Software Will Be Near-Term Tech Outperformer: Wedbush's Ives

at technology. We have earning a season about to begin in earnest tomorrow with the banks releasing their numbers, and then following that will be a whole host of industries and companies including technology. Uh will technology lead us out of this crisis? In terms of the market when the market really starts to move up, we've seen a nice

rebound here. Where will technology be? There's nobody better to chat about technology and tech stocks than Dan Ives, managing director for equity research at What Bush Securities, that joins us on the phone. Dan, thanks so much for joining us. Give us a sense of just over to pass month or so as the markets have gyrated? How is big tech performed? Book? And it's great to be here. Big Tech I think is performed as well and maybe even better than anyone could have thought in light of the pandemic.

I think what you're starting to see is the stronger getting stronger on the other side of the dark valley, the Amazon's, the Microsoft's, some of the large tech players that like Facebook included, and I think investors they're looking onto the other side of dark valley. In other words, where are these stocks? Where are the valuations in a normalized or at least a new normal two thousand twenty

one numbers right in the next quarter or two. And that's why you're seeing a flock to tech stocks, especially even in some of these more defensive plays like a Microsoft. So one thing that you wrote in a note was that the pandemic will further catalyze the massive shift to cloud computing. And I'm wondering to what degree that's already

priced in and where isn't it right now? Yeah, I think it's it's starting to get priced in, maybe on a Microsoft and some of the larger tech players like an Amazon with the a WSPS, I do not think it's priced in. Really across software, I think you're you're gonna see some of these software names forget just the zooms and the slacks and some of the core applications like citrics, but underneath a lot of the stacked names, the infrastructure, the tech stack, which is really application and

sass cross software. I think those are names that we continue to see, uh. You know, I think from a rereading perspective go higher as I think you see more investors go to those names in terms of the cloud stack, and I think software is going to be a bigger outperformer over the next three to six months in our opinion. So Dan, one of the things that's one of the concerns that's been heightened not just with the pandemic here, but also the trade tensions with China months ago, which

seems like a lifetime ago. Is a whole concept of supply chain. Um, how do you think the tech supply chain uh may change as a result of again depending the continuous trade attentions for China, but also uh, the

pandemic here. Yeah, I think the pandemic it's highlighted, as we've talked about many times even last year with the US China trade wars, just how heavily exposed US tech or broader tech Semi's smartphones is to the supply chain across Asia, and as much as there's tough talk, I just don't see that dramatically changing over the next two to three years. Because we talked about there's comings Like Apple, they made their bed in China in terms of fox

Con that's that is iPhone production. So ultimately, I think if you look at that and semmis, you can still see some production potentially moved to Vietnam and other parts of Asia, but at least for the foreseeable future, I do not see dramatic changes to the supply chain. The one thing I will say in why of this dark environment, you are starting to see some bright spots on the supply chain, which I'm starting to normalize, I think quicker than expected by call it early to mid May. So

that's actually where I was going to go. People have been talking about the pitfalls of having a global supply chain. What about the benefits as China reopens, right, I mean we saw better deliveries than expected, or you're expecting better deliveries with Tesla and with Apple you're starting to see some of the factories rev backup. Is it's actually a benefit at this point? Yeah, And I think right now is us or European consumers are locked down in their

houses focused on essentials. In China, they're buying iPhones and Tesla's and I think it speaks to one of the factors that's helping the likes of an Apple a Tesla because a gig of three in China. It is some of that diversification. And you're not just seeing from a supply chain in terms of protesting gig of three and

for Apple, you're also thinking from a demand perspective. And I do think that's something where when you get back to the earlier about tech, one of the things that's helping some of these companies is what they're seeing in the supply chains was demand throughout China, which I could tell you're starting to rebound pretty significantly even over the last two to three weeks. So Dan talk to us

about Tesla a little bit here. I mean, it just the concerns, I mean, you know, the issue I'm wondering if the consumers are going to be changing their behavior coming out of this pandemic, and one of the areas that people are thinking about it's just kind of the role of the automobile. How's Tesla doing through all of this look, and I think you've seen in the stock, especially coming off the better than expected delivery numbers which were reset lower a few weeks ago for one queue.

You know, bulls in Tesla are looking on the other side of this, not the next quarter or two, but in terms of ev demand, and Tula was really starting to game more more esteem, not just in China but across Europe. I do think when you talk about just the horrific unemployment and just what you're seeing just across the consumer landscape, you are seeing a slow down and you'll see that. I mean, just put numbers around it. The street originally was at five thirty or five and

fifty thousand units for Tesla. Now we're close to four hundred, four hundred k. But part of why a stock like Testa continues to outperform is because investors feel like it can navigate it. They obviously raise the cash to get through it from aquity perspective, and on the other side of this could start to thrive from an e V perspective in terms of some of the demand turns. Dad, just real quick here, I'm wondering how the drop off an oil prices will affect EVY demand given the fact

that it's a lot cheaper to fill up your car. Yeah, it's definitely. Uh, that's definitely a headwind for e V. Now some argue Tesla is more have fun, Like I still believe that's a called five percent headwind in terms of just what you're seeing on oil prices and gasoline prices, especially for new entrants like you're seeing Detroit focus more and more on the battery side and e V in terms of what's happening to win one gas. That is

an ultimate headwind for e V players. Although you look at Tesla and what Musk has been able to do, you know, much better than feared, and that's why you see the stock rallying even in this dark environment. Den i'ves thank you so much, of course, uh Dan Ives

of wet Bush Securities, Managing director of Equity Research. There's an incredible and growing dissonance between the economic data that we're getting with an increasing amount of jobless claims that defy any historical precedent, and then markets, which last week had their best rally since nineteen seventy four in the United States, and it's led Goldman sack strategies to actually revise their estimate it's for year end SMP levels upwards, saying that they really have faith in the fiscal and

the in the monetary policy stimulus that we're seeing. And this really raises a question, how much can you just put blind faith in stimulus at a time when companies are flying blind when it comes to earnings and growth

and profitability. Joining us now, we're so lucky to have Hugh Johnson, Chairman and Chief investment officer of Hugh Johnson Adviser is based in Albany, and Hugh, how much do you have conviction in the stimulus that we're seeing out of Washington, d C And the Federal Reserve at this point to continue to prop up equity valuations despite the big black hole that is forecasts from companies. Well, we had a positive response last week. You know, when I'm asked a question like that, I have to an uh

answer honestly, Lisa and say, I really don't know. I am a bit skeptical because I'm not sure to addresses really well the demand side of the sequaya. And but what I'm asked the question is it gonna work or is it not gonna work? I really have to turn to investors and investors tend to get it right. They tend to assess what the outcome is going to be in the answer we got last week is that the

stimulus that we're getting is going to have some impact. Now, it's not going to have any impact on the second quarter, the current quarter, which is going to be the most dismal quarter we've ever seen with g DP being down around twenty But the real question isn't the second quarter. The real question is third and fourth quarter. And I might add first two quarters of two thousand twenty one. And I think the answer has to be unbalanced based

on what I saw from investors last week. Is let's say it's going to be a positive impact, or we may turn the corner, maybe not the third quarter, but by the fourth quarter will have positive economic growth. So you give us just a sense of how you think this federal stimulus is going to really ripple through the economy. Is are we going to see it on main street, the small and midsized businesses, the consumers, as Lisa mentioned that job losses. Are we going to see that impact

the real economy? Uh, to some extent, it's gonna I I don't know it's gonna be that significant. Take a look at the p p P program and some of the numbers that we're seeing. They're assuming that we get enough banks, and assuming the banks get organized, and assuming the banks can make those loans with two small businesses, and those loans are going to turn into grants. The demand is right through the roof. Now, what are those

businesses gonna do? Well. One of the things they're gonna do where they're supposed to do is to keep the current employees employed and hopefully that helps. That's going to help some, but it's not going to help much until we get again to the third the fourth quarter when we look at the second quarter numbers. As Lisa was was suggesting, the claims numbers, the loss of jobs in the second quarter, Uh, the unemployment rate itself, Uh, they're gonna be really bad reading, as bad reading as you've

ever seen. But third quarter we might see some results. And there are other programs from the federal government. Um, you know that I think we'll have some positive impact that loans for example, to municipalities, counties and cities that qualify and you've got to be kind of big to qualify, that might help them through some tough times. When their revenues from taxes are gonna be just about nonexistent. So it'll help, It will help some, it'll get us through

a tough period. But the real key is we've got to have businesses come back to work and start to work. And I think we'll start to see that, not in the second quarter, but probably the third quarter, receive some results in the third. Going across my fingers anyway, so you're buying stocks right now, Well, that's a good question to know. That's in some ways it isn't it. It is. Yes, we are buying up, but we're still maintaining our meaningful sort of a meaningful allocation to equities. We did trim

our allocation equities. We cut back international, we cut back small and mid camp. If an investor comes to us and says i've got a fifty percent target for stocks, we're right around that fifty mark. We're not down at thirty, which we'd be if we were really barrish or worried. We're still around fifty. But if you look carefully at the portfolio, you'll see two things. You'll see one, it's

a very defensive portfolio. It emphasizes overweights. If you may things like health care, utilities, staples, so things that do well in a bear market. It overweights stocks with dividends in them. That's its defensive portfolio. But if you look carefully, you'll see we're starting to consider that. Look, this bear market is gonna end maybe third quarter, maybe first quarter

two thousand twenty one. And when we end a bear market and start a bull market sometime maybe in two thousand twenty one, hopefully stocks that are gonna work are the same old ones that always work, and that's technology, consumer discretionary stocks, industrials, and materials. Will start to add a little bit of that now, but not much. We're let's say, staging in staging and all right, just like

Tom Keene staging into the markets. Hugh Johnson, Chairman and Chief investment officer, Hugh Johnson Advisers, based in Alby, New York, giving us his thoughts as to the market again expecting at least a really really dismal second quarter in terms of earnings, in terms of GDP growth. And then the question is in everybody's mind right now, is to what extent does the economy and does corporate American global economy

come back? Is it kind of in the third fourth quarter or is it something that's pushed out into That's when investors are trying to get a sense of Right now, there's a big question about the Federal Reserves new bond purchasing program, in particular their focus on junk debt, a real big question. For the first time ever, they're delving into blow investment grade credit. Just how low will they go?

Is it's just a temporary effort meant to stave off some of the fallen angels Joining us now as R J. Gallo, senior portfolio manager a fixed income at Federated Hermes joining us are j. I'm wondering from your perspective, we saw the biggest rally, the biggest one day rally in junk debt on Front Thursday since the late ninety nineties. Do you think it's overdone? I think it's overdone. That's a great question. UM. I think right now the markets are all markets. It was a great week for for equities

to write um. Risk assets are responding to the fact that the second derivative, the rate of change, the rate of change in new cases, continues to head in a in a friendly direction, and so uh riff taking is coming back. The FED significantly accelerated that by opening up their buying programs to include how your corporate debt, which is a stark change from Federal Reserve history by any metric. Um The sharp move was dramatic. Our our traders were

recounting dramatic market conditions sharply higher. You can see an e t F, you can see it in bonds. I think the goal of the FED has been all along to make market functioning less of an issue, and by every metric, whether you're looking at weekly rates and munis, whether you're looking at commercial paper rates, whether you're looking at bill rates, they've all moved in a direction to

say markets are functioning better. Treasuries, unis, corporates, etcetera. Now the focus looking forward will be the broader fundamentalifications on credit defaults, downgrades, etcetera. So a little over down, a little emotional, maybe, but I think we're facing with a face with a lot of uncertain team. We're moving beyond the point where markets were dysfunctional, now to the point of assessing fundamentals as we go through likely U shaped

economic recovery. You're saying, you know that there is a support here, there's a question about fundamentals, what are you expecting r J when it comes to default and how much of that has been priced in? Well, first of on the fundamentals, I think there's a high level of uncertainty, and you can see it in Bloomberg's own data. You do the e CFC for those in front of a terminal UM the economic forecasts, and the median forecast for Q two GDP is a loss negative twenty two point.

The range is as high as a lot of decline of six, with some still suggesting a high of a little bit of growth. So a huge level uncertainty exists and and it Yeah, I almost hate the phrase markets don't like uncertainty. I think it's a silly phrase. Markets don't like high levels of uncertainty and shifts in the level of uncertainty in short periods of time. There's always uncertainty about the future. It's when it's extreme intense and wide and right now it's extreme intense and why so

it spread? Are are why there was a sharp sell off, especially in March, as markets were dysfunctional and the recession was setting in UM. We believe that there will be elevated default rates. We haven't put a number on it because I think there's sharp discrepancies across sectors. Uh. In addition to the recession, we had the oil price war

that now seems to be calming down somewhat. UM. I think safe to say as a firm, we went into this crisis underweight high yield, not because we thought COVID nineteam was going to get as bad as it has, but because valuation had gotten extraordinarily tight not and it wasn't compensating you for the uncertainties of the future. Those uncertainties became profound and very difficult. As we now know, we've been actually starting to add to our way how

yield our multi sector portfolios. Although we still remain slightly underweight. Why because of the uncertainties I just described. The fundamentals are still unclear, The sector ramifications are going to be vast and divergent. Oil in particular is a tough one UM,

and so we still think some caution is warranted. But over time, as some of that uncertainty stades, as evidenced by falling vix and and and just the passage of times, we see real data as opposed to fear of set data, then I wouldn't be shocked if we continue to incrementally move and get more constructive on how yell based upon valuation and as we see things unfold. R J, what is what is your expectation for credit quality across your portfolio?

I mean it's we're just in obviously the very very early stages here, but you know, if some of those GDP numbers come to fruition really going to be a pressure on a lot of balances. How are you thinking about that? Well, the interesting thing is that everybody in the market, whether they're in your role covering the market from an analytical or journalistic standpoint or from our role as being investment managers, we've never quite seen something as

profound as this. We've had a global financial crisis. I was around for that, We were around for the other recessions up in the in the business one way or another since nine. But nobody in the business has seen decline in g d P. Uh. You know, I think GDP contracted that its seasonally adjusted annirate of eight three percent. I think it was uh during the two thou procession,

so this could be like three times deeper um. But what's different about then and now is that this was in response to an exogenous shock, not an indogenous financial crisis, which too much leverage in the housing bubble was an

endogenous financial crisis back then. So if we can ramp back up with the huge amount of policy support, the two point three trillion in the Carra's Act, the FEDS myriad of programs from high yield to immunis to treasury, the mortgages, UM, if these cushions are are strong enough to give us enough of a bounce UM, then you have to believe that that the bottom will be this quarter, the quarter we're currently in UM two three is debatable whether we have a little bit more of a contraction

in the in the economy or not. The debatable prospect. But over times you start to reintroduce, and if the virus behaves reasonably well as we do reintroduce economic activity of all kinds of sorts that right now is largely been tabled in many areas, UM, then you have to believe that that this is like a big bridge loan to the economy, The Cares Act, the Fed, it's all a big bridgelander the economy to try to get us to a better day. Will it work? Will it not work.

Not totally clear. There's clearly optimism in the markets over the last week that it will work. UM. Back to the original question, that might have been a little bit overdone. We we have yet to see the earnings destruction. We have yet to see the fundamental data downgrades are coming. Um defaults will be rising. I think it's very difficult to sitting here and start pinpointing which names and which which individual sectoris and which you anticipate them. But it's

obvious that some sectors are more challenge than others. And this is what you have an analyst staff for. This is the time for active management. This is, you know, Federated an active manager. We're not a passive manager. We don't run bond index funds. Sorry, Ari Gally, once again, working to just cut in right now. We thank you so much for your commentary. Right now, we're gonna go to New York State Governor Andrew Cuomo. And that was R. J.

Gallas and your portfolio manager. Federate Attorney's time for Bloomberg Opinion. We're joined by Bloomberg Opinion columns Liam Denning. He covers all things on the energy front and land. We had over the weekend UM. This agreement by OPEC plus about ten million dollars ten million barrels per day cut in production. President Trump just tweeting just this morning that maybe as much as twenty million barrels a day. What do we know about disagreement and does it what does it really

mean for the global oil markets? I mean, I've I've always characterized this agreement as really OPEC plus and certain other players, including President Trump, you know, really trying to get ahead of UM what is actually just an inevitable issue, which is that they're going to have to cut supply. If if demand is down by you know, roughly a third by some estimates, then that means, you know, refiners

stop buying crude oil because customers aren't buying it. And that means if you're a producer and refiners aren't taking it, you have to find a place of store it, and you know, we could be running out of storage current rates UM, you know, sometime within a month or two, and that's when prices would you crash into single digits. So this disagreement to cut is I see as as kind of a veneer of control on a on a

pretty uncontrollable situation a veneer of control. I'm trying to understand the numbers, especially given the estimates that you highlight, which is that we could run out of Oorrige within weeks. And yet this agreement isn't going to go into effect until May first, technically, although a lot of them may barrels have already been sold in the in the futures market. So how much are we actually going to cut? Can

we avoid breaching capacity as some of these storage facilities. Well, I think that's certainly the aim, and I think it's a bit too early to the sages. Yeah, And look, I mean in the end, as I say, oh, Big Plus has to cut supply, Um, there is no other thing they can do. So I don't think it's necessarily a bad thing that they um kind of put it

in the context of this agreement. But essentially what they're trying to do, if I can borrow an analogy that's you know, quite prominent at the moment, is they're trying to flatten the curve essentially, rather than they can't coop

to that. Now, that's that's stuck for pandemic talk. Carry on now, thank you, uh, you know, and instead of running out lies to you beds are going to run out of tanker space, and a commodity that runs out of tanker space that you can't just dump, um, you know, essentially you're gonna have to start paying people to take

it off your hands. I mean, just to put this in context, my estimates on Friday had even under a best case scenario with this cut, another five million barrels going into storage within the space of you know, a couple of months. If we go back to the crash, that amount of oil went into inventory, but that happened over the course of about two years, and that was enough to do serious damage to the all market. Now we're talking about that happening in the space of weeks.

So Liam, where is America in terms of oil production here? I remember about thirteen million barrels a day. Is the American shop producers canna be reducing their output? Oh? Absolutely, I mean that is happening already, and you can see it in what's happening with the numbers in terms of acting cruise that are being deployed. I mean, that's coming

down at an enormous rate already. And if you think about it, those are the guys and the you know, the equipment that actually completes the wells that get drilled, and if they're coming off, as companies try to consider of cash shales, natural decline rate means that it will start to come off quite quickly. I would say, if it hasn't started to come off by the end of this quarter, almost certainly in the third quarter we will

start to see it and it will begin to accelerate. So, you know, going into that meeting on Friday, obviously the US was talking about, you know, contributing cuts, but these are cuts that were going to come anyway. It's not being done as an act of will. It's just a natural result of prices crashing. Yeah, which which raises the question of the Texas Railroad Commission, which evidently holds a lot of our Suddenly are people are looking to their

meeting tomorrow. Will it be the first time since the nineteen seventies that they curb aggressively Texas output of shale? What do you expect? I'm skeptical that we're going to see a lot out of that, partly because the most vocal proponent of it, of the Commission doing something, Ryan Sitton, is actually a Lane Duck commissioner. Um and we've seen disagreement playing out on Twitter, of course, between the commissioners as to what would happen. You also really need to

get in a sort of miniature version of OPEC. You need to get several state regulators to agree to to to curb output, because otherwise you'll have that similar dynamic where Texas may feel it curbs and other states jump in to take market share. And I think that's one thing that people are missing about this whole thing in general. The battle for market share hasn't gone away. You know.

We saw that most most prominently with the fact that there was this long argument with Mexico over what was in the end of rounding Era on the cut and the fact that we saw Saudio Radio cut its official selling prices the Asia last night. It just shows you that even if it's temporarily trying to support prices, the essential battle for market share in this or market isn't going away. Liam Denning, thank you so much for being with us. Liam Denning is an energy calmness with Bloomberg Opinion.

Thanks for listening to the Bloomberg Penl podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever. Podcast platform you prefer Paul Sweeney. I'm on Twitter at pt Sweeney and Lisa Bramoy. It's I'm on Twitter at Lisa Bramo. It's one before the podcast. You can always catch us worldwide. I'm Bloomberg Radio