Disney Had the Upper Hand All Along, Hartman Says

Joining me to discuss, I pleased to say as Joseph Quinland, Bank of America, head of Market Strategy for US Trust and he joins us here in New York. Joseph, good morning to you. Your thoughts on what is happening with the Chinese currency. Well, I think there's some weakness there, Jonathan, in the sense at the central banks trying to buffer growth.

We saw six point seven percent for a second quarter UM but when I don't think there's gonna be too dramatic a decline in the currency because remember, Chinese exports as a percentage GDP are not as large as it used to be. China's more consumption led growth. So I think maybe it's a signal to the US administration that there's ways to play the trade game, and this might be one of them. But I'm not looking for any

serious breakdown of the FX market with China. I was just Dum corresponding with Bob sin Chavamhurst Pipon who are pointed out that perhaps this move in dolly uan is much stronger than justified by general dollar strength. More broadly, Um, is that something you would agree with? Um? And so it's it's it's he's suggesting that it's more about China weakness. Yeah, I mean, I think that's part of the story, but that I think it's weighing on what the Chinese are thinking.

But at the end of the day, what money investors don't realize is that the consumer is driving the Chinese economy, not exports and investments. So it's part and part of the easy but it's not gonna be overdone. What seems to be driving the Chinese economy more consistently, whether it's the consumer or exports, it's the credit impulse of China. Um. China's credit impulse has rolled over quite dramatically in the

last twelve months. Do you see that turning around? No, I mean maybe alleviating, pulling back a little bit here because you're right there, there's been a huge push by the by the administration, the officials in China to tighten up the credit conditions. There's a lot of bad loans I've got to deal with, So maybe modest easy, but nothing going back to like you know, say, double digit credit expansion. This morning was saying some mod risk aversion

futures are lower. Where you see the paintings in the commodity market, we had copper stath of six thouns and dollars a ton um. We see brent and w T and depressure once again this morning. Why is twenty eighteen and the weakness that we see in the Chinese currency different to what we saw in the summer and early well. One reason why because we think we're longer in the cycle, that we're going closer to the end of the business cycle globally, as opposed to two thousand and fifteen, there

was still a lot of monetary expansion. The FED was still blowing out the balance sheet back then. So we're in an error now in a world where there's more central big tightening. Although I think we're going alleviated here. That makes it the print this time. So when you look at dollar denominated risk overseas and emergent markets in particular to trillion dollars in debt, and that has investors concerned. What's really cool here is I get to work with

John Farrell, who, like you, mentioned copper. I haven't looked at copper since time began. And the answer is it's off a cliff. Now. Is it doing a soybean? No, and we call it dr copper. Each of these commodities tells us a different thing. How does a grizzled veteran like you use copper is a measurement of the global economy? Well, I use it time to look out, say, twelve months

from exactly longer longer. So I think, you know, I think we're I think what copper maybe may be suggesting is that we're at the peak of global growth right now, and when you look out twelve months, it's gonna be at least three and a half, maybe closer to three as opposed to four where we are now. John, I'm gonna do a ballet here and get the chart out on Twitter, Bluebird Radio you'll see it first. But John, it's really simple. There's been a declining copper from two

thousand eleven to Trump. I mean, it's just that simple. And then we got the Trump pop and boy have we adjusted. I mean, you know, can we use a fancy word, it's Italian go on on a Fibonaci basis here we go. We're like not halfway back? Should I put it in English? Fibonacci had coached the Italian team that would have made the world done. But the answer is we're not back. But I'm sorry, John, You're bringing up copper is a big deal. And I would say just the magnitude of the move and the space of

time has happened in um. This is since early June, we've had an eighteen percent move in copper. That is brutal. That's brutal, and maybe and it is suggesting that out of the European Union, you know, a big economy, you're seeing more of a slowdown than what we expected. I think that could be the big story related commandities, is a significant pullback in your European growth. What's gonna put d c B back and play and what they do next?

So for US based investors, I think listening to this program right now, they're wondering how insulated are we in dollars denominating assets at home domestically from all of these pressures that are emerging abroad. We've got some were insulated to a degree, particularly small cap stocks, but you're gonna see a lot of You're already seeing the guidance from the big multinationals. There's pressures building, worker shortages, material costs

are rising. The best thing a US investor could do if they want to feel create that insulated portfolio, just stay mid small caps. Noise news in the earning cycle. In the earnings quarter is is always really really difficult to get through. Is it a convenient scapegoat or something that's actually hitting the bottom line. I get what it hits Alcoa. We see it in the outcome of Alcoa projections. That's obvious to me. But for the others, no, I think it's too early. I mean, they're using and I

won't see is using an excuse. They're using as a red red flag. They're signaling their costs are going up. They're going to pass it on the consumers if they can. We'll see that's not a given. So I think really here early stay in the middle of the summer. There we could see some bigger problems, bigger issues in the fall in the fourth course, So how is chair Hower

meant to respond to all of this? Because the Federal Reserve at the out of the year set us up for three hikes, and as the year progress, they set us up for full Um. I'm wondering whether it was the right ideas, sat right, the right path as these risks of building in the background. Well, I would agree with that because you can always extend it in two thousand nineteen. You can let the cycle run. And that's

the key issue. You don't you don't have to numerically put down a market if they have to do x amount per calendar year. Let the cycle run. If we're got to do more in two thousand nineteen, that's gonna be key. We saw Johnson and Johnson with I guess they did, okay, make make up band aids, great again, economy and then a little bit of a Ford view that was self, where where's your working revenue number in

your head? I mean as a blended nominal GDP number seven percent was so Q two wasn't and I think you know time that could have been the peak. But but where do how do but once you're at the peak. Where's the plateau? Do we stay above three and a quarter percent of growth? Add on some inflation? So I think the revenue growth is still going to run, say six for a lot for a lot of sectors. But the key is what investors are worried about, like, Okay, this is as good as it gets. Where do we

go from here? And do I want to sell or want to reallocate? John what do they call band aids in the United Kingdom? I mean they call it wrench. They call them plasteras plasters. I didn't know that. You didn't plasters? Yeah, plastic Johnson and Johnson makes plastics by a plastic. Yeah, I did not, folks, I learned John Tucker. Isn't it amazing what we learned every day from young Pharrell? I tell you what plasters? You're really throwing some sh

at me this morning? You deserve? Why do I deserve it? Well? I don't know. I mean I'm in a twelve step process to leave the World Cup. When are you getting to step twelve? We want how is this going to take? I don't know step three? As when we ran out of beer? You know, so I'm getting I can help you out with the beer. Yeah, I'm Simpsons free get good. It's like music to my ears. Okay, and um you know like I mean, Fiberacci could look good working for the Italians to get them to Okay, what does it

win four years from now? And the cutter because right, yeah, it'll be in the wind. What about the heat, it's going to be in the winter still, what about Yeah, well we were promised their conditioned stadiums. I don't know if they're following through on that, John Tucker, do you see that we're doing the World Cup right now? Air conditioned stadiums and it's over though, right? Oh you Rich Truman ways and it says there may be less scoring. What if I done to you today? Why? Why are

we doing this again? Why are we doing the World Cup again? We're not We're just a dancing Joe Quillan, Thank you so much for Joe. I want to repeat this on radio. Can you acquire shares this morning? Yes, we're buyers. What we're seeing opportunities in the market here, whether it's a healthcare, energy, there's some good values out there. Aerospace. We like cybersecurity. If you're worried about Russia, cybersecurity Joe, Joe Quillan long plasters this morning? Is that okay? Very much?

Thank you Joe, thanks for tolerating us. Do you know how many times have said that this year John fare and are looking at stronger dollar and it started out like, yeah, a lift, And this morning it's a real lift. And it's not yen yen one thirteen oh four. I think yen would be like one thirteen forty. No, it's it's it's more like a e m field with a real euro weakness as well. It's a careful concoction, which means we need we need to go to London and Queen

Victoria Station. Justina Lee joins us working for Bloomberg in the area of foreign exchange. Justina, the red men By has been weaker and weaker and weaker. Do we know why? Is it? Speculation? Is a covering of the stronger red men by? Bet? Is it flows? What is it? Right? Of course, overnight we got a stronger dollar, but that's not just it. This morning we saw the People's Bank of China weekend it's fixing beyond six point seven, and earlier people kind of saw that as a line in

the sand. So now investors are wondering whether China is actually tolerating more you in weakness, you know, to boost the boost the economy. And of course there's also news that Chinese banks are being offered cash and given instructions to boost lending. So it seems like there are signs that maybe China is willing to ease monetary conditions a little bit. What I love that phrase, and you say it with the glow that you learn from New York

University being given instructions? What actually happens? Who's who's giving instructions to who? Right? I mean, it's coming from the Banking and insurance regulator and it's just one of those things that you only get in China. Well, the statement they said that they said was that you know, they want Chinese banks to earnestly lower financing costs for smaller banks.

And so we don't necessarily know what goes on the scenes, but you know, if you're a Chinese bank and you're getting this instruction from your regulator, I think you should know what to do. And of course, can we conclude can we conclude now, Justina, just to jump in that we are we're moving to a PBOC that has an easing bias. Now, well, I think it's kind of hard to say, because in recent years we've seen that the PBOC doesn't exactly like to use headline tools like the

interest rate cut or deposit rate cuts anymore. But it seems like it's moving slightly towards an easing bias, if I can, If I can even say that, So the credit impulse of China is something we discussed out of in the program. What we've seen over the last couple of years is this big deleveraging effort. Is that starting

to bottom out? Do they have to put from in the town on that Justina to some extent, Well, it seems like relative to you know, last year, they are sacrificing some of their leveraging objectives in order to cushion the rest of their economy from this trade war. But I think they still seem kind of cautious about sending a very strong easing signal. What does the streets say?

I mean, John and I have noticed not only the polarity of of yen call say uh Nomura and Jordan Rochester with a polar opposite view from some of the you know, X number of handle moves to weaker young that we've seen. What does the cell side say about red Memby? Is there a one way bet here? Well,

I think opinions are still quite divergent. You know. It also depends a lot on what you think of the dollar, because I think what a lot of analysts would point out is that if you look at the past patterns of what the PBOC does, they never really want un weakness to get out of hand. You know, we've seen in the years after the unit evaluation in two thousand and fifteen that they were very wary of capital outflows. So maybe if things get out of hand, the PBFC

will step in and of course bake out the firepower. John, I know that re Memby is out about two point two standard deviations, so maybe we're on the edge of out of hand. We've we've had a big move. But I just wanted to Bob sinch bolt this up to me earlier on an email from MPST Pierpont and just in a place way in whether the move we've seen is more than justified by the general dollar strength that

we've seen. More broadly, and what I mean by that is, are we seeing anything abnormal in the Chinese currency against the backdrop of dollar strength. More broadly, is Dolly went higher than otherwise would be well. Of course overnight you could say the dollar strength has had a big impact on what the un UM did this morning. But I mean it's not like the dollar has really been surging.

But you know, if you put the dollar spot chart next to the un chart, it's quite obvious that you know, the un is rekening on its own regardless of what the dollar is doing. Brilli interesting only thank you so much, greatly appreciated off for London desk on for Change. Kurt Hartman was us with Wells Fargo and of course with the years with Wells Capital Management, their global chief investment officer, and and it's wonderful to have you here as an

institutional guy. When we look at this transaction, do you suggest do you suggest that it was just a silly valuation where guys like you say to Comcast to shareholders, this is dumb, don't do it. I don't think it's a silly valuation. I think that Disney had the upper handle along, but obviously asset prices were getting pretty high, so I think everyone on a ratio price to even time, I mean, it was getting silly. Right, Well, it's getting very high. But I think it also shows you the

tremendous value a lot of these media assets. Right, do these people? Do you have the power? You you're good competitors, black Rock Fidelity. Do you have the power to tell corporate titans what to do? Well, we have the power in terms of what we buy and sell and also in terms of our proxy voting. So I think that obviously that plays in. But um, you know, I think

this was a very rational decision by all sides. Come kissed up, um, twenty century Fox negative is well, you folded this off air into a discussion of Telephone and Time Warner, which I think is going to become Warner Media. I haven't figured out the naming. It's like alphabet google. I can't figure it out. But the answer is I'm enjoying a six percent dividend with Telephone. I mean, the media game right now. The capitalization of it and the

valuation of it is odd, isn't it? It is? And uh, you know we own obviously own this stocks in the index. But you look at something like a T and T, you know, six and a quarter dividend yield nine p you know, yere over a year free cash flow and you say this is cheap. Obviously it's got integration risk with Time Warner, and it's got litigration risk in terms of the adjustice apartment challenging the merger. But I think look, mergers are in vogue again and vertical integration, especially in

the media, is going to continue. But did discipline rain here? This is really important and that it's visible. It's in the media. We talked to all these great annalys major shout out, might I add, folks to Craig Moffatt of Moffatt Nathans and Pim jump in here as you can. You and I were sitting here with Mr Moffatt and he was the first one as an expert on Comcast who said, you know what the stocks down for a reason. I mean Craig was way out front. Oh yes, absolutely,

I mean he was. He was very clear about it and so with the investors. Um. But just the point if you if you don't mind about a T and T, but the stock has taken a huge hit. I mean the stock mean six and a quarter percent is great, but the stock your capital has declined. But kirk on a T and T with a six percent dividend. Are you buying it strategically for a bounce or is an underlying value as they morphed into a meeting whatever they're

gonna morph into nobody, nobody really knows do well. To Pim's point, I mean, look, it's got hit pretty hard. I think a lot of that is the litigation risk and secution risk on Time Warner. But you know, you've got to be a contrarian investing, So I just look at the fundamental assets and the other thing that it's it's shown me is that a Time Warner obviously a great franchise, And um, look at the as you were talking earlier, look at the valuations and how they're being

bit up. I made a joke in my TV script yesterday the opening when we're doing all this double negative malarchy about gap accounting and going over to that word adjusted, which maybe is like the late nineties ProForma. Do we know the goodwill or bad will on media balance sheets? On the balance sheet, folks, is it's intangible fiction called goodwill? Media? People? When I talked about this, they get upset because they say it's a tangible asset? Is it? Look? I am

am not a specifically expert on media, but I think that. Yeah, but I think look goodwill is always somewhat of a guess. So I think again, what's hard about this is, you know, it's very difficult to anticipate the future value. But one thing that's clear to me, whatever your good will, these franchises have tremendous value. And looking again at Comcast with a dividend two point and sprightly, Brian Roberts like fo five year dividend growth rate, with yields up and with

cash tangible. I think it was a New York Times today with a killer article on libor that world's back. Are we looking at dividends and dividend growth to the correct prism right now? Or do we need to adjust back to something where it competes with yield? Well, I think you have to look at value stocks right now. In other words, I think you have to look at things like free cash flow and what do how strange

pim how how strange look at free cash flow? Oh? Yes, century, I mean you have to remember what's very interesting to me in terms of dislocations. Growth has beaten value for ten straight Yeah, I love that. And I'll tell you what's interesting the last time this happened, this is a little bit of a scary thought, was the ten years before the Great Depression and the ten years before the

tech bubble. That's a quote of the months where half of it's what you say it again, this is so in the last time this happened was the ten year period before the Great Depression and the ten year period before the tech bubble in the early two thousand era. So look, if you're a contrarian again, you've got to go to mean reversion. You've got to say value stocks are cheap here and value is going to mean revert. Should I can I go to a Boston shout out here?

I mean, it's not Margie patell who's you know, one of your giants. You know Margaie knows David Tripple, who was a force of Pioneer Group. I had this conversation over a cup of coffee and a coffee shop with Dave Tripple a million years ago about that sustainability of growth being value. So say it a third time, folks, This is a real clinic with Kirk Hartman. You get a run of growth being beating value, and you've least got to be aware of it right, Oh absolutely, And look,

these things go in cycles. If you look at factors in terms of momentum growth value, they certainly go in cycles. And we have had a tremendous growth run. And you know, at some point you have to think it's going to mean revert to to Man Winkler's great column on Amazon the other day. Is the Amazon avail, You're a growth stuck. It's hard to say, but I can tell you it's a long duration asset. Right. It's very hard because you're buying the business model in my mind, I mean at

a hundred fifty or whatever it's. You know, obviously you're buying it for the uh, you know, the underlying value of the franchise. But it's hard on a on a metric basis to look at these One final question, Kirk Hartman, did you buy anything on Prime Day? I bought dog biscuits for I was traveling. So I got home and I said, I gotta do a Prime Day because everybody else is doing it. So I bought little, you know, dog tasty kind of thing, you know what. Nothing I'm

proud they taste. I don't please. Yeah, we're going there, you know. And Pim and I we have the same camp bills for a children, so we're down to eating dog biscuits. You didn't buy anything in Prime Day? I didn't. It's American, I know, but I was traveling, so you know, it's hard to buy things when you're traveling. Kirk Carbon, thank you so much. Really appreciate this. Is he's not supposed to comment on individual stocks, so I greatly appreciate

the media comments with a stock. Craig Moffatt of Moffatt Nathans and Craig, congratulations on absolutely nailing the game theory. If you would of what Mr Roberts would do. You have always said you were suspect about this transaction. Let's immediate drive it forward. Can you acquire shares of Comcast this morning? Well? Thanks thanks for saying that, but I don't think I was the only one to figure out that trunk hast had gotten itself wrong footed on this UM.

But but you know, look, I would like to say this is a green light to go and acquire Comcast shares, but um, but this was at this point reasonably widely expected And the real question now is you still don't know UM whether they are going to win or lose. Sky Um. Investors are going to be very happy that there they've lost fox Um, but investors would be even happier if they lost both and would go back to being a cable company, which is what investors always wanted

them to be in the first place. And we just don't know the answer to that. Today's press release from Comcast says they still want Sky, but whether they can win it versus Disney is unclear. Within that is going after Sky, and do I understand that's a two part transaction. They've got to take the Disney part and the Sky part. Well, it's a little more complicated. Disney in this case, Fox has it Foxes bidding for the rest of Sky that it doesn't own, but is effectively bidding as a proxy

for Disney because Disney within by the whole thing. Um they already correct, that's right. Comcast is now the leading bidder though for Um they've got technically got an offer for the whole thing. But they would buy the minority steak, and you would end up with an ownership steak in that scenario. That's the same as what you have today. It's just that now Comcast would own the majority and

Disney would end up being a minority investor. Now there's been some speculation that if that's the way things turn out, that you might see some kind of a of a swap of Comcast ownership in UH in Hulu, which would then be a minority interest UM for plus plus uh uh some cash for UM for the rest of Sky UM. But again that's all It's still all speculation because we don't really know whether Disney is going to increase its bid for Sky for the rest of Sky or not.

Craig moffatt from a strategic point of view, what makes the most sense for Comcast. Well, I guess it depends on who you ask, because obviously my answer is different than Brian Roberts. Bryan Robert's answer is they really want to get Sky. My to would be you're better off without Sky. You know. The problem for me is my suspicion is Comcast is trying to convince itself that Sky

is something that it isn't um. Sky is a global distribution platform that, if you look at it from Comcast point of view, has a lot of proprietary content, things like HBO and Showtime and Disney and the Premier League soccer. UM. That is that is the basis of of becoming something like a global O T T provider like Netflix. What what Sky really is though, is a satellite TV company.

And we've seen what happens to satellite TV companies because fundamentally their distribution technology is obsolete, and so the tension

between those two things. Can you transition from being uh rapidly obsolescing satellite TV platform to being a next generation OTT provider fast enough that you can beat the expiration date on a lot of that proprietary contract is the challenge that Comcast would face, and I don't think investors at Comcast are particularly enthusiastic about taking on that challenge. Do you and your colleague Michael Nathanson have a price to ebitda Mr Iger ponied up after Comcast a bit

up the price? I mean, folks, this is the comparison of the value of the transaction down the income as compared to down the income statement with a little bit of balance sheet ballet. What's the price to Mr Iger will enjoy in acquiring these assets. Well, remember that there will be synergies, but there will also be some divestitures. Okay, So to give me two numbers, presynergy excuse me, folks, we don't use the word synergy, Bloomberg surveillance. After cost

cuts and slashing, what will be the two ratios? Well, it's going to depend on on what he can get for or the regional sports networks that are going to have to be divested, But I think it's it's likely that the multiple will come out to be something like twelve to thirteen times net of all of that. Not stupid. Yeah, high,

but not stupid Comcast, you know. And that was the problem for Comcast is Comcast because of because it had gotten footed, would have had to end because of the regulatory challenges, probably would have had to bid at least into the low forties. If Disney had matched it, that would have put Comcast in order to win into the mid to high forties. And then you're talking about fourteen

times after synergies. That's crazy. Quickly, pim because I know you want to get a question two years ago, see if a level two they are so influenced by Moffatt, they had a question on price to Ibada, a cheap, be expensive, and a third choice was high but not high, but not stupid. I'm gonna copyright that one. That's Yeah, be careful there, um, Craig. While all this is going on, I do assume that there are other companies that are

going about their business, such as Netflix. Any thoughts on anybody else who maybe is taking advantage of all the focus on takeover an acquisition to actually just run their business and make a lot of money. Well, you know, I'm always a little suspicious of those arguments about X, Y or Z company was quote unquote distracted because of m and am the CFO and the CEO may be worried about the distraction, but generally speaking to people who run the business on a day to day basis, are

are probably not all that distracted. So I'm never all that sympathetic to those kinds of arguments. Um, you know, the real question for for Netflix, I think, um, and it's covered by my partner Michael, But Michael and I have I think very similar views on Netflix that the real tension here is just Netflix is clearly going to be very, very big, But there's a debate about how

how secure is the mode around Netflix's business. Is sheer size in the media business going to create an impenetrable mode or is it just going to create a big business and they're going to be potentially other big businesses as well, And those are two very different outcomes, because if it is the latter, there's no reason to believe that the returns on capital in just another big business without an impenetrable mode will be exceptionally high. And right

now Netflix is priced for exceptionally high returns. And so that it's a worthy debate, and you're going to find out a lot based on now that Disney is getting foxed and Disney effectively pursues something like a similar strategy just quickly. This is not like doing an A O L is it. I mean? You know we're not talking Time Warner a world quality here are we? No? No, no, no, these are Disney, you know has to be. And again

it's Michael's company to cover. But but Disney has to be given a lot of credit for having put the strategy in place and having executed very deliberately around during the assets to pursue the strategy that want to pursue. Craig, thank you, thank you for coming on with us. We'll look for notes from off at Nathanson to their clients coming up. Thanks for listening to the Bloomberg surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or

whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio