Markets may be facing disrespectful tweet fatigue : Paulsen

Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. So, now that companies are earning so much money and the cash that they have is slashing around their balance sheets, how much are they paying down that debt that they have been borrowing, the trillions of dollars of debt that they've been incurring over the past eight years. Here to answer that question, Joel Levington, see your credit analyst for Bloomberg Intelligence. He writes amazing reports. He joined us here

in our eleven three oh studios. Joel, you did a study looking at lover ratios among companies. Basically, this is the amount of death that they have relative to the income that they have. How do things look right now? Uh? Well, I'll tell you, Lisa, not that great. It's um uh. You know, metrics continue to remain elevated. We've done nine studies over the last five years, and we're right or at the highest point for all the major reading classes except for the junkiest class, the single B T here,

which has slightly improved. Okay, to be clear. In other words, corporate leverage has increased to the highest levels in data going back four years. Right, that's right, uh, and it has steadily increased even though the cash flows have increased profits have increased. That has not offset the rapid Uh, the rapid selling of debt. That's exactly right. And earnings

are are robust and healthy. However, tables have turned towards capital allocation plans where it's share repurchases, dividends and acquisitions, and the can that's being used for those three items are at least exceeding cash that is being generated, and therefore leverage can't improve. Alright, So let's dig into here a little bit. I mean, you're starting to see investors express concern at all about leverage increasing or are they still pretty much in a free for all? Take my money,

you care. It's a great question. The beyond just the individual company specific items, where I hear at the most is in the triple B category, which has increased a lot over the last few years. Uh, and what I find it's very bifurcated. You could look at subsectors and I would say it. My thirty second takeaway on it is that insectors that the reading agencies view as stable, like consumer cyclical excuse me, consumer stables, as well as healthcare.

The reading agencies have allowed the companies to level up much more than you would traditionally find, sometimes to even six times leverage, with the hope that a deal will pan out well and that cash flow will pay down debt over the next couple of years. Having been around the business for a long time, that never really happens

exactly the way people plan. This is such an important conversation because everyone talks about how much earnings are increasing, but the other side of the balance sheet is also inflating, and frankly inflating at a faster pace. And I feel

like this is a really important thing to realize. I want to shift gears a little bit because you highlighted another research piece that you put out that auto bonds have been among the worst performers of the year, and given what you've seen, you don't necessarily think that will change. That's right, you know, statistically, auto demand hinges on about three factors. It's the price of the vehicle that you're buying, It's the loan rate uh that that you have, and

uh it's gas prices. As they rise, it makes it tougher to bank that payment. And then so when you look at those three things, they're all working again to us. If you're a car company, right, prices are already at the highest on record. That's a mixed change of people moving out of auto passenger cars and into cuvs and SUVs, So the prices working against you. Loan rates are already at their highs for the last five years, and of course you are expecting another like three hikes going forward.

Can you give us a sense of which specific companies have been the worst performers in the bond world? Well, forward in investment grade has been very very poor. UM. I mean, do you think that investors might be pricing in a pretty substantial downgrade for Ford, because there's their stocks have been down substantially as well, they've had turnover. Uh, they've really struggled to increase the profits. I don't think so.

I think if you look at the forward bonds or g M bonds, uh, they trade as uh wide to their peers in consumer discretionary. But you can find a lot of retailers in that area too that have the wherewithal to down debt and may have less leverage and maybe more cash flow. So I'm not sure that they've priced in a severe downturn or decline. I think what they see is that maybe they were priced too tight

to begin with and are trying to reset valuation. You know, one thing I'm struck by is you're talking about the pressures on automakers and it includes higher costs for this the goods that they purchase. And I'm wondering, especially as we just finished that eventful G seven meeting, and that it seems like tariffs are going to be an ongoing theme. You know, are they going to be the prime losers

from this because their input costs are gonna increase? And what other sectors are people not thinking about that also could be big losers. Well, I think you're totally right, Li. So when you think of raw material inflation, the auto market is so competitive, it's very very hard to pass these costs on. And when you think of rising rates and they have huge finance companies, many of them, Uh, you can't really pass that cost onto the consumer. You

have rising steel inflation. We were just talk about it earlier, how addie auto suppliers down about sixteen seventent today because they can pass UH raw material inflation through. So I think these are the kinds of events that you could start seeing pop up more frequently, and clearly that will not have a great impact on credit risk or bonds. Is there another Is there another UH industry that could also see UH sort of declines or pressure as a

result of these increasing commodity prices. Well, in the industrial world, you do have a lot of use of oil and energy, so as those prices rise, I think you could see maybe in the machinery space where steel uses is also quite high, so I could see margin compression happen over there, and maybe not the amount of expansion and that people are expecting, and so that might be a place where you could see some problemats. Joel Livington, thank you so

much for spending the time here. Joel Livington, senior credit analyst for Bloomberg Intelligence, joining us here in our eleven three oh studios. This study that they did on leverage trends really fascinating, showing just how much people have been borrowing despite the increases in their earnings. Well, the market is pretty much flat, despite the fact that we've had quite a few pretty sensational headlines coming out over the

weekend and we expect more throughout the week. Why our investors not responding at all to the escalating trade tensions to the possible accord in Korea. Let's get some thoughts on that from James Paulson, chief investment strategist at the Louth Whole Group in Minneapolis, Minnesota, and he joins us now by phone. James, thank you so much for being with us. I'd love to get your sense, just to

get this out of the way. You know, it feels a little bit like the world is up in uh in a in a roar of potential trade tensions and people battling each other in with words and markets shrug they do not care why. Well, it might be uh, disrespectful tweet fatigue. I don't know, disrespectful tweet fatigue? Is that? Is that like going to be a thing? D TF? It's just t ts. I just think you know that we've we've seen this story quite a bit in the

last almost two years now. A lot of rhetoric, a lot of tough rhetoric even among countries now, but little really happens. And so that there has been market moves in the past has been fairly significant on news like we've had lately, and to no avail, and if you sold out, you lost out because the markets sort of recovered. And so I do think that the marketplace is becoming a little less sensitive to that, reducing their eat it

to that type of flow of news. Now, if something really happened fundamentally, um, certainly there'd be a different response. But but just tough talk. It's kind of we're getting used to tough talk. That's been the modus opera for for the last couple years, even leading up to the election. I think we're we're sort of adjusting how much we

move markets on the basis of that. And then the other thing least, there's just such a good fundamental story under this right now, you know, with with just strong economy here in the United States and high confident, strong earnings UM, and I think there's also a growing abolishness out there optimism about markets breaking out to the upside. So all those I think are factors keeping this market, uh, pretty healthy. In the face of some pretty striking headline news.

One thing that I've foundishesting is that big tech has continued to lead the rally. And I'm looking at the NASDAC, which is just off a record high and has continued to climb to about the year, out performing the other indiceason. I'm just wondering, you know, given some of the concerns around Facebook, given the incredible amount of debt that Netflix is incurring to finance the entire business model, I mean, do you think that this has gone too far? Do

you think that this is just the beginning? Well, that's a good question. I uh throde a piece a little bit called dot com deja vu uh here late last week. Uh. There's certainly some you know, evidence that the movement of tech stocks relatively overall market is is a little bit uh like dot com here in the late ninety nines. Over the last five years UM, for example, UH, technology stocks within the SP five hundred of outperformed UM the overall market by more than two to one UM at

the x Tech SMP five. If you look at the last two or three years, tech stocks have outperformed the x Tech SMP five hundred more by more than three to one, and the last year UH text docs ab outperformed the S and B X tech by more than four to one. Uh and even year to date roughly tech stocks are up around the FO and X tech is roughly flat. So UM there's a quite a dominance here of of tech stocks being the only game in town that's leading. Much like the five years the let

up to two thousand. On a relative basis, Lisa S and P five x technology to the overall SP has fallen about half as much on a relative basis in the last five years than it did during the dot com So you could argue on a performance basis that we've been experiencing almost a half a dot com type of environment. I do think it's uh, it's a warning sign of of concentration in a in a few popular names, that all the flows are going into UM and ignoring some of the potential risk that come with that. But

who knows how long that can continue. We we've you could see that in and it continued to go on as well. But I do think it's a growing risk. Well, can we just dig in a little bit as to how that risk could play out? Is the risk that There could be, say, a big regulatory push with Facebook and all of a sudden that brings down the entire market just because they've become so dominant. Or is it you know, the whole uh smartphone supercycle and then to

decline there? I mean that the kind of kind of thing that could trigger this or would it be sort of more wholesale Well, um, there could be a number of things. I think what the risk suggests is just the vulnerability is increasing, and if it increases enough, oftentimes it could be any one of a number of different catalysts, each of each of which individually might not even be that important. But if you've got a vulnerable enough market, it could be the straw that breaks the camel's back.

It could be something, as you say, direct, some new is item directly related to the technology space itself. I have noted earlier this year that there's a big difference if you took the Fang plus index New York stage fang plus index has about ten of those stocks most popular, and you divide them up to those that are regulated

versus those that they're not. And I don't mean they are regulated, but that those that rely more on social uh reselling customer information for advertising purposes versus those of selling actual product. Um, you already see quite a divergence. The non regulated quote unquote are doing far better than the regulated fangs, so the markets already discounting that risk.

If there was something official that came out, that certainly could be a tipping point for tech leadership, but it might also just happen because the tenure yield reaches a point that starts to scare people, or inflation picks up, and since everyone's in those areas, if if they do start to sell, they're going to see the most selling pressure as well. Just before I let you go, what

is the highest conviction trade you have right now? You know? Uh, Lisa, I would I would add a little cash and maybe a commod of the E T f uh in my equity portfolio that stay in equities, but I'd sort of change up how I'm writing them. Maybe have a little cash if we do hit an air pocket, you can go back in. And I like the commod of the E T f UH. Commodities I think are going to continue to go up. So those would be two things

I throw out as a possibility. Not have everything in in in the current momentum of technology right now, and just real quick, what would you sell in order to raise more cash and invest I'd sell some of those popular tech names right now. I pat myself in the back for owning them. Well happen and shure that I made a great decision and I give some of that away to somebody that wants them real bad right now. And Paulson, thank you so much for being with us.

Always a pleasure speaking with you. Jim Paulson is chief investment strategist at the louth Hole Group. Coming to us from Minneapolis, Minnesota, with its beautiful lakes. There's a lot of focus on where people are putting their money, on whether it is responsible UH. And our next guest wants to responsibly build UH. He builds homes offices using containers, the containers, shipping containers that are no longer being circulated. I want to welcome Paul Galavin, Chairman and chief executive

officer of SG Blocks. Paul, your company is fastenating. Can you just give us a rundown? What does it do so? S G Blocks is a premier provider of modular construction premised on the repurposing of shipping containers into internationally approved instruments of construction. The value proposition is a safer building in half the time at a better price. And so are they pretty? Though? There's they're pretty? I mean, do you have to keep the shape of the container? No,

there's design flexibility, there's cladding flexibility. You can go anywhere from a kind of a high end clad it finish with limestone or brown stone or hardy board, and all the way to celebrating the raw container as an urban look and feel, which a lot of millennials and developers and cities like. So what's the sort of value proposition from your perspective? Given the fact that I imagine there was a glut of containers at one point, the shipping industry took a pretty big hit. You know, how how

much were they discounted for you? Our pricing is arranged on a sort of permanent basis with a partner we've had since inception conglobal industries who have fifteen locations and manage the overwhelming domestic inventory. So pricing is not normally an issue for US. Even now with the tariffs and the increase in steel prices, etcetera. Know that we don't anticipate that being a problem for US. Conglobal has an

enormous inventory in the States already. Okay, so you don't think that that's going to increase the demand for UH for even used metal products, and no, we're not anticipating that at that moment. All right. Um, And you guys went public last year, right correct? About a year ago? About a year ago? And what was that experience like?

It was an extremely invigorating, enthusiastic, exhausting experience. The I p O itself was conducted over about twenty eight days and we met with well over a hundred good investors, qualified investors. And every time you speak with the investment community, you hopefully make them smarter, they hopefully make you smarter, and the dialogue can continue. So what did you learn? What's the number one thing that you thought was the

biggest a half moment for you? Um, the consistent experience from investors that they do not want to invest in small cap companies and then get diluted further down the road by other rounds of capital, which is why s G Blocks has a negative working capital. With our clients, we take deposits and complete on percentage of completion, so that while our backlog, which is enormous, is starting to

unfold into bigger increments of revenue. We don't need to raise money to finance those orders, and our company itself operates very efficiently. That's really interesting. I hadn't thought about that. I thought that there was so much interest in small caps right now because they've been outperforming, uh, that you know,

people wouldn't necessarily ask many questions. Well, for some investors, they looked at a company like ours with a market cap of about twenty million dollars, and we have i P and exclusive inventory and an enormous pipeline of opportunities, and for some people it looks like in a six trillion dollar vertical, how could things not grow exponentially? For other people, investors are on the sideline. They'd like to see some more of our backlog unfold into revenue and

some more of our pipeline into the backlog. We have in almost uncountable number of leads and inquiries on a daily basis from people from single containers two hundred containers trying to unlock the value of their real estate. And so we provide them with a cost efficient, time efficient, sustainable, better alternative than traditional construction. How much do you pay for each container? That varies between the age of use and condition. It can range from two thousand to for

a new one. Do you feel like when there are more containers on the market that represents something broader about the economy, Because I know people look at the shipping the dry bulk index for example, sort of you know, the harbinger of doom if it drops too much. And I'm just wondering, you know, if you shipping companies start to try to sell their containers, does that have a

similar kind of residence. No, it's a good strategy for the shipping companies to monetize assets that have been depreciated, in other words, when they don't need them anymore. Yeah, well, when the value of the net income isn't as valuable to them, and they could sell the commodity and see it repurposed in the economy and get a strike price for that. From our perspective, the containers are building up on our side of the pond because we're not manufacturing

what we need to. So at s G Blocks, we take that container, which is a symbol of our failed manufacturing sector, and we use that as a manufactured product and We use that for apartments and hotels and stores and offices. And at this time we're finishing up a school building in the heart of Los Angeles on Wilshire Boulevard, and we're working very hard to educate the investor base and the consuming base that construction doesn't have to be so slow and expensive. S G Blocks modular construction is

a better way to build. Paul Galvin, thank you so much for being with us. Paul Galvin, Chairman and chief executive of SG Blocks talking about taking shipping containers and making them into buildings and the US has become a major player in global oil markets, but there is a problem for the nation in its pursuit of dominance in the crew industry, and that is the infrastructure. UH is, let's say, behind the times when it comes to shipping

around moving around the oil within the United States. To join us and speak about this issue that's caused the gap between say Brent and w t I to gap out ten dollars or Brent in West Texas to eighteen dollars is Tyler Rosenlicht. He's Cod and Steers Senior vice president and portfolio manager of Midstream Energy that's focusing on MLPs and other energy portfolios as well as nick kotsoft Us. He is a senior vice president and portfolio manager of

Commodities Trading, Commodity Futures, etcetera. Tyler, I want to start with you and just talk a little bit about the problem that has caused this divergence between the Brent price on one hand and w t I on the other. Why is this such a problem right now? Yeah, So, you know, one of the things that I think the market has been surprised by is how robust and quickly

North American energy production has grown. And when you think about the disconnect between getting it to market, having pipelines and other infrastructure you need actually get it to where it needs to go, versus the production profile. You can have these periods in time where you know, maybe it's coming out of the ground at a really fast rate, but you can't actually fit it on a pipeline, so you need to move it by rail or by truck or by some other means. That's going to be a

lot more expensive. So what we're seeing today, you know, particularly all the way out in West Texas, is a lot of energy production, but we don't have the pipeline infrastructure that you need to actually move it to Cushing or to the Gulf coast, and so what you see is truckers coming in and actually moving that oil by truck, and that's a much more expensive way to transport energy commodities. Um. You know, our view is it's gonna persist for a

little while. You know, it takes a while for these new pipeline projects to actually be completed, and there's a few that we think will stage in sort of second half of nineteen early two thousand twenty, So expect to see these wide differentials for a while. But midstream businesses do have a good history of building infrastructure when these sort of arbitrage opportunities exist, and there's a lot of

projects being worked on. You know, Nick, I'm struck by the concept that people are talking about building again in the oil patch right now as oil prices surge this year, not today but just generally over the past few months. But two years ago, three years ago, it was a very different setting. Me. How much do these product projects to create the pipeline's hinge on just the price of oil? I think, Um, there is certainly part of it does rely on the on the on the price of oil.

But given the long lee times that you have for these infrastructure projects, it's important to you know, be able to plan multiple years out into the future. Um So, I think when whether it's an e MP company producing new projects or pipeline company building new pipe, you take maybe a three to five year view, and that view of the long term price is going to be somewhat lower than where current oil prices are now. So you'll say we're gonna base our investments on fifty to fifty

five dollar oil. Where oil now you know it's trading well, I mean, I guess that. Another way to ask this is does the volatility, particularly the volatility that we've seen over the past three years of oil prices make it difficult to raise capital for these projects at economic levels? Yeah, So maybe I can start with that because I think you might ask why do we have the wide differentials today? You know, why didn't we just build the pipelines a few years ago when we saw a line of sight

into the Permian production increasing? And I think one of the issues was oil volatility was really high. And when you think about building a new pipeline project, most midstream businesses aren't going to pursue that unless they get long term contracts that sort of fix at least a minimal acceptable return. And we expected some of these projects to be announced last year, even in two thousands sixteen, and

they weren't. And part of that was because a lot of E m P s were concerned oils really volatile. How can they have confidence in the next five or six years sufficient to underpin say a ten year takeaway agreement with a midstream company. So I think volatility and the commodity price does really do a lot when you think about capital budgets and building infrastructure and green lighting

new products and wells and that sort of thing. And even if we did go back only a couple of years ago, there was some level of of underestimating the amount of US supply. So you know, these companies, easy and P companies became a lot more efficient. We're using improvements and technology to increase the amount of supply coming out of the US, only to find ourselves in the situation where now where there's not enough pipe to get it to the to the refiner or to the international markets.

So I'm really glad you guys are here today. Earlier this morning, bloom Brooke News reported that black Rock is trying to get further invested in liquefied natural gas projects,

in particular pipelines. Um. And this is interesting on a number of different levels, but it sort of represents to me the trillions of dollars that have been raised for interest infrastructure funds around the world, and you know, the question of where they're going to put it, and I'm wondering, you know, have you uh Tyler has seen a real increase just an the amount of money and interest in investing in some of these projects today versus say, three

years ago. Absolutely, I think a few years ago, um, you're sort of staring into the abyss of a down cycle and energy and midstream energy, and these businesses traded at fairly high multiples. So on the publicly listed side, you've seen multiples contract a lot, and typically private equity was a capital source but wasn't really driving the ship.

But that's really changed. So since kind of early two thousands seventeen and in accelerating over the last six months, we've seen a lot of private equity investors be at the big infrastructure funds or some of the more niche energy infrastructure businesses actually step in and either provide capital

to publicly traded partnerships or acquired discrete assets, or build themselves. Um. They're actually paying very high multiples to get access to these businesses and to these assets, which, um, when you think about it, there's a huge incentive for private to deploy their money. They've got a very low cost of capital, much lower than the many publicly traded MLPs today. These are commercial businesses that can grow, that can typically pass

things like inflation onto their customers. And so when you think about sitting on this war chest of a trillion dollars or whatever for infrastructure, you know, we think this is a really attractive place for for that capital to be spent. You know, I'm struck nick by the idea that multiples are high. Basically they're buying expensive companies are investing. Uh, They're they're making expensive bets. Right now, I'm wondering what is the sort of price of oil that a lot

of these projects hinge on to be profitable. I think most planning is probably done in the fifty to fifty five dollar range. And I say that because if you were to look at where companies are now hedging the price of oil, A majority of the hedges are being put on at around fifties to fifty five. As long as companies are getting an economic return, you know, that's really the balancing point for for crew prices right now.

And it's interesting to note that when we talk about these differentials, that's actually what a lot of EMPs, for instance, are are getting at the at their sort of local pricing points today. So, yeah, Brent might be at seventy five, but if there's an eighteen dollar differential between Midland and the Gulf Coast, um, someone that's actually producing energy in

West Texas only going to get fifty seven dollars. And so I think it's important to note that, you know, just because that's what you sort of see as the headline price. Um, there's a lower price being received in these businesses are economic. Thank you so much for being with me a really important topic. Conan Steers Tyler rosen Licht. He's senior vice president and portfolio manager of Midstream Energy and Conan Steers. Nick Kutsoftis he is senior vice president

and portfolio manager looking at the commodity space. Thanks for listening to the Bloomberg P and L Podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Video