Bloomberg Surveillance: Markets Await Nvidia Earnings

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I don't think I really have to adapt.

I kind of believe in good times. You know, the economy is fine, the Fed, at least at this point, seems to have engineered. I don't even know if it's a soft landing anymore. And you know, the US economy is extremely dynamic. I mean, the only negative scenario that I could construct, and it's not my base case, I would just say, the probability of it's not zero. It's

That's the only negative scenario I could see at this point.

So where where are you, Steve on? Kind of your FED call? Where do you What do you think the FED will do?

What do you think it should do?

I think the FED should do nothing nice.

You know, it an engineered something pretty amazing, which kind of shocking to everybody, including me.

The economy is good, you know, why would you?

I mean, look, the worst case scenario for the FED would be to actually, I think cut rates, the economy gets stronger, inflation comes back, then you then you're back into the vulgar.

Situation of the early eighties.

The best thing to do would be just to patch yourself on the back to clear victory. And say we're completely data dependent and if things start to weaken a little bit, they can always cut rates.

Otherwise, you know, do nothing.

So is that is that something when you say you kind of wait, is June waiting or is even later in the year waiting for you?

I don't know. I think at least till June.

Okay.

After that, you know, they probably do nothing anyway because they don't want to be accused of getting involved in an election, right right.

Steve Aisen were celebrating Amazon into the day. I did a lot of down mathematics overnight, and it's so silly. It has a fifteen percent tech exposure, including a tech exposure including minuscule into Cisco where the street is twenty seven to twenty eight tech exposure as well. How do you approach this massive lifetime overweight in technology? Is there a derivative strategy? Is there a portfolio optimization you believe in?

Well, I do think in overweighting or at least equal weighting tech is something you have to do. But I think there are some themes that are direct offshoots of tech that really should be examined by people that are not technically in tech. And so for example, because of AI and the Nvidia chips which consume so much more electricity and are hotter, the grid has to be improved. Are companies that benefit enormously for construction, companies that benefit enormously from that.

That are not tech companies. The data centers have to be cooled even more so.

There are companies that provide those type of services that are going to do extremely well over the next couple of years. So there are offshoots from tech that are not technically technically tech that really should be looked at very close closely.

So, Steve, I guess a lot of folks, I'd love to get your market call where you're seeing opportunity here, because you know, one of the debates that we hear often is just do I stick and try to if I'm not there get to the magnificent seven somehow when I try to find some values in other parts of the market, maybe I've missed that trade. So, coming out of twenty three, when it was such a hot close to the year, what do what do you think about tech and being a leader in this market?

You know, I think, look, I think we're in a bull market. In bull market, people love stores. They just latch onto stories. It's what they think about, it's what they dream about. And if you can invest in something that has a story that people can really understand and get positive about, that's something to do. So tech is one such story. Infrastructure is a similar kind of story that's going to last a long time. And there are a few others, and those are the things that I would focus on.

I'm Steve, we got to go to the banks. You've done a lot of work on this, you claim of a certain movie years ago, and so it's the financial integrity of the system. Is there a flavor of bank where you think there's value.

I am not worried about the financial integrity of the United States. I actually think it's incredibly healthy, probably healthier than any time in anyone's lifetime. So I'm not worried about systemic risk. There is risk in the banks in terms of commercial real estate exposure, but that's really a regional bank, not a systemic problem. I just don't find banks a particularly interesting investment theme to be involved with it all.

Why why is it that's really important? I mean, just as a general theme. Is it just there's too many thanks?

I mean, first of all, you know rates looks like they're going to stay high though. Therefore deposits are going to slowly bleed out of the system into money market funds, which means banks are going to have to remain tight, which means that growth is not going to be is not going to be great. The only positive thing you could say at this point is that, assuming there's no recession, credit quality will be fine. That's how they It's not a story, it's not anything anybody gonna latch onto.

Do we have like another hour questions for mister Absolutely Steve. I should thank you. We've got to get you back on here. Long a discussion. We never even got to private equity, private credit and debt, and I really want to touch on that. Mister Iceman is with a small shop Newberger Berman ye an important investor. We thank Global Wall Street for your enthusiasm over get like Steve Iceman. So I love this out on Reddit. Thank you so much for this. I'm going to Hawaii in the winter,

I certainly don't. My sister does. She's Hawaii based in a professional surfer. She's like pro, she's super pro. And the reality is that she lives there in the winter because that's when the waves are the big.

Have you ever seen her in these I've never seen the ginormous wave.

You see it and you close your eyes because it's darn scary. It's scary, very and very dangerous.

She gets like in the tub thing where the water's on top of her and the whole the whole thing hang in again beginning like beginners one on one surfing in a wai.

Yes, yes, but I also so I'm rather afraid of sharks.

Yeah, I too. My surfing is to put the umbrella in the my type. Paul, why don't you bring our investment expert Camera Dawson.

Cameron Dawson joins us here. We want to talk about these markets. She's at New Age.

Weelth she's the CIO over there, and let's just start with I guess the equity news of the day camera, which is we're going to get a pretty big tech company reporting earnings after the close in Nvidia. So my question is is tech going to continue to be the driver of this market? Do we have to depend upon tech to be the driver of this.

Market, given how big it is as a percentage waiting in the index, it has to participate in this market. A really good reminder of that is twenty twenty two, where you saw smaller sectors like energy do really well. However tech was lagging and that's why the overall market was down. So yes, this market is very much dependent on.

Tech, so can I One of the things I need to see is, I guess it broadening out of the market.

Participation get a little bit better.

We saw that in November and d Member of last year, but I feel like it's kind of faded a little bit and a lot of technicians will take you really do need to see more participation here. How concerned are you about that?

The key reason why the market has been narrow is because earnings revisions have been narrow. So if you look at the leadership in earnings revisions, the only places that have seen earning sestiments go higher at the magnificent seven in tech names, you look at the S and P five hundred, earnings revisions have been flat over the last

I'm in the camp that in any great bull market, only thirty percent of the stocks really work out, and the rest of them are things you really don't want to be in. But that gets to the point of the vogue, and everybody knows I'm death on this. Where do you stand on rebail? Am I rebailing out on Microsoft right now? I don't think so.

Yeah. I mean it's one of those do you let your winners ride?

Well, Danoff at Fidelity is not rebailing from what I can tell.

I think that you have to respect the trend as well, because a lot of these areas that have led are still in very powerful up trends. So until you see those trends start to deteriorate, you're better off letting the winner's ride. That doesn't mean that you should add to those positions necessarily, meaning you shouldn't chase them at these valuations or at these levels of concentration or crowdedness. There's other opportunities, but I think if you're looking to rebalance,

Well, we've certainly had the focus on the FED.

And we're finishing up earnings here, a big earnings print tonight with Nvidia. But it still feels like the FED is driving this market.

Here.

We started the year with maybe six rate cuts priced in looking at the work function. Now we're down to something less than that.

Three or four.

How important or what do you think the FED will do? What do you think it should do this year? Because that's still important for these markets.

I think there's actually very little urgency for the FED to act. How strong economic data has been given the fact that you're seeing a reacceleration in some cyclical data. Pmis are turning higher. So with that data backdrop, for them to move to cut quickly, they would risk possibly restoking inflation, which just means status quo and keeping rates where they are is actually the lower risk option yesterday.

With Synergy Tuesday, and I'm going to suggest the word out there is scale. If I identify then I want to be advantaged by scale. How do you approach that within a portfolio? How do you You're not going to guess the next M and A transaction, but on a sector basis, how do you prepare for M and A or is it just something you can't control, it's just out there.

Well, I think that if you are looking for smaller companies that are getting bought out, you're starting to see a big tickup in M and A and that is supported by big cash balances. Companies still sitting.

On casut Sure, yesterday's it's a hockey stick.

It is a hockey stick. And it's also good to remember that that cash is also earning five percent right now. It's one of the reasons why net interest expense is down over the last year. It's running down thirty six percent. That's never happened during a rate hiking cycle. And this just shows you how topsy turvy this cycle is. High cash balances, less exposure to short term debt, and result being is that you're making more money on your cash than you're seeing your interest Costobs.

We have a five percent interest rate and a hockey stick that's called a CCM five stride.

Oh there you go. No, I've just heard that that's the.

Rich kids had CCM. John Lloyd had a CCM five.

Straight I did.

So what do we do here, Cameron? For new ideas? What's what's a new idea from you? Like what have you been telling your clients here? Maybe he's starting out twenty four, what's something new, because otherwise I'm just going to stick my money and my two year treasury at four point six percent.

We are finding names within healthcare, names within biotech. That's areas where you're starting to see some signs of life. Biotech has been in a bear market for two years of.

Really I didn't know that.

It's been absolutely ugly. So actually across the capital stock, whether we're looking at equities or even within private markets, we're seeing a lot of opportunity within healthcare and biotech, just areas that have been left behind and valuations aren't too stretched, and notably, positioning isn't crowded.

Do you buy week dollar international? I mean in the old days, you know, is religion? If five percent of your portfolio international, that worked out, But you know, like, do you just stick with us exceptionalism in large cap or is there a new edge theory?

We have been underweight international, we're now neutral. You're right, the dollar is absolutely imperative. The only time that you have seen major international bowl market is in periods of major dollar bear markets, the two thousands, the mid eighties. If you don't have a major dollar bear, you will not have an international bowl.

Paul Malaysian ring it. Yes, you know we saw that. A reporter in Dubai ca me up and she said, a stupid Malaysian riggit new weakness. That's what we're talking about, right, very good. I'm just doing that to impress Cam's surfing in Malaysia after all.

Exactly, so, we're pretty much done earnings here, about eighty percent of the way through. We got some retail names still to report. Anything you took away from this earning cycle that made it more or less bullshit, maybe just change your outlook here.

I think the one key message is that pricing power is really starting to fade, mostly on the good side of things. You're starting to see where you were running at high single digit pricing increases, that's now down to low single digits, which just means that the estimates for revenue growth of an acceleration in twenty four and twenty five that are currently baked in may be a little bit difficult. Then the question is does pricing ceilings hit

So, I mean, I think what we heard from Tony, I mean, they're still seeing some pretty strong demand. We're hearing it from the cruise companies as well. So it seems like the consumer's in good shape. Is that something you're banking on for twenty twenty four because if the consumer were to pull back, obviously that would be something that we haven't seen just in the recent past.

Consumers will continue to be able to spend as long as they have jobs. Real wage growth has turned positive, which is supporting consumer spending. But they are starting to push back on some of these price price increases. Walmart called it choicefulness. They're being very select.

Driving me this is like the new word.

Come on, But prices are crazy. I was looking at Pearl Gym tickets and they're forty eight thousand dollars. At a certain point, when do people hit a ceiling and being able to be able to afford these kind of experiences.

Yeah, we got to meld in our two great interviews here, Paul. I mean, I got the Marriotte co Olina Beach Club in Waho. It's like seven hundred bucks a night after fieves. Yeah, I mean it's like sid I mean, this is the new luxury YEP where Tony was staying in the pearl jam.

Then you've really got to dig in your pocket.

Well, the concert tickets I've given up and half that. I mean you're you're better at that. Yeah, I mean I don't. To me, it's like a consortium or something.

It's basically monopoly effect.

What are you not doing here, Cameron, quickly here out of time. But what's the number one thing you want to avoid doing?

I think chasing very liquidity sensitive, low balance sheet or low quality balance sheet names. They've run a lot over the last couple of months in pricing in the expectation for an easier FED. If the FED doesn't deliver, interest rates goes up, those are going to reverse.

We need a photo of you surfing. It'll stay just we won't put it social. It won't go out on Instagram. Promise it won't go out. I promise.

I have an old one from when I was a kid.

All all, we need a new one camera Dawson surfing from why Good Morning America, Cameron Dawson, thank you so much with new Edge on our way to Hawaii. We're great to get her in here quickly. Today, I thought of market Patel. I think it was yesterday, Paul, during Synergy Tuesday. I mean Walmart's out home depots out what's a two by fore cost out and outa uh? And all that mattered was middle single digit, higher single digit

I think that a creative open mind. I'm interested in all kinds of different things. Really was the nature of his brilliance, A flexible way of thinking. And we don't see a lot of that today. Investments in other parts of the area amazing.

It's become cookie cutter versus the entrepreneurial days of John Templeton and mister Kerrey Margie used to cash right now. We saw it from own depot, we saw it from Walmart. What are we missing here? What will use of cash forward look like? Well?

I think more of the same, And I think really what the market's focusing on is prospects of growth, and once you get away from the handful of very high growth companies, you know, such as Nvidia, there aren't motor sectors that have outstanding growth, and I think that's why the market's focusing on with that's going to do, what the economic growth is going to be, and why it's reacted so sharply when companies have reported, you know, say mild of trimming and their expeditations really wanged.

Hey, Marky, what are you taking out of this earning season? We've had about eighty percent of the S and P five hundred companies report already. Any themes coming out of you that maybe affect your outlook, I think the main.

Thing is you can see a good expected results better than expected, as we've had for the last few quarters. But I think we're seeing is a sort of erosion in the earnings, expectations and achievements, which to me telegraphs the twenty four is going to be a year of lower growth and after things are really spiked up with so much spend pictures from COVID, from the infrastructure bill and so forth, now we're going to see growth moderated, and I think that's what the market's focused on.

And does that suggests kind of a moderating picture for US equities here because we've there's a sense that the FED will cut that maybe a little bit later than we thought. So how does that affect your twenty four view for the markets overall?

Well, I think as far as the Fed, there's uncertainty because whereas people are thinking that cut in March, then the feeling wast be delayed. And now some people are saying, oh, well inflation is a little bit stubborn, they may raise race instead. But it all comes back to if the FED raises rates, economy will slow or the economy slow, and then that's why the fence cutting. And that also is a little bit of pressure on equity. So I think the first half the years chopping around and.

Not really doing anywhere all right, given that backdrop, but one of the sectors that maybe investors should be paying attention to. Should we be focusing on the sectors that pay good dividends? Thomas just highlighting some dividend growth stories that we've seen recently. How do you think about sectors?

Well, I think if you a little bit of companies have a balance of good growth and also pay a dividend, because a dividend really is kind of proof that the company has sustainable cash flow when they when they pay a dividend. I think really sector's technology, industrials, some parts of health care which look like they sort of hit far and might be starting to grow over the next year, but it's still a pretty farm few between.

We started the show this morning, Margaret with Paul's observation at a seven percent mortgage rate, interest rates or back up again is as well as you manage money, can you get a total return that gets you back to the long term log trend line of the Bloomberg Total Return Index, the oldly Email index. Can we get back to what we do with price appreciation in bonds?

Well, I think if you look at high yield right now, we're looking at returns to say six and a half to say seven and three quarters. Most bonds are training a little bit of a discount, and so I think that might be fairly competitive with equities. This year, I think equities will be high single digit, low double digit, and defaults are still rather low. I think they'll stay low in the in the high yeld market. I thought defaults will be in some of the more in Looqui parts of loan parts.

In the market.

Well, I was surprised, Margie, looking back over the past, you know, looking back at just last year, how well high yield performed relative to other areas and fixed incoming. You know, with all the talk we had about recession just right around the corner, I'm surprised to see double digit returns for high yield last year.

How do you think about highield credit this year?

Well, I think the high yield market is actually is better shape than it's been in my career, is saying a lot. The reason is companies took advantage of that period of very low rates to restructure the balance sheets, pay off their bank lines, so they're much less substive like investment grade companies.

Too.

Changes in what the FED does, and I think that we're not seeing any excesses of my old market after coming that's swapped the market and we'll pull the whole thing down. So it looks pretty balanced, Margie.

Edar Denny, you and I know Edjo Denny from ages ago. It's c. J. Lawrence. Wow is he a bull? And what's fascinating is he's a responsible bull. He's basically on log trend line. I'm going to call it up eight nine, ten percent per year. But he's extended out like we used to in the old days. He's got the courage to say, here's where we are thirty six months out? Are you running money saying here's where we are thirty six months out?

For me, that's a little long. I'm really looking at say one year or maybe two. But really the point I think that he's made voice for the song termed Roses. The one looks pretty balanced. There's no sector point too. Looks very vulnerable to the fence policy or just economic slowga. So there's no reason couldn't continue to grow.

Markie, Thank you. Margie Pattel with Afspring, Boston. At least I matella here with the newspapers and here and later on you're warned the obligatory tall people article. Great, let's start with something that doesn't about the bruises on my forehead.

I found that one just for you, picked out to me.

We'll get to it. We'll get to it.

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Think when Matt Winkler looked at my resume fell off his charity at the fluid is laughing so hard, and Laurie said, enough of that.

Next the four day work week swit Yes, okay, this is the financial Times they found this study, it's a trial in the UK. Just want to put that out there. Ran for the last six months of twenty twenty two. So what they found for people who worked that four day work week. Some were the fifth day on call, but the four day work week. The positive thing improved well being, improved productivity, boosted retention, improved recruitment. But the negative side is that the work was more intense, so

Okay, good for them.

I mean that's not an option for some of us. But correct for luck and joy it.

Okay, I'm ready.

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It's a huge thing.

It is.

So it's why Tom gets first class, has.

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Yeah, I don't know if you have this in your new rig. He's got the fancy rig with Apple card play. Sure, but what kills you is the sun roof takes out two or three inches a headroom in the back seat.

Really, that's what they said.

I prefer the old suburbans to the new suburbans. I was in a Lincoln car yesterday that actually was it's like an SGUVK. Yeah, sure, it was actually comfortable. There's a new Cadillact that's comfortable. I was in a Tesla coming out of a Philippine restaurant in Queen's Great and I'm screaming, I can't get in a Tesla and I actually fit in the back seat of some new model. Thank you Elon Musk. But this is like a huge deal.

Yeah, and the steerings will it becomes an issue too.

Yeah. Yeah, So it's like it's it's like it's like traumatic.

It's like, fortunately the Beentley's are very spacious. That's kind of how we had to. We're searching, you know, shopping for the saved in.

The Mercedes G Class. I can barely squeeze it. Thank you. This is a Bloomberg Surveillance podcast, bringing you the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global headquarters in