WEBVTT - Banks At Cycle Top, Will Be Down 30-50% In 12-18 Months: Peabody 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg p m L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Abramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg p m L 0:00:20.840 --> 0:00:33.080 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. The 0:00:33.159 --> 0:00:36.160 shares a Bank of America are lower by three tenths 0:00:36.240 --> 0:00:40.000 of a percent right now after reporting quarterly results. Here 0:00:40.000 --> 0:00:42.400 to tell us more about those results and the banking 0:00:42.400 --> 0:00:45.879 industry is Charles Peabody. He is the president of Portala's Partners. 0:00:46.159 --> 0:00:49.440 Charles always a pleasure give us the details when it 0:00:49.479 --> 0:00:52.280 comes to Bank of America and maybe just provide the 0:00:52.479 --> 0:00:57.960 context for how the bank is performing. Sure, well it was. 0:00:58.040 --> 0:01:01.360 It was a solid quarter um, but like other banks, 0:01:01.400 --> 0:01:04.000 the reported earnings were probably higher than what we would 0:01:04.040 --> 0:01:08.120 call core earnings as they included a number of unusual items. 0:01:08.280 --> 0:01:10.600 Two that can be called out was about a two 0:01:10.640 --> 0:01:14.800 cents share benefit from text benefits and a one cent 0:01:15.080 --> 0:01:19.280 um you know, goose from reserve release. So that's what 0:01:19.319 --> 0:01:22.119 you're generally seeing is that the core rains are coming 0:01:22.120 --> 0:01:24.680 in below the report earnings, but I would say the 0:01:24.720 --> 0:01:28.560 corens are in line with with expectations. This are these 0:01:28.600 --> 0:01:31.160 the best core earnings were likely to see in the cycle. 0:01:32.319 --> 0:01:34.720 They are, and I think that's why the stocks are 0:01:34.800 --> 0:01:38.679 reacting UM in a negative fashion to these. What are 0:01:38.760 --> 0:01:43.160 on the surface strong reported numbers is we're seeing what 0:01:43.240 --> 0:01:46.600 I would call low quality of earnings UM. The earnings 0:01:46.720 --> 0:01:50.200 strength is coming from large trading gains, which is a 0:01:50.240 --> 0:01:54.640 low pe revenue source, and they're coming from reserve releases, 0:01:54.680 --> 0:01:56.800 which you know investors aren't going to pay up for 0:01:56.880 --> 0:01:59.560 at the end of an economic cycle, and some unusual 0:02:00.120 --> 0:02:04.200 accounting gains. So in that context, if you have a 0:02:04.280 --> 0:02:08.520 situation where interest rates are moving higher because of either 0:02:08.600 --> 0:02:13.640 a strengthening US economy or increases from the Federal reserve, 0:02:14.320 --> 0:02:17.359 that should help the net interest margin of the bank. 0:02:17.840 --> 0:02:21.440 No matter how the bank is really run, it will 0:02:21.480 --> 0:02:24.480 and it has um. But what what we're looking for 0:02:24.560 --> 0:02:26.560 at this point of the economic cycle is what i'd 0:02:26.560 --> 0:02:30.040 call the second derivative, the end of cycle dynamics. So 0:02:30.160 --> 0:02:33.240 take your comment about higher rates, Yes, it is going 0:02:33.280 --> 0:02:36.600 to help net interest margins in net interest income, but 0:02:36.720 --> 0:02:40.960 we're past what I would call peak optionality in terms 0:02:40.960 --> 0:02:44.880 of the benefits of higher rates. So, for example, um 0:02:44.880 --> 0:02:48.640 back in two thousand and sixteen, Bank America would have 0:02:48.680 --> 0:02:51.280 seen about a seven billion dollar boost to their net 0:02:51.320 --> 0:02:55.560 interest income from a hundred basis point rise in interest rates. Today, 0:02:55.720 --> 0:02:59.320 that's about three billion JP Morgan and they're called Marion 0:02:59.400 --> 0:03:02.640 Lake the Sea Fox said that they're one point seven 0:03:02.680 --> 0:03:05.960 billion last quarter, would be material lower from a right 0:03:06.720 --> 0:03:09.560 rate hike, and that's down from three billion in two 0:03:09.600 --> 0:03:13.680 thousand and sixteen, So that the optionality that the margin 0:03:13.840 --> 0:03:17.880 is becoming less and less favorable. Add to that, issues 0:03:18.000 --> 0:03:22.720 of credit card charge offs are they rising? They are, 0:03:22.919 --> 0:03:26.760 and you know they're rising. You know what the analysts 0:03:26.760 --> 0:03:29.120 are calling in a benign state, but they are rising. 0:03:29.480 --> 0:03:33.160 And that's the other um end of cyclodynamic is usually 0:03:33.200 --> 0:03:37.720 you see cards lead other categories in terms of deterioration, 0:03:38.200 --> 0:03:41.440 and we are definitely seeing higher losses. Although it's been 0:03:42.240 --> 0:03:46.720 coined in the in the phrase of you know normalization, Yes, 0:03:46.800 --> 0:03:49.400 well that's that's it's a nice word. That's why that's 0:03:49.440 --> 0:03:54.760 why they get to use it. Lending against inflated asset values. 0:03:54.840 --> 0:03:57.720 Do you consider that to be a risk? I do, 0:03:57.840 --> 0:04:02.320 and that that's more on the on the wealth management 0:04:02.360 --> 0:04:05.280 side and on the corporate side. So in wealth management, 0:04:05.440 --> 0:04:08.440 one of the drivers of revenues is what we call 0:04:08.520 --> 0:04:13.680 securities based loans and jumbo mortgages and um, you know, 0:04:13.800 --> 0:04:16.760 I think we're going to see much more volatility in 0:04:16.839 --> 0:04:21.800 asset prices, where certain assets values could deteriorate literally overnight. 0:04:21.839 --> 0:04:24.200 And we saw that with the stein Hoffman in the 0:04:24.240 --> 0:04:27.960 fourth quarter. We saw that more recently with rousel Um, 0:04:28.080 --> 0:04:31.880 the aluminum company in Russia, and how either geopolitical events 0:04:31.960 --> 0:04:34.880 or economic events can cause the value of those assets 0:04:34.920 --> 0:04:39.000 to change very rapidly. And yet banks have made significant 0:04:39.120 --> 0:04:42.880 loans against these inflated asset values. And as rates move higher, 0:04:42.920 --> 0:04:45.479 I think it's gonna be tougher to sustain these asset values. 0:04:46.000 --> 0:04:49.320 Is it tougher for even experts to understand what's going 0:04:49.480 --> 0:04:52.720 on at large banks because there are so many unusual 0:04:52.920 --> 0:04:57.560 items that are reported on a quarterly basis. Yeah, this 0:04:57.640 --> 0:05:01.400 quarter was a very messy quarter because you new accounting 0:05:02.200 --> 0:05:05.839 adoptions that change to the values of equities. For example, 0:05:06.320 --> 0:05:10.720 you had tax benefits, you had lone loss reserve releases, um, 0:05:10.960 --> 0:05:13.920 you had asset sale gains there there it was a 0:05:13.960 --> 0:05:17.560 messy quarter, and that that has made it difficult, you know, 0:05:18.320 --> 0:05:20.960 short term to to understand what is truly core and 0:05:21.080 --> 0:05:24.440 underlying trends. Okay, so it seems to me that you're 0:05:24.480 --> 0:05:27.920 not just talking about the business at Bank of America 0:05:28.160 --> 0:05:32.440 but at all major banks. Is that correct? That's correct, 0:05:32.440 --> 0:05:35.360 But but there are some themes. For example, Bank America's 0:05:35.400 --> 0:05:37.480 revenues were up, you know, two and a half percent 0:05:37.640 --> 0:05:41.320 year over a year, So we're seeing low single digit 0:05:41.360 --> 0:05:44.520 revenue growth pretty much through all these big banks except 0:05:44.520 --> 0:05:47.000 for JP Morgan, which had much much stronger revenue growth. 0:05:47.440 --> 0:05:51.440 You're seeing reserve releases, you know, because of improvements in 0:05:51.440 --> 0:05:54.919 the energy portfolio and improvements in residential real estate. So 0:05:54.960 --> 0:05:58.120 there are some common themes. Expensive control remains very tight. 0:05:58.160 --> 0:06:01.160 They're doing a great job on expenses. And then see 0:06:01.160 --> 0:06:05.680 income remains weak outside of trading. And that's important because 0:06:05.720 --> 0:06:08.440 at the end of the cycle, you see a couple 0:06:08.440 --> 0:06:11.200 of things that that says we're at the end of 0:06:11.200 --> 0:06:13.280 the cycle. On on the trading front, you see a 0:06:13.400 --> 0:06:17.240 rotation from thick to equity as the driver of kapital 0:06:17.279 --> 0:06:19.840 markets revenues, and you saw that in this quarter equity 0:06:19.920 --> 0:06:23.039 was very strong. Thick was a little weaker, although solid, 0:06:23.880 --> 0:06:27.239 and then on the on the underwriting side, um, you see, 0:06:27.720 --> 0:06:30.599 you know, a shift as well. So we're seeing all 0:06:30.640 --> 0:06:36.719 the typical signs of end of cycle dynamics. So just quickly, Charles, 0:06:37.000 --> 0:06:39.960 all things being equal, if you aren't an investor in banks, 0:06:40.000 --> 0:06:43.400 should you just wait for a better time? I think so. 0:06:43.480 --> 0:06:46.040 I think we're in the topping process in the stocks 0:06:46.040 --> 0:06:47.560 in the first half of this year, and we'll enter 0:06:47.600 --> 0:06:49.640 a bearer market in these stocks. You know, a year 0:06:49.640 --> 0:06:51.240 and a half from now, two years from now, we'll 0:06:51.240 --> 0:06:55.240 be down from their peaks. Thanks very much, Charles Peabody, 0:06:55.279 --> 0:06:59.160 always a pleasure, President of Portalis Partners, talking about the 0:06:59.240 --> 0:07:16.440 US bank industry. I'm pim Fox. My co host Lisa 0:07:16.480 --> 0:07:20.720 Abramowitz is off today. Joining me now is Brian Egger. 0:07:20.840 --> 0:07:25.080 He is our senior Gaming and Lodging analyst for Bloomberg Intelligence. 0:07:25.440 --> 0:07:29.480 You can follow him on Twitter at breaking Call. And 0:07:29.640 --> 0:07:32.960 El Dorado Resorts and the real estate company Gaming and 0:07:33.040 --> 0:07:36.560 Leisure Properties. They are teaming up to buy carl Icons 0:07:36.960 --> 0:07:43.080 Tropicana entertainment price tag one point eight five billion dollars. Brian, 0:07:43.600 --> 0:07:48.520 why is carl Icon selling Tropicana Entertainment if it's such 0:07:48.560 --> 0:07:52.080 a good business, remember that Carlican has actually been selling 0:07:52.160 --> 0:07:56.080 his gaming interests over time. Uh. He basically had owned 0:07:56.080 --> 0:07:59.480 Trump Entertainment Resorts and ceased the operations of the Trump 0:07:59.480 --> 0:08:04.800 Tasha Hall back in sixteen, sold that property in seventeen. 0:08:04.840 --> 0:08:08.320 It's not reopening. So basically what this does is carl 0:08:08.320 --> 0:08:12.320 Aicon gets a billion eight five in proceeds and ends 0:08:12.360 --> 0:08:16.520 up effectively divesting his casino interests, which turns them over 0:08:16.520 --> 0:08:18.640 at Eldorado Resorts, which has the advantage of be able 0:08:18.680 --> 0:08:21.440 to get all these cost savings and synergies from doing 0:08:21.440 --> 0:08:24.680 this deal. Why are they able to cut costs when 0:08:24.760 --> 0:08:28.600 carl Icon is not, Well, it's basically because El Dorado 0:08:28.680 --> 0:08:32.319 has an existing base of operations, partly through the acquisition 0:08:32.880 --> 0:08:36.160 of Alfpre Casinos last year. So with a larger base 0:08:36.200 --> 0:08:40.560 of operations, you can basically reduce combined corporate overhead, get 0:08:40.559 --> 0:08:43.200 eventual marketing synergies. And what they hope to do with 0:08:43.200 --> 0:08:46.920 this deal is reduced the costs at the Tropicana Entertainment 0:08:47.080 --> 0:08:50.120 entity by about forty million dollars and basically take their 0:08:50.120 --> 0:08:52.840 purchase multiple down to like the five to five and 0:08:52.840 --> 0:08:56.600 a half times Ebadar range, which is quite attractive. So 0:08:56.760 --> 0:08:59.600 it does make sense for El Dorado and gives them 0:08:59.640 --> 0:09:04.360 some cost savings opportunities Gaming and Leisure properties. This is 0:09:04.400 --> 0:09:08.640 the partner with El Dorado Resorts that is making this 0:09:08.720 --> 0:09:13.000 deal there, that's just a real estate investment trust. They 0:09:13.000 --> 0:09:16.120 have been on the acquisition trail as well. They bought 0:09:16.120 --> 0:09:19.600 Pinnacle Entertainment back in sixteen, right, that was nearly a 0:09:19.640 --> 0:09:22.520 two billion dollar deal, right, So basically they own the 0:09:22.559 --> 0:09:24.520 real state of both Pen National Gaming and most of 0:09:24.520 --> 0:09:28.360 Pinnical Entertainment properties. Pinnacle itself as being acquired by Pen 0:09:28.440 --> 0:09:31.880 National Gaming in terms of the operations in the second 0:09:31.880 --> 0:09:34.280 half of this year. But as you mentioned Gaming Leisure 0:09:34.320 --> 0:09:37.360 properties as a reets, uh, they have the real estate 0:09:37.360 --> 0:09:40.320 assets here. So basically the way this deal works is 0:09:40.400 --> 0:09:44.000 that Eldorado is paying about sixty million dollars for the 0:09:44.040 --> 0:09:48.440 operations and that Gaming and Leisure is paying about a 0:09:48.480 --> 0:09:51.600 billion two for the underlying real estate. So you're really 0:09:51.640 --> 0:09:54.439 having kind of a separating the real state from the 0:09:54.480 --> 0:09:57.800 operations in this combined transaction. All right, So where does 0:09:57.840 --> 0:10:00.199 all this money come from? And is it money? In 0:10:00.200 --> 0:10:02.640 other words, why would you want to be buying if 0:10:02.679 --> 0:10:06.200 someone is supposedly as smart as carl Icon is selling right. 0:10:06.200 --> 0:10:08.160 So there's no doubt that Atlantic City has been a 0:10:08.280 --> 0:10:11.360 challenging market. UH. The two casinos opening up the summer, 0:10:11.400 --> 0:10:14.800 the Ocean resort UH and the hard rock properties I 0:10:14.840 --> 0:10:17.360 think could galvanized tourism. But they also come at a 0:10:17.400 --> 0:10:20.959 time I adding capacity to an already crowded Northeast gaming market. 0:10:21.000 --> 0:10:22.880 So I think the way El Dorado thinks about this 0:10:23.360 --> 0:10:27.199 in Atlantic City, which again is only of the cash 0:10:27.200 --> 0:10:30.280 flow of Tropicana Entertainment, is they probably increased the but 0:10:30.400 --> 0:10:32.839 dire fermenting some cost savings. They don't deny the fact 0:10:33.160 --> 0:10:36.280 that that particular market is challenging. Now this could change 0:10:36.320 --> 0:10:41.200 if UH the Supreme Court authorizes understructured sports betting across 0:10:41.240 --> 0:10:43.760 the country, in New Jersey and elsewhere, that could create 0:10:43.760 --> 0:10:47.720 a traffic driver that heretofore has not existed in Atlantic City. 0:10:47.720 --> 0:10:50.439 Based on your knowledge of the industry, do you believe 0:10:50.559 --> 0:10:53.880 that that is what many investors are betting on, this 0:10:54.080 --> 0:10:57.640 unrestricted sports betting. That's certainly a part of what the 0:10:58.040 --> 0:11:00.920 m and a interest in both Pennsylvania UH and New 0:11:01.000 --> 0:11:03.079 Jersey has been about been about. Now if you look 0:11:03.080 --> 0:11:05.880 Atlantic City, they had about twelve casinos a peak there, 0:11:05.920 --> 0:11:08.280 down to seven this summer will be up to nine 0:11:08.320 --> 0:11:11.320 again with two new openings. So we've shaken that market 0:11:11.360 --> 0:11:14.000 out already. We've cut it almost in half, and it's 0:11:14.080 --> 0:11:17.200 much healthier today, albeit on a much smaller scale. Two 0:11:17.200 --> 0:11:19.520 new properties opening the summer depends on whether or not 0:11:19.600 --> 0:11:23.439 they'll drive enough traffic to the city through entertainment to 0:11:23.800 --> 0:11:27.600 galvanized tourism and increase overall results. But there's no question 0:11:27.880 --> 0:11:30.600 the Northeast mid Atlantic gave market has become quite crowded 0:11:30.640 --> 0:11:33.559 with all the expansion throughout the mid Atlantic and Northeast. 0:11:34.120 --> 0:11:35.960 On a scale of I'll do this on a scale 0:11:35.960 --> 0:11:39.280 of one to ten. If the if the court does 0:11:39.440 --> 0:11:44.920 not allow sports betting, how challenged is this market in 0:11:44.920 --> 0:11:47.400 the Northeast on a scale of one to tend and 0:11:47.559 --> 0:11:51.400 being it's really challenge. It's a challenging market compared to 0:11:51.400 --> 0:11:54.600 any prior time period. You've now got twelve casinos with 0:11:54.640 --> 0:11:57.840 ten more to come in Pennsylvania. Uh, You've got six 0:11:57.880 --> 0:12:00.240 casinos in Maryland. You've got more casinos in the New 0:12:00.320 --> 0:12:03.080 York States. So it's a crowded market. I think sports 0:12:03.080 --> 0:12:07.280 betting would certainly give some incremental tourism to places like 0:12:07.440 --> 0:12:10.680 Pennsylvania Atlantic City. But Atlantic City is now just one 0:12:10.720 --> 0:12:14.320 of several destinations in the Mid Atlantic, which is why 0:12:14.440 --> 0:12:16.839 about half the casinos they have already shut down. Now 0:12:16.880 --> 0:12:19.000 we we we'll see what happens next. But I do 0:12:19.080 --> 0:12:21.720 think the Supreme Court is likely to allow for sports betting. 0:12:22.000 --> 0:12:24.560 I do think that's beneficial to Atlantic City. But I 0:12:24.600 --> 0:12:28.040 certainly think Eldorado Resorts has its eyes open in terms 0:12:28.040 --> 0:12:31.480 of the historical challenges there. All right, I can't let 0:12:31.480 --> 0:12:33.640 you go with that giving giving us the lowdown on 0:12:33.720 --> 0:12:36.680 Wind Resorts and what's happening with the Steve Win Empire. 0:12:37.360 --> 0:12:39.760 So Win Resorts, which by the way, did pre announce 0:12:39.800 --> 0:12:42.360 at least January febru results they're having a good quarter, 0:12:42.800 --> 0:12:45.080 doesn't detract from the fact that company has a number 0:12:45.120 --> 0:12:47.960 of challenges. A lot of the recent drama has centered 0:12:48.000 --> 0:12:51.800 around the fate of their property in Boston Win Boston Harbor, 0:12:51.960 --> 0:12:55.000 which could be renamed it could be sold to another operator. 0:12:55.040 --> 0:12:58.319 There were speculation last week that either MGM Resorts or 0:12:58.320 --> 0:13:01.240 another company might try to take over that license. Uh 0:13:01.320 --> 0:13:03.760 and so, because of the ongoing questions. Even with Steve 0:13:03.800 --> 0:13:07.600 when having sold his stock, resigned the CEO UH and 0:13:07.720 --> 0:13:10.360 Nonger being either an officer or board member, they're still 0:13:10.360 --> 0:13:14.000 ongoing scrutiny of the suitability of the other officers and 0:13:14.040 --> 0:13:17.960 directors as it relates to that Massachusetts gaming license. I 0:13:17.960 --> 0:13:19.839 have a feeling you're gonna be very busy and you're 0:13:19.840 --> 0:13:21.520 gonna keep us at the date on all of this. 0:13:21.920 --> 0:13:25.400 Thank you very much. Brian Edgar are expert, really whenever 0:13:25.559 --> 0:13:28.600 it comes to gaming and lodging. Senior Gaming and Lodging 0:13:28.600 --> 0:13:32.240 analyst for Bloomberg Intelligence. Remember to follow him on Twitter 0:13:32.400 --> 0:13:36.600 at breaking Call at Agronomics. Now believe it or not, 0:13:37.320 --> 0:13:42.120 that's breaking news. Yes, anomics. We thought that sounded better, 0:13:42.160 --> 0:13:44.240 so and it does. And I'm going to follow you 0:13:44.320 --> 0:14:01.240 right now as a result of that. And is the 0:14:01.320 --> 0:14:05.400 stock market overvalued or undervalued? Let's find out. Let's ask 0:14:05.480 --> 0:14:08.160 Jack Ablin. He is the founding partner in chief investment 0:14:08.240 --> 0:14:12.320 officer for Crescent Wealth Advisers based in Chicago, and you 0:14:12.360 --> 0:14:16.480 can follow Jack on Twitter at Jack Ablin. That's a 0:14:16.600 --> 0:14:21.640 B L I n R I Jack Ablin. Overvalued or undervalued? 0:14:21.920 --> 0:14:26.760 Make the case actually near term it's it's undervalued. If 0:14:26.800 --> 0:14:30.640 you look at one of the route force measures that 0:14:30.680 --> 0:14:33.600 I like to use, it's just a total return of 0:14:33.680 --> 0:14:38.680 the stock market against the cumulative growth of dividends and 0:14:38.720 --> 0:14:43.240 earnings UM. It shows that the market is probably about 0:14:43.760 --> 0:14:48.600 five to seven percent undervalued. If you assume that the 0:14:48.720 --> 0:14:51.480 earnings were expecting for the next four quarters and the 0:14:51.520 --> 0:14:54.200 dividends were expecting for the next four quarters will will 0:14:54.240 --> 0:14:56.960 play out UM. So near term, I think that's a 0:14:57.120 --> 0:14:59.920 that's a good thing because we did start the year 0:15:00.280 --> 0:15:03.920 about eighteen percent overvalued, and I think between the market 0:15:03.960 --> 0:15:07.920 coming down and earnings expectations coming up UM, things have 0:15:08.480 --> 0:15:10.400 kind of settled out in your term. Long term that's 0:15:10.400 --> 0:15:13.400 a different matter. You know, if you look at the 0:15:13.720 --> 0:15:18.240 Shiller's Index relative earnings over the last ten years, or 0:15:18.240 --> 0:15:21.080 if you look at a price to sales ratio UM, 0:15:21.160 --> 0:15:26.160 that would suggest negative returns for the next annually for 0:15:26.200 --> 0:15:31.280 the next three years. What is competing for investors money? 0:15:31.600 --> 0:15:35.720 Is it bonds? Because I'm looking at the twelvemonth dividend 0:15:35.800 --> 0:15:39.360 yield on the SMP five, we're just under two percent. 0:15:39.440 --> 0:15:41.400 Let's one point nine four percent, but let's call it 0:15:41.440 --> 0:15:44.080 just under two percent. Heck, you can do that in 0:15:44.120 --> 0:15:48.920 a one year treasury, Yeah, that's it. UM. You can 0:15:49.040 --> 0:15:51.480 in fact that you know, two years starting to get 0:15:51.520 --> 0:15:57.200 pretty compelling as a quote unquote money market alternative UM. 0:15:57.240 --> 0:16:01.000 But UM interest rates longer terms still seem to be 0:16:01.000 --> 0:16:04.080 below where they ought to be long term. So if 0:16:04.080 --> 0:16:06.800 you look at the tenure treasury at two point eight 0:16:06.840 --> 0:16:10.600 and change, historically, that ten year tends to track nominal 0:16:10.640 --> 0:16:14.920 GDP UH. And last time we calculated nominal GDP at 0:16:14.920 --> 0:16:17.560 the end of the last year, UH, that number was 0:16:17.600 --> 0:16:21.200 about four point one. So clearly we have another hundred 0:16:21.200 --> 0:16:23.920 basis points or so to move to the upside um 0:16:23.960 --> 0:16:25.960 to get to what it will call kind of long 0:16:26.120 --> 0:16:29.400 term fair value UM. And I think that can unfortunately 0:16:29.400 --> 0:16:33.600 constrains the Fed UH quite honestly, because what we find 0:16:33.680 --> 0:16:36.760 is that that tenure treasury isn't really tethered to FED policy. 0:16:37.000 --> 0:16:39.920 It's probably more closely linked to what's going on in 0:16:39.960 --> 0:16:42.640 Europe and Japan, and they're still pedal to the metal. 0:16:43.120 --> 0:16:45.720 Well but chack, let's let me, let's just make the case. Right. 0:16:45.760 --> 0:16:47.600 Someone comes along and says, you know, I understand what 0:16:47.640 --> 0:16:50.480 you're saying. This all makes perfect sense. But you know, 0:16:50.520 --> 0:16:53.400 if I can get more than two in a treasury 0:16:53.400 --> 0:16:56.880 and not pay state and local taxes on it. Uh. 0:16:57.200 --> 0:17:00.520 Then and that's money good. Then you tell of me, well, 0:17:00.600 --> 0:17:02.440 you know, maybe I'm going to get a pop when 0:17:02.440 --> 0:17:05.680 it comes to the stock market. What kind of returns 0:17:05.720 --> 0:17:08.040 are you looking for in stocks in order to make 0:17:08.080 --> 0:17:12.120 that more appealing? Yeah? I think that it's a good 0:17:12.200 --> 0:17:15.160 question because near term, you know, we can maybe get 0:17:15.640 --> 0:17:21.040 single digit uh gains um if you and and that's 0:17:21.119 --> 0:17:24.879 cumulative um for the next twelve months. So nothing really 0:17:25.200 --> 0:17:29.320 exciting here at home. Um. I don't think necessarily the 0:17:29.320 --> 0:17:31.360 bottom is going to fall out unless, of course, all 0:17:31.400 --> 0:17:35.320 of the data supporting the stock market falls by the wayside. 0:17:35.359 --> 0:17:38.680 But the economy appears to be pretty strong, So yeah, 0:17:38.720 --> 0:17:41.520 I don't think that the stock market is certainly a 0:17:41.520 --> 0:17:46.520 table pounding near term by um. But um, you know, 0:17:46.600 --> 0:17:49.159 I think bonds still have to get a little more interesting, 0:17:49.720 --> 0:17:55.000 uh yield wise relative to longer term benchmarks to to 0:17:55.359 --> 0:17:58.399 you know, uh, really prompt us to shift out of 0:17:58.440 --> 0:18:00.679 equities and into more of a bond focus. All right, 0:18:00.720 --> 0:18:03.840 So there specific industry groups that you would be looking 0:18:03.920 --> 0:18:10.360 to for greater capital appreciation. Yeah, I think that in 0:18:10.359 --> 0:18:13.679 this environment where we're taking what is a you know, 0:18:13.800 --> 0:18:16.480 call it a two percent donkey and beating it into 0:18:16.560 --> 0:18:20.119 a three percent or four percent racehorse, depending on how 0:18:20.200 --> 0:18:25.399 much we can accomplish with tax the tax reform, plus 0:18:25.440 --> 0:18:30.080 some infrastructure, maybe something else. Then I think that the 0:18:30.080 --> 0:18:37.359 they value oriented sectors, the industrial, financials, basic materials, Darius, 0:18:37.600 --> 0:18:41.320 even energy UM could take more of a leadership role 0:18:41.520 --> 0:18:45.240 versus tech UM. I think the first quarter, what we're 0:18:45.320 --> 0:18:48.080 trying to do is adjust to the new tax regime 0:18:48.720 --> 0:18:52.359 UM and UM. You know, there are some bigger beneficiaries. 0:18:52.400 --> 0:18:58.320 Their financials certainly a huge beneficiary UM, but also technology 0:18:58.440 --> 0:19:02.320 probably benefiting from both says and maybe the increased investment. 0:19:02.640 --> 0:19:05.600 But I think once we kind of play out the 0:19:05.640 --> 0:19:09.560 first quarter results and look beyond here to the rest 0:19:09.560 --> 0:19:12.640 of the year, then I think UM investors are gonna 0:19:12.680 --> 0:19:17.119 want to look at the the economic environment, and I 0:19:17.160 --> 0:19:20.440 think the value oriented sectors will tend to lead the mark. Okay, 0:19:20.480 --> 0:19:22.240 but all right, so and and Jack, you know I 0:19:22.240 --> 0:19:24.240 always challenge you on this. Let's say someone comes to 0:19:24.240 --> 0:19:27.000 you and says, boy, you know I have Netflix bought 0:19:27.119 --> 0:19:31.919 Netflix because my family spends all their time glued to Netflix. 0:19:31.960 --> 0:19:35.960 I'm paying the monthly subscription, the stock is up sixty 0:19:36.640 --> 0:19:39.760 year to date. Does Jack Ablin say take a little 0:19:39.800 --> 0:19:44.080 off the table and put some into energy industrials and financials? 0:19:44.400 --> 0:19:47.360 What do you say, stay with what's working. If this 0:19:47.440 --> 0:19:49.520 is the kind of market that we're in and we're 0:19:49.520 --> 0:19:53.199 getting sixty year to date returns on a stock that 0:19:53.359 --> 0:19:58.560 is burning through cash, it's that kind of market. Yeah. 0:19:58.640 --> 0:20:00.880 And the funny thing about net Flex and I will say, 0:20:00.920 --> 0:20:03.000 you know, let's let's just you know, if we didn't 0:20:03.040 --> 0:20:06.040 have to take taxes in the consideration, which is I 0:20:06.080 --> 0:20:09.840 think keeping a lot of investors probably glued into some 0:20:09.880 --> 0:20:12.000 of the names that have been working over the last 0:20:12.040 --> 0:20:15.200 couple of years. But if taxes weren't a consideration, I 0:20:15.200 --> 0:20:16.960 would say, yeah, let's take some of that off the 0:20:17.000 --> 0:20:21.160 table and let's diversified into into areas of the market 0:20:21.200 --> 0:20:25.399 that would benefit if we do get increased economic growth 0:20:25.440 --> 0:20:28.640 here at home. Remember the reason why, in many respects, 0:20:28.680 --> 0:20:32.919 the reason why investors love Netflix and they probably like 0:20:33.080 --> 0:20:36.120 Amazon for the same reason is that those are all 0:20:36.200 --> 0:20:39.880 weather stocks. You know, Netflix is going to add subscribers 0:20:39.880 --> 0:20:41.760 and they're going to continue to push the bottom line 0:20:41.760 --> 0:20:45.160 no matter what goes on. Uh in the economic environment, 0:20:45.160 --> 0:20:48.280 no matter what kind of tweets that we hear or headlines. 0:20:48.640 --> 0:20:50.919 Whereas you know, it takes a lot of courage to 0:20:51.000 --> 0:20:54.560 buy say, uh, you know a Kroger or uh, you 0:20:54.600 --> 0:20:58.760 know something you know another the banks nowadays or some 0:20:58.880 --> 0:21:02.720 of the other industrial um that really do rely on 0:21:02.960 --> 0:21:07.840 improving economic conditions right. Uh. What what is the one 0:21:07.880 --> 0:21:12.359 investment you would not touch right now, jack boy? And 0:21:12.440 --> 0:21:16.040 not touch? Probably I would say gold. Um. Gold is 0:21:16.119 --> 0:21:21.520 just not behaving the way uh the that um it 0:21:21.600 --> 0:21:26.080 has in the past. Historically it's been a great diversifier 0:21:26.160 --> 0:21:28.560 that zigged when everything else has zagged, and it just 0:21:28.680 --> 0:21:33.040 hasn't worked out this year. Um. And I think they're 0:21:33.080 --> 0:21:39.800 probably other alternatives perhaps um maybe even energy or maybe 0:21:39.840 --> 0:21:44.920 even master limited partnerships could serve that that purpose, uh 0:21:44.960 --> 0:21:47.360 and do it in a way that gold can't. Remember, 0:21:47.800 --> 0:21:51.920 gold gets undermined, if you will, when rates go up 0:21:52.160 --> 0:21:56.400 because financial assets and real assets are are kind of competitive. 0:21:56.680 --> 0:21:58.720 We got to leave it there, Jack Avelin. He is 0:21:58.800 --> 0:22:04.560 founding partner chief investment officer Crescent Wealth Advisors. Follow him 0:22:04.640 --> 0:22:22.560 on Twitter. In a note to clients, Scott Minor, the 0:22:22.880 --> 0:22:25.919 head of investing for Googgenheim has said that there's a 0:22:26.000 --> 0:22:30.000 chance of a sharp procession and decline in stocks that 0:22:30.200 --> 0:22:33.560 is looming. He says the worst of the damage would 0:22:33.560 --> 0:22:39.440 start in late into and he specifically called out corporate 0:22:39.560 --> 0:22:43.199 bond defaults. He said that increases are likely as the 0:22:43.200 --> 0:22:46.280 Federal Reserve raises interest rates and companies struggle to pay 0:22:46.320 --> 0:22:49.800 off record debt levels. Here to help us understand the 0:22:49.960 --> 0:22:52.760 role of corporate debt in this market is David Chain. 0:22:52.880 --> 0:22:57.000 He is the managing partner for Kennedy Lewis Investment Management 0:22:57.359 --> 0:22:59.879 and also joining me here in our eleven three oh 0:23:00.000 --> 0:23:04.000 studio is a shri not Ragin. He is our Bloomberg 0:23:04.200 --> 0:23:07.960 debt reporter. Gentlemen, thanks very much for being with us. David, 0:23:08.320 --> 0:23:10.960 why don't you begin and give us your thoughts on 0:23:11.200 --> 0:23:15.000 the role that corporate debt is currently playing and it's 0:23:15.520 --> 0:23:18.280 size in the marketplace so that we can understand how 0:23:18.320 --> 0:23:22.040 important it really is. Absolutely, thank you very much. UM. 0:23:22.960 --> 0:23:26.040 Corporate debt markets today are larger than they've ever been historically. 0:23:26.480 --> 0:23:29.040 Total corporate debt today is of GDP. It's an all 0:23:29.080 --> 0:23:31.720 time high. Uh so something that we obviously need to 0:23:31.720 --> 0:23:36.119 pay attention to. UM. Fiscal policy recent fiscal policy in 0:23:36.160 --> 0:23:39.160 terms of tax changes will continue to pressure the FED 0:23:39.160 --> 0:23:42.800 to raise rates. So we do see pressure as it 0:23:42.840 --> 0:23:48.120 relates to rising rates that will ultimately affect UM much 0:23:48.119 --> 0:23:50.480 of the corporate debt market today. When you look at 0:23:50.520 --> 0:23:54.320 the overall yields today, they're they're they're quite compressed relative 0:23:54.359 --> 0:23:58.239 to historical standards. So we do see that as we 0:23:58.280 --> 0:24:01.280 look out in this specifically in the HYO market, we 0:24:01.280 --> 0:24:04.520 do see UM some of the maturity wall issues and 0:24:04.840 --> 0:24:09.160 you know early two thousand twenties, combined with tax changes 0:24:09.200 --> 0:24:11.800 that are are being implemented in terms of the interest 0:24:11.800 --> 0:24:15.720 deductibility for some of the more levered UH corporates out there, 0:24:15.760 --> 0:24:20.399 we do see some real disruption coming. I think UM 0:24:20.600 --> 0:24:24.000 been from my perspective, when you see the likes of 0:24:24.119 --> 0:24:27.560 Guggenheim and Pimco and tc W send out warning flares, 0:24:27.760 --> 0:24:29.480 it's kind of important for us to sit up and 0:24:29.480 --> 0:24:33.040 take notice. These are big players in the corporate debt market, 0:24:33.119 --> 0:24:35.640