, one of their biggest
Speaker 6: companies is Precision Cast Parts, which makes precision parts for airplanes, right,
Speaker 6: and it's just not something you know that much about
Speaker 6: or hear about. That actually did pretty well in the
Speaker 6: quarter too, but it's got a monopoly on these kind
Speaker 6: of unique parts that no one else can make. And
Speaker 6: I think those are the companies that they look for.
Speaker 4: So if I'm a stockholder right now in Berkshire, do
Speaker 4: I want to see the company buying backstock or giving
Speaker 4: me a bigger dividend? Like, what do you think when
Speaker 4: you see all this cash?
Speaker 6: I think the market would love a dividends. I don't
Speaker 6: think they're going to do that. As long as Warren
Speaker 6: Buffet's around.
Speaker 2: They were they so just go back. That's a great question.
Speaker 2: Why don't they do a dividend.
Speaker 6: I think, but they the Buffett likes getting dividends. He
Speaker 6: doesn't like paying dividends. He I think he always assumes
Speaker 6: he can do something better with the cash.
Speaker 2: They okay, but that's now been proven beyond a doubt
Speaker 2: that they can't because theres one hundred and fifty seven
Speaker 2: bellion cash. Did they buy backstock?
Speaker 6: So they buy backstock. Historically they were not big repurchasers either.
Speaker 6: What happened in COVID the stock dipped and they really
Speaker 6: started buying, and massive buying, like six billion a quarter
Speaker 6: at one point. There's some limitations with the A and
Speaker 6: B shares, they can only be so much of the volume,
Speaker 6: but the share of purchase has gone down. It was
Speaker 6: like a billion for the past two quarters, which obviously
Speaker 6: has a lot of money, but not for them, and
Speaker 6: it was honestly disappointing. I would have loved to see
Speaker 6: them buy back more.
Speaker 2: All right, let's have a broader insurance conversation. Shadows who
Speaker 2: doesn't want to do that?
Speaker 4: Please do?
Speaker 2: What What are the big drivers A Howard insurance stocks
Speaker 2: doing these days? And B what's kind of driving? What's
Speaker 2: the driving thing that you guys need to get smart on?
Speaker 6: So investors, So I mean interest rates are big things
Speaker 6: that covered the P and C names, specifically, the life
Speaker 6: names are very much interest rate plays and move a
Speaker 6: lot with interest rates. The P and C ones property
Speaker 6: and casualty, as we say in the biz. They they
Speaker 6: were in a play on inflation, so the cost of
Speaker 6: repairing things went up, so that increased their loss costs.
Speaker 6: But their prices having going up as well, that's really
Speaker 6: on the commercial side. It's hurting the personal side as well.
Speaker 6: The thing is, these six Han's done that well this year.
Speaker 6: They did their their defensive plays. The beginning of the year,
Speaker 6: they all took a dive on the regional banking disaster,
Speaker 6: which for no reason, there was absolutely no reason they
Speaker 6: should fell in sympathy with them. We talked about it
Speaker 6: at the time. So they spent all year recovering from
Speaker 6: that just to bring into Berkshire a little bit. Berksher's
Speaker 6: outperformed all of them, so they haven't really moved like
Speaker 6: an insurance company this year. But so you want to
Speaker 6: get small on insurance companies, it its rates, it's loss costs.
Speaker 6: We just came out of the third quarter. Things were
Speaker 6: actually better than I expected, and the stocks underperformed. I
Speaker 6: think they have maybe another year of peak ros evaluations
Speaker 6: can peak before the ROEZ, so there actually is probably
Speaker 6: room in those stocks.
Speaker 2: We haven't had any like big does it the hurricanes
Speaker 2: and stuff?
Speaker 4: That question next, Yeah, because you mentioned the imknock.
Speaker 2: On wood here.
Speaker 6: So we had a bunch of weird stuff happen in
Speaker 6: the quarter, right. We had the Maui wildfires, we had
Speaker 6: the we had the tropical storm hitting California, and these
Speaker 6: were kind of they were odd events. The Mali fires
Speaker 6: were very bad in humanitarian aspect, and the insured losses
Speaker 6: were small for the industry. We haven't had a big event.
Speaker 6: We haven't had like a hurricane e in this year,
Speaker 6: and it's allowed these companies to build capital. But things
Speaker 6: have been worrisome even this There was a big hurricane
Speaker 6: in Mexico Otis, and I looked at it and my
Speaker 6: just kind of very initial blush was, Okay, it's not
Speaker 6: going to be big for the reinsurance community, might be
Speaker 6: big for the domestic market. It's coming out. Maybe it's
Speaker 6: six billion dollars, which is a modest industry loss. Again,
Speaker 6: it's probably going to hit a lot of the Mexican companies,
Speaker 6: but if you look at the damage there, it was
Speaker 6: some of the strongest wins literally ever recorded. So we're
Speaker 6: kind of on the precipice of maybe something big happening.
Speaker 2: All right, Matt Patlozola, thanks so much. We appreciate property
Speaker 2: and Casualty insurance senior analysts for Bloomberg Intelligence joining us
Speaker 2: live here in our Bloomberg Interactive Brokers studio here talking
Speaker 2: about insurance's business, Warren Buffett one hundred and fifty seven
Speaker 2: billion dollars of cash on the balance sheet. What is
Speaker 2: he to do with that? That's kind of the big
Speaker 2: question that investors been asking. A lot more coming up.
Speaker 2: This is Bloomberg.
Speaker 1: You're listening to the Bloomberg Business Week Podcast. Catch us
Speaker 1: live weekday afternoons from three to six Easter on Bloomberg Radio,
Speaker 1: the Bloomberg Business app and YouTube. You can also listen
Speaker 1: live on Amazon Alexa from our flagship New York station.
Speaker 1: Just say Alexa play Bloomberg eleven thirty.
Speaker 3: Bromarco a journal. Now bet you let me drive? Oh no, no, no, no,
Speaker 3: who's going to drive? Honey?
Speaker 1: Please, I'll do the travels.
Speaker 3: Listen. I want to drive. It's good question.
Speaker 1: This is the drive to the clothes dot punk music. Well,
Speaker 1: drive up to jog Dawn on Bloomberg Radio.
Speaker 2: Hi Mai Smith, Paul Sweeney live here on our Bloomberg
Speaker 2: Interactive Brokers studio streaming live on YouTube as well. Don't
Speaker 2: I don't know about you, Molly, but last week felt
Speaker 2: like peak rates to me. And I know nothing about that,
Speaker 2: but I just felt like peak rates to me when
Speaker 2: I saw it.
Speaker 4: Yeah, the Powell pivot, that's what we're talking about.
Speaker 2: I don't know.
Speaker 1: I don't know.
Speaker 4: It could be the end.
Speaker 2: Let's talk to somebody who actually gets paid to do this.
Speaker 2: Liz Young, head of Investment Strategy, it's so far, She
Speaker 2: joins us on Zoom from New York City. Hey, Liz,
Speaker 2: what did you think of last week's action in the markets? Again?
Speaker 2: Just to me, it kind of felt like peak rates,
Speaker 2: both in the bond market, and I looked at how
Speaker 2: the stocks were moving, and how did you get How
Speaker 2: did you view it?
Speaker 7: Well, first of all, it's difficult to call a peak
Speaker 7: really in anything, so I won't do that because it's
Speaker 7: a really easy.
Speaker 2: Smart I did for a living.
Speaker 7: It certainly does feel like we went down very quickly,
Speaker 7: and it would be difficult to pop all the way
Speaker 7: back up that quickly. So last week's action I would take.
Speaker 7: You know, obviously it was a strong week in the markets.
Speaker 7: Last week's action I would take as a bit more
Speaker 7: of a relief rally. I know now we're in this
Speaker 7: debate of whether or not it's a bear market rally
Speaker 7: or new durable upside, but I would take it as
Speaker 7: a relief rally. And I think the market interpreted what
Speaker 7: Powell has said and what went on in the jobs
Speaker 7: market on Friday as an indication that the Fed does
Speaker 7: not have to go any further, and interpreting that so
Speaker 7: far as reasonably positive. The problem with that interpretation is,
Speaker 7: as Powell has pointed out, and as I think all
Speaker 7: of us do know, that there are still some effects
Speaker 7: that are in the pipeline waiting to come through the
Speaker 7: rest of the economy and certainly come through the capital market.
Speaker 7: So I don't think we're in the clear yet, but
Speaker 7: I do think that there's been some relief in the
Speaker 7: market and the expectation that we may actually be done
Speaker 7: with the hiking cycle.
Speaker 4: Not in the clear yet, Liz as in there maybe
Speaker 4: another hike.
Speaker 7: Is that what you're suggesting, not necessarily? I mean So
Speaker 7: first of all, I don't think the FED is going
Speaker 7: to declare the end of the hiking cycle. They really
Speaker 7: can't do that, especially with inflation still as far above
Speaker 7: target as it is. So they're going to leave the
Speaker 7: door open no matter what until we get closer to
Speaker 7: that two percent target. And they continue to reiterate that
Speaker 7: two percent means to two percent, and I think that
Speaker 7: we should listen to them until that changes, and I'm
Speaker 7: not sure that it will change. So when I say
Speaker 7: not out of the clear yet, I mean that if
Speaker 7: you think back through this hiking cycle, we know that
Speaker 7: it's been fast and furious, we know that it went really,
Speaker 7: really far. But we even think back and forget that
Speaker 7: we had seventy five basis point hikes, we had four
Speaker 7: of those in a row, and then we had another
Speaker 7: one hundred and fifty basis point of hikes after that.
Speaker 7: I do not think that all of the effects of
Speaker 7: those have come through the system yet. So that's what
Speaker 7: I mean by in the clear. I still think that
Speaker 7: we're going to see some credit tightening. We obviously have
Speaker 7: this tapering program that continues to go on, and we're
Speaker 7: waiting to find out if companies are going to be
Speaker 7: squeezed by borrowing costs as they try to roll over
Speaker 7: their bond. So I don't think all of those questions
Speaker 7: have been answered yet. And getting through you know, earning
Speaker 7: season that has been maybe a little better than average,
Speaker 7: but we have a market that's been punishing companies even
Speaker 7: as they beat earning. So that's why I say I
Speaker 7: don't sentiment is quite all that positive.
Speaker 2: Yet that's kind of where I wanted to go, Liz,
Speaker 2: just kind of earnings. As a former equity analyst, you know,
Speaker 2: I do pay attention to what these management teams say,
Speaker 2: particularly on their guidance. And while a lot of companies
Speaker 2: have I guess beaten on their quarterly numbers, almost to
Speaker 2: a company, they seem quite quite conservative on their outlook,
Speaker 2: and I guess that's prudent given where we are. But
Speaker 2: what level of concern is that race for you?
Speaker 7: Well, I mean, I think it's good that companies are
Speaker 7: being prudent, and that's really been what's gone on throughout
Speaker 7: this earning season because the numbers, some of the numbers
Speaker 7: have disappointed, but the numbers have not been all that bad,
Speaker 7: and it's possible that we're going to have the first
Speaker 7: positive quarter of earnings growth, which would technically take us
Speaker 7: out of the earnings recession. The issue is that the
Speaker 7: guidance has been soft, and investors are now in a
Speaker 7: place where I think the tone has shifted. So for
Speaker 7: the quarters before this, the bar was really low, and
Speaker 7: it was easy to jump over that bar, and companies
Speaker 7: got rewarded for jumping over that bar. Now we're in
Speaker 7: a place where the bar is higher, and the expectations
Speaker 7: for fourth quarter earnings and twenty twenty four earnings are
Speaker 7: pretty lofty, and investors are hoping that companies can prove
Speaker 7: that those can come true. The guidance has been soft
Speaker 7: and probably a little disappointing versus what people wanted to
Speaker 7: hear from CEOs about the following twelve months. So I
Speaker 7: think it's good that companies are being prudent. I also
Speaker 7: think that we need to remember, yes, it's good that
Speaker 7: inflation has come down, but it also means that pricing
Speaker 7: power likely comes down as well, and that revenue comes
Speaker 7: down for some of these companies because they cannot pass
Speaker 7: that all through anymore.
Speaker 4: Something I wanted to ask you about, Liz, is looking
Speaker 4: at financial conditions. Obviously, it's a wide, raging term of
Speaker 4: what the FED looks at and evaluating how effective its
Speaker 4: policy is. And a story that we did last week
Speaker 4: going into the FED meeting was about the tightness of
Speaker 4: credit spreads, and I wonder if that's something that you've
Speaker 4: been looking at as well, because to me, when I
Speaker 4: look at high yield spreads now under four hundred basis points,
Speaker 4: and to think that the ED has been hiking rates,
Speaker 4: you know, for the past year and a half, I'm
Speaker 4: a bit confused here. I mean, you could, I'm hoping
Speaker 4: you can help explain this one to me.
Speaker 7: Unfortunately I can't. You and me both a little confused
Speaker 7: by that.
Speaker 4: What is going on here?
Speaker 7: Well, it feels like it's like watching a pot that
Speaker 7: you're waiting for it to boil and it's not boiling.
Speaker 7: I honestly, I'm not sure yet. We've had a pretty
Speaker 7: big correction in the equity market since the end of July,
Speaker 7: and spreads didn't really respond to that a little bit,
Speaker 7: but not the way that you would have expected, particularly
Speaker 7: high yield spreads. So I think so far we've still
Speaker 7: got a decent amount of companies with attractive borrowing costs
Speaker 7: because they haven't had to do much with it. But
Speaker 7: I do think again back to those legs and the
Speaker 7: things that are in the pipeline. I do think as
Speaker 7: we go forward into twenty twenty four, we're going to
Speaker 7: hear more about that. The other thing that I would
Speaker 7: say about, you know, spreads in general and just credit
Speaker 7: that's available. If you look at the equity action in
Speaker 7: small cap stocks. The reason one of the reasons that
Speaker 7: small caps are getting hit so much harder is because
Speaker 7: they are generally come meanies that are still trying to grow,
Speaker 7: and they don't have enough capital to finance their own growth,
Speaker 7: so they have to go to debt and equity markets.
Speaker 7: Small caps continue to be under pressure and they can't
Speaker 7: find durable upside. I think that is a signal that
Speaker 7: the market is sniffing out. Small caps are going to
Speaker 7: be under pressure because of this higher cost of capital
Speaker 7: over time as that affects companies in the debt market.
Speaker 7: I do think that you're going to see an increase
Speaker 7: in spreads on.
Speaker 2: The equity side. Liz, what are the sectors that you're
Speaker 2: looking at these days?
Speaker 7: This is going to be really boring, But because I
Speaker 7: am cautious, I think the sectors, particularly in the equity market,
Speaker 7: that investors can think about our consumer staples. I do
Speaker 7: think that utilities is an okay thing to have in
Speaker 7: the portfolio. I like energy, I like healthcare as in
Speaker 7: the large cap space, a defensive play, but also kind
Speaker 7: of a growth y defensive play that's not quite as
Speaker 7: connected to interest rate moves as things like technology and communication.
Speaker 7: So those are the sectors that I would be looking at.
Speaker 7: I also think that there's still a decent opportunity in treasuries.
Speaker 7: I mean, yields have come down a lot in the
Speaker 7: last week or so, but there's still a pretty good opportunity.
Speaker 7: And these are yields that are higher than I've seen
Speaker 7: in my career, so you know, it's not necessarily too
Speaker 7: late either.
Speaker 2: Very good, all right, Liz, thanks so much for taking
Speaker 2: the time. We really appreciate getting some of your insights.
Speaker 2: Liz Young, she's head of investment strategy at SOFI. Joining
Speaker 2: us on that zoom thing from New York City.
Speaker 1: This is the Bloomberg Business Week podcast, a little on Apple,
Speaker 1: Spotify and anywhere else you get your podcast. Listen live
Speaker 1: weekday afternoons from three to six Eastern on Bloomberg dot Com,
Speaker 1: the iHeartRadio app Tune In, and the Bloomberg Business app.
Speaker 1: You can also watch us live every weekday on YouTube
Speaker 1: and always on the Bloomberg Journey alone