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Speaker 1: This is Bloomberg Surveillance. Volatility is going to be one

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Speaker 1: of the few constants in this environment, and that's because

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Speaker 1: there are all of these structural changes that are hard

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Speaker 1: to understand. All the signs are and all the trend

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Speaker 1: lines indicate that inflation is more likely to accelerate. We

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Speaker 1: got to go back to to find capital levels in

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Speaker 1: the banking industry as high as they are today, and

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Speaker 1: that affects the r E. Bloomberg Surveillance your link to

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Speaker 1: the world of economics, finance, and investment on Bloomberg Radio.

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Speaker 1: Good morning everyone, Michael McKee and Tom King Bloomberg Surveillance

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Speaker 1: to recalibrate for you into the weekend into next week

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Speaker 1: on a Friday. We've got lots going on in this hour.

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Speaker 1: Dean McKee of point seven two, he was outrageous ninety

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Speaker 1: days ago modeling out an unemployment rate down to four

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Speaker 1: point two, four point one even four point zero percent.

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Speaker 1: That is hugely optimistic on the American labor economy. Dr

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Speaker 1: mackee will join this in this our John Galla with

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Speaker 1: us with RBC Capital Markets to readjust your four oh

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Speaker 1: one k or six oh one k if you've been

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Speaker 1: right or like the rest of us. I'm in the

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Speaker 1: all cash fund, which has sort of been boring. John

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Speaker 1: GOLLI will try to migrate me out of that. Here.

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Speaker 1: He'll be with us in moments. Bloomberg Surveillance this morning

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Speaker 1: brought to you by Investco. Looking for investment views. Experienced

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Speaker 1: experts are just to click away. Go to investco dot

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Speaker 1: com slash us to subscribe to the investco blog. Follow

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Speaker 1: them at investco US out on Twitter. Investco I n

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Speaker 1: v E s CEO at Investco US on Twitter. Features

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Speaker 1: up four as Karen mentioned, um Yen one eight and

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Speaker 1: watching Gold Week this week twelve fifty seven, there's some

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Speaker 1: form of support at Gold thirty. We're really not there.

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Speaker 1: To begin the hour, John Gallib with us with RBC

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Speaker 1: Capital Markets and John, you know, we've talked about a

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Speaker 1: number of things this morning, but let's go now to

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Speaker 1: your treatment of revenue misses and revenue beats. When I

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Speaker 1: talked to David Wilson, it's like mismssmisbeat, miss missbeat. It

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Speaker 1: seems to be more mrs and beats. Am I right? No,

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Speaker 1: you're you're not. I mean, if you look at this

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Speaker 1: earning season, what you've had is some really huge headline misses.

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Speaker 1: So you've had some you know, big tech companies like

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Speaker 1: Microsoft and and the like. But if you if you look,

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Speaker 1: seventy five plus percent of companies are are surprising the UM.

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Speaker 1: I think the media beat is something like seven percent.

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Speaker 1: So it was a from a growth perspective, this was

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Speaker 1: a softy earning season. But companies did you know, much

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Speaker 1: better than expected? So then how do you model forward?

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Speaker 1: If we I mean a lot of headlines out we're

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Speaker 1: now read on the sp A five hundred for the year,

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Speaker 1: woe is me, malaise? You're an enthusiastic guy, temper or

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Speaker 1: gauge now your bullishness into the end of the year.

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Speaker 1: What So I'll start with what the what Wall Street

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Speaker 1: is expecting? So what all these analysts are a Kimberling expecting,

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Speaker 1: which is something in the ballpark of a flat earnings

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Speaker 1: year over year in the second quarter, maybe three or

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Speaker 1: four percent in the in the third, and maybe six

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Speaker 1: or seven percent in the fourth. So what we're expecting

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Speaker 1: is not gangbuster earnings growth, but improving artist But then

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Speaker 1: what supports forget about whether you want to acquire shares

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Speaker 1: Monday or not. What supports equity besides FED policy is

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Speaker 1: it use of cash is that cash free cash flow

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Speaker 1: is that's what's gonna be. Well, I think that's that's

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Speaker 1: something that's really underestimated. What you have is right now

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Speaker 1: is companies in an environment where economic growth is really

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Speaker 1: weak are returning more capital to shareholders. If you if

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Speaker 1: you take buy backs and dividends, the amount the companies

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Speaker 1: take up their earnings and give it back to the marketplace.

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Speaker 1: UM stocks are yielding four point seven percent. Now a

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Speaker 1: ten year bond is yielding you know what is it?

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Speaker 1: One eight one eight five right now? So stocks relative

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Speaker 1: to anything else are very walks through this. Now, if

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Speaker 1: you have a dividend of two three per set in

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Speaker 1: the United States, higher dividends in Europe again, and then

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Speaker 1: you overlay on top of that the quote unquote dividend

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Speaker 1: from share buy backs and from dividend growth right right,

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Speaker 1: and that gets you up near five. That's blended throughout,

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Speaker 1: including ugly oil. That's correct. And if you look at

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Speaker 1: you know, our guess is that once oil prices recover

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Speaker 1: a bit, you can that that four point seven year

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Speaker 1: can go as high as the low fives. It's much

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Speaker 1: higher than it is in Europe. Europe has a much

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Speaker 1: higher dividend, but they don't buy back their share so

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Speaker 1: they pay everything out at dividends. In the US, companies

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Speaker 1: are returning much more capital back to the market. Ter

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Speaker 1: Tag was when this city group earlier this morning, and

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Speaker 1: he talks about the idea of more stock for stock transactions,

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Speaker 1: the currency of M and he seems to be changing.

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Speaker 1: How does that roll into the stock market if every

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Speaker 1: stock out there's richly priced and use this currency, But

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Speaker 1: I don't. I don't see the stock market as being

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Speaker 1: particularly richly pricing right now. The multiple on stocks is seventeen.

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Speaker 1: Historically on our has been fourteen. But you you know,

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Speaker 1: you and I know that the rain has gone from

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Speaker 1: six four. You know, so we are we're you know,

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Speaker 1: we're a little above average. Stocks are not crazy priced.

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Speaker 1: And I think you hit the point cash flow back

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Speaker 1: to shareholders and what how attractive that is compared to

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Speaker 1: other alternatives. Is the only way that you should be

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Speaker 1: looking at the value of stock today? Has there been

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Speaker 1: a seat change in thinking in corporate suites when you

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Speaker 1: look at the m d NA, the management discussion and

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Speaker 1: analysis in the end your report to me, there's been

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Speaker 1: a permanent psychological, psychological change in use of cash in

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Speaker 1: corporate America do you fold that into your research? So

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Speaker 1: right now, for example, companies of the of the dollar

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Speaker 1: to earning, they're returning over of that is being is

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Speaker 1: basically free cash flow that can go back to shareholders.

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Speaker 1: If you go back fifteen twenty years ago, that was

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Speaker 1: about seventy So they are much more shareholder focused. On

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Speaker 1: the other thing, which is a big change. UM executives

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Speaker 1: fully realized maybe something the Fed doesn't, that we are

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Speaker 1: in a slow growing world. It's the world we live in,

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Speaker 1: and they are managing their businesses for that. So they

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Speaker 1: are using less capital, holding less inventory, being tighter about

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Speaker 1: their use of capital. So they're really managing optimally for

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Speaker 1: this kind of environment. John Gallup with this RBC Capital

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Speaker 1: Market Stine Mackie to join us here uh in a bit,

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Speaker 1: Futures up, four down, futures up thirty seven. We welcome

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Speaker 1: all of you worldwide to Bloomberg Surveillance Coast to coast

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Speaker 1: as well the most interesting Friday to dive into your

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Speaker 1: weekend of reading. I look John Gallup at the at

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Speaker 1: the idea of the jure, which is dive it end

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Speaker 1: growth in consumer stocks, price to perfection. Let's start with

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Speaker 1: the idea I got smart, I owned a consumer stock.

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Speaker 1: It's up, up up. How do I hold it? Right now?

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Speaker 1: First of all, this this you know, what is a

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Speaker 1: consumer stock. So if you look at let's say the

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Speaker 1: North Strooms in the May season, Torry, so those traditional

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Speaker 1: and they're not and but those companies are I think

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Speaker 1: in a much more difficult competitive situation. If you look

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Speaker 1: at at um, you know, consumer staples, the stuff that

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Speaker 1: we use every day that's not under the same kind

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Speaker 1: of pressure, they are generate tremendous free cash flow back

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Speaker 1: to shareholders. On three M is not a consumer stock.

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Speaker 1: But I use Scotch tape every day, or the house does.

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Speaker 1: I mean I'm using it within a broad sense, many

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Speaker 1: of these stocks are priced to perfection within this gloom.

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Speaker 1: If again, I think if you look at even some

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Speaker 1: of these companies that may be trading in the high

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Speaker 1: teams in terms of pe suh that if you look

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Speaker 1: at what they're what they're return, the cash flow that

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Speaker 1: they're generating, the way that they're managing their their businesses,

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Speaker 1: and the value of that when interest rates are low,

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Speaker 1: and the alternatives for growth or a week. I think

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Speaker 1: those companies every passage here is the media's is guilty.

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Speaker 1: If this is anyone we quote the cash dividend prosdyke like,

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Speaker 1: you don't do that, you quoting your head cash dividend

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Speaker 1: plus buy back, et cetera. And the reason is is

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Speaker 1: that the U S companies have a certain amount of

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Speaker 1: cash and they can do a whole variety of things

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Speaker 1: with it. They can retire their debt, they can invest

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Speaker 1: in for the future, and when the growth prospects a week,

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Speaker 1: they're going to give it back. But economically, whether they're

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Speaker 1: doing that in a buy back or doing that in

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Speaker 1: a dividend, it really is the same thing because if

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Speaker 1: it's a buy back moves your stock price up. If

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Speaker 1: it's a dividend, you get the extra cash out. But

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Speaker 1: either way, it's a return that you're getting as somebody

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Speaker 1: holds the stuff the financials attractive. Here we get realm

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Speaker 1: mixed results. I mean, we've got cell Side saying maybe

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Speaker 1: not now, but there's a huge glory moment a year out,

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Speaker 1: two years out, three years out for the big banks.

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Speaker 1: Do you agree? I think it's I think as long

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Speaker 1: as interest rates stayed anywhere in the ballpark of where

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Speaker 1: they are right now, very very difficult to invest in

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Speaker 1: right now, the banks have become a big bet on

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Speaker 1: interest rates rather than a bet on their business models

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Speaker 1: and their strategic models and such. You know, I don't

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Speaker 1: think that's a classic American question. I don't think you

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Speaker 1: can't among the big banks. I don't think there's the

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Speaker 1: I don't think the regulators can allow for you know,

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Speaker 1: major mergency. You may have smaller banks squeezing together for

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Speaker 1: some efficiency. So either you're gonna have higher interest rates

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Speaker 1: or banks are gonna a bad investment. What do you recommend?

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Speaker 1: You work within the institutional space for the most part,

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Speaker 1: But what do you recommend for the idea of someone

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Speaker 1: with a four oh one care retirement plan. Their heads

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Speaker 1: are spinning by definition, they feel behind, even if they're

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Speaker 1: not actually behind. How do you find growthiness that helps

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Speaker 1: you catch up? You know, we've been talking about this

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Speaker 1: idea of stable growth. So there's there's like these these

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Speaker 1: mega growers, the facebooks and the Google that are delivering

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Speaker 1: you know, massive growth. But then there are companies that

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Speaker 1: are in you know, more boring areas like uh syntas

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Speaker 1: that you know make you know that that supplies uniforms

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Speaker 1: or waste management that holds your your trash, and they

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Speaker 1: grow at much lower rates, but they're stable, they're visible,

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Speaker 1: you can see it, and there's in a world where

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Speaker 1: there's so much uncertainty, investors are willing to pay more

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Speaker 1: for those kind of names then than they have in

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Speaker 1: the past. And I think that's where they could look

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Speaker 1: fift in seconds. Can you buy that pe multiple twenty

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Speaker 1: three consumer stock today? Forget about holding it? Can you

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Speaker 1: acquire shares at that level? I think you can. And

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Speaker 1: I will tell you that institutional investors are really struggling

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Speaker 1: with it, and I think they should be buying in.

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Speaker 1: But the institutional investors have all their radar of right there.

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Speaker 1: They are totally uncomfortable, and that may be the real

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Speaker 1: Like the draper guy in Madman today. I mean, it's

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Speaker 1: really back to isn't it. I think I think it is.

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Speaker 1: I think we will be back to John Galab with

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Speaker 1: us at the RBC Capital Markets, will continue this conversation

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Speaker 1: on the equity markets and were strapping across the American economy,

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Speaker 1: and then we'll move to Dean Mackie point seven two

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Speaker 1: as well. The yield one six percent, the two year

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Speaker 1: moving this week point nine zero percent on the us

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Speaker 1: full faith and credit. This our surveillance is brought to you

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Speaker 1: you by Palisades Outy. Visit Palisades out dot com. Here's

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Speaker 1: Michael Barr with the latest news headlines. Mike Tom, thank

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Speaker 1: you very much. An Egyptian Army spokesman says personal belongings

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Speaker 1: of the passengers and parts of the plane debris from

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Speaker 1: egypt Air flight eight oh four have been found one

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Speaker 1: hundred eighty miles north of Alexandria in the Mediterranean. The

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Speaker 1: plane crashed early yesterday after disappearing from radar while flying

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Speaker 1: from Paris to Cairo. The leading suspect and last November

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Speaker 1: as Paris attacks was questioned by investigative judges. It is

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Speaker 1: the first time Salam Obdous Slam has been questioned since

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Speaker 1: his extradition from Belgium last month. He didn't say much.

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Speaker 1: Slam was transferred this morning from a high security prison

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Speaker 1: in a Paris suburb to the main Parris courthouse for questioning.

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Speaker 1: The police chief of San Francisco has stepped down, Greg

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Speaker 1: Sara resigned after several fatal shootings and racially tends texts

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Speaker 1: sent by officers on the force. Global News twenty four

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Speaker 1: hours a day, Michael Bar. Thank you, Michael. Well. We

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Speaker 1: are looking at a market that is at least getting

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Speaker 1: over some of it's fed June move Jitters futures are

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Speaker 1: higher now. SMP features up by four. Bloomberg's Allowance is

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Speaker 1: Today Global business news twenty four hours a day at

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Speaker 1: Bloomberg dot com, the radio plus mobile lap and on

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Speaker 1: your radio. This is a Bloomberg Business Flash and I'm

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Speaker 1: Karin Moscow. This updates brought to you by c g M,

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Speaker 1: a Chartered Global Management Accountant. The c g M a

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Speaker 1: designation and program deliver critical skills your finance team needs

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Speaker 1: Slash Radio dear down three tenths percent in early trading,

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Speaker 1: the world's biggest firm equipment manufacturer, lowering its fiscal full

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Speaker 1: year profit outlook on projections for reduced sales of tractors

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Speaker 1: and COMBA and says farmers face a decline and income

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Speaker 1: future are higher with smp E. Many futures have four points.

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Speaker 1: And now we made futures of forty and nasdack emty

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Speaker 1: futures up thirteen decks. In Germany's up nine tenths per cent. Ten,

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Speaker 1: Your treasury down to thirty seconds. The yeld one point

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Speaker 1: eight five percent. NIMEX crude oil little changed. It said

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Speaker 1: forty eight dollars fourteen cents of barrel. That's down two cents.

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Speaker 1: Comic schooled up a tenth of upper center at dollar

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Speaker 1: seventy to twelve fifty six fifty announced the euro at

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Speaker 1: dollar twelve fifteen, the yen one ten point three nine,

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Speaker 1: and that's a Bloomberg business flash. Tom and Mike Cara Masco,

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Speaker 1: thank you very much. This is Surrounce. How Michael McKee

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Speaker 1: along with Tom Keene and Jonathan Golp from OURBC Capital Markets.

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Speaker 1: So Tom, we gotta put Jonathan on the record and

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Speaker 1: get him to make a forecast here of penguins lightning.

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Speaker 1: But we'll do that before he leaves. Uh want to

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Speaker 1: go to the FED a little bit and and pose

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Speaker 1: a question to you that's actually being posed this morning

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Speaker 1: by Nick Cholis at the converge X our friend over there,

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Speaker 1: He says, how high does the VIX need to go

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Speaker 1: in the next three weeks before the FED takes June

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Speaker 1: rate increase off the table. That's actually a really sophisticated

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Speaker 1: question given what has been doing. In other words, um,

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Speaker 1: you know, do you think that the markets are going

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Speaker 1: to be extraordinarily volatile around any kind of FED meeting

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Speaker 1: and lead the Fed by the nose to some sort

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Speaker 1: of conclusion one way or another. I'm looking at something

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Speaker 1: a little bit different, which is I think it's about

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Speaker 1: the dollar and and and oil. What happened over the

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Speaker 1: you know, really since mid February, which is is brought

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Speaker 1: the market up and taking all the tension away, is

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Speaker 1: that when the FED started to walk away from June

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Speaker 1: as a as a potential date for remove um, the

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Speaker 1: dollar fell and oil prices skyrocketed. And you can just

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Speaker 1: chart them like they're they're a single line. And so

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Speaker 1: I think that if the if the dollar starts to

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Speaker 1: strengthen and oil falls apart, I think the FED is

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Speaker 1: is absolutely out. Other than that, the data is perfectly well.

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Speaker 1: When you say the dollar strengthens, what do you mean

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Speaker 1: how strong does it have to get? Right now? We're

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Speaker 1: no where you're where it peaked earlier in the year.

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Speaker 1: And Um, as Bill Dudley said yesterday, isn't that the

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Speaker 1: pluy Um? You know, if you if you look at

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Speaker 1: the big things that have happened recently, the expectations for

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Speaker 1: the industrial sector and for anything which is more global

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Speaker 1: trade orient in terms of smp ficks, those companies have

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Speaker 1: taken off like a rocket and the expectations for their

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Speaker 1: earnings are up huge. Um. The energy sector is you know,

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Speaker 1: oil prices have have kind of recovered, and it takes

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Speaker 1: a tremendous pressure off of the banking sector and the

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Speaker 1: whole all the capital markets to risk in the whole

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Speaker 1: market falls down. Um, that whole set of issues is

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Speaker 1: really what I think the FED should be or will

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Speaker 1: need to be looking at. If if if the market

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Speaker 1: things are gonna move in June and it's willing to

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Speaker 1: swallow it and not get concerned that oil prices are

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Speaker 1: going to roll over again at the global times and

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Speaker 1: roll over, then you're from okay, But you work with

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Speaker 1: one of the guys doing the best work on wage dynamics.

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Speaker 1: Mr Purcelli, When when I agree with everything you're saying

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Speaker 1: about oil and dollar new correlations and all that and

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Speaker 1: how it comes into FED policy and d x y folks,

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Speaker 1: as I showed Monday or Tuesday, is just back into

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Speaker 1: the strong dollar range, nowhere near new dollar record strength.

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Speaker 1: But Percelli's looking at the wage growth dynamic. When you

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Speaker 1: read his work, what do you see? What do we see?

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Speaker 1: We see five percent unemployment, which is and and job

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Speaker 1: growth is strong enough to that number. Is you're talking

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Speaker 1: about d MACKI before expecting, you know, that unemployment rate

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Speaker 1: to fall into the midfloors or lower um. You have

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Speaker 1: inflation right now. If you look at the data you

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Speaker 1: came out this week, you have course cp I running

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Speaker 1: over two percent and wages are running ahead of course

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Speaker 1: c p I. The economic data tells you that Bill

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Speaker 1: Dudley's right defect defects you have moved a long time ago.

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Speaker 1: An interest rip B I don't know, a hundred basis

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Speaker 1: points higher than it is today. But what they're really

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Speaker 1: nervous about is this erupting not just the market, but

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Speaker 1: disrupting the economy. And mind you, we're having you know,

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Speaker 1: so I think that's the their concern. But if you

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Speaker 1: if you made Tom Purcelli the head of the FED

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Speaker 1: or most were most economists on Wall Street. I think

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Speaker 1: they would tell you Mr Trump would go for that. God,

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Speaker 1: don't even don't even uh let me, let me rip

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Speaker 1: up the script and change gears from that direction here

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Speaker 1: and point out that, Um, what you would expect And

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Speaker 1: what happened on Wednesday afternoon was that financials gained when

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Speaker 1: the idea of a June move came on and utilities

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Speaker 1: got hammered. And but yesterday that reversed. Uh, I mean,

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Speaker 1: shouldn't that hole. Shouldn't we see who's gonna in a

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Speaker 1: in a June scenario, who does well? Oh? And a

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Speaker 1: June scenario, Um, the banks are the single big winner,

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Speaker 1: and the utilities and the telcos and the reeds are

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Speaker 1: there the single big big loser. And you know the

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Speaker 1: rest of the market incrementally, companies that are a little

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Speaker 1: bit more cyclical might might might might weaken up a

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Speaker 1: little bit like it like you know, big industrial companies.

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Speaker 1: But but but the whole thing was I mean, we

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Speaker 1: probably did ask you, but I was gonna say, if

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Speaker 1: we asked you, and right before the Fed met in December,

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Speaker 1: you would have said the financials because of raising rates,

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Speaker 1: But that didn't happen. The financials had terrible quarter and

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Speaker 1: went down. Is it our rates so low now that

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Speaker 1: it really you know, a little move isn't going to

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Speaker 1: make a big difference to financials? Well, no, I think

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Speaker 1: it's the opposite. The lower interest rates are the more

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Speaker 1: that the financials become sensitive to you know, to to

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Speaker 1: being pulled out by by higher rates. So if we

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Speaker 1: were looking at if the tenure bond yield right now

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Speaker 1: was three or four percent, I'll tell you right now,

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Speaker 1: nobody would care. What the you know, the banks won't

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Speaker 1: care that much. We have been wonderful this morning talking

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Speaker 1: about twenty multiple stocks and all that we go dynamics.

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Speaker 1: Can you buy a pe of ten point five to

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Speaker 1: a yield of two point four percent three or dividend

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Speaker 1: growth of eleven sent for a year? They sell iPhones?

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Speaker 1: I mean, Apple is extraordinary in the on the bloom

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Speaker 1: bird screen that I see in terms of evaluation. Now,

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Speaker 1: you know, on the surface the answer is absolutely yes.

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Speaker 1: On the other hand, what what the story is over

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Speaker 1: there is negative earnings growth um on you know, in

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Speaker 1: right now, and that trend is probably going to continue

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Speaker 1: to be weak because they've saturated the market and their

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Speaker 1: margins are high and and but this is not a

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Speaker 1: new story, investors. Is the reason why Apple never got

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Speaker 1: the massive you know, we're not in the last piece.

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Speaker 1: It got the mass of multiple because because the market

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Speaker 1: kind of knew that there was a you know, just

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Speaker 1: so many phones that you were going to use, and

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Speaker 1: so the market is pricing it for deceleration. John Penguin's Lightning.

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Speaker 1: Oh you know, it's easier for me to go and

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Speaker 1: give you my prediction on the election. I don't know.

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Speaker 1: This is a thank you so much. I think we'll

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Speaker 1: go with Penguin's Good Morning, Pittsburg. Bloomberg's Surveillance. Bloomberg Surveillance

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