A Deep Dive Into Markets, Tesla Earnings Preview

of charts that we use on television. UM and if you click on four go you'll see something I noticed earlier. Danny Burger pointed it out to me. The VIX has come back down to kind of the lows of the year, whereas the move index has shot up. Volatility and fixed income is um movies okay, exactly, And we've seen, you know, the sell off which has been pretty amazing to me. In the course of a month. We've gone from one one sixty handle. Right now, the ten year yield is

trading at one sixty four. But we've seen the short end of the curve um sell off even more sharply. Hans Olsen is with us right now chief investment officer at Fiduciary Trust Company, Hans. Great to have you on the program, Thanks so much for joining us. You you also have noticed this divergence. Um, you know, equities are sailing right along back up above on the SMP five hundred, whereas we've got this weird sell off and volatility in

fixed income. What's happening. Yeah, it seems as if there are you know, different parts of the market are are making bets that are hundred and eighty degrees uh, you know, toward one another. You know, the equity market seems to be telling us that everything is going to be fine. Don't worry about inflation. It's going to be transitory. It's all going to work out, don't worry about h you know,

the taper bond market not so much. If you look across matt If you look across the entire landscape of fixed income over the course of this month, it's down if it's struggled, in fact, over the course of the entire year. But it's especially noteworthy in October when the equity market has caught another wind and the bond market says hold on. This is worrisome and at the same

time the dollar is struggling as well. Well, Hans, I kind of you know, I'm an equity person, equity analyst by training, but I've always been told is follow the bond market. Um, what is this divirgence telling you here? Should we as equity investors be a little bit more nervous than maybe we are? Yeah? I do. I mean I think that what we're seeing as a reprieve in the in the concerns that the equity market had last month,

given the earnings. I mean, as you said earlier, you know, the earnings, the earnings flow over the last couple of days have been fantastic. You know Netflix this morning, last night, Uh, um by a gen Verizon? All good? Right, So it sort of steals the nerves of investors. But um, you know we're going to get We're going to get over the next month. Right. More and more central bankers five and them are going to talk about it today, Um,

their views on what a taper might look like. So when the when, the the the the concept at the taper starts to become a reality and we continue to get more pushed through on prices. Um, you know, I think there will be a reconsideration of where we stand. On the part of equities, there's a lot of I think price risk and equities right now. If if we start to have a reset in interest rates. Um, we've been concerned about. As you said, inflation is a transitory.

Everybody was talking about stag inflation last week at the beginning this week, although it seemed many people had very different definitions of stagflation. But all the concern has been about chips and chips really at the heart of it. I've heard less and less about COVID until you know this resurgence that we're seeing in the UK and now the US as well. Are are you worried about that as an investor that we're we don't really have our eye on the ball. He No, I think you know

from from the infections. I do think what we're seeing is that it's it's becoming this um increasingly a pandemic now of the unvaccinated right and and more and more people are getting vaccinated, unfortunately not at a rate that perhaps a lot of us would like. But I do think on the inflation front, I think we have to Matt look at sort of the sticky inflation versus non sticky inflation. If we look at sort of sticky inflation. Um, what we're finding is that we're back to levels that

we were prior to the pandemic. So you know, the amount of FED cuts it into two buckets, sticky and non sticky sticky stuff. It tends to be prices that don't um um. They don't move around a lot, right, so you know, rents um, auto registrations and the like. If they go up, they don't tend to come back down. Um. And if you look at it from that angle, and we're running close to three pc on a year of a year basis on that on the sticky inflation a little less so on on core sticky UM, the names

get a bit a bit comical. But what the reality is is that I think we are resetting and I'm not sure that we're pricing that even as we work through this next phase of the pandemic. And eventually, you know, this becomes more like a seasonal flu becaus it becomes

endemic rather than what it has been. Hans, we're getting into the teeth of earnings, UH this week, what do you really need to hear from Corporate America as you read these comments and listen to these conference calls what I need to hear for the to make me feel better about things. Well, I don't think that UM any sense that they can They can deal uh with the input costs rising the way they are, either either by being able to maintain their margins, UH maybe perhaps even

price rises in order to maintain those margins. Those would be the very good things, and that's what I would be looking for. I mean, without a doubt. I mean, the the the earnings expectations for this quarter, for this year, UM remain you know, very good on very solid revenue growth, and even though it's going to slow next year, it's still pretty solid. So I think there's reason to to

stick with equities at this point. But we're going to have to buckle up at some point here when when we start to get this policy pivot, which which eventually is going to happen. All right, Hans, great to get some time with you. Really appreciate your insight today. Hans Olsen is chief investment officer at Fiduciary Trust Company out of Boston. This is Bloomberg JT with our Bloomberg Business Flash, and he mentioned the VIX. We were just talking about

this point. But I can't believe how low it is, how sanguine investors are, or at least appear to be by that measure. Let's bringing Kara Murphy, she's chief investment officer at Castra Investment Management. And what does it mean to you, Kara that we see you know, bond selling off UM and the VIX at least signaling that there's very little concern in the equity markets. Yeah, and quite a difference from just a couple of weeks ago, right

where there was a lot of handwringing and consternation. And I think what you're seeing is this push pull um as we shift from a COVID economy to a post COVID economy. So I think we're still you know, the market is very much testing how equips, companies and the rest of the economy are to be able to manage this type of transition where we have a less aggressive FED, less supportive fiscal policy, and more normal levels of economic growth. And you know that there are there is still handwringing

about things like stagflation. Right we're seeing Google searches for the term skyrocket, so there are definitely concerns out there, but for now, risk assets seemed to be brushing off those concerns alright, Cat in the context of ricks risk assets in the equity markets, what are the sectors that you are looking at right now? Again, looks like the markets getting another tailwind here. Where are you spending your time? So, one one of the big concerns in equity markets is valuations.

You have a lot of great things going for risk assets UM in terms of, you know, even though you have a descellering, decelerating FED support, you still do have a very committed, a combinative monetary and fiscal policy. You have some of the best free cash flow generation ever, really strong balance sheets. But then when you get to valuation, that's the one kind of chink in the armor of equities right here. So I think what that's telling us is that forward returns are going to be more muted

than what we've seen in the recent past. And because of that, we really favor areas that have that you know, profile of the really strong cash flow generation UM. Areas where you can find more quality as opposed to UM either you know, UH, deep value plays where you're looking for um A rebound, or areas where you might be relying on extraordinary levels of continued growth we would favor

those companies that have high quality. What about UM I think about the financials a lot, and how important it is that they get the curve, that they had the curve in the right place their rates higher. Are you betting that rates are going to rise or is it

not worth it to place that bet right now? So financials definitely need a certain level of interest rate in order to be able to earn money, but then they also need a spread, and so we've had a bit of a flattening of the curve which makes it sometimes more more difficult for a lot of financials to be

able to earn money. So I think there there is some continuing to pick up in economic activity and demand for loans, which is certainly supportive, but they're probably not going to have that really steep curve to be able to ride. Karen, I'm gonna beat my colleague Matt to the question here crypto. We've got bitcoin all time higher over six per coin. How do you guys think about

the crypto space? So, you know, as a practitioner who's focused on building portfolios for clients, it's very hard to look at crypto and find a strong investment case, only because you know, we don't have near the history, we don't have the statistics, we don't have the sort of infrastructure around crypto that we do with more traditional asset classes. Now, that doesn't mean that it won't go up and that it won't you be very a meaningful change and how

the monetary system works. Um. So you know, I'm just viewing it very much as a speculative bet, and I caution clients all the time to make sure that if you want to be part of that story, make sure it's a very small part of your overall allocation and you're not bet in the farm on it. I mean I've been I've been attracted to bitcoin in the community for over a decade now, but even to me, it's nuts to see this this process. It is heartburn inducing. Yes,

it definitely keeps me awake at night. Um not owning more of it. I want to just quickly ask about infrastructure. We're getting closer and closer to a bill. How close our markets paying really close attention to what's going on in Washington or do they not expect much progress? I think the infrastructure bill is going to be a bit of a whiff, at least when it comes to the market. It's not that it's not important for you know, those

areas where they're making the investment. But what we've seen in the past when this has kind of come to a head, the market has really looked through it. And it's really because even though the numbers associated with the infrastructure bill seem enormous and nominal terms, when you look at it overall in terms of its relationship to like g d P or anything like that, it's still fairly small.

Now it can have an impact on some individual companies who might be able to, you know, have plays associate with that type of spending for the market overall, though, I don't think it's going to be a big driver. Karen, thank you so much for joining us. We really appreciate you taking the time and sharing your thoughts today. Kara Murphy, chief investment officer for or Kestra Investment Management. Now I

want to get over to r J. Gallois. Paul said he's joining US senior portfolio manager, head of the Municipal Bond Group at Federated Hermes. They have um about six hundred and forty six billion dollars of assets under management, so no big deal. R J UM I was. I had lunch today with a big infrastructure guy normally in the US, and you told me it's going to be decided this week. What we get from Congress. What are

your expectations. Well, we're hopeful that despite the razor thin margins that the Democrats possess and in the House and certainly in the Senate, that that they can come up with something to have about bipartisan agreement that's waiting to be signed. Uh. And and now sort of a bargaining chip for the Old Back Better Agenda, you know, which is overwhelmingly social spending oriented. Uh. It was discouraging to

see how complicated it got within the Democratic Party. But all the coverage that you're seeing now is is signed promptimism that we'll get infrastructure spending and we'll get some fiscal spending as well. It won't be anything like the Cares actor or the American Rescue Plan. It's not COVID oriented. It's longer term, so they boon to the economy from that will be spread out over ten years. But nevertheless supportive of growth, obviously concerned about taxes, are going to

raise taxes, um. The question is how much on corporate corporations and individuals. So we'll see. Certainly meetings have reflected some expectation of tax increases for a while, and I think we're going to get some. The question is the degree, So you know our j Should I be surprised at all when I look at the tenure? Yes, it's up a little bit from where we had been worked at

one point six. But boy, with all the talk of tapering and you know, starting presumably next month, and then interest rates rising beginning mid next year, should I be surprised that rates aren't even higher? Well, we've been cautiously short duration in our taxable and tax exempt fixed income UM all year. And if you step back and look on the calendar year the ten your treasury is up

about seventy two basis points. We have that period you call it the summer months generally where the delta variants uh really took the narrative away from the idea of economic recovery. Um, it seems like we're turning the page on the delta variant cautiously, certainly in some of them more heavily afflicted regions of the country, UM, in the South, for example. Uh. So the hope is that that that's

narrative of economic recovery. COVID has evolved, but it's nowhere near the affliction that it once was from an economic standpoint or a public health standpoint. UM. And that the FED can began a very slow says towards normalizing, starting first with tapering. That's still there, UM. And I think the bond market UM took a bit of a divergence there for a while, and now we're back on that

same agenda. In my mind, if you see the tenure Treasury finished this calendar year around one seventy, that's where we've been for many months. UM. If you talk to me back in March, I think we said we'll probably end up around two. Along the way, we took another route when sharply lower at one twelve at one point

intra day back in August, I think it was. But the challenges of them are not the challenges now in terms of uh, you know, the longer term fed UM moves and things like the terminal rate, what are your what are your forecasts? You took the words out of my mouth. I was gonna say, we probably should be talking about what level of nominal interest rates can the

the Fed actually reach. UM. That's a huge it across that you occurve obviously, UM, if you imagine term premiums over time might eventually revert back to fairly low levels, low positive levels, which is more normal when central banks aren't expanding their balance sheets. That terminal FED funds rate then holds huge sway over setting bond prices as we look out in the medium term, certainly in the long term, and the FED still has it a two and a half.

I think that the inflation dynamic UM has been has been troublesome, certainly according to the Fed's view. UM, we felt that the FED was too optimistic on the transitory approach, that in fact inflation was was boiling and was going to be more challenging. So at this point I wouldn't be surprised if the Fed gets forced into tightening a little bit more than is in the market right now. The question is does that just short of shift forward monetary restraint in to say three or two UM, and

in doing so, your terminal rate doesn't change. Really that the FED probably has it roughly right. You know, they have a lot of economists working on this, But I would think that the terminal rate is going to be somewhere in the low two handles, probably a little south of where the FED really is. UM. I don't believe the world fundamentally is going to grow stronger because of

everything that's gone on in the last two years. UM. We still have an aging workforce, especially in the developed countries. Technologies a boon and productivity could be helpful. That could push terminal rates up a little bit, But I don't think it's migrated sharply one way or the other because of COVID or any of the changes that this challenge has presented to us. Hey, r J, thank you so much for joining us. We always appreciate getting your perspective.

R J. Gallo, Senior Portfolio Managery is also ahead of the indmissible bond group that federated Hermes based in steel Town, US, A Pittsburgh, Pennsylvania boy. When you go out there as a sell side, animals that is the number one meaning to get They've got sixty billion dollars in assets under management. Looking at the shares of Tesla, that's how you pronounce it, Matt, Tesla.

That's how Ela Musk pronounces it. UM. Looking at the stock, it's kind of flat today, up about twenty two year today it's a little bit better than the SMP got a market cap of eight hundred and sixties six billion dollars. The report numbers air for the clothes Today, let's get a preview with Day Equity Markets reporter for Bloomberg News joining us on the phone. Esha, you know what are you looking at here? Is it's still units and unit profitability?

What are you gonna be looking for? Him? Thanks for having me? Yeah, some. I think the top things to look out for Tesla ownings today is margins, how profitable

they were selling cars? Any update and how can what kind of capacity they are expecting to have on their um Austin and Berlin plants that are still being um you know, being developed, anything any kind of detail they can tell us about the supply chain troubles that the entire automotive industry facing and essentially how Tesla is being able to navigate those troubles so much better than the traditional car makers of the world, like the g MS and at the four Is that um you only I

mean there must be something else that plays into the stock price. I'm looking at my comp screen right now. I love to run the comp function um, just because it gives me a steady five year period to look at everything. Put Tesla up against Apple, Netflix, Microsoft, Google, Facebook. I mean, Tesla destroys all of those other companies in terms of its five year price growth. Why what what is it? That's a great question. It's a really dollar question,

isn't it. Um. So what investors are really betting on Testra here is that this you know, this automotive industry that is going undergoing a transformation at this point, and which is like a really at the nacent stage of you know, all gus driven cars will eventually be being replaced, right, electric cards, and people betting on those crazy valuations are really hoping that Tesla will be at the forefront of that huge market, right, and that they think actually justifies

these valuations more than you know, you know, we have seen a really bullish different vestor Kathy would of course see that, you know, three thousand dollars for share for Tesla. It's just for basics, it can actually become more than that. So you know, that is essentially what we're looking at here. Tesla kind of really leading and trillblazing of course this transformation and also becoming the market leader in the future

in electric cards. What is the company saying these days and what are you're hearing from the marketplace about the competitive landscape Because obviously they were essentially a monopoly in this EV business, but now we've seen both the big automakers VW, GM, Ford and all the others really make some big, big commitments to their EV future. How do people think about the competitive landscape? Uh, yeah, that's a

great question. So, um, you know, we will really see the competitive cars kind of rollout and hit the market starting next year. That's when they're the big daves will actually start, um you know, as as anything, as with anything in Tessler, this this is also a like a battleground for bulls and there they're to kind of du

get out. Some say that Tesla is going to lose its edge as you know, especially as like more um affordably priced evies hit the market, because Tusla has promised us a twenty five dollar evy, but we haven't seen that yet. We haven't heard a lot about those plants and where that is at this point. So as more affordable evies come out and more, um you know, we see the charging station networks becoming more eubiquatives almost as

like gas stations. That's when the adoption will pick up, and Tesla will definitely see some of its market share eroding there itself. Of course, hasn't spoken a lot about the competitive landscape. We haven't set much much headed to being made by any of the startups yet in that in that sense that's list has a headway. But you know, we will really see what the tradition as the legacy that the auto giants actually can't do with this satting

next year. Alright, thanks so much for joining us. It's something that obviously we're all going to be following very closely. Is gonna be on this call, mat because the Adam Jonas note that he could be the next or the first trillionaire, I thought, I laughed at first, thinking it was ridiculous, but um, he's actually not that far off already, right, he's already got a quarter of a trillion dollars. And Jonas point was that um SpaceX could drive him too

levels that no one has ever reached before. Escha Day is an equity market reporter for us here at Bloomberg News, joining us to preview the Tesla earnings which come out today after the bell um the stock really has been the best performer of the past five years of any of the major tech companies. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews of Apple Podcasts, or whatever podcast platform you prefer. I'm

Matt Miller. I'm on Twitter at Matt Miller three, pet On Ball Sweeney, I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.