WEBVTT - U.S. Shale Patch Is No Longer A Growth Market 0:00:02.640 --> 0:00:05.320 Welcome to the Bloomberg Penel Podcast. I'm Paul Sweene. You, 0:00:05.360 --> 0:00:07.680 along with my co host Lisa Brahma Waits, each day 0:00:07.720 --> 0:00:10.240 we bring you the most noteworthy and useful interviews for 0:00:10.280 --> 0:00:12.520 you and your money. Whether at the grocery store or 0:00:12.560 --> 0:00:15.480 the trading floor. Find a Bloomberg Penl podcast on Apple 0:00:15.520 --> 0:00:17.960 podcast or wherever you listen to podcasts, as well as 0:00:17.960 --> 0:00:21.360 at Bloomberg dot com. Reporting earnings today better than expected, 0:00:21.360 --> 0:00:24.840 shares up nearly two per cent, But interestingly, it said 0:00:25.200 --> 0:00:29.520 it's showing strength everywhere in providing oil field services except 0:00:29.600 --> 0:00:31.840 for in the United States. Joining us on a discuss 0:00:31.840 --> 0:00:35.519 Simon Casey covering all things energy for us as a 0:00:35.520 --> 0:00:40.360 team leader for energy team in America. UH, broadly North 0:00:40.400 --> 0:00:42.559 and South and Middle UM. So I want to get 0:00:42.600 --> 0:00:45.720 your sense, Simon, of how significant this is that Schlumberge, 0:00:45.840 --> 0:00:48.080 the biggest business of its kind, said that it's seeing 0:00:48.280 --> 0:00:51.280 less demand in North America. What it's the sign of 0:00:51.320 --> 0:00:55.960 the times. Uh. The US is the world's largest old producer. 0:00:56.000 --> 0:00:58.040 It wasn't the world's largest oil producer if you go 0:00:58.120 --> 0:01:00.880 back a few years. It's had tremendous growth, but the 0:01:00.920 --> 0:01:06.679 shale patch is it's under tremendous strain producers, they're are 0:01:06.720 --> 0:01:10.959 failing to come through with returns for investors. Capital markets 0:01:10.959 --> 0:01:14.039 are dried up for shells, for shell producers, for frackers, 0:01:14.080 --> 0:01:16.959 so they've had to go on a real campaign of 0:01:17.080 --> 0:01:21.040 cutting costs. They've been cutting jobs. The pace of drilling 0:01:21.080 --> 0:01:22.880 in places like the Permian Basin down in the West 0:01:22.920 --> 0:01:28.160 Texas has slow dramatically. That hurts companies like Slumberge. Now 0:01:28.280 --> 0:01:32.360 this is not entirely new slum slumber said last year 0:01:33.200 --> 0:01:36.919 it booked huge right downs for the third quarter thirteen billion. 0:01:37.040 --> 0:01:38.840 A lot a lot of that was to do with 0:01:39.200 --> 0:01:42.759 what's going on in North America. They are scrapping equipment. 0:01:42.800 --> 0:01:45.200 They're not just idling it, mothballing it, they're sending it 0:01:45.240 --> 0:01:48.560 to the scrapyard because they say they're never going to 0:01:48.760 --> 0:01:51.560 use all of this stuff. Again, we've kind of hit 0:01:51.600 --> 0:01:55.280 a sort of a peak in shale activity, and it's yeah, 0:01:55.320 --> 0:01:57.120 when when we're not likely to see that the extent 0:01:57.160 --> 0:01:59.560 of drilling we were seeing in recent years ever again, 0:02:00.240 --> 0:02:04.240 ever again. So it seems like where the shell business 0:02:04.280 --> 0:02:07.320 in the US, given work, global demand is this is it. 0:02:07.440 --> 0:02:09.919 So if you're a Slumberge, you cannot look to the 0:02:10.000 --> 0:02:13.280 US as a growth market anymore. That's pretty clear from 0:02:13.320 --> 0:02:15.200 the from what they've been saying this morning. Yes. And 0:02:15.600 --> 0:02:18.840 the flip side of this, of course, is the international 0:02:18.840 --> 0:02:21.400 business is continuing to rebound. You're seeing a lot of 0:02:21.440 --> 0:02:25.640 activities in places like, for example, off the coast of Guyana, 0:02:25.680 --> 0:02:28.520 Sur and m South America, Brazil as well, that's a 0:02:28.560 --> 0:02:30.040 real hot spot at the moment. There's a lot of 0:02:30.080 --> 0:02:34.200 activity there. It's coming back in Asia, in in in 0:02:34.320 --> 0:02:38.400 parts of Africa as well. So there's a lot of 0:02:38.440 --> 0:02:41.399 their international businesses looking really positive. But they they are 0:02:41.560 --> 0:02:45.400 Slumberge as well. It's it's based in the US, along 0:02:45.400 --> 0:02:47.360 with Halibursa and Baker Hughes. It's one of the big 0:02:47.400 --> 0:02:50.920 three names in this space. It's much more exposed to 0:02:52.120 --> 0:02:56.880 markets outside of the US, unlike Haliburton, which is reporting 0:02:57.040 --> 0:03:00.400 next week in fact, so it's going to be interesting 0:03:00.400 --> 0:03:03.480 to see how what Haliburton says, because lumberj has kind 0:03:03.520 --> 0:03:05.680 of managed to turn the corner a lot quicker. If 0:03:05.720 --> 0:03:09.160 you like, it's still cutting jobs, it's saying it's still rationalizing. 0:03:09.760 --> 0:03:12.320 I think the phrase these this morning was shrink to 0:03:12.480 --> 0:03:16.960 fit what is going on in shale, but it's it's 0:03:17.000 --> 0:03:18.760 still tough out there, and for for some of the 0:03:18.840 --> 0:03:22.120 smaller names in this space, UM, it's very bad. Indeed, 0:03:22.120 --> 0:03:25.200 it's very very difficult because their business is fundamentally shrinking 0:03:25.200 --> 0:03:27.120 and it will continue to this year. So there's this 0:03:27.240 --> 0:03:30.560 theme of peak shale. We've seen peak shale in a 0:03:30.639 --> 0:03:34.160 reary window. Correct, Well, let's let's just sort of try 0:03:34.200 --> 0:03:37.880 and define what I mean by it's peak acts drilling activity. 0:03:38.000 --> 0:03:41.119 Production is still on an upward curve. We've seen very 0:03:41.480 --> 0:03:43.800 literally one or two people have come out and said 0:03:44.240 --> 0:03:46.480 production is going to peak this year. It's more likely 0:03:46.480 --> 0:03:50.640 it's going to peak beyond. It's definitely the growth is 0:03:50.680 --> 0:03:53.600 definitely slowing. There's a huge debate within the your market 0:03:53.640 --> 0:03:56.640 and now the pace that that growth will will continue 0:03:56.640 --> 0:03:59.720 out this year, and that will ultimately determine the balance 0:03:59.800 --> 0:04:03.560 of global supply because most global supply growth this year 0:04:03.600 --> 0:04:07.920 is coming from the US, which is a dramatic turnaround 0:04:07.920 --> 0:04:10.520 considering where we were several years ago when US wasn't 0:04:10.520 --> 0:04:12.920 the biggest producer, it was still a net importer. The 0:04:12.960 --> 0:04:15.240 US is now a net exporter. So this is this 0:04:15.280 --> 0:04:17.760 whole thing, this whole what we're talking about here schlumber 0:04:17.920 --> 0:04:20.479 It goes beyond the company, it goes beyond the old services. 0:04:20.640 --> 0:04:23.279 It's about the balance of supply and demand in the 0:04:23.279 --> 0:04:25.480 global market. So, Simon, you mentioned some of the smaller 0:04:25.520 --> 0:04:29.440 players in the oil patch suffering, which we've certainly heard 0:04:29.480 --> 0:04:33.200 and read about. Does that suggest more consolidation is likely 0:04:33.240 --> 0:04:35.520 to occur there and we might see slumbers in Haliburton 0:04:35.600 --> 0:04:39.080 as net buyers. Maybe well, then maybe some consolidation among 0:04:39.160 --> 0:04:42.560 some of the smaller, smaller names domestic players. Companies are 0:04:42.560 --> 0:04:46.880 based almost wholly down in Texas, Texas, New Mexico. They 0:04:47.120 --> 0:04:51.320 would not expect Haliburton or Slumberge to be picking up assets. 0:04:51.320 --> 0:04:54.600 I mean they might pick up some sort of small 0:04:54.640 --> 0:04:58.240 assets as Bolton acquisitions. These companies that are looking fundamentally 0:04:58.279 --> 0:05:00.920 to upgrade their technology to knowledge as a mantra in 0:05:00.960 --> 0:05:03.719 so many industries these days, and oil is no different, 0:05:03.800 --> 0:05:07.960 or services is no difference. These guys are looking to 0:05:08.040 --> 0:05:12.280 keep headcount under control, but where they can upgrade the 0:05:12.320 --> 0:05:17.920 application of particularly of data management and and use cloud 0:05:17.960 --> 0:05:21.200 computing to crunch vast amounts of data and figure out 0:05:21.240 --> 0:05:23.640 what's going on underground and ultimately do the drilling and 0:05:23.720 --> 0:05:27.360 the production much cheaper and much more efficiently. Is the 0:05:27.360 --> 0:05:29.680 theory that we're going to see peak shale in a 0:05:29.720 --> 0:05:32.520 couple of years at least? Is the theory behind that 0:05:33.040 --> 0:05:37.480 driven by a lack of shale supply underground, or is 0:05:37.520 --> 0:05:41.960 it driven by just the sort of math behind how 0:05:42.040 --> 0:05:44.279 much it costs to drill versus what what some of 0:05:44.279 --> 0:05:47.799 these companies are getting. It's the math. There's plenty of oil. 0:05:48.400 --> 0:05:51.080 There is no longer any kind of idea of a 0:05:51.160 --> 0:05:55.400 shortage out there. The shale revolution funding fundamentally means that 0:05:56.000 --> 0:05:59.680 there's almost a limitless amount to intents and purposes. But 0:05:59.760 --> 0:06:04.000 it's it's the economics that are in focus here. American 0:06:04.279 --> 0:06:07.160 shail producers have been fantastic and getting huge amounts of 0:06:07.160 --> 0:06:09.599 sail out of the ground and getting them on the 0:06:09.640 --> 0:06:13.119 markets and indeed getting to the export markets as well. 0:06:13.400 --> 0:06:17.080 They've generally been with some exceptions, they've been terrible at 0:06:17.120 --> 0:06:21.360 turning it into a sustainable, profitable business that generates free 0:06:21.360 --> 0:06:25.360 cash flow and returns that cash flow to investors. If 0:06:25.360 --> 0:06:27.320 you look last year, it was one of the laggards 0:06:27.360 --> 0:06:30.279 of the stock market. There was barely any sort of 0:06:30.440 --> 0:06:33.839 price appreciation for the sector. Over all. The returns to 0:06:33.880 --> 0:06:39.640 investors were allousy essentially burning. They're burning cash, they're burning 0:06:39.640 --> 0:06:42.680 through cash, and basically, as what I said earlier, than 0:06:42.720 --> 0:06:46.880 the equity markets shut to them, debt equit markets are 0:06:46.960 --> 0:06:50.279 largely shut to these companies as well, and that's forcingments 0:06:50.279 --> 0:06:52.359 of turning woods and realized they've got a real problem 0:06:52.400 --> 0:06:55.040 in many cases, and that's why they're furiously cutting back 0:06:55.040 --> 0:06:57.640 on capex. They're doing a lot of meditation and looking 0:06:57.680 --> 0:07:00.800 into their navors and whither of my should we keep 0:07:00.800 --> 0:07:02.520 burning it? Simon Casey, thank you so much for being 0:07:02.560 --> 0:07:05.200 with us. Simon Casey is the team leader for Energy 0:07:05.240 --> 0:07:24.080 America's for Bloomberg News. At stock market setting new highs 0:07:24.280 --> 0:07:27.360 every day, it seems we've got the consumer remaining quite 0:07:27.640 --> 0:07:31.600 confident in the economy. For questions, how's that being felt 0:07:31.720 --> 0:07:34.800 within the c suite? Charlie Weinstein, chief executive officer of 0:07:34.880 --> 0:07:37.040 Eisener Emperor based in New York City, joining us here 0:07:37.080 --> 0:07:39.680 in our Bloomberg Interactive Broker Studio, has some thoughts in 0:07:39.720 --> 0:07:41.920 the Charlie, thanks so much for joining us. I know 0:07:42.040 --> 0:07:45.840 you guys do a survey of C suite business leaders. 0:07:46.400 --> 0:07:49.720 What did that survey tell you? Morning Paul, good morning, listen. 0:07:49.960 --> 0:07:54.600 Great to be here. Uh, this was very interesting survey. 0:07:54.720 --> 0:07:58.040 And so we we host the summit series across all 0:07:58.120 --> 0:08:01.200 our offices across the country, and as part of that 0:08:01.320 --> 0:08:05.360 summit series we host, UH, we host the survey. And 0:08:05.520 --> 0:08:09.720 that survey said to US seventies six percent of the 0:08:09.880 --> 0:08:15.400 C suite and significant investors think that their companies will 0:08:15.480 --> 0:08:19.600 be more profitable or at least as profitable as they 0:08:19.640 --> 0:08:22.440 were in two thousand nineteen. So they see two thousand 0:08:22.520 --> 0:08:27.360 twenty as a great year. But so the other side 0:08:27.400 --> 0:08:31.200 of the survey very interesting, showed that our business is 0:08:31.280 --> 0:08:34.520 going to be great. That was the common refrain. There 0:08:34.559 --> 0:08:38.720 are problems out there won't affect us, but there might 0:08:38.760 --> 0:08:41.480 be an economic downturn. Okay, So how much is this 0:08:41.720 --> 0:08:44.400 just CFO is being prudent and how much is this 0:08:44.800 --> 0:08:49.120 genuine concern about a global recession or a localized recession. 0:08:49.640 --> 0:08:52.600 There is a there is a concern. So we have Brexit, 0:08:52.800 --> 0:08:55.640 we have uncertainty over trade and tariffs, we have the 0:08:55.760 --> 0:08:58.240 elections coming up this year. But this this is all 0:08:58.400 --> 0:09:00.480 like small print that's been there for a while, right, 0:09:00.520 --> 0:09:03.000 I mean, yes, it has so, I mean, but is 0:09:03.080 --> 0:09:06.959 it's still really like dominant, and they're thinking not for 0:09:07.040 --> 0:09:09.560 their own business, and so for their own business, they 0:09:09.640 --> 0:09:13.160 are really bullish. Um I met the other day with 0:09:13.600 --> 0:09:18.080 U an executive who runs a construction company, and they're 0:09:18.480 --> 0:09:22.600 building out. They're branching out into managing real estate for hospitals, 0:09:22.960 --> 0:09:26.720 and so business business leaders are looking for opportunities. They're 0:09:26.840 --> 0:09:30.439 looking to uh deploy the profits that they've had, and 0:09:31.120 --> 0:09:35.400 they're highly optimistic. One of the economic underpinnings of this 0:09:35.520 --> 0:09:37.840 economy has been the strong consumer and that has driven 0:09:37.880 --> 0:09:40.880 in large part by the fact that most Americans have 0:09:41.000 --> 0:09:44.960 a job. Most Americans are seeing wage increases me been 0:09:45.000 --> 0:09:47.199 as much as they like. But on the flip side, 0:09:47.760 --> 0:09:50.880 C suite executives say one of the biggest challenges is 0:09:50.920 --> 0:09:53.120 finding people and keeping them. Is that what did your 0:09:53.160 --> 0:09:55.559 survey work kind of show you. Their survey had two 0:09:55.640 --> 0:09:59.839 results and they go right along with what you're suggesting. 0:10:00.280 --> 0:10:03.839 One is that they see fifty eight percent of the 0:10:04.000 --> 0:10:08.719 executives see an increase a significant increase in wages for 0:10:08.920 --> 0:10:14.360 next year for their businesses, and so getting talent is 0:10:14.520 --> 0:10:18.080 very difficult, and they see the need to increase compensation. 0:10:18.480 --> 0:10:21.560 Quite frankly, the nice thing about that is, the consumer 0:10:21.679 --> 0:10:24.520 drives our economy, and if that comes to pass and 0:10:24.640 --> 0:10:27.600 wages really do start to see an increase, that's going 0:10:27.679 --> 0:10:30.560 to fuel our economy even more. This is really important. 0:10:30.760 --> 0:10:37.760 Fifty percent see materially higher salaries, materially higher wages next year. Exactly. Okay, 0:10:40.040 --> 0:10:42.480 this is actually really important because right now, if you 0:10:42.520 --> 0:10:45.400 look at inflation expectations built into the market, they're more abound. 0:10:45.600 --> 0:10:47.719 There's this idea that it will never take off. But 0:10:47.920 --> 0:10:50.079 are you saying that there is a ce change in 0:10:50.160 --> 0:10:52.480 the sentiment that is different from what we've seen over 0:10:52.520 --> 0:10:54.839 the past decade that is going to lead to a 0:10:54.920 --> 0:10:58.839 potentially very different dynamic come next year. I see that 0:10:58.960 --> 0:11:02.760 there's a possible that you will see wages really increase, 0:11:03.280 --> 0:11:08.200 and but companies are not increasing prices, and so there's 0:11:08.280 --> 0:11:12.959 that dichonomy that inflation may be driven by increase in 0:11:13.000 --> 0:11:16.640 prices the margin pressure. Okay, but bottom But but this 0:11:16.679 --> 0:11:18.240 sort of goes to the key debate, right that the 0:11:18.280 --> 0:11:20.679 stock market is not the underlying economy, right, and the 0:11:20.760 --> 0:11:23.719 underlying economy lags the stock market. And so if the 0:11:23.760 --> 0:11:26.040 stock market starts to see a little bit of weakness 0:11:26.120 --> 0:11:28.920 because of margin pressure, but you have the actual consumer 0:11:29.000 --> 0:11:31.640 continuing to do better and better because they're actually getting 0:11:31.679 --> 0:11:34.000 paid more. You know, where does that leave the FED? 0:11:34.320 --> 0:11:36.320 Where does that leave markets? You know, it could mean 0:11:36.400 --> 0:11:38.480 a stock sell off, but it could mean continued strength 0:11:38.520 --> 0:11:41.040 for the U S. I'm just saying, I'm just I'm 0:11:41.080 --> 0:11:44.280 just extrapolating out what this could actually mean. You've gotta 0:11:44.280 --> 0:11:48.880 pay attention in this studio pretty quick. How at tech 0:11:48.960 --> 0:11:53.120 technology and Lisa and I we talked to executives across 0:11:53.200 --> 0:11:56.680 the whole swath of industries. They're all investing in technology, 0:11:56.720 --> 0:12:00.280 and I'm wondering if your respondents feel like technologies a 0:12:00.360 --> 0:12:02.760 real opportunity for them or is it a risk to 0:12:02.800 --> 0:12:07.080 their business. We always say invest in human intelligence before 0:12:07.160 --> 0:12:11.480 you invest in UH technology. And so you need the 0:12:11.640 --> 0:12:16.520 people to make value to create value out of the technology, 0:12:16.640 --> 0:12:19.840 and so technology will only take you so far. UM, 0:12:19.920 --> 0:12:22.840 you also need to be investing in people. Which sectors 0:12:23.080 --> 0:12:26.640 were the most optimistic and on the on the reverse 0:12:26.720 --> 0:12:32.319 side pessimistic. So our clients and professional services UM delivering 0:12:32.800 --> 0:12:38.200 services are technology clients by far the most optimistic. Manufacturing 0:12:38.280 --> 0:12:42.360 and distribution. It's interesting, even though we've had some trade 0:12:43.320 --> 0:12:47.280 uncertainty over the last six months, year, two years um 0:12:47.400 --> 0:12:51.480 our clients are are not finding difficulty in sourcing products, 0:12:52.000 --> 0:12:55.880 and so they're optimistic. They're really optimistic about the potential 0:12:55.960 --> 0:13:03.440 for who is pessimistic? Who's pessimistic? So real estate might 0:13:03.480 --> 0:13:07.360 be a little pessimists like that. He's like whispering. While 0:13:07.440 --> 0:13:09.840 we have so many clients in the real estate business. 0:13:11.280 --> 0:13:16.000 It's a secret, but they're they're feeling a little more pessimistic. 0:13:16.280 --> 0:13:19.319 They are feeling a little more pessimistic. And though, uh, 0:13:20.320 --> 0:13:23.760 the way people use space now and the way remote 0:13:23.840 --> 0:13:26.679 working and all the trends in real estate is just 0:13:26.840 --> 0:13:29.439 something for real estate clients to keep an eye on. 0:13:29.880 --> 0:13:31.800 Charlie Weinste, thank you so much for being here. This 0:13:31.920 --> 0:13:35.800 is really terrific. Jelie West is chief executive officer of 0:13:35.840 --> 0:13:55.240 Eisener Emper in New York and really paying close attention 0:13:55.400 --> 0:13:58.280 to earnings this quarter because we think about the performance 0:13:58.280 --> 0:14:00.400 in the market last year, you know, a thirty rise 0:14:00.480 --> 0:14:04.280 in S and P really pretty much all multiple expansion, 0:14:04.360 --> 0:14:07.120 not much earnings growth last year. So we have to have, arguably, 0:14:07.360 --> 0:14:08.800 if you think this market is going to go higher 0:14:08.800 --> 0:14:12.080 in twenty twenty, earnings growth coming this year To get 0:14:12.120 --> 0:14:14.360 a sense of kind of what's driving the market here 0:14:14.360 --> 0:14:17.760 as we get into Michael team in chief executive officer, 0:14:17.840 --> 0:14:21.120 team and advisers think about twenty one billion dollars under management. 0:14:21.560 --> 0:14:24.600 Michael joins us in our Bloomberg Interactor Brooker studio. So 0:14:24.680 --> 0:14:27.440 again Michael, the SMP earnings people and also looking for 0:14:27.440 --> 0:14:30.360 about ten percent growth that would suggest this market maybe 0:14:30.400 --> 0:14:33.520 can go higher. How comfortable or confident are you in 0:14:33.560 --> 0:14:36.200 that earnings number. A lot of what's driving the ten 0:14:36.240 --> 0:14:39.440 percent projection are the cyclicals, So you will have to 0:14:39.520 --> 0:14:44.360 see or general growth pick up in the US, and 0:14:45.040 --> 0:14:46.960 we we don't think there's a lot of room for 0:14:47.120 --> 0:14:50.520 error in these projections. That's that's our primary concern, in 0:14:50.600 --> 0:14:53.320 addition to the fact that that's largely being priced in 0:14:53.480 --> 0:14:55.560 or has been priced in over these past few months. 0:14:56.040 --> 0:14:59.800 So right now, when you talk to clients, are they optimistic? 0:15:00.080 --> 0:15:02.560 They feel like this rally has has legs and they 0:15:02.600 --> 0:15:04.920 should just shift some of their allocation to bonds into 0:15:04.960 --> 0:15:08.920 equities and take their cash out aloud into real estate 0:15:09.960 --> 0:15:13.680 not bonds. So the framework of this market has been 0:15:13.720 --> 0:15:15.600 set by the central bank for a decade, in really 0:15:15.640 --> 0:15:18.880 global central banks for a decade. So they've set the 0:15:18.920 --> 0:15:22.400 interest rate environment, the corporate credit rate environment, and then 0:15:23.000 --> 0:15:25.720 it enables the pe to expand like last year, so 0:15:25.840 --> 0:15:27.720 you saw the ten year ago from a three yield 0:15:27.800 --> 0:15:30.280 to one point eight yield, and that enabled p s 0:15:30.360 --> 0:15:34.720 to expand as they did. Um are clients comfortable? They 0:15:34.800 --> 0:15:40.000 are discomfited by what they're seeing politically globally, They're they're 0:15:40.040 --> 0:15:42.920 discomforted by a lot of the headline news that comes 0:15:42.920 --> 0:15:46.040 across their desk. But I think everyone understands that the 0:15:46.120 --> 0:15:50.640 economy in the US is on solid footing. So basically, 0:15:50.680 --> 0:15:53.200 we make them unhappy, Paul. Basically, that's the bottom line, 0:15:53.280 --> 0:15:56.440 is that we're driving any sense of discovers. Otherwise people 0:15:56.480 --> 0:15:59.920 are people are feeling great exactly So, Michael, I mean, 0:16:00.200 --> 0:16:03.000 as we think about asset allocation, given what we saw 0:16:03.080 --> 0:16:06.320 in twenty nineteen, how are your suggesting your clients allocate 0:16:06.360 --> 0:16:07.920 their capital. I mean, you know, we're hearing more and 0:16:08.000 --> 0:16:10.600 more about maybe emerging markets, maybe a little bit more 0:16:10.600 --> 0:16:12.160 out on the risk to maybe even think about some 0:16:12.160 --> 0:16:14.400 alternative investments. How are you kind of thinking about it? 0:16:15.160 --> 0:16:17.320 We are at the midpoint in our risk So if 0:16:17.360 --> 0:16:20.600 you had spoken to us in December of eighteen when 0:16:20.640 --> 0:16:22.880 everyone's concerned about a recession. We didn't see one coming 0:16:22.960 --> 0:16:25.080 and we were actually building our equity risk at that point. 0:16:25.440 --> 0:16:27.560 We've paired some of that back in these recent months, 0:16:27.680 --> 0:16:29.560 and currently at the end of the month, we're going 0:16:29.600 --> 0:16:33.240 to begin to buy some equity protection. So we have 0:16:33.360 --> 0:16:36.600 huge embedded gains. Anyone who's owned the equity markets for 0:16:36.640 --> 0:16:39.760 the last five ten years is enormous embedded gains. And 0:16:40.000 --> 0:16:43.560 rather than take them, we own quality risk assis quality corporations. 0:16:44.400 --> 0:16:48.840 We'd much rather buy hedges too, sort of diminish any 0:16:48.880 --> 0:16:52.720 of them if there are any sense is a growing 0:16:53.000 --> 0:16:59.120 sense of caution, valuation, evaluation. Okay, so what's your sense 0:16:59.360 --> 0:17:03.000 of what's going to cause some sort of sell off, 0:17:03.320 --> 0:17:06.480 some sort of decline that would encourage you to start 0:17:06.520 --> 0:17:10.440 buying protection. Well, we try to do it in the 0:17:10.600 --> 0:17:14.000 contrarian So if you think about the direction of markets, 0:17:14.080 --> 0:17:17.400 we generally will spend money when markets have done very well, 0:17:17.880 --> 0:17:20.920 we will monetize those in periods of weakness. So we 0:17:21.240 --> 0:17:23.520 do it sort of as a contrarian way to build 0:17:23.600 --> 0:17:26.639 in protection, embedded protection. In this there's not actually a 0:17:26.680 --> 0:17:30.000 call in markets. It's we're not trying to time markets now, 0:17:30.320 --> 0:17:33.040 are there sectors here, given given where we are in 0:17:33.080 --> 0:17:36.800 the economic cycle, given what performance we saw in twenty nine, 0:17:37.080 --> 0:17:40.120 are there some sectors that you're more bullish on versus 0:17:40.200 --> 0:17:44.040 less bullish on. We in terms of value, if you 0:17:44.119 --> 0:17:47.440 were looking at an industry, the energy infrastructure industry is 0:17:47.480 --> 0:17:50.679 still quite cheap, and I think that's garnering some focus 0:17:50.840 --> 0:17:54.240 among strategies mid cap in general, and so as you 0:17:54.280 --> 0:17:58.080 go down market cap you see some inefficiencies and so, 0:17:58.359 --> 0:18:00.840 and that's actually a place where active managers and great 0:18:01.320 --> 0:18:04.240 stock selectors can add a lot of value. Large camp 0:18:04.320 --> 0:18:08.959 of excuse me, large crab growth maintains itself as an 0:18:09.000 --> 0:18:11.640 expensive sector. We would have said that three years ago, 0:18:11.720 --> 0:18:13.840 two years ago, way, so it just has had a 0:18:13.960 --> 0:18:17.680 momentum that is unending. But so those are the those 0:18:17.720 --> 0:18:19.520 are the extremes within the u s of its So 0:18:19.560 --> 0:18:21.520 when you came in here, Michael, you said that a 0:18:21.640 --> 0:18:24.960 lot of the evaluation and the equity markets is predicated 0:18:25.000 --> 0:18:26.359 on the idea of that interest rates are going to 0:18:26.400 --> 0:18:29.960 remain low for a very long time, right, And I 0:18:30.200 --> 0:18:33.640 was thinking, well, what if inflation expectations are too low? 0:18:34.200 --> 0:18:37.359 What if the economy does solidify and we do start 0:18:37.400 --> 0:18:40.159 to see wage pressure, and we actually see bond yields 0:18:40.280 --> 0:18:44.280 rise even just you know, twenty five basis points, fifty 0:18:44.320 --> 0:18:48.680 basis points. How much does that affect equity valuations? Well, 0:18:49.119 --> 0:18:52.000 the only metric that the SMP does not look in 0:18:52.160 --> 0:18:56.200 the ninety plus percentile expensive in is relative to the 0:18:56.280 --> 0:19:00.119 tenure treasury. So that's the one, you know, are of 0:19:00.240 --> 0:19:04.679 justification for the current multiples. The we see that as 0:19:04.680 --> 0:19:08.360 a plausible outcome that rates As the global economy recovers, 0:19:08.520 --> 0:19:12.000 there is pressure un rates and they begin to slowly normalize, 0:19:12.400 --> 0:19:17.200 and that will just not enable anyone to justify multiple expansion. 0:19:17.520 --> 0:19:19.320 So then it will really come down to earnings growth. 0:19:19.560 --> 0:19:23.480 If earnings growth don't, doesn't you know, reach ten percent, 0:19:23.560 --> 0:19:25.280 and we think there's a chance it couldn't. That's five 0:19:25.320 --> 0:19:26.800 percent I think of it. There's a leverage of five 0:19:26.840 --> 0:19:30.600 percent revenue growth broadly across every corporation. In's you know, 0:19:30.640 --> 0:19:33.200 sort of a two to one general rule of thumb 0:19:34.359 --> 0:19:38.280 that they're just the combination of those two's. Really we 0:19:38.400 --> 0:19:42.600 see as a not overly exciting equity forward looking equity market. 0:19:43.359 --> 0:19:45.399 I know you did spend some time with emerging markets 0:19:45.440 --> 0:19:49.760 early in your career, it did any opportunities there that 0:19:49.840 --> 0:19:54.280 jump out at you. Yeah, so emerging, So the consumer 0:19:54.359 --> 0:19:57.879 and emerging markets has been and remains a great story. 0:19:58.000 --> 0:20:01.560 And I'll highlight country that I lived in, which was Brazil. 0:20:02.320 --> 0:20:04.679 The base rates have been falling in Brazil for several 0:20:04.800 --> 0:20:09.520 years as inflation fell, and what that enables is the 0:20:09.560 --> 0:20:12.160 knock on effect for the consumer, someone buying a TV, 0:20:12.440 --> 0:20:15.080 a car, just the financing abilities that just was never 0:20:15.640 --> 0:20:17.520 really was never there in the twenty five years since 0:20:17.560 --> 0:20:22.840 I lived there. So there are valuations combined with structural 0:20:22.960 --> 0:20:25.320 changes that are very meaningful. There's a huge amount of 0:20:25.359 --> 0:20:28.760 money in Brazil that has been reinvested in overnight rates 0:20:28.840 --> 0:20:32.959 for years. Portfolios were just there. Was it compounded at 0:20:34.359 --> 0:20:37.119 that is now three two and a half three In 0:20:37.600 --> 0:20:41.320 real terms it's even less so um when you look 0:20:41.320 --> 0:20:44.399 at those markets. There are big structural changes, but you 0:20:44.480 --> 0:20:47.760 also have political issues in many of these countries. In 0:20:48.040 --> 0:20:52.359 regions as well as countries. Valuations are attractive, but we 0:20:52.560 --> 0:20:57.560 create a threshold above SMP five hundred that a country 0:20:57.600 --> 0:20:59.879 has to be at a discount of substantial discount in 0:21:00.040 --> 0:21:02.119 order for us to really allocate CAPPITL there. We do 0:21:02.280 --> 0:21:05.800 have exposure there, so we we are we think that 0:21:05.960 --> 0:21:10.359 it's at that point, but it's not screaming is inexpensive currently. 0:21:11.000 --> 0:21:12.800 Michael Tetaman, thank you so much for being with us. 0:21:12.920 --> 0:21:15.359 Always great to get your thoughts on the market. Here, 0:21:15.440 --> 0:21:18.359 chief executive officer of TITAM and Advisors, overseeing where the 0:21:18.440 --> 0:21:37.160 twenty billion dollars, Joining us here in our interactive broker studios. Well, 0:21:37.200 --> 0:21:40.359 technology continues to lead, this market, continues to be a 0:21:40.480 --> 0:21:43.080 topic of M and A activity, I p O activity, 0:21:43.760 --> 0:21:46.800 lots of big themes driving technology. For to get a 0:21:46.920 --> 0:21:49.520 taste of kind of what we can think about for beyond. 0:21:49.560 --> 0:21:51.320 We welcome our good friend Ted Smith, co founder and 0:21:51.359 --> 0:21:54.120 president of Union Square Advisors based in New York City, 0:21:54.200 --> 0:21:57.040 joining us here in our Bloomberg Interactive broker studio. So, Ted, 0:21:57.119 --> 0:22:00.280 I know you guys came out with outlook report. What 0:22:00.400 --> 0:22:02.399 are some of the key takeaways that you guys are 0:22:02.440 --> 0:22:04.520 out talking about. Well, first of all, thanks for having me, 0:22:04.560 --> 0:22:06.840 Paul and Lisa. Great to be here again. Um, we're 0:22:06.880 --> 0:22:09.200 talking a lot right now just about the incredible amount 0:22:09.240 --> 0:22:11.720 of capital that's still available in the market for technology 0:22:11.760 --> 0:22:14.840 companies today, whether it be private equity firms who continue 0:22:14.880 --> 0:22:17.719 to raise capital and deploy significant amounts of capital, as 0:22:17.760 --> 0:22:20.200 well as strategic buyers who are out there with large 0:22:20.240 --> 0:22:23.280 balance sheets looking to do really interesting transactions. From an 0:22:23.320 --> 0:22:25.480 M and A perspective, So despite the fact that the 0:22:25.560 --> 0:22:29.280 markets continue to reward technology companies with valuations that are 0:22:29.880 --> 0:22:33.199 um perhaps unsustainable, but certainly are stratospheric and have been 0:22:33.280 --> 0:22:35.479 for some time, we think that deal making is going 0:22:35.560 --> 0:22:40.119 to continue. Deal making on the M and A front, right, 0:22:40.600 --> 0:22:42.480 And I'm wondering whether you think it's going to be 0:22:42.560 --> 0:22:45.280 specifically within the tech space or whether it's going to 0:22:45.359 --> 0:22:47.280 be broad based. Is there a place where you're seeing 0:22:47.320 --> 0:22:50.040 a growing amount of interest. We certainly we focus as 0:22:50.040 --> 0:22:52.480 a firm on the technology arena. So that's where where 0:22:52.640 --> 0:22:56.920 we're coming at this, uh, this set of opportunities. More broadly, yes, 0:22:57.040 --> 0:23:01.879 we still see deals happening in related spaces healthcare, energy, 0:23:02.119 --> 0:23:05.119 other places where technology is leveraged to the benefit of 0:23:05.160 --> 0:23:07.040 sort of the core investors or the core buyers. And 0:23:07.119 --> 0:23:09.919 how much is this being paid for by debt versus 0:23:10.560 --> 0:23:13.280 equity buyouts? And how is it how is it being financed? Uh, 0:23:13.359 --> 0:23:15.639 there's first of all, the again these large private equity 0:23:15.680 --> 0:23:19.159