Markets, Melvin Capital, And Satellites (Podcast)

at Bloomberg dot com slash podcast. Well, the earnings we've gotten so far this week from the big retailers have really put pressure on the broader equity markets, really bringing to the four inflation and what it means for consumers and consumers spending. Um, It's raising questions about stagflation, about recession, and then question for a lot of folks is how do equities perform in that type of environment. Let's bring in our favorite strategist, Gina Martin Adams, chief equity strategists

for Bloomberg Intelligence. Gina, would you take away from the earnings this week we saw from the retailers, more importantly, the markets response to those earnings. Yeah, first of all, thanks for calling me your favorite strategist. All that absolutely

through today. Nonetheless, you know what have we learned as a lot of more of the same, except for the market is finally paying attention, and I think the market is finally paying attention because the companies have gotten to the point where the margin pressures are so severe they have a really hard time forecasting where things are headed into the second quarter, and they took down expectations materially.

So more of the same was really We know that this group has been contending with increasing amounts of margin pressure, but it's just been broadening and deepening over the course of the last several quarters. It just got a lot worse in the first quarter and is now anticipated to continue to get worse in the second quarter every other season. And you know, they may have missed expectations that generally guided us to anticipate things to get maybe slightly better,

and that's the big difference this time around. So we did see a massive capitulation moment on the retail trade over the course of just twenty four maybe closer to eight hours, considering it kind of started with Walmart two

days ago. You know, I think the other thing that you take away from this is um the market clearly had of been and anticipating that there were areas to hide yesterday, and some of those areas to hide were in the more defensive quote unquote defensive sectors like consumer staples, and then finally realized as of yesterday, that's not necessarily a great place to hide when really, uh, when inflation and inventory cycle or your predominant drivers of weakness in

the earning stream. Gina, you've done so much smart work on margins, and they always like to ask you about margins every time you come on. UM, so you're probably getting tired of this, but so we are no creed. I never get tired of talking about markins. This is my personal obsession and has been for more than a year or so. I'm so glad you did. Because Andrea Felst dead one of our Bloomberg opinion writers. She covers

consumer goods. Um. She wrote this really interesting column last night about Target and Walmart being victims of their own success and that they've essentially secured their supply chain so well and they were able to pass on the cost of the consumers. But just any sign of weakness, the stocks really got punished, but essentially it made them victims of their own success. So I have to ask you here, where does the margin conversation even fall? Because a drop

and Target just seems extreme. Yeah, it does, except I think investors have been hanging onto this, right, so I would agree it does seem extreme relative to the size of the revision. Um. That said, remember how much these stocks were areas of strength for much of the last two years, right, And I think that that perspective is really important to just consider. Is these were pandemic place.

We knew that consumers weren't going to go out to restaurants, maybe weren't going to fly as much, weren't going to travel and you know, uh, stay at hotels. But but we also knew that they would still buy their everyday items at Target and Walmart, probably even start to buy more durable goods items because they could have those items

delivered to their homes as they were staying home. And the result is that this group developed quite a bit of premium and concentration and holdings, and that's been unwind largely over the course of the last um couple of days. It had started to unwind over the last year or so, but we really saw that unwind over the last couple of days. We're close now to seeing these stocks trade

in line with the overall index. When you go about all the way back to the beginning of the pandemic to date, so hopefully we've seen a lot of the unwind occur. Now the question going forward is, Okay, how do they perform relative to the rest of the market. Well, the reality is these are goods oriented companies. Goods oriented companies at this stage in the cycle are most likely going to underperform because they're more sensitive to interest rates.

They had their time to shine, and now we probably need to move on to more services. Are into companies in the consumer space to lead, and that certainly is reflected in a lot of our work. Margins are one of the triggers that we follow really closely to watch that rotation interest rate through the other trigger typically, Gina, just quickly, here, um valuation, where is this market? I know you're in your team do a lot of work on valuation for those that are looking to say, at

least I've got an attractive valuation for this market. Are we there yet? We're getting really close, and I think for the majority of stocks in the market are now trading it relatively attractive valuations. We still are deflating. Uh. You know, a couple of pandemic related bubbles in tech and some of the consumer names certainly, which is going to in our view way on the market. But if you look at an equalated S and P five and you kind of, you know, get rid of a lot

of that market cap, uh, concentrated risk. You're looking at a market that's trading under fifteen times forward earnings, and we think the market to accurately price where the bond market is right now should be trading somewhere between fourteen and fourteen and a half times. So you're getting really close, um, you know, within certainly within a stone's thrill of what

we would say are are pretty fair value valuations. All right, Gina, thank you so much for taking a time, really appreciate getting your thoughts, particularly as we, you know, continue to deal with this selloff in this market so far in two looking for perspective. Gina Martin Adam's chief equity strategist for Bloomberg Intelligence. She's been doing us a long time. She was a chief strategist there at Wells farg A for a while before we lured her over to Bloomberg

Intelligence some number of years ago. Right now, let's go to Schnali Basset. She covers all things Wall Street for Bloomberg News. She joins us here in on our Bloomberg Interactive Brokers Studio and SI big story out today. I think you know one of the big stories on global Wall Street is it's tough in the hedge fund business. They have not escaped the carners that we've seen in the credit markets, in the equity markets, and big name is closing stores. Tell us the story. Yeah, so this

is really a holdover from the game stop era. If you all remember the short squeeze that we saw early last year that really hurt Gabe Plotkins Melvin Capital, remember that fifty decline. He recovered from a little bit last year, still ending the year lower, but not as low as it could have been, and there were a lot of big names that came to his rescue, think Ken Griffin,

Steve Cullen and others we have heard as well. But this year the sell off really accelerated and in the first four months of the year, his hedge fund lost twenty three percent. Bloomberg's ham A Palmer broke last night that he wrote a letter to investors saying that he would be returning money to investors they would soon be stopping management fees and you are seeing an unwind of his positions. So what happens next? Does he does he have further ambitions? What do you do when your hedge

fund closes? That's been a big question lately. You know, he wrote the letter last night, so it's too soon to say what he's gonna do next. But a lot of hedgeman managers see a second act, you know, one very prominent one that we talked about a lot given the crypto excitement. I guess as Mike novograts, everyone remembers he had to shut his macro fund. Uh. Steve Cohen saw second act himself. A lot of people do see

second acts in the money management industries. Some people go around family offices, some people just decided to do something else at large. But remember, he did have a great track record before the last two years. He had a very good track record actually, and so his investors who have stuck with him despite you know, some concerns about his restructuring plans, do believe that he has done a

great job prior to this route. Is it should we be expecting other situations like this where some hedge funds shut down, because boy, it was just been a brutal, brutal start to the year, and maybe they don't see any opportunity to get above that high watermark and start generating those performance returns. I think that's such an important question because it's not just the carnage or see in the public stock market. You're also seeing a few other headwinds.

Private market valuations are starting to get hurt as well. Tiger Global is a ten pound gorilla in that room. Remember they were really a force in Silicon Valley. They put the biggest venture capital firms on notice. They have really had a lot of pain in their public market portfolio this year, and they you know, do they see more pain in that private market portfolio as well? Um do other people close their doors? Big question the cost of leverages going up. You can't just easily borrow money

to to put on easy trades. And honestly, hedge fund leverage has been at record levels as well as retail leverage, and that unwind is going to be showing in the stock market more so, really a gain here to mitigate losses this year, to keep your doors open longer. I'm a loudly you mentioned Tiger Capital for audience for our worldwide audience, I should say this is a hedge fund and the Tiger Cubs, of course, that are known for their tech investments, and that's why you've seen extra extra

pain in some of those companies. Very quickly, Shannali, I have to ask about the retail story. We talked. That's how we started this conversation. Does the retail bid come back very quickly? It's so interesting because you see f t X getting into stock trading and there's still excitement around it, and you know, influencers are talking about it. But the question is can they get in as much as they were before. It's not creating that additional bit

in the market, and you're seeing that very plainly. All right, we appreciate it. Shannale Bassett covers All Things Wall Street, got the Wall Street beat down for Bloomberg News talking about Melvin Capital shutting down, winding down, and you know it's a big, big fund. It was it about eight billion dollars um and so a big issue. Mr Plotkin a former player at Stevie Cohen's firm as well. So interesting the note there. I'm gonna get right to our

next guest, David Coudla. No stranger here, he's a founder, CEO and c i O of Main State Capital Management. David, thanks for taking a few minutes here. You know, we've been kind of frame mean, the investment environment is kind of no place to hide unless you happen to be in commodities, I mean fixed and come down double digits total return SMP near bear market levels. How are you as you step away and maybe you know, communicate with

your clients? What's your message these days? Good morning, Paul. Yeah, we uh, we just did a webinar for our clients this week and talked exactly about that. And we're at Mainstake Capital Management. We're taxo asset allocators. So uh, an environment like this is where we can um actually allocate among alternative strategies, allocate among commodities, actually short bonds versus

being long bonds. If we look at a typical portfolio this year, uh, if that's in or the plastic classic portfolio, if that's in the SMP five, in the NASDAC composite, in the US Aggregate Bond Index, that portfolio is down. Through active management. Going to these other areas, you can be down a lot less this year, a lot less this year. We're looking at SMP fire down well now only two tents of one percent. It was done as

much as one and a half percent earlier. What do you make of this kind of volatility, Well, there's so much fear of where inflation goes from here in the coming months and how the Fed responds to that. The you know, we we have you know, we've seen the year of year inflation come down a bit in the last read, but we don't know if peak inflation is

behind us. Uh, there's other external factors. But it's just a concern that the Fed will continue and and jpal said that right, he said that, Uh, they will do what it takes. Uh, the inverse of what Mario Drow said back in two thousand and twelve in terms of moving the other way and easy monetary policy. Ja Pale said he's going to tighten as far as he needs to to bring inflation down. And that's just put a

lot of fear, anxiety, indigestion into the markets. And so we're seeing this extreme volatility day to day on the upside and the downside. What we saw on what we saw yesterday, what we saw in May five on the downside, extreme days. So David give us a sense of valuation. Here, a lot of folks as they try to and I think foolishly, try to catch the you know, call the bottom of the market. They might look at maybe evaluation as a metric here is this market get attractive from

evaluation perspective? Or historically does your data show there's more to go? Um. Evaluation has never been a good measure, either on the upside of the downside. Uh. You know, typically what happens, and I like to say it is there's some maybe an external effect at an external event or something that starts to selling or something that starts to buying, and people look around and say, boy, look at valuation. Stocks are very attractive, and the buying begets

more buying. Or when valuations are high, investors look around and say, well, look how high valuations are, and the selling begets selling. But you know, one thing we know for sure is is when rates are very low, as they have been for the past decade, we can support a higher valuation. Now rates are going higher and it's going to be harder to support those valuations. Uh, we've had, Tina, there is no alternative. Bond yields are up now and

actually getting more attractive um. So so you know, we'll have an environment where we won't be able to or we probably won't be able to support the valuations that that we've had over these past years. So evaluations aren't the roadmap that perhaps other investors think it is. What do you look at margins. It's right now, right now, Critty, It's all about inflation. Right now. It is all about inflation. That was a message to our clients in our webinars

this week. It's all about inflation. Uh. We you know, we saw what the retailers did to the markets, and that's a function of how inflation is impacting their bottom line. But as far as the macro impact on the markets, it's it's about, um does inflation come to? How much does inflation come down on zone? The thought was durable goods inflation would would be coming down already as the labor force and the supply chains. Heell, we're yet to see a lot of that. We're seeing a little bit

of it. You know, if you look at some of the data, um, you know, if this continues, we saw housing starts uh lower than expected. Existing home sales are off um. In fact, existing home sales the lowest level in two years because mortgage rates have climbed so high. We're off a little bit this week, but still up

around five and a half percent. Jobless claims higher than expected, so we're seeing a little bit of this come through, but it's it's really about where we go with inflation and can the FED back off on this aggressive monetary tightening schedule that they've they've has been suggested ahead of us. All right, David, good stuff. We always appreciate getting your perspective.

David could founder CEO and CEO of Mainstay Capital Management and also notably he's a founder and sponsor of Engage, world's largest student stock pitch competition end conference that's hosted at the University of Michigan. So that's really a good opportunity for students to get a sense of what it's like to invest in these markets. And UH, David's a

big supporter that appreciate that. I want to switch gears here, but it's kind of in line with what we just heard from President Biden welcoming the leaders of Finland and Sweden as they UH. Europe continues to deal with the war in Ukraine. Peter Plats or Sea of Spire spires a space the cloud analytics company that owns and operates the largest multipurpose constellation of satellite Peter, thanks so much

for joining us here. I wonder if you could give us a sense of your company, what it does and and kind of how perhaps your customers are using satellites as they think about navigating around the ground war in the Ukraine. Absolutely, there are two elements respired data and analytics is helping customers. You know. One element is understanding the global supply chain, you know, where are products going? Uh,

looking at how that has changed. You know, we've seen quite a bit of change in the in the Russian oil has been going, especially as as pipelines, consumption you know, might be decreased. You know, we see tankers going, you know, more to with Asia than to us in the traditional country that it has been going. We also have a good insight for our customers that are concerned with food supplies and countries. You know, Ukraine has been has been a bretty big supplier off of grains and other food

elements and we've seen that decreased dramatically. And the second element where our data is relevant is an understanding you know, radio frequency emissions like GPS jamming on the ground and helping national and international security efforts. International security efforts Russia and Ukraine aren't the only tensions. Russia and China also uh and evolving relationship I think is the best way to put it. Is Spires Intelligence able to offer any

insights there to the extent that I can talk about it. Yes, you know, the power off of satellite constellation is that it provides an objective, neutral and correct few from the ultimate highest vantage points space. Uh SPIRE owns and operates one of the largest constellations, the fourth largest on the planet.

We on and operate the largest commercial r f G A location constellation with forty satellites UM and as such we do cover all of the regions you mentioned and indeed the rest of the globe about a hundred times a day, and that gives us a very objective few with data and analytics that can help support activities and

understanding of what is happening, including access denied areas. Is there any evidence that you're seeing from your satellite imagery that Western ships are are maybe not visiting Russian ports that you know some of these uh I guess sanctions are in fact happening on the ground on the high seas. Absolutely, Um, there is absolutely you know, recently we looked at the data. There are no U. S flag ship so in any

of the Russian ports for example. So yes, we do exactly see the impact of that, and even more so, we can detect and identify and alert where certain ships or certain flag carriers might be trying to circumvent certain sanctions, circumvent certain sanctions. I mean, this is probably we were talking about how the schemes are like Cold War esque almost it definitely feels feels cold War asked, So I have to ask is salite technology actually effective in the

fog of war? That is the power of the type of technology that we are using, which is radio frequency based, because radio frequencies to the sorry to play the pun, you know, goes right through fog. Um. It is independent of sunlight, it is independent of the weather, and it listens to what is happening. Um. I come from Vienna.

So just as in the Cold War you had to listen for footsteps around the corners of the of the hot streets of Vienna, um our satellites are capable of picking up information even when there is no sunlight and bad weather stuff, really fascinating stuff. Peter, really appreciate you taking the time. Peter Platzer, CEO of Spire. It's a publicly traded company on the New York Stock Exchange sp i R. Thanks for listening to the Bloomberg Markets podcast.

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