Surveillance: Record High Stocks With BNP's Morris

I think last year was just too driven by valuation. I mean, we had a good year from an earnings point of view, was high single digits, which is pretty good for the US economy. But you know, to get a twentysomething return, it's valuation that is going to be hard to continue unless rates continue to go down. And it really looks like we're in a fairly stable environment. And in fact, the market has gone from moderate to being on the expensive side. And there are specific pockets

of excess for sure in speculative stocks. If you look at companies that don't earn money, they've actually done better, that is a bad sign. It really goes back to so this year should be driven by earnings. You want companies that can be profitable and it's probably just gonna be a single digit return year. Rice, has Apple, a

company like Apple become a speculative stock. Yeah, Interestingly, we have honed it since the founding of our firm in two thousand four, and for almost all that time, Apple has grown faster than the market, but sold at a discount. Last year, sales declined, earnings declined, and the stock almost doubled. So something happened in the psyche of the market and we sold the stock. You sold the stock? When did

you sound the stock? In mid year? So it had already rallied about which we thought was the fair value, and it just kept going. She has outstanding it down since bind back program is absolutely massive that some people listening by now holding onto the name is sank. You know what, David, You're wrong. The buybacks will continue, the shares outstanding will continue to go down. I want to

carry on hold in this stock. Why shouldn't I? It's not that it's a bad company, it's just the valuation at this point assumes a double digit growth rate and the growth is all coming from return of capital. But how much are reaches back to the Tina trade? There is no alternative. With the fed UH potentially cutting rates once more this year, that's what's being priced into the market. I mean, it makes valuations look very different than they

have historically. So for that point, Apple is now more expensive than Google, which has higher margins, double digit growth, it's going about top and bottom line, and it's cheaper than Apple. So there are alternatives. And then we get to financials, which are the cheapest sector of the market at and to twelve times earnings and free cash flow the way we would look at it, and they're returning a hundred percent of capital b of a literally is

returning a hundred percent. And so if you take the dividend plus the earnings growth and the share buy back, you almost get a double digit earn without any valuation. Ton't expanding that, David Pearl, with this clepic Investments, welcome all of you on Bloomberg Radio Boston, Washington and New York as well in San Francisco in a very early morning and of course on Serious ex Chin on one nineteen and across Bloomberg Television today. David Pearl, I consider

where you begin January one. You don't begin with the stock in a dividend. So to recapitulate what you just said, you look at a given stock is a dividend, the dividend, growth, the share buy back, and then the then what right. So really what we're doing is saying what kind of profit in this company generate during the year and what do they do with that profit. So, some really profitable companies have wasted all the money they re They basically plowed back in growth and get a low return on

invested capital. So you put a dollar in, get eight cents back. You've wasted our money. All right. You're talking about financials too. You're saying that they're very cheap and more. About eight minutes away from the release of Morgan Stanley's earning you like Instanley, you like it more than Goldman Sacks. Why? Yeah, very simply, Morgan Stanley and Goldman used to be pretty much the same kind of business. They're very different now.

More than half of their business is wealth and investment management, which is a very sticky, recurring business, and the margins for Morgan Stanley have actually been going up because they're managing cost so it's recurring. The investment banking and trading are very volatile and you really don't even get paid for it. Even if you have a good quarter, the market kind of discounts it. So Goldman has really become

a trading black box. That's why they in the last couple of quarters they've tried to make it more transparent. They're moving into commercial of actually consumer banking. But the question is what does Goldman do that B of A and JP Morgan doesn't do, whereas Morgan Stanley really is the king of wealth management. They are really good at this. You said last year was a valuation story. The financial

sector really rewrites it and rewrites it higher. Do you see that as more sustainable than what you see our swear is that a sustainable rewriting body's market on a sect of its lack for quite a wild yes. And you know, the biggest test, unfortunately, is if we go into another recession. Because frankly, financials have underperformed since the financial crisis. People are afraid that the next downturn they go bankrupt again, and it may take till another downturn

to prove that they're well capitalized. They are super capitalized right now. That's why they can return capital because they're regulated, so they can only return capital because they have so much cash sitting there to protect them. So these are really good. And Morgan Stanley is still at eleven times earnings with the two and a half percent dividend defined scale then I mean, I mean, if if there's a dearth of revenue and revenue growth, there's an urge to merge.

I get all that. That's McKinsey one on one, but define skill. Take that idea further. Yeah, I mean, you know, when it comes to like the lowest commodity product, which is an e t F passive et F, there's black Rock and then there's Vanguard. Nobody really can compete when you're giving stuff away like that, So then you have to be more specialized and wealth management there is scale. My crampons for those of you that on television and radio,

John was looking at Mike still Crampons. You know, they're the ones with the foreign spikes. You remember what happened to me last year? Yeah? I remember what happened to you walked out of the restaurant. Absolutely, OK, let me total face plump. What it was? You guys need cameras the side of my body. Tom had to help me get back to a right David Scale back to scale Um about those things. Ken Leon was talking yesterday that he thinks Goldman Sachs needs to make a major purchase

of an asset manager. Do you agree, Well, that would be a good strategy. There are other things they could do. They're actually huge in high net worth, they really are, but that's not big in off compared to the size of Goldman Sacks. So yes, that that's the Morgan Stanley strategy, which has worked for Morgan Stanley. The question is is Goldman's culture ready for that, because they are a trading and investment banking culture. In two days in a row, ft Lex the ALM snow words about it, f Lex.

I don't know if it's because it's Lionel Barber's last day. You think he think. I don't know that. They really took speaking believe to do that next week at the piano. No, this is serious. The ft really took well, you know, for them to run a consumer bank just gonna work. It seems totally incongruous to Goldman Sacks and really the only way you're going to win businesses under price, I mean to get to go the Apple credit card. They probably are not making any money City Bank didn't even

make money doing the Costco visa card. So this is a scale business and Goldman just doesn't have scaling consumer banking. David pol with thank you some watch with Epica Investments greatly, greatly appreciated. Right now. I've really been looking forward to this. Very Lovely is going to join us. She's with the Peterson Institute in Syracuse University and she has written with

precision about China and America. I'm gonna steal some thunder from my colleague Lisa Bramo is Professor Lovely right now, which is on the enforceability of all we're doing. Let's do the history first. Is there everybody's history of enforceable or verification with China. Well, it's it's not only that it is a disagreement. Isn't unprecedented. Uh, this is an agreement that's going to rely on the players who are who are in the seats at the time. Uh. It's

meant to be stricter than previous attempts at enforcement. As you say, we've had a long standing problem with China on it on its meaning, its obligations in some areas, UH, particularly related to its accession to the W t o UH, and it's meant to have more teeth. The problem is, of course, is that the escalation could happen very quickly.

The end result would be the us UH putting on new tariffs or returning to the old tariffs, and at that point China can simply notify that it's quit the agreement. So we have an agreement that has teeth. We have, but those teeth mean that it can bite very quickly. And I think the problem then for businesses is do you go ahead and invest a little bit like Lucy in the football? Well, this is the tough part, isn't it? Plantic season for soybean starts in a couple of months time.

What are the farmers in America to who marry? I don't know, and interviews I've heard with farmers show that they don't know either. It's very tempting. My best guests, since I'm pretty optimistic person, would be to go ahead and think that it's going to hold at least for the first year. But it's a problem because farmers want to get into a rhythm with their customers UH and they need the sales. So what do they do? Mary,

You gotta hand it to the administration. They got China to the table and got them to agree to some big things. As you point out, though, follow through is the outstanding issue. Let's pick up on agg on food, seafood product annually the average important. Now it's got to be forty billion. Can they hit it? Do you think China can hit those kind of numbers? Well, there's been a little bit more wiggle room in the agreement now

that we've seen it. For example, they could buy Boeing planes, have the sales recorded for this period, but not take delivery for say another two years. So there are some ways that they can hit this. One of the bigger problems is that we worry about diversion from our training partners and then friction with those partners UH in energy, in egg and manufacturing. So there doesn't seem to be enough wiggle room. I think the Chinese UH in the

US feel that they can hit these targets. Otherwise we wouldn't have seen agreement, or at least that's what we hope. But you know, something can happen. Mary. People are pointing to what is being called a big win for Wall Street because one part of this less publicized part of the trade deal was an acceleration of the opening of China's capital system. How significant do you think that is?

I do think it's important, although you know, there are a lot of things we were we were promised a long time ago, so in some sense of the wind, but it's also been you know, a lot of losses as we've waited, while Chinese uh particularly fin tank companies have gained strength. So I think it shows that China has a certain confidence that it can withstand the competition, or frankly, that it needs the products that the U S service companies want to sell. So I think it's important. Again,

we have to see if they'll follow through. Mary, there's a criticism that's already coming saying was it worth it? Was this deal enough to offset the damage of the uncertainty and the tariffs that were put into place in the two years as this unfolded. But going forward there is a question and President Trump perhaps can say, look, the US is working with the European Union in Japan with a w t O to try to enforce some sort of reduction and how much China subsidizes its industrial sector?

Do you buy that? I mean, is that sufficient to sort of move the ball? Forward regardless of Phase two talks. Well, that was the best news of the week actually the US was returning to working with its allies. That that clearly is the way forward. UH industrial subsidies. As I said before, our multilateral problem, um, we need all hands on deck to try to reach an agreement within the w t O or some other way. And it's not going to be easy because every country uses subsidies to

some extent. How do you draw those lines? How do you adjudicate at those lines? What happens when UH countries move over those lies? You have to remember then w t O retaliation is basically you get to put on tariffs will be you know. So it's it's a hard problem and it's one that clearly is going to escalate as as China and other countries try to develop emerging technologies which are likely to be attached to very high profits. So there's going to be a lot of competition in

a lot of spheres. Mary, thank you so much, Professor Lovely with the Peterson Institute in Syracuse University as well. Do you want to snappy MP Powerbost Senior investment strategist, your message to clients this morning down what is it well. And I think the thing to contrast is the risks and the concerns that we have this year compared to this same time at the beginning of last year, and then valuations A lot of the risks honestly aren't all

that different. We know, we still need to worry about trade, We unfortunately still need to worry about Brexit. There's still questions about global growth, particularly in Europe. So that's really quite similar. The differences Now you've got the SMP five hundred at eighteen and a half time's earnings. You've got high yield bond spreads near ten year lows almost that we're investment great bond spreads, So the challenge is finding attractive places to invest. The risk is still there, but

the valuations aren't. I'm gonna punt a question that John posed to me this morning. You said, what's the message from the bond market, because right now you're seeing a flattening yield curve. It seems to be a bearish tilled amid six straight days of record highs, and if today's futures are any indications, will be a seventh straight day of record highs. I'm wondering is the message from the

bond market inconsistent with what we're seeing in equities. Well, I think what we're seeing from bond markets recently is probably more the dysformula on inflation, you know, which is kind of the perpetual puzzle that we've had. You know, we know that we have in a ployment rates at multidecade lows, but the pattern that you've seen across several sectors for wages in America is that you've had a

deceleration in the rate of wage appreciation. So there's still wage growth is just not as strong as it was. It's been going that way for about six months now. That's had a follow through the c p I, which is disappointing. So I think that's probably what you're seeing more reflected in treasures right now. It's the inflation component of your nominal yield as opposed to the real rate component, which was really the story from last year. But we

don't think this is going to persist. We're still expecting broadly stable rates around one point eight, give or take, for most of this year. There's a dissonance right now between the consensus call for emerging markets Europe to outperform the US given where we've seen the rally go uh and this sort of slow down that we're seeing certainly in the US but across the world. How do you

sort of pair those ideas. I think if you want to compare certainly US versus Europe, you've got to distinguish between kind of broad tech, so include you not just the tech sector, but Amazon, Facebook, Google, all of that, and the rest of the market. Uh. The rest of the market performed absolutely in line between the US and Europe last year. There was no difference. They're both around UH for the whole year. They just tracked each other. What really led to the US performance was entirely the

broad tech sector. So I think you need to have two separate allocations. What's your view on tech and then the rest of it. It's harder to call a big difference between the UN and Europe except for evaluations where the US is clearly much much higher. You're just joining us. Daniel Morris, BMP Pared BIOst Management. Where this as we look at the strategy for Dan Morris, what is the mode of institutions that didn't make twenty eight percent last year?

If you're up eight percent, you're up twelve percent. Maybe you're on the efficient frontier under performing. What's the sweat factor right now to catch up? Well, I think it's the same sentiment that a lot of retail investors have to be feeling. I mean, you know, you haddemptions from equity funds throughout all of last year. You know, as a market was rising, you know, to be to be honest, that's the story that's been in place to sound degree

since two thousand and nine. But I think after the optimistic span is at While a lot of that money did go into fixed income and obviously still did just fine, a much bigger share went into money market. So if we do see any kind of correction and equities, which we wouldn't be at all surprised to see over the next couple of months, there is a lot of cash on the sidelines that we think is going to go back into equities, but hopefully it more attractive valuations, because

again the punamental outlook is still quite strong. A potential catalyst on the horizon. The MACE sparks some nervousness and risk assets down is what happens with the Federal reserves balance sheet. Later this year, there's this big debate that is still ongoing. A lot of people in fixed income tell us it is not QUI many people in the equity market access if it is, I just wanted down. If ultimately it doesn't matter what you think it is, the outcome is still the same risk assets of rallying.

And there are many people out there listening to this program that thinks if the fedbacks off on the balance sheet, risk assets will get into trouble. What SAB had them, Well, you certainly think that was part of the story that happened at the end of twenty eighteen, when it was

one of many things that went wrong. I mean, you certainly had the prospect of balance she'd run off an, you had the prospect of higher rates, and then you added some disappointment earnings results from Apple, You added the trade war, and that was enough to trigger it. I don't know at this point if if I think it changed in FED policy in and of itself would be enough. But if you eat a couple other little things that happened at the same time, there could be an unpleasant repeat.

And yesterday on Bloomberg Television and Radio, Dallas FED President Robert Kaplan weighing in on this and basically saying, uh, he does think the FED should reduce it or at least pair the pace of its increase in balance sheet. This is this is sort of the most tepid endorsement of paring back the recent program because he's worried about acid bubbles. But it does raise a question, you know, what is the sort of perverse incentive that gets created as the FED reinflates at a time when the economy

is told this is really important distinction. Daniel Morris Lisa says, as the FED reinflates, is there any evidence they can reinflate? Well, if you want to see that evidence in in higher core CPI inflation, you know, even getting back to a two percent average to present average CPI inflation, you know, it's hard to see that happening. I mean, remember back when you started quee, all the scare stories that you read about how that this was going to set off

hyper inflation, and clearly that did not happen. So even after the trillions that you've had purchase in the US, in in in England, in Europe, and in Japan, you know, inflation nowhere to be seen. So it's just really hard to see, you know, any change that the FED can make having that big of a Danie Morris one final question, if we could, what metric matters to you right now when you go to the Bloomburger, when you're writing one of your twenty page jewels for BMP Perry. Is it

price to sales? Is it price to cash flow? Is it some enterprise value ratio? What ratio matters right now? To Daniel Morris, I think what's concerning right now is pretty much any ratio you look at is one to one and a half standard deviations above the levels over the last ten years. So I think it's it's a fact that everything is kind of giving you the same signal things are really pricey. As long as the world

is perfect, that's okay, But we suspect it's not. Daniel Moore, thank you so much for the briefing, and thanks to Verry by this morning. What's key there to his great mathematics is one and a half standard deviations under math is not a point of panic, It's a point of business as usual. Anxious with these reports whatsoever? So should I should I start buying? This doesn't change anything for anybody. That's just kind of push back to the big debate

over the consumer. The next crack you see in the data, the battle pile back on again and say that cracks it back futures. At the moment, we're doing. Okay, Donna Petison joining US Now City Global Economists to weigh in on the date. It's Donna, great to have you with us, way and please sure. I think data are absolutely amazing for the US of low initial job of claims, meaning that there are two people getting laid off. It marries very well the data we're seeing. UH an arrogant with

respect to payrolls. We do expect payrolls will flow a little bit over the course of the year, but still average one thirty five for the year. With retail sales again, as you were just saying, yes, we do see some cannibalization of of brick and mortar sales because of non store retail sales, but still at all, most people are still going physically to places to buy things and items and services, and so overall that's really great. And we're

still expecting the consumers to contribute to the economy. Looking at an average two and a half percent growth in consumptions for this year and for the first quarter two points if you dig into the numbers, the retail sales X auto month over a month beat significantly. Actually, they were up zero point seven percent versus an estimate of zero point five percent. Similar with X auto and gas. When you look at that category, which sectors are picking

up the slack? Were the auto industry, which continues to see weakness. Well, certainly we saw really strong sales and clothing, um, general merchandise. People are still going out to restaurants and eating and drinking, so it was really a lot of strength here. Well, look at retail where was it week? I mean, I see and the end of Scott Lammon's story, Dana, I see that department stores are negative five point five percent year over year. You do that two years in

a row. That's a problem, isn't it. Well, I mean, I'm just looking at a string of negatives for that, And it's not surprising that these department stores are losing momentum. We've been hearing about that for several years now. And yes, they are losing market share to the non store retailers. But I think also when you look at the non store uh number, it's a mix, right, So you'll have some brick and mortar stores that have offline sales, and

they just kind of mix them all together. You know, John, This is important because there used to be an academic discussion about institution on js Panay at five dollars a share. We're under a button. That's the marketing campaign they should be doing it. Institution, I mean, is an American institution and it's been in Is there an energy must go to a J. C. Penny a long time ago? John?

Is there any equivalent London or UK institution to J C. Panny? Yeah, there's a couple of struggling department stores, House of Fraser, Evanon's couple of names for you in the United Kingdom that have really struggled over the last decade or so. The same shopping experience. You go into somebody's stores, Tom, and you're just not treated very well. The people in that look like you don't They don't want you there, so why should you be there? In fact, that applies

also to luxury on on Fifth Avenue. Should I go on a rant because it really annoys me? Evidently we don't. When you go into my store on Fifth Avenue and you walk in and you're interested in buying something, because You've saved your money up and they look at you like you shouldn't be there. What is that about? It happens constantly. What is that about? It is why did they think that's okay? It is principles of these firms in America not reading the Riot Act to the help.

It's absolutely ridiculous. We're talking about retail sales. We're not talking about Fifth Avenue for the most of it. And Dana, you know, there is a question, and I mean, look, I agree with you, it is service. But then there is a question, what are these retailers doing wrong? If retail sales are actually picking up, why are we seeing the likes of coals J C. Pier to Tom's point and tar J, I've got a great idea, and that's time you go into the department store. Yes, so bloomy

Dale's talk to me like you want me there? That would that would help? I might actually want to spend some money in your in your department store. Well, how behind are they basically, you know, and and that's sort of you know, how much they have to invest, how much they have to pay people more, how much do they have to over you know, research. Also, I don't get lost walking around the store. I don't want to wait twenty minutes to get an Alephanka to address it's

not difficult. I want to go to Dana Peterson on this with City Group. We're thrilled that she's well, this is warning Dana. This talks about the labor component, and the question is can retail continue forward in a fully employed America? I mean labor, labor and retail is a beginning job across all of America. Can they get the bodies forward to keep brick and mortar retail going or is it done well? I think an important thing that

we should look at is big box doores. They've actually done extremely well, and they've just exploded in terms of the number of them and also their sales right alongside of your non store retailers. And that's because they are giving you the discounted price. And so we should look at the retails of a more differentiated market and understand that.

You know, certainly, UM, when you're looking at labor, you need to have things that attract labor, such as benefits UM And certainly, if if you're big box stores not able to do I'm sorry if you're department stores aren't able to do that, then you're not going to get the best quality of labor. Well, but this goes actually the John's point, And I was, and I don't mean to downplay your point because it is important give service.

I'm no, I mean I'm gonna build on it. Basically, how difficult is this situation amid this massive shift in retail where stores brick and mortar have to be investing substantially in their online businesses to compete with Amazon, while also paying up for staff, will also making sure that the actual experience is something special and exciting and not necessarily depressing on Fifth Avenue. For John Farroll, well, we can look at this as creative destruction. They're always going

to be industry. So if we think about the whaling industry, that's no longer exists, right um, and the world still move forward the whaling industry, no comment there, um, but certainly uh, within the retail sector they left. Again, there's differentiation. You have luxury, you have your big box, you have your discounts discounters, which you're also doing very well, um, and then you have your brick and mortar, big department

stores that aren't doing so well. And there are different aspects of it, and certainly if you are a retailer, you have to consider all these elements. Thank you so much, Dana Peterson, thank you very much. 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