Despite All the Noise, PPE Is Only 1% of 3M's Bottom Line

at Bloomberg dot com. Let's talk industrial earnings. We had three M, we had Caterpillar out today, Lots of uncertainty in a second quarter, lots of uncertainty to the point of withdrawing guidance, as we've seen from a lot of other companies, from some of these industrial companies as well. When we want to talk industrial companies, we talked to town double Heart. She's covered this space for decades. She's with Bloomberg Intelligence. Karen, thanks so much for joining us.

So three M and Caterpillar take whatever you want. The highlights you think we need to know. Um, I'd say number one, the breath of of the decline. So everybody knew things are gonna be down and down double digits, but cat every region, every segment. UM three M did a little better because of the diversity UM. So it's really the swiftness of the drop that UM is the issue.

Second thing is costs are doing pretty well. The decrimental margins were not that at Caterpillar, given two cent sales declines. They really didn't do that badly on costs because a they haven't taking out structural costs for years and B they did move fa UM on three m You know, they have a diversity that actually helps them. And I am a fan of the UM multies if they're well run,

although they're out of favor at the moment. And U they also saw declines and they're gonna expect double digit declines in April, but not as significant as, of course, the deep cyclicals UM. I'd say. The other point is everybody was talking about three ms ppe impact, you know, all the respirators. It's less than one percent of sales. It's certainly helped, but it wasn't a big deal. And yes, they're all eliminating guidance, you know, go ahead, go ahead.

I'm sorry, Well, no, no, I'm wondering. I was reading a story the other day about how executives never like to waste a good crisis, and that basically it's a fantastic opportunity to to accelerate moves that they would already be doing or find it prudent to do under the cover of it's a crisis. And there's no place that that actually is more relevant than in the industrial space, where there's been an incredible transformation, whether it's downsizing and

shrinking and becoming more focused or other moves. What do you glean from the earning so far in terms of ways that they are reshaping in the wake of this that they may have done anyway. Yeah, I mean in the case of the two we're talking about today, CAT and three M, they both have long term structural programs going on, and they have I mean CAT use the example.

Uh there there s g n A and their R and D in sort of their non manufacturing custs were flat um from nineteen while revenues were so I mean, they have already been taken big chumps of um costs and people, etcetera out of their business. But certainly they're going to accelerate that. They're gonna call it more structuring, but I'm sure they're going to try to hold on to as much of the cost production as they can.

I mean. The other big change is going to happen, of course, is supply chain is going to change a lot because why did we learn how long supply chain from abroad are not good? And um, so you're gonna see a lot more. I mean three M does a lot of local for locals still as Cato killer, but around the margin, there's going to be changes in that as well. Um And you know, so I think it's going to be a continuation um. And they're going to try to hold on as much as as much of

the cyclical structuring that they're doing as they can. So that's I would agree with you there. So, Karen, I know a lot of these companies, industrial companies have been pulling their guidance like a lot of other sectors as well. But did the management give you a sense of kind

of what their playbook is. Are they thinking that this economic contraction that we're is occurring in the second quarter is going to be lower for longer or do they expect this economy wants it's to we start to but up to to re accelerate in the second half of the year. I think the general seems so far is lower for longer, Like you know, second quota is going to be terrible. Third quota is not going to be

great either. And you know a lot of these guys still have significant US exposure where it's going to roll down and of the shutdowns and it's probably gonna be a roll back up. Um. Both Caterpillar M three M did mention the snap back in China, but that's the managed economy, so they shut it down quickly and they're spending money, um, you know, on on stimulation and of the economy and getting people back to work quickly as well. So I would not and in fact that question came

up in the three M call. Could we use that as a playbook? China is different, Um, Europe is snapping back a little bit. US is going to roll out slowly. Is the general sense is going to definitely be a tough year. I will say one thing on China three M is the economy with the diversity of their product line they set across the boards map back. It isn't just you know, one or two segments, So that economy

is starting to roll back up. That's that's interesting. And just real quick here, Karen, do we have a sense of whether the pace of the snap back is I hate saying this. I actually am feeling a visceral response v shaped or is it a slower it douns back or a w or you um, the China feels like a the you know, um us probably pretty slow roller.

And and I don't think you're gonna see good numbers still, you know, because you know there are you know, we're we're fighting over house fess we're gonna come back, you know. And uh so I and really the companies are really saying, we're going month by month, we don't know. And April, we know is going to be down in the in like the multi in the cyclicals, you know, but we don't really know. And and three M, which who never gives monthly orders, are giving monthly orders right now until

we know what the heck is going on. Emerson is also doing it, so they don't know, but they're going to try to give us as much as they can along the way. They don't know. Seems to be the theme of this earning season. Karen yu Bilhard, thank you so much for being with US senior industrials analyst for Bloomberg Intelligence. And you know, honestly, John Farrows raised this point.

A number of times. How can any company actually give guidance at this point given the fact that people have a real lack of clarity around what's going to happen. But the fact that they're giving monthly order numbers just to say, hey, we'll give you the data as quickly as we get it. Yeah, exactly, And the questions, well, what will this do to forward guidance going forward? Will companies give less of it? Maybe it's time to check in with Bloomberg Opinion. We're pleased to be joined by

opinion communist Dr Ellen Wall. She's a president of Transversal Consulting, also a Bloomberg Opinion contributor. Uh. Dr Wall, thank you so much for joining us. Boy, you know this, what we're seeing in the oil market is just extraordinary. We had negative prices just a week ago. We had tremendous volatility so far, uh this week a little bit of it today. What if you could just set the stage, Force Ellen, and just give us a sense of where you think the supply and demand dynamics are today for

global crude. Yeah, the supply and dynamic dynamics for um for crude are not good. Looking at what's happening and we've still gone I think, by the way, not good carry on good. So that way too much oil oil production coming on the market on the market right now, and not nearly enough demand, and that's resulted in a massive build in storage. And we're not just talking about storage of crude. We're talking about gasoline stocks are way up, diesel fuel, jet fuel. Massive amounts of this stuff is

piling up. And even though refineries are cutting their runs now, that's leading to even more build up of crude oil. And so that's really the main issue here as I think this in balance and supply and demand, which was not helped, by the way by Saudi Arabia, which increased its oil production to its maximum level of twelve million barrels per day in April, and at the beginning of April, you know, it seemed like that that might be okay, but but really, uh runs economies around the world, we're

clearly shutting down. We maintain that production when clearly there wasn't enough demand. So that kind of just piled on to all of the other issues. So this complete imbalance has been manifested, most significantly in the negative pricing in the May w t I contract that just rolled. We're seeing an exodus from the June contract as the biggest oil et F in the United States amends it's it's contracts, it's it's it's provisions, yet again in terms of what

it is willing to buy. My question is how long will this complete imbalance last? A lot of people putting faith that by to lie, things will start to ease and people will start to use cars and fly around more. Do you think that that optimism is misplaced? Well, I think that that's a that's a it's not a bad assessment. Um, I would say that's it's it's optimistic, But I don't

think it's it's too optimistic. I do think a lot will depend on, uh, the psychological effects of this lockdown in these quarantines, because even as states in the United States we're seeing them start to lift quarantine restrictions and lockdown restrictions. The question really is are people going to feel comfortable going out of their houses, going back to work,

sending kids to school or camp? And that I think will really set the tone for whether we're going to seek demand roaring back or kind of slowly trickling back. And that could really, you know, that could spill over past the summer and then over into into the fall and winter. Even win demand is traditionally lower, so were we could even compound the problem if we don't have strong summer demand by by heading into winter with lower demands.

On the other hand, okay, we could see a massive search in gasoline demand in the United States, for example, as if things get back to normal and people are psychologically ready to get back out there, but air travels not back, we could see a huge surge in gasoline demand as people drive a lot more. So. It really, I think depends a lot on how comfortable people feel, and also how comfortable they're made to feel by the

authorities and medical professionals. So, Ellen, how bad is it going to get for our friends in the U S. Shail patch? It's already bad h and I think it's only going to get worse. It's it's very bad. Companies are shutting down. And the question I think now is not just is it going to be bad for those in the upstream, but is it going to spill over into the midstream, into the pipeline, into the people who

are who are doing the midstream business? Uh? And are we going to see it spilling into into that area because um we're we're seeing we can expect more layoffs.

I think we've already seen a lot bankruptcies. But then the question is does is still into midstream and do we see long term damage to our midstream infrastructure and our ability to um you get that oil to where it needs to go, because that has for many years been kind of the limiting factor and we were just starting to get over that issue right when this hits just real quick here, Allen, I'm wondering what this means in terms of the swining oil prices for Saudi Arabia

and any potential political threat. Given how much of the nation's budget relies on crude. I think that's that's an issue that cannot be ignored, particularly at this point because crude oil, I mean we have we have Brent barely above twenty barrel, and at that level, Saudi Arabia is making just a few dollars in royalties off of every barrel of oil it and that's not good for the Saudy budget. And so far, what we've seen is basically

a complete dismissal of these issues. The Socauty government is choosing to rely on um borrowing money and that's not a bad idea, said, maybe it definitely has more room to borrow, but they're not. I think we're seeing them not really look at the long term nifications here. Dubai just announced that they're cutting cutting their expenses, and so it's really unclear as to whether they're going to see

a need to cut expenses. Uh, the country could could be seeing some serious financial problems, which, as we know, can lead to political unrest. Ellen Wall, thank you so much for being with us. Ellen Wild, President of Transversal Consulting and a Bloomberg opinion contributor. In some ways, the US equity market is going to be put to the test this week as the big tech companies report earnings.

The question is how much further can US talks rally if they don't necessarily have the leadership of the tech giants joining us. Now Jim Pulse in chief investment strategist at the Loophole Group joining us. I'm wondering, Jim, do you feel like the market cannot continue rallying without the support. And I don't want to say big tech. We're really talking Amazon, Microsoft and Netflix here. I think I could.

I think I think that it. It would be hard if they are going to collapse, Lisa, you know, over a sustained period, have a big collapse. I think that would be hard for the market to avoid going down

again in a big way. But if they just underperformed, I think that's maybe even to be expected somewhat in the sense that UM, you know, look look where we are here, where there's now greater expectations of restarting the economy after shutting it off the position UM and with that comes I think new leadership, and you're seeing that and things like the performance of the high Beata SMP, Hiberta Index, small caps, cyclical stocks, you know, over defensive stocks, UM,

even international markets doing better. I think it's real likely, which often happens at the start of a new recovery. If you off the markets starting to look in discount path, is that's the type of leadership you get. UM, So it might well be the new era of growth if you will, does have a period of under performance as the economy re emerges from the code UH from the coronavirus crisis, and I don't I think that could happen within the context of the general rising market. Even though

under performance by some of these most popular areas. So, James, the you're hearing more and more from scientists and medical professionals that it's possible, probably likely that the virus or return in some form and the fall in winter. Do you think the market's discounting that risk properly as we start thinking about reopening and and maybe a V or a U shaped recovery at the end of the year.

Who knows for sure, Paul. I mean, there's very little about this whole crisis that everyone knows, um including myself. But you know, I do think one of the things that's likely to happen that there hasn't been a lot of discussion about, is sure, it's gonna take a while before this virus is gone. It's going to take a while before we get all parts of the economy back

functioning again, even in general, let alone at full capacity. However, that does not mean that there might come sort of an appreciation among investors in general, companies, police officials that both this virus and the economy can coexist, and you know, both can be there and be a functioning capacity. I don't think it's one or the other necessary, which is

what we had here of late. I think in part because the primary issue has been the hospital crisis, and we've come a long ways in increasing our capacity and abilities there, and we're probably even if we have a re emergency, viruses not like to be as severe as the first time, And that combination means that we might certainly have re emergent virus problems down the road, but that doesn't necessarily mean we're going to have to close

everything back up again. I think we're already learning how to operate within the context of a live virus so um. I think one of the realizations that even the market might be coming to is that both can coexist. Collection and your calm assessment of markets is a very nice contrast with sometimes my my gut fear when I read some of the headlines that cross and you know, Moody's sending me a report fair enough, but you know, at least you know you know there there is there is

sort of sanity and preservation. Right now. We should note that we are seeing the NASDAC turned down negative seven tenths of a percent right now, in the SP is just up a tenth of a percent to do up about a quarter of a percent, And I think to your point, you could have both the sort of reality of the unfolding crisis and also look to the other side of this. I guess, then, are you buying into this rally? Are you just sort of sitting tight and

not expecting armageddon? Um? I definitely. And my approach, I guess is what we're doing star gapl Boil is kind of sitting with an overweight new era UM a mile overweight. I think, yeah, well, not just not just tech but kind of new era growth. It's a little broader than just tech, but certainly teching colms, part of healthcare, part of consumer discretionary. UM. You know, I I think I'm okay with with sitting in an overweight in that area.

But what I'm doing is taking advantage of any weak periods here, which will probably have some more and I would start to add more in the broader participation is in this market that haven't done that well even in the last bowl. I look, as I said to High Beta SMP high Baya, that I'd looked to cyclical sectors

would look too small caps. I've looked at international and add some of those compoets here because I think they are likely to have leadership over the next year as we as we sort of re emerge from this this thing. You know, you mentioned the fear, and to me, that's a that's a good thing. I think historically whenever we've had really high levels of fear, and we've got all

three fears in this one. If you're losing your money in the stock market, if you're losing your job, and the fear of losing your life, if you're on steroids, if you will. Typically that's led to good returns and risk assets. Look, I know, but look where we are in this crisis too. You know. We we start when it first hit in China, we thought, well that that's not really a problem. And then well, it's just gonna be a temporary problem. And then it was this is

full blown crisis. And now it's evolved too. Oh, it's never gonna go away. It's gonna last wherever, it's gonna fundamentally change capitalism. It's never gonna go away. I think that's the stages of a crisis that we're in the last stage at least committing Hey, James, thanks so much for joining us. We appreciate it, appreciate your calm perception of what's going on in the Marcus James Paulson, chief investment Strategies for the Luthold Group, on the phone from Minneapolis.

We always appreciate his thoughts in the markets here, and at least you were just mentioning you kind of did a quick market check here. The market's really kind of rolled over after a strong opening here as I guess, we're digesting earnings and thinking about what the Fed may or may not say tomorrow. Yeah, good luck, good luck trying to find a narrative for this market. That's all I want to say. I mean, for minutes a minute, you could change the narrative, and it's easy to do

it one way or another. Right now, let's take a look at the pharmaceutical industry after we did get some results from Merk and Fiser, and before we dig into those, we are going to be joined by Max Niece and biotech,

pharma and healthcare columnist for Bloomberg Opinion. And I never want to miss up a chance to ask Max about vaccine development, where we are in terms of that, and how well international pharmaceutical companies as well as scientists are cooperating to move as quickly as possible to make this happen.

So it does seem like there there is a broad movement towards cooperation UM companies, sharing science, beginning to focus on the issue of manufacturing its scale, which is the thing you have to worry about once you actually have an effective vaccine UM. There there was a report this week from from an organization called SEPPI that's working to do some that coordination in advanced candidates that they hope there may be a vaccine available for sort of limited

emergency use by by the end of this year. But again that would be in very small quantities and only if everything goes very very right. So I still looking probably at at some time next year or later for first sort of the broadly available vaccine that it would take to to really get get life back to normal. So Mark did report earnings today and they waited in on the potential for a vaccine. What do they have to say? So Mark is a company that that has been a little bit later to to sort of join

the fray UM. They they are actually the one company of the major pharmaceutical groups that's actually successfully developed a vaccine in a response to pandemic. So anything that they end up doing is worth responding or at least worth watching very closely, though they will be at least to some extent behind some of the other efforts that started sooner, of course, hopeful that that that past experience will lead them to a faster and more effective result at some point.

So Max, So that's the the updil on the vaccine. How about testing, that's the more immediate issue here, Testing equipment, testing laboratories. Where are we on that? So there has been some some genuine improvement and in the last week or so in terms of the testing rate, and and we just got a plan from the Trump administration um that that should hopefully bring a little bit more of

federal attention, funding and coordination to the issue. Their their goal of the Trump Ministry School is somewhat short of what some experts have called for, which is a really dramatic increase in testing such that you know, people could could be tested multiple times of months, those on the front line things like that. Um, you know, it'll take sometimes to get to the point where we have really robust diagnostic testing, let alone that sort of broader surveillance

and antibody testing. But definite progress and uh, it's covered by the Trump administration should help some extent. I remember a long time ago, about I don't know, three months ago, and other diseases and other medicines were in the forefront of people's minds, in particular with cancer and the development there. And I'm wondering, you know, fives are in particular has been particularly on the front lines with new drugs to

combat cancer. We got their earnings. Let's talk about some of the other things we're learning aside from the coronavirus, because life does go on another way, is too sure. So the two main things at point to from from Fiser Murk a nive artists also reported today the impact that you see in terms of their business cuts in

sort of two waves. The first is that they are seeing some reduced sales for for drugs like cancer drugs they're administered in a hospital settings as people have a harder time doing that safely, does certain things you can't avoid, and so they're they're doing all right. But Murk, for example, did cut it's expected to sales because it has a

high proportion of those kind of drugs. In terms of the long run, there there may be a slowdown in in various drugs development efforts because it's, as you might imagine, it really hard to run a cancer drug trial right now. UM, you're thinking about getting a lot of immuno compromise people to one place, and often to traditional clinical trial sites which are at hospitals and husion suits that are being

used for other things right now. So it's it's both kind of a short term financial impact and a long term disruption of research. Um, it will be some time before we find the real extent of both of those. Companies are still being pretty cautious about making really forward looking projections given the sort of early stage of the epidemic and the recovery from it. Max, you cover all things healthcare, how come there's not a Manhattan Project equivalent

for UM treatments and vaccines for this virus. So to a certain extent, there is that there is a lot of public funding being directed through organizations like set B, through through Barada UM towards supporting organizations that that are

working on these treatments. I think more, very much, so more has to be done in terms of you know, doing surge funding, coordinating efforts, making sure that the best candidates get as much funding as they could possibly need, and then the most expensive problem, the one that really needs that Manhattan Project effort. Something that I know Bill Gates is devoting some attention and resources to, is when you have viable vaccine, how do you rapidly deploy it

produce it at a global scale. That's something that that really hasn't been done before and is going to require an enormous amount of spending and wasteful spending in that if you wait for, um, you know, concrete proof that this is the best possible vaccine, the one that works, to even start building manufacturing, they won't even be ready nearly in times. You're gonna have to build some manufacturing

that you'll never knew, never end up using. Considering that a lot of these vaccines use different and novel technology. So that's the thing where I think you can you should have a dramatic increase in funding and attention because that is a difficult, huge and thorny problem that will need to be solved in the next year or two. We're speaking with Max Nis and biotech, pharma and healthcare

columnist for Bloomberg Opinion. And Max, since we have you, and since we have some time, I want to take this conversation a step further, not just as far as where we put money to develop the vaccine and to do it quickly, but the entire ecosystem of creating vaccines

and these crucial medicines. And I'm struck by Joseph stigletz uh column in Project Syndicate, Nobel Prize winner economist at Columbia University, where he was saying that the entire structure of drug creation is flawed and really goes against creating some of these crucial medicines. Can you speak a little bit to that and how maybe there'll be a rethink of the incentives around creating new medicines that could potentially be beneficial going forward. Oh. Absolutely, this is a real

hobby horse of mind. And the medicines that we incentivize are are the ones that are the most profitable, and often specifically the ones that are most profitable in the United States. Now, what that often means is a lot of money goes towards rare disease drugs, towards cancer drugs that are really expensive and don't get a lot of reimbursement pressure because there aren't that many people that that

get any given cancer disease. What that leaves behind our our vaccines, and especially vaccines for infectious diseases, which you know by their very nature, they they often arise and in less developed countries, they arise at moments of great public health need where there's not a lot of tolerance for for high pricing. UM. And then when you point to another potential source of future pandemics UM antibiotic resistant bacteria.

The incentive if you actually develop a good UM, a good medicine for those is to use it as little as possible. So UM, you know, the pricing, the things that we we tend to value and pay money for are not the ones that we want to most incentivize.

I very much hope that we can begin to build different incentives so there's not just uh an incentive to to kind of jump in when there's a crisis, but to develop the sort of long term pipelines and technology that that will help when when the next crisis runs around us to be more prepared at a global level. So Max, just I know you talked to lots of different people within the health spare, healthcare space, scientists and and doctors and so on. You know, I guess one

thing to me is a lay person here. This is a virus. It's similar to other coronaviruses, maybe even the common cold, maybe the flu. It doesn't appear from that perspective that we have to literally start from ground zero and have these biotech companies, these farmers companies saying they just you know, it's going to take a lot of time like any other new drug. Again, am I reading that wrong? Is this so different that most of these scientists really are starting from ground zero? So you know,

this is actually kind of getting back to incentives. You know, the closest cousin that we know about to this coronavirus is Stars, and there were Nasson efforts developed a vaccine, but since that outbreak peter out, there was no financial motivation to keep developing in and because we don't have well developed incentive structures or or long term financing structures for developing vaccines that don't have a profitable economic future, uh,

those vaccines stopped getting developed. So we didn't make a lot of the discoveries about coronaviruses that might help this time around. Um, you know, there there are some vaccines for animal coronaviruses, but none of them are are especially effective.

It just all comes down to the fact that making vaccines is incredibly difficult, and making a vaccine for a comparatively new and poorly understood virus, even though it's related to ones we know, it still does take a lot of work from scratch to develop a long lasting and in robust immune response. That's just a fundamentally difficult scientific problem and one that well, there have been you know, real recent advances, there's still a lot that we're learning

on the fly. The most advanced candidate, or one of is what's called an m R and a vaccine. The good nice part about it is that it's very adaptable. It's something that can be produced quickly in response to a new pathogen. We we don't know and we're going to kind of have to find out on the fly is whether it's safe, reliable, and effective and beyond that

able to be produced on a mass scale. So it really is unfortunately a lot of work that does have to be done from scratch, both drough to you know, bad incentives, under investment and sometimes the wrong priorities and any where we spend money. In the meantime, there's another kind of immunity, heart immunity that could be created by people getting the virus potentially we don't know, and not being able to get it. Maybe again, we aren't sure.

W h O has put something out saying that there's no evidence showing that you do get immunity to the virus once you already have it and developed the anybodies. But there is a question of how much of the population and the hardest hit area in in the United States, how much of the population has been exposed and there have been studies. Is this right that there about of the population has already been exposed max. So that that's one study and fundamentally that's an extra lation from a

limited sample size based on a test of unknown specificity test. Yeah, you know so, I I wouldn't be surprised if the final answer, once we have more data from a series of reliable tests, isn't too far off from there. But um, it may be that that it is substantially less than that once we get a sample size that better represents the broader population and a more reliable test. And then on the question of of herd immunity. Um, that that's one where we don't just need to you know, this

one round of testing. We need to do that test and then follow people for months in order to get a sense of whether reinfection is possible and who might be vulnerable. UM. You know that those common coronavirus is those seasonal ones we mentioned before. People lose immunity inside a year. That's why they come back seasonally. UM, if that's the case for for this virus, then if we reopen and cautiously, if we we aren't Julian, and we

may see you know, really robust seasonal reoccurrence. And that's something that we really need to understand and that should inform the sort of ongoing response for not just you know, the next few months, but for years of it. Max Neeson, thank you so much for taking all this time with us. Max Neison, biotech, pharma and healthcare calumnist with Bloomberg Opinion, joining us on the phone from New York. Thanks for

listening to the Bloomberg PANL podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Paul Sweeney. I'm on Twitter at pt Sweeney. I'm Lisa abram Boy. It's I'm on Twitter at Lisa abram Woit's one before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.