Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside my co host Matt Miller.
Every business day we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moving news.
Find the Bloomberg Markets Podcast on Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. I tell you this auto strike just it ain't going away here. It seems like it's getting even worse. The UAW just came across the Bloomberg terminal around ten to fifteen Wall Street time. The UAW says five thousand members
at GM Arlington Assembly join strike. So this is kind of going the wrong way, and it got to the point now where General Motors today I have to putt out some good numbers removes guidance because of the strike. So I don't know what's going on there. But I know who does know, Kevin Tyne, and he's a senior automotive analyst for Bloomberg Intelligence. He joined just via zoom
from our Princeton office. Kevin, tell us what GM said today, you know about the strike and how it's impacting their I guess operations.
Yeah, well, look that was strike started late late in the third quarter, so it would be the impact. I mean every day of the fourth quarter so far has been impacted by the strike. But you know, the backwards looking results were actually pretty good, better than expected, and just show the profitability that the company can produce and the you know, removing some guidance. There is just an issue of not flaunting that you're going to make fourteen
billion when you're trying to negotiate with the union. But you know, it could mean it's close, right that this is the final turns of the screw that kind of gets the manufacturer to give what the union thinks they deserve. I think they're probably close on the wage, the increase,
the percentage, and probably the ratification bonus. I think it's all the sort of secondary issues there in terms of headcount capacity, you know, new product plants and things like that, that are the sticking points this late in the negotiations.
Why are only some plants on strike?
Well, you know, it looks bad for everyone, and it's very difficult to put out that many workers, right because then they go to the strike fund and then you completely shut down everything. And I think it's just counterproductive to say, you know, we're not going to produce anything at all, then you're putting the host in real danger.
All right, So, Kevin, I guess the big issue, as I understand it, is, you know, as the industry, I guess he continues its evolution in the EV front, there's a real question as to how many jobs are going to be needed and where those jobs are going to be, and they're going to be different types of jobs, to the point where I guess the companies are saying, hey, we can't guarantee X number of positions because quite frankly, we don't know what positions we're going to need. Is
that kind of where we are? And if so, I don't know how you resolve that.
Yeah, And look in the other issue too, is that as labor costs increase for those union shops, they're only GM Ford and STILLANTIS brands. So even if there were no EV transition, the domestic manufacturers and their brands are going to be less competitive against even you know, Honda in Ohio, or Nissan and Tennessee or any of the plants down in the South that are not unionized. Never mind the EV manufacturers who are not unionized.
As well.
So you know, there's the EV transition is part of it. But the manufacturers have been very profitable on internal combustion, but by making fewer vehicles. So I think that's where the capacity and the headcount uncertainty comes in as well, where you're saying, you know, yes, we're making money, but we're doing it on fewer units. We can't be behold into these capacity you know, in footprint requirements going forward when we don't know that we're actually going to need that much.
What are the UAW members being paid and what are they asking for?
Yeah, so you know, when you look at it all in as the cost to the manufacturer, it's probably in the sixty dollars per hour range, and it'll go up into the nineties and maybe even higher depending where the contract is ultimately done.
You know.
And then you compare that all in to the transplants of European or Asian manufacturers or EV manufacturers and there there, you know, the cost to the company is significantly less, you know, And that's what probably needs to be reconciled and what the domestic manufacturers are saying, Look, if you want to increase your membership, you can't just keep coming back to us, right, you take your twenty five percent increase and go show it to some of these other
manufacturers and try and build your base that way, because we don't have much more to give.
So, Kevin, when we do get a resolution, is it going to be are we just assuming that it's going to apply to all three of the big three automakers?
Oops?
Kevin hears uh, I think we lost Kevin. All right, Well that was my big smart question the day, and we need to know. I think we lost the audio with Kevin, so we'll have to go back to that. But again, you know, it's serious here for these automakers because you know, I mean Jim again pulling its guidance. But as Kevin said, maybe that just might be a
negotiating tactic here. You don't want to say, oh, yeah, we we reiterate our profit guidance of fourteen billion dollars or something like that when you're trying to plead, you know, and trending to negotiate salaries.
And especially given what we were talking about earlier, GM beating a third quarter estimates despite losing two hundred million dollars from the walkout during that quarterly period. But then also what it means for when it comes to a automaker like that that has been rethinking its growth plans for EV sales because those sales have plug in have been actually slower than anticipated. So a lot of different moving pieces there.
All right, let's go back to Kevin Tyne and we got them back, We got the audio back. So Kevin, my question was, just, when we do get an agreement, is it going to apply to all three automakers just kind of automatically?
Yeah, Well, typically what would happen. Historically you'd have negotiation between the union and one manufacturer, usually the most financially sound, and then the other deals fall into place. This has been unique in that the union has been negotiating with all three at the same time. So yeah, this one would probably happen amongst all three and one shot, and then it'll just be a matter of catching up on production over the subsequent quarters going into twenty twenty four.
Yeah, as far as looking ahead and what could all this play out, what exactly do you think would be the remaining timetable for how long this actually.
Could continue on for?
Yeah, I think it's close, you know, I think people look at it like this is a lot of pressure on the manufacturers, and it certainly is, but it's also pressure on the union as well. You know, you have a lot of people that aren't earning what they're used to earning, and they're in the strike fund, and everybody, I think wants to move forward. So I would say
we're probably closer. And this is based on nothing than just what we're hearing in the rhetoric is that it's probably closer than it isn't, And I think it's the wage number is probably there, and then it's just some of these other secondary issues that just need to be hammered out in terms of details, because manufacturers, again, they want that flexibility to say, what this industry looks like in three four years from now may not be what it is today, and we need the flexibility to rationalize
cost if that's the case.
Hey, Kevin, A big picture. I just replaced the twenty fourteen BMW with the stick shift, and I got the twenty twenty four BMW X three, extraordinarily happy. Didn't even think about getting ev because it was such the premium price. So is the world rethinking, Are you guys as industry rethinking what the ultimate end market is for evs, I mean, it seems like it's not as strong as I maybe once thought.
Yeah, I think so. And that's playing out in a lot of different ways. You know, dealers were you know, the manufacturers are going to the dealers and saying, look, you need to fit your outfit your stores for this, and now they're kind of holding back a little bit, and the dealers are waiting it out and not being
the first ones to move. But I think if the demand and profitability profile of EV doesn't improve significantly through twenty twenty four, and we've already seen it, right, Ford pushed out its building its battery plan, General Motors put another year on the timeline. I think if not by the end of next year, there will be some of those one hundred percent by twenty thirty five, and the longer term goals are going to start to be walked back because the addressable market might not be what it
seemed to be when it was first going. And ultimately, when you look at it, you know, on the one hand, you have everybody saying how Tesla dominates an EV, but if demand goes away, you know, then you're questioning really everybody else, Right, If there's no demand for Tesla. What is the demand for a forty V or GMEV, which don't even exist yet in any kind of volume.
Yep, very interesting. It seems like the market's changing a little bit. And again I went internal combustion engine in old school. Kevin Tony, thanks so much for joining us. Kevin is the senior automotive analysts for Bloomberg Intelligence. He's a sconce down in our Princeton, New Jersey headquarters. Down there, great lunches down there by the way.
Ooh, you're listening to the team. Ken's are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot com, the iHeartRadio app, and the Bloomberg Business app, or listen on demand wherever you get your podcasts.
I want to continue talking about these markets here because again we are right in the middle of earnings. We've got yields moving all over the place, kind of, as Gina said, kind of dictating the market to a certain degree. Let's bringing Liz Young, she's head of investment strategy at so Far and Liz, thanks so much for joining us. I know you cut your teeth on small caps. And Gina Martin Adams and Bloomberg Intelligence was just talk about
kind of the tough headwinds they face. How do you think about the small cap space right here?
Yeah, Hi, thanks for having me.
So I did cut my teeth as a small cap analyst, and I have a soft spot in my heart for them, and it does pain me at a time like this to say, I just don't think that.
They're a goodbye yet.
And you look at where we are in the economic cycle and where yields are. Many small cap companies, because they're new and because they're growing, need financing in order to produce that growth. So as yield rise, as borrowing costs rise, and capital is constricted, small cap companies feel that much more than large cap companies do, who can usually find announce their growth internally. So small caps are
probably feeling the pain of capital constriction much more. Also, just where you are in the economic cycle, I still think there are many many signals telling us that we are late cycle. Small caps tend to outperform in early cycle, so we would need to finish late cycle, get through probably a bit of a slowdown, and then restart the early part of the cycle, which I just do not think is where we are today.
What are small cap stocks in the technology sector telling us at this point, because typically if they're holding up better, that couldn't mean brighter times ahead for small caps or we see any indication of that right now.
Well, I think sectors as a whole. As you move down the market cap spectrum, the makeup is very different.
So technology is one of those.
Obviously you're not seeing big tech stocks, and the behavior that we're seeing in big tech stocks, you're not going to see that in the small cap space. Generally speaking, in small cap tech, you're seeing things that are down the supply chain, so they're making components or maybe they're early software companies, so they're still going to be quite sensitive to moves in the market and probably quite sensitive
to yields as well. Small cap is actually quite dominated by things like healthcare, and the differences in industry makeup of healthcare can affect the performance of small caps tremendously. As you move down the market cap spectrum, beta in general is increased, so I would be careful in a rising rate environment, I would be careful with really growthy names, particularly in the small cap space, and generally speaking, even when you do enter that early cycle behavior, and small
caps tend to outperform. What usually tends to outperform is small cap value because a lot of those are dominated by the financial space. So it really does make a difference when you look at the sector makeup of different size categories, and investors should keep that in mind as we move through these different parts of the business cycle.
Hey, Lis, I wonder just kind of stepping back here, you know, in a world where you've got you know that the ten year at four point eight seven to thirty year, boy, it's at five percent. Haven't seen that in a while, and of course a two year at five point one percent and that kind of world, can equities perform?
Well, so far they've done okay.
I mean we've seen we've seen yields be pretty volatile all year since the end of July, so that local equities top in July July thirty first. Obviously we saw quite a swift rise in the ten year since that point, and equity saw a down draft. That's logically and rationally how I think it should work. You should see some
pressure on valuations as yields rise. So I think that that's actually been a pretty rational change in tone in the market, and it's been quite orderly, I mean the drawdown, although it feels like it's been prolonged because we were used to such a strong up up movement in the beginning of the year. It feels long, but it really has not been that.
Long, nor has it been that terrible.
I mean, it hit maybe seven and a half percent down on the SMP at worst, so not even in correction territory. Now, as yields stay high, I think that's where valuations really come into question. And as we go through Q three earning season, obviously looking out into Q four and into twenty twenty four, expectations are really high, and I think the market is priced for those expectations
to come true. So as we get more information from CEO th than guidance, if we find out that those earnings are not realistic to achieve, we're probably going to see more pressure on valuations, and yields are not necessarily helping that story. So I don't think that stocks can maintain these valuations if we keep yields this high for a very very long period of time. But it's not going to happen in a broad swath across the market.
You're going to see probably discerning choices in each sector of companies that are less sensitive to rates doing better.
What's the make or break lef in the ten year treasury yield to where there would be a potentially bigger calibration in the broader US stock market.
I don't know that there's necessarily a level that's going to send it all one direction or another. Five percent was clearly a very mental threshold for people.
I still think that that's probably the case.
There's still people out there calling for six percent and maybe even seven percent and higher. So I think when you look at it from the investor standpoint, you have individual investors or retail investors who are going to be more sensitive to hearing about mortgage rates going up. So as mortgage rates crept towards eight percent, I think that gave people a lot of pause about whether or not they wanted to be throwing all their money at risk assets.
And then you've got institutional investors and money managers who are watching yields and the inversion much more closely, and they're watching the cost of capital much more closely. So the ten year treasury at five percent or above gives them a little bit more consternation. So I don't think that there's a magic number that you know, oh my gosh, if we get to that, everything changes. But as it gets higher, it does get more difficult to sustain.
And as you have corporate debt coming due next year.
In the year after, many corporations have to renew their debt, and those corporations took that debt out when rates.
Were much lower.
So I think we're slowly going to hear about things being unsustainable at this level of rates. I'm not entirely sold that we're going to be able to stay this high for very, very long, because I just don't think the economy can withstand it.
Hey, Liz, Tech is going to take center stage here after the close today with Microsoft and Alphabet. How do you guys think about tech right here?
Tech is definitely going to take center stage this week, and I think everybody's going to be watching and listening.
I would say this tech has.
Been the darling this year, and almost as if it can do well in any environment. If rates are going up, it's suppose to do well. If they're going down, it's supposed to do well. Sideways, up, down. Everything has been true at certain points that's not typically how an asset class will work. So I think we're going to start seeing separation, especially among big tech and we talk about them, whether you want to call them the Magnificent seven or
just big tech stocks in general. We talk about them as a homogeneous asset class, but they're really not, and many of them are dependent on different parts of the consumer, on different parts of the economy, and I think we're going to start seeing some divergence in performance among those names where it's not just okay, you win because you're
in that big tech basket. So this week, I think is really important, not just for the results, because interestingly, as earnings have come in so far, we're seeing even companies that have beat still be punished.
So it's not just about the results.
It's about the sentiment and the commentary that comes out of those companies, because that's what we'll send the market in a different direction.
Thank you so much for joining us. We really appreciate getting some of your time. Liz Young. She's head of investment strategy at SOFI.
You're listening to the tape. Cat's are Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa play Bloomberg eleven thirty.
Sony Challa joins us. She is a portfolio manager partner at times Square Capital Management located guess where Jess, Time Square. How about that go figure some good naming rights there, So no, thanks so much for joining us. You're live here in on our Bloomberg Interactive Broker studio, so we appreciate you making the time here. What you call on technology here, boy, I hear some big, big numbers in terms of Capex the cloud, and then the kids are
talking about this thing, AI. How do you put that all together and have a tech call?
Yeah?
Sure, I would say the investor sentiment positioning is broadly cautious as we head into Q three earning season, as there's angst building around twenty twenty four outlooks and whether we will get a Q four budget flush. If we look at channel checks and alternative data providers, they're painting a conflicting message on the health of IT spending environment.
And I would.
Describe the visibility as clear as mud at this point. And what I would say is that today's tonight's earnings calls from the megacaps like Google and Microsoft will give us a better understanding of whether the public cloud consumption headwinds or abating or not, and the trajectory of the
hyperscale or capex into twenty twenty four. You know, the thing is that if you rewind to the start of twenty twenty three, as cost of capital has risen, you know, all these companies went on an endeavor to become financially fit.
So we've seen.
Significant positive earnings and free cash revisions upwards. Margin expansions have taken place, but what has been pressured is the net revenue retention rates as expansions have slowed as customers have cut back on spending and optimized their budgets with these.
Big megacaps and other software providers.
So the question is going forward into twenty twenty four with genai products from all these software companies ramping, whether that will serve as an incremental monetization driver into twenty four to drive you know, better revenue growth, especially given that the macro environment continues to be broadly stable and the comps are going to be easier into twenty twenty four.
Point I would highlight on this front is that we should not overlook the lapping of the precipitous decline in ventor capital funding that started in two Q of last year. If you look at the trailing twelvemonth VC funding, it is sitting at two hundred and sixty two billion, which is down a little over fifty percent year of a year from five hundred and thirty.
Eight billion last year.
And the biggest negative step step down occurred between Q two and Q three.
Of last year.
And you know, assuming a certain percentage of these VC funds end up as public cloud revenues, the drag from that collapse in VC funding exactly a year ago, by our estimate, is, you know, is a drag of about ten percent of public cloud revenues.
So I think the.
Comps are are easing into into the back half. So that's the backdrop, and you know, we're very interested to see how the revenues flow are reported tonight.
Something I'm keeping a close eye on is buybacks because we know that technology companies in particular have been a key pillar of support when you think about the broader stock market in last year with those buybacks being at a record, but they did slow in the first half of the year. As technology companies, obviously we're going through a lot of cost cutting efforts. What are you expecting to hear on that front from some of these big tech companies.
Yeah, we expect capital allocation to be an important top and going forward, given the cost of capital is higher, and so I think expect a similar strategy going forward in terms of buybacks as.
Free cash flows have ramped up.
I do expect, I do expect a balance between investments and buybacks, and I don't expect any major surprises on that front going forward.
So now, for the first half of the year, we all learned a new term AI, and every company that reported earnings for two or three quarters, whether they may dog food or where they may, you know, missiles talked about how AI is transforming their business in the supercharge at Kroger Croker when they's McDonald's. What is AI to you and is it incremental to spending?
Yes, it's an interesting uh.
You know initially when uh, if you look at the equity performance between me and July, we got we were in the hype cycle of AI, and in general, I would say investors generally overestimate the impact of new technologies like jen ai and the near term, but under estimate the longer term impact. So what is jen A I definitely, I think, you know, we've been, as part of our
ongoing due diligence, talk to a lot of customers. We've spoken to leaders of IT departments at big financial institutions, industrials, and healthcare companies, and there is definitely a view internally that GENI could be a meaningful productivity enhancer, and all these companies are exploring different GENI use cases within their organizations.
Our senses that the first use cases for GENI are probably going to be internal use cases to improve productivity improvement, be it in a call center agent, for a marketing professional, for a software developer. These tools, anecdotally, what we've heard, increased productivity by twenty five to thirty percent, so they're
definitely pretty impactful. There's a lot of interest within organizations, but they're also mindful and want to understand the data privacy issues around GENI, security issues around GENI, and the cost, you know, the cost of implementing JENI. So they're moving thoughtfully and conservatively. That's why I said we overestimate the impact of the near term but underestimate the longer term impact. So as GENI products from software vendorors become generally, you know,
more generally available. Microsoft's is coming out on November first, for example, a lot of these tools will be rolled out. Then the enterprises will, you know, decide whether it makes sense for them at the cost at the price points.
That they're being delivered.
But from our vantage point, it's more of twenty twenty four twenty twenty five revenue growth.
Through did we only have about a minute left. But if you are able to join the earnings call for Microsoft or Alphabet, what question would you ask for each company?
Yeah, the number one question is what is happening on the consumption optimized optimization? Have customers optimize the spend or is there more to go on that front? And the second is the trajectory of the capex spending. You know, that's an important tell for future demand that may be coming on the GENI front.
Because the expect I mean the understanding or a least my understanding is jen Ai is incremental to existing budgets. Is that true in your mind?
So there will be definitely repurposing off budgets, So savings in some parts of the budget will be repurposed to JENNI.
But you know, I do believe that.
You know, our conversations are suggesting that the IT budgets are looking to go up mid to high single percentage points in twenty twenty four. So and part of that is Jenny I related. And that view is that budget outlook is slightly better than what we've seen in twenty twenty three.
Okay, very good. We'll certainly be paying attention to the Microsoft and to the Google numbers after the closed tonight. So neutrala partner and portfolio manager at Times Square Capital Management, timely discussion here as we get ready to kick off some big, big tech earnings.
You're listening to the Team Ken's live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot com, the iHeartRadio app, and the Bloomberg Business app, or listen on demand wherever you get your podcasts.
Ank Rate dot Com US homeworkers thirty year fixed seven point ninety eight percent. Just extraordinary. That is the high since March of two thousand.
Wow.
Makes me feel less dumb for my six percent mortgage I got back in March of this year. I did feel a little like a knucklehead back then. Six percent, but not too bad. But that can't be good for like the housing market overall. Let's check in with somebody who knows this stuff, Brad Dilman, Chief Economists, RPM Living is the firm. Hey, Brad, we got a mortgage RDE up there at eight percent on the thirty year fixed man, what's that mean for the residential real estate market?
Well, I think we can see that in the existing home sales.
Right If that number is now at four million seasonally annualized, that's pretty ugly that we got to go back to the Great Recession to see a figure that bad.
So it translates into low volume, that's for sure.
And we're going to get a batch of housing data throughout this week, so starting tomorrow will have us new home sales for the month of September. When we did get August data, it did fall to a five month low. What are you thinking that we'll end up seeing from this data tomorrow?
I think the the consensus figure I had in front of me was six eighty six.
I think we may actually beat that.
AT's say, six hundred eighty six thousand seasonally, just at annualized, I think it will come in seven hundred, but I think it'll have a little bit more strength to it. New home sales obviously came down from their peak, but you know, if you compare them to pre COVID era, they're still pretty strong.
Also, though, another data point that will get later this week, which is important to look at the future direction when it comes to the housing market is also when you're looking at housing starts and building permits, and when you're looking at pending home sales. Obviously a leading indicator of existing home sales, given typically they're going to go under contract a month or two before they're end up being sold. What are you seeing on that end, and is that
showing any sort of promising signs? More broadly for the housing market, You know, I.
Really look at the builders when I think about this, and what I saw with them was really in the last ninety days or so, the reporting of a material slowdown in community traffic that's very clearly tied to the recent move in the ten year treasury rate. I think when we look at the existing home sales side and pending home sales and how that may move. We really end up with a question of geography here, and it translates to what we see on the rental market too.
The areas that are really strong thing.
It's Madison, Wisconsin, Maha, Nebraska, Urbana, Champagne, Illinois. It's markets that really haven't been in the spotlight in terms of housing in quite some time. And these may be the kinds of areas that actually lead even in this high interest rate environment.
So, Bret, I've heard, I've heard from real estate folks like yourselves that there's just not enough housing in the United States And A Tory, how did that happen? If that's even true? And I mean, b how do you fix it?
So A, Yeah, I think it is true.
My own analysis shows that we're under built by about six hundred and fifty thousand units right now. How that happened really goes all the way back to the Great Recession and really our efforts to stimulate home prices for about five years by.
Increasing affordability on the margin.
Back then, it resulted in less affordability and subsequent time periods and therefore lower construction volume, particularly in single family where it took more savings and migration to affordability for people to own. Now we are closing this gap. The degree to which we're underbuilt has been made up four in two parts. One has been that we have seen a de facto housing supply stimulus in terms of COVID era response. We saw fiction moratoria translates to high rank
growth and that into high multifamily starts. And then of course the really low interest rates that we had back then in terms of mortgages translating to home price appreciation, which translated into a lot of single family starts. We're closing this gap. I think we're under built by six hundred and fifty thousand units today. Let's put that in context. There's nearly one point seven million housing units under construction right now, so that means we've just by today's figures. Yeah,
you've got to figure in obsolescence and such. But if we finished everything that's under construction right now, we'd be overbuilt by a million units.
What about when it comes to particular home builders, because dear Horton Lenard, they have a particular demographic when it comes to that, But when it comes to housing affordability for lower income demographics, what builders do you think are out there that could help this particular segment of the population.
I just think it's going to be smaller builders, some of which may not even be publicly traded, right These are going to be folks who are in these much smaller markets that actually have a pretty.
Good land basis.
If we look at the big builders that focus on that move up buyer, that's really where a lot of the pain is right now. These people can't sell their existing home at an attractive enough price really because of mortgage rates, and then they can't turn around and get the discounts that they'd really need into the home that they would move into.
So the move up buyers really hurt.
Right now, we're seeing a little bit of a shift i'd say to you know, call it C locations, not so much in the D locations anymore, but a shift back in to see a focus on kind of smaller and higher quality product that really might kind of reflect
a bumping down effect when it comes to ownership. We can flip that to the rental side, where it looks like supply, you know, is siphoning demand from Class B and providing a lot of alternatives now for renters who look to more affordable but still quality options.
Are you? Are you down in Atlanta, Bread?
No, I'm in Clintonville, Wisconsin.
Clinton.
I'm remote.
I work for a company that's based out of Austin, and I spend time there, but I'm in rural Wisconsin, which is where the wife is from.
Clinton. Where's Clinton, Wisconsin?
Clintonville is about forty five five minutes west of Green Bay. They make fire trucks out here.
So how's the winter treating you so far?
It's not too bad. Yeah, I got a little bit of a storm right now, but.
It's actually a beautiful fall.
But may we talk in a few months when it's you know, dark at four o'clock contea?
Right?
All right?
If I want so, if I want to buy a four bedroom fairly new construction, Clintonville, Wisconsin, what's that going to run me?
Well, there's not too much supply out here, I'll tell you that.
But you know, we I think we can say that, you know, on the on the new home side, prices are down from their peak.
I would think if you wanted to build.
In rural America, if you wanted to go build, and you know Urbana Champaign, which is is rural enough for anybody who's sitting in New York or a major metropolitan area and you want your four bedroom house.
That's really nice. You've been looking anywhere from three fifty to four to fifty.
Do you talk to brokers often and if so, what are they telling you about what they're hearing anecdotally from potential buyers.
You know, I don't talk to brokers personally. I'm a data guy, right, so I see through this in data and reading reports.
But what I am hearing from the home builders.
Has been this really this decline in community trap that you know, the builders have been buying down rate for people.
They're really getting to the end of that. They're not wanting to cut their asking price yet, and so they're turning around.
They're trying to make up margin by basically going after the trade so labor and materials cost and trying to get concessions on that front.
Dude, you're not kidding, man. I just popped up Clintonville on the Google Maps. You are west of Green Bay, northwest of Appleton. That, dude, you are like the center of American No, no question, right, what's it? How's life out there?
Oh?
I've only been out here for about a month and a half in California.
I was in Seattle, I was in Boston, I was in London, and then I was in Atlanta.
All for me, it's the holy region of the country, and it's.
Still neat all right, look at less about like the economy, Like, what are you seeing out there?
Some growth? Right, you know, an area like this. HA had a tough time coming out.
Of the Great Recession for quite a long time, and I'd say really around twenty eighteen twenty or nineteen or so things started to pick up awesome, and then of course the pandemic led to enough remote work and then some continued growth out here. You know, out here though it's a lot of farming, it's manufacturing, right, We build fire trucks and a little.
Bit in terms of wind turbines and things like this.
Awesome, all right, Brad, Great chatting with you. Great getting the local color from Clintonville, Wisconsin. Bradilman, he's the chief economist RPM Living.
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Thirty, Coley Smith plus twenty live here in our Bloomberg Interactor Broker Studio Earnings Here, we're all been focusing on the tech earnings coming out after the close. We had some good industrial earnings out three M and Gee Boast had some pretty good numbers, boosted the profit outlook. The stocks are up five or six percent. We said we got to get Brook Sutherland in here. She is the
Bloomberg opinion person who covers industrial America like no one else. Hey, Brook, I don't know, it seems like industrial America is doing Okay, what are your takeaways from three M? Do you know what THREEM stands for? This is an awkward mining and manufacturing three M? And GE?
What G stands for General Alegen?
There you go, got one of us exactly what your takeaway brooks from some of these companies here.
Sure, So there's unique stories happening at both GE and three M, and so you know at GE it's really a story of just the aerospace market is continuing to boom and there is a supply problem there rather than a demand problem that the airlines of the world air lessers want more aircraft, more jet engines than these companies can produce, and demand is really fair to robust still.
So GE, do you not have the supply chain product in I guess the stuff to make them, or you're just a capacity.
It's a little bit of both. And so what was interesting in the US is that while we extended payroll aid to the airlines during the pandemic, we did not do that the aircraft manufacturers, and so all of these companies slashed their workforces very aggressively, and then when they tried to rehire them, they found that that was more difficult than they thought it was going to be. That a number of people had sort of retired. There was
obviously a lot of competition for skilled labor. That is particularly true this labor shortage issue at the smaller supplier. So if you're a company like GE, your ability to compete for top talent is better than somebody further down the line. But of course GE depends on these smaller
suppliers to be able to churn out jet engines. I talked with Larry Cole this morning actually, and the CEO of GE and talked about how they're still seeing supply chain constraints and the delinquent trees were up in the third quarter relative to the second quarter. They're working hand in hand with their supply chain to try to really ramp up output, but it is it's challenging.
How much has a story of materials versus labor issues.
I think it's more on the labor front at this point. That's really where the constraints are.
All right, So three M what's the story there? Three at the Saint Palm, Minnesota, great town by the way, if you.
Haven't been, it is it is not a demand story. At three AM to the same extent as what we're seeing in GE, they actually cut their organic sales growth outlook for the year. They're continuing to see a lot of weakness and consumer markets, electronics, some spottiness in industrials amid a slow down in Europe, and you know, less robust performance in China than I think a lot of
companies were hoping for. As we came out of the other end of the COVID lockdowns there, they did raise their profit guidance and that reflects very aggressive cost cutting actions that they're taking. Now, this is not the first restructuring effort by three AM under any stress of the imagination, but this one does appeal appear, excuse me, to have a little bit more heft to it where it is
actually showing up on the bottom line. One of the long standing complaints that analysts have had about three M is that it announces is restructuring programs and then we just never really see any kind of impact. That it appears to be different this time around, and I think that's why you're seeing some enthusiasm around the stuff today.
Well, tell us a little bit about the restructuring efforts that three M has made. I got a little loss trying to get ready for this to see just how many job cuts they've made and what kinds of different stages it's come in. So if you could give us a little bit of the backstory there, sure, it's been.
Going on for a few years now. I mean, the bigger issue with three M, apart from arguably a bloated cost structure, is that they have these legacy liabilities hanging over their head that involve Forever Chemicals or pfas and also ear plugs that they sold to the military that veterans have alleged contributed to hearing loss. So those have really been weighing on the company because they were somewhat open ended. It was not really clear what was going
to happen. Now three M does have a settlement for the public water claims related to PFAS that which is working its way through the court, and it also has a settlement for the combat arms the ear plugs issue, which is also going to work its way through the system.
So they've made progress in certain terms of clearing out some of these legacy issues, but there are still some p fast items outstanding that I think will continue to make this a tricky stock to own for investors because you're not really just betting on industrial markets or costcut.
That's what I was just going to ask you about, because I'm looking at the stock price performance in three M is down about twenty five percent year today, but GE is up about seventy five percent year to date. So when I think of GE, I'm back. I go back to the day's when it was everything it was GE was the economy, including the financial system. Obviously, they've paired it down dramatically over the last ten fifteen years. Is Larry Colp to see are they done. Do we
have the new ge ors. There's still stuff to sell or spend offers.
So their plan is to spin off ge Vernova, which will be the energy businesses, so that's their gas turbines, but also the renewable energy the wind turbine businesses. They said today that that is going to happen in the second quarter of twenty twenty four, which is around the sort of general timefirme that they've given before, but a little bit more specific in detail. And then once that happens,
you're mostly done as far as the streamlining process. It's an aerospace and defense company with some legacy insurance liabilities that they likely will want to sort out sooner rather than later, just to really clean up the story. And then I think the conversation really shifts to do you start looking at acquisitions really, which is crazy to think about after you know, the dark days of ge and cash flow burn and all of that. But the balance sheet is in a much better place.
And I'm just I was just going to point that out. You talk about the balance sheet, I'm looking for on my FA function and back in twenty nineteen they had ninety four billion of debt. That's down to like twenty three twenty four billion of debt.
That's pretty good, right, because they've sold off all these businesses and so they've been able to bring in money and really ship away at that debt load, and that puts the company in position where we can't have these conversations about you know, what kinds of acquisitions might make sense. You know, GE will be once they've spun off the energy business. It will be somewhat unique in that the
aerospace business will be highly focused on engines. You don't really have a comparable raytheon of course produces the GTF out of its Pratt and Whitney unit, but they have a much more robust defense business. So that raises a question of would g you want to get, you know, deeper into defense or are there other parts of aerospace that might be appealing to the company, whether that's avionics or other types of aircraft parts.
This is all really impressive for Larry Culp, you'd think, right, I mean, look at like the story that he's inherited. Obviously, like there's been a bit of turnover at the top, but he's been really you know, the man of the past couple of years here at the top of the GE ladder. I mean, what kind of legacies that mean for him? And like all that he has done to turn this company around. I mean I used to cover it back when the bonds were not trading so well.
I mean, this is like you were saying now, the deleveraging story has been incredible, but it's got to be like I mean, he's got to be like CEO of the century.
Sure, he's certainly being paid a lot of money to do this, but he really has accomplished a lot at GE, and it's really been impressive to see. It's been a long process with some stops and starts, but to make this kind of progress on the debt load particularly gives GE a future that really just was not, you know, conceivable a few years ago. And I think that's really to Larry's credit.
Yeah, and to even have the discussion, which I can't remember the last time we didn't with G about growing. I mean it's been almost twenty years. I mean, I think since Jack Welch left it's been at a The conversation has been.
Folks, and well, they did some acquisitions in the in the era that didn't work out so much kind of but yes, correct.
All right, brook thanks so much for joining us. Brooks Souther. Then she's a columnist for Bloomberg Opinion, covering all the industrial America, some great companies, some great industries. She covers the deal. She kind of does it. Also, we appreciate getting a few minutes of Brooks time here in our Bloomberg Interactive Broker Studio.
You're listening to the tape Cat's are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa, play Bloomberg eleven thirty.
Right now, people want to talk big, big media. We're talking music, can talk Hollywood and all that kind of stuff. There's lots to talk about, and we go to our go to analyst, Keitha Ranganathan. She is the media analyst for Bloomberg Intelligence, joining us via zoom from the headquarters of BIATDN in Princeton, New Jersey. Keitha, let's start with Spotify. Good story, some good numbers. Tell us what we got from our friends at Spotify.
Yeah, excellent story. Paul at Spotify when they reported their three Q today, so they beat on almost every metric that we were looking at. User numbers came in really strong, premium subscriber momentum will continue into four Q. They said that they expect their monthly active users to reach the six hundred million mark by the end of this year. They're targeting about a billion in the next three to four years time. But I think most important for this
story was really the inflection in the profitability metric. I mean, this is this is a streaming company that has plenty of subscribers. Before, for some reason, they haven't been really able to generate profits and that really kind of goes to their business model. But for the first time in two years, they actually generated a nice surprise profit, which is I think what is really driving most of that stock reaction today and.
Tell us, Githa, is that profitability because Spotify was raising prices in the period or like more to the strength of the business that you're talking about.
That's a great point. Yes, they did raise prices, and I think what it tells us in terms of their you know, not just their the operating income number, but the fact that they were able to gain subscribers even as they increased prices, it just tells us that they have a lot of pricing power. There's obviously a lot of stickiness for the product. But in terms of the margin story itself, they have really been looking at cost discipline very very carefully, and so they have been able
to finally cut down on their marketing spend. They've been able to cut down on personnel costs, which is what drove that operating profit as well as a slight mode margin expansion.
All right, Githa, you cover everything. We can go many different directions. Right now, we're going to switch gears and go to Hollywood. The actors. What's going on? They're still on strike, don't they know? They don't live in the real world. What's going on with the actors?
Yeah, I mean, you know, a few days ago, actually maybe a couple of weeks ago, you know that they you know, they had been talking to the studios, but then everything kind of hit a stalemate again when they basically said that they wanted a viewership bonus. I think they said the industry basically said it would cost them something like about a billion dollars and I think that
was kind of a no go. We had, you know, the Netflix CEO kind of talk about it at the Bloomberg screen Time conference, and that's where kind of things have have been left out so that it's supposed to restart, I think today, but we'll see where it goes. In the meantime, studios are really kind of facing a difficult situation. There's a lot of uncertainty in terms of the twenty twenty four content slate. We just saw that Paramount pushed out Mission Impossible eight by a whole year now to
twenty twenty five. You know, we know Disney pushed out Dead Poultry. So yeah, the film slate, especially for twenty twenty four looks really really shaky.
Paul.
Can you tell us either what the studios and the actors want that is maybe if it's different, or how does it compare to the writer's strike that has already resolved.
Yeah, so, you know, with the writer's strike, of course, a lot of it was in terms of remuneration. A lot of it was in terms of transparency in terms of viewership metrics, and I think the studios have promised to do better both in terms of paying them as far as residuals are concerned, as far as releasing you know, some of the viewership numbers, as well as some more guardrails around kind of the use of AI. I think what the with the actors, it's a little bit of
a different situation though. First of all, there are four times the number of actors that there are writers, and so the whole calculus kind of changes from an economics perspective, and it's going to be pretty onerous for the studios to kind of accept all of the actors' conditions. And so that's where I think there is you know, a lot of you know, the differences of opinion kind of
creeping up on top of that. I think the actors are getting I don't know if greedy is the right word to use, but they definitely want a lot more so for shows that are being viewed, probably more often they want, you know, what the studios are calling this viewership bonus kind of a payment is almost like a little bit of a tax. That's how you know, death Serrando's kind of called it. So they're not happy with that. So we'll have to see, I mean, somebody has to cave there has to be some compromise.
All right, pivot yet again, Disney they're looking to kind of I don't know restructures are right word, but certainly looking at all their assets. And one of the big assets is their satellite business in India, which I think they got from the Fox acquisition. I'm not sure talk to us about what's going on there that there's a story that they may be looking to sell some or all of it.
You know, you're absolutely right. So when they paid the seventy one billion dollars for a huge chunk of the Fox assets, a big part of that actually Star India and Star India is really a collection of plenty of local TV networks, about sixty TV channels and a very
very robust streaming service which was called hot Star. And this was really one of the crown jewels that Disney thought they got when they kind of acquired when they made that acquisition, because Hotstar really had a lot of users on its streaming platform, over about one hundred hundred and fifty million, and so it kind of really helped them juice that Disney plus subscriber number because they were selling it as Disney plus Hotstar. And so when subscriber
numbers were the main metric of success. I mean, this was this was the huge story for them. Of course, all of that changed because the main problem with hot Star was, yes, subscriber growth was good, but the revenue that a hot Star user brought in was very, very low compared to a US subscriber, but only about one tenth the revenue that a US Disney Plus subscriber would bring in, so it obviously was kind of really hurting
the bottom line. There was this additional issue with you know, sports rights and you know, the rights of cricket, which is really important in a country like India, but Disney didn't want to pay up and so they started losing subscribers and eventually Disney kind of came to a point where they decided that the best thing to do in terms of, you know, the business and the overall strategy would be to kind of get rid of the whole
Star India operation. And so right now they're looking to talk with one of the biggest telecom operators in India, which is Reliance. I think the sticking point right now is really the price. It ranges anywhere from about seven billion to ten billion. I think Disney wants ten billion, Reliance probably wants to pay closer to seven to eight billion, so they're looking to probably not sell the whole thing
to still kind of keep some kind of steak. But definitely any progress there and any influx of cash would I think be great for Disney, which has a lot more strategic kind of decisions to make, especially with the purchase of Hulu. They still have to buy out Comcast thirty three percent stake, so that's hanging in the balance along with all the other things in terms of their linear TV network as well as ESPN.
All Right, Gith, I think we kind of got through everything in which we can do with you. Keith Ranganathan. She is the media analyst for Bloomberg Intelligence breaking it all down. We've got Spotify, good numbers, Hollywood actors in the studios, still at an impasse and dizzy thinking about what to do with her assets.
And thanks for listening to the Bloomberg Markets podcasts. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three.
And I'm fall Sweeney I'm on Twitter at pt Sweeney Before the podcast. You can always catch us worldwide at Bloomberg Radio