Markets, Bonds, Energy, and Earnings (Podcast)

name reporting numbers, A T and T mob Bell. The numbers I kind of thought were okay, maybe a little disappointed about the stocks up six point two per cent. So let's break down what's going on with Big T buying some telephone? Is what we used to say on the trading desk, shares a telephone for sale and you know T. Yeah, John Butler, he's he knows back, he goes back that far. John talks to us about A T and T. What did they report and kind of

how did you and in the market take their numbers? So, Paul, I think you, I think you characterized it correctly. The numbers for the quarter largely in line. It's all about is coming right the streets, very forward looking, and I thought management's tone on the coming year and beyond was confident. You know, they very they do a very good job of sort of managing the narrative. A T and T right now is transitioning to you know, a connectivity company.

They're moving beyond that, you know, media and telecom conglomerate. They've sold off Warner Media in April of last year, and they're and they're moving forward, I think ahead into pushing into fiber and five G and they're doing you know, it's steady as she goes. They're really doing a very good job there of building out that fiber network and standing up news spent spectrum for five G and again management's tone around the whole project, if you will, was

very confident. Well, what does that mean for the share price here? Because AT and T has consistently actually outperformed some of its peers here Hoizon T Mobile as well. What are we looking at when it comes to the future of the share price. So I can't really speak specifically to the price action, but I can talk about sentiment.

So if you wind back the clock even six months, I seem I think people were very worried about the cash flow outlooking can they cover the dividend and can they really pull off this fiber build out at a time when the overall broadband market is maturing, just like wireless did a couple of years ago. And I think the answer to all that is yes, you know, they're

beginning to execute well. The visibility on that on that build out, and their prospects in that market have improved, and so overall we're seeing a shift in sentiment from negative to wow. I think this actually is becoming a good, you know, stable story with um you know, the on the call, management said, look, we feel we're going to generate more than enough cash flow to cover the dividends. So anyone holding the stock for for the income, I think is going to feel better coming out of this call.

So John, and it's you know, if you're a long time a T T shareholder, you've just been whipsawed. Here. You were, you know, kind of a tired old telephone company getting into wireless, and then boy they did this one a D and got to loaded up in the media business with Direct TV and then Time Warner, and they you know, almost as quickly unloaded those businesses. So if I buy a T and T today, what am I buying and what am I hanging my hat on?

I think you're hanging the hat on the dividend partly, and you're hanging your hat on them getting into the broadband business, but doing well in that business, taking share in that business. You know, I think CEO John Stankey nailed it when he said, you know, ultimately data finds its way to fiber. And you know, with the growth in data coming out of five G right with with video streaming in particular, you need a lot of capacity to support that traffic flow. And I think fiber is

the right answer for that. And uh, you know, the cable companies are all scrambling to upgrade their networks, which are mostly coaxial cable, and so I think a T and T has an inherent advantage with fiber. They see that and they're kind of pressing their bet there. Not only are they building the fiber in region and hitting their targets there UM, but they're building out a region now. They partnered with UM with black Stones to begin to

build fiber outside the network. So or there could be upside, if you will, to this broadband bed. And I think that's what you're hanging your hat on that and the dividends story, So is this something is the R word, the recession word, something that a T and T really has to worry about here when we're talking about this kind of build out. You know, it's moving around the

numbers modestly, I would say this year. But I think the investment community, based on where a sentiment is around these names, appears to be looking beyond any recession this year. And um and I say that because Verizon reported a choppier quarter and a choppier outlook yesterday, and yet the investment community seemed to be looking beyond all that. So you know, yes, telecom is a g d P plus business, so if you move into recession, it can crimp growth.

But um, again, managements com men surround it, we're like, look, you know, we're looking at the economy and we're seeing a relatively stable economic environment right now. We're not seeing that down draft that everyone's bracing for. And they did say, look, things can change and there right on that things can change on a dime. But I'm sort of in alignment with what they're seeing. Based on what I'm hearing from companies, I'm seeing modest softness emerged, but not not anything I've

seen with recessions past. All Right, John, great stuff. Always appreciate getting your perspective. You've seen a bunch of cycles over the years. We appreciate getting you perspective. John Butler, he's a senior analyst covering telecoms for a Bloomberg Intelligence. He's based in our lovely Princeton, New Jersey offices. All Right, I'm an equity guy. I just tell a story forecast and earnings. I slap a multiple onnament and my job's done. I go on. But the fixed income folks, that's a

whole another game. They have to dive deep. But boy, they had a brutal year last year. I mean, returns that they've never seen before. So let's figure out where we are now, what do we do going forward? Uh? And for that, we're fortunate to have Stephen oh in the Bloomberg Interactive Broker studio. He's not mailing it in from l A. He's here in New York. And why wouldn't he be. It's the world's capital. Uh. He's a global head of Fixingcome for Prime Bridge Investment. Steven, thanks

much for joining us here today. When you look back on two now you have some perspective what happened well on the one hand, I think it was largely anticipated that the FED would start to normalize policy going forward. I think what was the unexpected portion was really the strengthen the resistance of inflation, which forced the FED and other central banks to be much more aggressive in their actions in order to rein in future inflationary pressures. And

so we're at a turning point right now. But we always said that entering that fixed income was largely unattractive give the fact that duration was extended. Fields were very low and there just wasn't much upside, and we were recommending that fixing come be reduced in portfolios. But we finally have some yield in fixing come, which is providing a new opportunity. Stephen, do you care at all about the debt ceiling? You know, I think it's very important

and something that we need to pay attention to. But it's a repeat process, right, and so we seem like we're always here At some point. It would be great to get a resolution which is quasi permanent in nature. But I think from the period when we had a semi mini crisis back in with the issue, we've sort of navigated from there with the market largely ignoring the worst case outcomes where any type of a theoretical default

would be short lived in nature. So that's seems to be the consensus on on Wall Street and around the world. But I'm curious, though, in that worst case scenario, do we then see the treasury market have a much bigger dislocated nation than perhaps in the team saga that you are referencing. Simply because we are now in a tightening era as opposed to an easy era, I would say a combination of factors could result in higher levels of

treasury volatility. It's not only that component that you alluded to where we are in a tightening era, but volatility has risen significantly as the buyer basis diminished overall, and we've seen that even without any of the issues over the course of the past year. But again, any type of volatility that results in yields spiking up would be more of a buying opportunity because it's hard to see a scenario where that last or any period of time.

All Right, you're fixing the guys. You blew it in two, here's your chance to redeem yourself in three. What do we do now? Well, I'm not expecting fixed income to produce tremendous returns in a rebound. We're not going to go back to ultra low rates. In fact, we're probably out of consensus from the market that we do not believe that the Fed will cut rates later this year uh,

and the market is pricing that in. So the way we look at fixed income outcomes for this year is that because yields have peaked last year, we don't see the risking fixed income, but we see more of a coupon clipping from here on out, and most of the price action that may have been anticipated has already played out in the first three weeks of the year. So if you are at a consensus then from the market, does that then mean that you are selling the front

end of the curve? Blooming Intelligence, Chief Rate Strategy Ira Jersey, He says, look, yield are so low on the front end simply because of those FED cuts being priced in. Is that the trade you'd make? Well, we think it. Barbell strategy makes sense because if you look at the steepness, you know, being in T bills is not a bad place to be right now and rolling that over because we do think it will hold up and the yields that you're getting our superior rather than selling the front.

Then the curve. We like the approach of owning ultra short and then owning about the twenty year part of the curve in the Barbell approach, where that's going to be more reflective of a longer term normalized yield curve. That's a very wide range. It is what you're but you want to set your duration target. But that's where we see the two ends of the value. Interesting all right.

Back in the day, you were a vice president on doing some high yield stuff a Bank America Securities, and that was the security's arm of Bank America before they bought Merrill Lynch in two thousand and eight. What do you think about the high yield market here? I mean, people tell me I got a recession coming. Do I even think about venturing into high yield? Well, high yield

on surface to yields are very attractive. But from a spread standpoint, we always have to think about what is the fundamental outlook for both earnings, for defaults and so forth, and what is the valuation to reflect that. And right now, high yield spreads on the low four hundreds right now, it is not reflecting any type of a recessionary outcome. So from a tactical standpoint, we are cautious on high

yield right now. The case where high yield isn't is it an attractive part of fixed income credit markets right now, because we don't believe it is. The case where high yield is that it makes a lot of sense of relation to equities as a d risking approach. If you can get north of eight percent high yield lot de risking from equities, that trade off to us is very attractive. But within fixed income we prefer to stay within investment grade right now. Let's talk about then, uh, the story

when it comes to geo political risk as well. If you weren't worried about the debt ceiling, are you all worried about the bond market? Looking at the war in Ukraine as an ongoing issue, that is something that should factor into the decisions. The war in Ukraine has impacted UH global financial markets, not so much directly, but really the residual impact that it's having commodities, energy, certainly within Europe overall, although the male winners seems to have participated

that somewhat. While there is a scenario of sort of a severe terror, risk that the war could become a catalyst for broader geopolitical tensions and spreading that war, which could have a cataclysmic effect. You know, we believe that the probability is very low, although we're not political analysts. Ironically in some respects from a risk standpoint, as a extinct come in a credit manager. There's the other side of that risk, from the standpoint that what if there

is a peaceful resolution and outcome. Again, it's not something that we're predicting, but it represents a risk that you could have a tremendous rally in the markets, and we do not have enough risk within the portfolio. So we always think about risk, not only toward one end, but

what can go wrong relative to our personfolio positioning. Well, speaking of portfolio positioning, let's talk a little bit about the cross acid moves here, because when you're looking at the bond market, I'm curious, so what specific, uh kind of leading indicators you're leading market action you're really looking at. For example, I will clarify, uh if you went back to say, just pulling up the chart on my handy

dandy Winberg terminal. Right now, going back into early two and the war first broke out, you start to see oil prices rise, commodity prices rise, and yields rise in tandem. So the correlation between bond yields and commodities really quite strong and went hand in hand. That correlation has now been inversed, and I'm curious if you think that correlation

will snap or perhaps just get more and more negative. Well, we're in markets right now where traditional relationships don't necessarily work out because it's really about where central banks are heading that's driving markets, and that necessarily does not pretend that historical correlations and relationships will work out in the

same manner overall. So what we focus on, of course are all of the leading indicator of economics, but we also are very cautious about where do we think policy path is going to go, and again, what our markets reflecting, and do we have a view that differs in any way from the market, and that what really frames our positioning overall. But there's clearly indications right now of a soft landing or a perfect lie pass scenario that the

FED is supposed to engineer. We don't believe that that would necessarily be the case, and so that creates more caution in how we're positioning relative to what the market view. Maybe Okay, so I get to feel that maybe you're a little bit more cautious than the average fixed income manager. That being said, where are you if you had capital

allocate today? Where would you go? The areas that we are being cautious of our incredit markets that in our your trading type to a mild recessionary type of scenario, and those are going to be developed market fixed income.

The area where fundamentals are improving is in Asia, credit in China in particular with the reopening, and so where we see the fundamental opportunity is really more so in emerging market credit opportunities right now, and so it may be a little bit early or late, depending on your view of China property and so forth. But we think that gliding the portfolio more towards emerging market in the coming year, based on the differential and fundamentals h makes

a lot more sense this year. We've heard that. And my concern, not just about thir thirty seconds, is isn't there recession risk outside of the US more pronounced than here from a lot of emerging markets. I think it depends on how you define recession. There is certainly a correlation of what happens with developed markets versus emerging markets.

The other component that support of the fundamentals in emerging markets, although there's certainly flashpoints and we're seeing some of the political risk and latdown so forth, is the fact that the dollar strength, which was an inhibitor and a headwind to emerging markets. We don't necessarily believe that the dollar will weaken significantly, but the headwinds of strengthening is abating, and we don't expect that to re emerge great points.

Really appreciate it, Steven Oh. He's a global head of fixed income at pine Bridge Investments. He's based in Los Angeles. I'm looking at the office is about halfway between Beverly Hills and Santa Monica. If I had to guess center it is. It's a good place to live, you know, New York Center. But it's not a bad place. A good stuff, Steven. We appreciate it. Stopping into our studios here, the markets down at one point six percent today. Did we focus on the Fed? Do we focus on earnings?

Do we focus on inflation? Do we focus on recession? I don't know. I buy him when they're low and I pelomone they're high. That's what I was told my first day of paint Warber on the block trading desk, and it's worked so far. But Gina Martin Adams, she takes a much more analytical approach. She's a chief equity strategist at Bloomberg Intelligence Joint US here in Bloomberg Interactive Broker Studio, which we always appreciate. So, Gina, what am I focusing on this year in when I think about

what where these markets are going to go? Well, I think the investor base is really focused predominantly on recession and what recession really means. If the US is in recession, is European recession? Are they? Are? They? Are? Are they not? When are they going to fall into recession? You know? I think frankly some of this intense focus on recession is really just misplaced. Because earnings behave differently in every kind of recession. We won't know we're in recession until

probably when it's nearly over. If the official dating process, you know, follows it's normal historical trend. So what I think that we should be focused on is not always the same as well, we're focused on, And what we really should be focused on is the depth and duration of this earning cycle. Earnings peaked a year ago, they peaked at the end of one. They've contracted on an

unadjusted basis seven percent so far. The analyst community is anticipating a ten peak to trough drop at least will probably end up somewhere closer to twelve if our work is correct. And that's what's gonna matter. It's timing the end of that earning cycle. When are we going to start to see improvement. How will the economy impact earnings is critically important for sure. Um And then also this the show, the show going on in FED policy, right, you can't get away from FED policy as a driver

of valuations. So those are the two things. So if I look at the spars looking at the Bloomberg terminal like bucks or something, should they be more like two? Yeah? So this is an operating earnings number, right, And I think the construct is really difficult because when we look at the long term historical earnings trend, operating earnings have

only been around for about thirty years. When you look at the long long term, we have to think about unadjusted earnings and how adjusted earnings behave during recession on an operating earning spasis, I do think we probably see about a five percent decline in EPs. But you've got to remember companies are sitting on just boatloads of cash.

They're going to continue to buy back shares, They're going to continue to deploy that cash, and that's going to make adjusted earnings probably fall less than many people are anticipating, or fall less than your traditional recession decline on an on an unadjusted basis, though there is some evidence of distress. We're seeing it in margin contractions year over year, which are anticipated to finally bottom within the first half of

this year. We're certainly seeing some distress evident in tech, particularly relative to expectations which were extremely high for that space. So I think you do need to sort of read between the lines and really articulate the details, because you can get a very confusing picture depending upon what you're following. Well, Gina, you sund I think maybe either Monday or Tuesday on Limerick surveillance in the morning. Something that really stuck with

me with was sales are slowing down. Earnings on the top line perhaps aren't as much, but the sales is really a reflection of the macroeconomics slow down that you're seeing. At what point is that really punished more severely by the stock market as opposed to the expectation of that happening that we really perhaps priced in in the back half last year. Yeah, it is. It's an interesting complexity right now because sales, remember in two, were held up

by this idea of inflation. So even though volume sales were clearly decelerating throughout two, we had inflating prices, in particular in the commodity space, energy and utilities mostly, but also you know, some other peripheral commodity segments where sales growth was very profoundly positive. And now, for the first time in a very long time, in the fourth quarter, in any season, it looks like sales growth is going to miss expectations. So we are seeing this inflation shift

play out on the top line. Now, how much does that impact bottom line is really interesting to think about because so far bottom line is actually beating expectations because companies are enjoying the deceleration and commodity prices to produce stronger margins than anticipated. And that give and take is really important to consider because what happens with energy and utilities. As you know, commodity segments is meaningful for the overall headline index, but it also is meaningful for the rest

of the constituents. And generally, what's great for energy is not so good for everybody else, and what's bad for energy is great for everybody else. And that dynamic is playing out right now. So talk to us about like the discounting mechanism that is the stock market. When do you think the stock market starts to say, I've seen the worst of inflation, I've seen the worst of rate increases, I've seen the worst of earnings reductions. I can now

start discounting some better stuff going forward. What do you think that happens. I think it's been happening. I think that we got to our point of maximum pessimism back in September October, and since that period we've been starting to think about, Okay, how much worse can it get? How much did we already price? And even more importantly, what does the next cycle look like? And that's where I think we have this sort of really opaque challenge

right now, is what is going to look like? Because we spent so much time of the last year talking about the recession coming. The market has certainly prepared to at least a moderate degree for this recession that we've

all been talking about waiting for, trying to time. What I think we're going to continue to struggle with this year is what does the recovery look like in an environment where the FED probably doesn't backpedal to the normal degree, where they don't reduce rates to a lower level than they were at the end of the last cycle. That's impossible unless they go into negative territory, and so it seems also incredibly unlikely given the inflation dynamic and the

general resilience of demand that we're experiencing. So I think that is the challenge. I think that's where the market is headed already, and we'll continue to head through. It's really pricing that outlook for recovery emerging in. Is there a threat here that sell off was overdone by any margin if you indeed get a soft landing from the Fed. Yeah, it does seem like, you know, at least the market

seems to think that we overdid it. The market has had a very robust recovery from that that mid October low, So the market does seem that we overdid our expectations

on at least the FED and probably the economy. But we're going to continue to argue about that creaty, I don't I don't think we know for yeah, we're going to continue to argue about that for a couple of quarters yet, because the FED seems to be pretty committed still to maintaining this high rate and yet the market is saying, oh, no, no, no, you're going to reduce interest rates like you always do in recession. And you know, to the market's credit, we haven't lived through that kind

of environment. Right, For every recession experience going all the way back to the nineties, we've seen the FED reduced rates two lower levels than they ended in the last cycle. This is different, and you know, you hate to say that time that this time is different in this business.

But from a policy perspective, the FED is definitely behaving quite differently than they have in recent recessions and we'll probably continue to do so, and that's going to continue to create friction, to say the least for the equity market. All right, good stuff, Gina Martin Adams. He's a chief equity strategist for Bloomberg Intelligence. Joining us here live in

our Bloomberg Interactive Broker Studio. Always love getting Gina's perceptions of the market, where we think we are, where we've come from, and where we're going, so we appreciate her getting some time there. Another earning story in the news today Boeing. And this is a name I like the follower we're talking to, giant aerospace company, goes to the airline business, to travel business, all kinds of stuff. Here the numbers, it kind of looked in line to me.

I know there's another loss, but let's put it in perspective here. The stock trading off about two point eight percent today is Boeing. It's got a hunter twenty three billion dollar market cap, so it's it's a big one. George Ferguson, Senior industry analyst at Bloomberg Intelligence. He covers the airspace companies as well as the airlines the end customers. George, thanks so much for taking the time to join us here. I know you're busy talk to us about Boeing here.

What's your takeaway from what we heard from the folks that are based in Point I guess they're Washington now, right, George. Actually I think they're based out of yes, sorry Washington, d C. Right, Virginia, Virginia. But we know they build all those great airplanes. It's still Seattle for me, dude. The worst worst decision you ever made was leaving Seattle.

So yeah, so we um, we saw them, you know, bring earnings today and yeah, the markets off, but remember this, the stock has seen a lot of rally over um, you know, through the fourth quarter at the end of the year a bit so um. I don't know that I'd get too excited yet. I think, you know what I think we've heard so far. They're just a huge

amount of new details we're getting out of them. But you know, I think the bigger thing is that by chain is still going to be a problem in three right, But I think we all kind of knew that, but we were I think maybe hoping we'd hear better discussion

about how supply chains were turning the corner. And there's visibility on that improvement, you know, And so some of the some of the guidance for the year, it's like on seven thirty seven, right, but they're saying, look, the low end of our guidance means we're gonna deliver thirty one seven thirty seven's a month throughout the year and on the high end means we break to like a forty one, you know, maybe sometime in the back half

of the year. But they don't know because they just don't know if they can get supply chain stabilized enough to do that. And and that's key to this company, right The key to the company is getting commercial airplane that division moving profitable um and that really takes that, you know, that stabilization in the supply chain, higher rates,

which absorb the overhead better, you know. So again, I think visibility kind of lacking on that, and I think the market wants more visibility and that supply chain, hoping it would be a better story. We hear the same from raytheon yesterday, So I think it's it's you know, it's a wait and see on supply chains. George, to what extent is that going to prolong the backlog that we're seeing for Boeing, Because if correctly, if I'm wrong, really the fourth quarter was when they really stepped up

some of their jet deliveries. What kind of pressure does that supply chain issue put on the backlog? Yes, So I mean what we one it extends you know, the existing backlock of airplanes they've they've sold UM and Bowing has a little bit of a catch up to do against Airbus still, and I would think they could break to m They'll be breaking rates or you know, moving to higher rates UM probably easier than Airbus because Airbus

is at higher levels already. So I don't I don't think it hurts the ability to sell airplanes, is what I'm sort of getting out. They may even have a better they may maybe have a better position to sell airplanes than Airbus because I think there's more near term delivery spots that you could probably get if you're a customer. But again, I think, you know, we all saw kind

of December deliveries. They were strong, they were they were they were really nice, right and they and they led to the I think, you know, better than expected results in four que and I think the market, you know, I thought the story would continue like that and it would be more of it today where we're just hearing yep, you know, challenges in supply chains. So we're specifically are the challenges because I think I'm at the point of saying I'm calling bs on the supply chain. Excuse I

don't care what kind of company you are. So where are they seeing it from? In particular the brutal Sweeney call. Yeah, well, I mean so you know, engines are one that everyone points to. And you know, yesterday Raytheon on their earnings called cited castings and forgings. Right, we've heard castings and forgings. They were the limited at the at the tail end of the last decade when we were breaking direct levels of aircraft production for the seven three, seven and h

V twenty castings and forgings. There is no no no, no, no, no, no no no. It's a U it's a US Europe thing. But it's very skilled labor, right, And so to the extent you lost any of that skilled labor during the pandemic and said, hey, we're cutting rate, we don't need all you folks. People walked away, retired, whatever, you've got to bring new people back in and teach them how

to do castings and forgings. I wish I knew even more about it, and about to go, you know, get a job a volunteer to be like an intern in the casting and forging the department that the Raytheon to figure out more. But we keep hearing that and the other and the other truth I think is I think the smaller the supplier is and remember the supplier base can be quite small for aerospace because volumes in some

programs just aren't that large. And the smaller the supplier, I think, the less visibility, right that sort of the following an airbus have they got to really dig deep because they're multiple tiers down and those people are having problems hiring people still, right because they're not offering the best wages. They're not offering the best um uh you know, incentive packages. So raytheon Boeing Airbus they can fill their

factors and people ready to do work. But when you get down to those lower tiers, they're still scrapping to bring people in it and then train them to do

the job they got to do, right, So that's a challenge. Well, George, when we're talking about Bowing specifically as a company, the supply to an issues aside to what extent is it turning in away from defense more to in line with the airline industry when it comes to exposure in a ton when it comes to industry, it feels like in the last couple of years it's doing less and less with government contracting. Yeah, so I would say, um, what we saw at the tail end of the last decade

was definitely the company was moving more commercial. I think commercial the challenge in these businesses, or maybe it's you know, it's a it's a benefit, it's a it's a balance er. I mean, commercial can take off right there, you know what you're get in this situation, and so to speak, right where airlines just start to need a lot more airplanes. Global air growth, air travel growth is taking off, and they're booking all these orders and the commercial side really

outweighs defense. The beauty of these companies is usually that when that when that commercial cycle goes, you know, goes into a relaxation mode, is less less intense. The defense helps keep the lights on. It's a very stable business. It usually very profitable, good cash flows. So you know, we kind of in the beginning of the pandemic we saw some of that defense stabilizing a Boeing. But what I'd say where they are right now is they I

don't think they've de emphasized defense at all. I think part of that move to Washington was about getting back in touch with their defense customers a bit better. They have some great products. Case. The tanker is very important for US, uh, you know, it's power projection ability. Tankers are just hugely important. That the current fleet's fifty years old. Um, you know, they've got some great products in there. But

right now, margins are hurting bad. They bit a bunch of projects, um that were fixed cost that they took serious losses on. You know, so we're down the down in the low single digits on margins in a business that should just traditionally should be tennish. But I still think the company sees the value of that portfolio. They continue to talk about it. But I would expect as we get into another commercial upswing, which I think we're kind of going to get here, that they commercial Eclipse Defense.

But I think it's still super important, and it's embedded in global services as well, which is a which is a nice cash generator. All right, George, great stuff as always. George Ferguson, senior Airspace, Defense and Airline analyst for Bloomberg Intelligence, former military intelligence officer in the U. S. Army. So we thank him for service. Maybe most importantly, he's a proud undergraduate of the Penn State University. He's a proud alumni.

They're talking about Boeing. Uh commercial business got some challenges near term, of long term sounds pretty solid. One of the few few areas that did well last year, and I mean really well, is energy. Um Why did they did rip it last year? The question is what do we do from here? Like that? I missed that trade, like I might have missed a few other trades in my career. Ben Cook, he knows all about this stuff. He's a portfolio manager at Hennessey Funds. So Ben, again,

did Sweeney miss the energy trade here? That just ripped in two? Yeah? Good morning, Paul, thanks for having me. I think three stands to be another good year for energy, and you consider continued improvement in the commodity markets UMU, continued favorable valuation across much of the hydrocarbon sector, and of course the continued allocation of capital back to investors and former share repurchases and dividends. All those combined make

for a pretty attractive investment case. So I think twenty three is going to be another good year. I don't think you missed out. Are we looking at a hundred dollar oil again? In Yeah? It's very likely that we see improving commodity fundamentals, including crude oil fundamentals, in the coming twelve month period. I think, you know, the reopening

of China, easing of COVID lockdown policy. As recent as the Chinese lunar New Year, we saw rebound and dramatic rebound and jet travel and that a bodes well for increased consumption across the region and passenger mobility. And I think you know, if we continue to see growth there and modest GDP growth here, uh, we could very easily see oil over a hundred dollars over the next twelve months.

So Ben, I know, what's worked for energy equity investors creditors has been what the energy folks like to call discipline, not taking advantage when it's eighty or abound and started drilling holes in the ground, which is what I instinctively would do. UM talk to us about that. I mean, you know, I mean, it seems to me there seems to be I don't know if energy shortage, but certainly there's a shortage in Europe. But it seems like we still need more carbon energy out there in the marketplace

while we make this transition to um greener energy. But I guess there's just no real incentives for the energy guys to build a new refinery or or you know, kind of drill more wells. Where are we on that whole front. Yeah, the whole capital discipline phenomenon really, you know, it's been a part of the investment narrative for the large cap integrated group for some time, but the E and P companies here in the US have really adhered to this dramatically over the last eighteen months, close to

two years. And you know, I think historically the industry has ramped spending in a procyclical manner, meaning, you know, spending would rise as commodity prices, prices would increase, and ultimately as the cycle would turn and commodity prices would go lower, many of the companies would be left with significant debt and their equity values would come under pressure, uh during a downturn. And rather than do that, what we've seen recently are these companies have become smarter about

spending their money. They realize that equity values can rise without the expansion and production and development activity, and it's it's the return of capital that actually the shareholders are rewarding them for and so we see that that persisting. I'd say the other part of it, too, is just

the uncertainty associated with government policy. The regulations typically come in the form of a character stick, and here in the US, over the last several years we've we've had more of a stick as opposed to accarrot with the traditional hydrocarbon sector. So it's been a combination of a couple of things. But Fay capital discipline is all well and good, and of course the stick coming from Washington

as well. But I'm curious how much of this was simply a function of what Paul doesn't like to talk about supply chain issues. Um, but when it comes to some of these oil companies, were they being capitally disciplined or were they being restrained by some of the supply lighting issue that they have or both? Yeah, I think to a degree there have been some supply chain issues

when you talk about the oil field service industry. Certainly capital equipment is a necessity in terms of being able to employ the machinery that goes to work, to to drill, to to develop frac, etcetera, ultimately expand the capacity. So there was some of that. I don't feel as though the industry is dealing with dramatic challenge associated with supply

chain issues today. I think the more pressing issue for the upstream sector here in the United States and maybe to a lesser extent abroad, is the lack of availability of of of workers. UM. You know, whether it's you know, driving trucks to handle water or uh, you know, operating frack machinery. Uh, there is a shortage of available of workers, skilled workers to to put to work in in the oil field service business and in the integrated and the mp UH sectors as well. So that that's a real

challenge the industry is going to have to contend with it. Ben, what does China reopening mean for the energy space both from a supply and demand perspective, It would seem to me would be positive on the net. Yeah, there's no question the reopening of China is a positive on on a net net basis. UH. In terms of incremental growth, Southeast Asian demand is is the largest component of the expansion in the world's growing appetite for crude oil demand.

And you know it's it's um when you think about transportation that the jet fuel demand, the passenger mobility associated with rail and cars. There's no question that that's going to going to create a major tail win for demand going forward. And it's not just China, it's neighboring countries as well. Um, there's a significant appetite. I think the the i e. A recently published some forecasts of significant

growth in on the back of Chinese demand. You know, in terms of our view, we expect global demand growth on the order of two to two and a half million barrels this year, partly on on base effects associated with slowdown in China last year. But that's a meaningful incremental uh, you know, incremental growth amount of crude oil demand that should come this year and end up again provide a tail win to pricing. And again on the supply side, you know, capital discipline here a very steady

opeque uh supply policy. I think the combination of those factors, you know, could easily send prices over a hundred dollars as we as we just discussed ben can the world live without Russian crude in In the long term we seem to be doing okay now, but long term, yeah, longer term rush is a major supplier to the global market. Producing roughly ten eleven million barrels a day. You know, whether it's price caps or embargoes or sanctions, that industry

is going to face some challenges. In the world experienced supply disruption, There's no no doubt about that. We would anticipate over the coming years that as embargoes and sanctions kick in, that capacity will will begin to shrink in that country and it will diminish. In the meantime. UM supplies coming from Russia are making their way to India and China. Um. You know that that's important volume that you know, without those supplies, prices would be much much higher.

So on a on a short term basis, we still need to live with Russian crude, and even on a longer term basis, it's hard to envision the scenario, a global supply picture without Russian crude. It's just kind of the dumb question today. Is China a net importer or exporter of oil? They are a net importer? Uh, significant net importerer? Yes, they are the Middle East? Uh? And what a Russia's best clients got you? Okay, interesting to see how that reopening plays in this marketplace. Ben Cook,

He's portfolio manager at Hennessey Funds. Over the Hennessey Funds, he manages Hennessy Energy Transition Fund and Hennessey Midstream Fund, so kind of in the UH, you know, the old energy, the new energy. They invest in both. So it's great

to get bens perspective on all things energy. Talking about maybe another move back to a hundred dollar oil w T A crude oil right here is eighty dollars cents a barrel, a little bit off the lows we saw recently when't got down to about seventy dollars about 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