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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Ley.

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Speaker 1: We bring you insight from the best in economics, finance, investment,

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Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com, and of course, on the Bloomberg John

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Speaker 1: Gets around the table Here in New York City. On

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Speaker 1: Place to Say is Gabriella Santos, JP, Morgan Asset Management,

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Speaker 1: Global market Strategist. Good morning to Gabriella. Good morning, so Gabby.

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Speaker 1: Why are we're always looking for a narrative to explain

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Speaker 1: any given days price section? Yesterday, for me, I just

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Speaker 1: found like we were down because we were down. Yes,

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Speaker 1: it seems hard to ascribe a very clean narrative for

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Speaker 1: over the past few weeks. I think you know about

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Speaker 1: two weeks ago at this point, there was a narrative.

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Speaker 1: Um there was a very sharp move higher in tenure

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Speaker 1: yields in the U s about twenty asis points in

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Speaker 1: just five days. So that was a clear narrative. The

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Speaker 1: market had to digest that very fast moving rates. But

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Speaker 1: since then, I think it's largely been a function of

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Speaker 1: unwinding in some systematic strategies. The idea that bonds sold

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Speaker 1: off at the same time that the stock market sold

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Speaker 1: off right, so that correlation became positive, caused some funds

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Speaker 1: to had to to have to unwind positions. So it

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Speaker 1: feels like it's more of a technical story over the

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Speaker 1: past few days rather than a China or Italy kind

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Speaker 1: of story. The best one I heard was blaming Saudi Arabia.

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Speaker 1: So I checked the crude price and the crude price

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Speaker 1: was down, and I'm struggling to make sense of that one.

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Speaker 1: To Gabby, No, we I don't think we have seen

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Speaker 1: markets actually a price in UM a negative outcome from

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Speaker 1: some of the Saudi Arabia headlines recently. UM and exactly

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Speaker 1: because when we look at brand prices they're actually below

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Speaker 1: eighty dollars. We were close to eighty five dollars just

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Speaker 1: a few weeks ago. UM. So I find it hard

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Speaker 1: to ascribe it to that. Agree with you? So what

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Speaker 1: do you tell clients at the moment? Do you tell

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Speaker 1: them the fundamental is are okay, this will be a

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Speaker 1: technical wash out, things will stabilize in the coming weeks.

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Speaker 1: What's the message? Yes, So we think back two weeks ago,

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Speaker 1: before this volatility started, earnings were strong in the US,

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Speaker 1: they were actually strong around the world. Economic growth was

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Speaker 1: looking solid and none of that has really changed over

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Speaker 1: the span of two weeks. So when it's something much

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Speaker 1: more technically driven, UM, what we try to say is

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Speaker 1: stay the course, don't overreact, because of course when you

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Speaker 1: try to get back in the market has already recovered.

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Speaker 1: What are you telling portfolios? People want to do something.

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Speaker 1: They come in to see if you sit down high

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Speaker 1: net worth whatever, institutional whatever, and there's like growthiness to value,

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Speaker 1: there's other themes as well, what's the theme that will

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Speaker 1: work twelve months out? So we've been having more conversations

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Speaker 1: about being late cycle in the US economy. Um, we

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Speaker 1: are not saying that there's a recession in the immediate

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Speaker 1: horizon cycles, but we are acknowledging that it's the tenth

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Speaker 1: year of the three minutes, three minutes fifty to you

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Speaker 1: just turned up. I mean, should we talk about it?

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Speaker 1: You just want to get it out of the way

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Speaker 1: with my people. Start me to talk about David Price

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Speaker 1: on the way, Well you are David Price, and apology

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Speaker 1: I do give Killed Price such a hard time deal.

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Speaker 1: You know, we should do one of those game. It's

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Speaker 1: like those dumb soccer deals in England. You know, Barry

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Speaker 1: the franchise. So we say congratulations to the people of

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Speaker 1: Boston worldwide, worldwide, Red Sox Nation worldwide. I would point

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Speaker 1: congratulations games hands whatever in the World Series. They're at

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Speaker 1: the Big Dance. I just want to congratulate them for

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Speaker 1: making it. When they win the Big Game. You guys

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Speaker 1: have no idea. You know, you have no The first

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Speaker 1: time they won, it was like flat Earth Society. It's true.

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Speaker 1: You know, sixties state. I'm sure you've visited clients in Boston.

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Speaker 1: I was looking down on a window. Is the parade

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Speaker 1: turned left? No, I was in the office. Look, Actually, what, Cob,

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Speaker 1: you broke our drinks that day. So anyways, they're doing

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Speaker 1: the first Red Sox parade, and I felt John Tucker

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Speaker 1: like flat Earth Society. I physically couldn't believe that the

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Speaker 1: Red Sox had actually won. That's how deformed my childhood was.

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Speaker 1: It was very gabriel Is, like, why am I here? Yeah?

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Speaker 1: I was thinking back. I was in Philadelphia when the

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Speaker 1: Phillies won. That was quite a quite a celebration at

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Speaker 1: the time, and nobody had any experience doing it. Are

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Speaker 1: we going to celebrate equities next year? I mean, for instance,

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Speaker 1: the Lehman Low. It's been a single digit world and

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Speaker 1: every year you're wrong. I'm wrong, John's wrong, John's wrong.

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Speaker 1: Is it going to finally be a single digit world?

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Speaker 1: It might be at the risk of being wrong again,

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Speaker 1: UM our expectation and the tenth year of an expansion

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Speaker 1: going on eleven for next year, UM thinking that earnings

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Speaker 1: growth in the US is going to be much harder

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Speaker 1: to match by far than this year. Right, The year

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Speaker 1: over year comparison is very tough. At the same time

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Speaker 1: that interest rates will be much higher than they are

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Speaker 1: from here UM. So it seems to us like a

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Speaker 1: single digit return year for the US come, which is

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Speaker 1: why we still are focusing on having exposure to other

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Speaker 1: regions despite how negative sentiment has in performance has gotten

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Speaker 1: this year. So let's talk about what regions they are.

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Speaker 1: Because China overnight coming out with GDP with a slanting

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Speaker 1: downside surprise and a clear deceleration in that economy. So

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Speaker 1: what kind of regional of exposure do you want on

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Speaker 1: the equity side. So I think the trick for this

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Speaker 1: year is actually that the fundamental picture in major regions

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Speaker 1: around the world, and I would include China emerging markets. Europe,

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Speaker 1: Japan is actually looking fine. Right, It's not as strong

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Speaker 1: as it was last year. That was kind of like

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Speaker 1: a ninety degree kind of weather and we've slowed back

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Speaker 1: down and maybe a seventy five degree um, but the

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Speaker 1: overall picture looks fine. Earnings growth actually still delivering and

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Speaker 1: all these major regions. So really the story for this

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Speaker 1: year has been about sentiment and that's been reflected in prices.

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Speaker 1: All these markets are about ten percent cheaper than they

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Speaker 1: were just nine months ago, and you see that reflected

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Speaker 1: in currency weakness versus the dollar. So I think for

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Speaker 1: next year, as long as you get some positive surprises,

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Speaker 1: which at this point is not hard to do. Um,

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Speaker 1: these are markets that should do fairly over US. I mean,

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Speaker 1: I mean, is there any change in behavior if corporations

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Speaker 1: look at tax bill is one off? If if we

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Speaker 1: saw it with honey Well this morning, cash flows are phenomenal.

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Speaker 1: What are you observing that they do with their cash?

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Speaker 1: And the answer, I believe is dividend growth and share

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Speaker 1: by back right, Yes, changed when you when you look

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Speaker 1: at the numbers, the number one use that we track

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Speaker 1: has been buy backs. After that, we've seen some really

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Speaker 1: strong flow for M and A for example. Um, we've

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Speaker 1: also seen dividends remain pretty steady, and then last on

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Speaker 1: the list actually comes cap BACS. So in terms of

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Speaker 1: the ranking, it's last, but it's still an improvement from

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Speaker 1: the past few years. So there has been some uptick

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Speaker 1: in capex, but perhaps not the boom that may have

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Speaker 1: been suggested, just given the actual increase in cash. Thank

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Speaker 1: you so much. I'm glad you mentioned the Phillies. I

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Speaker 1: went back and look that was when called Hamil's launched.

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Speaker 1: Tom and Glory, Gabby, thank you, Thank you so much,

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Speaker 1: Gaba Sens JP, Morgan Asset Management. It's very fortunate that

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Speaker 1: Bob Hollmatts actually joins us in the studios given the

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Speaker 1: international Thank you for the introduction, kissing to associates, Vice chair.

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Speaker 1: He's good at those, Bob. It's coming out here and

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Speaker 1: we're going to get a movie from that book, The

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Speaker 1: Price of Liberty. Okay, alright, Tom Kane, thank you, Bob.

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Speaker 1: Great to see you this morning. Ready to be with you.

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Speaker 1: Let's talk about the debt in this country. It's a

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Speaker 1: problem brewing. Yes, it is the problem brewing, and neither

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Speaker 1: party seems to be focused very much on it. Um,

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Speaker 1: there isn't seemed to be any fiscal uh constraints on

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Speaker 1: budget discussions, or on budgets or on tax policy. And

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Speaker 1: for the moment that actually gives a big boost to

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Speaker 1: the economy. Over the medium term and the longer term,

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Speaker 1: it just increases death that someone else or usum are

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Speaker 1: going to have to pay off and service. I was

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Speaker 1: listening to Mitch McConnell speaking to Blamebags Kevin Sirially earlier

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Speaker 1: this week, and he was asked about the deficit really intense.

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Speaker 1: I thought it was really interesting that he brought up entitlements,

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Speaker 1: didn't reference the tax, kind of totally talked about entitlements

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Speaker 1: and we needed to do something about this. And what

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Speaker 1: we pick hand clear to me, Bob, is that we

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Speaker 1: very quickly begin to politicize the budget deficit. Can we

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Speaker 1: get away from politicizing the deficit and focus on the

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Speaker 1: economics of it. Well, there are those who try their

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Speaker 1: their institutions around like the Peterson Institute and others that

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Speaker 1: do a lot of work on this question, and p.

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Speaker 1: Peterson focused a lot on it during his lifetime and

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Speaker 1: in the book I talk a lot about this. The

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Speaker 1: difficulty and the process today is that the one area

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Speaker 1: where there seems to have been compromised and everyone said

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Speaker 1: so great that there was was in in spending and

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Speaker 1: adding more money to various government programs, defense programs, social programs,

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Speaker 1: various others. But there's very little conversation on either party,

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Speaker 1: and certainly not in the midterm election campaign, about the

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Speaker 1: impact on future generations of these very high deficits which

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Speaker 1: are now going to over a period of time, interest

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Speaker 1: payments will be higher than defense costs. It's gonna be

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Speaker 1: a big, big deal. It's going to be a big,

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Speaker 1: big deal, especially as rights rise. But I just wanted

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Speaker 1: to what degree it will be a big big deal.

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Speaker 1: And the reason I asked this is that America is

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Speaker 1: in a position of privilege relatively speaking to the rest

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Speaker 1: of the world. It can be a situation where it's

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Speaker 1: our debt, our deficit, your problem, because it's going to

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Speaker 1: get financed. That's the view of some people that I

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Speaker 1: actually treasuries they will be bought by the foreign buy it.

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Speaker 1: They just won't buy something else. What's your view on that. Well,

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Speaker 1: I think for the last several decades that's really been

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Speaker 1: the case that if we run big chronent account deficits

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Speaker 1: and we run big budget deficits which we're doing. UM.

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Speaker 1: Foreigners will buy our will buy our debt. The only

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Speaker 1: problem is that at some point the carrying costs becomes

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Speaker 1: so high that even if they're willing to buy our debt,

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Speaker 1: they may not be willing to buy at the same

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Speaker 1: low interest rates as they have over the last several years,

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Speaker 1: and they may not come into all the auctions with

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Speaker 1: the great enthusiasm, and it may, over a period of time,

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Speaker 1: mean that we'll just put more of our money into

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Speaker 1: debt payments than other domestic programs. Is this read the

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Speaker 1: same riod you visited is under Secretary of State? No,

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Speaker 1: it's a it's a very different read, and that the

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Speaker 1: Saudis traditionally have been very cautious about their diplomacy and

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Speaker 1: about their international role. UM. This riad is much more

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Speaker 1: UM pro. It's younger, generational, massive generation. It's younger. There's

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Speaker 1: a lot of focus on a stronger, more active UM

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Speaker 1: global role for Saudi Arabia and in the Gulf area

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Speaker 1: in particular, and it's focused a lot more on economic diversification.

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Speaker 1: You know, my knowledge of this some total. This is

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Speaker 1: Alec Gainn is playing somebody in the movie Lawrence of Arabia.

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Speaker 1: I can't remember the details, but the answers were a

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Speaker 1: little bit away from Faisal in three or four generations along.

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Speaker 1: What do you identify as the veil ues of this

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Speaker 1: generational shift in the royal family. Well, the interesting thing

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Speaker 1: is that trying you have to figure out what they're

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Speaker 1: planning to do and what they're what they're president. Well,

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Speaker 1: I don't know that. I don't know that. You know

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Speaker 1: is there are a lot of interesting things that have

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Speaker 1: been going on that have been on the positive side

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Speaker 1: in terms of UH diversification away from oil, which they've

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Speaker 1: had to do because they know oil at some point

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Speaker 1: um is going to be substituted for by alternatives and

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Speaker 1: they're trying to get new technology in. There's more opportunities

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Speaker 1: for larger numbers of people. So there are there there

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Speaker 1: are a number of positives that that have been emerging

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Speaker 1: along with all the problems that we've seen also well,

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Speaker 1: I mean the problems that we've seen. Also, do you

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Speaker 1: have a prescription or a best practice for the United States?

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Speaker 1: Given the uproar over Mr kashow He's disappearance murder, death,

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Speaker 1: like the US has put very high stakes on our

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Speaker 1: relationship with Saudi Arabia, and I think it's important and

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Speaker 1: I think that we're moving in this direction of making

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Speaker 1: sure that what is done UM and comes out of

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Speaker 1: this UH investigation that's going on is credible, that the

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Speaker 1: process and the outcome are both credible. That's I think

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Speaker 1: the important thing um for the saudiast and for and

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Speaker 1: for us, because the U s clearly wants to continue

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Speaker 1: to play good relationship and active lacship with the Saudis,

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Speaker 1: but they need to do the kind of things that

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Speaker 1: enable American politicians do that with political support in this country,

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Speaker 1: and a lot of that political support is now being

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Speaker 1: jeopardized as we've seen ten twenty years ago, the statement

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Speaker 1: we are dependent on Saudi hydrocarbons was somewhat an accurate statement.

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Speaker 1: Is that statement still true? You know, we're not really

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Speaker 1: very dependent on some what are we doing? But the

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Speaker 1: rest of the world, a lot of other countries are,

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Speaker 1: and the globe in their global markets and hydrocarbons. So

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Speaker 1: what happens in Saudi affects the price of oil here.

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Speaker 1: But what we are more and more actively engaged with

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Speaker 1: the Saudis on is Middle Eastern diplomacy, building up coalitions

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Speaker 1: against UH. Terrorism working with them hopefully and um and

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Speaker 1: we've been working with them to deal with uh Iranian

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Speaker 1: influence in the region. So they're playing a bigger geopolitical

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Speaker 1: role than they have been in the past. It just

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Speaker 1: seems that the foreign policy of this administration Bob hinges

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Speaker 1: on an alliance with this raelte and with Saudi Arabia,

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Speaker 1: and if that alliance with Saudi rape it breaks down.

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Speaker 1: I assume the whole foreign policy in the region breaks

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Speaker 1: down for this. That's correct, that's correct. I mean, if

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Speaker 1: the if the objectivist administration was to try to contain Iran.

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Speaker 1: One can debate whether that's a feasible objective or the

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Speaker 1: right one. But if you're going to do that, then

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Speaker 1: Saudi is the real lynchpin of that effort, and containing

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Speaker 1: Iran is also part of making Israel form feel more secure,

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Speaker 1: particularly containing Iran in the southern part of Syria. That's

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Speaker 1: the part of this administration which thanks the question. If

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Speaker 1: the Saudi Arabians don't have the leverage in the Old

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Speaker 1: market like they used to, they certainly still do in

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Speaker 1: the region. They do have a lot of leverage in

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Speaker 1: the region. They do have a lot of influence in

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Speaker 1: the region. And the US has tried to work with them.

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Speaker 1: That's what makes this makes this more complicated. That's not

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Speaker 1: just about oil anymore. It's about geopolitics, and it's about

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Speaker 1: a very key element of American geopolitics in that area. Abassador,

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Speaker 1: Thank you so much. Robert Harmetz with us today with

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Speaker 1: a Kissinger Associates. Is there a book coming out for

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Speaker 1: the next recession for the moment, but I probably have

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Speaker 1: to work on one. Let's get work on that at moments.

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Speaker 1: Thank you, Thank you so much for joining us this morning.

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Speaker 1: Jim Grant joins this right now. Jim. Jim Grant from

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Speaker 1: Grant's Interest Rate Observer. Jim, good morning. Wonderful to have

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Speaker 1: you here. You have predicted for years and at some

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Speaker 1: point rates will move up, But they're not moving up

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Speaker 1: right now in a Jim Grant way, are they? What's

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Speaker 1: distinctive about the rate rise we've seen? Oh, I would say,

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Speaker 1: uh that the compression of so called risk yields over

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Speaker 1: treasury yields is unusual. I would say that the level

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Speaker 1: of rates still is highly unusual. You know, worldwide time

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Speaker 1: is still sake. Last time we looked about six trillion

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Speaker 1: dollars worth of sovereign and other securities trading for less

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Speaker 1: than zero anominally yield, which is unprecedented I think in

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Speaker 1: three thousand years of interest rate history. So despite the

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Speaker 1: move up with now, the move has been I guess

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Speaker 1: two years and some months began in July of two

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Speaker 1: thousand and sixteen. Uh, you know, the temple of the

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Speaker 1: move actually, um now that I think of it is

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Speaker 1: rather more brisk than the upheave in yields that began

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Speaker 1: the previous two bond beer markets. Those two began in

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Speaker 1: nineteen hundred and ninety six. So these moves and rates

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Speaker 1: tend to be very long term, over the course of

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Speaker 1: decades or generations, and they move up. This time has

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Speaker 1: been rather risk okay, And what's so great about this? Folks?

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Speaker 1: And within the grants interest rate observer note and I

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Speaker 1: always get emails, please send us a note. No, we

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Speaker 1: protect the copyright of all of our guests. Jim. It's

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Speaker 1: widely read. And one of the major things you talk

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Speaker 1: about is this word e vernie, and it's it's the

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Speaker 1: idea that we're reverting to something. What are we reverting to? Well,

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Speaker 1: in interest rates in stocks, there is something called reversion

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Speaker 1: to the mean and that is the tendency returns to

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Speaker 1: uh to uh rally around some long term average returns

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Speaker 1: on equity for example of turns on equity capital or

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Speaker 1: profit margins in interest rates. There's no such observed tendency

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Speaker 1: rates now. Since about eighteen seventy or thereabouts, long terms

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Speaker 1: yields have returned on average on a four sixties six

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Speaker 1: and we are well below that now. And you might

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Speaker 1: expect that, because we are so much below it, that

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Speaker 1: we would move up to it, and we may, inde

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Speaker 1: moove up, but not because there's any gravitational pull. Well

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Speaker 1: as Jim Grant grants interest rate observer and it's like

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Speaker 1: forty seven things, John, we can go to what do

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Speaker 1: you want to talk We can talk about so many things, Jim.

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Speaker 1: I want to talk about term premium incredibly to prey

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Speaker 1: and some people would calculate it as somewhat negative over

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Speaker 1: the last few years as well. Do we get a

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Speaker 1: return of term premium and what's the catalyst of it? Well,

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Speaker 1: I think inflation would be the principal catalyst. We're talking

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Speaker 1: about the tendency of of longer dated securities to fetch

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Speaker 1: more in yield and shorter dated ones you're getting a

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Speaker 1: lot to get paid more for taking a greater risk

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Speaker 1: on the tendency of our currencies to depreciate. Um uh

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Speaker 1: so I would. I would expect that if there is

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Speaker 1: a return to normalcy in rates, and if there's a

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Speaker 1: return to normalcy in premium, the longer term yields will

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Speaker 1: arise in relations shorter ones. That is the book. The

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Speaker 1: inflation is the missing ingredient in this though. The backup

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Speaker 1: in yields that we had a couple of weeks ago

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Speaker 1: largely a real rates driven move. Jim, you're expecting to

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Speaker 1: see something more in the coming months, quarters, year, Yes, Um,

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Speaker 1: I you know. I I think that that the the

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Speaker 1: monetary sins of the West, to use a phrase that

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Speaker 1: the old French econmas Jacques rowe f coin, the monetary

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Speaker 1: sin of the West will finally be revealed in inflation.

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Speaker 1: We have certainly seen a levitation of asset values otherwife

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Speaker 1: known a wall free as a bull market, and one

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Speaker 1: might call that in a kind of a dog in

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Speaker 1: the manger way. And inflation. We have not seen inflation

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Speaker 1: in the checkout counter, but I think that's eventually coming. Okay,

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Speaker 1: I want to those parses apart. What's great about Jim

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Speaker 1: Grant is he's like he's like that great lead singer

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Speaker 1: like Bradley Cooper and his Stars born John Farrell. The

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Speaker 1: band is always better than him. So Jim Grant will

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Speaker 1: have a conference and he'll be the dumbest guy there.

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Speaker 1: He is guys like Jason Turnit the already got acmen

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Speaker 1: to darkened the door. And Jim Grant, you had Craig

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Speaker 1: Moffatt show up, and you and Craig skewer A T

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Speaker 1: and T on their debt build up. Is that symptomatic

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Speaker 1: of other debts out there? Now? Oh? Yes, Um, A

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Speaker 1: T and T has about a hundred and seventy billion

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Speaker 1: or so of coupon debt meaning tradeable bond kind of

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Speaker 1: debt out there, and about two hundred and fifty billion

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Speaker 1: all told, including post retirement benefits, pensions, stuff and leases

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Speaker 1: in't the like. It is by far the biggest non governmental,

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Speaker 1: non financial corporate borrower in the world, and it holds

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Speaker 1: that title while also generating negative growth and revenues and

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Speaker 1: uh and uh the sloppy measure of cash flow we

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Speaker 1: call ebit DAB. So that's that's A T and T

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Speaker 1: and it is indeed symptomatic of of of a persistent

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Speaker 1: move up in corporate leverage over these past ten years.

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Speaker 1: And in many ways, Jim, they've been incentivized to put

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Speaker 1: an extra turn of leverage on because the bond market

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Speaker 1: hasn't really punished them. And I'll just market as well. Yeah,

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Speaker 1: And I'm wondering, Jim, when we see the pain and

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Speaker 1: who's carry in kid, Well, we have several nominees. One

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Speaker 1: I think, and this is alas has become rather a

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Speaker 1: consensus view, but we think that there is trouble storing

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Speaker 1: up in the so called leverage loan market. Leverage loans

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Speaker 1: like a botanical garden. That seems like every garden is botanical,

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Speaker 1: and every loan connotes leverage or debt. A leverage loan

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Speaker 1: is a tradeable bank loan which is extended to a

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Speaker 1: speculative rate business. And there are something like a trillion

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Speaker 1: and a quarter dollars at one point to five trillion

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Speaker 1: or so of these things outstanding. And the story is

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Speaker 1: that over the course of this cycle, the fine print

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Speaker 1: the covenants that protect investors in times of stress have

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Speaker 1: been invescerated or erased, so the recovery rates on these

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Speaker 1: things be much lower. The next recession and the overall

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Speaker 1: return will be lower than it has been in times past.

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Speaker 1: And the reason that the covenants have been slashed, it's

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Speaker 1: because the demand of that spice has been so huge. Jim.

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Speaker 1: I don't know if you missed it, imagine you didn't,

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Speaker 1: but the leftage loan market is now bigger than the

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Speaker 1: high yield market in the United States of America. Jim.

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Speaker 1: That's a big change. It is a big change. You know,

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Speaker 1: the banks are in competition for deposits and also for assets.

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Speaker 1: It's a very different world than the stage of the markets. Yeah, Jim.

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Speaker 1: One final question, and you know, rip up the script

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Speaker 1: here a little bit. I know you helped Washington construct

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Speaker 1: the Naval Act of seventeen ninety four, where they identified

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Speaker 1: two gunners mates had to be on every ship. You

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Speaker 1: were an actual gunners mate in the United States Navy.

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Speaker 1: What is it like to be out on a deck

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Speaker 1: in difficult seas and you're you're the guy out there?

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Speaker 1: I mean, you know what I'm talking about because I

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Speaker 1: knew one from World War Two. Let me teach this way, Tom.

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Speaker 1: I will answer this question, and I will put it

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Speaker 1: this way. I would say I was at board the

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Speaker 1: USS Hornet seven. We were at one point off the

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Speaker 1: host of North Vietnam and South Vietnam. And I will

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Speaker 1: say one thing. I will say that I would have

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Speaker 1: been in greater peril had I been driving as a

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Speaker 1: teenager as I was then on a long island expressway. Okay,

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Speaker 1: that puts it in perspective. Jim Grant, thank you so

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Speaker 1: much the U. S. Navy keeping her sailor is safe,

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Speaker 1: including James Grant from the Bloomberg Interactive Broker Studio, John Farrow,

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Speaker 1: and Tom Keenan. Now, particularly for those of you that

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Speaker 1: own are angry you don't own or thinking of owning

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Speaker 1: Apple stock, Jim Suva over Its City Group wrote a

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Speaker 1: jewel this week with us The Merchant on Apple. Five

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Speaker 1: reasons to buy Apple stock. Jim Suva, I've been dying

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Speaker 1: to find a some of the parts analysis of Apple.

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Speaker 1: What's it worth? Some of the parts? Well, well, thanks Tom,

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Speaker 1: and good morning to both you and Jonathan. And the

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Speaker 1: way we look at it is simply this stock has

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Speaker 1: had a very big pull back, and with that, we

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Speaker 1: think investors are concerned about the trade wars, the tariffs,

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Speaker 1: and we line everything up as far as how those

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Speaker 1: could potentially impact Apple. And we know many people don't

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Speaker 1: realize this. Apple was excluded from the trade war tariffs.

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Speaker 1: Now that the trick is going to be is a

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Speaker 1: China retaliate and have to push back more and more

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Speaker 1: about say don't buy us good. At this point, it

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Speaker 1: doesn't appear to be the case. We're watching that. But

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Speaker 1: when we look at Apple, we believe that the iPhone

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Speaker 1: which we went out and did our independent checks for that,

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Speaker 1: we have found that it's selling pretty well. And importantly,

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Speaker 1: the consumers and here's the trick, and you know about

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00:24:39,520 --> 00:24:44,600
Speaker 1: beating exportations are actually buying the higher memory configurations of

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Speaker 1: the phone because they love their pictures, they love their videos,

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Speaker 1: and they're taking lots of them. And with that, we're

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Speaker 1: seeing that people are buying more and more of the

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Speaker 1: higher memory configurations and Apple makes big margins on that.

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Speaker 1: And we can talk about that in a little bit

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Speaker 1: to break it down and to directly answer your question

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Speaker 1: of what we think Apple is worth. We think it's

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00:25:02,359 --> 00:25:05,679
Speaker 1: worth about two hundred and sixty five dollars within the

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00:25:05,720 --> 00:25:08,480
Speaker 1: next twelve months, okay, twelve months, but out five years.

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Speaker 1: Can you do a terminal value analysis of Apple or

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00:25:11,160 --> 00:25:13,760
Speaker 1: you can you not do that. Um, you know a

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00:25:13,800 --> 00:25:16,920
Speaker 1: person could because it's a consumer electronics and these tend

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00:25:16,960 --> 00:25:19,920
Speaker 1: to be pretty fickle items. They're going to fail. Yeah,

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00:25:20,080 --> 00:25:21,880
Speaker 1: we go back and we look. I used to cover

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Speaker 1: other companies, Palm, Motorola, BlackBerry, and you know these kind

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00:25:27,040 --> 00:25:31,680
Speaker 1: of have a little bit of a great Jim scarred. Yeah.

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Speaker 1: I've been doing this for twenty years and we've seen

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00:25:34,400 --> 00:25:36,879
Speaker 1: a lot of these consumer devices have to hit and

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00:25:36,960 --> 00:25:39,879
Speaker 1: hit well. So we model Apple for three years and

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00:25:39,920 --> 00:25:43,240
Speaker 1: as long as estimates keep going higher, those target prices

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Speaker 1: keep going higher. And don't forget the company is buying

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Speaker 1: back a lot of stock. And to quantify that, they're

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00:25:48,119 --> 00:25:51,080
Speaker 1: buying back a hundred billion, which is about ten percent

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Speaker 1: of the company. I just want to talk about the multiple,

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Speaker 1: and then we can talk about the earnings and the

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00:25:54,920 --> 00:25:57,520
Speaker 1: maugins and the average selling price of that phone, which

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00:25:57,560 --> 00:26:00,439
Speaker 1: you sound really bullish about. Um, we'll try to eighteen

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00:26:00,440 --> 00:26:02,840
Speaker 1: times forward arnings. Most people would say that's quite fair.

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00:26:02,920 --> 00:26:06,600
Speaker 1: What would you say? UM? I would agree. I wish

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00:26:06,600 --> 00:26:09,560
Speaker 1: I could tell you it's a super cheap deep value stock.

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00:26:09,640 --> 00:26:13,440
Speaker 1: It isn't anymore. When we spoke, you know, six twelve,

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00:26:13,560 --> 00:26:17,359
Speaker 1: eighteen months ago many times, Um Tom on this show,

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00:26:17,400 --> 00:26:20,240
Speaker 1: and before Jonathan joined you, we talked about how it's

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00:26:20,240 --> 00:26:24,200
Speaker 1: a discount to the market that now had closed his

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00:26:24,280 --> 00:26:26,520
Speaker 1: Apple has done that, so now we view the valuation

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00:26:26,600 --> 00:26:29,760
Speaker 1: multiple is actually pretty fair. I mean John, you know

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00:26:29,840 --> 00:26:32,160
Speaker 1: j Sue was just finessing this so well. Jim didn't

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00:26:32,200 --> 00:26:33,879
Speaker 1: want to come on for like two years because you

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00:26:33,920 --> 00:26:38,280
Speaker 1: showed up. You know, like, come on, Pharaohs here, Pharaohs here,

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00:26:38,280 --> 00:26:40,600
Speaker 1: you gotta come on. Can we talk about Tom's trip

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00:26:40,640 --> 00:26:42,960
Speaker 1: to Brooklyn at the end of the month. What's he

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00:26:43,000 --> 00:26:45,440
Speaker 1: going to be looking for in October thirty and why Brooklyn?

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00:26:45,480 --> 00:26:48,480
Speaker 1: Why not Cupitina, California. Yeah, let me let me set

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00:26:48,520 --> 00:26:50,440
Speaker 1: it up for the listeners who may not be aware

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00:26:50,480 --> 00:26:56,159
Speaker 1: of that. Yesterday Apple sent out an invitation for a press,

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00:26:56,320 --> 00:27:01,439
Speaker 1: media and financial analyst leading in in Brooklyn, New York

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00:27:01,680 --> 00:27:05,439
Speaker 1: on October, so the end of this month. Now, the

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00:27:05,480 --> 00:27:08,359
Speaker 1: way to think about this is, obviously they don't do

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00:27:08,400 --> 00:27:10,960
Speaker 1: this because they have extra time or extra budget to

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Speaker 1: spend and nothing better to do with our hands. They're

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00:27:12,760 --> 00:27:15,480
Speaker 1: gonna they're gonna say something. Now. They just had in

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00:27:15,520 --> 00:27:18,439
Speaker 1: September their launch of their new iPhones, so we know

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00:27:18,520 --> 00:27:21,600
Speaker 1: it's not iPhones. When we think about the venue of

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00:27:21,720 --> 00:27:24,320
Speaker 1: where this at, is that a music center? Potentially it

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00:27:24,320 --> 00:27:26,560
Speaker 1: could be something around music, But we do know it's

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00:27:26,600 --> 00:27:29,720
Speaker 1: been well over a year and a half since they've

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00:27:29,800 --> 00:27:34,800
Speaker 1: launched anything on the new UM PCs and iPads, so

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00:27:34,840 --> 00:27:36,840
Speaker 1: that kind of sets the stage about what it could

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00:27:36,880 --> 00:27:39,680
Speaker 1: be or what it couldn't be. But importantly it's right

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00:27:39,760 --> 00:27:43,320
Speaker 1: before earnings and earnings are on November one, so we

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00:27:43,440 --> 00:27:46,200
Speaker 1: think that they wanted to get this information and news

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00:27:46,200 --> 00:27:49,639
Speaker 1: announcement out before that they had their earnings, you know,

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00:27:49,680 --> 00:27:53,080
Speaker 1: two days later. So what are you looking for? Uh,

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00:27:53,160 --> 00:27:55,840
Speaker 1: you know, we we would expect actually before the holiday seasons.

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00:27:56,080 --> 00:27:58,000
Speaker 1: We we would be it would be nice to see

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00:27:58,040 --> 00:28:01,600
Speaker 1: something new about the PCs. But also they've been talking

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00:28:01,600 --> 00:28:05,199
Speaker 1: a lot about content um content at both uh you

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00:28:05,240 --> 00:28:08,159
Speaker 1: know they have Apple Music, but also content about video

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00:28:08,440 --> 00:28:11,119
Speaker 1: and Apple TV, which has been you know, they've been

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00:28:11,119 --> 00:28:15,760
Speaker 1: taken baby steps into the TV sector. Jim. So we

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Speaker 1: gotta leave it there, but we'd love to get you

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Speaker 1: on again, not only to talk Apple but the technology.

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Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and

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00:28:27,400 --> 00:28:32,720
Speaker 1: listen to interviews on Apple podcasts. SoundCloud, or whichever podcast

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00:28:32,760 --> 00:28:37,000
Speaker 1: platform you prefer. I'm on Twitter at Tom Keane before

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Speaker 1: the podcast. You can always catch us worldwide. I'm Bloomberg

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Speaker 1: Radio