Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside my co host Matt Miller.
Every business day we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moving news.
Find the Bloomberg Markets podcast called Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com Slash podcast. Let's turn to economics because we've got a lot of eco data this week. We've got a lot of central banks meeting around the globe. I think the Bank of Japan, the ECB coming this week, along with the US Bank of England next week. So a lot to chew on
there from the central bank perspective. Let's break it down with Liz McCormick, chief correspondent of Global macro Markets at Bloomberg News, and Michael McKee, international Economics and Policy correspondent with Bloomberg News, who joins us here in studio. Mike, just want to start with you. We had the the PMIS come out. I don't they didn't look that good to me.
I mean, what do you.
Know, I'm manufacturing service. The composite PMI slowed from last month. What do you reading to these types of numbers.
Well, the economy is slowing, which we expected. The question is how fast does it slow. The Bloomberg most recent Bloomberg Economic survey that just came out last Friday, suggests that economists think that the US economy is going to fall off cliff starting in this quarter, but that includes July, and that's not kind of what the story the data are telling at this point. Now you look at a number that's forty nine for manufacturing, the PMI is not
a great number. It's below the level in theory that is break even. But we still see services above healthily above fifty, and composite above fifty. So things have slowed down, but they don't seem to match up with what people are expecting to happen.
Okay, so you're a glass half full type of person.
I'm wait until the waitress comes around.
Fill it up again.
We got GDP numbers on Thursday, and we get the latest spending numbers on Friday, so we'll have a much better view by Friday of where the economy is. Unfortunately, for the Fed, they're meeting Wednesday.
Yeah.
Well, speaking of that optimism, I wonder Liz, if you can talk us through this Nirvana scenario that we're hearing about, and.
Is that what we're gonna see?
Well, you know I love ed Yar Denny, but Nirvana we all wanted show.
That's great.
But yeah, well, I mean clearly there is some like Mike just said, some of the dire predictions many thought we might be in a recession already haven't panned out. So the market is kind of kind of more so saying hey, there's a possibility we could get through this. I mean, we've got five hundred basis points of tightening already.
FED says they're going to do some more markets pricing in a little that could we have this you know, I call it the nebulous soft landing on that possibly the market is pricing in some easy next year, but the FED could ease a bit even if we're not in a recession, just to get things better in line to normalize policy. So I would say there's still kind of a camps out there hard landing policy mistake from
the FED is coming. They should have stopped to the h Maybe they'll pull this off kind of thing, and you know, we'll have to talk in maybe six months in a year.
See it was right right.
All right, So Michael, you're the international guy here. Bank of Japan this week, ECB this week, Bank of England next week. How does a market look at some of these other international national banks visa v what kind of what the FED does?
Don't forget the Bank of Ghana which raised rates today.
Oh good to know to thirty percent.
Inflation is running at forty two and a half percent a year there, so they're a little bit above that two percent target. Yeah, But the FED is driving everything in the sense that we are the by far biggest economy, and it's the most influential central bank, and it is where the US rate settles, is what drives currency trading. So everybody's watching that, and then they'll be perhaps more eyes on. At this point the ECB, they're in the
sort of same situation as the Fed. Christine and the Guard has to and company have to decide whether they're one and done. They're going to do one more and then they will hold and wait and see what happens, or do they promise to do a series of rate hikes still because they're still concerned about where inflation is the Bank of Japan, the consensus is that a huge change is coming the end of yield curve control, but not now, so it's a question of when do they
get there. What'll be interesting with the Bank of Japan is to see what their economic forecasts are, because the reporting from Bloomberg is that what we're going to see is a big increase in the Bank of Japan's inflation outlook. They're going to raise their inflation view, which is kind of the opposite of what the other central banks want to do, but it's what the Bank of Japan wants to see happen.
So as we head into this kind of triple header of central banks, which do you think we'll learn the most from in terms of where we're heading.
Well, it depends, And this is a good question for Liz because it's a it's a matter of interpretation. What everybody wants to know from the FED and the ECB is what next and how specific are they going to be about what next? Whereas the Bank of Japan is not going to really do anything and probably won't say a whole lot, but if they do raise their inflation forecasts a lot, that's going to set up a lot to talk about what do they do next, how much closer. Are we to the end of your curve control?
So, Liz, again, what's kind of the market. Does the market feel like this Federal Reserve is still behind the curve? I mean when you look at the trading week, the week, month, the month here, it's felt like for a long time the market wasn't listening to the Fed.
Yeah, I think, well, I think the market has kind of thought the Fed was behind a curve on both ends. Obviously late to the party to realize inflation wasn't transitory, so they were slow to tight and slow to stop their quantitative easing. And then there are some who feel like Fed is going too far, like the market is only priced for one more quarter point hike. We know
the Fed's dots have said two. It'd be interesting to see if Chairman Powell, which he's been really you know, kind of doubling down and saying to whoever he talks to Congress, whomever, there's two more hikes coming. That's what a lot of our officials are signaling.
Does he tone that down a little.
I think he clearly doesn't want to, just like Christine Legard, like Mike was saying, they don't want to kind of gin up animal spirits too much to say we were done, we've won the battle, because they're pivotal, you know, at not a key inflection point, but getting there.
But inflation is above both.
Their targets, right, So maybe somebody called it endgame communication, like, you know, how far are we How do we kind of gingerly get us into even if it's higher for longer that they get to wherever and they stay there for a while. That's the next thing. But I think that's what they're trying to say. We're getting closer, maybe more work to do, but we're not for sure done.
You know.
They don't want to signal that, and I think that's why the market is in price for two hikes.
When you said does the market think the FED is still behind the curve? I was thinking, well, it depends on what day of the week it.
Is, right exactly. Well, and it's such a great point that they were too late to the party and now people think they're too late to leave. It sounds like, Liz, based on what we were saying with Mike earlier about this triple header this week, what are you going to be looking at the most?
Well, I probably since I live here, have to say the Fed, because I mean like they do move all boats. I mean for a while, like Edna Current and I were talking the other day, for a while we all thought maybe boj is right the most exciting this week, and then we had that great reporting from our folks saying not this time. Like Mike said, that's like a waiting on GOODO. We keep thinking that you'll curve control, change, tweak whatever is coming. So I really think it's the Fed.
You know, how do they signal? Does is there a way they can you know, get the market to price up a little bit? I think, you know, Pow wants as much optionality, but this bond market really kind of wants to rally.
So we'll see how.
He does with that.
And Michael, just for our friends who maybe don't have a good understanding of kind of inflation in Europe, why is it so much worse there? It seems like even though everybody's over there traveling, you know, that's.
Well, it's based on a few different things.
Especially energy has been an issue there, and their indexes are constructed a little bit differently from ours, so they're not directly comparable, but they do show the problems that we've had and they have had much bigger rate increases with some of the pattern barketing they have that people are worried about. But can it come down fast? Well, inflation's coming, I mean energy prices are coming down. So
as long as that happens, inflation should come down. And when you look at the PMI to take us back to where we started for Germany thirty eighty for manufacturing, that suggests you're going to see some price pressures.
Ease.
Okay, great stuff, great having you both in here. I looked up and Liz was right there. I was expecting zoom, but Liz was right there. LIZI McCormick, chief correspondent of Global macro Markets with Bloomberg News, and Michael McKee, International Economics and Policy correspondent, both the Bloomberg News, joining us
both here in our Bloomberg Interactive Broker studio. And on Monday, by the way, I mean usual on a Monday, you get the Bloomberg salespeople because they have their big morning media on Monday, so all the kids are and you get us and we get some of the economists.
And that's how it works.
Like Liz is doing an incredible Q and A session. I think tomorrow today I'm.
Going to be front row.
I can't wait for all internally, ask me anything.
Liz McCormick and the benefit of her experience.
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Ken's are lying Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot com, the iHeartRadio app and the Bloomberg Business App, or listen on demand wherever you get your podcasts.
Madison Mills, Paul Sweeney here in our Bloomberg Interactive Broker Studio. Big big earnings week, technology coming in to focus. I'm talking Microsoft, Alphabet, Meta, a bunch of others, and I tell you what these com be is better delivered. Nastac is up about thirty four percent just a year to date. So anticipation in the market for really strong performance. It's see if they can deliver. Dan Ives.
He always delivers.
Dan Ives as managing director and senior equities analysts for web Bush Security.
So Dan, a big week for tech. What do you expect.
I think it's get out the popcorn. I mean, in my opinion, we're going to see an uptick and it spend. I think Cloud's going to be strong from the likes of the behemoths Microsoft as well as Alphabet and I think it's all about AI spend. We're starting to see monizations sooner arrive than later. I mean, Paul in my opinion, Bright green Light, Dome and Tech I think up twelve to fifteen percent second half of the year.
Wow, Dan, how much are you going to be looking at capital allocation when it comes to overall it spend companies that are portioning off a larger chunk of that pie, specifically to AI. And are there any companies that could be hurt or dinged because of that allocation?
Yeah, it's a great question. That's why right now the trophy case at the top of the mountain is in Redmond. I mean, if you look with Nadella and the team have done, I mean they are in pole position to gain more and more share budget. We believe next year we're hearing eight to ten percent a budget to AI driven this year less than one percent. And that's that's the drum roll, that's the super Bowl what everyone's waiting for.
The actual quarters are almost the backstory to really the forecast and the outlook going into next year.
How about the companies that rely upon digital advertising, Dan, that's kind of been, you know, a wobbly business even you know, even amongst all the other key growth drivers in technology. So we're talking about Meta and you know Alphabet that really rely up on digital advertising.
How is that's looking right now?
I mean we're seeing upticks. I think stabilization is going to be the sort of word that we hear from Meta, from Alphabet, and you combine it all, we're starting to now see a less cautious spending environment. They'll be you know, probably toned in terms of how they talk about things over the coming quarters. But I think digital advertising we're seeing stabilization, cloud and uptick and overall it spint I
think you saw that from Arvin and IBM. I view this as sort of a table pounder of view into tech this week. I do not view the reactions of Netflix and Tassa as a brahma for what we're going to see this week. That's why, in my opinion, getting the popcorn ready, and I believe it will be a strong week for tech.
Okay, so if it's not Netflix and Tesla, Dan, what is the bell weather that you've looked into to indicate how happy you're gonna be able to be this week.
It's tomorrow night. When you look at Alphabet, you look at Microsoft. That's that's the key. That's that's the messy moment for earnings for tech because of what we ultimately see in cloud, in digital advertising, and if you look going back to the Nvidio guidance heard around the world the last quarter, Now we start to see the optics
in spend in terms of the forecast, no better. Everyone will be listening to Nadella and Microsoft's called that is going to be the one that they not just tech, but all the street's going to be focused on to see what we're seeing monization of cloud. We think a trillion dollars incremental spend next decade.
Hey, Dan, you know the Nvidia results.
I think it was the last quarter that just really shook the market, reset the market, woke up people like me who really wasn't paying attention to this AI thing. How much of the AI budget over the next several years do you think it's going to be incremental tech spending or maybe just taken it from all the parts of the stack.
Why we think about thirty to forty percent incremental. The rest will be taking from the stack. That's why the ciscos. You could argue the intels, maybe the hp is obviously will back in so on the hardware side. But I think it's incremental because in our opinion, it's a nineteen
ninety five moment. It's an Internet moment. Companies are actually changing their view of spend and two letters have all changed in terms of AI and that's why, unless you have a telescope, you're not seeing a recession out there. And I think that's gonna be innarratable here in the next week or two.
So if it is ninety five all over again, how are you not worried about a bubble?
Dan?
Well, first off, I think if you look at the actual evaluations, it's we're not talking pets dot com movement. In other words, these are now the star wards that ultimately I view. When I look at Microsoft, I could argue this is a three and a half four trillion dollar company in next two to three years. I think the difference when you go back to the bubble ninety nine two thousand, I mean a lot of that was hype. This is different because the fundamental and the real business
cases are there. I'm not saying, oh, there's not gonna be fraud from losers that fall by the wayside. But I believe this is an AI gold rush. It's real. And then's why this week I think the Bears go back into their hibernation mode after how little win last week to what's been a brutal six months for him.
Hey Dan, in the context of this AI discussion, it's going to accelerate once again this week with these earnings. How does Apple fit into an AI discussion.
I mean, they're not gonna be on the outside looking in, and we've talked about them. I mean, they're spending almost the equivalent of what Microsoft did with Open Ai in turn on on AI. This is all the drum all to what I believe. I'm in German's hand, had a bit to their They're gonna roll out AI within their ecosystem. I ultimately believe it's an AI app store for Apple, which I believe could add thirty to forty dollars per share.
And again Cook continues to play chess while others are at the kids table playing checkers.
Wait, say more about the AI app store.
What are you anticipating a separate app store that's gonna be AI driven developers? I believe it started off with Vision pro in terms of, you know, actually building a separate almost app store. It's gonna be AI driven health, fitness, AI apps will be in that app store, and that for Apple, that's just gonna be a whole nother opportunity to further penetrate the base that has an unparalleled install base.
And I believe right now the valuation is not reflecting what I'll call AI multiple and that's why I believe this is a four trillion dollars markap by twenty twenty five.
Dan, you mentioned the headset, and this earnings call is gonna be the first time folks have the opportunity to ask Apple about that headset. Do you think they're gonna get killed for invent staying in a headset when people have moved on to focusing on AI.
Because ultimately is not about the headset. Because my view is that this is really just the start ar v R to what ultimately is going to be the next vision around AI, and that's going to be integrated more and more within that ecosystem for Apple, and I think ultimately investors who are focused more on iPhone fifteen, we think ultimately units are going to be higher and this is a mini super cycle. That's the long game right now.
It's all about developers build out for what I view is sort of the next evolution of the Coupertino ecosystem.
Hey, Dan, I just want to talk Tesla for just a moment because Bloomberg News Stephan and Nicola is out with a great story saying Tesla is lapping Germany's automakers in the global ev race. And so you know, we heard from all the big German manufacturers over the last several years how they're going all in on EI. But Tesla delivered almost eight hundred and ninety thousand cars in the first half of the year. That's more electric vehicles the Volkswagen, BMW, Mercedes or Porsche combined.
So how do you think.
About Tesla and just kind of their competitive position as everybody else tries to ramp up.
I mean, it's Tesla's world, everyone else paying rent. If you look at electric vehicles and from a scaling scope perspective, battery technology, super charger, and I ultimately believe the FSDAI. That's why I think last week you got the knee jerk sell off after just a parabolic move this year. I think this is still early to middle innings of the broader Tesla story build out and this ev green title, the five trillion dollars green title. There's been many winners.
The three win three are Code GM four, the European players at the China players. But ultimately, if you look the biggest beneficiary is gonna be muscling us really quickly.
Dan, are you team Twitter formerly or now x formerly to Twitter? Or team threads?
Oh?
I stayed Twitter, and again I go back to thread? Did rathery broccoli from the full data the trench?
Very good?
There you go, Dan, conviction of nothing else. Dan I was managing director and senior equity analyst at Webbush Securities. Appreciate getting that roundup on Tech is again a big, big earnings week here for a lot of industries and most notably tech and is the biggest sector in the SMP.
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Let's talk about some of the industrial companies and because they're reporting numbers today, but you know, I looked at the PMIS today for the manufacturing PMI came in at forty six point two.
That's not good on the number fronts. A. It's below fifty, suggesting contraction, and it was blowed the concent of forty nine and it was below just kind of in line with last.
Month forty six point three.
But I want to start there and then we'll branch out to some of the manufacturing companies that are reporting later this week. Brook Sutherland joins us. She covers all of that industrial stuff for Bloomberg Opinion, and she joins us here on our Bloomberg.
Interactive Broker Studio. So, Brooke, what did you think when you.
Saw the manufacturing PMI today. I mean, it's a it's a manufacturing recession. Is that kind of what we're dealing with?
I mean, this is a continuation of a trend where we have seen numbers from the PMI that have been indicating a contraction in manufacturing activity. I think the question is there's a bit of a diversience between those numbers and what we're hearing from the industrial companies which are still very bullish on the demand that they're seeing. They, you know, are talking a lot about sort of structural tailwinds that will keep people buying industrial equipment for the
foreseeable future. Those include electrification of everything, the sort of wave of factory investments that we've seen in semiconductors, electric
vehicle and other types of manufacturing. And I think the question for investors is, you know, whether this slowdown that we're seeing just reflects a normalization of supply chains because you had a lot of people that were over ordering just to get their place in line and to make sure that they could get some kind of components coming in the door, and whether we may be just seeing the other end of that or if we're seeing a
real demand slow down. And I don't think investors have made up their minds, And I think it depends on which company is reporting. Honestly, the way in which people view their order numbers.
It feels like three M is the name to watch this week. Is that what you would say?
Sure?
I mean, it depends on what you're looking for. We've got just about every industrial company reporting earnings this week, so three m is interesting. You know, I don't really view them that they used to be an industrial bell Weather. I don't really think of them as that anymore, just because they have so many idiosyncratic problems, including pfast liabilities.
They have an ongoing legal issue with combat earplugs that they sold to the US military that veterans are claiming we're defective, and so, you know, they have a variety of issues that you know, investors will be looking for updates on. But they do still have their industrial businesses and it will be interesting to see what's happening there. These tend to be early cycle businesses and so they tend to be on the front lines of economic swing.
So if we are seeing a slowdown, you would see it hit there first before some of the longer cycle businesses like aircraft engines or wind turbines or things like that.
This is a Tom Keane kind of trivia question. What does three AM stand for? You know, I don't know that Minnesota Mining and Manufacturing. John Tucker knows that.
Well, it used to be.
They officially changed the name the three AM two to three AM.
Yeah, but based in Saint Paul, Minnesota. Saint Paul is a great Town by the way. I love Saint Paul, a great hotel that I can't think of the name. But the stock has been brutal trailing, you know, over the last five years, compounded annual decline of about nine percent versus the S and P five rounded up up almost twelve percent.
So that's just a brutal name.
And what's just I mean, it's a fifty eight billion dollar market cap company.
What's the problem with those guys? What's the story?
You know? And it's you have to somewhat feel bad for the current management team because the issues largely do not have to do with decisions that they made. They have to do with the way in which three M was managed, you know, decades ago. So the company is a legacy manufacturer of p fasts, which are known as forever chemicals because they linger in the environment and in the body. They've faced numerous legal challenges over p fast and the uncertainty of what happens there has been a
big drag on the stock. And then, as I mentioned, there's also the military plugs issue, which was the last thing that the company needed but remains unresolved. And you know, we're talking about estimates in the range of several billion dollars to try to settle that alone, before you even start talking about p fasts.
All right, three m Minnesota Mining Manufacturing went public. Just some trivia and get on the Bloomberg terminal with the dees function October first, nineteen seventy eight.
Who took them public?
Kid Or Peabody, which was an awesome firm back in the day, some of the best bankers, best analyst, great m and a practice, really good stuff. All right, ge, I kind of still consider them a belt, whether I don't. They're not the belt, whether they used to be.
What are you looking for here? From ge? What's the What are investors going to be looking for?
Sure? I mean, well, they're a significantly simpler company they used to be from back in the Kidder Peabody days. But they so they've already spent off their healthcare business, and then they are speeding toward eventually spinning off their energy businesses, and so that includes their gas turbines but also their wind turbine business and some other myriad assets
that get kind of grouped with that. And once they're done with that, they will essentially be an aviation company, and investors are already treating the stock as if you know that spin off is a good done deal, and I think it's just a simpler story and people are better able to focus on that core aerospace business and the growth opportunities there.
Broke.
One of the fantastic stories that you have for us on Bloomberger Opinion recently is about ties to China for some of these names, and you specifically talk about Chinese ownership of Sirrus Aircraft. I believe can you talk to me about how the China story is impacting some of the names that you cover.
Sure, I mean, I think it is a big issue, and I think the current environment is a minefield for CEOs, even those who have had long standing relationships with Chinese entities. And so Sirus makes private planes. These are more like hobby aircraft or used for charter flights, that sort of thing. And they were acquired by a subsidiary of a Chinese
company in twenty eleven. Before that, they were owned by a Bahrain investment arm of a bank there, and so they've been under foreign control for a very long time. But the company is getting more scrutiny. I filed to go public in Hong Kong in June, and that's just drawing attention to the fact that it is in fact owned by a subsidiary of a Chinese entity that is subject to sanctions. And you're seeing this happen in all types of industrial businesses where long standing relationships are coming
under fresh scrutiny. There was also a report in the Wall Street Journal earlier this year about a Rockwell Automation software development center in China and whether that might pose some sort of national security risk. And I really think to operate in China, if you are an industrial company, you need to have a siloed enterprise there, and a number of companies have already taken efforts to set this up.
Emerson sources ninety six percent but its components for its Chinese products within that region that with the rest coming from other East Asian countries. It doesn't run that business with expaths. It uses all local employees primarily, and I think you're just going to see more and more of that.
So when we talk to the industrial companies that you do all the time about China, is it central to their future as either a source of raw materials or an end market for consumers? How do they view China over the next five to ten years.
Sure, I mean I think they're carefully Yeah, that's given what a political issue it is. But it's a very important market for these companies. It's the reason why they're
there in the first place. And so, you know, one of the interesting things about Cyrus, the private aircraft maker, is that, you know, the entity that owns it has joint ventures with just about every aerospace company under the sun, and most of them are focused on the development of the C nine one nine, which is the Comac challenger to the Boeing seven thirty seven max in the Airbus
A three twenty. And the reason why those US companies have those ventures is because they want to compete for this business that you know, if this is sort of the future of China aviation, it's an important place for these companies to be.
All right, Brooke great stuff has always Brooke Suther then she's a columnist covering industrials and deals for Bloomberg Opinion.
Appreciate gatting a few minutes of your time.
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All right, let's check in with somebody who really does this stock stuff for a living. She's been doing it for a while now, she's got some experience. And Maletti, head of Active Equity at all Spring Global Investments in what town here and thanks so much for joining us here. We're getting into the teeth of the earning cycle here. What have you seen and heard so far and what are you looking forward to going forward to a big tech week of earnings.
It has been a big tech week. Nice and nice to talk to you again, Paul. Look, so far, earning for the most part have been pretty strong. But I think what our teams are looking at is what does the tail and the burning season look like? And I think we'll see some volatility this earning season. I think that was somewhat expected by most investors. You do generally see some softness this quarter, and that's what we're expecting to see. But you know, from what we expect it
all year. There will be differences from the bottom up company by company, and that's why we think it's a great environment to look at companies specifically and not just you know, pick a sector, pick an industry, pick growth, pick value. It's time for individual company selection right now.
So and what is the market going to move on more this week? The FED decision or some of these check earnings.
That is a great that's a great question. I do think it's not going to be on the side decision itself. I think we all really do believe. And there's kind of because Hass's opinion that we're going to get that twenty five basis point increase. But I do think what, you know, what we don't know is if we're going to get the interpretation of a hawkish tone or a dubvish tone from Chairman Powell. And that is the million
dollar question out there. You know, I guess I'm in the camp that he's still going to continue to be a little bit more hawkish. And you know, even though we have seen some signs of weakness in the economy, the jobs data and the employment data continues to be pretty strong. And that's going to continue to make can fairly cautious and want to give them optionality that we may not be done or that the FED may not
be done raising rates. And so I think the market's going to move a little bit more on that than on tech.
Brames, he and you and I have known each other for a while, so will not surprise you to know that I missed out on owning those big seven magnificent seven names. So now I got some work to do for the remainder of the year.
Do I look it?
Maybe some smaller MidCap names. I mean that acquires a little bit more homework on my part. But is that where you think some opportunities might be.
I'm Paul, you know probably put me in the same camp. I do think there is a really good opportunity for investors out there, and you know, I think this is this is something that we've been focused on a lot, because for investors who want to invest more broadly, who want to stay in the market regardless of what the economy is doing, and by the way, history would suggest that is the right thing to do. If the market broadens out, and it should, there are real opportunities downcaps.
And if you just look at the fundamentals, what Paul, you spent a lot of time doing, and I spent a lot of my career doing. Free cash flow is a really good metric of qualities. And if you look at the free cash flow margins and the highest quintile of free cash Dolow margins in those smaller cap names, they're trading at a twenty percent discount to the counter parties and large caps, and that's a historic discount by
any measure. And you know, if you can buy quality at that big of a discount, and even at a discount relative to their smaller cap piers, that's the area of the market that our investment teams are finding some real value in today. And I think where investors can be rewarded. There's strong balance sheets there. You know that pre cast slow will give them protection even if things get a little bit more challenging in the economy, even if we head into a recession.
So and how much of the boat needs to be filled with small caps at this point given what you're saying about some of the opportunities there.
You know, the allocation decision is really a personal one, and that's where it's a little bit more challenging for me to have a personal opinion. I certainly do have an opinion on my own, but I think for investors it's you know, small cap can be a little bit riskier. But again, it's the area. It's just where you want to invest within small cap. I don't think it's an area that should be ignored. Growth can continue to be really good block cap companies even when growth pulls back
within the economy. So it's it's an area that investors should not ignore. The lead the allocation decision up to investors themselves. The tactical decision is I would just say, don't ignore the area at all.
Hey, and do you folks at all Spring have you are you still talking recession? Is that still in your outlook or have you kind of tabled that a little bit?
Yeah, you know, I think we're still in the camp that the recession risks still do linger. And you know the reason for it is six months ago, you know, we were only at three percent interest rate, and there's a lot of great increases that have happened since then, and there's a big like effect to the impact of increasing rates. We have yet to see the full impact, whether that takes six or nine months to fully feel that, you know, we haven't seen it, and so we're still
cautious about how bad the total impact will be. We already know we saw some breakage in the system with what happened with the regional banks earlier. I don't completely think that is over. And again we're not done with rate increases. We have one coming this week and then still a question about what happens after that. So it's not off the table for us. That being said, you
don't want to be out of the market completely. We already saw the ramifications of what could happen with that, and so you know, the economy and the market are two different things, and investors just have to keep that in mind.
All right, and thanks once again for joining us and the Letty, head of active equity at all Spring Global Investments.
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All right, let's go to Mattel here. This is a beneficiary. They own the whole Barbie thing. Mittel stock is up one point six percent today.
Nice move. It's up twenty percent year to date. That's nice.
It's got a market cap is seven point six billion. Let's break it down with the analyst at Bloomberg Intelligence who covers Mattel, the company, the stock, Lindsay Dutch. She is an analyst at Bloomberg Intelligence. So, Lindsay, give us a sense of kind of what this means for Mattel. Here, it's obviously a great day, a great weekend for the movie and what it means.
For but what's it really mean for the company.
Yeah, thanks Paul for having me. So this movie is a big deal for Mattel. Barbie is one of their biggest brands. It peaked at one point seven billion and twenty twenty one, it was off about eleven percent last year. There was sort of weak demand for Arbi, so coming into this movie, there was a lot of uncertainty, you know,
and concerns about demand for the dolls. But I think Mattel did a really great job in terms of hyping up the movie, and I think that could be a catalyst for the second half and really a rebound for the company in terms of toy sales, but also the royalties that they're going to get from the movie and related merchandise and things like that. So there's a real possibility of strength in the second half, you know, with this big movie debut.
Lindsay I'm curious about and I know you haven't seen the movie, but there's definitely a sense of Mattel calling themselves out a little bit when it comes to some of the potential what someone view as mistakes they've made in terms of Barbie's impact on how young women and girls are viewing themselves, et cetera. I wonder is there any potential negative impact for Mattel because of some of those messages, or is the extra dream success of the Barbie movie just going to be a boom for them?
So I agree.
I mean, I think that the brand has had ups and downs, you know, throughout its sort of life and and creation. I think Mattel was going into this movie they knew it was critical to you know, reinvent the brand a little bit and and sort of ease some of those concerns that we've had.
So I think that was you know, it.
Is a pivotalle, a pivotal moment for the company and whether they can really you know, change the attitude around Barbie. But there are also so many people who are nostalgic about the toy, about the brand, and that adult collector's market is huge and it's growing.
It's a big piece of the toy market.
And so I think that there's a lot more opportunity than than risk, especially like seeing the numbers coming out of this weekend and this debut to.
In general, how big is it the toy market in general? How big is it?
What's the growth characteristics of kind of the toy business, because now it seems like every kid's got a phone in their hand.
I know.
So, you know, the toy market in terms of dolls, if you think about dolls, that's more like a three to four billion dollar category.
Mattel is a clear leader.
They've always been a dominator in that doll category because of Barbie.
They also own American Girl.
When we think about dolls, you know, growth was astronomical, astronomical in the pandemic, and it really started to come off in twenty twenty two.
You know, there was weak demand.
We had over inventory issues, you know for a lot of their key suppliers if you think about Target and Walmart. So there was a huge pullback in the fourth quarter last year. Really hurt results for Mattel and as well as other peers, and the beginning of this year, you know it is going to be challenging.
Their sales were in the first quarter.
I'm expecting sales to be down again when they report their results for.
The second quarter.
But like I said, this is really a second half story for the company, and really what can happen with this growth going into the back half. So in terms of the category as a whole, you're talking about sort of like low to mid single digits growth. You know in this next couple of years, Mattel is typically a market share gainer, so you know, we would typically expect a little bit faster growth coming out of Mattel.
Well, and you mentioned American Girl. They've also got Hot Wheels under the Mattel brand, which has increasingly been taken up a bigger piece of the revenue pie. Do you anticipate that allocation changing this coming earning season or earnings results because of the Barbie movie?
So I think so Barbie has always dominated in terms of Mattel's revenue mix. You're right, hot Wheels is gaining. They were about a one point two five billion dollar business last year compared to Barbie's one point five. I think that, you know, heading into second half, you know, success of the movie could really put Barbie.
Back, you know, sort of on top.
I think Hot Wheels is sort of closing that gap here in the first half.
There.
I think Mattel's history does sort of, you know, skew towards that doll category. But the vehicles has just had a couple of really great years and when we saw growth slow in dolls, vehicles picked up. Also, action figures has been a really big growth driver for them. It's much a smaller business, but where we are seeing growth
in that category. But I do think coming into the end of this year, you know, we'll see Barbie be still be a bigger business for matel than Hot Wheels, but that gap is definitely a lot tighter than it was historically.
All Right, Lindsaya, as a former media analyst myself, I have to ask this question, is there going to be a bar Be Seql?
What have we heard from the company? Have they said anything?
They have not said anything, but you know, their CEO has a background in TV and entertainment, and I think, you know, he truly believes in sort of that halo effect, you know, linking entertainment and movies and everything that we stream today, you know, to physical toys.
So I wouldn't be shocked.
And the return on the investment in the Barbie movie is going to be considered a positive for them when history looks back on this moment, right.
Yeah.
So I think there's you know, some element of the movie baked into guidance which is pretty bleak for the year when we think about Mattel, But I think a lot of it is not baked in. I think, you know, the profitability, the margin on you know, when they license out that.
Barbie brand, the Bee, the Pink Bee.
You know they had, you know, a partnership with Gap that they did, you know, all that merchandise sales, all the licensing out of things like that. It is huge on the margin and I think that a lot of that stuff can come in better than expected this year. But again sort of just rebuilding that love of Barbie and the brand going forward.
All right, Lindsay, thanks so much for joining us. Lindsay Dutch. She's an analyst Bloomberg Intelligence. She covers some of the consumer space, retail as well as the reachs.
But today it is all.
About her coverage of the company. Mattel again is stock up nice today on the news up twenty percent year to date. See if they can monetize this Barbie mania going forward.
You're listening to the tape Cat's are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and.
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One of the names that's actually driving performance this year, as it typically does, is our good friends Adding Cooper Tino Apple. Mark German joins us, I don't know why, because he's a chief technology off and corresponding something like that, I liked CTO.
He's basically the CTO.
Okay, we'll go with yeah, and he covers all the tech stuff out there in Silicon Valley. Mark, I haven't replaced my phone and I don't know how long man, How does Apple think about me? I've had this phone for I don't know, three or four years. What do they have to do to get me to kind of buy a new phone?
Yeah? So I think your first question is what do they think of you?
They okay, so they like you a little bit because you have an iPhone. They like you a little bit more if you're buying apps and subscribing to things. But they're not in love with you because you don't have a new one and you haven't bought for the last three.
Or four years.
What they would prefer is if you were upgrading annually.
What do they have to get you? What do they have to do to get you upgrade?
Well, I'll just be completely honest with you because I've had similar thoughts as well. So the iPhone ten came out in twenty seventeen, that's six years ago. So this is going to be the iPhone fifteen is going to be the sixth generation phone since the iPhone ten. God, honestly, it's not too different. The phone doesn't operate that differently, right. The big difference would be the overall performance in the speed.
And the reason you would want to upgrade at this point is because the phone at this point, if you have an iPhone tent, probably feels really sluggish and it feels really behind, particularly on the camera, or you've dropped the phone enough times or you have dents in the steel band around the phone, you have a crack in your screen, or maybe you have a big glass crack or shattering on.
The back of the phone. Right, So that's really.
How they get you to upgrade over time as the phone feels sluggish and damaged and such. This year is going to be an interesting year. This is going to be the first time in maybe three years where they're doing anything of significance.
Okay, right in my opinion.
So the iPhone fifteen Pro is going to be quite an upgrade this year. It's going to have a titanium case around the edges instead of stayingless steel on the biggest and most expensive phone, the fifteen Pro Macs. It's going to have something called a periscope camera that allows
for much deeper zoom using hardware. That means the camera lens can actually move within the phone to get closer to the image in order to provide better zoom versus the digital zoom we have today, which you can zoom in but you get a bit of a blurry picture. They're also changing the charger to more of an industry standard, going from the current lightning charger to what's called USBC, And there's also going to be a much faster process or in better battery life on the top end phones.
The low end phones will get some of the iPhone fourteen pro features like the dynamic island, that new area at the top of the phone, as well as a better camera on the back.
So how much of everything you're talking about played into Apple's decision to ask suppliers to keep the production of iPhone units in line with last year at eighty five million units, which I found just a little bit confusing because phone sales have been declining over the past eight quarters. So what did you make of that decision?
Yeah, so eighty five million would mean flat for the thirty year in a row. The thirteen was a very small upgrade. The fourteen was a small modus upgrade. I would say the fifteen is not a generational upgrade, right, but it is significant, And so I think if let's look at it this way, right, if it was a minor update this year, I think units would actually be declining given the overall economy and the overall smartphone market and the tech market in terms of sales and buying
power and such, not the stock market. I think the fact that it is a significant upgrade across the four models this year is why they're.
Able to keep it flat.
You know how sometimes Apple says that, you know, the revenue has gone down, but in a all things current environment, it actually would have been up. Right, So something similar to that, where given everything going on, they're able to stay flat because the upgrade is so significant.
Mark Toktos, I guess the latest thinking coming out of Kopertino on China. I can't think of a company that has any more ties both in the supply chain and source of raw materials as well as an en market than Apple does with China. What's their latest thinking about how they're approaching this over the next several years.
Well, I'll tell you one thing and that'll answer your question. It feels like the rhetoric around China and Apple working with China and the US China relations, while that's still there, it feels like it's an idea or a reality.
I guess that has.
Calmed down in recent months. Right, things were really teetering a year ago, six months ago even, and people were really pushing for Apple to get out of there. That is no longer the case now. To answer your question, nothing has changed.
Over the last year or so.
The idea or the plan is still to diversify production as much as possible outside of China. They're building up more lines for the iPhone in places like India. They're expanding the iPad to places like Vietnam. A lot of Mac production has moved to Vietnam and Malaysia, right, So they're doing what they can to move out of China except for one product. It's the iPhone, the one we
were just talking about. And in order to get the iPhones in those eighty five million quantity that you need to ramp up and be built in two months time and to be deployed globally over a three month period, you just can't and by the way, at the quality they need to do so, you just can't do that outside of Fox Coon in China at this point. So that's really what's keeping them there.
So Mark, we don't get Apple earnings until next week, but slew of tech names reporting this week, making up about forty percent of the market cap of the S ANDP. In terms of the names we're going to hear from which name are you going to be listening into to indicate how the Apple story may evolve or are the tech names we're hearing from this week completely separate from the Apple story.
I mean, I know this week we have Meta, we have Alphabet, we have Microsoft, right, any other big ones that I'm missing, some of.
The social ones like we've got to snap this week, some of that stuff, but not necessarily about weather for no Apple.
I would definitely not include Apple in that group. They have a way of either outperforming or underperforming that group, right, So I think they're a bit of an outlier there in terms of, you know, earning calls that I'll be paying attention to definitely will be meta, right. I would like to see how their you know, metaverse play as they call it, is continuing to go. I want to see what the losses are like. I want to see
what they have to say about the Apple product. I want to see if they have any more commentary on that. I want to see what's coming out of Alphabet in terms of their hardware sales. I want to see anything they have to say so far on their new pixel fold.
Right.
That thing is eighteen hundred dollars. I have had one for several weeks. I don't think it's particularly great. I also don't think people are particularly buying them up, so I want to pay attention to see what's going on there. One other interesting news item for this week is going
to be Samsung Unpacked. That's going to be their new phone launch event that's happening in Korea and they're going to be announcing their latest phones there, which obviously we'll be going up against Apple's new devices in the fall, so I'll be interested to see how those all compare. So it's actually going to be quite a busy week and a lot to pay attention to.
Hey Mark, just real quick twenty seconds. Apple recently completed their just amazing new headquarters in Koopertino. What percentage of their employees show up there on a given day?
Ooh?
What percentage show up on a given day? You know?
The headquarters seats about twelve thousand to fifteen thousand people, and then there was a bunch of peripheral buildings around there in the Coopertino Sunny Vale its larger Santa Claire Valley Silicon Valley area. I would say the majority of employees are coming in three times a week, that's typical. Most employees are there.
Two They better be happy employees.
The stocks of fifty percent this year on a compound of basis, up over thirty percent over the last five years.
They got to be happy. I mean, I say, get your wealthy keister back. That's just me, all right.
Mark German, Chief correspondent Technology for Bloomberg News. He's based out there in Silicon Valley. He's drinking the cool lad Why not? I mean, Applestock has just been a just a tank, just been amazing and it continues.
Thanks for listening to the Bloomberg Markets podcasts. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three.
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