Markets, Ukraine, Retail, And The Fed (Podcast)

Haven't seen those types of performance numbers? A lot of these credit folks taught me, Like ever, so what do you do for the second half after that brutal first half? Natalie Trevithick, head of investment grade credit Strategy Paid and Regal, joins us. Natalie, I'm sure you and you're good folks at Paid in the Regal again had experienced what was, you know, a brutal first half of the year. Put that in perspective for us and and kind of how

you're thinking about the second half. Sure, it was the very shocking first up as we had to underlying interest rates move up several percent as well extreads wide and by around fifty basis point, producing those first half negative total returns who are actually closer to negative fourteen and a half percent. As of the first half end of June thirte we've actually seen a recovery with total positive returns of two point two percent on that Bloomberg Corporate

indexed UH month to date. So what that means is yield are now much higher levels. The index is yielding four and a half percent. You couldn't even get four and a half percent on the law to high yield bonds a year ago. So we think on a go for basis is a pretty attractive time to be answering credits at these much higher all in meals. Is there any concern um that if we go into a deep percession some of those investment grade credits become do you

call them fallen angels? Fallen angels? Right, yeah, potentially, But companies are going to do whatever they can to maintain their investment grade credit ratings. So they may not mind following safe from single aid to triple B, but they're going to protect themselves from going from triple B down to a double be high yield status. And the good thing is over the past couple of years where we've

had very cheap financing since the pandemic. A lot of companies took advantage of that to prefund their maturities and extend their that profile. So there's no looming maturity wall coming, so we don't think there is going to be a big wave of downgrades. Natalie, I gotta ask, because it's in your notes, why do you refer to these markets

as Katie Perry markets. You know, they're hot when they're cold, they're up and there, down there, yes and there, no. You know, it's like each thing you's walk in and you don't know what to expect. It's been a pretty volatile relationship every day, so you don't know what you're getting.

A lot of time seems to be the opposite, despite you know, expecting the FED to hikes seventy five basis points tomorrow, we're seeing rates rally today with a ten year down to two point seven five percent, twenty five basis points in burden with the two year. So what do you expect from the Fed? I mean tomorrow seventy five basis points. I'm going to assume it's just locked in.

But what about the path forward? Yeah, the path forward I think we're expecting it to continue to be aggressive, with potentially another seventy in September, but the data is coming in much cooler the past few days. Just the Walmart profit warning, We're thinking the Fed may want to talk back some of those uh rate hikes which have already been priced into the market. Now, I mean, what

are some of the sectors. I mean again, given that really uh, you know, terrible first half of the year, what are some of the sectors to the extent that your pm is want to dip their toe in some of these investment grade credit areas. What are some of the sectors that you're suggesting they look at. Yeah, we like some of the more defensive sectors right now. That's going to be utilities, Healthcare still doing quite well. We

like the higher quality technology. Even though these higher rates, you know, are really hitting some of these tech companies earnings from a credit stand appoint these companies still have very very solid balance sheets intended and tend to trade at tight spread, so we don't expect them to widen as much as some of the more consumer driven sector.

Some of the retailers were a little bit more cautious on We continue to like the energy sector, but it's office peaks and we don't think it offers as much value on to go forward DASA thanks of all to issue forty five billions over the past couple of weeks,

and we're seeing definite pressure on that sector. Um So, While we like the US banks, we just think they're gonna be pretty volatile and to go forward data, but um SO, bottom line is after the horrible first half, now that yields are much higher, and the fact that you don't expect many defaults, you like investment grade credits um now despite the potential headwinds of recession, European crisis, etcetera. Yeah, we think it could be a good entry point, but

we particularly like the front end of the curve. So more looking at the Bloomberg one to five year corporate index because still you're yielding over four percent and you don't go that much more for extending out to one to thirty year credit and then you're taking on all the spread duration list. If you keep your portfolio pretty short, you know, in that one to five year area, we think you're poised to get positive total returns, even though you may weather some you know, months and months and

day to day volatility in pricing. Natalie Matt asked about, you know, investment grade bonds being you know, downgraded to junk does it? How often does it happen with a junk borrower gets upgraded to investment grade and then it's maybe it's something you can look at. Yeah, that's actually pretty frequent. We've had. We expect actually a few hundred billions to be upgraded from high yield to i G.

We're already seeing it in some issuers here to day. Uh, you know, we saw Freeport, we saw Toll Brothers e QT. So we're seeing more upgrades from some of those names which were downgraded during the pandemic. Also on the horizon, a score that's probably not gonna get upgraded back to i G until two thousand and twenty four, and Occidental Petroleum is another one we're watching. It's interesting Ford being upgraded back into investment grade. That would be a notable

move in the credit markets. Natalie trevith Iik thanks so much for joining us head of investment grade credit strategy at Peyton and Regal Red headline crossing the Bloomberg Terminal. European gas prices rise above two hundred euros per mega watt for the first time since March nine, and that is due in part to the ongoing war in Ukraine, which is a good segue to our next guest. Valentine now Yuchenko, member of the Ukrainian Parliament and ex head

of the Security Service of Ukraine, joins us. Mr Noliachenko, thank you so much for joining us here. I would love to just get you know, kind of your quick overview. Awhere we are today, where you are today as a country in your ongoing war with Russia. What's the latest? Thank you the Lisa, but Dona to be with you with the all the US. So from Ukraine. News are still bad, still about war and this night and early

morning south of Ukraine and the Islamic life cities. Again we're under the Russian missiles altogether eighteen Russian missiles world launched against like peaceful cities of Ukraine in the south, against civilians, against supports, so even a civilian infrastructure. As from the beginning of this war, Russia is still destroying

and targeting intentionally these object objects and facilities. So that's for us, like today's picture of war which Russia wages against Iubraine, what is the latest in terms of your defense? How how is the Ukrainian army doing in terms of holding the Russian invaders off so far? Much improvements because and thanks to the United States, Canada, United Kingdom, European Union weaponry supplies. It increased a lot of capabilities of our armed forces both in east and south of Ukraine.

And now our armed forces are capable to destroy Russian command centers, Russian weaponry at the temporarily occupied territories to hit in the response of their attacks on Ukrainians. So that's where we are united, and that's where Ukraine feels not alone alone against the Russian aggressor. That's, by the way, very much inspiring our armed forces, our people here in Ukraine, US members of parliament, and I think that's the strategy

to win the world, to win Russian aggression. What is there a belief with in the leadership of Ukraine about how this war may play out, what would be an end game and then also maybe the timing associated with is there any growing consensus. Actually what we see is that Russia himself, Kramblin put In, they try to as much as they could use their forces efforts even waging against war against Europe, to attack not only Ukraine but

the whole civilized war the world. That's so the Russian strategy again to use for instance, energy supplies as a weapon as a weapon against not only Ukraine, but European Union member states as well. Plus what we see at the temporal the occupied territories that Russia intentionally is destroying

medical facilities, schools, all social infrastructure. That looks like real invasion with the very very one target to destroy normal life, to inflict terror on civilians, on Ukrainians, and even broader, to inflict her terror on the whole Europe. We got a headline a couple of I think a couple of days ago last week that Russia is preparing elections I think September fift um to basically annex parts of the down Bass region. Does that to you set a date

for when the war could possibly end? Actually the date, what's a cain about dates? Or Russian's preliminary plans to hold so called referendums illegal of course and with no voters for June July. Now that it's at the end of July, and we hear from our intelligence that again again Gremlin NEPs. She has changed plans for August, maybe

even September. So this old referendum or voting stuff. Russians understand very well now that in her song, for instance, in South Ukraine or other temporal occupied cities or like Mariuple almost destroyed city in the south, or the Nascut and Basque region of Ukraine, it's simply impossible even to show a picture as the Russian propaganda used to do it before in two thousands fourteen. It's impossible to show even now the picture of referenda because no people know

voters guests. Today we've seen from one of Russian TV propaganda channel we they have collected up six people in her Son to issue for them Russian passports. Six not six hundred, not six thousand, but six people all together. That how that explains how it looks at the field. Uh, the real situation that all of Ukraine, I'm not willing to buy any means be under the Russian imperim and

to live under the Russian founding. What amazes me beyond um the staunch defense that Ukraine has put up against this Russian invasion is that in many parts of the country, UM Ukrainian workers are still trying to produce products, um, you know, farmlands, export um things as if it's business as usual. I've talked to auto executives who say they're still getting you know, um parts and wire harnesses out

of Ukraine. And of course many much of the world is still reliant on Ukrainian grains, especially when it comes to wheat and other grains. How are those exports going, You're right, absolutely, like I'm confirmed that in South Ukraine and Eastern and the harvest is going on this year, harvest with a lot of wheat, corn and other products.

And our farmers are doing outstandable job. Even Russia's bombarding or using artillery, but the farmers continues to actually to pick up the harvest and it's not bad this year, by the way. So talking about grain experts, of course we Ukraine and again Parliament, government, the President of Ukraine, we all listening together, united to do whatever is possible

to restart to resume grains experts from Ukrainian supports. And this is up to all together twenty million tones of grain ready to be exported to Africa, to other regions of the world. Ukraine ready and would and would like again to contribute to global food security by supplying as much as we can grains, fertilizers and others. All right, Valentine, thank you so much for taking the time to share

the latest from Ukraine. To really appreciate your time. Valentine, now Yuchenko, member of the Ukrainian Parliament, getting a fascinating, uh real shot what is going on on the ground in Ukraine. We appreciate his time. Walmart off eight point eight percent today, folks, and that's a real market cap. This thing started to day with a three sixty billion dollar market cap, so that's real dollars being wiped out.

Let's check in with put Him Boyle, Senior Animals for e Commerce at Leisure, off Price Retail for Bloomberg Intelligence. Basically she covers all things retail and she spends her life just walking around shopping malls. And that's kind of how there is not true. That's what they do. They do. They go and they check out, like what traffic and all all says you basically go shopping for a living. Is that true? Not for a living, but for definitely part of my job. Absolutely? All right, So wal tell

us what's going on with Walmart here? You don't see this kind of misery often from Walmart, and now it's twice right, Yeah, exactly, Yeah, I think this is just showing consumers trading down. If you think about the Walmart quirk consumer, it is the low income shopper and they are pinched by the inflationary pressures that we have been

seeing all year. So what you're seeing happen is them trade into more essential items like food, which are lower margin, and trading often away from more discretionary categories like apparel. That means that you're going to have lower margins, lower profitability, and that's why they're two key profit outlook mail calls for thirteen to fourteen present drop in operating income. So a concern previously for Walmart was that um, they had

too much stuff in their warehouses. I guess their whole stores are warehouses, but that they have too much inventory coming in UM over ordered and not selling enough. Now out it seems that's still a problem. But also UM consumers who are struggling to afford food and gas are spending all their money on that stuff rather than the other stuff that Walmart has too much of. Do they

get that right? Yeah, that's absolutely right. But Remember, as they spend money on other stuff, they're not buying that apparel that they had too much of anyways, So now they have even more apparel to career. So the problem hasn't gone away. And it's not a great time in retail to have a lot of inventory because in just a few months, retailers are going to be getting a new holiday merchandise and they need to make room for

that promotions. This is maybe good news for the FED. Um, does that mean that Walmart is going to have to start cutting prices on that apparel? Absolutely? I mean they have to get rid of that inventory, so prices will drop on those items. So they'll have to promote clear liquidate however to get them out all right. Put Um, I'm not an expert in Walmart, but just as an outsider, I put a out of this on management. Management misgauged

their consumer, mis mismanaged, or misgauged their inventory needs. Is that a fairer analysis? I mean yes and no. I mean think about where we're coming off of right So during the pandemic, we couldn't get the goods here so rightfully, So a lot of companies ordered goods in advance because they were sitting on ships or the factories weren't able to produce them. Now all that inventory has come on board and is getting off those ships. So yes, there

is you know, some of that. But then also um inflation. I wouldn't have guessed last year the gas prices would be over five dollars a gallon. They were treated a little, but you know, no one would have predicted that. So some of this is just changing macro um variables that you just can't really predict. Are they able, by the way, to keep up um margins on the stuff that they are selling a lot of where inflation still is a

problem food and does Walmart sell gas? They must have gas stations and costco very few, very few, I see, so they have some. But but food margins, are they able to keep those high or do they have to kind of eat some of those higher costs for their customers. It's it's a mix, really, right. So food inflation had

been a top concern also earlier this year. Prices are retreating a little, like if you look at the cost of the it's come down, but um food inflations out there and food prices are rising, and that's part of the reason that you're seeing that low income shop, I feel even more pinched because you're having to pay five dollars for a gallon of milk, where last year you may have paid for it dollars for that same gallon

of milk. And so there has been an increase. And by the way, a lot of those low income shoppers are also Walmart employees, right, are they demanding raises to try and keep up with inflation? They have been getting raises, right. I think that's the one thing that's been working well for the low income consumer is that minimum wage and

what companies are paying has actually risen. So if you think about what Walmart workers are making three to five years ago, they're making anywhere from thirty to more than that. You can argue, I mean, you walk into any of these um stores and they're willing to pay you fifteen dollars or more an hour. All right, put him it's probably too early to ask. But here we are at

the end of July. My son California actually goes to school like an first week of August at California, so it's not too early to talk about back to school. And then the dreaded holidays. What is the outlook. I mean, if I'm a Walmart any retail executive, I'm not sure how to gauge any of that stuff. Yeah, we're back to school. In all the retail data that we've seen so far indicates that back to school selling had been strong. The question is where are they spending Quebec to school?

Are they spending on apparel? Are they buying their laptops and iPhones and just to supplies or are they spending on home furnishing for their dorm rooms? So I think I think most of them. You'll have to get your supplies. You'll need your laptop for school. But where you could pull back is on where you're buying your apparel. Do you need five pairs of Denom jeans or can you do it too? And I think that's where you could see some softness as consumers um are challenged with inflation,

have to make trade offs. Are they Are they doing well in their competition with Amazon? I mean, we don't have a Walmart around here, but if we did, that would be the other place I would shop besides Amazon. Yeah, I think I think two different stories here. It really you know, we saw the Amazon shares pulled back last night after Wall March are coronets say, it's a little different at Amazon. Amazon has its own problems, they have too much warehousing space, but their customer is very different.

It's a more affluent customer base. And I don't think that customer base is trading down. Yes yet. In fact, Amazon had its time Day just a few weeks ago and the sales were up nicely and people were out shopping. They were looking for deals. So I think the focus will be deal shopping as we move into even holiday, and that's not good news for margins. Uh, luxury, how's that doing? Buguri is doing great? I know what end

the high end consumer is sending. I mean talk about the income inequality and the wealth inequality, and it's just getting exacerbated by this pandemic, as a lot of folks said, and you can see it in the numbers, as they say. All right, put him Goyle, thank you so much for joining us. Put them Oil covers all things retail for Bloomberg Intelligence. And yes, part of her job is walking around shopping malls and so particularly like that black we

had a Walmart around here. Why don't we have a Walmart at the Jersey Dude, you guys, get off this island. We got cracker barrel too, So you do the Walmart and the cracker barrel and that is a big day. I might even do that this weekend. Come and think of it. Okay, I'm want to talk about small cap stocks now because they've been hit harder than the SP five hunter. When you look at the Russell two thousand, a lot of folks are saying there's opportunity in value stocks.

There's opportunity and small cap stocks. Brad Evans, he does that for a living sup portfolio manager and senior VP at heart Land Advisors. Brad, I'd love to get your kind of thirty ft overview of kind of how this first six seven months of the year have been for the world where you live in small caps, value, that type of thing, and kind of what's your outlook for the remainder of the year heading into next Well, uh, Matt and Paul, it's a pleasure to be with with you, guys,

say thanks again for having me back. Um, I won't I won't really regurgitate what everybody knows. Value has had a good run in the first half versus growth, and that's you know, a carry over from the end of last year, and I think you know it's it's there's an incredible amount of violatility in the marketplaces we all know. And I think you know what makes the current environment very unique is you know, every crisis that we've seen

since is kind of in play today. Um you know, the Russian ruble default and the long term capital management crisis, of the Asian currency crisis, of the tech bubble, of OH one crisis, the global financial crisis, of the housing bubble that burst, and oh seven o eight, the pigs crisis and a live and and now the COVID black swan.

Of all those dynamics are actually in play today, which makes the current environment particularly tricky when you when you overlay it with um an environment where there's just a lot of leverage in the system. So this is this is an environment that that I think from a small cap perspective, you know, should be good for an active manager versus passives, and should be good versus for value

versus growth. But we are in a very very tricky environment today where it takes a very surgical approach to be able to navigate all the risks that are out there. Um well, that's a bummer. I was hoping I could just buy like a small cap value E T f UM and and and not worry about it. Why do we need to have you know, precision surgical active management. You know, I like to call the small captain to

see is kind of the land of misfit toys. And the reason I say that is because you know we have we have, you know, the the arbiters of the benchmark. The folks at Russell have created a kind of a unique benchmark, especially in the value benchmark. You know we have we have seven percent of the benchmark which is in biotech, and almost a third of the induscry is unprofitable.

And you know, the the the there's a there's a large negative survivor bias and the Russell indusease, especially value indusease. Where when I say negative survivor bias, these are companies that have not been acquired, They have not graduated, that have not been acquired by a larger company or private equity. They have not been they have not graduated or grown it to be a mid cap stock. So these are

companies that have just have have become zombified. They just sit in these small cap indusease for for long periods of time. For that reason, if you were to attack this asset class with a passive benchmark, you're buying a lot of you're really subpart companies that I'll be polite about it. And and for that reason, our job at Heartland as a small cap equity boutique, UM, you know, my my fund being a high quality small cap fund. You know, our job is to find diamonds in the rough.

And that's our job to build a concentrated portfolio of roughly fifty names of undervalued small companies with great balance sheets, which pay dividends and basically have been fallen, you know, fallen out of favor for reasons that we think are our temporary brat How do you do that? Um? You know, it's a it's a huge universe, and I guess you've been at this a long time. The Wall Street Journal recognized you as a category king in small caps. How do you screen for socks? Do you have a whole team?

Do you have a special method? What is it? It's it's just hard work. Actually, my partner Andy Fleming, and I, um, you know, we we just we dig through earnings transcripts. We we talked to a lot of management teams. It's UM, it's it's really rolling up the sleeves UH doing our own model building and just getting to know management teams

and understanding how they are intending to deploy capital. Because in small caps, Paul and Matt, that's the biggest thing that for us to understand is having a management that understands the problems that the company is facing and under ends the appropriate fix to get the company back to UH it's operating to a normalized operating environment where they're earning,

you know, an acceptable return on capital. Oftentimes we find in these in small companies, they think the path to successes you know, M and A to grow in organically, and that often leads to balance sheet leverage and that

usually ends in tears for shareholders. So we want we want to find companies who are focused on self help, that are internally focused, have understand understand the problems they have, and are going to deploy free cash flow UH to too in directions that are very shareholder friendly, meaning pay down debt, divesting non core assets they made that might be a drag to their operations, and then returning to capital shareholders through dividends and buy backs. All right, Brad,

good good stuff. We appreciate getting your perspective on a part of the market. We should probably talk a little bit more about kind of the small cap. Yeah, we gotta get back on and get some picks. Yes, some value stuff will through that He's based another. This is the second guest I talked to you today from Milwaukee. So I'm telling you this. Does it remind you of the furniture? Is just me? But sure, who doesn't? I mean when you think about Milwaukee. Brad Evan's portfolio manager

seen r VP Heartland Advisors. Brent Downley, president of Spectrum Markets Joints, is here. Hey, brand, I got my federal reserve tomorrow. It can be raising interest rates again. I look at the d X Y dollar index. It's as high as it's been for twenty years. Is there a bear case for the dollar here at all? Well, the markets tried it a few times, and I've tried it a few times to no avail. The the issue with the dollar right now is that it's really running from

one side of the dollar smile to the other. So which means that when things are looking okay in the US, which they were for a while, as really the sole engine of growth. With China and Europe sputtering badly, the dollar was doing well. But now as we're transitioning to this growth fear in the US from Walmart, Snap, Twitter, all that stuff, um, and also job cuts all over the place. Now we're moving into a global recession fear trade,

which again is bullish dollar. And then on top of that you have just this ongoing terms of trade gas shock in Europe that means anytime you try to buy euros, for example, when people tried to buy euros on the fifty basis point hike from the ECB, it works for about three hours and then the dollars comes raging back again. I was wondering who was defending the euro at parody, But it's been you know, it's held up, but it

only briefly went down through it. Do we do? We see it, um, the euro going back below a dollar, So I do for now. However, they're the reason that it bounced so hard was that positioning kind of got a little bit over at SKIS and there's a ton of options expiries there. So if you look at it the same way that people were looking at equity positioning, they both kind of happened at the same time stocks were at the lows and euro dollar was at the lows,

and then you had this squeeze. But it's been much more of like a tactical short covering kind of squeeze.

And actually the data and the economic data has been getting worse as stocks were going up there, and part of that reflects there's a small contingent of people that still think that bad news for the economy is good news for stocks, and I very strongly disagree with that given the framework um that the Fed's operating under now, so that that was that was true from one very often bad economic news was good for stocks because it meant more easy. But the Fed just doesn't have room

to to even think about easing now. And that that's what's interesting going into this fo MC meeting is that we have a lot of cuts price now fore, and to me, it's going to be very difficult for the math on CPI to work out in a way that the Fed will be able to cut early in simply because CPI is a lagging indicator and home prices and other past price rises are still going to pushing or putting upward pressure on cp I even as commodities start

to put downward pressure on it. Yeah, that's kind of where I wanted to go, is kind of get your your inflation call here. The thing I look at almost every day is to the gasoline price, and we're now down, you know, all fifty sixty cents per gallon off off of the peak here. Um. But you think this, this inflation risk to the marketplaces maybe more persistent than the market's discounting. I do, but I mean I could be wrong.

So one really interesting thing, really interesting dynamic is if you look on Bloomberg and look at the median economist forecast for U S c p I that comes in around three point five percent right now. But if you look at market pricing, because there's you can trade inflation in the market, it's pricing something closer to one point seven or two, depending on how you slice and dice the data. So there's a really big divergence right now

between market pricing of future inflation and economist forecasts. Now, it's very difficult to get to one point seven or two quickly, just because of the housing pressure and and other pressures that are still exerting some upward pressure on the number. So I'm skeptical, but that that is what the markets pricing. So the market has priced an incredibly dubbish scenario for where CPI is below two and the Fed is cutting as early as March or May. I

don't buy it. I think generally the FED has a bias to fight the last war, and that's because the politics drive a lot of what the FED does, and the politics now are just so squarely in on the side of fighting inflation because inflation affects everyone, and unemployment right now is affecting three point six percent of people, and inflations of affecting of people. Politics drive with the

independ pendant Federal Reserve. Does it hurts, but I feel like such a dope, being such a sitting sarcasm is the lowest form of wit. I gotta drop that part of my personality. Yeah. All the institutions in the US that are supposed to be independent are actually full of nominees that are all political appointees. So make of that what you will, all right, Bred good stuff as always. Brent Dolly, president at Spectrum Markets. He's been in the FX trading arena for a long time. Looking at his resume,

Marylynch City, I would say he's a category king as well. Yes, he's a category king in the current sias. And again, I I just don't see anybody given me a bear case for the U. S. Dollar. I've been saying that for a long time, and that seems to be the case right now. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller and I teen seventy three

and I'm fall Sweeney. I'm on Twitter at pt sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.