Trade, Fixed Income, Kelley Blue Book

that Bloomberg dot com. President Trump said there is a quote very good chance to make a trade deal with China, but the unrest in Hong Kong is a quote complicating factor. He was speaking on Fox and Friends earlier this morning. He also said that he would not commit necessarily or didn't necessarily say whether he was going to sign the bill that was passed by both houses of Congress, basically saying that that that that the U S stands by

Hong Kong. Brendan Murray joining us now Bloomberg's Bloomberg's reporter and editor covering all things trade. Can you give us a sense of where we are and what kind of credence we can give to a statement like this by President Trump? Well, you heard the President's say, uh, I send a couple of different signals there one was yes,

we're very close to a deal. But he also talked about some of the tougher issues that they still have yet to resolve, among those being, uh, the intellectual property oversight that China that the US wants China to have greater uh control over and and and and the and the forced transfer of technology. So these are these are issues that uh you know that that they still have yet to to come to an agreement on. Uh. You know, Trump has said four weeks now that we're very close

to a trade deal. It was six weeks ago today when he sat in the Oval Office and said, we have a deal. All we have to do is get it on paper. Uh so, and he said we could do that in three to five weeks. Here we are week six and he's still saying it. And we still don't have any sign that that that an agreement is in fact imminent. Um, it could come any day now,

or it could drag on from several more weeks. So Brendan, both sides, the U S And China have said that they ideally would like to keep the Hong Kong issue and the trade negotiation issue separate. Do you think that's possible? I think this is one of the things that that that that President Trump will offer as a concession to his Chinese counterpart if if they can indeed get close to a deal, he could just say, you know what, I won't sign that bill, and but you know, this

is what I want from you. It's it's it's leverage in trade negotiations and and uh, and that's that's what this piece of legislation is likely to become. What are we hearing from the Chinese side? We heard President Shi Jim ping speak overnight about the need for mutual respect and equality in a deal, which is which are some guiding principles that China has demanded all along. But is that significant? Because I saw that headline and I was thinking, how do I frame that in terms of does this

make a trade deal more or less likely? It is significant when you hear President Trump, as he did just you know, a few hours ago, say I don't like that we're equality. China has been ripping us off for decades now. Uh, you know that this can't be a fair deal. This is going to be a deal that benefits us. So you you add those two things together, and you've got two leaders who are still apparently very

far apart, brendon what are next steps? I think the last thing I read was a US delegation had been invited to Beijing by China. Is there anything on the calendar? We don't have any information that that invitation has been accepted yet. Uh that that uh was made last week and the the U s Trade representative, Robert Leitheiser, has been running around Capitol Hill in the past few days trying to work out the US Canada Mexico deal and

get a speaker Pelosi to sign up to that. So he said his hands full with with some other things. Now he can do multiple things at once, but his priority is not flying to Beijing in the next couple of days. Uh uh. And certainly with the US holiday next week, you know it's it would be. It would be a stretch to think it could come together before

the middle of next week. As Paul was mentioning, the trade negotiators on both sides are trying to distinguish the Hong Kong issue is unique and separate from other negotiations having to do with trade. What's the tipping point here for when that is impossible? Well, I think the real this whole thing will I think tip when the US agrees or disagrees to roll back tariffs that are already in place. That seems to be where the US is.

You know, China really wants the US to to give some ground on that, and the US is, you know, the whole, the whole US economic strategy with China is to apply tariffs and keep them applied until you extract you know, changes out of China that you know, bringing it more in line with you know, other sort of market economy. Uh. So that is where sort of the rubber meets the road in this whole, in this whole saga. Um, the Hong Kong issue, as President Trump said, you know,

it is definitely complicating things. But whether it's enough to you know, totally throw it off the rails, uh, you know as a total as a different question that I don't I don't see it happening. So, Brendan, we're talking really about a phase one type of deal. That's all we're talking about right now, Is that right? That's right?

So Phase one, as President Trump laid out a couple of weeks ago, involves agriculture purchases on China's behalf, you know, protection of intellectual property of American companies and some of these other sort of structural issues, whether they can get those, you know, as a whole. Another question the you know

they've we've heard you know, phase two. Well we'll come right afterwards, and maybe even a phase three, so you know, these things we're we're about to head into year number three of these negotiations with you know, not even the simplest issues worked out in phase one. So we could be you know, we could be looking at something that lasts, you know, through the election next year and beyond. Perhaps

Brendon Mury, thanks so much for joining us. Brendan Murray covers all things trade for Bloomberg News, joining us from our London bureau DIDGA. Under the surface of credit markets, you could find a bit of a conundrum. You can see that everything seems to be chugging along on average, but if you take a look at the riskiest credits, the triple C rated debt, it has sold off and continued to sell off, with yields on the securities extra yields now rising to the highest since two thousand sixteen.

Joining us is Ken Monahan, co director of Global High Yield in a Moondy pioneer in our Bloomberg Interactive Broker Studios, Ken, do you think that this is a harbinger of more pain to calm the weakness that's been persistent with in

the triple C rated UH category here? Well, a Lisa, you know, the triple C portion of the market has often been viewed as kind of a big risk indicator for the overall credit markets, and when those trade to very high levels, which they're at right now, where spreads are wide, yields are high, and they've underperformed woefully in two thousand and nineteen, usually people say, Okay, well, that's a sign of not such good things to come and

perhaps a recession. I would think in this case, actually it's a little different because there's so much of it that's tied up with the energy sector and then a few other idiosyncratic situations that that's really driving it. You know. You know, we had said earlier that sometimes triple cs are the tail that wagged the dog. This time, I don't think the fact that the dog the tail is wagging that hard is indicative of a major problem. And

this is what a lot of people are saying. This is a specific sector issue energy and then there are a couple of retailers, etcetera that have also struggled, along with some pharmaceutical companies a number of other uh types

of stories. I'm just wondering what it says about a time when we have so much, such a liquidity, when we have you know, such a risk on kind of overall feel that there are an increasing number of companies going bankrupt, even in some of these troubled sectors right Well, you know, I think the energy is a key piece

of that. And I think if you look at the energy sector and you recognize how much money had gone into it over the previous ten years and really facilitated the expansion of the shale boom in the United States, um, you maybe had too much money chasing too few opportunities. And I think if you look at those companies, by and large, they have not been able to generate a

sustainable return on capital. And companies that can't return capital or generator return on capital over time, I just can't raise new money, which is why these companies are in difficulty. So I actually talked to a lot of it distressed investors and they are actually highlighting energy as one of the sectors they think they can actually find value and add value? Is it if you do your real bottoms

up research. Are there still opportunities there? I think you're right that there are opportunities and uh, you know, but they're they're not a whole lot of them out there. I think you really kind of look under rocks here, um and uh, but there are some out there, and I think we are looking at them. But I would not expect in two thousand and twenty necessarily that you'll see a wholesale return or surge or returns for the

energy sector. And if you do, because it's not impossible, what it will probably indicate is that a lot of the companies have washed out of the index. So when a company goes bankrupt, it drops out of the index. So if you had enough energy companies going bankrupt in early two thousand twenty, um, the rest of them that are maybe sustainable, they could have a big rally. How

far in the shake up are we It's interesting. I was up with the capital markets team of one of the largest banks yesterday and and talking to them about it, and it's amazing how few companies have gotten religion. Um, you know, they were offered a second lean paper early this year at seven percent, then by midsummer it was nine percent. Now there maybe eleven or twelve percent, and they still haven't gotten on board. They still haven't figured

out there's still hope springs eternal. But you know, it's the old adage hopes is not a business plan and uh and we're we're stuck in that situation right now for many of these companies. All right, so energies, dicey only for the brave. What are some of the sectors that you think are attractive range? I mean high you market, I guess up eleven twelve percent this year, it's had a pretty good year. Are there still areas that you

still find attractive? You know, it's it's we're still looking under rocks as well in general in this market because the returns have been so significant this year. Let's recognize, though, what happened is in the fourth quarter of last year, we all experienced misery. If anything you had that was risk,

whether it's equities or high yield, got absolutely pummeled. So effectively the return that should have taken place in two thousand and eighteen got sucked into two thousand and nineteen, so effectively is supercharged the performance for two thousand and nineteen. But where we look at when we look at things where they are now, it's much going to be much more difficult to generate a return Next year. Two thousand twenties not going to be a double digit year for

for high yield. It's just not possible. What's it going to be? I think you're looking at kind of mid single digits. It could be even lower depending on what happens with the washout of certain sectors like energy. Do you think that you are guaranteed bigger returns going into the double B or into the single B or into the triple C. That's the big question. I would tell you that the problem with double bees right now is one they've got a lot of interest rate to risk

on them. And to the other problem I would suggest is that there's been so much money that's gone into double bees from what we call crossover investors otherwise investment grade buyers that are so desperate to get some extra yield into their portfolio that they're dipping down into buy

things they don't normally buy. Double be credits, that they've compressed the spread on those bonds, And if we look at those new issues that come out recently a little last several weeks, for example, in the double B space,

very few of them are trading up significantly. They kind of come out, they price it par four and a half four and three quarter coupon, and it just sits there now arguably, you know, maybe if you know, if it stays there at that level for all, the two thousand and twenty four and three quarter return may not look so bad relative to investment grade, particularly if interest rates rise a bit from here. But it's not exactly attracting a lot of interest. So outside of energy, how's

the credit quality in your portfolio? I would say that, you know, if we look at our portfolio, historically, we generally own credits that on average rated about a notch below that of the index. So we tend to seek seek value in single bees and that's where we are right now. Doesn't mean we're not buying double bees. We are, we're a bit more selective about it, but we're very much overweight single bees. We're kind of underweight double bees, and we're about market way triple cs right now. How

close are we to our session? Um? Well, not between here and Christmas? How's that? And? Uh, I don't think it's you know, and I don't think it happens in twenty either, but will you know, it will remains to be seen obviously, the however happens. We supposedly are on the verge, as we have been for over a year now. It seems of of of a completion of these trade talks, uh and if that keeps getting pushed out or there's more saber rattling that goes on on either side, that

could facilitate something. Yeah, alright, alright, I mean, come on, this is literally what we live every day. So can just real quickly what's the most attractive area that you guys are looking at right now? You know, it's interesting the the auto sector had been beaten up fairly bad um and there's a bit of a recovery going on there. We've found some opportunities there and that's one of the places we would point to where there's it maybe had

gotten oversold. People thought perhaps a recession was coming, people sales were going to come down, and that really has not happened. Bonds backed by the cyber truck exactly hopefully. Ken Monahan, co director at Global Hi, a Monday pioneer joining us here in our Bloomberg Interactive Broker Studio. He's based in Durham, North Carolina, home of the Durham Bowl, amongst other institutions down there and Derham. Looking at quick

data check right here the SMP. We are absolutely flat on the SMP today, no change now at forty two uh nasdak off just a little bit. Looking at yields again, not much movement there to ten year up three thirty seconds, pushing that ten year yield down just slightly to one point seven six. Compared that to the two year at one point, So the curve flattening just a little bit. This is Bloomberg twos, the era of forecasts. A lot of the big banks are coming out with the predictions.

Joining us now is Dan Skelly, head of Equity Model, Portfolios and market Strategy at Morgan Stanley Wealth Management, joining us here in New York. I'm trying to unders and the consensus so far, which is a resurgence in a way at least in equities next year that potentially could even see double digit returns in the US and perhaps even bigger in Europe. Do you agree with that consensus? So, I think that at this point in the cycle, you

want to be more selective. In the US market in particular, we think there's less upside to the index in the US where we could see more absolute returns as overseas. In Europe in particular, just given how much it's lagged, and then also given the potential for some rising catalysts on the fiscal front. You know, the only game in town forever in Europe has been monetary stimulus, and I think should we see some fiscal improvement there, that could

be a potential catalyst. You think we will see that because I know, you know, particularly Germany, which is where everybody I think kind of focuses, has been pretty resolute and saying they're not into that game. Yes, So I think that's an interesting question. It's right now. I would label it a small probability, but a rising probability, and guard and ECB. Maybe she's the you know, the she could be the cha agent. I think Merkel, who had

always been loath to do more spendings obviously leaving. So I think that swap in personnel is actually net positive for the for the potential um And you know, listen when you heard Mario dragging on his way out addressing policymakers. He was basically saying, we've gotten to the point of diminishing returns on negative interest rates. So I'm trying to understand how much a trade truce is priced into the idea that we're going to see pretty good year next year.

I think that's part of it. I think the other driving factor has been liquidity. And when you look at what's happened in the US the last call it three months, the FETE isn't calling it qui, but effectively we're seeing QUEI four in terms of generating more liquidity. So I think there's this expectation that you're going to continue to have the FETE at your back and a tail win

in the markets. And we don't see that this program ends early next year, as we all know, and so that could be a potential source of altility next year. I'm looking right now at equities uh SMP and NASTAC a little little down, but the doubt up all of them near the highs. And how much of the gains of next year have already been brought forward and priced

in now. So that's a key question, and I think we would argue Morgan Stanley, a majority of the gains, and we rely not just our own on our own judgment and experience, but also on quantitative models, and our earnings model a year ago was telling us that earnings were at risk, and what we've seen the last three quarters is a meaningful slowdown from we've seen flat to down earnings, and frankly, our numbers for next year is predicting flat earnings once again in the streets at plus

ten percent. So we're that spread to normalize in the street to come down ten percent. We think that provides the genesis behind a potential ten percent correction. I want to be perfectly clear though, because we think that's all it is. We don't think it's more than that. We think we're still amid a twenty year secular bowl market that started in and we're just going through some volatility

and some potential hiccups. So if you see the potential for perhaps a ten percent pull back in the equity markets, what are you telling your clients to do today to get some build some cash or just get defensive. Interestingly, our clients are already fairly conservatively positioned already, so when you look at our system, cash levels are above average versus the last ten years, so we wouldn't be telling

folks to necessarily raise more cash. Here it goes back to my earlier comment at the onset about where you position within the equity market. We're saying avoid some of the more crowded, expensive areas of the market, like technology like growth that have really been on fire this year, and being some of the more value oriented areas of the market. If text not leading, what will I think that's a it's a really great question because you need

something of size to lead mathematically. And so if I look at what has size today, the money center, banks, or really what could what could lead so that to us? If the FED stays on pause and we have a resurgence in the old curve like we've already seen the last couple of months. Wait wait, I'm sorry, we need to have a just data check because we are seeing an eighth straight day of yield curve latining today, which I believe is the longest streak in about two years.

So we're seeing a bit of a reversal already of that trade. Yeah, and that's I think related to this day to day headline back and forth around China and trade. Right, But I think the greater point of the larger point I'd like to make is that if the FED truly is on hold next year, you could see it an environment where the yeld curve does steep and eventually, and given how cheap the banks are, and given how big again their market caps are, that could be an area

of leadership. Once you're once you're selling out of large cap technology, you need something else of size to buy into. You're not just gonna go into microcap stocks or small cap stocks, so that, in our opinion, is a logical source of funds. Dan Skelly, thanks so much for joining us. Really appreciate your smart thoughts there. Dan Skelly, head of Equity Model Portfolios, a market strategy at Morgan Stanley Wealth Management, joining us here in our Bloomberg Interactive Broker studio. Kind

of you know a little bit of caution there. Perhaps you know the potential for a pullback into markets next year, but uh, not interrupting the longer term bowl market. I

think it's interesting the idea of yield curve steepening. And this goes to something that Priamsra was talking about of TV securities earlier today, where she was saying she expects the FED to cut rates actually at the beginning of the year, and some people are expecting the consumer to show a couple of signs of weakness heading into the new year, as you see a stabilization in the manufacturing

sector and that that could push the FED over. And that's sort of the base is increasingly becoming the base case of a number of these reflationary trade bets, which is interesting because the market is pricing in a September eight cut, not in March. I just think it's an interesting kind of dissonance there. Yeah, exactly, exactly. Just a quick data check here, we do have the SMP just again continues very flat today up only one percent and now up so fifty seven points. So very quiet day

on the US equity market. I want to shift gears. We've been talking about the auto sector and it was interesting Ken Monahan was saying that he likes bonds of automakers have gotten a little bit beaten up. A big question in my mind is resell values of used cars. And joining us now is Karl Brower. He's executive publisher of the Telly Blue Book US as sort of the bible when it comes to determining what the value of

your car is that you're trying to resell. Carl, I'd love to get your sense of what we're seeing in terms of trend lines, Uh, for car and truck values. It's a great question. And uh, you know, for years, the used car values have been very strong. Uh, and we kept thinking they we're gonna drop with all these cars coming off least so many, so many times in the last three years, a lot of vehicles coming off least. We are finally now starting to see a shift down

in used car values. Not a tanking, not a dramatic shift, but a shift down, you know, to to a degree we hadn't see in years. So it looks like the new car pricing that's gotten, you know, high keeps going up. It's up around thirty eight thousand dollars now for the average new car. I think it's finally starting to drive some new car buyers back into the used market. Um. And I used car values are are are dropping a little bit as well. So, Carl, I know you guys

just published your blue book best Buy Award winners. What are some of the highlights. Well, you know, there's sixteen categories and we've got a bunch of vehicles that we've been testing for resale value and ownership costs, plus of course things like fuel efficiency, safety and technology and how well they drive. And I think the big winner this

year was the keya Telier Ride. First year, the Key has made a three row suv and a one not just the three row suv category, but also our best New Vehicle category, which is kind of like just the overall car we're most impressed with for the year. So really a lot of value packed in that car starting around thirty dollars, and a loaded one for low forties that has he didn't cool seats and all sorts of features. All right, Carl, I'm sorry we can't have you on

and not ask you about the cyber truck. I mean, you must have known that it was going to be coming, the Elon Musk cyber truck that was tested on stage and failed the shadow proof window test. What do you think of it? Did you like it? You know, he threatened to have some kind of a sci fi you know, a blade runner truck, and he didn't. He didn't disappoint He had a truck that nobody I think thought was real,

myself included. I kept waiting seriously, for him to say, all right, right, this is kind of an early sketch, here's the real truck. No, it was it was that was the truck. Uh. And I'm gonna be interesting to see if the final production version looks like that. But I really think that it's good. There's this kind of built up fan club for Tesla models because there'll be plenty people who will want that truck. And you're not going to answer what you really think of this truck,

are you? That's quite clear what I'm saying. I think it's just gonna be hard for traditional truck buyers to buy into it. I think that it's just been a pure electric truck with traditional styling that would have been somewhat of a leaf traditional truck fires, but you add in the styling. I just don't think he's going to get much of that. You know, one and a half million volume full size truck market, which is a great market that tapped into now a couple of years go by.

It's dependable, it doesn't have any issues. Maybe you'll start to pull, you know, stifon off some of that huge segment, but for the near term, you're going to mostly get Tesla or tech oriented fans, not really truck fans on that truck. So Carl looking again at your best Buy award winners, you know, outside of the pickup trucks, and again the cybertruck is Leasa's favorite. I think now you're trying to get back to real stuff high I think, I mean, I don't see. It's pretty much all uh

international nameplates. Where are the US carmakers in terms of quality right now? They've come a long way and there the truth is, the markets more competitive than it's been in a long time. Every you know, continent is contributing great cars, whether it's Asia or Europe or the US. UM. But you're right, that's set, you know, when it comes to resell value, which is a key part of Kelly u book, you know, and how we value vehicles and we want people to buy a car and had to

suffer the least drop in value over time. That's one of the biggest most expensive things. People don't think about. They buy the car, and they don't often think about the drop in value and the and a lot of the you know, Japanese cars and uh, some of the European cars they do better in those areas than a lot of the US cars. Still it's a much tighter race. US cars keep getting better and they're closer, but Honda's, Hyundai's auties, they still have a lot of the advantage

in that area. Carl, just real quick here thirty seconds. I'm wondering which kind of vehicle is seeing the biggest price drop in resale values? Uh? You know, uh sedans. As you know, the market has just kind of abandoned them. So I think when you've got uh Sadan's, especially non popular sedans, you still have strength in like the Honda

Accord or a Toad to camera. But I think the reason that all the domestics bailed out of this of the sedan market is, among other things beyond not selling them when they're new, is they don't hold their value when they're used. They're just not just not popular cars with consumers today. Carl Brower, thank you so much for joining us. Carl is the executive publisher of Kelly Blue

Book the Phone. They're based in Irvine, California. Giving us some thoughts about the some of the hot and maybe not so hot cars coming for of course, I guess we now when we think about one, we can think about this cybertruck I thought what he said was actually a really important point, which is, it's one thing if they had a truck that just was the Incorporated Electric Technologies. It's another if it looks like it's yes, I'm going

to repeat this Doctor Who all over again. If you start to, you know, have this sort of sci fi aspect, you're not going to get the rank and file truck buyer exactly, which is an interesting point, but that probably wouldn't have been in keeping with who Elon Musk is. Anyway, Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on

Twitter at pt Sweeney. I'm Lisa Abramo Woods. I'm on Twitter at Lisa abramow Woods. One before the podcast, you can always catch us worldwide on Bloomberg Radio