Stocks Slip on Trade Concerns

in the yield curve. This concept of perhaps better than expected earnings coming out of companies that have pretty weak comps to to beat. Basically joining us now is Ben Emmon's Medley Global Advisors Global macro Strategy, and Ben, I'm looking right now at what might be the initial phases. I don't want to see the death of their inflation trade,

but the death of the inflation trade. You're seeing the yield curve continue to flatten, and you're seeing a measure of forward inflation five year five year up break even rates dropped near their lowest levels since two sixteen. What do you make of that? I can only say thanks for much for having us Um, well, there's obviously uncertainty has creeped in since the speech from Trump in New York last week when he started to voice his word

about substantial rising tears as the deal doesn't happen. So I think the bond market listened to that closely and saw like, okay, you know, there's always a risk that there will be no deal or will be delayed, and then people are looking at these December fifteen tears as the first one of the substantial rise. I think this is what's in the market's mind right now, that that

risk isn't totally abated yet, right. You know, the real reflationary trades you spoke about that happened in sort of mid October was only idea that the tears would be de escalated. So that's now been taken a little bit back. At least the market seems to be cautious that that that that the escalation may not happen so quickly. So

therefore I think this is why the YUK flattened. In addition to that, what we have had in the meantime is really soft inflation data, right, whether you look at PPI data for example aland Germany today or import price in next last week in the US all shows very global disciplationary pressure from the trade wars. I think that

too presses down on the UK whoy I get this flattening. So, Ben, if we do get a Phase one type of deal on schedule as we head into would you want to be you know, more exposure to the US or maybe have a little bit more of a global exposure. How do you view that? Yeah, I'm definitely on that idea, Paul, because you know, if you look at the performance, then yes, the US has outperformed this mostly this entire time in

the trade war. And the areas that have been effected most by the trade war are an, Asia, Pacific in Europe, and so there is of course a valuation difference there that that you would presume that if the Phase one deal happens and as some confidence coming back that trade in particularly global trade, which seems to be pretty depressed

at this point. Take for example, the export import data from Japan overnight is a good good indicator of death and that could see be some some rebound there and I think then countries that are very sensitive to the global trade are going to benefit from that. I think days where the value is as opposed to the U stock market, which could to perform, but maybe not as

much as relative to those you know, undervalued markets. If if you, if you will, right like so, I think that is probably your trade next year, of course, condition upon that this Space one deal successfully gets completed. One

thing I'm struggling to understand. Yesterday, at around I don't know, six fifteen pm Eastern time, Wall Street time, there was the headline about the Hong Kong Bill that was passed by the Senate, and this is basically UH saying that the U s stands in alliance with the Hong Kong protesters in asserting freedom and pushing back against Beijing. Beijing has come out vehemently against this. There was concern that this would impede or torpedo any potential for a Phase

one trade deal. Come now, Uh, you know, several hours later, people are not even thinking about it or talking about it. It's and largely dismissed as no ways and being sort of symbolic more than anything else, not leading to any serious disruption. What's the right narrative here? Well, I think that is the right narrative at leastaid that that yes, it's an important signal by the Senate of course, to take a stance on pro democracy in Hong Kong. And that's that is I think well known out there and

I think markets understand it. But the link between that bill and the progress in the trade talks that may be not so strong, and and probably the reason really is that the retaliation that China talks about may not just necessarily happen so quickly. I think one of the the news items that can out this morning is actually making the comparison to other measures that the US has threatened with or or even done, like the UAHWE case, that that China has not retaliated on those situations either.

So I think this is probably what creeping into the market's mind of that this is an important bill and it matters, but it may not matter as much for the trade deal from here. With more matters is of course, ultimately the agreement on what is the there rollback going to be about and what is the agricultural agricultural purchase is going to be about to make this deal actually happen. In other words, will the deal phase one be really the sixty that Trump talks about, or will be less

than six? I think that's ultimately with a market will trade on if it is a lot less than six, I think then you get more uncertainty about the future of the trade deal that you know phase two. So Ben, if we do again I'm operating assumption that mean we do get a Phase one deal on schedule. Is that my signal to maybe to dip my toe into emerging markets? Yeah, I mean that is I think the general consense out there that again, where is the value at the moment

if you compare the US to other markets? Right? And that and that is indeed Asia specific or Europe and some parts of emerging markets. That's that's I think the catalysts that people feel confident that if Phase one is completed, it's in writing we really have a base for we can work off the more structural issues over long term.

And what most of all that matters is that people probably discount that there will be a level of de escalation from the tears have been put in place over course in time next year into into that would have an economic impact, and that I think is why investors are pre positioning themselves on that Phase one complete. There's opportunity in these undervalued marketss Ben Emon's thank you so

much for joining us. Bend is uh metally Global Advisors, global macro strategist, giving us some thoughts on kind of how this could play out. Trade still very much front and center for investors in the question is I have probably is you know, it seems like the consensus is a phase one deal is coming. Is there downside if it doesn't come? You know, and what is that downside? And trying to uh, you know, kind of put a

handle on that. But there's certainly some arguments for taking on a little bit more risk should we get that phase one deal. What a year nineteen has been for equity markets, double digit increases across the SMP, the doll and NASDAK. Where do we go in? Phil Orlando, chief equity market strategist and had of client portfolio management at Federate Investors, I'm sure has some answers. Phil, thanks so

much for joining us. You know, one of the discussions we have, you know, almost daily here is this is kind of the bull market that nobody really loves or trust. What is your sense of the market here given where we are at, you know, close to twenty thousand on the Dow. No one loves or trusted. This is the

most hated bull market in the history of civilization. There you go, remember that that a year ago and after that waterfall decline that we saw that that ended in Christmas Eve because the market was pricing in with absolute certainty the fact that recession had you just started, it was about to start. Stocks were trading at fourteen times earnings.

We had a very different view that that we did not believe that there was any near term risk of recession in twenty eighteen or twenty nineteen or twenty we still believe that multiples at fourteen times forward earnings in our view, we're way too pessimistic because you had very benign levels of both interest rates and inflation. Core inflation the PC sitting at one point seven percent right now.

So the multiple at eighteen times earnings, where it was a year ago October was exactly where it should have been. In our view this year is that we would spend the year sort of grindering our way back to that level. So we're probably in around I don't know, seventeen seventeen a half times earnings right now. We're not quite there yet, but we have hit our thirty one hundred full year forecast, um, you know, six weeks before the end of the year. Indeed,

so what drives things are here? Um, the consolidation that we saw on corporate earnings this year was was absolutely understandable because we were up twenty in calendar eighteen. That that's not sustainable. So we're gonna get back onto a growth trajectory for earnings next year. LI So we think maybe something in the eight percent neighborhood, give or take, we're gonna get a little bit more multiple expansion because

inflation and interest rates are still relatively benign. So if we do a hundred and eighty dollars and earnings next year, which is our forecast, and and we get a multiple that's in that eighteen eighteen and a half times earnings neighborhood, we get to our thirty five hundred forecast on the SMP five hundred. Now we're sitting at thirty one hundred.

Now that's not a huge move, but like you said at the very beginning, Paul, where we're up you know, thirty two percent or something like that in the last year, and and uh, if we can do another ten or fifteen percent next year, that ain't bad. That ain't bad. Indeed, I'm trying to figure out that what the leader is going to be here because it's really been tech driving a lot of the games that we've seen in Can

You to Be Tech? So they understand what's going on as a result of of the reduction in tax rates, the repatriation of two point seven trillion dollars back into the United States and we've we've only brought a trillion dollars of it back so far, and the automatic expensing of cap X. We are going through, in my opinion, one of the most significant technology upgrade cycles we've seen since the White two K build up back in the late nineties. That that trend ought to continue through at

least the end of next year. So you look at you say, well, texts had a pretty good year the last year or two. They should have had a good year, and we should have another good year as companies continue to you know, upgrade their software and whatever else they're doing in order to fix up their their technology platforms. So so you've been absolutely on it on this equity call, this bullish call here. Where could you be wrong in

your here? Well, I think there's a very significant uh swing factor here and that's the results of the presidential election in in t I mean, our base case is that we get good election results that allow the market friendly, economic friendly, investor friendly fiscal policies that we've seen the last couple of years to continue. But that could be wrong. We we could have a very radically different set of fiscal policies, uh waking up to in calendar twenty one.

And and the market is a forward looking discounting mechanism is going to price that in early based upon polling or based upon the the actual election results in November of next year. If if it looks as if there's gonna be a radically different change in fiscal policy approach and therefore economic growth, corporate earnings growth, and everything else. Phil Orlando, thank you so much for that. Phil Orlando is cheap equity market strategist at Federated Investors. Always wonderful insights.

Interesting to think that tech will continue to drive the market towards that goal for the SMP five hundred and ten. That ain't bad. He's been right, He's been right. Let's shift gears a little bit to healthcare and what some people are calling a drug shortage, which is incredibly ironic considering the focus on the costs of certain drugs catering

to specific niche diseases. Michael al kare joining us here in our Interactive Broker Studios, President of Premier Inc. Healthcare Management Company, and I'm wondering from your person, Factive, what is this shortage all about? Yeah, thank you for having me first. First of all, the drug shortages pertain to a certain part of the pharmacy market. So it's it's

related to generic drugs. So as you are well aware, in the sort of the evolution of a drug, a drug comes out typically it's a branded and then um, after a number of years, that drug goes to a generic status. What happens then is obviously the price goes down. And I'll just use an analogy. It starts at a hundred bucks, it sometimes ends up at two bucks. Along the way, you have various producers of that product that have to exit the market because they can't make margins.

So some may have high cost and at fifty bucks to share they exit. Some have to exit at twenty and then you know, when the market sort of settles out, you may only have one or two suppliers. When you have either a monopoly or a duopoly. That's when obviously drug prices actually go back up. Uh. And then our job at Premiere is to figure out ways to create

health markets. So the focus of a company that we just launch called provide g X is to bring new entrance into the market when you have a monopoly or duopoly. So we'll actually invest capital in new companies that we think have a history of high quality manufacturing to create a healthier market, healthier supply. So what are some of

the drugs or treatments that are experiencing shortages? Now, yeah, it's pretty crazy because there's some just basic stuff that our healthcare systems need that will be uh in a shortage situation in any point in time. Think of sailing solutions, So those are the those are the the therapies that are being utilized by I V s. UH. Think of nutritionals, just basic nutritionals. If you're in the hospital for a longer term stay and you need nutritionals. You know. Those

are drugs that oftentimes are in short supply. Things like morphine have been on the shortage list. Probifle that's the drug that allows you to go under anesthetic that has been under a shortage. UH. There was a very very important drug that focused on um toxic shock. Uh and there was a Jamma article written in two thousand and seventeen.

UM And because we didn't have access to this drug, the Jamma article sort of proved out that uh it increased mortality because we didn't have that drug by three point seven percent during the time that that drug was in a shortage situation. UH. And it was a uh EF the epene from family, so it really helped to sort of treat low blood pressure when your body entered into shock. So we think there was about thirteen billion

dollars of costs associated with that. Alright, So going forward, I'm trying to just understand from a big picture standpoint, what can be done to put the emphasis on creating more and affordable generic drugs at a time when the pharmaceutical companies in large part are focused on the cancer drug rugs that are sort of hot, and they're and they're very they can be priced at very high points, but don't necessarily take care of this need. So great questions.

So what we want to do uh and again through um that company I mentioned provide g X, we want to actually go out to smaller manufacturers who are actually are in the market to produce drugs today UH and help them expand either their production or help them get additional and s, which is the approval from the s the f D eight actually UH to actually manufacture the drugs.

So that's number one. Number two and this is something that keeps me up at night is we have issues with the active pharmaceutical ingredient, that's the raw goods that go into manufacturing these generic drugs. UM. Little known fact of these raw goods for generic drugs are actually done in China, manufactured in China. So what keeps me up at night is the ability of potentially China to weaponize you know this this and balance sort of in the

supply chain. So think of a p I s for antibiotics, think of things around UM cancer drugs, things around UM acid, reflectious basic drugs that our population needs. I do worry about having such a dependence on that raw material being produced in one country. Michael Alcary, thank you so much for joining us. We appreciate you coming in. Michael's the president of Premier Healthcare coming talking about healthcare shortages which are more pronounced and I probably would have guest. Thanks

for listening to the Bloomberg P and L 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. I'm Lisa abram Woids. I'm on Twitter at Lisa Abramoids. One before the podcast, you can always catch us worldwide. I'm Bloomberg Radio