EM Spreads Are Embedded to Sovereign Risk, Sassower Says

is Damian Sassaur. He's our fixed income strategist for Bloomberg Intelligence. Damian always a pleasure, Thanks for being with me. Can you explain what what exactly are we trying to understand here? A connection that I didn't really I didn't realize existed. Yeah, sure, So, I mean emerging markets, especially the debt issued by emerging market oil and gas companies, tends to be are tightly correlated to the sovereign parent countries in which they're located, right,

and so one would think it's an oil company. It produces oil, and so it's business. It's emerging, you know, it's it's it's the spreads for its for its debt should be more correlated to the price of oil. But that's just not the case. What what gives us an ex I mean, what are you talking about? Brazil? So Brazil, Actually, Brazil is an interesting case because um, the Natro Petro Brass is basically owned by the Brazilian government. Yeah about so you would think that it would um, but nevertheless,

it produces oil. I mean, it's got upstream and downstream businesses. But Petro Brass for the most part, um and has historically had a very tight correlation to the price of oil.

But um, you know, it's core the correlation between Petro Brass bond spreads and that of its of Brazil itself or just I mean they're upwards of close to although that's been declining of late um in lieu of all the political instability that's going on on the ground, right, So I think what's happening is you might have creditors a little bit more decenseive ties to the political turmoil surrounding Michelle Timer and just exhausted by it because that

goes back to the previous administration and then the previous previous administration in Brazil, and also there was there was a big corruption scandal at Petro Brass That's that's correct. So I mean as opposed to perhaps what's going on in Mexico, right, I mean, what's interesting about pemm X, which is the large and that is, you know, the

oil company in Mexico. Exactly the spreads of Mexico, of quite frankly of pem X are more trightly correlated to that of Mexico and Mexico given what's been going on with NAFTA renegotiations and trade linkages to the US. What you're finding is that uh, pem X bond spreads are more trightly correlated to US financial conditions, the US money markets right there the front end of the Yolk curve.

So you know, with um with all that's going on here, with the removal of quantity, quant easing and perhaps you know, quantightening going forward, and just finding that PEMMIC spreads and more track lee or more closely tracking that of the US and of of its sovereign parent is is do we need to note that this is also because the companies, these oil and energy companies, they are so closely linked to the governments of these emerging economies like Mexico, like Brazil.

I mean, it's not as if these are what we would consider to be private, shareholder owned companies. Well, well, I mean that's a great point. I mean, Petro Brasse and Pemas are definitely quasi sovereign entities that are you know, they're not going to do anything that's the central government, the government doesn't want them to do. But I can I can direct your attention to a company um in Russia by the name of lock Oil, right, and lock Oil is not owned by the government, and yet it

spreads track that of the Russian sovereign upwards. So it's not as if it's a public private, quasi sovereign corporate. You know. Issue here, what you're finding is that emerging market companies that that the embedded sovereign risk in their

bond spreads it just outweighs the fundamentals. And we've seen that, right, fundamentals you know, for the most part, I don't want to say they don't matter anymore, but we've been in this one way street, this one way environment for e M debt, and so you know, you're finding that they're tracking sovereign bond spreads pretty closely. All right, I'm gonna push back with you on on on Russia because you

mentioned Luke Oil. Okay, very good. It is a private company, it is not run by the government, but it happens to be in Russia. And my I mean, you know, uh, forgive me, but I think that bottom reputing casts a very wide shadow over every aspect of the Russian economy. So it's not like Luke Oil is gonna do something that the Russian energy ministry doesn't like. No, that's absolutely true. But eighty percent of its revenue is coming from abroad, right, it's not gas prompts. So look what we have is

you know, um, but you make a good point. I mean this is that the political context is crucial when you're looking at a merchant market debt. And that's and that's the point here. I mean, you just can't ignore the soueig risk. I mean, anybody who's gonna do a deep dive and do a fundamental bottom analysis on any e m issuer, you just can't ignore the political risk

that's embedded within bond spreads. I was gonna say, next we should go to Venezuela, right, Petasa, Well, Pettis is an interesting one, right, I mean, now that we've seen you know, the you know all the talk about you know, the U stupping sanctions and and everything that's going on on the ground there. I mean, it's a real crisis. And so what you've seen there is you've seen credit

the fault swap spreads blowout. And what that's done is it's increased the implied probability of default from something like upwards of seventy over the last month. That's a huge move. And and so doing someone's made a lot of money on this right because someone has bet that. I mean obviously someone bought the credit the false swaus when they were low and people thought there wasn't gonna be a problem.

And this is like you're you're hoping that you're gonna get into an automobile accident and then you benefit because the premium skyrocket. Well well just from but that's true if you're if you're kind of playing, if you're trader

mentality and you're playing the CDs spreads. But if you're a cash bond holder in petivesa right and you're a long term investor, you know what you're seeing is people have kind of been playing the front end because you know, every time there's you know, they're gonna default, they're gonna default. They don't default, and so the bonds pay out and and they and they mature and they were deemed and

you get hundred cents on the dollar. But all those short end bonds, especially the ones that are coming due towards the end of the year, that are trading at svs on the dollar, they've come down quite a bit, and people are moving further out along the curve simply because your risk of loss is less. Think about it. If you're paying eighty cents for a pet of Basia bond and at the faults you lose eighty cents, but if you're paying thirty five cents for the twenty seven

or your risk of loss is that much less. So you're seeing, you know, long term investors moving out along the curve. And that's what's going on with That's that's interesting because I mean that really highlights how people are reacting to try to reduce their risk, but at the same time they're looking for more yield. Yeah. Yeah, and pet A Basa Actually I just ran the numbers. It's actually the only oil and guest issuer in em hard

currency land that is actually down on the year. But if you look at it over I mean, my goodness, if you look at it over the last two years, you know, I think it's up. You know, seventy eight per chens, you know. So you can't ignore Petivisa if you're kind of a closet Banta chaser and index tracker, if you will, you know you have to have it in the portfolio. It's just where do you want to pay your points on the curve? Thanks very much for

explaining this very interesting. Thanks so as always. Damian Sasaur Hughes are fixed income strategist for Bloomberg Intelligence, giving us some detail about emerging market that in the connection between the oil companies in those countries and uh the value of their dead All right, I want to turn our attention now to the hospitality industry, and as much as Marriott has released its results and also we'll be getting a preview of price line, I want to bring in.

Dan was Leaky is the senior equity analyst at morning Star, and Dan, let's begin with Marriott, because yesterday they said they've putting together this partnership with Ali Baba Group in China because of course they want to tap into the growing market for tourism and travel amongst Chinese individuals. Can you speak to what you learned from Marriott's report today? Yeah, you know, I guess with Ali Baba, we didn't find

that too surprising. I think it makes sense for Marriott, and in the future, I expect other hotel operators to join a platform like ali Baba. Given that they have five million active monthly users, that's a platform that you're going to want shelf space on, especially, you know, given China is a growing outbound travel market, so this is something that is should help Marriott's long term growth opportunity in China. We're currently about eight percent of their total

rooms are from that region. Um. But beyond that, what we learned out of the quarter was that their brand continues to be very strong, and also the US corporate business spent is seems to be pausing a little bit, and that's a kind of been echoed by some other competitors in the hotel space over the last week or two. All right, we'll get to the bigger, the bigger issue.

Just second, I want to ask you about Marriott and are would how is the that pro that combination coming on, because didn't they say that they want to cut what two fifty millions in uh in dollars from the company's budget, right, Yeah, so everything that appears on track. You know, they acquired Starwood back in September of last year, is a good acquisition and that Marriott was more focused on US and Starwood had more of an international exposure, so that was

a nice marriage from that vantage point. But yeah, everything appears on track. As far as the synergies that they expect to strip out of the Starwood UM integration, UM the two or fifty million and cost savings, they remain on track to to have that annulyzed sometime next year. Dan, it's this this is considered an asset light strategy. Is that correct? Right? Right? And maybe explain how does that work and why is that of benefit, particularly when it

comes to margins. Yeah, so, um, you know, so they don't own a lot of their own hotels. They depend on third parties to really join the platform, and therefore they don't have a lot of development capital intensity costs that really that that's all um forwarded by the third

parties that are joining Mariotte. And the reason they're joining Mariotte is because Maria has a leading loyalty program, they have strong brands, and they also have a good website of traffic um So those are the things that a third party will look to when they're looking, for example, to franchise under one of the larger brands. And also Marriott doesn't have to pay for any of the marketing costs. All that is is again paid for by these third parties.

So the margins are very high versus if you own the hotels, those costs are going to be associated with that because those franchise fees as well as the incentive fees, they continue to increase the revenue at Marriott and doesn't cost them any more money. Uh yeah, that's that's essentially correct, right, So there's a lot of there's a lot of leverage here um as as they continue to sign up and

get unique growth. The costs are very low, and then they get a percentage of the revenue that's generated by these franchisees. Is this the model that you think most hospitality hotel groups should follow? I do, But you know it's also a matter of scale. So when you're a smaller hoteler, you really have to kind of invest your own capital behind the brands in order to get them to a point where third parties can gain confidence in

in the brand development. UM. So you look at a company like Hyatt, for example, that is has more of an owned exposure. They're starting to get to the point now where they're approaching two thousand total rooms where I think they're starting to realize that third parties now believe in the in the brands that they've put their own where to put their own capital behind. So it's kind of an evolution that a company gets into where it

becomes more asset light as as it builds a certain scale. Now, price Line is set to release its results after the close of trading today. The shaffs of price Line are up nearly forty percent so far this year. Two stock is of a dollar twenty three right now, what do you expect to hear from price Line? Well, first of all, our long held view is that Priceline is the best position company with an online travel um. You know, the

question now is is it the best stock? We think that it's actually near fair value or fair values two thousand and thirty dollars essentially where the stock is training right now. But you know, as far as the report, we expected to be solid um Expedia reported their results two weeks ago. They saw a pretty solid macro environment globally. Um Expedia's room nights also saw some acceleration versus the prior quarter, and then even though there's been some mention

of US corporate pause with the hotelers uh. They also point out that the leisure market, which is more of price lines um um forte that the leisure market is quite strong, so we think that the quarter probably is going to be quite quite solid for Priceline. Can you speak about this idea of you know, the competition from air b and b so vacation rentals, how does that

play into a Priceline strategy. Yeah, vacation rentals is a growing market with online travel, and one of the reasons why we like price Line is because Priceline actually has

a really strong vacation rental um platform. So price Line has about one point two million properties and twenty five million rooms on booking dot com um and of those twenty five million rooms, about eight million or so our vacation rentals or alternative accommodations, which would compare with Airbnb, which probably you know has around three or four million UM rooms itself on its platform. So price Line actually

has a very competitive offer into air Airbnb. And we think that of the total bookings, vacation rentals probably represent a low double digit of price lines total bookings. And you think that at fair value? What is the alternative if you don't like the price of Priceline. What should you do? Well? Trip Advisor? Uh, you know, I think trip the market, it's greatly probably discounting Trip Advisor that also has a pretty good platform. Uh, there's a lot

of traffic that goes to trip Advisor. A trip advisor has a lot of content. Um, you know they'll be renowned seeing their results at the close of trading today. As yes, thanks very much. Dan Wassleck, he is a senior equity analyst at The morning Star talking about the hospitality industry. Well, what are the characteristics that a money manager looks for in an investment? Here to tell us

is David Coudla. He is the chief executive and the chief investment strategist for Mainstay Capital Management, helping to manage more than two billion dollars based in Grand Blank, Michigan, and he can be followed on Twitter at David Underscore Kudla. That's k U D. L A. Alright, David underscore coudla. What are the characteristics? What are you looking for in

an investment right now? Right now, we're looking for investments that can do well in a slow growth economy, and those are the actors that are more dependent on secular a second or growth story than they are the economy and cyclical forces. The economy is doing okay, but it's really just sputtering along at about two gdp growth. So we've seen value stocks have really suffered this year. Growth

stocks have done very well, namely technology. Are you going to stick with that or is it time to rebalance? We're going to stick with technology and we're gonna stick

with big cap technology. Uh. We We are in the ninth year of a bull market, and there will be a point where, uh, this market finally cracks after the over eight years of the second longest bull bull market in the history of US stocks, where we'll see a problem with a flat or down market and all stocks will suffer at that time until that time when we look at where do we want to be in this market right now past six months in right now, it's still with technology and even healthcare that tends to be

economically insensitive. Well, David, how do you how do you know when to get out? I mean the NASDAC is up nearly this year, the SMP is higher by more than eleven. You know, no one's gonna ring a bell for you when you know when it's time. But how do you avoid that downturn on? How do you mitigate

the effects? Yeah, no one's gonna ring a bell, although there are some people acting like the ringing bells UH at Oakmark Capital H. Jeffrey Gunlock are have words of caution, and we know that that market has stock market has to have pessimist has to climb a wall of wory. But when we look at market fundamentals, primarily earnings, earnings are very strong and expected to be strong through. So

we think you stay with stocks for now. We're probably UH quite a bit more careful within the bond sector, staying away from those interest rate sensitive bond sectors. Well, let's take one of the sort of tech join as an example. Apple, Uh, the earnings that they are recently posted better than estimated, also looking into the future saying that they think they're going to do better than analysts had previously thought. Is Apple characteristic of the kind of

company one to own it is. We saw iPhone sales come through very strong in the most recent quarter. Uh. They're continuing really to perform well with still a low pe relative to a lot of their peers. And when we look at the tax reform, that may becoming one of the primary UH ingredients in that is a way for those big companies like Apple to repatriate dollars. And that will be good whether it comes in the form of further investment or in financial engineering, stock buybacks, higher

dividend payout. So how do you respond to people that say, gee, you know, David, You're just you're a momentum trader. You're you're going with the momentum. You're adding to the positions that are doing well. Uh, as you just said, eventually, that's not going to work forever. Eventually it won't work forever. But then then we look for as technical assid allocators, where do we want to be in the next market environment.

You know, right now, if people who are Warren Buffet or Graham Dodd type investors that have looked at value because it's undervalue, that's simply been a value trap. So momentum has worked very well this year. We think it continues to work well and it will take us to other sectors. Uh as as the market chiefs well. Is a company like Tesla, do you consider that to be a technology company, an automobile manufacturer, a solar company? How would you parse Tesla all the above? Uh? You know,

it's a consumer. You know, we'd put it in the consumer cyclical category as an auto manufacturer primarily, but also you'll see it held in a lot uh tech funds, technology stock funds because of the technology incorporated in the overall business model in their products. You know what Elon Musk is all about. But it's a it's a technology stock that quite quite frankly, concerns is quite a bit now and that's because we have this Model three production ramp that we see a lot of. We have a

lot of concerns with a cash burn rate. We were concerned about until um a couple of days ago when it was announced that there would be another bar or a bond offering to raise another one point five billion. But you know, that's that's a company we can look at, not like Apple at a low pe that's making a lot of money. Tesla is a company with no Pe. They have no earnings and it's a question of when

and if they will ever be a profitable company. So we think owners of Tesla we called a story stock, and they've given Elon Musk and Tesla path on a lot of things because they believe in the future. But we think there's a lot of reality to set in in the next six to nine months for Tesla. Well, it certainly hasn't stopped the stock because the shares are up more than seventy percent so far this year. Do you think that one point five billion dollar bond offering

that they're talking about, is that just an effort. They've got to raise the money somehow, but they just don't feel they can dilute the current shareholders. Yeah, and it's it's a good time if you're going to capital markets a lot of companies. There's companies that are going uh in issuing debt to buy back their stock because capital is so cheap right now, so now it's a good time to do it. But they also we think it's a good time for Tesla to do it because they've

had the rollout of the Model three. The press has been very good. It was really superb rollout, but if they get a production encounter, some of those production problems the next year's service problems. UH, it'll be a little tougher to go to capital markets. Given that their cash burn rate throughout the money in two in two to three quarters. I think it was very wise for them

to do that at this time. As far as this, uh, this effort on on what you hall secular growth healthcare, what what characterizes because I mean health care is abroad, you know, a broad section of the of the market, what particular areas of healthcare, pharmaceuticals, health insurance, health insurance, healthcare providers. We saw a lot of revenue generated for those companies with Obamacare, and we've seen as the different packages have been put forwards legislation and proposals by the

Health and then the Senate. Uh. There there within are the factors that the healthcare providers can continue to do well. So healthcare being a non cyclical typically non cyclical a a uh, A non economically sensitive sector that has been on a growth tear, and we think that still a good place to be. What would you say is the one question that you get most often now from investors, When will the other shoe drop? When? What do you what do you tell this bull market end? We know it,

we know it will, right, we know it will. And the further it goes, the more chances are quite frankly, that it that that it ends badly. But uh, you know, I think that some of these these uh well and people that have gone to cash or short at this market over the past year, two years, three years, four years, they have definitely not done well and it is not it is not got worked out for them, Thank you

very much that David coudla. He is the chief executive and the chief investment strategist for Mainstake Capital Management, helping to manage two billion dollars more than two billion dollars in Grand Blank Michigan. Chairs of Ralph Lauren and Michael Cores all moving higher today. Ralph Lauren up eight and a half percent, Michael Corps is higher by twenty Who

says retail is dead, well, maybe my next guest. Daniel DeMartino Booth is the founder of Money Strong and economic consulting firm, former advisor the Dallas Federal Reserve, and a Bloomberg profit. Bloomberg profits are professionals who offer actionable insights on markets. The economy and monetary policy, and the contributors may have a stake in the areas that they write about. Well, Daniel DeMartino bootha, do you have a stake in Ralph Lauren?

Meaning do you have things in your closet that maybe you're not going to throw away? Now? Well, I certainly have plenty of Jimmy choose, So I personally stand behind and endorsed the Michael Core's news. All right, well, very good. So Michael Core is one point two billion for Jimmy Choo. What what do you make of today's retail report from Ralph Lauren and Michael Cores? Well, I mean it's not terribly surprising. There's going to be there will be continued

pockets of of loyalty out there. I'm a perfect representative representative thereof that being said, I'm complete lately, uh, price sensitive outside of my my little sphears of loyalty, if you will, And I think that we continue to see that come out in the aggregate data. Him So, this idea that people will pay whatever, they whatever, this being asked for the things they really want, but everything else

is just sort of up for grabs. It's all price driven it's kind of it's a lot of retail, if you will, has been commoditized, and that commoditization has happened via Amazons, as we all know and talk about until we're blue in the face. Well, you've written a column that says back to school means more retail agony. Describe why you you believe that to be? So, you know, I think that that we saw an acceleration of the decline and brick and mortar retailers over the holiday season.

It's surprised even the most pessimistic analysts when it came down to the trajectory of store closures. And because I think many retailers, of course, as we've seen today, not all, but because I think many retailers are in a vulnerable position. I think it's it's feasible that we actually see some more bloodshed around the back to school season, which is the second most important time of the year for retailers

after after the holiday season. All right, and do we is it worth while making a distinction between the retail the retail corporations that only sell online versus those that have, you know, substantial store locations, because I think, for example, Michael Course has over like eight hundred and thirty stores right now, you know exactly. In fact I was. I

was in a mall recently at gunpoint. My children had taken me to see an animated feature, and you know, out of the corner of my eyes, I noticed a Michael Core store. I don't go into malls if I don't have to, but you are right. Their footprint is enormous, and that will that will come back to haunt them at some point as more of the second and third

to yer malls begin to close down. Do you think that that's reflected in the Chinese trade number US with the United States That trade with China continues to be robust, and indeed the sale of and demand of Chinese products continues to rise, You know it does. I was fishing over the weekend in Maine with Leland Miller, who's the China Age book, who runs the China based book, and he gave me you know that he always says, you use an eye dropper full of of skepticism when you

see these data. I'm not so sure that five months in a row of a growing surplus in China is reflective as much of true underlying improvement or or Chinese politicians trying to make a statement to President Trump about some of the hard talk that he has on on trade. I just I don't know if we can parish this as being a true trend or or being more game theory at play, because Trump continues to threaten trade wars

expand on that. If you can about the this potential for the conversation really being political rather than economic, well again, you know, I don't. I don't think that anybody in the world, especially given with what's going on in North Korea, wants to see the outbreak of a trade war. On the other hand, we saw just last week that the Japanese have indeed moved forward with tariffs on importing beef, so it might be once in from the United States, from me and from other countries as well. Uh So

these are small steps. But but we've not seen any backing down in terms of threats of of of tariffs on steel imports into the United States, and these things never tend to end well. And again, you know, there's been a lot of weakness out of the Chinese trade data. I would put more stock in it than I otherwise would. I do say it's more than just political given the deeper disappointment that we saw overnight coming out of Germany and its trade numbers, followed by weakness the night before

in its manufacturing industrial production figures. All right, now, if we if we sort of combine that with what is happening to the US consumer and how they're managing to pay for all of the products that come from these countries, maybe just to tell us more about that, well, you know, what we have seen is extreme stickiness in services inflation

in this country, and whenever we see that. In fact, a recent survey showed that parents are going to be spending more money on after school activities those are services than they will be spending on products to get their kids ready for for for the back to school season, which which brings us back to my column from last week. But the more we see in terms of sticky service price inflation, the less wherewithal the average household has to

spend on any goods. So you'll see that continued tug of war moving forward as household strains continue to grow. Of course, we saw news out of Discover Financial last week before that Capital One Financial that we've we've seen credit card defaults continue to tick up well and also revolving credit which obviously credit cards. You say is at a record? Is that a record right now? Well, that's

what Bloomberg reported last night. Yes, no, we we we have indeeded indeed seen uh that prior peak taken out. At the same time, though the Fed Senior Loan Officer Survey data tell us that the standards are tightening, I have to I'm just gonna sit back and and try and figure out how this dynamic is going to play out, because it's apparent that households are reaching to their credit cards not to cover discretionary Ralph Lauren, Michael Corese type

of spending, but rather to cover spending on necessities. If lenders are pulling back at the same time tightening standards, you have to start to wonder if we're going to see that play out in an increase in mortgage defaults, in a continued rise in automobile loan defaults. We mentioned Titan standards. What about tightening interest rates? Do you believe that the increase in interest rates that is foretold by the Federal Reserve will have a dramatic effect? You know,

I do. It's it's interesting. We have we we have the ongoing battle between the hawks and the doves and

Bullard overnight saying there's not another rate increase. I think that if the Fed manages to follow through on its theory of balance sheet UH shrinking being on autopilot and a non event for the market, it wouldn't surprise me PIM if we were to see them follow that with a rate hike in December, and at some point these these continued rate hikes, one on top of the other, will make a difference in conjunction with live or going away for the average US household. I want to thank

you very much for joining us. Danielle di Martino Booth is the founder of money Strong, former advisor at the Dallas Federal Reserved, a Bloomberg profit, and you can follow her on Twitter at di Martino Booth, which is also the author of fed Up, This is Bloomberg. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interview use at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa

Abramowits one before the podcast. You can always catch US worldwide on Bluebirg Radio,