Vogel Expects Fed Plan for Treasury Holdings by Year's End

whether at the grocery store or the trading floor. Find the Bloomberg P and L Podcast on iTunes, SoundCloud and at Bloomberg dot com. I want to talk about the treasury market and what happened to the foreign buyer. I am so happy to bring in Jim Vogel, interest rate strategists at ft N Financial, A fantastic analysts. I read his reports every day. Jim, I would love to get your take first off on whether we're starting to see foreign investors come back to the U. S. Treasury market

after abandoning it in December. Not yet on a large scale. What we're really seeing is some buying when we get these odd currency fluctuations, but it's not enough necessarily to say that the foreign buyers are back. So, in other words, even though there is a higher proportion of indirect buyers at some of the recent auctions, in other words, that's usually a category that includes foreign money, but also that includes hedge funds. It's been increasing, but it doesn't necessarily

represent that China and Japan are coming back. No, not yet in the kind of support that the treasury market became accustomed to over the last five to six years. Hey, Jim, could you just comment on what's going on with the US dollar? And and and am I correct in thinking that we saw this big searche in dollar since the November election and that after the new year we still saw some strength. But then they started to be conversation aations about you know, how long things would take in

taxes and interest? Right, what can you tell us about the sort of trajectory of the dollar. The dollar is still going to regain some of its strength, but it was way too strong in December because for a while people feared that the Fed was falling behind the potential of the Trump slash Republican stimulus that everybody was talking about. It became part of the Trump trade, and so on that basis, if the FED was behind, then they would have to catch up, say with a big increase or

a quick increase at the March meeting. That thinking from December has totally wilted, particularly after we saw average hourly earnings growth revisions last week. So there's this debate right now that's been going on, which is, are we headed toward an inflationary reflationary time period or are you going to see treasury yields go back down in the wake

of disappointing growth. Where are you weigh on this? Uh, We're going to stabilize inflation once we move past a couple of other uh, the next couple of months that are going to see increases in the indexes. And but we are not really set for say the ten year to go back to the two percent level when people

were less concerned about inflation. Uh. It's still an early days in the Trump administration, and the people that believe tips are the right place to be are hurting this week, but they have certainly been winning and are ready to commit more capital to that market. How much does the foreign bid that we were talking about earlier play into your thesis? For the most part, do we see the overseas UH fixed income investor staying focused primarily in the

European market. Right now. We do not see them as major players in the US, except when there's a risk style event that may come over from EU banking or other matters such as that. So we're back up for a little bit. No, when you say that they're focused on on the on the EU, are they looking to buy German debt French debt now that yields have risen there? I mean where where are they focused? Yeah, for the most part, they're focused on Germany and France, and then

everything else keys off those relationships there. And so the big news in addition to the treasury rally this week is that both German and French tenure yields have returned to roughly their two month average. Do you see the rally continuing unfortunately for a bit longer, Yes, because we still have to retain firmer footing, and when we have the big sell off in December, we totally bypassed this

area between two thirty and two thirty five. There are no technical indicators for traders to go, oh, finally we've reached here and now we can start selling again. And until we just sort of leach out some of this dollar trade and a couple of other points, we can stay below to th D seven on tens UH into next week. Jim, what do you think is a likely outcome for year and ten year treasury yields? We're still

in the two five to fifty camp. We don't see to the extent that rates spike in the at some point as we look at FED or possibly UH stimulus from the fiscal side in Washington, they could go up to, say to sixty, but we believe they'll come back down because there's people are looking at the federal UM picture on a linear basis and not with all the different

ramifications that follow any particular Washington UM fiscal move. The other really big topic that people have been talking about in the bond world is whether the Federal Reserve will start to unwind their four point five trillion dollar balance sheet. There's been discussion about whether they'll start doing that as soon as early later this year. There's also been discussion about whether they focus more on their mortgage holdings or their treasury holdings. Where do you weigh in on this?

We believe that we will look far more at their treasury holdings. Uh, there are four hundred billion dollars of treasuries that have to be reinvested in two thousand and eighteen. So that's the far more immediate um UH horizon that requires a policy decision, and we think they'll be looking at it very closely in the second half of this year to at least communicate to the market a fairly detailed plan. Kim, is there any plan for if the economy is currently at its peak, end will either plateau

or we will see a slowdown? Uh, there is nothing in the broader numbers that indicate that we've peaked. The sort of the worst trend that we've got is the fourth quarter personal consumption grew at two and a half percent versus the six quarter average of two point eight. But but that's still quite reasonable given um the FEDS goal of continued um solid growth in the US economy. That's still ahead of their formal forecast. So you think that things are kind of just going to be steady

throughout the year, What do you think? What's what's the biggest potential surprise on the horizon that could change your view? Uh. The biggest that would be a more coherent action plan from Washington, where the White House and Congress are moving together very quickly. Um to say accomplished, say corporate tax reform in significant detail, not necessarily pass it, but have it out there on a two hundred day calendar, as opposed to what people like to talk about in terms

of the one hundred day calendar. Interesting, very good. Thanks for pinpointing that. Jim Vogel. He is interest rate strategist for FTN Financial, joining us from Memphis at Tennessee. While we want expertise in the world of technology media, well turned to only one person, Paul Sweeney, US director of Research and senior Media Internet Analyst for Bloomberg Intelligence. I urge you to go to b I go on the Bloomberg for a variety of detailed reports and insights into

a variety of industries. Paul Sweeney, where do you want to start? You want to do Disney or you want to do uh Time Warner and the A. T. T. Combo. I think Disney is usually the most fun story to talk about. And you know they had a kind of a mixed quarter last night. Uh they beat on the EPs line, but they missed on revenue and the ESPN numbers. You know, we're still a little bit soft and uh, and that's kind of a problem because their cost based

continues to go up. At ESPN, sports rights continue to go up. In fact, they are in the first year of new NBA contract, which is six million dollars of incremental expenditures for them. So the cost of sports rights continues to go up. And that's obviously you know, ESPN has has the monopoly there, but the revenue trends remain

challenge at ESPN. They're dealing with chord cutting, they're dealing with skinny bundles, and they have to figure out a way to kind of tap into the digital growth opportunities for ESPN. But ESPN still has a very steady and desirable group of viewers. No, I mean, this isn't exactly

something that's going to go away. I know, it's it's by far the most valuable cable network out there, and it continues to grow revenue and profits continue to grow, just at a slower growth rate um and so again some investors at work, certainly, but it's you know, it's it's half almost half the operating profit of the Walt Disney Company. So it's a major driver of of the company. So the question for the Walt Disney Company, like all kick cable networks, is you know, how do they bring

their content direct to consumers? Uh, you know, through some type of streaming service. UM. It looks like people are on the margin cutting the cord. So you have to think about new ways to reach your consumers with your content. And you know, we've seen some examples like HBO has taken Hbo direct to consumers. It's called HBO now and you can subscribe to it directly, and you know, and we're off to see, you know what ESPN decides to do.

You know, Paul, there's been some speculation that Disney might spin off ESPN as its own entity. What do you think the likelihood of that is. I think in a near to intermediate term, that's very unlikely. Um. This is still again half of the almost half of the operating profit of the company here, so it's a major part of the business. UM and it's still a extraordinarily valuable part of the business. Throws off tremendous amounts of free

cash flow. But I think to the extent that they ever get to the point where, you know, the growth rate, you know, turns materially negative and it ends up being a real drag on the valuation, which I don't think it is now. Then clearly there will be an opportunity to to spin this asset out, and there'll be a lot of demand for that, but I don't think that's

anything in the near term. Paul, I wonder if there's anybody that has access to the Internet that doesn't either pay a telephone company or a k able company some money. We're talking about like cable operators, whether it's Comcast or Charters, Spectrum, Verizon, so on. Right. Well, and unless you're a millennial, so the younger demos are in fact are kind of corded never's if you will. They've never signed up to any kind of pay TV service. Um. And so the question is,

you know, how do you reach those people? Um? And there's actually that that percentage of the population is actually growing, the folks that do not pay it's a small percentage today, but it's growing. Where do they get their service? Where do they get their connection to the internet? Just public WiFi? Well, they'll get it, yeah, you're right, So they'll they'll either get a public WiFi or maybe they'll just subscribe to a standalone you know, uh, broadband connection through a cable

company or through a telephone company. But the question is will they pay for a big video product, and that you know, on the margin, the millennials tend not to be doing that. But again, if you're isn't that what T mobile I was gonna say, isn't that what T Mobile was trying to do by giving away? We're not giving away, but like getting you unlimited video for certain types of video. Fair does Disney needed that kind of

more direct pipe into people's homes? I think they do um and I think they're moving, but they're moving more slowly than others are. And the reason to moving more slowly is because they have more to lose. They get almost seven dollars per subscriber per month for ninety millions subscribers to ESPN. It's hard to walk away from that order even potentially cannibalize that business. So that that's why they've been more reluctant to do that versus some other companies.

But you know, you take a look at a T and T. One of the big reasons that they bought a Time Warner is because they have you know, so many wire line and wireless customer relationships, but they don't have any content and so that's why they stepped up to pay eighty five billion dollars for Time Warner. Well, talking about Time Warner, they have a strategy that perhaps others will adopt, squeezing cable and satellite distributors for more and more money. And this is one of the reasons

why they reported better than expected earnings. Correct. Yeah, the numbers came in a very very strong for them, a good good quarter for them, which is nice for a T and t um. The big driver for Time Warner was the fact that they did continue you to have strong affiliate feed growth in their cable networks and that about affiliate feed growth year of a year, which is

by far the best in the industry. What was driving that is they just over the last two to three years renegotiated most of their distribution contracts with the cable companies and the satellite companies and they were able to get big increases. The reason they were able to get big increases is because they just invested a ton of money in their programming, particularly sports programming, uh the NBA, in the n c a A. Uh So they put

their money where their mouth is. And then they turned around the distributors and they're like, Okay, we're giving you better content. We want to get paid more, and they did. Thank you so much. Paul Sweeney, director of North American Research and media analyst for Bloomberg Intelligence. P and L is brought to you by proper Cloth, the leader in men's custom shirts. At proper cloth dot com, ordering custom shirts has never been easier. Create your custom shirt size

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uh potentially buy a Jaguar Land Rover. If you want to do it, you need to buy it soon because it could cost seventeen dollars more than it costs Now. I want to bring in somebody knows all about this. Alan Baum, principle at Baum and Associates, a Michigan based research firm that just did a study looking at how much auto prices could increase as a result of the border tax. Some pretty big numbers, huh, Allan, yeah, and Tim that seventeen thousand may not to pass. That's what

the numbers say in terms of our analysis. Obviously, companies will make their own decisions on what the how they would price their product, right, But the point stands that basically the border tax will make it a lot more expensive for some companies, and more so than than others.

For example, Volvo or Mitsubishi or Volkswagen would face a bigger challenge than say Ford or General Motors, right, And it's based upon where they make their product, the price of the product, and how much of the product, even if it's made in the US, is imported. Um and so Jaguars obviously and land Rover obviously on the far end there because their products are imported and their high price. Well, Alan,

for the record, I'm I'm all. I'm a public transport person, so I I just gaze into the windows of the showrooms. But if I were to gaze under the hood, I might find that most of what's in there, at least some of it anyway, was be made in Cana the in Mexico, right, because GM and other automakers are still facing this uncertainty because of the president's vow to institute this border tax. And from the Center of Automotive Research, they say that's seventies six percent of the seating and

interior trim come from outside the US. Electronics more than six engine. I mean, if you want to break system, chances are it's you know, might come from overseas or somewhere outside the US. What are they going to do to change that? That's a big deal. And of course it's based upon labor UH and scale and so you want to do UH, you know, for the kind of investment that you're gonna be making there, you're gonna make large volumes and so yes, that is clearly the the issue.

The other thing that that our study showed is a company like Sword UH that makes small and midsize cars UH in Mexico, as opposed to f C A UH and UH and GM both make large pickups. A company like Ford is better off because the value of the products they're shipping from Mexico is less than that of

f C A UH and UH and GM. So that's why you've seen Forward perhaps being a little more supportive of this concept, although obviously all auto companies would prefer to have their cost reduced um particularly their tax rates, which seems to be something that's that's being considered, and not have their taxes increased in the form of this

border tax. You know, I gotta say, on one level, your study shows exactly why some people want this border tax, because it essentially would incentivize these overseas companies to either move jobs here removing the potential tax, or else not be competitive in the same way. I mean, isn't that exactly the point? Well, yeah, I mean, I'll be slee. Mr Trump is is being responsive to the issues in his campaign. The companies, of course, are less excited by

that because this is a global industry. They've been working on that premise for years. Uh. And if we talk about the Detroit Three, they are in fact making fewer and fewer of their vehicles, not just in the US but in North America because they're looking at ways to

improve their position across the globe. And the companies that are based in Japan and Germany are in fact coming here to produce because they're looking to do the same thing, except in reverse, and that is increase their position here in North America. Would that be a much more intelligent way to move in your in your estimate, Well, those have been the rules of the game. That's what automakers and for that matter, businesses across the board have been doing,

uh to to capitalize. I mean, you know, the obvious growth in the automotive market in terms of volume is not in North America, and for that matter, it's not in Western Europe China. It's in China, and it's in Eastern Europe, and so that's that's where the development is

coming now. The difference, of course, is the North American market, particularly US, remains incredibly profitable relative to those markets, and so obviously companies are very interested and attached to this market, which of course is a good thing for us here in the US particularly. I was just gonna say, particularly

if you're making pickup trucks and SUVs, that's correct. On the other hand, uh, you uh, you don't want to be making one set of products for North America and one set of products for the rest of the world. I seem to remember a bankruptcy or two that happened in a few years back where that was part of the problem. Thank you very much. Alan Baum is a principle at Baum and Associates based in Michigan, doing a

lot of research on the automobile industry and visa. It will be interest think to see how the Republican tax plan actually moves forward, because they're getting a lot of pushback from like, for example, automobile dealers. Will be interesting also to see how much the foreign automakers have a voice into the White House. Well, I'm gonna I'm gonna give a round number. I'm going to give a round number, well almost round number A hundred and two. That is

the ranking for company. It's not around number I said. It's not around number A hundred and fifty. Maybe it would be the round number, but it is okay, a hundred fifty second place. Molus ranks in global equity. Tell people what right is a boutique firm? And somehow they managed to win the assignment to manage the most coveted I p O of this century arguably. I want to bring in Ruth Avid. She's an IPO and deals reported

for Bloomberg in London. Ruth, how did Bollas get this. Hi, that's a great question, since everyone has been trying their hardest to get on this deal. And I think you know you've you've heard of banks going and pitching this for months, and we had something last month saying that

ever Cohen Mollis had been shortlisted. But keep in mind that these are just the boutique banks that are getting on the mandate, right, they're also speaking to the global investment banks, so the Goldman Sachs and hsbcs and city groups of the world to get more of them in. I mean, you're talking about a company that says it's going to have a valuation of two trillion dollars, So you'd imagine even if they list like a five percent stick, that's a hundred billion I p o. And, as you said,

probably the largest of the century. Um, it's gonna take a lot of banks and a lot of people to get it over the line. Can you give a little detail of the people involved in making this decision and how this is going to affect the other investment banks. I think investors are taking into account of fact that this is a big coup for Mulist and there's going to be you know, I mean it is the It is the government which will have a big say in who gets the mandates and what kind of do we

know the people? For example, I mean do we know the key people involved in making this happen? I mean this is a relationship business. Yes. I mean if you're saying, is ken Molly's pitching strongly? Yes, and he's doing a great job at it, Like I just want to know more about him. You want to know, like who did he who do you have dinner with? Exactly? Just or well, so I know a lot of the people came from

ups for example originally, Ruth. What I'm curious about is what how much are the fees potentially that we're talking about here, I mean, just to give a sense of just how much bankers were salivating over this deal. So typically I po fees are about two point five to three percent of the deals size. But that's just you know, that's just the overall numbers and not something to get

too excited about. Because state deals, and this is one thing that whether it doesn't matter what market you're in, a government deal is going to pay you much less than a private company. So it's more of the prestige, right and it's more of them, like oftentimes the underwriters that would not be moreless, but the other big banks managed to make money by getting commissions from the investors

that they bring in. So you'd imagine that fees would probably be on government deals they're less than a percentage, and then they'd be split between so many banks. But this is going to help moreless when they go and pitch for other roles. I mean, this is the biggest I p or the biggest deal that they've ever done. Well, this is well, this is certainly helping their stock today. I mean the stock is you know, a dollar five

or thirty six seven. This is a stock that was trading, you know, in thirty four now we're up to thirty six. It seems that there's a model, is it or a a reason? Is it because was the people behind you know, just can since he owns you know, he's party owner of the of the company, does that have anything to do that what made them select this particular? Ken Mollis, I think the it's not just I mean, so I don't

think it is just a relationship story. I think it's also them looking at the other banks that were pitching and trying to figure out which one would be the best for what they want to do, which one would be the would fit with what the Saudi government is saying best, because you know, for instance, we know that Rothschild and Lazard. I've also been speaking to them and typically those are the kind of boutique banks that get in there. But they weren't on this deal at all.

I mean even last week last month when we were talking about banks being shotlisted, it was ever Coen Mollis. So they probably wanted a bank that is not very well known and where they think even to an extent they may be able to avoid leaks and have them working in secrecy on this that that probably wasn't so successful. Um and and so now these banks are going to be working the bigger investment banks when they come in and managing everything and trying to get this deal off

the ground. But keep in mind, this is not going to happen until the first or second quarter of two thousand and eighteen. And that's an optimistic prediction. So the great I mean, the investors are that are coming into the stock today are making a long term bed and and well, I guess we'll have to see what happens you say that this want to take place until the first quarter. Well, yeah, first, second, third, yes, but it's it's not a two thousand seventeen deal, is what I'm

trying to say. Yeah, got it. Yeah, it's already priced in. Thank you very much for illuminating all this for us. Sir Ruth David I p O and deals reporter for Bloomberg. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast.

You can always catch us worldwide on Bloomberg Radio. P and L is brought to you by proper Cloth, a leader in men's custom shirts, with proprietary smart sized technology and top rated customer service. Ordering a custom shirt has never been easier. Visit proper cloth dot com to order your first custom shirt today.