ETFs, Markets, And Broadcom (Podcast)

SMP up about eight tenths of one percent. A lot of questions for war investors out there as we flirt with bear market territory and SMP maybe chief among them, as a recession, Sylvia Jablonski, chief investment officer and co founder, have to find a t F S joins us. Sylvia, how are you thinking about that? Again? I think maybe over the last week or two, one of the more frequent questions we had is, Okay, the Fed is raising

interest rates. We get that, but put in context the risk of a recession that might result from this rising indestrate environment? Do you guys think about that? At Defiance? Good morning to Paul Well. I think that a lot of what is going on in the market is very much you know, near term panic, fear, um some capitulation, and that naturally spurs these these thoughts and again just fear that there will be an inflation sooner or inflation

recessions sooner than rather than later. Um. You know, my my thought on that is that we're certainly in a deep correction, if not a short term bear market, we're pretty close. You know, no dec is there a spire is swarting with that twenty percent level intra day Um, it's it's it's got about half of the components below or so foot call ratios are high, you know, consumer sentiments, so there are all these things that are just sort of scary and it feel terrible in the near term.

But you know, I don't think we're at that point where a recession is necessarily right around the corner. And the reason why is because the economic backdrop still remains pretty healthy. You know, you have a hot labor market. If loosening a little bit, um, you have you know, trillions of dollars and savings from from a strong consumer, a strong curve of balance sheets, and we don't have a credit crisis. You know this isn't two thousand eight.

Banks are sort of stable and strong and there are good things that will help us sort of weather the storm, if you will. So, yeah, how much does this bear market talk really matter? We gonna have guilty little our markets reporter on just a few minutes ago, and she said, well, you know, it's really just psychological. It doesn't matter that much. Do you agree? Well, I think it matters for for

people who are who are selling. I think that you know that that crowd is is essentially um, you know, taking losses and they really shouldn't, you know, So I think um Abigail makes a great point. I expect, I expect that a lot of this is sort of psychological and that you know, we're just watching the sort of market fall and and it feels terrible, and so you have traders sitting on the sidelines. But where it does matter is that you know there are opportunities that can

be had now. Right, So if you are an investor that has on the sidelines and you have a long term investment, her eyes and you could be missing out on an opportunity of fear and panics. Keeping on the sidelines. You know that also keeps things sort of repressed for a longer period of time as well, if we don't see investors coming back in. But what's interesting about you know, sort of this their market or non bare market, whatever

it is is. You know, there are sort of two types of people out there there, traders who can benefit the short term, and what I would say is that those traders tend to be high frequency experts. I'll go, guys, you know the hedge funds so invested in the corporation. Don't try to do it yourself. It's too tricky now.

But if you're a long term investor and you have a long term outlook, you know, buying stocks on the discount again, with the odds of a recession still being fairly low, with this unique set up in the economy, it is probably not the worst idea if you're looking for, you know, sort of quality and strung down sheet. A lot of names around down now, you know. I had a phone call from my financial advisor on Friday advising me that we're taking some tax loss tax losses on Friday,

just letting me know. I was like, oh great, But that was the first time in fourteen years we had had that conversation. About taking tax losses on and there's all my e T s as well. So are there e T s out there that are actually doing well that unfortunately I was not in? You know, it well depends on the time frame. It depends on when you when you sort of got it in them, and when

you're getting out, you know. I definitely think that there are some ets that investors can look at now that are poised to do well, you know, in terms of well. I think that the pullback of the market is pretty widespread right now. I mean, oil, gas and energy ets have have sort of done well, um with you know, with sort of the inflation, the energeo politics. But I also think that ETFs that are poised to do well do exist, and I think a lot of those will

be in the travel reopen um type of spaces. You know. I think that that's a good trade of consumer spending going from good services. I think that you know, the longer term outlook on things like you know, alternative energy resources, things like hydrogen things solar um could be interesting to investors now, So you know, they're definitely places to look

and look. I would even just argue that that you know them both cues and sim age and just just you know, sort of plain old technology and and um, you know, um sort of larger market cup somebody. Conductor ETFs are interesting just because they've been absolutely hammered from their all time highs um, so their places to do well in the future. But to answer your question now, it's probably more around the commodity space, and it's around

those names. Sylvia, what about Levered e t s And there was some chat on the street a couple of weeks ago that Leverty t f s and their liquidation was hurting the market and kind of snowballing some of the selling. Where does that fall in the grand scheme of things. Yeah, so having you know, having a background of some more than a decade at the level of a niversity ETF provider direction, Um, you know, what I can say is that a lot of people sort of

misunderstand how how the trade works. Right. If if you have a both fund um that is buying, you often have a bare fund that is selling or vice versa. Um. You know, there's a lot left and there's been numerous studies done and the impact on the close of leven niversity TF funds, whether it's you know, direction posures are kind of the lion's share of it. It tends to be well under one percent or so. UM. So you know,

I think it's it's it's. It sounds good, but in sanery, the math doesn't usually play out for it to be true. All right, Sylvia, thank you so much for joining to really appreciate getting your thoughts here on these markets and on the E t F space. Sylvia Jablonsky, chief investment officer, co founder Defiance E t F s here we have a good green day on the screen for equities, but you know, you take a look at the total return aggregate for US corporates minus thirteen percent year to date.

Just brutal out there in the world of fixed income and credit. Um, let's talk to somebod who does this stuff for a living. Randy Schwimmer, co head of Senior Lending and Seeing Senior Managing Director Churchill Asset Management. Randy, anywhere for you and your team to hide year to date? And what are your thoughts for the remainder of the year. Well, it's great to be with you, and actually we're not

hiding at all. We're out We're out there investing and uh, you know this is a time when private markets are actually shining. So we're seeing a reset as you mentioned, you know, it's been now happening for a while, kind of a repeat of March of when we were really

sure where the public markets were going. UM. We have more recession worries to deal with now, I think as the FED is increasing interest rates and trying to battle inflation um and so that's now causing concerns in the public markets about you know, what's going to happen with earnings and so forth, and if if rates start to

get too high, what's the impact on the consumer. We're starting to see some slowing in some areas, but but private capital in general has been very constructive, particularly during

this time. We've actually seen a number of deals that were stalled in the high yield bond market being taken out by private capital managers who are stepping in with deals like Nielsen and CDK Global and even peloton Um and and stepping in actually refinancing some deals that that were stuck because of what's going on in the public market.

So I think, you know, the private capital, because of the long term nature of both the assets and liabilities UM that that are locked in in our markets, as well as the significant hole levels that we've that we've achieved because of great fundraising activity. In general the last couple of years, private credit sects have been very constructive

during this otherwise volable market, this otherwise volatble market. I want to dive into what you said about the high yield space specifically because to me, I feel like with all this recession talk, if there was indeed a recession coming or even on the horizon, you would see it show up in the credit market first. But the crests crest prosts haven't widened to what we've seen in previous recessions.

Is that disconnect that you're keeping an eye on. Yeah, and in fact, we haven't really seen that in the private market's well known fairness. You know, the middle market, the smaller companies tend to be a lagging indicator, so the large cap, more highly traded businesses are probably gonna see the impact first. Um. You know, we're not seeing really a slowdown, certainly not in our portfolio. Revenues for

our portfolio companies continue to be strong. Um. Now again, you know, we'll see what happens during the rest of the year. Some of the impact particularly with inflation UH sensitive areas such as food and energy and commodities. Those kinds of things are are still top of mind for us from a portfolio perspective, and we're very focused on

the potential of higher costs down the road. Supply chain issues continue to be UM at the forefront, potentially compressed margins as a result of some of these higher costs in certain areas, But in areas where we're UM you know, being very constructive, for example, health care and technology and business services, these companies are continue to do pretty pretty well.

And I think you're starting to see even the public markets today a little bit of kind of reassessment UM in what we mean by a slowdown and what really

the markets are worried about. But I do think that UM private capital will continue to be very very positive as we move forward, you know, and even in an environment where some of the concerns with whether where, whether it's inflation or interest rates, that's something that we've been really dealing with all along, particularly going through over it.

So I don't really see any change in our own posture. Randy, how about as interest rates UH continue to rise and there's talk of a slowing economy, maybe even a recession. What are the leverage have you changed the kind of the leverage levels or that you're willing to go to the market with. Well, we we always are sensitive to those kinds of things. We we tend to turn down and probably the transactions that come in the door because

of that reason. Um. I think the focal point, Paul, that is, as I mentioned, something that's of concern is really the cost structures of these businesses because you're as you're looking forward to your point, you know, if you start to see food and energy in certain commodities where costs are going to be higher, you're not going to be leveraging those businesses the same you would have, you know nine months ago, twelve months ago, and so yes, um,

you know, more leveraging in companies or things that we're always focused on. We're going to be very um cautious about that going forward. But in many cases where companies are doing well, where the private equity sponsors that we're partnering with are putting in significant capital below our structures because they believe in these businesses, those are companies that were we continue to lean into and we believe in.

And I think that you know, the outlook for the rest of the year continues to be good investors that we are serving, uh, seemed to indicate that they have the same or even higher interest in private credit again because it tends to be you know, the oil on troubled waters which we're seeing right now, and people believe that that that's going to be positive going forward. All right, Randy,

good stuff. Really appreciate getting an update on the private equity and a senior lending business into the private equity space. Randy Schremmer, cohead of senior Lending and senior managing director at Churchill Asset Management. You know, one of the bricks in the wall of worry, and there are many, is this scene called stag inflation. I started hearing about over the last couple of months. I had to go back into my economics book from Business Malfair, What the heck

is stagflation again? And I guess it's kind of like inflation but slowing to no growth. And that just doesn't sound very good. But that's certainly one thing that's been royal in these markets. Let's get the latest Lis McCormick Global Fixed Income and Foreign Exchange Reporter for Bloomberg News joints. Us I like to say, live in our Bloomberg Interactive Broker studio. That's good stuff, Liz, all right, stagflation is it a thing for this market? Our investors really worried

about it? And you know, what are you hearing about it? It's definitely, uh, something that people are worried about. And I've heard even the senior investors say, we had to crack out our textbooks and remember what this is. And I think it's become I'm amalgam of different explanations now with a lot of people saying, hey, look, if you're telling me stagflation in this world is slowing growth and

high inflation, well that's what we have. I mean, I don't think that's the textbook explanation, but so people are worried about that. You know, obviously the feed is worried. So there, you know, kind of stepped up this tightening path. But yeah, people are thinking about that. So let's how do you get out of a stagflationary environment. Well, I

think that's what the FED is doing. Like you've heard Chairman Pal talk about he thinks he can pull off tightening bringing down inflation without causing recession, although he's changed his tone a little from slow growth to slowish growth too. It'll take a little bit of pain, right, But then that's their ideal goal is to say, hey, the labor market is really strong. It can take these higher rates. We can bring inflation under control, but we don't have

to completely implode the economy. I'll though, as you guys know, history doesn't always go with that. Usually Fed tightening, there's a recession, but we'll see what happens. You know, the FED calls rightfully into the discussion the strong labor marketplace, which it certainly is if you look at unemployment just for example. But one of the risks when you do talk about the labor market is wage inflation kind of

spiraling a little bit. And I guess we're running it wage inflation five percent, but there's a concern out there that could get a little bit hotter um is a market concerned about that? Do you think, Well, that's something people talk about because also talking to a colleague today that you know, when people get these raises, say they got a five percent raise, they're not so much the next year are going to say, oh, I'll give that back, right, So that's what the FED is worried that this gets

in trench. So I think that's on the radar, though I've heard some FED officials say, or we don't see the wage price spiral as if yet. You know, we want to contain inflation expectations, which have come off a lot from the kind of peak we had. But yeah, you know, if those wages get entrench, that's the problem. You know, there's two jobs basically for every opening, and that's what Chairman Palell's talked about, concerned too hot labor market. And I saw just a new story today. I guess

the Bank of America. They're hourly employees now going up to twenty five dollars an hour. So yeah, I think the official minimum wage is still seven dollars, but it seems like Walmart and you know, you know Amazon have set the real minimum wage at fifteen dollars for all intensive purposes. But now you've got you mean like you mean like the like the bank teller's and I guess, so very interesting. So we're seeing it out there. Um,

just don't know if it's problematic yet. I was gonna say, they used to be like if you did like a junior banker salary divided by hours they work. It came down like twenty five, which is interesting. Um, Liz, let's talk about the dollar if we can. We are seeing this new dynamic where you see a weaker dollar yield

kind of resumed their march higher. Why the separation, Well today it's interesting and I heard you guys talking girl or but we had Christine Lagarde kind of pre announced, which was a surprise that you know, they're going to be stopping their bond buying. They want to get rates

off the negative level. But I think the third quarter, she said, so, you know, the dollar for a while, the FED was the most aggressive in town, you know, even though other central banks were tightening, and definitely the e c B was the lagger. Now you have le guards stepping up. So I think there's the feeling that you know, hey, the other central banks and there's others that are kind of increasing their hawks rhetoric that it's

you know, that divergence isn't as extreme. Plus, the dollar had such a torrid rise, right, you know, I mean, let's let's just talk about dollar long saying like in any market, hey, let's take some profits. It's come a long way. How far can it go. So I think there's the two things flows and you know the divergence narrowing. You mentioned ECB starting to move here. Is it still a valid concern to claim that the US feder Reserve is quote unquote behind the curve. Well, the FED would

argue not so much, right. I think Buller just said, we're not so much behind the curve. Um. I think with where the market has priced in what the FED will do, which Chairman Palace kind of pointing to a lot. Hey, listen, the markets doing what you know we want, and they've priced in all these hikes to come. So I think if you go by that and the q T is starting next month where they unwind you know, some of the dead on their balance sheet, they would argue, we're

not as behind the curve as we were. Um, that's where the question is. Like I was listening to one of the guests earlier talk about do they have the room to hike maybe fifty basis points the next two meetings and then stop and look around. Maybe but not if inflation is too hot, they might have to just keep going. But is it enough for the ECB to finally catch up to the Fed or at least that's

the way it's being framed. When you have the b o E that's kind of doing their own thing, you have a PBOC that's actually looking to stimulate, um, and a b o J that's kind of stuck between a rock and heart place. Right. Well, the b o J has kind of been stuck for a long time, exactly. Um. But yeah, no, I mean clearly, I think the FED in the in the last months has been the most kind of laser focused. We're on a mission. We're getting

to neutral. You know, we're going to get inflation down that. Yeah, they stand out, but yeah, these other central banks are a little more hodgepodge, you know. But I think the guards, especially because you did it in that blog, you know, kind of getting ahead of it was pretty telling. And you know you look at the work function. I mean w i r P World interest rate probability still looking for eight basis point cuts by the end of the year.

I'm sorry, thank you markets. Yeah, exactly, that's what I mean. That if if the FED, and that's what they're kind of looking at, says, look at how much the markets priced in. You know, we're getting there. It's it's filtering through to expectations, which is what we want. Um. Yeah, but it's like that nebulous neutral. They said, we want to get to neutral. Some people say it's bound two and a half. They're gonna feel their way as they get there, and that I think you're going to see

some more volatility at that point. All right, Liz, thanks so much. We appreciate it. Liz McCormick, global fixed income and foreign exchange reporter for Bloomberg News, joining us live, which we really appreciate. In the Bloomberg Interactive Broker studio, Dianna Baker and Ed Hammond had a story out on the Bloomberg term on this morning. There are M and A reporters. They broaked a lot of news right there

saying broad Comms and talks to buy vm Ware. I mean, vm Where's a big Company's got a forty billion dollar market cap, so this would be a major deal in in that business. Let's bring it somebody who does this stuff for living Ujinho. He's a technology analyst for Bloomberg Intelligence, which thanks so much for joining us here. What do you make of this deal? Vm War's a big company.

The deal actually makes sense from from a broadcom perspective. UM, they've been embarking on a revenue diversity the percification strategy for the past couple of years, dating back to with the acquisition of c A and UM. If you listen to Broadcom's last serning is called, they said that they had the capacity to do a deal that's fairly sizeable and vm where somewhat. That's a deal, So that's from a deal synergies perspective. There's another player here that might

get in the way. Michael Dell at stake in vm ware. Can you walk us through why he might be a hurdle UM. Well, I wouldn't necessarily that he's a hurdle, right.

The one thing that I do think that given that he is the holder, as well as silver Lake being a teen percent UH Holdrovid, they want the right valuation, right and and that's one of the reasons why the stock is up about uh The evaluation that that we pegged as part of our note earlier today was that it's probably going to be an enterprise value about seventy billion,

So that's another ten percent from here. So Michael Dell isn't going to sell vm ware for cheap boy, I wish I were the m in a bank care for Broadcom UM. These guys do a lot of deals. What's the strategy behind you know, some of their acquisitions? Sure, UM a couple of couple of things, right, scale up on the areas that they do do well and and do best, shed the non performing assets, and then then

really try to optimize the the operating margin. These guys have stunning operating margins if across the semiconductor or any space, UM you operating margins UH and UM. Every deal that they make they try to shed excess costs to bring their operating margin to that sixty percent level. So, for example, UM, in the analysis that we did, we think that without any deal operating expense energies, they could probably do roughly

seven dps secretion UM. Vm Ware has about operating margin here. Now, if they can shed some of the excess costs for vm Ware, they can make this deal very very creative over the next two to three years, just just by bringing vm Ware's operating UH levels closer to Broadcoms. I'm just reading some Bloomberg Intelligence research here says brod Com

can do and all cash deal if necessary. This is a theme we're seeing among a lot of the tech players that they're sitting on so much cash that they're kind of deploying it in this M and A space. Is there a broader trend here we need to be aware of or is this a more idiosyncratic Broadcom vm ware story. Well, you know, what are the themes um that that we're thinking about from from a an M and A standpoint, uh is that if you do have excess cash, might as well use it um if you're

not going to get the returns on that cash. Now, what what Broadcom may have to do is to raise the debt to make this deal done. Now, some of the other news reports I've read was that it might be an a combination of cash and stock. But if if I do you know, if I if I think about it, you know, for from from uh uh from evaluation or net debt to a nibada standpoint, they can really take up the deal much higher if they really wanted to, if there is a competitive bid. Right now,

I don't think there's a competitive bid. But you know, from a post deal perspective, I get roughly a three point products um net debt or leverage ratio. So for these guys, so they can comfortably do the deal and possibly continue to UH fund their capital over trans program. All right, would you let's step back a little bit. You know you've been covering the tech space for a long time. Now give us a sense of kind of

where we are in tech spending. I don't know if the supply chains are still on issue, but give us just a sense of as you step back and look across the tech stack, where are we kind of in the psycle, how are things going for the big nature. I actually view it as a tale of two cities, right UM. The overarching theme, at least in the near terms that the supply chain has thrown a monkey ranch to UH some of this spending. But I do think that on the consumer side we do have some UM

inflationary concerns heading into the second half. I'm fairly concerned about European tech spending, China tech spending, in consumer tech spending in the near term, and that's going to affect

the PC space. And some of the names that we have called out in the past UM are R Dell and H H P hp Q. But on the other end of of the ledger, we have an enterprise tech spending and we're still coming off a period where companies that have under under invested in tech in the pre pandemic period are finally, um, finally leading to invest coming out of it. And even though there might be a recessionary environment going into three UH, they still need to

invest so they can avoid another potential black Swanna. That and and if we look at orders, not sales, right, because sales are probably impacted by the supply chain. If we look at orders, we're seeing order order growth that are two hundred three hundred times UM over the past to three quarters, which and you're gonna see, um, you know that that orders are going to convert into sales sometime or another. And twenty three or twenty four, All right,

good stuff as always. Wogein host senior hardware analysts for Bloomberg Intelligence, one of the top tech analysts on Wall Street, and we have one of tech research top tech research teams on Wall Street, Bloomberg Intelligence. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three, pet On Ball Sweeney I'm on Twitter at pt Sweeney

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