Bloomberg Surveillance: Outperformance in Tech

This is the Bloomberg Surveillance Podcast. I'm Tom Keene along with Paul Sweeney. Join us each day for insight from 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

We need more.

Cameron Dawson joining us now our futures at negative three is Cameron Dawson unbelievably pression about losing the cliches go to cash.

She's not there.

She's in the market, in the game, and of course it's seen a bull market from October. Let's go there first of about six album before Paul Sweeney jumps in with real market talk. And the answer here is we did all this technology investment in the pandemic and now it's in place, and I think there's a complete underestimation of margin strength forward because they're going to apply I'm not.

Talking about Microsoft, I'm talking about DuPont.

Yeah, I mean, never bet against the great American might of expanding margins. We've been talking about peak margins year after year after year, and yet we've continued to press to new all time highs. I think a good question of that is how much is that technology related versus globalization, which of course was a big driver of better margins through before the pandemic. But we have to also appreciate during the pandemic one of the key sources of margin

So I get I'm just looking at the earnings forecast kind of bottoms up for the S and P five hundred, kind of high single digit, low double digit.

I don't know.

I'm not sure how much confidence we should have in those numbers. I know I've got my FED going to help us by being rates down, But do I still have earnings risk in the marketplace.

I think that we have to keep our heat on a swivel for that, because what's underlying those ten and eleven percent earnings growth is an acceleration and top line not just in twenty four but also in twenty twenty five as well as those new record margins. Now we have a lot of levers to pull, things like possibly going back to M and A, which could help with deal activity, utilizing the balance sheet possibly a little bit

So how do you think about valuation in this marketplace? I mean, it used to be when I was a kid, fifteen times was the market. Now it's eighteen, nineteen, twenty times for the market. How do you feel about valuation here?

Yeah, I am.

I'm open to the idea that the backdrop of the market sector kind of dispersion does support a higher multiple over the long run. However, if you're looking at twenty point one times forward earnings, there are only two times in the last forty years. We traded above that level during the tech bubble in the two thousands and during

Not to go Steve Ross on you from MIT, but does factor investment here forward matter?

And in that if we assume in any.

Bull markets seventy percent of the stocks underperform, thirty percent drive the boat? Or obviously that's not a cliche, let's call that a tutology. Okay, great, but de factor choices matter forward? Or is it earnings analysis, securities and analysis that really drives the ship.

For us, it's the factors that are related to earnings, such yes, such as looking at free cash flow generation. Free cash flow is such an important driver of being able to reinvest in your business because that gives you that effective flywheel effect. We don't want to be investing in companies mostly at this point in the cycle that cannot self fund themselves. We want companies that are agnostic to wear interest rates.

Are so how many companies are this?

There's like four you know, I mean, I mean, there's Bloomberg, LP, there's Apple. You know.

Okay, how many companies?

I love what you just said, except this weekend I'm going to you know, nobody's going to do.

They're not going to do like a Monte Carlos.

Survey or whatever that SMB five hundred.

How many stocks out there meet the Cameron Dawson analysis.

Well, to put a number on it. When we think about our equity strategies, whether it's growth, value or international, each have about thirty five stocks in them. So to get to the cream of the crop. It's a pretty type filter.

Nothing else matters today.

You and I can go home right now.

Yep.

What Cameron Dawson said there, folks, is gospel. She's looking at thirty five stocks. Let's double it, seventy stocks. The streets out there looking at three thousand stocks because it's a marketing employ to keep us busy.

There's like seventy stocks.

You can actually put My lecture's over continue.

What sectors do you guys like right now at Cameron, I mean, I'm wondering, do I is tech still going to lead this market going forward?

For example, I'm so torn. It's definitely a head and a heart kind of moment because what I see with tech is that you see a lot of concentration positioning becoming very crowded. It's saw huge inflows, forty billion dollars of inflows. It's also very expensive. It's trading at its twenty one peak valuation, so COVID policy era pat valuation. However, Tech and communications are the only sectors in the S and P five hundred that have seen positive earnings revisions

Okay, Pharaoh's not here. I mean, I gotta do soccer talk with you. Only I'm gonna get through the day.

Boy, I got to wake up from the surveillance nap.

I got Tottenham Manchester City today in the FA Cup. Do you think the Tots can do it?

I've never been more nervous to answer a questions.

John Pharaoh. That's all there is. Turn around it's like it's there.

It's like it's like it's like, you know, all I can say, folks, this is a ginormous.

Game three pm, Paul, this afternoon.

Really and it's Tom Now.

Adele's going to be there, Emma's going to be there, coming back from Australia.

Wow.

They called me up, they say they'd be there. You know, bring John Yep. It's like a huge game at Manchester. He should win. All right, we'll tune in, we'll see. Thanks for the soccer talk.

That is great.

Okay, you did not off.

There, very good entertaining.

Please, you'd kill him.

Conviction to be in the market, as you often say, Bob do all cross Mark Global Investments. He's the CEO and CIO over there, but he's been on the street folks for many, many years. I first started following his work when he was a Chief investment Officer Maryland's Investment Management down there, and that's sprawling Princeton campus back in the day. Bob, thanks so much for joining us here.

First of all, happy Friday, guys. Yes, it was an unbelievable rally in November December stocks truck mid teens.

Yep.

That's like a year and a half's work in two months over the long term, and that's a big number. And of course it all came because the Fed said, not explicitly, we're gonna pivot, We're done raising rates, and you know, it's happy, happy land again, and bonds took off, and stocks took off, took off, and credit spreads narrowed. We came into the year, we had a little bit of a hangover. I'm not convinced we aren't gonna get

Absolutely that's where I wanted to go. Bob, I kind of felt like, just looking at that performance at the end of last year, it was, as you mentioned on that fed pivot. So I'm wondering, now, now what's the driver? And I kind of feel like, as a former equity analyst who still thinks earnings matter, I think earnings need to really come through here. I'm not sure we're gonna get it here. How do you think about the earnings risk here in this market?

I think the risk exists, especially with PE ratios over twenty. You know, if the PE were fifteen or sixteen, maybe we could relax on earnings. But not true fourth quarter earnings they're coming through fast and furious. On October first, when that quarter started, analysts expected earnings to be up for the quarter seven percent. That number is now plus one. From plus seven to plus one. That's a much bigger

In my view, Bloomberg surveillance.

Retirement planning, We're never retiring, so we'll talk about it for you, Bob Dahl, let's talk about retirement planning.

Rebalancing is all out there.

If I had to rebail whatever the timeline is, quarterly, semi annual, yearly, every five years, whatever I would have sold Microsoft six years ago, or at least lightened up. You need to explain to me the marketing racket of target date funds. You fought against that your entire career. What's the problem with over rebalancing.

So the first problem of those target day funds is I think they're too conservative. You know, if we retired at sixty five and died at sixty six, different story. But life expectancy continues to get longer. So the mixes are and my view, too conservative. And then when you rebalance, you constantly rebellance out of things that are working into

Well, Sweeney, you nailed this with your first question of the morning, saying what about holding your winners in that The guy that lectured me on this was a gentleman from Saint Louis. I've never forgiven him for not buying the cardinals from the Bush family.

Benjamin S. Edwards, a third of a G.

Edwards.

Ben Edwards would scream at me, do not sell your winners, Bob Dahl one.

Oh one, Hey, Bob, twenty twenty four, whether way like it or not, is an election year. You've been through so many cycles, Bob, does this factor into your outlook? What do you tell your clients here in what could be a volatile, you know, electoral cycle.

Hell yeah, I think have patients. Don't look for stock where you think the valuation's going to go up, the earnings, the cash flow. Just be very cautious in terms of the kinds of things you're buying. That's advice all the time, but in periods of uncertainty, in periods when the PE's over twenty, you've got to pay attention to that. The election is going to create some uncertainty. Of course, the nominees are just about wrapped up about the earliest ever.

So yeah, exactly just what we all need.

Maybe the TV stations with all the advertising dollars, maybe they'll benefit here, So, Bob, you know, I'm also wondering, as I talked to a lot of investors, did the move we saw in the markets again in November December was I kind of buy the rumor and now sell the news because what can the Fed do? The expectations already kind of in the market, it seems like.

Their expectations, and then summer in the market, as you know, we got at one point the expectation that Fed fund futures were saying seven cuts by the this year. That's backed off the six. I think it's gonna be more like three or four. I think inflation remain sticky, especially wage rate inflation, and it's gonna be tough for the FED to do as much as the future's curve is suggesting. So yes, we've bought the rumor. I think there'll be some disappointing news to come if we can't get six cuts.

Bob, do I want to finish up here just with the oddity of the moment, which is cash at five percent, What actually happens if rates come down? I mean, pria miser over JP Morgan is saying the ten year real rate's gonna come down to here one percent.

I'll believe it when I see it.

But if we get lower yields on money market funds, how does that change our retirement investing?

Look, I think, and that's probably I hope inevitable we get that at some point Tom. The problem it will probably be because the economy is disappointing, and that's why those rates will come down. That means earnings will disappoint even more that we're discussing here, which I think creates some sell off in stock. So the best beneficiary of here to down one hundred basis points and short rates is probably bonds out the curve.

We'll have to see.

Bob Dol, thank you so much, greatly appreciate with grossmark this one of your This is an important interview, and this is what's great about this. When you go to Trinity and Dublin. The answer is you develop internal humility. And David Kelly owns a high ground. I'm being humble in his certitude. He's with JP Morgan, they're chief global strategist. David Kelly, you had one of the great insights hedged this year, which is, at some point non farm payrolls.

Are gonna go negative. There's gonna be a.

Vector of a lower growth than non farm payrolls.

Well, okay, it didn't happen. I get it.

You know, it's very good employment here. How do you adjust your trend? There a non farm payrolls going from say one hundred and seventy thousand down to zero. What's that timeline rule?

Growth was a little bit stronger than we thought in the second half of the year. I still think that there's enough volatility in those payroll numbers and in the seasonals that at some stage over the next few months you might get that negative payroll number. But you know, the headline is what we've seen in the second half of the last year is US economy can grow faster without growing hotter.

So the inflation rate is right on.

Where the Fed thought it was going to be in their December forecasts. But growth is a good deal stronger three point one percent a year over year growth in the fourth quarter, which is very good news. This is actually a very healthy economy, good productivity growth, and inflation is still coming down.

So David, I kind of agree with you. The numbers seem pretty solid. Yet the sentiment out there and just the general reportings, people don't feel like the economy is doing that well. And then University of Michigan last week put a big, big, consumer you know, positive number out there in terms of expectations, and I know, as a Michigan State man, you don't like to quote the universe in Michigan consumer survey, but it's pretty big out there.

Talk to us about.

Sentiment out there in the marketplace. What are you feeling here as you kind of do work.

Yeah, you know, even when I was working in Michigan State, we had a close relationship with the University of Michigan and their Consumer Sentiment project, which is a very old project. But what I think we're seeing a little bit of a break in the ice here because we were in an extraordinary situation even as recently as two or three months ago, where you had, you know, by the number

And that is what we've seen.

And I think that's important because once confidence begins to balance, it begins to gather on itself, and people, you know, start reporting in a good economy and saying, you know, well, though, there is opportunity here. So I think I think confidence will get better. It's still lower and will I think continue to be lower than the numbers would justify. But we are seeing some improvement of confidence here.

You know, I'm just speaking for the average consumer out there. I look at gasoline prices and that just filled up the new car two dollars and ninety seven cents a gallon.

That was awesome.

Down at the Jersey Shore, everything's better down at the shore, of course. But then even mortgage rates are coming down, so the couple of things that really hit people's pocketbook are coming down. And maybe that's kind of coming through some of the official data.

Well, yeah, I think lower gasoline prices are really important. But what also happened though, in the last few years, we had a big increase in food prices yep. And the problem is that people remember what the food used to cost and then what it costs now, and that jars on them a little bit. So I think that's part of the story. But you know, lower gasing prices will will help. And then the one other thing I

I think the mood should continue to improve.

David, You've got such a great background here from University College London over Intos. Paul mentioned Michigan State, Lansing, Michigan and East Lancing, and I got a lot of emails this week criticizing me because basically it's a fancy people on the east coast, West coast, and there's flyover America, and I would take it even further to say Wisconsin, there's Madison, and then there's basically you know, there's these academic center holes where things are good, maybe Ames Iowa.

I think we are politically very partitioned.

I feel very fortunate that when I arrived in America, I headed straight for the middle of the country Lansing, Michigan, and even heard about But you do get a sense of how people in the middle of the country feel. But there is a big political divide here. There's also an income divide. If you're in the top ten percent or top twenty percent of households, you're probably doing fine.

If in the bottom eighty.

Percent, you had that inflation, you had some some wage increases. But you know, there are services which are that sixty percent of families live paycheck to paycheck, and that's pretty grim, you know, year after year after year, particularly when you go through the pandemic and all this sort of social isolation that caused from particularly given the social media feed

David, you are the chief global strategist at what I think is the most global investment bank financial services company in the world, JP Morgan. Can the US economy continue to do well performed when we've got Europe slower than expected growth, slower than they would like to see, China really not doing well. Can the US continue to outperform?

I'm just back from Stockholm yesterday and I'm heading off to Tokyo next week, so that this is a good time.

To ask me that.

But I think I think the answer is yes. And the big difference I think between the US and other nations such as China, Japan, or Europe is that US

Right now, Missus King's favorite guest, Missus King's favorite guest, David.

Kelly go away. He's a JP Morgan there.

It's like a Davos conversation, except it's actually going to be more focused, tighter, and it affects every single one of us in our addiction to all this technology. And of course, what Paul and I believe is the study of what in God's name is this doing to our children? And we'll get to the Dodgers. Frank McCourt joins.

Us right now.

He's legendary. The family is definitive in Boston business history. They've husband that over generations, culminating in the ownership of Marseille, the French football team in a wandering I mean, he's sort of made the modern Dodgers, So I mean We'll talk to him about that in a minute, but let's get to the important business at hand right now. Frank McCourt, I love Project Liberty. It's basically saying we got some things to worry about here. Let's talk about how it

Yeah, well, a good morning, guys. It's nice to be with you. Yeah, it's a look. I come from a family of that you alluded to, a builders for over one hundred and thirty years, we've been focused on building things and fixing problems and so forth. And what's going on with the Internet right now? It's an engineering problem. I mean, we have a flawed design, an internet that's ubiquitous, that was never designed to do the things that's doing. And so we see the harms and in those harms

So it's not just limited to children.

So what we thought we might do is set out and put forward a solution rather than just recycling around the problem.

And Frank, what's so important here?

And I think a large body of our audience, whatever their political persuasion, would say, whatever we do, we don't need a government policy because it's probably not going to work and it's going to take you know, longer. It's going to take longer, Paul, for the government policy to click in to when the red sox get above five hundred.

But Frank McCourt, what's so important to me is you have to speak to our tech leaders and basically say do something. When you do that, how do they respond?

Well, it's interesting.

First of all, I think you're right that we need to innovate our way forward here, not regulate our way.

Thank you.

This country is full of creative people, of innovators, and we can solve this problem fixing the the the engineering problem, as I say, fix fixing how the internet works so that individuals have ownership and control of their data and we return agency to individuals and they have a voice in how these platforms work, rather than these black boxes that we all sit and wonder like what's going on? And also, by the way, we individuals who are creating

So, Frank, when I was kind of reading through your notes here, and reading about Project Liberty.

Well you could.

I'm sure you have a tremendous amount of support out there if you pull just the average person out there about the aims of Project Liberty. However, I kind of feel like it's too little, too late. That the industry's already evolved, and the business models have been developed, and the ecosystem is so entrenched. Is there a concern that the industry it just might be too late.

Maybe I don't believe so at all.

I do believe if we sit back and do nothing, then we can pretty much predict the outcome here, right, I mean, people know, and you're right. I just came back from Davos and the number one issue there in people's minds was missing disinformation and how that is destroying not only democracy, but someday we'll destroy capitalism. Because remember, both our capitalist system and our democratic system are both built on one simple but important concept, and that is trust.

So it's happening, and I just think we need.

To socialize this and our choices do nothing and see further harms or do something, And Frank.

I want to talk about do nothing.

When I was a tiny lad my grandfather took me up a dirt hill in LA and said, this is where the Dodgers are going to play.

And of course this is all.

The emotion of the move from New York City, from Brooklyn out to LA along the way News Corp happened along and.

It wasn't pretty.

You were a pinata out in LA with your ownership of the Dodgers. But the fact is you were the first one to make the Dodgers start winning. That was let's call it ten fifteen years ago. How do you perceive what you wrought and what they took forward? When we look now at the Pacific Rim Dodgers is arguably the team of Asia. What are the new Los Angeles Dodgers to Frank McCord, Yeah, I.

Mean I think they're there.

You know, look, they've always been an epic franchise, one of the great brands in all of sports. You know when I when I bought them from from Rupert Murdoch, they were they kind of got off the track. The team hadn't won a postseason game in sixteen years, if you can imagine that, and and you know, things were kind of run down, and the brand had lost a

In some great young talent.

You know. Clayton Kershar was one of the folks that really led the way with our you know, in terms of our scouting and player development, and built a new training facility in Phoenix, Camelback Ranch and closer to our fans, and by the way, took the team to China to play the first and only major baseball games that have ever been played there in two thousand and eight and reconnected with the past. Remember, the Dodgers had a relationship in Asia. It just needed to get them be refreshed.

It pretty awesome, right, Frank.

We're out of time. I could go on forever about this. I'm genuinely excited about. I can't believe him saying this. The evil Los Angeles Dodgers.

They're gonna kill it.

Frank McCord of Boston and always the guy that helped resurrect one of the great story franchises of America. 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. Is it the Bloomberg Podcast channel on YouTube To see the show weekday mornings from seven to ten am Eastern from our global headquarters in New York City.