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Speaker 2: Eric Fannastron, we start strong, Chief investment officer at Wizard
Speaker 2: Asset Management. What a tumultuous weekend. The emotion, the President's
Speaker 2: tweet and everything else is well, what are people actually
Speaker 2: doing well?
Speaker 3: I think, Tom, if you look over the past couple weeks,
Speaker 3: this is not the first couple of days that we've
Speaker 3: had whipsaw action coming out of the White House in
Speaker 3: terms of how aggressive the posture is going to be,
Speaker 3: and or on and corresponding whipsaw action in the way
Speaker 3: markets are responding. You know, you open the show talking
Speaker 3: about OILBA at one o eight. It's not at ninety
Speaker 3: the way I think about it. It's at one oh eight,
Speaker 3: it's not at one thirty. If you do a basic
Speaker 3: back of the envelope on how much the oil price
Speaker 3: should be moving, if we're really in for a persistent
Speaker 3: period of straight disruption, I get much higher numbers and
Speaker 3: That's why I'm pretty worried looking at markets that are still.
Speaker 2: In the car that was really in the Zeitgasis. Ye,
Speaker 2: it was the pros like Eric are all one thirty one,
Speaker 2: forty yep, you know in a Wong's model and two hundreds.
Speaker 4: And exercise impact. So as the chief investment officer and
Speaker 4: asset management is, what's the conversation you're having with your
Speaker 4: portfolio managers these days?
Speaker 3: So what we're looking at is the disconnect between where
Speaker 3: where economic fundamentals are telling us that oil is going
Speaker 3: to go, that companies that are linked to the oil price,
Speaker 3: the companies that are link to other non oil imports
Speaker 3: coming out of the straight are going to go, and
Speaker 3: what markets are saying. And we're still concerned that markets
Speaker 3: are much too sanguine about these shocks, much too sanguine
Speaker 3: about inflation in general, in an environment where the fundamentals
Speaker 3: on the ground don't seem like this is wrapping up
Speaker 3: anytime soon.
Speaker 4: Yeah. I mean, I think when it first all started
Speaker 4: five weeks ago, it was always a concern of not
Speaker 4: too concerned in the near term. But if oil is
Speaker 4: higher for longer, then we have concerns about inflation. Then
Speaker 4: we have concerns about economic growth. Potentially, it seems like
Speaker 4: we're longer now. It seems like this is higher for
Speaker 4: longer now. I'm not sure when it starts impacting you know,
Speaker 4: economic data.
Speaker 2: That's right, Paul.
Speaker 3: And this is what worries me is markets have been trained,
Speaker 3: over years of geopolitical disruptions to always bet these disruptions
Speaker 3: are in the short term. And by the way, if
Speaker 3: you've been investing alongside that, if you've been just betting
Speaker 3: against every big geopolitical disruption, you've been rewarded over the
Speaker 3: past twenty years. So people think that's the smart thing
Speaker 3: to do, is always bet against the shock. What we're
Speaker 3: seeing now is the shock is lasting longer than a
Speaker 3: lot of the optimists set up front, and that requires
Speaker 3: a bit more tactical decision making from investors.
Speaker 4: So are you guys dialing back risk? Are you reallocating
Speaker 4: to safer I guess sectors in the market, What are
Speaker 4: you guys doing?
Speaker 3: Well, what we're doing is focusing more on bottoms up
Speaker 3: idiosyncrat investment stories, identifying the individual companies that are likely
Speaker 3: well placed to be resilient to supply chain shocks, rather
Speaker 3: than betting with the whole market to improve quickly on
Speaker 3: some downturn.
Speaker 2: We don't think it's covered right here.
Speaker 3: Well, we're betting on companies that we think are have
Speaker 3: robustness in their supply chains that are going to be
Speaker 3: able to handle the near term disruption, even if it
Speaker 3: persists longer than the overall markets.
Speaker 2: Say what about MEG seven? I mean, one of the
Speaker 2: great themes I'm seeing and I don't have an opinion
Speaker 2: on this, folks. Is some people saying to borrow the phrase,
Speaker 2: A few are saying load the boat, and others are saying, boy,
Speaker 2: you better do a new review of a repriced mag seven.
Speaker 2: Where are you on that?
Speaker 3: So your first two questions, Tom, the combination of them
Speaker 3: is exactly why I think markets this year are so interesting.
Speaker 3: We're dealing with this negative supply shock that's coming from
Speaker 3: oil markets in the Straits. At the same time, we're
Speaker 3: also dealing with a historically huge positive supply shock from
Speaker 3: optimism around what AI is going to deliver, and the
Speaker 3: mags and are benefiting meaningfully not just recently but over
Speaker 3: the past couple of years from that optimistic supply shock.
Speaker 3: It's hard for investors because they don't know how to
Speaker 3: manage these supply dynamics. We all grew up in markets
Speaker 3: worried about demand. It's the fact going to stimulate enough,
Speaker 3: Government's going to spend enough. This is all about supply
Speaker 3: too much, constraint too much AI.
Speaker 2: I mean, Paul, let's be honest. April fourteen, twenty twenty six.
Speaker 2: Two things happen, JP Morgan starts the yearning SS and
Speaker 2: off and that's it for the Red Sox.
Speaker 4: Yes, I know, for your restues there, Tom, All right,
Speaker 4: So Eric, what is the AI call here? I mean,
Speaker 4: let's let's just get away from the war for a
Speaker 4: second and focus on the fundamentals and what the One
Speaker 4: of the fundamental questions for the marketplace for the last
Speaker 4: three years arguably was AI. And I think that it
Speaker 4: went from being let's just buy anything remotely associated with AI.
Speaker 4: Now it's kind of the market's trying to differentiate a
Speaker 4: little different winners and losers. How do you approachiate that big,
Speaker 4: big theme.
Speaker 3: Well, look at Lizard, we're very optimistic about the reality
Speaker 3: the AI is going to meaningfully chase not just our
Speaker 3: working lives, but our investing lives for the rest of
Speaker 3: our professional careers.
Speaker 4: It's easy to look.
Speaker 3: At valuations of AI names today and say they're too expensive,
Speaker 3: you got to just back off. But I still think investors,
Speaker 3: you know, white collar employees up and down the income
Speaker 3: struct from across and across industries haven't really found them
Speaker 3: the transformative nature of the technology still, even a couple
Speaker 3: of years into the into the hype.
Speaker 2: I just noticed on the screen JP Morgan twelve months
Speaker 2: trailing of forty two percent. This market doesn't feel like
Speaker 2: we're celebrating that. Maybe, you know, with all the trauma
Speaker 2: out there and this weekend as well, there's this gauze
Speaker 2: of negativity and the answer is a select group of
Speaker 2: equities have really performed. Yeah.
Speaker 3: The way I think about it is that supplied demand
Speaker 3: dynamic again that the corporate earnings are seeing continued robust demand.
Speaker 2: September into Q four, Q three.
Speaker 3: Well, I think it's been the story the last twelve months.
Speaker 3: I'm actually a little pessimistic about how long that's going
Speaker 3: to last this year.
Speaker 2: Single digit pessimistic or z it won't let that in
Speaker 2: the house single digit.
Speaker 3: Yeah, I think we're seeing I think we're seeing a
Speaker 3: meaningful slow down in households and band it's coming from
Speaker 3: a slower labor market and it's coming from slower wage growth,
Speaker 3: and I think that's going to be tough to reconcile
Speaker 3: with the levels of consumer spedding we've seen in reci years.
Speaker 4: What are we doing in the bond market these days?
Speaker 4: I mean, you could sit there in to your treasury
Speaker 4: oly three point eighty five percent. That seems like a
Speaker 4: very nice return for very little risk. Do I take
Speaker 4: credit risk on above and beyond that?
Speaker 3: Well, here's where I go back to the inflation story,
Speaker 3: right because I am I am shocked that interest rate markets,
Speaker 3: that treasury yields in long term and in the short
Speaker 3: term haven't been more responsive to the inflationary dynamic we've
Speaker 3: seen over the past couple of months.
Speaker 2: Oils.
Speaker 3: We talked about oil, oils, a lot of it. Oil
Speaker 3: is not the whole story. There are also non oil
Speaker 3: imports coming out of the coming out of the Gulf
Speaker 3: that are going to be supply constrained, that are going
Speaker 3: to drive the inflation numbers up in the near term.
Speaker 3: And I'm surprised that we haven't seen long term, long
Speaker 3: term inflation expectations. I look at you know, five or
Speaker 3: five year break evens, the the market metric that used
Speaker 3: to be very cool to watch for inflation expectations. Now
Speaker 3: I feel like no one pays attention to anymore, very
Speaker 3: sanguine about the inflationary path from here, and I think
Speaker 3: central banks can't afford to be that sing wine over.
Speaker 2: The coming years. And I think we're god see more
Speaker 2: upward pressure on rates that Eric is to give us
Speaker 2: a nice start, Dana, I've scheduled here at about fifteen
Speaker 2: man is starting strong into seven o'clock hour. We say
Speaker 2: good morning, and across the nation the way you choose
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Speaker 2: nine FM, Dodgers Radio in Washington, we say good morning,
Speaker 2: ninety two NINEF. But in Boston Bloombrig eleventh three to zero.
Speaker 2: Here in somewhat frigid New York as well, Poss meeting
Speaker 2: with Eric Astro.
Speaker 4: So Eric, I'm just looking at our good friend Torsten
Speaker 4: Slock from Apollo out with a note. Sure talk talking
Speaker 4: about gold and the reasons that went up and maybe
Speaker 4: the reasons it's gone down here, maybe just because people
Speaker 4: need liquidity in other parts of their portfolio, so they're
Speaker 4: selling gold. How do you guys think about gold here?
Speaker 3: The way I think about it generally, is if if
Speaker 3: you and I are talking about gold fall, people are
Speaker 3: watching too much gold volatility, then things are probably not
Speaker 3: running very smoothly in the global supply chain picture. And
Speaker 3: I think just the focus on gold, more so than
Speaker 3: what the price is doing, is an indicator that people
Speaker 3: are very worried about the pipes of the global economy's
Speaker 3: ability to deliver goods and services. And that's the same
Speaker 3: thing we're seeing in oil markets, same thing we're seeing
Speaker 3: in global food markets.
Speaker 4: So how do you think about these? I mean, I
Speaker 4: think with this war, I'm not sure where we are
Speaker 4: in terms of our ultimatums here for Iran here, but
Speaker 4: it feels like it's gone longer than expected. It feels
Speaker 4: like I may go even a little bit longer here.
Speaker 4: Is there a positioning here that you guys feel comfortable
Speaker 4: about for the next three to six months?
Speaker 2: Here?
Speaker 4: Am I getting more conservative in my positioning? Am I
Speaker 4: just taking cash? What am I doing here?
Speaker 2: Yeah?
Speaker 3: So to a first order, at Lazard, we're not focused
Speaker 3: on trying to time the macro events. We don't think
Speaker 3: that's our edge, And I would humbly point out that
Speaker 3: those who do things their edge have seen some egg
Speaker 3: on their face recently. What we're trying to do is
Speaker 3: identify the companies from a bottoms up perspective that have
Speaker 3: enough robustness on their balance sheets to tolerate prolonged periods
Speaker 3: of uncertainty on margins pond Tom, we are leaning against
Speaker 3: aggressive expansion into risk given that oil dynamic.
Speaker 2: I did a survey with an intern into a survey
Speaker 2: for US over the weekend. They used AI did they
Speaker 2: how many people are waiting for healthcare to move? Let's
Speaker 2: begin with the why Why hasn't the healthcare sector moved?
Speaker 3: I think the healthcare sector is really emblematic with some
Speaker 3: of the broader some of the broader demand dynamics we've
Speaker 3: seen in the US. Because within the healthcare sector, what
Speaker 3: we haven't seen that you would normally see at this
Speaker 3: point in the cycle is more R and D investment,
Speaker 3: more capital expenditure to really strengthen our ability to deliver
Speaker 3: improve health care services. You haven't seen it. I think
Speaker 3: it's because business leaders are still pessimistic about the consumer's
Speaker 3: ability to really deliver persistent robust demand.
Speaker 4: What's that better reserve doing here? I mean, I'm looking
Speaker 4: at the WORP function. I don't see much movement at all.
Speaker 2: It's just shirt. I don't know.
Speaker 3: Yeah, the way I think about it, the FED managers
Speaker 3: demand and everyone's talking about supply right now. I still
Speaker 3: think the big story is how calm markets and particularly
Speaker 3: investors who are pricing for FED action when you're looking
Speaker 3: at the work function, how calm they are about inflation.
Speaker 3: And I still expect us to see a bit of
Speaker 3: an upward turn in some of those pricing forum pricing
Speaker 3: for monetary tightening over the coming years.
Speaker 2: Next two meetings, folks. April twenty nine. The end of
Speaker 2: this month seems distant away given all the war news,
Speaker 2: but there is April twenty nine. In June seventeen. I
Speaker 2: need to get in trouble on a Monday. You know
Speaker 2: that was a jaption. I'm doing my Easter thing and
Speaker 2: like God looked down at me and said, get Eric
Speaker 2: in trouble on Monday morning. That's a great way to
Speaker 2: stir Or's egg. And Adam Posen has framed out a
Speaker 2: higher interest rate environment. Yeah, not the scale the magnitude
Speaker 2: they're talking about, but given all the events were sobered
Speaker 2: by this, what happens if we get a Posen or
Speaker 2: ZG five point two percent thirty year bond five point
Speaker 2: five percent thirty year bond, what actually happens?
Speaker 3: So I think the main point of their piece is
Speaker 3: that the reason what's gonna the big trigger that's going
Speaker 3: to get you to those higher bond yields is this
Speaker 3: inflationary uptick. We've been doing the wage push with exactly
Speaker 3: inflation from labor markets coming wage. I know you did
Speaker 3: talk right, would I would have questioned it, but that
Speaker 3: that inflationary impulse which has you know, we thought that
Speaker 3: was likely to be the case before the war, Yes,
Speaker 3: And what happened in the war was we pour gasoline
Speaker 3: on the inflation outlook, right, And I think the I
Speaker 3: think both from the oil and food sectors, we're going
Speaker 3: to see continued up ticket prices that are going to
Speaker 3: put even more pressure on long termials.
Speaker 4: So what's the for the remainder of twenty twenty six?
Speaker 4: What's your what's the call here? Is it the you know,
Speaker 4: I'm just wondering if people are going to be buying
Speaker 4: the dip here like they've been buying the dip for
Speaker 4: the as you mentioned last twenty years.
Speaker 3: Yeah, the big the big story is we think investors
Speaker 3: should spend less time focused on are you going to
Speaker 3: buy the dip? Are you going to sell the spike?
Speaker 4: Because that's a very hard call to make.
Speaker 3: So we figu where our portfolios are going to generate alpha,
Speaker 3: where we're going to deliver returns from our clients. It's
Speaker 3: from the bottoms up, it's from identify the companies systematically
Speaker 3: and fundamentally that are going to be robust to these
Speaker 3: geopolitical environments.
Speaker 2: Eric, thank you so much, really really great to get
Speaker 2: us started. Eric, mister van Nostrin, he is with Lizard
Speaker 2: Asset Management. Stay with us. More from Bloomberg Surveillance coming
Speaker 2: up after this.
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Speaker 2: Scott Demago picks up the piece of Senior Vice president
Speaker 2: pet of Fixed Income Alliance Bernstein. I guess just simply
Speaker 2: on what I would call bonds, but of course it's
Speaker 2: bills notes in bonds. What is the to do as
Speaker 2: we launch into April? A wonderful research notes, Scott. But
Speaker 2: you know, if I'm not panicking, if I'm capturing a coupon.
Speaker 2: What is the to do?
Speaker 5: Hey, good morning Tom, Good morning Paul. Thanks thanks for
Speaker 5: having me. I think that to do here is to
Speaker 5: focus on duration. And you know, as this war has progressed,
Speaker 5: as you said, the past thirty eight days, we've seen
Speaker 5: the market really start to worry about inflation, and we've
Speaker 5: seen that cause bond yields to sell off. We think
Speaker 5: we're getting to that point where the market's going to
Speaker 5: start worrying about the growth impact that higher energy prices have,
Speaker 5: and that's going to cause bonds to rally as we
Speaker 5: go through the second half of the year.
Speaker 2: Does it matter what kind of bonds Paul's I am.
Speaker 2: He says credit risk, but boy, you know, do you
Speaker 2: just run to full faith and credit?
Speaker 6: Yep.
Speaker 7: Yeah.
Speaker 5: We think there's value in investment grade names right, we
Speaker 5: sat good a good week for investment grade.
Speaker 7: Last week.
Speaker 5: We've seen yields in ig move out towards five percent,
Speaker 5: which historically has been a pretty attractive levels.
Speaker 7: The faults remain low.
Speaker 5: There should be a good environment where investment grade, especially
Speaker 5: and even parts of high yield should perform, should perform well,
Speaker 5: I think it does matter. There are going to be
Speaker 5: some central banks overseas that are going to be forced
Speaker 5: to hike interest rates as we go through a higher
Speaker 5: inslationary period, and there'll be other central banks, like we
Speaker 5: think in the US and Canada that will have a
Speaker 5: lot more patients and be able to potentially lower rates,
Speaker 5: if not keep rates at these levels.
Speaker 4: Scott, what do you think of all the new issues
Speaker 4: coming out of the technology sector. It's not something that
Speaker 4: the bond market sees that that often, but boy, there's
Speaker 4: been a ton of flow coming out of those big
Speaker 4: tech games, and I'm guessing Alliance bursting is one of
Speaker 4: the first phone calls that the underwriters make.
Speaker 7: Yeah, we definitely see our share of that activity.
Speaker 5: I would say what a very positive dynamic is that
Speaker 5: these companies are coming, these hyper scale ors. They're coming
Speaker 5: with much bigger deals now. So rather than drip on
Speaker 5: the market every three months or six months and put
Speaker 5: that fear about the issuance that's coming, they've tended to
Speaker 5: do at least in the first quarter, much bigger deals.
Speaker 5: Do them across the maturity spectrum, do them across currencies
Speaker 5: right in both the US and in Europe, And I
Speaker 5: think those deals clear pretty well. And as since the
Speaker 5: technology sector has been trading better in both IG and
Speaker 5: high yield in the US.
Speaker 4: What do you think your federal Reserve is going to
Speaker 4: do here given all these crosswinds here Scott, with the
Speaker 4: geopolitics as well as just the fundamentals.
Speaker 5: Yeah, I think they're going to sit on their hands
Speaker 5: for a little while and watch to see how this progresses.
Speaker 5: We had a good jobs number on Fry, but if
Speaker 5: you look at the last six months, the US economy
Speaker 5: has been averaging about fifteen thousand jobs. So we think
Speaker 5: the jobs market is kind of, you know, just ticking
Speaker 5: along at a fairly static level, which is a good
Speaker 5: thing to feds in a good place.
Speaker 2: Do you see any lessening of this issuance? It seems
Speaker 2: every story I hear from helping Emily Graffeo and the
Speaker 2: restaurant in bonds, there's this huge demand to buy new paper.
Speaker 2: Is that going to sustain.
Speaker 5: Yeah, we think so, as long as yields are at
Speaker 5: these levels. Again, IG at five percent, high yield at
Speaker 5: seven thirty seven forty deals are coming. They're pricing with
Speaker 5: a bit of a concession. There seems to be a
Speaker 5: lot of cash on the sidelines right seven point eight
Speaker 5: or so trillion in money markets. We think these higher
Speaker 5: yields will find buyers and the market will will keep clearing.
Speaker 4: Scott, how do you think about just fixing come opportunities
Speaker 4: in the US versus rest of the world.
Speaker 5: Here, Yeah, we think, I mean, we still like credit
Speaker 5: in Europe. We think that you know, that market's repriced
Speaker 5: a bit. The credit fundamentals remain very solid in Europe.
Speaker 5: So we have been picking up some US sorry, some
Speaker 5: European IG and European high Yeald names. We think in
Speaker 5: the US the emerging markets US dollar emerging markets are
Speaker 5: offering value here as well as you know, parts of
Speaker 5: that single B and double B part of the high
Speaker 5: Yeald market. So there is a lot of opportunity. This
Speaker 5: repricing that we've seen in the past thirty or so
Speaker 5: days is creating some attractive opportunities.
Speaker 2: Then bring it over to the equity market. Are you
Speaker 2: in the Campscott, with all of your expertise that your
Speaker 2: world is a value right now to interpret what to
Speaker 2: do in equities?
Speaker 5: You know, talking to our equity colleagues who just sit
Speaker 5: across the floor, you know they're looking at us saying, look,
Speaker 5: as long as high yield spreads and credit spreads in general,
Speaker 5: they stay pretty well anchored. They stay optimistic on you know,
Speaker 5: what's happening in equity, so earnings continue to remain pretty robust.
Speaker 5: We'll have to see what the next couple of quarters
Speaker 5: brings after this conflict in the Middle East, But so
Speaker 5: far with credit spreads anchored, you know, at these still
Speaker 5: fairly attractive levels, that's giving our equity colleagues, you know,
Speaker 5: a breath of relief, Paul, to me, this is.
Speaker 2: The heart of the matter over the weekend. It's like
Speaker 2: so many of the recent wars. You know, I get
Speaker 2: the news and all that, then people like you and me.
Speaker 2: But the answer is it's removed from the investment financed dialogue.
Speaker 2: It seems to be like the private credit issue is
Speaker 2: way more important to the street right now.
Speaker 4: Yep, you would have thought, how about a year, Scott
Speaker 4: here as we step back here in is twenty twenty
Speaker 4: six a year where Tom and I just clip coupons
Speaker 4: or can we get some capital return as well? How
Speaker 4: do you think about that?
Speaker 5: I mean, I think the majority, we think the majority
Speaker 5: of your return is going to come from clipping clipping
Speaker 5: that coupon. But if we are right and the economy
Speaker 5: slows and we get into the second half of the year,
Speaker 5: the Federal Reserve can reduce interest rates one to two times.
Speaker 7: We think you can.
Speaker 5: Get some spread tightening, some lower interest rates, and you
Speaker 5: can get some capital appreciations as well.
Speaker 7: The corporate market offers value.
Speaker 5: You know, the muni market's repriced quite a bit the
Speaker 5: last two or three weeks, So we think the muni market,
Speaker 5: especially the long end, also offers values for those you know,
Speaker 5: US US clients.
Speaker 4: So I mean in the muni market, you bring that up.
Speaker 4: I mean for the folks in the you know, high
Speaker 4: tax jurisdictions, the tax equipment yields are just really attractive.
Speaker 4: So how does that figure into your overall on occasion.
Speaker 5: Yeah, for those I mean, you know, as we as
Speaker 5: we allocate capital, as we look at opportunities, we have
Speaker 5: a pretty complex set of algos that actually look at
Speaker 5: each client, what's they do they pay, what state tax
Speaker 5: do they pay, what federal tax bracket are they in,
Speaker 5: and we actually calculate expected returns at each bond, at
Speaker 5: each for each bond, you know, based on that unique
Speaker 5: client circumstances. There is a lot of value out there,
Speaker 5: especially with the long end of the market where you're
Speaker 5: talking about, you know, tax equivalent yields, you know, pretty
Speaker 5: close to ten percent right in many cases. So you know,
Speaker 5: that's an area that we are encouraging clients to move into.
Speaker 7: But it's a it's a bit of an orphan sector
Speaker 7: right now.
Speaker 2: Scott, thank you so much. Was it a joint, Paul,
Speaker 2: to have like a rational conversation.
Speaker 4: Exactly with a fixed income get away from all those
Speaker 4: people want to talk to fixed income people cocktail parties now, Tom,
Speaker 4: I mean, after being shunned for years because they had
Speaker 4: no coupon, now they're like pretty popular people.
Speaker 2: Scott Demasia, that's popular. Alliance Percy, thank you, Thank you
Speaker 2: so much. Stay with us. More from Bloomberg Surveillance coming
Speaker 2: up after this.
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Speaker 2: Dana's joining us on qual a Lumpar and of course
Speaker 2: with Webbush Securities. Dan explain what you learn traveling to
Speaker 2: the Pacific rim I mean, if anybody can do this
Speaker 2: with Ai it's you. Why do you have to go there?
Speaker 8: Yeah, Look, you have to have feet on the ground
Speaker 8: to be talking not just to investors but companies. I mean,
Speaker 8: what's happening in Taiwan? What does memory look like in Korea?
Speaker 8: Are there shortages because of the straight the boys? These
Speaker 8: are the things and we've talked about in the show
Speaker 8: for many years, like it's what I believe, it's the
Speaker 8: only way you can navigate this environment to understand what
Speaker 8: demand looks like, and you know, trying to be understand
Speaker 8: some of the power that we're seeing.
Speaker 2: What have you learned? The clear rumors here is there's
Speaker 2: a filter down from one hundred and nine dollars barre
Speaker 2: of oil into technology. Do you observe that?
Speaker 8: Look, I'd say it right now, there's one clearly sentiment.
Speaker 8: It's a white knuckle environment for tech. But when you
Speaker 8: look at demand to supply in terms of just what
Speaker 8: we're seeing in terms of demand in Taiwan, it's robust.
Speaker 8: It's robust not just for an video, but it's robust
Speaker 8: for memory and for the components. And what that ultimately
Speaker 8: means is that's going to be bush for the hyperscalers.
Speaker 8: And look the backdrop is obviously nervous, but you know,
Speaker 8: I just think it's very important in these environments to
Speaker 8: understand what the trends are because this will pass, and
Speaker 8: when it passes, you know, tech stocks. I continue to
Speaker 8: believe that's where you want to be positioned, especially in
Speaker 8: some of these cell offs that we've seen.
Speaker 4: Dan, what's the conversation you're having with clients over there
Speaker 4: in Asia about some of the I guess structural concerns
Speaker 4: about software stocks in general, software as a service stocks
Speaker 4: in particular. How do you frame that after your clients?
Speaker 8: Yeah, well, I think that's it's as negative as sentiment
Speaker 8: as I've seen software, and not just in the issue,
Speaker 8: but I think you're just across the world that I've
Speaker 8: seen probably going back ten years or more, because right
Speaker 8: now there's no every investor. They're focused on Semi's hardware
Speaker 8: and no one wants touch software. And I continue believe
Speaker 8: that is a massively disconnected narrative from the reality of
Speaker 8: what we're going to see in the use cases from
Speaker 8: Microsoft to Oracle salesforce to service now and I think
Speaker 8: we're going through one of those periods here where these
Speaker 8: stocks are on massive seal. In my opinion, relative to
Speaker 8: where we see them heading as part of the AI revolution.
Speaker 4: So how do you try to differentiate between potential winners
Speaker 4: potential lose in the software space, Dan, how do you
Speaker 4: step back and assess that?
Speaker 8: Yeah, I think to some extent, I'll call it a
Speaker 8: good AI ghost trade in terms of anthropic and some
Speaker 8: of the worries about that these LM models anthropic in
Speaker 8: particular is going to basically unseat software. So I think
Speaker 8: if to separate between, are there some companies that could
Speaker 8: be at risk? Yeah, of course, like to some of
Speaker 8: the pure please, but when you look at install based
Speaker 8: in trench stack players like Salesforce Service Now, Oracle, Cybersecurity, crowds,
Speaker 8: Tright palle out the look we talked to the customers,
Speaker 8: how are they going about architecture, how are they building
Speaker 8: these use cases? And that's where plunteer again again continues
Speaker 8: to also stick out positively.
Speaker 2: From qualmum permanently as you, Dan ives with us, thrill
Speaker 2: he could be with us to get our Monday I started, Dan,
Speaker 2: Paul Sweeney taught me this MSFT equity EE, which is
Speaker 2: the earnings and estimate screen for beleaguered Microsoft forward twelve
Speaker 2: month PE twenty one point two six. I mean, I
Speaker 2: know you're gonna tell me it's a bargain, it's a
Speaker 2: broken record, But we really want to understand Dan ives
Speaker 2: the durability of their margins down the income statement, given
Speaker 2: these shocks into Q three, into Q four, into the
Speaker 2: first quarter of twenty twenty seven, is it possible to
Speaker 2: guestimate that?
Speaker 8: Look, I mean, when I look at Microsoft right net,
Speaker 8: we're talking about multiples in a free cash flow basis
Speaker 8: and on earnings that we haven't seen you going back
Speaker 8: eight years, ten years, you know, relative to where I believe,
Speaker 8: and I think from a margin perspective, it's ultimates free
Speaker 8: cash flow type of growth that's going to be in
Speaker 8: the mid to high teens next two to three years
Speaker 8: or higher than that. It all comes down to ten
Speaker 8: percent of their base have upgraded or gone down the
Speaker 8: path for AI.
Speaker 2: If we're ten percent.
Speaker 8: Right, this is a five hundred to five point fifty stock.
Speaker 8: If we're Ba's case right, it's six to six fifty.
Speaker 8: That's that's how I think it continues to be the
Speaker 8: most disconnected stock in tech period, right.
Speaker 2: Paul, the debt load three point three percent, it's just backbreaking.
Speaker 4: Hey, Dan, talk to us about cybersecurity here, how do
Speaker 4: you think about cybersecurity in a world of AI, because
Speaker 4: it just seems like, boy, the risk could be just
Speaker 4: exponentially higher.
Speaker 8: Yeah, Paul, the budgets are going to increase some five
Speaker 8: percent of it to ten percent next two to three years.
Speaker 8: Because the surface area, if every person has any if
Speaker 8: every person has five agents working out there for enterprises,
Speaker 8: that's just going to expand the surface area. So what
Speaker 8: that means cybersecurity the budgets that much more strategic, that's
Speaker 8: not going to be unseated from anthropic or and AI.
Speaker 8: It speaks to our view CrowdStrike, pow out, the checkpoint
Speaker 8: rubrics like these are names that are going to have
Speaker 8: massively bigger opportunities than they do today.
Speaker 2: But it's another.
Speaker 8: Example that the AI ghost trade is a black cloud
Speaker 8: over the sector.
Speaker 4: So, Dan, what are some of your channel checks in Asia?
Speaker 4: What are they telling you these days? What are you
Speaker 4: learning over there?
Speaker 8: I mean, if you look demand, the supply quarter of
Speaker 8: a quarter is accelerated, and that's not and that's really
Speaker 8: because you're seeing more and more enterprises go down this path.
Speaker 8: And I think what you're seeing is the deals are
Speaker 8: getting larger. You're seeing shortages when it comes to memory
Speaker 8: and components because it's a memory supercycle that's going on.
Speaker 8: And with that speaks to our view. We're in year
Speaker 8: three of an eight to ten year build out and
Speaker 8: despite all the white Knuckles are seeing with Iranic, that's
Speaker 8: not changing that this fourth and Dush revolution's happening.
Speaker 2: I got to get one question in here, Dan Briefest
Speaker 2: here and some of the parts on Apple, given their
Speaker 2: global plan of manufacture.
Speaker 8: Look some of the parts in what I view as
Speaker 8: like a worst case scenario three twenty five. When I
Speaker 8: think best case scenario, I mean we're looking three seventy
Speaker 8: five to four hundred, and it just looked on this
Speaker 8: is one like obviously they were way to the game
Speaker 8: of AI. They couldn't do it internally. Now they'll they'll
Speaker 8: all by not putting cap backs hours they ultimately won
Speaker 8: by accident. And I think Gemini is going to be
Speaker 8: the sort of pillar there and the consumer AI revolution
Speaker 8: is going to go through Apple, and that's why this
Speaker 8: is the name. Seventy five two hundred dollars will ultimately
Speaker 8: be the upside as they monetize AI. This is another
Speaker 8: one just you know, massively sell off based on what
Speaker 8: we're seeing in terms of the environment.
Speaker 2: It's safe travels, Dad, safe, safe travels for all of us.
Speaker 2: A team observing this rises with Wedbush, of course, you've
Speaker 2: seen him with the industry of claim Stay with us.
Speaker 2: More from Bloomberg Surveillance coming up after this.
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Speaker 2: Joe Mazzola joints US head of Trading and derivatives strategist
Speaker 2: at Charles Shrub Joe, what are you writing in a
Speaker 2: memo this morning? For ten am this morning? What's the
Speaker 2: Mazzola memo looked like?
Speaker 6: Well, and I want to talk about kind of what
Speaker 6: we saw in March from our investors, and that was
Speaker 6: basically a little bit of de risking, guys, de risking
Speaker 6: versus broader disposure I think, or exposure. I think that
Speaker 6: you know, investors had a couple of choices given what
Speaker 6: they saw in the market volatility and the choppiness, and
Speaker 6: that was either you know, try to pick a rebound,
Speaker 6: like we've kind of seen over the last couple of years,
Speaker 6: you know, buying into the dip or you know, stay
Speaker 6: invested with tighter controls. And they looked like they picked
Speaker 6: a little bit more of the latter than the former.
Speaker 4: Are there certain sectors that they're favoring, Joe, Because we
Speaker 4: did see a rotation kind of starting late last year
Speaker 4: into this year before they ran conflict, where we had
Speaker 4: maybe some investors selling some of the high tech, high
Speaker 4: high value names for maybe some more cyclical stuff. Are
Speaker 4: we seeing that continue?
Speaker 6: We did see that in March, so industrials and financials,
Speaker 6: you know, you can make the case that those are
Speaker 6: definitely cyclical sectors. They saw the inflows. Interestingly enough, technology
Speaker 6: saw outflows, but then the other one would be energy,
Speaker 6: And I thought that was interesting just kind of given
Speaker 6: what we saw with the overall oil oil market and
Speaker 6: the makeup of the movement and energy overall. I mean,
Speaker 6: it's really kind of the only that utilities are really
Speaker 6: the only upper forming sectors in terms of relative strength
Speaker 6: given the entire market. But it looked like our investors
Speaker 6: maybe saw that as an opportunity to maybe fade some
Speaker 6: of that move you know, you had some stocks up
Speaker 6: thirty forty fifty, some of the services conglomerates, and you know,
Speaker 6: one of the top fives on the list urd that
Speaker 6: sales was occidental, which I don't think I've ever seen
Speaker 6: in the three years we've done the stacks.
Speaker 4: Joe, what are your clients? What are the schwop clients
Speaker 4: when they buy? Did they buy ETFs? Did they buy
Speaker 4: individual names? Do they buy funds? What did they buying
Speaker 4: these days?
Speaker 6: So really interesting guys usually in the top ten. So
Speaker 6: what we do is in published top top five, but
Speaker 6: you know, I look at the top twenty five, so
Speaker 6: in the top ten, you tend to see one, two.
Speaker 6: You know, sometimes on a very distant, very distant lists,
Speaker 6: sometimes you'll see three. This time we saw five out
Speaker 6: of the top ten were diversified ETPs, which was really
Speaker 6: interesting to me. And that kind of goes back with
Speaker 6: that theme of wasn't really de risking as much as
Speaker 6: it was diversifying and instead of maybe trying to pick
Speaker 6: some winners, they wanted to stay investors, wanted to stay
Speaker 6: involved in the market.
Speaker 4: Just didn't you know.
Speaker 6: It was one of those months where there was such choppings,
Speaker 6: so it was hard to kind of pick the winners,
Speaker 6: stay involved but diversify a little bit. That's what we saw.
Speaker 2: We start strong this hour Joe Mozzola with us Charles Schwab,
Speaker 2: head of Training and derivative strategy as well. Is there
Speaker 2: a bet on the market right now, Joe? Like the
Speaker 2: fancy institutional people, Paulo's on this charge and like long
Speaker 2: short in the CTAs and the rest of it, are
Speaker 2: they placing bets or they hunkered down?
Speaker 6: You know what I would say, Tom, is that coming
Speaker 6: into probably mid March, you saw that the majority of
Speaker 6: institutions were hedged. You know, I look at something like
Speaker 6: skew on the S and P five hundred around ninety five,
Speaker 6: ninety six percentile. That's actually started to wane a little bit.
Speaker 6: These last couple of weeks. We've seen some of those
Speaker 6: hedges come off a little bit. A lot of that
Speaker 6: had to do with the roles that we saw in
Speaker 6: some of the end of March hedges that kind of
Speaker 6: move forward into June, so you know, they tend to
Speaker 6: be quarterly, So a lot of that came off. Some
Speaker 6: of the GAMA exposure, some of the short dam exposures
Speaker 6: specifically with the marketmakers the dealers that kind of rolled
Speaker 6: off a little bit, so I think that's had something
Speaker 6: to do with some of the some of the benign
Speaker 6: movements that we've seen over the last couple of days
Speaker 6: in the markets, where yes, you know, futures have moved,
Speaker 6: but intra day we've seen some of that come down
Speaker 6: a little bit. We've seen the vis go from about
Speaker 6: thirty one thirty two down to about twenty five where
Speaker 6: it's at right now. And I think, guys, we're all
Speaker 6: this kind of waiting on pins and needles for the
Speaker 6: next announcement, in the next global macro announcement. When we
Speaker 6: ask our our investors, hey, you know, what what are
Speaker 6: you waiting for in April? Like what's kind of scaring you?
Speaker 6: Or you know, what's what's driving your investment, and they're saying, look,
Speaker 6: there's just so much geopolitical risks out there right now
Speaker 6: that we're getting a little bit more bearish.
Speaker 4: Joe. I mean, I guess with some of this, when
Speaker 4: we see the selling days, it just to me, at least,
Speaker 4: it doesn't feel like there's panic out there, right are
Speaker 4: you what are you seeing in your flows data? Because
Speaker 4: point nobody sees more flows than folks at Charles Swamp.
Speaker 6: Yeah, you know, we use that that term capitulation, and
Speaker 6: I would agree with you, Paull. I don't think we've
Speaker 6: seen that yet. I think that uh, you know, up
Speaker 6: until until we get back above maybe that two in
Speaker 6: a day moving average. Looking at technicals right now is
Speaker 6: a little bit difficult, you know, for some support levels.
Speaker 6: You know, I look at things like relative strength and
Speaker 6: it's just really difficult to use that or look at
Speaker 6: something again RSI to say our market's over sold once again,
Speaker 6: I think you need to be in a longer term
Speaker 6: bullish market. I don't know that we're there yet. We might,
Speaker 6: you know, we might get back there this week, and
Speaker 6: you know, all this becomes noise in a couple of months.
Speaker 2: Who knows, but.
Speaker 6: There is, uh, you know, there is this kind of
Speaker 6: conscious optimism. And that's what I would say is what
Speaker 6: we're hearing, for the most part, uh from from our investors.
Speaker 6: And what we tend to see is, you know, the
Speaker 6: difference between what they're doing and what they're saying. So
Speaker 6: what they did in March is, like I say, it
Speaker 6: wasn't de risking as much as it was diversification. But
Speaker 6: going forward, and this is what's interesting, we always ad them,
Speaker 6: you know, what do you, what do you see for
Speaker 6: the month I had and in April, what we're seeing
Speaker 6: is kind of the highest level of bearishness that we've
Speaker 6: seen in a while.
Speaker 2: Now.
Speaker 6: We haven't necessarily seen that inequity outflows, and you don't
Speaker 6: You're not just seeing that in terms of SCHWAP, but
Speaker 6: just the whole market wide. You haven't seen a ton
Speaker 6: of equity outflows. But I think that there is just
Speaker 6: this this this cautious optimism that we don't know what
Speaker 6: the next shooter drop is going to be.
Speaker 2: Joe Masol, thank you so much for the brief, very valuable.
Speaker 2: Really appreciate it.
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