Eaton Vance's Peabody Sees Opportunities in High-Yield

whether at the grocery store or the trading floor. Find the Bloomberg P and L Podcast on iTunes, SoundCloud and at Bloomberg dot com. Target is in the spotlight today, or should I say on the hot seat. It shares plunging the most in more than eight years, down more than twelve per cent, after announcing plans to cut prices to get customers back in the door. I want to bring in Burt Fleckinger, man ing director at Strategic Resource Group, for more insight on what's behind the plummeting shares and

the potentially UH negative outlook. But did this come as a surprise to you? No surprised Lisa's As we talked in earlier Bloomberg broadcast anyone has seen in the stores. Just problems in Syriotom for example, for Christmas Hanukah, Kwanza through Valentine's Day, finding fashion, jewelry, Department's most important department in the store, unstaff, do you have to ring a

bell for service waiting for godo? Nobody comes to serve the shoppers, People walk out, go to Cole's, Walmart, Walmart, Sears Kmart and uh the company's off course and uh the new definition of being rudderless for Target retail, which is very un characteristic for the company. Well, butt, You've got a company, it's got a market cap of thirty two billion, They've got about two and a half billion in cash, their threety one thousand employees. What can Brian

Cornell do in order to turn this surround? Is it worth? Is it worth what it's being priced at right now, which is fifty eight dollars a share them it's a

good price right now. That Bloomberg Terminals reporting a five year low UH for Target flat over five years compared to the S and P being up over sevent same time, your present point on Target needs to UH take cash off its balance sheet, invest in capex, they're distinct disadvantage Kroger, Walmart, Coles, H and M everybody they compete with because Targets outsourced just about everything. Outsource distribution cost the goods are too

high to leass present point on prices. UH. Target spacing a price war, pervasive price war of unprecedented proportions for for the next few to five years. UH, Walmart, Legal, et cetera. Because they're they're cat of goods or lower targets keeps getting higher from outsourcing. Target needs well. But hang on, Burt, But I mean I was looking at Brian Cornelli's biography. He's the chief executive of Target and the chairman. I mean he was the CEO of Sam's Club.

He also was the CEO of the America's Food division for PepsiCo. Is he the one that's going to make this happen or do they need new talent in the in the boardroom him? It's uh, Lisa Brownham. What's his Bloomberg hot hot seat up in Minnesota, Brian, Brian Cornell has got one more fiscal to deliver. Uh. It looks look like he's going to bring great new leadership to the company. But with John Stump, who now left on the board other board members of sleep at the switch,

kind a Rip Van Winkle routine. Uh, you need new leadership, and regrettably it's almost like a Mackenzie like monarchy with the consultants half running the company and erroneous assumptions, erroneous conclusions. They need to invest in Target dot Com. They need to invest in self distribution. Uh, and they need to invest in staffing instead of cutting hours and and having shells that are too empty that impair the same store

sales and operating income. You know, there's there's a quote in the Bloomberg story about Targets results from one analyst saying, we are stunned. We thought they were going the other way with higher margins stuff. I mean, this is sort of what's at stake here. Target was always thought to be the higher quality version, uh, and sort of tried to lure people who had a higher price point than say Walmart. But now Target appears to be putting Walmart and it's compete as as sort of like a competitor,

or at least on that level. Is this is this strategy going to work for them? What they're doing isn't working. Lisa's as you Pam, your great producer, Sam Langon, I've discussed offline in the studio for for months. UH. Target has gone the wrong way, and also Targets probably the most vulnerable company to being organized by the ufc W, the Retail Clerks Union, UH, because even even the workers that want to take corrective action on the out of

stocks are disciplined and run off. We call it the Volkman rule after Carl Volkman, who was fired for overriding an inventory management system that wouldn't order product for product that was out of stock on the shelves, and the company decided in favor of the consultants and the constructive UH students who are highly rated in terms of productivity,

wound up getting sacked in the stores. And UH. You know, for for all the problems that you and Pimm have presently pointed out, least in retail, all Targets problems are self inflicted. And Brian, Brian Cornell's got a got a few quarters to FIXTS. That's not totally fair because we also have this sort of elephant in the room, right, We've got Amazon. How much is this just Amazon creating a food fight among the rest of the brick and

mortars Amazon on creating a food fight. Yes, Lisa. Yet yet at the same time, Target dot Com at uh stupidly outsourced Target dot Com fulfillment to Amazon for nearly a decade. So Target dot Com is way underdeveloped that areas growing quickly. But Target got complacent in basic apparel and fashion, especially for boys and girls and young women

and men. And even uh, Target and Sears with lands and have better basic fashion as does Walmart for the first time in fifty years, and many key categories in apparel, and Uh that's self inflicted from Target. To Opportunity or stay away bird flicking show for all Chinese sign pim opportunity and danger. I'd bet on opportunity, okay, and as well as with the bonds too for Target. Uh, definitely with the bonds. I would bet against the bonds for Bergdorf, Neiman, Marcus,

Grouper and MG. I would bet on the bonds for Target at divis are going to come in. Uh, the consultants are going to go out. You'll have better leadership, better business, better bond prices, better equity prices. Yeah, I'm looking at the Target two point nine percent bonds. Uh. There are a mirror one hundred and two point three cents on the dollar total discount. But this is an a UH and A minus rated company. This is a

company that has a study revenue stream. So that's why you're saying they're going to be able to repay their debt. That's not the issue. Yeah, And this is also this is also a company that's neutralized Christmas hank quans and no merchandizing signs, no real good merchandizing activity. And as we've discussed, more vacuum cleaners in the ads in Christmas and hanak and quansa items during the key holiday selling period. UH,

companies clearly gone the wrong way. And with a lot of merchants getting sacked and the consultants making the refreshed decisions, that that's a perscription UH for sick company getting sicker. But at least, as you and Tim said, it's fundamentally a strong company founded by the great Dayton family and there's still large shareholders in one way or the other in the honor of founder George Draper Dayton and the late Great Bruce Bliss Daton who passed away within the

last year. UH. This this company will come back I'd be much more worried about nord uh than than I would be Target Uh. But Target Target we're gonna have to talk about. We're gonna you know, it's interesting you talk about North because we want to get your views on it. We're gonna have to leave that for another time. Because NORDSTN reported results recently and they exceeded analyst estimates.

The stock moved higher. So I'm interested to hear what worked flicking share of Strategic Resource Group has to say about that. It's been yet another stellar by of months for US high yield bonds. Yields on the deck can no longer be considered high. They are low yield bonds at five point six percent, the lowest UH since two thousand fourteen. Has this market gone too far? I want to bring in Henry Peabody, co manager of the Eaton Vance Multisector bond Fund. He is the expert in all

things fixed income. Henry, I'm so glad that you're here. Uh, Henry, what do you think? Do you think that the bond that the US hi yield bond market has gone too far? Probably has um thinking about yields in the mid fives, thinking about default rates, UM expected real returns, it's not too compelling. Fortunately, this is a market that active can do reasonably well in UM. For US, we see opportunities in US high yield UM. Not the broad market, but

certainly a few UM. But spreading what well, you know, we're watching the retail sector fairly closely. UM. I can't say that we're UH diving in, but we're watching it fairly closely. So just to put this into perspective, a lot of people have been talking about a retailer recession, and we heard Bert Flickints share earlier on this program and analyst of the retail sector saying he thinks Nordstrums could potentially be in real trouble and that the bonds

could be in real trouble. Do you agree, No, not necessarily, UM. We're still very early on in this process. UM. It's going to take a little while for this to settle out. You think about energy and you know, post OPAC Thanksgiving of a couple of years ago, and it takes off of us to shake out. So it's it's a slow moving process and one that you need to UM follow closely, establish starter positions UH and watches spreads evolve, but hard to make a distinct call on that credit per se today. Well,

what would you be looking for? What are the characteristics? You know? I think you look for companies that have good online presence, UM, good uh footprints in good regions, with good product suites. But how about if you could just give me some number, like what kind of numbers are you looking for? You're looking for a certain amount of cash flow? Or because I mean all every company I know looks for exactly the things that you're describing. No one wants to be, you know, the old shoe.

What what are the financial characteristics that you deem a winner as opposed to someone you want to stay away from. Well, I think that's going to evolve, and I think what we look for in any position is a good liquidity runway. You need a company that can weather a challenging environment. You need liquidity, UM. You need assets that are will it that a company is willing to protect good assets UM. Potentially salable assets if those in the case of retail,

if that's a real estate UM. So you need a company with a relative mode from a competitive standpoint. But that's all gonna evolve over the next year or two. As this situation. Does you know, Henry and a lot of people talk about rich valuations in the higher bond market. I have to think about the Carlyles and the black Stones and the Kkrs of the worlds that have been seeing money for distress debt funds uh and have a record amount of dry powder on their books. Won't this

prevent the higher bond market from falling too far? Or is it? Is it bad to read too much into this sort of stash of cash. Well, you saw that with energy, right, You saw a great deal of capital being raised in the private equity space for energy, and there were fewer transactions because of that. Uh. You saw that valuations between the band and the office side never actually reached a clearing point. But by the same token,

you did see a great deal of capital availability. So these companies were able to access the capital they need and come around the other side. So does private equity put a floor underneath it at the margin? Yeah? Okay? So um, what's eaten vances sort of base case scenario for ten year treasuries for the end of the year. Well, it's important to point out that we don't have a top down view form from an economist personally then I think you need to think about the tenure out as

a reflection of nominal growth. And so if you believe that Trump is going to achieve nominal growth in the four percent range, then you need to think about a four pressure towards a four percent Okay, so if that happens, if there is pressure towards a four percent ten year yield, what would that do to HILD bonds. Well, you'd have to My guess is with the front end of the curve coming up at the same time, you would likely

see negative convexity. You'd see this market extend. You would see HI yield extend away from being priced to call and more to being priced to maturity. So you would see uh duration extend performance be fairly soft. Um. That would be in the context of better growth, which should see spreads contract, so other words, losses, but they'd be tempered. Yeah, I think that's a fair fair assessment um in the multi sector bond income fun right, Uh, what kind of

cash position are you holding right now? We're about seven or eight percent today? Is that considered high? That's a little higher than it has been, but we've been as high as twenty UM in mid fourteen. We were, um, when there was are you looking for reasons to get into cash right now? Are you going after? I noticed you've got Australian Queensland government bonds, you got bonds from Brazil, Canada, and you do have a bunch of energy debt in

there as well. Sure we have. We still have some legacy energy and materials positions that are doing very well. But we've been looking more towards the e M side over the past handful of months. Um. We think we've owned Brazil for a while and that was a good performer for us last year. But there's been some good corporate issuance recently that, um, you know, we think offers a good deal of return over the next handful of years.

We think that dollar strength is probably reaching uh high, Um, you hope, So if that's going to get paid in Canadian dollars. I was looking today one thirty two against the Luna dollar strengthening. Yeah, the dollar has been strong, but our non dollar positions have actually benefited us this year. Um. Aller has rolled over against most major currencies since the

beginning of the year. We had that rally post election in a fade since then, all right, I want to thank you very much for coming in and spending time with us. Henry Peabody as co manager of the Eaton Vance Multisector Bond Fund. P and L is brought to you by proper Cloth, the leader in men's custom shirts. At proper cloth dot com, ordering custom shirts has never been easier. Create your custom shirt size by answering ten easy questions, select from over five fabrics to suit your

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cloth dot com Custom shirts made Smarter. There was a great scroup that came out overnight by Bloomberg News is Laura Keller along with a couple of her colleagues talking about how c l s A, the brokerage which is owned by China Citic Securities, dismissed ninety US based employees

on Monday. This is basically them closing their US equity research team and for more, I want to bring in Laura, who joins us now in our Bloomberg eleven three, Oh, studio, Laura, First of all, just sort of give us a sense how long has c L s A been in the business of US equity research and how big of a departure is this for them? Right, So, Lisa, they've been here since about two thousand nine, so it's definitely some franchise that's been here for a while. When is that

eight years? Um? And they're I mean, they're not small, but they're not one of our huge, sort of bold brackets. Of course. So they had about um, I guess it would be around a hundred sixty people in the US. Were some very well known ones, yes, very well known. Mike Mayo is really sort of their star guy. Um. They also had um some tech analysts as well, obvious Silver and McGuire we mentioned in our story. And Mike Mayo of course being this very prominent, very outspoken bank analyst.

Today he's at the JP Morgan conference. He he actually called himself a free agent, um, since he's not working at c L s A anymore, and he was dismissed along with ninety others um as you mentioned, h late in the day, we understand called into a meeting around four fifteen aftermarket clothes and let let known that they would be no longer working there. UM. And we have this image as well, uh and our story of Mike Mayo walking home with this box um of things, you know,

presumably from his his desk in his office there. Can you explain why did c ls A decide to do this? So, I mean c ls A has had a lot of trouble with this um Us business, but also with their equities brokerage. I mean they were bought UM by a Chinese firm, Civic Securities in two thousand, goes all the way back to Creditly right, yes, and they bought it

from that French bank UM. So they actually had tried to sell um CIDEC had tried to sell these guys and they weren't I guess presumably able to find a buyer. So they've had some trouble since. Back then. You know,

we had reported UM. One of our Asian colleagues, I think it was Kathy Chan in UM September reported that the bank actually pulled this sort of it's a very unusual thing where they asked people to voluntarily take unpaid vacations of up to ten days and that's they were just trying to save money, and this is something that they have done three other times when they've gotten in trouble.

But I mean that's a very unusual measure, UM, and really not something you do unless you're having a lot of issues on the revenue side and even on the cost side. Well, but c LA say, this might be an idiosyncratic issue, but it does sort of come at a time when on a broader level, research firms across or research units I should say across Wall Street have

been cut significantly. And part of this has to do with new rules that are going to go into effect the third of January in two thousand eighteen that require banks to charge investment firms for any research they provide them. I mean, does this play into c LSA's decision at all? UM, I don't think, Lisa from According to the CEO that UM, Jonathan Sloan UM Kathy Chan had talked with him and he said, no, this is not a result of those rules, those my fed roles that you were talking about, UM,

this has nothing to do with those. What he said was that they want to really just you know, have execution only framework in the US. That's what he said, UM, And and really focus on those parts of the business. Nothing to do with these new rules, although I will say, I mean, just on a broader level of competition for research has been amped up in a pretty dramatic way,

with the worth of it being called into question. There was a Financial Times article that came out over the weekend talking about how different firms are bandying about what the costs scheme will be for this type of research, with some banks proposing ten thousand dollars a phone call for with for for a chance to talk with their senior analysts, um and and basically investment firms saying no way. So it's a huge departure from every which way that

they normally have conducted business. I mean, normally you have a big investor who can just call his his you know, his sales up, yes, but also his equity analyst and talk about ideas. You know, if he's I've even heard too. You know, if you're a dead investor, but you want to talk a little bit on equities, you copy your your debt representative, maybe the analysts on that side, and he can bring in the conversation for you a sell side person on the equity side. So it's a charge

for that conversation. I mean, I'm just not sure what kind of mechanism you start to get into. And I mean it's almost like billable hours for lawyers or something. Certainly seems that way. Thank you very much, Laura Keller, financial reporter for Bloomberg. You've been keeping us up to date on this story and of course the ongoing changes to equity research. Before I buy any mobile device, I check in with one person, John Butler. He's our senior

Telecom Services and Equipment analyst for Bloomberg Intelligence. He provides unique and real time research for the telecoms industry, and he's here in the studio joining us. Now. Thanks very much. Well that's great, Gray of different phones in front of him. Well, he wishes, he wish he's getting as many as pim. Right. Well, I'm not gonna go there. That's not let's not talk about those problems. UM, I want you to talk about

Mobile World Congress taking place in Barcelona. You say it's a zoo you go to CS Consumer Electronics show in Las Vegas. Uh. I was reading the reports from Barcelona, and I thought that Nokia was the one that grabbed the head lines for something that I frankly did not expect they really did. They're not even making handsets anymore. They actually have a partnership with HMD, which is a longtime partner there is, and they're manufacturing the phone and

licensing the brand. And they came out with the old candy bar that the thirty three ten has been updated, complete with the popular game Snake if you remember that one from back in two thousand is when that was originally launched. Yes, and it sold over a hundred and twenty five million units, which back then was really a big deal. So it was a huge hit. Everyone who had had wireless service at that point at least considered

buying one if they didn't known one. So the Nokia thirty three ten is back, it's updated, it's got a color screen. But it's why you think I can I think people are you know, if you look at even TV these days, a lot of there's a lot of retro stuff showing up, and I think it's sort of playing into that trend. But I for Nokia, I really think it's about reminding people that the brand is back,

so they I mean, this is not a smartphone. No, I actually I don't know what the price is they say it's going to be something under like it'll be it'll be two digits, not three. I'm certain of that. Um And they launched the Nokia three, five, and six along with it, which are very moderately priced smartphones, and I think that's where they should play. The brand is very popular, for example, in India, it's a huge brand there.

So coming out with a reminder of hey, we're back, uh, you know, sort of welling up those warm memories of the Nokia brand with the three tum But let's a little bit about Apple, because they're going to be having their investor meet egg and we just found out about Warren Buffett's newfound love of Apple and his newfound share or ownership of Apple has increased. Do you expect that to be something that Apple is talked is asked about,

or even volunteers. You know, they may talk about the fact that team really is a big year for Apple. It's an anniversary year for the iPhone. What tends to spark upgrades in the in smartphones in general, something really

an innovative new feature. So we saw it with the iPhone sex for example, the first large screen iPhone, and that generated what can best be described as sort of a sales super cycle, and I think the hope is building that this year we're going to see a move to a brighter screen technology called oh Lead, and we're going to see true waterproofing with the iPhone and a better on the front and the back. So there's a

lot that's being talked about. Uh, they have room to innovate, and um, you know, I think it could really be a big year for them, So fingers crossed, and I think that will come up in the shareholders meeting. I think they're going to figure out how to get those Year buds made in scale so that people can actually listen to the phone with I'll happen to be use an adapter because they got rid of the uh you know, the imp the sound output, the air phone jack. Yeah.

That actually, of all decisions they've made over the years, that one really lets my head. Yeah, I don't get it. And um, you know, the move to wireless technology and headphones and other accessories is definitely a trend that's in place, but it's not really mature enough at this point in my mind to have done away with the Year phone jack. But it is gone on the iPhone, seven, and uh, you know, my hope is that they come out with lower cost alternatives than those wireless ear buds, which are

a hundred. What I was very excited about hearing is that Apple may cut the charging chord completely with the iPhone eight. That's the rumor sort of circulating right now, right, Yeah, yeah, there are better than the earbuds, I mean wireless technology, charging technology. It's I mean one of these new things, you know, they always come with with some downside. Just quickly, John, I just went back. We got to go back to this Nokia thing because I found out it's about fifty

two bucks for the Nocchia thirty three ten. Now it's twenty two hours talk time a month long on standby, available in warm red, yellow gloss finished dark blue, and gray, both with Matt finish, and it supports two point five G network technology, which is ancient technology. But my point is, how many people you think are going to buy this as a fashion access for I mean, this is almost disposable at fifty two bucks. Yeah, I actually that's a

good question. But I think they're really aiming for emerging markets, to be honest. Yeah, India, Well, hm d Ye, thanks for well, we'll be, we'll be, we'll be heeping tabs on him's budding career as a an advocate for the Nokia Phones. John Butler, thank you so much for joining us. Always a pleasure of senior telecom services and equipment analysts talking about Apple's annual shareholder meeting and also uh the Mobile World Congress with Nokia's new phone. Thanks for listening

to the Bloomberg P and L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio. P and L has brought to you by proper Cloth, a leader in men's custom shirts with proprietary smart sized technology and top rated

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