Surveillance: Stock Picking with Emanuel

Equity and Quantitative Strategist ever Core. I s I, I want to go to the fact folks, and we protect the copyright. I'm not gonna send you out earnings Edge. This is what Emmanuel has brought to ever Cores. I s I. Every day, the granular nature of where we are, and I want to know what disinflation is doing to your granular research. Note here early in earning season, Well, it's the revenue line is coming in and that that's

really the story. And then the question is who are the companies, where are the pockets within sectors that can actually hold the bottom line given the fact that the top line is decelerating because inflation is coming in zero hig every Afternoon does a brilliant job with Bloomberg charts here, and one of them is a short squeeze chart. The last two days big up equity market. We've had massive short squeeze. Then what how do we get to the Then what after we take out all the negative bets

on the market. So if you think about it, the last two months, we are within this range in the SMP thirty eight hundred, the low, forty one, the high. And what it is is this tug of war between the view and rightly so that inflation decelerating more rapidly than people expected. You know, ed him is looking for two and a half percent inflation in three, which is very very bullish on balance, except for the fact that part of the way that you get there is a recession.

And when you think about the I, s M S, you think about leading economic indicators, you think about the money supply contracting, they're all telling you that that recession is going to happen, but to the point of possibly seeing lower earnings and yet upgrading the forecast for the earnings target. As Tom was just talking about, how much is that a gloom already priced in a recession, a

downturn and earnings, the forecasts that are coming in. So the reason that the market has gotten off to as good a start as it has is you look at bottoms up consensus, and it started the year at two hundred and thirty. Everyone knew that that was a fictitious number. Our number is two oh six. But I would suggest that actually, in talking to our clients, the by side is looking for more like two hundred. Now, part of the narrative around this short covering, among other things, is

that that number could creep higher. So we were talking about some of the cuts that we've seen, the announced cuts at technology companies in this morning, as we get the slew of SMP companies reporting earnings, we're seeing a similar tone. Is that going to be the theme? Cutbacks? Is it steep enough to get you excited? So, look, cutbacks have actually rewarded stocks over these last several months.

But there's a finite aspect to that, because you know, when you look at the way reports are coming in, there's only so much you can do to massage your bottom line. If your top line is decelerating, I want to talk to you about not so much. It's anathematic Julian Emmanuel but he's a fundamental guy working for ed Hyman and Edeheiman has always believed in mixing in economics

with with fundamental analysis and technical analysis. Ralphan Kompora dark in the door yesterday, the technician, the giant of the CMT world, and he was heated. There was a bottom constructed in October? That's a lonely call right now? Was

there a bottom constructed in October? So what it really comes down to is if there's going to be a recession in the next twelve months, the answer is no, Okay, if the recession is going to be both postponed because we have such an accumulated level of savings, because China is reopening, because the labor market has confounded everyone with its strength, that could have been a bottom because down twenty seven five at the low in October was the

average of a hundred years of non recession full your notorious in lonely six point one China GDP call over to American equity optimism. So and actually the interesting thing is is our China guy took his number down to five nine because the fourth quarter of two is going to be better than expected reported, better than expected um

and and what it is. It's less a direct effect on the US economy and more a psychological boost because you look at the greatest names in corporate America, one of which is reporting next week in between the FED and the unemployment report, and if those stocks do well because China is doing better, that's a wealth effect in the US. Just real quick here, because this has been a theme over the past couple of days and weeks, is people are moving toward Europe as the outperformer this year.

Do you buy that with the China reopening disproportionately affecting that region. We buy that. We buy that. And and the interesting thing is some people might say, well, the e c B is now the most hawkish central bank in the world, and and that is probably true looking at the next six months. But the fact is that you are absolutely ridding Europe once and for all of the psychology of negative interest rates, and that is a massive positive for equities long term. We have a big

take story out to this morning, folks. This is from our crack Feder Reserve team in bontem Liz Capel McCormick writing with Junal Marty as well. And this is outside your pur view, but this is something Mr Hyrman's looking at, and he has debt ceiling experience. If we have a debt limit fight, is the headline goes, does it mean the end of q T doesn't radically adjust the FED

policy that your shop sees. Well, it's certainly ups the stakes with regard to what the chairman is going to say on February the one, because there's no question that he's going to be asked about that. And and look, the part of the bowl case of the last month is that there are cuts priced in the back half of the year, lots of cuts. Are those only going to be in response to a debt ceiling debacle or are they a consequence of an economy that would be

turning down naturally. It's really an open question earning season earnings edge as well. What you're earning edge gonna say when you're write the last report for Q four it was it was a sloppy ce season, much more closer to the pre pandemic normal. UM numbers are coming down, but again at the index level, not as important. It's all about picking stocks in this environment. Juliana Manuel, thank you so much, really really appreciate that we pern on bigcoin,

which means we can go to John Farrell. He is in London with the always interesting Carol. I'm pickering, Mr Farrell. I actually have to start with an apology. Tom just quickly taking a lot of heat for this from the last segment. Aluminium, okay, just aluminium, You're not aluminum. I think we get it back to front. I think you did the English version. I did the American version. We spent too much time together. T K. Thank you Callum pickering with me now, senior economists at Barrenburg. Calum, I

don't want to start with that. I want to start with this. This from BNP Paribah in the last twenty four hours. I'll read the quiet out for you when I'll get your view on it. Soft landing has been the catch phrase for still young twenty three, but we think it will go out of the window and the same fashion as transitory inflation did in two. That line right there, you are great well. I think there are

risks to this scenario. I think the dangerous in markets we start pricing in I would call it law law Land, which is we have two risks to worry about. There's the huge global energy price shock, which so far. Actually, at least in Europe and the US doesn't seem to be playing out quite as aggressively as markets amount of thought, say six months ago. But then there's the reaction to that,

which is type financial conditions from central banks. Remember this energy shock hit tight labor markets and type product markets coming out of COVID and triggered these second round effects. And so the danger here is that we think, well, if the first risk is not so bad, central banks just cruise inflation to two percent. We don't really get anything severe when it comes to the recession, and everything is going to be fine. History suggests central banks rarely

get these kind of calls. Right, we already made a central bank mistake in one. The danger here is that we forget that central banks occasionally make these kind of mistakes, and then landing a bit of a mess in the second half of the year. What's the mistake potentially this year doing too little or doing too much? I think

probably doing too much is the bigger mistake. Monetary policy works with the like, but the problem is, once you've reacted late to inflation repressure, it's very difficult as a central bank to justify pausing while you still have signs of inflation. And so a good example take the latest mix of UK data. Clear measures of economic activity week through December and January, no question. But then you look at the November data for services inflation and December services inflation,

you look at the wage data and it's still edging up. Now, the economist in me says, these price data reflect things that were happening in the economy three to six months ago, and so the prices three or six months from now will reflect these weak measures of activity. So central banks should indeed pause. Whether or not you can do that with inflation with a nine handle or an eight handling.

The US is let's talk about the situation. Tom mentioned it earlier this morning, when hundred nanos on the jobless climbs. What does that day to tell you? Well, again, labor market UM data react with like underlying fundamentals. UM. The reason why the Phillips curve was so appealing for good thirty years as an economic policy model is because government's in central banks thought if we create some inflation, we will have strong employment data. UM that still holds. We

have a high inflation re environment. In nominal terms, economies are raising ahead. This gives us an illusion of strength, which encourages strong labor demand. I don't think we're heading here into a severe recession. I think, you know, the business cycle dynamics are not late cycle. This is an early cycle economy the Western world and early cycle economy that's been intercepted by this big Exhulgan shock, and in central banks have reacted. But it's far too early to

say that recessions won't happen as a general rule. Um, I think actually all the pain is probably still to come. What can you learn from corporate guidance? So we've got a couple of earnings reports this morning. Our cherry pick to the R Horton as a home builder in the United States, purchase contracts the three months through December down thirty eight percent from a year ago. I'll pick another one. Three M job cuts. I'm told there's a big chin

to reopening. It's going to have manufacturing industrials. There's one kind of jobs. What do you read into these right now? But that seems to be the effect of the tight financial conditions on economies rather than the initial energy shock.

And this is again where we just have to consider the lags that we're dealing with the energy price shock, which actually for the US, the UK, and even in Europe where we've managed to get enough supply now it's really a terms of trade shock rather than a supply shock. We get the energy we need, we just pay more for it. We see that immediately. There's not much of a lag between the high price and the impact and

economic activity. But there is a lag between what central banks do and economic activity, and so it's not inconceivable that there's very unusual window where the first shock isn't as bad as expected. Things look fine, but then we're just waiting for the monetary shock to come through. That's why the housing market data and the labor market data are in Houghton, because those are major transmission mechanisms for

for monetary policy. And that's where I think we we fall into this trap of thinking economies are fine, central banks need to go a little bit further to cool inflation. But in fact, actually we've just made the opposite mistake to what we made in twenty one, which was then to ease too much. Now the risk is we tighten too so we're price to get what Ko Lana land relative to what you expect later This year. I think the risk is that we start to price in this

law law Land situation. I don't think it's inconceivable, but it's conditional upon certain things happening. And the main thing is that central banks don't make a mistake. And the other thing that we just need to keep in mind is we are out of the great moderation world where inflation was trending to the downside and central banks could make a one sided bet that you just stabilize growth

and trust the inflation will remain low. When now in an inflation environment, aging populations, the globalization activism, which means monetary policy is asymmetric in the opposite direction, we worry more about inflation risks then we worry about deflation risks. Or to put in another way, central banks now face

a trade off between growth and inflation. And remember, we wouldn't be worried about a recession now if central banks hadn't reacted, If we were happy to just accept the inflation risk from this oil and gas shock, then we would avoid a recession. But central banks actually, no, we're going to accept the growth risk. We'll put economies into recession to control inflation and therefore to the extent that this oil excuse me, this gas shock is not hitting

as hard as we thought because demand is stronger. That may mean that central banks say, will if demand is stronger, we need to go further. That's what we're hearing complicated right now. Can I'm pickering of Bamberg Cannam. It's more complicated than I think these markets let on in the early weeks three right now. And while you can pick this economist to that economist, this strategist to that strategist, but it helps to have a chief investment strategists in

chief economists. This is City Global Wealth, who is truly expert it linking the earnings and profitability dynamics of American corporations into our greater American economy. Owning the high ground on that is Stephen Whiting, and he joins us right now. Stephen, I loving your research. Note how you say there are beats out there and there's a bang up fourth quarter, but you're just not all on board the American recovery. How out of how how painful will those corporate earnings

announcements be throughout the year. Well there's something to adjust too later. It's it looks so much in the analysts earnings estimates, like the fourth quarter was the recession, and here we are sitting in the recovery. And it actually

looks a little bit like that in financial markets. And it would be wonderful if that were really the truth, if we weren't just on the leading edge of the hit that we're going to have profits um And of course how markets traded last year are not anticipating this to be, you know, some kind of profit Nravana. We don't have declines, uh, you know about something. But if you really take a look at the estimates, they fall

at a annualized rate in the quarter past. This is like a setting a hurdle that a toddler could leap over. Most companies, by far are going to beat those estimates. But then they're putting all that promise of the future that the year will be a growth here for EPs and the out quarders, but as soon as the second

calendar quarter, the April through June quarter, there's a substantial gain. Now, there's some complexities when you beat your earnings estimates, it's easier to hit those later numbers because of the level they come in. And but the idea that this is all behind us in the economy. I don't think that's true at all. Then how do you participate? I'm going to assume that City Global Wealth Management is not enjoying being a hundred and in cash like the triple leveraged

on cash fun How do you participate? I know, how do you participate if you're not all in cash? We look, we've got to live with the ups and downs of equities markets, and we've had three rallies and excess of ten percent since the Fed started tightening the real rally the turning point for the economy, the beginning of a new recovery is likely to begin. This year could be a stronger year for the economy. Do we think that we should already be discounting this recovery. No, so we

are playing it safer. Again, our largest overweights are in firms that are the most consistent dividend growers, in pharmaceutical shares that have low cicklutality. I think this very near term period, especially before we see the January employment report and we probably see the Fed deliver hawk is UH is probably going to be a period where we're gonna have to settle back a bit. UH. And again that does not tell us to time the market and be

all out of equities. But we're okay with a short covering rally and low quality shares and just missing that for the mere terms. Even how much it would you lean into oil majors in particular because of that dividend story, that share buyback story, and not necessarily a call on commodity prices. It's a full waiting despite a poor ciplical backdrop, and we think that a lot of industrial and materials companies are going to see earnings down visions are going

to see weaker activity this year. I would say though that petroleum generally um is pretty well positioned for for a week period for the world economy. The downside maybe seventy dollars in the Brent price in what will be a probably a mild global recession or something that we might call that. Uh literally, the US economy is going to have some significant job losses. We don't believe that you have sales declines without real job declines. We're not

just talking about job openings. But even with that said, OPEC has cut production early supply sources around the world are recovering slowly, so I think this is not going to be a particularly bad cycle for energy. Meanwhile, you mentioned the FED, and we have been steering clear of the FED because they are in the quiet period ahead of next week. But there is this question inherent in a strengthening financial conditions index, a lesser negative actually a

positive that Tom has been sighting. As you see the stocks rally and as you see ponds rally, at what point does this bush the FED to go further, to do more than people currently expect, simply because this really

does kind of make it more difficult for them. Well, look, I think the FED can't entirely ignore the fact that real data two months of decline and industrial production, two months of decline and retail sales uh, you know too much, two months of a decline in total hours worked, and all of that survey data that you mentioned or softening. Plus we are seeing a deceleration and and inflation. That's for real. Here we have a decline in money supply.

Yet the FED is not going to be satisfied, And unfortunately, I think that that is their mistake because you've heard from an earlier guest that the reality is that there's still pipeline effects on the economy that are coming The problem for markets is that they can't ignore the slowdown in the economy that will change the Fed's view. And the FED isn't all likelihood going to try to weigh

against these easing the easing and financial conditions. You know, will they do that by tightening more and harming the labor market even more? They probably won't, But they're gonna leave it to markets to sort this out, and there can be certainly more corrections ahead simply because of that mispantter.

That's a critical distinction, Steve Whiting. If they're going to quote unquote leave markets to sort it out at the end of the day, do markets tell the Fed what to do with its understood asymmetries whate I think about the message at the long end of the bond market, the treasury market is saying that the FED has already at an unsustainable funds rate, particularly now that they shrink their balance sheet four or fifty billion dollars, and they'll

continue to lend less to the bond market. You know, that yield curve steepening that they predicted on q T didn't happen again. So I think that ultimately the FED is going to get this forecast. But again it is predicated on the notion that are labor markets, that demand for labor is going to fall now that we have sky high inventories and massive declines and home sales to reckon with in terms of labor markets. So the Fed

will get the message of markets. I believe the longer term bond market is telling the FED the right the right message. I just do think that they're going to say, like they said in the minutes, uh that if they markets have misjudged their reaction function and they're going to ease here quickly. Um, that's not what they're going to do. I wish they would pause if they're not going at least you dove tell that with what Andrew holland Horst

said the other day. Yeah, we go up call from fifty, etcetera. But then you get to a level into Mr Whiting's comments, they stay there, Which is the reason why some people are leaning into the long end, because they do believe that or restrict growth. They do believe that the Fed will induce something that's more significance. Even how much are you using longer term treasuries longer term sovereign debt as a ballast in a really uncertain time. Well, we are.

We're overweight long term treasuries, underweight other markets like Japan for example. Again, because we believe the correlation between stocks and long term treasures, equities and long term treasuries will break down, it will be negatively correlated. Again, portfolios will work with you know, barbells of high risk and low risk at the same time. Though, it's the front end of the curve and the belly of the curve that's

offering real yield, so we have larger overweights there. And again this is not to be negative in the long run. We can't be too cute about when markets can recover, but we're just not going to load up on a lot of cyplical risk. Interest rate risk we think is peaked in market, so we don't have to worry about long bond yields going to six or seven. But we do think that there's a price to pay to keep ten year treasury notes at three and a half. Stephen, before we let you go, do care about the death

ceiling debate. I think it's likely to be highly likely to be resolved, and I think that the debate over uh the House speaker role again probably overstates the amount of risk. There are multiple ways to address this. There are again some ways of which we can cause a disruptive period again losing the House speaker role, not preparing an advance sufficiently for this. So it can be a market concern. I doubt that it rises to two thousand

eleven levels of worry. Again, Stephen Winning, thank you so much to complete an also staring particularly linking in earnings in corporate America into the greater American economy. He is with the City Group. This is an important conversation this morning in London are John Farrell was conna of D and F ME and John T. K. Thank you buddy. As always, I want to talk about two metals, not just copper, but aluminum as well. Year today, these two

offen the race is absolutely flying at the moment. Year today, copper at more than eleven aluminum more than ten percent. We are just three or four weeks into this kind of hack joins us right now. Kinda let's talk about it. I want to start with this. It's a big question, big picture question. It's an important one. How commodity intensive is this reopening going to be in China? That is actually the big question. I sensed that right now it's

very sentiment driven. The idea of China reopening. It's definitely gonna lead to a lot of pent up demand, just like it did when the US and Europe opened up after COVID. But in terms of actual manufacturing intensity, which requires the huge amounts of commodity imports, I feel like China's commodity imports are still pretty good. I mean, their stock levels are really quite high right now. So I think right now it's potentially the copper rally is running

ahead of itself in anticipation of more to come. But I think we just have to be a little bit patient on that. So when you hear Jeff Carry of Government say eleven thousand, five hundred this year, you're pushing back. I think short term, I think we might have run ahead of ourselves. But I do agree that copper fundamentals are tied, inventories are still free slim, the supply side still looks like this huge amount of capics and still is required. Um, But I don't think we're at crunch

time right now. But I think right now it's a very sentiment driven, and understand it's all things China. When you look at the marginal dollar increase of China GDP. Has it become more or less commodity intensive over the last decade or so? Is that something that's declined. Yes, I think China's reopening. It's significant, but it's going to be different China. The structural changes that we're seeing in China.

I mean, we've been talking a lot about the population decline, the fact that the property set is no longer as hot as it was before. The manufacturing is slowed down, there's no longer that big impulse and push, you know, to go back to your point of what intense intensity of consumption of copper, I just don't think it's as going to be as strong as the two thousand and ten reband for example. We'll talk to me about where

you do want to be? What bucket do I want to be in right now preparing for the demand that's going to come west, tom On going to show up. Oh So I do think commodities are a good place. Um and I feel like copper and alley have you know, slightly gone ahead of themselves. I think crude all is justified because you know, right now, at particularly ahead of the February fifth European ban on Russian products. I think

China has a huge role to play that. So they're going to be in putting more crude in order to meet that gap in terms of product exports, and they're doing that in a big way. I think mobility in China it's just starting and that's going to be again, very oil intensive. So I like crude oil very much. I think to a certain extent acts as well. I think is as they start the Chinese go out and looking, you know, going back into restaurants and consuming what they

couldn't behave back in the lockdown. I think that could be quite good for the beefs and therefore the feedstocks, which is the grains. Triple digit crude back on the table just a bad. I think I might touch a hundred, but not unless you go high. The reason I asked that question is because we're all trying to figure out how much of this we import to the United States, to Europe. Do we import higher prices from what's happening

in China right now? And that is the risk. So I think, yes, there's a potential that we see a little bit of an uptake in commodity prices, but for the reasons I mentioned before. I don't think we can sustain higher because the rest of the world is moving into recessions. So we're just a little bit too China centring right now, and I think we need to balance that out by the fact that the USA and Europe are slowing. When you say the rest of the world's

going into recession, who do you mean? Um? Okay, good question, because the idea is at least the bondmarkers are telling us that the Europe, that Europe and the USA are going to intercession, maybe a mild one, but it's still heading that way. The tent the yield curves are definitely pointing to that. Um. Obviously, don't look at the stock

markets that nothing. Everything's great and rosy. But I think if we are paying attention to perms, and maybe not today's European one, but uspre mis are going to come out later today, If those start showing continuous contraction, I think we are looking at a recession. And I think even if it's mild or not, it has to be taken into a can and that might have an offsetting balance to any China reopening. The markets are playing a relative game with things better or worse than they were

three months ago. Clearly they're better in Europe. One thing I don't think we've discussed enough is the fact that Europe is still projecting what zero percent zero point five GDP growth for the year ahead. Why aren't we talking more about stagflation? Why is that word not being used a whole lot more? Actually, if you talk to some

hedge funds, they are talking about stagflation. And it's interesting because in a in a stag inflationary environment, you want to stay long some commodities, but you also don't the state commodities that are economically dependent. In that case, something like aggs could do quite well because those are income in elastics. So no matter what happens to the economy, you need a certain level of agricultural foods. So some people like agriculture in their basket as a good hedge

against stagflation. Um. So you prefer a long and soft commodities as opposed to a long in base metals. Um? Oh? Good one? Um? Yes, interesting, that's the year ahead conviction call for you entertain kinda hack. Thank you of a D and F map. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten AMI Eastern and 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 In. This is Bloomer h