Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: We begin this out with stocks adding to gains to
Speaker 2: kick off the first full week of the first quarter.
Speaker 2: The third quarter, Mike Wilson and Walk and Stanley writing
Speaker 2: falling down into prices, peaking, tariff inflation and contained services
Speaker 2: keep the Fed on hold rather than hiking this year.
Speaker 2: Lower real rates should support equities and further fuel the
Speaker 2: broadening trade. On police to say that, Mike joins us
Speaker 2: around the table. For the next hour. He joins us
Speaker 2: for more. Mike, good morning, good to see you.
Speaker 1: Good morning.
Speaker 2: Let's just start with the stability we're seeing in the
Speaker 2: rates market and how important that is to set the
Speaker 2: stage for what you're anticipating in the next few months.
Speaker 3: Yeah, I mean, I think you were saying it earlier
Speaker 3: as listening to the show. I mean, there's somebody expecting
Speaker 3: a hike, there someone expecting.
Speaker 1: A cut, and we're on hold.
Speaker 3: And this is I think what we've got to get
Speaker 3: used to is that with the new chair probably not
Speaker 3: giving as much guidance, is going to allow the market
Speaker 3: to kind of figure it out on its own and
Speaker 3: have these different different views. We're in that adjustment period now,
Speaker 3: and I think That's one of the reason why the
Speaker 3: market's been a little choppy or even correcting in the
Speaker 3: last month or so, is we're getting used to this
Speaker 3: new regime, which is going to be higher volatility and
Speaker 3: potentially the bond market. But over time, I think what's
Speaker 3: going to end up happening is the market's going to
Speaker 3: settle down. It's going to it's actually more estimates. A
Speaker 3: wider dispersion of estimates actually least to the lower volatility
Speaker 3: in the pricing over time. But we're in that adjustment period,
Speaker 3: so we think rates are lower ultimately, particularly.
Speaker 1: At the back end.
Speaker 3: And by the way, we've talked about this on the
Speaker 3: show many times. New Treasury secretary, you know, new Fed chair,
Speaker 3: this kind of new Fed Treasury accord to really anchor
Speaker 3: the back end. That's what they're focused on. You got
Speaker 3: to get the back end down or at least anchored,
Speaker 3: because you have so much debt to shift to basically finance.
Speaker 2: Do you think in the meantime we're confusing a reduction
Speaker 2: and guidance with an increase in hawkishness in the meantime.
Speaker 3: Yeah, I think that's right, and then market is pricing
Speaker 3: that now, So that's the good news is that we've
Speaker 3: already had that adjustment, and that adjustment started four months ago.
Speaker 1: Right.
Speaker 3: This is why precious metals have traded really poorly. You know,
Speaker 3: the day that worsh was announced as a nominee, the
Speaker 3: gold market peaked and that that was a sign the
Speaker 3: dollar has been stronger. So once again the market has
Speaker 3: really gotten ahead of this.
Speaker 2: So rates of recent we come down from around four
Speaker 2: point suo percent to four point one. There's a belief
Speaker 2: this morning at least we've removed the urgency to hike
Speaker 2: as soon as July, so we can put that story
Speaker 2: to bed. Cruise the climb massive recent crewed from triple
Speaker 2: ditchits down to the sixties on wti's Does that open
Speaker 2: the door within the equity market and let's talk about
Speaker 2: the stock market exclusively. Does that open the door to
Speaker 2: the broadening trade again?
Speaker 3: Yeah, that's our call. Basically is that that was happening
Speaker 3: at the beginning of the year. Then we had Venezuela
Speaker 3: and then I ran. By the way, the market priced
Speaker 3: Iran before the invasion even happened or the attacks happened,
Speaker 3: because because once again it was pretty well signaled, and
Speaker 3: so that's when the broadening trade stopped. The broading trade
Speaker 3: literally stopped the day that the attacks happened, and we
Speaker 3: had the big spike in oil and then the pricing
Speaker 3: of the FED to high rates. Since I say mid May,
Speaker 3: which is when we reiterated the Briney call, we had
Speaker 3: a different view the most we thought ore prices would
Speaker 3: come down, and that has allowed now FED pricing to
Speaker 3: sort of stay wise, and that has allowed the broadening
Speaker 3: trade to regnite.
Speaker 2: Small caps have performed nicely, just had a massive quarter
Speaker 2: up by more than twenty percent on the rustle. We've
Speaker 2: seen the broadening trade. Speak to the performance we've seen
Speaker 2: in the equal white on the S and P five
Speaker 2: hundred as well. Let's talk about a MAC seven, which
Speaker 2: increasingly was called the Lack seven. You've got to know
Speaker 2: out this morning talking about maybe the money going back
Speaker 2: into the hyperscatus. Just walk us through how you're thinking
Speaker 2: about what's happened in tech and that divergence between the
Speaker 2: big spending companies and the beneficiaries of all that spending,
Speaker 2: of the diviogence that's really widened in the last few months.
Speaker 3: Yeah, I mean there's a symbiotic relationship between the spenders
Speaker 3: and the beneficiaries and typically they trade sort of in lockstep.
Speaker 3: And a couple of things we've been writing about for
Speaker 3: the last several months. Number one, capex to sales. That
Speaker 3: particular factor has been straight up since the Big Beautiful
Speaker 3: Bill has passed. Right that basically the government's incenting businesses
Speaker 3: to spend.
Speaker 1: Money today rather than later.
Speaker 3: And so that capex of sales factor has been driving
Speaker 3: a lot of stocks higher.
Speaker 1: That looks like it's peaking now.
Speaker 3: And by the way, the hyperscaler stocks started to trade
Speaker 3: poorly about a month and a half ago and into
Speaker 3: this idea. But that's not sustainable. You can't have the
Speaker 3: spender stocks trading poorly and the beneficiary stacks continuing to
Speaker 3: go straight up. And now what we saw last week,
Speaker 3: you know, Meta announced perhaps they're going to sell some
Speaker 3: excess capacity, maybe turned into a provider of capacity. That
Speaker 3: is just a reason for these things to take a break. Also,
Speaker 3: peak great a change on revision breath, right, the memory stocks,
Speaker 3: the revisions have been spectacular, but they can only go
Speaker 3: so high. So all that's kind of happening at the
Speaker 3: same time, and I expect the hyperscalers now to stabilize.
Speaker 3: That's what's going on in the last couple of weeks,
Speaker 3: and the semic counter stocks are going to are going
Speaker 3: to correct.
Speaker 1: That's a good development.
Speaker 3: That doesn't mean the capeck cycle is over, but that
Speaker 3: ebbing and flowing between the two is a natural kind
Speaker 3: of governing factor because you can't have this divergence continue.
Speaker 1: It's unstable.
Speaker 2: Your words take a break. That's interesting. Some people have
Speaker 2: called it a narrative shift for the overall trade and
Speaker 2: maybe a shift in spending. Two. Why is it one
Speaker 2: or not the other?
Speaker 3: Well, we don't know for sure, but we've had three
Speaker 3: of these already, John, So since chance GPT was announced
Speaker 3: in November twenty two, we've had three of these sort
Speaker 3: of mini cycles within the broader structural capex cycle, which
Speaker 3: is that the market starts to question, oh, the return
Speaker 3: on capital isn't good enough to support this kind of capex.
Speaker 3: What happens Then the stocks trade poorly, and then the
Speaker 3: CEOs of those companies come out and say, well, you know,
Speaker 3: maybe we won't spend as aggressively, and then it abbs
Speaker 3: the other way. And so that's that's the story. That's
Speaker 3: the dance back and forth. Now there is going to
Speaker 3: be a period there is going to be a time,
Speaker 3: we don't know when it's going to happen yet, where
Speaker 3: the CAPEC cycle will exhaust itself, and we will have
Speaker 3: you know, we've talked about this that there is going
Speaker 3: to be mal investment here. We don't think that that
Speaker 3: spending cycle is over because they just start raising the
Speaker 3: capital and the credit market, so they're going to spend
Speaker 3: the capital. Okay, So but we can have these mini
Speaker 3: cycles within in the structurable market of compul.
Speaker 2: I think, as you know, though, forget the spending that's
Speaker 2: not yet happened, is the intentions that matter. At a
Speaker 2: deceleration in capex intentions from here, how do you think
Speaker 2: this market's going to internalize the prospect of that in
Speaker 2: the coming months.
Speaker 1: Well, it's doing it right now.
Speaker 3: So we talk about it as a peak rate of
Speaker 3: change or you know, trough rate of change. Second derivative growth,
Speaker 3: and that's exactly what's going on. There's two things we're
Speaker 3: focused on. Ernie's revision breath for the semi country stocks
Speaker 3: themselves are like seventy five percent. That's about as high
Speaker 3: as it goes. We've documented that, so that's going to
Speaker 3: roll over. It doesn't mean it goes negative. But the
Speaker 3: deceleration on that can cause those stocks to correct, and
Speaker 3: then of course the hyperscalers will benefit if the market
Speaker 3: perceives these companies as being somewhat capex disciplined, that they're
Speaker 3: not going to do willy nilly spending in a way
Speaker 3: where free cash flow goes to zero or negative. And
Speaker 3: by the way, free cast real expectations for some of
Speaker 3: those companies.
Speaker 1: Are going towards zero. That's why they've underperformed.
Speaker 3: So it's just stands like I said back and forth,
Speaker 3: and now in the last week and a half, the hyperscaler,
Speaker 3: some of the hyperscalar stocks have started to trade better.
Speaker 3: That's a good sign that we're going to have a
Speaker 3: little correction. This could last you know, four, six, eight
Speaker 3: weeks something like that, and then we'll probably have the
Speaker 3: next upcycle for the semi.
Speaker 2: These are names that we're in bear markets. I'm talking
Speaker 2: about met To, Microsoft Matter had a better week last week.
Speaker 1: Chips.
Speaker 2: You keep using this word correct. When I hear that,
Speaker 2: I'm just thinking, what do you mean by that? How
Speaker 2: much is the downside? How big is the downside for
Speaker 2: somebody's chip?
Speaker 1: Nips?
Speaker 3: Well, these are hype beta stocks. I mean, they can
Speaker 3: correct thirty forty percent in a ball market.
Speaker 1: No.
Speaker 3: By the way, just look at the tun or day
Speaker 3: moving average. That's so that's probably a really good gauge.
Speaker 3: These stocks are so extended relative to those moving averages.
Speaker 3: That's how you got to think about it. Those moving
Speaker 3: averages exist for a reason, right, They always return to
Speaker 3: the moving averages. Does it happen in a violent way
Speaker 3: or does it happen kind of gradually over time?
Speaker 1: Walked? Await and see?
Speaker 3: But yeah, thirty percent correction in these stocks is I mean,
Speaker 3: well within possibility.
Speaker 1: In fact, some of them already have corrected. There.
Speaker 2: You can have a thirty percent correction in chips just
Speaker 2: bear with me here, and you can still see the
Speaker 2: index move up and to the right on the S
Speaker 2: and P five hundred even with a massive weight and
Speaker 2: they have well we didn't say pay that's what I'm.
Speaker 3: But I mean, that's part of our call too, is
Speaker 3: that we think this rotation is happening in a down tape. Okay,
Speaker 3: unlike the correction we saw on the precious metal staff
Speaker 3: in January. Because they're such a small part of the index.
Speaker 3: Energy stocks had a big correction after having a great
Speaker 3: run in January and February. Now the market traded off
Speaker 3: a little bit because of the war itself. But so
Speaker 3: I agree with what you're saying, or your premise or
Speaker 3: your question, which is, since these stocks are such a
Speaker 3: big part of the index, it's going to be really
Speaker 3: hard for the index to make any upward progress until
Speaker 3: this rotation has sort of happened.
Speaker 2: This is a summer story for you.
Speaker 3: Oh yeah, I mean, we're not bearish on the year end.
Speaker 3: We're still eight thousand plus per year end, and we've
Speaker 3: had that call for quite a while based on the
Speaker 3: earning story. So that earning story is very much intact.
Speaker 3: In fact, the fact that we're rotating now to some
Speaker 3: of these other areas almost confirms the thesis we've had
Speaker 3: all year, which is this is not just a techt story.
Speaker 3: That's a great story, but the broadening story is the
Speaker 3: story that I think people have really underestimated the rolling
Speaker 3: recession from a year ago, this operating lever story, which
Speaker 3: I think is still very underappreciated.
Speaker 2: Do you think the banks can start working now too?
Speaker 1: Well?
Speaker 3: They have been I mean, the the money center banks
Speaker 3: and the capital market spanks related have.
Speaker 2: Been Your stock absolutely Delvin Stock's fantastic. I'm talking about the.
Speaker 3: Others regionals and so they've started to perform, and that's
Speaker 3: been an area we've been highlighting. Now the yal curve
Speaker 3: is flattening still or you know, is having trouble kind
Speaker 3: of resteepening, so I think that group could pause a bit.
Speaker 3: We took that off of our list of favorites for
Speaker 3: the for the broadening trade this week, but ultimately between
Speaker 3: now and year end, we do think the banks are
Speaker 3: going to do quite well because this is the strategy
Speaker 3: of the Treasury and the Fed is they want more
Speaker 3: lending going through the traditional lending sector. So while the
Speaker 3: your curve is flattening, loan growth is accelerating and that's
Speaker 3: feeding this whole broadening out story of the economy, right.
Speaker 3: This is a strategy of the administration. They want a
Speaker 3: privately driven organic economic expansion and that's what we're getting,
Speaker 3: notwithstanding that maybe the labor market isn't as robust as
Speaker 3: some people were hoping, But that's also then feeding the
Speaker 3: earning story, right because you're seeing revenue growth without a
Speaker 3: crazy need to hire a bunch of people, and that's
Speaker 3: the operating liver story.
Speaker 2: One oh one, This market mic has been conditioned just
Speaker 2: to ignore all of this. This market burned by anyone,
Speaker 2: of course, anyone who was sure the market at the
Speaker 2: end of March for the next month or so got
Speaker 2: burnt really hard. Why should it pay any attention to
Speaker 2: any of this over the next week?
Speaker 3: Well would I would say, is the market intends to
Speaker 3: get in front of this stuff. So what I'm trying
Speaker 3: to figure out is what is it what is it
Speaker 3: digesting in the next six months. And I am this
Speaker 3: is one of the reason why I'm looking at that
Speaker 3: bullish in a short term for the I think we
Speaker 3: have this kind of low oil prices at this point.
Speaker 1: I mean tink it's down, it's in the market. Yeah,
Speaker 1: well it means.
Speaker 3: Oil prices are seventy bucks again. So it's going to
Speaker 3: be hard to really get oil prices below that level,
Speaker 3: you know, without you know, significant new source of oil
Speaker 3: or maybe demand being destroyed further, which is probably not
Speaker 3: a good thing for gross So I think this is
Speaker 3: another part of the story is that we you know,
Speaker 3: the market got ahead of this in April and May
Speaker 3: it said oil price is ry to change and oil
Speaker 3: prices are peaked. Okay, that the conflict that you know
Speaker 3: continues to go in between Ukraine and Russia. I mean,
Speaker 3: like to me, this is sort of back and forth
Speaker 3: and it's uncertain, But the market, just like tariffs a
Speaker 3: year ago, the worst, the rate of change, the worst
Speaker 3: part of it is now behind and markets are always
Speaker 3: forward thinking. So I'm trying to figure what's going to
Speaker 3: happen in six months that was happening next week