M&A Volumes Peaked in 2015 Says Bory

The budget process in the United Kingdom, John, seems so different than over here. What's a distinctive feature from the lad from Coventry. Well, it's a parliamentary system and I think it's a lot easier to execute the budget in the United Kingdom than it is here in the United States. For one, I mean there's so many people that have told me when I first moved over here, when they reduce the budget here in the United States, it's a little bit different because it takes a long long time

to actually get any kind of approval. In the UK, you have a majority in parliament, the chance to introduces the budget, and it's kind of just done. You accept what comes through and then that's it through the term of parliament. Very good one, and then they redo it

the following year. Well spreads are in I mean, you know that's where we are they going to deal with that in the United Kingdom and EVERYWHERELSE, Why don't you bring in our gentleman from Wells Fargo, John George Bori, joining us now of course to BC Securities Global Equity strategists on on the market. George is great to have

you with us on the program. Looking at the situation at the moment, tom as I'm looking at the markets, I'm looking at a situation where things futures are positive at the moment by about sixty eight points, futures up by about six or seven points. The story for me looking at the situation in the United States is whether they get tax reformed done? Is that going to happen? And it's it gonna be the bill that we connrety see. Yeah, thanks,

it's good to be on the show this morning. You know the tax bill, you know it, something is going to get done. People keep saying that. I think it's been repeated over and over that certainly our firm view and that's what we expected. We don't think it's sort of what is exactly proposed today. You know, we're going through the process of iteration between the House and the Senate.

Um what seems very likely. It's it's sort of a pro it's a pro business tax bill, likely to implement meaningful tax cuts for corporations, and it's it's attempting to incentivize companies to both bring money home through repatriation and reinvest that money here in the US. UM. You know, I balanced that should be a good thing, but the question of whether it ultimately gets done is probably on the other side of the ledger when you think about

what's happening with individuals. That's my fault. We have a surveillance correction here. I told John Farrow's HSBC, and I was I was looking east wells Fargo is like the stage coaches, John, wherever you go there have age coaches and it's far far west in San Francisco. But HSBC is farther west across the Pacify that you have to

get to Asia's home. Yeah, completely went down in flames on that excuse, right, No, I mean, and so I think tax reform becomes absolutely pivotal for for next year and in the corporate bondmark in the area that that I focus on, you know that that becomes a very big issue. So what a company is gonna do with a that that tax cut and then ultimately with access to sort of this money they have sitting all over the world, and our basic expectation is they're going to

try and use it. They're gonna lever up that saved earnings from a tax cut. They're gonna lever up that cash that sits overseas and in various jurisdictions, and that could drive a little bit of investment here in the US. But I think what it's really going to drive is a big increase in M and A. UM. You know, they're they're a whole. That's fascinating because I T and T is fronts and cents of worldwide. Today. A big conversation about whether that deal was going to get blocks.

We thought this administration would have the doors open for some big deals if these companies bring that money home and want to do big M and I Are you confident that it gets done well? I think certainty for for tax reform is important, and I think if you look at m and A activity over the past year. Uh, it's down about from the prior year. We peaked in M and A volumes back in two thousand and fifteen. Sixteen was a pretty good year as well. This year

has been a notable slowdown. And I think there's there's sort of two issues at play. One is political, as you mentioned, and that has a few very deal specific issues attached to it. But the other issue is is really just what is your tax structure? A lot of a lot of um M and A deals are are driven around how how tax the tax structure sets up

for the deal. Once that's clear, then you have a lot of industries, several very big industries that have a significant amount of pipeline um M and A activity that I think ultimately comes through George Boy this with Wells Fargo how to credit strategy. George, Wells Fargo has got a huge platform, a nationwide platform. What is the analysis of the entire team, your credit strategy, your economics of

John Sylvia and the rest. What is the analysis of this tax cut bill if it actually goes through, does it really does it help business for you? Forget about the middle class, forget about John Farrell forget about me, forget about Rich Truman. Does it help businesses? It's called I think on balance it should, and I think what it what it can do? Um. You know, a material tax cut to corporations improves cash flow, and then it really becomes what do companies do with the cash flow?

I think the actual economic impact will be modest, you know, a few tents of a few of a percent over a couple of years. UM. That's sort of the actual economic impact. But corporate activity should actually kind of kind of pick up, and I think that's where you could start to see, you know, maybe the momentum impact of

of of a tax change. The The other issue is it does incentivized companies um to spend a little bit more on capital spending that is a mild positive, and to utilize kind of these big pools of cash that are that are sitting all around the world. And then the last bit, which doesn't really I didn't get a lot of attention, UM, is it's it's intended to pull

money back to the US. A corporate tax rate of for America makes the US corporate structure very competitive versus the rest of the developed world and even some of the not so developed world, so that that low cost base could actually kind of pull some investment into the country.

To be fair, it is a redistribution of taxes, and so you know, sort of that's where the economic impact is a little uncertain because the individual doesn't benefit as much as you know, maybe you know, the economy would rely. I don't know what your males like, John John Farrell, My male's brutal in this vicious and was sent. People can't stand it. It's a top to a bout them every politics. People are really upset about these two proposals. I just think looking at the corpora sana things. George,

you mentioned the competitiveness of US companies. When I look at US multinationals, I don't see a competitiveness problem. They're dominating pretty much every sector therein So what's the argument now that we need to come down Why? Well, I think it it helps improve the competitiveness of the US.

It actually draws capital to the US. It creates a competitive capital structure on an already competitive capital base, and I think that you know, that ensures that you know, US economic competitive competitiveness kind of persist for the foreseeable future.

And I think there's Also there's a much bigger rotation here that governments sort of around the world have been evolving to and that's you know, less taxes on corporations and more taxes on individuals, and the US is trying to thread that needle, if you will, and take it one step further. How much price down should I enjoy before I sweat? Is it like price down of a year's coupon, price down of two years? What does price down become painful down? Yeah? Yeah, pain you know, I

think you're talking about price down yields up. That would be true. That's very good, John, John Ferrell Maker, Michael Barr. This is too complicated for we just got a bump. When the pain set it, I think it depends on the pace of the pain. You can you can be you know, it's sort of cut by a foul, you know, death by a thousand cuts. You know, sometimes it hurts a little over a long period of time versus one fell swoop. And that seems to be the environment we

we seem to be moving into. We're not quite there yet. So when you look at the front end of the curve, I think it's a good good example of that. It yields have crept a little bit higher. Believe, price went down. Price went down, and and you are seeing some dislocations. I think, I think hot some of the dislocations you've seen in the high yield market over the last couple of weeks are a function of those higher yields and lower price. Some dislocations, as George Bori talked for, somebody

just gave up their bonus, some two institutional portfolio. George Bori, thank you so much for spreading the glee on the Gloom. He is with Wells Fargo head of Credit Strategy. We greatly appreciate his attendance. It is a classic book. And John Farrell, I'm sorry to say next year will be thirty years on Jeffrey Burnba on the outstanding Jeffrey Burnbaum with the outstanding Allen Murray showdown at Gucci Gulch. Steve Bell has never worn Gucci, but he was there and

he's with us now. He's with a Bipartisan Policy Center and was with Senate Budget in six and is truly one of the wise men of Washington. Steve Bell, what was it like two weeks four they got this thing through the House in what was it like. I think it was great enthusiasm. Um. Everyone knew that the votes were there. You had bipartisan support, is support from the President of course, um. And I think there was a

really upbeat mood. Uh. When you get something bipartisan like that, you have Republicans and Democrats and the executive branch all on the same page, you really can do something historic like act. And I think that's the big difference between now and thirty years ago. Within this, can you predict with your immense experience experience of Baker, Dashville, Mitchell and the rest, can you predict the next four weeks? Yeah,

I'm going to give give it a shot. Actually. One, I think they're going to run into a lot of problems on the floor of the Senate with the tax bill, over reasons that not many people have mentioned. One, the likelihood that this will increase the deficit much larger than people expect. Number Two, I think they know that if the deficit estimates go up, it's going to make it very hard to pass all the spending bills that keep the government open just three weeks from now Tom eight.

And at the bottom of it, there are elements in here which seem to favor um real estate high income UH recipient high income earns, and the possibility that the fact that certain provisions may advantage the real estate industry could make Democrats start to talk about the president's empire in real estate again, as they did last year. So I you know, I know that we'll solve state and local in some way, will solve the mortgage interest deduction in some way, So we'll take care of those things.

And that's what's been in the news. But underlying all this are these generalized bears. What is this going to

do to deficit and debt? Because we have a debt ceiling that's about ready to hit us probably early next year, and you know, if we get if we get to a trillion dollar deficit estimates, which I think we will for f y n um, that's really want to bring people's attention back to that, Steve, Steve, let me bring in John Farrell, who wears glasses that look like Howard Baker's from another time, and Steve about help me out here. What's the rush? Oh, the Republicans need This is really simple,

and it's really kind of funny. They are frantic to get something done, so they don't really care about what people say about Roy Moore. All they want is to get this done before if More loses in Alabama, before his Democratic UH opponent would be seated in the Senate, that would be about December of the rush. One, we got to do something because they're frantic. Two, we have to do it before December because we'll lose one vote in the Senate, which is critical. And number three, we

have to be honest about this bill. This is a bill that was designed to cut taxes for business and admirable goal, but they said, you know that's not going to fly in this day and age, So we have to put in some stuff that looks like we're helping the average worker. And that's really, in my view, strategically how it was concocted. So I think for many people, they're already looking ahead to the next election, the midterms. What are the consequences if this bill gets rushed through

in the midterms next year. Well, Number one, Republicans think it will really enhance their chances to retain the House and Senate, especially in the House, whether there are there are some questions about retention. Number two Democrats and we're here to buy pars and policy center have active democrats as well as active you do have democrats. You have democrats in the building. Oh my goodness, Yes, surveillance break exclusive.

And one of the very best of them said to me, you guys think you should pass this because it will help you in two thousand eighteen. We think you should pass it because it's gonna help us in two thousand eighteen. And what do you think, Well, I think it's going to help the Democrats. I think this bill, by the time it's cost it out next year by independent people liked a Congressional Budget office, by the time the distribution tables,

who gets how much benefit from it? I think this will lead to a lot of nice thirty second ads and a lot of social media adds. So, Steve, when these senateces go back to that constituents this week, does the penny drop. No. I think they have got talking points you will get and you saw the talking points on the House floor. You're going to get a thousand dollar tax break. I promise you. They will not say

that that tax break is going to expire in seven years. Uh, We're going to have a cut for business and we have thousands and thousands of new jobs. They won't say we're already at the lowest unemployment in decades, so they will be able to get away. I think this week, with people's attention really devoted to Thanksgiving and stuff, I think they'll get away this week without a lot of kickback. I think two weeks from now, UM, when we know the results, three weeks from now, when we know the

results of the Alabama election. UM, when we have had people really take a look at this bill and they read editorials in the papers saying, hey, we'll get a big tax that. Like you said, it's so and so and so and so, I think then the erosion will start. Say. Something we've explored on this program in the last twenty four hours is the politics of the campaign trail and the economics that underpend the win of President Donald Trump. We seem to have a big divorce between that and

the policies they're executing down in DC. At the moment, it does not appear to me that this tax bill would address the inequality that came up on the campaign trail. Does it address those things for you? Oh? No, I think when you take a look at some of the details. UM. For example, if you're a graduate assistant you're making twenty dollars a year, you know, to be a graduate assistant, and they forgive you your tuition very now, tens of thousands of people do that. Now, under this bill, you

would be taxed on the tutition benefits. So let's say that tuition was forty, you would be taxing at forty, which means you wouldn't be making dollars for your work. Okay, well, Steve Bell, let's take this to Washington. Good morning, nine and nine one FM, Washington. Let's say that graduate assistant is it American University? Killer school outside Washington. A lot of people good, good morning, David Gregory. A lot of people go there who really get things done down the road.

Is this just a mean spirited idea? I mean, you've been doing this since time began? Where does this what's the right word, John, there's a British word for this, Like, where does this this mean spiritedness come from little tenC weency thing to the next tenC weency thing? Is this original? Oh? It's original? And and and frankly it's because they need the money. It's just that, come on, well, what are they going to get out of a graduate student of

American University Coast to coast a couple of million bucks. Yeah, not very much. But I there are provisions in here which make you scratch your head. I agree that you wonder who is mad at the university's Well, apparently somebody on the Senate Finance Committee or this Finance Committee staff really doesn't like this break and doesn't like perhaps, as

you said, American University. So I I've got to tell you that one has caused a lot of discussion among the universities because he could have a significant impact on gradual resistance and graculate education. There's some other things in here. Let's take a look at this so called transfer. This is a crazy thing. You buy a piece of art for five million, now it's worth twenty. You come to me and you say, Belle, you've got something worth twenty.

I want to trade you even under the law now you're from five to twenty, but you weren't taxed on it. May we just considered ten transfer. There's a language in this bill. There's language in this bill that prohibits that takes away your ability just to do that trade except

real estate development. That's interesting, isn't it. Steve, you gotta leave it there, Steve Bell, thank you so much so Bipartisan Policy Center today with US right now, Tobias Levkovich of City Group, and Tobias, I really want to go to the wheelhouse, which is these city groups surprise Index. It's actually very cool. A lot of people outside City Group follow it. What what does it say it right now? UM?

So the data is actually pretty strong. If you look at the City US Economic Surprise Index, UM, it's kind of nearing five year highs. That gets me a little bit concerned that it could roll because there is some inherent mean reversion to the model. UM. But I'm also hoping the intellectual capital comment was not directed to me. It's very much directed. It makes the boss don't worrying about that going into next year. It's kind of shut your eyes and hope for more from what I'm saying

in some of the forecasts on SMP year. So I think it's, you know, a question about what you think the concerns around FED policy, for example, relative to economic trend. In other words, if economic trend is actually looking stronger, and most of our leading indicators suggest it is, then what's the pace at which the Fed moves and do you kind of cap off the opportunity. There's also some element of we're bringing forward some of the next year's return into this year as a result of, for example,

tax policy initiatives to bias. I think a big thing for money is waiting for that late cycle behavior that melts up in equity market. A lot of people thought it would happen this year. We've not seen it. Are you starting to see signs of it? At least that we're at that late cycle mounts up phase in the in the bull market, So we haven't really seen signs of in terms of big money flow coming in, which

is where the meltuple would come. We are seeing our for example, are panickyphoria UH index or model which tracts sentiment in a variety of ways, starting to edge higher. It's still in neutral territory, but it's the upper end of neutral. You've said, that's sending someone the yellow caution sign at the moment, but not a red flag quite yet. Um So I do see in that sense, but not in the money flow. And I think investors are caught.

We refer to it as being caught between two very powerful forces foam O, the fear of missing out, and foam move the fear of messing up. So they're there, they're you know, they had a nice run, they're little do overstair welcome concern kind of question pops up or did I miss the run? Do I come in now? And then it comes down and I mess up? Well, let's do the look back. But now twelve months trailing return SMP return NASDAQ four could almost round it up

to return. I've been told that it's a single digit world. I'm not observing that. When does it become a single digit world? So what we suspect next year? But part of it is also we've had double digit earnings growth in the first to three quarters of the year, and up and down the income statement, you've got the same kind of constructive revenue down through the margins. It is

happening that way. But it's also momentum driven. So you're seeing, for example, you sided number of statistics, but if you look at momentum driven factors, you're probably up thirty seven percent. So it's not across the board. Certain areas like energy, telecom you've lost money this year. Um. What is fascinating is if you look at the constituents of the SMP. A lot of people have talked about faying. For example, about fifty percent of the SMPI constituents have outperformed the

SMP this year, so it's a very widespread rally. It is not just about four or five names. It's speaking of momentum. To Bus, it seems to me that this year, at the beginning of the year, if I'd said that's in a bubble, that's in a bubble, that's in a bubble, and you bought the bubbles, you've done pretty well this year. Someone might have said the fangs were in a bubble, You've done well. Bitcoin ev we won't go that to bus,

don't worry. I could have said that was a bubble for the last five years, and you would have done beautifully this year. What do you make it the momentum that we have seen through seventeen and how strong is it? So there is very powerful trends and technology that are driving some of the names that that you've meant that you're highly were hinting at, and we have you know,

just think about what's going on in technology today. You've got cybersecurity, you've got a cloud, you've got mobility, you've got um the little botics, automation, virtual reality. I mean, there's so many different powerful trends that are forcing companies to spend and that online versus brick and mortar type of shift that's been going on because of convenience, sitting at home and your jammies and ordering stuff to bias. Nobody cares fills up in Montreal saying asked to bias.

There's thirty one teams in the National Hockey League. The Halbs are thirty in goals per game, twenty ninth and goals against in power play. And I've never seen a team that is that bad. When do you take over as coach? And I'll tell you as general manager or president hockey operations any day. I apologize to my city employers, but I'm he's gone. Tobias is so gone that I

can I can handle people yelling at me. But Mark Bergeman has a lot of answer for the mirror mortals that are non Canadians understand this is a national disgrace. I don't think they quite understand, and I don't think I don't think that justin Trudeau socks can solve it either. Well there would be that as well, Phil. Thank you so much for emailing and love to hear from you. And there's your Canadians UH Montreal Canadians review with Mr Levkovich.

Assuming tax overhaul passes, We just had a whole conversation with the pass Leftovic City Group chief US equity strategist on the markets without discussing politics in d C. Is there a reason for that to bias? Look, the if you get tax reform, you could add nine ten to earnings estimates next year, so it does have a real market impact. Question that you'd have to ask yourself a little bit is does the market give the same multiple to tax related earnings as it does to operating efficiencies

within companies? And that I think is a fair one. Um. We we've we wrote about this early in the year that we didn't think the market would give you quite the same multiple for the tax benefits. But again, it would be very instrumental to the earning comparisons. You reverere you've got the headline tax rate to bus and then you've got the effective tax rate that these companies already pay.

So talk to me about sector to sector where the biggest difference is actually going to be made effective tax right now versus what they'll pay perhaps next year and beyond. So if you look an aggregate for the SMP five hundred tax rate over the past couple of years have been about effectively and if it drops to that's the seven point differential um we've we have already in our estimates for next year rate, so about four dollars of

incremental learning capacity already built in. But you get about ten dollars more if you went down to certain sectors like financial's regional banks for example, clearly very uh exposed. Some other ones utilities which are very domestic would probably have to give that back in the rate base, so they wouldn't really capture the benefits of it. So it really depends you gotta go industry by the industry. The

big multinationals clearly don't have as much exposure here. I don't want you to comme in a city group and get you in trouble with your team. But is a general rule, I believe we have curve flattening. What does that do to finances? The tobias money aside. So clearly the two things that you watch very carefully in the banks would be bond yields in general and the deepness

of the curve, the defferminent stock price performance. UM. There are a few other things going on, less regulation, UM, you know, the the capital return stories of the of the banks that also generate UM so interest. I think the biggest story that is not really being told in the banks right now is that we're going to see a turn in the fourth quarter and to pick up later in the year, later next year UM into the

commercial industrial loan activity. There's a six quarter lag between the senioral and officers survey from the Fellow Reserve Board on C and I are commercial industrial planning standards and loans, and I think that's going to be the kind of growth story for banks that aren't necessarily being captured. But you're right, the curve does matter. Well do you have

can you give us a deep's number? I mean, I know you're not bond guy, but it's I mean, Mr Gross is talking tensions at two tens spread fifty forty five basis points. George Borriot Wells Fargo agrees with that. A lot of people don't do you have a number? I don't look, I don't have a real number. Where does everybody get nervous? Because it's hard to really get

into everything. But but I think as you start getting closer and closer to flat, if it's twenty five basis points twenty, people are gonna get very nervous about economic conditions, and the FED may have to kind of manipulate the longer end of the curve a bit um. You know, you break a little fifty, people will start to worry about twenty five. Break below twenty five, and everybody's going to be terrified. I mean I should point out that Mr Lefkovitch and I have been through this a few

times before. Let us talk about hydrocarbons. Have you made a you're putting together your two thousand eighteen view, Excuse me, we're sort of range e, but I would say almost at the high end of range. Can you, with your terrific commodities teams say a bottom to the oil market finally at five zero? So I tend to defer, as you know, to add Morris on this and commodity team they're they're a little nervous that oil prices have run a bit too high right now and that there's some

pullback nearer term. But I think generally speaking, they're still thinking that we can get into those sixties UM on a W T I basis, But you know, think of it this way. UM as you get recount growth rates start to diminish, which we've already started to see. It's usually when energy stocks start to pick up, the market starts to sense that their summary balancing coming, especially if you think about jail projects and have three year lifespans.

So if you're not adding lots and lots of riggs, eventually the production comes off and you get some balance. So I think that's more the story and the stocks. Let's less about the commodity. So let's let then go to what's kept us going here? And I guess it's it's I don't. I'm not as cynical as to say it's financial engineering, but diviting growth in share buy back

have been a huge part of the story. I know Zero has just that great chart where they go the percentage of the market move that's been from share buy backs. Have share buy back has been the strength of this pool market. You buy that theory, No, I don't. I think what we what we've actually looked at is what's what's the change and shares outstanding as opposed to how much money is being spent on bibacks. The peak here for buybacks in dollar terms, for example, was two thousand seven,

right before the market's corp. Interesting. You're you're you're looking at the unit change, how many shares outstanding are there? And they've been coming off by about a half a percent to maybe one percent a year the last five years. So if you think about earnings per share, the contribution from less shares outstanding is like a half a percent to the earnings growth. So that's not really the story. What it is doing, though, and this is valuable as well,

is it's it's removing share creep. So normally you would have seen two, three, maybe even four percent incremental shares outstanding through either share grants or bad acquisitions using stock. So they're removing that, if you like, the dilution that would have occurred otherwise. So there is value to it, but it's not really contributing turnings. It's preventing the delution of the earnings. How distorted? One final question, how distorted

is the do the new vogue? You know, it used to be there was Buffett with an expensive share, and now the new vogue is we're never gonna split, which you know, it's fine, I get it, but does that mean the DOU is You know, it's what we follow twenty three thou thirty futures up a hundred eleven. Okay, but is it as distorted as has ever been? Well? Again, we tend to use the SMP five hundred more because it's a broader index UM and the you can do

equally weighted chairs as well if you wanted to. There's a value and arithmetic UM. So we don't focus that much on the DOW. The doll was a residual for us. It's less of the determining factor. We don't do earning his estimates for the DOW because it's just too limited. When you have thirty names were you're quickly on General Electric and the industrials. I know you're not gonna comment.

I won't comment on the company specifically, but um, we have We had been earlier in the year overweight capital goods were kind of neutral. Right now we think selectively. There's some really good names. Industrial activity is picking up and like this day strong. You know, my background was a machine reality, so I kind of like the old cyclical names that I used to cover UM. But some of them have run pretty strong already, and we've got to be a little bit more careful. I've been through

this whole interview folks here on the surveillance Internet. I've been looking at hockey News. I just did a word search Canadians and Lefkovich and maybe next week, maybe a couple of more losses they might you know, I'm open, Mr Molson anytime, very Mr Mailson, Thank you for listening up and come back this morning. Mr lev Cavechs with City Group, of course, melding equities into all the other things that we covered. 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 Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.