Big Tech, Markets, and Earnings (Podcast)

of Silicon Valley. We got the Bloomberg Intelligence Technology team with us men Deep sing here in Bloomberg Interactive Broker Studio on a rock Rona phoning and if god knows where but on Rod let's start with you. You know, I get it that digital ad spending slowing. We'll go over that with man Deep. But Microsoft a little bit weaker in their guidance that I would have anticipated, and I think the street as well, judging by the stock

What did you take away anticipated? We were looking for the slowdown somewhere from you know, sixteen percent constant guard and see growth rate to let's say around ten to twelve percent, and these guys said they were going to be somewhere around eight nine um that was a bit of a surprise to us. Now with this, you know, in our view tells that enterprise spending is starting to

hold back. Now, this does not mean, you know, this is not a good sign for all the enterprise companies, both in the software world as the services world, and so man deep. Let's also tie in what we heard from Alphabet. If I look at the shares right now, I see them down about seven percent. They've clawed back a lot of their losses, but still seven percent loss on the day. What was the biggest headline there to explain this market reaction? I mean, across the board, they

validated the weakness on the AD side. What we heard from Snapchat, Alphabet said search at revenue growth is slowing, YouTube is slowing. And look, I mean except for search, none of their other segments make any money. So if you're an investor in this dock and you're looking at this, you know management saying search is slowing, but we are growing. Our employee had come by t You're questioning, you know, what is it that they're hiring all these people for

and when will that translate into profits? And I think that is what they need to address. So I don't know if there's no reason for anybody to think that big text spending is anything but a short term cyclical pull back right here, because I mean, this is the only reason we talk to people like you and men, Deep, is because your businesses that you cover continue to grow all the time. That's still the case, right Yeah, yeah, definitely. You know, I'll give you a very easy example. Cloud

is something that everybody's talking about today. Slow down in that you know, if you go back and look at during the pandemic, we saw a similar slowdown for four waters in a row, and then the year after growth rates improved, which is very unusual for these large businesses. And we expect a similar trend here. The end markets are so large and we are still in very very early innings in this case. So even if we see slowdowns in the next two to three quarters, we expect

a massive bounce back in the year after that. And that's a true tech analyst right there, the amountsive bounce back. It's not it's not just Dan Eyes. All these tech analysts massive bounces. They can see the future, they can I know, yeah, and it involves technology that makes sense to me. But I mean, Deep, I want to go back to the social media names, because we still have two biggies left. We got Twitter, we got Meta, both

interesting for their own reasons. But given what we saw from Snap, like you mentioned, given what we saw from Alphabet most recently, are we just going to be talking about ad spending? Is it going to be another gloomy two reports to sit through? I think so. But look, I mean to an ugs point, you know there is a cyclical element even in ads. Things will come back,

the growth rates will improve. The problem for Meta specifically is you know, there is a question mark around how sustainable their business model is, given what has transpired with Apple's privacy changes, and you know TikTok taking share, so they have a real challenge ahead of them. I'm not worried about search. Search will come back. YouTube growth rates will be after this downturn. So there is a lot

of cyclical element within ads. But then I think the key to watch out for is what happens to Meta. All right. We actually had an i p O today, which is a rarity in UH mobile. I I PO at twenty one per share, giving it a eight sixty million dollar I p O. M. Bloomberg News is reporting that the Mobili has not traded yet, but it's indicated to open at twenty five men deep. What is Mobile

I and what's the street call on this company? Well, Mobile I is one of the segments within Intel, a company that they bought, and it focuses predominantly around autonomous driving. They make chips and they have embedded software for driving, you know, level two three for autonomous driving. So very hot space given what we have seen from Tesla this year, and it made sense that Intel went ahead and you know,

I p out this company. Uh. The valuation, clearly, I think was pulled back from the initial discussions, and I think it was priced well enough that you know, there was receptivity around uh investors looking to get that initial trancho of the allocation. But look, I think it's still small when it comes to the capital race here. Million isn't going to make a difference in Intel's fortunes. UH

and UH. I think what Intel wants to do is really to showcase, you know, that they have exposure to a top like automotive sector, which is a high growth sector within semis Alright, good stuff. I'm just you know, as a former banker, I'm just happy that somebody got a deal done. So let's see how this thing trades today are right, good stuff talking technology and no two better people to do it within Anaragrana and Man Deep Seeing from Bloomberg Intelligence their tops tops in the business.

We are in the thick of earning season. We had the US banks last week, a lot of the European banks reporting numbers this week, and we want to talk euro banks. We talked to John Tasy, has been covering the European banking sector for decades. He joins US. He's Bloomberg Intelligence senior banks analysts. So John, thanks so much for joining US year. I want to talk with about Deutsche Bank. It looks like, you know, they're bigger business,

which is their trading business. Their FICK business did actually pretty well. It was just kind of the bankers didn't have a lot of stuff to do during the quarter. Yeah, High Paul Um completely agree. Fick as expected has beaten expectations pretty much across the board. And actually, if you look at Barclays today, up sixty in dollar terms, so comfortably better than um Deutsche. But yes, the advisory very disappointing. And as you will know from your many years in

the investment banking world. What pays bonuses, It's the investment banking fee. And I mean Deutsche was down eighty five, so um, the market's clearly looking at results through a bear market lens. At the moment, prettyfficult to catch break even if you look at Standard Charter or SEB or something today, down four or five, even with massive revenue upgrades, purely because the markets worried about bad debt. It's worried

about cost inflation, slump in investment banking revenue. I mean, just the worst of any of the large Wall Street firms. And John, what is the light at the end of the tunnel for Georgia Bank? Because Paul I were talking about how use I mean use it's a shadow of its former self? Uh, how does it get there? Or is that such a lofty goal at this point that it's not even on the radar? Well, I mean, I think that you're used to looking at American banks because

I think think HSBC. HSBC was one of the sort of global leading banks. It's trading at a discount to Europe. Now it's trading on five times next year's earnings with massive revenue upgrades. Deutsche Bank is actually more expensive on p So when you say light at the end of the tunnel, clearly the one thing they've been waiting for is revenue to recover. And the NI side of it, the fixed income side of it's in proved. We know that fees advisory originations quite syctical. Last year, it was huge.

This year it's down a lot um. But I guess the light at the end of the tunnel is getting through the next two or three years of economic pain in Germany, because don't forget, they've got a very large corporate loan book there as well. And Germany is at the epicenter of all the issues you've got with Ukraine, Russia,

the gas issues. So we're still working our way through that. Yeah, John, I don't think that you know, our listeners here in the States have a full appreciation of how difficult the economic conditions are in much of Europe for a variety of reasons. So as you think, as you assess the European banks, how are you thinking about credit quality and right offs? And I mean, how much of a headwind

is that going to be? Do you think? Well? I mean, the funny thing is it's not just about being a headwind at the moment because because banks have become so much more profitable purely mechanically, because rates have gone up, You've got the ECB and the Bank of England beginning to think, hang on us that you guys are now reporting double digit r oees simply on the back of us having to raise rates. So how do we crimp that. The banks are thinking, you know what, let's get ahead

of the curve. Let's IFRS non as the accounting standard. A bit boring but quite important. They're taking more reserves and setting aside more provisions, and they will do more in the fourth quarter to get ahead of this and also to damp reported profits. They don't want the regulators saying, right, we're going to put a cap on bonuses. We want to put a cap on capital returns. So it's an interesting trade off, a bit like you saw, um the US banks being told, well, let's let's just calm down

on the buy backs. The same as coming in Europe, but but more of a revenue question. Okay, a lot of gloom and doom in this conversation so far. Let's get some good news in here. If we look at Barclay's results on a dollar basis a U S dollar basis. You did have thick up sixty three per cent equities, but let's talk about thick. That seems like an undeniable bright spot. It was, and Barclays has been investing very heavily, and obviously the dollar going the way it has has

really flattered that. But i'd point to the share prices down, and what did the call focus on? The call focused on the underlying outlook for credit um and the UK and credit impairments and pointing to things like in the US their credit card book early warnings, so thirty dead

delinquencies are beginning to rise quite quickly. So the market is looking through all of the good news on the top line and focusing on are you doing good enough job on costs, which Barclays is at the moment, and are you setting inside enough and are you being realistic about where the bad debt goes? So yes, obsolutely a good number, but when you look at what the market's

focusing on, unfortunately it looks straight through that. So Jonathan, as as we are globally deal with, you know, slowing economy, give us let us step back, you know, And I'd love to get your view on kind of the structure of the European banking market. Will there be any change going forward, any m n A. I know, the cross border m n A is very difficult to to do. How do you think that European banking sector may evolve just structurally going forward? Well, consolidation cross border is needed,

but we're still a long way from that. I mean, if you think the most things the ECB is debating at the moment isn't the seventy basis point rate high, which they almost certainly will do. It's what do you do with the two trillion euros of loans that you made to the banks during the crisis, because at the moment they're now making money for the bank's handover fist and if you're Italy, the Italian banking sector needs that.

If you're Deutsche Bank or if your BMP and you've got hundreds of billions of these loans, you're being given free money. But the ECB has to make a change, and so as with the sovereign crisis, it's faced with the what do we do about Italy where there's still a lot of risk and stop the largest banks just being given free money. So I think consolidation cross border is still a long way away. Um. The likes of b MP will be at the forefront of it, but

it's still gonna be more piecemeal. And I suspect we've got more domestic M and A over the next year or two. Particularly is would you buy a bank right now, even on a depress multiple if you know that bad debt is going to go up and you don't know how much The answers no and John before we let you go, I am I am curious to hear in your opinion how much reorganization we should expect to see in the next couple of months. I mean to pick on Deutsche Bank a little bit more. There's been a

lot of shuffling around there. Have we seen most of it? Or do you think there's more to come as we had into these hard winter months. Well, I mean, it's difficult to say with Deutscha, but obviously we've got credit Swiss the next day or two. And that's the interesting that we get a Reheork tomorrow. Right. The question is a right, we'll be on standby for us tomorrow. John. Have they have they raised enough money to avoid a capital raise? Um? And the other issue they will have.

Is it's one thing making cost promises, but in an environment where you've got so little visibility on revenue and clients are probably showing away, how do you present a credible plan? So Deutsche where it was three years ago, Credit Swiss is at the moment. That's good stuff. I remember those Deutsche Bank days. And again tomorrow, I guess

is when we get the plan from Credit Swiss. So again another plan, Jonathan Tyson, you start senior banks analyst covers all the European a lot of the global banks. He's based in London and he does a great job. So we always appreciate getting a few minutes of his time. So there at Bloomberg Intelligence. So again some pretty decent numbers from some of the European banks. But again it all comes down um as it does for a lot of industries, particularly this quarter, are on their guidance, and

I think their guidances cautious at best. I'm not even say cautiously optimistic. They've got some challenging economic times ahead, particularly in your exacerbated in large part by the war in Ukraine. So we'll stay on top of all those europaining banks, all right, Katie are you a homeowner. I'm not. I have visions of beings. Okay, it's kind of tough out there. I think the US thirty year fixed mortgage right top seven percent. That's the highest since two thousand one,

that's reported by Bloomberg. That's a far cry from I think Matt got his mortgage, you know, less than a year ago. Three and a quarter. Maybe is that amazing that jump in such a short timeframe. Uh so that's a big deal. And then we have new home sales today, and I guess you see it in that number, those numbers, six hundred three thousand new home sales. Uh that's better than the consensus of five thousand, but that's below last month five thousand. So it's starting to really slow the

growth in new home sales here at the time. Maybe it's good for people like me. I mean, I'm not imminently looking to purchase a home, but I know some people that are, and they're just waiting for the market to turn enough. Or it makes sense again, all right, let's talk to somebody who does this for a living, Erica Heidelberg. She's a mortgage backed security strategist for Bloomberg Intelligence Erequity make that that new home sales data we got today, how did you read it? Well, you know,

it looks like we're continuing. I think a lot of people didn't expect last month's little surge to last because mortgage wits are going up, and if anything, the new home sales number is probably still a lagging indicator because rates have risen a lot this month as well. Overall, we're down around eighteen per night year every year, and

I think that's not to be unexpected. At the same time, we are seeing new homes under construction going up, so there's a continued kind of stabilization and prices and new home sales, but that may not last as well. And let's talk about what US mortgage rates are doing. I have to imagine that's trickling through into some of that new home sales data. US mortgage rate it's topping seven percent. That's the contract rate on a thirty year fixed mortgage.

What's the ceiling here? It seems like it's lifted every single week. You know. It's it's really quite related obviously to where treasuries are going. And I know that our economics and our Treasury team both expect that Treasury shood be leveling out soon because even though we do expect sure rates to continue to have to rise to fight inflation, I think the economy will start to slow in response, and therefore that will start putting a limit on how

high treasury als will get. And mortgage spreads are also very wide treasuries right now, we actually think they're probably wider than fundamentals suggest. I think there's just a lot of digestion going on as the TED pulls out of the market. But even take into account kind of you know, where we take the bed holdings as the percentage of the market will be, we think spreads are probably a little wide. So we're seeing some strong buy just in the past couple of days by mortgage investors who say

spreads are wide enough. Um, so, you know, presuming the money and the dry powder is there to kind of stabilize the mortgage market, it's it's looks promising at least the last in the most ucent trading sessions. That's kind of where I wanted to go, h Erica. In the kind of the market you cover, the NBS market, I'm looking at the Bloomberg u S MBS index total return and year to date minus fifteen point three percent, and don't worry, you have lots of company in that type

of performance across the fixed incomes specter segment. Do your clients you talk to are any of them saying, boy, this is A it's historic in terms of underperformance, and B can't get that much worse? Maybe now is the time? Um? Yeah, well, I definitely have a lot of clients talking to me and saying, you know, at what point are spreads wide enough?

And of course I can't fully answer that question because there's always unknowns and we're not really allowed to do that, but I will say that when we run aggressions and look at where spreads are relative to fundamental economic variables as well as the housing market variables, and even you know, our expectations for FED holdings as a present of the index,

spreads look wide. Now. One of the things is keeping spreads wide is the fact that volatility both in terms of return, so you know, from a fear versus reed standpoint, um, but also just in terms of how it affects mortgage valuations because there's make into convexity and the mortgage sector inherently, so high levels of spread volatile the actually do reduce the value of the mortgage overall fundamentally. But that being said, even taking those into account, spreads look wider than they should,

wider than our models think they should. So then it just becomes a matter of who who can fill the fens um void as as they step out of the market. Right Well, Erica, that's what I wanted to ask you. How much of that maybe unjustified spread wideness can we just blame on the FED pulling back from the market.

I think we can blame the bulk of it on that, but we also complain the high volatility overall in the market and uncertainty about the direction of rage and the magnizument of FED tightening policies which has related all the unknowns about inflation. So you know, it's not as as you guys said. It's it's not only mortgages that are into performing to perform. Obviously, equities of end to perform. So it's a global asset class um risk off phenomena.

But at the same time, I will add the interesting fact that as of this month, mortgages and an access return basis, which is considering hedge returns, are actually the worst performing sector in the Bloomberg Aggregate Bond Index, so we we've taken that dubious crown and have been corporates until September. So you know that also points of the fact that mortgage mortgage cheapening maybe overdone even relative to the other risk products. Seconds Erica, what's the credit risk

for mortgages right now? I'm getting that question a lot. My opinion is it's very low. Letting standards very high, and the amount of equity most homeowners have in their homes is very strong. So I'm not a concern for me at this point, but obviously we will be looking for any science pointing in the other direction. Alright, great, great stuff. I'm so glad we have somebody like Erica Ittelberg with us because the only thing I know about the mortgage securities market is that what I learned in

the Great Financial Crisis. I'm probably everybody else there, which is why we had to get smart quickly on that. And it's a very complex business. But fortunately have pros like Erica Heidelberg, mortag back security strategist for Bloomberg Intelligence. Yes, we have an MBS strategist at Bloomberg Intelligence because it's a huge market Uh. It touches pretty much everybody out there, the housing market. Uh. And it is certainly interest rate

sense that to say the least. And we're seeing that in the performance as John was just mentioning some disappointing tech numbers last evening. More to come reports after the closed today. Waiting on the market here, but we've seen SMP and doubt turn positive, so go figure maybe this market wants to move a little higher. We check in with somebody who does this stuff for a living. Quincy Crosby, chief global strategist at LPL Financial as a publicly traded

company on the NASDAC. You can put lp l A the ticker into your Bloomberg terminal. Check that out. Uh, Quincy, thanks so much for joining us here. What do you make of this market? Bloomberg News is out reporting on on a Goldman sax called Golden Sex as US equity bottom conditions are not there yet. Do you agree with

that or how do you think about it? Well, you know, statistically it's probably not in What you now have is the market transitioning from you know, concerns over inflation to recession. I mean, you you've seen much made of the three months Treasury note inverting with the ten year hasn't pretty pretty strong track records that excellent track record predicting a recession.

The question will be what kind of recession, and that is going to affect how the market reacts, because you know, if if market starts discounting uh and and concerns over over earnings, that's going to matter for whether or not we've reached the bottom. Quincy, I want to get your thoughts on the concept of bad news being good news

as we, you know, continue this conversation about earnings. That mantra has typically applied to economic data, but I mean many have made the case that when you see lower ad revenue, especially for some of these tech companies, that's a read on the economy, that's a read of cooling demands. Maybe that's good news in the eyes of the Federal Reserve.

What are your thoughts on that? Well, yeah, absolutely, I mean the market has been taking the data and then you know, filtering it through the perspective from the FED, and it's exactly that the bad news is good news because what the market is hoping for is that the FED begins a transition. I mean, I do most want the FED to stop or to pause, but you know, most likely it'll be a transition to a lower rate and less hawkish rhetoric as it moves towards the towards

the terminal rate. But that's what the market wants. In the market understands that the more the these the economy slowing, especially because it's become much more embedded in the broader economy, the labor market for example, then the said understands his campaign is working. So that's why, right, bad news is good news. Good news at this point is bad news, so Quincy. Last night, Microsoft, like many other companies, called out the stronger US dollar as as a headwind and

impacting their reported results. As a professional investor, Quincy, do you look past, you know, the swings and currencies and try to focus more on the underlying business or do you have to take the reported numbers as they are? How do you how do you deal with that? Well,

you know, you're you're always looking at guides. You've heard that over and over again that when we're going through the earning season and listening to the guidance, and you could see a number of analysts, especially Microsoft, and said, hey, this is this is a buying opportunity. The stronger dollar has been an important headwind, There's no doubt about it, particularly amid about back drop of a weaker demand as the global economy flows down. But that is going to change.

I mean that you're looking ahead three months and expectations are that the dollar will have weekend because the FED eases off, and that is very helpful for UM, for the you know, the global footprint for a good portion of the S and p if. I've heard at the multinationals. So there's no doubt about it. The guidance is crucial. Isn't as if Microsoft came in with a you know, terrible guidance the end of the Earth guardance. You know, it wasn't that at all, but it missed in terms

of the guidance, and that should change. Similarly, we're waiting tonight you hear from Apple, and Apple, you know, has a major fourth print globally. The dollar is going to matter. And so Quincy put this onto a portfolio for us, what's your highest conviction position at the moment, Well, right now, where we tend to be more conserve rid of at this point, and we like healthcare and energy has been

a top performer healthcare is moving in that direction. That has moved in that direction, including its riskier UH compatriot, which is biotech. On moving on moving UH A nice nice games for the advisors. Another thing that we're looking at, and that's important, and that is move in um UM industrials. It's like green shoots. A lot of that has to do with the defense component of industrials. The defense stocks very important for for the overall industrials. They're moving inch

by inch higher. The other thing that we're looking at is the bond market. We've been saying for some time now, the bond market has come back and offering UH investors a return, a return that they haven't seen in a long time. And to take advantage of that, the short duration we're moving a little bit longer, but investment grade

short duration again moving a little bit longer. This is going to help until the market realizes that the rates are going to come down as recession fears are introduced, and then obviously the rates will start to pull back. All right, Quincy, thank you so much for joining us. Always love getting your perspective there. Quincy Crosby, chief Global Strategist for LPL Financial NASTAC traded company lp l A is the ticker symbol there. Just talking about earnings and

kind of how the markets digesting those earnings. And you know, when I was an analyst, I tend to try to look through some of the fluctuations on FX and try to look at the underlying business to say, hey, how

are things going. But again, it can have big moves in the currencies, can have big moves on some of these multinational UH companies, And we're really seeing it, uh, you know, in a big way this quarter again Microsoft last night Apple as Quincy was mentioning huge global company after the clothes tonight along with the Facebook slash Meta. Let's get fright to our next guest, Brian Whalen. He's a co c I O and generalist portfolio Manigmate TCW Fixed Income Group. Ah. He went to some college in

Connecticut that's best known for its pizza. But what really gets my attention he was a former VP at Donaldson, Lufkin and Jenrette and Flux that don't know that was one of the premier firms on the street before Credit Swiss bought it and kind of destroyed it. But what's really good about the d l J people as they trained some of the best analysts on Wall Street. So keep that in mind, Brian, I got double digit declines

everywhere I look in the fixed income space. People are telling me this has never happened before, So of course I want to jump in with both feet and start buying everything. What do you think of my strategy? I like it. You had me at the intro and and now you've got me with the support for the bond market. Completely agree. We're at such a different place right now. I mean, you know, we started a year of the

ten years at one and a half percent. You know, you look at your your kind of standard bond fund today you're looking at a yield of somewhere between five and a half and six percent ends. Um. You know, there's there's plenty of opportunities around, not only just the yield, but you know, the potential opportunities you can get in credit.

Not to say there won't be more, but it's a different conversation about the bond market today, and not only get the yield, you know, but there's a strong argument to be to be made that you know, bonds can be what they're supposed to be in your portfolio, which is a diversifier versus other assets like equities. It's amazing to me how quickly uh tina went away. There is no alternative now. It almost feels like there's too many alternatives. There's so much opportunity, uh so many juicy yields in

the bond market. I mean, where do you see the most opportunity at this point? Yeah, good question, you know, for for us this first, you know, the first ten months of the year, it's been a kind of we've called it a high quality sell off. You know, so where have you seen most of the repricing. You've seen

it obviously in treasury rates. We just talked about that, and then other higher quality, larger parts of the bond market like agency mortgage backed securities, like investment grade corporate bonds. You know, those have kind of repriced the most and

looked the most attractive at this point. But you know, if our outlook is right, and it's you know, it seems to becoming more consensus, which is that we're clearly heading into a deep slow down and recession, you're probably gonna want to keep some powder dry for credit opportunities, meaning that you know, areas of the bond market like

leverage and dance, you know, high yield leverage loans. Parts of the bond market where you're exposed to kind of lower quality uh types of borrowers in the commercial real estate area or the residential mortgage area, You're gonna want to keep that powder dry because you know, those parts of the market really have not repriced. The spreads of the prices you see in those parts of the market

are not reflective of a recession. And so that's you know, with regards to our strategies, we've you know, we've jumped with both feet into the former into the kind of higher quality parts of the market, um, but still being cautious on the lower quality parts. So you know, I spent a couple of years earlier in my career that v Chase Manhattan Banks, so doing credit analysis. So I've got some chops there. I'm just an equity, simple equity guy. But my question is, you know, I'm concerned if we

go into this recession about credit quality. UM. So you're suggesting that is in fact a risk, and that is suggestive that maybe focusing on quality right now as opposed to maybe trying to grab for some extra yield. Yeah, I mean, look, you know, when we look at, let's feel good like corporate balance sheets, you know, they're actually not as levered as we saw them in late two thousand and nineteen. And part of that is, you know, it's the upside inflation. Right, you know, debt is a

nominal problem. And so when you have inflation, uh and debt stays relatively constant, your ability to service that that actually looks it looks fairly healthy right now. It doesn't look bad. That said, if we enter a recession, they'll certain be some you know some uh, you know, some things that go bang in the financial markets that will dry up liquidity, and you will see that reflected in wider spreads, higher yields in those parts of the corporate

bond market. It doesn't necessarily mean we're going to see the faults the same types of the fault levels that we saw in the Great Financial Crisis or you know, during the kind of the two thousand one two thousand

two tech bubble burst. But there could be a period of time and it could last, you know, months where you know, the high yield market is priced like that and now and now that would be a buying opportunity because you could get prices reflective of a high default cycle, but in reality, over the ensuing to three years, you may not get or most likely will not get, those types of peak default rates, and that will lead to the very good returns. Fry. Let's wrap the FED into

this as we count down to next week's meeting. I'm gonna ask you a version of a question I'm obsessed with this morning, which the idea that bad news is good news. You have, you know, signs of cooling economic data, and I know you're a credit guy, but you look at what we're seeing in the corporate earnings results, the impact of a higher dollar, slowing ADS demands. When you add all that together, what do you think it means for the FED? And what do you think that means

for the fixing communiverse at large? I think the I think that we think the FED is going to go as far as the mark it allows them, meaning that you know, if this you know, it's been fairly surprisingly orderly kind of year to date, like we haven't really I mentioned those bangs in the financial market, we haven't seen them. So you know, the Fed's gonna get They're gonna try to get well north of four percent, you know, the market's got it priced in somewhere between a four

and a half and a five percent funds right. You know, what might stop them from getting there is something that goes you know, really goes bang. Um. It's kind of the equivalent or even larger of that kind of UK pension LBI problem. You know we were here in the States. You know, that may cause them to kind of stop or you know, let's say, you know, unemployment jumping up surprisingly or a little more quickly, you know than the

markets anticipating. But long story short, the modern market right now is allowing them, you know, it's kind of pricing and allowing them to get north of four and a half percent. And if they're giving it to them, they're going to take it. All right, good stuff as always Brian Well and coc I go in generalist portfolio manager TCW Fixed Income Group and manage like two billion dollars. How do you even do that? Looking at the Bowing today, the stocks down about two and a half percent. They

reported some numbers. I kind of went through it. It It kind of looked like a mixed bag. Revenue, uh EPs missed estimates. On the one hand, all that are they hand had a ton of free cash flow, and I know that's what analysts and investors for Boeing focus on a lot. So let's break it down with George Ferguson. He's a senior aerospace, defense and airline analysts for Bloomberg Intelligence, has been doing this stuff for decades and of course the highlight of his life is easy proud graduate of

the Penn State University. Uh, George, kind of a mixed bag there for bowing. What did you take away from it? Yeah, so thanks for having me on you. I mean the takeaway was that even though cash was cash and global services, I think we're the two standouts in the quarter and a really ugly muddy quarter. Um, cash wasn't as good

as uh as it look. You know, the cash generation was largely driven by a tax refund and then um some pre payments on airplanes actually accounts receivable going up yere, which I think is has a lot to do with the defense businesses that they took charges on, but there's some other moneys in there. So you know, when when I look at cash floy like core cash flow like you generated from operations, You don't generate it from working account changes and tax refunds that were just it's just

not not not good, just doesn't not good, not good. Uh. Let's let's move from cash flow and talk about the seven thirty seven delivery goal cut again. Uh. It reduced its forecast for deliveries uh to about three seventy five for this year. Again, just another cut there. How surprising was this? Are are you pretty used to seeing these cuts at this point? Yeah? I think we are unfortunately getting used to seeing these cuts. And you know the noise we heard about next year wasn't good either, uh.

And I think that's really the challenge, right. I think UM build rates have to be higher than you know, they're not even achieving the thirty one they say is their stated rate UM. But I think they even have to get above thirty one to keep the company healthy, to generate cash, to absorb all that overhead, and to keep their supplier base in decent shape. And I think everyone is scratching their heads about this. Hey, it's the

engine makers that can't get US engines. You know. The Boeing management kept going through a number of analysts and the call question that you know multiple times, and you know, when we look at Airbus, they're building eight to ten more airplanes a month and they're getting engines, So what's what's the difference? Right? What's going on? So I guess you know, one of the issues is then seven the Dreamliner, which is one of my favorite aircraft in the sky. Um,

how's that doing? So I know it's not just a seven thirty seven then we have to worry about. But I know there's some issues with the seven eight seven as well. Yeah, so seven, you know, they they've got the FAA to sign off on on the six on those and they're starting to move them out of inventory, which is you know, that's a that's absolutely a positive story.

The challenges that the SEV seven doesn't make much margins, so you know, the contribution to profit isn't isn't large, But there's a lot of money in inventory that I think, you know, Boeing needs that cash, needs to needs to get it into the into the balance. She shipp those airplanes and that's going to give them some comfort going forward. Um you know. So, I mean again, I think seventy seven improving story, but just not not a lot of

profitability in that program. And so when you think about Bowing and the different struggles that the company is dealing with, supply chain issues, labor shortages. What do you think is the biggest hurdle that the C suite is talking about right now? You know, I think that, Um, I'm not going to limit it to one story. I'm gonna go for two. First, I think they should be talking every single day again about what it's going to take to get seven thirty seven max production up UH and sustained

at a higher level so they can generate profits. And they should be talking each and every and actually, part of that discussion is going to be they've got to be going to the White House and trying to figure out what is going on with China trying to either going to open or not open. And if it's not going to open for them, they got to go sell those airplanes that they've already built and get that cash again into their coffers. And the second thing is that

defense business. That defense business has rolled over. Now we look in we're not going to generate cash in that business that was you know, that is supposed to be one of the stabilizing factors at this company and now it's and you know, now it's not performing for them.

And they've got to get into that defense business, get these charges behind them, get that supply chain right size, even potentially go to Congress and talk about adjusting some of these fixed price contract because it's not just Boing this losing money a fixed price contracts. Everybody's having a problem with it. They've got to work that issue hard. That's an important part of this business. Uh, George, you mentioned China. What is the state of Boeing's relationship with China?

Can they in fact are they allowed to sell this China just not buying? What's going on? So China has approved the Max to fly in the country, but they are not taking delivers of the airplanes. And so of seven thirty seven Maxes that have been built in and are sitting on the tarmac out and you know, out

at different bowing facilities around the world. So as near as we can tell, this looks like part of a you know, part of the US China trade fight that bowing is kind of stuck in the middle of um there's a hunderd and thirty eight airplanes waiting to be

delivered into China. And you know what part of what's boosting air buses deliveries is the fact that they're still delivering into China um and that's giving them eight to ten a month again, So Bowing's got to go to the White House, I think, and start getting this figured out, like where are we in relations with China on trade? Interesting? All right, let's switch heres just real quickly to the airlines.

What's the top line story? What's the story here for the airlines that we know, like consumers, they came back, maybe they paused a little bit. Is where are we in terms of demand there on that for the airlines? Yeah? I mean demand has continued to improve and revenues have looked very good during earning season. Costs are still elevated. They're not getting twenty levels of profitability. Wasn't the toptick? Was the top tick? So will they will managements tell you, hey,

it's great, revenues are coming in. We think there's a huge amount of demand for air travel there clearly is. But the question is why can't they get us back to margins that look like against labor costs, it's fuel costs. So my sense is there's still some weakness at the

low end of leisure and business isn't back fully. So business, we think it is about back and the low end of leisure I think is going to struggle with higher inflation, and especially because we go into you know, economic slowdown, whatever you think is coming just over the hill, that's going to be the challenge for them. All right, Good stuff, George Ferguson, He covers the airlines, He covers the airspace

and defense companies all tied in, of course. George Ferguson, Senior aerospace and Defense analysts at Bloomberg Intelligence, calling in from our Princeton office. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller, three pen On fall

Sweeney I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.