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Speaker 2: So let's get to that consumer confidence data. So overall,
Speaker 2: as Paul and Jahmer talking about, coming in at one
Speaker 2: o six point seven, that is lower than January, and
Speaker 2: it also missed present situation not looking as great either,
Speaker 2: one forty seven point two, the expectation number coming in
Speaker 2: at seventy nine point eight. So Dana Peterson is chief
Speaker 2: economist over at the conference board. She helps to get
Speaker 2: through all this data. Hey Dan, what should my takeaway
Speaker 2: be from these numbers?
Speaker 3: I think the k takeaway is that the numbers are
Speaker 3: still pretty range bound. We haven't seen a breakout in
Speaker 3: confidence to the upside yet. We did see a dip
Speaker 3: in the measure for February, and January was also revised.
Speaker 3: I'm sorry for January, and then December was also revised downward.
Speaker 3: And certainly in this month reading, we saw that both
Speaker 3: expectations and current position. Current conditions were weaker and importantly,
Speaker 3: when we ask consumers about recession, that expectation ticked up
Speaker 3: a little bit after falling pretty steadily for many months.
Speaker 4: So what do we take here, I mean, how when
Speaker 4: we look at this consumer confidence data points, how do
Speaker 4: you guys look at it?
Speaker 5: What's a reasonable time series for you guys? Well, we
Speaker 5: look at it as a whole.
Speaker 3: There's a lot of information in there, and certainly when
Speaker 3: we look at the details, consumers were a little less
Speaker 3: optimistic about employment and business conditions right now. They also
Speaker 3: complained about their finances not being as strong currently. Also
Speaker 3: looking ahead, consumers were pretty unhappy about employment, business and
Speaker 3: income and their financial situations. They're expected financial situations were
Speaker 3: also a little bit worse. So we're still kind of
Speaker 3: just moving back and forth in the data, but I
Speaker 3: think some key things in the write in suggests that
Speaker 3: consumers are a little less concerned about food and energy prices,
Speaker 3: and certainly they are. We're showing that the expectations gauge
Speaker 3: continues to decline, so that's all good news on the
Speaker 3: inflation front, But they are more concerned about jobs going forward,
Speaker 3: and they're also more concerned about the political climate, and
Speaker 3: so we'll be watching not only the inflation gauges, but
Speaker 3: also the jobs gauges within this, because if consumers get
Speaker 3: the whiff that more layoffs are coming, then they'll pull
Speaker 3: back on spending and that'll contribute to slower growth over
Speaker 3: the course of this year.
Speaker 2: What am I still spending on and what have they
Speaker 2: now avoided?
Speaker 3: Well, consumers are definitely still spending on services. We see
Speaker 3: that in retail sales, we see that in the consumer
Speaker 3: spending data that the BEA puts out. But when it
Speaker 3: comes to goods, they are starting to pull back on
Speaker 3: things that require financing, so homes, cars, big ticket appliances,
Speaker 3: and that's because interest rates are high. And indeed, in
Speaker 3: this in today's report, consumers said that they don't expect
Speaker 3: interest rates to continue falling. They think interest rates might
Speaker 3: actually tick up. So that's pretty material when it comes
Speaker 3: to their buying attitudes for goods. But certainly when it
Speaker 3: comes to vacations, we did see a little bit of
Speaker 3: a pullback and expectations about going on vacations. But that's
Speaker 3: just one aspect of services, and we're really going to
Speaker 3: need to see the PCEE data this Friday to see
Speaker 3: about whether services consumption is still pretty robust.
Speaker 5: In the United States.
Speaker 4: Talk to us about the labor market and how that
Speaker 4: impacts consumer confidence.
Speaker 5: I would think that would be a big one, because
Speaker 5: it seems.
Speaker 4: Like everybody who's got a job has a job, and
Speaker 4: wages are going higher, so that's got to be helpful.
Speaker 3: Yes, I mean, when we look at payrolls, we saw
Speaker 3: really shockingly surprisingly strong numbers in January and December, and
Speaker 3: it wasn't just kind of your big three driving things.
Speaker 3: The big three are leisure and hospitality, government, and also
Speaker 3: healthcare and social assistance. You saw gains across the board,
Speaker 3: and you also saw an uptake contemporary employment for the
Speaker 3: first time in a little over a year. So those
Speaker 3: data are pretty good. But we need to continue to
Speaker 3: see improvement in the labor market or in terms of
Speaker 3: the gains being more broadly based, or else we're going
Speaker 3: to see weakness ahead. Indeed, you still do have some
Speaker 3: industries that are letting people go, certainly finance, tech, transportation,
Speaker 3: and warehousing. We don't think that's really going to improve. Also,
Speaker 3: residential constructions probably not can improve until interest rates start
Speaker 3: to fall more materially. So we're definitely watching the labor market.
Speaker 3: We think there will be weakness in the US economy
Speaker 3: slowing down probably around zero percent, between one and zero percent,
Speaker 3: a little bit of an uptake and unemployment rate before
Speaker 3: the end of this year to four point three set,
Speaker 3: but then we'll see things get better towards the end
Speaker 3: of the year. Certainly as a FED as we think
Speaker 3: we'll have begun cutting interest rates, probably starting around June,
Speaker 3: and then we'll cut interest rates further next year.
Speaker 2: So they're looking at sort of prices everyday, prices to
Speaker 2: sort of give them a read on inflation. They're looking
Speaker 2: at their job status to feel good about that. What
Speaker 2: other factors do they wind up looking for? Like, is
Speaker 2: it I'm gonna go buy a car and I don't
Speaker 2: like a five percent interest rate? Is it the mortgage rate?
Speaker 2: Is it the stock market? I know that the stock
Speaker 2: market's not the economy, but we have a four on
Speaker 2: one K probably pretty happy, which what has come through
Speaker 2: in the last year.
Speaker 3: I think consumers looking at all of that, and certainly
Speaker 3: we've seen that consumers have continued to spend, but some
Speaker 3: of that spending is depicit spending. They're using credit cards,
Speaker 3: so that means that you know, their real incomes are
Speaker 3: probably not rising as much and certainly is below the
Speaker 3: real spending that we've seen, and this isn't really sustainable.
Speaker 3: So but again, as many consumers are working, they still
Speaker 3: feel confident that they can put expenditures on the credit
Speaker 3: card and they'll be able to pay it off. But
Speaker 3: the thing is that if you fall behind, and we
Speaker 3: are seeing delinquencies rise, the cost of that credit is skyrocketed.
Speaker 3: And indeed, when you look at the amount of interest
Speaker 3: that people are paying in the PCEE data on debt,
Speaker 3: it's skyrocketed along with the amount of consumer credit card
Speaker 3: debt that's piling up.
Speaker 4: In terms of future expectations, the conference board expectations came
Speaker 4: in at seventy nine point eight last month versus last month,
Speaker 4: which was revised down to eighty one point five.
Speaker 5: Where would you like to see that? Where would economists
Speaker 5: like to see that number?
Speaker 3: Well, I mean the thing is that people always say
Speaker 3: economists they are dismal scientists, but really we are optimistic.
Speaker 3: And you know, anything above the eighty threshold signals that
Speaker 3: consumers think the economy is going to continue to expand,
Speaker 3: and that's always a hope among economists. But you know,
Speaker 3: this measure has been over and above eighty over the
Speaker 3: last few months, and certainly the uptick in the percentage
Speaker 3: saying that they think a recession might be on the
Speaker 3: horizon is disconcerting. So we want to continue to watch
Speaker 3: the data and see how consumers feel in line with
Speaker 3: the real data that gets pumped out by the government.
Speaker 3: So certainly we want to see better growth, but we
Speaker 3: see tremendous risks to the downside.
Speaker 4: All Right, Danny, thanks so much for joining us. Dan Peterson,
Speaker 4: chief economist at the Conference Board.
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Speaker 5: Let's go to Macy's.
Speaker 2: That's not us now up by three point six percent.
Speaker 2: They're closing about one hundred and fifty namesake stores. Certain
Speaker 2: areas like Blue Mercury did pretty well, which, as I
Speaker 2: keep telling you guys, invest in your face is a thing.
Speaker 5: Okay, I think it's the time has past for John
Speaker 5: and I am no it's next.
Speaker 6: I know.
Speaker 7: I went into one of these stupid stories with my daughter.
Speaker 7: She wanted to whatever, the margins on these things must
Speaker 7: be incredible.
Speaker 5: Yes, I'm like, there was eighty.
Speaker 2: Dollars and they never go on You don't even want
Speaker 2: to know. And I spent on my skincare but they
Speaker 2: never go on sale. You just had to take it.
Speaker 2: And you can see that through Macy's numbers for Bloo Mercury. Anyway,
Speaker 2: Mary Ross Gilbert is going to help me out here
Speaker 2: Bloomberg Intelligence senior equity analysts covering retail. Okay, Mary, what
Speaker 2: did you make of Macy's quarter? And do you invest
Speaker 2: in your face?
Speaker 8: I invest in my face. That's why beauty has been
Speaker 8: the outperformer for almost anyone who announces, including when Dillard's
Speaker 8: came out with their numbers yesterday. So with Macy's for
Speaker 8: the quarter, they beat their estimates on sales and on
Speaker 8: earnings margins, so sort of across the board. But the
Speaker 8: focus really wasn't on how they did in the fourth quarter.
Speaker 8: It's really their new plan that was the big focus.
Speaker 8: The new plan and their guidance for the year. So
Speaker 8: their guidance came in softer than consensus, and I guess
Speaker 8: it's just no surprise just thinking about how department stores
Speaker 8: are under pressure, and we've seen it across the board
Speaker 8: with you know again, Dillard's showed some weakness yesterday. We're
Speaker 8: seeing it with Macy's in their outlook. But Macy's has
Speaker 8: a plan to address the department store model in shuttering
Speaker 8: one hundred and fifty underperforming stores and then they're going
Speaker 8: to invest in the three hundred and fifty remaining and
Speaker 8: those are going to be primarily an A and eight
Speaker 8: plus plus plus malls, and what they're going to do
Speaker 8: is increase the service levels. Beauty has been something they've
Speaker 8: been investing in almost every year and expanding the floor
Speaker 8: space dedicated to beauty. So you'll notice that if you
Speaker 8: walk into Macy's, you'll see that they have expanded the
Speaker 8: space and who knows, they could expand it again this year.
Speaker 8: We've been seeing it for the last five years that
Speaker 8: that space has been expanded. So there's a lot of
Speaker 8: details in what Macy's is doing. It's something they need
Speaker 8: to do. They really need to up their game, and
Speaker 8: that's exactly how they started their presentation, and that includes
Speaker 8: really making the assortments a lot better than they are
Speaker 8: because if you look at the inline store performance at malls,
Speaker 8: they're the ones that are executing, such as the Abercrombi's,
Speaker 8: the Urban outfitters, they're outperforming.
Speaker 4: So Mary I was kind of surprised to see this
Speaker 4: number of stores one p fifty because I kind of
Speaker 4: thought that this decade plus long shrinkage of department store
Speaker 4: footprints across the country by a lot of different companies,
Speaker 4: that was more or less kind of we're done that,
Speaker 4: or we're at near the finish line. So to see
Speaker 4: another big round of closings that kind of surprised me.
Speaker 4: Did it surprise the market at all? Or is this
Speaker 4: something that analyst and investors have been asking for.
Speaker 8: What Macy's had said is we don't need to close
Speaker 8: stores except for the usual stores that you close every year,
Speaker 8: which is maybe less than ten year. But the reason
Speaker 8: that they've decided to close them is because these stores
Speaker 8: were underperforming, but they were still profitable on a four
Speaker 8: wall basis, so historically that their thought was, well, if
Speaker 8: it's still profitable and we're still generating cash, we'll keep
Speaker 8: it open. And this time what they did is they
Speaker 8: took a more holistic approach and said, okay, even though
Speaker 8: it's four wall profitable. We could do a lot better
Speaker 8: with the funds that we could generate closing these stores,
Speaker 8: selling the real estate and redeploying it back into the
Speaker 8: existing store base. And for all the initiatives that they
Speaker 8: have going forward, it makes a lot of sense because
Speaker 8: that space, we really need to rethink the department store model.
Speaker 8: It has to evolve.
Speaker 3: Mary.
Speaker 2: Does this do enough to get activist investors off Macy's back?
Speaker 8: That is a good question. I think it may. I
Speaker 8: think it may. I think board has made it very
Speaker 8: clear that they are supporting this plan. Could they enhance
Speaker 8: the board with additional directors That could be a possibility,
Speaker 8: So learn more about that in the coming months. But
Speaker 8: I think that this plan is it's been decided that
Speaker 8: this is the move forward. And when you think about
Speaker 8: what's happening with the activists, it's usually it usually involves
Speaker 8: the real estate. And what we have seen in past
Speaker 8: transactions is the real estate is usually milked and it
Speaker 8: can be to the detriment of the retail operations, and
Speaker 8: so sometimes it's not always the best move. So they
Speaker 8: do have valuable real estate here.
Speaker 4: Talk to us about that, like a relative performance between
Speaker 4: like a Macy's store and a comparable Bloomingdale store. Is
Speaker 4: the Bloomingdale store maturely more profitable.
Speaker 5: I guess.
Speaker 8: Yes, they don't disclose the profitability on Bloomingdale's versus Macy's,
Speaker 8: but Bloomingdale's outperform, as does blooem Mercury. This year, their
Speaker 8: comp sales were down one point six percent because the
Speaker 8: aspirational luxury consumer is spending less. And we've been, you know,
Speaker 8: hearing about the overall luxury business being impacted, especially after
Speaker 8: we came off the post pandemic spending from stimulus checks
Speaker 8: that really had that aspirational customer going after luxury. So
Speaker 8: now that that's kind of you know, falling back, we're
Speaker 8: seeing more of a normalization. This is something Nordstrom asco slided,
Speaker 8: so their sales were just down one point six percent,
Speaker 8: but they think that could probably stabilize and go higher
Speaker 8: next year. And of course, you know, with the beauty
Speaker 8: side on luxury, you know that's posting positive comp sales,
Speaker 8: So that's that's stronger.
Speaker 2: Yeah, Mary, I was going to ask about then, the inventory.
Speaker 2: Macy's notoriously last year struggled with inventory. The last quarter
Speaker 2: we saw they really got to together. What did we
Speaker 2: learn this quarter about their inventory.
Speaker 8: Yeah, even though inventory was up two percent year every year,
Speaker 8: it's still down over twenty percent versus twenty nineteen. So
Speaker 8: they've really done a great job reducing their inventory and
Speaker 8: that means that they're having less clearance activity. This is
Speaker 8: something that's going to affect their first quarter because last
Speaker 8: year they had more clearance and this year less. So
Speaker 8: they're doing a great job overall. They've just been improving
Speaker 8: their execution with data technology, logistics, and they talked about
Speaker 8: that on the call. They're going to be even employing
Speaker 8: some generative AI. They've already been employing machine learning, so
Speaker 8: you know, we'll see more. And they're going to be
Speaker 8: streamlining operations. We didn't talk about that, but they're going
Speaker 8: to be consolidating some of their facilities, so they've really
Speaker 8: and they've reduced layers within the management structure, so overall
Speaker 8: simplifying the operations. So all of these things could restore
Speaker 8: positive growth in twenty twenty five.
Speaker 4: Mary, who's the retailer out there that you think is
Speaker 4: doing the best job.
Speaker 8: Of all of retail or just within the department store space, just.
Speaker 4: Kind of within your coverage because you cover a broad
Speaker 4: range of the retailers.
Speaker 8: Yeah, so I think that what we're seeing right now
Speaker 8: is some of the inline specialty retailers are doing really well.
Speaker 8: If you look at what Ralph Lauren has done, Ralph
Speaker 8: Lauren is outperforming. But what they did was they sort
Speaker 8: of retrenched the business they do supply to Macy's and
Speaker 8: other department store retailers with their wholesale business. But what
Speaker 8: they did is really focus on DTC direct to consumer.
Speaker 8: This is something other brands have been doing as well.
Speaker 8: But Ralph Lauren cut back on off price, they cut
Speaker 8: back on wholesale, they elevated the product so it's much
Speaker 8: higher quality, and then they've theated the overall consumer and
Speaker 8: so it's much more of a luxury brand now and
Speaker 8: and uh. But but they also do have, you know,
Speaker 8: some aspirational brands in their portfolio like Lauren Ralph Lauren,
Speaker 8: which you'll find at Macy's, and then you'll find Polo
Speaker 8: Ralph Lauren and Double R Ranch in their Bloomingdale's concept
Speaker 8: for example. Hey, Mary, I think Lauren's a good example.
Speaker 2: Mary. We appreciate it, Thank you very much, Mary Ross,
Speaker 2: Gilbert Bloomberg Intelligence and your equity analysts. But my point
Speaker 2: is that like, what if you can get men really
Speaker 2: invested in skincare.
Speaker 6: He's not like makeup on is he?
Speaker 5: No, he's in investing in his face. That's what it is.
Speaker 2: Can you become a certain age Tucker?
Speaker 6: You gotta do that at what age? Well?
Speaker 9: You know?
Speaker 2: Now anyway, intelligence, do you That's not good?
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Speaker 2: Hes is down three point twenty five percent. It's one
Speaker 2: of the worst performing stocks in the S and P.
Speaker 2: Chevron is also off by two percent. Here's the interesting
Speaker 2: reason why so Chefron had a filing that came out
Speaker 2: late last night that said one of their risks about
Speaker 2: its takeover of Hesse is actually the fact that Exon
Speaker 2: and Sinook, which are partners with Hesse in Guyana, say
Speaker 2: they have the right of first refusal for Hess's portion
Speaker 2: of Guyana, which basically means that Exon and Sinok, which
Speaker 2: is a Chinese oil company, could bust up this merger
Speaker 2: between Chevron and Hess. So for nerds like me. This
Speaker 2: is cool, that's big, this is stuff that's happening. So
Speaker 2: for that I turned to Fernando Vali. He's Bloomberg Intelligence
Speaker 2: senior oil and gas analysts. Fernando, when we think about
Speaker 2: these mergers, we think about ooh, competing bids, we think
Speaker 2: about antitrust, we think about those things. We didn't think
Speaker 2: that this was going to happen.
Speaker 10: Yeah, Typically you don't see preemption rights on corporate takeovers.
Speaker 6: It's very rare.
Speaker 10: You saw it recently when Suncrep acquired Total Energies Canadian subsidiary,
Speaker 10: and there are some preemption rights there on Chronicle Philps
Speaker 10: acquiring fifteen percent of Sermid. But typically you're acquiring the
Speaker 10: whole company and the owner itself doesn't change, just the
Speaker 10: controller of it. So most joint operating agreements don't foresee
Speaker 10: for that to be a preemption right event.
Speaker 4: So what does the contract say here? It's got to
Speaker 4: be cut and dry. If I'm Chevron and I'm buying Hess,
Speaker 4: I have to have a high level of confidence that
Speaker 4: I'm going to get the Hess steak in Guyana.
Speaker 10: Well, all we can do is speculate because it's a
Speaker 10: private agreement. So we're not We are not really privy
Speaker 10: to the details of that contract.
Speaker 6: Has seemed to be very confident.
Speaker 10: That they will be able to push this through and
Speaker 10: there is no preemption rights. I would argue that that
Speaker 10: Guyana is the value the most valuable ascid In has
Speaker 10: his portfolio. I think most people would agree with that.
Speaker 10: And so, as Alex mentioned, if this if Guiana was excluded,
Speaker 10: then likely there's no deal for Chevron anyway, and so
Speaker 10: I doubt that that we'll get clarity in the next
Speaker 10: few days. But has seems to be fairly confident there's
Speaker 10: no preemption rights.
Speaker 6: In this case.
Speaker 2: So why is Chevron doing sorry, why is Exon doing this?
Speaker 6: Well, because it's the second best asset in the.
Speaker 2: World, So why isn't just buy Hess then?
Speaker 10: Because you know, they don't want to buy everything else
Speaker 10: that's included with Hes.
Speaker 6: They want to buy Guiana.
Speaker 2: And so why did't they do this before Chevron got
Speaker 2: into this?
Speaker 10: Probably because Hess wouldn't want to sell just Guiana. And
Speaker 10: now Chevron has laid out the marker, the pricing marker
Speaker 10: for it. And if you can just find a way
Speaker 10: to just get pull out the best asset out, why wouldn't.
Speaker 4: You so this is an exercise for the lawyers here.
Speaker 4: Who's got the better lawyer? I mean, that's what it
Speaker 4: comes down to. Do we have any sense as to
Speaker 4: when we're gonna get some visibility here?
Speaker 10: Probably within the next couple a month or two, I
Speaker 10: would expect some visibility. It does take the dragon tend
Speaker 10: to drag on with Konaco. It took upwards of two
Speaker 10: months to see the actual preemption and then to find
Speaker 10: a new over six months to get a new deal
Speaker 10: between Suncren to Hotel Energies. But I think probably within
Speaker 10: two months we'll get more clarity on this. It's really
Speaker 10: about the contract at this stage. And you know, if
Speaker 10: they were negotiated at a suitable way for Hess and
Speaker 10: Chevron back when the joint operating agreement.
Speaker 2: Was signed, how much of a bummer would this be
Speaker 2: for Mike where that Chevron if this deal collapsed.
Speaker 6: I mean, this would be huge.
Speaker 10: This is, as I said, the second best asset available
Speaker 10: for sale in it and you know, really that's the
Speaker 10: only block that has any production out of Guiana, any
Speaker 10: real potential as it stands. So if they lose out
Speaker 10: on that as a big part of the growth opportunity
Speaker 10: for Chevron and it puts X on a whole new
Speaker 10: level because now they would own upwards to sixty percent
Speaker 10: of that asset and give them a lot of growth
Speaker 10: over the next decade. You know, you don't spend sixty
Speaker 10: billion dollars on hes if you don't think that Kayana
Speaker 10: is a very very attractive development over the next ten
Speaker 10: to fifteen years.
Speaker 2: Yeah, And to your point, it's not like they can
Speaker 2: just like go buy the next asset, right Like, it's
Speaker 2: not like they're buying for areas in the Permian where
Speaker 2: there's a ton of producers where maybe you could look
Speaker 2: at different acres somewhere else. Like this is kind of
Speaker 2: a make or break it moment. If the deal does
Speaker 2: go through, then what's the relationship between chevron Xon and
Speaker 2: Sinook going to be?
Speaker 6: Like?
Speaker 2: Since they all sort of are working in the same
Speaker 2: area working together.
Speaker 6: I mean they work in.
Speaker 10: A lot of projects together and they are in Tangi's
Speaker 10: Chevroyal or in Kazakhstan, they are in reach Stone in Australia.
Speaker 10: They've been partners for a long time and I think
Speaker 10: there's no love lost. There's there's always going to be
Speaker 10: a competition. And if you can exercise your rights, you know,
Speaker 10: fair play to you. Obviously they won't be totally happy
Speaker 10: with it, but I just can't foresee.
Speaker 6: You have to be.
Speaker 10: Fairly sanguine in this industry and you have to move
Speaker 10: on to the next deal, into the next growth possibilities.
Speaker 10: So I'm sure it will be hurtful at first, but
Speaker 10: you've got to find ways to keep working together and
Speaker 10: do best for your shareholders.
Speaker 2: That's awesome. Hurtful, It will be hurtful. Hey, just looking
Speaker 2: at the share price, you know, Hess off over three percent,
Speaker 2: shev one off by two of these legit reactions here.
Speaker 10: Well, I think yes in the aspect that again, it's
Speaker 10: the second best asset after Pioneer, and if there's a
Speaker 10: movement that where excellent consolidates those two best assets, and
Speaker 10: it's really painful for or Chevron, and then for us.
Speaker 10: If you sell just your best asset, you take the
Speaker 10: diamond out of the rest. You know, the rest of
Speaker 10: the portfolio is hard is a much harder sale.
Speaker 4: All I know is if I'm Chevron, I'm turning to
Speaker 4: my lawyers and I'm saying, tell me we're covered here, Yeah,
Speaker 4: I mean, tell me this is not a risk.
Speaker 5: I can't imagine that this is even something that would
Speaker 5: be talked about. Is this something that happens in other deals?
Speaker 10: Well, as I mentioned, it happened with Suncore buying Total
Speaker 10: Energies in Canada. It was a little bit different because
Speaker 10: the Sermont mine was only Conico in Hotel, and Conico
Speaker 10: managed to preempt at. I'll say that Suncore in sun
Speaker 10: Corps release saying that they were caring Totel, they noticed
Speaker 10: right away that that could have been an issue in Sermont,
Speaker 10: so as opposed to Chevron did not say that as
Speaker 10: a risk in their initial.
Speaker 2: Filings, which is interesting too because if you take a
Speaker 2: look with some analyst notes out they also came out
Speaker 2: today it's like, look either way, it'll be fine. Let's
Speaker 2: just say it's going to take a lot longer for
Speaker 2: the deal than to get closed, which makes everything's a
Speaker 2: little more uncertain, the synergies, the development, et cetera. Fernando,
Speaker 2: thanks a lot, Always love talking to you. Great to
Speaker 2: see if under Volley Bloomberg Intelligence Senior analyst for Oil
Speaker 2: and guests, he's like my go to guy.
Speaker 5: Yeah, he knows what's happening global energy. He's our guy Global.
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Speaker 1: Just Say Alexa playing Bloomberg eleven thirty.
Speaker 2: Excellent and Seinook are trying to prevent Chevron from taking
Speaker 2: over hes because of the guy on a asset. They're
Speaker 2: trying to sort of get the rights of first refusal.
Speaker 2: That's interesting. We're seeing a lot of natural gas deals
Speaker 2: getting done. We're also seeing natural gas prices continue to tank,
Speaker 2: like under two dollars mmbtu is really tough for some
Speaker 2: of these producers. So we want to get a broader
Speaker 2: perspect on how to invest. And Haig Sherman is chief
Speaker 2: executive officer and chief investment officer over at Teutonic Holdings Now.
Speaker 2: He is a big deal in the energy space. He
Speaker 2: manages about six point seven billion dollars across all asset classes,
Speaker 2: not just energy, but he was the guy that you
Speaker 2: go to for this kind of energy advice and energy investing. Haig,
Speaker 2: it's great, great, great to have you. Thank you for
Speaker 2: joining us. There's a lot to talk about what is
Speaker 2: foremost on your mind when you think of investing specifically
Speaker 2: in the energy space.
Speaker 9: Well, I think foremost on my mind is really the
Speaker 9: consolidation that's going on in the industry. So if you
Speaker 9: look at both oil and natural gas, you have some
Speaker 9: major transactions that have been inked. You just mentioned one,
Speaker 9: which is the Chevron Hess steal, which is being attacked
Speaker 9: effectively by Exxon based on their right of first refusal
Speaker 9: on the Guyana assets of Hess. But you also have
Speaker 9: a natural gas you have the Chesapeake Southwestern transaction, which
Speaker 9: is severally very interesting. So I really think this is
Speaker 9: the central thesis of energy, which is we want to
Speaker 9: have more scale in the basins in which we operate
Speaker 9: because we're really in the manufacturing business. We're manufacturing molecules,
Speaker 9: so scale, operational efficiency, and inventory matter.
Speaker 5: Hey, I hear you know. I have a lot of
Speaker 5: buddies from my pain Webber day.
Speaker 4: I know you were there, David bratch On, a bunch
Speaker 4: of other guys that were in energy space.
Speaker 5: What I know is from them, EMP was the fun
Speaker 5: sector to cover there for a while.
Speaker 4: But I get the sense that these EMP companies aren't
Speaker 4: doing too much e these days.
Speaker 5: They're just kind of in production. Is that the case
Speaker 5: and why?
Speaker 2: Is that good question?
Speaker 9: That's exactly right. So if you look at historically as
Speaker 9: we grew up, especially here in Houston, you know, the
Speaker 9: e was kind of the glamorous part of EMP. I mean,
Speaker 9: you had these great offshore projects. You had, you know,
Speaker 9: these frontier projects, the North Slope, you know, when Russia
Speaker 9: opened up, you had the Cycling Island, you had Kazakhstan,
Speaker 9: kazaksand and you had other projects. And this was really
Speaker 9: the glamorous part of the industry. And our oil and
Speaker 9: gas companies were intrepid. They would invest, but they also
Speaker 9: had a long time horizon. Today, that time horizon is
Speaker 9: much much shorter with the onslaught of renewables. The executive
Speaker 9: teams of these big or these big energy companies are
Speaker 9: more focused on delivering short term investor returns, delivering cash
Speaker 9: back to investors. They don't want to take duration risk.
Speaker 9: So they're really focused on becoming manufacturing businesses with good
Speaker 9: core holdings and good inventories of areas of current operations.
Speaker 2: So how do you invest in that when they're becoming
Speaker 2: a different type it's becoming a different type of industry
Speaker 2: in essence, Well.
Speaker 9: I think you really focus on those that are best
Speaker 9: at at manufacturing the molecules. I think Exxon is an
Speaker 9: excellent and they've really been on this trend or quite
Speaker 9: some time. They had a big twenty nineteen initiative to
Speaker 9: cut costs and really become more efficient. EOG is another
Speaker 9: kind of a mini ex On without the downstream operations
Speaker 9: very efficient. They understand that this is about inventory, unit
Speaker 9: level costs, unit level productivity, and economies of scale so
Speaker 9: that they can deliver the best return possible to their shareholders.
Speaker 5: HEG.
Speaker 4: So you're right there in Houston, you know, the center
Speaker 4: of the US energy business, maybe the global energy business.
Speaker 5: I don't know. Talk to us about renewables.
Speaker 4: How committed to what extent are US energy companies kind
Speaker 4: of committed to renewables Because some of the rhetor coming out,
Speaker 4: I don't know if it's just politicians or others.
Speaker 5: I'm just not sure.
Speaker 4: It seems like it's more commitment out of some of
Speaker 4: the European energy companies.
Speaker 9: I think that's right. I think if you really look
Speaker 9: at the big integrats in the US, there are certain
Speaker 9: areas that they're focused on carbon c questration and other areas.
Speaker 9: But to their credit. They've been focused on what their
Speaker 9: core competency is, which is producing hydrocarbons. And if you
Speaker 9: look at Europe, which you brought up BPS, under a
Speaker 9: lot of pressure now for abandoning hydrocarbons or at least
Speaker 9: deemphasizing hydrocarbons. So I really think that the US energy
Speaker 9: companies got it right. But we have other areas of investment,
Speaker 9: particularly here in Houston and Texas. Texas is a US
Speaker 9: leader in renewables. We have great private equity supported the
Speaker 9: industry here in Houston and throughout the state and really
Speaker 9: throughout the country. So we're getting that built out independent
Speaker 9: of our EMP companies, our energy companies.
Speaker 2: So HeiG as I talk about how to invest, it's
Speaker 2: really going to be private equity, it's government money, and
Speaker 2: it's oil companies. Like those are three buckets that I
Speaker 2: see that invests in the energy transition, not just straight renewables,
Speaker 2: but the energy transition. What in the energy transition do
Speaker 2: you like the best? There's so much money that's going
Speaker 2: to be wasted on stuff that doesn't work.
Speaker 5: What do you like?
Speaker 9: Yeah, It's it's a tough space to navigate right now,
Speaker 9: because if you really look at kind of renewables right
Speaker 9: now and really over the past couple of years. It's
Speaker 9: really like the shell boom I can call it twenty
Speaker 9: thirteen twenty fourteen, two before it crashed, because there's a
Speaker 9: lot of money that's coursing in. You know, prices are inflated,
Speaker 9: so to me, it's really an area that you have
Speaker 9: to be careful in. And that's why I like, you know,
Speaker 9: fossil fuels better at this moment than energy transition, just
Speaker 9: because I think the prices are better. And if you're
Speaker 9: a share or an investor looking for returns, you want
Speaker 9: to go to where you can get the best returns.
Speaker 9: So I've shied away from renewables, really focused on traditional
Speaker 9: fossil fuel energy. But the day will come when those
Speaker 9: will become more investable in my opinion.
Speaker 5: You know, I'm looking at this chart for natural gas.
Speaker 5: What happened? Holy cow, things greater. I thought people like
Speaker 5: natural gas.
Speaker 9: People like natural gas, and conservers like cheap natural gas.
Speaker 9: It's not great for producers, but it really is. It's
Speaker 9: a stunning collapse. I mean, if you look a year
Speaker 9: and a half ago, you're at nine dollars per mcf.
Speaker 9: Today it's a buck eighty or thereabouts, and so it's
Speaker 9: been a stunning collapse. A lot of it's weather driven.
Speaker 9: You had a big L and G facility that was
Speaker 9: offline that really started. It was a catalyst for the
Speaker 9: current downdraft. And right now we can talk about natural
Speaker 9: gas being a global commodity, but right now it's still
Speaker 9: largely a domestic commodity. So we really don't have the
Speaker 9: global support until we start opening up more L and
Speaker 9: G facilities, which'll happen in twenty five and twenty six.
Speaker 9: If you look at the curve in twenty five and
Speaker 9: twenty six, it's more constructive, although it's not great.
Speaker 2: So but to that point, I mean, with natural gas
Speaker 2: prices at this level, are they economic for producers and
Speaker 2: for LG exporters?
Speaker 6: Uh?
Speaker 9: For producers it's it's tough. So I mean a lot
Speaker 9: of them are hedged, and so for example, I think
Speaker 9: chess Peak's forty four percent hedged. Okay, so a lot
Speaker 9: of them are hedged in a higher price environment, so
Speaker 9: they're still getting by. But if you look at really
Speaker 9: what what chest Peak announced last week was we're not
Speaker 9: going to invest is aggressively in the space, and so
Speaker 9: that created a situation where natural gas got a modest bid,
Speaker 9: but all the or all the energy companies in natural
Speaker 9: gas sell their stocks rally. There has to be this
Speaker 9: this sea change within natural gas production where rigs are
Speaker 9: laid down, and that'll happen to a certain extent through consolidation.
Speaker 9: That's why the continued consolidation the industry taking privates out
Speaker 9: because they've been more active with the drill bit. Uh
Speaker 9: and public companies have certainly been more disciplined than private
Speaker 9: companies as it relates to you know, producing our thrilling
Speaker 9: wells Haig.
Speaker 2: Thanks a lot, Really appreciate Hig Sherman. He joins the
Speaker 2: CEO CIO of Tectonic Holdings. He joins us up from Houston.
Speaker 2: In the case of Chesapeake, for example, buying Southwestern, they
Speaker 2: also just are basically leaving the natural gas in the ground.
Speaker 2: But then in a moment's notice, when natural gas prices
Speaker 2: tick up, they're going to go and explore it. So
Speaker 2: they have like the reserves around to do it, they
Speaker 2: have the equipment to do it, they have the know
Speaker 2: how to do it, but not everybody does.
Speaker 5: So we don't like firing oil.
Speaker 4: I understand it's like forty to fifty dollars per barrel
Speaker 4: costs roughly to get it out.
Speaker 5: Of the ground. Do we have it? What's the number
Speaker 5: four neck gas? Do we know?
Speaker 2: You know, I don't actually know.
Speaker 4: I'm wondering about dollars sixty seven, whether it's.
Speaker 2: Like, yeah, I don't know that the hedging question was
Speaker 2: a good one for him. But I also think that
Speaker 2: I've been talking to LNG exporters. Under two bucks is
Speaker 2: really hard. It's really hard to make that export number
Speaker 2: work for them. So I think that's interesting too, particularly
Speaker 2: with the moratorium, et cetera, how that winds up playing out.
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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Speaker 2: Iira Jersey. He is a Bloomberg Intelligence Chief US interest
Speaker 2: rate strategist. So I care because yesterday we made the
Speaker 2: two week the five. We had record corporate bond sales,
Speaker 2: and we had a pretty solid takedown. I mean, there's
Speaker 2: a lot of supply overnight, we had a really strong
Speaker 2: demand for some French issuance. Come on, buyers are there?
Speaker 7: Yeah, I think given where yields are and just the
Speaker 7: idea that you know, we are getting a bunch of
Speaker 7: mixed data that there are some people dipping in their toes.
Speaker 7: And keep in mind, going into the most recent sell off,
Speaker 7: it seemed like the market was positioned a little bit
Speaker 7: on the short side. So if nothing else, you're going
Speaker 7: to wind up seeing contin to see some short covering,
Speaker 7: you know, talking about the auctions, you know, the two
Speaker 7: things that we look at very closely in the auctions
Speaker 7: is that bid to cover ratio if it's if it's
Speaker 7: basically at or near where it has been historically, that's
Speaker 7: actually a pretty good sign because these auction sizes are
Speaker 7: much larger, so that means that you still have bidders
Speaker 7: who don't have to come in a bid. So these
Speaker 7: are bidders that aren't just the primary dealers that are
Speaker 7: coming in and looking to buy some bonds. And you
Speaker 7: saw that a tick up in the bid tocover ratios
Speaker 7: in some of the auctions in the last couple of
Speaker 7: in the last couple of weeks, So that's number one.
Speaker 5: Number two is indirect bidders.
Speaker 7: So indirect bidders are people who go to dealers put
Speaker 7: in their orders and their end users so those are
Speaker 7: hedge funds, pension funds, investment managers at mutual funds and
Speaker 7: the like, and so that is the end user demand
Speaker 7: and the higher that is, the better. So again we
Speaker 7: look at the trends in that. So those are the
Speaker 7: two things. Bid to cover and indirect bidders that those
Speaker 7: are the ones you want to key in on.
Speaker 2: See see I learned something John Tucker cover ratio.
Speaker 5: Those thirty years, He's learned one turn bid the cover.
Speaker 4: All right, So is the market also positioned IR for
Speaker 4: kind of a hot inflation data point on Friday?
Speaker 6: Yeah?
Speaker 7: Yeah, Well, so the data that we're going to get
Speaker 7: this week is the is the PC deflator, and obviously
Speaker 7: that's the FEDS primary gauge that they look at and
Speaker 7: that they want to try and target when they talk
Speaker 7: about inflation. I think that the market is expecting somewhat
Speaker 7: of a better number or higher number than we had
Speaker 7: in the recent trend.
Speaker 6: And it does.
Speaker 7: Broadly follow CPI's there's different weights, but generally speaking, whatever
Speaker 7: CPI does, usually PC does that at least directionally does
Speaker 7: the same thing, maybe higher or lower magnitude, but usually
Speaker 7: the same. So I think investors are currently expecting, you know,
Speaker 7: inflation not to be coming down as quickly as it
Speaker 7: had been last year.
Speaker 5: And that's one of the reasons why we have.
Speaker 7: Ten year yields at four and a quarter percent instead
Speaker 7: of under four right, And then that was one of
Speaker 7: the big reasons.
Speaker 2: For that, and then hence like the short positioning and
Speaker 2: then now the short covering. So are we going to
Speaker 2: come in more clean in terms of positioning for the PC.
Speaker 7: Yeah, it seems that way that I still think that
Speaker 7: people are leaning at least a little bit on the
Speaker 7: short side. There were a lot of people who were
Speaker 7: long the front end of the curve and short the
Speaker 7: long end, so you had people in what we call
Speaker 7: yield curve steepeners, so people who thought that short term
Speaker 7: interistrates are going to go down more quickly. That's really
Speaker 7: been the big unwind. It's been the unwind of this
Speaker 7: of this curve trade that has driven things significantly. So
Speaker 7: you know, we talk about ten year yield at four
Speaker 7: and a quarter percent, Look what the two year yield
Speaker 7: is done?
Speaker 6: Right?
Speaker 7: You have it all the way from just over four
Speaker 7: percent all the way up to four seventy, which which
Speaker 7: implies that the market's thinking the Fed's only going to
Speaker 7: cut six times over the next eighteen months or so.
Speaker 7: So that's pretty impressive that we've you know, come back
Speaker 7: and basically priced out two full rate cuts over the
Speaker 7: next year and a half. And I think that that's
Speaker 7: a very telling telling positioning shift that we've had in
Speaker 7: terms of the curve. So I think, yes, people are
Speaker 7: leaning short, but also curve positioning is probably much cleaner
Speaker 7: now than it was before, which is the reason you
Speaker 7: saw a semi decent two year auction yesterday.
Speaker 4: So the ten year treasury IRA is about four point
Speaker 4: two eight percent today, where do you think this is
Speaker 4: towards your end?
Speaker 7: So year end, we still think that we're going to
Speaker 7: see a pretty significant rally in the treasury market, So
Speaker 7: that means that that means price up, yields down, and
Speaker 7: so we do think that we're going to see you know,
Speaker 7: somewhere south of three and a half percent over the
Speaker 7: next over the next nine months or so, And the
Speaker 7: primary reason for that is that over time, we do
Speaker 7: think that the economy is going to slow. You are
Speaker 7: going to get you know, rate hikes ray cuts, excuse me,
Speaker 7: price into the market with and the Federal Reserve actually
Speaker 7: acting on that doesn't seem like it now, but over
Speaker 7: the course of the of the year, there are some
Speaker 7: cracks in the economy. They just haven't manifested themselves yet
Speaker 7: in some of the hard data. But you look at
Speaker 7: even the consumer confidence numbers that we just got a
Speaker 7: couple of minutes ago, and that was a pretty big downshift,
Speaker 7: both in the current expectations and the headline number. So
Speaker 7: and that doesn't mean that people are going to stop
Speaker 7: spending tomorrow, but it does suggest that if we continue
Speaker 7: to have, you know, slightly better or higher inflation prints,
Speaker 7: and you have people who are worried about the political angs,
Speaker 7: and you also don't have people getting the raises that
Speaker 7: they were getting over the last couple of years, that
Speaker 7: all of those things can contribute to a slowdown and spending,
Speaker 7: lower inflation, and therefore interest rate cuts. And that's why
Speaker 7: long term treasure yields could rally a bit by the
Speaker 7: end of the year.
Speaker 2: So I'm looking at a chart not normalized of the
Speaker 2: two year yield and the SMP and I know you're
Speaker 2: the bond guy, but the peak that we saw in
Speaker 2: yields for the two year back in what October mark
Speaker 2: sort of the interim bottom for the SMP and sort
Speaker 2: of ignited that bull run that we've seen since then,
Speaker 2: where the SMP is up, you know, twenty three percent.
Speaker 2: If we keep grinding higher here on yields, like at
Speaker 2: some point, that's got to one denting the equity market.
Speaker 10: No.
Speaker 7: Yeah, I would think that the way that risk assets
Speaker 7: have been acting recently is that if the Federal Reserve
Speaker 7: is not cutting interest rates, then valuations are much too high.
Speaker 6: Right.
Speaker 7: So that's what you saw back September October when you
Speaker 7: wound up having us actually pricing in the potential and
Speaker 7: serious potential of hikes this year or over the course
Speaker 7: of the eighteen months following that, and that I think
Speaker 7: was really driving some of the equity valuations.
Speaker 6: And the fall thereof.
Speaker 7: I think the question is now, and this is where
Speaker 7: the uncertainty about what's going on in the economy really
Speaker 7: comes into play into how you position your portfolios. Is
Speaker 7: that if the economy is good, and that's the reason
Speaker 7: why we have interest rates that are relatively high, that's
Speaker 7: not necessarily bad for equities. It doesn't mean that equity
Speaker 7: markets necessarily can go up or need to go up,
Speaker 7: but it doesn't necessarily mean that they need to fall either,
Speaker 7: because if you continue to have good top line growth,
Speaker 7: you can hold your prob fit ability where it is. Then,
Speaker 7: you know, then it becomes a valuation story, not a
Speaker 7: fundamental story for I think companies more broadly so, I
Speaker 7: think interest rates are You know, there will be shifts
Speaker 7: in how the market and how the different markets react
Speaker 7: to each other, where that negative correlation you saw back
Speaker 7: in October might actually turn positive and be positive over
Speaker 7: the next six to nine months.
Speaker 5: All right, Ira, thank you so much. We appreciate that.
Speaker 4: Our Jersey chief US interest rate strategist, Bloomberg Intelligence, dialing
Speaker 4: in from our Princeton studio.
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