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Lots of earnings coming out this week.
We also had in addition to the tech game, so I also had a lot of big energy companies report. Exxon Chevron reported. Let's break it all down with Vince Piazza. He's a senior equity research channels covering the oil and gas space for Bloomberg Intelligence. Joining us from Philadelphia via zoom So, Vince, let's break it down. Let's start with Exxon Mobile. Looks like they missed a little bit here on some of their earnings. Give us the lowdown from Xon Mobile.
Well, look, I think here's the takeaway we're telling investors and listeners right, this is about cash. Cash is king. Yes, they missed, they telegraphed some of that miss It's really on lower natural gas prices, margins, a lot of timing effects and maintenance issues one timers. Really, But if you think about Exon Mobile this quarter, I want you to say cash is king free cash flow of over ten billion dollars this quarter. That's a forty billion dollar run
rate annualized. You know, they paid out something like six point eight billion distributions, dividends and also share buybacks. Thirty three billion of cash on the balance sheet at the end of Q one. This is the lowest financial leverage they've had in roughly a decade. So, yes, earnings did miss. That seems to be dragging it down roughly four percent
this morning. But the main takeaway for us is that they're in a really strong position balance sheets, they're generating capital, they're paying dividend to three percent yield, and they're buying backstop the Pioneer acquisition. At least from what I heard, it doesn't really seem that there's much in the way it's going to push the closing of that deal past past the first half. So once that deal closes, Paul, you're looking at a stop buy back run rate of
roughly twenty billion dollars a year. So I think they're in a fairly good position, probably better than this four percent clip that you're seeing this morning, and I think, quite frankly better than what Chevron had to offer.
Yeah, breakdown Chevron for US that company adjusted EPs beat, upstream earnings beat, but the cash flow from operations for the first quarter six point eight billion dollars versus estimates of seven point eight billion.
Yeah, so you know, again cash is king, right, they posted gap free cash flow of just under a three billion, yet they paid out three billion of divvies and another three billion and shary purchases. You know, if you compare the financial leverage, right, Exon is net debt to cap
of roughly three percent, again, lowest in a decade. For Chevron, it's closer to nine percent, So they're not generating the kind of free cash flow and they're probably dipping in to the balance sheet to help fund those distributions.
You know.
Obviously there's also the uncertainty around preemption rights over Hess and really really Guyana, so that remains an open question. Whereas Exxon's acquisition a Pioneer looks like it shouldn't be that many issues for them to close at that time. Whereas you know, the Hess deal for Chevron could get extended, so fewer questions around Exon, yet it's four more. I have more questions around Chevron and that seems to be
you know, roughly down one percent. But in terms of what's going on, what what has gone on this year, I mean Exon even with that four percent clip, it's up seventeen percent this year. Yeah, and it's you know, pretty much in line with with crude and what we've seen CREWD do this year as well.
And that's the one I wanted to get to Vincent we just updated. I mean, both of these companies are so diversified within the energy space.
How highly correlated are they to the price of Brent crude?
Yeah.
Look, you know what with the acquisitions that Exon has made and what the acquisition that Exon you know will make with Pioneer, they're going to be much more correlated to us on sure, And in this case, Pioneer is is much more exposed to to the to the permium basin and much more exposed to regional Texas benchmarks in the case of in the case of Chevron, you know, with the UH with with the Hess deal, they're going to have some US exposure via via the Bakan, but
you know, obviously the Guyana exposure in offshore, so that seems to be more tilted toward seaborne marks, whereas Exon and they're the importance of the Permian for Exon I will likely shine through post the Pioneer deal.
We had Tesla earnings earlier this week, we talked a lot about dropping demand for electric vehicles. I'm wondering to what extent is that bullish for companies like Exon and Chevron.
So when we discuss natural gas, you know, we've had rough and storage actually ballooned. You know, we're roughly thirty percent above the five year high for now gas storage in the US, and that's a new a new five year average high. We have over we have an oversupply issue, and we had a horrible winter, so we didn't see
the demand, the cyclical demand. But in terms of natural gases share in the more important sectors, the power stack, that has actually improved over the last several years, So that gas as a feedstock into power generation that will increase. It's not so much evs, but think about the amount of power that one needs for all these data all
these data centers. Whether you're mining bitcoin or whether you're Microsoft and these other tech companies building out their data centers, you're still going to need and a massive amount of power. And while you still are investing in solar and wind uh and other technologies, you're still going to need that transparency and the depend didn't see on natural gas as a major feedstock into the power sect.
Hey, Vince, just wondering kind of where we are in terms of this commitment to going green, greener energy. I was at a bn EF conference with Alex Steele last week in New York, and a lot of the energy companies were there, and they're talking about the investments that they're making and thinking things like that. How do investors feel about the investments that these energy companies are making in their traditional fossil fuels versus maybe some of the newer technologies.
Yeah, I still think we're in the.
Early stages.
Uh.
You know, Exon talked about direct air capture and gray versus green hydrogen. You're still going to need significant amount of civic support, government support for these projects.
You know.
Occidental seems to be more further along in terms of direct air capture. Exon talked about that. Excellon continues to talk about it, but I think we're still somewhat a ways from using it as a mechanism in our models for a fundamental change in the makeup of these entities. It's still going to be about upstream extraction and cracking the molecules and putting them into the system, into the broad.
All right, Vince, thanks so much, appreciate it.
Vince Biazza, senior equity analyst covering the oil and gas space for Bloomberg Intelligence. There again, we had a couple of the big companies report earnings here, Exxon Mobile and Chevron.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play and Android Auto with the Bloomberg Business. You can also listen live on Amazon Alexa from our flagship New York station Just say Alexa playing Bloomberg eleven thirty.
We're a little lonely today. Friday's on a big in person day.
Not a lot of people.
You know.
We're here in our Bloomberg Interactive Broker studio, but we're kind of kind of lonely here. But I'll say we're joined now by Sarah Ponsek. She's a financial advisor at UBS Private Wealth Management. She's based down a Boca Briton, Florida. Nice Trade from New York City, she joined the mess of moving down to Florida.
She was actually a little bit on the early side. Sarah, thanks so.
Much for joining us here. A lot of earnings, a lot of economic data. This week, we've seen some volatility in the equity markets, pulling back maybe four or five percent here off off the peak.
What are you telling your clients at ubs?
It's great to be here with you both. And yes, I was part of the mass exodus down to Florida, but I tell everyone that I I was raised here, I'm from Florida. I have a lot of a lega. But no, Look, this was a big week in terms of information when you think about what's driving the market right now and what is most important when it comes to thinking about the market outlook, there's really two components of that.
One inflation and growth, which we had insight into this week, and two tech and tech earnings, because so much of this rally that we have seen over the past five months, past year has been predicated upon this assumption that we are going to see.
Unbelievable growth and AI. Now, with that said, what did we learn this week?
Honestly, nothing too new at the PCEE numbers this morning that came in pretty much bang in line with expectations.
Inflation sticky. We all know that the Fed's dealing with it and they're just waiting at this point in time.
And we saw some unbelievable tech earnings overnight as well, proving that CAPEC spending in AI is paying off.
So, you know, as for what we saw this.
Week, how that reflects into the outlook for the market ahead, There really isn't too much of a change at this point in time.
Okay, So when you look at the macro data, not just this week, but what we've seen over the last several months, are we really going to get cuts this year from the Federal reserves era?
It's a good question. I think it's the million dollar questions on everyone's mind.
And frankly, I don't even know if FED Chair Powell and his colleagues at the FED know the answer to that question right now. Look, our economists base case is that we will still see two FED rate cuts this year. Coming into the year, our expectation was for three. We never bought into the markets expectations that we might see
six seven rate cuts throughout twenty twenty four. We were standing pad at three that has since been revised to two, with that starting likely in September, sometime in the back half of the year. But again, the only way that we are actually going to see that come to fruition is if we see progress on the inflation front, and right now there are concerns and question marks surrounding that.
So I would say, if we think about what, what's the biggest risk to you know, our base case right now, what's our biggest risk to the market outlook, it is that inflation stays sticky for longer and that those cuts just get pushed out into the future.
And I know there has been some talk of even a great hike at this point. That's not our forecasts at this point in time, and we would you know, there'd be a lot that would have to happen.
We would need to see a reacceleration in inflation for us to believe that that might be on the table.
So, Sarah, what do you mean you speak to your clients kind of what are you telling them here as it relates to any change in maybe asset allocation, stocks, bonds, alternatives. What's what's kind of the message you're trying to get across to your clients So the.
Message within the last couple of weeks, because it seems as though, you know, investors always have short term amnesia. You see any blip in the market, any volatility, and there is concern. So even amongst clients of ours who you know have had phenomenal performance over the last year.
For all, if you look at the S and P five hundred over a five month span, we saw the stock market almost just go straight up thirty percent over five months, and all of a sudden over the last couple of weeks, we are faced with volatility and we see a pullback. What are we telling them in relation to that, Well, one we all have to know as investors, pullbacks are normal. Corrections are a healthy element of the
investment process. In fact, if you actually look at how often we see five percent pullbacks in the stock market and averagely happen about three times a year. So making sure that you don't see this pullback as a reason to completely throw your plan and strategic acid allocation.
Out of place.
Now, as you're asking a question as to what we're talking about, if we're making any changes as it pertains to asset allocation, I would say the biggest message to get across right now. For a long term investor who's trying to build wealth long term is if you are sitting on a lot of cash right now, which a lot of investors are. If you look at the amount of cash and market funds, it's above six trillion dollars,
So there's a lot of cash out there. At this point in time, you should be looking to buy bonds lock in yields, because yes, it's great that you can get a juicy five five and a half percent in a money market right now on your cash, But what are you going to be thinking And I'm not even going to say a year from now, but two three years from now, we see interest rates come back down and all of a sudden, you didn't invest your cash.
You're not getting a return on your cash.
And by the way, at that point in time, you can't go out and buy bonds yielding what they're yielding now either. So making sure that if you're someone who's sitting on a hefty cash position, working through a plan and making sure that you're putting that cash to work, at least in the bond market at this point in time. For stocks, look, we're seeing volatility, it might make sense to ease into the market over a period of time.
Don't need to do it all at once. But it's time in the market, not timing the market that matters.
And over a long period of time, cash is not the best asset class to be sitting.
I'm wondering what you make of the boom in some of these options linked products. I write about ETFs, and earlier this week I wrote about a new ETF that offers one hundred percent downside protection, but it caps the upside. We know that covered call ETFs have seen about seventy billion dollars. Is that a product that people are interested in from your view, Sarah, or is it just an easier bet to just buy bonds don't worry about all the time it's done well.
Well, it's a completely different, you know, investment scenario investors who are looking to trade options or you know, we do work with clients when it comes to structured products or structured notes as well. Occasionally investors like the idea of you know, being able to have their cake and eat it too. In essence, what you're describing is an investment product in which you can get upside but limit your downside as well well. Investors, you know, would take
that any day of the week. Of course, there's always trade offs, and I don't know the specifics of the ETF that you're speaking of, but I would imagine that there's got to be some trade offs. You can't get one hundred percent upside in the stock market and you
had cap your downside one hundred percent as well. But I would say from our perspective more so, I have had clients who might be sitting on and I'm not going to name particular names, but maybe a large megacap tech stock that has run up significantly over the last year, and we're talking about different options strategies with them on how to limit their downside or how to maybe take some profits while being really smart and tactical tactical about
the tax implications of realizing those gains as well. You know, how do you deal with the actual ramifications of having a position in your portfolio that has performed phenomenally. That's great, but at that point in time, if it is a significant portion of your portfolio, how can you diversify out of that position? How can you limit your downside? But while being cognizant of the tax effects as well.
Sarah, thanks so much for joining us. Always appreciate checking in with you.
Sarah Ponsek, She's a financial advisor UBS Private Wealth Management down there in lovely Boca Raton, Florida.
Back going back to her home state.
There.
You're listening to the Bloomberg Intelligence podcast. Catch us live weekdays at ten am Eastern on Focarplay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts, or watch us live on YouTube.
Let's talk tech earnings. At least was just reporting on some of the tech names. Both Microsoft and Google reported numbers last night, beating expectations, putting in some pretty solid numbers. Both stocks trading quite well here this morning. Let's bring in man Deep Singh and Onna rog Rana. They are senior technology analyst for Bloomberg Intelligence. Man Deep is here in our Bloomberg Interactor Brooker Studio, and Honurrock is in work is in Chicago, hon rog Let's start with you Microsoft.
What you see from our good friends in Seattle last night.
Yeah, I was a bit surprised. I think the beat was much more than what I had anticipated. I was actually a little more pessimistic going in but they really showed that they are the you know, one software company that's really capitalizing on the AI demand. So so I mean all go down to Microsoft side margins. A good outlook is good, so you know, no bad news there.
All right, So man, deep, let's like likewise on alphabet, I'm seeing stock you know, fifty two weeks high today, just ripping. You've liked this name, You've been on top of it all along.
What were some of the takeaways from the quarta last night.
Was focus because everyone thought their traditional search is getting disrupted. You know, they're going to lose share in search. And what they showed us last night is not only you know, they have maintained their share, Jenny I is actually helping engagement with their search and not just search on maps, on YouTube and on top of that, I think what really should excite investors is they have got the cloud
business where you see accelerating growth along with YouTube. So now it's one hundred billion dollar ERUR business going at twenty five percent without any impact.
To the cost.
Remember, everyone thought, oh, the search queries are going to cost more because you have to use this GENI infrastructure. No, there was a five hundred basis point margin expansion in search. So clearly they have executed very well and it's not a one quarter thing. I think this is going to continue.
So, Mandy, the cloud operation for Google first quarter profit of nine hundred million dollars, that was ahead of estimate projections of six hundred and seventy two million. So can you talk a little bit more about what's fueling that beat in the cloud side for Google.
I mean, in the case of cloud, there is one traditional cloud revenue and then there is the GENAI link cloud revenue. And what Google has done well is one they are getting the n video GPUs and that's where you know, the sixty percent increase in CAPEX is coming in. And the market didn't mind that capex in increase in
contrast to Meta where the stock felt. So clearly they're deploying that those GPUs on the cloud and it's contributing in terms of additional revenue, which is where the beat comes from in terms of why that growth rate accelerated.
And anag I'm just kind of looking at the you know, Microsoft such An Adela, the CEO. He's been infusing Microsoft's entire product line with AI technology from partner Open AI. How much of advantage is partnering with open ai. How much is advantage does that give Microsoft?
I think it's only in terms of time, so you know, before all the others ketchup and try to do the same thing. I think it's a land grab thing at this point of you know, try to get as much as you can get people hooked into these products with open AI and then you know, but I'm fairly certain other companies, everybody from Google to Amazon will have similar infrastructure for other people to play where they currently have it already. It's just that it's not getting infused in products that quickly.
What exactly are like Microsoft's AI services? What are some examples of how that company is basically deploying a AI especially for these enterprise customers.
Yeah, the first and the foremost is they run open AI's back end, so you use more chat GPT, they make more money off of it, and that's the number one place where you see we see their growth rate.
Now we calculate that to somewhere around a billion dollars a quarter at this point run rate of all AI services added in for Microsoft, So that's a very big number or annualized at four billion The second part is a product called GitHub where they have infused open Ai services, so it helps people code things on a very much faster pace. Then you have Office three sixty five that also has copilots built in using open Ai services. I would say their entire suite, you know, same thing, were
LinkedIn same thing for you know, other products. So they are using a lot of those R and D dollars from or R and D expertise from open Ai to improve their own products.
Hey man, deep, I'm looking at our good friends at Google. This is an AH alphabet free studios. You know, so are good friends of Google? Eighty billion a free cash flow this year, ninety billion next year. I'm a big, you know, use of cash kind of guy. They're buying back seventy billion dollars worth of stock and they started they're going to initiate an actual dividend.
That's a good thing, right, Yeah? Is that a good use of cash.
I mean, it's not like they're skipping on capex or anything.
They're not in Probably they're following the Apple playbook, where all the free cash flow you generate you use it for buybacks and dividend and capex increases. I mean look, Google did raise their CAPEX guide by almost sixty seventy percent, so clearly I think that's what investors want them to do, and they can't acquire any companies, so this is probably the best use of the cash.
You know, How do you compare that with Meta, because earlier in the week it seemed like the Meta investors were not very happy about increased spending on AI initiatives.
I think Meta is one of the top three companies when it comes to generative AI, and they are exposed in a positive way. It's just they don't have a cloud business like Amazon, Microsoft and Google have, so all the CAPEX they do is going for their own infrastructure for their own apps, which is very important and it's
helping them actually improve their at targeting recommendation engines. But they also have a money losing reality lab segment, and investors just want to discern how much are you continuing to lose on reality labs versus the AI capex, which is I think the good capex. So that's why you saw that stock reaction.
All right, an rad I'm looking ahead. That's what I do.
Next Thursday, after the close, Apple is going to report earnings their stock is down eleven percent year to date, really underperforming what it considers its peers being the metas, the Amazon's, the you know, the Microsoft's of the world. Here, what do you need to see next Thursday on that conference call after the close.
Yeah, any comments about stabilization in China is the only catalyst. Other than that. I mean, I don't see anything that can you know, I would say change the mood for what's happening with Apple, primarily because iPhone sales is what drives company, and then there are no leading indicators that will give us any signs that that can improve anytime soon.
Can I ask about Snap? Oh, Paul, I mean, I know we were talking about, you know, the larger companies and the larger earnings, but I mean Snapchat. This was the first time that we're seeing the stock higher the prior seven earnings reports. The stock just absolutely tanked after the earning. So is this a turnaround for Snap?
I mean, look for a company like Snap which is not profitable, they are sort of driven by how the overall digital ad market is doing. And in this case, the print from Beta and Alphabet shows digital ad market is coming back. You're seeing a rebound even though the small business sentiment is still quite weak, and if there is a TikTok ban, there is no doubt that Snap is one of the beneficiaries, both in terms of engagement
as well as ad dollars moving to their platform. And we saw a glimpse of that in their print when they said their advertisers actually grew eighty five percent and their brand ad revenue grew twelve percent, which is the first time in the last four quarters their brand ad actually is positive.
All right, men, deep saying thank you so much. Mendeep sing Anaragrana. They are senior technology analys for Bloomberg Intelligence. They drive our global technology research effort at Bloomberg Intelligence.
Two of the best on the street. We appreciate getting them again.
Big numbers, good numbers out of the tech companies last night, you know, Snap on the smaller capsite ony billion of market cap, and then of course Microsoft and Google and again all those stocks hire as we talked with the Anorog, a big big Thursday next week when Apple reports it's earning example for the close, a lot of pressure I think on that company too, as Aniog said, kind of give some clarity about China.
I'm not sure they can.
They might just be one of those issues that's going to be hanging over this company, force many quarters to come.
I don't know.
And then, of course you know their play on AI. They do have a developer event on May seventh that's also going to be highly anticipated. Maybe that's an opportunity for Apple to come out and say here is our AI strategy. iPad right, yeah, I mean I still have my iPad, the original one. I don't know, but I put everything on the phone. These days, I don't. I rarely use the iPad. It's just everything's on the phone.
But we'll see.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Apple card Play and Android Auto with the Bloomberg Business app. Also listen live on Amazon Alexa from our flagship New York station just say Alexa playing Bloomberg eleven thirty.
This market is moving higher. We had some PCE data today. The month on month of zero point three kind of came in line with expectation, but the annualized number a tick higher. But again, strong tech earnings kind of driving this market here. Maybe a little bit of relief that the inflation data didn't come in even hotter, maybe a zero point four percent or zero point five percent on
a month month basis. Here and on a Rothbund joins us here, chief investment officer at Sibiz Investment Advisory Services on and thanks so much for joining us here. Boy a busy, busy week in terms of economic data, earnings data tie it all up together for us. And how is your market perception changed, if at all?
Good morning.
My market perception hasn't early changed. We expected this week to be a very interesting and busy week. If you think about the market cap of the companies that are leading the S and P five hundred, those were the ones that were reporting this week, So it was going to move the markets up or down and definitely affect the beta of the market and the sentiment. And that's
what we're seeing today. We saw that yesterday. I don't think it changes the general feel of the market's feeling like it's over bought, so I don't think it changes the dynamics. The PCE certainly could have had a bit bigger impact on the markets today, but it.
Really did it.
So I think it's pretty much the same old a little bit of a difference today with alphabet ana.
Do you think that the macro is getting maybe more confusing, because, like we were talking about John Tucker were saying, the PC data came in a little bit hotter, but we're seeing treasure yields down. Earlier this week we had Bill Gross saying that he was bearish on tech void tech. Now we have the Nasdaq up about two percent.
What is going on?
Is it getting harder for experts like you to kind of discern, you know, what's really driving this market?
Well, so it's been hard for a while, so I don't think it has become hard. So in terms of PCEE, frankly, it is hotter. The year of A number is a little bit hotter than expected, but it's actually in line with what the FED has forecast back in March. By the end of this year, the FED is expecting two point six percent in core PC were ear y'ere around two point eight and that was a March figure, right, So we have a lot of room. Anything can happen between now and December, so I think we can be
patient on that. I think the market's reflecting that. With regards to tech. I think tech right now, especially big tech they're at a sweet spot between development of AI and they're not betting the farm on it. They're just incubating it somewhere deep inside of their company while there's still excuse me, while they're still able to turn cash right, and so Google or Alphabet signaling a divid end, I think it's a big that's a signal. So I think that it's the sweet spot of AI and cash flow
and quality earnings. I think I think TEX still has some room to run, certainly notwithstanding the volatility that may come. But over the long run, I don't think it's necessarily a place to run away from.
So on a we've had I guess about forty five percent of the S and P five hundred report they're earnings as of today. Any takeaways for you here, how's corporate America doing well?
The corporate America is not doing as well as the big tech companies might imply. Right, So if you think about the three companies Microsoft, Meta and Alphabet, I mean together they have returned what your earnings growth of more than sixty percent. That is definitely skewing the earnings growth profile of the S and P five hundred index in general.
So I mean where do people say SMP four hundred and ninety five or that would be four hundred ninety seven, right, So I think that the rest of the markets, they're still lagging. I believe as at the end of last Friday, that was the last number I actually looked at for the entire index out if you're looking at four or ninety five stocks outside of some tech stocks, we're looking at year or year's earning growth. That was a little
bit on the negative side in terms of expectations. Hopefully we will beat those expectations for the second half of the earning season, but it's certainly not looking it's not looking all that stellar.
When you look at the month of April, we have the S and P five hundred SPY ETF down about three percent. We have TLT, which is an ETF that tracks long term treasury bonds, down six percent. Where are you going for protection when it seems like that traditional stock bond correlation hasn't really been serving investors for protection.
Yeah, and that's been true for a while now, and it's been really tough for people who are sixty, forty, fifty to fifty, you name it. I think you have to be actively protecting, especially with fixed income, which traditionally has been a hedgekin secuity beta. Lately it hasn't been right lately, meaning the last two years. It's a long time.
I think you still have to be mindful of duration because even if the Fed, you know, PC came in relatively in line with expectations and the markets are sort of thinking, okay, maybe the Fed can be on track, three rate cuts is still a bit high in my opinion. They may be doing two, maybe down the one, depending how the data runs between now and the end of the year. So I think duration, you still have to be a bit careful. But look, the total yield profile
is very delicious. It's yummy. So I think clipping coupons and being aware of duration is what you have to do with your fix income portfolio.
So I mean, that's a great point. I wanted to just get on the fixingcome story. Here do I sit in my two year treasury close to five percent or do I take some credit risk here?
So high yield I mean I think when I think of lower duration profile than your traditional fixing combined benchmark, which is the AG and then of course clipping high coupons, I think of high yield. Right, high yield is sitting at duration a little bit less than four years, and I think the last time I checked the yield, the total yield for the Bloomberg High Yield Index is around
you know, just under eight percent, nearly eight percent. I mean, that's that's a really if you think about you know, yield versus duration risk, that's actually a not a bad risk reward ratio. And frankly high yield if you stay in the higher credit profile, it's not a bad deal. Right, So rate hikes, I'm not saying that, you know, everything is a tie that lifts all Boat's not like that at all. If you want to utilize active managers to really look for quality balance sheet, I think that that
could also work as well. But that yield, actually, if there is a spread, winding can go a long way to protecting on the downside in terms of price section.
All right, Anna, thank you so much for joining us. As always, Anna rathbun She is the chief Investment Officer Sibiz Investment Advisory Services. Joining us from Cleveland, Ohio via that zoom thing.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten Am Eastern on Applecar Play and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa playing Bloomberg eleven thirty.
Eric Zaski Joints is here.
He's the senior municipal bond strategist for Bloomberg Intelligence. Hey, Eric, talk to us here. We've had rates kind of moving around here. We had some higher rates earlier. Talk to us about what's happening in the municipal bond market visa VI kind of the treasury market here.
Yeah.
Absolutely, Well, there's two ways you can really look at it, right. We can focus on total returns, which certainly aren't that great, or you could look at it is a buying opportunity right yield draw up thirty basis points on the month, about fifty five sixty basis points on the year. Certainly not near where we were last fall, but certainly an interesting opportunity to come back into the market and you know, get those four percent five percent higher premium structures at
cheaper dollar prices. And that's ultimately what people want to be doing when they're building portfolios.
If you run ETF go on the terminal. I'm bringing ETFs into this poll.
Yeah, let's do it.
You can see that over the last year when you scan for municipal bond ETFs, sixteen billion dollars of inflows into those funds. Does that make sense to you that we're seeing this much money kind of pour into the strategy right now?
Yeah?
Absolutely right.
So, anytime you have a cheap data strategy that has gotten a lot of attention in the news, not only what we're saying on the Bloomberg side, but externally, there's going to be more attention focused on that from WELP advisors and retail clients, and that's why you're seeing those flows go in there. But just to keep it in context, from a notional standpoint, sixteen billion flows in a fortullion dollar market, it's not really that big of a deal.
It seems impactful sort of looking at it in a vacuum, but when you look at a total mini market, still a very small piece.
Hey, Eric, I want to ask you about this Brightline deal, this railroad deal. Yeah, talk to us about I know they came to market recently. What is Brightline and what was the deal they brought to market?
Yeah, so they obviously they have a train system down in Florida right now, it's going from you know, Palm Beach area down to Miami. They're extending it up to o Orlando. It's a high yield deal. There was two portions of the deal. While was triple B, there was a non rated portion. Part of it was a funding. Look, it's still a speculative project. You know, will people use the train, what will rider ship be a lot of questions that nobody really seems to have answers for. But
I will say, look, I'm definitely jealous. I wasn't able to get any of those bonds.
Right.
If you look at this sort of where they came on the non rated portion, you're talking about twelve percent tax exempt yields, you know, on a tax equivalent yield basis, it's like eighteen percent, right, So obviously a lot of risk and a lot of compensation being demanded for the risk being taken.
Andre that, How was that deal welcomed by the marketplace in terms of demand?
Very oversubscribed and that really sort of speaks to the dearth of high old issuans that we're seeing in the marketplace, and also the returns that we're seeing in high yold muni's as well. So we started off the conversation talking about IG total returns, which are down almost like two percent on the year, But higommunities are positive, right, They're really the only green portion of the screen I can look at when I look at I go and looking
for munis. So there is obviously a lot of interest both retail and institutional in high yield credit and looking for deals that have some hair to them.
You have a note out it says muni tourists who dabble casually in the municipal bond market are being bombarded with calls to come back to what has been a treacherous place so far in twenty twenty four. What kind of market outlook does an investor have to have if there's someone who was a muni tourist and now they're going to come back into this space.
Lot of people got scared last year because they found out that their bond portfolios could have losses, and I think that's something a lot of investors probably hadn't seen before, So there was probably some reticence there, and then there's a lot of excitement as last year ended, where rates were rallying right and Meeti's turned out.
To be a great buy.
There's still a great buy from a risk adjusted, you know, purchase standpoint, you know, because they have much lower default risk than corporate credits. But you know, there is probably a reticence to sort of dive back in knowing that the Fed really doesn't have a firm control where inflation is right now and when and if they're going to cut.
But I, like I said, the ball, you know, if you can come in and you can buy those five percent coupons at a lower dollar price, I think it's more interesting opportunity right now.
So, Eric, so what's the credit risk profile of the municipal bond space? I know, in historic has generally been pretty darn good. Are we seeing any cracks out there?
No, not as of yet. I mean, if you look at just the the Bloomberg Media Index, it's average double A credit quality and that really sort of spans the gamut. You have some trip wle B rated credits in there and some triple A rated credits right just the averages double A. I will say that from a rating agency standpoint, we're not really seeing any cracks, but they're also very backwards looking and that they're looking at audits from last year.
Everything's on a very big lag. We're actually working on a new sentiment monitor over on our side on BI and what we're showing on a predictive standpoint is that things should be worsening or at least softening a little bit when it comes to me to spoke credit in the next twelve to twenty four months. Right we've seen a very large up taken headlines talking about layoffs from the state and local government sector, as well as budget
cuts and budget deficits. So something we want to keep our eye on.
How should investors be thinking about picking where in the market they want to invest. I'm going to bring this back to ETFs, but obviously you can buy immuni ETF that's going to track a number of different regions of a specific state in the US. Is that the better bet or should people be kind of maybe zeroing in on a specific state right now?
Well, I think it goes back to the argument of passive versus active management, And I think in a sloppier market like we're seeing now, when yields are hired and there's a lot more volatility, the case for active management can really be made. You talk about those ETFs that are getting the flows, they're passive structures. So if you look at what they're actually investing in, they're missing about
thirty percent of the UNI market by credit exposure. They're not buying higher education, they're not buying hospitals, they're not buying natural gas bonds or bond subject to AMT, So all the sort of the higher alpha areas that we've seen over the last several months they're missing out on. You know, so that is an opportunity that you would find more on the active sector, but you're going to
be paying more for a management fee for that. So if it was me, I'd probably be looking more toward active management right now in this market.
All right, Eric, thanks so much for joining us.
Eric Kazaski, senior municipal strategists for Bloomberg Intelligence, joining us from the Princeton, New Jersey offices of a BI in Princeton.
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