You're listening to the Bloomberg Intelligence podcast. Catch us live weekdays at ten am Eastern on EFFL car playing Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts, or watch us live on YouTube.
Tesla That's dock down by three tenths of one percent a great scoop by Dana Hall and Ed Ludlow on our Bloomberg News team talk about how staff and Tesla are bracing for potential job cuts. Apparently, managers were asked to affirm whether each of their employees position is critical. That feels good.
Yeah, that always feels.
Really great when you hear that. Joining us now is Steve Mann, Bloomberg Intelligence, Global Autos and Industrials research analyst Hasteve. What did you make out of the scoop from Bloomberg?
Well, I think, I mean, job cuts are never good for the employees, but I think the investors will probably look at it positively because the stock's been down like twelve percent since their last earnings call in thirty percent year today, and that's all because as you know, slowing EV sales price cuts, so the company needs to do something to you know, to address them of the short term challenges they're facing.
So when I see news like this, it's it really makes me think, Steve, that maybe they see something fundamental in their business such that they have to look at a big fixed cost like people, what's the company saying these days about where they see well, I guess demand.
Well, well that's a good question. I think you got two questions there. First of all, fundamentally, you know, they've done a lot of price cutting, you know, in their operations, in an administrative side of things, in their manufacturing, so they're naturally they actually they're naturally kind of out of They plucked out all the low hanging fruits. There's not much to cut anymore other than looking at their human resources,
and that's what they're doing at this time. Now. Obviously you know you don't want to cut, but I think they have to. If you look at forged earnings call last night, the market is really brutal. They've the margins was down, like was that negative ninety eight percent for
Ford's EV business. That's worse than their third quarter. So from that you can see the whole entire EV market is still facing you know, price cuts, slower demand, and that's you know, I think that's what Tessa is trying to dress for twenty twenty four.
Hey, Steve, do we have an idea of when the trough might happen for EV's, when we is just going to take cheaper ones or is it going to be actually more hybrid and that trough be really pushed out.
I think hybrid is a good kind of fill in between now and when you know EV's can take off. Our view is actually, you know, around twenty twenty six, because I think that's when prices cost of manufacturing evs will come down, you know, with localization of battery production, more EV models out there, and everyone, every automaker right now is talking about the second generation of EV vehicles,
the third generation of EV vehicles. They're actually designed on a very different platform than the ICE vehicles, the internal combustion engine vehicles that is supposed to streamline production, cut parts, cut the number of parts, and hopefully drive costs down and make it more affordable for the consumers.
So it's a twenty sixth story. Will the charging infrastructure also be a twenty six story?
Well, no, there are some spending at the moment to increase charging infrastructure, but I mean that's another bottleneck that the industry is facing. I think, you know, out on the West coast, out in the East coast, charging in structure are not of a big concern, but Central America is, So that's where the focus is. I think in the next couple of years you really built up the charging infrastructure in that part of the country.
How many charging units do you have at the Princeton campus at Bloomberg right now?
Oh, it's It's interesting. If you go out to the parking lot here, you think it's a Tesla dealership out here, there's probably you know, fifty forty.
Fifty people have the cars, like are the Tesla's actually being plugged in or ev oh.
Yeah, oh yeah, oh yeah. You'll see mostly Tesla. You'll see a couple of Volkswagen, a couple of Volvols.
But because when I was that's why when I was at the Princeton campus, Steve, you know, I guess I haven't been there since before the pandemic. It's called it five years. Five years we had two. Now you're telling we have fifty. That is a good barometer.
I think.
I think Bloomberg is usually on the cutting edge of this stuff, but still interesting.
Yeah, and I wonder like, did you get the idea that the charging was there, therefore you brought the EV's or it's just a clientele that has the EV's. Unfair question, But like, what do.
You think that's a good question. It's all about the cost of ownership. I think you're right, Alex. Having the charging stations here make it convenient for people to charge and really cut their monthly costs. Right, there's no fuel costs anymore with the with the evs, and but it's all by the cost of ownership.
It's free.
The energy should be charging you people down there for this.
They got I mean they got the solar panels up back, they.
Got free launch, the literally free launch.
It's awesome down all right, Steve, thanks so much for joining us. Steve Manny's a global autos industrials research he's down there in Bloomberg in our Princeton office, which is really cool.
That's you know, that was one of the Bloomberg's first offices. Down there.
They had the global data folks and I don't know how many people we have that there with three thousand maybe maybe more do some awesome work down there, and that's where a lot of.
The b I folks, and also all the EV's apparently.
Carent all the EV's fifty. That's pretty cool.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecard Play and Android Otto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg eleven thirty.
It's got a Hermit chen here.
He's a senior and was covering the regional banks Hermit New York Community Bank. That's the story of I guess the last several days. What's the current status of that? Is that something that bank investors in general have to worry about regional banks in this country?
Sure, I think it's definitely brought to the forefront worries about commercial real estate in particular. But really New York Community's issues are a bit aiosyncratic because they just crossed over that one hundred billion dollar threshold that requires tougher regulatory scrutiny. And New York Community is also the dominant lender in the rent regulated apartment lending area here in New York Work, so not much read across to other regionals.
Well, we also had headline that they want to sell some of their RV loans and offloads some mortgage risk. Are there going to be the buyers for that.
Right, so that that's going to be an issue for the records.
The buyers at the right price, buyers at the right price.
So for newer community what these two actions are really a bid to improve their capital ratios. They've talked about lifting their CT one ratio to ten percent by the end of the year, which would be more in line with their larger regional baking peers. And so the synthetic transaction to add insurance on their residential mortgage loans and offload some RV loans is designed to potentially do that.
R V loans, now, these are recreational vehicle loans. John Tucker thought there's some technical arcane these.
We're sure to John Tucker, that was me. I was the one who was like, is this a specialized sort of loan?
So is that a thing?
Yeah, So that's the thing that some regional banks actually do, and it's it's a lucrative business. You can think of as sort of like a an auto loan, but just for r v's and banks like M and T and Bank ozk Uh.
These are RV lenders.
Well, also, remember that RVs were super hot in twenty twenty. Everyone wanted them. You couldn't like make them fast enough because that was the only vacation you could have get in your RV go around.
So that's right, what's going to be the open road?
Exactly what's going to be next for this company? Because you could make an argument that they're doing everything right and I'm putting that in quotes in terms of like updating investors, getting their books in order, et cetera. So what do they do now that they right?
They're trying to control the narrative, But the market's saying something else entirely where where the market's concerned that even though liquidity is in a pretty good shape and deposits are actually up, but since the end of the year, are they going to be able to generate enough earn to meet their capital ratios? And how are they going
to fare in the upcoming stress test? When they did that, if you step back and when you look at what they did after they announced the signature transaction last year, when they were viewed as a savior, they could have been I guess maybe a bit more aggressive in building up their capital and liquidity back then, so they're not in a pickle now. But that's really spilled milk at this point.
So one of the themes I'm still in the back of my mind if I were a bank investors, I just don't know the magnitude of some of these commercial real estate exposures.
I believe in the past you've.
Said for most lenders, it's not that big a deal, is.
That right, Well, we're gonna talk specifically about office commercial real estate, where that's that's really the potential boogeyman here.
On average, across our research coverage, which covers the largest nineteen twenty regional banks, it's two percent of their total low books, so it's actually really small, advantageable and you can and then on top of that, you have pretty conservative underwriting, and they've they know this is a risk, and the regulators know this is a risk, so the banks have already started to build up reserves to protect against potential losses. So put that all together, it just
seems like it's going to be a manageable issue. But you're going to see losses eventually.
So can this bank stay in business.
That's going to be an open question.
Uh.
They've tried to put a very encouraging view out there on their earning, on their management call earlier this morning, talking about the strength of deposit franchise and you're not seeing deposits flow out of the branches, and they have a boost of liquidity. So they're they're what they need is time and it remains to be seen if the market's going to give them time to build up their capital.
I want some m and A. I want some business.
I want to come in here every Monday morning and see company A, bank A buying bank B.
But that's what they did. And look what they're in now.
Careful what you wish? What are we going to see?
You know, this whole issue surrounding your community. Where they came in, helped out the FDIC and the regulators and really helped out the banking system by taking over signature, and now they're in this pickle where they have to adhere to these tougher regulations clearing that one hundred billion mark. I don't think any other bank that's going to be in this same situation wants to jump into that same scenario.
Can I answer a quse stupid question. Is there a stock price that we need to be worried about? Is it three seventy well zero, but three seventy nine right now? Down another today?
I think if the market pressure continues, it's going to be something where where the regulators take a more focus view and maybe be more forceful with what's next.
But you have to wonder too. You know they were able to do that with SVBN First Republic, right, but now look at what happened with this bank which boughts of first of public access because of that? So what will regulators do to that?
Right?
Hey, Jamie, Jamie, sorry to ask, but I got another favor you got to do me.
For here start a body down at St.
Barts, but can you go over and buy you in your community bank? Hermit Chap, Thank you so much. We appreciate that, Hermit cham He's a senior analys He covers the regional banks in the US Force. It's been a go to source here really over the last you know, twelve to eighteen months as we kind of figure out what's happening with the regional bank business.
You're listening to the Bloomberg Intelligence podcast Catch Us live weekdays at ten am Eastern on Apple car Playing and broud Otto with the Bloomberg Business app. Listen on demand wherever you get your podcasts, or watch us live on YouTube.
All right, let's get a sense of what we're doing here with this market's We're about halfway through the earnings for the quarter. We've got to fed that presumably is in the mood of rate cutting.
So what do we do here?
Couch Schlife joins and she's a chief investment officer at Bimo Family Offices. I remember when they were Bank of Montreal, but some I'm sure you know consultant came in and said bemo and shorten it to BEMO. So Pang of Montreal bought a lot of my loans that I originated at Chase, So we love those folks. Carol, what are we doing with this market here? I had a great November December. I'm not sure if everybody else did, but
I had a great period there. I'm wondering what do I do now in twenty twenty four.
Yeah, November and December were definitely fun periods, especially coming after October. But we think the market's got a little over their skis with exuberance about how soon and how often the FED was going to cut this year, and so the some rationalization of that coming into this year is actually makes a lot of sense.
But our approach really hasn't changed much.
We actually were in the soft landing camp all of last year, from the beginning of the year on, thinking the FED was going to be able to navigate both keeping the employment and the economy humming along while we
were seeing inflation straighten itself out. But coming into this you're keeping that balanced approach to risk where you're getting paid to invest in some bonds, so having that portion of your portfolio maybe out of cash into some of those higher yielding, shortened intermediate term bonds, but then also not wanting to back away from a growth oriented sort of We think the economy is in decent shape. We think you'll see a broadening like you saw in November
December last year. The most encouraging thing about that period was seeing that broadening of the market, the participation.
You narrowed it up.
On the good days here as we've had earnings from the Magnificent seven or five or two as you were talking earlier, but bringing that through and continuing to see more participation in mid and small cap will really be necessary.
And we think too, Carol, But I guess I wonder when we get there, because it doesn't seem like a really no one's going to sell right now? That feels clear, right, The hurdle to cell feels really high. But if I have money in a money market fund, the hurdle to then buy here feels also really high. So what am I supposed to do?
Yeah, it does.
It feels high until we're looking back and the Fed's done a couple cuts and all of a sudden, you're five percent in cash is three three and a half percent.
So I need to buy small cabs now.
Is smaller mid cap in terms of more broadly, and there's ways to do it in a passive way. There's ways to look through. You know, are there interesting sectors or industries or actively managed ETFs that you want to be part of. There's some secular stories going on out there, as it relates to artificial intelligence, as it relates to infrastructure rebuild.
There's some active ETFs.
That follow those those segments, if you will, And so there's interesting ways to play it. And then again too, even if you have passive s and P exposure and dollar cost average into that you're getting participation de facto by the overweight in those major indexes to technology in the United States here in particular.
So cal when when you talk to your your clients at BIMO Family Office, the the you know, the financial consultants at BIMO, what's the ETF allocation.
For you guys?
How often do you say do you recommend an ETF to get at you know, maybe just exposure to fixed income or just different asset classes.
So how important are ETFs?
Well, ETFs play a role, so do active and passive. We also have passively managed tax or passively managed tax efficient strategies where we can do separate accounts. So there's a variety. It depends on the size of the account. It depends on the inclinations. If we're going to take and say, adopt an exposure to artificial intelligence, an extra exposure to Japan or artificial intelligence, we might take a three to five percent position in a particular ETF or
a suite of ETF. If the account is the such a size that we want to use ETFs to deploy some short, intermediate, long term bonds, the whole position might be in a variety of ETFs, and they would most likely be passive.
There what do you really hate right now? Like what can you not touch?
What could we not touch?
Yeah, I'm not sure depending on the client, that there's anything we really hate, if you will, that's part of being balanced. We're going to be underweight some certain things. Emerging markets, develop markets in Europe where underweight those relative to relative to.
The overweight we've had in the United States.
Sector Wise, it's tough because there's a lot of interesting things going on, especially from a secular build standpoint in the United States, and there's a lot of things that are overlooked and unloved. We don't hate technology, but clearly
that's where all the emphasis has been. But there's a lot of things like industrial and infrastructure companies where when you look at those as sectors, they're only ten or twelve percent of the S and P. And we think you'll see that grow as we reindustrialize and bring manufacturing back here, as we build out the grid. You mentioned having the green and the hook, you need to get
it on the grid. Also in places where take Minnesota, where you've got the western part of the state is where the solar can be built, but it's not attached to the grid, so they actually have to build hundreds of miles of transmission power just to get it to the grid.
To be fair, there is like a name for that thing, that thing, but I just know the thing that you need to plug into the grid.
But there is a need a plugging things.
It's the pluggy thing. We'll just coin that right here.
So, Carol, we're about halfway through earnings. Here is anything kind of jumping out at you?
Here?
Are you?
Are you okay with the earnings? Do you think we're.
Seeing some cracks maybe in earnings power out there?
I think the thing that jumps out at me on earnings is that you can't and you can't broad brushstroke even in an entire sector. There's been a lot of dispersion in those sectors about the haves and the have nots. There's also been a lot of dispersion in how investors are treating them because a company might beat on the top and the bottom line, and they nail the stock because they don't like what the CFOs said and the conference call, and so it's really it feels and smells
like we're back into a stock pickers market. We're actively managed, should have an advantage if they've got deep and broad research, and so that's one of the things that strikes me, because overall earnings are pretty reasonable.
They're not as exuberant.
On the beats on the top and bottom line as they have been in prior quarters, but they're reasonable and
they're consistent with this economy. The other thing that's really notable is companies are seeing from the reaction and other stock prices that if they announce, oh, we're triming heads over here and we're cutting costs over here, the stock prices go up sort of no matter what the numbers are, because it looks like management teams are staying really focused to be laser precise in how they're running their business.
In the street likes that it does.
Absolutely. We saw that with Meta last year. Just amazing.
Cowrischlife, Chief Investment Officer for BEMO Family Office, Thanks so much for joining us. Based after in Minneapolis, Saint Paul, I'm happening to be a Saint Paul fan versus Minneapolis. That's just my I thought that architecture in Saint Paul's really cool.
I've never been the same place.
The airport that has a plane hanging from the ceiling.
I think so. I don't know, it's just I've been so many airports in the Midwest that I.
Can't help your eyes with out with this one.
Ye got an great hotel. I forget the name of the hotel that I like to stay in Saint Paul. It's just awesome, really old school.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Apple card Play and Android Otto with the Bloomberg Business. You can also listen live on Amazon Alexa from our flagship New York station Just Say Alexa playing Bloomberg eleven thirty.
Disney reporting after the closing bell today. Of course, yesterday we got the news the ESPN, Fox and Warner Brothers were going to do a streaming sports service. I don't truly understand what that means, but luckily KEITHA. Mrgnahan is here with us, Bloomberg Intelligence analyst on US Media. Gith, is everyone going to ignore the quarter now and just focus on this ESPN thing? Yeah?
Definitely, big, big news, Alex. Absolutely, I think there are a lot of you know, obviously, it raised more questions than answers, but potentially it could be a huge game changer. I mean, especially if it kind of comes out at a really really attractive price point.
So Githa, why, Well, I guess why are they doing it now?
Do you think?
I mean, what's kind of the strategy there? Are they trying to get people who just don't watch sports or don't have subscribed a cable.
What's the play here?
Yeah?
I think you know, definitely, we know that we've lost about thirty million consumers to court cutting. It used to be one hundred million, we're now down to seventy million. We also have multiple, multiple four who have actually never subscribed to a PATV bundle, and a lot of them actually tend to be very hardcore sports enthusiasts. So you know that the companies are actually pinning that market at about sixty million subscribers potential subscribers, So there's obviously a
huge target market for them. And I think this is really a wave Paul for these companies to kind of finally take control of their own destinies in a way. Right, they own content production, but they have never you know, owned distribution. You know, they've always kind of been at the mercy of the PATV distributor, and so this is a way for them kind of I think, whatever you want to call it, but in a way kind of future proofing their their revenue streams.
So when you say an attractive price, what is that price?
So there, you know, there have been some rumors out there, so we know an attractive price has to be something way below the seventy dollars PATV package, right, that's what we're paying right now. If you just want to buy this package off of Comcast or Charter or any of the PATV operators out there, it's obviously not going to be as low as say, you know, a regular streaming service right like Netflix for twenty dollars. It's obviously going
to have to be higher than that. We have seen some reports trickle in about a potential forty to fifty dollars price point. I would say that that is still pretty attractive for a hardcore sports fan. Of course, some others will argue that you're still not going to get all of the sports, right, You're not having paramount, you're not having you know, NBC content, So it's still going to be somewhat of an incomplete package. So it remains to be seen, you know, you know, the devil obviously
is in the details. We'll have to wait and watch and see if you know they're going to be able to license out any of the other sports, or how it exactly works. But I would say, you know, for first, at first glance, the forty dollars price point seems pretty attractive.
Well, I got to pay for that somehow, and I think the way I'm going to pay for it either is I'm going to call up podcasts and cancel my video package and just keep broadband. The cable companies can be very happy.
About this, no way.
I mean, this is really I think in and if you just kind of look at the market reaction today, you look at the broadcasters, you look at some of these other media companies, obviously a very negative reaction, and I think a lot of that is kind of exactly this point that you're bringing up, Paul, which is this worry that this is actually going to accelerate cord cutting.
So we already know that cord cutting is running at about I mean it used to be back in the day, it used to be two percent, three percent, just to kind of this little trickle, so nobody was really overly concerned about it. Of course, now that has accelerated to about eight and a half percent right now, and I think this news obviously can take it well into the double digits, and that's really a dismally bleak future for all of these broadcasters.
Do you think that the broad the broadcasters are surprised by this? I mean, I had to have seen something like this coming, right, like what's their plan ABCD?
Yeah, I mean I think we kind of knew that ESPN was going to do it, but just kind of getting this more robust bundle, you know, having you know, both fought like if you kind of think about it. Fox has never ever said in fact, they've been always kind of married to the PATV bundle. So having them kind of do something like this of these a little bit of a shock, I would say, in some ways,
similarly Warner Brothers Discovery. Again, they don't have too much of sports, but they do have some sports that really count, which is the NBA and March Madness, and so you know, again having them kind of participate and make this kind of this bigger streaming service, I think definitely came as a little bit of a surprise, if not as kind of blind siding some of these broadcasters.
All Right, So I'm guessing on the conference call this afternoon after the market close, when Disney reports earnings, this will be a topic of conversation. But there's a long list of issues for Disney and investors. What's topic number one for you aside from what's going on here with the sports business?
And I think the two things that everybody is kind of really looking to is, you know what the streaming profitability numbers are going to look like. I mean, Disney has obviously already done a really really good job, Paul, in terms of bearing those streaming losses. So just two years ago they were losing about four billion dollars a year. Last year they kind of really cut that down to about two and a half billion. This year, hopefully they
get it down even lower. They're supposed to turn break even to slightly positive by the end of the fourth quarter. But any any kind of guidance that they can offer on that front, I think is something that investors are going to be looking very very closely at. And then I think in general, just the cost cutting efforts, right,
We've seen Disney already do a fantastic job. I think in many ways, even the sports streaming service kind of speaks to that whole concept of, you know, rationalization of sports costs because when they kind of bid in the future for you know, for sports rights, you know, the joint venture kind of really helps them limit the downside, I think in many ways, because sports makes up forty percent of Disney's total content bill, so it's a huge, huge,
huge part for them. So I think anything on those two fronts, cost cutting and streaming profitability will be top of mine.
So let's go to the streaming profitability for a second. What is less bad versus good?
So right now, less bad is good, you know, because nobody is making profits right now other than of course, Netflix, which just through out about seven billion dollars of EBITDA seven billion dollars of cash flow. None of these other big media companies are doing it, and so that is kind of, you know, the guiding light, if you will. I mean, everybody wants to be Netflix. Of course, it's not easy to get there. There's going to be a
lot of challenges down the road. But I think that you know, we do have one streamer that has kind of achieved profitability. We do have Netflix at twenty percent operating margins. It's going to take a long time for Disney for a lot of these other piers to kind of get anywhere close to Netflix. But I think they know what they have to achieve if they've got to win over the street.
Does Bob I have a successor yet, because that's still kind of an issue.
No, I mean, maybe they do. I'm not really sure. I mean, you know, the one thing that I think was kind of a little bit surprising is is their hiring of an external CFO. So we've always kind of seen Disney go internal for a lot of these key management hires. It was interesting that they kind of, you know, have mister Johnston there in the CFO post. I think
obviously he's going to do extremely well. But I think that again raises the question of whether they will kind of look externally for a candidate to lead Disney.
Is Disney stock a value trap? At this point, she keeps laughing. I don't know what that means.
I wish I knew the answers. I mean, you know, if you just kind of look at the profit profile of this company, it's actually really really strong. I mean, I'm kind of when I think about the EPs potential. I mean it's it's you know, ten to fifteen percent EPs growth over the next few years, especially if it gets to streaming profitability pretty quickly. So in that situation, I think, you know, the stock will definitely have to
re rate. So I mean, it all kind of now boils down to what they're going to say on the profitability numbers, what they're going to say on this new streaming service, whether that is going to accelerate the whole profit profile. So you know, the devil again is going to be in those details.
All right, Githa, you're going to be busy the say, I think a lot of people are and be listening into this call to forgot how they're going to get their sports going forward.
Who cares about the EPs? But what do I have to buy?
I don't have to pay to get all my sports here, So we'll be paying attention to that. Keith Ranganath, and she covers all of the media stuff for Bloomberg Intelligence based down in Princeton, New Jersey.
So all I know is I'm not.
Gonna pay an incremental forty bucks for stuff I already get.
So I mean, I'm just gonna cut.
Have you cut the cord. No, okay, I haven't and you haven't because.
Mostly sports, mostly sports, So now if I can get you know, but CBS, Now, CBS isn't part.
Of this package.
So that's a problem because they have a lot of football that you like to watch. They have a lot of NCAA basketball they like to watch. So it's really getting difficult here, I think for the consumer before. I mean, what I used to argue for people is, yeah, you're upset about the cababile. Everybody's upset about their cabable. But man, it's convenient. It's one check and you get everything. Now you're writing six, seven, eight checks, and are you getting a better product?
I don't know.
First of all, he's still writing checks.
Let's just just what that is.
Yeah, generational thing you were, But you were bringing up the idea that we walk up and pay cash to the He just gives it right to them. That we're gonna have like a bundle for streaming too, But eventually they'll have to bundle up to sort of sidestep exactly what you're just talking about.
Yep.
It is.
It is the total disruption of the media marketplace and who pays. I think the consumer does here so terms, certainly in terms of convenience.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Apple card 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.
Let's get the perspective though, on how do you invest and where to put money? When we're near five thousand, which really, lets be honest, means nothing with the S and P. People like round numbers, but I don't feel a lot of conviction heading into this fill Orlando is cheap what he strategist with vetterated hermes and he joins us, Now, Phil, do you buy this rally here? Do you sell it? Do you sit tight? What do you do?
First of all, Alex, thank you very much for having me back on the program. Your previous guests made an interesting comment about buying dips and that dip at forty one hundred in late October was a great buying opportunity we like. I'm sure a lot of folks were all in at that time, but the market has now rallied by twenty two percent from the end of October up here to you know, a week into February. The Magnificent
seven has really driven that rally. Last year, the mag seven was up seventy six percent, the S and P was up twenty four percent, the other four hundred and ninety three names were up twelve percent. So there's a valuation disparity that's been created here. And that's the point I'd like to make. We think that a lot of the the froth in the market should spread out, and this rally should should diversify, should broaden out the areas of the market that were left for dead last year.
Domestic large cap value, domestic small cap growth, International, those are the areas that we think have some room to run here. And we'd be very nervous with stocks up here, you know, as you said knocking on the door. At five thousand, we're only four percent away from our full year target of fifty two hundred. So something's got to give here, all right?
Is our earning's going to give here?
I mean, can we see an earnings growth driven market here?
What are you seeing?
I think that's a great point, Paul, that as we look at the cumulative effect of what the Federal Reserve has done in terms of tightening monetary policy over the last you know, two years, right, they took interest rates from zero to five and a half percent. They've shrunk the balance sheet from nine trillion dollars down to seven point seven trillion dollars. We think that the cumulative weight of that tightening is going to start to have an
impact on the economy and corporate earnings. So we saw that the fourth quarter was slower than the third. We think that over the course of this year, the first three quarters of this year, GDP growth is going to be in that you know, one one and a half percent neighborhood. Not a recession. We're in the soft landing camp. But if GDP drops down from let's say five percent in last year's third quarter to one percent at its trough this year, should there be a commensurate decline in
corporate earnings. Earnings growth is going to slow, and we think ultimately, given where valuation levels are, we could see we could see some slowing in some stocks, particularly the growth and technology names that have just had a phenomenal run here over the last year or so.
Small cap trade, though worked for a second last year and then it didn't. What gives you the confidence that this time will be different.
The foremost dangerous words the English language for an investor. This time it's different. What we're focused on within the small cap row space domestically is healthcare with a real focus on biotechnology. As we talk to our biotech experts here. The pipeline, the drug pipeline for these companies has never
been stronger. The valuations have never been cheaper, and if interest rates are in fact going to go down over the course of this year, which we believe they will, that should make the potential for m and a merger and acquisition activity more prominent. So given the valuation and balance, we think small caps against specifically biotech auto work.
All right, Phil, how about just some sectors in general here? I mean you mentioned the tech names which have been a leader. A lot of folks feel.
Like they need to continue to be a leader to move this market higher.
Is there other places I need to be looking, because unlike John Tucker, I did not own the MACS seven last year.
Well, you know, more broadly speaking, let's look over in the domestic large cav value area that I mentioned. There are two categories there, financials and energy that we like a lot. Energy. You know, crude prices are working higher. We've gone from the mid sixties the mid seventies over the last couple of months based upon all of this instability you know in the Middle East. The stocks really
haven't participated. We could see crude prices in our view working back to eighty ninety dollars a barrel given all of this volatility on the underlying commodity. So energy should work ps or low giving in yields are very high. And then financial services. You go back a year ago when Silicon Valley Bank and that whole thing blew up.
These stocks dropped fifty percent. Now, what we know now, or we think we know now, is that the problems were largely concentrated in a handful of companies that were poorly managed, and the rest of the banking industry, particularly the large cap names, are relatively in good shape, but they haven't come back to where they were or should have been. We think there's some catch up that will play out over the course of this year for them as well.
So what we see New York Community Bank, and you could say that they bought some stuff from First Republic and that's kind of why they're in that mess.
So do you that was going to be my answer.
Okay, so, but what about some of the regionals that aren't that company and that aren't like the JP Morgan's like, do you need to be looking at those between like two hundred and two hundred and fifty billion or is that it going to be too risky?
Well, and I think we get into a stock pickers market environment where you've got to do your fundamental due diligence on these companies and what do their balance sheet and income statements look like? Do they have the same sort of exposure to commercial real estate that Silicon Valley Bank or New York Community Bank did, Do they have the mismatch and assets and liabilities? Or have we just
thrown out the baby with the bathwater. So that's got to be an individual decision that the analyst and the portfolio manager is going to make about whether an individual regional bank or money center has the same problems that some of the ones that have got taken out behind the woodshed. And rightly so a year ago.
All right, very good, Phil Orlando, thank you so much for joining us. Philer Orlando.
He's a chief equity market strategist, and he's head of the Client Portfolio Group, a federated hermes joining us at via zoom from New York City.
This is the Bloomberg Intelligence Podcast, available on apples, Spotify, and anywhere else you will get your podcasts. Listen live each weekday ten am to noon Eastern on Bloomberg dot com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg terminal