Markets, Apple, Washington, And ETFs (Podcast)

at Bloomberg dot com slash podcast. Let's check in with a professional who does this stock stuff for a living, Phil Orlando, chief equity market strategist and a head of client portfolio management and federator at Herme's Phil, I'm looking at the markets here, you know, bouncing off the bottom here. I guess we're just throwing around the question here in the studio. Did we see the bottom of this market? Is this real? This? Or is this just kind of a little bit of a headcake in the context of

a greater bear market head cake? Or head fake? Head fake? Is that was the Monday version of head fake? Yes, Look, we've had a really good six weeks. I mean the month of July the SMP was up about ten. I think that was the best month we've seen in a up the years since the middle of June. Market went from an oversold readings rallied about I think we're a little overbought here. Um, but you know, I was listening

to your conversation earlier. This is kind of a bad news is good news kind of a scenario that you know, the inflation is sitting at a forty one year high. The GDP report last week not particularly good. You know, everyone's on recession watch right now. And and the way the market has perceived all of this is that the data is so bad that that must mean that there's

going to be an immaculate Fed pivot. You know, by the middle of next year that the Fed will we'll be able to stop hiking interest rates this year, and we're gonna start to see a deceleration of that pace, and then the Fed is going to turn around and start actually cutting interest rates by the middle of next year. Um. We think that that is a little too optimistic. And and UH inflation, in our view, is stubborn. It's it's deep seated. It's UH sitting at a forty one year high.

We're not going to be able to wave a magic wand and in a couple of months take a nominal CPI from nine point one percent back to two or three percent. We're going to measure that decline we think over the course of a couple of years, not a couple of months. So for for all those reasons, Uh, this very impressive rally over the next six over the last six weeks could could very well result in some proper taking over you know, the next couple of months,

as you know we get some some some more difficult data. Yeah, I think that makes a lot of sense. Feel Um. One thing I noticed or I read from Cameron Christ We've got to get this guy in here, he screamed. For Uh, he probably works from home. He screened for every drop monthly drop of more than seven and a half percent that was followed by a month that you know more than made up for that, which is what

we just saw. And the results are pretty shocking. If you look post war, it's only happened um a few times in October of nine, in October of two thousand two, in March of two thousand nine, uh, January of two thousand nineteen, and April of two thousand twenty. So it's only been these big bottoms that we know. I mean, March of two thousand nine is like uh, imprinted on

my brain as a massive bottom. Um, it looks good at least, but I take your point that people are going to be wanting to take profits and those who stayed with it and are just to have too much oddit. I want to get out, But maybe we don't have to fall another twenty is what I'm thinking, because that's kind of what was the bad news consensus right before this month, is that we went halfway. We have another halfway to go. Well to some degree that's going to

be a function of economic growth and corporate earnings growth. Um. If we were having this conversation a week ago, Uh, the earnings for the S and P five we're probably down about five or six percent into the quarter now, but a lot of the energy companies have started to report,

God bless them. So we're about two thirds of the way through the earning season and earnings have gone from being down six or seven percent, they're now up seven percent, largely on the strength of how good the earnings reports have been. Discretionary financials technologies, those numbers are all negative, and to a significant degree, companies are providing cautious guidance.

Strategists and analysts may start to cut their numbers uh and and multiples have just moved up a couple of turns based upon this third percent rally we've seen over the last couple of months. So I think that as we get into to the August September, you know, early October period, there may be a little bit of rationalization

in terms of valuations. Lower earnings estimates, lower GDP growth estimates, UH more UM comfortable pe multiples i E. Lower and and I just think that that given this big rally we've seen, uh, it would be prudent to expect a little bit of a pullback here. All right, good stuff as always. Phil Orlando, chief equity market strategist and head of client portfolio management at Federator Hermy's that got over six billion and assets under management. That's some sway right there.

Let's bring in our next guest, Robert Stimpson, c I O and portfolio manager Oak Associates Funds. Robert, some folks have been telling me here is I look at this bounce off the bottom, that we can buy it here, but you've gotta be selective. What is it? What does this selective mean to you in a market move we're experiencing right now? Is it is this kind of a bear cat bounce or is this something I can really wait? A bear market rally or dead cat dead cat bounce? Yeah,

I use a barcat market bearcat bounce. I like that. How do you think about that stock selection? Robert, Well, good morning guys. You no, I agree, you have to be pretty selective in this market, simply because you know the forward new slow UH is still very questionable. Um. We're about to head into some earnings reports and I think they're going to be mixed, and that's going to affect sentiment. And we know the overall trends in the market are are pretty strong. The status raising rates inflation

is still persistent, and that affects different areas differently. So, UM, you know a lot of consumer focused businesses are going to struggle because the consumer is pinched pinch by inflation and pinched by higher interest rates. Whereas industries that have more long tail UH spending cycles, whether it's UH bule expenditure with intech UH, you know, those are probably gonna fair better in this sort of environment. Is this you know?

For years, um, people have talked about active versus passive and the kind of Jack Bogel passivity of Vanguard one out. But is that over now? I mean, is buying an index tracking fund just not going to do as well as getting an active manager? You know, that's uh, you know the million dollar question. Um. You know, I do think there is value and active management, and I do think a lot of the industry does not realize the

risk that come with index funds. I mean, the top five and ten positions and an index fund um tend to be the names that are up a lot. They tend to be um, you know, big movers of the market in the index. UM. So there's a risk profile there that a lot of people, uh may not fully understand or they're betting on Tesla essentially in a sense. I mean, I can't believe it's I think the fourth biggest weight or the fifth biggest weight in the SMP. Yeah.

Robert talked us about healthcare down the pass that scen area. You guys have been looking at what's your healthcare sector call right now? So coming out of the pandemic, we feel like a lot of industries out there rebounded strongly as the world returned to normal, but healthcare was one that lagged, and it, you know, kind of makes sense people were reluctant to head back to the doctor to get those knees, replace those hips, or seek the care. They were more apt to go on vacation or on

a cruise or back to concerts. So we think the return to normal for a lot of traditional consumer healthcare is still in front of the index, and when you look at its relative valuation compared to other industries, it's still very attractive. So it's more defensive. The valuation is attractive, it has business in front of it, and it's also an industry that is used to operating, uh in a high inflation environment. I mean, healthcare costs been going up,

you know, mid single digits for years. UH, so this is business as usual with a tailwind. And of course the long term demographic So um, it's an area we like, uh and there's nothing that can turn that around. I mean you'd think that, especially the Democrats, would like to slow it down, but they can't and maybe um, their

lobbyists are the same as Republican lobbyists, so they won't. Um. You're not concerned about anything in the future that stops that, because it does seem like such an easy such as slam dunk. You know, the risk of regulatory oversight and pricing pressures. Uh. You know, I'm not gonna belittle it, but it has been around for twenty plus years. Uh, and at the end of the day, it has very

little UM impact beyond sentiment over the group. So UM, it's a risk, absolutely, but it's not a risk you should embrace and avoid the sector entirely because of it, because that would have been a losing proposition over the last twenty years. Certainly though it's popular trade, right. I mean, we all see and feel the rising costs of healthcare and then make that decision for an investment. Where do you see value what's unloved right now that that you think, um,

people have overlooked well. I do think the two sectors within healthcare that are somewhat ever loved now, the managed care groups have been performing well, but I think the pricing trends are underappreciated there. With higher healthcare costs and the cost of insurance. I mean, these prices kind of get booked into the managed care groups, UM, and it tends to be very profitable by locking in at higher

prices for them. So we think that's a powerful factor for that group and the other issue is the drug distributors UM. They have been probably the main target of of pricing pressure regulatory concerns from Washington. But the again, those concerns are often overblown when it comes down to actually implementing legislation to change things. And the group was also suppressed for a long time due to concerns over

the opioid legislation. And now that most of those concerns have either been settled or on route to being settled, that is a huge overhang from the group. UM that you know, relieves a lot of the risks. So as a result, we think those groups are attractive as well. All right, Robert, thank you so much for taking the time to join us and share your thoughts here on these markets. Robert Stimpson, he's the c I O and

portfolio manager at Oak Associates Funds. All right, I'm looking at Apple's balance sheet here D eighty billion in cash, total debts, so that's sixty net cash. I'm looking at the f A function on the Bloomberg terminal. I gotta say it's one of my favorite functions. It's so basic, but it's got everything you need, I mean everything. Whoever thought that function up did did did good? Uh so, all right, So sixty billion in net cash on the balance sheet, a hundred ten billion of projected free cash

flow in each of the next couple of years. Why are these Why is this company going to the bond market? Well, on a rock runner, he covers all this stuff, Senior Soccer and I T services animals from Bloomberg Intelligence on a rug. Why are they going to the bond market? Why does Apple borrow money? Just I mean that the cost of money is so cheap it does make sense

to bottle it and keep it. Because, as you said, the net cash is about sixty billion, and they spend about eighty five to nine billion in buying back stock, so they do have to botrow that money to buy back that that ships that you mentioned just not that's crazy. They borrow money to buy back shares. So and the bond analysts and the bond investors don't care. Usually that is a huge no. No. Can you lend us money

so we can pay our stockholders? Yeah? Yeah, But but they're going to generator a hundred billion in free cash, So it's not a big deal. It's just a matter of what's most optimized for that capital structure. So if you know, if they can bottle let's say a few hundred let's say even a hundred bases point on hundred a fifty basis points about tragedies, that's really cheap capital. That's just you know, you're not gonna be able to buy it let's say a few years from now, Um

that much cash at that that low prices. Alright, So given that free cash low profile, given that balance sheet profile, I then go to another great Bloomberg function that is the most used function d e s to get a sense of what their dividend yield is. It's less than one percent. Why don't smart equity analysts like you on a rock get in the ear the CFO and say raise that to a respectable to two and a half

three percent. That would be really good to attract retail shareholders. So, Paul, I've been writing that I think they should increase their buy backs rather than the dividends, because you know, in FY twenty, which their fiscal twenty, they reduced share counts by about six percent five point seven and they brought back seventy two billion entree cash flow and stop in f one, they reduced the share gun by three point eight percent on and but used about eighty six billion

this year twenty two. They're gonna reduce the share account by somewhere around three so that inherent EPs growth is just coming down a little. I would love for them to buy back more shares rather than increase the divident.

But just as my personal choice, I mean, isn't one better for dividends is probably better for the shareholder, whereas buy backs is better for the corporation because once you start a dividend, you can't reduce it or cut it off without taking a lot of heat in markets, right, whereas a buy back plan there's a beginning in an end exactly. So no, I mean the buyback you know once also it is it is it's a cultural thing.

If you have a company like Apple, where the free task, though is predictable, you can't say that the buyback is going to be predictable as well. The thing is again, you know, there there's a lot of discussions about the value of buybacks versus dimenon in my view, and it

has changed a of the years. If the if the intrinsic value of the company is still below the current share price, they should be using that cash to buy back most here is because hendically, as a shareholder, my you know, piece of the pie becomes growth grows every year by that four or five percent without even putting

a new dime in. So I think from that point, if it's a value company, and Bilkshire just started doing this after many years of not buying back any shares, if you can't, if you don't know what to do with that cash, you should be buying back heres, assuming they are trading flow the intrinsic value of the company.

By the way, um does it keep growing at that level on a rack because you know, I bought an I bought a desktop Apple computer back and I think two thousand twelve, and I still don't need a new one ten years later. It still does way more than I could ever do with it. Um My my iPhone eleven or twelve, even though it's got a little break in the corner of the screen, I can't imagine what an upgrade would really get me. Um And my Apple Watch. Also it does everything I needed to, Like, I don't

need a new one? What what what are they gonna come out with it? I have to buy? No, it's just doesn't have to be you know, it's going to be the replacement cycle for your iPhone as the single biggest driver. Because what happens is the average lifetime of they're about eight million units of iPhones out there, the average life let's say, is somewhere between tea and a half and four years. You may not want to upgrade right now, but within the next four years you will.

It's just a matter of in slow down. So every year they're selling two million iPhones, even without finding a new buyer. This is just a replacement cycle. And then what happens is and we saw this this time in the quarter. They saw really good growth in emerging market countries like Brazil and India and China and Indonesia where the middle class as it starts to become a little bit richer, Apple the brand they're going to go through. They get rid of the Android phone load and Android

phone and they go for an iPhone. That's the growth market. It's not going to come from you, Mark Miller. It is you are just a replacement for every three to four years. But it is going to come from those emerging markets. That is not a growth market. That wasn't very nice to say, fair fair enough, by the way, can you settle something for our listeners? Uh, once and for all? Does Apple have a secret self destruct mechanism built into the phone? Like it at the time when

you're ready to renew, does your battery just automatically die? No? I don't think so. About what happens is you really need to take those you know you you want to take those high end videos. You want to be able to run the games at a much faster pace. So over time, when these new applications are built with new videos come out, when and you know Netflix videos at a very high pace, your system may not be able to handle it because the equipment is four or five

six years old. Then you will replace should at that time? All right, Anna rock Rana, thanks so much for joining us on a rock ran a senior software and I T Services analyst, phoning it in from Bloomberg Intelligence. I'd like to point it out. All right, let's switch gears, go a little political. Let's go Watchington d C Emily Wilkins, Congressional reporter for Bloomberg Government. So, Emily, the news coming out today that Speaker Nancy Pelosi will in fact visit Taiwan.

What's the feeling within the nation's capital about that news. So we've known about this trip for a while. Of course, Speaker Pelosi's office wouldn't confirm it for security and safety reasons, but Bloomberg has been reporting on this for a while and we know that even though the Department of Defense and the Pentagon have raised some concerns about it strictly from a security standpoint, there is really a lot of support for the Speaker to be making this trip at

this time. Um, you heard both from Democrats as well as Republicans, and thinking about Senate Minority Leader Mitch McConnell saying that if Pelosi was too back out of this trip now that she'd be handing a gift to China, and that there are supportive of her going. It's certainly

a significant trip. This is, you know, the number three top leader in the entire United States making an official visit from Taiwan, the first since how Speaker knew Gingrich traveled to the island back in So another speaker has done this and I feel like, um, Speaker is kind of the highest level we could do this without starting actual war. But are people still gonna possibly die because of this trip? I mean, is she risking real military action.

I mean, certainly the military is always cognizant. Right when a congressional leader or so someone you know, the president goes abroad, they are security measures in place. Heck, even when they go domestic, their security measures in place. This is just a little bit more of of a larger situation, a tens or situation, I think, and this is a bit of guesswork here, but I think if the Speaker seriously thought that someone was going to die, she would

not be going on this trip. Same with Department of Defense. And to be clear or at this point, we still don't have confirmation from the Speaker's office that she will be going to Taiwan. She's in Singapore today. We know her schedule is going to bring her to Malaysia, to South Korea, to Japan, but her schedule isn't completely finalized. We don't know the exact dates for all of those things, and so there could be a potential that she could go to Taiwan and not be announced ahead of time,

potentially for security reasons. Uh, Emily, we've got about thirty seconds left or so, do we have any sense of what her agenda might be with a visit to Taiwan. Well. President Biden did tell Chinese President shi Jin paying on the phone last week that the U S policy on Taiwan has not changed. So I don't think we're expecting any sort of major announcements, but perhaps to sort of reaffirmed Taiwan, especially after we saw everything with Ukraine and Russia in the past year. Just it seems like a

very highly highly visible trips. So we see if it's anything more than just a photoop, I guess. I mean, I think it'll be very interesting to see what is done and what is said. It does seemed on a way of reaffirming that the US does have support for Taiwan. Yeah, cross this line. Okay, we're crossing. We're crossing exactly, all right. Emily Wilkins, Congressional reporter joining us from Bloomberg Government in Washington, d C. Stephanie Pierces in our Bloomberg Interactive Broker studio.

That's big news for us. She's the CEO at dry Fust Melon does all the exchange traded funds there at BNY Melon. So, Stephanie, crazy year, brutal, brutal first half of the year. You could make money anywhere in that portfolio. Now we've had a little bit of a bounce. What's been like in the E t F world? Is that still the hot thing out there? Well, here's what I would say. E t F s continued to be in

any market environment, the vehicle of choice for investors. We've seen over a three hundred billion dollars of flows here today on a net basis in a tf SO which just doesn't stop. But here's what's interesting. There's been a lot of talk about the divergence between taxable fixed income mutual fund flows which have been NETTI, and e t F flows in the same category, which have been positive. And it's a pretty big spread. But if you actually

peel away the onion, that's happening in multiple sectors. US equity, same thing, mutual funds and outflows, E t f s and inflows International equity, same thing. About. The only place that's not true is alternatives and commodities, where both are in positive flows. But you know, if you peel it back one level further, was really interesting is it's not

really about just musical funds and ETFs. It's active mutual funds in those categories that are out closed and ETFs, both active and passive in the same categories in inflows. So one thesis on that is that the tax loss harvesting opportunity, as we've seen market volatility has given, you know, opportunity here to actually book those losses or make the kind of opportunistic trades in portfolios clean harvesting, take your

losses after drop in the SMPI. Right, you had your index funds, and that was the thing to do for years. Now the kids want actively managed UH funds and they don't want to pay the mutual fund fees, right, so they're looking for actively managed ETFs. Even um. Even Vanguard is like starting to do this. I don't know if Vanguard is actually starting to do it, but I think it's right. I mean, look, the reality is it's been years since you could actually move out of a mutual

fund without the penalty of a big capital game. And so in the first part of this year you've had that opportunity. So when we talk to our investment advisor clients, this is the way they can show value to their clients. It's also been i mean never that you've been able to buy actively managed I mean, this is a relatively new thing, right, not this year but in the past, mutual funds were um or or any kind of fund that wasn't. An e t F was, and you're only

actively managed choice. You know, now you can actually buy an ETF for fifty sixty seventy five basis points and you get an active manager. That's right. And if you actually look at the flows this year, underneath that three hundred billion active managers or active ets are punching above their wait. Right, So active ETFs are only five percent of the entire six trillion, seven trillion dollar ust F marketplace, so call it three billion, but they are over fifteen

percent of the flows that I mentioned that. What about definitely? What about people who want to hedge against inflation. We were talking to Phil Orlando earlier and he was saying, um, you know, healthcare actually has been a great hedge against inflation. I thought I should be doing that for my future. Right the day when I get cancer or your heart disease or whatever it happens, I and I go, oh my god, the hospital bills are insane. I will be happy to have invested in healthcare. But our e t

F s a big vehicle for hedging against inflation. Are

people using them? For that this year. Yeah, and you absolutely are seeing some cyclical trades, right, So, you know, one of the things that I would note, particularly in ETFs, and this is both active and passive, would be, you know, particularly in the month of July, we actually saw a reversal where instead of just the short duration fixed in com ets that we saw or equity tfs earlier in the year draw dominating flows, we actually started to see

fixed income take over equity overall, and within that more extending duration, more corporate exposure being taken on. So not just short duration of people really trying to look to say, gee, you know, if the FED is even close to halfway done in the tightening cycle. And we can debate whether that's true or not, but investors are looking at what's priced in the market and saying, Jimmy, I can extend out the curve here, pick up a little bit more yield.

So that is definitely a theme that that we are seeing, and yield is a theme. That's what Katie Griffold was just telling us. People want uh dividend paying e t f s, dividend paying ETFs and even areas like you know, corporate investment grade. You know, you're looking at things like high yield, which is seen, you know, for the first time all year, two months of positive flows, a couple of billion dollars. Why is that, Well, you can pick up a seven to eight percent yield in a high

yield ETF. That's a nice coupon. Even if you think there's some recession risk and there's some risk of default call it one one and a half percent worst case default risk. You're still picking up a nice coupon. If you're a little shy about jumping back into equity, right, you have equity like exposure with a nice coupon to shield you a little bit. And certainly evaluations are very attractive.

You know, corporates still don't have a lot of um leverage they have historically, you know, high cash on the books. It's not a bad trade in this environment. Stephanie Suenior extensive resume that you spend some time at fidelity. It can't be a good time. May be a mutual fund. Every time I stalk e t F, it's just record inflow here, record inflow there. Well, look what's look? Mutual funds and ETFs are going to co exist for a

long long time. But I think it's fair to say, you know, I have a twelve year old at home. Many of us have kids, grandkids. I'm not so sure that those kids are or their their kids are necessarily going to buy mutual funds. ETFs are simpler, they're more transparent and more costom tax efficient. There's one price. It's really what we think of as the democratization of finance,

and everybody's converting. I mean, we're seeing so many conversions this year, mutual funds converting into e t f s. And the only reason they wouldn't is probably because of this aged you know, four one K infrastructure that still doesn't allow a lot of times you to pick ets. But that's that's right, and it is operationally calm, located with multiple share classes, what kind of account they're sitting in,

so it's not simple to do. But I absolutely think, um that is the wave of the future is probably more ETFs than more next generation investors coming into the vehicle. All right, Stephanie Pierce, thank you so much for joining us here in our Bloomberg Interactor Broker studio. Stephanie Pierce, CEO Dreyfus Melon and Exchange Trade of Funds at b and Y Melan. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts

or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three. Put on false Sweeney I'm on Twitter at pt Sweeney Before the podcast. You can always catch us worldwide at Bloomberg Radio