iPhone X Concerns Are Too High, Piecyk Says

get used to this permanent layer of uncertainty. We're just gonna do this every single month for the next few months and maybe the foreseeable future as well well. I guess time will tell I suspect we might. I mean, I still view this, Jonathan as a as a very uh political move from the from the president. He ran on a protectionist sentiment nationalism, and so he brings these

things out and then we slowly walk them back. The reason why I view it is still largely political rather than more of a of a of a bigger move is because you know, this is done to appease the base in the mid term elections and and set up twenty twenty. But if you go forward in an integrated global marketplace with uncertainty around trade or or greater protectionist measures, you're going to see an economy in a market that

perhaps doesn't look so good. By the midterms are into the elections, so the president and the administration need to navigate that. So it's a state to negotiate better deals. UM in the meantime, and you kind of touched on it, and I want you to elaborate. Do you see any damage being done to the economy as this administration chooses to use this negotiating tactic. Well, for the time being,

business sentiment looks quite good. So we're we're coming at this in a place where businesses are keeping more of what they earn. UM. Confidence is high. But yeah, you could see some erosion and sentiment if uncertainty continues over where we're going with regards to trade. I mean businesses. You know, it's the old saying, the old adage that the toothpastes out of the tube on globalization and for a lot of big companies, UM, you could see stranded

capital if we go down a more protectionist path. You guys are in the theme and definitely the theme of the president United States delegation heading to China to begin talks on the massive trade deficit that has been created with our country. Very much like North Korea. This should have been fixed years ago, not now. Same with other countries and NAFTA dot dot dot, But it will all get done. Great potential for the USA exclamation point the

President John Farroll three minutes ago. Yeah, and the trade says they should have been dealt with years ago. Previous administrations should have tackled the issue that is China head on, and they haven't. And you just wonder whether we can actually get some results. So you hopeful, Brian, that we could get some positive results here when this delegation just

head out of to China. Well, what I would like to see is, you know, greater protection for US technological companies, greater protection for intellectual property, but to do so in a manner that is not disruptive of the goods market.

If anything, um, you could see some uh you know, some impetus for greater reform in China if there, if there, if we do go down a path of greater disruption in the goods market, there could be opportunity for China to transition more quickly um to and more consumer based economy and a more service based economy. But again we have to remember that the numbers that we're talking about with regards to trade and the tariffs that were concerned about is still small from a from A A U. S.

China trade perspectives. Think it's still about sentiment and confidence at this point. Brian Lovett with us with Oppenheimer Funds that we must say John Pim and I that we thank you for your supporter of Bloomberg Surveillance. Absolutely Funds is we appreciate your global and coast to coast support for all that we do. Christian Mormoney was in the other day. Let me ask you the same question. Do I buy US multinational rolls to express an international view or do I still have to go out there and

get international companies. Well, we believe you still have to go out there and get international companies. I mean, there's a lot of great companies around the world that are taking advantage of significant growth trends all around the world. Most American investors are not significantly exposed. We don't have the research capability, right, I mean, but you know, Tom, we we deal with these products on a daily basis.

I mean, for most of us, we get up in the morning and turn off the Japanese alarm clock and put on the Korean television. But this is important. In the old days, it was simple. You about telephone, is Mexico about te Max? And you bought a concrete company in Southeast Asia and you call it yourself investor give us I'm serious. You think you know there's like six textbooks for the CFA you read on this great, what

do you guys actually do in Malaysia? Well, um, you know, I would just say, you know, turning it to the global economy, to the global markets as a whole. I mean, if I were to go home on Mother's Day with, you know, a US made luxury product, my wife might look at me and say, where's the Louis Vuitton product, where's the Burbery products? Exactly? Um, you know, you look at what's going on in China, with what's going on

in e commerce or gaming or social media. I mean the we're not buying concrete companies, We're buying companies that are that are part of this big growth trend over there. Can you buy MidCap internationally? Is there? Like is it all blue? Chip or can you like, is there a lot of MidCap companies? There's there's a lot of MidCap

companies to research. In fact um, if you look at our performance of our international small mid, our emerging market small mid, we've we've generated very strong performance in those parts of the market and they you know, they tend to be less covered. Great, great opportunity for active managers take advantage. Can we get to the elephant in the

room just quickly? And I think for financial markets the elephant in the room cross asset over the last couple of weeks has been this Research and West dollar and it certainly managed to the trick discussion too. And we see it on the screen again, the dollar bid coming back into the market, right. What do you make of that? Because so many people eager to fade this, They just don't believe that this is going to continue. It's just a relief rally, bit of covering. We'll be back on

trend shortly. What are your thoughts right now? Well, the first thing is, if you pull it up on the Bloomberg terminal and you zoom in, it does look like a pretty good move. If you zoom out just a few months or or a year, it doesn't look like much of a move at all. So the trend, the weaker trend, still remains intact. What's happening is the money your capital is going to flow to where there's growth

in the United States. Um. Although you know the first quarter wasn't as it was big as people some may have expected, it's still above trend. In the second half of the year is likely to look pretty good given the amount of stimulus coming to the US economy, So some money comes in. UM. I think over time we are likely to be in a stable or week or dollar environment. I'm gonna put two charts out. Can we

do this for Bloomberg Radio? Or we're gonna do two standard deviation trading envelope zooming in as Mr Levitt says, And then I'm going to take the weekly chart John, which borders on teacher college course excellence of where we're just mid range is. Mr Levitt suggests, a weekly chart gives you a dollar that's migrated stronger. Yeah, back to

the mid range. And I think whether I'm worries is if this continues to several trades that sit on top of this week a dollar theme and the big one for me at least that I observe, is this consensus. O wait until we am both on the equity on the debt side that's been built up over the last year, build up on the back of a week of dollar Bryant.

That's right, and look at this point in the cycle, I would be far more concerned with a significantly weaker dollar that was inflationary in the US would bring forward Fed tightening and you know, would see something along the lines of the Taper tantrum that we saw um the last time. That But if you look at them markets right now, inflation is down, real yields are are attractive. Growth looks strong, um. So the currencies have sold off some, as you know, US growth looks like it's going to

pick up in the second half of the year. But to me, this is not the disruptive environment that we saw in the past. I would be much more concerned with a significantly weaker dollar and more aggressive FED tightening. UM. Some some modest improvements on in the US dollar or some modest strength in the US dollar on the back of good growth should be good for the global economy

and emerging markets. Catch help me this morning, o'llpen on a fun senior investment strategist if you're in the bond market. This is the interview of the day Priam Ezrae with TV Security. She's brilliant not only in full faith and credit, but taking it out to less or credits as well. PreO, what's the tip point looking at full faith and credit tenure yield? Do you have in your head a point with the two year yield? It's not a linear function,

it's quadratic, it's dynamic. At what point do we really sit up and watch the nominal tenure yield? That's a great question. I think for a lot of people in the market it's three percent, So that was the psychological level. I don't believe, right, what is it? I would say for the two year to watch anything close to three I would get a lot more nervous about because I think that is indicating that the FED is going above neutral.

I think neutral rate is somewhere in the two and a half range, which is exactly where we are right now. So we've got to go up half a percentage point and the two year yield? Right? Is that a function of GDP growth or is that a function of FED movement? It's a function of real long term GDP growth. I think inflation, there are secular forces that keep inflation, you know, pretty well contained in the two percent range. It's really long term real rate of interest, you know, is that

moving higher. We're not really seeing any evidence that that's moving up. Productivities stays pretty is staying pretty low. Labor force participation is only going to keep heading lower as we're an aging population. So if the Fed actually takes real interest rates, you know, close to that one or higher percent level, I do worry about then, is the economy's ability to handle these high real rates. I'm not

sure we're there yet. We don't really have any real rates from the FED reserve yet on a on a real basis, um, we're still incredibly accommodative prayer. I think something a lot of people exploring right now, including common SAX and yourself, is whether they Fed interest rate picks above where the market sees the interest right Pakingum, where

are those two respective things right now? As far as you're concerned, Yeah, I think the FED has been suggesting now for a while because the UH, the the SEP or or essentially the dot plot has been suggesting that the fair in twenty mainteen is going to go above neutral. I think the rates market is really going to struggle to price that in because you know, a year from now growth could be slowing down. Um you know, we could have interest rates rising as the Treasury issues significant

amount of supply. So I think the market struggles to price that in. I also worry about risk assets if the Fed moves away from the narrative of normalization. To know, we're tightening and we're going significantly above what everyone believes as neutral rates, how to risk as its react in that environment. This is exactly the conversation I had yesterday with JP Morgan and Bob michael on the asset management side, that it's not the ten year. He's looking at the

two years. And at the moment, quite clearly, you're not really incentivized to take duration risk because the spreads like fifty basis points tends over twos and even less if thirties over tens um credit risk and the incentive to take credit risk it's really going to be hit if you get that to your note up to three pc?

Is that your base case prayer that we do get that to your note up to three So I guess it depends on if the economist to me thinks yes, the strategist in me, because you know historically the FED does go above neutral. The strategist in me worries about how financial conditions tighten and the fact that we have for this time in the cycle a significant amount of treasury supply than the market has to take down at the same time when global interest rates might be rising.

So I do worry about the fedsibility to get two more hikes this year. I think is doable. When we talk about next year, as we're talking about going above neutral in an environment where interest rates are rising, I think find out the tightening financial conditions will probably prevent the FED to take interest rates that high. Do any of our listeners get a real wage increase? Priamiser rates up, inflation up. I don't buy for a moment that anybody

is supposed to get a real wage increase. Yeah. Well, what we're seeing in the labor market is a very bifurcated labor market. So you will see high wage increases if you're in the group of people where there is

a significant skills mismatch. For a lot of US I think technology, um, you know, I think all of that keeps wage real wage growth very low at at pretty low levels, prettymis with Thank you so much the TV Securities Walter Pisk working with Rich Greens on the bt I G has just been absolutely brilliant on staying with the Apple story once again through thick and thin. Oh right, now, as you mentioned Walter, the hand ringing going on. Is the legitimate worry over iPhone legitimate or is it just

another bout of worry. It's worry we're talking about this quarter. Every quarter there seems to be a different worry. And you know antenna gate and there are well all the different types of gates that are out there, right, so the but you know, going, the concern in guidance is the new one. Last quarter, the going in the guidance consensus was sixty billion UM. That was obviously too high. People were too excited about the sp mix and that number came all the way down to sixty billion in

the stock um still performing well, outperforming the market. So here we are again worried about what the guidance is going to be for the June quarter. Now, in terms of the iPhone UM ten, I think the concerns are just way too high. Like some of the data that we're getting from the operators is that you know, people are buying this product and actually the market share may have increased from month to month. Certainly the eight is the thing that's selling more, but not the ten. Is

this horrible phone that no one wants to buy. The bigger issue is you had analyst at the end of last year, you know, talking about superside. This is the next supercycle from the iPhone six and like augmented reality is going to drive these masses phone sails, and that's just that's not the case. Like Apple is not that human bust cycle that it was before. It's it's all coming down to how old your phone and are these

replacement cycle is going to stop elongating? Are the upgrade rates of the operator is going to start going up? That's the issue. Well, this is great function on the Bloomberg and I'm sure you've used it before. It's e r N and you can get the earning surprises for any given security on any given equity across most of the planet. The last time that Apple actually missed earnings estimates on any given quarter, you've got to go back, I think all the way back to Q two sixteen.

Q two sixteen is all the way back to QT sixteen, and before then you've got to go all the way back to Q four. It is just really rare for Apple to miss earnings estimates. Why do we do this every quarter? Walter? I mean, there is a huge company, right everyone, It's broadly owned, so there's obviously a tremendous

amount of focus on it. But ironically, the work that's done to try and figure out where that guidance is going to be probably is a bit lacking in some cases, and there's a lot of data points that people react to. I mean, you get a number of different suppliers that may or may not be losing market share with Apple or coming out with with estimates that have been revised on a weekly or or a monthly basis, and then

you have analysts reacting to it. I mean, the approach that we try to take is looking more on the demand side. Where are the end users right now in terms of how old are the phones that they currently own, and what are the operators telling us in terms of

those upgrade rates? And and there's reason to be more optimistic now than we have in the past, meaning that it sounds like those upgrade rates are not going to continue to decline, you know, as we progressed through and there was already some evidence of that in the A T in the Verizon numbers. That are the companies that reported last week in terms of those upgrade rates. So well to the suite, that could be the capital term

program as well. What's your base case for what we get from Apple on on buy banks and boosted dividends and the like after the tax county. I mean, I've always looked at this in terms of they're tremendous, They're they're they're generating a tremendous amount of free cash left, so forget about the cash that's already on the balance sheet, and and they can spend ten billion a quarter on

sherry purchase. Now, if you said everyone's talking about this net cash here, I mean that you take your hundred sixty billion of net cash and you bought a bunch of stock back. If they bought at the stock price today, you'd eliminate the share account, right, So you'd add about three dollars in earnings um just from that. You know, that type of significant event in terms of sherry purchase. I don't mind if they do it on a regular basis,

so they increase the dividend. I mean, this is a way that that you take what is more normal and recurring lower revenue growth and leverage the into higher higher earnings growth to our basis, good base our base case, our base cases again is ten billion a quarter. But if they want to do something extraordinary above and beyond that,

then obviously doesn't have a huge impact to earnings. So here's the question I've never asked, because once again we're handering and if you're just joining us Walter Price with A with B T I G. The world's gonna end as we know it. But we never talk. And this is if a one to three about the malleability of a given company's income statement, which is that the margins are there, and there's dynamics Walter within those margins that can be S G and A can be manufacturing processes

and the rest of it. How malleable, flexible, adjustable is their income statement? My answer is it's got to be more valuable than anyone's out there. Well, there is some malleability, but I think on the R and D line is an example. UM as far as please you know what they're investing in future. I mean, that's that number has

been outpacing revenue growth. Right. They're spending more and more on R and D every year, and I think what investments are hoping for that is that that will at some point, you know, yield a new product that will help us. Okay, stop there, this is too important. Why do they need a new product? I mean, I think people look at the iPhone business and if you're bullish

on the company, say, look, it's it's it's um. We might not have these growth years again, but you've got a base that's going to come back to you every couple of years and continue to buy the phone. So if we'd rather not have three or four percent growth and we'd rather have double digit growth, you know, we have services out there as a as a business that a lot of people talk about. But new products are

other ways that you can accelerate growth. But Tom the other thing on margins that that's interesting in terms of the malleability of an income statement. If you remember a decade ago or maybe even longer, you know, when Motorola and Nokia were the top dogs in this space in terms of devices, they would struggle to maybe get to

ten percent operating margins. We are so far above what the perception of the appropriate margin is for phones relative to consumer electronic business or even other you know, path leaders in this space that whether it's up or down twenty or thirty basis point is the is missing the bigger picture in terms of how high these margins are. And why is that? Because people come back to these products every you know, every couple of years, and they're

very loyal to the brand. Well, so I want to finish up by talking about the multiple and talking about the services business that you just briefly mentioned. And I don't think many people outside the analystic community that you lead um quite aware that it's now the second biggest source of revenue for Apple. It's coming from the services

side of the business. What does that mean for how this company evolves over the common years and your mind, Walter, and what does that ultimately mean for how we value this company? So, so what it really means is you have this It goes back to this concept of a loyal customer base. I could pitch the fact that their their phone business is a recurring revenue business that you're not going to go to Android when you're ready to

replace your phone. So you say, okay, I've got this loyal base, Now what else what other types of revenue can I extract from them? And services becomes that, So it's going to ultimately turn into a more of a

recurring revenue business. Like we look at wireless operators where there's a hey, I've got x number of users, let's call it a billion users, and they're paying me X dollars a month on their different service is that we're offering, and we're hoping that we can take that r POO higher or lower and and that we grow our overall base. And if you start looking at the company in terms of that a recurring revenue stream, investors are typically willing

to assign a much higher evaluation on the company. And you know, up to this point from evaluation standpoint, Apple is traditionally traded at discount to the market. But recurring revenue stream type companies should get a premium to the market evaluation, and that would be the ultimate goal. Please, we're a one, I believe, and again that's that's not even assuming that they can they can get a premium to the market. We're just talking at market type multiple walters.

Thank you, so much love to get you and Rich Greenfield on together again. We did that, I believe a year ago. That was just lights up. It was great. We're gonna do a tangent here and talk about a company that I'm sure many of you have looked at before, some have owned it, some of not. Christian Melick with us with JP Morgan Casanova in London and Christian it is. It is a company that defines for me the word enigma,

and it is British Petroleum. For the last ten years the total return is under five For the last twenty years, the total return is under five percent. How did they get away with this? That's great, Christians tent and thanks for inviting me on the show. And uh, you know you you use a very British term enigma to describe BP, and I think you know, we're sort of zoom out on BP and look at the history and look at

what happened on Kondo. You could argue that BP has gone through several inflection points, and in fact, you probably they want to use the word inflection to too strongly, given they've had to through several both in the context of having to sort of get through the condo restructure of the business in order to be able to source the funds for paying the condo, but equally through a through a down cycle and having to sort of restructure

again in terms of recalibrating under lower oil. And I think what's interesting is just seeing, you know, b piece to come out of this in terms of these two tracks and Macondo track and the the sort of the the industrial track around around the down cycle, and and the way it's coming out is I think there's quarters in some ways symbolizes for them this inflection around the condo finally being behind them and also being able to

deliver a significant cash uplifts through not just restructuring under lower oil, but all the projects that they put through and what it means for free cash flow. It's finally coming together for them. Um. And this is where I'd come back to you and say five percent is probably the right way to think about it. Give them the value destruction through both will happened in the though and then the down cycle, but that as still as their cross to therefore generate a lot more value game forward

having learned their lessons. I just want to know where they're going to maintain the dividend. Yeah, that's a very fair question. In some ways, that's the way we pivot our bike case on BP. It's all of our cash break evens. What price can you do? What price can all price? Can you pay your full cash dividend? This is the first quarter where we've seen a total shooting of the lives for BP. They've they've basically come out with a cash break even in the mid thirties I

thirty five dollars to pay their fore cash dividend. UM. The trending on cash breaking user forul BP is best in class, from sixty dollars last year to fifty dollars this year, to fourteen next year and then below forty twenty. The average break even for the sector sits around UM fifty dollars over the next few years. So you're talking about it, sorry, just to break in Christians, just some people understand what you're saying. When you talk about break given,

you're talking about the actual price of a barrel of oil. Yeah, exactly, Okay, Because it's all persons which BP can pay their dividend plus capex right now and right now the dividends five point so at these different price points, this is the ability of BP to maintain that five point three current dividends exactly, pay all your dividends and therefore understanding what all price. That is important because if they if for this fall price, they still can't pay their cash dividends,

you've got a problem. When in reality they're really in the money so to speak, this quarters, all they need is thirty seven dollars a barrel there is for them

to pay all their dividends and their capex. So that cash neutrality is a leading indicator for BP that you know what, having been on the back foot and behind the behind the piers in terms of the condo and calibrating on the lower oil, very strong refinding, fantastic result in the upstream which is no no coincidences, all these projects coming online on much better margins with also managing.

Can you put that all together? All you needed thirty five dollars to pay the dividend, which is a testament of peace ability to recalibrate and in folks, you know, to be fair to the long term mediocrity off the mad of early two thousand and sixteen, they're up six pim twenty six per year. Right, Well, I've got to ask Christian how much of that is BP. How much of that is oil? And you've got to get us

about a mission. Yeah. I mean, look, I mean i'd say two thirds of that soil, a third of THAT'SPEF. I don't want to be too cute around around the mix. And I think BP has underperformed, and that's mainly due to mcconda having been raised in terms of costs and also still being in a penalty box in terms of perception around being able to deliver a proper cash flow uplift on all the PLW projects. So this porter was crucial in terms of getting out the penalty works to

prove that it's not just the your price. Underlying cash flow for BP is best in class. For disappears this quarter because you're going to go here, But just to be clear here, you're saying this is a new BP. Absolutely this we're entering into a new inflection for BP, which is the conda behind them, new projects coming online strong, refining the stars of LINING. But not just in this

sort of two month three months. This is our long term trending where having been out the money in terms of paying the diffence and now massively in the money and moving into best in class. This has been one of the Christian Thank you so much, greatly appreciated. This morning with JP Morgan Kazanov, Christian Mayleck in London and we said good morning to Mr Dudley and the people at British Petroleum. 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