Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside my co host Matt Miller.
Every business day we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moven news.
Find the Bloomberg Markets Podcast on Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. Let's bring in some smart people here to talk rage, to talk banks, to talk to you know, where things are going here, Ira Jersey, He's a chief EOS interest rates strategist. He's phoning it in and I love that about him. From somewhere in Jersey, Herman Chan in the
Bloomberg Interactive Brooker's studio. So, Ira, you know, I typed in FED go into my terminal, and I see we got a FED meeting on May third, give us a preview.
Yeah.
So, after today's GDP report, which showed, you know, slightly higher than expected inflation data, I think that that Wednesday's FED is definitely gonna Hi. I think that that's almost a gift. And I think the question now is under
what circumstances might they go further? Because we still have some of these concerns, and I'm sure we've talked about this with Herman about credit potentially starting to contract in a pretty meaningful way and that could have serious effects on the economy in the second half of the year and going into twenty four. So I do suspect that
this might be the last hike. It's not a given that'll be the last hike, but I do think that the FED is much closer to being done than they are to continue hiking.
So, you know, hermit hanging.
Can I correct myself because I was far off the average US home price and immediately got a couple of
listener emails. Oh good, Okay, But so I did actually put it into being and Bing tells me that the average US home price varies depending on the source and the type of measurement used, but the medium home median home sales price, which is the middle point of all transactions, is reported to be between three hundred and twenty one thousand and four hundred and forty thousand dollars as of twenty two.
And then and then they gave me.
Four sources that they used, which is I love this new chat search function.
It's I mean, I just think it's cool.
Because they give you pretty decent answers and then they source so so I can dig in if I want to know. But yeah, so between three twenty and four forty three seventy it's still far lower than sixteen million. Yes, it's right, it is. So I guess our good friends on hampsons are not necessary. Let me let me ask Herman Chance. So, Herman, how were these mortgage products? First of all, thank you for giving us some of your time.
I know how in demand you are. Herman Chand covers regional banks for us at Bloomberg Intelligence Inteligence and is now the most famous person in the building. What what were the mortgage products? I know I flubbed that as well, But was it you get interest only rate for ten years and then you trip into a normal thirty year fixed mortgage.
Usually it's the io period. It's just only period either five years or ten years, and then you wouldn't go to a normal interest rate. You would refinance that loan again and then do another loan, maybe the same sort of product, but then start the start the interest only period all over again.
All right, So Herman, just looking at these banks, Paul, did you get that kind of rate? When you bought your I did not your lat Jersey state on the Jersey Shore, No I did. I did not. Unfortunately, apparently so Herman, I'm done with FRC. I'm done.
I mean, dude, Ben Emmon said said out a note last night or two nights ago, saying that FA flight is now a huge problem for them.
So I think, what flight financial advisor flight?
So basically they lost one hundred billion dollars of assets in Q one and then they said in their call in which they took no Q and a deposit, flight was only one point seven percent in April. So I thought, oh,
that's right, that's tapering down to nothing. But I think after the huge stock crash two days ago, a lot of financial advisors or those who are still left, said listen, I'm gonna take all my clients, all their assets, and we're going to Morgan Stanley, We're going to JP Morgan, We're going to Goldmansax.
They're leaving.
That's the risk that all the productive folks at the Biggs now try to find greener pastures. The earnings released earlier in the week had mentioned that of the financial advisors that had left prior to earnings, they represented less than twenty percent of assets in their management, but you can presume that that number is only growing by the day.
I'm talking soccer with you. I have had enough of you two. I mean, we're gonna have a fed on, you know, May third, and I'll raise twenty five basis points and we'll get you then, to read the tea leaves so man City for one over arsenal John Farrell's telling me I had to make time on my day yesterday to watch that. Of course I did not. What did you take away?
I actually have not seen that. I tried to avoid watching Manchester City.
Really why is that?
You know, evil empire kind of stuff? The because I support a team that that is their arch enemy.
Who do you support? Who's your team?
So?
Why support Afton Villa in the Premier League?
But okay, now, why do you now, as an ugly American, how do we pick teams to follow?
Like?
How did you pick Aston Villa? I couldn't pick that.
I have a well, I had a close connection. So I did a postgraduate degree at the University of Birmingham in the Midlands of England, and Afton Villa was the closest Premier League team to where I was so so this was back in nineteen ninety three, ninety four, and when I was there, we you know, I went to like eight or nine matches, and so I just became a Villa supporter. People would say like, hey, Liverpool's come into town, let's go to Villa Park to watch a match.
And I just wanted so many matches. I became a supporter.
That's how it happens. Man. Yeah, very cool, the ugly American in England. I actually heard last night.
A very cool interview Carol Masser had on Alexis Ohanian. I don't think that's too far off the beaten bank rates path. But Alexis o'hanian, who of course made his money I think originally from Reddit, but he's super rich from other stuff. Married to married Divinus william Serena Serena Williams.
Sorry.
He he bought women's soccer team in Los Angeles, Angel City.
I think or went in to start it right, and he was saying the coolest the coolest part of what he was saying, I should say, is that he didn't do it because now he has a wife and a daughter, and all of a sudden, like he realizes the importance of equity equality, gender equality, but because he looked at their Twitter following and the deals they were getting as individual players, the popularity of these women, So many people are interested in what they had to say and are
paying money for their the goods that they're selling. And he said the collective value of the team was far less than even one player. Yeah, you know, interesting. Yeah for him, he said, it's a huge business opportunity. And he also bought a little piece for his now five year old daughter. She's the youngest sports own owner in America.
All Right, I were real quick third thirty seconds, twenty five basis points on the third. Are we done then?
Yeah?
I think we very well. Maybe, but obviously, if we keep on getting inflation data that creeps higher and higher, it's possible that they go another twenty five in June. But I think after that that they'll be done because the Fed is worried about going too far and they don't want to plunge the economy into a recession.
All right, Ira Jersey, he's our guy on the rates. I mean, we'll talk to him next week. Of course, we'll see what this Federal Reserve is going to do again. Twenty five basis points kind of priced in IRA Jersey, Chief US and straight strategist. Thank you so much, Herman Chan in the studio. This man does not mail it in,
he does not phone it in. He's at his post every day and he's been very widely needed here over the past month and a half as we try to navigate some of the turmoil, some of the stress in the banking system, particularly on some of these regional banks. And we also have the credit Swiss ubs thing, so there's been some challenges there in the banking space and that's spoop the market a little bit. So we're appreciative of getting Herman's expertise.
You're listening to the Ken's Our Line program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot com, the iHeartRadio app and the Bloomberg Business App, or listen on demand wherever you get your podcasts.
All right, let's be honest, folks. Bond Guy screwed up bad last year. I mean, double digit declients everywhere across the fixed income space. But they're making up for it a little bit here. In twenty twenty three, the Bloomberg u US Aggregatortal return value unheedged index whatever that is, is up three point four to six percent year to date, so that's pretty good. So let's bring in George Bori.
He's a chief investment strategist covering fixed income space for all Spring Global Advisors, who are located just outside of Lovely Milwaukee, Wisconsin, but he's based here in New York. He joins us here in our Bloomberg Interactive Broker Study. We appreciate you coming in, George. You get a gold star for showing up and not phoning it in. Talk to us about the difference between this year to date and what you guys had to do with last year.
Yeah, well, good morning, thanks for having me on the show.
We're a very different.
Point in the economic cycle. You know, the Fed's obviously much more advanced in terms of rate tightening, and although we continue to see, you know, some ongoing inflation pressures. What we like to say is, you know, inflation's off the boil, but it's still still pretty hot and coming down.
So you need it to come down.
So you think, then we're set up for one more hike and then hold. I mean that's pretty much consensus. But if we have financial stability, assuming we don't have a banking industry and crisis. I can't imagine why the Fed would hold at you know, still between five and six percent of sticky inflation.
Now today's data makes it tricky, and you know, I think the bias is to move to a pause, but you know, they don't have the all clear. They certainly don't have the cover to do it without some risk. And so you know, yes, raising rates one more time certainly makes sense. You know, we need to see in
FED funds rate above the level of core inflation. At that point, you know, the Fed can be a little bit more disciplined, but we're simply not there yet, and with core inflation showing some signs of moving up, that may keep pressure on them.
Yeah, we're at four point nine percent.
The core PCEE quarter of a quarter came in at four point nine percent today, so we were looking for four point seven percent. Yeah, that's going the wrong direction essentially.
Yeah, all right, So George, I'm not sure if you can't keep a job or you just like working all over Wall Street JP Morgan Ubs Securities, Wells Farger. You've been doing is for a long time. Where are you, guys? Given where we are in cycle. Given where we are with the FED, where are you guys at offspring thinking about the best opportunities at fixed income right here?
So these were all tactical moves, just to be very self initiated, not firm initiated, at least not yet.
So hopefully that continues.
But I think if I've learned anything over thirty plus years, you know, as a fixed income investor, income matters. You know, that's ninety plus percent of your return as you move through time, and your best forward looking indicator or predictor of returns is just your simple starting yield. So beginning of the year, yields are pretty high. You know, that was sort of a good entry point from our perspective
to certainly make a meaningful move into fixed income. You know, as the year has unfolded, you know, with all these sort of conflicting economic signals and really sort of the reminder that yields are relatively high, adding duration to your portfolio is effectively the kicker. That's really where you're gonna get a little bit of extra return in the portfolio. And we've seen that so far year to date. As you mentioned the ag up, you know, let's call it
three and a half percent year to date. That's pretty good by bond in bond terms for three months or four months of effort. And so to the extent, you know, expectations are that number could probably double over the course of the year. You know, seven percent return doesn't necessarily earn back everything from last year, but gets you, you know,
almost half of what we love. And so as we move through time, you want to compound at the highest rate possible, and we're doing that basically in just about every strategy that we manage.
What's on your dashboard, George, when you look especially at you know, the try to engage the health of corporate America or you know, corporates globally, it seems from looking at spreads to.
Me like they're pretty healthy.
But if I look at other interest rate indications, we're headed for a recession. So how do you what's the data that you look at every morning to do your job?
Yeah, I mean, I think what's unique about this cycle? You know, it's not a great surprise, but inflation is both you know, it's it's a it's a double edged sword. You know, it generates a lot of nominal income for both individuals as well as companies, and that nominal income
is ultimately used to pay back debts. So when we see companies that have good, solid balance sheets, ones that are pretty well funded, not a lot of immediate borrowing needs, and relatively low cost of debt, they're in a good position to kind of weather a lot of economic volatility. And that's really what we're seeing, and that kind of
moves up and down the rating spectrum. That's not just you know, the very highly rated triple A rated of the few that exist companies in the world, but that can kind of go all the way down kind of the credit spectrum. And so what do I worry about. I worry about companies and individuals that are attached to floating rate debt costs because they've gone up, they've gone up a lot, they've gone up quickly, and they are now sort of working through and we're seeing it in earnings.
You're seeing you're seeing margin pressure. You're seeing now that a reduction in capital spending and all that has to do with the cost of capital. So that is working its way through the system. But we don't have the same kind of pressures in say one specific sector like we had in eight or even in the dot com bubble back in two thousand and so this is kind of a long drawn out exercise, and for us as bond investors, you know, sort of that quality that that
company analysis becomes absolutely critical. We can build good portfolios with good companies that have very strong predictive paying power, and that's where you sort of grab today's yields. You capture it, and you continuously compound it through time. If you can avoid permanent impairment, you win.
George, I know you've got a lot of experience in a high yield space here. You know, if I'm staring down our recession, do I allocate capital incremental capital to the highild space or might just too worried about again the potential recession and credit quality and all that kind of stuff.
I think that the basic, you know, sort of assumption is avoid high yield going into a recession. You know, it's a good rule of thumb, but it's not exclusive. And as I mentioned, you know, what's unique about this cycle is we have a wide range of companies that have very very well funded capital structures that includes high yield companies. I mean, if you just simply avoided the lowest and riskiest sectors of the market like triple c's that that you've already taken out, like the line's share
of default risk in the universe. You haven't eliminated it, but you've taken most of it out. And so just moving a little bit up in quality and focusing on say triple b's, double B single bee companies. Those are the ones that are kind of hovering between investment create and high yield companies that are paying six, seven, sometimes eight percent yields and have good earnings transparency as well
as a well funded capital structure. To us that those are very attractive opportunities, So our messages don't throw the baby out with the bathwater, you know, be willing to sort of look for those high quality companies regardless of their rating, and then stick with them as you move through time. So, you know, we like that segment of
the market. We like it in the front end of the curve, so shorter duration, so constrain some of that interest rate sensitivity and sort of capture that sort of seven percent running yield and just try and compound it and use that income to fund other parts of your strategy.
All right, So I mean, in your high yield models, are your analysts what are they kind of modeling in here for top line? I know it varies by industry, but I mean, are you guys, is your base case a recession model that you guys have had in your back pocket for several years? Are you bringing that recession model out? And that's my base case.
Our base case is no growth. Okay, so high nominal growth, zero real growth. In that world, companies still make money. It's just in real terms, who has pricing power, who's keeping pace with sort of the economic backdrop that we're seeing, and so we're sort of seeming to be sliding in that direction. Today's data tells us that we're in a what we'd call kind of a slow flation world. You know, maybe we're sliding towards stagflation, but we're not there yet.
But in a world of slow flation, there are companies that are keeping pace with kind of pricing pressures. They're maintaining their margins and for the most part, you know, as a debt person, they don't have big borrowing needs.
They might have a lot of.
Debt to begin with, but they don't have a lot of borrowing needs going forward. So from that perspective, we can find good companies, and you know those are that's what's in our high yield bond fund, that's what's in our short duration high income fund. That's in kind of our more aggressive fixed income strategies. And you know, those prices move around, but the paying ability of those companies is pretty strong.
All right, George, thanks so much for coming in. I really appreciated George Borri. He is the chief investment strategist covering all the fixed income stuff for Allspring Global Investments.
Here.
We appreciate them coming into the Bloomberg and Actor Broker studio. Just looking at the yield right here in the treasury market, we've got the ten year treasury up about seven basis points three point five to one percent, a little bit more action there, and movement in the two year space. We got it up ten basis points four point zero five percent on your two years, So getting paid the kind of weight there in that short term paper that kind of gets your attention.
You're listening to the Take kens Are program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa play Bloomberg eleven thirty.
We got Mara Goldstein. She's a biotech analyst at miss Zuho and she joined us share Mara, thanks so much for joining us. You really appreciate it. I know you upgraded recently. Hang on, what go Mayra?
Before we get to the world of drugs, we got to talk about your resume.
Go Alex Brown. I love Alex Brown.
Yeah, yeah, yeah, you're publicly outing me. But yeah, Alex Brown.
Was that in Baltimore? Or is that was that in Baltimore, New York?
So I was here in New York, based in Baltimore.
All right, Yeah, Drew Marcus was my arch competitor at alex bid.
Yeah.
Now we're good, good buddies. It brings me back to my days at Tucker Anthony. Yeah, go back, back back. I know you upgraded Merk recently. What's the call there? I mean this is a big company. I forgot it's so big, two hundred and eighty billion of market cap. The stocks kind of unchanged here to date. What's your call here on MERK?
So we upgraded Mark at the end of last year, and it was based on our view that so Tattertep, which is a product that the company acquired to the acquisition of accelera On, would be a great product. We saw the data, the Phase three data earlier this year. It looks like it's it looks like it's going to be a fabulous product. That's for an indication called pulmonary arterial hypertension. It's a rare disease and the exists in the cardiovascular space, but opportunity to expand out from there.
And then secondarily on the basis of the potential for the company to offset some of the key trudea loss of exclusivity that could happen later in the decade with a subcutaneous formulation, and that process is underway right now. Those clinical trials are underway. We only converted part of key Trudi sales to the subcutaneous formulation in our model
in the app years, so there's definitely flexibility there. And in general, our belief that the company would continue to acquire and develop and have solutions, maybe not exactly dollar for dollar, but that's already in the stock. For the loss of the key Tete exclusivity, I mean Kytuta is a fabulous, you know, oncology product. It's going to be twenty you know, it's twenty billion dollars. So it's a big you know, it's a it's a huge concentration of revenue for the company.
Twenty billion dollars annually.
That'll be a twenty billion dollar product.
Unbelievable. Maybe they are charging too much for this stuff. I mean, how much did they pay for it?
So Key Trudah came to the company shoot the acquisition of sharing Plow, and it was something that sharing Plow wasn't working on. Mark found it in the sharing Plow sort of back office, if you will, to sort in the back of the lab and developed it and it is approved in you know, many many cancer indications. It was originally approved in late stage disease. The company is
migrating it to use an earlier state disease. Some of the biggest indications, or where most of the sales get generated from, are things like non small cell lung cancer, which is a very deadly disease and really allowing patients
truly to live longer lives. I mean, it's you know, it has it's part of the handful of drugs the im you know, oncology drugs that work by basically redirecting the immune system in cancer, and it's been transformational for a lot of late stage disease and now they're moving it earlier. Just was approved in breast cancer for an
earlier form disease. So you know, there's a there's a long way to go here, and they could continue to see additional indications, additional combinations, things like that.
You know, every morning, I come in marat three and I start looking on the Bloomberg I type in most space U four to see the big movers in the market, in the pre market, and there's always a company that's up or down, like eighty ninety percent, it's inevitably a biotech that either yeah.
Is going to get bought or didn't get bought.
What are these big companies looking for when they, you know, screen for these little biotechs that may have a one hit wonder.
Sure, I mean, companies acquire for a variety of reasons, right, and so there are some reasons that aren't particularly connected to the company's immediate top line. Right, there's some kind of technology that they're interested in. Maybe there's also something that we don't readily see like an intellectual property estate
that they want access to. But the other piece of it, and this is where you see Merk doing acquiring and variety of other large cat pharmists, is either a product that could be meaningful me and fills a hole in their own portfolio, or something that can be a companion
product that can also help develop the portfolio. Like if you look at Merk for a second, they have a joint venture with Astrosenica and they market to Astrosenica cancer drugs alongside their own cancer portfolio, and through that process they've been able to expand not just those drugs, but but Kei truda because they've done combination trials and things
like that. And so but if you look, I think more to your point at merged acquisitions over the course of the past you know, year two years they've bought accele on, which had a product in phase three, so you know reasonably the risk, you know the mechanism works at that point, you don't know if the trial is
going to work, but you know the mechanism works. You know, you have a sense of what the activity is that can really come into a therapeutic area and be meaningful, or a company like a Mago, which Merk just recently closed the acquisition on that company, and that's a pre revenue company and has a really interesting technology developing a drug in an area where Merk does not have, where work does not have a huge presence in and it's a it's a new and it's a new drug with
a new mechanism. So there's a variety of reasons why companies do these acquisitions. Sometimes they work, sometimes they don't.
Hey, Marik, just kind of like thirty seconds left here, you know. I always joke that my next life I want to come back as a healthcare M and a banker. Should we expect more healthcare M and a going forward?
I think there's a couple of things. I think absolutely companies will continue. There is a patent cliff, you know, coming in this decade, so companies will continue to acquire. The other piece of it is that the cost to compete is so much higher than it used to be, and the time frame in which drugs get to and in which competitor drugs get to market has collapsed over the last ten years or so, so the competitive environment.
So I think, you know, you need to have the scale, and you need to have distribution and investors also, you know, want to see. I think we prefer that then continuing to invest in a company, because if you have one product, it's very hard to be profitable company.
All right, Marek, great stuff. I really appreciate you taking the time. Maraeric Goldstein, she's a biotech analyst at Mizuho, joining us to talk about Merk and some of the other healthcare and biotech companies out there. It just seems like almost every Monday we come in and there's another healthcare m and a trade. So lots of our ne going on in that space, but also lots of acquisitions to acquire drugs, different therapeutics. Really interesting, fascinating to follow.
You're listening to the team Ken's Are Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot Com, the iHeartRadio app, and the Bloomberg Business App, or listen on demand wherever you get your podcasts.
All right, let's talk fixed income here, folks. John Talker, thank you very much. A fixing of twenty twenty two brutal year. I don't care. There was no place to hide equities or fixed income and really not too many places in the fixed income space to hide it either a little bit better this year. The Bloomberg Aggregate US aggregatoral return value is up about three point five percent this year, so they're doing a little bit better. And when you want to talk fixed income, you need to
go talk to the folks at TCW. They're pretty big in that biz. Steve Kine, co CIO and Generalist portfolio manager for TCW Investment Management Joints is, Steve, you guys are doing a little bit better this year than last. What's kind of driving or what are the areas of opportunity you guys see in a fixed income space this year.
Well, we're seeing quite a bit of opportunity. Actually. First of all, sort of getting at your general point of returns being positive is we think we're getting towards the end of the FED hiking cycle and the market's beginning to anticipate that, and that means that rates are likely to be coming down. So the first thing we like is the overall rate market, and specifically the front end of the market where you're getting the highest yields, and we expect that part of the market to rally the
most going forward. And then beyond that, I think we're rather pessimistic about the economy. We think that the reason rates are going to be going down is because you're going to be entering a recession sometime later this year early next year, which means we're defensive on lower quality credit. But we like lots of areas of the high quality parts of the fixed income market away from treasuries. You've heard us talk at nauseum about the agency mortgage market.
We think that's very attractive. That continues to lag recently. It's lagging due to the fact that the FDIC, through Black Rock, is selling agency mortgages that were taken over through the SVB and signature bank takeovers, if you will, by the FDIC. But we like that area. We're modestly constructive on investment grade corporate credit. We think that's fair. And then we like high quality parts of the securitized market, including non agency residential mortgages.
Why do you think, I mean in light of today's inflation data, which I realize is only one point, but core PCE quarter over quarter up to four point nine percent from four point four percent in the last reading, and more than economists had estimated. We were looking at four point seven, so we're going back to five and it looks like climbing. How can fed even consider lowering rates in that type of environment.
It's a really good question, and the answer in the short tenments, they can't cut rates. As a matter of fact, the market's pricing this in. They're likely to hike next week at their meeting, and maybe even another time. I think we're the view that the market's getting a little ahead of itself in terms of expecting easing as early as September of this year. But we do think, whether it's one or two more hikes, that the cumulative effects of all the tightening five five and a half percent
is ultimately going to slow the economy down. We're beginning to see signs of it in various areas housing. Certainly, the business investment part of the GDP report suggests that, you know, businesses are pulling back in a fairly significant way. The last thing to go, and it's still hanging in there is labor market, and we do think that it's just a matter of time before you know, you start to see bigger and bigger layoffs and loosening in the
labor market. And that's sort of the key part of the equation that's going to get overall inflation heading towards that two percent turn.
I mean, we I'll just repeat the GDP numbers that we got this morning for our listeners. We got annualized GDP quarter over quarter of one point one percent. That compares to two point six percent in the previous reading, and we were looking for one point nine So much worse than expected, much worse than the previous number, a real decline. What happens if we get into a situation where GDP is coming down, unemployment is going up, and inflation is stuck at five percent?
Is that something you could imagine?
Yeah, yeah, certainly. As a matter of fact, it's it's very typical at the beginning of a recession because inflation lags that you get this sort of temporary period of stagflation where kind of economic activity is declining on it's rising, but inflation is yet to adjust to kind of adjust
with a bit of a lag. So, yeah, it's gonna there'll be a period of time where it looks like a real conundrum for the FED because inflation will be lagging, and the risk is that they are too focused on that lagging indicator stay too tight for too long and worsen the recession instead of you know, sort of looking forward and understanding that you know, inflation trends are heading down.
Hey, Steve, unlike my colleague Matt Miller, I'm willing to take some risk in life, and I'm willing to go out to the high yield space here. You know, I'm not really in that recession camp, or if it is one, it's going to be pretty shallow. So I'm willing to take on some some credit risk here. Can you steer me somewhere? Says the guy who has the bulk of its well, his wealth and munis exactly.
Yeah. Yeah, here's you know, high yield. You know, there's uh, there's a wide variety of risk within high yield. There's you know, the double b's down to the triple c's, things trading at par yielding, you know, seven eight percent, things trading fifty cents on the dollar and likely to default, so big range. I think what I would advise you, Paul, you know, is your financial advisor for the day. You stay in the high quality parts of the high yield market.
Stay in those double b's and you know, high single bees. The things that you know, the economy does take a downturn, even though it sounds like you don't think it's happened happening, that you'll be protected, you know, And that part, most of that double bee single bee market really is fairly default resistant. And I would say, you know, to make a general statement about high yield is that part of the market is pretty sound fundamentally from a leverage standpoint,
liquidity standpoint. You know that the fundamentals for the high yield market look pretty good, you know, going into this recession. So we don't expect a huge default cycle. I think our cautiousness is we just think you're going to get better entry points. We just think spreads are going to widen. Even if it's a relatively benign default cycle, we still think spreads are going to get a couple hundred basis
points wider. So we're keeping our powder dry. But you know, I do think that you know, if you've go outen buy how yield today, you're you'll underwrite a little bit of volatility, but you're certainly not going to lose money.
Hey, Steve, just real quick twenty seconds. What are your analysts, what's what's a recession model look like for your analysts, no revenue growth, declining growth.
You mean for our credit analysts?
Yeah, what are they wrong?
Oh it's oh, it's kind of it's really industry by industry. I mean, the disparity of industry trends is significant, although a lot of them are starting to shift in the negative direction. So what we've seen thus far is relatively decent revenue trends YEA, and very negative earning strengths, meaning you're seeing a lot of cost pressure, mrgin pressure and that type of thing.
Steve, great stuff. Always appreciate getting a few minutes of your time. Steve Kane Key's a co CIO generalist portfolio manager TCW Investment of Management. They're based in La. They got like two hundred and twenty five billion massive under management. Not bet it's worth the trip to La.
You're listening to the tape. Cat's are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa play Bloomberg eleven thirty.
Let's talk industrials Industrial America. We had Caterpillar reports and numbers, say, we want to break that down, So we're gonna welcome Chris Gielino. He covers all the largest maker of earth moving equition. Isn't that cool? That is awesome? So Chris Giuliano, he covers those stocks. From Bloomberg Intelligency joins us on the phone from Princeton and brook Sutherland in our Bloomberg Interactive Broker studio. She's Bloomberg Opinion calumnists and she covers
all things industrial. So Chris, let's start with you here. Catcat is a symbol. What did they tell you on their earnings release?
You know, it was really an impressive print across the board. Beat, very strong pricing again in the quarter, better than expected sales and margins really across all segments. That being said, there's a lot of negative sentiment out there around the name, and I would say even just more broadly in cyclicals in general, just giving concerns over recession. So not only that, we saw orders decline in the period, and then dealers
also built more inventory than we expected. So if you're in that bearish camp and you kind of believe that we're heading into a downturn. Those are kind of two data points out there that will certainly concern you, and I think that's part of the reason you're seeing the stock trade off.
Didn't we just have a giant trillion plus dollar infrastructure deal.
Don't we need this stuff to fix America?
We certainly do. And really you're just starting to see those numbers from the Infrastructure bill come into the backlog. You still have the IRA, you still have the Chips Act. There's trillions of dollars of money coming into the system, but there's just more near term concern and around commercial construction tightening credit standards that have certainly kind of spooked investors here. We still see, you know, a multi year runway from a lot of these recently past legislations.
I mean, I think Bloomberg News Mats got one of the great headlines. Heies it relates to Caterpillar, cattle pillar drops, mid worries. Quote, it's as good as it gets and those things are kind of creeping in. So I think that's kind of what we're hearing. So Hey, Brook Yet have a great column out recently talking about deal making and more. I know this Comerson caught my eye a couple of weeks ago. And then.
A Carrier, which is a Utex spin off buying a German company buying Viisman climate Solutions. And when I started to see these deals, Honeywell announced six hundred and seventy million dollar acquisition, the the Utex or the Carrier purchases a thirteen billion dollar acquisition. Emerson was what was it, eight billion? So these numbers are getting big, and I started to you know, I was going through these stories like now I ten pm at night, and I was thinking, Wow, there's a pickup in M and A.
But then I looked on MA Go and there really isn't a pickup.
In M and A.
There's not across the board. I mean, we are seeing, you know, we're in a tighter lending environment, and the macro outlook is concerning. But I think what's interesting is that you're seeing a revival of these industrial two industrial deals. And actually on that front, April was the biggest month for industrial to industrial deals outside of a couple of outliers that were really dominated by single mega transactions in
the last couple of years. So you are seeing a real pick up there, and I think you know, honeywell, and it's called today. The CEO said, there's never been a better time to be a buyer, which I think is a really striking state.
That's interesting.
Private equity has like two point seven trillion dollars. I can't remember the exact number, but it's always mind blowingly high. How come they're not competing with these industrials for these deals.
Well, I think they have been the last couple of years, but I think it's getting harder for them to do so, just because of the you know, tighter credit environment that
we're seeing. And so I think you're seeing these industrial companies feel a little bit like they have the advantage again and going after some of these strategic assets, especially if you're going to take a longer term outlook in terms of the robustness of some of these markets in light of all of the stimulus funding and some of the mega project trends that we're seeing.
Hey, Chris, I'm just looking at the PGeo function PGeo function for Caterpillar and it says, you know, roughly forty percent of their business is outside of the US. I'm sorry, sixty percent of their businesses outside the US. What are they saying about some of their US markets versus their international markets.
You know, US continues to be remarkably strong. We continue to see some of the strongest growth rates in North America, even with that region being the most supply constraint. Still, Latin America continues to be quite well, and Europe is actually holding up a little better than they anticipated. I guess the one pocket of weakness is Asia and more specifically China. China is the largest equipment market in the world. You know, historically it's been you know, five ten percent
of consolidated revenue at Caterpillar. It's below five percent and will be this year. So relatively small and the big scheme of things. But you know, like I said, it's it's been holding up, I think better than most had anticipated, including Caterpillar.
Brook in terms of you know, the boost in industrial m and A. How much is on shoring or friend shoring had to do with this, you know, Chris Menson mentions China, and I just see a spate of stories about, you know, things we're no longer buying from China, Things were no longer sending to China. So does it make sense that industrials are trying to you know, bring back production and then also do M and A in order to aid that.
Sure, we haven't seen any big deals in the name of reshoring. You've seen some sort of smaller incremental investments of companies buying parts of their supply chains. I think sure, when Williams bought a coating ingredients maker, Hershey bought a pretzel factory, and so smaller things like that around the edges. But these deals, did you.
Brought it back from Germany? Was it Bavaria? No?
But in terms of just like building up the robustness of their North American supply chain and being you know, less dependent on sort of sprawling parts, networks or even just third parties. But I do think, you know, that some of these deals fit within some of the secular trends we're seeing, whether that's automation, whether that's the energy transition or positioning for you know, greater investments in industrials.
I do just want to make one point on Caterpillary, you know, I do think it's interesting all the negativity around their order backlock today. If you look at another company, Rockwell Automation, which is positioned with some of the same trends around mega projects construction spending, and you have investors being a lot more forgiving on that front, even though they are also talking about a similar moderation in their
orders for the vary same reasons. The Caterpillar gives that you have a supply chain normalization and sort of a reset of ordering patterns, and you just see a really lopsided reaction from investors just depending on where these companies sit in these secular themes.
You know, we had I'm Fazelli on yesterday. He's a biotech analyst for Bloomberg Intelligence. He lives in France on a farm. He just bought like a big tractor, like not like a little tractory due to your lawn in suburbia, like a tractor tractor. I mean, he's an outlier.
He's an outliers, very popular during the pandemic. Actually, hobby tractors, We're like a huge business.
I would love to have a tractor.
But I can imagine that's exactly the kind of spending that I'm going to be curtailing, soiting into this recession.
Right, So Chris, Let's say, let's say I go onto a Caterpillar a lot here and I want to buy of these big tractors for my farm. A. Do they have them in stock? B? Do I have to pay over the MSRP like I do for an automobile?
Yeah? Yeah, yeah. So inventories are getting better. We're still below historical average is pretty significantly, both a new and used equipment. Things are progressively improving though, and you've heard that echoed in some of their commentary. Supply chain normalizing in the quarter, but pricing continues to surprise to the upside.
We were up almost fifteen percent in the quarter, which was an acceleration from what we saw in four Q. So inventories are still tight and they're able to push price because of a lot of the productivity improvements that these new equipment. The new equipment has and you know, underlying demand is still quite good and you have all these infrastructure built, you know, coming through the pipe.
You know, Brooke brings up rock well and in the sense that it differs investor reaction is different from what investors are doing with Caterpillar. Next week, I'm going to talk to the CEO of Mac Trucks, the maker of Mac trucks. Right, it's a private company, but do you think they're facing the same kind of problems as Caterpillar, What do you think I should ask him?
You know, one thing that's interesting about the truck sector is you have this bifurcation of what the customers are saying and what the OEMs who actually make the equipment or saying. If you look at all the truck makers this past quarter, complete blowouts of their early results, way better than anyone had anticipated. As a supply chain has kind of loosened up, and they've got some operational efficiencies
and you know, backlocks already extended to next year. But if you listen to the commentary coming out of any transport company, any of the freight carriers, it's doom and gloom. And we're heading into a freight recession. So any insight that we could glean into twenty twenty four and how deep of a decline we could be seeing on the freight side, we'll have certainly have a big impact on demand there.
Brook do you think we're going to see more consolidation if we had into a recession?
Is that sometimes what happens.
I think we could. I mean, I think you know, these industrial companies have been so preoccupied the last couple of years of breaking up or buying software companies that I think they're now starting to look back at the core of their business and you know, like I said, with a longer term view towards this coming investment wave. I think people are looking for opportunities. They are trying to position themselves to better take advantage of these trends.
So certainly, if you see, you know, a meaningful downdraft and valuations, companies will take advantage of that. Most large industrial companies are in pretty good shape as far as their balance sheets are concerned, so even in a tinder lending environment, they have some flexibility.
Dude brook has her own NI ticker. Oh she's special, and.
That Bloomberg terminal that that explains.
That explains a lot, all right, The aforementioned Brooks Sullyn she covers all the industrial stuff for Bloomberg Opinion, and Chris Chilian when he covers the industrials for Bloomberg Intelligence, looking at the equities and the financials of those industrial companies. We are fortunate to have both of them join us here to talk about Kat and all things industrial America.
You're listening to the tape Cat's are Live program. Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station Just Say Alexa playing Bloomberg eleven thirty.
Good Day in the Market, SMP up one point two percent. Let's think bringing a professional who does this investing stuff for a living, Brian Smaller, piece of CEO and principle of hood River Capital Management. And despite the name hood River, you're based in Florida, right, Brian.
Correct, we moved here around three years ago.
That's such a scam, this whole Florida my grade. I've had enough of it, you guy. You guys only because you haven't been able to do it yourself, exactly right, you guys, can I hope your summer is just gonna be sweltering and then you guys are gonna say, what was I think?
So?
Anyway, Hey, Brian, thanks for joining us. We love yeah, exactly. I love talking to Brian because he's a former analyst. That Salomon Brothers my my place I used to work way back in the day, and you got his NBA some trade school alma mater. Yeah, so he went to Boston, Yeah, Boston. Yes. So anyway, Hey, Brian, what do you make of kind of these markets this year? I mean kind of yes, and P's up seven eight percent year to date. I mean, if you look on a trailing twelve month basis, yes,
and p's almost flat. I mean, so a big rally off of that October lower. Are you guys buying it?
We're constructive when you look out twelve month it's probably gonna be a little bit bumpy here for the next three to six given all the macro headwinds that everyone's talked about at nauseum. But when you get through that, and if you just have a mild recession, then most earnings estimates have been taken down for most companies. And when you look at the twenty twenty four stocks are pretty cheap. So I think that's why the market's okay here.
It doesn't mean that there can't be some downside volatility if you have some negative earnings revisions from lots of different.
The macro picture looks kind of like it's coming in as expected, right. Inflation is sticky, growth is slowing down. Maybe we're headed for a recession, the Feds in a tough position. What about earnings?
Does that turning out as we expected?
We're generally in an earnings recession, I would say yes. I would say generally it's about as expected or a little bit better in terms of companies being able to control margins cut cost. So if you ask me twelve months ago, the big negative surprise was companies couldn't really manage the cost situation very well. Now that's pretty much under control. Margins aren't really an issue in the near term. It's really end market demand in lots of different areas,
and you're seeing softening there. But the market for the most part, is expecting it, and that's why I think it's worse. In the back half we be in more trouble, but right now it's about as expected. Which letter market's acting.
Okay, Hey, Brian, I want you to sell me on small cap growth here. What's the play?
So small cap tysically trades at a premium, given that the names usually grow faster than their large cap brethren. Right now they're at discount. They've been through a rough two year past here, and usually it's risk off when
the markets are tougher. If you think you're going into a mild recession and the stocks at discount that for the most part, then you're set up for griding provisions in twenty four and a lot of multiple expansion, and then stock pickers and small cap tend to outperform the media manager's beaten the benchmark over most time periods, so it makes sense to look in that area too.
How much cash do you have on hand in order to take advantages take advantage of things like small caps? I mean, how did you prep and what are you looking at?
So our clients want to make the market calls, not us, So we're typically more than ninety five percent invested. Our job is to stock pick within the universe, in any sort of environment and outperform. And right now we're trying to concentrate in names where we feel like the irving provisions are going to be good. You can defend evaluations and they don't have a demand problem. Looking out six to twelve months.
Hey, Brian, I know you've got to name on your list. Fortress Aviation. I got my attention. FAI is the ticker. It's hitting a fifty two week high today. We had a gentleman here earlier this week, and he's in a business of leasing aircraft to the big airlines, and his problem is he just can't get enough planes from Boeing and Airbus. Talk to us about Fortress Aviation and kind of what's driving that stock. Why you guys own that one.
So they benefit from those trends. Because of the supply chain issues that Boeing and Airbus are having, they're able to lease out engines, that's the primary part of that business, and then they also repair the engines and provide parts. The utilization levels are moving up, the prices of the engines are moving up, which is good for the underlying asset. Travel in general needs to still recover because of the
weakness that you've seen in Asia. In Europe, US has been good for a while now, but worldwide we're only about ninety percent of where we were pre pandemic. So you layer in the demand getting better with Tigner reopening, plus the supply chain situation, someone like Fortress can actually deliver. They've had a really rough fundamental pass in COVID and the company has gone from being an lc C corpse. That's good for multiple expansion. That's why the stock has
been good. The reason why it stocks up today is because they had a really good quarter and all those demand drivers I just mentioned are intact and so and we still like the stock here given the evaluation.
What's the what's a reason that you wouldn't convert to an ETF? If you if I look at say the Hood River Small Cap Growth Fund, why not.
Convert?
Why not?
Why not?
Why not convert to an ETF?
Yeah?
Well, part of it is we don't want to have to dispose our holdings every single day, and there's kind of a transparency issue there, and our clients are good in the regular mutual fund structure, so we'd rather not tell them Mark what we're doing every single day.
That's good good enough for me.
I mean, since I anchor an ETF show, I just hear so much about these conversions, and I hear every day arguments for why convert?
So why not? Is ye one of the thing that's a good good answer. Hey, Brian, I missed this whole energy drink thing. I mean, if I want an energy to drink, I get a shot of expresso like like adults do. But I know it's the thing. You guys own this company Celsius tell us about.
That so Celsius currently has about four percent share of the overall energy market. It's been growing about one hundred percent. It's going to slow down a little bit this year, but they just partnered up with Pepsi and that gives them around fifty percent more doors in twenty twenty three to sell in versus twenty twenty two. So the demand is definitely there. People are going to keep buying their energy drinks in a recession. It tastes better than the
other products that are on the market. It's the better It's generally just a healthier, better prodit product. I don't like drinking the other one that I like. It actually
like drinking Selsius, and most customers do too. And the stock is only discounting right now around six and a half percent market share, and we think the success for the product house and House designed and the partnership with Pepsi should allow them to eventually get to twenty percent share, and that gives you a lot of upside in the stock from here.
You know. I just I pulled up the holder's list for Fortress Aviation and Celsius and hood River. They're in the top ten holders of these names. So when they go into a name. Brian, you guys go into in size, so you got it like that, So that's conviction. Brian Smallocky is the CEO and principle of Hood River Capital Management. Like so many others, he's headed south, down to South Beach or down to Miami. You're just doing what all the cool kids do and we're stuck here in the
upper side. I'll stick here. I would like to be down there, to be honest with you. Yeah, it's it's a pretty good gig for a lot of those folks. No taxes right now, about that.
Thanks for listening to the Bloomberg Markets podcasts. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three.
And I'm Paul Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.