WEBVTT - EM Spreads Are Embedded to Sovereign Risk, Sassower Says 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg p m L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Bramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg p m L 0:00:20.840 --> 0:00:32.120 Podcast on Apple Podcasts, SoundCloud and Bloomberg dot com. I 0:00:32.159 --> 0:00:35.360 wanted to want to learn about connections connections between emerging 0:00:35.400 --> 0:00:37.960 markets and the energy sector, and here to help us 0:00:38.080 --> 0:00:42.120 is Damian Sassaur. He's our fixed income strategist for Bloomberg Intelligence. 0:00:42.440 --> 0:00:45.120 Damian always a pleasure, Thanks for being with me. Can 0:00:45.159 --> 0:00:48.519 you explain what what exactly are we trying to understand here? 0:00:48.680 --> 0:00:52.800 A connection that I didn't really I didn't realize existed. Yeah, sure, So, 0:00:52.880 --> 0:00:57.240 I mean emerging markets, especially the debt issued by emerging 0:00:57.280 --> 0:01:00.400 market oil and gas companies, tends to be are tightly 0:01:00.440 --> 0:01:04.560 correlated to the sovereign parent countries in which they're located, right, 0:01:04.600 --> 0:01:07.000 and so one would think it's an oil company. It 0:01:07.080 --> 0:01:10.640 produces oil, and so it's business. It's emerging, you know, 0:01:10.640 --> 0:01:13.160 it's it's it's the spreads for its for its debt 0:01:13.200 --> 0:01:15.360 should be more correlated to the price of oil. But 0:01:15.360 --> 0:01:17.400 that's just not the case. What what gives us an 0:01:17.400 --> 0:01:20.039 ex I mean, what are you talking about? Brazil? So Brazil, Actually, 0:01:20.040 --> 0:01:23.440 Brazil is an interesting case because um, the Natro Petro 0:01:23.520 --> 0:01:27.480 Brass is basically owned by the Brazilian government. Yeah about 0:01:28.000 --> 0:01:30.800 so you would think that it would um, but nevertheless, 0:01:30.880 --> 0:01:33.840 it produces oil. I mean, it's got upstream and downstream businesses. 0:01:33.840 --> 0:01:36.200 But Petro Brass for the most part, um and has 0:01:36.280 --> 0:01:40.000 historically had a very tight correlation to the price of oil. 0:01:40.040 --> 0:01:43.600 But um, you know, it's core the correlation between Petro 0:01:43.680 --> 0:01:46.840 Brass bond spreads and that of its of Brazil itself 0:01:46.920 --> 0:01:50.880 or just I mean they're upwards of close to although 0:01:50.880 --> 0:01:53.280 that's been declining of late um in lieu of all 0:01:53.280 --> 0:01:55.600 the political instability that's going on on the ground, right, 0:01:55.640 --> 0:01:58.200 So I think what's happening is you might have creditors 0:01:58.800 --> 0:02:02.120 a little bit more decenseive ties to the political turmoil 0:02:02.200 --> 0:02:06.040 surrounding Michelle Timer and just exhausted by it because that 0:02:06.120 --> 0:02:09.680 goes back to the previous administration and then the previous 0:02:09.720 --> 0:02:13.120 previous administration in Brazil, and also there was there was 0:02:13.160 --> 0:02:16.920 a big corruption scandal at Petro Brass That's that's correct. 0:02:16.960 --> 0:02:19.880 So I mean as opposed to perhaps what's going on 0:02:19.880 --> 0:02:22.799 in Mexico, right, I mean, what's interesting about pemm X, 0:02:22.840 --> 0:02:24.919 which is the large and that is, you know, the 0:02:26.120 --> 0:02:29.720 oil company in Mexico. Exactly the spreads of Mexico, of 0:02:30.720 --> 0:02:33.240 quite frankly of pem X are more trightly correlated to 0:02:33.320 --> 0:02:36.240 that of Mexico and Mexico given what's been going on 0:02:36.320 --> 0:02:40.600 with NAFTA renegotiations and trade linkages to the US. What 0:02:40.720 --> 0:02:44.080 you're finding is that uh, pem X bond spreads are 0:02:44.120 --> 0:02:47.600 more trightly correlated to US financial conditions, the US money 0:02:47.600 --> 0:02:49.800 markets right there the front end of the Yolk curve. 0:02:49.919 --> 0:02:53.359 So you know, with um with all that's going on here, 0:02:53.480 --> 0:02:57.280 with the removal of quantity, quant easing and perhaps you know, 0:02:57.440 --> 0:03:01.160 quantightening going forward, and just finding that PEMMIC spreads and 0:03:01.200 --> 0:03:04.240 more track lee or more closely tracking that of the 0:03:04.360 --> 0:03:07.320 US and of of its sovereign parent is is do 0:03:07.360 --> 0:03:10.080 we need to note that this is also because the companies, 0:03:10.120 --> 0:03:13.400 these oil and energy companies, they are so closely linked 0:03:13.400 --> 0:03:17.280 to the governments of these emerging economies like Mexico, like Brazil. 0:03:17.360 --> 0:03:19.400 I mean, it's not as if these are what we 0:03:19.440 --> 0:03:23.760 would consider to be private, shareholder owned companies. Well, well, 0:03:23.800 --> 0:03:26.200 I mean that's a great point. I mean, Petro Brasse 0:03:26.240 --> 0:03:29.840 and Pemas are definitely quasi sovereign entities that are you know, 0:03:30.120 --> 0:03:32.200 they're not going to do anything that's the central government, 0:03:32.280 --> 0:03:34.320 the government doesn't want them to do. But I can 0:03:34.360 --> 0:03:36.560 I can direct your attention to a company um in 0:03:36.600 --> 0:03:38.680 Russia by the name of lock Oil, right, and lock 0:03:38.720 --> 0:03:41.200 Oil is not owned by the government, and yet it 0:03:41.320 --> 0:03:46.280 spreads track that of the Russian sovereign upwards. So it's 0:03:46.280 --> 0:03:49.360 not as if it's a public private, quasi sovereign corporate. 0:03:49.520 --> 0:03:51.680 You know. Issue here, what you're finding is that emerging 0:03:51.720 --> 0:03:55.280 market companies that that the embedded sovereign risk in their 0:03:55.280 --> 0:03:58.760 bond spreads it just outweighs the fundamentals. And we've seen that, right, 0:03:58.760 --> 0:04:01.200 fundamentals you know, for the most part, I don't want 0:04:01.200 --> 0:04:02.840 to say they don't matter anymore, but we've been in 0:04:02.880 --> 0:04:05.080 this one way street, this one way environment for e 0:04:05.240 --> 0:04:07.520 M debt, and so you know, you're finding that they're 0:04:07.560 --> 0:04:11.000 tracking sovereign bond spreads pretty closely. All right, I'm gonna 0:04:11.040 --> 0:04:13.200 push back with you on on on Russia because you 0:04:13.240 --> 0:04:16.479 mentioned Luke Oil. Okay, very good. It is a private company, 0:04:16.560 --> 0:04:18.800 it is not run by the government, but it happens 0:04:18.839 --> 0:04:22.080 to be in Russia. And my I mean, you know, uh, 0:04:22.400 --> 0:04:24.520 forgive me, but I think that bottom reputing casts a 0:04:24.640 --> 0:04:29.440 very wide shadow over every aspect of the Russian economy. 0:04:29.480 --> 0:04:31.360 So it's not like Luke Oil is gonna do something 0:04:32.040 --> 0:04:35.520 that the Russian energy ministry doesn't like. No, that's absolutely true. 0:04:35.560 --> 0:04:37.760 But eighty percent of its revenue is coming from abroad, right, 0:04:37.800 --> 0:04:40.159 it's not gas prompts. So look what we have is 0:04:40.320 --> 0:04:42.279 you know, um, but you make a good point. I 0:04:42.279 --> 0:04:45.560 mean this is that the political context is crucial when 0:04:45.560 --> 0:04:47.640 you're looking at a merchant market debt. And that's and 0:04:47.680 --> 0:04:49.520 that's the point here. I mean, you just can't ignore 0:04:49.520 --> 0:04:51.880 the soueig risk. I mean, anybody who's gonna do a 0:04:51.880 --> 0:04:54.479 deep dive and do a fundamental bottom analysis on any 0:04:54.560 --> 0:04:57.880 e m issuer, you just can't ignore the political risk 0:04:57.880 --> 0:05:00.559 that's embedded within bond spreads. I was gonna say, next 0:05:00.640 --> 0:05:04.560 we should go to Venezuela, right, Petasa, Well, Pettis is 0:05:04.560 --> 0:05:07.080 an interesting one, right, I mean, now that we've seen 0:05:07.200 --> 0:05:09.000 you know, the you know all the talk about you know, 0:05:09.040 --> 0:05:11.840 the U stupping sanctions and and everything that's going on 0:05:11.839 --> 0:05:13.840 on the ground there. I mean, it's a real crisis. 0:05:13.960 --> 0:05:17.120 And so what you've seen there is you've seen credit 0:05:17.160 --> 0:05:20.240 the fault swap spreads blowout. And what that's done is 0:05:20.240 --> 0:05:23.839 it's increased the implied probability of default from something like 0:05:24.880 --> 0:05:28.000 upwards of seventy over the last month. That's a huge move. 0:05:28.440 --> 0:05:30.719 And and so doing someone's made a lot of money 0:05:30.720 --> 0:05:32.880 on this right because someone has bet that. I mean 0:05:32.880 --> 0:05:35.080 obviously someone bought the credit the false swaus when they 0:05:35.120 --> 0:05:37.080 were low and people thought there wasn't gonna be a problem. 0:05:37.360 --> 0:05:39.400 And this is like you're you're hoping that you're gonna 0:05:39.400 --> 0:05:42.400 get into an automobile accident and then you benefit because 0:05:42.400 --> 0:05:45.440 the premium skyrocket. Well well just from but that's true 0:05:45.480 --> 0:05:47.440 if you're if you're kind of playing, if you're trader 0:05:47.480 --> 0:05:49.360 mentality and you're playing the CDs spreads. But if you're 0:05:49.360 --> 0:05:51.960 a cash bond holder in petivesa right and you're a 0:05:51.960 --> 0:05:54.520 long term investor, you know what you're seeing is people 0:05:54.520 --> 0:05:56.800 have kind of been playing the front end because you know, 0:05:56.880 --> 0:05:59.839 every time there's you know, they're gonna default, they're gonna default. 0:06:00.000 --> 0:06:02.120 They don't default, and so the bonds pay out and 0:06:02.120 --> 0:06:03.720 and they and they mature and they were deemed and 0:06:03.760 --> 0:06:06.599 you get hundred cents on the dollar. But all those 0:06:06.600 --> 0:06:08.520 short end bonds, especially the ones that are coming due 0:06:08.520 --> 0:06:10.280 towards the end of the year, that are trading at 0:06:10.320 --> 0:06:14.240 svs on the dollar, they've come down quite a bit, 0:06:14.279 --> 0:06:16.479 and people are moving further out along the curve simply 0:06:16.520 --> 0:06:18.640 because your risk of loss is less. Think about it. 0:06:18.640 --> 0:06:21.000 If you're paying eighty cents for a pet of Basia 0:06:21.040 --> 0:06:23.040 bond and at the faults you lose eighty cents, but 0:06:23.080 --> 0:06:26.279 if you're paying thirty five cents for the twenty seven 0:06:26.400 --> 0:06:29.080 or your risk of loss is that much less. So 0:06:29.080 --> 0:06:31.720 you're seeing, you know, long term investors moving out along 0:06:31.720 --> 0:06:34.360 the curve. And that's what's going on with That's that's 0:06:34.400 --> 0:06:37.360 interesting because I mean that really highlights how people are 0:06:37.400 --> 0:06:41.320 reacting to try to reduce their risk, but at the 0:06:41.360 --> 0:06:44.560 same time they're looking for more yield. Yeah. Yeah, and 0:06:44.600 --> 0:06:46.640 pet A Basa Actually I just ran the numbers. It's 0:06:46.640 --> 0:06:50.599 actually the only oil and guest issuer in em hard 0:06:50.600 --> 0:06:53.400 currency land that is actually down on the year. But 0:06:53.440 --> 0:06:55.000 if you look at it over I mean, my goodness, 0:06:55.000 --> 0:06:56.480 if you look at it over the last two years, 0:06:56.960 --> 0:06:59.719 you know, I think it's up. You know, seventy eight 0:06:59.800 --> 0:07:02.200 per chens, you know. So you can't ignore Petivisa if 0:07:02.240 --> 0:07:05.200 you're kind of a closet Banta chaser and index tracker, 0:07:05.400 --> 0:07:06.919 if you will, you know you have to have it 0:07:06.960 --> 0:07:08.400 in the portfolio. It's just where do you want to 0:07:08.400 --> 0:07:10.440 pay your points on the curve? Thanks very much for 0:07:10.480 --> 0:07:13.520 explaining this very interesting. Thanks so as always. Damian Sasaur 0:07:13.560 --> 0:07:17.400 Hughes are fixed income strategist for Bloomberg Intelligence, giving us 0:07:17.440 --> 0:07:20.239 some detail about emerging market that in the connection between 0:07:20.280 --> 0:07:24.559 the oil companies in those countries and uh the value 0:07:24.560 --> 0:07:37.400 of their dead All right, I want to turn our 0:07:37.440 --> 0:07:40.240 attention now to the hospitality industry, and as much as 0:07:40.320 --> 0:07:43.600 Marriott has released its results and also we'll be getting 0:07:43.640 --> 0:07:45.720 a preview of price line, I want to bring in. 0:07:45.840 --> 0:07:49.560 Dan was Leaky is the senior equity analyst at morning Star, 0:07:49.680 --> 0:07:53.440 and Dan, let's begin with Marriott, because yesterday they said 0:07:53.480 --> 0:07:56.680 they've putting together this partnership with Ali Baba Group in 0:07:56.760 --> 0:07:58.920 China because of course they want to tap into the 0:07:59.400 --> 0:08:05.280 growing market for tourism and travel amongst Chinese individuals. Can 0:08:05.600 --> 0:08:09.720 you speak to what you learned from Marriott's report today? Yeah, 0:08:09.800 --> 0:08:11.840 you know, I guess with Ali Baba, we didn't find 0:08:11.840 --> 0:08:14.360 that too surprising. I think it makes sense for Marriott, 0:08:14.400 --> 0:08:17.520 and in the future, I expect other hotel operators to 0:08:17.600 --> 0:08:20.120 join a platform like ali Baba. Given that they have 0:08:20.160 --> 0:08:23.000 five million active monthly users, that's a platform that you're 0:08:23.000 --> 0:08:26.000 going to want shelf space on, especially, you know, given 0:08:26.120 --> 0:08:29.640 China is a growing outbound travel market, so this is 0:08:29.680 --> 0:08:33.600 something that is should help Marriott's long term growth opportunity 0:08:33.720 --> 0:08:36.360 in China. We're currently about eight percent of their total 0:08:36.480 --> 0:08:39.440 rooms are from that region. Um. But beyond that, what 0:08:39.520 --> 0:08:41.840 we learned out of the quarter was that their brand 0:08:42.000 --> 0:08:45.960 continues to be very strong, and also the US corporate 0:08:46.000 --> 0:08:48.800 business spent is seems to be pausing a little bit, 0:08:48.840 --> 0:08:51.160 and that's a kind of been echoed by some other 0:08:51.200 --> 0:08:54.240 competitors in the hotel space over the last week or two. 0:08:54.520 --> 0:08:57.160 All right, we'll get to the bigger, the bigger issue. 0:08:57.280 --> 0:08:59.600 Just second, I want to ask you about Marriott and 0:09:00.040 --> 0:09:04.000 are would how is the that pro that combination coming on, 0:09:04.120 --> 0:09:05.960 because didn't they say that they want to cut what 0:09:06.000 --> 0:09:12.000 two fifty millions in uh in dollars from the company's budget, right, Yeah, 0:09:12.040 --> 0:09:14.679 so everything that appears on track. You know, they acquired 0:09:14.720 --> 0:09:17.120 Starwood back in September of last year, is a good 0:09:17.120 --> 0:09:21.640 acquisition and that Marriott was more focused on US and 0:09:21.720 --> 0:09:24.000 Starwood had more of an international exposure, so that was 0:09:24.000 --> 0:09:26.600 a nice marriage from that vantage point. But yeah, everything 0:09:26.600 --> 0:09:29.319 appears on track. As far as the synergies that they 0:09:29.360 --> 0:09:33.280 expect to strip out of the Starwood UM integration, UM 0:09:33.280 --> 0:09:35.640 the two or fifty million and cost savings, they remain 0:09:35.720 --> 0:09:39.480 on track to to have that annulyzed sometime next year. Dan, 0:09:39.840 --> 0:09:43.160 it's this this is considered an asset light strategy. Is 0:09:43.200 --> 0:09:46.760 that correct? Right? Right? And maybe explain how does that 0:09:46.840 --> 0:09:50.000 work and why is that of benefit, particularly when it 0:09:50.040 --> 0:09:53.640 comes to margins. Yeah, so, um, you know, so they 0:09:53.640 --> 0:09:56.000 don't own a lot of their own hotels. They depend 0:09:56.080 --> 0:09:59.440 on third parties to really join the platform, and therefore 0:09:59.480 --> 0:10:03.040 they don't have a lot of development capital intensity costs 0:10:03.360 --> 0:10:06.840 that really that that's all um forwarded by the third 0:10:06.880 --> 0:10:09.080 parties that are joining Mariotte. And the reason they're joining 0:10:09.120 --> 0:10:12.640 Mariotte is because Maria has a leading loyalty program, they 0:10:12.640 --> 0:10:15.680 have strong brands, and they also have a good website 0:10:15.760 --> 0:10:19.040 of traffic um So those are the things that a 0:10:19.160 --> 0:10:21.800 third party will look to when they're looking, for example, 0:10:21.840 --> 0:10:24.560 to franchise under one of the larger brands. And also 0:10:24.960 --> 0:10:27.800 Marriott doesn't have to pay for any of the marketing costs. 0:10:27.840 --> 0:10:30.560 All that is is again paid for by these third parties. 0:10:30.559 --> 0:10:33.120 So the margins are very high versus if you own 0:10:33.160 --> 0:10:35.400 the hotels, those costs are going to be associated with 0:10:35.440 --> 0:10:38.920 that because those franchise fees as well as the incentive fees, 0:10:39.080 --> 0:10:42.680 they continue to increase the revenue at Marriott and doesn't 0:10:42.679 --> 0:10:46.280 cost them any more money. Uh yeah, that's that's essentially correct, right, 0:10:46.360 --> 0:10:48.920 So there's a lot of there's a lot of leverage 0:10:48.960 --> 0:10:51.840 here um as as they continue to sign up and 0:10:51.840 --> 0:10:54.400 get unique growth. The costs are very low, and then 0:10:54.440 --> 0:10:57.000 they get a percentage of the revenue that's generated by 0:10:57.040 --> 0:11:01.680 these franchisees. Is this the model that you think most 0:11:02.400 --> 0:11:06.520 hospitality hotel groups should follow? I do, But you know 0:11:06.520 --> 0:11:08.840 it's also a matter of scale. So when you're a 0:11:08.880 --> 0:11:11.520 smaller hoteler, you really have to kind of invest your 0:11:11.520 --> 0:11:13.800 own capital behind the brands in order to get them 0:11:13.800 --> 0:11:17.400 to a point where third parties can gain confidence in 0:11:17.400 --> 0:11:20.199 in the brand development. UM. So you look at a 0:11:20.240 --> 0:11:23.360 company like Hyatt, for example, that is has more of 0:11:23.360 --> 0:11:25.920 an owned exposure. They're starting to get to the point 0:11:26.000 --> 0:11:29.040 now where they're approaching two thousand total rooms where I 0:11:29.040 --> 0:11:32.080 think they're starting to realize that third parties now believe 0:11:32.160 --> 0:11:34.440 in the in the brands that they've put their own 0:11:34.720 --> 0:11:37.520 where to put their own capital behind. So it's kind 0:11:37.520 --> 0:11:41.040 of an evolution that a company gets into where it 0:11:41.040 --> 0:11:44.320 becomes more asset light as as it builds a certain scale. Now, 0:11:44.360 --> 0:11:46.960 price Line is set to release its results after the 0:11:46.960 --> 0:11:50.120 close of trading today. The shaffs of price Line are 0:11:50.200 --> 0:11:55.720 up nearly forty percent so far this year. Two stock 0:11:55.840 --> 0:11:58.480 is of a dollar twenty three right now, what do 0:11:58.480 --> 0:12:01.240 you expect to hear from price Line? Well, first of all, 0:12:01.280 --> 0:12:03.200 our long held view is that Priceline is the best 0:12:03.200 --> 0:12:06.280 position company with an online travel um. You know, the 0:12:06.360 --> 0:12:08.839 question now is is it the best stock? We think 0:12:08.880 --> 0:12:11.319 that it's actually near fair value or fair values two 0:12:11.320 --> 0:12:13.640 thousand and thirty dollars essentially where the stock is training 0:12:13.720 --> 0:12:15.680 right now. But you know, as far as the report, 0:12:15.760 --> 0:12:18.840 we expected to be solid um Expedia reported their results 0:12:18.880 --> 0:12:22.760 two weeks ago. They saw a pretty solid macro environment globally. 0:12:23.200 --> 0:12:27.240 Um Expedia's room nights also saw some acceleration versus the 0:12:27.280 --> 0:12:30.640 prior quarter, and then even though there's been some mention 0:12:30.840 --> 0:12:35.160 of US corporate pause with the hotelers uh. They also 0:12:35.200 --> 0:12:37.080 point out that the leisure market, which is more of 0:12:37.400 --> 0:12:41.280 price lines um um forte that the leisure market is 0:12:41.600 --> 0:12:44.199 quite strong, so we think that the quarter probably is 0:12:44.200 --> 0:12:47.080 going to be quite quite solid for Priceline. Can you 0:12:47.120 --> 0:12:50.600 speak about this idea of you know, the competition from 0:12:50.640 --> 0:12:54.040 air b and b so vacation rentals, how does that 0:12:54.480 --> 0:12:59.000 play into a Priceline strategy. Yeah, vacation rentals is a 0:12:59.080 --> 0:13:01.560 growing market with online travel, and one of the reasons 0:13:01.559 --> 0:13:03.800 why we like price Line is because Priceline actually has 0:13:03.800 --> 0:13:08.240 a really strong vacation rental um platform. So price Line 0:13:08.240 --> 0:13:11.040 has about one point two million properties and twenty five 0:13:11.080 --> 0:13:14.240 million rooms on booking dot com um and of those 0:13:14.280 --> 0:13:16.679 twenty five million rooms, about eight million or so our 0:13:16.760 --> 0:13:20.760 vacation rentals or alternative accommodations, which would compare with Airbnb, 0:13:20.880 --> 0:13:23.600 which probably you know has around three or four million 0:13:24.000 --> 0:13:27.000 UM rooms itself on its platform. So price Line actually 0:13:27.040 --> 0:13:30.640 has a very competitive offer into air Airbnb. And we 0:13:30.720 --> 0:13:34.000 think that of the total bookings, vacation rentals probably represent 0:13:34.080 --> 0:13:37.040 a low double digit of price lines total bookings. And 0:13:37.160 --> 0:13:40.880 you think that at fair value? What is the alternative 0:13:40.920 --> 0:13:43.480 if you don't like the price of Priceline. What should 0:13:43.520 --> 0:13:47.200 you do? Well? Trip Advisor? Uh, you know, I think 0:13:47.240 --> 0:13:50.680 trip the market, it's greatly probably discounting Trip Advisor that 0:13:50.760 --> 0:13:54.240 also has a pretty good platform. Uh, there's a lot 0:13:54.240 --> 0:13:57.040 of traffic that goes to trip Advisor. A trip advisor 0:13:57.080 --> 0:13:59.640 has a lot of content. Um, you know they'll be 0:13:59.640 --> 0:14:02.840 renowned seeing their results at the close of trading today. 0:14:02.960 --> 0:14:06.839 As yes, thanks very much. Dan Wassleck, he is a 0:14:06.920 --> 0:14:10.280 senior equity analyst at The morning Star talking about the 0:14:10.360 --> 0:14:26.000 hospitality industry. Well, what are the characteristics that a money 0:14:26.040 --> 0:14:28.880 manager looks for in an investment? Here to tell us 0:14:28.960 --> 0:14:31.200 is David Coudla. He is the chief executive and the 0:14:31.240 --> 0:14:35.120 chief investment strategist for Mainstay Capital Management, helping to manage 0:14:35.160 --> 0:14:39.040 more than two billion dollars based in Grand Blank, Michigan, 0:14:39.040 --> 0:14:43.040 and he can be followed on Twitter at David Underscore Kudla. 0:14:43.200 --> 0:14:47.680 That's k U D. L A. Alright, David underscore coudla. 0:14:48.160 --> 0:14:50.320 What are the characteristics? What are you looking for in 0:14:50.360 --> 0:14:55.720 an investment right now? Right now, we're looking for investments 0:14:56.280 --> 0:14:58.640 that can do well in a slow growth economy, and 0:14:58.680 --> 0:15:03.720 those are the actors that are more dependent on secular 0:15:03.840 --> 0:15:06.840 a second or growth story than they are the economy 0:15:06.880 --> 0:15:10.480 and cyclical forces. The economy is doing okay, but it's 0:15:10.480 --> 0:15:14.240 really just sputtering along at about two gdp growth. So 0:15:14.280 --> 0:15:18.360 we've seen value stocks have really suffered this year. Growth 0:15:18.360 --> 0:15:23.160 stocks have done very well, namely technology. Are you going 0:15:23.200 --> 0:15:25.640 to stick with that or is it time to rebalance? 0:15:26.680 --> 0:15:28.840 We're going to stick with technology and we're gonna stick 0:15:28.880 --> 0:15:32.200 with big cap technology. Uh. We We are in the 0:15:32.280 --> 0:15:34.960 ninth year of a bull market, and there will be 0:15:35.000 --> 0:15:39.560 a point where, uh, this market finally cracks after the 0:15:40.560 --> 0:15:43.720 over eight years of the second longest bull bull market 0:15:43.760 --> 0:15:47.680 in the history of US stocks, where we'll see a 0:15:47.760 --> 0:15:53.000 problem with a flat or down market and all stocks 0:15:53.040 --> 0:15:56.000 will suffer at that time until that time when we 0:15:56.040 --> 0:15:57.560 look at where do we want to be in this 0:15:57.720 --> 0:16:01.360 market right now past six months in right now, it's 0:16:01.400 --> 0:16:04.960 still with technology and even healthcare that tends to be 0:16:05.040 --> 0:16:08.520 economically insensitive. Well, David, how do you how do you 0:16:08.520 --> 0:16:10.440 know when to get out? I mean the NASDAC is 0:16:10.520 --> 0:16:14.200 up nearly this year, the SMP is higher by more 0:16:14.200 --> 0:16:17.280 than eleven. You know, no one's gonna ring a bell 0:16:17.440 --> 0:16:20.680 for you when you know when it's time. But how 0:16:20.680 --> 0:16:22.880 do you avoid that downturn on? How do you mitigate 0:16:22.960 --> 0:16:25.840 the effects? Yeah, no one's gonna ring a bell, although 0:16:25.840 --> 0:16:28.720 there are some people acting like the ringing bells UH 0:16:28.720 --> 0:16:33.560 at Oakmark Capital H. Jeffrey Gunlock are have words of caution, 0:16:33.600 --> 0:16:37.680 and we know that that market has stock market has 0:16:37.720 --> 0:16:40.440 to have pessimist has to climb a wall of wory. 0:16:40.480 --> 0:16:44.240 But when we look at market fundamentals, primarily earnings, earnings 0:16:44.240 --> 0:16:48.720 are very strong and expected to be strong through. So 0:16:49.040 --> 0:16:51.920 we think you stay with stocks for now. We're probably 0:16:52.440 --> 0:16:55.640 UH quite a bit more careful within the bond sector, 0:16:55.680 --> 0:16:59.960 staying away from those interest rate sensitive bond sectors. Well, 0:17:00.160 --> 0:17:02.440 let's take one of the sort of tech join as 0:17:02.480 --> 0:17:07.120 an example. Apple, Uh, the earnings that they are recently 0:17:07.160 --> 0:17:11.400 posted better than estimated, also looking into the future saying 0:17:11.440 --> 0:17:13.680 that they think they're going to do better than analysts 0:17:13.720 --> 0:17:17.639 had previously thought. Is Apple characteristic of the kind of 0:17:17.680 --> 0:17:21.040 company one to own it is. We saw iPhone sales 0:17:21.080 --> 0:17:24.920 come through very strong in the most recent quarter. Uh. 0:17:24.960 --> 0:17:29.160 They're continuing really to perform well with still a low 0:17:29.400 --> 0:17:32.920 pe relative to a lot of their peers. And when 0:17:32.920 --> 0:17:35.440 we look at the tax reform, that may becoming one 0:17:35.480 --> 0:17:39.240 of the primary UH ingredients in that is a way 0:17:39.320 --> 0:17:43.640 for those big companies like Apple to repatriate dollars. And 0:17:43.760 --> 0:17:45.720 that will be good whether it comes in the form 0:17:45.840 --> 0:17:52.280 of further investment or in financial engineering, stock buybacks, higher 0:17:52.320 --> 0:17:55.840 dividend payout. So how do you respond to people that say, gee, 0:17:55.840 --> 0:17:58.120 you know, David, You're just you're a momentum trader. You're 0:17:58.160 --> 0:18:01.439 you're going with the momentum. You're adding to the positions 0:18:01.480 --> 0:18:05.000 that are doing well. Uh, as you just said, eventually, 0:18:05.040 --> 0:18:08.600 that's not going to work forever. Eventually it won't work forever. 0:18:09.720 --> 0:18:13.480 But then then we look for as technical assid allocators, 0:18:14.000 --> 0:18:16.800 where do we want to be in the next market environment. 0:18:17.119 --> 0:18:20.400 You know, right now, if people who are Warren Buffet 0:18:20.440 --> 0:18:23.640 or Graham Dodd type investors that have looked at value 0:18:23.640 --> 0:18:26.560 because it's undervalue, that's simply been a value trap. So 0:18:26.720 --> 0:18:29.280 momentum has worked very well this year. We think it 0:18:29.320 --> 0:18:32.040 continues to work well and it will take us to 0:18:32.160 --> 0:18:36.960 other sectors. Uh as as the market chiefs well. Is 0:18:36.960 --> 0:18:39.640 a company like Tesla, do you consider that to be 0:18:39.720 --> 0:18:45.679 a technology company, an automobile manufacturer, a solar company? How 0:18:45.680 --> 0:18:49.840 would you parse Tesla all the above? Uh? You know, 0:18:49.920 --> 0:18:52.520 it's a consumer. You know, we'd put it in the 0:18:52.600 --> 0:18:58.399 consumer cyclical category as an auto manufacturer primarily, but also 0:18:58.480 --> 0:19:01.360 you'll see it held in a lot uh tech funds, 0:19:01.400 --> 0:19:05.520 technology stock funds because of the technology incorporated in the 0:19:05.560 --> 0:19:09.480 overall business model in their products. You know what Elon 0:19:09.560 --> 0:19:13.040 Musk is all about. But it's a it's a technology 0:19:13.080 --> 0:19:16.400 stock that quite quite frankly, concerns is quite a bit 0:19:16.440 --> 0:19:20.280 now and that's because we have this Model three production 0:19:20.440 --> 0:19:22.439 ramp that we see a lot of. We have a 0:19:22.440 --> 0:19:24.879 lot of concerns with a cash burn rate. We were 0:19:24.880 --> 0:19:29.160 concerned about until um a couple of days ago when 0:19:29.160 --> 0:19:32.280 it was announced that there would be another bar or 0:19:32.280 --> 0:19:34.760 a bond offering to raise another one point five billion. 0:19:35.160 --> 0:19:38.639 But you know, that's that's a company we can look at, 0:19:39.280 --> 0:19:42.480 not like Apple at a low pe that's making a 0:19:42.480 --> 0:19:45.720 lot of money. Tesla is a company with no Pe. 0:19:45.800 --> 0:19:49.240 They have no earnings and it's a question of when 0:19:49.760 --> 0:19:52.000 and if they will ever be a profitable company. So 0:19:52.040 --> 0:19:54.600 we think owners of Tesla we called a story stock, 0:19:54.800 --> 0:19:57.679 and they've given Elon Musk and Tesla path on a 0:19:57.720 --> 0:20:00.199 lot of things because they believe in the future. But 0:20:00.280 --> 0:20:02.320 we think there's a lot of reality to set in 0:20:02.320 --> 0:20:04.800 in the next six to nine months for Tesla. Well, 0:20:04.840 --> 0:20:08.080 it certainly hasn't stopped the stock because the shares are 0:20:08.160 --> 0:20:11.840 up more than seventy percent so far this year. Do 0:20:11.880 --> 0:20:14.480 you think that one point five billion dollar bond offering 0:20:14.480 --> 0:20:16.280 that they're talking about, is that just an effort. They've 0:20:16.280 --> 0:20:18.040 got to raise the money somehow, but they just don't 0:20:18.040 --> 0:20:21.200 feel they can dilute the current shareholders. Yeah, and it's 0:20:21.320 --> 0:20:23.639 it's a good time if you're going to capital markets 0:20:23.680 --> 0:20:26.639 a lot of companies. There's companies that are going uh 0:20:26.680 --> 0:20:30.600 in issuing debt to buy back their stock because capital 0:20:30.680 --> 0:20:32.640 is so cheap right now, so now it's a good 0:20:32.640 --> 0:20:35.119 time to do it. But they also we think it's 0:20:35.160 --> 0:20:36.840 a good time for Tesla to do it because they've 0:20:36.840 --> 0:20:39.560 had the rollout of the Model three. The press has 0:20:39.600 --> 0:20:42.439 been very good. It was really superb rollout, but if 0:20:42.480 --> 0:20:45.200 they get a production encounter, some of those production problems 0:20:45.240 --> 0:20:48.040 the next year's service problems. UH, it'll be a little 0:20:48.080 --> 0:20:50.280 tougher to go to capital markets. Given that their cash 0:20:50.320 --> 0:20:52.480 burn rate throughout the money in two in two to 0:20:52.560 --> 0:20:54.640 three quarters. I think it was very wise for them 0:20:54.680 --> 0:20:57.560 to do that at this time. As far as this, uh, 0:20:57.760 --> 0:21:02.919 this effort on on what you hall secular growth healthcare, 0:21:04.000 --> 0:21:06.560 what what characterizes because I mean health care is abroad, 0:21:06.760 --> 0:21:09.879 you know, a broad section of the of the market, 0:21:10.240 --> 0:21:16.240 what particular areas of healthcare, pharmaceuticals, health insurance, health insurance, 0:21:16.280 --> 0:21:20.159 healthcare providers. We saw a lot of revenue generated for 0:21:20.200 --> 0:21:25.080 those companies with Obamacare, and we've seen as the different 0:21:25.880 --> 0:21:28.960 packages have been put forwards legislation and proposals by the 0:21:28.960 --> 0:21:33.280 Health and then the Senate. Uh. There there within are 0:21:34.000 --> 0:21:36.880 the factors that the healthcare providers can continue to do well. 0:21:37.040 --> 0:21:44.760 So healthcare being a non cyclical typically non cyclical a 0:21:44.760 --> 0:21:49.520 a uh, A non economically sensitive sector that has been 0:21:50.440 --> 0:21:53.119 on a growth tear, and we think that still a 0:21:53.119 --> 0:21:55.359