Surveillance: Correction Has Room To Go, Rochester Says

Bloomberg dot Com, and of course on the Bloomberg. We start this program though, by getting Jordan Rochester on the phone the mare a gtain effects strategist to Maura, and Jordan's walk me through the house view right now for how these kind of shocks are going to roll through asset classes, roll through markets in the coming weeks. Hi, John, It's it's not going to be fun and I hate to be the pair of bad news, but there is

a lot going on in terms of equity markets. It's huge moves and that's feeding through to foreign exchange markets in weird, wonderful and slightly confusing ways. So where do I start. First, of all, equities were in a world of their own for the past couple of weeks. We have been watching the situation in China, the rally and fixed income, the sell off in commodities, but the equity market was making fresh eyes. So we're seeing that corrections

coming back down to where it should be. And I've got these charts on my screen which show me how U S equities trade versus growth expectations, and the same for Europe. And we've seen sell offs in both markets, of course, so they're coming back down towards Earth. The US markets have corrected more than the European ones, and I think there is actually still more room to go because what we're not used to is a supply shock

of this magnitude if it escalates. We're used to Donald Trump being able to do a Phase one deal with China, the FED cutting rates and solving the issue with credit markets and resolving financial conditions. Supply shocks are very hard for central bankers or even policy makers to solve. So that's why you're seeing the moves in markets here, and it's going to take time, and time will be painful.

When it comes to the European market, they won't have as much flexibility when it comes to rate cuts like the ECB. The ECB it has about ten basis points of rate cuts they could do. They could maybe do quanta to be easing again, but they're already doing it. So for me, I think the currency rising today is just absolute bonkers. And I think that this is something that needs to correct weaker euro and eventually stronger dollar.

But what's going on, guys, is when you've got big moves like list and equities, you've got investors repatriating their money, and you have seen those qui outflows drive the U euro. Hire here as that money is coming back home, Jenn, I want to point out we are nine point zero two correction, like we're almost to the cusp of an spres. We're close to ten percent over in Germany on the equity benchmark in Frankfurt, Jordan, let's talk about the euro

repat training cash. Are we starting to see some end type qualities to the single currency? There is, John m I was mentioning it before. So we saw contate of easing into a fifteen, and we had extensions, we had slowed downs, and we're back in the same game again. And when you've got buns at negative yields, they you saw massive outflows into US assets, into emerging market assets. So what's going on is European investors have got all these assets abroad and now having fun redemptions, and so

they because the risk off tends to see sellers. So you're seeing those fun redemptions mean that they have to bring that money home and convert it back into Euros. Now, this is a flow which is very hard to predict. It's very hard to trade, and timing it to be very difficult. I think once it does settles, and I think if we see a bit of stability, will then go back to euro being much more exposed to what's going on in China and also the situation escalating in

Milan as well. So I think short term this is what's driving you are higher, but I'm not chasing it, and I do think that the currency will come under pressure because guys, I think by the end of this year we're all gonna be experts in credit risks again. We've been so used to rates rallying, ECB easing rates for everybody um that we've kind of neglected the credit

risks that have been building out there. And if we have a hit to growth like this, and if the lockdowns and the virus spread goes into Q two, maybe even we're still here in June talking about it, then credit risks will be on everyone's minds when we talk about credit risks. Jordan, it seems to be a race

to the bottom. I was struck by the idea that the dollar is actually weakening versus certain Asian currencies because people are now treating their focus on the potential for the coronavirus to spread in the United States and for that not being fully priced in. I mean, yes, the euro is expected to weaken more, But how vulnerable is the US here given the fact that a lot of people viewed it as immune from some of the worst

impacts here. Yeah, the U S exty market have been the safe haven of ecty markets in the world thanks to all those share by backs. You guys have been enjoying UM. And also you always had the FED rate cutting rates as your backup, and the market is now pricing that in and you've got a pro We see further pricing of that to come. However, let's think more about the end game. Most of the world capital is

still between the New York to Boston corridor. When I look at all of my country's I track the biggest holders outside of the residents of those countries of equities for example, UK eputies, European equities, the US. So if everyone's going to repat your eight, the biggest flow is going to be back into dollars. Now. It's not going to be like the global financial crisis because back then there was very little foreign exchange hedging. We've had much

higher FX hedging ratios. So the impact on the currency maybe a lot less than what we saw in the Panics of two thousands, seven and eight. Jordan, give us some point here and Dolla Yan, what is your adjusted target now for dollah Yan? Well, look, we had had this big outflow from Japan just the other week. We had that push up to one well and dolli and that was driven and buy pension flows. Our guys still think that will matter um and so we're not chasing

the yen strength here. But if we start to see signs of the Tokyo Olympics being canceled, we're looking out for that risk. Maybe something to talk about more in May. I think yen still trades like a safe haven tom and so at some point there might be some yen strength. Are you are you being we're not chasing? Is there a big figure play here on Euro? Then? I mean within all these huge flows, these titanic moments we're talking about, is there like five big figures in Euro one way

or the other absolutely. I think essentially once we get over Friday, so tomorrow's month end, and we're going to see some dollar buying. I think when we see those flows because of what's been going on, I think Monday we come back to work, euros lower and we're tracking more towards one oh six one oh seven again over the next month. We'll hold you to that. Jordan's great to catch out with you, Jordan Rochester. Hopefully we'll catch out with him in the next couple of weeks. Now

More's g said effect strategists. We are committed, folks to giving you the best conversations we can from medical professionals. John. If you go down fifth even or you know there's well you see so many benefactors of Wall Street Mr. Travis, Mr Icon and others that have put money where Hope and Mouth is in build a first class, world class medical set of institutions. Adam Bernheim is with Mount Sinai and they own the high ground on medical engineering. Biomedical

engineering in his case is a study of lungs. He is one of the best in the world at these viruses and what they do to our lungs. He's a cardio thoracic radiologist. I'm really happy to say on this program, we've made such a big effort over the last couple of weeks, the last few months to really focus on leaving the medical issues to the medical professionals. Professionals. Doctor, is fantastic to have you with us on the program.

Something I don't think has done, or a lot of people haven't done a good enough job of, is talk about the differences between coronavirus, other viruses, other flus. Take me inside the body, inside the chest, inside the lungs, the pictures that you've seen, Why is this so different? Thank you very much for having me. It's a pleasure

to be here. When we first started looking at scans and patients with coronavirus infection from China, we didn't know what to expect because this is a new diagnosis that we were describing for the first time. But as we categorically went through hundreds of cases, we're able to recognize clear patterns that were emerging. Importantly, the way that the lung was infect affected included lesions that had a predilection for a certain area in the lung. They often had

a certain shape, and certain other imaging characteristics that were suggestive. Notably, there are other factors and features on the scans that were absent that are found in other infections. For example, patients with other pneumonias often have fluid outside the lungs, lymph node enlargement, nodules, cavitation which means air cavities within

the legion, or calcification. These were actually notably absent in all of the patients that we went through, So that's really helpful for distinguishing disinfection from other infections, including other viral infections like influenza. No one single case is one accurate, but if there are enough features on any on a scan,

an index of suspicion is elevated. There are enough features that we can be that there are certainly very strongly suggestive, and I think that's one of the reasons that radiologists and cat scans have emerged as foundational and the algorithm of diagnosis of these patients. Dr Bernheim, that's an excellent synopsis of the diagnostic developments here. How nations are looking to identify coronavirus cases, but how does that translate over to the potential remedies and how easy or difficult it

is to actually cure these cases. I think one of the keys is just limiting its spread. So I think as a radiologist and one of the key ways that we can be huffle is to ensure prompt diagnosis. So, for example, one of our findings was that patients very early on after symptom onset, if they had a camp skin it was negative actually about half of the time, and that's important to know that there could be false negatives, particularly very early in the disease, so that patients shouldn't

be taken off isolation. In terms of combating the epidemic on a larger global scale and treatment, I think the

best way is really preventing its spread. So if we have patients that may be suspected of having infection, it's really helpful to know that we can make a diagnosis as early as possible, which is certainly helpful for that individual patients, so we can start treatment as early as possible, but it's also necessary for a greater public health perspective to ensure that patient does remain isolated and will not

transmit the disease to others. Donctor, you would have heard people make the comparison to the seasonal flu many many times over the last couple of months. And a question I've had for quite a while and I'd love to put to you, is why this particular coronavirus requires such a huge containment effort to degree that China and others

are taking it. Why is that the case? The flu has some similarities to coronavirus, but also some differences Influenza the flu in itself is a very deadly disease that is killed about sixteen thousand people already in this year's season and hospitalized almost three hundred thousand. So influenza and its own right is certainly a very serious infection. However, COVID nineteen are coronavirus infection now is concerning in other ways. For example, the mortality of an infected patient is actually

quite a bit higher than influenza. So, for example, the chance of any given patient passing away from suluenza infection is about point one percent, but the mortality rate here

is twenty times that about two. That's one feature that's different and another, and I think one of the concerns is that there's a large percentage of the patients that actually have very mild symptoms about of COVID nineteen cases are actually patients that have very mild, non specific symptoms, perhaps some fever and a cough, shortness of breath and little more than that. And there are many that are actually asymptomatic for a very long time before the manifest symptoms.

So one of the concerns and one of the distinguishing from influenza, is that you have patients that have sometimes no or mild nonsphysics symptoms and are easily transmitting the disease to others. Dr Bernhind, you have a good knowledge or understanding of the age distribution effect of this virus. The bar charts are simplistic. Everybody over eighties in trouble. Enlighteness on how you go down to the younger patients on that, that's a really interesting question that we're looking at,

and you're right. Early investigators have noted a higher mortality in older patients and those with pre existing lung disease like emphysema or fibrosis, and also mail seems to be affected a little bit more as well. One of the things that we found that was really striking is that pediatric patients were characteristically very unaffected. In other words, even the patients that even kids that were positive for the coronavirus very often had normal CT scans, which is something

that's uh, not something we necessarily expected. Oh, we have ten more questions in no time. Dr Bernheim, thank you so much for joining us today with Mount sign A Hospital. We look forward to speaking to you again as soon. Adam Bernheim abount uh sign Hi, that's just extraordinary. Let's bring in Patrick now, Patrick Armstrong Flaim Wealth ce io. Patrick, interested to find out what you've been doing in the market of the last couple of weeks. What kind of

moves have you've been making. We've not been doing a huge amount, despite a huge amount of volatility, really because we were defensively positioned, so we were quite frustrated when everything was moving higher together earlier in the year, and quite comfortable with our positioning right now at the margins. We've been moving away from some sequality and equities. We sold air Bus Um yesterday. We bought some alphabet Google. Basically, we think Cloud's not going to be impacted by the virus.

People stay at home, watch YouTube, search will continue to do well. So we're looking for companies that have a lot of cash, not in new and to the virus by the means, but not going to be severely impacted. To be clear that, Patrick, you are starting to put capital to work then in more offensive areas of the market. Would that be a correct a correct observation of what you're doing. Sorry, you're just cut out for a second.

That's okay, Patrick, I'm just wondering if you are starting to put fresh capital into more offensive parts of the market given the sell off that we've seen over the last couple of weeks. Not really so adding off about something we did. Um, it's a great company obviously, but still not cheap we I think the next move I'm going to make is actually selling out of some of my treasury positions and moving into the shorter end of the old curve, so that that's not really an offensive move.

But I do think pricing in secular stagnation and that you're going to have a sharp hit to the economy from this. But twelve months from now, very confident what what level of yields is sort of the trigger point for you to sell. I've been thinking about it for the as few days, and we'll probably pull the trigger today.

Even the levels now, it's very hard to see how when you get a dividend yield on the SMP five hundred of one point nine percent versus a ten year yield at one point to five and thirty year yield one seven, it's I'd rather have equities for the long term. Short term, there's a lot of momentum behind bonds and a lot of negative momentum on equities. I'm not ready to really make a big position on equities yet because I still think they're expensive, but I do think the

bond rally has probably gone too far. Your thoughts one final question, your thoughts on financials right now? And not talked about the banks, but they've got to deal with this unique yield market, don't they. Definitely, And we've owned the banks in Europe in the past, and that's been a mistake we made. When I was Bush on the banks, I expected the ECB to get rates towards zero, and I really think that's the catalyst. Don't need to get back into that. The negative interest rate engine is such

a headwind. Unless there is a wave of consolidation in Europe, that would also be good news for the banks, but you have to allow employees to be fired for that to work. Too short of visit Patrick Armston, Thank you so much, Plurimi Capital in London joining us. If you are in the tech stocks, I will just say flat out, this is your interview of the day. She's Shannon Cross of Cross Research. She's not like some ginormous uh name

out there where she's like doing the media trial. And we're thrilled to get her on today because she uh sticks to her clients and attention of her clients out of Berkeley political economics, and she does prodigious tech research. Have you changed Shannon your by hold cell on the big thing tech names? You know, I haven't. Um, here's the interesting thing, whether it's Microsoft or Apple or even best by just and I don't cover best Buy, but

I was just listening to their earnings called. You know, everyone at this point continues to say that underlying demand remains strong. So yes, the supply chain is interrupted, but all of these companies continue to believe that this will be, you know, a relatively relatively short term issue. Um. Right now, the biggest challenge is getting employees back to the factories in China, and you know, it sounds like some of

the factories are starting to come back online. Clearly you know, it seems to be spreading, so we'll have to see what that does over time. But you know, demand is demand is still there. What do the companies you follow do with there once in a century levels of cash? I mean, if there were opportunities seven weeks ago, some of these stocks are down bear market. Is this where we finally see them deploy cash? Well, you know, it will be interesting. I mean from an M and A perspective,

we'll see where things things play out. I mean we've been teen HP and Xerox, and obviously that transaction is one where Xerox is looking on putting a ton of leverage onto the combining company, which frankly doesn't seem particularly smart at this point in time. But the ones that have a lot of cash, I mean, I would assume Apple is going to be out very aggressively buying backstock. You know, HP will They just announced a fifteen billion

dollar share repurchase program. So as soon as they sort of get through some of the Xerox tender offer prohibitions about buying, they will be you know, and others as well, being Microsoft too, So I think, you know, companies are going to be smart about this. I don't think they're going to overreact. I think the ones I've talked to in the management that most of them are being very

prudent about looking at it. They're protecting their employees, they're protecting their partners, and they're assuming that this is going to be short term. And again they keep pointing to the fact that demand remains very solid. Market negative four seventy seven Paul Apple on a weekly chart negative. Yeah, exactly, Shannon. You know, we're so happy to have you on here because we're you know that Microsoft News just kind of added onto the Apple News again, pulling back revenue guidance

or adjusting revenue guidance. UM. At this point, is it primarily a supply chain issue for the tech companies throughout the tech stack or is there also, you know, some demand issues. I know you mentioned that the companies are still talking about good underlying demand, But are they seeing canceled orders and mean that type of thing, or is this just supply chain not yet I mean, and you know, no canceled orders that I've heard of yet. I mean,

it's it's supply chain. Obviously, sales in China are going to be weak this quarter. UM, But you know, I think you can not that it's going to make up for it, but Apple, for instance, will sell more services and I've had sales appaired to be pretty strong because people are going to remote um you know, remote learning

and remote working. Uh, you know, I think that what I've heard is it's literally getting the people to the factories because obviously transportation and in sorry in China has been um impacted, and then you know, people have to be quarantined when they get there to make sure they don't have the virus, and getting the of factories up and running. Um. Interestingly, what I've been told, and I some somehow question it, but it's what I've been told by several people is that shipping has not been a

particular issue. So and even access to a lot of components haven't been necessarily the issue. It's been the people issue. So, Shannon, are the companies that you chat to, are they saying, hey, once this passes in China particular, and maybe there's some evidence that maybe it's peaking there, that we can ramp up quickly and this might be a one quarter type issue for them, or this might drag on throughout the year.

You know, they're there at this point a lot of them were saying, look, it will be you know, if we can get back to a percent utilization of the factory by the end of March, then you know things should be good for a second quarter. It might be a little optimistic. I mean, you know, we'll see how how long it takes to ramp. I mean, I've heard from companies that they have some factories that are basically making nothing and some factories that are running in a

dent um. So that's not really helpful, right, but you know, it's it's kind have along the spectrum um I would I would say, as long as this doesn't expand and start hitting economies, you know, and then you know, consumer confidence than all of that that you can you can kind of get back to normal. I think, you know, companies like Apple can probably go a bit above a hundred percent in terms of bursts in their factories to try to make up for channing Cross with us with

a Cross research. We do this with another day to check negative five Dow right now twenty six thousand and four sixty two sixty six points on the standard three zero five one and the vix Paul and I've been watching carefully from a twenty eight level up to thirty two point seven four. I don't have the chart in front of that. Maybe a high more sphear laden fix of the day up five point one eight big figures two year yield bottoms out low yield for the day

one point zero six one. To be clear, that's a bid to note prices price up, yield down uh tenure yield and Paul, I'm sorry, oil is my mint of the day, if you will, Oil forty six nine down two dollars forty four since and there's just simply no bid. There's no best Texas in me absolutely, Tom Shannon, I know you spent a lot of time talking to institutional investors. Um,

what do you sense they're doing. Are they taking this as an opportunity to add to some of their best high conviction tech names, or are they just saying this is beyond kind of this is not in our model. Well, I think initially they were saying this is not in our model. We're going to look through that. You know, obviously that was about ten ago, so we can we

can get past those comments. I think at this point they are starting to look at you know, I talked to a number of people in Microsoft yesterday, for instance, and they're saying, look, this is you know, a part of their business. Um, it will impact this quarter and maybe a little bit next quarter, but the core underlying um, you know, Fundamentals and Microsoft are very strong, and so I think some of those names they're they're kind of trying to start adding to. I assume people will start

taking up Apple at some point. But you know, there's that old adage about you know, not not catching a falling knife. Um, so I think some people are sort of just sideline point. I'm glad you mentioned that let's go stochastic. We can do that with Shannon Cross the great chart idea of catching a falling knife in the dark leads to guessing single data points on a chart. Okay, we're not going to do that. We're gonna look at

the opposite, which is not stochastic, but trend. Shannon, if you if you were, you know not, you know, there's only just me and Paul listening. But Shannon, if you were to establish a trend for the names you follow, am I clear that that trend is still up? From a yes, I think from a long term perspective, Look, people there are underlying I don't know, changes in business that are going on. People are moving to the cloud,

people are you know, moving to edge computing. We will eventually we have five G there's gonna be a lot of data that's going to be crunched. I mean, you know, technology is not something that's you know, going the way of the buggy whip. I mean, it's it's definitely where people are going to be in investing. And again, the economies were strong going into this. So assuming this is, you know, something that sort of plays itself out through

I don't know early summer. I haven't know. I'm not a doctor, I don't know, but you know, it's I think the underlying demand and fundamentals are pretty solid for the names we cover. So Shannon, going back to Tom's initial question, here, would you expect to see press releases from companies saying we are increasing our buy back, we're doing a one time buy back, or just taking a more aggressive stance, or is this just gonna be part

of their existing buy back kind of strategy. I don't think at this point, um, anybody's gonna put something out because there's just too many unknowns. I mean I was talking to one executive and he basically said, if anybody tells you they know exactly what's going on, they're not really you know, they don't really know. Um So I don't think this is the time when people step in with sort of inclemental bibact related to Corona, and I'm

not sure they ever will. But you know, I think for companies that have as their amount of cash to deploy, they always use the term opportunistic. So as this thing starts to sort of settle out, I think that opportunity will probably come in and you will see some aggressive buying depending on where we are in the quarter, because remember a lot of these companies do have to go into quiet period. You have been opportunistic. Shannon Cross, thank

you so much for joining us today Cross Research. Again, we protect the copyright of all of our guests research. You can get Cross Research research from them. Shannon Cross of her own firm, and she doesn't 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