Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside my co host Matt Miller.
Every business day we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moven news.
Find the Bloomberg Markets Podcast on Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. You know, the market's got a little dicey here in the last five six weeks here, people get starting to build up a little bit of a wall. We'll warr as it relates to that higher for longer type thing. And then if that's not enough, then you've got a government that might be on the verge of dysfunction. You don't have a speaker on the verge of yeah, yeah,
we have a dysfunctional government. We have a dispatch on Let's just go there, Let's see how the pros are kind of putting it all together. Phil Taves joins, the CEO of Tave's Asset Management. Phil, I mean, how do you put this situation that we've got down in Washington with the House of Representatives, How does that kind of weave into your investment outlook here?
Well, we've already gone defensive over the last three weeks, we've made into a fully, fully defensive posture. What you guys, well, you may remember that we actually can move fully out of equities onto the sidelines and T builds. So that for eighty five percent of our roughly a billion dollars is in T bills, but what's not a lot of it has full notional value of put hedging. So that
means defensive, not just like defensive stocks. But here's what I find so interesting is that, you know, if you look at what happened with the debt ceiling negotiations and then the recent budget impass, is that the market has tended to just ignore it. Right, So we were shocked at the debt ceiling negotiations that markets weren't freaking out. We were, but the markets weren't. And I here's the way I think it looks. I think that you know, again, it's sort of a I was expecting, Wow, did disarray
in the house. Markets are going to open very negative this morning. Obviously that didn't happen. And I think the way this looks in terms of a government dysfunction is that we have more that same thing until until and if we reach a point where the dysfunction really is full on and plays into the fact that, wow, we're just going to have the government be closed for you know, uh, maybe ten days, maybe thirty five days like we've have
in the last twenty years, or maybe longer. And then I think, then I think, potentially you'll have some real market movement, just as we did when you know, they were trying to negotiate the debt ceiling under Obama and the leaders agreed to something and all of a sudden, the legislature said, no, we're not going to do that. So I think, yeah, the market is just going to be sanguine about this until it's obvious that things are just so broken that it's going to be very bad scene for markets.
So let's talk about holding treasuries here. How painful is it if you know, the two year goes from five to eleven to five twenty or five thirty, like, if these rates keep on rising And I will admit I didn't think they could go any higher last week or maybe even two weeks ago, but it seems like they continue to do that, not today, But you know, how how rough is it if you're holding two years and they move up twenty basis points.
Yeah, so I think you need zero duration basically as close close as zero as you can get. So across our platform, we're just in one to three month, right, so you really want to be on the very very short end of the curve. There's no you know, the worst trade ever I was, you know, I was talking to a massively big advisor about two months ago and he said, I think it's time to go really long duration, and I said, maybe you should wait on that. Well,
that was a really bad trade. So you need to be in T bills at this moment because the breakout is really the most important thing that's happened obviously over the over the last thirty days. And you know, I think it's just the fact that you have this relentless advancing yields that that keeps bringing the markets lower. Now we have a little bit of a reprieve today on the ten uere you know, thank goodness for that. But there's you know, if we could be at five percent,
I think it'll be interesting to see though. So if we reach five and then we pause, I mean, if we can just stop increasing and stop the breakout, it'll be interesting to see if markets can sort of regain their their stability here. But as long as we're moving higher, no, not two years, not five years, not ten years, good Heaven's not like twenty years bring it into one to three months in our opinion.
Although TLT has seen massive inflows. Right, that's a ETF with twenty years plus. Like everyone's been going out the curve. Everyone's been buying these elong duration bonds as we get higher and higher on the on the yield, and you expect, like if you buy the thirty year right now, you're getting four point nine percent, So you know, as long as you're holding it to maturity, that seems like a good trade. Right.
But yeah, right, so like hold that hold that thirty year two maturity, that would be a that would be a great plan.
Well look, well I wonder I mean if it turns around now, if this is the peak, But what do you think the peak is?
I just I just don't know. But I don't think you know, you know, you've got the acronym BFF. I don't think you want the long gone to be your I think you went the short term, very short term to be or BFT, which is your best friend temporarily right, and and you just you just can't work against a trend like we see happening right now. You know, look at look at the stock market for the last three years, inexplicable. All of the moves have been inexplicable, like the advance
this year, the advance during the pandemic. You know, So it's just not possible to call the market. So why would you make that trade? Why would you make that trade until until a trend comes along where you've got an opportunity. And look, so in terms of the long gone what we're you know, salivating at the possibility about
because we're defensive now and we're in t bills. But if the trend changes and all of a sudden things fall off a cliff in terms of stock market, things look very bad and you actually see a change in direction of yields, there are going to be that's an amazing opportunity, and not just long bonds, but in just even conventional bonds like aggregate bonds. So we're waiting for that, but it's not right now, and I don't think you make the trade at this moment.
Do you have to wait for the FED? Actually the signal rate cuts are coming.
No, I think what you do is you watch the trend of yields and you watch the trend of just the price of these of these bonds. That's what we do. So we just really ignore everything else and so that you know, typically what you see is the market. You know, this bond market will about a month before you see any FED movement or you hit actual peak rates, you start to see a change in direction of those bonds. So watch the price of these bonds more than anything else.
So in terms of you know, I guess you got to wait until you see the whites of its eyes.
Right.
That's been the same thing with any government shutdowns. If you think that's going.
To be horrible for markets, well it doesn't seem to be until things go overboard.
Is that?
Do you feel the same way about the broader you know, government debt picture, because right now, you know, thirty three trillion and counting, we know entitlements like won't be funded for probably more than another decade. Does that not matter to markets until we get to you know, pass the deadline.
Yeah, So that's the most important thing that we think is going on in the markets. I'm here in Austin, Texas, you're getting ready to fly out back to New York. And yesterday I spoke again at a broker dealer conference, and I talked about the hidden implications of global debt. So you've got this situation where the lender of last resort right always saves the day, and so over and over again we go through these market crises and then
and then the FED comes in. Well, we all know the FED over the short term isn't going to come in and save the markets. But I think what you have to ask a question about is is if you actually tip into a recession, if it's a hard landing, then you've got the potential for decreased GDP at a time when death of GDP is already high, the possibility for increased need for fiscal stimulus, which gets you to the point where all of a sudden, this all maybe
looks unsustainable. And so the giant wave that we are ignoring right now that could be upon us at some point is the fact that you know, just as we saw in the UK last year, that was the most most I think like poignant data point to look at when treasuries collapsed last year, when when all they did, guys is they they they passed a bill that decreased taxes and increased spending. So who cares about that, right
normally in the US. But but you know, it start to you know, if you ever have a situation where
you've got to start to have soft auctions or treasuries. Now, I know it sounds like conspiracy, crazy stuff, but really it's just you're kind of not there and then you all of a sudden are But if you get to the point where instead of one hundred percent or GDP or one and ten hundred and twenty hundred and thirty, that's the big questions like what do you do with this lender of last result resort all of a sudden not being an effective tool anymore. That no one really
talks about that, No one thinks about that. But that's if you look out five or ten years from now, I think we'll look back and say, wow, what were we thinking of We were.
Already you know.
That's this is dwarfs the mortgage crisis dwarfs it.
Hey, yeah, yeah, on that note, Okay, there you go, leave you right there, Phil Taves, thanks so much for joining us. As always, Phil Tave's CEO, Tave's Asset management eighty five percent of their portfolio in T bills T bills, not even eaten like notes or T bonds T bills, so ultimate short term there, that is a cautious portfolio. That's almost like a doomsday portfolio. But I appreciate getting his thoughts as well.
You're listening to the team Ken's are Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot com, the iHeartRadio app and the Bloomberg Business app, or listen on demand wherever you get your podcasts.
Jamie Patten joins us, she's some TCW. They know what they're doing over there when it comes to the markets. Uh, Jamie, the last time we talked, we were talking about or maybe the discussion of the market a place with soft landing, hard landing, no landing. But boy, you took it another step forward with your aviation knowledge. Where are we now? Do you think as we kind of feel a little bit more comfortable with higher for longer, I guess, and we our.
Views are unchanged, so we understand how the markets have been willing to give into this no landing view. And just as a reminder, I think it's a really terrible analogy because it defies the laws of physics airplanes run out of gas.
I'll keep saying that until people stop using the analogy. But this kind of things are different this time.
It speaks to the underlying optimism that higher rates will simply just be absorbed without any effort. Things are different. The economy is no longer leverage, is no longer rate sensitive, and at TCW we completely disagree with that. We understand that it's exasperating to wait for the proverbial shoe to drop. Market participants are tired, they're impatient. It's been almost nineteen months since the fed's first rate hike. Nothing has gone
around yet, but we still think it's early. It's only not even nineteen months from the fed's first rate hike, and of the prior thirteen hiking cycles, only one has turned into recession less than nineteen months after the start of a hiking cycle, so a recession today would still be early. We're still relatively early in the cycle. Even though we're approaching the end of the FED hiking cycle,
we're still relatively early in the economic cycle. And we talked about it last time, but we still have the view that lags between the fed's interest rate hikes and the impact of the economy are longer now for many reasons. So while nineteen months is early historically, we think it's even earlier from the perspective of lags are longer.
Yeah, Jamie, with all that in mind, where are you guys putting money to work? Then, just given if you're kind of taking that point of view, that it's still early in the cycle.
So at TCW, we really like duration longs. We've been adding to them. We don't claim to know exactly when the top or the bottom of the yield range is going to hit. So we dollar cost average in and we like them the last time we talked, we like them even more now, so we've been adding to our long positions. We also think that the curve will be steeper.
Monetary policy will continue to be the big driver for rates in the economy, especially at this point towards the end of the FED high type the FED hike cycle, the FED is likely to overtighten. That gives us even more confidence in our long duration positions. If you want to keep going with the flying analogies that can give you one comparing the economy today, and it gives us
more confidence in our long duration position. But the National Transportation Safety Board always writes these crash reports after every airplane flying accident. And as a side note, and I promise I'll connect this to the markets and the second books amazing. They read like a novel, So JFK. Junior's infamous flight crash into the Atlantic Ocean. The NTSB report
starts twenty years prior to the crash. It talks about when he got his license, he had a broken ankle from a hang gliding accident, why he left for the airport late, the traffic he got stuck in, he didn't get a weather briefing. The point is that the accidents aren't caused by just one thing, and it's a confluence of everything combined, one thing you can recover from. So when we look at the markets today, it's beginning to
read just like a crash report. If you were going to write an NTSP crash report about today's economy, it would probably start back in the nineteen seventies when Arthur Burns reverse course on.
Rate hikes too early.
That resulted in this conventional wisdom that cas Burns is not wise or strong enough to keep rates as high as they needed to be. Then Vulgar is glorified for having the courage to relentlessly keep rate hikes.
And then you have paul A.
Powell, four decades later, carrying around the Vulgar Memoirs talking about how that's a great lesson it should be required reading. Combine that with a global pandemic, fiscal policies arguably helicopter money, a surging deficit, increased treasury supply. So now you have global central banks raising rates in the front end in uniform almost across the whole world. Meanwhile, you have longer
rates going high for all the aforementioned reasons. All of a sudden, you're like, you know, oh, don't forget about a leadership vacuum in the house, raising the ads of a government shut down. So you can kind of see how these things are all coming together and creating a really hazardous environment for financial markets in the economy.
Jamie, you mentioned a potential government shutdown. It seems like the chatter is back about a potential downgrade on the back of that. Given right now, it seems like all signs indicate a shutdown in mid November. How are you positioning that and what are you thinking about in terms of a potential government shutdown and what would happen if we were to see the US get downgraded.
We think that's a very high possibility. We expect the government is much more likely to shut down now than it was before yesterday's events, and Moody's already came out on Monday and said they're considering it. Seems like it's more likely that they'll downgrade. US treasuries are a little bit strange in this aspect, where yields tend to go lower, not higher, when the treasury gets down great, so it's the opposite of a more of a credit risk asset,
where it's a flight to quality. In terms of the economic impact, we don't think that it will be We'll see a contraction with that quarter's GDP growth, but typically we get that back the following quarter, so we don't see it as as big of an economic impact as we do just more uncertainty, more spending. More markets just don't like this kind of like lack of organization, lack
of structure, lack of getting anything done, more spending. So on the margin, we think it's bad for risk, but from our long duration position perspective, we actually think on the margin it would be a positive for that.
So do you expect the FED next year to cut rates? And if so, when.
We do, the.
Fed's own forecast only has them cutting rates maybe two times next year. That's assuming this perfect soft, immaculate disinflation landing, and that's not necessarily our view. We think that they're going to have to cut harder and more than expected,
But the timing is relatively uncertain. Maybe at some point in the second half of twenty twenty four when we see this sort of financial accident or a bigger hit to growth, a bigger hit to risk assets because it comes in the form of more of a bigger accident, a bigger slow down in growth.
It's harder to.
Predict the exact timing, but we do think, I mean, even just if you take out everything else, just the fact that we have such higher, flatter inverted curves that in and out of itself is a negative impact for investment, consumption and employment, which just by itself can lead to this negative self reinforcing downturn. So they're kind of all
these aspects that are combining together. And we don't claim to predict the future, but we see all these reasons why the economy could take a turn, and yet another reason we like buying duration and being long bonds in this environment.
I'm looking at it soft right now that odds are slowly dropping about another hike. Do you think we could get another hike this year?
Our base cases probably we don't need it. It probably not, but we still think it's fifty to fifty. The FED told us that they're data dependent. The data between now and the end of the year could shift on the margin towards one more hike. The FED zone forecast is that they have one more hike, so we could definitely see it, although it's not our base case.
Jamie, you're a pilot in the Los Angeles area, Yes, how find an airspace and not get like run over by these jumbo jets coming into LAX.
You stay away from the LAX airspace, So there's actually a corridor through LAX that you can fly just visual flight rules as a private pilot, and you're kind of guaranteed to avoid all that.
But yeah, it's pretty busy.
And I would just also like to say, while we're talking about my personal life, that all of this, like Jamie knows all about hard landings, because she's a pilot.
It hasn't been great for my pilot brand.
So I want to emphasize that I know about this from reading things like NTSB crash reports. In my own pilot record is perfect. So just to put that out there.
Excellent. No, I know I need you've got this. You know you've got this hobby. You like to read these accent reports. But that's a great way to learn what not to do.
I guess yeah, in financial markets as well.
Very good, Jamie. Always great to talk with you. A lot of interesting stuff, a lot of fun along the way as well. And good luck with your flight instruction, I mean flight career.
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I'm looking at the Bloomberg Index browser.
I d go, well, I was just looking at that too.
Wow, great minds think to like, I mean, the only thing I'm looking at, you know, look at the bond market here. The indices here in Nexus.
Sorry is official Bloomberg style, I understand.
And the only one that's positive for the year is the high yield corporate Corporate high Yield index.
So I was looking and I saw so US treasure or treasuries in general, right, Ye, that index is down four point seven percent this year. And remember it was down seventeen and a half percent last year, and the year before that it was down six and a half percent. Yeah, so if your long treasuries into the pandemic, you got a thwacking.
Whacking that is a CFA level term. Let's see what the quants are doing out there about these markets here. Hugh Roberts joins US head of analytics at quant Insight. Hugh, what are your models telling you about these markets here? We had a huge move up and yield the call seems to be higher for longer. That's making the stocks kind of problematic out there? What are your models saying?
Yeah, so agree with the facking comment. Basically, all macro fundamentals, which can be distilled into three broad buckets, economic fundamentals, measures of financial conditions, measures of risk appetite, are doing a very good job of explaining most things at the moment across bonds, currencies, and equities, and the primary trend,
the kind of momentum of our models remains unchecked. So even though there's some kind of anecdotal stuff around in the last couple of days that maybe we're reaching a bit of a capitulation phase, if we look at our model value for treasury yields still pointing higher. If we look at our model for say dollar yen, even though
there's intervention risk around, still points to higher. If we look at our model for Nasdaq, it's had an amazing for what it's fallen twenty percent in the last month, courtesy of actually what you guys were just talking about, a mixture of rate vol which we use as a measure of qt QE expectations, and the moving credit spreads
that you guys just alluded to. So the basic messages is that the the tightening of financial conditions that has been engineered since that last FED meeting is just having a rolling effect, and for the time being, at least from a pure macro modeling perspective, we don't see any change, I'm afraid.
So my takeaway from all that is, you see yields going higher from here, I mean how much higher?
Well, so what we do if we because when modeling all these things in real time, we're kind of capturing macromnum. So there's two key outputs that we produce. One is word of macro conditions, say things should be right now, whether it's spoos, ten year yields, dollar in whatever. And then secondly we then compare that to where things are trading, so you can see if there's a valuation gap. Because obviously some asset classes lead, sometimes they lag. There's these
gaps that create short term tactical trading opportunities. So right now we have ten year yields and the model value is pointing higher, has been for several months, but is accelerating the good new yield did the compensation uses that the market is simply keeping track with the move in macro warranted fair value, so there is no valuation gap. Of note that they're kind of sitting on top of each other. Ten year yie olds are where they should be given the prevailing macro environment.
You when I look at this, when I look at the government, you know, when I look at the strikes, even when I look at basically consensus for a soft landing. I feel like this economy is going to creater.
Don't you want to hold to hold.
Treasuries, even longer duration treasuries if that's the case, if we go into a deep recession.
Yeah, I get that argument, But I guess that's why the balls have been loaded up on duration since the start of the year.
Now.
I know there's different surveys telling you different things, but you know, the Commitment of Traders report will tell you the asset managers have been long for that kind of recession call for the last nine months.
US.
The same report says hedge funds are short, but we know a big part of that is polluted by basis trades. Now, I know there are other surveys that will point the other way, so you can pick and choose your data on that. I guess the better answer to your question is is it's not obvious at this juncture that actually
treasuries are trading as a growth dynamic. It's not obvious that they're going to give you that recession hedge that actually what they're trading off is the sense that rates are going to be higher for longer that you know, we're kind of removing the two thousand and nine period on the new normals, reverting to the old PREGFC normal, that treasuries are focused on budget deficits, They're focused on shenanigans in Washington in terms of the ability of politicians
to stay on top of this stuff, and they're focused on the fact that the deficits with the supply needs that that implies is buffering up against QT rather than QE from the Fed, foreign central banks stepping back from buying, you know, just the normal sponsors of bond yields at these point, they can afford to step back and wait for better entry levels. So at some point what you say, I think will be spot on. I'm just not sure that this is that point. Q.
You said, we're probably not there. On capitulation. What do you look for as signs of potentially capitulations? Which markets do you look at? Which will we be looking for.
Now?
All markets? I think, you know, when you get to the kind of environment we're seeing at the moment, and then the old adage about you know something's going to break is very true. So you can then draw up a list of potential candidates. You know, probably top of a lot of people's lists will be commercial real estate. So you can draw up a watch list of you know, kind of ETFs like the Reach ETF or individual names like you know, the Vornadoes or the Boston properties, and
use those as your canaries in the coal mine. If CRE is going to go, what does that say about balance sheet? So let's keep kbre kre in Europe the SX seven E future. Keep that on your radar. There's some kind of nice proxies. I like to watch for private equity because there's a lot of theories that ten plus years of easy money have encouraged private equity to lever up, and that might be one potential kind of
swimmer who's left naked. To use the buffet to speak, there's something called business development companies and BDS is the ETF that you can track to follow those as a loose proxy for that side. There's lots you can watch, and I think that the main point that jal This is a very subjective. This is not the quant side of QI speaking at all. It's just me. But I would say for the last month plus what we've seen
has been pretty orderly. It's actually only been this week we're starting to see the first signs of capitulation, and I would cite Monday's price action in utilities that's smacked of capitulation to my mind, dollar yen and obviously what's happening on FX with potential intervention risk and then just look at some of the mat d's and the RSIs on TLT or the thirty year bond, so that there are straws in the wind yep.
You always great to talk with. You get your insights, a lot of great stuff as always. Hugh Roberts, he's head of analytics at quant Insight.
You're listening to the team Ken's are Live program Bloomberg Markets weekdays at ten am Eastern.
On Bloomberg dot Com, the.
iHeartRadio app and the Bloomberg Business app, or listen on demand wherever you get your podcasts.
So let's talk to somebody who does this for a living. Margie ptel Joins, a senior portfolio manager at Allspring Global Investments. Mark you put all the cross currents together out there. We've got an update in the market today, but you put all the cross currents out there, whether it's the interest rate environment, whether it's a political situation in Washington. You put it all together. How constructive are you guys on markets right here?
Well, I think the.
Market is going to have a strong finish to the end of the year after we get through this little seasonal weakness. I think people are just putting too much emphasis on interest rates as a determinant.
Of economic growth.
If interest rates go up, the economy has to go into recession, and that has simply been wrong for the last two year and three quarters.
I think you'll continue to be wrong. In an absolute sense.
Rate to store pretty low, especially compared to inflation, and companies are in good shape, so I think we're going to see a pretty decent growth in the third quarter reported and for the fourth quarter, So that's pretty good for stocks.
Why are you so optimistic, Margie when we have you know, rate sensitive companies that have led to charge These tech companies typically should not benefit from a rising rate environment. And as I mentioned to Paul earlier, you know, a lot of companies had expanding margins due to the inflation scenario, and now we're seeing that turnaround, hopefully, and we're starting already to see companies come out with margin pressure due to disinflation.
Well, I think that companies have fundamentally changed how they operate in the last say, five ten years or more, so that they have a much more flexible way of controlling their costs.
So I think, again, you are not going to see.
The sort of margin pressure we saw in the past that when inflation goes up, margins get squeezed and they lose margins when rates go down too. I think companies are going to maintain those margins. They've done that even with fluctuations and interest rates before. What's more important is are their revenues growing and can they control their costs so that they can maintain their profit margin?
And I think they will. I think they'll continue to do what they've been doing. And keep in.
Mind that companies are not over levered as a whole. Companies restructured the balance sheets when interest rates are near zero, so they really aren't sensitive to borrowing costs going up by short term rates going up. In fact, it's benefited in many companies because they have large amounts of cash balances on their books that they raise proactively, so they're actually benefiting a little bit from higher rates and those very low fixed costs that they used to borrow over the last decade.
So let's talk valuation here, Margie. I mean there's a couple of ways to look at it. I guess if you just look at the headline, pe multiple closes that twenty here, maybe nineteen ish, But if you back out some of those magnificent seven it looks a little bit better fifteen sixteen times. How do you guys think about valuation at this point, Well.
I think valuation is not an impediment to stocks going higher. I think the valuations are more or less within the average range. The average average is, of course pulled up because of a handful of growth stocks that have very very high pees price earnings ratios.
But for many many stocks that.
Have growth, their PE is really pretty competitive with their cash flow yield with short term treasury. So we think as long as earnings move ahead, we think companies can actually have higher stock crisis And who's to say we can't have an expansion in price serviance ratios if people feel a little bit more optimistic about economic growth.
How much of a competitive environment the rates offer here? I mean, when you see a ten year at four point nine percent, you know, how does that compete with the S and P yield?
Well, I don't think it's a lot of competition because the SMP yield is now about one point three, so that's not very high, but there are many stocks that have dividends above that and that are raising the dividends every year. And again, if you have capital appreciation as a company has rising revenues, I think that a five percent is really a pretty low hurdle for stocks to climb over and equal or do better.
How about on the fixed income side, We had a guest on earlier today, you know, at a big, big bond shop on the West Coast, saying you know, they're going out longer term duration. They are very bullish there. How do you think about kind of just fixed in the fixed income space.
Well, I think that if you look at say the average bond, I think that corporate bonds off offer more value than treasuries. In fact, if you look this year and last year, many people felt the best place to be was treasuries because they were safe, and actually investment grade bonds and high yield bonds, junk bonds outperformed treasury bonds.
They continue to do that this year.
So I think that to be longer duration and to be in the high yield space a lower quality space is going to continue to provide more return than treasuries.
All right, So on the equity side, here, are there some sectors that you guys like or are you more factors, whether it's you know, some of the factors investing that kind of you have liked.
The Magnificent magnificence.
I can't get this Magnificent seven And by the way, I think it's a horrible name. So well, yeah, it doesn't roll the Big seven. You know you've gone along though, So do you stick with that trade?
Well?
I think so.
As long as those names continue to have above average growth, they will continue to be boarded with a higher price earnings voltible, and I think investors will be rewarded. We've seen that when some of those companies have reported disappointing
earnings and stocks get hit. But I think really, when you look at a world where we may have slow growth, they're still going to be premium for growth stocks and we may see some rotation, but we still like the technology sector as a whole, not just that handful of stocks. A communications sector and even some of the industrials which we think are benefiting from a capital expenditure cycle that probably is going to last a little bit longer than
people think, so we think there's some good opportunities. The defensive areas, I think are going to continue to be disappointing as they've been now for a year.
And a half.
Hey, Margie, we're going to have earning season upon us sooner than we think, and you know, a week or so, what are you going to be kind of looking for here as we start to hear some of these companies report.
Their earnings, well, number one is are they still seeing good demand? I think that's really going to be the driver of stocks. And number two is really what's happened to company's business with China, because we've seen some surprises so far where companies that have a big share of their business and growing business with China have been disappointed because the band there is really slowing down. So I think that'll be an interesting take to see what companies
are heard as Chinese grow slow down. But basically, I think we're looking for modest, moderate growth.
And next year's an election year.
It seems like we've been in one for four years anyway, and I think that'll be another decent year for the market.
All right, Margie, thanks so much. For joining us as always. Margie Bettell, Senior portfolio manager at Offspring Global Investments.
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Our c sweet conversation of the day is we're talking decking, you know, like the deck on the back of your house. And here's a data point from Bloomberg Intelligence drew readings then also covers tricks half. I guess there's sixty million decks in the United States and maybe half of them need to be replaced. Mine is not one of them, I'm going to say right now, but we have the CEO of Treks right here with us today, so we
want to get right to it. What do we got here, Brian Fairbanks, He's the CEO of Tricks.
Now.
This is in New York Stock Exchange listed company t r EX is the ticker. This is a six point four billion dollar market cap company. The good news is stocks up forty percent year to date. It is off about twenty percent off of it's high of just a couple of months ago, but a lot of the markets pulled back. But Brian, thanks so much for joining us here in our Bloomberg Interactive Broker Studio Decks. I got to think that's a good business. I got to think
during the pandemic, people built a lot of decks. Talk to us about the state of your business right here.
Yeah, thanks for having us back on again. Absolutely, through the pandemic, there was definitely a surge of people interested in outdoor living and wanting to expand their ability to spend time outdoors with their family. Even leading into the pandemic, we had seen that there was a significant opportunity to be able to really appeal to those families looking to add on a low cost way to add on space
to their homes. Within the repair and remodel indecks, approximately thirty percent of it is associated with outdoor living and so we really sit in the sweet spot of that.
And what's unique about the decks you make is you don't use wood. What do you use?
Right, So we're very unique in that ninety five percent of the material that goes into our deck boards is recycled and reclaimed. Last year alone, we recovered six hundred million pounds of material that otherwise would have potentially gone into landfills. So this is the form of polyethylene, plastic bags, stretch wrap, and wood dust. We combine those with a number of additives to make a deck board that will
last basically if your lifetime. Our warranty runs anywhere from twenty five years and our entry level products up to fifty years. On our premium products.
All right, So, one of the issues that I'm sure you're feeling, like a lot of businesses are, is just is the consumer slowing down? Is inflation cutting into the consumer? So in your retail channel in particular, are you seeing any of that, Because we had home depots, we had lows. They're seeing some softening trends and some of their big ticket discretionary items. Are you seeing that in your business?
The consumer has remained remarkably strong in twenty twenty three. Coming into the year, we did expect to see more weakness from that consumer. We originally expected to see flatsh to down single digit type numbers for the year. We saw that in the first quarter and then through the second quarter. Second quarter we saw mid single digit increase in our guidance for the third quarter assumed roughly a low single digit type increase in the consumer, So we've
been happy with the resilience of that consumer. The other thing that plays well for Treks is our consumer tends to be at the higher end of the income spectrum. We're focused on those households over ninety thousand dollars average type income, so not quite as heavily impacted by some of these short term changes in the economy.
So it's fascinating reading the research note from Drew Redding, who covers your stock your company for Bloomberg Intelligence. He's at in there the recyclable segment or is only twenty four percent of total sales in the industry. So you, guys, arguably, where do you think that number can go eventually?
Right, So composite decking of the old positive overall industry is twenty four to twenty five percent of the volume sold. One of the strategies that we've been executing since two thousand nineteen to really go after that buyer who otherwise would have been going to would and take that instead of being at twenty five percent, take that up to fifty percent. When we started on this strategy in twenty nineteen,
it was about nineteen percent of the marketplace. So the strategy with those products to convert roughly two hundred basis points a year has been quite effective and we expect will continue.
So does your company actually go to the someone's home and build a deck or do you just sell to the people who actually build a deck.
We sell to the people who are building the deck. We will sell to Home Depot and Lows. We have our product on the shelf at both of those DIY centers. We also sell to we call the pro channel. So these are locations that would be selling directly to the contractor as well as homeowners and contractors.
So who do you compete with most directly? How does that work in your business?
We have it's a pretty concentrated industry. Our second competitor is about twenty five percent of the industry, and then a competitor number three they are roughly twelve to fifteen percent. So it is a concentrated industry and everybody makes great products. It's able to service the market and really provide a
much more superior experience for that consumer. Versus installing wood, which you'll have to maintain every year, and then as you started out with the piece, in a number of years, it'll have to be completely replaced again.
All right, So what's a typical I don't know what's a typical deck cost?
You know?
I mean, like, what's a typical Homer spend on a deck.
If we talk about a wood conversion type deck, that deck's generally three hundred to three hundred and fifty square feet and probably going to be in the twelve to fifteen thousand dollars range. The material cost is not the biggest part of it. Wood you'll spend about one thousand dollars for just the decking part of the wood, whereas our entry level treks that's going up against woods roughly
seventeen hundred dollars. The biggest cost is going to be building that structure out in the labor that comes along with it. As I mentioned, our customer tends towards the
higher end of the income spectrum. Those that are buying our treks, Transcend, Transcend Lineage and signature products tend to be building much larger decks, and those average five to six hundred square feet and can range thirty thousand dollars up to We've got contractors building complete outdoor living rooms that include couches and TVs and kitchens three four hundred thousand dollars outdoor living areas.
All right, So what I'm just looking at your income statement here, you get got gross margins kind of in the high thirties forty percent kind of range. What are the levers really on the cost side for you guys.
We've got a number of levers that we're pursuing, we have been pursuing, and will continue to pursue. First is our capacity utilization. Every one hundred million dollars of additional sales that goes into our existing capacity is worth about one hundred to hundred and fifty basis points of margin. We also have a strong continuous improvement program within the organization. We've got a group of people pacifically dedicated not only to building the pipeline of what are those cost actions
we're going after, but actually implementing and tracking that. We're seeing the cost savings coming through. And then the last opportunity is going to be SG and a leverage. As we continue to grow as a company, that fixed portion of our SG and a can be leveraged.
Brian, thanks so much for joining us. Really appreciate it. Brian Fairbanks, he is the CEO of Trecks, the composite deck builder out there, so for those that are thinking about putting on a deck or replacing a deck, you can think about the composites part of the business.
Thanks for listening to the Bloomberg Markets podcasts. You can subscribe and listen to interviews on Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three.
And I'm Paul Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio