Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller. Every business day we bring
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
Speaker 1: at Bloomberg dot com slash podcast. This market hanging in there.
Speaker 1: It's doing a little bit better than maybe I had
Speaker 1: given a credit for. Just a few minutes ago, the
Speaker 1: SMP up about eight tenths of one percent. A lot
Speaker 1: of questions for war investors out there as we flirt
Speaker 1: with bear market territory and SMP maybe chief among them,
Speaker 1: as a recession, Sylvia Jablonski, chief investment officer and co founder,
Speaker 1: have to find a t F S joins us. Sylvia,
Speaker 1: how are you thinking about that? Again? I think maybe
Speaker 1: over the last week or two, one of the more
Speaker 1: frequent questions we had is, Okay, the Fed is raising
Speaker 1: interest rates. We get that, but put in context the
Speaker 1: risk of a recession that might result from this rising
Speaker 1: indestrate environment? Do you guys think about that? At Defiance?
Speaker 1: Good morning to Paul Well. I think that a lot
Speaker 1: of what is going on in the market is very
Speaker 1: much you know, near term panic, fear, um some capitulation,
Speaker 1: and that naturally spurs these these thoughts and again just
Speaker 1: fear that there will be an inflation sooner or inflation
Speaker 1: recessions sooner than rather than later. Um. You know, my
Speaker 1: my thought on that is that we're certainly in a
Speaker 1: deep correction, if not a short term bear market, we're
Speaker 1: pretty close. You know, no dec is there a spire
Speaker 1: is swarting with that twenty percent level intra day Um,
Speaker 1: it's it's it's got about half of the components below
Speaker 1: or so foot call ratios are high, you know, consumer sentiments,
Speaker 1: so there are all these things that are just sort
Speaker 1: of scary and it feel terrible in the near term.
Speaker 1: But you know, I don't think we're at that point
Speaker 1: where a recession is necessarily right around the corner. And
Speaker 1: the reason why is because the economic backdrop still remains
Speaker 1: pretty healthy. You know, you have a hot labor market.
Speaker 1: If loosening a little bit, um, you have you know,
Speaker 1: trillions of dollars and savings from from a strong consumer,
Speaker 1: a strong curve of balance sheets, and we don't have
Speaker 1: a credit crisis. You know this isn't two thousand eight.
Speaker 1: Banks are sort of stable and strong and there are
Speaker 1: good things that will help us sort of weather the storm,
Speaker 1: if you will. So, yeah, how much does this bear
Speaker 1: market talk really matter? We gonna have guilty little our
Speaker 1: markets reporter on just a few minutes ago, and she said, well,
Speaker 1: you know, it's really just psychological. It doesn't matter that much.
Speaker 1: Do you agree? Well, I think it matters for for
Speaker 1: people who are who are selling. I think that you
Speaker 1: know that that crowd is is essentially um, you know,
Speaker 1: taking losses and they really shouldn't, you know, So I
Speaker 1: think um Abigail makes a great point. I expect, I
Speaker 1: expect that a lot of this is sort of psychological
Speaker 1: and that you know, we're just watching the sort of
Speaker 1: market fall and and it feels terrible, and so you
Speaker 1: have traders sitting on the sidelines. But where it does
Speaker 1: matter is that you know there are opportunities that can
Speaker 1: be had now. Right, So if you are an investor
Speaker 1: that has on the sidelines and you have a long
Speaker 1: term investment, her eyes and you could be missing out
Speaker 1: on an opportunity of fear and panics. Keeping on the sidelines.
Speaker 1: You know that also keeps things sort of repressed for
Speaker 1: a longer period of time as well, if we don't
Speaker 1: see investors coming back in. But what's interesting about you know,
Speaker 1: sort of this their market or non bare market, whatever
Speaker 1: it is is. You know, there are sort of two
Speaker 1: types of people out there there, traders who can benefit
Speaker 1: the short term, and what I would say is that
Speaker 1: those traders tend to be high frequency experts. I'll go, guys,
Speaker 1: you know the hedge funds so invested in the corporation.
Speaker 1: Don't try to do it yourself. It's too tricky now.
Speaker 1: But if you're a long term investor and you have
Speaker 1: a long term outlook, you know, buying stocks on the
Speaker 1: discount again, with the odds of a recession still being
Speaker 1: fairly low, with this unique set up in the economy,
Speaker 1: it is probably not the worst idea if you're looking for,
Speaker 1: you know, sort of quality and strung down sheet. A
Speaker 1: lot of names around down now, you know. I had
Speaker 1: a phone call from my financial advisor on Friday advising
Speaker 1: me that we're taking some tax loss tax losses on Friday,
Speaker 1: just letting me know. I was like, oh great, But
Speaker 1: that was the first time in fourteen years we had
Speaker 1: had that conversation. About taking tax losses on and there's
Speaker 1: all my e T s as well. So are there
Speaker 1: e T s out there that are actually doing well
Speaker 1: that unfortunately I was not in? You know, it well
Speaker 1: depends on the time frame. It depends on when you
Speaker 1: when you sort of got it in them, and when
Speaker 1: you're getting out, you know. I definitely think that there
Speaker 1: are some ets that investors can look at now that
Speaker 1: are poised to do well, you know, in terms of well.
Speaker 1: I think that the pullback of the market is pretty
Speaker 1: widespread right now. I mean, oil, gas and energy ets
Speaker 1: have have sort of done well, um with you know,
Speaker 1: with sort of the inflation, the energeo politics. But I
Speaker 1: also think that ETFs that are poised to do well
Speaker 1: do exist, and I think a lot of those will
Speaker 1: be in the travel reopen um type of spaces. You know.
Speaker 1: I think that that's a good trade of consumer spending
Speaker 1: going from good services. I think that you know, the
Speaker 1: longer term outlook on things like you know, alternative energy resources,
Speaker 1: things like hydrogen things solar um could be interesting to
Speaker 1: investors now, So you know, they're definitely places to look
Speaker 1: and look. I would even just argue that that you
Speaker 1: know them both cues and sim age and just just
Speaker 1: you know, sort of plain old technology and and um,
Speaker 1: you know, um sort of larger market cup somebody. Conductor
Speaker 1: ETFs are interesting just because they've been absolutely hammered from
Speaker 1: their all time highs um, so their places to do
Speaker 1: well in the future. But to answer your question now,
Speaker 1: it's probably more around the commodity space, and it's around
Speaker 1: those names. Sylvia, what about Levered e t s And
Speaker 1: there was some chat on the street a couple of
Speaker 1: weeks ago that Leverty t f s and their liquidation
Speaker 1: was hurting the market and kind of snowballing some of
Speaker 1: the selling. Where does that fall in the grand scheme
Speaker 1: of things. Yeah, so having you know, having a background
Speaker 1: of some more than a decade at the level of
Speaker 1: a niversity ETF provider direction, Um, you know, what I
Speaker 1: can say is that a lot of people sort of
Speaker 1: misunderstand how how the trade works. Right. If if you
Speaker 1: have a both fund um that is buying, you often
Speaker 1: have a bare fund that is selling or vice versa. Um.
Speaker 1: You know, there's a lot left and there's been numerous
Speaker 1: studies done and the impact on the close of leven
Speaker 1: niversity TF funds, whether it's you know, direction posures are
Speaker 1: kind of the lion's share of it. It tends to
Speaker 1: be well under one percent or so. UM. So you know,
Speaker 1: I think it's it's it's. It sounds good, but in sanery,
Speaker 1: the math doesn't usually play out for it to be true.
Speaker 1: All right, Sylvia, thank you so much for joining to
Speaker 1: really appreciate getting your thoughts here on these markets and
Speaker 1: on the E t F space. Sylvia Jablonsky, chief investment officer,
Speaker 1: co founder Defiance E t F s here we have
Speaker 1: a good green day on the screen for equities, but
Speaker 1: you know, you take a look at the total return
Speaker 1: aggregate for US corporates minus thirteen percent year to date.
Speaker 1: Just brutal out there in the world of fixed income
Speaker 1: and credit. Um, let's talk to somebod who does this
Speaker 1: stuff for a living. Randy Schwimmer, co head of Senior
Speaker 1: Lending and Seeing Senior Managing Director Churchill Asset Management. Randy,
Speaker 1: anywhere for you and your team to hide year to date?
Speaker 1: And what are your thoughts for the remainder of the year. Well,
Speaker 1: it's great to be with you, and actually we're not
Speaker 1: hiding at all. We're out We're out there investing and uh,
Speaker 1: you know this is a time when private markets are
Speaker 1: actually shining. So we're seeing a reset as you mentioned,
Speaker 1: you know, it's been now happening for a while, kind
Speaker 1: of a repeat of March of when we were really
Speaker 1: sure where the public markets were going. UM. We have
Speaker 1: more recession worries to deal with now, I think as
Speaker 1: the FED is increasing interest rates and trying to battle
Speaker 1: inflation um and so that's now causing concerns in the
Speaker 1: public markets about you know, what's going to happen with
Speaker 1: earnings and so forth, and if if rates start to
Speaker 1: get too high, what's the impact on the consumer. We're
Speaker 1: starting to see some slowing in some areas, but but
Speaker 1: private capital in general has been very constructive, particularly during
Speaker 1: this time. We've actually seen a number of deals that
Speaker 1: were stalled in the high yield bond market being taken
Speaker 1: out by private capital managers who are stepping in with
Speaker 1: deals like Nielsen and CDK Global and even peloton Um
Speaker 1: and and stepping in actually refinancing some deals that that
Speaker 1: were stuck because of what's going on in the public market.
Speaker 1: So I think, you know, the private capital, because of
Speaker 1: the long term nature of both the assets and liabilities
Speaker 1: UM that that are locked in in our markets, as
Speaker 1: well as the significant hole levels that we've that we've
Speaker 1: achieved because of great fundraising activity. In general the last
Speaker 1: couple of years, private credit sects have been very constructive
Speaker 1: during this otherwise volable market, this otherwise volatble market. I
Speaker 1: want to dive into what you said about the high
Speaker 1: yield space specifically because to me, I feel like with
Speaker 1: all this recession talk, if there was indeed a recession
Speaker 1: coming or even on the horizon, you would see it
Speaker 1: show up in the credit market first. But the crests
Speaker 1: crest prosts haven't widened to what we've seen in previous recessions.
Speaker 1: Is that disconnect that you're keeping an eye on. Yeah,
Speaker 1: and in fact, we haven't really seen that in the
Speaker 1: private market's well known fairness. You know, the middle market,
Speaker 1: the smaller companies tend to be a lagging indicator, so
Speaker 1: the large cap, more highly traded businesses are probably gonna
Speaker 1: see the impact first. Um. You know, we're not seeing
Speaker 1: really a slowdown, certainly not in our portfolio. Revenues for
Speaker 1: our portfolio companies continue to be strong. Um. Now again,
Speaker 1: you know, we'll see what happens during the rest of
Speaker 1: the year. Some of the impact particularly with inflation UH
Speaker 1: sensitive areas such as food and energy and commodities. Those
Speaker 1: kinds of things are are still top of mind for
Speaker 1: us from a portfolio perspective, and we're very focused on
Speaker 1: the potential of higher costs down the road. Supply chain
Speaker 1: issues continue to be UM at the forefront, potentially compressed
Speaker 1: margins as a result of some of these higher costs
Speaker 1: in certain areas, But in areas where we're UM you know,
Speaker 1: being very constructive, for example, health care and technology and
Speaker 1: business services, these companies are continue to do pretty pretty well.
Speaker 1: And I think you're starting to see even the public
Speaker 1: markets today a little bit of kind of reassessment UM
Speaker 1: in what we mean by a slowdown and what really
Speaker 1: the markets are worried about. But I do think that
Speaker 1: UM private capital will continue to be very very positive
Speaker 1: as we move forward, you know, and even in an
Speaker 1: environment where some of the concerns with whether where, whether
Speaker 1: it's inflation or interest rates, that's something that we've been
Speaker 1: really dealing with all along, particularly going through over it.
Speaker 1: So I don't really see any change in our own posture. Randy,
Speaker 1: how about as interest rates UH continue to rise and
Speaker 1: there's talk of a slowing economy, maybe even a recession.
Speaker 1: What are the leverage have you changed the kind of
Speaker 1: the leverage levels or that you're willing to go to
Speaker 1: the market with. Well, we we always are sensitive to
Speaker 1: those kinds of things. We we tend to turn down
Speaker 1: and probably the transactions that come in the door because
Speaker 1: of that reason. Um. I think the focal point, Paul,
Speaker 1: that is, as I mentioned, something that's of concern is
Speaker 1: really the cost structures of these businesses because you're as
Speaker 1: you're looking forward to your point, you know, if you
Speaker 1: start to see food and energy in certain commodities where
Speaker 1: costs are going to be higher, you're not going to
Speaker 1: be leveraging those businesses the same you would have, you
Speaker 1: know nine months ago, twelve months ago, and so yes, um,
Speaker 1: you know, more leveraging in companies or things that we're
Speaker 1: always focused on. We're going to be very um cautious
Speaker 1: about that going forward. But in many cases where companies
Speaker 1: are doing well, where the private equity sponsors that we're
Speaker 1: partnering with are putting in significant capital below our structures
Speaker 1: because they believe in these businesses, those are companies that
Speaker 1: were we continue to lean into and we believe in.
Speaker 1: And I think that you know, the outlook for the
Speaker 1: rest of the year continues to be good investors that
Speaker 1: we are serving, uh, seemed to indicate that they have
Speaker 1: the same or even higher interest in private credit again
Speaker 1: because it tends to be you know, the oil on
Speaker 1: troubled waters which we're seeing right now, and people believe
Speaker 1: that that that's going to be positive going forward. All right, Randy,
Speaker 1: good stuff. Really appreciate getting an update on the private
Speaker 1: equity and a senior lending business into the private equity space.
Speaker 1: Randy Schremmer, cohead of senior Lending and senior managing director
Speaker 1: at Churchill Asset Management. You know, one of the bricks
Speaker 1: in the wall of worry, and there are many, is
Speaker 1: this scene called stag inflation. I started hearing about over
Speaker 1: the last couple of months. I had to go back
Speaker 1: into my economics book from Business Malfair, What the heck
Speaker 1: is stagflation again? And I guess it's kind of like
Speaker 1: inflation but slowing to no growth. And that just doesn't
Speaker 1: sound very good. But that's certainly one thing that's been
Speaker 1: royal in these markets. Let's get the latest Lis McCormick
Speaker 1: Global Fixed Income and Foreign Exchange Reporter for Bloomberg News joints.
Speaker 1: Us I like to say, live in our Bloomberg Interactive
Speaker 1: Broker studio. That's good stuff, Liz, all right, stagflation is
Speaker 1: it a thing for this market? Our investors really worried
Speaker 1: about it? And you know, what are you hearing about it?
Speaker 1: It's definitely, uh, something that people are worried about. And
Speaker 1: I've heard even the senior investors say, we had to
Speaker 1: crack out our textbooks and remember what this is. And
Speaker 1: I think it's become I'm amalgam of different explanations now
Speaker 1: with a lot of people saying, hey, look, if you're
Speaker 1: telling me stagflation in this world is slowing growth and
Speaker 1: high inflation, well that's what we have. I mean, I
Speaker 1: don't think that's the textbook explanation, but so people are
Speaker 1: worried about that. You know, obviously the feed is worried.
Speaker 1: So there, you know, kind of stepped up this tightening path.
Speaker 1: But yeah, people are thinking about that. So let's how
Speaker 1: do you get out of a stagflationary environment. Well, I
Speaker 1: think that's what the FED is doing. Like you've heard
Speaker 1: Chairman Pal talk about he thinks he can pull off
Speaker 1: tightening bringing down inflation without causing recession, although he's changed
Speaker 1: his tone a little from slow growth to slowish growth too.
Speaker 1: It'll take a little bit of pain, right, But then
Speaker 1: that's their ideal goal is to say, hey, the labor
Speaker 1: market is really strong. It can take these higher rates.
Speaker 1: We can bring inflation under control, but we don't have
Speaker 1: to completely implode the economy. I'll though, as you guys know,
Speaker 1: history doesn't always go with that. Usually Fed tightening, there's
Speaker 1: a recession, but we'll see what happens. You know, the
Speaker 1: FED calls rightfully into the discussion the strong labor marketplace,
Speaker 1: which it certainly is if you look at unemployment just
Speaker 1: for example. But one of the risks when you do
Speaker 1: talk about the labor market is wage inflation kind of
Speaker 1: spiraling a little bit. And I guess we're running it
Speaker 1: wage inflation five percent, but there's a concern out there
Speaker 1: that could get a little bit hotter um is a
Speaker 1: market concerned about that? Do you think, Well, that's something
Speaker 1: people talk about because also talking to a colleague today
Speaker 1: that you know, when people get these raises, say they
Speaker 1: got a five percent raise, they're not so much the
Speaker 1: next year are going to say, oh, I'll give that back, right,
Speaker 1: So that's what the FED is worried that this gets
Speaker 1: in trench. So I think that's on the radar, though
Speaker 1: I've heard some FED officials say, or we don't see
Speaker 1: the wage price spiral as if yet. You know, we
Speaker 1: want to contain inflation expectations, which have come off a
Speaker 1: lot from the kind of peak we had. But yeah,
Speaker 1: you know, if those wages get entrench, that's the problem.
Speaker 1: You know, there's two jobs basically for every opening, and
Speaker 1: that's what Chairman Palell's talked about, concerned too hot labor market.
Speaker 1: And I saw just a new story today. I guess
Speaker 1: the Bank of America. They're hourly employees now going up
Speaker 1: to twenty five dollars an hour. So yeah, I think
Speaker 1: the official minimum wage is still seven dollars, but it
Speaker 1: seems like Walmart and you know, you know Amazon have
Speaker 1: set the real minimum wage at fifteen dollars for all
Speaker 1: intensive purposes. But now you've got you mean like you
Speaker 1: mean like the like the bank teller's and I guess,
Speaker 1: so very interesting. So we're seeing it out there. Um,
Speaker 1: just don't know if it's problematic yet. I was gonna say,
Speaker 1: they used to be like if you did like a
Speaker 1: junior banker salary divided by hours they work. It came
Speaker 1: down like twenty five, which is interesting. Um, Liz, let's
Speaker 1: talk about the dollar if we can. We are seeing
Speaker 1: this new dynamic where you see a weaker dollar yield
Speaker 1: kind of resumed their march higher. Why the separation, Well
Speaker 1: today it's interesting and I heard you guys talking girl
Speaker 1: or but we had Christine Lagarde kind of pre announced,
Speaker 1: which was a surprise that you know, they're going to
Speaker 1: be stopping their bond buying. They want to get rates
Speaker 1: off the negative level. But I think the third quarter,
Speaker 1: she said, so, you know, the dollar for a while,
Speaker 1: the FED was the most aggressive in town, you know,
Speaker 1: even though other central banks were tightening, and definitely the
Speaker 1: e c B was the lagger. Now you have le
Speaker 1: guards stepping up. So I think there's the feeling that
Speaker 1: you know, hey, the other central banks and there's others
Speaker 1: that are kind of increasing their hawks rhetoric that it's
Speaker 1: you know, that divergence isn't as extreme. Plus, the dollar
Speaker 1: had such a torrid rise, right, you know, I mean,
Speaker 1: let's let's just talk about dollar long saying like in
Speaker 1: any market, hey, let's take some profits. It's come a
Speaker 1: long way. How far can it go. So I think
Speaker 1: there's the two things flows and you know the divergence narrowing.
Speaker 1: You mentioned ECB starting to move here. Is it still
Speaker 1: a valid concern to claim that the US feder Reserve
Speaker 1: is quote unquote behind the curve. Well, the FED would
Speaker 1: argue not so much, right. I think Buller just said,
Speaker 1: we're not so much behind the curve. Um. I think
Speaker 1: with where the market has priced in what the FED
Speaker 1: will do, which Chairman Palace kind of pointing to a lot. Hey, listen,
Speaker 1: the markets doing what you know we want, and they've
Speaker 1: priced in all these hikes to come. So I think
Speaker 1: if you go by that and the q T is
Speaker 1: starting next month where they unwind you know, some of
Speaker 1: the dead on their balance sheet, they would argue, we're
Speaker 1: not as behind the curve as we were. Um, that's
Speaker 1: where the question is. Like I was listening to one
Speaker 1: of the guests earlier talk about do they have the
Speaker 1: room to hike maybe fifty basis points the next two
Speaker 1: meetings and then stop and look around. Maybe but not
Speaker 1: if inflation is too hot, they might have to just
Speaker 1: keep going. But is it enough for the ECB to
Speaker 1: finally catch up to the Fed or at least that's
Speaker 1: the way it's being framed. When you have the b
Speaker 1: o E that's kind of doing their own thing, you
Speaker 1: have a PBOC that's actually looking to stimulate, um, and
Speaker 1: a b o J that's kind of stuck between a
Speaker 1: rock and heart place. Right. Well, the b o J
Speaker 1: has kind of been stuck for a long time, exactly. Um.
Speaker 1: But yeah, no, I mean clearly, I think the FED
Speaker 1: in the in the last months has been the most
Speaker 1: kind of laser focused. We're on a mission. We're getting
Speaker 1: to neutral. You know, we're going to get inflation down that. Yeah,
Speaker 1: they stand out, but yeah, these other central banks are
Speaker 1: a little more hodgepodge, you know. But I think the guards,
Speaker 1: especially because you did it in that blog, you know,
Speaker 1: kind of getting ahead of it was pretty telling. And
Speaker 1: you know you look at the work function. I mean
Speaker 1: w i r P World interest rate probability still looking
Speaker 1: for eight basis point cuts by the end of the year.
Speaker 1: I'm sorry, thank you markets. Yeah, exactly, that's what I mean.
Speaker 1: That if if the FED, and that's what they're kind
Speaker 1: of looking at, says, look at how much the markets
Speaker 1: priced in. You know, we're getting there. It's it's filtering
Speaker 1: through to expectations, which is what we want. Um. Yeah,
Speaker 1: but it's like that nebulous neutral. They said, we want
Speaker 1: to get to neutral. Some people say it's bound two
Speaker 1: and a half. They're gonna feel their way as they
Speaker 1: get there, and that I think you're going to see
Speaker 1: some more volatility at that point. All right, Liz, thanks
Speaker 1: so much. We appreciate it. Liz McCormick, global fixed income
Speaker 1: and foreign exchange reporter for Bloomberg News, joining us live,
Speaker 1: which we really appreciate. In the Bloomberg Interactive Broker studio,
Speaker 1: Dianna Baker and Ed Hammond had a story out on
Speaker 1: the Bloomberg term on this morning. There are M and
Speaker 1: A reporters. They broaked a lot of news right there
Speaker 1: saying broad Comms and talks to buy vm Ware. I mean,
Speaker 1: vm Where's a big Company's got a forty billion dollar
Speaker 1: market cap, so this would be a major deal in
Speaker 1: in that business. Let's bring it somebody who does this
Speaker 1: stuff for living Ujinho. He's a technology analyst for Bloomberg Intelligence,
Speaker 1: which thanks so much for joining us here. What do
Speaker 1: you make of this deal? Vm War's a big company.
Speaker 1: The deal actually makes sense from from a broadcom perspective. UM,
Speaker 1: they've been embarking on a revenue diversity the percification strategy
Speaker 1: for the past couple of years, dating back to with
Speaker 1: the acquisition of c A and UM. If you listen
Speaker 1: to Broadcom's last serning is called, they said that they
Speaker 1: had the capacity to do a deal that's fairly sizeable
Speaker 1: and vm where somewhat. That's a deal, So that's from
Speaker 1: a deal synergies perspective. There's another player here that might
Speaker 1: get in the way. Michael Dell at stake in vm ware.
Speaker 1: Can you walk us through why he might be a
Speaker 1: hurdle UM. Well, I wouldn't necessarily that he's a hurdle, right.
Speaker 1: The one thing that I do think that given that
Speaker 1: he is the holder, as well as silver Lake being
Speaker 1: a teen percent UH Holdrovid, they want the right valuation,
Speaker 1: right and and that's one of the reasons why the
Speaker 1: stock is up about uh The evaluation that that we
Speaker 1: pegged as part of our note earlier today was that
Speaker 1: it's probably going to be an enterprise value about seventy billion,
Speaker 1: So that's another ten percent from here. So Michael Dell
Speaker 1: isn't going to sell vm ware for cheap boy, I
Speaker 1: wish I were the m in a bank care for
Speaker 1: Broadcom UM. These guys do a lot of deals. What's
Speaker 1: the strategy behind you know, some of their acquisitions? Sure,
Speaker 1: UM a couple of couple of things, right, scale up
Speaker 1: on the areas that they do do well and and
Speaker 1: do best, shed the non performing assets, and then then
Speaker 1: really try to optimize the the operating margin. These guys
Speaker 1: have stunning operating margins if across the semiconductor or any space,
Speaker 1: UM you operating margins UH and UM. Every deal that
Speaker 1: they make they try to shed excess costs to bring
Speaker 1: their operating margin to that sixty percent level. So, for example, UM,
Speaker 1: in the analysis that we did, we think that without
Speaker 1: any deal operating expense energies, they could probably do roughly
Speaker 1: seven dps secretion UM. Vm Ware has about operating margin here. Now,
Speaker 1: if they can shed some of the excess costs for
Speaker 1: vm Ware, they can make this deal very very creative
Speaker 1: over the next two to three years, just just by
Speaker 1: bringing vm Ware's operating UH levels closer to Broadcoms. I'm
Speaker 1: just reading some Bloomberg Intelligence research here says brod Com
Speaker 1: can do and all cash deal if necessary. This is
Speaker 1: a theme we're seeing among a lot of the tech
Speaker 1: players that they're sitting on so much cash that they're
Speaker 1: kind of deploying it in this M and A space.
Speaker 1: Is there a broader trend here we need to be
Speaker 1: aware of or is this a more idiosyncratic Broadcom vm
Speaker 1: ware story. Well, you know, what are the themes um
Speaker 1: that that we're thinking about from from a an M
Speaker 1: and A standpoint, uh is that if you do have
Speaker 1: excess cash, might as well use it um if you're
Speaker 1: not going to get the returns on that cash. Now,
Speaker 1: what what Broadcom may have to do is to raise
Speaker 1: the debt to make this deal done. Now, some of
Speaker 1: the other news reports I've read was that it might
Speaker 1: be an a combination of cash and stock. But if
Speaker 1: if I do you know, if I if I think
Speaker 1: about it, you know, for from from uh uh from
Speaker 1: evaluation or net debt to a nibada standpoint, they can
Speaker 1: really take up the deal much higher if they really
Speaker 1: wanted to, if there is a competitive bid. Right now,
Speaker 1: I don't think there's a competitive bid. But you know,
Speaker 1: from a post deal perspective, I get roughly a three
Speaker 1: point products um net debt or leverage ratio. So for
Speaker 1: these guys, so they can comfortably do the deal and
Speaker 1: possibly continue to UH fund their capital over trans program.
Speaker 1: All right, would you let's step back a little bit.
Speaker 1: You know you've been covering the tech space for a
Speaker 1: long time. Now give us a sense of kind of
Speaker 1: where we are in tech spending. I don't know if
Speaker 1: the supply chains are still on issue, but give us
Speaker 1: just a sense of as you step back and look
Speaker 1: across the tech stack, where are we kind of in
Speaker 1: the psycle, how are things going for the big nature.
Speaker 1: I actually view it as a tale of two cities,
Speaker 1: right UM. The overarching theme, at least in the near
Speaker 1: terms that the supply chain has thrown a monkey ranch
Speaker 1: to UH some of this spending. But I do think
Speaker 1: that on the consumer side we do have some UM
Speaker 1: inflationary concerns heading into the second half. I'm fairly concerned
Speaker 1: about European tech spending, China tech spending, in consumer tech
Speaker 1: spending in the near term, and that's going to affect
Speaker 1: the PC space. And some of the names that we
Speaker 1: have called out in the past UM are R Dell
Speaker 1: and H H P hp Q. But on the other
Speaker 1: end of of the ledger, we have an enterprise tech
Speaker 1: spending and we're still coming off a period where companies
Speaker 1: that have under under invested in tech in the pre
Speaker 1: pandemic period are finally, um, finally leading to invest coming
Speaker 1: out of it. And even though there might be a
Speaker 1: recessionary environment going into three UH, they still need to
Speaker 1: invest so they can avoid another potential black Swanna. That
Speaker 1: and and if we look at orders, not sales, right,
Speaker 1: because sales are probably impacted by the supply chain. If
Speaker 1: we look at orders, we're seeing order order growth that
Speaker 1: are two hundred three hundred times UM over the past
Speaker 1: to three quarters, which and you're gonna see, um, you
Speaker 1: know that that orders are going to convert into sales
Speaker 1: sometime or another. And twenty three or twenty four, All right,
Speaker 1: good stuff as always. Wogein host senior hardware analysts for
Speaker 1: Bloomberg Intelligence, one of the top tech analysts on Wall Street,
Speaker 1: and we have one of tech research top tech research
Speaker 1: teams on Wall Street, Bloomberg Intelligence. Thanks for listening to
Speaker 1: the Bloomberg Markets podcast. You can subscribe and listen to
Speaker 1: interviews with Apple Podcasts or whatever podcast platform you prefer.
Speaker 1: I'm Matt Miller. I'm on Twitter at Matt Miller three,
Speaker 1: pet On Ball Sweeney I'm on Twitter at pt Sweeney
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