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Speaker 1: Bloomberg Audio Studios, podcasts, radio news, and.

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Speaker 2: Char Jay Powell speaks later today, and that's ahead of

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Speaker 2: Friday's all important jobs report.

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Speaker 3: Automaker, seeing a run of bad news to Lantis joins

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Speaker 3: Volkswagen and Aston Martin and issuing the latest profit warnings,

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Speaker 3: partly blaming sluggish demand from China.

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Speaker 4: And this on m and a Monday, DirecTV and Dish

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Speaker 4: agreed to combine in a deal that we'll create the

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Speaker 4: biggest PATV provider.

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Speaker 5: In the US.

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Speaker 4: All that and more coming up, But let's take a

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Speaker 4: look at where markets are trading thirty minutes until the

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Speaker 4: bells ring. As Matt mentioned, not too great on this Monday.

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Speaker 4: Of course, we're coming off of several consecutive weeks of

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Speaker 4: solid gains, seeing some of the steam come out of

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Speaker 4: the market right now, out of that rally right now,

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Speaker 4: even with that big run in Chinese equities, you're not

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Speaker 4: seeing that good vibe music over there translate into the

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Speaker 4: US market. The S and P five hundred currently down about

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Speaker 4: two tenths of a percent, the NASAQ one hundred, your

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Speaker 4: big tech names which have been leading, currently down about

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Speaker 4: three tenths of a percent, and still a little bit

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Speaker 4: of a sell up in the bond market rate now

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Speaker 4: right now, matt you're not seeing that haven rush necessarily.

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Speaker 4: Ten year yields curly up about three basis points, all right,

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Speaker 4: in terms of.

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Speaker 5: The runs that we've seen.

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Speaker 3: Mohammed el Area and, a Bloomberg opinion columnist and the

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Speaker 3: president of Queen's College, Cambridge, highlighted this chart here on Twitter,

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Speaker 3: showing the S and P five hundred has put up

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Speaker 3: its best first nine months of the year since nineteen

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Speaker 3: ninety seven.

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Speaker 5: The index is up more than twenty percent year to.

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Speaker 3: Date, boosted by the fifth consecutive monthly gain in September.

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Speaker 3: The S ANDP has gained for ten of the last

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Speaker 3: eleven months.

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Speaker 5: So we've been doing pretty well so far this year.

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Speaker 2: May ging me smarter this Monday morning, Matthew. Let's take

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Speaker 2: a look under the hood as well. Here Stilantis, plunging

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Speaker 2: at the carmakers said its forecast for the year would

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Speaker 2: be lower as it plans to lower production.

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Speaker 5: Just taking a beating.

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Speaker 2: Now you have Stilantis down more than twelve point seven percent.

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Speaker 2: You have Ford also down three point two percent, three

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Speaker 2: point three percent, and it announced that it will install

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Speaker 2: free home chargers for ev buyers as competition heats up

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Speaker 2: in the auto sector. We'll talk more about that later

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Speaker 2: this hour. Also watching shares of Echo Star Corp. Up

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Speaker 2: about seven tens of one percent. Remember, Direct TV and Dish,

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Speaker 2: which is owned by EchoStar, have agreed to combine in

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Speaker 2: a deal that will create the biggest pay TV provider

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Speaker 2: in the United States. Interesting that it has been up

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Speaker 2: more than fifteen percent since Bloomberg had reported that the

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Speaker 2: deal would be happening.

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Speaker 5: Yeah, very interesting.

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Speaker 3: We're going to continue to talk about those mergers, but

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Speaker 3: right now I want to talk about rather takeovers. Interesting

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Speaker 3: as a merger. Right now, I want to talk about

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Speaker 3: what going on in China. Six consecutive days of gains there,

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Speaker 3: and they had a bomb today, nine percent up on

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Speaker 3: the CSI three hundred.

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Speaker 4: Yeah, best run since two thousand and eight or so.

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Speaker 4: It's been pretty amazing to watch the CSI three hundred.

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Speaker 4: It's now up over twenty percent year to date. It's

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Speaker 4: in a bull market. You rewind to just a week

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Speaker 4: ago this index was done by more than four percent

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Speaker 4: or just about so. I mean, the rate of change

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Speaker 4: here has been just incredible.

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Speaker 5: You're not really seeing it though.

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Speaker 4: In US equities and I think a lot of that

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Speaker 4: we can blame on Germany.

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Speaker 2: I think you also have to ask if it's real

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Speaker 2: or if it's a head fake, because twenty five percent

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Speaker 2: more than that over a five day period. The reality

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Speaker 2: is it's driven by stimulus. The underlying data is weak

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Speaker 2: as it is in Germany. I think the question is

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Speaker 2: how much of that does that spill over that weakness

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Speaker 2: abroad into the United States.

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Speaker 3: Yeah, Germany having obviously real problems, being the home of

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Speaker 3: three automakers, all of whom have their own issues, but

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Speaker 3: really it's Chinese imports and inflation that are the biggest

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Speaker 3: issue there. We're going to talk about Folkswagen, We're going

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Speaker 3: to talk about BMW.

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Speaker 5: We're going to talk about Daimler as well as Stilantis,

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Speaker 5: which is.

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Speaker 3: Kind of like an Italian Dutch US automaker French as well.

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Speaker 5: Later on in the program.

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Speaker 3: Right now, I want to focus on the US markets

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Speaker 3: with another chart Mohammed el Area highlighted on Twitter this week,

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Speaker 3: and it shows the strength of everything Else, the everything

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Speaker 3: else rally with the equal weighted SA outperforming by the

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Speaker 3: most since twenty twenty two.

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Speaker 5: With US Now is Morgan Stanley's.

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Speaker 3: Chief US equity strategists and CIO Mike Wilson. Regarding the

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Speaker 3: non farm payrolls number DOE out this Friday, Wilson says,

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Speaker 3: we would need to see an upside surprise to drive

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Speaker 3: a sustainable cyclical rotation in the US. And I understand

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Speaker 3: that good news would be good news for some parts

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Speaker 3: of the market. But wouldn't we want to see in

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Speaker 3: some ways a miss because then we could get a

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Speaker 3: bigger cut from the Fed in November.

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Speaker 6: Well, yeah, maybe it comes with a fine line. I mean,

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Speaker 6: the good news is good news until it's not because

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Speaker 6: then the fitness to raise rates too much. That was

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Speaker 6: the story before. Now it's bad news is good until

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Speaker 6: it's too bad. So look, I think there's three parts

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Speaker 6: to what happened in the last two weeks. Okay, First

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Speaker 6: of all, the FED gave us fifty. I think everybody

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Speaker 6: was kind of expecting twenty five right up until the

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Speaker 6: last minute, and so it was still an upside surprise.

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Speaker 1: And we had written about this.

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Speaker 6: We thought fifty going into the meeting, if they could

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Speaker 6: convey that it was not being done for growth concerned

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Speaker 6: reasons would be a positive. So we got that checked

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Speaker 6: the by And I don't think that was a shocker,

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Speaker 6: but it was a positive event. And then we got

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Speaker 6: the China stimulus, but that came in two pieces, don't

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Speaker 6: forget right. It came with the monetary stimulus initially, and

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Speaker 6: I would say most people, including us, were like, well,

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Speaker 6: that's interesting, but that's not going to do much. We

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Speaker 6: need we need fiscal stimulus. They're a deflation, right, We're

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Speaker 6: not going to get any action in real economy. So

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Speaker 6: then of course the policymakers came in because they listen,

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Speaker 6: and they said, okay, we'll do some fiscal too, and

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Speaker 6: then we got this massive move. So we've had a

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Speaker 6: twenty percent plus move in three days, which I would

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Speaker 6: say very few people captured.

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Speaker 1: All Right. The other thing you have to think about

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Speaker 1: that read it? Whys it up so much today?

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Speaker 6: Well, Japan sold off sharply over the weekend, so I

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Speaker 6: think you know, China has been a source of funds

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Speaker 6: for the Japan trade, for the India trade, all the

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Speaker 6: other em countries that have done well. Okay, and now

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Speaker 6: you may see some reversion back, but that feels pretty

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Speaker 6: overcooked to me at this moment. What we care about

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Speaker 6: in the US as the following is this going to

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Speaker 6: change the trajectory of growth in the US in a

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Speaker 6: meaningful way.

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Speaker 1: And the answer really is no.

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Speaker 6: It can maybe get some excitement and things like materials,

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Speaker 6: some of the industrial stocks who have direct leverage to

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Speaker 6: perhaps the China stimulus of some kind, But beyond that,

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Speaker 6: I think we need to see the labor market get

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Speaker 6: better in the US and we need to see the

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Speaker 6: policy changes from the FED have an impact on consumer.

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Speaker 2: Let's talk more about the labor market because clearly a

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Speaker 2: lot of investors are hinging on Friday's report.

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Speaker 5: How much could that.

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Speaker 2: Move the needle? And if you have a significant miss

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Speaker 2: to the downside, what that would would that mean for equities?

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Speaker 1: I mean for us. The labor market is everything now

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Speaker 1: and by the way, it's everything for the FED. So

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Speaker 1: you know, this is the sixty four trillion dollar question.

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Speaker 6: Did the FED cut fifty because they are actually worried

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Speaker 6: about the labor trends, which I think they should be

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Speaker 6: paying attention to that, or are they doing it because look,

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Speaker 6: inflations come down and they're too tight to begin with,

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Speaker 6: and so that they're able to it is effectally because

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Speaker 6: they can or because they need to. So the labor

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Speaker 6: market will tell us the answer to that. And you know,

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Speaker 6: we've been pretty straightforward about this. If the unemployment rate

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Speaker 6: goes up again, I think that's a clear negative.

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Speaker 1: If the undeplanment rate can.

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Speaker 6: Come down and jobs data is okay with any major revisions,

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Speaker 6: that would be a positive.

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Speaker 4: That's where I want to go. And you make that

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Speaker 4: point in your recent research that we need no material

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Speaker 4: downside revisions to the prior months. Unfortunately for the bulls,

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Speaker 4: we've seen that over and over again the past several

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Speaker 4: months of NFP reports. I mean, when it comes to

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Speaker 4: the quality of the data and these big revisions we

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Speaker 4: still are getting, how much can you really trust it?

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Speaker 6: Well, even cher Paul said that right, he talked about

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Speaker 6: the QCW revisions being so dramatic. This is what you

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Speaker 6: get in a slowdown. You get revisions to the downside,

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Speaker 6: just like when you have a recovery, all the revisions

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Speaker 6: are to the upside. So this is not abnormal. And

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Speaker 6: let's let's take a step back. This is what the

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Speaker 6: FED was going for when they raised race. This once again,

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Speaker 6: the big question is, you know, can they arrest the

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Speaker 6: down trend, stabilize and then see labor markets actually improve

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Speaker 6: next year.

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Speaker 1: We don't have the answer to that.

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Speaker 6: We're going to get two labor reports before the next

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Speaker 6: FED cut, before the next FED meeting, We're going to

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Speaker 6: get election, which you know, I think is probably slowing

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Speaker 6: hiring in the short term just because there's uncertain around that.

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Speaker 6: So yeah, it's going to be an interesting October, no

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Speaker 6: question about it.

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Speaker 3: You also point out that you say earnings revision breadth

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Speaker 3: is the best proxy for company guidance, and what exactly

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Speaker 3: do you mean by earnings revision breadth. It's a little

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Speaker 3: too much jargon for my mom, my mom, And you know,

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Speaker 3: what do you want to see and what is it

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Speaker 3: telling you?

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Speaker 6: That's by design, Matt, we have these special terms. You

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Speaker 6: know that you have only I know the answer, but no.

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Speaker 6: Earner's vision breath is very clear. So it's the leading

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Speaker 6: indicator for earnings revisions. So when I say earning revisions,

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Speaker 6: I mean our earnings going up or down, and revision

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Speaker 6: breath we look at because that tends to be a

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Speaker 6: leading indicator for whether it's going to be up or down.

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Speaker 1: Revision breath has been basically flat.

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Speaker 6: Now for the S and P five hundred for quite

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Speaker 6: a while, and for the Russell two thousand and small caps,

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Speaker 6: it's been negative. That explains a lot of why smaller,

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Speaker 6: low quality companies have underperformed, because the revision breath and

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Speaker 6: the earnings revisions subsequently have been poor.

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Speaker 1: So here's the thing for October.

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Speaker 6: Typically, seasonally, revision breath is negative going into or third

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Speaker 6: quarter earnings.

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Speaker 1: Why because fourth quarter estimates are always too high.

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Speaker 6: That's why stocks tend to that trade great in the

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Speaker 6: first half of October. So we'll see if that pattern

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Speaker 6: is changed. If we get positive revisions in the next

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Speaker 6: two weeks, boy, I'm going to be that's gonna be

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Speaker 6: a real big positive because that would be going against

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Speaker 6: the seasonal trend.

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Speaker 1: I expect them to be negative.

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Speaker 6: The question is will the market care because that's normal.

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Speaker 6: We'll see it's going to be once again a very

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Speaker 6: idiosyncratic earning season like it has been the last two

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Speaker 6: or three.

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Speaker 2: Well, that leads me to the question. We hit forty

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Speaker 2: two record closing highs in the S and P five

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Speaker 2: hundred last week Friday, and to today you have seen

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Speaker 2: a cooling of that upward trajectory. Is there any more

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Speaker 2: upside left in the S and P five hundred for

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Speaker 2: the rest of the year. One selection volatility cools.

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Speaker 4: Yeah.

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Speaker 6: I mean we wrote about this this weekend quite frankly.

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Speaker 6: I mean, this is our bulk case, which is that

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Speaker 6: the mount of policy stimulus, okay, has been tremendous, particularly

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Speaker 6: in the US, both fiscal and monetary, and that seems

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Speaker 6: to be somewhat coordinated now not only in the US

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Speaker 6: but also in China now and other central banks are

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Speaker 6: cutting rates, so that tends to allow multiple to expand further.

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Speaker 6: You know, I would say three weeks ago, myself and

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Speaker 6: most of the clients I speak with were in the

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Speaker 6: camp that we would have a tough four or five

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Speaker 6: weeks into the election and then you'd get a strong

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Speaker 6: rally into year end. But I'm starting to think maybe

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Speaker 6: it might be more the opposite. We may stay bid

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Speaker 6: into the election and then I think we get some

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Speaker 6: disappointment post election on the idea that fiscal's kind of

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Speaker 6: peaked right into the election, and also the FED then

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Speaker 6: is in fully priced. And then it comes down to

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Speaker 6: the numbers. Can we continue to deliver the numbers that

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Speaker 6: justified the multiple EXPANSI.

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Speaker 1: We've really had.

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Speaker 4: Well, we're going to talk more about politics in the

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Speaker 4: election in the next block. I want to go back

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Speaker 4: to what you were saying about earnings though, and the

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Speaker 4: earnings breath revisions. There was a really interesting note oubt

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Speaker 4: from Torsen slock Over at Apollo this morning, saying that

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Speaker 4: forty two percent of companies in the Russell two thousand

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Speaker 4: have negative earnings for the S and P five hundred.

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Speaker 4: For contrast, those big caps, that number is just six percent.

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Speaker 4: So even with these revisions that you're watching so closely,

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Speaker 4: in the idea that maybe the FED could cut more

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Speaker 4: aggressively from here, I mean, how careful do you have

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Speaker 4: to be about where you're picking your spots?

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Speaker 1: Absolutely, And we talked about this last time I was here.

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Speaker 6: We don't hate all small cap stocks, right, I mean

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Speaker 6: we hate the rustle because it's a low quality it.

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Speaker 1: We don't hate it. We think it's a low quality index.

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Speaker 6: And therefore, in this kind of environment, that's not the

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Speaker 6: instrument you really want to be long. That doesn't mean

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Speaker 6: there are some wonderful small cap stocks within that. And

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Speaker 6: this has been a very high alpha generating environment for

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Speaker 6: a lot of our clients are doing quite well generating

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Speaker 6: alpha this year because there are some very good lungs

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Speaker 6: and there are some very good shorts, and I think

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Speaker 6: that's the way we're continuing to approach it, whether we're

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Speaker 6: talking about small, large cap indicies or even within sectors,

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Speaker 6: and there we've been very clear we want to continue

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Speaker 6: to stay up the quality curve. We're not willing to

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Speaker 6: go down the quality curve. We don't think things are

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Speaker 6: cheap enough. We don't think the FED is far enough

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Speaker 6: ahead of the curve yet to stimulate interest there. That

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Speaker 6: could change if we see the labor data improve.

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Speaker 4: And Mike, I want to talk to you about the

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Speaker 4: potential impact of a strike along the ports. Of course,

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Speaker 4: you have union workers along East Coast ports and Gulf

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Speaker 4: ports coasts threatening the strike starting tomorrow October first, and

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Speaker 4: seems like there is a lot of daylight between the

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Speaker 4: two sides. To put it mildly, so if we were

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Speaker 4: to see a strike, if we were to see a

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Speaker 4: prolonged strike, how much of an economic impact could that have?

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Speaker 6: I think it's the second part what you said, it

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Speaker 6: has to be prolonged. I mean the good news is

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Speaker 6: that inventory levels are still quite high kind of across

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Speaker 6: the retail channel, so in some ways it may provide

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Speaker 6: some relief potentially that inventories can come down. Maybe there's

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Speaker 6: some extra pricing here as supplies get short. But if

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Speaker 6: it persists beyond a month or so, then it becomes

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Speaker 6: a real constraint and the cost start to really build up,

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Speaker 6: and then we have a margin pressure. And for the FED,

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Speaker 6: I mean, the FED then has this If let's say

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Speaker 6: this thing doesn't get negotiated, or it does get negotiated

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Speaker 6: in a way where wage increases are significant, does that

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Speaker 6: factor into twenty five or fifty next meeting. So there's

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Speaker 6: a lot of implications here. These are messy situations.

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Speaker 1: I do.

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Speaker 6: I'm not optimistic unfortunately, that it gets resolved this week.

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Speaker 6: Probably needs some more action before the two sides come together.

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Speaker 6: But as I said, I think it's the length of

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Speaker 6: the strike that will then determine the magnitude of the impact.

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Speaker 5: You're not known for your optimism, It's that true.

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Speaker 6: I'm generally a half class full guy. But in this case,

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Speaker 6: they think this is a tough one.

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Speaker 5: Yeah.

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Speaker 3: Well, I was thinking, what impact could this actually have

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Speaker 3: on the markets? An interesting story, you know, politically and economically,

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Speaker 3: But then I remembered what happened when that Evergreen.

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Speaker 5: Boat got stuck.

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Speaker 3: It was amazing, Yeah, in the Suez Canal and those

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Speaker 3: supply chain reverberations lasted for more than a year. Sure,

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Speaker 3: you know, I mean Aston Martin right now is its

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Speaker 3: profit warning is because of supply chain problems more than

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Speaker 3: it is China. Do you expect this could be a

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Speaker 3: real problem at that scale?

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Speaker 6: Well, sure, I mean we had the report issues during

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Speaker 6: the pandemic where you couldn't get workers to unload the cargo.

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Speaker 6: So it's just one more example of how fragile some

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Speaker 6: of these supply chains have become pre pandemic. Right We've

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Speaker 6: gone just in time inventory system globalization and manufacturing goods

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Speaker 6: halfway around the world and then shipping them from there,

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Speaker 6: and so you know, I think this is part of

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Speaker 6: the bigger question like how are companies thinking about managing inventories,

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Speaker 6: managing production, reshoring, etc.

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Speaker 1: Going forward? This is just one more example of that.

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Speaker 6: And labor costs has been something that's been a real

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Speaker 6: tail wind for thirty years, and maybe we can't be

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Speaker 6: that confident about that anymore.

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Speaker 4: Well, as you both point out, I mean we've been

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Speaker 4: through this before, We've seen this movie before, and the

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Speaker 4: argument is out there that companies maybe are a little

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Speaker 4: bit more flexible in their supply chain, so that maybe

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Speaker 4: they know a little bit more how to handle these

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Speaker 4: sort of crises.

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Speaker 2: Well, here's the question on that note. If you're worried

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Speaker 2: about wages going up being potentially inflationary, if you're worried

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Speaker 2: about inventory shrinking here to this extent that you have

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Speaker 2: to raise prices, then wouldn't both things be inflationary at

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Speaker 2: the end of the day. Do you still worry about

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Speaker 2: the trajectory of inflation when nobody seems to be as

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Speaker 2: worried about it anymore, except maybe if you're Michelle Bowman.

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Speaker 6: Yeah, I think, I mean the inflation situation short term,

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Speaker 6: I feel fairly confident and about But I think if

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Speaker 6: we don't have a further like, let's say things reaccelerate

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Speaker 6: here because China stimulus, which is a surprise we get

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Speaker 6: perhaps you know, gas prices continue to come lower. That's helpful,

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Speaker 6: and then the FED gets really ahead of the curve

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Speaker 6: and they start cutting rates again in a way where

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Speaker 6: people feel optimistic. Well, then, yeah, I think, then you're

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Speaker 6: going to be back into the other camp. This gets

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Speaker 6: back to our original thesis coming out of the pandemic,

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Speaker 6: which is going to be we're in sort of these.

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Speaker 1: Shorter hotter cycles.

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Speaker 6: We don't have all these tailwinds anymore, these relief valves

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Speaker 6: that we've had for the last thirty years of falling inflation,

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Speaker 6: falling interest rates, falling labor costs, outsourcing a production and

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Speaker 6: so these are all things that make the supply side

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Speaker 6: of the equation harder to manage, and that creates this

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Speaker 6: boom bust almost in the inflationary cycle. I'm not worried

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Speaker 6: about inflation right now, but I think it's a great

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Speaker 6: question for twenty twenty five.

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Speaker 4: And Mike, just quickly here before we let you go,

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Speaker 4: let's talk a little bit more about the US election.

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Speaker 4: There was an interesting note doubt from Evercore saying that, well,

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Speaker 4: in a century of returns, so that united government handley

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Speaker 4: outperforms divided this time could be different, that in this

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Speaker 4: specific scenario, actually a divided government might be better for markets.

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Speaker 4: And with that in mind and that history that we

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Speaker 4: have here, how closely are you watching the down value races?

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Speaker 6: I mean, I think the congressional election is way more

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Speaker 6: important for markets than the presidential election, Okay, and the

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Speaker 6: main reason is because of legislation. I would say that

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Speaker 6: a unified congressional outcome is definitely bad.

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Speaker 1: For bond markets. Okay, I'm not so sure about.

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Speaker 6: Stock markets because you'll probably get more stimulus, which is

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Speaker 6: going to be bad for the fiscal situation, but that

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Speaker 6: may be okay for stocks, right, because the stock market

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Speaker 6: likes growth. The stock market likes inflation. I mean, it's

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Speaker 6: a misunderstood concept, right. People think, oh, inflation is terrible

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Speaker 6: for stocks. Actually it's not true. When inflation was booming,

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Speaker 6: that's when we had the best breath in the stock market.

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Speaker 6: That's when the Russell two thousand was doing really well

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Speaker 6: because that's their pricing, that's their nominal GDP, that's their

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Speaker 6: nominal revenue growth. So I think to me, unified government

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Speaker 6: on the congressional side, you get more stimulus, probably better

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Speaker 6: for stacks and bonds. You know, if rates go up

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Speaker 6: too much, obviously it's not great for stacks.

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Speaker 1: Mike, great having you in.

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Speaker 5: Thanks so much for joining us.

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Speaker 3: Mike Wilson there from Morgan Stanley, US Equities Chief, US

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Speaker 3: equity strategist and CIO