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This is an important conversation and perfect to start the second quarter. David Sowerby is out in Detroit with Encora. We're thrilled to join us today and looking really at mid cap, small cap and now on lovely are David, I think this is something everybody, including me, has wrong. Okay, I didn't buy Nvidia, Sweeney owns it. I didn't buy the other magnificent for whatever. But the answer is large cap over the last decades up twelve thirteen percent a year.
MidCap is terrible, lagging way behind Beloney. It's up eleven percent per year the Vanguard MidCap fun Why are midcaps so on, love David sowerby.
Tom I think it's because they sit a little bit in no man's land. You have small cap stocks that are trying to graduate to MidCap, large cap stocks that sometimes are on their way to mid cap. And if you think about as you position portfolios, the small cap manager is going to own names and continue to have conviction at migrate up. Large cap managers are going to migrate down in cap, and sometimes that exclusive MidCap manager
gets forgotten. That's why I like something like smid small and mid combined small and midcom.
I think about kelen Nova. I don't know where you put that. I mean, that's a twenty billion dollar market cap. Yeah, I have to spun off from Kellogg's because cheese It's Tom's, and we like cheese. Its here at seven we do, like Jesus, yes we do.
That's the official food of Bloomberg Surveillance exactly.
So David talked to us about a company like kelen Nova.
Sure don't don't forget pop Tarts and pringles of course, Well, of course they're growing internationally, Bottle creep and in both cases yes, and and Kellogg, the old Cereal play is having a good run as well. If you look at the Bloomberg Spinoff Index, it's up twenty five percent year to date. Over the long term, one of the best, if not the absolute best formula for unlocking value in that small MidCap area is to buy the spinoffs. And they're back on their on their treadmill again in twenty
twenty four. And that's why I think the ability for a small MidCap manager to outperform their benchmark is going to come buying spinoff stocks like Kelenopa, like Era Mark, which spun off it's its uniform business and now it's just food at sports venues, universities, hospitals. I like spinoffs.
In our great final four appearances, it looks great. Bloomberg Spinoff Index, Paul Sweeny bn SPI N b N SPI N is the index. It's on the Bloomberg terminal in your car and next to your YouTube remote control.
Exactly right, all right, David, So we step back and we think about this market here. The first quarter was just such an extraordinary performance and really coming off those October lows, you know, up over twenty five percent for the s and P five hundred. Do you get concerned that this market might be overextended here a little bit, not so much.
Over extended, but maybe that pause that refreshes. And even though the market had that ten percent gain in the first quarter, the median S and P five hundred stock the median was up about seven percent, So I think there's more room to go. You're able to find companies that are generating favorable free cash flow margins, growing the dividend that close to a double digit pace, and I think there's more room to go. Recognizing that, ever elusive, we will get that ten percent correction.
You just got.
To fight and grind through it because taking too much evasive action trying to predict it.
Feudal Crane ce xt currency printing presses.
I'd been to their factors was a rite of passage.
You went to Crane stationary and et you were bored. If you fell over, you'd fall into a vat and die exactly.
So, I mean, I haven't thought of Crane seext in a long time. Talk to us about that story.
Well, it's a spinoff from Crane, the industrial company that has one hundred year history. So what we're seeing is not just currency demand in the US, as the FED was on this twenty five to money supply growth rate, but we're seeing it internationally and there and there's more concern about fraud, so that plays into their ability to print currency and avoid fraud. And that's a global story, and it's a spinoff story as well.
Yeah.
I look at this, David, and it's a great bullmarket, and I'm going to take it off the what I call the kompor yard Denny Low of October two ago. What happens in a second leg of a bull market? I mean, you know, you're a trustee of some serious money. What's our behavior we should expect in this second leg of a bullmarket?
I think it's it's still that the micro is going to trump the ever concerns over the world is a more dangerous place macro uncertainty. Companies are going to grow their free cash at about fifteen percent in twenty twenty four. Valuations today for US stocks large cap and small cap, I think bode over the next three to five years to compound at a seven to eight percent price gain and in the dividend, and it's hard to beat that
anywhere outside the US. So I think continuing to migrate into US stocks and for those small cap stocks, maybe a little less money into private equity given the leverage and deploying that in small cap makes sense too.
David, thank you. A great way to start the second quarter. He is mister Sarby. David Sarby. He's a huge fan of the undefeated Detroit Typers. The closest ball Sween and I got to five beta Kap was a cliff notes.
Greek remember Greek one on one in the school.
It was like a one week course. Then you took Latin one on one and that was it. That was just because five Beta Cap was a great sorority. She's the real deal. Lori Calvissina, for years of credits we sent unto RBC, has delivered intelligence on something nobody wants to talk about, which is small cabs. Paul, you guys can explain this. Small cabs like every ten years they're in right and then they go on hiatus. Yeah, she's the smartest in the block.
There's no other way to put it exactly.
Lri Cavalsina joins us here in our Bloomberg Interactive Broker studio. She does a mill it in Lori Cavalsina is the head of US equity strategy for RBC Capital Markets. LOURI were up twenty five percent since those October lows. I mean, what's going on out there? I don't see earnings, you know, rising twenty five percent in terms.
Of looking at the small caps specifically.
Yeah, I mean it's just amazing.
So look, I think there are a couple of things. I think the big move in November December they were over sold. You saw it on valuation data. You were close to sort of recession type lows on forward pees in the space, and positioning data wasn't at all time lows. But back in twenty twenty two you had been down around recession type lows. So they were starting to climb out of the hole. I think when people were ready to put on the FED rate cut playbooks, that's what
sort of sparked the November December rotation. You evaporated those oversold conditions. I think where they sit today, they're due for a bit of a catch up trades. You've got average valuations three year high, but not all time high. On positioning. There's been some debate right about what the Fed's going to do and when they're going to cut and if they're going to cut, but it seems like we're still leaning in favor of that right now in the market consensus, So I think that's causing people to
look at them again. And there's been some stealth stabilization there right now, as many people are talking about it lately. The thing that's happening now right is that economic expectations are being revised up in a hurry. So you got the rate cutpeede and piece in place, You've got the cyclicality starting to develop. And if we get allows the unemployment rate, I don't really care because small caps tend to outperform around the same time the unemployment rate starts to move out.
Now, I just looked at a small cap called draft Kings. They took all my money on my final one.
It's my final one and right doing that.
But most small caps don't have thirty five people following them like the popular DraftKings. Is your world removed from the financial world because so few people follow small caps, so there.
Are fewer people. I mean, frankly, you know, just over start doing small cap in two thousand and seven, and I would I can't even calculate how long I've been doing it, but I think I did notice as ZSG really took off. I saw a lot of my small cap portfolio managers repurposed as ESG investors, you know, kind of move from an area that was struggling a little bit to a hotter part of the market. So there's a been a big etfhysation of the small cap world.
And you know, in terms of the au WIM that's there. But the active managers, you know, they're still out there doing good work. They really try to be out of consensus. They try to find hidden gems and I think, you know, there are some benchmark issues that make it kind of tough, right, But in general, you know, I think a lot of the small cap pms I see, you know, they are talked to. They just feel a lot of opportunity out there because frankly, there are fewer eyeballs on.
The space you mentioned ESG. How does that figure into kind of your work in general? How does RBC think about Yeah, you.
Know, I had a phenomenal associate. Her name was Sarah Mahaffey, and we spun her out I think in twenty twenty, twenty twenty one to be our ESG strategist. Okay, So to be honest, we've just really it became such a big thing it didn't make sense as part of my product really, and she was just doing a phenomenal job with it. So I really do feel like it's kind of its own world, the same way Small Cap was its own world for me back in two thousand and seven or so. It comes up less in my conversations
for general equity strategy. I think people who are going to incorporate it into their process have done it, and they've got their system set up and they go talk to Sarah because she's still the real, you know, sort of expert on it. But that's very different from maybe say five years ago, when everyone was trying to get smart on it.
In the US.
Right, it seems like maybe in the US it's it's kind of waned a little bit, whereas I know in Europe it's still the place to be. Where do you see opportunities here? I'm not sure if it's mark a cap, it's if it's factor, if it's sector, where are you seeing opportunities right here? Because a lot of folks are saying, poay, this market's moves pretty aggressively.
You know, Look, I make sector calls, I don't talk about them quite as much in my meetings the last few months. You know, we've been talking a bit about energy utilities recently. But the reality is it's mag seven versus everything else. And everything else can include small caps, financials, energy, healthcare. There's a lot of stuff that looks really interesting out there in your meetings.
And you're a worker bee and you're in all sorts of meetings where I'm sure people are saying, look, I miss this. I missed last October, I missed two octobers ago. Forget about nvidiing all that, LORI kelvisina. How do I catch up? How do I enter the market? You're not going to give me dollar cost averaging right right?
And look what I'm telling people is, let's start on why we missed it. What I think essentially happened in twenty twenty two is we had something really really close to a recession two negative GDP quarters any valuation metric and small cap or just general sentiment barometer. I can look at to recession type.
Without without the stimulus.
I think everybody's right, And you know, why did people feel so bad?
Right?
You look at the Michigan's Consumer Sentiment index, it went down to recession type loos or worse than a recession as inflation spike. So the misery index did what it does typically in a recession, but it did it because of inflation spiking, not unemployment spiking. So I think you have to look at recovery traits. Small caps are part
of that, cyclicals are part of that. Financials are part of that is kind of the plumbing of the economy, and you look for things that have these recovery aspects that still have some good valuations in them.
How about energy. I got wt CUD oil.
I look this week and it's amazing how x on is behind.
Yes, I filled up the ride this weekend. Then there's a sure three dollars and twenty cents a gallen. What's going on with energy?
So look, energy is a cheap sector. Despite the move, it still looks cheap, both large cap and small cap. If the oil prices continue to be strong, then we'll see the earnings revisions come. They haven't really yet, But I think this sector is one in inflation edge, and two I also think that it's just a different sector than five ten years ago, the ESG concerns have kind of fallen by the wayside. The dividend yield is the highest of any S and P sector, and it's also
very very high relative to history. So in an S and P five hundred world where very few companies offer a dividend yield and access and the ten year treasury, you can find a lot of that and energy if you're an income seeking in.
My theme quickly, my theme two years ago was a roll up, the great zombie roll up, and it can be zombies or frankly, can be quality companies. Is that's what's coming this year, as we're going to see a roll up a small cap in a mid, mid into large.
I don't know if you're you know, I've had some questions on M and A and if it's coming back.
You know.
One PM I talked to recently was talking about how the and the small k PM's all right, look at their portfolios end of the year. How many takeouts did I have? But one guy tell me it was as low as he's seen it in the history of his career, and so he's sort of wondering if it's coming back. The only thing that gives me a little bit pause in saying that it is is that I do think one of the things that pushes M and A is the idea that economic growth is lacking and economic growth
forecasts are picking up in a hurry. So I'm not saying he's wrong, but I don't know that the need to go out and buy growth is all that strong.
Lori Kelvistine to thank you.
Soone's terrific brief back to back David Sawerby and Lori Kelvisina, inspired by the surveillance scenes inspired.
I mean, it's a nut back there. And that's somebody who's this weekend.
Ian Bremer's smartest guy in the block. He stole from Bloomberg News. Emery Pakar who joins us now, who was definitive in corporate finance, and you know the crash and all that seven eight oh nine, and now is on the Turkey Watch for Eurasia Group and we're thrilled at memory in short notice could join us this morning. The shock of this election emirate and I look at Airdawan saying this is my roots. I was the mayor. Istanbul is my heart. But he's lost. Istanbul. What does it
signal for someone? Twenty two years on the watch.
Yeah, thanks for having me on, Tom, great to be on show. So I think it says two things. The first and groundshaking one is that add On and the AKP's dominance of Turkish politics is over. As you will well know that people used to call the teflon ardon right. Nothing bad stuck to him ever, including very bad economic circumstances.
But going forward to add On and the AKP will have to fight two cent nail for every vote that are down to thirty five percent now, which is roughly where they started when they first found the party in two thousand and one. The second point that I'd like to highlight is that despite more than a decade of political polarization, values, social issues, etc. At the end of the day, people are still voting with their pockets. And this was Turkey's version of it's the economy stupid.
What does he do with his new central bank team, with his i'll call a chance of the exchequer? What does he do to stop Paul what did you say, eighty percent inflation?
Something like that? Yeah, what does to do Emory to turn the.
Ship around other than a lira devaluation?
I think it sticks to the game plan in the short term. Right Treasury and Finance Minister man At Shimshek has been administrating the bitter pill in slow but increasingly harsher doses since June of last year when he came back to government took over the reins's economiz are. The Central Bank is working in very close coordination with Shimshek. We don't anticipate that to change, especially in the short term.
Ardon's comments last night also suggests that he's wedded to this economic policy rebalancing normalization effort, but he will want to see results. So if a don't had done better yesterday, Shimshek would have a much greater maneuvering room now. Adam will want to see results from summer onwards, once we've hit peak inflation and swaited around seventy five percent in May. If Shimshik doesn't deliver, then I think we're in a
bit of a tight spot from fall onwards. And in terms of what he will do, we spain him to continue quashing consumer demands, so it's very bad for the households and then selective lending to export oriented businesses, but a lot of SMEs are going to be hurting from.
This, so right, just give us a little history lesson here. How do we get to this point with the Turkish economy.
Let's see twenty eleven. Aard on Secure's re election as Prime Minister calls it my master period and starts banging on about the interest rate lobby and says high rates cause high inflation. I want low rates. A succession of central bank governors play magical realism, create these interest rate corridors, do backdoor tightening while loosening at the front the banking
authority undermines what they're doing. Fiscal and monetary policy don't speak to each other, and in the end Adam puts all the burden on very loose credit to keep consumer demanded going. You have that, especially on the back of the global financial crisis and the period that followed with all the qunitive easing, extra lease monte policies, negative real rates.
He got away with it for years and years and years until he couldn't and it really accelerated under the first executive presidency terms starting in twenty eighteen, when he got rid of all the capable policymakers in his cabinet, appointed his son in law to run the economy who proceed to sell more than one hundred and twenty five billion dollars in reserves to keep the currency stable. And that's where we.
Ended up camera.
That's a lot.
Yeah, in the time we got left and there's any ways to go here. But let me call us at around the US response. I don't want to do a clinic now. And how smart I am on Turkey, I'm not, but I look at someone like you, and that would be Sonar Kagopte in his wonderful book Erdowan's Empire was my book of the summer X years ago and his new book is Assaultant in Autumn is erediwan in his Autumn Facing Winter or it's seventy years old.
He just keep going.
I think you will find it increasingly difficult to keep going. Folks that I talked to in Anka and also in Istanbul who are close to the president always say that add On is no different than any other successful, strong Turkish leader. He will be at it until the very end. So I don't anticipate add On to willfully step down
from any powers of positions of power. That said, yes Day's election results, the makeup of parliament currently, the economic challenges these are the worst circumstances he's ever faced since coming to power two decades ago. So I'd absolutely agree with Sona's take that this is add On's autumn. Maybe we're still in the September mid September face, so there's a way to go, but it's not going to be easy for it.
How should mister Biden in any future administrations respond to our NATO allies.
New vote business as usual? I think what the Biden administration has succeeded in doing is very important, which is reinstitutionalize relationships with Turkey. I anticipate that to continue because Aardon also needs stability on the foreign policy front to continue his balancing act between NATO Allies, Russia and the Ukraine War in the Middle East, given the Israel Hamas War, and in all of these things, having good relationships with
the US help. So I think Biden and add On will continue to work in a transaction but constructive manner, and add On will want to keep that up after the November elections in the US, as might.
Pacar with e Raisia, Groupean Bremers. Thank you so much for that brief. Lisa Mattel here with a truncated newspaper.
How do you follow?
He is still spinning.
I can't even all right, we're talking about home ownership. How much it will take you in salary to be able to afford regular home.
Okay, so this is from Banker. It's a new study.
It says you would need a six figure salary. So that's nearly a fifty percent increase just the last few years. Here's the specifics, just to give you an idea. So to afford a media price home, let's say nearly four hundred and three thousand dollars, Americans need to make an annual income of just over one hundred.
And ten thousand dollars.
It's global.
In Paris, the topic, well, why people they are talking about a housing.
We're not our population is not exploiting. Why are we just building more houses? I don't get this whole thing.
Yeah, yeah, that's that's that is the talent of face. I cannot be.
We got a lot of land in this country just built.
I'm gonna get them. Okay, Oh gosh, all right. This is for the kids.
So if you have kids who are on Snapchat, there's a paid feature. Apparently it's called Snapchat Plus. It'll cost about four dollars a month extra. But here's here's what it's doing. It's getting kids anxiety because it lets them see their position in their friends digital orbits. So, for example, it lets you know how much your friends are communicating with you, and it puts it into like.
This solar system metaphor.
So if you're a mercury, that's good because that's the planet closest to your friend.
So you see it. It does these little metaphors.
It can be shut off, but it you know, it's on by default. So these kids are getting, you know, into fights, these BFFs, boyfriends, girlfriends. Everyone's arguing because they're not at the top.
Of the list.
This has nothing to do with the news.
This is the Mateo household.
About you.
Well, I won't pay the four dollars extra for my daughter. You can't, I'll tell you that much.
This is another teen thing, Brandy Melville. So we talked about this before. It's run by this secretive Italian family. Okay, so it's one size fits all. I went to the store with my daughter and I'm looking at the shirt saying, how is everybody going to fit into this tiny little thing? I don't understand how it's one size of it all, but that's the whole controversy behind it.
A lot of people are saying it's made.
For skinny mostly blonde girls are filling its social media feed and staffing its stores too, So that's kind of the controversy behind this hole.
It's Italian.
I just assumed secretive Italian fanily.
I just assumed it was American.
And I'm walking down the street in Florence and there's a line out the door like it's the best pizza in town kind of thing. No, it's a line of ugly Americans lined up to buy one size fits all hit Brandy Melville.
Does anybody copy in this?
Yeah?
Well, you know what it is they're going against because all these fashion brands are leaning into inclusivity. You know, they're adding bigger sizes and more plus size and racially diverse models. Brandy Bell Mills, they're not doing it.
So I don't know.
Forty one of its fifty stores are in the US.
Actually, yes, so okay, one more.
All right, one more so if you're tired of getting that ping or email or phone calls from your boss and off work hours, Okay, there is a new legislation. It's from a San Francisco lawmaker trying to be the first and that stay in the country to give employees the right to be able to ignore it, to hit the ignore button, except if it's an emergency or if there's a scheduling change issue because of it.
But this is a democratic assembly of a Matt Haney.
He's trying to do this to allow employees to kind of ignore those He got the idea from Australia actually has a right to disconnect. The law that's going to be implemented later this year, but it originated in France. This whole idea, Okay, it's spread to different forms from Canada, Italy, Belgium, Philippines.
They're doing this as well.
New York City tried it in twenty eighteen. Didn't adopt it though, but there's a couple restrictions behind it. But they're trying to give employees that right to say, you know what, don't bother me.
It's the weekend off hours.
Well when I see when I see on my phone somebody has notifications shut.
Off, right, I try to respect that.
Yeah, I mean, you know, I was going back and forth with Rachel the Boiler maker, and you know her notifications are shut off because she's at the game.
Yeah, and okay, you know I try to respect that, do you.
When I was managing Bloomberg Intelligence, I assumed that my people were twenty four to seven. Yeah, yeah, this is that's how I grew worled uh for seven. But maybe it's different now.
I don't know it's different.
I hear from a lot of people's different list. I'm gonna tell you, thank you so much for the newspapers. Here's the podcast. Thank you for that. This is a Bloomberg Surveillance podcast, bringing you the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from.
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