This is Bloomberg Business. Wait inside from the reporters and editors who bring you America's most trusted business magazine, plus global business finance and tech news. The Bloomberg Business Week Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
All right, everybody, you're listening and watching Bloomberg Business Week Carol Masser along with Matt Miller, Tim you know on leave. We're live in our Bloomberg Interactor Broker studio on YouTube on Bloomberg Originals. Now, Matt was kind of hot and heavy about doing the Apple debt offering.
I mean, to me, it's huge because this company A already has one hundred and seventy billion dollars in cash.
What does it need money for?
Right?
They don't seem to need money. Although if I if I type in DDIS on the terminal, I can see that they have forty four billion dollars in debt coming due over the next four years.
So it's all about maybe just managing that debt right. The next round, let's see what Robert Schiffman has to say. He's senior credit analyst at Bloomberg Intelligence. He's here in our interact a broker studio. That's right. I mean we've all been reading your work that says they've got a fortress balance sheet, right, So why do they have to do this? Or is this just business as usual for Apple?
Yeah, I sort of don't want to burst everybody's bubble, but this is a little bit of ho home. You know, Apple raising five and a quarter billion, it's almost a rounding error. And you know, if you look, you talked about how much debt Apple for Apple for of course, yes, now I live in a different world of megacap you know, in a lot over the last three years, Apple's raised
forty billion dollars a debt. This is sort of just regular course of business for them, Like I, like I said to you earlier, Matt, Like, I'm just I'm wondering why they're just not raising a little bit more. You know. Maybe it's a play on rates. Maybe they think that three minutes from now, three months from now, three years from now, rates are going to be a little bit lower and the cost of capital be a little bit lower.
That's what I'm wondering, right, why not wait even a little bit more, or just they have to do this?
It's honestly it's it's reasonably it's it's five tranches, but it's reasonably short duration. You know, the first four tranches are three, five, sevens, and tens. So it's really not so much I think a play on rates. You know, Apple, if you think about it over time, with one hundred and ten odd billion dollars a debt, they're going to constantly need to refinance unless they want to take their
debt levels down. And they've had one hundred and ten odd billion dollars a debt for the last decade, So what they're really well, we still have one notch to go at SMP doub plus, but Moodies did raise them to triple A in December of twenty twenty one. So listen, we've always talked about the mount rushmore credit. They're on it. Yeah there with Microsoft.
Well, this is why I wanted to do this story. This is why I'm so hot and heavy on it, because Apple is putting another product out into the market that everybody has to have, right, everybody wants these bonds. If you can get five percent on thirty year debt in a completely risk free company, which this is as close as damn it to a completely risk free company.
You want that, which is why they got oversubscribed. That's why they did five and a quarter instead of five and that's why they're got a spread of one hundred eight rather than one hundred and thirty five.
Right, Yeah, listen, Apple.
When you comp them versus their peers, they look pretty cheap.
Yeah. I mean they trade.
Wide to both Alphabet and Microsoft. The reason is not so much about credit quality, like you're really like mincing words. If you're thinking about what's the difference between a double A and a triple A. The real difference is technicals. Apple's got a lot more bonds out there than their peers, so people have a little bit of larger holding. It costs a little bit more to put another five or
ten billion in people's pocket. But listen, if Apple wanted to raise fifty billion dollars today, the market would be there for them. It's just a matter of what that cost is.
How much of this too is though having enough on the balance you. I mean, they've got we said a lot on the balance you. But they like to do buybacks, they like to do dividends, and if it's a questionable economic environment, potentially if anything slows down.
They wish they did dividends.
They could still do this and make shareholders happy.
Yeah, listen, they pay a already fair dividend. The dividend yield is low, but on an absolute basis, you know, it's fifteen odd billion dollars, it's not like it's nothing. I will tell you though, I'm a was a bit surprised. It's pretty much every year during their their fiscal two Q is when they reauthorize a bigger buyback.
So surprise they did it already.
No, it's surprised that it wasn't bigger. It was ninety billion, which was similar to last year. I think if they really want to make hay on this cash neutral target, you know, they've got fifty seven billion dollars to get through, you know, why not announce one hundred and twenty five billion dollar authorization. Listen. I don't know if it's a call on their stock. I don't know if they need
money for they don't need They don't need money. That's you know, they have one hundred billion dollars of annual free cashrob I just think it's managing a long term balance sheet. It looks like what they really want to shake out with is having enough cash on this balance sheet over time that they can do whatever they want. Right now, they can't do whatever they want. For instance, Microsoft is trying to buy Activision sixty nine billion cash.
Uh.
Pretty much governments around the world said no, you can't do it. At some point, maybe there's a different administration, maybe the M and A environment is different, and Apple can go out there and I don't know bya Netflix. I mean, it seems crazy nowadays. Well, Peloton though, doesn't move the needle. I actually I have my Peloton and I spend somewhat regularly. It's not moving my weight needle.
It's just not big enough for for like these large cat names to do a transaction that actually makes a difference. It's got to be signed.
I'm just thinking the whole health and wellness thing that they are looking. They see that as a.
Growth that you know, that's actually a great point that you're making.
You know.
One of the ways that Apples can get to a triple A is they need to diversify their revenue stream, and they're doing that. Services have their best quarter ever. But this is still a hardware company, so they need to continue to figure out new, different, better ways to make all of their products sticky, and that means that they're they're gonna have to find things that they're not used to doing. You can build.
It, it's hard to get as sticky as the iPhone.
I mean.
Warren Buffett was pointing out he thinks people in America would rather have an iPhone than a second car. Yeah, And he said, if somebody comes to repoe your second car and it comes to giving up your iPhone, you say, take the car.
Yeah, I listen. I don't think that he's wrong.
One thing I don't get is why the dividend yield is so painfully low. I mean half a percent. I get that they spend a lot of money in dividends, but if I buy the shares, I would like a bigger dividend yield. It's something I can count on and something I can plan on, rather than hoping that they continue, you know, one hundred billion dollars of share buybacks every year.
Yeah, Well, as a shareholder, you'd also hope that they bought back a trillion dollars worth of stock each year. You know, they're doing what's in the long run best financial case for the business. Quite frankly, the dividend also is a little bit ho hum, like, why does anyone have a one percent dividend yield? It's to check a box that you're in a variety of dividend funds, so people so so the name fits into various ETFs and industries. I don't think that's going to go up that much.
You want to keep your flexibility really high. I think there's a benefit to be able to say next year, if we want to buy back one hundred and fifty billion of stock, we can do it. If you triple that dividend, it limits your flexibility over time?
Am I an idiot? Always thinking that when you're doing buybacks it's just financial engineering? Right, You're reducing the amount of improve your EPs number? Like is it just? I know investors like it, I get it, But isn't it a form of financial engineering?
Well?
I wish I wish Tom was here because he would break out modic Leani and Miller. And that theory is that you know, it doesn't It doesn't make any difference. I will tell you though, because it doesn't. Weighted average cost of capital I think does matter. Apple's weighted average
cost of capital it's reasonably high. It's because it's got such a large equity component, their debt component is effectively zero, and that to me argues they're supposed to be borrowing a lot more to buy back stock, which has a wait a cost of capital that's closer to ten percent.
Are we seeing, though, a drop in the kind of demand that Apple would have previously seen? I mean, are investors out there more risk averse showing more patients when you look at the at the book building for this offering, wasn't it a little bit weaker than you may have expected?
Now? I don't think it's being risk averse. I think it's part of being one of the largest non financial debt issuers in the market. At some point, it doesn't make a bit a difference how big you are. On the byside, you can only have so much exposure to individual names. And you know, this is Apple's probably most largest individual non financial exposure out there. So it just gets harder and harder to squeeze in that last dollar. But again, if they wanted to raise another ten or
fifteen billion, they could do it. You just might have cost them another twenty five beeps across the curve.
Hey, Robert, just broadening out right, We're obviously focusing on Apple, but there's a lot going on right the corporate issuance world. What are you keeping on your radar this and what does it tell you about kind of the economic outlook?
Well, listen, I think corporate outlook. You know we've been saying this for the last couple of years, is I think that tech needs to be considered the corporate safe haven, and in fact, tech credit needs to be considered the market safe haven. We're seeing right now that banks certainly don't fit that. If you have a super highly rated financial institution with hundreds of billions of dollars of deposits that can go to zero, that's not a safe haven.
We've also seen that with treasuries. The volatility that we're seeing your conversation about what the Fed has been doing and potentially, you know, breaking a debt limit is sort of mind boggling. So we've always talked about, you know, large tech companies that have massive cash positions that generate tens of billions dollars of cash a year, that have enormous competitive barriers to entry. Those are the safe havens.
People tend to talk about tech is being violatile because stocks are violatile but tech bonds are not nearly as violatile. They trade tighter than just about every other sector for a good reason. It's because credit risk is really low. So what's happening is we're seeing more companies borrow to buy back shares. We just saw that with Meta.
I was just gonna say Meta last week, right, just quickly, just got about twenty seconds.
Yes, I think we're going to see more of this. And if Microsoft's deal with Activision ends up disappearing, I wouldn't be shocked to see seventy billion dollars of buybacks right off the bat. So you're going to see more of this. People. Tech credits are going to get on the back of their balance sheets, and they're gonna benefit shareholders.
I love what you said about looking at the tech debt side of things. Robert Chiffin, Senior credit analyst at Bloomberg Intelligence, Making us smarter. On this Monday, you are listening and watching Bloomberg Business Week. This is Bloomberg.
You're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from three to six Eastern Listen on Bloomberg dot com, the iHeartRadio app, and the Bloomberg business or wants us live on YouTube.
All right, let's get to it, because we just got the FED update on the financial stability of our system, specifically warning that banks concerns about slower growth could lead them to make fewer loans, accelerating an economic downturn. That's our headline on our story about Craig tour. So let's
get to it with our team, Bloomberg Intelligence. Senior analyst for US regional banks, Herman Chan back with us in our interactive broker's studio on the phone in New York City, Chris Whale, and institutional risk analyst at Will and Global Advisors, someone who follows the financial sector, was with us during the crisis. Herman, I'm going to start with you.
In a Great financial crisis during the.
GFC exactly lean down him in a big way. Herman, Let's start with you. Among those two reports, the Senior Loan Officers as well as the Fed's report, what's important? What's a takeaway for you?
Sure?
So the Senior Loan Officer survey was interesting because it showed that commercial loan demand basically has cratered to the levels of the Great Financial Crisis, as you mentioned, So that's something that we weren't quite We were expecting a pullback in demand, but not quite to the same level as the survey indicated. And it also showed that credit is tightening across the board, across all loan types, so commercial, commercial,
real estate, consumer. The banks are increasing spreads, being more cautious in terms of what loans they're putting on their balance sheet. And it just confirms the report, just confirms what we expected heading into the report.
Chris Well, let me ask you, is this what the FED wants anyway? I mean, don't they want tighter financial conditions? You know, if they hadn't wanted banks to fail, wouldn't they have done something more serious about it ahead of time? Or is this all part of the plan.
Well, I don't think the plan incorporates markets or banks in terms of the inputs. They're really focused on GDP modeling at the FED mat and I've confirmed with so of my former colleagues I worked at the FED in New York. They don't talk to the bank supervisory people at all.
So one side is like firewalled off from the other. Monetary policy and financial stability.
Yeah, and it's it's kind of concerning as far as I can see. But you know, I think the answer is no. They didn't model us at all, and they really didn't know what the equivalent of open market intervention is in interest rate terms, you know what I'm saying. So they had to guess and they went big thinking that was helpful, and in fact it's not helpful, as
we can see. So, you know, there's this huge debate in the economics community right now about abundant reserves versus a more austere approach, and I think the austere approach is the right one, but we just have to fight our way through this.
Matt, Yeah, well it looks like it looks like.
Price in their balance sheets as fast as they can, but there's nothing they can do about assets.
Well, you know, this brings up an interesting point that Tom Keane was talking about this morning, and that is scale and the lack thereof. Right, these banks are shrinking, and typically that's not great for investors in any company, in any industry. Right, is that just the reality of what's happening here on the KRI Do we have to look for all these regional banks to shrink, Well, you have.
To look for the system to shrink, because as the FED shrink sits balance sheet. Every time a Treasury bond is redeemed on the books of the FED, a deposit disappears because the Treasury is in deficit, so they have to refinance that bond immediately your customer buys the bond, a deposit disappears, right. So the mechanics of this are very Darwinian, very you know, binary one to one. And at the same time, you see, the banks are very competitive.
You've been the big guys that are out there for four and a half five percent now for one year, and it tells you they have to compete for money with the little guys. You know, it's the banks versus the treasury, and the Treasury is at what five point twenty this morning on one month, So you know that's the problem. People come to me, said Chris, if the FED doesn't do anymore, is it okay? And the answer
is no, They've already done too much. You know, they could have maybe gotten FED funds a three and a half or four without breaking the China. But I think we're gonna break some china. I really do, Chris.
You here, sorry, Herman Herman Chana Bloomberg Intelligence Regional Banks analysts. Are you hearing the same thing from the banks themselves? Are they at all pointing the finger at the FED?
Well, they're not going to point the finger at the FED, because, as we talked about earlier here, the FED is also the regulator.
So you're, yeah, but they don't do anything. They could be my regulator. I never heard from them.
You know, right, Really, the FED creates the rules of the game, and the bank management team have to abide by those rules. So you have bie by credit rules, you buyed by interest rate rules, and if you don't, then you have a chance to break your bank. And that's really what's happened over the past couple of months.
It's just a velocity of change. The time is so inadequate for these banks to actually adjust, you know what I mean, They roll off it maybe twenty percent a year if you think of it that way, so they can reply price twenty percent assets a year. Now. The deposits are headed for five right now this quarter, So that's going to be a remarkable shock I think for earnings and for net interest income for the whole industry.
You know, if you look at our blog, we model it down thirty billion dollars and they'll still make money, don't get me wrong, but the you know, the search and cost for funding is going to be remarkable, I think.
So, Chris, what's what's the regional bank industry look like on the other side of this? Well, well, but because it's interesting, you know, coming off in Milk and I was talking about this with Matt earlier, is that I'm just blown away by the role of the private market in so much, especially when it comes to smaller companies, mid sized companies. So I just wonder the big guys have been like pulling back for a long time. Regional banks maybe not so much to what happens to our
financial system. More broadly, if we don't have those regional banks out there, well.
You'll have more non bank involvement facing consumers because big banks don't want to face consumers. You know, think of the credit scale for FICO scores. Most big banks don't want to talk to anybody in the bottom half. It's just too much risk and too little reward. So particularly
things like mortgages, Nah, they don't care. And that means that you know, the community banks, who were the ones who actually provide credit to communities right at the micro level, and particularly vulnerable communities that are not well served FAHA lending for example, that will go even more to non banks. And the irony, of course, is that the federal government, the home loan banks for example, don't deal with non banks, so three quarters of the industry is not supported.
Right, This tighter credit is precisely what the Fed wants to do to slow downslation.
They're going to get it because to your earlier points, they are stepping back. And it's not this loan office for survey, right, it's the treasurer walking into your office. You're the cfon. He says, I want to double cash by the end of the quarter.
Well that makes sense.
Look at everybody tapping the debt markets, right, yeah, but.
The easiest way to raise cash is stop lending. Redemptions come in, you just don't redeploy them.
I mean, for me, the ramifications seem like they could be amazing. Everyone's tightening credit as the price of money goes higher. Meanwhile, on the good side, we've been making trying to make as much stuff as we can. We're gonna end up with big fat inventories at the end of the year. I hope, in the form of much cheaper V eight engines from here because I've talked I talked to dealerships lately and they're like, they say the same thing that you do, Chris, about people with on
the lower end of the ficos. They don't even want to hear about it. And right, they used to ask do you have a job? Now they want to know what job it is, and how much you get paid and how long you've worked there. They really care, well, they.
Care, and also they know if they don't have more stringent standards, can't sell alone. Right, These loans are mostly originated for sale to investors, so you know, and a bank is even worse. The bank doesn't want to see a loan. It's not the middle of the fairway. So that's you know what I mean. The banks are even more picky than the cash investor.
Which just means those who have been squeezed out of the financial system, locked out of the financial system, it's just even worse for them.
Ultimately, you've seen some of the you've seen some of the growth.
The FED approves mergers usually for wounded banks. You'll never forget Chase was bought by JP Morgan because it was gooded by Penn.
Square right, say five seconds for you, Herman.
I was just saying, you've seen some of the growth in some of the non banks, the AI type banks, like so far and you got it, Herman, Chris, thank you.
You're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from three to six Easter on Bloomberg Radio, the Bloomberg Business app and YouTube. You can also listen live on AM on Alexa from our flagship New York station, Jo Say Alexa playing Bloomberg eleven thirty.
Carol Master along with Matt Miller. Are you a chocolate or strawberry frosty kind of guy?
Uh?
Chocolate.
This is an odd question because when I was a kid, there was only one kind of frosty, right, what there was, I didn't know if it was any specific flavor. It was just a frosty. So now when I go to Wendy's and I asked for a frosty, they asked me what flavor. I'm like, come on, there's only one flavor. But apparently you can get multiple flavors.
Could get the flavor you don't want, all right, we are, of course talking about Wendy's. They do report earnings on Wednesday before the open. Something they've been doing and really other companies generally have been incorporating for years into their strategy and how they make financial decisions is ESG. We're talking about environmental, social, and governance issues, which we know is going through its own little reckoning. Weighing in though
on that. First this afternoon is Liliana Esposito, chief Corporate Affairs and Sustainability Officer over at Wendy's, joining us on zoom from Dublin, Ohio. Lilliana, good to have you here with Matt and myself. We do want to talk about ESG. You've worked though, in the food industry for a long time, You've worked at Dean Foods, Mars. What's top of mind of you when you think about ESG and what needs to be done?
Yeah?
Great to be with both of you.
And I will say, Matt, if you haven't tried to strawberry for us and yet they come back to our restaurants and you're missing out, So definitely definitely give that one.
To try and look.
I think that even the letters ESG are relatively new in terms of this area, but obviously companies Wendy's and others have been operating responsibly for decades, but I think what has changed is really the demands that those efforts really be formalized and that they be very goal based.
And so you know, at Wendy's, we you know, we organize our ESG portfolio under the platform of good Done Right, and we've got some i think pretty aggressive public facing commitments around food, people in footprint and what we're trying to accomplish that we would essentially say is doing our fair share or more than our fair share too, to really demonstrate that we are operating our business in a responsible fashion.
It seems to be a difficult business. I mean, like, if you want to do ESG, you don't want to be working at an oil producer or a hamburger seller because you know, that's one of the leading causes of climate change is raising beef. So how can you change that?
Yeah, it's got to be a partnership.
And so what you're referring to clearly are around greenhouse gas emissions. You know, we have set a science based target for greenhouse gas emissions reductions.
And that will include scope one, two and three.
So Scope one and two are the about four hundred restaurants that the company owns and operates ourselves. And then Scope three is our franchise restaurants, which generally look and operate like a company restaurant, they're just owned by a franchise e. But the biggest part of our footprint is of our greenhouse gas emissions foot print is our supply chain, and the biggest part of that is is proteins and specifically beef.
And so you know, the encouragement is that, you know, many of.
Our suppliers have already started down this path, even in advance of us, of setting their own science based targets.
But we we know that we'll have to work together.
It's not going to be just Wendy's changing that landscape, but but substantially improving the footprint, the environmental footprint of agricultural production, and with a heavy focus on protein is is definitely going to be necessary to achieve these targets.
Leona, what about garbage? And I think about food waste in particular, So I mean it's.
It's oh, food waste or plastic.
Food waste in particular that ends up in dumps and the methane that's produced off of that and other which is more problematic.
Food on your compost? Do you not compost that?
No, people throw out a lot of stuff and it ends up in the dump. That's apparently compost I do at home.
I actually am fortunate to live in a community that has curbsided food waste pickup. But that is unusual, and that's that's a really key piece is that. I will say for Wendy's Restaurants, we actually waste very little. And I think that's not unusual for a company of our type because it's just a small footprint. And so you know, our operators get very good and have gotten very good over the years of only ordering what we're going to prepare and only preparing what we're going to be able to serve.
And really, guys are that tight, so you're not throwing out a lot of stuff.
And we've actually done some audits on that and have found that. But there's always opportunities to, you know, to be better. But certainly as you look at the supply chain, that's where a lot of that that waste may be occurring, particularly in agricultural products.
And so it absolutely is a it's absolutely a focus for us.
It's interesting and you you know, you mentioned plastics, and maybe we'll get to packaging as well. One of the things we're doing right now in some of our Chicago area restaurants is we've actually got some initially two stream trash receptacles, so you know, landfill and recycling, and over
time we may add composting to it. We did kind of a video study essentially of the waste produced by the restaurant, then did some education with our team members as well as with with customers, showing them what of our packaging in particular, and then for our our team members what of our backup house packaging could be recycled. And then on the back end of the pilot, we'll look at that same kind of video technology and see whether we were actually able to change behavior.
Do we need to get rid of plastic?
Then?
Well, straws? What do you do about straws?
Why'd you know? Haven't you gotten rid of straws already?
Uh? No, we still have We still have straws.
And I will say, you know, one of the commitments that we've made is that by twenty twenty six, one hundred percent of our customer facing packaging will be sustainably sourced. And so we're defining that as either recyclable, compostable, or reusable. And so we just put out our corporate Responsibility Report a couple of weeks ago and reported that we're now
more than halfway towards that goal. A big part of that progress over the last year for us was actually transitioning our beverage cups from our former kind of paper based cups that had limited recyclability into a plastic.
Format that is recyclable.
And then we're also incorporating post consumer recycled content into those cups. We'll do that over time, and so, you know, one piece of the puzzle is the material making sure that you have a material that is recyclable or compostable, and then but then also making sure that you have the infrastructure. And we certainly don't control that, you know, at Wendy's, but certainly that's a great need of ensuring that there is infrastructure to be able to recycle or
compost these materials when they're made available. And then the third piece is educating the consumer so that they know what to do, you know, with with the packages that they have.
I so full disclosure, I'm from Columbus, right, so I love Wendy's with all my heart. I mean, I used to go and eat a store number one on Broad Street with my grandmother growing up, so I have a very special connection. But you definitely don't want to be giving out straws, do you. Isn't that the worst kind of possible CSR sin ESG sin straws.
I don't. I don't think i'd agree with that.
And and really, I mean, in the in the grand scheme of total package, you know, certainly items like you know, cups and wrappers and containers produce more more product challenge with straws and and and it's it's not unique to straws, but they're small, and so even if the material is technically recyclable, uh, you know, most facilities won't won't accept that. And so we've got some locations that have alternatives to plastic straws, and and certainly are looking at at other.
Alternatives as well.
But but a lot of consumers, you know, really prefer to, you know, to to have a lid.
I don't know. I actually I walk around with a metal straw. I got my own little like reusable as washing them. That's what we do. Liliana, thank you so much. Liliana Esposito, chief Corporate Affairs and Sustainability Officer of at Wendy's on Zoom from Dublin, Ohio Chocolate Frosty's from Math Though this is Bloomberg.
This is Bloomberg Business. Wait inside from the reporters and editors who bring you America's most trusted business magazine, plus global business, finance and tech news. The Bloomberg Business This Week Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio jab Donald Gary.
You ready to talk about some airliners?
Yes, Matthew Miller by the day, Steve Miller band I had this tape. I had the cassette back in the day.
Did a break?
I mean probably eventually. I don't have it anymore because it's.
All right, We're going to talk about Airbus and Boeing, the rivalry. Nothing new, uh, and yet Arabus looking to tweak an existing plane laying out of course to really go after Boeing seven thirty seven. So let's get into this story. It's in the new issue current issue of Bloomberg Business Week, which is on newsstands, online at Bloomberg dot com, slash BusinessWeek, and of course on the Bloomberg terminal. Let's get to it. It's a story written by Bloomberg's
Julie Johnson and also Phillip. Thank you, sir Darth Phillip, thank you for the assists there.
Let's get to you Sid the I mean, we love Julie too.
We love them both.
Yes, they're both great reports. And we love Jewel.
We do.
Did you intro? Joel already? No?
Okay, but that's okay, you can do it is the editor of Booberg Business Week. He's here in studio along with the BusinessWeek Assistant Managing edit Jim Ellis is on Zoom in New Jersey.
We love Julie, we love said. We also love editors, Red Jim So yeah, editors today. So the Airbus bowing story, obviously, this is like a historic rivalry, right, and there's kind
of just two that make planes now airplanes. And you know, if you look at the share prices of these companies going back to twenty twenty, they were tight, and then all of a sudden it was sort of like Airbus took a commanding lead and there could be more problems ahead for Boeing with what Airbus might have in store, right, Jim right.
I mean, this is what's so interesting about this is that, you know, people have talked about Airbus finding a way to best Boeing for a long time, but you know, Boweing, because of the seven three seven, has basically been the
go to supplier for most of the world's airlines. What's happened, though, is the seven three seven had a you know, it's had a bad run, I mean the Max with its crashes, the grounding failure, you know, of getting the plane back up in China, it's given an opening for Airbus to come in and say, hey, guys, maybe what we could do is to stretch one of our planes, a small plane, a newer plane called the A to twenty. And if
that sounds not familiar, it's because it isn't us. The plane that's been a long time in Airbus is stable. This was the plane that Bombardier, the Canadian company, thought was going to be its ticket, It's meal ticket to becoming a big aircraft maker. It was a very good plane. The problem was that they were not cash rich enough to actually bring it to market in a big way, and so they sold the program to Airbus in twenty eighteen.
Airbus has been running it. But they say, now, let's stretch that plane out and make it the same size as basically these seven thirty seven and then offer it up as an alternative to seven thirty seven that is more modern because the seven thirty sevens you know, thirty forty year old program, and this is going to be new with new wings, new engines, and it can steal
business away and suddenly give Airbus a commanding lead. The issue is, you know, they think they can do that for not much money compared to a brand new plane. But there's plenty of risks there.
Okay, so wait, why why would you just take an existing plane and stretch it rather than you know, create something new.
Sound like just changing the buttons on a jacket, Jim, is it?
Yeah?
I mean there's a lot, But the big deal is the expense. I mean, the expense of developing a brand new plane, you know, sort of new on paper now could approach you know, eight ten billion dollars. The price of taking an existing plane, particularly if it's a fairly modern existing plane like the A to twenty and sort of you know, so tweaking it to be longer and maybe adding new wings to it to support the bigger
frame and and maybe an ew engine. You could probably do that at the producer level for about two two billion, three billion maybe and then get a little come on from the engine makers that might have to put in a billion apiece. Either way, you know, you're talking about a third of the cost to coming up with a brand new plane. But this plane would still have the modern avionics and the modern cockpits that you know has made Airbus basically a big player in this market.
And the A two twenty has a bathroom window.
You can't underestimate.
It's the only commercial plane with a bathroom window. So if that sounds weird to you, that's because it is no other plane.
Actually, I have flown on it relatively recently, and it is weird when you're in the bathroom and you're like, wow, I can look out the window right now.
I'm not weird, but good right.
I mean, it's those types of consumer you know, sort of the things that you know, consumers pick up on that's been really successful for that plane. People like the interior, people like the fact that the windows within the plane, regular windows seem bigger to consumers, and you know, so
the plane is very popular. It's been used by a lot of big airlines now like Delta France, you know, and so there is you know, there is a market out there if you could get a bigger plane, but air Bus is going to have to take a risk on putting that money up.
Jim, what I My question is how important is the plane, you know, the tube and the wings as opposed to the engines because a lot of these planes will use engines from Rolls Royce or engines from Pratt and Whitney or you know, I don't g ge okay, g still make stuff. Is how how important is the plane is the wing compared to the engine in terms of fuel efficiency, because that's what the main concern is for the for the airlines, right, fuel efficiency.
Every thing, Probably the engines the most important. And they're going to have to get the engine makers to you know, sort of play all to make this program work right now, you know sort of you know Pratt and and and and and and the other engine maker which is the joint venture, uh you know gans and and Saffron have a joint venture called CFM you right now, those are the ones that they would like to see both making
you know, engines for it. The issue is that, you know, you're you're asking people to you on the engine maker to make a billion dollar bet that you're going to sell enough of the planes to merit their investment. So it's not just you know, Airbus convincing itself that it wants to put that money up. It has to convinced engine makers to do it as well.
And Boeing just sits by idly doing nothing. Right, So I mean, what's what's happening on the flip side of this equation? Sorry for my sarcasm.
Now, Boeing's issue is that, uh, you know, Boeing's already said that they will not introduce a new plane this decade, and I think that by saying that that has sort of made a lot of people think, Aha, this is Airbus's moment. They can come in if they're going to
do anything. You know, this is the opportunity when they know they won't have something, you know, sort of there won't be a rejounder from from Boeing on it because Boeing has a lot of debt right now, It's had all sorts of operational problems and they still haven't worked through the sort of after Max, you know, problems that they have, and so this if you're going to do something, this is the time to do it, simply because they can't respond as aggressively as they might if they were
in a better financial position.
One of the things that struck me about this article, Jim, was the the A three twenty is obviously Airbus is very good at making those turns, out about fifty of them a month. Right now, it's only making about half a dozen of these two twenties, and then they're gonna have to lengthen it and just give us a sense of, like, you know, what what does it take to go from from making it at this scale to like the skill that they're potentially looking at.
The problem won't be making the plane simply because you know, they're very proficient at making planes and they have Bama.
By the way, isn't this I've been down to the factory. Don't they make this in Mobile?
They've got pieces of this made in different places because of a deal with the Canadian government. They have a finishing plant in Canada, they have I mean, so these things are truly international pieces of equipment. The problem is that you need to have a potential volume of these that allows you to have the plants operate at a level high enough to actually mean that the production costs for each individual model isn't more than you can actually
sell it. For That's why planes that you know, you sell a lot of, you know, like the A three eighty, the double decker, you can sell a lot of them. They never sold enough to actually make that a very profitable program because they didn't have the volumes up. So they made the plane well, but they just couldn't get the volume. And so that's what they think they can do with the two twenty simply because narrow planes or are single autplanes are the bread and butter of this business.
They are the bread and butter Boeing's earnings and of airbuses earnings. Airbus is danger though, is the A three twenty is a cash cow. It is a program that's been around for years and it's just churning out money. If they bring the A two twenty stretched up to the size of an A three twenty, they then start pulling money not just from Boeing but also from their own cash cow. So it's a very very you know,
sort of tricky thing they have to get right. What is the true demand on this airplane and is it big enough to you know, merit taking away from your cash cow and to stealing production space. So right from a plane that's already you know, churning out money.
And to that end, you know, which are what kind of airlines are going to be looking at this and comparing it to Boeing seven thirty seven if they're you know, if it's one or the other. Right, what what kind of airlines are we talking about here?
I think right now you're probably talking about the ones that are already big users of it, you know, Delta Air, France, Jet Blue. I mean, these are all good sizes for them, and narrow body is the bulk of the airline business. But you'll also probably get more European makers, you know, because it is air Bus. But also you know, something like some of the IAG units, which is the company that owns British Airways. I mean people like that have shown interest in a plane that has that distance and
that size. The issue is, you know, nobody wants to make a commitment on that and unless they think that
the manufacturer is going to go through with it. Now there's a big a couple of big air shows in the next few months, and that's going to be a lot of the buzz at both of those is behind the scenes talk between the manufacturer, you know, air Bus, the engine makers, and all the airlines that are there trying to see if they can scrape together enough business so they can go ahead and announce this plane so they can come out before you know, Boeing has an opportunity to say something.
So, you know, Jim, what's interesting is you talk about this window of opportunity for Airbus and that this is good timing since Boeing, you know, isn't planning anything in the near future. But you also or the story also includes that there is a chance that if they don't get it out soon, right, and that this plane's going to be flying in the early twenty thirties, it still could be kind of one uped by Boeing and Boeing's next offering.
Well, that's that's another one of the risks. The problem with airline programs is that even a program that's built on top of another one, like a stretch of this, is going to take some time to actually get up and running, particularly if you've got to develop a new engine and you can't just sort of sort of lop
onto an engine's already out there. I mean there's talk that you know, maybe an engine that could run on a seven thirty seven Max might be able to be sort of you know, jigger to work on this, but most likely you're going to end up with new engines that are going to require some time to develop. So if you can get all this done in three four years, yeah,
you're before Boeing can do anything. If you take years to make the decision to actually pull the trigger, then you're going to get back into that period when Boeing is saying it's willing to come back with a new program, And then who knows what that new program would be if it's a narrow body that goes head to head
on this. A lot of people have a lot of Boeing equipment, and a lot of them don't want to switch out because it means retraining cockpit crew, it means having different sort of it means spare parts are difficult. Lot of people like to keep it all in the family, right.
It actually the pricing conundrum here. It reminds me a little bit of Tesla, Right, Like you got this models Model Y, you have great success with those products, and then you bring out mass volume products that are you know, a fraction of the price. You flood the zone with them, and then suddenly it's like, you know, how many more s's and why and x's can you sell?
Right?
I think I said why earlier? Yeah, the sn X are the time. Yeah, but you have that S and that X problem. And then it's like, wait, you know, so you you could have this, you know, amazing plane in the A three eighty and yet you know your future might depend on something that doesn't look like that.
Well that's the case with h with Boeing as well, right, I mean they had the seven eighty seven, but everybody wants, as Jim was telling us, the single aisle narrow body plate.
It just comes back to the physics of that tube, right, like, how do you make the next plane? Let's just make the tube blonger, guys, and.
The fuel efficiency. I mean, ultimately, that's what's driving a lot of this. All right, Jim, thank you so much. Jim ellis assistant Managing editor at Bloomberg BusinessWeek on zoom in New Jersey Joe Weber here in studio. He's of course editor a Bloomberg Business week, the story in the new issue that's out online, on the Bloomberg and on newsstands. This is Bloomberg Radio.
Problem.
A journal.
No, how about you let me drive?
Oh no, no, no, no, all right please, I'll.
Wait.
I want to drive.
Good question good, this is good.
Drive to the globe to me? Well, jug it on Bloomberg Radio.
All right, everybody under eighteen minutes to go until we wrap up the Monday trading day.
Let's get to it.
Carol Master along with Matt Miller in our Bloomberg Interactive Broker Studio on YouTube, on Bloomberg Originals and with us right now is Alex Coffee Senior Trading Strategies at td Ameritrade, joining us on zoom from Chicago. Alex, good to have you here with Matt and myself. How are you and what do you make of the day's trade and really the more broader market environment right now?
Yeah? Thanks Carol, thanks for having me.
It's been kind of a boring day, kind of like watching pain drive, but sometimes boring is okay. It's going to be a pretty busy week, I think, once we get CPI and PPI later on.
Of course consumer sentiment as well.
But all things considered, I think a fairly straightforward day on sort of a minimal news headline day certainly can change any notice, though, what are you watching?
What are you seeing when you when you look at the regional banks? Is it all just trading action with not a lot of fundamental backing. Does it matter to the wider market?
I think it matters tremendously. I mean, I think it's right now.
It's almost a sentiment gauge, right, So we're seeing sort of the ebbs and flows of the uncertainty as it kind of picks up in both directions, and oftentimes it's sort of steering the market. On the days where the banking fears really start to ramp up, those have been the big red days. Fortunately the last few though, a lot of that fear started to dissipate as some of the worst of the contagion didn't ultimately materialize. But again, I mean, I don't see this as a story that's
necessarily over. I see this as one that's constantly kind of, you know, continue to transform and take us in different directions.
Hey, Alex, so what's kind of the retail trade on a name likeke PacWest, which was up thirty percent at its highs and now is just up about three percent. That's quite a switch in one day.
Yeah, no doubt.
I think that this is a situation that's fairly typical for a stock that's plummeted as much as this one has. I mean, absence of negative news is going to lead to, you know, somewhat of an optimistic trade.
But is the retail investor though, Is the retail investor in on this one?
Alex or No, Nothing that's stuck out tremendously. But I would say that anytime something that's moving as much as some of these regional banks have, there's gonna be interest, right. The volatility drives interest. But First Republic and some of the other names kind of working towards zero ultimately going into receivership going out, I think has scared some investors.
Are you watching the we We had the slews today and then we had the well we have coming up the Federal Reserves Financial Stability financial stability Report. Sorry, you know everyone is watching it today, but no one has ever watched the Federal Reserves Financial Stability Report before? So what do you think this tells us that we're all following?
We needs to pull up the kre either.
I never knew what sleuse was. I mean, I heard the summer Loan Officers survey, but yeah, yeah, is it.
Making an impact?
I think it is.
And I think the reason is everybody's trying to figure out, you know, why is the market pricing in something for interest rate policy that seems so different than what we hear from the Federal Reserve.
And we're looking for pieces to a puzzle to connect those two.
Not to say that one is right or one is wrong, but right now, based off what the Fed has told us, in words, the only way you can get to December lower rates, which is basically a certainty based off of the market.
Pricing, is something substantially changing.
Is that credit tightening, is that more instability in the banks, or is that a tremendous downturn in the economy.
I don't know. I don't know if we're.
Getting any of those things, but right now, to me, that's what the market has to be pricing in for that divergence to exist.
Hey, one of the reasons we love talk to you, Alex's we do get a feel of what retail investors are buying or selling. And you just just got your report in terms of what was going on in April. It's a backward looking report, but give us an idea of where investors were buying where they were selling.
Yeah, thanks iMX.
The Investor Movement Index did move up slightly three point seven two percent, three straight months of net buying of equities.
But some of the specific names that stuck out.
That I thought that were quite interesting is actually a move from the buying side.
Of course, Tesla finds itself there.
Obviously, stock struggled a little bit in April, but realty income and medical properties trust so some names getting some buying attention saw this as sort of contrarian. We've actually heard obviously some of the ramped up concerns around commercial real estate recently. Well, realty income of course, specializing in single tenant retail thanks seven to eleven, Thank Walgreens, some of those hybrid workforce environments that have disrupted commercial real
estate not really affecting that company. Of course, medical properties more like hospital So I thought it was contrarian. I thought it was somewhat opportunistic by the client base, especially given the context of the of the greater interest rate conversation that we were having.
You know, I was looking at the breakdown of the S and P and I thought, at first it looked bullish because they're buying consumer discretionary and they're selling the staples. But then I see commercial services is and they're selling, and they're selling i should say, the defensives, so utilities, industrials, healthcare, real estate all getting sold off. Then I saw though that they're buying communication services, which is I don't even know.
It's a terrible category.
It's a horrible category. But basically it's you know, the streamers to Warner Brothers, Netflix, Disney, and then Google as well. Are these like defensive stocks these days?
Well, actually it's funny too because they also throw in the telecom game there too, And those are actually the ones that we saw with buying activities.
So it's actually the Verizons and the.
AT and ts that actually struggled quite quite a lot in April post earnings for AT and T in particular,
and then Testlok Courses. Consumer discretionary, that's a name that it's pricing cuts have impact, that its margin's gone down, but it's pretty consistently a name that we see in the top traded be it buys or sells I actually saw this month in terms of the buying and selling is kind of a contrarian action by the Taameritrade client base, some of the ones that's stuck on the cell side, for example, Apple, Meta, Alphabet, Microsoft, All these names actually
did really well in the month. In the case of Meta and Microsoft in particular, these are names that have done really well this year in general.
Yeah, it's interesting. Despite everybody saying it's time to get out of the growth names, we hear that over and over again, and yet that's where investors have been piling into.
Yeah.
Final thoughts in terms of investors comfortable with this market, willing to take on some risk or not necessarily or it kind of feels like that they are. Based on what you're telling me, I.
Would say cautiously optimistic would be would be my takeaway here. We're seeing a modest improvement, you know, month over months for several straight months after the iMX botmed out in November and December of last year, but it's still moderately below based on how we kind of section out in it's percentiles. So I would say costly optimistic. Definitely some positive takeaways, but a long ways to go.
We're going to get back to where we won't work.
All right, We're gonna leave it there. Hey, Alex thik so much. Alex Coffee, Senior Trading Strategies of at TD Ameritrade on zoom from Chicago.
This is the Bloomberg Business Week Podcast, a little Apple, Spotify, and anywhere else you can get your podcast. Listen live weekday afternoons from three to six Eastern on Bloomberg dot com, the iHeartRadio app tune In, and the Bloomberg Business App. You can also watch us live every weekday on YouTube and always on the Bloomberg terminal alone