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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordernt. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg
Terminal and the Bloomberg Business app. We begin this out we're Stark's looking to add to record highs following Dow's blogbuster earnings report. Max Kettener of HSBC writing the close to one hundred percent EPs beat rate, coupled with strong forward guidance of the US tech sector in Q one, is cushioning the overall equity market.
Max.
Join just now for more. Max. We've talked about it repeatedly, Max Kenner, Max overweight and Max, we got into your danger zone at one point in this bond. Ok, this market didn't blink. What gives?
Yeah? Look, thanks for having me, John. I think the danger zone for now at least we can ignore it. We can ignore these higher yields because there's a couple of things I think happening over the last two three months. We've obviously seen yields start to go up in treasuries in conjunction with that much much better earning season. You guys were just bringing up that tech head and almost one hundred percent beat rates are almost all of the companies in tach surprising to the upside. I would look
also at the worst beat rate. If you look at Telcoast Telco's had an earning speed rate that was just the average beatrate of the S and P and the twenty tenths that at the moment is the worst beat rate across the sectors. That's how strong and how broad based of a reporting season and of upside surprises we had. And that of course was cushioning really the equity market and rescatsets overall, and that made us maybe little care
a little less about higher yields. The other thing that I would say is if you look at yield increases in the last few years, where we went into that day zone where yields really were popping a little bit too quickly, where the velocity was much more vicious that actually was seeing volatility in rates way way higher. When you look at the move index, we've only spiked to around eighty. In the last couple of episodes. We spiked around one hundred thirty, one hundred and forty, even one
hundred eighty. Now the high was only a about eighty and the move index So that lower equity volt also really led to a little bit of less of multiple compressions. So to me, that is perfectly rational what the equity market spreads and the broader risk acid complex have done in the last two week.
Mass. Could you take it an additional step further? Do you think the forces driving equities right now are less right sensitive and will be even if this Feller reserve becomes more hawkish.
Now I would take it one step further from your one step further. I think it's also the economy. Right Let's be honest. Let's say, for example, five years ago, I would have come on the show and would say, look, I think rates are going to go from zero to five and a half in record speed. And as a result of that, I think that nonfinancial corporate in the US, the net interest payments of those non financial corporates are
now going to dive to a twenty year low. I don't think you guys would have invited me back, right, I think you guys would have been like, well, he's a funny German. But maybe he's going to have to go back to university and study econ one or one a little bit, and maybe we'll invite him back in a few years again. But that's what's happened. So I think we've, even in the economy overall, underestimated how less rate sensitive we are now, how companies have termed out maturities.
Look at the SMP. Almost two thirds of debt in the SMP now it expires after twenty thirty. Look at high yields. The maturity wall that we've got in high yield is less than three percent of the index this year. In the US in particular, when you look at the amount of triple cs and you're a high yield, that's about six percent of triple c's. That used to be like ten to eleven percent. In you as high yields just ten years ago. That used to be eighteen percent.
Now it's only about nine percent triple cs. So even if yields go up you know, credit is better quality nowadays. We don't have the maturity walls as much as we had in the past. We have companies, even higher rated companies termed out maturity is locked in low coupons. You know, rates really aren't this big, big danger anymore, Max.
Can companies continue to make earnings like what they've been doing without some sort of participation with the forum of wage gains or a much tighter labor market?
Yeah, I think so because most I mean, obviously, most of the earnings increase that we've seen now has been very, very concentrated, and that I think is maybe going forward from a strategic from a structural perspective, a bit of an issue, a bit of a problem, right that when you look at the S and P five hundred, it's not really like we're investing in five hundred companies. We're really investing in sort of thirty forty companies. The first
thirty companies is almost two thirds of market cap. So, Lisa, when you're asking, can all of the five hundred companies weather this, I'm not sure. Right. When you look, for example, at the lower one hundred companies within the S and P five hundre, I think we are starting to see management guidance, corporate guidance deterior rate a little bit. That's clearly what we've seen in our own analysis on company
earnings call analysis. Absolutely. The problem there is it affects more the companies that have a very very low rating in the S and P five hundred. Let's give you one example. If you look at the lower one hundred or the last one hundred companies in the S and P five hundred or the last twenty percent, they account for a little more than one percent of market cap.
So it's not all companies. Surely the smaller ones. They will probably struggle a little bit if let's say the tenure goes to five percent and stays there, But for the overall market direction, that just doesn't matter.
If that's a case, max, what would it take for you to actually turn less positive less overweight.
I like that you said, no, not bearish, because that will that will be a big hurdle to turn me verish myself. Your ahead, very exactly. No, I think the big, big issue is position. So positioning overall still is pretty subdued. You know, on our analysis, we don't really get a proper bias signal nor a proper cell signal positioning. Even from systematic strategies, it's not even at the fiftieth percentile. Yet, when you look at equity market participation, for example, it's
not very broad. Right, we know that it's mostly been tech and AI. Contrast, last year liberation date the V shaped recovery, the amount of companies in the SMP that are above the fifty day moving average. They pop from five percent to eighty five, almost ninety percent. Now we've gone from twenty percent above the fifty day moving average to only fifty, so half of the index isn't really participating.
I think if we were to get some more supportive news out of the Middle East and then we get another pop, we get really sort of the rate sensitive cyclical stuff participating, which I think is the next big trade. Your regional banks, retail, you know, things like home builders. If that starts to participate, I think there is a reason of bass to say that's probably the very last leg. Then then participation rises, positioning rises, and after that I think it's time to take a couple of chips off
the table. Max.
There is one line that stuck out to me in your note, and it was that you doubt investors will fully embrace progress in the US around talks, and said point to lack of detail to to keep positioning low. Are you basically saying until we get a proper deal, which max could take months, we're not going to see this rally broaden out.
No, that's not what I'm saying. I think progressively or incrementally better news that actually means that incrementally, I think people will give up on Oh yeah, I'm just long tech in AI and I actually cannot embrace that broad based earnings recovery that we've seen in the first quarter. I need to stick to that narrow set of stocks
that have been working. Actually, I think over the next couple of weeks and months we will start to realize hold on, look at the last month and a half, for example, we've had activity data surprises in the US clearly have been going going up, so clearly improved. I think for now people are probably reluctant to put those kinds of trades on because we had that rate sell of right, we still have Hall Moves closed, so there
are some sorts of warries in the background. But I think with time we'll start to realize that particularly sicklicality in the US is much much more insulated from what's happening in the Middle East than perhaps we thought three months ago.
Stay with us more Bloomberg Surveillance coming up after this. You mentioned Dallat's talk about doubt soaring and pre market training. After raising its full yet guidance, the CEO David Kennedy, the CFO, telling Bloomberg the confidence and demand for its service continues to grow.
It's a tremendous start to the quarter obviously in the year ahead, built on real, durable and accelerating globally the amount of infrastructure that's needed out there, so really more broad based, you know, AI demand if you like, beyond the GPU in terms of the opportunities ahead.
Angelo Zeno of c FI A writing, we continue to have a positive fundamental outlook on semiconductors and hardware, driven by the AI infrastructure build out and massive earnings power. Angelo joined us now for more, Angelo, I just hear the same thing repeatedly, earnings, earnings, earnings is through a risk of normalizing the irrational, so to speak, given the moonshots we're seeing development across single names at the moment.
Yeah, so, John and thanks for having me.
So when we think about, I guess, you know, the earnings power in this market, I think it's you know, we're clearly seeing some sort of a reset higher right in terms of just the magnitude of the capex increases we're seeing from these hyperscalers. And I think right now the street's really trying to sliff out where the greatest earnings power is coming from. And I think we've got a pretty good sense here just going through Q one earning season of where that earning's power is coming from.
And obviously you've seen, you know, the respect of move in those stock prices given the fact that you're seeing pricing increasing from increases from those companies, and that's also translating to that higher earnings power. I would say, you know, as you kind of look ahead, we think there is some sustainability, or we do think there is sustainability in terms of the reset higher from these hyper scalers, And
as a result, you've got that sustainability. Once you kind of get this leg up in the earnings power maybe to your point in terms of the normalization or earnings growth normalization, that's going to start playing itself out probably as you go into twenty twenty seven, in twenty twenty eight, because you're not going to be able to have these hyperscalers continue to increase capex on one hundred percent basis year of a year, but you'll probably be able to continue
at least in twenty seven and into twenty eight see increases of let's call it twenty five to thirty percent, as long as you get that cash flow from operations continue to grow, which at this point in time continues to be our base case.
The issue for a lot of people is that companies won't continue to pay these massive billion dollar costs for the AI tools that they're getting unless they can prove some productivity. And we're getting to that point increasingly where executives are pushing back and saying, please stop just experimenting with it, start actually using it to prove why it's
worth its money. At what point do you have to see the real economy catch up a bit to some of these big tech behemoths in order to keep the street going.
Yeah, I mean, listen, I think we've actually we're starting to see some of the AI monetization themes play itself out, which is really what's getting the market excited at this point in time, right, I think you look at an Anthropic and you know, potentially looking at a fifty billion dollar run rate by you know, in June on an ARR perspective, and continuing to go up. Really at this point in time, only limited by their compute. But we're seeing the use cases we're seeing greater.
We're seeing a.
Lot of these pilot use cases go into AI production mode. I mean you just sort of salesforce report this week and you kind of see the usage rates really go up significantly just on a quarter of a quarter basis. We think that continues into the second half of this year. So enterprises are adopting this stuff. You're seeing those use
cases go up. And as a result, as long as you know, we continue to see what we're seeing from a company like Anthropic and only you know, continue to be limited by the compute availability, I think you know this AI infrastructure built them continues to work.
Here is Anthropic gatting open ayes lunch.
It looks like it, right, I mean you kind of look at the headlines at this point in time, you know, clearly it seems like Anthropic was right to focus almost exclusively on the enterprise side, and you kind of look at just the tools that they've come out with at this point in time, the focus more on security, I'd say. I'd say, you kind of look at where the enterprise space is really gravitating to and it looks like, Yeah, I mean, Anthropic is definitely winning here over the last
kind of two to three quarters. And again, I mean it's still early days and I won't necessarily col open AI out, but at least at this point in time, yeah, I think I think anthrop has been the clear winner here over the last couple of quarters.
Stay with us. More Bloomberg surveillance coming up after this. Let's talk about the reason for this conversation. Its central banks right now, at least one of them, crude on track, at least for now, for its steepest monthly decline since twenty twenty. Optimism building for a resumption of traffic through the straight upfor mers as energy producers are highlighting the risk of an extended closure. Chefron's been warning quote, we will start to see physical shortages. The CEO, mikel Worth,
I'm very pleased to say, joints still the studio. Mike's going to see you good to see you. Welcome back to the program. Sir. I get this question a lot. You're the expert. Help me answer it. Why is crude at one hundred at ninety and not close to the two hundred given this straight's been shut for three months?
You know, it's a little hard to explain.
We really are seeing markets Titan inventories draw demand for products around the world still very strong.
I think there's this belief and.
You know, we're experiencing it again the last few days that the end is near, the conflict is nearly resolved, and flow through the strait will resume very quickly, and that has kept the back end of the curve lower than it might otherwise have been. And I think the psychology the market has been this is closer to the ends rather than the beginning.
But what about the physical world? When will inventories be at the very bottom?
Before long?
We are steadily drawing inventories down on products on crude in locations around the world. I think June and July are going to be critical months, and you can see the trajectory of these inventories in the data. And it's concerning do.
You see any physical shortages right now around the world.
We do see some in some Asian markets, and we've seen some rationing. We've seen work weeks adjusted other demand measures imposed in some of the countries in Asia. Markets are very efficient at moving products and barrels to where they're needed, and we haven't reached a crisis point yet, but the inertia in the system is very very strong, and turning that is not easy.
One of the main sticking points the US has when it comes to negotiating with Ron is this idea of the tolling. Would Chevyn consider paying a toll?
No, we wouldn't. Do you know how people are paying a toll.
I've heard reports of people using cryptocurrency in various countries.
I think the Treasury has come out this.
Week and sanctioned the new authority that has been put in place to oversee transit through the Strait. It went from a toll to a navigation fee to something a navigation fee. I don't know enough about any of these things to say definitively, but look, freedom of navigation through international waterways is a very well established principle, and anything like this would begin to say that countries adjacent to an international waterway can charge some sort of a transit fee.
There are many other places in the world where that principle could be applied, and not just to energy products, but to all freight moving through the Straits of Malacca, the Bosphorus. Pick your choke point, and so that's not a principle I think that most countries in the world would find acceptable.
How far are we away from having pipelines that connects some of these countries to the mainland and their production without having to traverse the straight at all.
Well, there's a couple that exists now that you've talked about in Saudi and the UAE. The UA sanctioned a project last year which is about fifty percent complete to get more of their production over to Fuji and outside of the Strait. So I think you will see more
of that, Lisa. The one opportunity there is countries like Iraq and Kuwait that are deeper up in the Gulf don't have access to those pipelines, and for them the road could be through the North and ultimately then into the Mediterranean, maybe through Turkey, where we see a pipeline comes out of the Caspian Sea over into the Mediterranean in Turkey. And so I do think one of the responses to this will be infrastructure investments that will allow these energy flows.
To avoid the strain and horror moves.
And that's underway now and I think you'll see that in the years that follow.
We started the conversation talking about why oil prices aren't higher, and you're saying that we're getting close to breaking the bottoms of some of the inventory bins. And we were speaking just a moment ago with Alex Saltman at Barclays who said we actually could see a glut of oil in six to twelve months time. If there is a resolution here based on the production levels of so many different oil companies and countries.
What's your take on that.
Do you think that that's a feasible interpretation.
Well, history says that shortages tend to be followed by gluts, and high prices send a signal and markets work. Consumers consume less, producers produce more in response to a price signal, and there's a time lag in the way both of those manifest themselves in the market. And what has happened historically is about the time that the new supplies reach the market, demand may have turned down through conservation measures, economic slowdown, maybe a recession, and you can see those
lines crossover and the price cycles down. It's why commodity markets are cyclical, is they tend to overshoot. And history says when we get into one of these situations that is somewhere out in the future.
What signal do you take from the futures curve. I'd love your reaction to that, because so many people have pointed to the back end of the futures curve as a prediction of markets, of where they think crewed will be. How does an energy boss like yourself look at a futures curve?
Not very frequently. It's not something we use for planning purposes. We do a certain amount of hedging in our business on commercial activity where you will use futures, but we don't look at future's curve as a prediction of future price. We do our own fundamental analysis on demand, supply, technology, policy, economic growth and arrive at our own scenarios, and we don't use a point forecast or a curve. We use
a range of scenarios. Prices are hard to predict in these markets, and so we don't anchor on a single price.
We use a range of prices.
What's fascinating is you were talking about how typically commodity markets tend to overshoot and then you get the glut just as demand falls off. Are we overshooting because what I keep hearing is that we're not overshooting. Actually, oil prices and the future's curve is remarkably low, and that people keep consuming. And frankly, people like yourself are not investing in more production right now. You're not increasing production
traumatically to offset some of what's going on. So is this time different in terms of the commodity cycle?
Well, first of all, we are increasing production. Our production growth seven to ten percent this year, which is a lot in a world where demand is growing one percent on average, and so there is investment in growth. Is this time different? You know, people say that every time and often find themselves regretting having said that this time is this is the circumstances. Here are things we haven't seen before. The twenty percent of the world's energy production
cut off for now nearly one hundred days. A billion barrels that is not in the market that otherwise would have been in the market is not something that we've seen before.
So that part of it is different.
How commodity markets respond have a pattern that has been proven through different types of shocks to the system that is remarkably repeatable. Maybe not perfectly predictable, but it is something that you have to bear in mind when you're in this business, as you allocate capital and as you plan for your business. Is you know these patterns exist for a reason when.
You allocate capital.
I want to ask you about Venezuela. When will you put fresh dollars into the country.
Yeah, we're currently operating under a system that's been approved by the US treasure and the Venezuelan.
Government to recover debt that we're owed.
We made some loans to their state owned company many years ago and they weren't repaid, and so we set up a mechanism to ensure repayment. Oil flows to the US, which is important for US refiners. We're working our way through that and we'll recover the debt over the next year or so, the final portion of it, and then we need a new set of fiscal terms under which
we would invest in the country. Right now, the amount of tax and royalty that's paid doesn't leave enough for an investor to get a return on their investments.
The country has changed.
It's a hydrocarbon law has indicated a new range of taxes and royalties that would be applied to the energy sector, but they've not been specific about wearing the range those would land. So there are negotiations underway, discussions. Even this week, we had a team in Venezuela that had some discussions on this issue. I expect over the next short period of time we may see some clarity from them on specific values on corporate income tax, on a range of
things on royalties and how that might be applied. So there's progress being made to clarify the things that would be needed in order to make those investments.
But we don't have enough clarity right now.
We don't understand what the regime would look like, and so it's unlikely we would put capital to work until those things are clarified.
Inquiring minds want to know. I'm getting the feedback right now. So December is trying to get eighty four. What is the micworth chef from price this year? What's the range in your scenario?
Planet, Well, the range on the low end would probably get to that number, and on the high end, if we were to see an extended constraint on transit out of the straight to horn moves. The question is how high is high. You get to very high.
Numbers, so your low is actually where December is priced right now.
And some assumptions, right we don't tip into a recession, we don't have some other exogenous event. But yeah, it's going to take months john two to clear ships out of the strait, to make sure that the mines have been cleared, to establish to get two thousand ships out, they don't all go out at once. You need weeks
and weeks. Somebody's got to prioritize to bulk freighters go out first, to container ships go out first, to US, allied ships go out first or last arranged two ships decisions unclear at this point.
Wouldn't it be the fifth fleet.
It's unclear at this point. So there needs to be as system to prioritized traffic. Shipowners have to be convinced that it's safe to transit through the strait. There need to be some sort of security measures. And then that's just to get ships out. You have to get ships in as well, and the tanks inside the gulf are full. That's why production is being slowed or stopped is because there's no place to put it. The ships are full, of the tanks are full, so you need new ships
to come back in. Shipowners have to be comfortable sending ships back in after having ships trapped for months and crews trapped for months.
They may or may not be willing.
To move all of their vessels back in. There's other routes now that are trading us to Asia is a very heavily traded route. There's a lot of ships in that service, so it will take months and then you start to clear out the inventories that are in tanks, which allows fields to restart, damage to be repaired. This doesn't happen overnight, so this is going to be with us for some time.
I got to wilsh you do you just sit here and say you first, how do you think about it?
Well, we'd like to get our ships out. It's not a decision that ship.
We have six ships inside the straight right now with our cargoes. All of them are chartered, so they're owned by a third party and we don't ultimately make the call. The shipbowner decides whether or not he wants to put his vessel and his crew through the strait.
And so that's a decision.
We provide advice on input to, but we can't make that decision. So it's a very complex set of decisions that need to be made to begin to get things moving again, and it will happen slowly. I would expect there will be some stop and start to it. There still has been kinetic activity this week someone which has been reported in the media summer which has.
Not and so we see risks very real still.
In that com a journalists, you can't say things like that, what's not been reported? What do you hear it?
Well, there have been there have been vessels that have been in transit that have suffered attacks.
That's more than what we've heard of in the press.
Yes, from our reports would indicate that.
What do they suggest how frequent of those attacks been there?
Maybe not every day, but there have been multiple incidents that have occurred.
This is the Bloomberg Survendon's podcast, bringing you the best in markets, economics, antient politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg business out
Mm hmm