Good Time To Sell Oil Into Rally: Cantor's Cecchini

at Bloomberg dot com. Right now, we are looking at markets that are slightly down, not perhaps down as much as someone expected, after oil prices surged and continue to surge even higher, the most on record in the wake of the Saudi Arabian attacks on the attacks on the Saudi Arabian oil production facilities. Joining US now Peter Checchini, Global Market try to Global Chief Market strategistic Canter Fitzgerald. Peter,

thank you so much for taking the time. Let's just start with are you surprised that there isn't a more market sell off in US equities in the wake of this disruption oil production in the Middle East? Yes, good morning, and thanks for having me. Um. You know, the reaction I think is is about right. The broader markets are obviously uh off overall. Um somewhat frankly offset by the benefit to UH energy companies with the with the spike

and oil prices. UM. The spike and oil prices itself doesn't really come as much of a surprise to us, so our our target for oil this year has been fifty to fifty five dollars on w T I UM. But we wrote recently that we expected UH geopolitical risk to come into play with spikes and oil between sixty and sixty five, and in fact, quite frankly, I think UH this would be a time to sell oil rather than to buy it. I think UH around a COO in particular, has an incentive to to cure this problem

as quickly as possible. May not be easy, but obviously UH they don't want to delay their I p O any longer than they have to. So market action seems to be about right in response to this attack. But for us, you know, more broadly, UM, we think, as we've been saying, we're in the red zone for US equities for other reasons. So, Peter, I know last week you wrote a note suggesting that the credit markets might be getting a little bit frothy. Give us your sense

of what you're thinking. There. Yeah, you know, we've we've been careful not to overstate this because one of the things that's been going on, UH is the capital flows into US high yield really because there's there are very few people places in the rest of the world that on a risk adjusted basis, you can get the kind of return that you can get in US high yield. Default rates have been relatively low, about two point one

percent UH for trailing twelve months. And you know, with with seventeen trillion dollars of negative yielding dead about to trillion of that being in corporates, the flows into high yield in the US have been have been pretty pretty strong UM and a couple that with the low default rates. Until one sees cash flows starting to roll over UH,

it's difficult to get barish of high yield. However, the signs of FRA are there where we're seeing UH pictoggle deals come coming out like the corn Main deal recently. We haven't seen very many of those. I think there are one or two last year, but that tends to be a very market topy kind of event, especially when they go to pay UH dividends to LBO sponsors UM.

And so we're seeing that and even just the issue wance volumes of late have been gigantic, with I think last week probably the third or fourth highest on record, depending on whose data you look at. So so I think the signs in terms of issue and volumes, as well as the form of the deals are are sort of singing to that that's froth, uh, and it's just really to me a question of how much longer it

can last. So then there is sort of a flip side to this, which is when you see froth and credit markets in a real robust demand, uh, that typically is a positive for US equities, at least to the short term. So do you view this as being potentially constructive even if in the longer term not great. Yeah, that's that's an interesting point least, and I and I

would generally tend to agree with it. I think in most cycles, when you look at the history of credit cycles, credit actually tends to to to lead equities in the hig yield market in particular, tends to be pretty important to that. I think there are some interesting differences this cycle, one of which is the dependence of equity markets uh, less so on high yield and more so on the levered loan market in particular in my view, and we're we're seeing some some real signs of frosth there as well.

You know, for example, of the of the names in the levered loan index are are now demonstrating interest coverage ratios below one and a half, in leverage above seven times, which is which is really quite something. And we're starting to see a trend in cash flows for those same companies. Uh. Really the growth and cash flows for those companies is close to zero at this point. So so yes, I

would agree with you. In the near term, I would say over all credit markets are still providing support, but um, I think in particular equities are going to be very sensitive to a turning cash flows, especially for some of those levered names. Uh. And we're starting, at least in the form of the second derivative of cash flow, is starting to see that that rate of growth slow considerably. Peter, thanks so much for joining us. Peter Stini, Global Chief

market Strategist for Cantor Fitzgerald joining us on the phone. Well, the United Auto Workers Union is leading its first strike against General Motors in twelve years, digging in for a fight over jobs and benefits that could cost the Carmaker deally for an indefinite period of time to get some more details. We welcome David Welch. David is a Detroit bureau chief for Bloomberg News located in our Detroit bureau

right now. David, thanks so much for joining us. Just give us a sense of how far apart you think the union and GM are right now. There's a key issue here that I think really has them apart by quite a bit, and that is the use of temporary workers. GM wants more of them because they get paid less, they have weaker benefits that they do cut their labor costs overall, but you can also get rid of them much more easily if there's a downturns that kind of

makes the workforce flexible. They want fewer are them, say they want more um and the a W wants not only few of them, but they want a path to make those people permanent employees. So there's not a lot of middle ground there. Someone's going to have to give on that one. Uh GM had made an offer over the weekend that had pretty hefty raises and I signing bonus. They're going to hire more than five thousand new workers.

So there's some job security and there. It was a pretty nice offer to start with, but that that one issue, I think it's going to be a big sticking point for them. You know, I'm looking right now General Motors share price down three per cent and I'm wondering why the union is doing this now. I mean, sort of

what what what catalyzed this strike? Well, you know, the the labor agreement expired over the weekend, and this is kind of the one shot in four years they have to go out on strike and get a really good deal. There's a lot of pent up anger over the plant closing is that GM announced back in November. That's for plants, including a very big one in Lordstown, Ohio that President

Trump has taken a personal interest in. So there was a lot of anger there, especially when you have GM putting out near record profits three years in a row and actually affirming guidance that they might hit that number something close to that profit number again this year's you have a prosperous GM plant closings, and and the workers

are already pretty angry. They want a piece of of the record profits, even if we are possibly headed into a downturn um and and this is there one chance to get a piece of those profits while the company still has a lot of money. So that that's that's the weather they're pulling at this point in time. So, David, what's the sense here early days of this strike. Is this something that is expected to drag on for a long period of time or can this be a relatively

quick issue? Um? Honestly, I think this will last maybe a week. Because GM did with their first offer that the union really won't talk about yet. The GM made public, they didn't address a lot of the issues, and those issues things like pay, things like investing a lot of money and plants that GM announced as part of this that they're gonna invest seven billion dollars in their US plants over the next four years. That the Lordstown plant will not get a vehicle to build, but they would

make a battery plant. They would build a battery and wint vehicle battery plant in Wordstown and that would hire some of the workers who have not transferred out of there already. And the plan in Detroit that was at risk of being closed is also going to get a vehicle to build, so that there were a few bones in there for the workers who were waiting to see what their fate is going to be, but the other issues could take some time. And look, there's also a

bit of vaudeville here. The union negotiators have to show the rank and file, who, by the way, they have to vote to ratify the deal. They got to show them that they're putting up a good fight in a story, because the way to do that. Yeah, and it's so I thought that part of the story was pretty interesting

that the piece that you wrote. I do have to wonder, though it's been twelve years, right, this comes up every four years that they have to negotiate a new contract, this time is different, and they're going to dig their heels in. And you said that part of what the backdrop here is the record profits and the fact that General Motors has been closing some plants. But you also in the story pointed to a corruption scandal plaguing the U a W as part of what is sort of

setting this setting the stage here. Can you give us more color on that? Sure, So there's been a corruption scandal at the union that's gone back for well over the past year, and it started at theat Chrysler. On both sides, Union and man manishment people have been indicted and convicted basically giving union leaders graft out of a union training fund in exchange for giving Fiat karist or a more lenient contract. That investigation has moved a GM.

It's slightly different in that the union leaders and including past president Dennis Williams and current president Gary Jones, are being accused of stealing money from union charity funds and community activism funds and the general fund for this lavish lifestyle they woven in uh, Palm Springs, California, for renting villas for a month or two, expensive cigars, expensive scotch.

Is kind of crazy stuff. So the union and everybody, even some of the was called analysts wh watched the unions say that they won't really play into this, but I think it does. I think when members don't trust you, you've got to drive a hard bargain uh to get a deal ratified, because the membership is going to be looking at any deal really scrutinizing it, saying, Okay, we try these people. They're they're stealing our money to buy mccalen eighteen and some good cigars. Why would I trust

them to give me a good deal. They've got to drive a really hard bargain here. David Welch, thank you so much for being with us. David Welch's Bloombergs Detroit bureau chief. Talking about that GM news the first strike of the labor Union in twelve years. There is that surge in oil prices that we're seeing today in Brent crude. At one point it was the most on record as reaching the highest levels since May, but jumping more than

eleven percent. The question is how long will this disruption oil production out of Saudi Arabia last what will be the implications for the Middle East in terms of Iranian relationships with the US and Saudi Arabia. To help us understand, let's bring in John Killed, a founding partner of Again Capital. So John, let's just first get your impression of how much oil prices are rising. Do you view this as a temporary blip or something that has longer lasting legs

and potentially even a higher leg up. Well, I think the response has been um somewhat measured, even though it was the biggest jump since the invasion of Kuwait bi Iraq back in the day. Um, We're gonna have to see how quickly the Saudis can get the situation under control. You know, they're claiming that they can get a good portion of the production back online UM, and they're also claiming that they'll be able to supply everyone as needed

out of available inventories that are in the country. The big thing to watch from here really is what the response is going to be. It seems now that the US and a few moments ago the Saudis themselves are accusing Iran of having uh done this, and it's hard to believe that the Saddies won't respond or the US won't help them respond. But if they don't, you're gonna look incredibly, incredibly weak. So it seems to me that they'll be vulnerable to more attacks and that the security

premium and prices is only going to inflate. John. You know, as someone who follows these markets closely, are you surprised at how much this facility, again, one of the largest facilities and we're not maybe the largest facility in the world. How susceptible it was to attack? UM? Yes, and no, uh look to the extent it was it was cruise missiles coming from Iran. If that's the case, UM, you would have think they should have been picked up by some kind of anti missile defense that the Saddi's have

purchased from the US. Drones are almost impossible to stop, and um, the Saddies are particularly bad at it. This is not the first drone attack I think, as most people know on Saudi infrastructure, UM that has occurred. It's been going on for months, and the Satti's have really done nothing about it, which I have found remarkable. Um. They tried to put more pressure on the Hoothies and Yemen and and do other things, but for the most part, as far as the direct response goes, you know, there's

been nothing. So this day was almost inevitable. But if you look at the satellite imagery, you can see there is unbelievable precision in in where these uh these round tanks that they have there that store the oil got penetrated almost the exact same spot in each tank that are in a row together. So um, high level sophistication. And certainly for roll of money the Sadie's spent on their defense, they should have had some kind of anti missile technology uh AT in place here. So it's it's

it's a remarkable failing on their part. So, John, I want to go back to what you were saying about how the response in markets has been somewhat muted, especially given the backdrop you were just talking about, which is sort of a lack of protection on the part of

Saudi Arabia against an attack like this. I'm just trying to understand the counter argument to that that there's loss of production that can be increased elsewhere, and that you know, the US can increase shell production, this will offset any decline in production out of Saudi Arabia. What do you say to that. I think that's partly right. I mean, as far as there being any kind of you know, spur of the moment US shell response that, I don't buy that at all. I mean, they're not built that way.

We don't. Our guys don't necessarily e gals don't necessarily dial up and down the production in reaction to price. As we all know. They just plot along pump as much as they can, and and and deal with the prices as best they can. There is spirit capacity out there, though, because of what OPEC and Russia have done to try to um curtail the price slide. So we know Russia

has spirit capacity. You a some of the other countries. Also, two of the other levers that are out there arguing against the greater price increases is certainly the existence of all the strategic petroleum reserves around the world, and China in particular, which has almost two years worth of supply to cover a complete cutoff of STATI supply to China. So um, you know, we we're sort of well banked in terms of oil supplies for now. The problem you have though, is that this turns into any kind of

sort of hot war. And it's also remarkablelives if I could just stay quick. Um, the fact that these prices aren't up as much much more in light of the fact that we have already lost I ran in Venezuela oil to the global market as well, So it shows you just how sloppy the situation has become supply wise in the face of diminishing demand. As we were speaking about a few weeks ago. Yeah, John, that's kind of

where I wanted to go. It seems like when we talk about crude oil, it's obviously trying to get a handle on the supplied to demand dynamics and what had been driving price. It seems to have been the demand side of the equation, and investors concerns that the trade wars and other issues would be slowing down demand for crude. But this news coming out of the Middle East brings

the supply story right back into focus. Here, How what do you think will be the driver of oil over the next several weeks, the supply or the demand or some combination of the two, if the situation at all calms down, and we're in the situation looked like it was gonna be calming down, just generally with the overtures that were being made to the Iranians by President Trump over the past couple of weeks, you know, we're gonna slide right back down lower. There's really no no two

ways about that. The key economic data that we're all waiting for at a China last night, for example, was horrific again, seventeen year low on industrial production growth goes right to the heart of the matter in terms of energy demand growth. I mean, it's just continuing to slip. The U. S. China trade war is really rereaking havoc on these manufacturing intensive economies in Asia, and and that's

oil demand. Uh so, um, you know, to the extent this doesn't break out into a war, and it looks like my sense of it is that it's not going to It's not going to break out into a war. The Trump administration wants to avoid it at all costs. They're gonna take this one too. I guess, um and um, you know it'll it'll stabilize and and head lower until something else more horrific happens. So, John, I just wanna wrap up with the idea of gas prices in the

US and the bleed through effects on the economy. Do you think that if prices were to stay where they are or go materially higher, that will translate into higher gas prices in the United States? Yes, I mean then I mix. Today gasoline prices are up about over ten per center, up seventeen cents a gallon. Um. You'll see some of that ripped through to the to the retail pump over the course the next couple of days. It'll

take longer for that to go through. We're still at a relatively low price at the pump, but to the extent consumers start to get anxious and if or if the price goes you know, even higher, Um, you'll see another You'll see a hit to consumer confidence, and you'll see a hit to UH freight rates and other industries that rely obviously on fuel for transportation, but also with the grocery store, you'll see the price of veggies whether things that start decline. John Kildo, thank you so much

for joining us. John is the founding partner of Again Capital, joining us to discuss what's going on in the energy market. Certainly an eventful day. Well. The ongoing trade dispute between the US and China is whips on currency markets around the globe, presenting hedging challenges for a whole host of companies. To get a sense of how some of these companies are managing that currency risk as well as their cash overall,

we welcome our next guest, Wolfgang Coaster. Wolfgang is a senior strategy officer at Kirrieba based in Phoenix, Arizona, but joining us here in our Bloomberg Interact their broker studio. So Wolfgang, thanks so much for joining us again. You know, one of the issues with this the uncertainty presented by the U S and China trade issues is currencies. Give us a sense of how well you think companies are

managing their currencies at the currency risk. Yeah, so I think that one of the things that we're seeing is unfortunately it's all over them what map, Right, You have some companies who do a really good job, and the key thing is to actually understanding your exposures, really having a good grasp around where are my exposures, how am I exposed not just on the revenue side on the but on the expense sides, and what's the net impact of that? And then what do I do to manage

that properly? That's really the gist of it. The execution of that strategy then of actually putting hedges on, etcetera, isn't as hard. So as we see these companies doing it the once we're doing it well are the ones who are ahead of the game. I want to talk a little bit about your company because I find it really interesting and it sort of builds on what we've

been hearing a lot. Basically, you do liquidity management for companies, right um, and what that means is helping them manage their cash and risk as well as just in general operations. And it's the software, uh that you that you provide And I'm just wondering, why is this such a growth area that companies are increasingly outsourcing some of the basic functioning of the way they run their businesses to software such as yours. Yeah, I think that it's an evolution

and really over time of how things are going. And quite frankly, treasury and finance are often the later partists to the stages than sales organizations and marketing organizations are. So you've seen this, like you said, exactly like a salesforce.

There typically in the forefront finance more conservative and a little bit difficult and more difficult to open up to that because what you have to do when you help companies at the very basis of it, you have to help them get at their data and that's a really tough thing to do. They have these enterprise systems like these Earpie systems like an Oracle, or they have you know, an s A P. But now they have both on.

So they have tursury management systems as one of our offerings that we also have that help them manage that in the pre trade and the post trade era, so raw data to decision. Then they'll make some decision and actually execute on that, and then they need to book that and track those transactions as well, and automating that was not easy, and quite frankly, being able to be cloud driven made that a lot easier because installing those soft wars was a very difficult prospect and quite frankly

is a very difficult business prospect. So we're purely cloud driven and that's why all of a sudden, this incredible growth because all you do is you hook up your API as we do it for you, you implement, and you're ready, ready to go, and all of a sudden, year impacts are major. So you mean, we see thirty to fifty percent risk reductions on the currency side, We're seeing much more efficient use of capitals. So the our

eyes on that are pretty significant. But you know, sometimes it's harder for people to say, well, my my great Excel spreadsheets or my this process is good. But that's when it kind of that's that's kind of where I wanted to go. Like if I think about you know that you know the world is becoming a smaller place, arguably through technology global trade, despite some of the moves against globe global trade. So even small and mid sized

companies have international exposures. Um, how do you find some of these mid sized companies do they know what they're doing and when they're hedging. I mean, but I think a Microsoft, I'm sure that's got a hundred people thinking about hedging in their finance department. But I think somebod these small and mid sized companies, it's probably a black box for them. What do you what's your experience been there?

You're absolutely right, And the difficulty for these mid sized companies, and we see there as a major growth area for ourselves as well, is you really have you need? You require all these different um disciplines. So from it, let's say a risk management on the finance on the form exchange side A, you need really understanding purely accounting. Then from that you go to really financial risk management, and then you need to understand the markets. You need to

understand how to actually execute those things. And technology facilitates that because typically small to mid sized company doesn't even have you know, they're not going to hire three people to do this. It's not very cost effective, for example. But we help the largest companies in the world, like the one you just mentioned, do the same thing because for them, it's we're all over the world. We may have two hundred and thirty currency payers. You're gonna stick

to the currencies. They all interact and even if they hired a hundred people to do it, the technology tells to split a second. If you have a hundred people doing it, it it will still take you four or five six hours to do. Now you're right at the pulse

of it. So, as we do talk about the currency fluctuations and which companies are sort of able to better weather some of the less predictable fluctuations that we see emanating from tweets, which companies to sort of hone in on as the as the potential benefactors frankly of a lack of altility in the wake of that. Yes, so

I think you have a few different categories. Let's start with as an investor, I first of all, if I want to stay out of this, I'm gonna look at companies that are not very international, big companies like a General Mills. You say, listen, you know I don't want to I don't understand this stuff, don't know how good they are. Why don't understay in the area where they're much more focused on growth. They only have eleven percent

of their sales are international. So that's an interesting one that's very stable that's that's kind of an interesting strategy

to just stay out of it. Quite frankly, okay, But then you go into companies UM like an Apple or a Boeing or Texas instrument, they're really struggling with this, right, they have macroeconomic moves, they have all these sort of things, and what they have to do they have to go in there and say, okay, like a like a UM Texas instrument of their revenues out of China, that's a

major impact, what do I do with that? So you know, some companies like a General Motors, they've gone really good at figuring out what their exposures are both on the revenue and their expense set, and they try to match it as close as possible so they're not exposed to the terrorists. But then what they do, they'll actually take part of it, like the Apples, etcetera doing or Flextronics for example, is doing really well. They're actually looking to

go somewhere else. They're going to Cambodia, They're going to Vietnam. We all know that's big. The currency therefore strength things significantly. So what this whole trade war does, it does, whether one likes it or not, disrupt the supply chain of China, and that's the intention of this whole thing at the end of the day. And as investors do you have to look at a are they going to be impacted like a General Mills, No B. If they are going to be impacted, how good are they manage gen that risk?

And quite frankly, if you read their ten cues and ten caves and you can actually figure some of that stuff out. Thank you so much for being with us. My pleasure. Well for having me, it's really interesting. Wolfgang Coaster, Senior strategy officer of Cariba based in Phoenix, Arizona, for joining us here in our BLOOMBERGUNNA active broker's studios talking about what he is seeing out of companies in terms of how they are planning ahead for their currency risk

amid the trade wars. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa abram Woyds. I'm on Twitter at Lisa abram Woit's one before the podcast. You can always catch us worldwide on Bloomberg Radio