Speaker 1: Bloomberg Audio Studios, podcasts, radio news, and.
Speaker 2: Char Jay Powell speaks later today, and that's ahead of
Speaker 2: Friday's all important jobs report.
Speaker 3: Automaker, seeing a run of bad news to Lantis joins
Speaker 3: Volkswagen and Aston Martin and issuing the latest profit warnings,
Speaker 3: partly blaming sluggish demand from China.
Speaker 4: And this on m and a Monday, DirecTV and Dish
Speaker 4: agreed to combine in a deal that we'll create the
Speaker 4: biggest PATV provider.
Speaker 5: In the US.
Speaker 4: All that and more coming up, But let's take a
Speaker 4: look at where markets are trading thirty minutes until the
Speaker 4: bells ring. As Matt mentioned, not too great on this Monday.
Speaker 4: Of course, we're coming off of several consecutive weeks of
Speaker 4: solid gains, seeing some of the steam come out of
Speaker 4: the market right now, out of that rally right now,
Speaker 4: even with that big run in Chinese equities, you're not
Speaker 4: seeing that good vibe music over there translate into the
Speaker 4: US market. The S and P five hundred currently down about
Speaker 4: two tenths of a percent, the NASAQ one hundred, your
Speaker 4: big tech names which have been leading, currently down about
Speaker 4: three tenths of a percent, and still a little bit
Speaker 4: of a sell up in the bond market rate now
Speaker 4: right now, matt you're not seeing that haven rush necessarily.
Speaker 4: Ten year yields curly up about three basis points, all right,
Speaker 4: in terms of.
Speaker 5: The runs that we've seen.
Speaker 3: Mohammed el Area and, a Bloomberg opinion columnist and the
Speaker 3: president of Queen's College, Cambridge, highlighted this chart here on Twitter,
Speaker 3: showing the S and P five hundred has put up
Speaker 3: its best first nine months of the year since nineteen
Speaker 3: ninety seven.
Speaker 5: The index is up more than twenty percent year to.
Speaker 3: Date, boosted by the fifth consecutive monthly gain in September.
Speaker 3: The S ANDP has gained for ten of the last
Speaker 3: eleven months.
Speaker 5: So we've been doing pretty well so far this year.
Speaker 2: May ging me smarter this Monday morning, Matthew. Let's take
Speaker 2: a look under the hood as well. Here Stilantis, plunging
Speaker 2: at the carmakers said its forecast for the year would
Speaker 2: be lower as it plans to lower production.
Speaker 5: Just taking a beating.
Speaker 2: Now you have Stilantis down more than twelve point seven percent.
Speaker 2: You have Ford also down three point two percent, three
Speaker 2: point three percent, and it announced that it will install
Speaker 2: free home chargers for ev buyers as competition heats up
Speaker 2: in the auto sector. We'll talk more about that later
Speaker 2: this hour. Also watching shares of Echo Star Corp. Up
Speaker 2: about seven tens of one percent. Remember, Direct TV and Dish,
Speaker 2: which is owned by EchoStar, have agreed to combine in
Speaker 2: a deal that will create the biggest pay TV provider
Speaker 2: in the United States. Interesting that it has been up
Speaker 2: more than fifteen percent since Bloomberg had reported that the
Speaker 2: deal would be happening.
Speaker 5: Yeah, very interesting.
Speaker 3: We're going to continue to talk about those mergers, but
Speaker 3: right now I want to talk about rather takeovers. Interesting
Speaker 3: as a merger. Right now, I want to talk about
Speaker 3: what going on in China. Six consecutive days of gains there,
Speaker 3: and they had a bomb today, nine percent up on
Speaker 3: the CSI three hundred.
Speaker 4: Yeah, best run since two thousand and eight or so.
Speaker 4: It's been pretty amazing to watch the CSI three hundred.
Speaker 4: It's now up over twenty percent year to date. It's
Speaker 4: in a bull market. You rewind to just a week
Speaker 4: ago this index was done by more than four percent
Speaker 4: or just about so. I mean, the rate of change
Speaker 4: here has been just incredible.
Speaker 5: You're not really seeing it though.
Speaker 4: In US equities and I think a lot of that
Speaker 4: we can blame on Germany.
Speaker 2: I think you also have to ask if it's real
Speaker 2: or if it's a head fake, because twenty five percent
Speaker 2: more than that over a five day period. The reality
Speaker 2: is it's driven by stimulus. The underlying data is weak
Speaker 2: as it is in Germany. I think the question is
Speaker 2: how much of that does that spill over that weakness
Speaker 2: abroad into the United States.
Speaker 3: Yeah, Germany having obviously real problems, being the home of
Speaker 3: three automakers, all of whom have their own issues, but
Speaker 3: really it's Chinese imports and inflation that are the biggest
Speaker 3: issue there. We're going to talk about Folkswagen, We're going
Speaker 3: to talk about BMW.
Speaker 5: We're going to talk about Daimler as well as Stilantis,
Speaker 5: which is.
Speaker 3: Kind of like an Italian Dutch US automaker French as well.
Speaker 5: Later on in the program.
Speaker 3: Right now, I want to focus on the US markets
Speaker 3: with another chart Mohammed el Area highlighted on Twitter this week,
Speaker 3: and it shows the strength of everything Else, the everything
Speaker 3: else rally with the equal weighted SA outperforming by the
Speaker 3: most since twenty twenty two.
Speaker 5: With US Now is Morgan Stanley's.
Speaker 3: Chief US equity strategists and CIO Mike Wilson. Regarding the
Speaker 3: non farm payrolls number DOE out this Friday, Wilson says,
Speaker 3: we would need to see an upside surprise to drive
Speaker 3: a sustainable cyclical rotation in the US. And I understand
Speaker 3: that good news would be good news for some parts
Speaker 3: of the market. But wouldn't we want to see in
Speaker 3: some ways a miss because then we could get a
Speaker 3: bigger cut from the Fed in November.
Speaker 6: Well, yeah, maybe it comes with a fine line. I mean,
Speaker 6: the good news is good news until it's not because
Speaker 6: then the fitness to raise rates too much. That was
Speaker 6: the story before. Now it's bad news is good until
Speaker 6: it's too bad. So look, I think there's three parts
Speaker 6: to what happened in the last two weeks. Okay, First
Speaker 6: of all, the FED gave us fifty. I think everybody
Speaker 6: was kind of expecting twenty five right up until the
Speaker 6: last minute, and so it was still an upside surprise.
Speaker 1: And we had written about this.
Speaker 6: We thought fifty going into the meeting, if they could
Speaker 6: convey that it was not being done for growth concerned
Speaker 6: reasons would be a positive. So we got that checked
Speaker 6: the by And I don't think that was a shocker,
Speaker 6: but it was a positive event. And then we got
Speaker 6: the China stimulus, but that came in two pieces, don't
Speaker 6: forget right. It came with the monetary stimulus initially, and
Speaker 6: I would say most people, including us, were like, well,
Speaker 6: that's interesting, but that's not going to do much. We
Speaker 6: need we need fiscal stimulus. They're a deflation, right, We're
Speaker 6: not going to get any action in real economy. So
Speaker 6: then of course the policymakers came in because they listen,
Speaker 6: and they said, okay, we'll do some fiscal too, and
Speaker 6: then we got this massive move. So we've had a
Speaker 6: twenty percent plus move in three days, which I would
Speaker 6: say very few people captured.
Speaker 1: All Right. The other thing you have to think about
Speaker 1: that read it? Whys it up so much today?
Speaker 6: Well, Japan sold off sharply over the weekend, so I
Speaker 6: think you know, China has been a source of funds
Speaker 6: for the Japan trade, for the India trade, all the
Speaker 6: other em countries that have done well. Okay, and now
Speaker 6: you may see some reversion back, but that feels pretty
Speaker 6: overcooked to me at this moment. What we care about
Speaker 6: in the US as the following is this going to
Speaker 6: change the trajectory of growth in the US in a
Speaker 6: meaningful way.
Speaker 1: And the answer really is no.
Speaker 6: It can maybe get some excitement and things like materials,
Speaker 6: some of the industrial stocks who have direct leverage to
Speaker 6: perhaps the China stimulus of some kind, But beyond that,
Speaker 6: I think we need to see the labor market get
Speaker 6: better in the US and we need to see the
Speaker 6: policy changes from the FED have an impact on consumer.
Speaker 2: Let's talk more about the labor market because clearly a
Speaker 2: lot of investors are hinging on Friday's report.
Speaker 5: How much could that.
Speaker 2: Move the needle? And if you have a significant miss
Speaker 2: to the downside, what that would would that mean for equities?
Speaker 1: I mean for us. The labor market is everything now
Speaker 1: and by the way, it's everything for the FED. So
Speaker 1: you know, this is the sixty four trillion dollar question.
Speaker 6: Did the FED cut fifty because they are actually worried
Speaker 6: about the labor trends, which I think they should be
Speaker 6: paying attention to that, or are they doing it because look,
Speaker 6: inflations come down and they're too tight to begin with,
Speaker 6: and so that they're able to it is effectally because
Speaker 6: they can or because they need to. So the labor
Speaker 6: market will tell us the answer to that. And you know,
Speaker 6: we've been pretty straightforward about this. If the unemployment rate
Speaker 6: goes up again, I think that's a clear negative.
Speaker 1: If the undeplanment rate can.
Speaker 6: Come down and jobs data is okay with any major revisions,
Speaker 6: that would be a positive.
Speaker 4: That's where I want to go. And you make that
Speaker 4: point in your recent research that we need no material
Speaker 4: downside revisions to the prior months. Unfortunately for the bulls,
Speaker 4: we've seen that over and over again the past several
Speaker 4: months of NFP reports. I mean, when it comes to
Speaker 4: the quality of the data and these big revisions we
Speaker 4: still are getting, how much can you really trust it?
Speaker 6: Well, even cher Paul said that right, he talked about
Speaker 6: the QCW revisions being so dramatic. This is what you
Speaker 6: get in a slowdown. You get revisions to the downside,
Speaker 6: just like when you have a recovery, all the revisions
Speaker 6: are to the upside. So this is not abnormal. And
Speaker 6: let's let's take a step back. This is what the
Speaker 6: FED was going for when they raised race. This once again,
Speaker 6: the big question is, you know, can they arrest the
Speaker 6: down trend, stabilize and then see labor markets actually improve
Speaker 6: next year.
Speaker 1: We don't have the answer to that.
Speaker 6: We're going to get two labor reports before the next
Speaker 6: FED cut, before the next FED meeting, We're going to
Speaker 6: get election, which you know, I think is probably slowing
Speaker 6: hiring in the short term just because there's uncertain around that.
Speaker 6: So yeah, it's going to be an interesting October, no
Speaker 6: question about it.
Speaker 3: You also point out that you say earnings revision breadth
Speaker 3: is the best proxy for company guidance, and what exactly
Speaker 3: do you mean by earnings revision breadth. It's a little
Speaker 3: too much jargon for my mom, my mom, And you know,
Speaker 3: what do you want to see and what is it
Speaker 3: telling you?
Speaker 6: That's by design, Matt, we have these special terms. You
Speaker 6: know that you have only I know the answer, but no.
Speaker 6: Earner's vision breath is very clear. So it's the leading
Speaker 6: indicator for earnings revisions. So when I say earning revisions,
Speaker 6: I mean our earnings going up or down, and revision
Speaker 6: breath we look at because that tends to be a
Speaker 6: leading indicator for whether it's going to be up or down.
Speaker 1: Revision breath has been basically flat.
Speaker 6: Now for the S and P five hundred for quite
Speaker 6: a while, and for the Russell two thousand and small caps,
Speaker 6: it's been negative. That explains a lot of why smaller,
Speaker 6: low quality companies have underperformed, because the revision breath and
Speaker 6: the earnings revisions subsequently have been poor.
Speaker 1: So here's the thing for October.
Speaker 6: Typically, seasonally, revision breath is negative going into or third
Speaker 6: quarter earnings.
Speaker 1: Why because fourth quarter estimates are always too high.
Speaker 6: That's why stocks tend to that trade great in the
Speaker 6: first half of October. So we'll see if that pattern
Speaker 6: is changed. If we get positive revisions in the next
Speaker 6: two weeks, boy, I'm going to be that's gonna be
Speaker 6: a real big positive because that would be going against
Speaker 6: the seasonal trend.
Speaker 1: I expect them to be negative.
Speaker 6: The question is will the market care because that's normal.
Speaker 6: We'll see it's going to be once again a very
Speaker 6: idiosyncratic earning season like it has been the last two
Speaker 6: or three.
Speaker 2: Well, that leads me to the question. We hit forty
Speaker 2: two record closing highs in the S and P five
Speaker 2: hundred last week Friday, and to today you have seen
Speaker 2: a cooling of that upward trajectory. Is there any more
Speaker 2: upside left in the S and P five hundred for
Speaker 2: the rest of the year. One selection volatility cools.
Speaker 4: Yeah.
Speaker 6: I mean we wrote about this this weekend quite frankly.
Speaker 6: I mean, this is our bulk case, which is that
Speaker 6: the mount of policy stimulus, okay, has been tremendous, particularly
Speaker 6: in the US, both fiscal and monetary, and that seems
Speaker 6: to be somewhat coordinated now not only in the US
Speaker 6: but also in China now and other central banks are
Speaker 6: cutting rates, so that tends to allow multiple to expand further.
Speaker 6: You know, I would say three weeks ago, myself and
Speaker 6: most of the clients I speak with were in the
Speaker 6: camp that we would have a tough four or five
Speaker 6: weeks into the election and then you'd get a strong
Speaker 6: rally into year end. But I'm starting to think maybe
Speaker 6: it might be more the opposite. We may stay bid
Speaker 6: into the election and then I think we get some
Speaker 6: disappointment post election on the idea that fiscal's kind of
Speaker 6: peaked right into the election, and also the FED then
Speaker 6: is in fully priced. And then it comes down to
Speaker 6: the numbers. Can we continue to deliver the numbers that
Speaker 6: justified the multiple EXPANSI.
Speaker 1: We've really had.
Speaker 4: Well, we're going to talk more about politics in the
Speaker 4: election in the next block. I want to go back
Speaker 4: to what you were saying about earnings though, and the
Speaker 4: earnings breath revisions. There was a really interesting note oubt
Speaker 4: from Torsen slock Over at Apollo this morning, saying that
Speaker 4: forty two percent of companies in the Russell two thousand
Speaker 4: have negative earnings for the S and P five hundred.
Speaker 4: For contrast, those big caps, that number is just six percent.
Speaker 4: So even with these revisions that you're watching so closely,
Speaker 4: in the idea that maybe the FED could cut more
Speaker 4: aggressively from here, I mean, how careful do you have
Speaker 4: to be about where you're picking your spots?
Speaker 1: Absolutely, And we talked about this last time I was here.
Speaker 6: We don't hate all small cap stocks, right, I mean
Speaker 6: we hate the rustle because it's a low quality it.
Speaker 1: We don't hate it. We think it's a low quality index.
Speaker 6: And therefore, in this kind of environment, that's not the
Speaker 6: instrument you really want to be long. That doesn't mean
Speaker 6: there are some wonderful small cap stocks within that. And
Speaker 6: this has been a very high alpha generating environment for
Speaker 6: a lot of our clients are doing quite well generating
Speaker 6: alpha this year because there are some very good lungs
Speaker 6: and there are some very good shorts, and I think
Speaker 6: that's the way we're continuing to approach it, whether we're
Speaker 6: talking about small, large cap indicies or even within sectors,
Speaker 6: and there we've been very clear we want to continue
Speaker 6: to stay up the quality curve. We're not willing to
Speaker 6: go down the quality curve. We don't think things are
Speaker 6: cheap enough. We don't think the FED is far enough
Speaker 6: ahead of the curve yet to stimulate interest there. That
Speaker 6: could change if we see the labor data improve.
Speaker 4: And Mike, I want to talk to you about the
Speaker 4: potential impact of a strike along the ports. Of course,
Speaker 4: you have union workers along East Coast ports and Gulf
Speaker 4: ports coasts threatening the strike starting tomorrow October first, and
Speaker 4: seems like there is a lot of daylight between the
Speaker 4: two sides. To put it mildly, so if we were
Speaker 4: to see a strike, if we were to see a
Speaker 4: prolonged strike, how much of an economic impact could that have?
Speaker 6: I think it's the second part what you said, it
Speaker 6: has to be prolonged. I mean the good news is
Speaker 6: that inventory levels are still quite high kind of across
Speaker 6: the retail channel, so in some ways it may provide
Speaker 6: some relief potentially that inventories can come down. Maybe there's
Speaker 6: some extra pricing here as supplies get short. But if
Speaker 6: it persists beyond a month or so, then it becomes
Speaker 6: a real constraint and the cost start to really build up,
Speaker 6: and then we have a margin pressure. And for the FED,
Speaker 6: I mean, the FED then has this If let's say
Speaker 6: this thing doesn't get negotiated, or it does get negotiated
Speaker 6: in a way where wage increases are significant, does that
Speaker 6: factor into twenty five or fifty next meeting. So there's
Speaker 6: a lot of implications here. These are messy situations.
Speaker 1: I do.
Speaker 6: I'm not optimistic unfortunately, that it gets resolved this week.
Speaker 6: Probably needs some more action before the two sides come together.
Speaker 6: But as I said, I think it's the length of
Speaker 6: the strike that will then determine the magnitude of the impact.
Speaker 5: You're not known for your optimism, It's that true.
Speaker 6: I'm generally a half class full guy. But in this case,
Speaker 6: they think this is a tough one.
Speaker 5: Yeah.
Speaker 3: Well, I was thinking, what impact could this actually have
Speaker 3: on the markets? An interesting story, you know, politically and economically,
Speaker 3: But then I remembered what happened when that Evergreen.
Speaker 5: Boat got stuck.
Speaker 3: It was amazing, Yeah, in the Suez Canal and those
Speaker 3: supply chain reverberations lasted for more than a year. Sure,
Speaker 3: you know, I mean Aston Martin right now is its
Speaker 3: profit warning is because of supply chain problems more than
Speaker 3: it is China. Do you expect this could be a
Speaker 3: real problem at that scale?
Speaker 6: Well, sure, I mean we had the report issues during
Speaker 6: the pandemic where you couldn't get workers to unload the cargo.
Speaker 6: So it's just one more example of how fragile some
Speaker 6: of these supply chains have become pre pandemic. Right We've
Speaker 6: gone just in time inventory system globalization and manufacturing goods
Speaker 6: halfway around the world and then shipping them from there,
Speaker 6: and so you know, I think this is part of
Speaker 6: the bigger question like how are companies thinking about managing inventories,
Speaker 6: managing production, reshoring, etc.
Speaker 1: Going forward? This is just one more example of that.
Speaker 6: And labor costs has been something that's been a real
Speaker 6: tail wind for thirty years, and maybe we can't be
Speaker 6: that confident about that anymore.
Speaker 4: Well, as you both point out, I mean we've been
Speaker 4: through this before, We've seen this movie before, and the
Speaker 4: argument is out there that companies maybe are a little
Speaker 4: bit more flexible in their supply chain, so that maybe
Speaker 4: they know a little bit more how to handle these
Speaker 4: sort of crises.
Speaker 2: Well, here's the question on that note. If you're worried
Speaker 2: about wages going up being potentially inflationary, if you're worried
Speaker 2: about inventory shrinking here to this extent that you have
Speaker 2: to raise prices, then wouldn't both things be inflationary at
Speaker 2: the end of the day. Do you still worry about
Speaker 2: the trajectory of inflation when nobody seems to be as
Speaker 2: worried about it anymore, except maybe if you're Michelle Bowman.
Speaker 6: Yeah, I think, I mean the inflation situation short term,
Speaker 6: I feel fairly confident and about But I think if
Speaker 6: we don't have a further like, let's say things reaccelerate
Speaker 6: here because China stimulus, which is a surprise we get
Speaker 6: perhaps you know, gas prices continue to come lower. That's helpful,
Speaker 6: and then the FED gets really ahead of the curve
Speaker 6: and they start cutting rates again in a way where
Speaker 6: people feel optimistic. Well, then, yeah, I think, then you're
Speaker 6: going to be back into the other camp. This gets
Speaker 6: back to our original thesis coming out of the pandemic,
Speaker 6: which is going to be we're in sort of these.
Speaker 1: Shorter hotter cycles.
Speaker 6: We don't have all these tailwinds anymore, these relief valves
Speaker 6: that we've had for the last thirty years of falling inflation,
Speaker 6: falling interest rates, falling labor costs, outsourcing a production and
Speaker 6: so these are all things that make the supply side
Speaker 6: of the equation harder to manage, and that creates this
Speaker 6: boom bust almost in the inflationary cycle. I'm not worried
Speaker 6: about inflation right now, but I think it's a great
Speaker 6: question for twenty twenty five.
Speaker 4: And Mike, just quickly here before we let you go,
Speaker 4: let's talk a little bit more about the US election.
Speaker 4: There was an interesting note doubt from Evercore saying that, well,
Speaker 4: in a century of returns, so that united government handley
Speaker 4: outperforms divided this time could be different, that in this
Speaker 4: specific scenario, actually a divided government might be better for markets.
Speaker 4: And with that in mind and that history that we
Speaker 4: have here, how closely are you watching the down value races?
Speaker 6: I mean, I think the congressional election is way more
Speaker 6: important for markets than the presidential election, Okay, and the
Speaker 6: main reason is because of legislation. I would say that
Speaker 6: a unified congressional outcome is definitely bad.
Speaker 1: For bond markets. Okay, I'm not so sure about.
Speaker 6: Stock markets because you'll probably get more stimulus, which is
Speaker 6: going to be bad for the fiscal situation, but that
Speaker 6: may be okay for stocks, right, because the stock market
Speaker 6: likes growth. The stock market likes inflation. I mean, it's
Speaker 6: a misunderstood concept, right. People think, oh, inflation is terrible
Speaker 6: for stocks. Actually it's not true. When inflation was booming,
Speaker 6: that's when we had the best breath in the stock market.
Speaker 6: That's when the Russell two thousand was doing really well
Speaker 6: because that's their pricing, that's their nominal GDP, that's their
Speaker 6: nominal revenue growth. So I think to me, unified government
Speaker 6: on the congressional side, you get more stimulus, probably better
Speaker 6: for stacks and bonds. You know, if rates go up
Speaker 6: too much, obviously it's not great for stacks.
Speaker 1: Mike, great having you in.
Speaker 5: Thanks so much for joining us.
Speaker 3: Mike Wilson there from Morgan Stanley, US Equities Chief, US
Speaker 3: equity strategist and CIO