Ukraine, Travel, And Markets

want to talk to you bred about balance sheets. I started my career lending money to media companies, so we always looked at net at the bat and coverage ratios and all that kind of good stuff. Now I've got interest rates rising. Is there interest rate risk out there for more companies? And maybe we're thinking about well, Paul

to pleasure to be with you. Thanks for having me. Um. What I would just tell you is, you know, you know Heartland we're we're a value boutique here in Milwaukee, and I managed one of our small cap portfolios and our goal is to invest or investment cycles, and you know, we seek to invest in undervalued small cap stocks that have strong balance sheets, paid dividends and generate strong free

cash flow that I will just tell you that. You know, we're in an environment where, you know, for most investors at a high level, balance sheets only matter when there's credit stress, and you know, most investors are focused on earnings and earnings growth, and you know, balance sheets matter especially when the feed is raising its race and the

old the old match goes don't fight the feds. So we think, you know, our process, which you know, you know has been tested through various bowl and bear markets and through cycles, is a prudent strategy in this of our because especially in small cap space, we have a lot of companies that are improfitable. We have a lot of companies that are very shaky balance sheets, and we have a lot of companies that have very secularly challenged

growth outlooks. And so our job is to weed through all that shafe and find things that are interesting and have you have investment merit through um you know, through an investment cycle that we look for between you know, two to three years. Is that the focus? Is that your professional focus? Because I noticed you were recognized as a category king manager by the Wall Street Journal. I don't know what that is. So you know, Heartland has

long been known for value investing in the Heartland. Value plus one, which I do lead manages, is a dividend focused small cap fund that looks for undervalued small companies which pay dividends. And you know, we we think we think low debt has merits always because you know, low debt companies have lower volatility than their high debt counterparts. So that's an important dynamic, especially as the feed is raising rates and lowers volatility, especially in a portfolio context.

You know, there's an environment also where you know, highly levered companies have much less flexibility in terms of free cash flow deployment, and especially as we're going through a downturn or I should say maybe an economic that economy that is peaking, and the feed that is is messaging

an aggressive rate cycle to tame the inflationary pressures. UH having having free cash flow flexibility to buy back stock if it's under value, to service any debt you might have to maintain your dividends, and then maybe you know, look for attractive m and A opportunities when others are

not is really a recipe to win. Especially you know, we often see um and we saw this the COVID crisis is balance sheets were very stress going into the COVID crisis, and that was as a result of you know, really interest rates being very low and many companies you know, feast down that low leverage to acquire companies at high valuations. And the end result of that was you know a lot of pain for investors as as as we saw

the COVID recession, I can understand. I mean, how you screen for UH small cap value stocks, especially then you go look at the balance sheet and you can make that judgment. How do you know if the company is an M and a candidate, Well, we never really make an investment with that as a as you know, the necessary outcome. But usually what we find is, you know, in the in the small cap space, higher quality companies that are on the bargain bin um. They might be underloved,

under followed. But if if we have managed teams that are effectively pursuing a strategy we like to call it a self help strategy, which is really where where management teams are very internally focused. They're focused on reducing costs, perhaps restructuring operations, or perhaps divesting non core assets that

might be deluded to their overall organization. From a margin perspective, we usually find those self help stories as being ones where they don't need the macro economic environment really to give them tail winds to to to be successful in driving operating leverage in margin expansion. They really need to focus on on on their internal asset base and their

existing operations to drive value for shareholders. And especially in an environment where perhaps the FETE is going to be on the prowel with higher interest rates, that we think that's going to be an effective place to be. And just answer your question, Uh, those self help strategies, you know, those companies that are perhaps underloved, under followed because of

some self inflicted internal issue. If they are successful in pursuing that self help strategy on top of having a strong balance sheet, those companies usually become a part of large organizations over time. Andy Brad thinks so much for joining us. We really appreciated. Bradford Evans, portfolio manager and senior VP at Heartland Advisor Small Cap Value. All right, here's the conversation of the morning, at least for me.

One of the questions that I've had as we look at what's unfolding in Ukraine over the last couple of months is what did the Russian people know? Did they do they know? The A that there's a war on be the conduct of the Russian military within Ukraine? And if so, what is their level of support for Mr Putin and this war? Unfortunately? Leonide Burschitski, columnist for Bloomberg Opinions, out with a column on that today. So leon and do you have a sense of what the Russian people

know about what's going on in Ukraine? Well, uh, Russia has turned into a pretty close society recently, so I can only make an educated guess. But my educated guess is that they is that people inside Russia know a lot about what's going on, and they understand correctly what is going on. So they're not really taken in by the by the propaganda, even if they might say they are. So am I to assume then that they tacitly approve

putting conduct in Ukraine? Well, you know, in a police state, uh, and sort of a copy of the Soviet Union that Russia has turned into. Now they're mostly business surviving, so it's not really um, you know, tacit agreement or acquiescence to what the Russian military is doing in Ukraine. It's it's you know, every man for himself and every woman. You know, people are just trying to basically avoid clashing

directly with the regime mostly. Yeah, I mean it's understandable, um, right, when we see these surveys, I kind of wonder how many people were being honest. To hear from friends of mine that grew up in East Germany that they would not criticize the state publicly, not on the telephone, not at school, UM, for fear of being um, you know, punished exactly. And and this is you know, this is

a time ownered Soviet instinct. Especially the older generation of Russians remember remembers how it used to be, and they would never whatever they think about what's going on, they would never publicly express those opinions or say anything on the phone or on Skype or on any method of remote communication, because they assume that even if the authorities aren't listening, they can listen in So, you know, here in the US, UM, and I guess in Western Europe

as well. Younger generations don't really watch tell Vision anymore. Everyone um gets entertainment and information from the Internet. And I noticed, especially Europeans use VPNs a lot the what is that virtual personal network virtual private original private network. In your column you point out that even to Metri Pascoff uses a VPN, So does everybody in Russia have one? Uh? Well, the VPNs actually have been uh all of the top

four most downloaded epps in March or VPNs in Russia. Um, and the fifth one was telegram, uh, you know, the encrypted messenger. And this allows people to get around state controls of the Internet. Basically, yes, it does. Uh. It allows them to get around state controls of both information

and and and entertainment. Basically, the you know, those Western services lake Netflix that have with Russia are still accessible via VPN, so a lot of people download these to be able to, you know, watch their favorite UH TV series. You know. I've been thinking that at the very least Mr Putin will never ever be accepted back onto the world stage, will never see him at a G twenty summit.

Now I'm wondering, as we go into the second and third month of this war Russia itself, are what is the feeling about Russia in terms of being part of the world community, Because it seems like at this point, based upon their behavior over the past couple of months in Ukraine that they are not welcomed in the world order. Does the average Russian even care about any of that? Well, the average Russian, as I said, it is probably business surviving.

You know, those who have not left the country, those who have left the country are obviously feeling uh certain change of changing attitudes. And you know, Russians are not not welcome in many places where they used to be welcome, and they're not um you know, treated with um, you know as treason is in the same friendly way as as they used to be treated in many places. Uh. Inside Russia, people perhaps have not felt this yet, but it is a similar situation to the one that Germans

found themselves in after World War Two. Yeah, I will actually even say, you know, Leonard, I was living in Berlin um around two thousand two, two thousand three, and I was welcome at all parties before the invasion of Iraq. That basically the day the US invaded Iraq, and if you recall at the time, it was without um the approval of Gerhard Schroeder and the German government. The day after that, I was like persona non grata. And it sounds silly, but it is absolutely true. I I felt

it instantly. Do you feel the same kind of did you feel the same kind of turn or do your friends, um Russian friends around Berlin or in Western Europe feel the same kind of change all of a sudden, Well as somebody tried to set my daughter's school on fire, which is a biolinqual school. Uh. So you know, you get um, all sorts of people and all sorts of attitudes, and uh, you know, you get nasty reactions sometimes from

some people when you speak Russian in public. Uh, you have to basically, well I can't really say take it and stride, but you have to accept it as um sort of normal retribution retribution for what the you know, the country's military is doing. I mean, as as Russians, we all bear part of the responsibility for not stopping this time Leonid, the thirty seconds left. How do you think this ends in Ukraine? H? Well, I I don't

think it ends in the foreseeable future. Okay, but do you think the people, I mean, is Putin's position within Russia as strong as it ever has been. There's and there's relatively low risk that the people will overthrow him, overthrow the current the current level of repression. I don't

think this is imminent in any way. All Right, lady Brushitski, thank you so much for joining us, giving us really fascinating column there for uh Bloomberg opinion, just talking about uh, you know, as someone who used to live in Russian and as a Russian now in Berlin, giving us his thoughts about what's happening in Ukraine from the Russian perspective, and again it just kind of begs a question, what

did the Russian people really know? Uh? And based upon that knowledge, how supportive are they of the Russian state, the Russian Army, the Russian policy towards Ukraine. All right, let's talk about stocks here. Peter McNally joins US Series Global Lead looks at industrials, materials, energy, Third Bridge Group Limited. Uh, Peter, we had Delta come out with some numbers today, some good numbers, some good guidance. What's your call on the

airline space here? Are we kind of back or are we still waiting for the business side of the of of flying to come back? Well, it's gonna be with you, guys. I mean, revenue is coming back. It has been, you know, particularly on the on the leisure side. There's still a ways to go though in business and long haul international. But what haven't come back yet have been profits, right.

I mean, even though Delta in the second quarter is gonna get close close, not quite levels of revenue, it's fundamentally less profitable because costs are higher and it's both on labor which is the biggest cost, and fuel. But that's coming. I mean, Delta is managing well, Um, you know they'll be profitable most likely for the rest of the year. Um. But you know, relative to expectations, things have picked up for Delta. So what about uh, ticket prices are they able to do they have the pricing

power to make up for rising fuel costs? Well, that was you know, one of the key messages I think that Delta delivered today is that they are getting you know, getting pricing. You know, it's not bringing them the whole way back, but on on a unit basis, um, they have recovered to uh actually record levels of you know, beyond where they were in twenty nineteen. There is pent up demand for travel, that is, that is fundamental and you know we're seeing it as you know, other countries

open up. Um, you see the bookings in in international We've obviously been through that here in the leisure market in the United States, and you know, Delta in particular has been slow to add capacity. Now some of it in the industry is because of labor constraints, you know. We we saw Jet Blue last week, you know, actually cut some flights because uh, you know, for the summer, because they are concerned about staffing levels. Delta is managing

this pretty well. Uh. They may be an outlier, um, you know, relative to the you know, to the industry, but that is something we're gonna watch, you know, through the summer. Yeah. I've just been on a couple of flights over the past couple of weeks and the load factor, as they say in the business, got to be near on My planes were were packed here. Where are we in terms of capacity? Have the airlines brought all their capacity back online? If they've taken some of those parked

aircraft in the in the desert and brought him back. No, it's been it's been slow. I mean, it looks in the domestic leisure market, you know, you're basically there. But you know, Delta is still only in the mid eighties at this point in terms of capacity, and they're only adding a little bit you know here in the second quarter. Despite despite this, you know, uptick, the labor is don't be instant in the industry. You know, pilot just people

servicing the planes. Well, it's you know, it's actually like a lot of things. I mean, Delta was even talking about how within the airport they're having to take over some of the operations themselves. Um, you know, the things that had you know, had normally been you know, been outsourced. But you know, Deltas hired like fifteen thousand people in the last year or so. Um, you know, they do

seem to be getting out of it. But not every airline has been, let's say, as successful and hiring enough people to man all these you know, all these flights. And it began about a year ago where the airline started talking about pilot you know, and the constraints there and um, you know, labor issues are not going to go away in this industry. Peter. I've I've always felt like airlines in America don't have pricing power relative to

you know history. When I was a kid, I remember flying out San Francisco to watch The Grateful Dead, and then I did it again when they had their fifty at the anniversary a few years back, and I paid the same price for the same ticket, you know, twenty years apart. So I thought that was a little bit weird. But then after having lived in Europe for a while, where I wouldn't have paid more than a hundred dollars for an international ticket, Um, I feel like there's something

very different about this market. What what is the deal with the US market is just an oddly regulated pocket. Well, I mean, look, there's one thing that we learned or maybe was you know, we were reminded of through the pandemic is that investors, whether they're you know, credit or equity investors, don't stop giving airlines money, you know, and and we're able to finance this industry. We had startups, we had I p o s through the pandemic, and we've never seen a decline you know like this now.

We we we've moved a lot of planes around and you know, fleets have in you know, reorganized and gotten more you know, more efficient. But you know, it is an industry that does you know, thrive on competition, and there's always new you know, new entrance you know coming in. It'll be interesting to watch you know, at the low end of the market. This fight that has emerged over spirit you know, this is the this is the ultra

low cost carrier. You know that's out there, and you know to you know companies in there, they've they've been disruptive, you know, particularly in Florida, which was been been the hottest market in domestic travel, you know, since the since the recovery began nearly nearly two years ago. Good stuff, Peter McNally, thanks so much for joining us there. Timely discussion there with the good numbers coming out of Delta and they had some good guidness so about summer travel.

So good to get Peter's thoughts there. He's global lead Industrials, Materials and Energy. Third Bridge Group is his gang over there, so good to get an update there. Alright, tough, tough first market for fixed income investors, and I've got a foto reserve that's hell bent on raising rates throughout this year. So what's the fixed income investor to do. Let's check

in with Allie Peiffer. He does it for real, Managing director Fixed Income Coupital Markets at Raymond James ray j as we call him in the business, great little firm down there in Florida, competed against him for a long time. Good stuff, ellis UM talk to us about investing the fixed income markets these days? What do you do? That's a great question. It's it's the question I get almost

every day. Good morning, UM. Well, we're saying what we found out over time is, you know, when the FED is in this kind of environment, is we like to do somewhat of a multi primed approach. One is we like cash flow in our our portfolios. As we've been telling clients to to maintain cash flow, advertising products such as mortgage backs to bring in UM cash that you can reinvest at the higher rates as the FED moves higher.

We do like floaters at this point. We normally aren't big fans of floaters until the FED begins to move because that's when you actually capture most of the move from there from from the rising rates. UM, and then as far as the rest of the portfolio. Were we Barbell uh classic Barbell in a in a curve movement environment like it is, a flattening environment like it is.

We like m more negatively convexed products like uh, you know, option embedded products like callables and mortgages that I mentioned earlier, and then we like more of our positive convexity on the back end of the curve where we can kind of control that risk factor a little bit. I haven't heard convexity terms since my finance class and a duke, do you not watch surveillance? Yeah, but it's up there

with sitgeist among the most mentioned words on surveillance. He's got his own you know, he's got his own language. Convexity is a Faraoh thing and zeitgeist is tom Okay, I wonder what I wonder? What I wonder? At least it says just all things credit. So I don't know. So So in the corporate market do I go hire? You do I stay investment grade? What do I do? Um? Right now? I think you're you're better off on the corporate market in the in the investment grade, I think

the risk is just um. You know, the FED normally doesn't end in a soft landing. We've only had one to my account, and so you know, I think the spreads of all widen across the curve. But you know, as far as an up in quality trade, I think still remains the right move at this point is there ever a time when someone who works in fixed income says, man, now is not not not a good time to be in fixed income. Yes, I have done that before. I mean, it's it is. It is one thing you have to

be careful with. Obviously, in a balanced portfolio, UM, you want to be you know, probably underweight uh interest rate products at this point. But you know, we have a lot of clients who are depositories of money managers fixed income products, and it's like that they must maintain investments, and so we try to adjust their waitings accordingly in

order to best fit that environment. So are your corporate clients ellis Um, do they feel like the parties over in terms of new issuance that the windows closing if not closed? Or what are you hearing from your corporate clients? Uh? No, I think I think the the product is still very violable at this point. I think we're still getting, um,

you know, some some good flow. I mean, it's obviously things have changed with the with the flattening, but you know, when when you're looking at corporate credit, a lot of it gets swapped out once it's initiated. Um, that will tighten up as the fed titans. But I think there's there's still an open window at this point. I think we've got a little bit of time before we get to that close that you know what as it closes, was that it for the inversion? Do you feel like

that was one and done? I do for now, um And And part of that is if you look at the you know, two S tense curve, which I've always used as is a very good measurement. I mean, all recessions, as we know, have been led by an inversion, but

not all the versions was a recession. And in the three tends, the three month to tenure, not the three to tends, but the three month tenure is very wide still at a hundred ninety basis points um And, I don't think we're going to get that kind of indication of a recession until those two curves come more into alignment. And I think I understand quantitative easing, but now I'm being told by credit folks like you that there gonna be quantitative tightening. What does that look like? How does

that actually get affected in the market. Well, the FED will uh in their portfolio, there's a certain amount of runoff with maturities and mortgage run off from their holdings, and so they're gonna allow that to to actually begin. In the past, every bit of runoff has been met or exceeded by their purchases. And when they when they stopped making new purchases, that's where they kind of left it. Uh, they kind of made it even at that point. So now they're gonna let that run off to a certain limit,

and so they'll they'll build that up over time. I expect that to come in May at their next meeting, uh, and they'll wramp that up to about nine billion per month, which is an effect you know, it brings about a double barrel tightening uh in the market. I means you've got you've got them raising rates as well as taking liquidity out of the market by allowing this runoff, and so they're not putting that liquidity back into the system. Alright. So, uh, how far down do you think we can get? And

what's the terminal rate? It's got about thirty seconds here, um as far down? Uh, you know, the truth be told, that's going to be a difficult one for them at this point. They're they're pretty much in a very difficult bind as far as terminal rate. You know, if you think about the FED. If they are right and hitting there to seventy medium projection in the dot plot, the terminal rate on tens is probably north of that in the you know, three and a quarter to three fifty range.

I think that's a that's a real possibility on tens, but that should occur before the FED or at the time the FED begins to stop tightening. All right, now, that's good stuff. We will appreciate getting some of your able time. Ellis Pfeiffer, Managing Director, Fixed Income Counpital Markets for Raymond James again sees that fifty basis point hike in interest rates coming up at the next meeting in May UH and then the runoff likely to occur begin

as well. Then thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller. Put on fall Sweeney I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio