Netflix Shares Plunge; Morgan Stanley Posts Steep Trading Slide

Stanley report earnings this morning. Kind of a mixed bag, I would say, from some of the big money center banks and global investment banks. That kind of help us pass through what we are seeing. We welcome Ken. Leon Ken is a global director of Industry and Equity Research at c f R. A Ken, thanks so much for joining us. Let's start with Morgan Stanley since they just

printed this morning. What would you take away there? So it was an earning speed eight sets and they did this really on the more stable businesses and wealth management. Asset management and cost control areas that are really a burden right now are tied to the capital markets. Uh, the equity underwriting was flat sixtent come down, m and A has really fallen off for Morgan, failing at other banks down eighteen percent, and of course trading as well.

UM has been weak with investors on the sidelines as it relates to global worries about trade tariffs and things like that. So Ken wired shares basically flat this morning. Shares are flat UM, and I would say all the large banks had a terrific four week performance, you know, first starting with the June seven Federal Reserve approving their capital plans. UM. Morgan Fanley is up about ten percent since June. UM. Looking at the stock today, we reiterate

our by recommendation. We have a forty nine dollar target price and feel that, uh, you know, the overhang just on the capital markets, you know, for Morgan Stanley to hit it out of the park or a fire on all cylinders need to see improvement related to investment banking. So Ken, let's talk to let's go to the capital market side of the business for these big banks here it's been you know, I'm just thinking back, you know, three or four or five quarters, it's been very difficult

for these companies to put us some good numbers. And I'm just wondering, is this kind of a a cyclical issue just market conditions or is this something more secular about just kind of the profitability that these capital markets desks and businesses can generate for these big investment banks. It's a great question, and related to capital markets, particularly banking,

it's it's cyclical. Um. You know, Morgan's Familey, Goldman and JP Morgan are usually typically in the top three rankings of anything you choose and underwriting, and then when it relates to their business, Morgans Faniley has been really moving away from kind of cyclical businesses to the ability to have more stable recurring revenue and they're getting that from

a Lard's wealth management franchise and the ability to expand that. Um. The difference really in performance for these stocks versus other others in the financial sectors predictability. So um, yes, capital markets is important, but I think directionally, whether you look at a Morgan Stanley or Goldman Sachs diversifying it to retail, they're they're looking for more predictable businesses that give investors

more confidence about their outlook. So Ken, you know, now that we have the major US banks all reporting, I'm wondering, what do you mean your big takeaways. The big takeaway is focuses on the inverted deield curve or the forward curve, which suggests um a narrowing of net interest margin and then lower net interest income and calibrating what that does

for the earnings outlook. So that's a factor. But at the same time, there's other inputs into net interest income, which for the other large banks of that can be you know, of their total net revenue UM it's growth and investor accounts or in retail banking. Uh, the consumer is very strong. Yet each of these banks has sensitivity to net interest income, so they have to pull growth from non interest income, which is their businesses, and then

also from cost control. The other big plus, because we we've moved the story away from the capital plans, these are very significant for all these acts. The ability to have significant return of capital with buy back and dividend increases including more in Stanley today now to ten point seven billion buy back six pin point seven percent dividend increased rays these banks are beginning to look at attractive total return yield stocks and you could not say that

over the last seven to ten years. So I guess can one thing I'm struggling with I mean, I get the sort buy back dividend story. It's just an income story. But going back to what you were talking about with the net interest margin, this has been offset in the past years of financial oppression in the wake of zero rate policies. It's been offset by much higher capital markets activity.

What does it say to you that we are not seeing that acceleration in capital markets activity now and you know the prospects going forward, even with lower rates ahead, the prospects that perhaps capital markets are kind of done as far as what they need to be doing well. There's two areas here. First, related to interest rates, that this is a reversal to where we were at the end of last year. So analysts were factoring and rising rates, perhaps two to three increases, and that went away, So

then of course that reverse net interesting income. The other part of your question is really interesting and it really ties to what's going to spur the capital markets. We had Chairman Pal two weeks ago testifying essentially the worry is about in the US at least investment capital investment and plant and equipment um and there's been a delay in doing that. There's also uncertainties that really tied to CEO confidence. Uh the ability to invest here or overseas

or even mergers and acquisitions for all these banks is down. UM. There is a good pipeline related to uh N N a UM, but it's been very challenging right now because the visibility is very difficult. Ken Leyan, thank you so much for being with us and for all of your insights. Can lea On, Global Director of Industry and Equity Research at c f r A Research. It's ten thirty three on Wall Street. Time to check in with Bloomberg Opinion. We are so lucky to be joined by Shara O.

V Day Bloomberg opinion columnists focusing on all things technology. Obviously, today the big story not just in technology but broadly across stock markets. Netflix shares down more than ten percent. They reported yesterday after the bell that they missed their subscriber forecast by what more than fifty percent, almost almost fifty percent, and that it's a subscriber base dropped in the United States. What happened? I do not know. I

think the company's company. What is your explanation? The company's explanation was a couple of things. One is that Netflix increased prices for most subscription plans, both in the United States and in several other countries at the beginning of this year. Starting at the beginning of this year, and the company said that it missed its subscriber forecast um even more than an expected in as places where it increased prices, which to me shows a lack of pricing

power for Netflix. Right if if the idea of Netflix is this thing is so valuable, people will pay whatever it costs to get access to it, I think this

these second quarter numbers kind of deflated that idea. The second issue Netflix raised was it has, you know, It's outs, all of these kind of original programmings or stuff that it buys and airs exclusively on Netflix, and it said that the slate of programming in the second quarter drew in fewer subscribers than it had expected, which is not a great sign either for Netflix ability to kind of pick must watch programming, or frankly, for this implicit promise

of Netflix that it doesn't really matter. Individual pieces of content are not that material. The thing that matters is this kind of buffet of offerings. So if people are looking at that buffet and making a decision to turn off Netflix or not subscribe to Netflix because of one or two shows. That maybe indicates that individual pieces of programming are more were important that Netflix suggests. And again I think that that dense the thesis behind the optimistic

scenario about Netflix. Sure, I think you're spot on there. I think that and that raises I think probably the big issue for a lot of people that are concerned about this doctor bears out there that boy, it kind of sounds and looks like it's starting to sound starting to look like more of a just a traditional media company where you gotta have hits, and you know, it's not just about having the you know, there's the secret

sauce of oh I'm a streamer. Now did they talk at all about uh, to what extent did they talk about competition? Because we know that Disney Plus is launching this year than a T and T Comcast or launching their streamers next year? How did they kind of frame that up? Netflix, at least in the second quarter, downplayed the effective competition because it said, look, we were all aware of these looming competing Netflix like services from HBO or or from a T and T, s Time Warner division,

from Apple, from NBC down the road. But those haven't started yet, right, So it's not like there's an immediate, uh, competitive threat out there that is currently launched Disney. I forgot to mention Disney. So there's nothing new necessarily on the horizon. But you've got to think that some of

the competition, it's it's in people's brains, right. If you know, hey, there's gonna be this new thing from Disney or from HBO, maybe that plays in people's minds that they're kind of saving money to see what Apple comes up with or what Disney comes up with. But Netflix kind of said that that wasn't a factor in the second quarter. So this sounds bad, okay, I mean like just a suit a stute analysis from Trunch and Trunch analysis. Um, this all sounds really bad. And certainly you're seeing a big

stock price move. Looks at the bonds. Some of them traded down, you know, a couple of cents on the dollar yesterday, but there's still trading above par. And this is a company that has relied on debt markets to continue to burn cash, and it seems like debt markets believe in them. They're saying, we believe and you're seeing investors, analysts a cross wall streets saying we do believe also, and we're going to say we should you should go

out and buy Netflix shares. What's the bull case from here that this was just a temporary blip and that we'll see Netflix gain its mojo in the third quarter. I think the bull case is that, as you said that that this may be a blip, you see that Netflix is expecting that it's going to return to more normal kind of subscriber growth numbers in this current third quarter. But let me make it clear Netflix does not exist

period without the faith of bond investors. This is a company that is burning three to three and a half billion dollars in cash every single year. It is not financially sustainable unless it can continue to borrow money at cheap rates. Otherwise there is no Netflix. And so anything that dnse the story dense the optimism of both bond and stock investors, which are kind of working in tandem here on Netflix. Anything that that dnse, that story threatens

to kind of unraveled. This whole thing. Just a little fun fact. Sure, Overday and I have bonded for for months and months over the Netflix story because we share joint interests account account, start account. We merely think that bond investors are completely irrational? What and we do not. I no longer write columns, so I'm not going to say that. But they're just it's a hundred forty million dollars of equity cushion underneath my I don't have to worry.

So that's that. That's kind of play. Bloomberg Opinion columnists. You're overday, Thank you so much. Well, investors are trying to gauge where the US economy is amidst you know, weakening economies in Europe, slowing economy in China. How can the US economy remain vibrant when many of its trading partners are struggling to get the latest We welcome our guest, God Lebanon, Chief Economists North America at the conference board. Uh so, God, what's the data that you're seeing telling

you about the US economy? Well, so, our leading economic index decline today, and that's not good news. But it's not as bad as bad as it looks. I think our index is slightly tilted towards the manufacturing sector, which is doing not as well as the rest of the economy. Um. I think, on the other hand, we have a very strong consumer spending numbers in recent months. You know, there was after the week winter there was a concern that the consumer spending is going to remain in a slow territory.

But that's not the case. Um So, I think the decline in the leading index is not as bad as it looks. It's interesting though, to me, because this is the story we keep hearing. The consumer is strong, industrials and corporate America feeling less certain and certainly seeing less investment. Uh So, is this sort of indicative of the consumer being a lagging indicator and manufacturers being out front in the economic cycle or the other way around. Well, in general,

consumer spending is actually leading business investment historically. I think part of the weakness that we are seeing now in business investment and in manufacturing is a result of the weakness in the rest of the world. But I think, and you know, if if manufacturing and business investment will remain slow at some point, it will impact hiring and and consumer spending as well. But at the moment, there seems to be some stronger, stronger growth, independent growth, I

would say, from the consumer. So when we talk about you highlight the man facturing sector we've we've had some evidence that that has been weakening over the last several quarters. I'm just trying to parse out how much of that is just kind of trade concerns, Um, you know, maybe corporate spending kind of pulling back in the face of uncertainty about trade. Or is it just the kind of a slowing or just part of the cycle here we

are ten plus years into a cycle. Do you have a sense of how much it's just Hey, it's just the psychle versus boy, I'm really concerned about some of these macro geopolitical issues. I think it's it's both. We we sometimes have cycles in manufacturing that don't spread to the rest of the economy. Like twenty fifteen twenty sixteen we had a genuine recession in manufacturing that the economy

continued to grow. I think the manufacturing, as I said, is more impacted by the rest of the world, and there is some significant weakness in some parts of the world. So I think, um, it is a lot because of that. But if consumer spending continues to grow at three plus per cent and manufacturing at some point will pick up. So, just to put this in a perspective, the zero point three pc decline in the leading economic indicators. The index

is the first decline since last December. And you talked about the manufacturing how that let it, But the housing side of things, the real estate side, I'm trying to figure out where that fits into the narrative because that also contributed to the decline. Yeah, so housing has been

a weakness for a year. But I think one of the main implications of the large drop in interest rates that we have in the economy, and and over a hundred basis point drop in long term rates will boost the economy, and so a lot of the impact should be through housing. We are seeing already some increase in mortgage applications and I think housing will will improve for the rest of the year. So, God, where are you

in the recession discussion? But there are certain parties out there, a certain factions in the marketplace that feel like, Gee, the timing, if nothing else would lead us to a recession perhaps by mid twenty What is your data telling you. I think the leading indicators are good for three to six months and they're not signaling any recession during that time. Beyond that, I think we have to think what what

will cause a recession? There could things could pop up, but at the moment, I don't see anything obvious that will cause a recession. So I think it's as likely to happen in twenty twenty one, or twenty twenty two, or or twenty twenty. But it's it's not the fact that we just broke the historical record for the longest expansion doesn't by itself mean that we are about to face a recession. God Levanon, thank you so much for

being with us. God levan and is chief economist for North America at the conference port Thanks for listening to the Bloomberg Penl podcasts. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Paul Sweeney. I'm on Twitter at pt Sweeney. I'm Lisa Abram Woyds. I'm on Twitter at Lisa Abram Woyds. One. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio.