Again Capital's Kilduff Expects Oil Prices to Fall to $42

whether at the grocery store or the trading floor. Find the Bloomberg P and L Podcast on iTunes, SoundCloud and at Bloomberg dot com. Can oil break out of this fifty dollars to fifty five dollars a barrel range? I don't know the answer, but John Kilduff perhaps does. John Kilduff he is founding partner of Again Capital who has gotten it right again and again with where at the

price of is going? So John, uh, you know where do you see this sort of tenuous truce in the Middle East about not producing too much more oil going? And do you think that we we could break out of this range? Um? Either way? First, good morning, Good morning, And Uh, I think you have to give them certainly some credit. The the OPEC and non OPEC producers like Russia that came together to try and cut looks like

they've achieved about eighty five of their efforts. The problem is that there's several notable countries not part of the deal, Iraq, Iran in particular, and Nigeria and Libya, all of whom we're sort of written off in terms of not being able to grow their output much more. And it turns

out there coming back like gangbusters. Um. Also too, we're heading into now the end of the winter season, which brings a sort of shoulder season demand period to the northern hemisphere globally, which I think is going to complicate the picture, uh for these guys, and I think dash their hopes. So to answer your question, I see it's breaking out to the downside here, I think in over

the course the next couple of weeks. Hey, John, I wonder if you could put that together with the demand picture and maybe just you know, give us the thirty thousand foot few in terms of all right, we're going into the peak driving season will be the summertime in the northern hemisphere. Uh, you know what percent of production

is that going to soak up and so on. Yeah, so the demand picture actually has been rather soft, particularly for refined fuels over the past several weeks here now, particularly in the US, we've been down on gasoline demand five to seven percent, which is somewhat remarkable. With some of that is a drop in exports, but some of it seems to be consumer response to the relatively higher

gasoline prices already. UM And unfortunately for the refiners, UH, we're we have record inventories of gasoline on the East coast, UM and you know, we're continuing to see this. This lackluster demand sort of hurt them. You saw a STAT oil report today UM as did BP, and they both referenced the refining sector last quarters as being poor, which had been a bright spot. Part of this is being driven by the Chinese who sort of ramped up a mini sort of boom in refining there and which led

to record exports during much of last year. So the whole world kind of got swamped and refined products. So you're seeing today gas leaned down about two down under a dollar fifty a gallon on then I am X Commodity board and UM the downward pressure I think is is going to continue there. So UM also too, we've seen the biggest slowdown in twenty six years according to the latest data out of China for refined product growth demand growth. So there continues to be a lot of

issues around the whole complex. John, you said that you do think that we're going to break out to the downside. How low do you think oil prices could go? I think if we can, if we can break the fifty market, there's no reason why we couldn't retrace all the way back down to the lows from November, which was forty two dollars about So I think it's pretty easy for us to make an argument to get back qually back down there. And with a barrel, Which companies would that

disrupt the most. It's gonna disrupt the pure play producers, so it's gonna it's gonna hurt hess UH companies like Hess, Occidental Petroleum, UM, some of the shale players, Continental Resources companies like that. Well, we'll we'll take it on the chin. It may actually help the refiners perversely, because there they'll have much lower input costs and UM it may spare more demand at the pump again just at the right time.

As we hit the peak summer travel season. So what works early last year, it looks like it may work again early this year in terms of trying to play the energy patch. So all right, John, let's let's just keep this in mind. So we're looking for oil prices to go low or for a variety of reasons, right, Okay, Now is there any value in connecting this to just the thought that oil is up about eleven since the November election, that gas is up on nearly twenty since

the election. Can you knit together a bigger picture for us? Well, it's it's interesting to me. I mean, obviously, all the entirety of the stock market and a lot of assets have risen on on hope for relief and regulation and other pro growth policies. The energy industry gets hurt in a big way. To refining industry gets hurt in a big way if this border tax adjustment UH program were

to be implemented. Um also too, you know, the oil producing oil producers need to be careful of too much of a good thing, to the extent that they were they were to be released hogwild to exploit hundreds of thousands of more acres and produce more and more oil. It's going to add to the glut and not take away from it, obviously, So you don't think that there will necessarily be as much drilling as perhaps President Trump will allow them to do by opening up federal lands,

which is widely expected. Yes, No, because you know a lot of federal land leases went unexploited during the Obama administration. You know, the U S producers cut back drastically with the price drops. So you know, the US in that regard is really the swing producer as much as Saudi Arabia these days, except that our policy is driven by economics, whereas the Saudis are trying to uh, you know, dictate

price from on high. But no, I think it will be um not as great as land rush as you might think, because prices are going to be challenged more and more as we're already seeing the shell players ramp up. You know, John, last week we were talking about the solar industry and how the prices for solar energy has dropped to the point where it's competitive at least with gas.

Do you think that this is going to increasingly be a pressure on the oil industry or is this a nonstarter just because it's so small relatively No, no, very very much. So it's a it's a it's become a big factor. Wind has become even a bigger factor. Um is it's actually considered a conventional energy source now, not

even a special sort of case renewable um. But the uh, what we're dealing with here, you've got to keep in mind is that it's a bigger pressure really for natural gas, because oil still is eight barrel of oil is still of that barrel goes into transportation um. And we're still not seeing obviously solar cars, although we are starting to see more electric ones and and really ones that are desirable by consumers, like the ones Tesla produces, but for

now it's going to be a while. So oil is still the transportation fuel as opposed to what the electrical utility industry is going to have to be dealing with, what sort of decentralized power generation prompt solar and now importantly the battery technology that's coming along with it. Thanks very much, John Kilduff, great stuff, founding partner of again Capital. Let's learn more about what to do with your money in this market that, as Dave Wilson was earlier describing,

we could be seeing the SMP five. Tony Dwyers, the chief market strategist that can accord genuity, and he joins us, now, Tony, thanks very much for being with us. Give us your outlook, and then maybe I would throw in with that, give us all the things that could go wrong with your outlook. Okay, that's that's probably better. Stay to het them. Thanks for

having me on and RISA. So we believe that the next few weeks we're going to see a correction UM in the market somewhere around five And that doesn't sound like a lot, but when you're down a couple of percent in the new kind of trading world that we're in, everybody kind of gets scared that it's going to be a ten to fifteen percent correction, and we we want to be in a position to really aggressively by that um.

For the list nurse to make this really super simple, UM, you never want to be a net seller or negative on stocks until you have a recession in sight, because any correction in the midst of a positive growth backdrop always comes back um and pretty quick form and goes higher. So the only time you really want to be negative is if you can see a recession, and we don't see a recession for at least another couple of years.

Hold on a second, Tony, you said, next couple of weeks you see a five percent pulled back in stocks. This sort of conflicts with what we hear a lot, which is I can't predict the next few weeks. I can maybe predict the next few years or give a sense of of sort of the trend. But this stands out why such conviction about a time frame that's so

near to us. Well, to be fair, I've been making the call since mid December, and you know, we turn neutral on the market in mid December because we thought a lot of the positive um data was already reflected in stocks and you had an extreme overbaught condition. And that's the case, like, for example, today, if you don't have a one percent move, I read on the Bloomberg that if you don't have an enter day one percent move, it will match the longest period without a one percent

move in the market for this cycle. So you just have been in this period of very very very low volatility and that typically comes to an end in a sharp way. And and that doesn't mean that you know, everybody should run for the hills because the fundamental backdrop is so good you just have to be ready and expect it to happen. Um. So it's not just it's not just the call that I've made today for the next three weeks. It's a call that we've been in

since mid December. Hey, Tony, I wonder if you could just bring in the concept of active investments, in other words, people picking stocks. Plus, you're in the earning season and I'm wondering if that might have anything to do with what happens to last price, because that's really what we're talking about. You're not talking about value, talking about how much someone is paying for something in the short term, right, And the earnings backdrop has been really strong or not,

that's that's not right. The earnings backdrop has been significantly improved from where was a year go or even two quarters ago, because you're seeing a recovery in the commodities. And I think the story, guys that that nobody's really talking about is how good the global economy is acting. We're so focused on what President Trump is tweeting in the legislation. Well, it's interesting because Lisa Brahma, hold on, Tony,

because Lisa Bramwitz. You mentioned even just last week, the economic performance in Europe is better than many investors believe on the surface. Right, So some people are actually going back to an increasing number of hedge funds. But but Tony, I want to get to your point. I mean about just because of President Trump and some of his rhetoric.

You know, dot dot dot. Seth Klarman, who is a very respected hedge fund manager, put out a letter in the past few weeks that was quoted in the New York Times, and he was saying, that's important in and of itself, when you have a president, a leader who puts who makes volatility his strategy, that could potentially upend a lot of the order that we've seen in markets. Markets don't like uncertainty. What do you say to that.

I think markets don't like uncertainty. But we've been uncertain since the summer of last year, and you have one of the lowest volatility periods on record. So to this to this point, Seth is right, it's gonna end up. And that's kind of our correction call. When you have such low volatility in an environment where so much rhetorics coming out, you've got to you've got to believe that at some point it's going to come into play. What's amazing to me and I think Seth and anybody else

is it hasn't yet. You've had such a narrow trading range of the market despite so many issues being you know, um harshly criticized and talked about back and forth. So again, what here's what I would urge the listeners to do. Invest your money based on what you know, not on what you fear. What we know is that even with increases and interest rates in the US monetary policy, meaning you know, credit is in very very good shape, the

set is historically accommodatives. On another points higher in you Yeah, Tony Dwyer, thank you so much for joining US chief market strategist at can Accord Genuity, P and L is brought to you by proper Cloth, the leader in men's custom shirts. At proper cloth dot com, ordering custom shirts has never been easier. To create your custom shirt size by answering ten easy questions, select from over five fabrics

to suit your personal taste. Shirts start from eighty five dollars and are delivered in just two weeks with proper Cloths perfect fit guarantee remakes are completely free and expert staff are standing by to help. For premium quality, perfect fitting shirts, visit proper cloth dot com custom shirts made Smarter. Uh, there was a fascinating story that I really want to highlight that raises the question of the hardware and the integrity of the hardware behind the giants of Apple, Google,

and Facebook. I want to bring in Jordan Robertson, a technology reporter with Bloomberg News who wrote the story. He is coming to us from Washington. Jordan's first, I just want to get a sense of how easily it would be to potentially manipulate the hardware that sort of provides the infrastructure for Apple, Google, and Facebook before they even

get it. Hi. Sure, Yeah. You know, part of the problem with the supply chain security for these large technology companies is, you know, the way the technology industry has evolved is that most of the code is proprietor for understandable reasons, Companies like Cisco, which make network switches that shuttle data traffic. The very significant parts of these companies networks. Uh, you know, their business is selling the code and the hardware,

and they don't open sources. They don't disclose that code anybody else. The problem with that is if somebody is able to tamper with the process of creating that code, uh you know, typically it would be a foreign government or even the US government. In some cases, uh you know, customers like Facebook or Google or Apple, you know, or LinkedIn or others had no way to check that code to to verify the presence are not of a government

back door. This has taken out a new life after they Edwards Snowden revelations of a few years ago, and companies are now starting to try to create some of that network switching code on their own. Hey, Jordan's a great story. Can you just describe a photograph that really kind of highlights what you're talking about? Just describe what's in this photograph, where it came from, etcetera. Sure, there's a very famous photograph that came out a couple of

years ago. Again, part of the Snowden League was published in Glenn Greenwalt's book on the Snowden Leagues, and what it shows is, you know, uh u s government officials federal agents intercepting a piece of cisk O network hardware equipment at a transmission a distribution facility, probably a UPS or fed X or some other transit point, very carefully opening the box and then taking it to a what they call a load station, which is you know, just some a series of laptops on the desk next to

the the conference table and loading it with you know, basically malware with malicious code. And you know, this photo really struck fear in the hearts of network operators throughout Silicon Valley. Uh. You know, there are lots of things in the snow and disclosures that struck fear in the hearts of data center people, but this one especially because what it showed them was you know, uh, you know, the U. S. Government and others by extension, you know,

are able to intercept this hardware. And again when you talk about Cisco and Juniper and network equipment, this is central that the brains of these networks, who they're not just computer servers either as switches that shuttle data traffic around these networks, and they see everything basically either they all seeing I and you know, if you're able to interspect this equipment, modify the software code on it, uh to maliciously spy on you all the data traffic passing

through these switches, you know, you're able to get visibility into an entire network, and that's really scary for operators of large data centers because for internet company, their data is their lifeblood. But you know, if they lose control of that, they lose control of the company. Hey, Jordan's I think of this in terms of every problem that technology creates. Technology with a heavy dose of experience and

funding works to find a solution. Right there are the open compute project snap Route tell us about this, that's right, Yeah, So that's that's really the crux of the story today is that there's a company called snap Route out of Tawa, Alto, California. They've just gotten twenty five million dollars in funding. You know, big ZC announcements seemed to happen every day or every week out in California. But what's interesting about them this

is a group of former former Apple engineers. Uh, you know, they've been designing their own network technology for a while for performance and other reasons, but security became a really big focus for them and they said, look, we need to have a hundred percent visibility into our code because we just simply can't trust that these proprietary technologies from Cisco and Juniper and others. Even if the companies have the best of intentions, you know, are not compromised at

some point you know, along the way. So what they're saying is we're going to create an open source switch network switch. This is actually a really big deal because open source technology has admitted for a very long time in computing, but it hasn't really migrated to the network switch level. And again, these are the brains of these

computer networks. It's hard stuff to do. But what the goal is to give network operators at these big Internet Silicon Valley companies visibility into what's happening on their network switches. What's the likelihood this is going to fundamentally disrupt Cisco's business. I'll tell you Cisco is nervous. Cisco very nervous to talk with them for the story. You know, obviously they know Cisco is a huge competitor here. I mean they control over half of the computer networking market. They're not

going anywhere anytime soon. This is a very nascent, very small market right now. It's only the large data center operators up including big banks as well. They're doing this, however, there's a lot of value here because you can drop the price of this equipment by tens of thousands of dollars if you're willing to kind of take some ownership of the management of this stuff. So you could see this eventually, you know, evolving from just the data center operators. Uh,

you know too, smaller midsize and smaller company. That's the ways off. But I will play Cisco and the other legacy technology vendors are very nervous because there are a lot of advantages to this technology, some downsides to but some big advantages. Thanks very much for being with us and shedding light on this topic. Jordan Robertson, technology reporter for Bloomberg News, speaking about open compute projects, snap Root and challenges to Cisco. I want to get David Well

to bring him into the conversation. He's Detroit bureau chief. He covers General Motors, and Uh, David, can you give us some insight into why such a negative response from stock investors? Well, General Motors is really defied gravity All year long, the market has gotten a little bit softer or it's flattened. You've seen Forward pulled back on their earnings forecast and they've missed some of their numbers, and

GM has been able to keep keep pushing. The growth showed weaker margins and they're showing growing inventories, which is I think giving some investors a little bit of worry that maybe even GM is is unable to keep the proper train going with the market that's kind of flattening out a bit, maybe going a little bit soft. David, I was looking at the performance of General Motors stock before today. It was up fourteen percent, so you've got

the dropped today. This is from the election of fourteen percent. Since the election, the four percent dropped today, So I mean the stock has already had a decent run. Did you learn anything today the details of anything like free cash flow or margins in China? What stood out to you in today's detailed report. The thing that jumped out of me the most was that in the fourth quarter, margins in North America. So, and that's really the profit horse. China is a real money maker for them. It's about

two billion dollars a year. But then you look at the nine to ten billion a year that GM has been making and you know the rest of it, and then some comes from North America. So you saw a fourth quarter of stall margins go from ten percent a year ago two I think it was eight and a half percent. Roughly, It's it's not awful, it's a good performance, but it's it's headed in the wrong direction. Now. GM

had a lot of reasons for this. They're saying that they've got a lot of SUVs coming to market later this year that will really help margins. So they're in inventor build out right now. Uh, and a lot of the cars really still dominate their a lot in terms of what they're offering consumers, and cars are out of favor and require a lot of incentives. They're saying, hey, the good stuff really isn't on the lot yet. When

it is, we're going to make good money. And they did affirm their their guidance that they will again have record profits for two thousand seventeen. But I think analysts and investors are looking at this and saying, margins North America fell, inventories are higher, incentives are higher, We'll wait and see, we'll we'll we'll put our money somewhere else and see if they can can show a better first quarter.

I think some of that is going on David, just quickly, is this is the strategy of GM and other automobile makers. Is it all based on sub three dollar at gallon gasoline? Pretty much? Well, let's put it this way. It's based on some price of gasoline that doesn't make consumers buy

what they're buying today. And the reason I say that is we've said in the past, oh my god, two dour a gallon gas known to buy a truck Again it hit it, and they did all three hour again and gas known to buy, and I should be again, and they did. There's a magic number in there. I'd say it's probably more like three fifty where consumers really

start to change. But your point is is basically right, if gas gets very expensive than the market prospect passenger cars, that's lower margins and that's not good for anybody in the industry. Dave Wilson, I want to get your sense, just on a broader level of how much of the response to GM's earnings is being colored by a broader sense that the auto industry is plateau ing at best and headed for a slight dip. I mean, are you seeing reactions and shares It kind of gives insight on

that well, you want to talk about plateau. I mean, GM shares peaked back in December. They've basically been up and down since then. So you know, today being a down day, you're really talking about, you know, more fluctuation for a stock that has kind of topped out. Uh. And you look at Forward, I mean, you know, it's come down the last couple of years as OW. I mean, so it's not like the boom times that we've seen in the auto industry lately have led to boom times

for the shares. So you know, there's the concern about what happens down the road. I mean, certainly they're vulnerable to whatever gasoline prices are going to be, and we've seen crude oil pick up in the past several months. But beyond that, it's really just a matter of how long do things keep going. That's as much as anything a focus here, David. Can I just get your thoughts on some of the other automakers, because I'm looking at the shares of Fiat Chrysler and they are down as well,

down about three and a half percent. Does this do anything to that idea putting Fiat together with GM, Well, that idea has not really first of GM doesn't want to do it. I think GM shares initially didn't react so hot when that idea was floated. And one of the reasons is we've seen auto mergers in the past not really work so well. We're no Nissan maybe the lone example, UM, but you know, diam Ward Krysler was a big failure. A lot of the joint ventures haven't

worked out. And if you look at GM, you know what, once if GM were to take fied Chrysler, you still have this passenger car line up. You still have a lot of plants and and redundancy they need to take out, and then you're managing like eleven brands. That was the problem GM had before bankruptcy. And you know that it's just it becomes very unwieldy. So you know, I don't I've never really uh seen a great case for this, other than from the Fied Chrysler side, which, hey, we

need scale and we need investment. We gotta know, we got we gotta go on, we gotta move on. Thanks very much. David Welch, a bureau chief Bloomberg News Smart Detroit Bureau, Thanks for listening to the Bloomberg p m L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm out there on two are at him Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast.

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