When WHO Sounds The Alarm, History Shows It's Time To Dip In

Bloomberg dot com. The conundrum baked into today's markets. You're seeing that sell off deepen in the face of the spreading coronavirus, and yet a lot of people saying the US will remain intact, will remain immune or relatively so, to the deepening a health crisis across Asia. Joining us now to talk about exactly how to play the US

market amid the increasing macroeconomics uncertainty. David Deats, president and chief investment strategist at Point View Wealth Management that has more than seven billion dollars under management, joining us on

the phone from Summit, New Jersey. I'm wondering, David, considering the fact that you have studied through the eras classical literature, You've studied law, You've studied a whole host of things at a variety of degree easy worked with a lot of different people who are trying to figure out how to navigate this incredibly complicated market. What do you buy on a daylight today when fear is the prevailing sentiment? Well, so,

I think it all goes down to your time horizon. Um. Clearly, one of the big drivers today is the spread of the corona virus. And the best way to figure out where that may be taking us is to look at these epidemics that we've had in the past, mayors, stars, hiv, et cetera, over the last let's say, uh forty years, and we have done that study here. And what's interesting is, other than the HIV age situation the early eighties, the market has invariably up significantly after the first onset of

these epidemics. Um. Why is that? Well, typically what happens, of course, is the vaccine makers get on the bandwagon, and we've seen the stocks and some of these vaccine makers double and even triple because there is an opportunity here. Um. And and typically the tipping point is when the World Health Organization declares an emergency, because at that point is

fully discounted in the market. Now we could be wrong here, but UM, and certainly that's this is not advice to day trade it today or even next week or even in February. But if you have a longer term horizon, there are some discounts for something that I don't think it's going to go on forever here. So, David, some folks are looking for value in this market. One of the places they look for is the energy space. We have some disappointing numbers out of Exxon and Chevron today.

What's your view of the energy space? Well, so, UM, you know, I think most of the experts say that we are undergoing a shift at transition to cleaner fuels and renewable energy and so forth. But most of the experts say that's going to take decade to UM come into fruition. What we've seen recently energy prices back in two thousand and fourteen where hundreds of barrel, now they're

coming down to about fifty UM. The best cure, quite frankly, for low commodity prices is low commodity prices, because who in the right mind would explore for further fuel UM given where the situation is. So, if you're a believer that things are cyclical and that sometimes a tough environment for an industry actually favors the biggest players on the block because they have can attract the best people, they

have the lowest borrowing costs, most diversified operations. Then maybe this is the time to dip your toe into the water of some of the biggest players who which you have outstanding track records in our integrated across all phases of the industry, plus geographically well diversified. David, I know that one of your stock picks is Exxon, which would fall into that category. And I'm looking right now at

Xson shares that are really underperformed. But at this point, and this Dave Wilson are Brick Socks editor pointed out that the dividend yield being paid out on Exxon shares now exceeds what you can get on US junk bonds. How much of this is a dividend play and how much is this an appreciation play? Well, I think it ultimately could be both, because obviously there are players in the market they're saying this dividend won't grow. In fact,

it might be uh cut um. But I think that historically buying some of the biggest dividend players in the Dow has worked out well, that would be the dogs of the Dow theory. Plus, of course, we do know that Exxon is an industry giant, I think third largest revenues in the sp so you know there's a lot of way ways for them to cut costs. They announced earnings this morning, this stock is down significantly. Nevertheless, they did beat expectations in terms of the top line, and

the bottom line relates to what animals were projecting. So again, the other thing, of course, is is it an exon specific problems in an industry problem where we've given that energy prices down this month alone, I think you'd give a pass to x on management and look at global macro economic conditions. David, thanks so much for joining us. We appreciate you stepping on the phone with us and

give us your thoughts on the market. Here David Deet's president and chief investment strategists at Point View Wealth Management, calling on the phone from Lovely Downtown Summit, New Jersey. We appreciate a s thoughts. Looking at the SMP right here, hitting the lows of the day down forty nine points. I'll be one point five percent on the SMP that down down fourner and sixty six points, that's one point six percent decline and NASDAC down a hundred twenty two

points one point three percent decline. So seeing some accelerating selling here as we close up the morning, David dates with some kind of a non consensus view here that with the w h o uh sounds the alarm, that's usually the trough for that's usually when you can start thinking about getting back in. Not what other people are saying. They're looking for some sort of halt in this exponential expansion of the coronavirus, which we really haven't seen it.

Boil has been falling out of bed steadily as the coronavirus spreads throughout Asia and frankly throughout the world. Right now, looking at Crew traded on the night mix, trading at fifty since a barrel, the lowest in August two nineteen, what will it take for the prices to rise and for the fate of some of the weaker oil companies to improve? Joining us now, Regina may Our Global Energy had at KPMG Regina, can you just give us a first your your broad sense of the main driver behind

the latest weakness in oil. So I think we're experiencing a really significant demand destruction event that's had a major impact, not just what you said. That's the lowest point since August. It's down almost twelve dollars from January six. The coronavirus was announced on January and we've seen almost half of that destruction since the virus was announced. So I think this is going to be very significant, and it's only escalating.

So I think it's going to get worse before it even stabilizes, because we're going to see even more consumer and business activity both inside of China and inbound into China that all continue to have destructive effects on oil demand. So, Regina, when you talk to your clients, your energy clients, how are they kind of thinking about this as you again as you talked about demand from a demand equation? Are

they taking this seriously, very seriously? But you know they're in it for the long term, so they can't overreact to these these uh, these weaker signals right now. We have seen in corporate results though that downstreaming chemicals earnings are significantly down and for Q one will have an even bigger impact. Those that have extensive ties to Asia will see even more demand destruction. Or or revenue decreases

from what's happening in Asia. So definitely taking it seriously, but can't change their strategy given the long term nture of the overall process. So, given your incredible experience talking with companies of all sizes within the energy sector for decades and trying to figure out the next part of disruption and sort of how to get ahead of that, what's your main conversation today with some of these corporate executives. Well, this one, I would say, Lesa is a bit of

a black swan. I mean, I don't think that. I think we were experiencing almost a mini renaissance in Houston for Q four when we saw independent producer stock prices go up um, and I think because the industry and the investor community felt like Number one, they were quite a good bargain. Number two, we felt like we'd reached a bit of a floor and commodity price right was w T I and the mid to high fifties and

Brent in the mid sixties. And now look at where we are, literally three weeks after the January six high that we experienced. So I think it's um, this one wasn't foreseen, And I think We're going to have to figure out out what that is going to mean. Capital

spending levels we're going up. You'll have seen permian production surged from some of the announcements that are coming out this weekend next and that excitement I think will die down given given what's happening, and it's a crisis for you know, overall the markets as well as the oil industry Regina. You raise a really interesting question implicit in your in your statement that this is a black swan, how resilient are the weakest players in the energy space

to something like this black swan? In other words, are we going to see a rash of bankruptcies that are accelerated as a result of this. I think you're right. I don't think they're incredibly resilient, particularly the players that were hanging on by their fingernails. We've seen the smaller players are already being very challenged, and I do think we'll see more bankruptcies, restructuring calls on debt for the

for the much much smaller marginal players. You've seen the larger players make pretty big announcements on significant write downs with gas positions. So if you're an investor and you're looking at the sector and you see a small player that's predominantly gas portfolio that would not be where I would place the pet in this market. So, Regina, that kind of calls into question, do you think we'll see

some more consolidation in the oil patch? Um? You know a lot of your you have big clients, medium sized, smaller clients. Is the expectation that if it gets even tougher in the oil patch, that maybe some of the bigger companies will look to scoop up some of the weaker ones, the ones that maybe have a challenging capital structure. I believe. So, I do think there are going to

be some bargains available. There are larger players the same midsize players that have really nice acreage portfolios UH and decent assets that are not operating as effectively as they can be. The market, the overall sector would be so much more improved if we could consolidate like a big one that we saw last year, and I think the market would benefit, The sector would benefit. Whether or not the bid ask spreads UM come together. That's been the

big that's been the big hurdle. But if we were faced with bankruptcy and restructuring, then you don't have the sellers being in such a strong position to try to demand a higher price. Regina, what would it take when it comes to the spread of the coronavirus for oil prices to get a bottom or get a sense of the potential economic fallout. We have to be at a

stage where we believe we've reached the tipping point. Right now, it feels like an exponential upward curve with cases and spread and fear until we feel like the world and China has got its arms around the virus is stemming the tide. People are going back to work, people are flying in and out again. That's when we'll see the

floor and have it stabilized. That doesn't feel like it's close right now to me, but obviously I'm speculating, so I think that's what's causing a lot more of the fear is we don't know when that tipping point it would be achieved. You thank you so much for joining us. We really appreciate your commentary. Regina Mayor, Global Energy head for KPMG. And everyone's talking about the coronavirus and the risk off field that we're having in markets today in

the US. But I want to go to another place, which is Amazon and the incredible surge that we've seen there. Apple's earnings came out, incredible earnings, even though the shares are down today a little bit on the coronavirus, leaving a question that Tom Keene raised this morning. I thought it was really salient, which is an investor who has been underweight some of these big tech names, what do they do now given the fact that you're getting earnings

that beat so dramatically. And Chris Christopher Wolf joins US now chief investment Officer at First Republic Private Wealth Management with seventy four billion dollars of assets under management, normally based in San Francisco, but here with us in our interactive broker studios. And we'll get to the coronavirus issues,

and we'll get to macro concerns. But when it comes to big tech, which has been really the driving force of a lot of the gains in the SMP and NASDAC over the past decade, where do people go now when they see that these earnings just keep coming. So I think there's three things. I do think you have to go there, meaning towards the technology space for a couple of reasons, one, we're in an age of hyper aggregation. Technology enables that kind of the reach that the Internet has, etcetera.

You can buy I think anything you want almost on Amazon at this point. I mean you're basically stealing share. And that hyper aggregation function, driven by instantaneous everywhere communication, is one key piece of what technology provides and kind of why it's very hard to stop. Number two, you're in an era where kind of the public markets have been increasingly dominated by machines machine trading. They kind of

simply follow rules. I'm greatly simplifying it, but if it was up yesterday or earnings beat or whatever, just by and I think you get that kind of rule following mentality, particularly is the market is starting to separate by signals with this sectors, with this big external influence called coronavirus, which I hope we get to. I think the last piece of the puzzle. I just want to throw a curveball because it's a question. It's on my mind, so

I think you gotta go there. Anyway. Last piece of puzzle on the tech side is that it is the one place where there is growth. The thing that's scarce in this world is growth. So there's an old maximum in the equities and kind of more broadly markets as you buy what scarce growth is the scarce thing. There's a lot of cheap stuff as we can see, and energy and other parts of the market, but it's really hard to find true growth these days. And it's still

in tech all right. So we're seeing a so often the SMP of a little more than one percent today, the Dow off one point three today, presumably on growing concerns about the coronavirus. Even given the today's so off, are you concerned at all that the markets maybe been a little too sanguine about the potential risk to economic growth coming from this virus coming out of China. I think the level of uncertainty around the policy response. So we've seen some of it, so water closings, for example,

shutdown of flights. You've just seen some recent announcements about the airlines in the US cutting the flights. You know, the challenge error is two fold. It's not just the people traveling, it's the goods that move in the bellies of the plans, for example, and including when they're talking about shutting ports, moving lots of goods back and forth.

So we haven't seen a lot of that just yet. Um, there's some good data, or at least some data historically that suggests that markets kind of tumble until we see a peak in the number of cases and the policy response gets really strong. At that point, there's some confidence that this is under control or in contained in some way. And I don't mean to be glib, but that's how financial markets tend to respond to things. So am I worried, not just yet. Number one, Yes, economy is a giant place.

It's really hard to damage the battleship. Number two, we're pretty closed, you know, more or less we trade with ourselves. Only about six percent seven percent GDP is net basis at export import, and I'm greatly simplifying the numbers. I think. Number three, you know, we're in a place where, um, this has started in China, and some immediate actions have taken place. The World Health Organization actually praised China's efforts immediately and in some ways, uh, that may help limit

the spread. So I think the overreaction here. Now back to my point and I'll stop on this has something to do with the machines. Things have been down a couple of days. You have an outside event a coronavirus, and hey, if it's down yester day, why not sell today? All right? Blame the machines that said I got to start. There's other things, but but you could say, you know,

that's that's sort of what's driving the action here. If your thesis is right, though, and the US is an economy that can keep chugging along and is relatively immune to the scare that's weakening growth and expected to continue to weaken grow throughout Asia and beyond. Why is the Russell two thousand underperforming large caps? Why are we seeing a loss of two point four percent on the companies that are most leveraged to the U S economy while

large multinational companies are outperforming. So I think there's two reasons for that. Um And and look, there's remains to be seen a lot about the coronavirus, and it's spread is not understood yet, and if it follows other patterns, it is coming here in the U S. And we do have to be thoughtful about it. But at least with respect to markets, two things matter a lot. One liquidity. There's a lot more in the big stocks than there isn't a little stocks. Um And to the financial position

of many of these companies. So if you watch a lot of the data on the Russell two thousand, you know that the debt to eb DOT numbers are out of control. The debt burden and small company these days is four times what it is in the large companies. Financially, they are way more susceptible to just tiny changes in the revenue line. So even if we get you know, small effects in the US, they could be exaggerated by how much leverage is into the small cap space these days.

So if I were thinking about the fundamentals and wanted quality, I'd want a better balance sheet, I'd want some way to manage um kind of subsidize the cost associated with all this. And I wouldn't want to have all that leverage if there were some risk to my top line. So I think that can tie back to why there's another performance. So what are your clients saying to you right now? Are they bringing up the coronavirus and what

it means for global economic growth? Are they just saying, you know, I need to I need to be in this market. You know, we published a piece earlier this week and it's kind of tied to something we wrote the end of two thousand eighteen and carried through two

thousand nineteen. It didn't look all that great because two thousand nineteen was up so much, but it said we're entering an era where it's time, given kind of all the dynamics that we've just talked about, to be more thoughtful about managing risk, diversify the portfolio is more, we're comfortable hold a little bit more cash um And what we tried to key off on our recent piece for this coronavirus is there's a lot of unknowns at this point.

There may be a treating dip that we get out of this, but I think our view is that there's a lot of things related to the growth story that not only could coronavirus hit, but other things could hit that we want to be a little bit more cautious in this low, slow, central bank free money dominated world. What's your time frame of for investments? Typically we look at a minimum of two years. We're not really a

trading house, you know. Most private clients, that's the folks that we manage money for, look over a longer time frame, although they are sensitive to the news of the day. All right, So if it's a two year time horizon, When does the coronavirus disruption end up becoming a trading opportunity on some level with that longer term horizon in mind. So I really hate to refer to old maximums, but

sometimes they're very valuable to anchor the context. And um market stop panicking when policymakers start panicking is one that kind of goes around. And I don't know that we've seen full blown policy panic, like shut everything down, getting mad. I think you're gonna go right back to the places that are scarce, So you're gonna go right back to the technology, right back to the growth stories that I've come under pressure with this, And I think you know,

tech is actually held up pretty well here today. If you look at the numbers, the growth stories that were requiring China, Japan and basically Asia to grow strongly are all under the most arrest. They probably have the most rebound potential all the longer term. I don't think we're as as positive on the hyper aggregation stories, I mean on those as we are in hyper aggregation. Christopher Wolf, thank you so much for joining us to really appreciate

your commentary. Christ Wolf is chief Investment officer for First Republic Private Wealth Management based in San Francisco, but joining us here in our Bloomberg Interactive Broker Studio, would mention to seek, I mean we're off, you know, more than one percent here on the SMP. Is this a buy on the dip? Again, Lisa, this isn't a dip, Okay, I mean this is not this is not this is not a dip. This is this is this is normal

market action, right. I mean this is not, uh, something where you can look at it and say, wow, this is just absolute fear. I mean the doubt you're seeing more of declare line and the SMP. Sure it's down more than so we'll bring that up with Da Wilson coming.

You better believe we're gonna bring up with no But but to me it raises it raises a really interesting question I think Tom Keene raises this morning, and I thought it was really important, which is how money, how much of the gains are gone right, and how much can you sort of believe in the growth stories if the global growth isn't going to happen. And I think that that's sort of a bigger question that remains to be seen as the coronavirus plays itself out and people

look at the fundamentals. My other favorite person always speak with his Karen Eveil Heart, and she joins us here in our interactive Broger Studios, a senior industrials analysts, love having her perspective with respect to Caterpillar, in particular coming out today with weaker than expected projections that shares now down nine point two per cent on the year, including

reinvested dividends. Karen, how much of the weakness that they are for telling has to do with the coronavirus versus just a general slowdown that we're seeing in the industrial sector that continues. I think was just another shoe. Um Cat has about three to sales in China, so that will that's actually doing okay now, but they're they're concerned about that. Uh, it's just global growth is slow everywhere

and it's not coming back. And I think it's really interesting a that they came out so below consensus in EPs outlook, and also the range is so wide they don't know. They said it's reflecting uncertainty. They had a hundred dollar fifty range from top end to low end of of estimate, and that's really that's wide. So they got exposure to the energy businesses, right, So how's that

that's got to be challenged? Um, well, their energy and t businesses, Energy and transportation, the piece of it that is oil service is doing poorly, but they have other stuff that's downstream and midstream that's holding up okay, And and the transportation business is okay, So that's only moderately down. Mining is falling apart because industrial commodities and that had

had a mini recovery and now that's backed down. And construction is the incremental worst there, the North American construction, they're much more worth were concerned about. I want to pick up on that though, And this is sort of one of the fundamental questions that I think a lot of people will be passing through. How much the weakness that we're seeing, particularly in industrials and I'm looking at industrials, medals absolutely getting pummeled over on the London Medals Exchange.

How much of this is due to the coronavirus. How much is due to what we've seen, which is just a broader slowdown, particularly with this with this sector, I think, but happening at least this week. I think there is panic about the virus. I mean, because if you sit back,

you can get yourself pretty worked up. I mean, if China stops production just because that people can't go to the plant, that could be a big number for a lot of these a lot of these companies, I mean the ext I mean, and and then they're all lowering expectations. Honeywell did very wide range on their EPs two. They never do that. People are concerned about. That's like the incremental thing that they can't put their arms around yet, So they got to make a big wide range. How

about trade? We got the Phase one deal. Are the c e O s and that you talked to in Industrial America are they still saying this is still an issue for us? Yeah? I mean they I don't think they make much of that. They're happy that it's a step forward, that it's not really going to change the trend line in any big way. Um, and I think they're more concerned about the just the global growth outlook.

Any bright spots, uh Well, aviation was the bright spot and now and you know we had Max Okay, nobody people weren't completely worried about that because that's going to come back. But now you've got the virus, you know, and honey Well said they're already seeing it in aftermarket parts that, um, the volume of travel is slowing, and that's how they make money. That's how they make money. UM, airline airline traffic slows, they sell as parts. You know.

It's so interesting. Paul I was looking at how Chinese travelers really account for such a huge proportion of overall travel, of overhaul luxury spending, and just how much of a disproportionate hit to these sectors. Uh, there has been because of what's been going on. Just dramatic. Yeah, I mean they move the needle on everything and you know, just you know, incremental. A few stay home and but it's the flights are already slowing so dramatically that you know.

The good news about the max slowing was, oh, we we're flying older plains. That's good for parts right. Well now if that one's gone, so the bright spot is hard. Here's the bright spot there. They're they're managed, managing, they're executing very well, like like you know, in a very bad situation, cats in decremental margins were very good. Um, you know, cut back on the expense and they have and they didn't bring the costs back and they have

more flexible cost structures. That's the good news. How's how's the American farmer doing? Uh? Not not well at all, um, But they're gonna China. One thing China is going to do, when they can do it rather quickly, is buy more soybeans. So it'll go from a bad, bad situation to just a crappy situation. But it's not term okay. Karen Uberhart, thanks so much for joining us. We always like chatting with you to get a sense of what's going on

in industrial America. Karen's the senior Industrials analyst for Bloomberg Intelligence, joining us here in our Bloomberg Interactive Broker Studio. Disappointing numbers again out of Caterpillar today. The stock down one point five percent today and is Lisa mentioned that about nine point eight percent for the year up just slate if you look at it on a trailing twelve months

up about three percent, really trailing the market. Here's concerns about end user demand and the company was forecasting in their press released end user demands seen to be down four to nine percent this year for Caterpillar. So that gives you a sense of some of the demand or the lack of demand from industrials across the world, and that is clearly a global company is Caterpillar. 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 abramoy It's I'm on Twitter at Lisa A. Bram woyds one. Before the podcast, you can always catch us worldwide on Bloomberg Radio.