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Even with today's thirty seven percent increase and lift, the stock still has a market cap, you know, six seven billion dollars worth.
Uber's got you know.
Multiples of that's skyrocket and such a huge divergence. So let's break down both of those numbers. We can do that with men Deep Singh. He follows some of the technical sectors of this market, follows pretty much everything in ten Yeah, so he's a technist for Bloomberg Intelligence.
So let's start with Lyft.
I took getting fired.
I took a Lyft home last night because why because it was cheaper than.
Uber by how much?
By like twenty Yeah, and that's typical one one or the other not. I just arbitraged the too. Matt Miller does not do that. I arbitraged the too. I thought everybody did that. So anyway, what happened to Lyft with their earnings last night?
Well, last night was bizarre because you know, you don't often see that in press releases.
You there, but you know, at the end of the.
Day, it was I think just a mistake that happened. It wasn't intentional in any way. And the stock move was pronounced because of you know, the short interest and uh, the fact that obviously people were not very optimistic going into the print. And look, I think in the case of Lyft, not much has changed in terms of execution.
There's still kind of a distant number two. And you talked about taking a lift, but there are certain zip codes where they are able to meet the ETAs that Uber has, but in other zip codes they have no supply. So even if you want to take a lift, there is no availability.
But my dude last night, like most markets I go to, he's got a n Uber sticker and he's got a Lift sticker, and he's got both apps open and they'll drive each other.
Yeah, there is a huge amount.
Of owner that and so literally it's apparently.
It's just here's my reading and you're the effort. It's just Uber algorithm, Lift algorithm. They're different. They're going to give you different prices and things like that. But but from.
A driver perspective, what Lift is doing is they are paying out more to lower drivers. So if it was a ten dollars ride, the driver is getting seven dollars or eight dollars from Lift, whereas from Uber they're getting six dollars.
It's just an example.
Yes, So that's where you know, the take rate matters what these companies keep versus.
What the driver is getting. And that's the I think tactic.
Lift is using to really pay more to the driver to bring on more supplies.
So then how does that then play out? So at some point they get enough supply and then they can sort of make more money per ride and increase the shares.
When does that moment happen?
I mean scale is the only mote you can have in this business, scale and operating efficiency. And so what Uber has done is obviously they have the scale. They are six times bigger than Lift in just the mobility segment, and like think of the gross margin. The reason why this is a sixty percent gross margin business is because insurance costs is.
Pretty high for right sharing, So how do you bring down.
Insurance costs through scale? And that's what Uber has because it does, you know, six times more rides, then lift, and in the case of Lift, if they don't maintain the supply, then they're just going to keep losing share, which is what was happening.
So they have to compete on price.
The only way they can maintain their share is they if they offer a lower price, as they did with Paul last night.
So that's that's the tactic. And I don't think.
It's going to be term modeled.
Yeah, so think of what happened with food delivery. There were so many players. Now you're down to two or three, you know, remaining it's Uber Door.
I still will not pay for for my youngest in college.
I have a hard time paying, but I'm.
Not going to.
We've established that firmly.
I support this.
Yeah, so there will be consolidation.
But if uber is announcing a seven billion dollar buy back, you know they're not buying Instacart now, So that's and are they are buying left? Okay?
Talk about that that buy back?
What does that tell us like when you buy backstock, isn't that because you're no longer a growth company?
Like? Is that the thing?
Yes? I think there is that element.
And also they're going to be prudent in terms of returning.
Cash to the shareholders.
So remember they acquired the freight business, that is a big drag on profitability. Uber didn't build freight business organically. They bought a company that didn't work out well. They bought Postmates for food delivery that didn't work out well. So their track record with Aquas isn't great. And so now they're saying is we are going to generate about seven to eight billion dollars in free cash flow. Well, guess what we are using seven billion out of that
for buying back er stock. I mean, obviously it's going to be over a period of time, not in the next twelve months. But I think that's good sound capital allocation, stuality, And look, this company is generating.
The mobility side is very healthy.
They've got you know, mid twenty percent ebit dumb margins compared that to lift, which what got people excited is they could get to twenty percent ebit dumb margins.
Well, not so fast. I guess that was the typo.
So I say, all right, how about the Uber each business. Again, I don't support this. I mean, I know it's a great people love it, but not on my credit card. So talks about the each business.
This is just to drive frequency, ok, just so that Paul has more transactions.
Which is advertising.
Then basically exactly and the only profit they're going to generate right now is through advertising. So the good thing working out for Uber is they have a membership's business, So that's your recurring subscription. You're going to buy an Uber membership that works for both mobility and delivery, and also they're going to show ads. So ads is a billion dollar rundread business now primarily driven by delivery and it's almost ninety percent gross market, so that's what's going
to drive the delivery profitability. But on a transaction basis, this is zero.
So this is sort of like Amazon Prime VIDDEO. Like it's just basically sell more subscriptions Amazon Prime up the price a little bit and then you get more viewers who were just into it and they buy more stuff on Amazon's Coming.
Is the way.
So they like Uber talked about this concept of being a super app almost three four years ago and they have been working towards it. Now they have integrated taxi. Remember when Uber came to the scene, they were supposed to or they actually disrupted taxis. Now they have onboarded Taxis on the platform to boost supply, and Taxis is about five percent of their business, So clearly, you know.
You come a full circle there.
You have integrated Taxis and their thing is will bring everything related to transportation on one app and you can find any and everything.
Neahi, I mean, he's done an amazing job turning that company around.
Minus the acquisitions.
If it was buying stuff, and that's.
What he did at Expedia. Expedia was built around acquisitions.
There.
I think acquisitions worked out probably better than they did in Uber, but clearly acquisitions wasn't and.
So one of the potential acquisitions I was out there was Instacart to ramp up the Uber eats. But you're now saying the stock buybacked signals that un likely to do.
That's completely out of question.
I mean, the question is can door Dash buy something given Like the reason why Lift's stock moved this much is because the valuation is like one time CB to sales.
Compare that to.
Five times ZV do sales or Airbnb ten times ZV do sales.
So clearly a.
Lot of the growth prospects are reflected in the lifts valuation.
Yeah, Airbnb will do that next time. I'm just I'm just not comfortable that concept. But I know a ton of people are around the world and they love it. So we'll get to that next time.
Staying or renting out your renting out your house or staying at someone else's.
House, both both, you know, I don't know, but I might not that weird. Yeah, coming into somebody else's It's more.
Like an investment property lot at the time.
All right, man, Deep Seeing Senior Tech anais Bloomberg Intelligence. We appreciate you stopping buy.
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I want to take a little deeper into the small cap world because the rust of two thousands up one point six percent of the narrative, if you just rewind the money, was that we were broadening out this rally in the S and P, that it wasn't just big tech. We were finally seeing small caps get a little bit of a bit. Well, let's talk to Brian Smoluck. He's principal and portfolio manager of the Hood River Small Cap
Growth Fund. He joins us from Palm Beach, Florida, much to Paul Kane as he looks at the palm trees in the background.
Hey, Brian, kill me. Do you buy small caps here?
Like?
Are they actually going to finally make a good comeback?
I think so.
The CPI print yesterday clearly didn't help things near term, given the FED was a little bit too aggressive in December when they talked about aggressive cuts this year. But I think once the CPI does settle down to a level of people are comfortable with where the Fed's going to cut, it's a matter of when, not if, then
small caps will outperform. You see that when people want to put on risk, small cap, particularly small cap growth, tends to put on a really big move, and then in Q four last year when that happened, the space really ripped. And it's been a fairly protracted period of big underperformance for the last several years. So the setup
is good given valuations, earnings revisions are trending. Positive spreads, which are a great leading indicator for small cap stocks, have tightened significantly to just a little over one hundred basis points, So the odds are highly in the space's favor for it to app perform over the next twelve months.
Hey Brian, Am I going to get an evaluation break if I go down into smaller mid MidCap territory relative to the S and P five hundred?
Yeah. So if you look at small cap growth versus the SMP, it usually trades at a premium. Right now, it's trading around eighteen times twenty twenty five earnings versus the SMP at twenty times, so you do get a discount there, And that's part of what I was saying why the setup is good because you get a relative valuation break. Usually the growth is faster and small cap names. I wouldn't expect this upcoming cycle to be any different.
So that's why you'll get probably some multiple expansion and positive ring servision which would lead to our performance over the next twelve months.
Hey Brian, would you have made a different argument six months ago because small caps did have a moment last year in that moment was short lived? Is the argument different now?
I would say it's honestly pretty similar. You know, we're bombs up stock pickers trying to find companies with a dislocation of fundamentals valuation. It's been a constructive setup, and six months ago it actually was good when you look into Q four and small capt putting up playing a move on to being up around nineteen percent for the year last year, so it was solid. But it has been a waiting game for small cap and you need race to cooperate with spreads for the sector to work.
Fortress Aviation FTAI is the ticker.
What's the call there, Brian.
We like the stock, it's one of our bigger positions. It's been really huge over the last eighteen months. We think there's some significant legs left in the story for it to really work. It trades it around twenty times earnings.
They have a new module repair business for engines that's growing around one hundred percent, and we think there's upside in that area, particularly when you look at all the news in the supply chain and airlines across the world really need to optimize how well their current engines were given that they can't get new engines or new planes
when Boeing's having all these problems. Meanwhile, the asset value on their current their current engines has been moving up because of the supply to demand and balance created by the fact that new planes really can't make it out the door, and you have rising demand around the world continuing for passenger travel.
You also have Celsius, which is it's like a Red Bull energy drink, right, I know it's different, but it's the same kind of idea.
You like this company, how come?
Yeah, we've owned it for a while.
It's a secular market share gainer. We think in the category it's gone from around two percent share to ten percent share. We think they can reasonably get to twenty percent share. They have a partnership with Pepsi that's ramped up over the last twelve months. Pepsi's the largest distributor in the world. And fortuitously they left Budweiser, which obviously wasn't great with all the bud light issues that they
were having. And we think the streets at about forty percent, they could easily grow fifty this year and the stocks has can around thirteen percent share, and as I said earlier, we think they can get to twenty And have.
You ever had them on those energy drinks? No, I'm scared of them.
Yeah, a little bit bitlius.
Yeah, Celsius is a little bit healthier. It's all natural ingredients. You still get the boost from caffeine. It's two hundred milligrams of caffeine. So I definitely wouldn't take it for you to go to bed, but it tastes better, it's healthier than some of the other drinks out there.
Yeah, I don't know.
Hey, Brian, what's a what's a how do you divine kind of like the market cap? Like what's a small cap, what's a MidCap?
Few?
And what happens when they maybe grow out of those levels.
So the last the last six months has been abnormal for the sector, and that there's been a huge bifurcation. So within the Russell two thousand growth, for example, super Micro is actually in the benchmark and it's over a thirty billion market cap. So normally I would say the range is between call it one hundred million up to six or seven billion, but it has expanded over time.
The sweet spot really is in that two to five billion dollar range, and those stocks tend to be a little bit more inefficient, and we don't typically sell stock when it gets too big. It's really when we think it's efficiently priced based on the fundamentals, or we think something bad is going to happen, we'll step aside.
It is a leading question because we're talking about you manage a small cap growth fund, but growth versus value in the rustle? Is it the same kind of thing as what we see in the general market growth, tech, everything else.
Well, in small cap growth you do have a larger percentage of software companies, semiconductor companies, biotech, and a little bit less financials and then some of the higher growth consumers. But small cap growth and small cap value are relatively highly correlated. But in different area there can be biggest versions, Like in twenty twenty you saw growth massively outperformed value
and then it completely inverted the prior year. We frankly try to be agnostic and try to find companies that are growing reasonably quickly called fifteen percent, but are inefficiently priced, So we kind of thread the needle there.
There's a good article in the Bloomberg Terminal today Florida boom cools an area where home insurance costs tripled Hurricane Ian worsened already rising homeowners rates, and they call that like Naples Sarasota Cape Coral.
I noticed you guys own some exposure here.
HCI Group is a homeowner's insurance company based in Florida.
Uhh yes, what's that?
Yeah, So it's been a great stock because of the dislocation in this particular geography. And what's happened is the lawyers had the upper hand, not a big surprise for an extended period here. A lot of insurers pulled out because of that because they were having massive losses. The state legislature came in made it so that it was
more reasonable and favorable to insurers. Each CI was set up well to write new premiums profitably, as well as takeover existing premiums from the state entity, which is called citizens, which allowed them to dramatically apperform expectations and earnings. Growth is significant. So it's trading eleven times zarniings. We have
to think there's upside of that number. And they're just set up well because the supply demand in the area, and as you know, the area is really growing, so you have a lot of people moving here, so demand is strong.
As Paul talks about all the time, you do want to move here?
No, no, he doesn't that's a hard note.
Okay, it's a hard no, but it does get jealous of the pond trees.
Yes.
What I find interesting though, when you talk about insures is that you know Florida is going to get hit with storm after storm, and it is a bit worse now, and I just wonder how the risk premium got to bake into these docks.
So whether it's a big issue obviously during hurricane season, HCI has been here forever and they did a good job pricing for that risk. So you just got to assume over extended period of time that when you take your lumps, you're going to more than make up for it based on pricing, And as you've noted from that article, pricing is up huge and there are a lot of
different reasons for that. In condos, for example, there was that condo that went down in Miami and that jacked up premiums all over the area, and an insurance companies were able to capitalize because now condos realized they just had to become conforming with state codes. So to me,
hurricanes are a manageable risk here. There's actually been less direct hurricane impacts on Southeast Florida than in the up to the northeast where you guys are so but you do have a fair amount happening happening in the golf, but there's less population in Florida and the golf and on the southeast side.
Hi, Rian, thank you so much for joining us. As always, Brian Smallock. He's a principal and portfolio manager of the Hood River Small Cap Growth Fund. Not in Bend, Oregon, but in Palm Beach Gardens, Florida.
You're listening to the Bloomberg Intelligence podcast. Catch us live weekdays at ten am Eastern on Apple car Play and then broud Otto with the Bloomberg Business app. Listen on demand wherever you get your podcasts, or watch us live on YouTube.
I want to know what's up with Craft?
So that' stock is moving a wopping six percent, it's down six percent. Organic sales decline wasn't so great. It was a lackluster end of the year and that's really dragging on sales.
So what's up with that?
Let's go to Jim Bartash's she has Boomberg Intelligence Senior analyst, retail Staples and packaged foods. Jen what was just so bad about Craft?
Well, the big surprise for Craft that volume was down, which was not a surprise, but it was down more than prices rose, and that really put pressure on the ability to generate sales growth, and so organic sales were negative for the first time since twenty twenty. And although there's some momentum in the business, it's got people concerned.
So, Jen, as I understand the package food business from reading your research and talking to you, you know, I guess post pandemic volumes are down, but then they've been able to make up for it by raising prices. More so, is that game kind of played out now?
Yeah. Basically a lot of these companies have run out of their pricing power. And what that means is, you know, they were able to raise prices because their input costs were hire, whether it was ingredients or transportation or packaging. But as inflation is coming down, they're losing the ability to pass through additional price increases, which means that if you want to have top line growth or organic sales growth, you have to have positive volume growth because you're not
getting it from just higher price anymore. And the problem for Craft Hends has right now is that volume is still down, price is lower than it's been and they're not seeing that bounce back in volume that typically lower pricing would encourage.
Okay, so a couple things to focus on. Let's go to the product side then, because you mentioned that a few times so volumes are down, it doesn't seem like that's just a pricing power thing. Do they not have the right products right now?
Well, I think their portfolio is actually pretty good. It's just that the consumer is not buying as much as they were before. So if you think back to pre pandemic, people had huge pantries and everything was stocked. They had lots of boxed goods in there. And now people are still a little bit more conservative and buying more on
a need basis rather than a stockpiling basis. And so until people start to bulk up those pantries again, it's hard to entice them to buy more than what they just need for this week.
So as I look at the analyst forecast, jen, I kind of see the one and a half to two to two and a half percent revenue growth in the next several years. That really is the story for most of these consumer package goods companies, isn't it.
It really is, especially for companies where the bulk of their portfolio are what you would call center of the store items, so that's the candy items, the boxed items. You know, that type of outlook for top line growth is pretty much in line with where you would expect normal inflation rates to be, and so that in and of itself is probably a reasonable expectation for where these where these companies can go over the next few years.
Do you think that prices then will come down or do you think that they stay sticky?
Prices will slowly come down. Retailers are looking to pass through cost savings to their customers, so there will be higher pressure on package food companies to lower prices as well. And as their input costs or their packaging packaging costs come down, it's harder for them to just tofy holding prices at a higher level and not passing through some
of those savings. So while prices may never come back down to where they were pre pandemic, they should come down a little bit from where they were in terms of peak pricing in the last eighteen month.
A little bit, I don't know if we like a little bit.
No, we don't. And that's and that's what that's the problem. That's a problem.
That's a problem for a lot of people, and it's a problem for the politicians who are saying inflation is still.
A bad story here.
So all right, So Jen, with these names like Craft Hinds and General Mills and Kellogg's, I got a you know, low single digit revenue growth.
I'm looking.
I got dividend yields for Craft Highs about four point seven percent. I mean, what am I owning this thing for? Am I owning it for single digit kind of maybe stock prece return plus some dividend yield.
And that's and that's my game.
That's that's that's probably the value play at the moment, right, meaning you've got steady kind of slow and steady growth, you've got a reasonable dividend. They do do share buybacks, you know, so there's some some shareholder benefit there, and you know, as consumers start to pick up their spending, then we may see a better outlook for these companies as well.
Who does Craft This is a really dumb question. Who does Craft compete with?
Like the Coke and PEPSI I know that PEPs was all like snack snack snacks, but they have the soft drink business. Who's like a straight up Craft competitor.
Someone like Caniagra would be, you know, or Campbell Soup. You know, those would be kind of those center type store companies that would compete most directly with the Craft Times.
Hey, Jen, I look at the at the holder's list here and I forgot about this. Berkshire Hathway Warren Buffett by far the biggest shareholder of this company with about twenty six twenty seven percent ownership.
What what?
What is Berkshire Hathway publicly said about this investment? How long have they owned it? What do they say about their stake here?
They've been involved for a very very long time. Haven't made a lot of public comments lately. But when Kraft Times began its transformation plan, which was now a little or three years ago, Berkshire Halfway was very pro They were very positive on that transformation story. And to be fair, Craft Times has executed on that transformation plan and generally ahead of schedule when it comes to cost savings initiatives, streamlining things, rebalancing their portfolio. So they really have been
sticking to that plan and delivering ahead of schedule. It's just that it's a multi year process.
Right, And like it's a tough time, and I get it, and there's inflation and then there's the demand. Do you think that the stock move I mean, I'm just looking at the chart here is it overdone?
Well? Part of it, you know, part of it is the concern about the volume. And when they gave their guidance for twenty twenty four, the company actually said that they think volume is going to shift to positive growth in the second half of the year. That seems like it might be overly optimistic and is probably part of what's contributing to that stock decline today.
So Jen, in your coverage area, you know, you got to Staples, the package food companies. What's the kind of the best idea? What do you talk to clients about most often?
Well, right now we're talking to people about, you know, who is it that has taken the least amount of price increases over the last say, eighteen months, and where are volumes holding up? Because to be successful over twenty twenty four and into twenty twenty five, it really is that question of how are you going to actually drive
overall growth and profitability. And so the companies that have been more conservative and been more prudent in that approach are the ones who are positioned right now to maybe benefit from.
That, So you haven't benefit from those. Actually, what's a representative name there?
So a good example there would be Mandolies where they took a lot less price than and actually the spinoff from Kraft Times career. Yeah, but they've been very They've been a little bit more prudent in terms of their price increases. And what we've also seen is that their volume has held up better Hershey, is another one where their volumes have held up, and part of that is that people love their chocolate.
That's true. I don't care about the Flowers examples. I'll definitely take.
We're learning a lot about Jen, we're learning a lot about Alex and her Valentine's Day preferences.
So flowers know, but chocolate, well.
I don't want anything.
Don't stupid but stupid.
If one tray herself as like this, simple girl, no demands, I don't buy it for a.
Minute, simple girl?
What No do I like Valentine's No, it's done. But will I eat chocolate? Absolutely as long as it's high end dark chocolate. Hey, Jen, what what's something you really don't like right now?
Like?
What sort of a negative trend because I'm also trying to understand for some of these names, the normalization that we've seen sort of backtrack the last four years and erase that, and that's where you have to kind of pick up and go from there.
Well, I think one of the I think one of the things that is an issue for the industry is that everyone still believes that they can optimize their portfolio and that they're going to find a buyer for the products and the product lines that they don't want at
a good multiple. And you know, at the end of the day, there aren't a lot of buyers out there for you know, categories that are slow growth or declining, and so there's maybe a little bit of a mismatch in terms of the belief that they can streamline their portfolio, get up you know, all the value that they think they deserve out of it, and yet I don't see a whole, you know, a whole suite of buyers lining up to look at those products.
Hershey, this company went public in nineteen twenty seven. Oh boy, they did one follow on offering, and then for about a period about twelve months in nineteen ninety three or four, we pitched them hard on doing another following. We actually had a good analyst on the name in the company like this, We went to Hershey probably six or seven times in a space you're pitching a falling pitching. Nothing didn't get paid, but the got the Hershey and got a lot of Hershey chocolate.
There's that.
So, so, Jen, what does a company like Hershey do? It's one of those things. I know they've gotten bigger through some acquisitions, but there's still relatively a small player relative to some of the.
Other big names.
But is there a brand so good that they can kind of remain independent?
Yeah, I believe that the Hershey brand is really iconic. And if you think about some of their uh some of their biggest chocolate lines, there really aren't a lot of uh, mass targeted competitors out there, so, you know, people may prefer the higher end alex, you know, but but when it comes to kind of that mass market, it's hard for an external brand to come in and
get the kind of penetration that Hershey has. And in addition, Hershey has really done a good job of diversifying into the broader snacking, so they own you know, they own popcorn brand they own, you know, Pretzel brand, so you know they've they've done a good job of diversifying and that'll help, you know, that'll help them with their long term growth as well.
Really interesting.
I'm surprised that John Tucker didn't have some weird factoid about Hershey, Pennsylvania.
We have the Hershey School and all that kind of stuff, and.
Yeah, but I mean like weird off the beaten track, like here's where the cemetery.
I don't have any fun facts about Hershey, but I suspect it's out in that region of the world because there are lots of farms and milk cows that give milk and stuff.
I could have told you that. All right, we really appreciate it. It's so great to catch up with you. Such wonderful analysis. Jen Bartasha's Consumer Staples Bloomberg Intelligence senior industry analysts, and she covers everything everything, everything food related, which is just such.
An years ago which still shocks me to this day. The number one supermarket chain in the United States is Amazon.
What no, I mean Walmart. I'm sorry Walmart.
Oh, okay, okay, that makes more sense.
Sorry, right, and I forgot about that. But when you do go in there. They're just massive square footage.
It's huge. H I mean, isn't where they make the majority of their money or.
I think I think it drives traffic and they make it on it because it I think, you know, supermarkets, I think the margins are really really, really really low, so you make it up on buy them and you bring them into the store and they buy other stuff.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play and Android Auto with 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.
Okay, let's get to the markets here at the SP's up four tenth of one percent. You know, I kind of felt like this was going to happen yesterday when we had that big sell off, particularly as we closed off the lows.
But the question is how sustainable is this? Sort of by the dip narrative?
So let's ask Nancy Davis, founder and CEO of Quadratic Capital Management. She joins us now from Greenwich, Connecticut. Nancy, how do I own understand the price action right now on the main index.
Well, Alex, I think you said it. Well, it's a little confusing.
I mean, it's basically good data. Yesterday we had a stronger inflation, less FED height or FED cuts, and that's what's kind of fueling the market. The market's on hope right now that the FED is going to ease rates and save everything from being overly tight.
So you know, I'm looking at the bond market here because boy, in twenty twenty two, the bond market just got crushy. There's no place left to hide. The sixty forty portfolio did nothing for you, a little bit of a positive performance, and last year, thanks goodness to November December. But here we are starting off the year again in the red for fixed income.
What is what do we do in the fixed income space? Nancy?
Well, it's tricky because the US yield curve is so incredibly inverted. So what that means is that longer dated interest rates are anticipating the FED will aggressively cut rates, and everybody in the bond market is kind of holding out their hands saying okay, cut now. And the market being inverted, you're getting paid less yield to take more duration risk. And so the market has been rushing into credit,
private credit, public credit. So credit spreads are incredibly tight, right along with their corporate cousin equities, So those financial assets that are at all time highs. And then if you look at the treasury market, you can buy a one month T bill and get paid five point four percent, or you can lend money to the US Treasury for
ten years and get over a percent less. So it's a really crazy environment because the yield curve is not normally this inverted for this long and it's really I think a message to bond investors that you're not being paid to take duration risks.
So it's funny you mentioned that because a week ago, the conversation was, Okay, my three month T bill was up? What do I do with the money? Do I do I go into equities? Now do I do something else? And now it's like whoof Nope, gotta stay, gotta stay, because that the money market funds are just really too attractive. How do you then navigate an environment where we're going to get three cuts maybe for normalization rather than something more dramatic.
I mean, I think most people do have equities in their portfolio, and the equity market is really hanging on to this premise that the FED is going to cut rates. So I think it's reasonable to have some short term treasuries. And I don't think you're really getting paid for the
risk to take credit risk, because it's similar. You know, if you think about owning a corporate bond and owning a corporate stock, it's a similar corporate beta, and corporates are really expensive right now, so I think it makes more sense to just have treasury exposure and not add that credit risk into your bond portfolio because you already have it on the equity side.
You know, I was surprised last year when we did get some decent performance out of fixed income, that high yield was the real outperformer. And I would have thought with all the discussion of everybody talking about a recession right around the corner, that you wouldn't want to take that level of risk.
What happened in the HYLD space.
And I assume, just by your previous comment that you're not being enticed by the hyold space this year.
Yeah, I think high yield investment grade pretty much anything with a credit spread. What you want is credit spreads tighter. If you own bonds with credit risk, and credit spreads are near you know, their tenth percentile of all time tightness. So you know, especially I think I caution people it's
not just high yield, it's also short dated. A lot of people have been going into short duration funds, and if you look at your short duration funds that take credit risk, you know, ig credit spreads are around thirty basis points for the three year point. It's even tighter when you go closer in and there you need a company to amend or extend, right, they either have to pay back the loan or they have to turn it out. So it's really you know, it can only go to zero, right,
so there's very little. You know, you're taking a lot of risk and not getting a ton of return. And so going back to those tea bills, like, yeah, maybe maybe the FED is going to cut rates, but then you should be okay on your equity side of the portfolio. And if they don't cut rates, you don't have that reinvestment risk. So I don't I don't think T bills. They're they're boring and they're not super exciting, but I don't think they're bad.
You also mentioned here in your notes of the fiscal situation and watching the deficit. I feel like, yes, except no one seems to care, So like, what do you do with that?
Yeah?
No, Alex, You're exactly right, nobody cares. But I think that's also the time when nobody's talking about something, it's important to be mindful of it because usually that risk is not priced. You know, the Treasury Department does have to refinance a tremendous amount of debt, we have a ton of fiscal spending, we have an election year. There's really even no election premium priced into the volatility markets.
I mean, talk about pulling my hair out. I want to grab people and be like, what's wrong with you? Do you realize what's around the corner and what we're going to be facing. So I think that's the time that investors. You know, in all markets, you want to buy things that are low and sell things that are high.
And there's certain things in the fixed income markets that are really inexpensively priced, and then there's ninety percent of the market that's really expensive, so you want to kind of avoid the expensive stuff and buy the cheaply priced things.
In my opinion, so what is the FED going to do this year. I guess obviously the March cut is off the table. I think people are now really debating May and maybe even suggesting June might be the first, might be the launching point.
What do you think?
I think it's really hard to predict what policy makers are going to do, and then it's even harder to predict what markets are going to do in response to that policy, because it's all related to expectations. Right. You know, if we if we rewind before the FED started hiking rates and the dot plots started to come out higher, I don't think any economist out there would have said, Okay, the Fed's going to hike to five twenty five and
about a twelve month window. I think nobody was talking about that, and now everybody is talking about rate cuts. It's just a question of how many, how quickly, and when is it going to happen. I think we also have to be mindful of the Silicon Valley swap lines. So the BTSP program is expiring in March. That's put a ton of liquidity out there in the system that's
going to be coming out. So I think there are a lot of things out there that are catalysts to make markets more normal and fixed income, I think having an upward sloping yield curve. You know that's not some kind of tail event, right, that would just be normal. Like in normal environments, when you lend somebody money longer, whether it's a sovereign or a municipality or a corporate, you typically get paid more interest to lend longer, right,
because it's more risks. Right now, we're not seeing that. So I think there are a lot of ways to kind of play for a more normal market, and it doesn't necessarily have to be dependent on the FED just cutting rates, because I think the longer the FED pushes off the rate cuts, the more the economy, especially all the corporates out there that have debt will have to refinance. So it could potentially be higher for longer means more
cuts faster later because the economy is really slowing. So I think it's tricky.
That, all right, Nancy, We appreciate it.
Nancy Davis, founder and CEO of Quadratic Capital Management talking about fixed income, and then also you layer in the election timetable and the idea that the closer you get to the election and the more you cut the more it.
Looks political, and that kind of changes the framework to a little bit.
Yeah, so I think if you start, maybe that takes some of the political risk at you start.
Olentially see how play that.
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