WEBVTT - Doritos Goes Organic to Break Into Amazon's Whole Foods, Kaplan Says 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 Bramowitz. 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 --> 0:00:32.479 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Right now, 0:00:32.520 --> 0:00:35.159 we want to turn our attention to healthy dor Rito's 0:00:35.240 --> 0:00:38.080 because it sounds so good and it's getting close to 0:00:38.159 --> 0:00:40.520 that time of day when it is time for a snack. 0:00:40.600 --> 0:00:43.400 Jenny Kaplan joins us right now. Jenny Kaplan is beverage, 0:00:43.440 --> 0:00:46.560 tobacco and Cannabis reporter for Bloomberg News, and she joins 0:00:46.640 --> 0:00:49.440 us in our eleven three oh studios. So, Jenny, you know, 0:00:49.440 --> 0:00:52.080 I'd love to get your sense on, first of all, 0:00:52.400 --> 0:00:55.320 why it's taken so long for some of these traditional 0:00:55.400 --> 0:00:59.440 junk food purveyors to health if I some of these foods, 0:00:59.640 --> 0:01:03.440 and whether there's really an appetite for that. Well, PepsiCo 0:01:03.600 --> 0:01:07.000 generally and and Fridol specifically has been working for some 0:01:07.080 --> 0:01:11.039 time to make healthier versions of their snacks. Both these 0:01:11.040 --> 0:01:15.319 core brands like Doritos and Cheetos and tostitos, and also 0:01:15.440 --> 0:01:18.800 create new products, new kinds of snacks that fit with 0:01:18.959 --> 0:01:22.360 the consumer. What's really driving this is consumers want better 0:01:22.400 --> 0:01:24.680 for you products, and that's in the snack part of 0:01:24.720 --> 0:01:28.000 PepsiCo's portfolio and the beverage part of the portfolio, and 0:01:28.000 --> 0:01:31.560 they're working towards that. But to get a dorrito to 0:01:31.920 --> 0:01:36.360 qualifies organic isn't totally simple task. I mean, if you 0:01:36.400 --> 0:01:39.600 think of a dorito, it has that bright orange cheese. 0:01:40.319 --> 0:01:44.640 I mean, I think it's not not not generally, I 0:01:44.640 --> 0:01:47.920 don't think. So it's definitely a challenge, and technology is 0:01:47.960 --> 0:01:50.120 improved and they're trying to get more and more of 0:01:50.120 --> 0:01:53.800 these products to qualify for these growing natural parts of 0:01:53.840 --> 0:01:57.680 the supermarket. What about the purchase of whole foods by 0:01:57.720 --> 0:02:00.560 Amazon that's got to feed into this conversation. And because 0:02:00.800 --> 0:02:02.920 you know there's a gate, you're not getting into Amazon 0:02:03.080 --> 0:02:06.520 if you're not the following all their rules and regulations 0:02:06.520 --> 0:02:08.320 in terms of what the food contains or what it 0:02:08.360 --> 0:02:11.840 doesn't contain. So there's some speculation by analysts that I've 0:02:11.840 --> 0:02:14.320 spoken with that this is actually going to be helpful 0:02:14.400 --> 0:02:18.000 for big companies like Freedo, Lay and getting some of 0:02:18.040 --> 0:02:22.320 these healthier products into whole foods. So Amazon already carries 0:02:22.400 --> 0:02:27.800 this line of chips called simply that are simply Doritos, 0:02:27.840 --> 0:02:32.000 simply Cheetos, that that fit technically the whole Foods guidelines 0:02:32.040 --> 0:02:35.960 but aren't actually in whole foods yet. Okay, So first 0:02:35.960 --> 0:02:38.760 of all, you know, when you say healthier, I just 0:02:38.880 --> 0:02:41.560 am seeing air quotes around all of that, because, first 0:02:41.560 --> 0:02:43.720 of all, I can't imagine that the actual nutritional value 0:02:43.720 --> 0:02:46.600 will change all that much. But I'm also wondering how 0:02:46.680 --> 0:02:48.840 much more is the price tag going to be on 0:02:49.200 --> 0:02:52.799 health if I junk food? It's a great question. The 0:02:52.840 --> 0:02:56.880 healthier segment of the snack market is what's growing at 0:02:56.919 --> 0:02:59.440 an accelerated pace, and part of that is because people 0:02:59.480 --> 0:03:01.600 are willing to pay more for products that they think 0:03:01.600 --> 0:03:05.040 are healthier or have cleaner labels, you know, don't have 0:03:05.120 --> 0:03:07.960 those things that people are trying to avoid, like GMOs 0:03:08.360 --> 0:03:13.320 or artificial colors or flavors or preservatives. So PepsiCo as 0:03:13.360 --> 0:03:16.240 a whole is trying to push into this higher market, 0:03:16.440 --> 0:03:19.120 higher margin market where they can charge more because the 0:03:19.120 --> 0:03:22.600 consumers willing to pay for it. Well, didn't Pepsi already 0:03:22.720 --> 0:03:25.760 buy into this uh, this business right. I mean, didn't 0:03:25.800 --> 0:03:28.120 they make a purchase that would allow them to then 0:03:28.160 --> 0:03:31.560 get in. I mean they bought Stacy's pita chips, right, correct. 0:03:31.720 --> 0:03:36.040 Stacy's is already in whole foods UH, and they have 0:03:36.160 --> 0:03:39.680 other products and their portfolio that are either in or qualified. 0:03:39.680 --> 0:03:42.680 But what's really important to talk about here is that 0:03:42.760 --> 0:03:46.760 these are the simply line is covering their core brands, 0:03:46.840 --> 0:03:49.640 So it's things like Fritos and Dorrito's. These are the 0:03:49.640 --> 0:03:52.680 big money makers for Freedo lay and for PepsiCo as 0:03:52.720 --> 0:03:55.320 a whole. And if they don't figure out a way 0:03:55.360 --> 0:03:57.480 to sort of push these big brands a little bit 0:03:57.520 --> 0:04:00.400 towards premium, there they risk getting caught on the one 0:04:00.440 --> 0:04:02.440 hand by value plays and on the other hand by 0:04:02.520 --> 0:04:04.800 these healthier and more expensive snacks. Well, Jenny, can you 0:04:04.800 --> 0:04:08.680 give us a sense of how these Doritos, Torito tostitos 0:04:08.720 --> 0:04:11.800 and other ETOs that they sell, how they're actually doing. 0:04:11.840 --> 0:04:14.480 I mean, have they actually seen some kind of cannibalization 0:04:14.680 --> 0:04:18.720 in that whole uh line based on the increase in 0:04:18.760 --> 0:04:22.520 desire for for healthier foods. So, based on my reporting, 0:04:22.800 --> 0:04:25.000 all of these chip brands are still doing pretty well. 0:04:25.120 --> 0:04:28.919 They've actually managed to avoid some of the trouble that Pepsi, 0:04:29.040 --> 0:04:31.960 for example, has gotten in on the soda side of things, 0:04:32.360 --> 0:04:37.480 because people are still snacking. But when they took steps 0:04:37.520 --> 0:04:41.920 to make products more healthy, as in, for example, they 0:04:41.960 --> 0:04:46.000 have reduced sodium Lays just regular lays, but with less salt, 0:04:46.080 --> 0:04:50.839 and they've actually pushed growth, accelerated growth beyond what the 0:04:50.839 --> 0:04:53.760 rest of the Lays portfolio is doing. So they've sort 0:04:53.760 --> 0:04:57.360 of proven that healthier products work to drive sales. And 0:04:57.760 --> 0:05:00.520 I think largely people who are buying the in the 0:05:00.640 --> 0:05:04.880 natural aisle. It's not necessarily cannibalizing. Maybe those are customers 0:05:04.880 --> 0:05:07.320 who've moved away from the products altogether and now they're 0:05:07.320 --> 0:05:09.880 willing to do it. I will just say full disclosure. 0:05:09.960 --> 0:05:12.200 My eight year old son absolutely loves lace, and when 0:05:12.200 --> 0:05:14.559 I've tried to give him the baked not fried ones, 0:05:15.080 --> 0:05:18.720 he has rejected them. It's like these aren't lace. So 0:05:18.800 --> 0:05:22.360 I mean, there is also the gold Star gold star 0:05:22.480 --> 0:05:27.839 for what least healthy aspect of food, but he definitely 0:05:28.200 --> 0:05:30.880 distinguishes it. So I imagine others will too. I mean, 0:05:30.880 --> 0:05:32.560 I don't know if you tried simply, but do they 0:05:32.600 --> 0:05:34.960 really taste the same well, it's funny. A lot of 0:05:35.000 --> 0:05:36.920 these chips. I mean, if you think about plain Lays 0:05:36.960 --> 0:05:40.359 potato chips, they already pretty much fit into this category. 0:05:40.440 --> 0:05:43.120 Like there aren't a lot of crazy ingredients in a 0:05:43.160 --> 0:05:46.400 Plaine bag of lace. They're basically like potatoes with oil 0:05:46.440 --> 0:05:49.360 and salt. So some things it's making me feel a 0:05:49.360 --> 0:05:51.680 little better. Yeah, some things, it's pretty similar. And it 0:05:51.760 --> 0:05:54.679 really is sort of the messaging that's changed. Other things 0:05:54.720 --> 0:05:56.880 like Doritos and Cheetos. You have to imagine that the 0:05:57.000 --> 0:06:01.320 ingredients are pretty different, So it's sort of depends on 0:06:01.360 --> 0:06:04.599 which brand you're talking about. But I think the big 0:06:05.360 --> 0:06:07.960 message here is that it's really in the marketing and 0:06:08.000 --> 0:06:10.799 the messaging and trying to appeal to this different set 0:06:10.880 --> 0:06:13.880 that isn't already picking up a bag of you know, 0:06:14.000 --> 0:06:16.640 chips in their normal grocery shopping. All right, Well, like, 0:06:17.160 --> 0:06:19.640 just talk briefly about something that we know is off 0:06:19.680 --> 0:06:23.040 the healthy chart because it's not smoking and cigarettes and 0:06:23.440 --> 0:06:26.080 the cost of a pack of cigarettes in the city 0:06:26.080 --> 0:06:29.000 of New York. Tell us what's happening. So cigarettes in 0:06:29.000 --> 0:06:33.440 New York have just been the bottom price has just 0:06:34.480 --> 0:06:37.480 been raised by um. It's now going to cost at 0:06:37.560 --> 0:06:40.200 least thirteen dollars a pack to buy cigarettes in New 0:06:40.240 --> 0:06:42.839 York City. That's the highest in the country. New York 0:06:42.920 --> 0:06:45.240 was already the most expensive place to buy cigarettes in 0:06:45.240 --> 0:06:49.440 the country, but it's raised even higher, so it's tough 0:06:49.480 --> 0:06:52.680 to get cigarettes here. Well, when New York originally rose 0:06:52.760 --> 0:06:56.880 prices on cigarettes, was there a material decline in smoking rates. 0:06:57.400 --> 0:07:03.040 There is evidence that raising prices leads to declines in 0:07:03.040 --> 0:07:06.520 in purchasing volumes. That being said, New York is one 0:07:06.560 --> 0:07:11.000 of the places in the country that has the highest um, 0:07:11.120 --> 0:07:14.920 the highest amounts of people basically selling cigarettes that aren't 0:07:15.600 --> 0:07:18.880 legally HU sees basically in other things. And people who 0:07:18.960 --> 0:07:22.000 go to pick your state and then they come back 0:07:22.080 --> 0:07:24.840 with these huge cartons of cigarettes and they sell them 0:07:24.840 --> 0:07:27.080 out of their back trunks. I've seen that happen. Yeah, 0:07:27.120 --> 0:07:29.840 I'm from North Carolina originally, and I will say that 0:07:29.880 --> 0:07:31.760 when I first got to New York, just looking in 0:07:31.840 --> 0:07:35.000 windows and seeing how much cigarettes cost, it's just insane 0:07:35.040 --> 0:07:37.560 to think of the difference. I mean, it makes sense 0:07:37.600 --> 0:07:41.360 that there are people who make a business off of 0:07:41.440 --> 0:07:43.880 driving to other states and coming back here and selling 0:07:43.880 --> 0:07:46.600 them for a higher price but still lower than that 0:07:46.640 --> 0:07:49.440 thirteen dollars a pack. Well, and and also I believe 0:07:49.480 --> 0:07:52.000 that they're gonna be a pro there's going to prohibition 0:07:52.200 --> 0:07:58.200 on pharmacies selling tobacco products when their licenses come up 0:07:58.240 --> 0:08:03.280 for renewal. We'll see the s has already stopped selling cigarettes. Um, 0:08:03.320 --> 0:08:06.440 they made a push saying, you know, we're about trying 0:08:06.440 --> 0:08:10.520 to CVS health exactly, We're trying to be a company 0:08:10.560 --> 0:08:12.360 that promotes health. We're not going to do this, but 0:08:12.680 --> 0:08:14.720 it's interesting, it's gonna it's gonna be a big deal. 0:08:14.720 --> 0:08:17.360 It's gonna have a big impact on the industry. Um, 0:08:17.400 --> 0:08:20.120 when there are fewer and fewer places you can buy cigarettes. 0:08:20.200 --> 0:08:24.160 That being said, the consumers very loyal, I mean smokers 0:08:24.200 --> 0:08:26.760 will buy have proven that they will continue to buy 0:08:26.800 --> 0:08:29.920 cigarettes no matter what the prices. So it's it's sort 0:08:29.920 --> 0:08:32.200 of we'll have to see whether this really has an 0:08:32.200 --> 0:08:35.080 impact on smoking rates or not so loyal that some 0:08:35.160 --> 0:08:37.760 could say that they're addicted. Jenny, sir, and thank you 0:08:37.760 --> 0:08:40.360 so much for joining us. Uh, Jenny Kaplan and thank 0:08:40.360 --> 0:08:42.360 you so much for joining us. Truly a pleasure having you. 0:08:42.440 --> 0:08:46.360 Jenny Kaplan is Beverage, Tobacco and Cannabis reporter for Bloomberg News, 0:08:46.440 --> 0:09:00.120 joining us in our eleven at three oh studios. All 0:09:00.200 --> 0:09:04.000 Tropical Storm Harvey has now prompted at least fourteen US 0:09:04.080 --> 0:09:07.800 refineries to shut or reduce production. This affects about four 0:09:07.840 --> 0:09:11.800 million barrels a day of US processing capacity. That's around 0:09:12.720 --> 0:09:15.280 of the nation's total. Here to tell us more about 0:09:15.400 --> 0:09:19.360 commodities energy as well as agricultural is Mike mcgloane. He 0:09:19.480 --> 0:09:23.000 is our commodity strategist for Bloomberg Intelligence. He joins us 0:09:23.040 --> 0:09:26.320 here in our studio and Sal GILBERTI. He is the 0:09:26.320 --> 0:09:29.200 president and the chief investment officer and co founder of 0:09:29.240 --> 0:09:32.760 a two cream trading based in Brattleboro, Vermont. Sal, I 0:09:32.800 --> 0:09:34.360 want to begin with you because I know we're gonna 0:09:34.360 --> 0:09:35.920 talk a lot about energy, but I want to give 0:09:35.960 --> 0:09:38.600 you the opportunity to just set the stage in terms 0:09:39.040 --> 0:09:45.040 of what is the agricultural dynamic for farmers and for 0:09:45.800 --> 0:09:50.120 end markets such as cotton. Sure, cotton is a big one. 0:09:50.160 --> 0:09:53.599 Cotton has taken an enormous hit. Farmers were expecting a 0:09:53.679 --> 0:09:57.480 bumper crop and cotton, particularly in Texas and um As 0:09:57.480 --> 0:10:00.040 We've seen from articles and news reports and in the 0:10:00.080 --> 0:10:02.760 street reports, a lot of the cotton even even cotton 0:10:02.800 --> 0:10:06.680 that was harvested was damaged because the storm basically ravaged 0:10:06.840 --> 0:10:08.959 cotton that was in storage, cotton that was sitting on 0:10:09.000 --> 0:10:11.800 the docks, cotton that was harvested in on the sides 0:10:11.840 --> 0:10:14.280 of the field. So content a big impact, and we've 0:10:14.320 --> 0:10:17.319 seen a price rallying cotton the last two weeks in 0:10:17.360 --> 0:10:21.480 anticipation of that. I think what people uh haven't yet 0:10:21.600 --> 0:10:24.080 factored in and in fact the markets are making new 0:10:24.120 --> 0:10:26.960 loads as we speak in corn and soybeans, is that 0:10:27.200 --> 0:10:30.280 in the path of Harvey, the current path uh as 0:10:30.320 --> 0:10:35.480 it's it's headed up into um Louisiana, Arkansas, Mississippi, Tennessee. 0:10:35.679 --> 0:10:39.520 There are unharvested bushels of corn, They're unharvested bushels of 0:10:39.559 --> 0:10:43.320 soybeans out there that represent roughly um of the corn 0:10:44.160 --> 0:10:47.360 of the projected ending stocks for this year's crop, and 0:10:47.880 --> 0:10:50.880 UM potentially threatened our the equivalent of about eighty three 0:10:51.360 --> 0:10:55.280 of the potential soybean surplus. Now, those those things aren't 0:10:55.320 --> 0:10:57.520 all going to be damaged, but I think you may 0:10:57.600 --> 0:11:00.360 take the chains the balance sheet. There's a ential to 0:11:00.440 --> 0:11:03.760 change the balance sheet here, which could potentially support prices. Well, yeah, 0:11:03.760 --> 0:11:07.679 I was just about to say, of the soybeans surplus 0:11:08.240 --> 0:11:11.760 could get affected and possibly even wiped out. I mean, 0:11:11.800 --> 0:11:15.360 based on the trajectory of the storm, what's your projection 0:11:15.600 --> 0:11:17.920 for how big the damage might be to some of 0:11:17.960 --> 0:11:21.760 these unharvested crops. It's really a stunning number. I think 0:11:21.800 --> 0:11:24.800 it entirely depends for corn on wind at this point. 0:11:24.800 --> 0:11:28.040 If the crops get wet, it's okay. It may raise 0:11:28.160 --> 0:11:29.840 the cost a bit, because you've got to dry your 0:11:29.880 --> 0:11:32.840 corn once you harvested. Soybeans is another matter. If they're 0:11:32.880 --> 0:11:35.320 if they're sitting in water for a while, they're they're 0:11:35.360 --> 0:11:38.439 not quite as far along as corn in their maturity. Um, 0:11:38.520 --> 0:11:40.920 there could be some significant damage. Now, you're not gonna 0:11:41.000 --> 0:11:43.320 lose all those crops. Crops are used to being rained upon. 0:11:43.640 --> 0:11:47.520 But because we're making such extreme price loads right now, 0:11:47.559 --> 0:11:51.800 and because actually there's a seasonal A year ago today, cotton, corn, 0:11:51.840 --> 0:11:55.120 and soybeans all price bommed and there's a seasonal strength 0:11:55.160 --> 0:11:58.160 that comes in beginning in September for all of those crops. 0:11:58.160 --> 0:12:04.320 So Harvey may actually support a seasonable season seasonality effect 0:12:04.360 --> 0:12:07.079 of bottoming prices on those three crops. And again, cotton 0:12:07.080 --> 0:12:09.160 has already rallied but corn and soybeans, no one, No 0:12:09.200 --> 0:12:10.840 one seems to be looking at them right now. Well, 0:12:10.880 --> 0:12:13.280 we're gonna look at them after you said so, of course. 0:12:13.360 --> 0:12:15.680 But I want to bring Mike McGlone into this because 0:12:16.000 --> 0:12:19.520 Mike uh I got the report that Motiva Enterprises Port 0:12:19.600 --> 0:12:22.320 Arthur facility, which is the largest in the United States, 0:12:22.320 --> 0:12:24.960 is said to be shutting because of severe flooding issues. 0:12:25.280 --> 0:12:28.560 Tell us about the availability of refined product, because you know, 0:12:28.559 --> 0:12:31.839 if you've got soybeans, if you have corn, you're gonna 0:12:31.840 --> 0:12:34.080 need to get it to market. Yeah, that's been the 0:12:34.160 --> 0:12:37.240 key factor in the energy market from the hurricane is 0:12:37.360 --> 0:12:40.839 this reduction supply, most notably of distillate, which means number 0:12:40.840 --> 0:12:44.480 one unleaded gas and diesel. So what's happened so far 0:12:44.520 --> 0:12:46.640 as obviously unletting gas has taken off. It's now a 0:12:46.800 --> 0:12:49.560 fourteen percent on the year versus w t I down 0:12:49.760 --> 0:12:52.079 down fourteen percent, which is blown out the crack spread, 0:12:52.080 --> 0:12:54.319 and the crack spread is the indication is when you 0:12:54.440 --> 0:12:57.200 take crude a bear of crude oil and you converted 0:12:57.280 --> 0:13:00.840 to unleaded gas, and when that moves out means refineries 0:13:00.840 --> 0:13:02.760 are making money. But the key thing that's happening is 0:13:02.800 --> 0:13:06.640 it's reducing this supply. Now that supply is going to 0:13:06.720 --> 0:13:09.360 come back, it just doesn't be it's not replaced. It's 0:13:09.360 --> 0:13:12.760 going to reduce inventories and gasoline inventories which are historically high. 0:13:12.760 --> 0:13:15.360 But the key thing is before the hurricane, inventories are 0:13:15.280 --> 0:13:18.640 already trending down, so should accelerate that. It's obviously accelerating 0:13:18.679 --> 0:13:22.040 the increase in in um a lot of gas prices, 0:13:22.080 --> 0:13:25.199 so it's helping rebalance the US energy market. One issue though, 0:13:25.200 --> 0:13:28.480 it's reducing exports, which are on a bowl market trend, 0:13:28.559 --> 0:13:30.400 so that's gonna hurt for a little while. Well, and 0:13:30.400 --> 0:13:33.160 it's sort of interesting when you say rebalance that should 0:13:33.440 --> 0:13:36.720 end up helping crude values, I would think, because if 0:13:36.760 --> 0:13:39.800 there's a rebalancing and diminishing of the supplies eventually down 0:13:39.840 --> 0:13:43.199 the line, you would guess that the demand for crude 0:13:43.240 --> 0:13:46.719 would go up, and yet the values declining again. Yet 0:13:47.440 --> 0:13:49.600 it again today. Yeah, Well that's part of it because 0:13:49.640 --> 0:13:52.920 now that we were bringing down the refining of I mean, 0:13:52.920 --> 0:13:56.120 all crude oils essentially really worthless until it's refined, So 0:13:56.160 --> 0:13:58.560 once it's refined and has values, we're bringing down that 0:13:58.679 --> 0:14:02.200 refinery demand which is obviously reducing demand for w t I. 0:14:02.240 --> 0:14:04.280 So the key thing is what's happening is Brent. W 0:14:04.360 --> 0:14:06.400 t I has moved out in Brent, which is global 0:14:06.480 --> 0:14:10.080 sea Born is doing fine. That it's getting it's seen 0:14:10.200 --> 0:14:13.680 reduced supply of w t I in the market, reduced prices, 0:14:13.960 --> 0:14:16.960 and that's blowing that spread out. But overall this is 0:14:17.120 --> 0:14:19.720 a bullish indication. It's just showing up in the distalates 0:14:19.760 --> 0:14:22.280 more and unletting guess the key thing underlying this before 0:14:22.320 --> 0:14:24.840 that people need to remembers these trends were already fabled 0:14:24.880 --> 0:14:27.280 before the hurricane. In one bottom line is the declining 0:14:27.360 --> 0:14:29.640 value of the dollar overall, that was a very fable 0:14:29.680 --> 0:14:33.200 trend for all and all commodity prices, most note and 0:14:33.440 --> 0:14:37.160 definitely medals. Yeah, that's continuing. Thank you so much, Mike mclown, 0:14:37.200 --> 0:14:40.160 commodity strategist for Bloomberg Intelligence, and of course our thanks 0:14:40.360 --> 0:14:43.920 to Sal GILBERTI. He's president and founder of two Creum 0:14:44.160 --> 0:14:48.320 Trading and focusing on uh, those soybeans and that corn 0:14:48.360 --> 0:14:51.080 that has yet to be harvests and what effect I 0:14:51.080 --> 0:15:06.680 could have on the U. S economy and those particular commodities. Well, 0:15:06.720 --> 0:15:10.760 there was a headline today on the Bloomberg from stocks 0:15:10.760 --> 0:15:14.360 two bonds, the bear market signals are multiplying, to get 0:15:14.360 --> 0:15:17.160 a sense of whether that's an accurate reflection of the 0:15:17.240 --> 0:15:20.760 risks that Hugh Johnson, thanks, we're gonna get talk with you. Johnson. 0:15:20.760 --> 0:15:23.240 He's chairman and chief investment officer of Hugh Johnson Advisors, 0:15:23.280 --> 0:15:26.640 which oversees one point two billion dollars and is based 0:15:26.680 --> 0:15:29.720 in Albany, New York. Hugh, thank you so much for 0:15:29.800 --> 0:15:32.600 joining us. So do you agree with the assessment that 0:15:32.760 --> 0:15:36.560 the warning signs of some kind of broader deterioration in 0:15:36.680 --> 0:15:41.360 markets is imminent. There's certainly some some warning signs when 0:15:41.360 --> 0:15:44.680 you start to look at the performance of sectors, for example, 0:15:44.720 --> 0:15:47.800 and you see that utility stocks have been performing very well. 0:15:48.360 --> 0:15:51.320 That's ordinarily a very defensive sector of the market and 0:15:51.360 --> 0:15:54.640 actually the best performing sector of the market during bear markets. 0:15:55.320 --> 0:15:57.680 You also see, of course, large cap stocks. I think 0:15:57.680 --> 0:15:59.920 it can be explained away, but large cap stocks out 0:16:00.120 --> 0:16:02.560 forming small and mid cap stocks. And you see a 0:16:02.600 --> 0:16:05.160 number of things in the credit markets, such as quality 0:16:05.200 --> 0:16:08.080 spreads opening up a little bit, uh not much, but 0:16:08.120 --> 0:16:10.120 a little bit. So you do see some signs, but 0:16:10.200 --> 0:16:13.760 I think overwhelmingly if you take a look further back 0:16:13.800 --> 0:16:15.720 towards the election, if you take a look at the 0:16:16.400 --> 0:16:20.120 complete picture, which includes not just the signals coming from 0:16:20.160 --> 0:16:25.280 the markets, but also important economic and monetary numbers. For example, 0:16:25.360 --> 0:16:30.080 bank lending, money, growth, liquidity, leading indicators for the economy, 0:16:30.120 --> 0:16:31.800 they say that we are further to go go in the 0:16:31.840 --> 0:16:34.760 current cycle. So, yeah, you can be worried. You always 0:16:34.800 --> 0:16:36.720 can be a little bit worried, as you know, Lisa, 0:16:36.800 --> 0:16:40.120 But I think that you'd be probably overstating the worrieds 0:16:40.240 --> 0:16:43.280 by moving to too much towards cash or a very 0:16:43.320 --> 0:16:47.160 defensive beer market position. Hugh, can you be bullish on 0:16:47.240 --> 0:16:50.440 stocks and accept the possibility that there will be no 0:16:50.800 --> 0:16:54.040 tax reform bill, that there will be no change in 0:16:54.520 --> 0:16:58.240 financial regulations at least as far as approval from the 0:16:58.280 --> 0:17:01.120 Congress is concerned. I'm not talking about executive actions here. 0:17:01.280 --> 0:17:03.880 I can be very bullish on stocks PIM, but I 0:17:03.920 --> 0:17:08.680 can be very concerned about valuation. Uh, they're really evaluation 0:17:08.720 --> 0:17:10.439 when you know, you know, and I know, and I 0:17:10.480 --> 0:17:12.760 think we all kind of know are since that the 0:17:12.760 --> 0:17:14.960 economy is growing at a very slow pace, And when 0:17:14.960 --> 0:17:17.359 you take that, it doesn't give you the kind of 0:17:17.400 --> 0:17:20.919 earnings numbers that would really justify the current levels of stocks, 0:17:20.960 --> 0:17:24.359 or might say we're fairly valued, but the upside potential 0:17:24.440 --> 0:17:27.480 is fairly limited. So something has to happen to give 0:17:27.560 --> 0:17:29.600 us the kind of earnings that we really need to 0:17:29.640 --> 0:17:32.240 get the market to go on the upside. One of 0:17:32.240 --> 0:17:34.560 the two things would be, of course, tax reform that 0:17:34.560 --> 0:17:36.440 would give us a little bit of a lift to 0:17:36.600 --> 0:17:39.119 corporate profits and U S and P five earnings. But 0:17:39.240 --> 0:17:42.120 quite frankly, you know, if you reduce the corporate rate 0:17:42.200 --> 0:17:46.520 to two to it gives you some upside from the 0:17:46.560 --> 0:17:49.640 current level, and it gives you some better earnings eight 0:17:49.680 --> 0:17:52.840 percent instead of six percent through two eighteen, but not 0:17:52.840 --> 0:17:56.000 not quite, not a whole lot. Uh. The The real 0:17:56.080 --> 0:17:58.920 thing that has to happen is that the consensus forecast 0:17:58.960 --> 0:18:02.080 for earnings, which is much brighter than I think that 0:18:02.160 --> 0:18:07.720 the economic forecast will allow. Statistically, the consensus forecast is 0:18:08.080 --> 0:18:11.040 really optimistic. If you get that, you can make the 0:18:11.080 --> 0:18:14.359 case for higher stock prices. So I'd be bullish, but 0:18:14.480 --> 0:18:18.040 I'd be very concerned or worried or concerned about the valuations. 0:18:18.359 --> 0:18:21.120 So what's your heads right now? Well, my heade right 0:18:21.119 --> 0:18:23.040 now is I'm not buying to the real hedge is 0:18:23.080 --> 0:18:25.679 not buying any stocks at current levels. I'm maintaining or 0:18:25.720 --> 0:18:29.520 preserving my current you know, allocation to equities. For an 0:18:29.560 --> 0:18:32.680 account or a portfolio that says, let me have fifty 0:18:33.080 --> 0:18:36.120 and equities and the balance being in fixed income, I'm 0:18:36.200 --> 0:18:39.560 about six. The question is what I add to that 0:18:39.680 --> 0:18:43.760 portfolio at current levels. And given those concerns about valuation 0:18:44.000 --> 0:18:46.960 uncertainty about valuation, I have to say that no. Look, 0:18:47.600 --> 0:18:49.600 I look for a better entry point, and a better 0:18:49.720 --> 0:18:52.040 entry point would be somewhere, be in the neighborhood of 0:18:52.480 --> 0:18:55.560 four to seven percent below current levels. And I think 0:18:55.560 --> 0:18:57.600 you know, with the volatility of the news that we're 0:18:57.600 --> 0:19:02.160 getting the international news, particularly North Korea, things like that 0:19:02.480 --> 0:19:04.720 could touch off a correction which would get us down 0:19:04.720 --> 0:19:06.560 to levels that make much more sense. We've got to 0:19:06.600 --> 0:19:10.760 have a better, better entry point, Lisa, what if you're 0:19:10.800 --> 0:19:13.400 an investor who is willing to take on more risk? 0:19:13.560 --> 0:19:16.600 What would you recommend if someone wants to put the 0:19:16.600 --> 0:19:18.639 pedal to the metal and says, you know what, I 0:19:18.680 --> 0:19:22.080 think this is going higher and I really want to participate. Well, 0:19:22.119 --> 0:19:24.239 we've got plenty of clients that are just like that. 0:19:24.600 --> 0:19:26.480 Most of them right now are a little bit cautious, 0:19:26.520 --> 0:19:29.639 which is sort of surprises me given the performance of 0:19:29.680 --> 0:19:31.480 the markets. But if they want pedal to the metal, 0:19:31.880 --> 0:19:34.119 and the first thing I'd say is, look, you know, 0:19:34.240 --> 0:19:38.360 don't don't don't have a your guidelines, say fifty stocks, 0:19:38.359 --> 0:19:41.240 fifty percent bonds. You know, give give me a little 0:19:41.240 --> 0:19:44.360 bit more room, say that, raise your target for equities, 0:19:45.560 --> 0:19:48.840 in which case I'd probably be up around in stock. 0:19:48.920 --> 0:19:51.080 So it's really up to the client to say, if 0:19:51.119 --> 0:19:53.080 I want pedal to the metal, I want to raise 0:19:53.119 --> 0:19:55.879 my allocation equities or my target, and I would be 0:19:55.920 --> 0:19:59.120 raising it from fifty eight. And then if you want 0:19:59.119 --> 0:20:02.120 to do something, oh about that. You buy the kinds 0:20:02.119 --> 0:20:04.439 of things that really work in bowl markets. And of 0:20:04.440 --> 0:20:08.560 course technology has been a great performer, great relative performance, 0:20:08.880 --> 0:20:11.840 and there's a lot of companies in the technology sector, 0:20:12.600 --> 0:20:15.119 well known names, which are the kinds of stocks that 0:20:15.200 --> 0:20:17.680 you want to own in the portfolio. And you might 0:20:17.760 --> 0:20:19.840 buy some small cap but believe me, that has not 0:20:19.920 --> 0:20:22.440 been performing well. C Is there any asset that you're 0:20:22.440 --> 0:20:25.840 selling right now? Uh? No, there's no asset that I'm 0:20:25.840 --> 0:20:28.639 really selling other than the fact that I'm reducing my 0:20:28.720 --> 0:20:32.480 exposure as best I can uh to fixed income because 0:20:32.560 --> 0:20:35.840 my expectation is we've got higher rates. I don't think 0:20:35.880 --> 0:20:37.639 I'm the first person to say that. In fact, I've 0:20:37.680 --> 0:20:39.440 been saying it for four years and haven't really gotten 0:20:39.440 --> 0:20:42.080 a whole lot of it. But nevertheless, I really think 0:20:42.080 --> 0:20:44.280 that the handwritings on the wall of it's going to 0:20:44.320 --> 0:20:47.280 move towards restraint in response to that short long rates 0:20:47.320 --> 0:20:49.240 going up. So it's not so much that I'm bailing 0:20:49.280 --> 0:20:53.159 out of fixed income, but I'm really reducing my duration 0:20:53.280 --> 0:20:56.160 or maturities or however you want to say it. UM 0:20:56.720 --> 0:20:59.320 in fixed income securities, I'm trying to avoid it, and 0:20:59.359 --> 0:21:03.040 then I'm avoid things like um, you know, consumer staples. 0:21:03.400 --> 0:21:06.320 I really don't like it as a defensive sector. Uh, 0:21:06.359 --> 0:21:10.800 telecommunications avoiding it. It's a very defensive sector. You want 0:21:10.840 --> 0:21:13.000 maybe on a little bit there, but you want to 0:21:13.080 --> 0:21:16.600 underweight that those are defensive sectors. They don't work in ballmarkets. 0:21:16.600 --> 0:21:19.800 Just it's that simple. You've heard a lot of shure 0:21:19.800 --> 0:21:22.760 about the emerging markets, people trying to move money outside 0:21:22.800 --> 0:21:26.200 the United States. You buy that trade, I do. I do. 0:21:26.359 --> 0:21:29.680 We've done that recently, you know, for the longest time 0:21:29.880 --> 0:21:33.720 of him. As you know, the international markets generally emerging 0:21:34.119 --> 0:21:38.280 and developed just significantly underperformed US markets. And I mean 0:21:38.320 --> 0:21:42.280 I'm talking about ten years so more recently, and I 0:21:42.320 --> 0:21:45.080 really mean this year two thousand and seventeen, we've seen 0:21:45.119 --> 0:21:48.960 positive relative performance in response to improving economic numbers and 0:21:49.000 --> 0:21:51.320 earnings numbers coming from other parts of the world. So 0:21:51.800 --> 0:21:55.280 we've raised our exposure to international We raised it from 0:21:55.280 --> 0:21:58.639