Surveillance: Stock Picking Is Back, Says Kirr

us a two hundred dollar top tick on Apple. We're not going to do that with beyond A. Kirschy's co head of investment Strategies, Burnsteain Private Wealth, but she is in the heart of the earning season as our Gina Martin Adams, what is the trajectory of earnings that you seem as Kerr Well, what we see as an earning season that's likely to be more volatile than the last several We're coming off of a substantial rebound and earnings, whereas in prior quarters earnings are up forty percent year

over year, the consensus view for twenty two has really moved to a nine percent year over year view. Now that's still positive and that's one of the fundamental underpinnings that's really driving the equity market forward. But like you just said, this is going to be a story of figuring out supply and demand. The demand still appears to be there. Who's got pricing power is one of the

fundamental differentiators in this earning season, Bietta. Are you buying consumer staples considering how much they've sold off in the fact that we have seen them able to pass along that pricing, Well, what I would say, at least says it's not about a sector, it's not about a style. It's about the stock picking. Stock picking is back, and even though thirty percent of managers only are beating the SMP year to date at Bernstein, we've had great success

this year with stock selection. So it's not as easy as saying by this sector. It's about the company. Do they have the ability to pass on price increases? And some companies do and some companies don't, So you really have to differentiate by the individual company. So told to me about the pittas of support into next year for this equity market. If you're constructive next year, what are the things that you see right now that can persist into a new year. Well, what we see is still

strong economic growth. Obviously, economic growth is fading from the incredible rate at which we were growing in this calendar year. But we're still looking for close to four percent GDP growth in the US and over four percent GDP growth globally for twenty two. So you've got that as an economic back drup. We don't think the Fed moves rates

until tree. The taper argument is out there kind of well understood by the market, and as you were just discussing, it looks like we're still going to get some stimulus, even though it is a measure pace. This is really important. You have us vision for how along be out of that's for two thousand and twenty two. Like you said earlier, the visibility is murkier, Tom, So there's a wider range around that. Fair okay, But how do you get to that optimism we got, We got most people way under

yond that. What's the Bernstein call that gives you that enthusiasm? I would say that the Bernstein bottom of view to get to that economic perspective is still that there is tremendous support in the overall output. What we're seeing is while you see manufacturing plateauing a bit. You still got services rebounding. Look at the supply and demand issue. The real issue has really been in goods. Services are coming back, you just said it earlier. Consumers are coming back, families

are traveling again. We do have to be careful on the lower end of the consumer especially, but what we see broadly is still support for that strong economic PETA. One debate aspect of debate on this show repeatedly over the past few months has been what the investment thesis is around what's going on in Washington, d C. We've seen mostly dysfunction, but they are working to get something done. How do you price in the idea of more fiscal

stimulus but also the idea of higher corporate taxes. Yeah, we think the market is really acknowledging that the corporate tax rate is going to move up a couple of percentage points, so you're looking at a mid single digit hit to earning scrolls. So there is some vulnerability in that current consensus number. The market has been a in a weight and see mode to see what actually happens. But if you look over the last six months, nothing close to what was originally proposed is going to happen.

So while there is some downside pressure from the corporate tax right likely to come up, it's far less threatening than it was at the outset. And then, like you said, Lisa, there's the offset of more stimulus actually coming in to support the consumers. So I think the markets, you know, saying weed again, it comes back to companies pricing power that's supplied. Demand picture is going to be much more

important for earnings outcomes and ultimately market outcomes. Bieta, we've been talking about some of the pessimism out there and that markets have rallied despite all of that gloomy talk. What is the biggest concern among clients who you speak to who have to figure out how to reposition. Well, it's not just the biggest concern amongst clients, but it's something that we're watching the most closely as a potential risk for the market, and it's what we've already brought

up several times. Is inflation transitory and our house view is that it is going to moderate from the extraordinary price increases that we've seen over the summer, but that the likelihood of it being higher than it was pre pandemic is going up. So We're not talking about in nineteen seventies type environment, but we are talking about an environment that's in the two to three percent range in all likelihood compared to the much lower numbers that we

sought pre pandemics. To thank you Bianno that of Burnstein Private Wealth Management on the path forward, rust Coat Street joining us now he's not ugly portfolio manager for the blank Rock Global Adication Fund. Just around the corner, Russ from all time highs walk me through while you're still constructive set. Good morning, John. You look, I think it's pretty straightforward up. We have a market that's earnings driven. You know, last year was all about the multiples. This year,

multiples have been flat. They've actually been down a little bit in many sectors. But is Lisa pointed out a moment ago, earnings have been stellar, and yes there are reasonable concerns about margins. But when you have an economy it is growing this fast where nominal GDP is still growing at the best level in years, if not decades, you're seeing that manifest on the earning side, and that's been powering the market higher really all year. You know, I look ross where we are right now, and we're

all trying to reset. I'm getting some optimism out there. Lisa, I think nailed it in her opening comments, and the idea that even with some worry about rising raids, steeper curves and all that, we see corporations delivering within this environment is at what you expect. Yes, I think the short answer is yes. And you know, just to be clear, I get the rate concern. We've had some volatility coming

from the bond market that is likely to continue. But again, just to put things in perspective, we've got some deceleration, economy still very strong numbers. We've got the US household arguably in the best shape in decades, whether you look at savings, household net work, you look at the growth and income, and against all of that, against all of that, we've got a ten year at one sixty three that

is not an exerstential threat to equity markets. When I look when I look Russ at the moment and the back and forth narratives, we see the gloom narrative is evaporated in the last ten or twelve days. What's the caution you have in portfolio management? How do you take those narratives, take them in and stay optimistic now I think one look at what's driving Mark gets to go back to earnings. But there are some risks out there, up the risk to needs. Not again whether the ten

years at one sixty. Uh, it's around some of these supply issues. One because obviously it feeds into inflation, and as we've seen, inflation has been stickier than forecast six months ago. But it also can affect growth. But the key here is that you know, these supply issues are while they're widespread, they're more heterogeneous than I think. A lot of the narrative talks about what do I mean about that? Just take one segment of the economy. People

have spoken about commodities. Even there you see all of this diversions, copper, iron, ore, lumber, aluminum, They're all doing different things. And this is just again within industrial commodity. So this notion that we're going to be strangled by supply I don't things right. But at the same time, whether you're talking about inputs, semiconductors or the most important one, labor, there are real supply constraints that we have to watch. Okay, Ross,

so you talk about nuance, let's talk about nuance. You like consumer discretionaries, you're not that fond of financials at this point, even as you do expect yields to rise. Can you square that for us? Absolutely? I think there are a couple of things behind that. The first of which is we don't expect yields to rise that much. There's still a wall of money looking to invest. You still have everyone from pensions to UH endowments looking to

take advantage of the backup and yields. You've got foreign investors looking to take advantage of backup and yields. Second, if you actually look at what's been happening on the curve, as you know, it's been flattening again, not up. Not a huge head wind, but again not a tail wind either for for financials. And then finally, I think we consider where do we want to be right now. One of the key ingredients is pricing power, and this the

simple answers. We see better examples of pricing power in manufacturing UH in parts of materials in the consumer space, and we do in the financial space. It's not obvious how much pricing power banks and other financial companies have right now. I think they're better opportunities elsewhere in the economy. All right, and the other side that I thought was

really interesting about how you are nuancing your portfolio. As you don't like gold, you think it's kind of useless as a hedge, you think it's kind of useless as a potential for profit. Aine why and when did you start to actually sour completely on gold as an allocation. So we were fairly long gold about fourteen months ago. I think, as we've discussed now the shows, we were really brought it down starting late last year earlier this year.

And it's not that gold is always useless. There are periods such as last year in gold is an incredibly efficient hedge. The problem is gold is very responsive to real rates, and we have seen some normalization real rates. The other issues you've got to ask what is gold hedging against? What is its efficacy as a hedge? And

there are two areas that people normally quote. One is risk unfortunate right, and now if you look at how gold is trading, is actually trading with a positive correlation with equities, so it's not really doing a great job hedge and equity risk. The other argument is gold hedges inflation. I think that's partly right, but it's right on a timeframe that most of us don't think about whether you're talking about literally decades if we're thinking about how do

we want to hedge inflation in the near term. To my mind, the better hedge is focusing on equities with pricing power that are gonna keep up with that sticky inflation rush. Fantastic to catch up with you, sir, with record high it's just around coal and a rust Co strick. There a black rock widely anticipated by Global Wall Street.

We bring a Daniel, I've senior equity research journalists at wed Bush, will do Apple here one question on Tesla this morning, Dan Ives reaffirm the accounting integrity that gets you to a thousand on Tesla and ms Wood to three thousand. I think it continues to I never viewed house as an automotive comes a disruptive technology player, and it comes down to can they do one points three to one point four million units next year for coming out?

It's now start me profitable selling cars. You put that together, some of the parts, I think thousand dollars in East case, I think bull case. You we've got to reset on Apple. The new toys are the new chip is extraordinary by twelve course speed for those that don't understand that. All

you need to know is there technological marvels. Do you adjust your bull case not your call of two hundred, but to get out to a three trillion dollar Apple at a hundred eighty one dollars a share or a four trillion dollar Apple a two hundred and forty one dollars a year state the bull case, Yeah, in bull case now to was two hundred, and I think that the part that's really the delta is the innovation from a marginal expansion story that you're gonna see a Apple

on their new chips, as well as what I believe forget just the chip shortage for a second, but right now demands outstripping supply by about ten to fifteen thousand, you know iPhones. You know i'd say per day. You sort of put that together. This is something that you know, I believe right now we're running into about a five percent SHORTAGEES on iPhone going into holiday season. If you've got an idea down of what the product mixes like around that shortage, is the high marchin goods that can't

get the chips? What is it? Is it broad based? What's you read on that down it's important for the Martin story. Yeah, I mean we got a call about five ten million shortage that that you could see going into holiday when you put all together. But I think the one thing too is a SPS continue to trend much higher. China the star of the show for Apple. That's going to be front and center going into next week.

I think you put this all together, we think this is the three trillion dollar mark APP going to early next year. As well as the services you know continues to be the accelerant in that Cupertino growth story. Now you've got two new products from a hardware perspective in

terms of the macro time talking about in AirPods. I I continue to think this is just a massive growth renaissance and Cupertino down hard to gain this out, But just for this quarter, given the supply issues, can you envision a story where we miss on the top line but beats on the bottom line for everything you've described. While I see it, it's a beat on September across

the board. I think Nicked Gardens for December may be cut by about two to three percent just on that unit shortage, but then ultimately two thousand numbers come up and right now the streets looking through any sort of timing trans story issues and ship shortage to two thousand twenty two growth story. That's why haters will continue to hate on Apple. But in my opinion, this is the stock that continues to move higher right now. They have

a supply issue, not demand issue of high class problem. Dan, how would you like to see them use their money on the outside of buying a country right which is always an option which they they have the I think I think right now it's going to continue to be about to buy back, David, I don't see them. The only acquisitions I see them doing is more and more we'll call it strategic content acquisitions, you know, as it

goes to an Apple TV. But this is all the drum roll to what's gonna be the next product in the nation coming on Apple, the A R v R Apple Glass next year and then the Apple Car in two thousand twenty four. I think that's what the drum roll and Tom talks about. How you get the four trillion I think three trillion next year and the next two years you're looking at a four trillion dollar mark ap for Apple as this all plays out. You said

that really the accelerant here is the services component. However, Apple is still very much a consumer products company, at least in terms of the reputation of consumers. We see certain pressures with respect to the app store. What services do you see really driving the charge as we really continue to look for the product side of Apple to innovate. Yeah, it's a great question. It's all probably the reratings store and you go back eighteen months goes services Street was

assigning three n jibillion. We think it's worth one point four and one point five trillion, So by monization on cloud, on app store, you know, really across the ecosystem, and just go back to some of the head winds called epic trial and regulatory streets, kind of viewing that as background noise. And that's why this stock is the one that continues to power through that for a mid team grower. And what's a seventy billion annual revenue stream? Dan, you

and I are close. I missed this one. Maybe I missed it a long time ago. When did you start covering GM? Yes, we look. We started covering GM over the last six months because my view in GM is that this is gonna be an e v transformation story.

You know, as as it gets rerated, and I think what you're seeing a GM and four renaissance and Detroit you start to get more of rerating a year from that GM to double very quickly, Dan, are they gonna make a cur America once, not some fancy techy thing like Tesla, but something you can get the family in. I mean, look, two weeks ago, I was out at their test driving facility and I test you have a bunch of the models. I think it's gonna be a

game change where they're coming out with a GM. I think marrying the team, phenomenal job what they're doing on this green tidal way. They're gonna be a big participant. Although right now it's Tesla's world. Everyone else is paying rent on evs and just quickly though, before you run for people who aren't familiar with the stocks you cover, Apple, Microsoft, Docu signed. Are you expecting them to get a tech

like multiple of the time. Well, that's my view. My view is GM and four they start to get rerated on disruptive technology. As they convert that base. You start to do some math. You convert about timber Center GMS based by two thousand five I think there's a three digit stock and I think that's the key here as it starts to get more of a rerating on this green tidle. It's a five trillion dollar green tidal way. Tesla's the lead about many others are going to benefit

by what you're seeing. The biggest transformation to the auto industry since nineties down amazing, fantastic acoun shops. I spent a bit more time on that in the future. Then I said that of wet Bush on GM general modes. We are advantaged with Julia Carnado of macro policy perspectives. She is truly an academic of the FED working in market economics with the knowledge of Dr Weidman as well.

Did he leave Julia, would you suspect because of the transition from miracle to something new for the Republic of Germany? Oh yes, I mean that was a very important inflection point for the Eurozone and UH and and the appointment of drag Each as as Jonathan said, it changed everything. So I don't I remember very well the existential moment

that we were in at that time. I was working for a European bank B and P Perry BA and UH we we actually had a repeated series of existential moments uh and Draggy turned out to be the glue that held it all together. In addition to Merkel Merkel's actions. Um, but I think that that was actually a very important transition away from the Bundesbank driven e c B towards something more flexible that had a view and a vision

to holding the euro Zone together. The hallmark of your work at BMP paribas you were absolutely right about Tepe of g d P within that era. The reality for Germany is massive trade surplus two x billion, only China ahead of Germany, with a huge foreign common component, and yet a domestic economy flat on its back. Does the new Bundesbank president have to say let's get this domestic economy going or do they not care? I mean, I think to some extent they do need to to to

say that. I mean, we do, we do still need UH demand driver in the Eurozone. All though you know, I think it's not quite as dire as where we were before. I mean, the Eurozone is is has weathered the crisis reasonably well as in a pretty decent position. But but yeah, I mean Germany is in the same position. And it's always been. It is a really key economy for the Eurozone and it does need to help drive

demand for the region. Julia. The idea that one of the lone hawks on the e c B is gone raises the issue that we see more broadly for central banks, which is the pressure really is to not make a move, to not make a policy, or to not raise rates too soon. And yet the market in the United States is pricing in two rate hikes by the end of

next year. What do you think it will take for the FED to actually get to that place given this pressure towards easy money policies for a longer time, I think the main scenario that has to develop for the Fed to move to rate hikes that steadily would be that most of this inflation do us turn out to be demand driven, that it really is reflective of a hot economy, a tight labor market generating strong wage gains, that the hawks are right about the labor supply not

coming back, and that you really have these demand driven, incipient inflation pressures that are building and broadening. That is the only scenario in which rate hikes makes sense as the solution to the problem. If instead most of this inflation, or at least a significant portion of it, is tied to chip shortages and supply chain bottlenecks that get resolved over time. The FED hiking rates wouldn't do anything to fix that and would actually harm the broader recovery. So

it's going to be really difficult to read these tea leaves. Luckily, the FED has some time. They've set out a tapering schedule that's probably not going to deviate, So we're tapering from here to June, and then then we'll see where

we are by then. I think companies earning reports are going to be a really important bell weather indication of how companies are navigating this, because let's not forget one of the things that's been one of the narratives this year is that companies have actually been navigating these challenges surprisingly well and in a profitable way, and all the incentives are aligned for them to do so. We've so we've been in a highly profitable, highly productive economy despite

all of these frictions and challenges. Does that continue to be the case? Do these problems get solved and we hum right into two That's not an unlikely scenario, all right, So in that scenario. If you see the FED staying on hold because everything's coming along, what sort of the tipping point in terms of ten year yields? I mean, if we keep coming along and the FED remains easy, the expectation is for ten year yields to rise at what point is unsustainable for an economy that has more

debt than ever before? Oh, I think we're really far from those levels. Uh, you know where we are is I mean last recovery, we we discovered through the ebbs and flows of yields that three percent was the magic yield on the ten year That really started to hurt the economy, That really started to hurt the interest sensitive sectors. And obviously that might be lower now, it might be higher now, but it's we're certainly far from there if

that is still the sort of magic number. Uh. So, you know, we could probably see, especially if this Rosier scenario turns out to be the right one, yields can rise and it's just fine for the economy. It actually serves to naturally cool things off, like housing which have been running super red hot. Julia, should we pay attention to Atlanta GDP now? I mean, it's a wonderful methodology.

Great respect for the talent here in it. Frankly the other regional banks that are guessing GDP E. But do you find value in the vector of Atlanta GDP lower or even the sub number? Yeah, no, I do pay attention to Atlanta GDP. They they're not always right, but they have a very careful and methodology that I understand. And so we're actually tracking one and a half percent two I mean they're lower. Let me interrupt because the times, Juliet,

I've got to interrupt here. If we have a sub two percent g d P, does that constrain the FED in tapering and also in rate hikes? Well, the problem with this number is it's all cars, it's all autos. It is all about the semiconductor shortage. So auto sales have plunged not because of lack of demand, but because of lack of supply. Inventories are down. This is also maybe constraining the construction sector. Where the number, what's the number,

what's the real GDP number if it's are adjusted. Well I don't I don't do that myself pre g d P. But you can look at that number once the GDP UH number comes out, and it will be substantially higher. So domestic demand. We've seen retail sales be resilient, We've seen other service sectors remain resilient. Uh, the consumer is

pretty resilient, the demand is pretty strong. So uh, you know, I think X Autos is going to be a pretty healthy above trend gain and we expect some you know, the beginnings of you know, higher production in Q four to produce another decent number were at four percent. Uh, So we'll see. Timing these bottleneck resolutions, especially with a SEMIS,

has been maddeningly difficult. Every time we start to get production ramping up, COVID comes back up, another factory shuts down, and the whole thing uh you know, hits the brakes again, no pun intended um. And so we're we're you know, we're just watching day by day how how things evolve on that production front. Uh. Now, magnesium might be another bottleneck, So we'll we'll see how all of these things have all.

But it's it's a wild ride given you know, remember was all about how resilient, surprisingly resilient the economy was. Now it's all about how surprisingly unresilient global supply chains are. But again, in sentenced are aligned to fix these problems. So uh and and COVID knock on wood. We're heading

in the right direction. Uh. And you know, hopefully the economy can move forward and and and those wheels can spin which struggle into capop still with Judia, thank you as always, Judy Carran out of that, Mattcrowth policy perspectives just wonderful. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live week days from evan to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best

in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene and this is Bloomberg