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All right, let's get more on the market. How to manage all of this? At James Abatte's managing director and chief investment officer at Center Asset Management. I mean, here's my really dumb question, like do you sell and or is there a level to buy? Like, I don't know a more sophisticated question than that.
I don't know if it's a level. I mean, let's think about what markets are doing with us today. But let's look back at Friday. The selling on Friday, which just indiscriminate. We have the highest volume day ever on US trading. I mean ETF volume account for about forty percent of the volume, which in these there was a
rush to either hedge or de lever positions. And I think one of the things that was telling to us is it even the safe havens like consumers, staples, healthcare, utilities, even domestic infrastructure stocks participated fully in the drawdout, and I told us that even for the short term, maybe we might see some stabilization or of vicious counter trendorality
like we're seeing this morning. You know, the bottom line for us is this is a terrific opportunity, you know, for true active management, because we think we're on the cusp of a potential market leadership pivot. We've been in an environment for the last two years where it's been the mag seven being the only source of returns, leading
to some extreme concentration. In fact, you know, we saw a lot of large cap core mutual funds have to change your investment policies to become non diversified funds because of the top heavy buyes of the benchmark. So going back to November, we came out very skeptical of the analog of just following the Trump trade playbook despite the post election rally, and stayed that way. But we've had
a tremendous reset in prices. We've seen a rallying treasuries that I think, you know, leads to opportunities in certain segments.
Of the market, like the regional banks.
You've got treasuries that have prepared the balance sheets fed cuts. We're the most bullsh on regional banks probably since nineteen ninety six. I don't want to date myself, because they're going to be growing and really be the leadership of the market, we think, because they'll be financing the industrial heartwain and build out. So our point of investors is now is the time to have a main street portfolio, not a Wall Street portfolio. And that's really a key thing for us.
So what is I guess the constituents of that kind of portfolio, what are the themes driving it?
The themes that would drive it are basically regional banks, utilities, other domestic infrastructure plays. I think the first thing to remember and why we were kind of bearish heading into this year, was that markets with price with perfection, you know, inequity risk premium that was essentially zero credit risk was essentially dismissing any potential of disruption for us.
Deep Seat, the announcement of deep Seat.
Was the first match that was thrown on an over valued mag seven driven market. The teriffs were kind of an accelerate. So I think the real key thing to look here for is on the other side of this trade, where we do get a rally. I would expect this to be in an environment where a mag seven does not lead the other side of the cell here, and I think that will be confirmation that a Main Street driven portfolio, not a Wall Street driven portfolio, will be the one to.
Lead us out.
Main Street has also and will be hit. I mean, as we were just talking about earlier with Morgan Stanley is downgrading all the banks. Yes, the ones with the capital market exposure get hit first, but the mid size banks, the regional banks, they're not going to be spared either.
Well, we'll think about that or how much of that has already reflected.
Many of these regional banks, whether it's key regions, they're trading it less than book value. Many of them have seen an inflection and the return on equity. But most of the pain in the regional banks occurred when we had the sell off driven by the failure of Silicon Valley Bank and some.
Of the others. They have not yet been in the growth mode.
Clearly, there could be some credit issues on the lower end of the consumer, but the concentration of commercial real estate problems is really dominated in the money center bank. So as we would avoid the money centers and really for the first time have an opportunity further down on the capitalization spectrum with the regional banks.
So what's the how do you price in this environment where now, James, do you think it's something that is going to be a longer term issue for this economy?
Well, I think when we saw President Trump announced potentially that there'll be a stay on most tariffs except for China. I mean, China is the primary target and going to be the biggest loser. I mean the fact that the market sold off on their retaliation to the US on Friday is kind of, in a fundamental sense immaterial.
I mean, our biggest exports of.
China are soybeans, coal, almonds and other things. I mean, the US owns the asset that China and everybody needs. The US consumer market the key theater.
And remember with all of this is.
That you know it's we should stay away from blaming China. It was the US multinational companies that closed down US production facilities to gain access to cheaper labor and loose environmental concerns, and now they're the ones that have to reap the negative consequences of those technology transfers.
As well as the intellectual.
Property teams that the proper allocation of capital. Why produce something, don't you want to produce it in the lowest cost environment to pass on the cost savings to US consumers through lower prices and lower inflation.
Sure, would you.
Rather be unemployed and have access to a seventy nine dollars flore having jobs?
Unemployee? We've got apployment, James, James, we've got full employment here. Who's unemployed?
Well, it's it's the quality of the jobs. It's terming about the competitive edge that you can have as a country. There are security concerns, I think when you look back.
Okay, so it's not economic, it's security.
It's both.
Actually, you have to have national security issues. I mean, let's forget that, Chuck Schumer back.
Into the fact that we widgets are being made in China. That's a security concern to you.
That's not where Trump is going after. He wants the high value out of things like automrkety is going out.
Technology, pharmaceuticals. That's where he's trying to gear it up, toys, other things.
Those are not really on the radar.
Pharmaceutical companies are in New Jersey, James, Thanks for journey Appreciate it. James About, the managing director and chief investment officer of Center Asset Management, Appreciate it.
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All right, let's go to the autos because they ain't getting any love you got. GM stock is down by about another three point seven percent. Kevin Tynan is director of research at the Presidio Group A joining us to discuss all things auto. Kevin, I mean, how bad can it get for these guys? Like, where's the low here in these in the stocks?
You know?
The interesting thing, Alex is that if this is, if tariffs are a supply constraint for the auto industry, for the US auto industry going forward, the last time we had a supply constraint, from twenty twenty to twenty twenty three was actually the most profitable time for the dealer groups and for manufacturers. So it kind of puts supply and demand, or has the potential to put supply and demand back in balance and or utilize more of the
domestic capacity. And this actually could be a good thing because we're not oversupplied with this narrow margin environment that this industry has struggled with for decades. So it's kind of interesting that it looks like an opportunity because you're talking about tightening up pricing or firming up pricing and expanding margins going forward.
Guys jump in on that for one second. Yeah, but then we've heard like you have Ford, I think Volkswagen also like Volkswagen's laying off some workers in the US, Ford is now discounting their cars or to get people in the lot. That feels really different from twenty twenty.
Well, the difference is it effects.
Where twenty twenty was supply chain disruption across the board, right, almost everybody was impacted the same. Because the supply chain is common through a lot of automakers. This is very
different depending on what your production footprint looks like. So for those right, for example, if you look at US automotive factories in the fourth quarter, utilization was sixty five percent, right where you're really looking for eighty eighty plus to be, you know, utilization for your auto factories in this country. So the idea is that you're going to have manufacturers that don't have enough capacity here to ramp up and
are going to be penalized by that. And then you have the ability for manufacturers who do have capacity here that is being underutilized to ramp up output output to make up some of that difference or those lost units. The way I look at it as this right, sixteen million units were sold in the US in twenty twenty four, about eleven million were produced here. So if you think about five million units in play, whether they get built or not built, there's the opportunity for domestic capacity to
absorb some of those five million units. And when you think about it, twenty twenty two, which was the most profitable year for manufacturers and dealers, was only a thirteen point eight million unit market, So this can be profitable for manufacturers on smaller volume. And I think the headline is this takes units out overall and that all sales are good sales, which isn't necessarily true. This will improve the quality of sales because supplying the man will be in balance.
Okay, that's what I thought too. That's why I'm very surprised that auto stocks have been trading down. Shouldn't this be the tariff environment? Should this not be good news?
Eventually it should be right if that's if it goes according to plan, where now we're at eighty percent capacity for our automotive factories. The other thing too, and I think Paul the burden on the manufacturers because they have to right size or utilize more of that capacity. That lift is heavier for the manufacturing base than it is for the retailers. The retailers went through this process of supply constraint fewer units and have sort of rationalized their
cost structure more recently than the manufacturers did. Right, They idled plants, but they really didn't take out that capacity. So I think there's a little bit more of a longer lead time to get that production where it needs to be. And that's a global issue, right. Automotive capacity globally is a problem and some of it needs to come out. So I think you're going to see a different impact on the manufacturing stocks versus the retailer stocks.
And at the end of the day, the consumer ultimately just pays more for everything.
That's such an interesting take. Let me add on one more layer. What about the steel and aluminum tariffs and pretty much tariffs. That's the input part. You mentioned that we could maybe absorb about those five million cars that were bought that weren't made in the US. What's the layer though on top of that when it comes to these derivative tariffs, and I.
Think that's an impact on the supply base, right, You're going to have some suppliers smaller and depending again what your production footprint looks like, that are very much impacted. Where there may be one or few big contracts where margins are razor thin that this throws everything out of balance.
But again, even if you think about that at the materials and the supplier tier two three going to be a problem at the end of the day, that's supply constraint, and as you move through the value chain, that impacts the manufacturers differently or the retailers differently. If you think about the US auto market going back, it's least profitable when there's the most inventory we're and it's the most
profitable when there's the least inventory. So we're moving to this period where we're coming out of a rebuild of inventory back to dangerous levels, I would argue, and that gets right sized back to a two to one ratio inventory to sales, and it's actually a good thing longer term. There's going to be some pain right now in the uncertainty, but if it's according to plan, supply and demand come and balance and margins are just better.
Kevin, we got about a minute left. Does this uncertainty in the auto business impact the changeover to EV's I'm not even sure where we are there, but is there an impact?
Yeah, I mean, and I think that was happening happening organically anyway. I think what's what this does, or this administration does, is it takes some of the demand levers out of there, which relieves some of the financial pressure on manufacturers to do a technology that has proven unprofitable. So I think you're starting to see that at state by state level. In terms of the California Air Resources
Board waivers, Virginia didn't go for theirs. There's talk about every other state saying like, we can't go one hundred percent EV or battery electric and plug in harbrid by twenty thirty five, we're going to lose units to noncarved states. So I think you're starting to see that that pressure from government back off a little bit and let the market be a little bit more organic and grow that demand naturally.
All right, Kevin, Kevin, great to talk with you, as always. Kevin Tyn and Director of Research at the Presidio Group, joining us from New Jersey via zoom. Appreciate getting some of his time.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Applecarplay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts, or watch us live on YouTube.
Think back to the election, to the turn of the calendar. You're into twenty twenty five animal spirits, and nowhere did animal spirits run more rampant than on Global Wall Street. Let's get some deal making. You're gonna have be easy money. We're gonna have less regulation, we're gonna have pro business policies.
Capital market, it's gonna be wide open, yep.
And let's go rip it.
A little bit different tone here today, particularly punctuated by the letter from Jamie Diamond to his shareholders.
Here.
Stritenana Rogen joins us here a Bloomberg News He's a senior financial reporter. Sree Times have changed, my friend, over the last few months. What are your sources on Wall Street saying about deal making IPOs? I see a big loan got postponed today to fund the buyout.
So what's happening?
And they're looking for dog walking appointments. I mean, look, the sentiment is honestly captured by Isabel's story today, where if you look at the big take we have out on Bloomberg today, the Headlindal trays Wall Street is just
collateral damage in Trump's trade war. Both of you are right five months ago, when after the election, the biggest reaction in the markets came from these firms index to Wall Street, Index to deal Making Index to Capital Markets, who were certain that regulation was going to go down, all the obstacles going to get out of their way, and it was going to be boom time for their business.
The only problem was they were not taking President Donald Trump seriously, or at least President elect Donald Trump or the man who was campaigning to be president seriously when on the campaign trail repeatedly he talked about his decades long desire to change the global trade order. Tariffs are not something that's an idea that's been injected in Trump's head in the last week or two weeks or a few weeks before that. He's been talking about that for
nearly forty years. The problem was Wall Street refused to take that seriously. Now they're being forced to confront it, and the reaction hasn't been great.
And Jamie Diamond talked about in his letter right that there could be irreversible damage if it's not turned around or change relatively quickly. What did that entail? What was that really speaking to and to.
Me, it was interesting that Jamie said that again his annual shareholder letters something that people look forward to, not necessarily the Warren Buffett letter, but with his stature as the elder statesman in the banking sector, every time Jamie Diamond has something to say, people pay attention. It's a sixty page missive, so most of it was written weeks and months in advance, but there was a lot of
changes made in the last forty eight hours. And the one that we're all drilling into is the is this commentary on Tariff's and he's clear that that the longer this goes on, the negative effects negative impact will be cumulative, and that's what a lot of people have been talking about even if you start trying to change course, you try to negotiate those a commentary from a Goldman partner over the weekend who said, it's really hard to put the toothpaste back in the tube once it's out. And
that's the concern for Waltreet. If you are taking away the critical ingredient that businesses need, that bankers need, that the economy needs, which is certainty that gives you confidence, then what hope do you have?
Did the big global investment banks just refresh my memory? Do they provide earnings guidance?
Typically they generally tend to talk about what their quarter is looking like. But the problem is when they start reporting earnings starting Friday and through the middle of next week, you will see that a lot of the numbers that they forecast, a lot of the numbers they talked about, which was especially relative to trading expectations and even deal making expectations, they will match them, perhaps even beat them.
But nobody really cares anymore because we do not want to know what they did between jan one and March thirty. First one is paying attention to how badly they will be hit going forward. Morgan Stanley's out with a note today downgrading the entire banking sector and the breakdown there is interesting. They talk about how someone like a Goldman Sachs, you will see the immediate impact because the twitch reaction in capital markets and deal making is just it's a snap,
you see it. It's evident with respect to slowing down of loan growth and consumer books at banks or consumers falling behind on their loans, that is still something that's out in the future. And perhaps you know, if you're able to somehow navigate through this tariff, whether it's a negotiation or a negotiation, whether he goes away with with sort of the worst case scenario or dials it back a bit, that could have an impact on those things.
But where you're seeing the immediate impact just the fact that it is hanging out there is deal making, is capital markets, and when that is shut, banks and firms that are indexed to that part of the business are going to bear the brunt of it.
Okay, but but but but just there's not a last Like ten minutes stocks have just turned around. Now you have the S and p up say one and a half percent. You got bonds selling off hard on that back end, like kind of out of nowhere. Isn't that volatility supposed to be good for banks?
It turned around is a strong word, because yes, if you if you checked that, if you if you're checked out Friday evening and came in Monday morning and you're down one and a half percent, that's still bad news. But yes, if your weekend ended at six pm Sunday and you were watching Bloomberg surveillance last night and you saw stock futures at down five percent, you started this morning down four and a half percent, down one and a half percent, is not that bad. But again, this
is this is not your volatility. This is not good volatility. This is not even informed market reaction. At this point, people are just trying to get how long can this last? Will there be a flip? Donald Trump himself has come out with tons of messages, including his excitement about meeting the Dodgers at the White House this morning. So maybe that's what's causing the positive market reaction.
We just don't know, right, We'll.
Stick with that.
I think that might be the winning forecast there. Shread Don Roger, and thanks so much for joining us giving us the thoughts kind of how Wall Street's trying to price in some of this uncertain to hear from the terrorist.
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