Smead Sees Fed, Markets 'Dichotomy'

You can also listen to our radio show at two pm Eastern Time on Bloomberg Radio or watch us on YouTube. Search Bloomberg Global News. You're listening to Bloomberg Business We've We've just got about eleven minutes, a little bit under eleven mids left in today's trading session. We've bounced around, but we definitely have Charlie mentioned him. We firmed up when it comes to the equity trade post that fed

announcement and j Pal presser yields. They went up a little bit, they're back down and they're just down as smidge as we look along the yel curve. Let's get right into all that and more with Cole Smed, President and Portfolio manager at Smead Capital Management. He joins us now on the phone from Phoenix, Arizona, Cole your reaction to what we heard from the f O m C and Fedhare Palace press conference just now? I J. Powell

reminds me of Kevin Bacon and Animal House. While he's yelling at everyone, all is well, all as well as chaos has ensuing on main Street, and eventually Kevin Bacon they show later in the scene that he's completely trampled, still saying all as well. And I think, Um, that's really the the you're saying. You don't think, I don't know. You go ask businesses, is all well, they would tell you, no, prices are up. Um, businesses are notably concerned about inflation

in the set, isn't. It's really strange. And there's people that are taking risk with their personal income and their their personal capital. Um think that's a massive risk, and the people that aren't taking risk with their personal capital don't. Well, that's quite a dichotomy. One thing that really stuck out to me was was what Powell actually thinks transitory means

and the definition of transitory. He's said that it doesn't it means not, it means it's something that doesn't leave a permanent mark, so not necessarily the prices will go back down, which is what I think a lot of people perhaps had in mind lumber. There's been a lot of commodities that have gotten has made that point that perhaps lumber notwithstanding, but you know, corect lumber, lumber has gone down. However, we're at the highest sustained falloff in

lumber ever. I mean, it's just we're off the charts in terms of where we are in lumber prices relative to the last thirty years. So, um, you know, we we this was the high back in eight teen on lumber prices, roughly speaking, Um, this was the high and that was the highest point we've ever seen really since ninety four. Inflation adjusted nine to four is bigger. But I just say that because you know, yes, lumber fall has fallen off. We're just at the highest heights we've

ever been on that commodity. So I think housing, by the way, is the poster child of inflation. Um, go back to deflation eight oh nine. What was the lead story? It was, how using deflation that's why we had deflation the US economy. Go back to the nineteen seventies new home builds, existing homebuilds. They did, they had more pricing power than cp I did. No words. My theory is that housing actually tells us more about the future than

cp I does. And by the way, just so everyone's on the same page, thirty of CPI is housing related and over that is tied to owner ownership of houses. And I think that's really where the CPI data is wrong. It's understating the pricing increases of housing because the SET is using or the the BLS is using surveys, they're

not using transaction based data. We could go on and on about this spot whether or not inflation is real, and I guess time will tell whether or not it is transitory if we start to see I don't know. I feel like Cole, it's safe to say that we don't have a true transparent picture quite yet. Because we have unprecedented stimulus thanks to the FED, thanks to the US government, thanks to a lot of things. Right now, we don't have people all completely back in the workforce.

We heard j p Will talk about that. I feel like it's very hard to really understand what's going on in the economy and the inflationary story until things start to settle down without all these uh kind of extra factors that are distorting some of the data points. And don't just I mean, don't you know, we're not going to know how bad or good things are until the future. That's a great part, it's all unknowable. UM. The beautiful part to your guys life in the media realms as

well as ours in the professional realm is UM. Security prices are a great, great way to arbitrate an unknown future. And so we just look at and and look at the opportunities we get in more asset intensive businesses like UM, home building, like the energy business, like mall rates where we think the benefits of the unknown future are greatly

underpriced UM. And that's that's you know, I could be completely wrong on interest rates and we can make great money and common stocks UM at a time that we just don't think that's going to be brought the true for most investors. So it's at to your point, Carol, this is such a fun industry in business to be in because the future is always unknown, right, and very entertaining.

I just think of take, you know, the last twenty years or some some of the different cycles we've seen in terms of booms and busts, right where something can go up to extraordinary levels and then of course either because of froth and too much money chasing too few assets. Of course, the you know, the bubble bursts, and we've seen that. I guess I just don't know yet, having seen lots of market cycles like you guys have, I'm just waiting to see how this this one pans out.

I'm not quite sure yet. Well, And I think one of the things that I don't think that you're you're not hearing the said talk about this at all because it's it's just it's hard to model. But what are demographics doing in our economy? For example, there have been some big changes in last year, just without talking prices.

You've had a group of millennials wake up and decide that houses are actually pretty awesome in the suburbs and use cars are pretty awesome as well, right after years of people saying huge leennials are never going to buy homes, they're never going to buy cars, and guess what I mean, they do? They did. And by the way, it just happens to be the biggest demographic going through the consumption years of the U s economy since the late sixties

and early seventies. It kind of sounds odd, right, but and that was the opposite of peril to your point. I mean, oh, five, we're building houses for no one. We had less gen xers, and what we're gonna do is build houses for no one that was there. Um, that was the opposite. That was the dull drums of demographics, and therefore the economy was greatly affected by it. All right, So where are you committing money? Your value? Guy? You're gonna like the value like is are you finding opportunities?

Finally we are? And and uh, that's just it's probably the most contentious thing that that we've been buying his energy, and we've been buying it the last year we went from we went from very few names. We continue to add more. We have a fourth name that we haven't disclosed yet in our thirteen f but that'll come up soon. Um. So the three that that you can see in our whole things would be Conico, Philips, Chevron, and Continental Resources. The oil business is being left for dead. It's incredible

economics on the CPI front. Everyone's looking through pricing pressures in it. Why shouldn't it be left because the industry is acting really rational. They're returning capital, they're not wasting it. That's so different. It's like oil people are not being oil people. But look at what's happening long term. In the auto industry, for example, Look what's happening. Every company is committing to net zero right now by you know, decades away. But you know you had Mercedes Bends last week.

Tens of billions of dollars committed this decade to electrification. Um, how come you're still optimistic on oil? Where is the energy? Uh? Where is the energy needs going to be filled? And I say that because we don't do nuclear in the United States. Are really in the developed world, Um, we don't do hydro power. We're getting rid of marginal hydropower, which, by the way, those two are the most green friendly things that are present and saw already. Um, from there

you go to much higher cost projects. So what we do know is we are going to higher cost energy forms. Surely, the question is how high? And if if green alternatives are adopted sooner, what it does It makes oil and gas more expensive because the market is effectively moving prices higher for energy needs. And that's just pure energy then from there you could arbitrate how much of that's combustion,

how much of that's electricity. But the policies that are being laid out is limiting supply of new investment for energy, and that is taking prices higher. No one thought we'd be at seventy plus w T I R. Brandt right now. And guess what we think we're going to hundred? Okay, alright, So give us a name, Give us a name that you that you'd be putting money to. Continental Resources with the stewardship of Harold Ham is one of the most

incredible risk word relationships we've ever seen. Um, we get like four barrels of oil per share and you know what, Uh, we love that business and and we're one of the large shareholders there and we couldn't be more pleased by the stewardship. Like I said earlier, what they're doing with their projects, what they're doing to invest um. There there is some people that are doing good things and there are some people that are stuck in a hole from

the problems the last few years. There will be consolidation. But Continental Resources in an ideal position right now. Uh. And is there just quickly five seconds ten seconds. A housing name that you like, uh d r Horden. I mean watching people worry about what's going on in Texas with their business. We're just we're just absolutely excited about the future in their business. But also the housing business. Land is a game. Land is a game. Who's got land?

Who can build houses? Good? Check, close, speed, present protfolio Maager, It's me Capital Management. They're fun beating just about all of its peers year to date as well as over the past five years. This is Bloomberg Business Week with Carol Masser and Bloomberg Quick Takes Tim Stinovic from Bloomberg Radio Well a slew of earnings crossing the Bloomberg have nothing going on. We have Facebook, we have four we have Qualcom, we have LAMB Research. But what we want

to focus on now is Facebook. John Orlickman is anchor at BNN Bloomberg's The Open, also a correspondent for CTV National News. He joins us now on the phone from Toronto. Shares in the after hours, John Elickman down more than while look close to four percent, they were down as

low as five percent. What has investors concerned is the outlook quote in the third and fourth quarters of one, we expect year over year total revenue growth rates to decelerate significantly on a sequential basis, as we lacked periods of increasingly strong growth. Is that what you think is

investors concerned right now? Yeah? Tim, I think you hit the nail on the head there, because as we came into earning season, it felt like we were expecting big numbers and we'll talk about just how big they were for Facebook during the second quarter. But immediately the company

comes out and discloses a couple of things. I mean, first of all, that they have seen a real surge in the business and the possibility that they can't necessarily have that same kind of growth as you go into the third and fourth quarter, coupled with them really making a point of highlighting changes in how the advertising world

online is working. On Facebook, quite frankly, has been at the center of the storm of a push by governments and regulators around the world to get away from those pefky trackers that have tracked you and me around the internet for years, um ad targeting tools that really have benefited the Facebook business. So they were up front about that. Investors immediately see that, and it takes their attention. I think Carol and Tim away from from the headline number,

which I think is still mind blowing. I know, Carroll, I'm found in like this broken record as they look at these numbers. Right, I always think maybe we just expect a little too much. I mean a little perspective, and I understand, but at some point, I mean, it's a huge company and then a lot of money. Well, this is the challenge. Now. We could have a conversation around the business of Facebook, some of the ethical lines here that I think a lot of governments and regulators

want to talk about. But for investors, the problem with all of that is if you really honed in on that, the reality is you would have left money on the table. I mean, we're now talking about revenue in this quarter over the last decade growing more than three thousand percent. And you know, I was thinking, like I love my historical bates and history, and it was it was literally around this time two years ago that we were spinning

in the Cambridge Analytica scandal. To so many people thought that would be the end of Facebook, right, John, You're so right to him, you know, we were really we started having a big conversation around the bust up, the break up, all the antitrust concerns. They came out with quarterly results. UM I want to say there was a similar sort of reaction to what was in front of us with the earnings, and stock ended up losing of

its value. And if you had sold and just walked away, you would have missed ultimately more than doubling in the shares. I mean, we came in and this is the problem with earning season so far this cycle, which is a lot of these stocks have been up up in a way, they've been trading around all time highs. Facebook is in

that boat. So even though they're down in the in the aftermarket for these legitimate reasons, let's not forget that this stock had been rocking and rolling in recent trading sessions, right down three and a quarter percent. Now it's up thirty six percent. That was at the end of the close today a year to date. UM, I do want to mention just some earnings crossing PayPal down about four point one percent here in the after hours. Uh, and they're seeing third quarter revenue six point one five to

six and a quarter billion dollars. The estimate out there is above that at about six point four five billion. Uh, the company saying second quarter net revenue was six and a quarter that was a little light. The estimate was six point to seven billion a just ADPs at buck fifteen. That's three cents better than what Wall Street was forecasting. It did reaffirm its full year revenue outlook and total payment volume for the second quarter three ten point nine

nine billion. That's above the estimate of two D ninety seven point zero eight billion. So I just wanted to put that out there and again that stock seeing some selling now down about four point seven percent the after hours. Hey, John, I wanted to get your thoughts on the metaverse. This is something that we know Mark Zuckerberg's obsessed. I'm obsessed. I think he's a member, a secret member of the metaverse, because he won't exactly tell me what it's all about.

But I think you know, but if we think about what Facebook has acquired in the past, right, it's acquired Instagram, it's acquired WhatsApp, it's acquired Oculus, and where it really hasn't performed is Oculus. And we know that one area that Mark Zuckerberg is really interested in is blending these digital and physical worlds and there are hundreds of job postings right now for metaverse related jobs. Is this the growth area for Facebook? If if growth declines or if

growth slow, as I should say on the family of Apps. Well, I think it's a great question, tim, And one thing this company has never done is sit around and wait for its bread and butter business too slow. And you know, I even think back to when the company went public. I mean, let's face it, they have not seen the kind of growth in the core Facebook platform that they want, and by Instagram is like the best thing they ever

did exactly. And um, you know, I don't want to get too far into the weeds for the audience here, but this week when Alphabet, the parent company Google, reported they're now breaking out the YouTube numbers, because at a certain point you kind of have to. I mean, YouTube generated seven billion in revenue in the last three months. On its own, it would be one of the largest

companies in tech. Same story for Instagram, it's still um under the bed, right, it's part of the overall Spacebook's not telling us exactly how much of the business is Instagram, but I think uneducated guests will tell you that a lot of the advertising growth is coming from the Instagram platform, and then we get to what Tim's talking about, which

is looked at these other avenues. I would make the argument, you know, I don't know if anyone listening has family or friends that that is UM toying around with VR doing anything with oculus. Slowly but surely, I mean, I don't think it had the impact that they might have thought initially, but slowly but surely more hardware is making its way into people's homes more more often than not. I mean, we're we're likely moving in that direction, and I think Facebook has a certain amount of patients to

wait to see how that plays out. I think the same you know, you guys just talked about PayPal, Like, let's not forget that. Um. Facebook is thinking a lot about that digital money cryptocurrency world. They've had starts and stops there too, but they're not going to sit around and they don't have to. They've got lots of resources

and lots of money. But until we see a lot more developing in terms of you know, what Wall Street looks at as material parts of the business, they're really just going to look at this as a digital advertising jugger. And I don't have direct comparisons to what's happening with Google, and I have to say, if you look at the Wall Street views coming into this year, they were pretty favorable on alphabet and and that that paid off in a big way. Facebook also has been, you know, gaining

ground in the stock market. But this might be a bit of a moment for pause that the company's straight out, coming out and talking about some of the challenges they might have short term and coming up with the same kind of numbers they saw. Well, I think you're come last. You guys are right to you know, you talked about earlier about all this tracking and what the impact is

on all of that. Facebook anticipating increasing ad targeting headwinds, saying growth to slow this year, So that's some of the reason why we're seeing some selling a Kurt Wagner saying, what's also unclear from the releases why the year of a year two year growth rate will be down in the second half. Is it's just iOS related or something deeper? He says, questions I will be hoping that will be answered on the call, John, what would you be asking

on the call? What do you want to know? Well, I think if they could answer some of those questions, it would be super helpful. UM. I still would really like if they could um share more details on Instagram. It would really be helpful for us to get a

sense on how that platform is doing. UM. We were kind of at a a point now where we've got a healthy number of publicly traded social media stocks between Facebook and Twitter, Pinterest, a Snapchat's parent company, and a lot of those companies have seen really strong digital ad growth. We saw that with Twitter, we saw it with Snapchat, and the biggest download um player on the planet for basically a year plus has been Byte Dance owned TikTok. And you know, at some point we'll probably talk more

about their move towards public market. Undoubtedly that is a threat to Facebook, and I'm really curious to watch that head on battle between call it Instagram and TikTok. They likely won't say too much about that, but I think anything they say about those factors that they are watching as possible headwinds is always just helpful for whether you're thinking about where the stock is going or even where the business is going. Yeah, if you think Instagram is

a time stuck, you haven't tried to TikTok. That algorithm. That algorithm is unbelievable. I call that a rabbit hole. You call nicely, it's it's you gotta h's something. Hey, John, I want to go back to something that you were talking about a little earlier, the idea of the tracking and the ad tracking and what Apple did in its latest version of its mobile operating system, the latest version of iOS. Is that an issue that investors should be

more worried about. Is Facebook warning enough about the implications of not being able to track users across different apps? Well, I think they'll have to focus on their messaging because to your point about Apple, Apple has seen an opportunity in the marketplace to market that very fact um, and you know that's that's a pretty worthy adversary. So I would I would say if you were Facebook, you you

want to be ready on the messaging around that. Um. We have now gotten used to Mark zucker We're being on Capitol Hill and facing a lot of questions around this. I think in terms of you know what you talked about earlier, Tim, when we were wondering about literally the future of the business, whether Facebook would be busted up, it just does not seem like there are enough teeth for that to happen right now, So you can make

the argument that they have done their job there. But at the end of the day, the end consumer is important. How they feel about the platform is very important too. Um. But you know it's as soon as we try to start talking about privacy and um, you know a lot of complicated issues. You know, a lot of people would fire right back at Apple as a company. Look at what's been happening in China these last weeks, and how how tied Apples. I was just gonna say, I bet

Facebook clad they're not in China. Just going to put that out there, Um, General Lokman, thank you as always, He's anchor being and Bloomberg's the open Christ Bondent for CTV National News. Facebook shares down three point five per cent, paypals down about seven point seven percent, forties up about two point four lots of ERNs, lots of earnings. Also more to come tomorrow, which I'm forgot about Amazon. We ain't done yet. Have a good night, Tim. Thanks for

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