Speaker 1: This is the Bloomberg Surveillance Podcast.
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Speaker 3: Christopherroun with us around a tay Bupana had a technical
Speaker 3: of Matros Strategy strtig us a bad company. Chris good moins,
Speaker 3: it's great to be here. Is it time to buy
Speaker 3: that story?
Speaker 4: In China, I would say this, I wouldn't be sure.
Speaker 4: Think about how terrible the newsflow has been the last
Speaker 4: three or four which probably the most barrett news out
Speaker 4: of China I've seen since eight And what hasn't broken
Speaker 4: down iron Ore come to your point, has knockne down?
Speaker 4: Copper has not broken down. The Chinese two year yield
Speaker 4: has stopped going down. So I think the price action
Speaker 4: doesn't reflect the bearishness from the news. As someone who
Speaker 4: tries to marry, how does price action first news interact
Speaker 4: every day? It will be difficult for me to be
Speaker 4: here short and comfortable with that when I've gotten every
Speaker 4: piece of information in the direction of the bears, and
Speaker 4: price won't break lower. So I think, at a minimum,
Speaker 4: cover your shorts and open your imagination to the idea
Speaker 4: that something might be changing there.
Speaker 2: Chris, you and I are trend based analysis. There's a
Speaker 2: stochastic catching a knife in the dark and getting on
Speaker 2: a trend, staying on a trend. The trend you're most
Speaker 2: interested in is oil. I link oil demand directly to
Speaker 2: a Pacific rim recovery.
Speaker 1: Am I right to do that?
Speaker 4: I think we can link it to a number of
Speaker 4: inputs that certainly being one of them limited supply. I
Speaker 4: think the supply side of this is equally as important.
Speaker 4: But at the end of the day, we've had this
Speaker 4: just bearish onslaught of Russia news and of China news.
Speaker 4: And what hasn't gone down is crude. Crud's bottomed. It's
Speaker 4: positive in our trend work, I think brent on its
Speaker 4: way to ninety. Here. Look how the energy stocks, after
Speaker 4: a pretty meaningful consolidation or pause this year, have just
Speaker 4: regained the flag of leadership. When I look sector bisector,
Speaker 4: there's not another group that has say ninety percent of
Speaker 4: issues of the two hundred day, that has relative leadership.
Speaker 4: Inflecting again that the energy you have.
Speaker 2: A sex sound just as one example, what is xomb
Speaker 2: I mean basically it hasn't gone down as oil went
Speaker 2: from one twenty to seventy whatever back up to eighty
Speaker 2: as well. Is oil catching up to the equity stocks
Speaker 2: or do the oil stocks surge ahead of a recovering oil?
Speaker 4: Yeah, Tom, I think one of the things we try
Speaker 4: to do in our work is understand the regime we're in,
Speaker 4: and therefore we know what rules to play by. I
Speaker 4: think for so many years, every single rally in crude
Speaker 4: was one you could sell. Every time the energy stocks bounced,
Speaker 4: you should sell them. This is a different regime. We've
Speaker 4: had six months of a benign consolidation and energy and
Speaker 4: now it's reasserting itself to the point on exon. What
Speaker 4: I'm encouraged by is a lot of the return to
Speaker 4: leadership from energy has come without the major integrators doing
Speaker 4: a whole heck of a lot here. This has been
Speaker 4: the service names, this has been the EP names. Look
Speaker 4: at some of the big global names here as well,
Speaker 4: which have all really reignited in terms of a leadership story.
Speaker 5: Okay, what about elsewhere in cyclicals? Financial stocks in particular.
Speaker 5: I know you're looking at some of the banks. We
Speaker 5: were just talking about how we're continuing to see the
Speaker 5: ramifications of the failures we've seen this year. What's happening
Speaker 5: in those guys.
Speaker 4: I think if you told me that the Bank index
Speaker 4: would be down fifteen percent year to day, I wouldn't
Speaker 4: guess the SMP would be up fifteen percent year to day.
Speaker 4: We went back yesterday and looked at every major SMP
Speaker 4: low over the last hundred years. This would be the
Speaker 4: first time in one hundred years where you're nearly a
Speaker 4: year off the low last October, where SMP's up some
Speaker 4: number and banks are actually down. It would be more
Speaker 4: normal if banks were up seventy percent. Here they're down
Speaker 4: fifteen from where they were last October. You name by name.
Speaker 4: It's just odd to me that city group was back
Speaker 4: on the loads. Big of America's right there. Goldman and
Speaker 4: Morgan Stanley look weak, and we know the regionals have rolled.
Speaker 4: I think it's difficult to entirely dismiss that. I think
Speaker 4: the benign explanation is listen, fifty percent of the S
Speaker 4: and p's above, the two hundred and fifty percent is below.
Speaker 4: It's a very very split tape. What I don't like
Speaker 4: is on the wrong side of the split tape, you
Speaker 4: have some pretty important groups like banks.
Speaker 3: So if you're saying we're too pessimistic on China, are
Speaker 3: we too constructive on the United States?
Speaker 6: Yeah?
Speaker 4: I think we're probably first, probably too constructive on Europe,
Speaker 4: which I think is deteriorating right now. Like look at
Speaker 4: three month low German d acts, three month low French
Speaker 4: CAC and you know what drove a lot of those
Speaker 4: markets where European luxury names, those have all rolled here,
Speaker 4: European discretionary has rolled. So you know, in a way,
Speaker 4: go back fourteen to fifteen months ago, Europe was kind
Speaker 4: of first to bottom and turn up and lead. That
Speaker 4: seems to be flagging here. So I think before you
Speaker 4: talk about US at major risk, I think there's a
Speaker 4: change going on in Europe. You see in euro usdcross
Speaker 4: as well, which has come in sharply as US German
Speaker 4: rate differentials have changed.
Speaker 3: So what am I positioning for Donna strengths? What are
Speaker 3: you looking for? Why do your positions take advantage of that.
Speaker 4: You know what's funny is I think it's interesting how
Speaker 4: consensus short dollar is yet dollars really not going down
Speaker 4: almost against anything I pair it against in a way
Speaker 4: time it actually makes energies resilience here even more noted
Speaker 4: that it's happened even as dollar has firm, but dollars
Speaker 4: firm against end, it's firm against Euro, it's firm against Stirling,
Speaker 4: it's firm against C and H. So hard for me
Speaker 4: to really embrace the short dollar call when it's just
Speaker 4: not on the charts.
Speaker 2: And I'm looking at BBDXY, which is a blended bank
Speaker 2: index which includes a lot of emerging market in China
Speaker 2: as well, and to be kind, it's well behaved and
Speaker 2: centered trend on the trading level of two standard deviations
Speaker 2: as well. You suggest that break stronger.
Speaker 4: I think if you look pair by pair, it's hard
Speaker 4: to come up with a really compelling short dollar call here.
Speaker 4: I mean, even like also USD, right, that's been soft.
Speaker 4: I think the pair you ought to focus on here
Speaker 4: is actually EUROCNH. Euro has been so strong versus C
Speaker 4: and H for the better part of the last year
Speaker 4: that actually seems to be changing here. And I think
Speaker 4: it's in step with this idea that something's changing with China.
Speaker 4: Perhaps a stronger CNH relative to euro is one more
Speaker 4: sign in that direction.
Speaker 3: You've got a call for lagat next month, September fourteenth.
Speaker 4: You know, when I look at say German rates is
Speaker 4: kind of our barometer here. They've effectively been in this
Speaker 4: range for the last six or seven months. My experience
Speaker 4: in this business has always surprises break in the direction
Speaker 4: of the trend, and I think the trending global rate
Speaker 4: is still up. So I think if there's a surprise,
Speaker 4: its rates have one more or last push in them.
Speaker 4: That would be our.
Speaker 3: Guest, Chris. This was awesome. Thank you, by thank you,
Speaker 3: Thank you, Chris around mister to take us there. If
Speaker 3: you want to call on the FX market, Goldman Sachs
Speaker 3: out with the call on the FX market six month
Speaker 3: call dolly n. They were looking for one thirty five,
Speaker 3: they're now looking for one fifty five on dolly En.
Speaker 3: They've gone back to the nineteen nineties on the Japanese end.
Speaker 2: Governor, you had to have the chance to clear the
Speaker 2: air at Jackson Hall. From what I can tell, he
Speaker 2: did not. There's a huge uncertainty there and here what
Speaker 2: you said, John, one thirty five in the Golden Sex,
Speaker 2: cause what.
Speaker 3: They're looking for one fifty five? The co what's one.
Speaker 1: Forty seven right now?
Speaker 2: And I would say kid Jukes and others are really
Speaker 2: heightened here at one forty seven. I don't know where
Speaker 2: you break through one fifty, but I'm sorry. The Bank
Speaker 2: of Japan, the Ministry of Finance will defend the yen
Speaker 2: on the path to one fifty five.
Speaker 3: You got a level of mind there, Chris. But when
Speaker 3: that happens for the bijah high higher? How much higher?
Speaker 1: Weaker?
Speaker 7: Ye?
Speaker 4: I'm drawn to the fifty five number. It's an important
Speaker 4: Fibinac number actually if you look at kind of the
Speaker 4: long term dollary en charp. But you kind of can't
Speaker 4: have both ways. You're either going to defend the bond
Speaker 4: market or you're going to defend the end, and I
Speaker 4: don't think you can do both. The big winner, though,
Speaker 4: I think is domestic Japanese assets, if they're doing everything
Speaker 4: they can to keep money at home. I think Japanese
Speaker 4: bank stocks reflect that did the strongest bank stocks anywhere
Speaker 4: in the world. I don't think that's an accident.
Speaker 3: Chris Farrean go to Thank you twice.
Speaker 1: What a joy to get.
Speaker 2: A brief summary from Jay Brice and chief economist at
Speaker 2: Wills Fargo.
Speaker 1: I love, love, love Jay.
Speaker 2: The two sentences in your report on a real yield
Speaker 2: and inflation adjusted ten year yield that will quote drift
Speaker 2: through two percent. What's the ramification to our viewers and
Speaker 2: listeners of a two point one or a two point
Speaker 2: two percent real rate?
Speaker 7: Well, so, I think the ramification is that exerts significant
Speaker 7: headwinds on the US economy. I mean, what you look
Speaker 7: at with the real rate, and Mike was kind of
Speaker 7: talking about this before, is that's what matters for the
Speaker 7: real US economy. And if the potential growth rate of
Speaker 7: the US economy, no one really knows exactly where that.
Speaker 6: Is, but let's call it roughly two percent.
Speaker 7: I mean, you kind of want, you know, a real
Speaker 7: FED funds rate, you know, at that or maybe even
Speaker 7: a little bit below that would be neutral. You get
Speaker 7: north of two percent, then you're putting some real restraint
Speaker 7: on the economy. Whether it's enough to actually cause you know,
Speaker 7: a technical downturn, technical recession, that kind of remains to
Speaker 7: be seen. But even if it's not enough, it certainly
Speaker 7: puts headwinds on the economy.
Speaker 6: It slows growth in the US economy.
Speaker 2: I mean, jee, I've got a Bloomberg Financial Conditions Index
Speaker 2: a positive.
Speaker 1: Point three one. Folks.
Speaker 2: All you need to know in the mathiness of it
Speaker 2: is it screams accommodation to me, how many rate rises
Speaker 2: do we need to get truly restrictive?
Speaker 7: Well, so, Tom, the index that you're referring to, and
Speaker 7: just for your viewers, it comes up with like there's
Speaker 7: ten different variables beneath it, okay, And one would be
Speaker 7: credit spreads on corporate bonds, one would be volatility and
Speaker 7: markets things of that nature. Those are the big, the
Speaker 7: big sort of things. And so how do you how
Speaker 7: do you get it more restrictive? I guess it would
Speaker 7: be if the Fed were to become really more hawkish
Speaker 7: here and so you start to price in some more rate.
Speaker 6: Hikes in there.
Speaker 7: That leads to volatility in the stock market, that pushes
Speaker 7: bond spreads wider.
Speaker 6: All those things.
Speaker 7: Really matter for you know, for the real economy as well.
Speaker 7: And right now markets you know, are looking at markets
Speaker 7: have been I would say, very accommodative. Recently, bond spreads
Speaker 7: have narrowed, you know, the stock markets holding in there.
Speaker 7: But you know, if we get let's say we got
Speaker 7: a bad PCEE print, you know tomorrow, or or you know,
Speaker 7: a really strong labor market number, and people start to believe, okay,
Speaker 7: there's even more tightening coming in there. You'll start to
Speaker 7: see that tightening in terms of the financial markets.
Speaker 5: But but the question is, you know when that tightening
Speaker 5: will come. Even if we do get those things this week,
Speaker 5: If we get a blowout jobs report, if there's more
Speaker 5: inflation pressure, then perhaps the Fed would like to see
Speaker 5: would that actually result in a hike in September. We
Speaker 5: were discussing earlier how the bar for next seems quite high.
Speaker 5: Would they still not pause, wait to see the lagged defects,
Speaker 5: perhaps kicking in more than make a call on November?
Speaker 6: Yeah, Kelly, we agree. I agree with your sentiment there.
Speaker 7: I mean, I think that, as you said, the bar
Speaker 7: for a rate hike in September, I think is pretty
Speaker 7: high at this point. I think, you know, my sense
Speaker 7: is where the consensus on the FOMC is right now
Speaker 7: is we want to see a.
Speaker 6: Little bit more data.
Speaker 7: And so if you do get a blowout jobs report,
Speaker 7: if you do get a bad PCEE print. I think
Speaker 7: what happens in terms of markets is that pushes the
Speaker 7: probability of rate hike in November up.
Speaker 6: But that would also, I think lead to some volatility
Speaker 6: in markets.
Speaker 2: Jay question, with immense respect for what Wills Fargo's done
Speaker 2: on labor economics for decades, is our job market accountable
Speaker 2: or are we going to be surprised every job's day forever?
Speaker 2: Where we really guys like you sort of don't in
Speaker 2: your great team, don't really have a handle on the
Speaker 2: accountability of the two surveys.
Speaker 7: Well, so you know, when we look at our model,
Speaker 7: we look at the you know, the error bands around
Speaker 7: that are estimate. You know, the arab bands around our
Speaker 7: estimates are you know, similar, like plus or minus seventy thousand.
Speaker 7: So you know, in some sense you're you are throwing
Speaker 7: a little bit of a dart with that, and and so,
Speaker 7: and then that gets magnified in terms of the of
Speaker 7: the pandemic because that just puts so much volatility into
Speaker 7: the underlying numbers that you're using to try to come
Speaker 7: up with a prediction. So as the pandemic stuff starts
Speaker 7: to fade away over time, I think those aerror bands
Speaker 7: will start to narrow, but it's always at the end
Speaker 7: of the day, you know, a little bit of a
Speaker 7: guessing game as it relates to the labor market.
Speaker 5: Yeah, and as it relates to you know, the headline
Speaker 5: figures on non farm payrolls. But when we think about
Speaker 5: some of the other components of the labor market data,
Speaker 5: specifically the pressure, the upward pressure perhaps on wages. We
Speaker 5: were speaking with City earlier on in the show about
Speaker 5: what we're seeing in terms of strike activity and union
Speaker 5: activity and the power of labor and in pushing for
Speaker 5: higher compensation. How should we be thinking about that and
Speaker 5: how it relates to the FEDS fight against inflation.
Speaker 7: So you get a lot of headlines in terms of
Speaker 7: you know, unions and things of that nature. I want
Speaker 7: to say that I don't remember the number off the
Speaker 7: exact top of my head, but I want to say,
Speaker 7: the percent of the labor force that's unionized today, it's
Speaker 7: only like six percent. I mean, we're not talking the
Speaker 7: nineteen fifties or nineteen sixties here. It's a much smaller
Speaker 7: sort of a piece of that. And so it's you know,
Speaker 7: there's gets a lot of headlines, but at the end
Speaker 7: of the day, it's a marginal sort of effects in
Speaker 7: terms of wages.
Speaker 5: And sorry to interrupt, but the thesis, the thinking from
Speaker 5: City says that this is more just an indication of
Speaker 5: the supply problems we are still seeing in labor, which
Speaker 5: is why workers feel empowered to ask for more and
Speaker 5: in theory that goes beyond beyond unions.
Speaker 6: Yeah, that's a good point.
Speaker 7: I mean, obviously, the labor market is very very tight
Speaker 7: right now. You know, to push for higher, higher wage gains.
Speaker 7: That's easier when you are unionized, when you have collective
Speaker 7: bargaining than if you're just out there independently doing it.
Speaker 7: But know, the point is that the labor market is tight.
Speaker 7: But you know, anything that we've seen right now, whether
Speaker 7: you're looking at the ECI, whether you're looking at the
Speaker 7: employment cost Index, whether you're looking at average hourly earnings,
Speaker 7: all of those things showed there has been some deceleration
Speaker 7: in terms of wages. Now we're probably still above where
Speaker 7: we need to be to be consistent with a two
Speaker 7: percent inflation rates. But that said, it's it's we're not
Speaker 7: getting the same sort of upward pressure on wages that
Speaker 7: we were, say last year at this time.
Speaker 2: Jay personal income, personal spending, are they acting in a
Speaker 2: normal way?
Speaker 7: Personal yes, I mean, given it's given as tight as
Speaker 7: the labor market is right now, personal income is acting
Speaker 7: in the normal way if you look at the last
Speaker 7: the last I don't know, ten eleven out eleven months,
Speaker 7: we've had positive real disposable income growth because wages are
Speaker 7: growing faster than what prices are going up.
Speaker 2: Right now, J Brison, thank you so much. Doctor Bryson
Speaker 2: is with Wells Fargo to.
Speaker 1: Joining us now.
Speaker 2: Smartest guy in a block, John Ovallo, US homebuilders analyst
Speaker 2: at UBS. Did you see this coming?
Speaker 7: Like?
Speaker 2: Were you like pounding the table Ubs strong by back
Speaker 2: when everybody said they're all going to die and they didn't.
Speaker 8: I'll tell you we came out of the gates pretty
Speaker 8: bullish when we when we launched about a year and
Speaker 8: a half ago, and we did not expect this to
Speaker 8: play out the way it did.
Speaker 4: However, we your thumb up.
Speaker 1: You were a thumb up at the time.
Speaker 8: One hundred percent. And I mean we were looking at
Speaker 8: stocks that were trading at a fraction of book value
Speaker 8: right when we saw very little risk to book value.
Speaker 2: Now, what I mean a DH hort and venerable company,
Speaker 2: are they all the executives all unload and shares and
Speaker 2: and that on a log basis, it's a log convex
Speaker 2: to say the least are going to call it a moonshot.
Speaker 1: Now, what for the homebuilders, we're still bullish.
Speaker 8: I think that it's an incredibly interesting dynamic that's playing
Speaker 8: out right now where there is just very very little
Speaker 8: existing home inventory three point two months to be exact,
Speaker 8: that's about half of what it should And so you
Speaker 8: couple that with the fact that demand out there is
Speaker 8: still resilient, regardless of the fact that rates are at
Speaker 8: seven and a half percent, and the demand is all
Speaker 8: being funnel towards these public homebuilders.
Speaker 5: I just wonder how long that could last. John. If
Speaker 5: we're north of seven already on the approach to eight percent,
Speaker 5: that's got to hit demand at some point, even for
Speaker 5: people who are trying to.
Speaker 8: Buy new one hundred percent. But the beauty of being
Speaker 8: a public home builder is that you have arrows in
Speaker 8: your quiver. What they can do that the existing incentives incentives,
Speaker 8: so they can buy down mortgage rates, and not only that,
Speaker 8: they can build smaller footprints, they can build a little
Speaker 8: further away from the city center, so there's optionality that
Speaker 8: the existing home market doesn't have. You can't pick up
Speaker 8: the home and move it, and so there's a lot
Speaker 8: of things that are favoring being a builder at this point.
Speaker 3: So John, in the UK, this can slowly correct because
Speaker 3: they fixed rate mortgage over there is maybe an agreement
Speaker 3: for two, three, four, five years, some even on floating.
Speaker 3: Right the US mortgage market thirty you're fixed. I'm trying
Speaker 3: to work out, johnni we're facing something generational here. Is
Speaker 3: this something that goes over the next decade, twenty years?
Speaker 3: How are you thinking about that? Just what kind of
Speaker 3: time arison have you got for this to play out.
Speaker 8: I think that there's a long, long runway here in
Speaker 8: the US housing market. You have, first of all, a
Speaker 8: massive generational wealth transfer sixty eight trillion dollars being funneled
Speaker 8: from baby boomers to millennials in Gen X, And you
Speaker 8: have an underbuilt housing market in the US and a
Speaker 8: lot of millennials that are coming to the market right
Speaker 8: now that have been kind of shut out of the
Speaker 8: market for fifteen years, and all of a sudden they're saying, well,
Speaker 8: you know what, I think we do want to own
Speaker 8: a home. They're a little bit wealthier than prior, prior generations,
Speaker 8: they have the ability to borrow from parents and so forth,
Speaker 8: and so that capacity and ability to buy is actually there.
Speaker 8: And he adds to the fact that.
Speaker 2: So our housing market is based on rich parents giving
Speaker 2: money to kids.
Speaker 8: That's part of it for sure. But I would say
Speaker 8: that the generation that's coming through right now as the
Speaker 8: first time home buyer is a little bit better healed
Speaker 8: than prior generations because they're a little bit older, they're
Speaker 8: doing things a little bit later in life. So there
Speaker 8: is wealth that has been been accumulated. And this is
Speaker 8: a need based player, right.
Speaker 2: Okay, the fancy people you follow have I mean, Granted's
Speaker 2: out now writing kitchens.
Speaker 1: You don't do.
Speaker 2: Granted courts now courts Thanks Katie Lin's on top of that.
Speaker 2: Everybody you talk to who's got courts kitchens. Why can't
Speaker 2: we build a starter home that's respectful.
Speaker 1: Why can't we do that?
Speaker 8: It's a great question, Tom. I mean, the one thing
Speaker 8: that this industry has not done over the years is
Speaker 8: really sort of adopted technology like other like other industries have.
Speaker 8: Think about the automotive industry, right, they're building a home
Speaker 8: today exactly the same way was built one hundred years ago,
Speaker 8: So there needs to be technology infusion into this industry.
Speaker 8: There are a lot of players that are working on this.
Speaker 2: I mean, John, we had an ice drink in the
Speaker 2: backyard and the ice skates to the refrigerator, cuts through
Speaker 2: the linoleum floor and nobody cared. And now you know
Speaker 2: it's a courtz counter right.
Speaker 6: Yeah.
Speaker 5: Well, but on the subject of and of the tools
Speaker 5: that are actually being used to build this home or
Speaker 5: these homes, part of the issue with rates being so
Speaker 5: high is because there's a fight to get inflation down
Speaker 5: and a lot of that inflation was actually just driven
Speaker 5: by supply chain challenges. Are builders still contending with that?
Speaker 5: Are there any supply issues that still are being worked out?
Speaker 8: The supply chain has gotten much much better. I mean,
Speaker 8: there are still some hang ups on electrifying communities, so transformers,
Speaker 8: things of that nature, but in general, the supply chain
Speaker 8: is getting a lot better than it was. And I
Speaker 8: would say, you know, the biggest sort of headwind, if
Speaker 8: you will, would be labor and we're just you know,
Speaker 8: in a labor constrained market. But the public builders, given
Speaker 8: their size and scale, have the ability to attract and
Speaker 8: retain better than the smaller builders.
Speaker 5: Okay, So as we're talking about the different public builders
Speaker 5: and of the different to Tom's point, you know, a
Speaker 5: starter home versus elsewhere in the new build landscape, between
Speaker 5: like a luxury player, more luxury oriented player, or one
Speaker 5: that is more for that base consumer. Who fares better
Speaker 5: in environment? Is it the luxury end.
Speaker 8: It's a really good question. We still actually favor the
Speaker 8: entry level first time buyer. And that's so that would
Speaker 8: be a d R.
Speaker 4: Horton.
Speaker 8: And that's because this is a very need based, life
Speaker 8: driven buyer. So marriage, children, things of that nature that
Speaker 8: require more space, and so to the extent that that
Speaker 8: person can make the math work, they're going to make
Speaker 8: it work. And you know what, the public home builders
Speaker 8: are going to help them make that math work. Now
Speaker 8: to your question, though, we like the other side too,
Speaker 8: so sort of a Barbell approach. We're a Toll Brothers
Speaker 8: of the World, for instance, who just reported a massive
Speaker 8: quarter that buyer is a little bit more shielded from
Speaker 8: interest rates. We have twenty five to thirty percent that
Speaker 8: are buying with cash, for instance.
Speaker 3: How disciplined are these home builders bank? That's what we're
Speaker 3: really trying to get at here. When you are able
Speaker 3: to construct really bullish thesis for things like home builders,
Speaker 3: where we can sit here and say this might be
Speaker 3: a ten to twenty year runway for these guys. If
Speaker 3: I'm listening to that, I'm just like, let's build, let's go,
Speaker 3: let's go, let's go. How disciplined are they being right now?
Speaker 8: It's a great question, and it's really what has changed
Speaker 8: between two day and maybe pre financial crisis, that there's
Speaker 8: been a lot of discipline instilled in the market because
Speaker 8: of the pain from the past. But maybe just as importantly,
Speaker 8: there are some capacity constraints, particularly on the labor front,
Speaker 8: that will not allow them to overbuild. So even to
Speaker 8: the extent that the industry wanted to overbuild, they wouldn't
Speaker 8: be able to. So there's natural governors to the growth,
Speaker 8: which I think are very healthy.
Speaker 3: I can't wait for these high prices for the rest
Speaker 3: of our lives. Tom Seclarly, that's the story right now.
Speaker 3: That can change. When you say things like that in
Speaker 3: the house in market, you just wonder how quickly things
Speaker 3: can change. John, Thank you, John Levelo that the GBS.
Speaker 2: This is a joy because he is the one who
Speaker 2: has been right, and also he's the one who's been responsible.
Speaker 2: Andersliman joins us right now with Morgan Stanley, Managing director
Speaker 2: of Fear, senior portfolio manager at Wrigley Field in Chicago,
Speaker 2: Andrew flying over Wrigleyfield. I'm sorry going into oh here
Speaker 2: there and look him down at Wrigley Field. It's God's country.
Speaker 2: You are in the market. How do you find the
Speaker 2: courage to be in the market now?
Speaker 9: Well, I think really the story of this year is,
Speaker 9: you know, it's a tragic story in many ways, which
Speaker 9: is stocks looked forward. But as Warren Buffett said, people
Speaker 9: use the rear view mirror to frame their viewpoint, and
Speaker 9: we had a terrible market last year, and that's when
Speaker 9: you're supposed to get more bullish after a down year.
Speaker 9: People looked in the rearview mirror and saw down here
Speaker 9: and got more pessimistic. So it was a you know,
Speaker 9: in hindsight, it was pretty in my opinion, you had
Speaker 9: to put the chips in because we had a bad
Speaker 9: year last year. And what I see now is all
Speaker 9: that money that washed out of the market hasn't capitulated
Speaker 9: back in. Sentiment has gone up, but flows have in
Speaker 9: turned positive. And I've never seen a bull market where
Speaker 9: ultimately people reverse and flow back into the market. It
Speaker 9: happened in twenty twenty one. I think money market yields
Speaker 9: being where they are are keeping people on the sidelines.
Speaker 9: But I just refuse to believe that ultimately this cycle
Speaker 9: won't end the same way, which is, we got to
Speaker 9: get everyone in before the boat sinks.
Speaker 2: How do you identify a second leg of the bull market?
Speaker 2: You and I know the pop off seventy four, first
Speaker 2: leg up of that mess was amazing, and then shock
Speaker 2: of shocks.
Speaker 1: I believe it was January of seventy five. We had
Speaker 1: a moonshot out eighteen months. How do you figure out
Speaker 1: your beginning a second leg?
Speaker 9: Well, I think there's you know, in terms of from
Speaker 9: now to year in and then looking further out. I
Speaker 9: think we're in a pause period now, but I suspect
Speaker 9: we'll have a strong fourth order for a three simple reasons.
Speaker 9: Number one is what I said is you know, and
Speaker 9: Jonathan's actually quoted me on this, which is the pain
Speaker 9: of being out of the market is going to become
Speaker 9: more cute as we get in the four reporter knowing
Speaker 9: that you got to go see clients and report, you know,
Speaker 9: how they've done relatives to the market. That's first. Number
Speaker 9: two is earnings are actually earnings growth rate is going
Speaker 9: to inflect from negative year over year to positive later
Speaker 9: this year. And thirdly, and this is I don't think
Speaker 9: this gets enough focus. The amount of money that the
Speaker 9: government is going to unleash in the Chips Act, Infrastructure Act,
Speaker 9: IRA Act, all coming starting the fourth quarter is huge,
Speaker 9: and that is going to invert the M two positive.
Speaker 9: That's another reason. So all those I think will drive
Speaker 9: the market higher. What I struggle with, and you guys
Speaker 9: have already touched on this, is how are we going
Speaker 9: to get back to two percent target? Which is what
Speaker 9: Jerome Powell told this last week. He's still targeting with
Speaker 9: wage pressures, all this public works spending coming, I just
Speaker 9: don't see that, and that worries me about next year.
Speaker 9: But I think this year it's a good set.
Speaker 5: Okay, well, but to expand on that point, and we
Speaker 5: actually were just getting headlines out from President Biden related
Speaker 5: to the Medicare drug negotiation part of the Inflation Reduction
Speaker 5: Act to what you were just referring trying to lower
Speaker 5: healthcare costs. But to your point on all of this
Speaker 5: fiscal stimulus an impulse that kick in later on this
Speaker 5: year and going forward, Does that good thing then become
Speaker 5: a bad thing when you're talking about more money being
Speaker 5: pumped into the economy and potentially what the FED is
Speaker 5: going to have to do to counteract that force.
Speaker 9: Sure, but absolutely it's a long term negative. But look
Speaker 9: what happened COVID. You know, we pumped a ton of
Speaker 9: money into the market, into the economy, and the market
Speaker 9: responded positively. So I think there's a positive response to
Speaker 9: that spending money, and we hear it from the companies
Speaker 9: and one of the reason why I like the industors.
Speaker 9: We're hearing these companies say the money is coming, We've
Speaker 9: got projects set up to do.
Speaker 6: So.
Speaker 9: I think this will dry part of the economy and earnings,
Speaker 9: but it's going to extend this inflation fight longer than
Speaker 9: I think many expect.
Speaker 2: Inside Baseball question, Jeff Curry at Goldbin Sachs, retiring there
Speaker 2: out of the oil racket, talked about how the new
Speaker 2: yield structure getting us back to pre two thousand and
Speaker 2: seven makes inventory management and the hydrocarbons completely different. I
Speaker 2: would suggest across America we underestimate what inventory management, given
Speaker 2: a real yield, how it changes corporate behavior. I would
Speaker 2: suggest corporations will begin to adjust viscerally to these new yields.
Speaker 9: Do you agree, Well, there's no question a rising ye'll
Speaker 9: curve creates a higher cost of capital, and eventually that's why,
Speaker 9: you know, rates going up causes a recession. And I
Speaker 9: don't question that. Inverted you'll curve is also suggesting that
Speaker 9: the question is when, and it's not very good at predicting,
Speaker 9: And I think what is really going on here is
Speaker 9: that actually, for most of the companies in the S
Speaker 9: and P five hundred, higher yields is a net positive
Speaker 9: because they've locked in fixed rates, but they're making more
Speaker 9: on their cash. So right now, right now, it's not
Speaker 9: a negative. But certainly as that as that debt comes due,
Speaker 9: the cost of capital will increase. The other thing that
Speaker 9: it will slow is ultimately capex spending because projects are
Speaker 9: harder to justify at higher yields. I think that's all
Speaker 9: to come. I just don't think it is this year
Speaker 9: or early next year.
Speaker 3: Andrew isn't a negative for the banks.
Speaker 9: Yeah, you know, again, it's the cost of capital. So
Speaker 9: I think that that that they're the spread, the margins
Speaker 9: remain higher. What I've want worry about will we have
Speaker 9: another SVB crisis out there. It doesn't look that way.
Speaker 9: We've watched the bar at the window. It doesn't look
Speaker 9: that way to us. But ultimately, is there are there
Speaker 9: other banks that have a duration issue. That's a tough,
Speaker 9: tough question to answer.
Speaker 3: They've just not tried it well over the last month.
Speaker 3: Tak the financial it's been a tough one.
Speaker 9: The other areas in value I would search.
Speaker 3: For, Andrew, do you want to finish that? You've got
Speaker 3: about fifteen seconds if you want it, well, there is sure.
Speaker 9: I think the industrials look very attractive because i think
Speaker 9: with this public work spending coming, I'm very comfortable that
Speaker 9: these companies are going to make or beat the numbers,
Speaker 9: whether it's materials, industrial companies or with this spending that's
Speaker 9: that's already been approved. So this has already been approved.
Speaker 9: I think that's a cleaner area than financials.
Speaker 3: Right now, Drew, thank you, sir, Andrew Slim and there
Speaker 3: of more good standing.
Speaker 2: This is a joy on your biggest headache besides what
Speaker 2: we've said on housing and all today.
Speaker 1: And that is never an always airline.
Speaker 2: Sheila kahou joins US right now, Senior Equity Research channalysts
Speaker 2: at Jeffries and once she dabbled in leveraged finance, so
Speaker 2: she's got a really twisted financial understanding of this crazy business. Sheila,
Speaker 2: My arch question is do you change your bag? What
Speaker 2: is the behavior of senior managers? Are the senior managers
Speaker 2: now at United Delta Southwest all of them? Are they
Speaker 2: not like one or two generations ago where they're actually
Speaker 2: going to deliver a more persistent free cash flow.
Speaker 10: Thanks Tommy giving me a lot of it. At Jefferies,
Speaker 10: I focus on equity coverage covering aerospace, defense, and airlines,
Speaker 10: so I get the benefit of covering, you know, three
Speaker 10: segments of the market. And we're quite negative on the
Speaker 10: airlines just having our other coverage with the OEMs, mainly
Speaker 10: because of pricing and what we're seeing the low cost
Speaker 10: carriers doing. But we do think the network carriers are
Speaker 10: better positioned, like the Deltas and the Uniteds of the
Speaker 10: world that are getting that premium customer base versus the
Speaker 10: network carriers versus the low cost carriers that might see
Speaker 10: a little bit more pricing softness potentially as people's pockets move.
Speaker 5: Okay, so to that point, we're starting to see a
Speaker 5: little bit of a deterioration in the pricing power of
Speaker 5: some of these airlines. Is that to suggest that travel
Speaker 5: demand post summer, now that it's winding down, isn't going
Speaker 5: to look as great.
Speaker 9: I think that's the question.
Speaker 10: I don't think you know.
Speaker 9: First of all, I think.
Speaker 10: Corporate is stagnating at eighty five percent ninety percent, and
Speaker 10: some of the meetings are getting replaced by Zoom permanently,
Speaker 10: so we haven't seen corporate improve and across the airlines,
Speaker 10: nobody's really calling for a massive improvement here. International has
Speaker 10: been recovering and is doing really well, and that's where
Speaker 10: we're seeing the pricing momentum, and that's why United and
Speaker 10: Delta are really benefiting, prices up twenty five percent plus.
Speaker 10: On the US domestic side, US domestic flights are still
Speaker 10: up year over year like down ten percent below twenty
Speaker 10: nineteen levels, and we're seeing pricing stagnate there. So it's
Speaker 10: is the wallet moving to international or are we seeing
Speaker 10: some customer softness there. That's the question that remains to
Speaker 10: be seen for twenty twenty four. But the fight that
Speaker 10: we a few weeks ago we downgraded Southwest Airlines to
Speaker 10: an underperform rating first and to perform on the stock
Speaker 10: basically because we think that they have to change their network.
Speaker 10: They announced a five hundred million network optimization plan that's
Speaker 10: going to go through the first half the next year.
Speaker 5: Okay, So if we're talking about some of that pricing
Speaker 5: power going away, the pricing not being as strong on
Speaker 5: the input kind of side, then it's also the question
Speaker 5: of output and costs, especially in light of the deal
Speaker 5: for example, American agreed to with its pilot some of
Speaker 5: the cost pressures on the labor side. Also what we're
Speaker 5: seeing in terms of energy and fuel costs. What's going
Speaker 5: to happen to the profitability of these airlines if they
Speaker 5: have those two dynamics happening simultaneously.
Speaker 10: I think that's the concern here. How much does the
Speaker 10: profitability shrink if pricing is going down, fuels going up,
Speaker 10: salaries are going up. American two weeks ago announce that,
Speaker 10: you know, their their pilot agreement. They didn't change the
Speaker 10: fulllier guidance. Because they change they took down some other expenses,
Speaker 10: and they were pretty ambiguous on what those other expenses were.
Speaker 10: So how does that now affect twenty twenty four costs?
Speaker 10: And how does that strength them Morgin profile at the
Speaker 10: corporate of these airlines, and that's really why we're to
Speaker 10: live on the center as we think, you know, pricing
Speaker 10: although fifteen percent above twenty nineteen levels probably stagnates here.
Speaker 10: We'll see what international pricing does next year, but we
Speaker 10: don't think domestic improves.
Speaker 2: Sure, their planes are packed, that's my amateur observation. They're
Speaker 2: absolutely ridiculously packed. Every seat's taken. It scenes. I remember
Speaker 2: when they were seventy four seventy six percent capacity, and
Speaker 2: yet I keep getting emails telling me that they're putting
Speaker 2: on flights internationally and particularly across the Pacific. Are those
Speaker 2: planes going to be full? Are those proven add ons?
Speaker 9: So I think that's.
Speaker 10: Where you're seeing the issue. You know, load factors is
Speaker 10: what we call them. They like you said, Tom, they
Speaker 10: used to be normalized in the high seventies, and now
Speaker 10: the high eighties are the new normal. But Southwest saw
Speaker 10: eighty three percent, I believe in the second quarter, which
Speaker 10: was relatively low for the highest trapical season. So it
Speaker 10: depends it's on certain markets. One of the examples they
Speaker 10: cited is certain cities in the US there are more
Speaker 10: work from home, so you don't need that connecting flight
Speaker 10: to a major hub. So that's where you're seeing the softness.
Speaker 10: But I think international demands and capacity is still well
Speaker 10: below twenty nineteen level. Sorry's national community and that's driving
Speaker 10: the demand in the person, Marrea.
Speaker 2: I don't know if you've seen this story, Sheila, but
Speaker 2: Alex Milson here for Bloomberg were the only story that
Speaker 2: matters today. There's going to be an adult and child
Speaker 2: section on airplanes. You gotta be kidnaping, Sheila, LaGuardia to DFW.
Speaker 2: There's going to be a children's section on the airline.
Speaker 10: I messed and missed it.
Speaker 5: Okay, Sheila, here's here's your context. This is one European airline,
Speaker 5: Corndon Airlines, is going to pilot a no kid area
Speaker 5: on a ten hour flight just between Amsterdam and Currosol.
Speaker 5: You can pay forty nine dollars to sit in the
Speaker 5: expori adult only zone.
Speaker 1: What do you think, Sheila.
Speaker 10: I didn't know that was a coveted route that needed
Speaker 10: a specialized section. But good for them if they think
Speaker 10: that's a niche market, Sheila.
Speaker 1: Thank you, Sheila. Call with this with Jeffreys here.
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