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 moven news.
Find the Bloomberg Markets Podcast on Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. What's new in the last twenty four hours here? What are we seeing?
Look, the resolution with First Republic was great to see. The market is working, the market resolution mechanism is working. But on the other hand, there's still some uncertainty within the regional bank space. There's lots of negativity with regards to deposits stability, rising fundy costs, increased regulation, potentially in inadequacy on the capital front, so there's lots of negativity.
Those things all sound like not the reason we saw the seale off yesterday.
I mean it not.
Is it not that shorts after First Republic didn't see any kind of relief rally and said, you know, let's short the hell out of this basket of stocks again. Let's let's have another run at them, because I saw from S three data, you know, Bob Sloan shop S three. They give us a lot of important short selling data. Ninety six percent of KRI shares are sold short. That's amazing, really.
Wow, ninety six percent.
That means that there's only four percent of shares out there that haven't been borrowed to sell short. And that's probably because those share holders don't even know they have them.
Look, the short sellers have done a great job with what happened with SBB, with signature, with First Republic and the playbook still there. Nothing has changed from an exogy to standpoint from Washington or the regulators to derail the narrative that if you short a stock it could go into receivership.
All right, I want to bring in another smart mind, and so Matt and I could just sit on the sidelines and let these people kind of debate it. Neil Grossman, former CIO with t k n G Capitol, joins, is, Neil, you've been around the block once or twice. What do you make this bank stuff here? I mean I placed all the blame squarely on Herman Chen and the fellow regional bank people.
Look, there are a couple of levels of this. Number one, it was pretty hard to accept what happened with SVB and signats are to begin with, because senior management had to know how badly impaired their assets.
Were, not to mention regulators at the Federal Reserve and the FDI see they all claim to have known a year in advance and apparently did nothing.
They didn't do anything. However, on the other side, which I believe is in part equally culpability. A year ago today, I think we were all together. Inflation was peaking at nine percent, the FED was just starting to cut and mister Powell and Coe just starting to raise. Were a parton me. We're promising or expecting that by September of this year, FED funds would be peaking between two and
two and a half percent. So if you're running an institution like SVB or anything even JP Morgan, and for the last twenty five years, you've been told to ignore reality and ignore risk and just listen to the guy at the FED telling you what she's gonna do. You don't react in interrrational and conservative way.
Has anybody herman at these banks tried to put any of the blame on the FED because it is fact that they have raised interest rates by five hundred basis points in about a year. Right, that would be difficult for a lot of investors.
There has been no blame on the FED, and I don't think you want to do that because the FED also is your regulator, so you can be blaming the regulators for your own problems.
Well, that's why we're here. We can blame. And by the way, they were way too slow in raising rates even when they started to be very clear. But at the end of the day, you're now a year into this SVB and signature go, which is bad enough. But first Republic, there is no excuse before they had six weeks right where first of all, you'd had a big
rally treasuries, which meant asset prices were actually appreciating. You knew how impaired your capital was, and yet you didn't do one thing to reduce your balance sheet leverage and give yourself a chance to survive and maybe raise some capital at the same time.
Why they didn't use them?
Why didn't they?
Yeah?
I just think that the management team are not crisis managers. They've always been lauded for just how well they run the bank, and so they.
Weren't in terms of customer service, in.
Terms of customer service and in terms of having above peer evaluation. So they just weren't experienced enough to deal with the crisis, whereas a bank like Western Alliance.
You're on the phone with Jamie Diamond. Jamie Diamond called up the CEO of First Republic, didn't he say it, like, dude, do this right now?
You just compare with what happened with Western Alliance. It almost failed during the financial crisis, and they have a litany of actions that they took in terms of increasing the deposit coverage, insurance coverage, selling assets, a plan to increase their capital, seeing deposits come back. So it's a start contrast to what happened between the two managements.
So, Neil, I mean, when we'll hear from Fred Truman j Palll later today, how much of all this banking stuff and today, yesterday was a really bad day for the regional banks. How much is that factor into his calculuss analysis, his messaging.
Maybe, well, look, I think you have no choice but to be considering it. And there's no doubt that there is significant risks. My guess is one of the problems with this bank and others is in fact there has been tremendous impairment of capital due to the sharp fall and assets the values of assets they hold. The problem on the other side, of course, is as you've seen the last number of days, Yeah, the data is not
really helping them, and the inflation data was higher. Look at the ADP numbers this morning, another three hundred thousand jobs. So you have a very strange set of circumstances where the inflation and by the way, I think we've talked about this, I suspect as you've move into later in the year, you're going to have up with pressure begin to develop again on asset price on prices.
So what does the FED do now? I mean, they're clearly going to raise today, right twenty five basis points. What does Powell have to say to calm markets in terms of financial stability and to rein in inflation when you're worried about upper pressure later in the year.
Well, a couple of things. First of all, for the next couple of months, I mean, if you look at gone on with oil and commodity prices, there is going to be some downwards.
We'll drop five dollars over it was crazy.
Right, So there's going to be some temporary drop in prices to begin with, which may give them some cover for the moment. And I think you're seeing. You know, they're going to continue to talk about the fact that there seems to be some slowing in the employment picture. And look, I don't know what you do at this point in a general scheme of things. They have raised rates five percent to five percent, and there's an there's a legitimacy to be sent to say five to five
and a quarter is not really relevant. I suspect he's going he's going to say that whether they raised today or not, they're now going to start to step back and give it time to see what the what the effect is. Look, you know there's always a lag between FED action and results, and you know that they don't want to totally unsettled the economic system right now. So I'm guessing that's where you head.
Now.
The problem on the other side is if he's going to stimulate a rally in equities, and equities are quite interesting right now as well. I mean, if you look leaving aside the the the the banks in theory, stocks are actually a lot higher. The banks have been getting killed, but the stocks are actually near the highest level in six months. But if I said, prices continue to go up without the fundamental supporting them, then the system becomes more more at risk to unexpected conces.
Somebody said, we had our earlier guests on said it just kind of feels a little bit nineteen ninety nine, two thousand and I said, oh, don't go there. I live through that, herman. Are the regional banks expecting the FED and the FDIC and other regulators to kind of increase regulations on them going forwards? That the expectation for investors.
Yeah, the base case is that the capital ratios will go up because banks will now need to incorporate the unrealized losses and the available sales securities into the capital calculation.
Increase.
The liquidity requirements that went away during the Trump administration for the regionals and potentially higher debt issue went to help protect the capital structure of banks as well.
So that's the base case.
I think everybody's just expecting that if it gets worse, then that's could be an incremental.
A know, earlier I pitched to this is me and my pitch to Stevie Cohen, give me two billion dollars. I'm going to buy some regional banks. I'm not sure when, but I'm very close to buying a basket of these high quality regionals, and I'm gonna make you thirty forty percent twelve months.
Well, you know you can. You can actually take advantage of the fact that not only your price is dropping, but the volatility is going up in the regional so you can actually write put options on on regional banks in the end of seas let's say five percent below the market, and I haven't looked at the prices today, but I'll bet you get paid an awful lot of
money for that. So you break events on this type of strategy, you're probably ten to twenty percent below market, depending how far are you out your go guys, this probably will be doing that.
This is gold.
Why don't we start a buffer regional banks buffer ETF.
Yes, exactly know. But yeah, we've heard a lot of those are all the rage right now? They are all right, Neil, thanks so much for joining us. Neil Grossman, former CIO a tk n G Kapital, joining us here in our studio, as is our resident bank expert, Herman Channing. You might as well, just you know, take the seat for the Day Vandlinberg Interactive Broker studio. Herman Chan covers the regional banks for Bloomberg Intelligence.
You're listening to the Team Ken's Are Live program 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.
All right, FED Day today, a lot of folks are going to be paying attention safe for our Federal Reserve and FED Chairman j Palll probably no more than Omar Aguilar. He's the CEO and CIO of Schwab Asset Management. What does that mean. Well, here's a couple of just ridiculous stats about Schwab seven hundred and fifty five billion billion in assets under management as of the end of last year, third largest provider of index mutual funds and fifth largest
provider of ETFs. I don't know how they even manage all that stuff, but somehow Omar does it. I mean we get a few minutes of his time. Omar, thanks so much for making some time in your schedule to chat with us today. What are you expecting from your Federal Reserve and kind of where do we go from here.
Hey Paul, good morning. Always happy to talk to you and the rest of the audience. Yes, you know it is and it isn't important. It's called Guess FED Day and we all, you know, get together to just figure out. I mean, I never see most of my fixed income team so excited as FED Day. I mean, yeah, that tells you a lot about fixed income, but in general they get really really excited about, you know, what happens.
I would probably say the expectations, just like the rest of the market, is that there will be at twenty five basis points increase in the FED rates. I think what is gonna be the probably the most interesting, you know, part of the of the day is gonna be what the conference called will look like and the kind of questions and any insights that we may get from from
Jerom Powell about you know, what may come ahead. You know, our expectations continue to be that, you know, given you know, where we are with the stress in the banking sector, with the potential tidening of credit conditions as a result of the failed banks, as well as just the overall you know, structure of this lowing down of the economy, that there is the possibility that the Fed may actually pause or that hint that they will pause, you know,
provided that they will have themselves thinking that inflation numbers continue to go high. They will continue, but you know, clearly the signs that inflation is coming down maybe on their on their side.
Oh, Mark, we're you know, sixty sixty five percent of the way through earning season here, and let's let's take our eye off the FED ball for just a moment. What are you seeing in earnings? Does anything kind of jumping out at you, either on the plus or the negative side.
Yes, that's a that's a great question. And yes, we're roughly like seventy percent of the S and P already reporting, and we continue to see that, you know, the the numbers to be probably in line to what we expected. The big part of the driver here, you know, tends to be obviously that these what I call this inflation of earnings that came out as a result of you know, higher inflation number increasing the top line for most companies.
And now as that pricing power starts to you know, go away, then we're starting to see just those softened you know, pieces of that. And just to give you a couple of things. You know, earnings that are batting estimates by seven percent is roughly around seventy four percent of the companies, and that's again that tells you a little bit of the fact that, you know, earnings estimates going into the quarter were actually load to begin with.
But that also shows you that when you compare that to previous year, that we're going to see this, you know, sort of this inflation of EPs, you know, compared to what we saw last year, that is expected given where we are in the cycle.
So what does it mean by year end, are we in a recession?
We're We're definitely, I would probably say that on earning side, well, we're getting to that point that the earnings recession has begun. I think economic wise, we have gone on our theory and our you know, continued claim is that there is these rolling recessions of different parts of the economy that will continue to take place. We saw already the selfness in housing, We saw the softness in manufacturing. We haven't
seen the softness in the service sector. And I think by the time we get to that soltness in the service sector, we're probably gonna have a rebound in housing. We're going to have a rebound of this, and in many cases what we have encouraged clients to think about it is, you know, what does that mean for your overall portofolio. You know, we have encouraged clients to reduce duration.
There is this time period given the higher interest rates at the front end, but this is maybe a time for people to start thinking about rebalancing their strategy and increasing duration given that the expectation that we're going to be a top you know, of the FED cycle is coming soon.
So Matt Omar is obviously a smart guy. Got his PhD in statistics and decision sciences from Duke, so he's a Duke Blue devil. So that's why we like talking to him. So, Omar, you've got a gajillion and one Schwab clients out there. What's kind of the question you're getting most often from them these days?
Well, the bigger question is similar to when you said, is that are we going to see a big recession? And is this going to happen tomorrow? And what we have described to folks is that recessions don't necessarily a peer one morning and then that's appear the next week. We tend to see these cycles play out. I think what has the bigger question that we get as well, is the recession something that we're going to see it will be sustained. And then second question that comes right
is how about inflation? And now our answers, you know, to those questions tend to be twofold. One is, you know, normally every cycle, you know has a different you know pass, and what we're seeing here is a very unique cycle because of the tithing, of the speed of the tithing, of central banks racing raids. So therefore we're not seeing this similar type of cycles for that recession to just be you know, claim as the way it was. But what we saw, as I said earlier, is these rolling
recessions of different parts of the economy. But the good news though is that the economy is still holding up well and even though we're going to see some softness on the labor report on Friday, you know, I think, you know, that is a healthy path for getting a full recovery.
All right, Omar, thank you so much for joining us. Really appreciate it. Omar Aguilar, he's the CEO and CIO of schwab Asset Management.
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 the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa play Bloomberg eleven thirty.
Let's talk a little fixed income. And when we talk fixed income, let's talk to somebody who kind of just does nothing but fixed income. And our next guest certainly fills up Bill Joanna Go Diego's co founder of bond Blocks, and that is an ETF focusing exclusively or family of ETFs at focus exclusively on fixed income. And when we talk ETFs, we need Katie Greifel. Yeah, she's like an expert here. She does an NEEDTF show with you. That's true, right, Mondays or something.
It's usually on Mondays.
It's actually tomorrow's Okay, go figure out Thursday. That works fine as well. Joanna, thanks so much for joining us here at our Bloomberg Interactive Broker Studio. We appreciate you coming into the studio. Man. There's a lot going on out there in the fixed income space. After a disastrous twenty two guys found your footing here in twenty twenty three, you guys being the fixed income space.
That's right, the income is back in fixed income and we're potentially today ending the hiking cycle. We're at the end of a cycle and it's now time, we believe, for investors to get right back into portfolio, reposition their portfolios in a fixed income and take advantage of the opportunity ahead.
We do see.
We do see pricing indicating that today's the last hike. So you don't think there's gonna be another hike in June.
So whether there's another hike or not, we probably we need to be thinking about these yields that are going to be really powerful in your portfolio. They're at historic levels, and we think investors should be, you know, getting their allocations back into fixed income.
I wonder, I mean, we do see the two year yielding almost four percent right coming down a little bit. But we've spoken to you in the past. I don't know if Katie wants to jump in here. We've also spoken to investors who buy your products quite often in fact, and it doesn't seem like it's the yield level that drives that they sometimes need some of your ETFs for certain strategies that they're trying to execute on.
Yeah, exactly. I mean you can take this simple X half an X one they are that's the sixth month and the one year treasury products we have. I mean, they're really excellent, excellent places to sort of you know, stay in there for safety, low volatility, also tax exempt from state taxes because it's a treasury portfolio. I think there's been really with these yields in that feature. Like, I think it's a really great place for investors to
use for cash management. So those that's a fairly simple trade all of our clients have been making this year. But we also think that investors should be looking opportunistically at credit because you know, as we enter the next phase of this cycle, and whether or not you believe there's an economic slowdown coming, you know, there are opportunities here across different credit ratings and credit that are really compelling because the yields are giving you a huge head
start in returns. This year, well, it's.
Really interesting if you look at the flow show across the whole industry, fixed income ETFs have taken in something to the tune of sixty five billion dollars this year equity ETFs, and there's a ton more of them. They've only taken in somewhere in the neighborhood of forty billions.
So in fact, when you type in ETF go, the launch screen default to equities.
Because I mean they make up the bulk of assets still. But obviously fixed income ETFs have taken in the bulk of flows at least when it comes to twenty twenty three. You and I were talking a little bit earlier this morning about how if you look at the common position of those fixed income flows, you are seeing a little bit of a dynamic shift.
Yeah, so there's two things we're observing right now. Is in treasuries, you're seeing obviously there's kind of equal flows this year to date in both the short end of treasuries and also now year to date in the long end. So you're seeing investors take a little bit of risk on in their portfolio, is at least in the treasury space. And that's someone that's taken on risk understanding that maybe there is going to be an economic slowdown and bond
prices may rise towards the end of the year. And then what we just tapped into which I think is really interesting is just in April, you're seeing people shift back into corporate debt and also high yield, and that's a space that we've been we've launched into, you know, significantly across credit ratings and across sectors, and we really believe, as I mentioned before, there's a lot of relative opportunity within high yield versus just looking at it so broadly.
So you mentioned that people when it comes to the treasury market specifically, people taking a little bit more risk going out the curve duration risk, But at the same time, it feels like investors are also taking on more credit risk. Also to your point, high yield ETFs coming back into vogue a little bit here. How do you marry those two things? Because when I think long duration treasuries, I think, oh my goodness, this economy is going to slow down.
Why might high yield also be seeing love in this environment?
Well, I think that what people don't haven't been able to see more as clearly as they should and Hyael is that the categories are very different. And so for something like if you just look at the very first high yield category of XPB, it actually has the lowest default rate amongst the high yield category.
If there's high yield, and there's high there.
High it's only one percent in XPB in our product XBB, And it's if you can get access to a big diversified portfolio in that credit writing space, you know, you're looking at yields that are you know, close to seven percent,
and that's it. That's a really interesting thing. So if you're worried about a weakening I cannot conditions, you should consider adding some XBB to your portfolio because it's the least exposed to this risk over time, and so you now have an opportunity to be more precise, more timely tools to really take advantage of what's coming.
Well.
So it's I mean, we're all worried about weakening economic conditions, but if you think that they're not going to get so weak that everybody defaults, this is what you buy, right.
Yeah, exactly. And then even if you go, you know, a little further down the credit rating scale, some people take a view and this is why we created so many products. In a granular way. Some people could give you, I mean, this is your favorite, the triple C product. Okay, so it has a yield that's almost fourteen percent, So it has a yield that's almost fourteen percent. So there
are investors out there. Like you said, even just taking that really long treasure review sounds really you know, compelling to you. But the truth is, like, if you believe the risk of recession in the second half of twenty twenty three is over, you could consider some X triple C. It offers a higher yield, and it's just it's something that like it. So I went back into high yield. You may, you know, take a small portion of your high old exposure and tilt a little bit with these products.
Really quickly, we have a question from a listener writing in, when are you going to bring an investment grade sector suite of products into the market. We only have about thirty seconds left.
We just filed for three triple B products two weeks ago, and what we've done is we've carved them up into maturity buckets, not sectors yet, but we always will take suggestions and we have looked at sectors and I think it's an interesting thing that you know, fixed incomes should be more ganular.
Right watch the space, Watch the space, and you guys have it completely covered on the ETF front, joined Diego's co founder of bond Blocks, joining us live here in our Bloomberg Interactive Broker Studio as it does Katie Greifel. She covers all things on the ETF front. You guys got your show on tomorrow.
Tomorrow Tomorrow, souly. Our show is Monday, is at one pm. It's called ETFIQ.
You're listening to the team Ken's are live program 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.
Looking forward to this next discussion. It's about logistics moving stuff around. You know, all the boxes on railroads and trucks and who knows what else. Drew Wiklson he does this stuff. He's the CEO of RXO, which is a tech enabled broker services platform that will spun out of its parent XPO. I guess recently, I'm looking at the RXO stock and it's got a market cap at two point three billion, it's up fifteen and a half percent this year, up seven and three quarters percent today, and
the parent company stock XPOS up thirty five percent. So it looks like shareholders are winning all over the place with this spin out story.
Here.
RXO reported numbers last night, so we appreciate getting a few minutes of Drew's time. So, Drew, you guys reported your earnings last night. What are the highlights from ROXO and the logistics business?
Thanks for having me, Paul and Matt. When you look at what the highlights were, the first is that while the macro economy is tough right now, we took market share and we grew volume by six percent on a year every year basis. So while there's less volume out there in the freight world, we're able to grow and grow profitably. We have best in class margins where our brokerage gross profit percentage came in at sixteen point three percent.
That's well ahead of where the industry came in. And the last point that I'll make is our technology continues to work. We've invested in technology from day one, and our technology is allowing us to operate at best in class gross profit percentage. It's helping us grow volume, and it's helping us continue to increase our employee productivity. So we're very pleased with the results for the quarter and fill our best days are ahead of us.
Are you not worried about a slow down in overall volume? We were hearing from some shippers. Ups is one for sure, but there are a couple others Fernando Valley was talking about who have said we're in a freight recession already.
We absolutely are seeing a slowdown in the overall macro economy, and as I said, there's less volume out there. But we've done things that are idiosyncratic to our business that are allowing us to grow volume on a year of a year basis despite the tough macro. Again, our technology is best in class. It does things like help customers decide what day of the week they should ship something,
what mode of transportation they should use. So when they look at this as a tool and they are consolidating the number of carriers that they're working with, even though the pie for them may get smaller, our piece of the pie is getting larger, and it positions us very well for when the market and flex.
So Drew explain to us kind of your business, because you're not really like owning rare roads and trucks and things like that. You're more kind of logistics and software and a brokerage business. Can you explain kind of what you guys do day to day, who your customers are.
Yeah, we work with a lot of the Fortune one hundred and five hundred companies and we're a best in class tech enabled truck brokers. So what we do is help the largest shippers in the world connect with massive amounts of capacity. We do business with fifty eight of the Fortune one hundred and over two hundred of the Fortune five hundred, and we give them access to about a million and a half trucks and these are mostly
small to mid sized cares, typical sized cares. As a large shipper, you wouldn't sign up, but as we're able to aggregate capacity for our customers, it's a huge benefit to them.
Do we see smooth logistics in terms of the US or North American supply chain now? I mean, has everything been figured out that was all stopped up over the last couple of years of the pandemic.
I don't think there's anything that's been smooth about the last few years.
If you go from but we are we back to normal now, is what I'm wondering.
You're seeing inventory levels at much stronger levels than what they were last year. So if you go to last year and retailing e commerce specifically, customers were talking to us about destocking their inventory, and we're having conversations now of how they are restocking their inventory and continuing to get it out to the end consumer, and we're a great choice for them to be able to use for that.
Who do you compete against, Drew, Who's share are you taking based upon the results you've reported last night? Are you this morning?
Yeah, So we take share from everybody. We're not picky on where the share comes from. What we do is we look at the customer as a whole and see where we can provide value and where our service is best fit. And if you think about our top twenty customers, we grew volume with our top twenty customers, which again is some of the biggest brands in the country. We grew volume with them by thirteen per sent on a
year of a year basis. So our largest customers come back to us year after year, and they don't just come back to us and award us with what we did the previous year, because we've got great service, because we've got the best technology in the industry, and we've got great operators who know and understand the market, they're rewarding us with more freight.
When you look at the future, Drew and you have so much experience with XPO before becoming CEO of RXO, do you see you know, EV trucks, Do you see an automated fleet or how far off is that?
It's something where we're talking to EV manufacturers on an ongoing basis right now. I think the one thing that you have to watch is while I do think that you will see EV pick up as a trend, you have to watch to see how long the truck will be able to drive before it has to be charged again. So if you think of average length of haull across across the industry, is you know, plus six hundred mile, you know right now today you would have to stop
and recharge before reaching your destination. And so I think the end state whenever you're able to have a truck drive further operating hours and be able to go from shipper to constantee and deliver that that's the end state of where we're going. But on short hauls, I think that it's something that you're going to see in the near term.
It's true give us the latest on kind of the labor piction picture within the logistics pipeline in the United States. You know, whether it's the truckers or or some of the other pieces of the puzzle, because a lot of the trucks are saying, boy, it's always hard to maintain and keep our drivers, but it's been even harder over the last several years.
Help.
Is that still a big, big issue for you and your customers.
Yeah, all of last year we saw capacity coming into the market, and so the first quarter was really the first time that we saw capacity exit the market. And for our business, that's actually a good thing because anytime there are shifts in the market, customers are going to lean on carriers who they trust the most and that's been us. So as you start to see the load to truck ratio increase over time, what you'll see is you'll see tender rejection start to pick up from asset
based carriers. And that's where a company like RXO can come in and be a big winner.
So when you talk to your customers, when you talk to your transportation partners, what's their view of the economy over the next twelve to eighteen months.
I think there's still a lot of uncertainty on the macro economy as a whole, and so as you start to look into the back half of the year, there are some encouraging signs for US. I talked earlier about retail and e commerce inventory levels picking up. We've seen pickups in healthcare and technology and home furnishing as verticals. So there are some encouraging signs. And I just talked
about capacity exiting the market. That's again that's actually a good thing for our business at this point in the cycle. So there are some encouraging signs, but I don't think that anybody's got the crystal ball to when they can point to when this market and inflection will be, whether it's Q three, Q four, Q one.
All right, Really appreciate getting some of your time. Drew Wilkelson Wilkerson, he's the CEO of RXO. The ticker is our XO. Pop that in your terminal and you can see the stocks up eight point three percent today. They reported some better than expected results this morning in the
market reacting favorably to that. So love talking to the folks into the logistics business in the supply chain issue that was such a big issue starting with the pandemic and maybe getting a little bit more back to normal.
You're listening to the tape Can's our live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa play Bloomberg eleven thirty.
Let's get a sense of what to do with these markets here. We're going to get a lot of cross currents out there with Divot, with earnings coming out, with the FED decision today, with some bank uncertainty. Let's get a couple of pros in here. Daviddet's senior investment strategist at Pepack Private Wealth Management, and Tim Courtney, cee IO
at Eccential Wealth Advisors join us here. Let's talk. Let's start with you, Tim, what are you telling your clients here in a very uncertain time after coming out of a brutal twenty twenty two in terms of equities and debt? What are you telling your clients these days?
Yeah, you know, what we've been saying is just kind of the simple message of continue to diversify, and you know, we are still working through so many distortions of historic proportions. In twenty twenty and twenty twenty one, coming off of those zero rates, you had capital labor flowing into areas. You've got capital moving back out of those and labor
moving back out of those areas. So many distortions, it's hard to just be able to make sense of how the market is readjusting to to more normal times with normal rates. And so we're saying, look, there's lots of discounts out there. The market appears to be pricing in some troubles for small caps international value stocks. That's typically what you would see going into some slowdowns or potentially recession.
The market has already discounted those. In some cases, small caps are trading about thirty percent lower than their twenty year average, and so it's okay to go get some exposure there. Own some small caps, own some international stocks as well as some of the larger growth stocks, which should see their way through a recession, you know, in a better way.
Are you not terribly concerned about a recession? A lot of people coming on this program say they expect a recession to be short and shallow. Nonetheless, you know that, you know, it could be worse, especially if we continue to get bank runs.
Yeah, you know, the story on the recession has gone back and forth. At the beginning of the year, it was we're definitely going into recession, and then we had strong numbers in February and it was, well, we can avoid it, and then we had the bank failures, and now we're back into Okay, we're definitely going into recession. You know, I'm not so sure this recession, if it comes this year. I do also think it's likely to be shorter and probably lighter, just because there is so
much capital out there still. Even with the housing gains, the stock gains, even though we pulled back in twenty two, stocks are still hugely higher from where they were just a few years ago. So there's a lot of wealth, a lot of dollars out there, and just anecdotally, there's still a lot of spending and we're seeing that in earnings come through. Earnings are coming through, Okay, So I think that it likely will be a little bit lighter than a deep recession, and it's priced in in a lot of areas.
Hey, David You've been at this game a long time. Here, how do you put all this together? We've got a FED decision today, We've got some turmoil slash crisis in the bank space, and you know, right in the midst of earnings, what are you telling your clients here?
Well, you know, it all comes down to the time horizon. I mean, if you've got a time horizon that goes past the end of this week, I think there's a lot of great places to put your money to work. I mean, let's look at some of the big advantages. One is, you've got a market that's eighteen percent off of it's all time high. You know, we've always come back to that. You know, is that going to be
this year? Probably not. If that's in three years, that looks pretty good relative to stuff and your money under the mattress. We know the FED is probably going to raise today. What's it going to do going forward? We do know it's close to finishing its work. We do know that inflation has come down dramatically since last summer, and that's been one of the big problems that the
FED is reacting to. The economy is staying reasonable. We've just got a nice report coming out of ADP with far more jobs created in the private sector than we expected. We still have positive job gration, So I think buying stocks for the long term still makes sense here, but we would avoid some of the megacap tech stocks, which have accounted for close to eighty percent of the games this year, and anything that's touting AI be very cautious.
Wait, I thought, first of all, that's that's well said. Yeah, that's something that we're going to clip and probably use in commercials from now on. With the what about Amazon? I thought you liked Amazon and they're a megacap tech stock.
And I love the fact that it fell after a better than expected earnings report because they said it didn't make a convincing AI case. I think they're just being honest. But you know, here's the thing. You've got the two best businesses on the planet. One is cloud, the other is e commerce. We know that those businesses are going to be growing double digit rates for as far as you can look out into the future. We know they're number one in both by the cloud, they're double the
size of Microsoft. We also know that Amazon is down forty five percent frons high, So you're not buying it at a peak. You know what I love here is Amazon's trade about two times sales, or you can buy Microsoft eleven time sales. Amazon's got the better cloud business, and you're paying about one fifth as much. Amazon's even trained less for eBay, who has the better e commerce site.
Compelling valuation there for a lot of folks, that's for sure. Amazon's the answer to David's question.
I think that is, Hey, hey, Tim, are there sectors? Are there areas where you're saying to your clients, let's put a little put some chips on the table here, you know, whether it's an equity so or fixed income?
Yeah, yeah, well, you know, I I don't know that
there's any any specific areas. There are some areas that we probably would avoid, you know, when you're looking on the fixed income side, you know, with spreads being still really narrow, really compressed, there are some areas that just don't the risk reward doesn't look like they make sense, you know, owning some higher yield bonds, some riskier bonds, you know, going into a recession or a potential recession, even if it's light you it probably doesn't make sense
to get you know, slightly higher yields from there, if you're going to take on that risk, you know, you might just consider going into equities instead with with higher upsides. So we're we're we're looking to avoid some of the areas. I would agree with, you know, the comment that some of the megacaps look a little expensive. You know, you
may not want to overweight there. The market is certainly overweighted in the megacap the space, and so you know, maybe you didn't want to take a full weight there, but otherwise, you know, I think, just broadly, now that that rates are higher and things have more normalized, you know, outside of those few areas maybe where the risk returned doesn't line up, I think getting exposure in most broad asset classes, including you know, including real assets like commodities
in real estate. Real estate had a really poor year last year. It's still risky, but there's with with rates higher, you could look to put some money into real estate in those areas as well.
David, you like Alexandria real Estate Equities. What is that company? AARI is the ticker.
Absolutely so it's the only pure play in office space for the biotech industry, and I think that makes more sense than conventional office space for less of lawyers and accounts because you know you're just not going to work from home for your lab work. The companies that have about forty percent from the start of the year four percent dividend yield, it's a unique property that I think can rebound here.
Okay, David Deets, we appreciate it. Tim Courtney appreciate as well. Getting the latest on these markets.
You're listening to the tape cats our live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station Just Say Alexa playing Bloomberg eleven thirty.
Some news out in the pharma space today Lily drug slows Alzheimer's disease and final stage study UH shares of Eli Lellyer up six point five percent today. In part on that news, we want to get the latest on what that means for Lily, what it means for the space and all things pharmas we do that with Sam Fizzelli. He is the head of European Research and he is a pharmaceutical analyst at Bloomberg Intelligence based in London. God knows where he is in any given day, but he
is based in London. So Sam, talk to us about this fit this farmer news from Eli Lilly. What's it mean for Lily and for this disease?
Hey, Paul, I'm actually sitting in the studio in lod Yes, there we go, so so based on in the in the in the mothership. So look, any positive news for this devastating disease has to be taken positive. You know, it is no question that we need drugs for treating this curse that's going to be at some point, hopefully not affecting you and I, but somebody close to us potentially. So the question, however, is well, how good is this data and how does it set up Lily compared to
the competition. Well, it certainly gives Lily an opportunity to play in the in the to be a contributor in this business, and that that that is going to be a positive, There's no question about that. But how much you know, you look at the efficacy that they reported, it's not that different to another drug that we talked about just about a year ago as the data was rolling out, and that was biogens the Camby now that's
on the market. So twenty nine percent reduction in the speed of decline versus twenty seven percent for the Camby different trials. But that's what we're seeing. The issue we have and the worry I have, is that the Lily
drug has higher side effects. There's a particular side effect that they look at in for Azhonma's patients and it seems to have not exactly not quite double, but it seems to have quite a higher rate of that particular side effect, and that's something that worries me about its commercial.
Wait, what's the side effect?
So what you get with these drugs, with all of them is something called amyloid related imaging abnormality ARIA. Yeah, and a lot of them are exactly just that you scan the brain and you find these weird dots around it, and that's being called ARIA. Some of them cause inflammation, real inflammation, and unfortunately there is a version of it where there's little hemorrhages. Now that doesn't sound good, right, So,
and that's what you want to try and avoid. Now, the Kenby has a much lower percentage of patients who suffer the hemorrhage type aria h than the data that we've seen from dunanamap from Lily. So that's the question that I think a lot of physicians are going to be asking, how good is the efficacy? And am I going to be wanting to put my patients through this given that they're going to you know, these are elderly patients already, if they get these side effects of what we have going to manage.
It, Sam, What are the folks in the medical community, the scientific community, what do they believe is the realistic I guess ultimate treatment of Alzheimer's.
You know, Paul, it's just pretty much like cancer. I think if you think about it, the biology is multifaceted. There are many things that are going wrong in the brain. And remember, by the time you get to the deficits in memory and cognition, you've had this disease developing for
ten years, fifteen years. So what everybody's trying to do is to go as early as possible, identify markers, and find treatments that have side effects that you can manage for somebody who's going to get treated for ten years, but also gives really seriously slows down the risk of you developing that later Alzheimer's. That's the holy grail. So you know this is in patients that have got some
signs of cognitive decline already. We need to get earlier and there are definitely going to be more than one way of doing it and possibly come nations.
Why are Lily's drug is called done nanomab and Biogen's drug is add you canomab.
And that was the old one it canomap.
Or well, the same question, then what's the mab?
What are these things?
The maps? The maps are antibodies, so basically they are biological biologicals I either manufactured, you have them in your blood. You know when you got your vaccine for COVID. A lot of the action against the virus initially when the virus enters your body is done by antibodies. They are highly specific. They're buying to one particular tiny little area on a cell or a protein or whatever it is
and deactivate it. And that's what their job is, I mean, really really making it a lot simpler than biology.
Does we need you to do that?
So that's what this is. You injected and of course what you're doing here is injecting it into the blood stream and then hoping that a bunch of it gets into the brain. Of course, the brain is very privileged. It's protected from your bloodstream because we put a lot of stuff in our blood stream.
Unfortunately, but so certainly ideal goodness. This is this still an attack on the plaque. This is a simple idea that I have found easy to understand that there's some kind of plaque that forms around our synapses or something like that, and that that's the Alzheimer's problem, and we need to get that plaque away, just like we do when we're kind of brushing our teeth.
Right, I thought you said your knowledge was elementary.
That was pretty they impressed me.
There, Yeah, I'm well done. Absolutely right, These things begin to form in brains. Not everybody who dies and has a brain looked at and has got plaques actually got Alzheimer's. That's one of the problems. Only some people do so at least what we know here now, two trials, two drugs that lower plaques have been able to produce some efficacy. We need to push that boundary that bar higher and higher and higher.
And Sam, is this something in the next few years or is this kind of like cancer or there really isn't any kind of light at the end of the tunnel.
Maybe Yeah, I mean, I think with Alzheimer's we're going to end up having the same sort of situation where you're getting a thirty percent reduction in the decline. Remember, this is not as stopping, although in some people it probably will so if you're one of those lucky people, But this is reducing the rate to decline. And what you want to do is take that from twenty nine percent to forty percent to fifty percent to sixty percent and if you're lucky tow one hundred percent. So that
and without side effects. Of course, as I said that, that's rarely going to be the outcome, but that's what people are working on different mechanisms.
Here.
We are attacking plaque. Should we attack another molecule in the brain called TAW. People are trying that. Should we go after the inflammation that these things cause? People are trying that. It would be a long long way, But I'm optimistic that with these little wins we're going to be able to see a better upsidey.
So investing in farmers stocks, Sam, I'm just looking at kind of the trailing twelve month performance of some these on in. You know, I got Lily up fifty percent. That's great, it's fifty two week high. But nobody else is really doing I guess Murkers up forty percent. But is it You can't just say I'm going long Farmer, can It's really company by company, drug by drug.
Well, Macro has has done that. I mean, you know, as we had recession coming and worries about interest rate rises and worries, and you know, the defensive the defensive play is farma. So one of the defensive plays is farmer. So so you can you can pile into some etf or some form of a basket. But as you rightly say, there are some who've done phenomenally well and over in Europe you'll see that nova notice kids. But Lily has
been one of the best performer. They had many things going right for them, and it's been a fantastically well managed story in the past three or four or five years. As their pipeline has evolved, their margins got better, and of course these drugs hit. You just keep adding to that baseline of of your salesforce and you keep pushing that revenue up and hopefully your margin up. So and in the meantime, you treat people, I mean, how can you be in a better business.
And well, people who pay a heck of a lot for your drugs here and far less everywhere else. Is that the case? Do we Americans subsidize the rest of the world in terms of drug prices?
Yeah? But then you do you do? And the problem the difference therefore, is that US has usually got access to first to drugs first year, two years, three years, four years ahead of other countries. So the patients are reaping the benefit, and a lot of the industry, and the biotech industry is based out of there. That's jobs. So look, I'm not defending prices. This is not our
what I'm doing here. There are probably some prices that should be lower, absolutely, but the system has so many middle men in it that need to be sorted out. And you know that some of the of the politicians are going after the PBMs, so many this is the pharmacy benefit maledges. So many middlemen that that just death needs to be cleaned out and sort it out. But let's just remember, I think Lily's talked about this. The cost of obesity, for example, to the US is a
trillion dollars a year. Their estimate. How much would you spend on an obesity reducing drug if you could cut that by half?
Oh yeah, I'm all in because as soon as I get that obesie reduction drug, I'm gonna go get a root beer float.
You know, we can eat.
Anything we want, never exercise, and still say skinny.
Yeah.
Well no, thank you so much pharmacy industry.
Sam's gonna push back on that, all right, Sam, thanks so much for joining us. Always appreciate checking in with you. Sam Fazzelli, Folks, he runs the research business for Bloomberg Intelligence over in Europe. He's got like, I know, one hundred people reporting to him, and he's also the top pharmaceutical analyst in the city of London, so we appreciate getting some of his time. So he's there doing all that for Bloomberg Intelligence. He's based out of London, but
we never really know where he is. He's always traveling all over the place.
Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews on Apple Podcasts or whatever podcast platform you prefer.
I'm Matt Miller.
I'm on Twitter at Matt Miller nineteen seventy three, and I'm Faull Sweeney. I'm on Twitter at pt Sweeney Before the podcast. You can always catch us worldwide at Bloomberg Radio