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Speaker 3: All right, let's get back to Tesla for a second.
Speaker 3: Dig a little deeper here. Craig Tudel, Bloomberg Global Autos Editor,
Speaker 3: joins us, Now, so can you play this out over
Speaker 3: the last like three days? So elon, Musk jumps on
Speaker 3: a plane, he goes to China. Then what happens?
Speaker 4: Yeah, good morning. It has been a WorldWind a couple
Speaker 4: of days, a few weeks, I would say. Actually, so
Speaker 4: just to go back even slightly further. You know, Musk
Speaker 4: with the post to go to India a little more
Speaker 4: than a week ago and called off that trip said,
Speaker 4: you know, he had heavy obligations that Tesla is how
Speaker 4: he put it. You know, Tesla proceeds to release really
Speaker 4: crumby for quarter earnings. But Musk kind of pulls a
Speaker 4: rabbit out of a hat in you know, announcing the
Speaker 4: change in strategy to get deeper vehicles to market faster,
Speaker 4: how exactly is going to do that is a little fuzzy,
Speaker 4: but the gist of it is to use existing manufacturing
Speaker 4: lines to make these new vehicles that could be ready
Speaker 4: as soon as the late this year or early next year.
Speaker 4: In the process of making that pivot, he clearly needs
Speaker 4: to sort of, you know, get incremental revenue after you know,
Speaker 4: a first quarter where sales were really weak, they had
Speaker 4: the lowest revenue since early twenty twenty two levels. And
Speaker 4: in kind of one clear way that they could do
Speaker 4: that is by offering the system that they've marketed as
Speaker 4: full self driving in the US. Importantly, we should note
Speaker 4: it is not a self driving system, but they've market
Speaker 4: that hasn't stopped them for marketing it as for years now.
Speaker 5: All Right, So Craig, let's focus on this weekend, which
Speaker 5: seems to be moving the stock today. Am I to
Speaker 5: understand that the getting the Chinese approval for this driver
Speaker 5: assistance was up in the air, like there's a risk
Speaker 5: that they wouldn't get it, and then Elon hops on
Speaker 5: a jet, flies over and saves the day.
Speaker 6: Is that what happened?
Speaker 4: Yeah, it wasn't necessarily the case that this was you know,
Speaker 4: kind of an overnight thing. Actually the last time that
Speaker 4: Musk was in China, this was something that we reported
Speaker 4: at the time was on the agenda. It's been something
Speaker 4: that Tesla has been after for quite some time, and
Speaker 4: it's increasingly a way that you know, carmakers are competing
Speaker 4: in China is you know, how advanced is your driver
Speaker 4: assistant system? You know, that keeps you from crashing, that
Speaker 4: keeps you in your lane, that allows you in some
Speaker 4: cases to take your hands off the wheel. But in
Speaker 4: all cases you know you absolutely are responsible for or
Speaker 4: for you know, the car, and you know no companies
Speaker 4: are are taking responsibility legal responsibility if if you get
Speaker 4: into a craft UH. You know, with the exception of
Speaker 4: of some you know, very small sort of limited fleets
Speaker 4: and and contained areas, and you know there are quirks
Speaker 4: as you might imagine, you know, buy market for what
Speaker 4: is required to be able to offer these systems that
Speaker 4: really need to be safe and also need to have
Speaker 4: you know, controls for UH data collection and and you know,
Speaker 4: the cameras used to navigate UH the surroundings that these
Speaker 4: cars are going to need to to pilot around. And
Speaker 4: that's been a hang up for Tesla and other international
Speaker 4: companies that you know, they need to uh in you know,
Speaker 4: in all cases work with local Chinese companies for things
Speaker 4: like mapping and navigation. So one one of the key
Speaker 4: sort of you know takeaways from this trip was uh
Speaker 4: Tesla agreeing to do that with bay Do in China.
Speaker 3: So who owns the stuff.
Speaker 4: It is importantly you know, it's a matter of ownership
Speaker 4: and where it's kept. And so you know, this has
Speaker 4: come up years ago. Actually, you know, Tesla had had
Speaker 4: a bit of a hang up where their cars were
Speaker 4: banned from you know, being in the area of military
Speaker 4: compounds and other sort of sensitive parts of kinda out
Speaker 4: of concerns about you know, any information that cars were gathering,
Speaker 4: and you know, there were concerns about whether any data
Speaker 4: was going from Tesla's China operations back to the US,
Speaker 4: and so Tesla needed to sort of reassert kinda that
Speaker 4: you know, any data collected in China will stay in China.
Speaker 4: And so that has been you know, something that they've
Speaker 4: had to sort of acquiesce to as of you know,
Speaker 4: several years ago. But they they needed to still sort
Speaker 4: of you know, clear uh you know approval for for
Speaker 4: you know, making sure that their keys were crossed and
Speaker 4: eyes were dotted in that respect, and they needed this
Speaker 4: deal with BAYD. It does seem to be the case
Speaker 4: that they need other need to meet other conditions in
Speaker 4: order for FSD to be offered in China. It's still
Speaker 4: not a done deal, but what you know, sort of
Speaker 4: hoops they still have to jump through are a bit
Speaker 4: unclear at this point. That's not stopping the market from
Speaker 4: getting very excited about this.
Speaker 5: So how does this change, if at all, kind of
Speaker 5: the competitive landscape for Tesla in China? I know, you guys,
Speaker 5: you you guys have been reporting a lot of how
Speaker 5: some of the local EV makers have really become very
Speaker 5: good and very competitive.
Speaker 4: Yeah, I think it absolutely is something that's been missing
Speaker 4: for Tesla that, assuming all goes well here, you know,
Speaker 4: it will no longer be a sort of strike against
Speaker 4: them among consumers who really, you know, want the most
Speaker 4: cutting edge technology. It remains to be seen how big
Speaker 4: a deal it will be or Tesla from from a
Speaker 4: revenue standpoint, because we don't know at this point how
Speaker 4: much Tesla will be willing, uh will be looking to
Speaker 4: charge for it. We don't know, uh, you know, to
Speaker 4: what extent they may have to share some revenue with
Speaker 4: some of their partners. It's not clear whether by Do
Speaker 4: maybe gets a cut. You know, in the US, Tesla
Speaker 4: and you know throughout the world, Tesla has made a
Speaker 4: point to really be you know, want to be vertically integrated.
Speaker 1: Uh.
Speaker 4: And that's you know, fancy talk for in control of
Speaker 4: its own destiny. Uh. They were willing to sort of
Speaker 4: acquiesce in this case. Uh, you know, I think because
Speaker 4: they they really could use this boost in China at
Speaker 4: a at a time when their their lineup is getting
Speaker 4: a bit tired and they're losing a lot of market
Speaker 4: share to companies like byd Well.
Speaker 3: This also raises the question too, it doesn't take a
Speaker 3: lot of news to get Tesla stock moving. Not that
Speaker 3: a trip to China wasn't a big deal, but like
Speaker 3: you said, there's so many questions as to the actual
Speaker 3: revenue driver and what it's going to mean. I mean,
Speaker 3: you have to wonder, you know, it's not going to
Speaker 3: take a lot for any kind of shorts Craig to cover.
Speaker 4: I think that's right. And this is also a name
Speaker 4: that you know, options traders absolutely love. It's it's sort
Speaker 4: of like the meme stock that has lasted as a
Speaker 4: meme stock as that craze has sort of faded away,
Speaker 4: and so you know, anytime to your point, you know,
Speaker 4: Musk is able to sort of get the momentum with
Speaker 4: you know, the narrative, it tends to lead to big swings.
Speaker 4: So you know, earlier this year, I think he lost
Speaker 4: control of that narrative. And you know it's not it's
Speaker 4: not at all a mystery as to why that is,
Speaker 4: you know, looking at last week's earnings, but I think
Speaker 4: he was really able to sort of change what people
Speaker 4: were talking about last week. If it, I guess, you know,
Speaker 4: it will see whether or not you know, this is
Speaker 4: uh mostly talk as opposed to you know, going to
Speaker 4: to lead to real, sort of meaningful change in Tesla's
Speaker 4: earnings trajectory, which has not been trending in the right direction.
Speaker 6: All right, Craig, thanks so much. We appreciate it.
Speaker 5: Craig Tudell, Global autos editor for Bloomberg News, joining us
Speaker 5: from London.
Speaker 6: You know, I follow it.
Speaker 5: Bloomberg's own ed Ludlow on social media, and of course
Speaker 5: he just got a new testa and I think he
Speaker 5: uses that autonomous driving features that it has, so he's
Speaker 5: been reporting today for example, our boy Ed, who lives
Speaker 5: in San Francisco. His full commute about twenty five miles,
Speaker 5: three disengagements, but ninety percent of the drive was under
Speaker 5: their FSD in all smooth. His FSD made it all
Speaker 5: the way to the Golden Gate Bridge, but then had
Speaker 5: some problems about deciding which lane it wanted to choose,
Speaker 5: so Ed had.
Speaker 6: To step in there.
Speaker 5: But by and large, that's reporting this on a daily basis.
Speaker 5: He's putting his life on the line for his primary
Speaker 5: reporting duties.
Speaker 7: He's the best.
Speaker 6: It looks like it's working.
Speaker 3: I guess is the question just becomes like how much
Speaker 3: you want to pay for it? Like, I mean, sure
Speaker 3: it'd be great, but is the average person, not just
Speaker 3: the tech reporter in San Francisco who are also anchors
Speaker 3: in tech show, like well, the average person spend eight
Speaker 3: grand a year for it or one hundred bucks a month.
Speaker 6: I don't know. I mean that kind of goes to
Speaker 6: the bigger issue of car here.
Speaker 5: I mean, you know, it remains to be seen for
Speaker 5: Tesla investors, you know, is it tough to make? Can
Speaker 5: they make a profit at a thirty thousand the price limit?
Speaker 5: There's a lot of concern that.
Speaker 6: They won't be able to do that.
Speaker 5: But again Elon put out some good talk on the
Speaker 5: earnings call, trying to masking over what was a week
Speaker 5: quarter and then of course going over and had this
Speaker 5: great successful event here in China.
Speaker 6: The last forty eight hours.
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Speaker 3: You got the SMP up about four tenths of one percent.
Speaker 3: But it's a really busy week between Eco, jobs data,
Speaker 3: the FED and then earnings as well. So you want
Speaker 3: to break down what is going to actually move the markets.
Speaker 3: Margie Pateel, senior portfolio manager at all Spring Global Investments
Speaker 3: that joins us now, So I know you're going to
Speaker 3: say all of the stuff, but let's just pin you down.
Speaker 3: So is it going to be Apple and Amazon and
Speaker 3: all the companies reporting. Is it going to be the
Speaker 3: FED or is it going to be the jobs data?
Speaker 8: Oh, I think the job will be more important because frankly,
Speaker 8: what the FED has done or not done, hasn't really
Speaker 8: had much of effect on the market either way. When
Speaker 8: they talked about three cups this year, the market was
Speaker 8: a little interested in. When the market is now saying, well,
Speaker 8: maybe they'll even race rates, it hasn't really affected the market.
Speaker 8: The market's been hooping at earnings. That's what's important. Inflation
Speaker 8: has not been a negative issue for companies, So I
Speaker 8: think it's more of the same at looking at data
Speaker 8: that shows the strength of the economy, like the jobs data.
Speaker 5: So are you concerned that this FED maybe maybe get
Speaker 5: a little bit reticent here about that FED pivot we
Speaker 5: had in December, and that maybe they went a little
Speaker 5: bit too far, and maybe they'll try to compensate here
Speaker 5: this week and may talk a little bit more hawkish
Speaker 5: than the market's discounting.
Speaker 8: Well, you know that they're seems to have swung a
Speaker 8: lot more than their actual actions, and the actions that
Speaker 8: they've made, even raising rates for the last two years,
Speaker 8: didn't really derail the market.
Speaker 9: The market really has proven to be not.
Speaker 8: So sensitive to short changes in short term interest rates
Speaker 8: as we've seen in past cycles.
Speaker 9: So I think the and particularly short rates, I think again.
Speaker 8: Corporate America is pretty much immune to the Fed's decisions.
Speaker 8: They're not overlevered. So really, I HDA doesn't matter, but
Speaker 8: it really doesn't matter. And I think inflation at say
Speaker 8: three and a half percent is really a benign backdrop
Speaker 8: for corporate earnings, allowing companies to have the ability to
Speaker 8: raise prices a little bit and keeping those high margins.
Speaker 8: I think that's what the market's looking at, rather than
Speaker 8: what the FED is doing or thinking about.
Speaker 3: In that case, what are we going to learn from
Speaker 3: earnings this week? In that you're at a date, you
Speaker 3: got energy and financials are number two in three in
Speaker 3: terms of sector is best performing on the S and
Speaker 3: P Communication services number one, But you could argue that
Speaker 3: it's a meta an alphabet thing and tech comes in
Speaker 3: at number four. Is it going to be cyclical leadership?
Speaker 3: Will that actually happen when their earnings deliver?
Speaker 8: Well, I think all those sectors that you said are
Speaker 8: economically sensitive, and so they have all.
Speaker 9: Reflected, frankly, a better economy. Last week's earnings were better.
Speaker 8: Than the market expected, and we'll see this week if
Speaker 8: again we have better than expected. I expect that we will,
Speaker 8: and so I think that that's really what the market's telegraphing.
Speaker 9: When you have those sectors that.
Speaker 8: Are sensitive, even financials energy, that says to me that
Speaker 8: the market is not worried about economic growth.
Speaker 9: It's looking at price and power or a little bit
Speaker 9: of inflation.
Speaker 5: Right now, we're speaking with margattele portfolio manager at all
Speaker 5: Spring a Global, and coming up in just a couple
Speaker 5: of moments, we're going to listen into a Bloomberg television
Speaker 5: interview with Lamborghini CEO Stefan Winkelman, and Matt Miller is
Speaker 5: not here to participate in that.
Speaker 6: I know who's going to miss that.
Speaker 5: So Markie, here, what are the sectors we should be
Speaker 5: looking at here as we think about the second half
Speaker 5: of this year, where are you guys most.
Speaker 7: Of these.
Speaker 8: Well, again, we think economically sensitive sectors are going to
Speaker 8: do better for the year, so that would be technology.
Speaker 9: Certainly, it's been a volable sector, but we still.
Speaker 8: Think there are plenty of very competitive companies who are
Speaker 8: not priced too high that will perform better than the market.
Speaker 8: We also like industrials because we do think there's a
Speaker 8: capital expenditure cycle and expansion of manufacturing and investment by
Speaker 8: companies that were very positive. Some of the materials in fact,
Speaker 8: we think will benefit and energy, which has rather been overlooked.
Speaker 8: Healthcare has been more a company come group of companies
Speaker 8: that's reacted to the down draft after COVID and the
Speaker 8: drawing up of money to be spent on tools and
Speaker 8: devices by log of.
Speaker 9: The new companies.
Speaker 8: So we think healthcare is attractive still, but very selective
Speaker 8: because some companies, say Lily for example.
Speaker 9: Have a wonderful product.
Speaker 8: Some of the tools and devices companies have had disappointing
Speaker 8: earnings because of destroyer and funding and also because of
Speaker 8: dramatic luring of China sales.
Speaker 3: Margie, you didn't mention tech, and so I assume that
Speaker 3: if you don't own tech right now, it's hard to
Speaker 3: buy it at these levels. But how big of a
Speaker 3: part should that be of your portfolio?
Speaker 8: Well, really, when you look at technology, there are first
Speaker 8: of all, many companies now pay competitive dividends, which I
Speaker 8: didn't used to do. And if you look at their
Speaker 8: price earnings ratio versus some sort of estimate of future growth,
Speaker 8: and then you look at other sectors price.
Speaker 9: Earnings ratio estimates of growth, it always.
Speaker 8: Seems to me that tech may be a little bit
Speaker 8: expensive on a price earnings ratio, but much higher sustainable
Speaker 8: prospects of growth. When you look at some sectors that
Speaker 8: are priced almost as high as tech, say consumered staples. Really,
Speaker 8: I just don't see the growth there. I don't see
Speaker 8: the pricing power there in an uncertain world. Just as
Speaker 8: to me, technology use is fairly valued and it will
Speaker 8: really depend on earnings, and so I think it'll continue
Speaker 8: to do better.
Speaker 6: Right, market Ptel, thank you so much. We appreciate that.
Speaker 5: Market Ptel's senior portfolio manager at all Spring Global Investments
Speaker 5: joining us via zoom Hearing.
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Speaker 3: Let's go to Apple for a second. So that's not
Speaker 3: is actually up by about three percent to get an
Speaker 3: upgrade over at Bernstein. It sees Bernstein apparently sees China
Speaker 3: issues as cyclical, but the broader headline was that the
Speaker 3: European Union took aim at Apple's iPad. It's been hit
Speaker 3: by its digital dominance corrack down. I don't really know
Speaker 3: what that means, but luckily Anna Igrana does. He's Bloomberg
Speaker 3: Intelligence technology analyst. He joins us. Now on a rock,
Speaker 3: what does that mean that the EU's digital dominant crackdown
Speaker 3: hits the iPad.
Speaker 10: Yeah, it's to be very honest, it's not much, frankly,
Speaker 10: only because the EU wants to make sure that these
Speaker 10: ecosystems or the operating systems are open and allow third
Speaker 10: party apps and you know, the opening of the payment system,
Speaker 10: et cetera. Apple's already said they're going to do this
Speaker 10: for the iOS for the iPhone, so which is a
Speaker 10: bigger deal. And no, now they have to do this
Speaker 10: for the iPad operating system too, which they're going to
Speaker 10: do anyway. I mean, it's not going to be a
Speaker 10: big deal again mathematically because as you know, iPad revenues
Speaker 10: are tiny compared to what they generate from the iPhone.
Speaker 10: So the services associated with iOS iPhone is far bigger
Speaker 10: than the services associated with iPads. So in our view,
Speaker 10: not a big deal. But you know, we we we
Speaker 10: follow whatever the news stays, all.
Speaker 5: Right, an rag big big seven or eight days coming
Speaker 5: up here for Apple. Thursday they report their earnings and
Speaker 5: next Tuesday they have their I guess, so develop a
Speaker 5: developer conference on the seventh. Let's start with the earnings.
Speaker 5: What can they say or what does a market want
Speaker 5: to hear about China? About what type of headwinder it
Speaker 5: will be in for how long?
Speaker 10: So if you hear the word China stabilizing good, if
Speaker 10: you say China's still bad, not good, that's it. I mean,
Speaker 10: there's there's not a whole lot other than.
Speaker 9: That.
Speaker 10: Those are the only two things you'd be looking for,
Speaker 10: because the AI stuff's not going to happen for another
Speaker 10: month or so. When they're when they do the developer
Speaker 10: conference back next day in June, the main event is
Speaker 10: about the iPads, the new iPad's coming out, which is
Speaker 10: again exciting, but again not a needle mover financially.
Speaker 3: Yeah, I was gonna say, I'm okay, fine, what did
Speaker 3: you make of this Bernstein upgrade? So they upgraded the
Speaker 3: Apple target to apperform for market perform. They have an
Speaker 3: unchanged price target of one ninety five. But the reason
Speaker 3: behind it I found interesting. They said the China weakness.
Speaker 3: They see it as more cyclical than structural, and they
Speaker 3: say that overall Apple's business in China has been more
Speaker 3: volatile than the wider company and everything's kind of already
Speaker 3: priced into that point. Do you agree with that based
Speaker 3: on your research?
Speaker 10: See one of the things I would agree is yes,
Speaker 10: it is cyclical. But one of the things I don't
Speaker 10: know is how far is the bottom for these you know,
Speaker 10: do you know we're going to see a double digit
Speaker 10: decline in China?
Speaker 7: That's going to happen now.
Speaker 6: I do not know.
Speaker 10: Whether next year we're going to see the same thing
Speaker 10: or not, because you know, what is going to drive
Speaker 10: that iPhone cycle in China if things are still weak,
Speaker 10: if consumers still weak, and Jami is still giving them
Speaker 10: a hard time. So I think it's tough to time
Speaker 10: when this thing is. But I do believe that Apple's
Speaker 10: a premiere brand and people are not getting rid of
Speaker 10: it to the sake of something else. The Jamie Phone
Speaker 10: just came out after a very very, very very long break,
Speaker 10: and which is what doing I apologize Jaweve phone, not
Speaker 10: not Jami.
Speaker 5: So we had Dan ives on earlier today on surveillance
Speaker 5: and those surprise books about AI and Apple's ability to
Speaker 5: capitalize on AI despite the fact that they really do
Speaker 5: not have any dedicated offering it.
Speaker 6: It appears to most investors. How do you think about
Speaker 6: Apple and AI?
Speaker 5: Will they at some point become an AI play for investors?
Speaker 10: So I think the most important thing is when they
Speaker 10: announce in June. Is it going to be a tie
Speaker 10: up between them and Google again or are they going
Speaker 10: to license some technology from open ai or are they
Speaker 10: going to build something in house. I think the in
Speaker 10: house is probably the weakest at this point, because you know,
Speaker 10: if they would have had something, they would have already
Speaker 10: talked about it. And the second thing is they're just
Speaker 10: pushing a lot of resources in the last six months
Speaker 10: and it's not easy to come up with those things.
Speaker 10: But I think I'll be I'll feel far more comfortable
Speaker 10: if they announced a deal with Google and say we're
Speaker 10: going to license some of Google's technology to build our
Speaker 10: own products or improve our products with that technology, because
Speaker 10: they already have a deal with them on the search
Speaker 10: side of things. So that would make me more comfortable
Speaker 10: than them trying to push out some of their own stuff.
Speaker 3: Would you categorize as Apple being behind AI or is
Speaker 3: this just what Apple does, like they let everyone else
Speaker 3: kind of front run a little bit. They see where
Speaker 3: the good and the bad are and then they kind
Speaker 3: of make their own decisions.
Speaker 10: I would say almost everybody was caught off guard with
Speaker 10: open AI, and I you know, I would say Apple
Speaker 10: was behind.
Speaker 5: So again, but if your Apple, you're not behind in
Speaker 5: very many things for a very long period of time, right,
Speaker 5: I mean, do you envision AI becoming a big part
Speaker 5: of the Apple story, because one could argue without it,
Speaker 5: it's a lot less attractive.
Speaker 10: No, I completely agree with you. In this particular case.
Speaker 10: What could happen is, let's say you build a lot
Speaker 10: of the GENI features or search features within the actual
Speaker 10: iOS or you know, you were to ask CD that
Speaker 10: question that currently you go into an app and you
Speaker 10: input that information and then get it. But what if
Speaker 10: you were able to do it just on the operation system?
Speaker 10: And I think that's I mean, that has a powerful
Speaker 10: way of solving that problem. But again, you need to
Speaker 10: have their technology to do that.
Speaker 3: What else do you What else is on your docket
Speaker 3: this week? What else is front and center for arag?
Speaker 10: I think Amazon announcing tomorrow night is a very big deal.
Speaker 10: I think that's going to tell us whether Amazon's going
Speaker 10: to surprise us on the cloud side or not, because
Speaker 10: we've seen Google's done well Microsoft's done well, and if
Speaker 10: Amazon does not perform, it's going to raise all sorts
Speaker 10: of question if they're losing market share, if Google's ahead,
Speaker 10: if Microsoft already you know, showcasing its AI products. So
Speaker 10: I think it's really focuses on Amazon in my view,
Speaker 10: more than I honestly in Apple at this case.
Speaker 5: All right, So I think the one of the questions
Speaker 5: here ANURAG is just technology in general, I mean, and
Speaker 5: it's all about AI. And the question I have is
Speaker 5: just how much of this incremental or how much is
Speaker 5: this AI spending, which is kind of people so excited
Speaker 5: about any company, does any expert AI? How much of
Speaker 5: that do you think is incremental from spending on AI
Speaker 5: for example, taking money just my IT budget.
Speaker 10: This is the single most important question for this year,
Speaker 10: and for what we have seen, it's more of a
Speaker 10: transfer of budgets at this point because when you see
Speaker 10: your results from Accenture or IBM, you see consulting being
Speaker 10: really weak. So people are taking money from that pocket
Speaker 10: and putting it in you know, hardware or AI related hardware.
Speaker 10: Now we think it's going to drive incremental spending. It is,
Speaker 10: I mean driving it, but at the expense of consulting,
Speaker 10: but we think it's going to come back, and it
Speaker 10: may come back next year.
Speaker 7: That's interesting.
Speaker 3: So it's like one big pot that's just kind of
Speaker 3: moving around and then how you wind up playing it.
Speaker 3: Is there any indication that Amazon's cloud won't be good
Speaker 3: in the same way that Google's was? Microsoft were well.
Speaker 10: There are certain you know, you could see that he leaves.
Speaker 10: Is the way we want to think about it is
Speaker 10: Microsoft did well because it had its open AI relationship.
Speaker 10: Amazon does not have that. Amazon selling a lot of
Speaker 10: the nuts and bolts at this point, and it's really
Speaker 10: large in terms of size. It's the biggest cloud of fault.
Speaker 10: So maybe it takes them another two or three quarters
Speaker 10: to get that big push on AI and they are
Speaker 10: still stuck in the old non AI technology. But I
Speaker 10: think that's really they have to come out and prove
Speaker 10: that they are a viable player, you know, in the
Speaker 10: current status. In the long run, I'm very certain that
Speaker 10: Amazon will get the benefits of a lot of incremental
Speaker 10: spending on AI.
Speaker 5: All right, good stuff on a rog Rana. Thanks so
Speaker 5: much for joining us on a rag Roanic. He's a
Speaker 5: technology channels for Bloomberg Intelligence. Joining us from Chicago, so
Speaker 5: we get you know, we have Apple Thursday after the closes,
Speaker 5: Amazon like gu Tuesday after the close, So a couple
Speaker 5: other big prints coming out of technology. I would say
Speaker 5: some of the technology numbers have been good kind of
Speaker 5: so far this quarter. So be up to these two
Speaker 5: big guys to continue, because it just feels like when
Speaker 5: you look at this market, if technology is not working
Speaker 5: for you, where does the market go?
Speaker 3: Industrials and energy? I Like I mentioned earlier, like if
Speaker 3: you look at you're to date, it's communication services, then
Speaker 3: it's industrials and energy, then tech and the communication services
Speaker 3: as a Google and Amazon story at the end of
Speaker 3: the day. So you have to wonder can the cyclicals
Speaker 3: really take control? Which leads me to energy and the
Speaker 3: idea that how many energy stocks do you actually want
Speaker 3: to own? Or is it just going to be the
Speaker 3: big guys and the rest of them are going to
Speaker 3: be scrambling anyway.
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Speaker 5: We want to talk to fixed income market coming up,
Speaker 5: but I'm just looking at the news. Boeing announced today
Speaker 5: they look to sell bonds after reporting a cash burn.
Speaker 5: They want to do about eight billion dollars of a
Speaker 5: deal here, and I just see another.
Speaker 6: Bloomberg story coming across.
Speaker 5: Just recently Boeing seas seventy seven billion dollars in demand
Speaker 5: for its six part bond sales. So even after that
Speaker 5: really tough quarter, it just shows you how strong the
Speaker 5: corporate bond market is and how much they're looking for
Speaker 5: bonds to invest in.
Speaker 6: So that's a perfect time to bring in.
Speaker 7: R J.
Speaker 5: Gallows, senior portfolio manager fixed Income at Federated Hermes, joining
Speaker 5: us from Pittsburgh via Zoom. I'm sure a phone call
Speaker 5: went in from the underwriters into Federated Hermes for some
Speaker 5: Boeing bonds. But boy, Rj, it just shows the demand
Speaker 5: out there in the strength of the corporate bond market,
Speaker 5: doesn't it.
Speaker 11: Yeah, corporates have done very well this year high yield,
Speaker 11: in particular on a total return basis. Issuance of IG
Speaker 11: has also have been very strong. I think the fact
Speaker 11: that the economy has proven to be much more resilient
Speaker 11: than many would have expected in the face of a
Speaker 11: bed funds rate between five and a quarter and five
Speaker 11: point fifty has underpinned strong demand for corporate credit. Risk
Speaker 11: fundamentals are good, Earnings have been generally favorable. Obviously there's
Speaker 11: some concerns now is the FED is pushed back on
Speaker 11: the prospect of rate cuts, you know what's next. But
Speaker 11: the theme year to date has been resilience in the
Speaker 11: face of a tight FED and that has certainly underpinned
Speaker 11: strong demand for corporate credit.
Speaker 3: So would you take credit risk or duration risk then,
Speaker 3: or I don't know, like both.
Speaker 11: You know, it's funny that you say that. For our
Speaker 11: investment process, we sort of break things up into you know,
Speaker 11: sort of different components of a fixed income portfolio. We
Speaker 11: deliberate on duration, yield curve, and what we'll call credit
Speaker 11: or sector the allocation of a multisector portfolio across different
Speaker 11: portions of the bond market to include say, treasuries, investment
Speaker 11: of corporate's high yield, emerging markets, et cetera. And our
Speaker 11: playbook year to date has been one of somewhat low
Speaker 11: conviction on the rates side. With respected duration, we're neutral
Speaker 11: at this point in time. We think that means that
Speaker 11: there's symmetric risks that yields could rise or fall from here.
Speaker 11: That's proven to be a fairly safe place to be.
Speaker 11: We're not adding alpha by being neutral, but we had
Speaker 11: been more constructive expecting yields to fall at the beginning
Speaker 11: of the year, and the simple resilience I was just
Speaker 11: mentioning has made that not the case. With respect to
Speaker 11: credit risk, we've been a little up in quality into
Speaker 11: places like mortgages. We like the evaluation and mortgages better
Speaker 11: than we do and investment grade corporates. In high yield.
Speaker 11: We're somewhat underweight investment grade corporates and a little bit
Speaker 11: more underweight high yield. We own them, but we're below
Speaker 11: the universal index in terms of our allocations. The corporate
Speaker 11: credit risk, in part because of the strong rally, has
Speaker 11: driven valuations to a place where we feel like there's
Speaker 11: not a lot of upside left from here. You know,
Speaker 11: that's not calling for panic or recession, but we think
Speaker 11: there's opportunities for spreads to widen on event risk or volatility,
Speaker 11: and we revisit those underweights in that timeframe.
Speaker 5: All right, So I mean I could go, I mean,
Speaker 5: what should I do here? Should I go buy a
Speaker 5: two year treasury darned near five percent? Should I take
Speaker 5: that phone call from my city group salesman's trying to
Speaker 5: sell me some of this Boeing paper?
Speaker 3: Here?
Speaker 6: Do I take the credit risk? Just buy and large?
Speaker 11: It's a it's a great question. The I think that
Speaker 11: it's important you think about acid allocation. To step back
Speaker 11: a little bit. Uh, there's a lot of question right
Speaker 11: now about where are equilibrium yields? What where is the
Speaker 11: Fed going to tell us in the next summary of
Speaker 11: economic projections? Where do they see the long run FED
Speaker 11: funds rate? Where is our star? And our star, you know, conceptually,
Speaker 11: should give some underpinning to bond investors in terms of
Speaker 11: expectations of where yields will be pulled to over an
Speaker 11: economic cycle. When you don't have a lot of confidence
Speaker 11: about our star, it makes it a little bit harder
Speaker 11: tactically to say, yeah, the bond market looks real cheap
Speaker 11: right now, let's add duration, let's add interest rate risk
Speaker 11: to our portfolio. And you know, in that context, that's
Speaker 11: why being at neutral sort of dissatisfying as a bond investor.
Speaker 11: It's almost like you don't have a view on the market,
Speaker 11: but one thing we do have are some of the
Speaker 11: highest yields in fifteen years. And I am one who
Speaker 11: believes that our star is probably not two and a half,
Speaker 11: it's not five either. I wouldn't be surprised that the
Speaker 11: Fed is increasingly going to be migrating your long run
Speaker 11: dot upwards. That suggests that yields won't probably go as
Speaker 11: low perspectively as they have in the past, say ten years,
Speaker 11: certainly outside of the context of crises like a pandemic.
Speaker 11: What does that mean to a bond investor, Well, it's
Speaker 11: just to me that the FED funds rate north of
Speaker 11: five money market yields north of five. That's a good
Speaker 11: place to be for your very risk averse investor, but
Speaker 11: for someone with a little bit of a longer term horizon,
Speaker 11: the bond markets valuation, the level of yields has been
Speaker 11: restored to a point where you can add duration to
Speaker 11: your portfolio and take some more balanced investing as opposed
Speaker 11: to do I own cash or do I owned stocks.
Speaker 11: Bonds are sort of back in the sense that they
Speaker 11: have a role in a diversified port folio because they
Speaker 11: have been reset higher and yield even if I don't
Speaker 11: know those yields will go down in the next three months.
Speaker 3: It's such a good point, which leads me to the
Speaker 3: refunding announcement. So we're going to get the amount today
Speaker 3: and then where Treasury will issue on Wednesday, and then
Speaker 3: just hours later we'll get questions on will to Fed
Speaker 3: back off on quantitative tightening. What do you think the
Speaker 3: combined effect of all this is going to be.
Speaker 2: Well?
Speaker 11: I think the Yellen Treasury has been pretty careful. The
Speaker 11: amount that's being financed is near record proportions, I think,
Speaker 11: only surpassed by the depth of the pandemic and the
Speaker 11: borrowing that was going on at the time. As a result,
Speaker 11: they've relied a lot on the short end of the curve,
Speaker 11: with short yields being high and money market balance is
Speaker 11: being astronomically high. I think they're at a record there's
Speaker 11: plenty of demand at the short end of the curve.
Speaker 11: I don't expect any sharp turns away from that strategy
Speaker 11: in the upcoming announcement. I do think the Fed's QT program,
Speaker 11: you know, we're getting closer and closer to the point
Speaker 11: the Fed is telegraph this where they're going to want
Speaker 11: to slow down the pace of balance sheet reduction, you know,
Speaker 11: slow down the pace of QT, I think, as it's
Speaker 11: come to be called, which is a rational thing to do.
Speaker 11: As much as there's uncertainty about our star, there's also
Speaker 11: uncertainty about the right level of reserves in the system,
Speaker 11: and the FED doesn't want that uncertainty to sort of
Speaker 11: spill over into financing market pressures, which is what happened
Speaker 11: the last time they were trying to reduce their balance sheet.
Speaker 11: So I think both parties, the Treasury and the FED,
Speaker 11: have been very careful about these these key variables, how
Speaker 11: much Treasury is borrowing and where on the curve, and
Speaker 11: how the Fed is going to alter their their balance sheet.
Speaker 11: I don't think either one of these is apt to
Speaker 11: be very market moving right now because of the sort
Speaker 11: of deliberation and the signaling that has gone on both
Speaker 11: from the Treasury and the Fed on both of those
Speaker 11: fronts are.
Speaker 5: Chie I'm going to jump in front of Alex here.
Speaker 5: I know sure what they ask about this? How about
Speaker 5: municipal bonds?
Speaker 7: How about segments?
Speaker 5: Man, exactly, how do you think about muni's in this
Speaker 5: environment here?
Speaker 11: Well, yeah, munis have The absolute yield argument has motivated
Speaker 11: many investors to buy bonds in general, certainly on the
Speaker 11: corporate bond side and also on the meuni bond side,
Speaker 11: investors have been putting money to work into SMAs. The
Speaker 11: mutual fund flows on the uni side are positive. They're
Speaker 11: not huge, but they're they're meaningfully positive. I think the
Speaker 11: point I was making a few moments ago about relatively
Speaker 11: high yields and restoring fixed income as a component of
Speaker 11: your balanced in diversified investment strategy, it resonates with people,
Speaker 11: and you can see that in the behavior in the
Speaker 11: muni market. Interestingly, however, that that has meant that munis
Speaker 11: have held up better on a year to day basis. So,
Speaker 11: for example, if you look at the Bloomberg Muni Bond
Speaker 11: index on a year to day basis, I'm getting updated
Speaker 11: number here, it's down one point seven percent in total return.
Speaker 11: At the start of the year, we expected that would
Speaker 11: be positive by now, so that's been a little bit
Speaker 11: of a setback, but that's still a lot higher than
Speaker 11: the Treasury index, which is down three point two percent,
Speaker 11: or the aggregate index, which is down three point also
Speaker 11: three point two percent, just about the same. You know,
Speaker 11: why is that, well, munis have outperformed given that strong demand,
Speaker 11: and the MUNI market is underpinned right now by the
Speaker 11: fact that the value of the tax exemption goes up
Speaker 11: at today's higher yields relative to the last decade when
Speaker 11: yields were much lower. So tax exempt income has helped
Speaker 11: to attract investors into them munity space who might not
Speaker 11: be so worried about whether yields are going up another
Speaker 11: thirty or fifty basis points or down thirty or fifty.
Speaker 11: They like the valuation in a longer term sense in
Speaker 11: the here and now, and the credit story is good.
Speaker 11: Munie's credit story has been very, very fundamentally strong given
Speaker 11: the economic expansion and sort of the long tail of
Speaker 11: some of the fiscal transfers that went from federal to
Speaker 11: state and sort of bleed through the unique credit system.
Speaker 11: That's still very much a positive dynamic there as well.
Speaker 5: All right, RJ, great overview as always, really appreciate getting
Speaker 5: some of your time.
Speaker 7: R J.
Speaker 5: Gallows, Senior portfolio manager over there at Federated herme C.
Speaker 6: Municipal bonds can be cool.
Speaker 3: Muni's cool UNI moment.
Speaker 5: Cool thanks Joe, mysec very cool.
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Speaker 7: Data for.
Speaker 3: I see, guys, this is my damn. The news from
Speaker 3: last week that I did find interesting, that I did
Speaker 3: key in on, is that a bunch of panel makers
Speaker 3: and polysilicon producers are trying to get tariffs increased for
Speaker 3: equipment coming from Southeast Asia. Basically, there's a lot of stuff.
Speaker 3: There's a lot of equipment coming on. Solar cells and
Speaker 3: modules are coming on, and that is lowering the price
Speaker 3: of those which are then hurting US companies. The problem
Speaker 3: is you kind of need all that stuff if you
Speaker 3: want to greenify or decarbonize your economy quickly. So let's
Speaker 3: get to some of the analysis here joining us now
Speaker 3: as Paul Licenzo he is Bloomberg nif a senior associate,
Speaker 3: can we impose tariffs on the stuff we need to
Speaker 3: decarbonize quickly? Decarbonized quickly?
Speaker 7: We should not, And the US has been doing it
Speaker 7: for a while, actually very quietly since twenty twelve, so
Speaker 7: it's not a new thing. And it's really made solar
Speaker 7: more expensive in the US and everywhere else in the world.
Speaker 7: So the difference is the US has very generous has
Speaker 7: had very generous subsidies for solar for a long time,
Speaker 7: and that upsets some of those higher input costs. But
Speaker 7: is it the most efficient way if you're trying to
Speaker 7: decarbonize quickly and grow sector quickly. Probably not. So what
Speaker 7: are we.
Speaker 6: Talking about here?
Speaker 5: The panels the more than the panels, What are we
Speaker 5: talking about.
Speaker 7: Here, Yeah, we're talking mostly sales and panels.
Speaker 5: So the panel gets the sun, converts it puts it
Speaker 5: into a where's it go from there?
Speaker 7: Correct, it goes into an inverter, which is the brains
Speaker 7: of the system, and the inverter translates that direct current
Speaker 7: power that the panels produce into alternating current power, which
Speaker 7: is the one that we use.
Speaker 5: Thank you for exp because I represent like ninety nine
Speaker 5: percent of our listeners, It's true.
Speaker 7: Sorry about that.
Speaker 3: Yeah, So what part of that would be taxed with.
Speaker 7: The taroff the panels? But what typically those tariffs target
Speaker 7: are the cells, which is the sales is essentially what
Speaker 7: composes those panels. You stack them together and you assemble them,
Speaker 7: because the cells is really the true, the true technological
Speaker 7: component of the panel. The panel is just like cells
Speaker 7: assembled basically. So what's what the US is trying or
Speaker 7: what some of these companies are trying to do, is
Speaker 7: impose a new set of tariffs on Like there's already
Speaker 7: tariffs on panels coming from Southeast Asia, and there will
Speaker 7: be new tariffs coming in June, but this would be
Speaker 7: an additional set of terrafts that they're trying to impose why.
Speaker 3: Can't these companies, like a I don't know, First Solar
Speaker 3: or something make these panels themselves.
Speaker 7: They do First Solar, so First Solar sits in a
Speaker 7: different league. First Solo has a different technologies. This we're
Speaker 7: talking about crystalin silicon technology. First Solo uses a different
Speaker 7: type of technology called thin film, and they fist. Sola
Speaker 7: has been producing their own panels for a long time,
Speaker 7: and they have really ambitious plans in the US.
Speaker 3: But I guess that's the point, right, because they don't
Speaker 3: want the cheaper ones coming in and diluting what they're
Speaker 3: able to sell. So why can't I guess the better
Speaker 3: question I should have is why can't they make it
Speaker 3: for as cheap is the ones that Southeast Asia is
Speaker 3: selling for.
Speaker 7: Yeah, the question is probably the answer is not going
Speaker 7: to surprise you. Just higher input costs, higher production costs,
Speaker 7: higher labor costs. You cannot really reach the same scale
Speaker 7: that you can in the Asian countries in the US.
Speaker 7: It's not just about the factory that you have that
Speaker 7: you where your assemble or making the cells or making
Speaker 7: the panels. It's about all of the adjacent supply chain
Speaker 7: and China and some of these Asian countries, and by
Speaker 7: extent from being so closely to China, they are able
Speaker 7: to ramp up all of the adjacent supply that they
Speaker 7: need in a very efficient way. So typically those megabases
Speaker 7: in China have massive solar factories, and if you go
Speaker 7: across the road, that's where your aluminum prime supplier is
Speaker 7: going to be. If you go in a little bit
Speaker 7: further down the road, that's where your glass supplier is
Speaker 7: going to be. So it works in and in coordination
Speaker 7: quite quite nicely, and that helps improve efficiencies and lower costs.
Speaker 6: It doesn't seem high tech to me.
Speaker 5: Why would I care if China is producing them other
Speaker 5: than if at any time they could stop producing them
Speaker 5: and screw us.
Speaker 11: But I mean, because.
Speaker 3: You're saying that there's no like cybersecurity or security measure
Speaker 3: for that.
Speaker 6: Don't I just want the cheapest panel?
Speaker 7: That's That's correct, And that's exactly what we've been trying
Speaker 7: to say for a long time. Solar manufacturing is a
Speaker 7: terrible business to be in. It's it's really fear compet
Speaker 7: compet Competition is really fears where typically go through all
Speaker 7: these swings of overcapacity, a bunch of bankruptcies and then
Speaker 7: new companies arise from from nowhere, and there's again over capacity.
Speaker 7: So there the IP and really that the technological know
Speaker 7: how there is really not that difficult. And I really
Speaker 7: don't understand, we don't understand why you would want to
Speaker 7: throw so much money at building this industry in the
Speaker 7: US unless it's a geopolitical hedge, which is something that
Speaker 7: obviously begs a very different question and a very different
Speaker 7: set of analysis.
Speaker 3: What kind of Let's say that these tariffs do go through,
Speaker 3: So this request could raise the prospect of tariffs as
Speaker 3: high as two hundred and seventy one point five percent
Speaker 3: later this year. Let's just pretend that that happens. Yeah,
Speaker 3: and I want to install a solar panel on my
Speaker 3: house in Massachusetts. What's that going to cost me?
Speaker 7: Now, it's going to cost you a ton more money.
Speaker 3: A ton I don't like a ton.
Speaker 7: No, I mean, the two hundred and seventy one percent
Speaker 7: is very unrealistic. So what's happened Typically in these petitions,
Speaker 7: this is a little bit of the boring stuff. But
Speaker 7: what happens is what happens is they file this petition
Speaker 7: and then if the US agrees to investigate these companies
Speaker 7: or these they go, they try to they open their
Speaker 7: books to companies, they open their books and they have
Speaker 7: to prove that the amount of subsidies that they receive
Speaker 7: is not as high as what that country wide tariff
Speaker 7: would look like. So typically they get a tear raise
Speaker 7: that is much lower than the two seventy one percent
Speaker 7: that you're referring to. And it can range from like
Speaker 7: thirty to fifty percent. It just really it just really depends.
Speaker 7: But the bottom line is if that were to happen,
Speaker 7: obviously imports from Southeast Asia would be completely ruled out
Speaker 7: in the US and that would really trigger for you know,
Speaker 7: would really trigger the renaissance of the US manufacturing industry.
Speaker 7: But you would have to pay more for your panels.
Speaker 6: Just real quick, thirty thirty seconds.
Speaker 5: What percentage of our panels here in the US come
Speaker 5: from China today?
Speaker 7: About from China?
Speaker 1: Zero?
Speaker 7: Okay, So the US has been singling out China for
Speaker 7: a long time. Southeast Asia more than eighty.
Speaker 5: Percent in the more than eighty percent, And these tariffs
Speaker 5: are just for China or for all.
Speaker 7: For Southeast Asia, for Vietnam, Malaysia, Thailand, and Cambodia, which
Speaker 7: represent that eighty percent number, that I just quote it.
Speaker 3: Paul, Thanks Lott. This is really interesting stuff, and it's
Speaker 3: just that when you want to put a solar panel
Speaker 3: on your house, there's a lot more that goes into it,
Speaker 3: and if you want to sort of decarbonize quickly, why
Speaker 3: wouldn't you want the cheapest available. Paul to your point,
Speaker 3: all right, thanks a lot, really appreciate that. Paul as
Speaker 3: Kano joining us from Bloomberg n EF.
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