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This is Bloomberg Intelligence Radio Malexy alongside Paul Sweeney. We cover all the main news and business economics and finance through our lens of our Bloomberg Intelligence folks. They cover two thousand companies and one hundred and thirty industries all around the world. And we finally get to the pressing question.
Of the day, will we now have chocolate cheeses?
And the only person asked about this is Jen Bartash's Bloomberg Intelligence senior analyst Retail Staples and Packaged Food is joining us. So Jen, seriously, we're actually kind of serious chocolate cheeses.
Is that going to be a thing?
You never know? I mean it certainly maybe Snickered flavor, Snickers flavored cheese its or eminem s micks.
I don't know, Wait, what about like that have been Eminem's No, that'd be gross, that'd be gross, Like cho.
Checks mix kind of thing where it's got eminem's and cheese its and everything all mixed together. You might see something like that.
Why is this deal happening? What's give us a strategic ration now for this deal?
Well, there's there's a couple of things. The first is, you know, from a Mars portfolio perspective, when it comes to the snacking category, they are heavily exposed to chocolate and the coco. You know, coco has been a structural issue in terms of cost for a while and we think that's going to continue indefinitely. And so this helps them diversify out that snacking side of their portfolio, and it also helps them do a little bit more in
emerging markets. It's which is an area where Keilenova has some strength.
So okay, so is it offense or defense from that perspective, because it feels like it could be a combination of both, like diversify away from just pure coco, but but also expand.
Yeah, I think it's a combination of the two. It's it's on the cocoa side, it's a little bit of risk mitigation, you know, and helping to ease some of the costs they're feeling there and you know, traditionally chocolate has held up actually really well through the pandemic and after the pandemic, but we're finally starting to see a little bit of weakness and consumer demand for chocolate just because of food inflation, and so diversification will will certainly
help with that. And then you know, on a global basis, Mars has leading you know, they're in the top three market share in almost every region in confectionery, and so having more of the salty snack side and getting more into that can only consolidate their market share position in a lot of leading global, you know, regions.
Jen, What makes us deal really interesting for me is the Mars company because it's a private company. What do we know about Mars? Maybe I don't know the size capitalization. Did they ever talk to investors.
Very rarely, you know, but what they have disclosed, you know, their annual revenue is a little over fifty billion dollars, so definitely a sizable company. And what I think is very interesting is when you break that revenue down, nearly sixty percent of their revenue is coming from pet food. So although everybody associates Mars with chocolate, the larger portion of their business is pet and so they own the Pedigree brand, they own the Whiskers brand, and that is
a big powerhouse for them. And so when you know that's that's part of the reason we think there actually won't be a lot of FTC pushback on this because it's a smaller port of their portfolio and the products are there's really no overlap between what Kelenova does and what Mars does.
Amazingly, I did not know that. I did not know that at all. Why we love Jen Bart.
I mean, that would kill them, but sure right, dogs can't have chocolate from that thing. And so Jen, does this mean we're going to see a lot of other M and A in the space? And if so, sort of who and where would we see that?
Well, we've seen, you know, we've seen a lot of a sentiment towards tuck in acquisitions over the last couple of years. But there are some pressures that are affecting the industry. So when you listen to what all of these package food companies are saying, their priority for twenty twenty four and headed into twenty twenty five is regaining volume. But the problem is that consumers not yet in a position where they're buying bigger volumes of food, and so M and A is a potential route to be able
to better navigate the market. So you know, in this instance, with this deal, we're expecting over a billion dollars in synergies between Mars and Kelenova, coming from procurement, coming from manufacturing,
things like that. So I think that this deal may spark some at least some consideration for larger deals again in the package food space, as they're trying to find ways to contain costs, expand their geographic and product footprint at a time when it's hard to spend to spur consumers into buying greater volumes, So it may be an alternative for them.
Gen here's the big quest out there for I think most consumers, as John Tucker digs into a bag of cheese, it's in food inflation. You cover the package of good companies, You covered the grocery stores as well. Those prices while the rate of inflation has slowed, those prices ain't coming down, are they.
They're coming down, but very very slowly. And so if you look on it on a basis, you know, comparison back to twenty nineteen food prices are still almost twenty
percent higher than they were in twenty nineteen. Now in certain categories where there's been relief, especially from the cost of commodities, So as corn has come down, and soy has come down, and wheat has come down, sugar has come down, we've seen you know a little bit of price relief, but it's going to take some time for that to really translate into something that consumers feel in their pocketbook instead of just individual products being you know,
either not getting increases or coming down slightly in price.
So which company in your space do you feel like is doing pretty well on the margin and the top line side, because if margins are gonna get squeezed, you need the top line to grow. But the top line is still really struggling with consumers right now. So who's managing not the best?
Well? You know, up until the probably the the you know, the last quarter or two, Mandalis has actually navigated that pretty well, you know, because the demand for suites and indulgences has had held up pretty well. You know, companies that do have that exposure to snacking, generally speaking, are doing better overall than companies that are more center store. And I would point to Kraft heines as an example of center store or Campbell Soup is a center store type.
Center store. I have heard that before.
So center store is when you're in a grocery store. Everything that's not on the not on the outside, so it usually is like shelf stable products. So think about your canned soups, your pasta, your pasta sauces, things like that, and and those are those are the pantry staples that most people you know purchase. And then the perimeter is of course all of your fresh you know, your fresh foods, your produce and your meat and your dairy and things like that.
And I learned today that's why we love Jen.
That's why we love Jen. Yeah, all right, Jen, thanks so much for joining us. Jen Bartash, I've senior retail analyst for Bloomberg Intelligence. But when I do, of course, when I see an M and A trade cross the tape, I go m A, go click on advisors and see which one of my banker buddies are getting paid for the acchoiry here from Mars. They were solely advised by City Group. Good for them, and then for the target, which is really where you want to be as an advisor.
They had Goldman, Saxonell's art. So some blue chip names getting paid across the board on that big big trade there thirty six billion with including debt.
And this was an easier fix, and that, like the anti trust issue is probably not there versus other companies where you know you're going to have it.
Do you get in the Q now? Do you wait till after the election? What do you do? Increasingly you what do you do?
Oh? Yeah, just get let's get move and get this enclosed.
Yeah, but you're the banker, of course you're going to say that.
Yeah, but they only I was reading Gen's research, a combind company only has like six point two percent global retail spend or whatever the metric is. I think the regulators will use.
So it's akady yeah for that one. But for other companies, I don't know.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play and Android Auto with the Bloomberg Business. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa play Bloomberg eleven thirty.
It was a nothing burger the CPI, But we could also make an argument we've already had a humongous move over the last couple of weeks. Volumes also light, so you're kind of in a different positioning stage. Emily Roland is co chief investment strategist for John Hancock Investment Management, joining us.
Now, Hey, Emily, what do you make.
Of the non reaction in the market, Like, what does that tell you about positioning and sentiment?
Well, it tells us that the PPI report yesterday really sort of stole the show, coming in lighter than estimates, and you saw big moves in bond markets as well as across equity market. So I think today, you know, coming in right around in line with expectations. Of course, that sticky shelter or housing components still looking like the primary driver of inflation, and you know, we're seeing the housing data take a long time to slow down.
Inventories are still really.
Low, prices are still elevated, so we think that inflation is certainly coming down. That's great news for markets, but it's not happening in a straight line exactly.
So what does that mean for our feder reserve here? I mean, it feels like this is kind of giving them some run by. I know, we have some more economic data between now and September, but boy, it seems like they could certainly go here.
Yeah, this certainly gives the Fed the green light to go in September, which, of course the boondo market was already pricing in. The expectation shifted a little bit after the report. We went from fifty basis points being.
Kind of the slight odds, and.
Now it's back to twenty five basis points, which feels about right for us. Again, the Fed has noted that the labor market is seeing some cracks. They're confident that inflation's decelerating, and I think they certainly want to cut rates, and that's our expectation going into September. There's still some more data though, We're going to get another jobs report, another CPI report, and of course we have Jackson holl
at the end of the month. So I think, kind of hemming and hawing about fifty versus twenty five, we've still got some time to go out here.
Yeah.
It's just also so interesting to point out that the Fed didn't change their tune, like they were still talking about we want to see more progress, we want to wait, want to wait.
It was the markets that change their reaction function.
So after we've kind of cleaned out positioning, here are we sort of on the same page markets, bond markets, equity markets, and the Fed.
Yeah, I mean we're getting there.
You know.
We want to be patient here as it relates to bonds.
We're seeing a lot of volatility across high quality bonds here.
You know, again the data continue to chop around.
We do want to lean into duration into high quality bonds here, but again it's not going to happen in a straight line, and.
We've seen some massive moves.
This is type of volatility around bonds is not normal, So we want to be patient here, but we do continue to like the income that's available the aggregate bond index yielding close to five percent. We like the idea of locking in that income stream for years, even if you're not getting paid yet on the duration component, you're still getting that income, which we think is really attractive in an environment where an economic contraction is likely in our view.
So Emily, let's flash back to a week ago Monday. What did you and the good folks up at John Hancock Investment Management, what did you make about the volatility we saw on last Monday's trading.
You know, it was so remarkable, and you know, everybody was kind of thinking.
About the smoking gun.
You know, was it that ism manufacturing data?
Was it initial claims jumping?
Of course, everybody scrambled to try and explain the yes and carry trade all of their clients and the unwind.
Of that and the surprise move from the Bank of Japan.
But I'll tell you the one thing that you couldn't point to was earnings. And over time, we all know that stock prices are going to follow profits, and we look at earning season, we're up about twelve percent year over years. Still a couple of big names to report here,
but earnings have come in pretty solid. I think the challenge for investors on the earnings front is this impressive run up in prices that we saw prior to the earnings report, so you almost had to be perfect in order to see an outsize reaction from markets there.
But earnings growth continues to come in solid.
It's being driven by those megacap tech names communications.
Services up there as well.
We're seeing some broadening out in earnings, so the fundamental backdrop is remaining intact, which makes us know pretty optimistic.
On the equity front.
Does it also make us much more sensitive than to Nvidia's earnings since that's going to be one of the big earnings catalysts and you get Walmart on, I get that, But is it now like an Nvidia story for earnings and the market?
Absolutely, And it's you know, it's funny how navidia is so far delayed versus everything else. You kind of think that earning seasons over and then you remember that this massive driver of the market is still yet to report. So that's really going to be I think the next big event, you know, coming up in a couple of weeks. Watching that Obviously, it's been incredibly important to markets, especially on the US equity front, so we'll learn a lot from that report.
Absolutely.
So, people we're talking to us earlier today about small cap stocks, if we are in fact going to see some rates coming down, this could maybe be an opportunity for small caps to perform. Are you willing to make that leap? Is that seem reasonable?
And some of the small cap earnings like weren't terrible, like they delivered.
Yep, yep, some of them did.
But overall, if you look at small cap earnings, they're negative for this quarter versus large and mid cap equities. So we think it's a bit early to lean into small cap here. We would be looking for a shift into an early cycle environment.
We'd want that contraction to play out.
We never really bought into the idea of lower rates helping small cap equities. In fact, we have to remember that when rates are coming down and the Feds cutting, it's because something not great is going on and that should not benefit the more cyclical areas of the market. Small caps feature a lot of stocks that are unprofitable, some growth at any price names. In fact, about two thirds of the Russell two thousand index is comprised of
companies that don't make money. Those names, again, they can rip when cyclicalities awarded in an early cycle environment, but we simply think it's too early to lean in there. We'd be moving up in cap. We'd be embracing quality. We want companies with great balance sheets, tons of cash.
Great margins.
Remember, yes, inflation coming down is great news for sure, especially for the consumer, but it also means revenue growth is slowing. So again we want to lean into quality for the reason. For that reason, because those companies can defend their margins better when revenue growth is coming down.
So before we let you go, Emily quickly, aside from tech, where is that spot?
Yeah, so we're looking at areas of the market that are cheaper.
Think about quality at a reasonable price.
Areas like US mid cap stocks, which are trading at the most significant discount to their large cap counterparts since.
The late nineteen nineties.
Midcaps also have an overweight to industrial stocks that are benefiting from on shoring in this manufacturing renaissance that we're having in the United States today. So it's really about again, I think we might have made this term up. I'm not sure, but quality at a reasonable price is really the sweet spot for us for the remainder of this year.
All right, Emily, thank you so much for joining us. We always appreciate getting few minutes of your time. Emily Roland Co Chief investment Strategist, John Hancock Investment Management joining us via that zoom thing from Boston here. So I know, I guess one of the questions I have is, you know, twenty five basis points or fifty basis points if they do cut in September, and what would either of those
tell us? It's fifty basis points. Would that suggest to the market, oh boy, something is wrong maybe, or will twenty five or will twenty five not suffice the market?
You know, well that's so tricky, right, because you're right.
If you do fifty, then the narrative is gonna be like, oh, things are a lot worse than we think. It didn't seem like the inflation was coming down. The disinflation story was coming down fast enough to justify the fifty basis point cut. But if you look at WORP, we're still pricing in over twenty five basis points, not fifty, but still over twenty five within the market.
That's a different scenario.
Yep. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Apple car Play and then broud Otto with the Bloomberg Business app. Listen on demand wherever you get your podcasts, or watch us live on YouTube.
All right, let's get to a story that is very widely read on the Bloomberg coming. John Tucker's been following it closely all day this he doesn't understand it. Yeah, I'm not. All I know is the store's not there across the street, and it was before Mary Ross Gilbert
joins us Bloomberg Intelligence Senior Equeryanna. She covers retail and the story is Victoria's Secret has notd Rihanna Brands CEO to lead a turnaround there and I didn't know Victoria's Secret needed to turn around, but apparently it does in the area. Go that's why the store is no longer across the street from our office in that space has been vacant for like five years. There we go, there we go? All right, Mary Ross Gilbert, thanks so much
for joining us. Here is this a big deal for Victoria's Secret?
I think this is.
A big deal for Victoria's Secret. Being a woman focused brand, we think that Hillary super And as you mentioned, she was just the CEO at Rihanna's brand fenty x Savage, and that's a lingerie company. It's a teeny, teeny tiny company. But Hillary has three decades of experience. She was the chief of the Anthropology brands. More recently and prior to that, she's worked at a number of other brands, including American Eagle.
And speaking of competition to Victoria's Secret and why they've lost share, American Eagle has a brand called Airy and that's about you know, one point six billion dollar business. So Victoria's Secret has lost market share, but they have been in a turnaround mode for the past three to
four years and we're starting to see some traction. But we really think that with Super's understanding of the consumer, working with multiple brands and really getting the brand heat, we think that she could really make a difference here at the HELM.
So we think this is good news.
And of course it comes as they say that they just beat two Q earnings. You know, they gave preliminary estimates for their second quarter.
When did things really fall apart for Victoria's Secret? What was the trigger?
Yeah, the trigger was really this sort of me too movement and given that it was a brand that was sort of focused on the perspective of what made women sexy from a male perspective rather than from the female consumer perspective.
And that has has shifted.
When it used to be part of Limited Brands, it was then spun off and Martin Waters, who has now left the company as CEO, he was the one who came in and really spearheaded that and they've become a more inclusive brand. I mean, how many companies out there can say that they have one hundred percent equal pay across the business. I don't know of any others, but they have achieved that. It's uh, you know, it's third party documented or certified, I should say. So they've made
tremendous progress. They've really improved the lineup and it is coming from the perspective.
But I think kind of.
Getting it to the next level and really getting that turnaround to a point where they can get back to growth. I think this is the right time at a moment to pivot and bring in somebody like Hillary super So. I think it's very, very exciting for the company at this time.
Well, Mary, if the if the industry has changed, that the lingerie part of the business has changed, where are success coming from in that new world?
Yeah, well, so there's a couple of things that happened. I mean, the category had been growing for many years and had been expected to grow, but they did experience a slow down last year. But we're already starting to see improvements in the category, at least in the US. Internationally, by the way, Victoria's Secret is growing in the double digits. I think in the last quarter international was up eleven percent. So the category did weaken, but it looks like it's
starting to turn back up again. And really what happened is with this sort of me too moment, it became more inclusive, and so Victoria Secret has adopted their brands to be more inclusive and you know, once again to come from the perspective of a woman and what the woman needs, you know, and it's a whole assortment, and if you go into the stores, you will see a dramatic improvement in the assortment that they have. In the employee culture, I would say it's very positive, very exciting
environment when you go into the stores. But they do need to remodel most of the stores. They've only been able to touch a small percentage of the store base so far, so there's still more to go. And then the Pink brand is really at an earlier stage of a turnaround, but we're already seeing fallen assortments really improve. And they they brought on Natalia Bryant as a brand ambassador, so that's pretty exciting. So the stock I think we're heading in the right direction.
Yeah, the stock market agrees with these stock Trading Hire today on the news, Mary Ross Gilbert, thank you so much for joining. It's Mary Ross Gilbert. She's a senior Eco analyst covering retail for Bloomberg Intelligence. She's based in our LA office, Wiltshire. Now how are they now? They're it's Central Century sent They're in Central Cited in the new office. Very good office, very cool, overlooking the country club.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play and Android Auto with the Bloomberg Business. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg eleven thirty.
Alex see alongside paulse We need this Bloomberg Intelligence Radio. We bring you all the top news in business, economic, and finance. There are lens of our Bloomberg Intelligence folks. They cover two thousand companies in one hundred and thirty industries worldwide. We also take you outside Bloomberg Intelligence to get the broader take from some chief investment officers, and one of them is Brent Shot. He is a CIO
at Northwestern Mutual Wealth Management Company. He joins us from Milwauk, Wisconsin. Brent, really great to see you and you get your take here. So if we take into account CPI, the non reaction that we've seen. How aggressive does the Fed actually need to be now in September.
Well, I think absent any further labor market weekning, I think the Fed only does twenty five basis points. To me, you've had three good reports after four bad. Look at the three month numbers that look pretty good. The six month numbers are still kind of in the middling area, but the longer term numbers on things like services, etc. Are still a bit elevated. And I think the Fed wants to avoid a repeat of nineteen sixty six where
they cut too early and that led to inflation. Or even if you think about last year, this time in the fourth quarter, we had CPI that was coming down, the Fed expressed an optimism, investors priced in a ton of rate cuts, optimism regrew, and what you saw was inflation coming back. And so the reality is we're later in an economic cycle, and typically late in an economic cycle, the Fed does not cut aggressively, especially where they don't know where the neutral it is.
So Brent, I think historically I kind of considered your view probably more conservative than maybe then that the consensus as a related steed economy and maybe the FED and markets overall. Has anything changed in the last several weeks in terms of either economic data or company earning data that would change that.
Look, I think over the past year there's been plenty of things that historically have led to recessions, and investors have been able to say, yeah, but that yeah, but always ended with the labor market. And to me, what has changed is you have seen the labor market week and although we've been pointing to that for some time, non farm payrolls versus the household and plumber report has had a huge divergence, and you've seen other indicators show
that the labor market is weakening. And this is where I think the market woke up last week at least a bit for a touch of time at least that this beloved som rule that everybody talked about was finally broken. Also, look, I invite you to go look on your Bloomberg how many times the unemployment rate has risen zero point nine percent and we haven't been in a recession or headed
towards one. And this is where I think, if you think the labor market's are lagging into because companies want to hang on to people because they're hard to find and expensive. That's where I worry that we're a little bit too optimistic in mind is not conservative, it's just that can we admit there are risk out there and the stock market on many measures is expensive as I've seen it since nineteen ninety nine.
Well, that's the funny thing is that last Monday and the Friday before we would be like, yeah, you're right, there are the risks in there, and we are taking it on a chin, and then all of a sudden, it feels like yesterday, it's a go ahead, put on some more risk.
So what is it? Which is it?
I think you've had investors for fifteen years who have kind of been lulledlessleep by the Federal Reserve, who has always supported risk assets post the Great Financial Crisis because they needed to to get the economy higher. Now I think we're on the opposite side of that. And this is where this continual commentary that I hear about the Fed cutting rates because the market fell last week was a bit I don't know if word is silly, but
a bit premature. And that's where I don't think you're going to have the Fed be as easy any longer because there are no shortage of risk takers, and so to me, we're a bit on the frothier side of the equity market. And that is not an all equity market thing. That is just in some of the places where people want to go. No matter what I think, there are plenty of opportunities for long term focused investors. I heard about your I listened to your prior guest.
I think small caps, certainly there are some issues that are there, but I think if you're thinking about a three to five year time horising, given how cheap they are, that is where I think if you're willing to stay through a downturn, which I still think one is likely, that's where I think there is opportunity now in those areas even if we have that downturn.
How about some sectors, brand are some sectors that screen well for you guys if the economy is in fact slowing, but there will may be an easing interest rate environment.
That's the irony. I think small caps if you look back to nineteen ninety nine, which is a similar time period, they actually did fairly well into the recession because they were trading at similar levels to where they are today and people had placed money into that late cycle economy, into a narrow group of stocks based upon the belief that they were impervious to any economic downturn and we're longer term things that you needed to own no matter what.
And that's where small caps actually did okay into that downturn. And then I think this one will be mild, and that's where I think the economy turns from a headwind to a tailwind. The FED turns from a headwind to a tailwind, and that's where I think there are opportunities there.
And even in parts of the S and P five hundred, we happened to like the S and P equal weight just a bit, and so I think there are plenty of opportunities in this kind of odd period where you hear things that made sense in the past that don't make sense today. That just worries me a bit, and it brings me back to those moments in my thirty year career where I've heard these things in the past shrugged off, and history does have a tendency to repeat.
What do you do with then bonds at this point.
So we've been extending our duration and we were actually overweight bonds right now, and so we've been pretty much underweight bonds for most of my career here because of the belief that the Fed would would do what they did even post COVID and the fiscal policy makers. Now we're just a bit overweight bonds and a bit underweight equities. The thing I think people are missing is that I don't think you want to just hide out in cash.
You saw what happened during those two days, which was supposedly traumatic of market downturns, in which the long treasury actually did quite well. And so I think bonds are back to being a hedge against equities because I think any downside this time is not going to be caused by rising inflation, but falling inflation. And that's where I think people are missing kind of the second question that
you ask about inflation falling, Why is it falling? Usually it falls because demand falls, and I think you're seeing that on the services side, and I think you're seeing that in the labor market.
In a fixing can market, Brent, how much credit risk should I be taking? I can sit into your treasury and get almost four percent here. How do you think about credit and credit risk?
I think you want to be higher in the credit quality spectrum. I think you're not being paid much to take on excess credit risk right now, spreads are pretty tight, and it kind of goes back to the reality that I just don't think people are pricing in the possibility of all the warning signs that are out there potentially being actual, real warning sids, not things that are going to go away because of the post COVID period being odd. Look,
that's my bottom line. It's not that people shouldn't be taking risk or you should dramatically alter your asset allocation. Just make sure you're taking the risk that you want to take, and that if the stuff does hit the fan, that you don't do what I tell every investor not to do, and yet they want to do it every time,
which is not sell stocks while there's people panic. And so just make sure you're comfable at the risk level and if last week comes to fruition that happens again, that you're able to hold through that, because I do think it will be brief and mild, but I do think there will be uncomfortable moments for people in the future, especially with an election on the docket. For example.
Well, I was going to bring up the election too, because more and more I feel like I'm hearing anecdotally that the election is becoming a big risk for say, capital expenditures, that who what CEO is going to will lay out a lot of capex in the US when they don't even know what tax tax policy is going
to be, and there is so much risk. I also was reading an article I think it was in the Journal that talked about how or the Ft, that talked about how the IRA projects have been delayed and delayed and delayed, and this is all that capex cycle we've been waiting to see deployed. How do you think that plays out?
I think it plays out exactly the way that you just mentioned, So thanks for answering the question for me. I mean, I do think that's a reality. Look, investors should not overreact to any recep to any presidential cycle. If you look historically, what matters more is where you're at in the business cycle, not who's in actually in office. And that's where I think you know, just right now,
we're later in a business cycle. The unemployment rate is still low, it's actually rising, but it's still low, and typically in that environment you do get presidents who actually preside over a recession. I think all those things that you mentioned are concerns that are out there, as well as the economic concerns which I don't think are settled yet, which I do think means that there'll be more volatility
that I just want people to be prepared for. It's been a bit odd that the market has kind of gone in one direction, at least those seven stocks have pushed in one direction while everything else has been a
little bit weaker. But it's kind of an interesting period of time where I think we're closer to a recession at least according to labor market, than any point in the last fifteen or sixteen years absent COVID, and people are willing to take all kinds of risk at this moment because they don't believe things that work in the past will work in the future.
All Right, Brent, thanks so much for joining us. Always appreciate getting a few minutes of your time. Brent Shouty, chief investment officer at Northwestern Mutual Wealth Management Company there based in Milwaukee, Wisconsin, And again my call on Milwaukee, pound for pound, some of the smartest money managers I've ever seen, and I don't know why it is. Maybe it's a water. Maybe it's a water. University of Michigan, University, Wisconsin.
I'm sorry, Ben, I have a mistake there. Anyway, Still cut some smart folks there.
So you're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecard Play and Android Otto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station Just Say Alexa playing Bloomberg eleven thirty.
Another big story out there is Google that hard justice coming down hard. Yeah, but I just don't know what it really means. What can they do? Jennifer re joins us Bloomberg Intelligence Senior litigation analyst on the DOJ thinking about Google may thinking about breaking up a Google after pushing through a landmark anti trust case. So, Jen, thanks so much for joining us here. Explain to us what the DOJ has done is thinking about doing as it relates to Google.
Here.
Yeah, well, you know, now push comes to shove with this case because it hasn't. The DOJ hasn't really talked too much about remedies. It's been working on liability in it won and it won pretty resoundingly, So now it has to think about what it wants to ask the judge to do to remedy what the judge found to
be anti competitive about what Google's been doing. And I have to say that the idea of a structural request or a breakoup's been around since twenty twenty because the Department of Justice inserted it into the first complaint at filed back in October of twenty twenty. It said, we may be asking the judge for structural relief as necessary, and it's something the DJ's thinking about. And I don't
think it's a surprise. Why not go for it? You know, there's kind of a big is bad mentality right now, And if that's the case, then you want to break apart these dominant firms and they have this win, why not try to go for the gold on this?
So that's the case, though, I mean, is it one of those things where they're going to go for it but really it's going to be okay and they're not going to do it, and they're going to do something else, and then what's that something else instead?
Look, I think they will. It's going to be up to the judge and my gut here is that the judge probably would not order that kind of drastic relief. I just think that the judge was really specific here about finding that it's the default agreements that Google had entered into that were anti competitive, and what was harmful about them was that it did not allow the rivals to gain the data they needed through searches to have scale to be a good enough search engine. And those
are two big issues. So if those are the two things that are anti competitive, my suspicion is the judge will say, hey, no more default, no more payment to be the default search engine at these key search access points. And by the way, maybe you need to share some of this data you've collected over the years through all these searches with rivals to give them a chance to get better. Those are two options. And leahon Island's reporting was great about also this AI issue and concerned about
using its dominance to get a lead in AI. And maybe the dj will do something there too.
Because the AI thing is the one that I think has a lot of people concerned, not investors but just people think about AI and what it means for privacy and all these other issues. What does it mean for jobs and security and all these things which the market nobody has an idea, and certainly not the courts or regulators here. But what are Google's defenses here here, given that they did lose that antitrust case.
I think one of the things Google will do will point to language by the judge, And actually there was quite a bit of it in the complaint about the fact that it really has been a great innovator, that it's been ingenius, that the fact of the matter is it developed the best quality search engine in the world by putting in money, by putting in innovation, by hiring great engineers and ingenuity, the judge did say, And I think Google will say, look, you have no And also
the judge, by the way, said, even though Google had obtained a monopoly position, it continued to innovate, even though it didn't really have to once it gained that spot. So Google will say, look, you know, you have no guarantee that that same kind of innovative spirit will be behind the parent of this new company. If you cleave off Android or cleave off Chrome and it's run by some other entity, you know that might not be in
that entity's DNA. You have acknowledged that we're innovators and that will continue to innovate, and it makes the most sense for these assets to stay in our hands. That's what I think Google will say.
Google stock is down by Bowel, okay, alphabet stock down about three point five percent. Does that feel right in relation to what you're talking about and what you're looking at in the timeline or are we underpricing this kind of some kind of risk here?
What do you think?
I tend to think the market always overreacts a little bit to headlines. It might have been a little bit of a shock the news that the dj is actually going to ask for this, but this has been handied around as a possibility now for a couple of years, and I don't think anybody should be very surprised. And you know what, this is still going to take a
really long time. Google's going to appeal. Google will fight this, and in particular, if there's a divestit your order, Google will try to take this all the way to the Supreme Court. And I have little doubt that that kind of an order would be stayed pending all these appeals, so it would be years before they'd be implemented. So I think that the impact really is still to be felt for quite some time.
All right, Jen, thanks as always, life savery. When it comes to this stuff, I have no idea, you know, kind of how to gauge the risk here, but fortunately we have experts like General to help us out. Generally is a senior litigation analyst when we're intelligence, you know. To answer your question, Alex, I kind of thought this was more than I would have thought that the stock would have traded down. I thought it would have been a nothing burger. Oh, here we go again, trying to
break up bake Tech. Nothing ever comes from it.
But it all.
It's off three point four percent, which leads me to believe that some people are saying, we need to think about some remedies that the judge may impose and what that may mean for the value.
I mean, to be fair, it wasn't a whole lot of nothing before the cash market opened.
It wasn't.
It was down barely, so clearly there might be something to that as well.
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All right, let's get about our take on the markets here with Victoria Fernandez, Chief market strategistic Crossmark Global Investments. Victoria been saying it's a nothing burger CPI, and it was a nothing burger market reaction. Am I right or wrong?
Well, Alex, I think you're right in the sense of the report itself did not probably bring any big news. I think the ramifications in regards to what the Fed is going to do have probably changed because of this report. So we know, after the last ten days or so, the market's really been pricing in that fifty basis point move after the weekly jobless claim's last week, really anticipating that the Fed was going to jump in and really kind of give us a lift off here of fifty
basis points. I think that's changed following today's report. You're seeing some of that get priced out of the market. It's why we originally saw yields and move a little
bit higher after the report. They've kind of settled back down again, but I think we're going to have to see some repricing where it's just a twenty five basis point cut in September, although the market is still anticipating one hundred basis points by the end of the year, and I think that is too much and we'll continue to see some repricing over the next couple months.
All right, Victoria, Now, with a little bit of hindsight, what did you and your colleagues Acrossmark make of that market action a week ago Monday? From your perspective, what happened?
Yeah, so it was interesting because you got a weekly jobless claims number and then we got the non farm payrolls number. Okay, it came down, but it wasn't like this huge difference that really just caused us to take a step back and look and say, oh, my goodness,
everything's changed. We have seen a lot of maybe yellow flags, I don't want to say red flags, but concerns in the market around growth, where we've already been in that camp that we think the economy is slowing, that we have to be cautious of pullbacks in the market so that there's overvaluations and we need to see those names come back. I mean, you look at the numbers in the Jolts market, forget non farm payrolls right, immigration affects that,
there's other things that affect it. In seasonality. You look at the jolts number. Openings are down, quits are down. The key number we watch is the rehiring rate or the hiring rate itself. Both of those are in downward trends. So we've been seeing that manufacturing has been poor. So there's other elements coming in there that are telling you things don't look so good. For us, it was more of a confirmation of what we had been thinking. What's
surprising to us was the turnaround. How quickly the market just went from oh, my goodness, the sky is falling to oh, never mind, the sun's out and everything's great. There was such a quick turnaround that that makes us a little bit nervous as to where we're sitting right now.
So if you're nervous, what do you do?
Yeah, So for our clients, what we've been doing because we've been nervous, and what we continue to do is really kind of add to more of that defensive or staples part of our portfolio.
We have exposure to tech.
Hopefully people were doing what we've been doing all year and trimming some of those tech names is those valuations got a little bit too high, and we've been adding into more of the defensive areas, into some of the healthcare names, into those staples names. We do like the banks because of the yield curve steepening again will be beneficial for banks, but it all comes down to those companies with solid balance sheets. You really got to kind
of dig in there. It's not just all sectors, but discretionary versus staples continues to be low, and for us, that's another signal that the market has not reached a conviction low. We could see the market pulling back to the low that we saw last week again. So I think you need to kind of fill in your portfolio a little bit on the defensive side.
How about on fixed income Victoria Here we're the opportunities here. I mean to your treasury, we're just just a little bit below four percent here. That seems like a reasonable return. Or do I want to take some credit risk out there?
So look, I mean you're talking my language. I manage our taxable fixed income strategies here at Crossmark, So we want people to have some fixed income exposure. If you think the FED is going to cut rates, and I think everyone assumes they will at some point over the next couple of months. Then you can have some advantage to being in the short end of the curve. Even now with yields lower than where they had been, you still have the opportunity to get in and take advantage
of that short end of the curve coming down. I do think also you mentioned credit credit spreads have behaved really well. Did they widen out, you know, when all the volatility was going on in the market, Yes, but
they've already tightened up a little bit. So I think you can add some credit exposure, high quality credit we don't like junk bonds, investment grade credit a little bit further out the curve to lock in some of those rates you see right now and have good cash flow to help buffer maybe some equity volatility going forward.
When you take a look at the rest of earning season.
By the way, how closely are you looking at the specifics when we have so much uncertainty with the Fed as well as the upcoming election.
Yeah, earnings are key, and I know we're kind of winding down this earning season and it's actually kind of produced numbers better than what we thought that we would see. We actually thought we'd see more margin compression coming, although the PPI numbers tell us that there was some margin compression in there, so maybe it starts to show up in the third quarter. Guidance was very weak for the majority of companies in regards to consumers.
You were talking about the strength of the consumer.
So I think we're going to see a lot of that flow through. Hiring its down, so wages will stagnate. I think a lot of that is going to filter into third quarter earnings. People are already starting to look afforward to that quarter and what's going to happen there. That could also weigh on the markets a little bit. But this quarter turned out to be somewhat better than what we expected it to be.
But again right there.
At that double digit line, right about ten percent EPs growth?
All right, very good, Victoria Fernandez, Thank you so much. We appreciate it. Victoria Fernandez. Market strategists across Mark Global Investments, the Pride of the Houston, Texas native Houston Kalstan put there some good stuff.
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