Hello, and welcome to What Goes Up, a Bloomberg weekly market podcast. I'm Sarah Pontzec, a market supporter on the Cross Asset Team, and I'm Mike Reagan, a senior editor at Bloomberg. On this show, we'll speak with expert guests from inside Bloomberg and beyond to break down what's moving stocks, bonds, currencies, and commodities, and how each asset class is affecting the others. On the show, this week, it's a tale of new highs.
The sp finally took out its previous September record, the US dollar is also at the highest levels of the year, and the oil rally just can't seem to be tamed. The question, Mike, is if all of that can continue? That is the question, of course, and I'm happy to say our two guests will give us the exact answer to that question, right or intend to pinpoint where the markets that war as you here is Chris nag, executive editor at Bloomberg, and he will tall us the exact
date and time that the bowl market will end. Is that right, Chris? I have that information, but you have to you have to wait until later in the show. Also joining us lup Kawa of the cross As Team. Luke has been very busy Europe in Canada recently. Right, I was indeed up in the coldest G seven capital a great, great time in in Ottawa, in rainy Ottawa watching the Leafs lose in Game seven and having my heartbroken again. Okay, well we'll avoid that topic from that case, Lukawa,
what caused this record in stocks this week? It's great when you have a stock market that is actually just a handful of stocks, as as the name would suggest. But more and more this rally has become a concentrated phenomena, and you know, you could point out that this is a source of weakness or a potential vulnerability, just that you know, a few tech heavyweights are essentially doing the
heavy lifting, empowering it higher. But then you have Facebook and Microsoft, two of those tech heavyweights just you know, absolutely killed on earnings and do exactly what people expect them to do with stocks in terms of Facebook top line growth, and you know, not getting their business model up ended by regulators and instead just saying, you know,
the three billion, five billion cost of doing business. And then Microsoft the cloud, just showing that that business is a structural growth business and not kind of having the decline people might have thought in the fourth quarter. So really it's just a story of you know, just the heavyweights are the heavyweights. They've really taken over and they've given us less reason to dope them. So to dial it back a bit, it was back on Tuesday when the sp finally hit those highs, it was that was
the magic number. And Chris, of course there are always bowl and bear cases to be made, but why don't you walk us through what are the reasons that bulls are coming out now and saying why this can keep going? Yeah, I mean the obvious, the most obvious answer to that is that the FED remains incredibly uh friendly to the market.
It's not going to do anything this year. It got like everyone else traumatized it end of at the end of two thousand eighteen, and it's basically vowed to sit there as stocks continue to go up ten percent a month or something or that seems to be basically their posture. The other bowl cases, I mean, you can you can ascribe it to a handful of tech heavyweights, fine, but I also point out that those heavyweights are basically of the NATS back one D. They're a good portion of
the SMP. There's still a kind you know, the same thing that's driven the bull market for ten years, the fact that there is an enormous amount of efficient earnings production going on in the US economy, at least in the mega cap publicly traded space, that it's just it drowns out everything else. The margins remain incredibly fat, return on whatever equity invested capital remains strong, and it's just a hard train to get in the way of. And then on the micro level, like you had the everyone
was worried about earnings recession, earnings estimate's coming in. We've seen in the past week as more and more of the big ones report earnings, that you've actually seen full year estimates start to firm a little bit, and the second quarter estimates haven't been slashed anywhere near to the same degree as the first quarters. That whole earnswer session thing. Oh, it looks to be going the way of the only mammoth.
But yet, if you look at some of the earnings out this week, I'm thinking of UPS and three M. I mean, these are sort of year old cliche macro indicators. You know, UPS is the the biggest, one of the biggest shipping companies in the world. Three M is the maker of fifty things. I think what we used to say, you know, in the Bloomberg stories, is it safe to ignore these? I mean, are people just assuming these are idiosyncratic stories, company specific stories and not really the macro
indicators that maybe we we once thought they were. Um, I think to some degree the SOB stories we've always had around the market for the entire ten years. We've also had bad eco growth for much of the or not not bad, but middling equal eco growth for most of the the bullmark, and people have been able to live with it. So I agree those are a little concerning. It's hard entire way to write stuff like that off is idiosyncratic given the pervasiveness of their reach, those two companies.
And certainly you know something was being signaled at the end of last year, regardless of the fact that it got put away so quickly. I mean, that's what happens when the FED utterly pivots on itself. But um, for the moment, I think you do have to kind of give the benefit of the doubt to the idea that
this is not uncharacteristic of how it's always looked. There's always been scattered blow ups going on, and then you kind of have, you know, this scenario where along our our last kind of leg higher march to all time highs, you had healthcare really selling off and cyclical is absolutely going haywire. So you had in the cyclicals defensive index,
you had essentially a huge parabolic move. And now what we have, you know, just a rotation, a reversal of that, and it's just another iteration of these protective rotations that have protected the market because you know, nothing goes down all at once except for you know, your February eighteen, Andrew Q. I want to come back to talk of profits recession just for a bit, because I know about eight percent of companies are beating on earnings this quarter.
But still it seems like a lot of people are talking about that hockey stick fourth quarter about a nine percent gain. Does it seem like that is potentially more reasonable to achieve now to bring this here into full growth. I've never seen it as quite as odd as others. It seems to me just to be more function of math. There's sequential growth expected quarter by quarter by quarter, and there's no real acceleration in the sequential quarter by quarter
by quarter growth that's expected for twenty nineteen. So this is just more function to me of base effects. Where where it gets weird is I I don't understand how the margin story gets so much better in Q four and and that's one thing that like this will not become clear to me after the first quarter results or the second quarter results, of the third quarter results. That would be something I need to essentially see to believe or have a lot more visibility, because I just can't
unpack and understand it. And yet so here we are off to this amazing start to the year in stocks, but the latest figures I've seen still indicate that money is flowing out of stock funds UM and I don't think hedge funds have really embraced this rally, you know, based on some of the indicators we would use to to uh sort of suss that out. Is this all buy backs? I mean, is is buy backs the main catalysts and any sort of threat to buy backs the main risk to the to the EQUATIONY Well, first of all,
it's hard to imagine a threat to buy backs. I just sort of story that Buffett may announce some extremely high numbered buy backs next year. It's not that typical that those actually go away until a recession happens. So if the recession happens, it would be to some degree the west of anyone's problems. I I don't necessarily fall into the camp that buy backs are really that big of a source of fuel for the for the rally.
I do what you're saying is absolutely right. This is a totally unloved and flow less is the word now recovery. But to a largic stent, that's part of the bull case. I would say, I mean stocks can go up. Stocks went up two thousand nine, two thousand eleven with virtually zero flows or or the opposite, and most for most of the period. It really isn't necessarily the sole driver of the market, this idea that money has to be
being thrown at it. What has to be happening is people are driving harder bargains for to sell, and or people just the people who are buying are more eager. And right now there's a lot of people walking around who would say the fact that hedge funds haven't participated, the fact that et F flows have been relatively inn emic relative to past peaks, like vastly less than September and January is something that's yet to go right in
this market. And the really big bull cases, the sort of melt up cases for two thousand nineteen or premised on those facts coming out of slightly different perspective from from the buy back story exact. I just think they're so fundamentally important to preventing downside more than they are
to spurring upside. Just the idea that you know, a lot of these are pre programmed and kind of out of the hands of discretionary but the discretionary ones essentially like, what what do we know about the structure of the market, what do we learning que for QUE four? We learned that liquidity is terrible in single stocks. That's why the kind of long short tech de leveraging went absolutely awry. We learned that futures market depth doesn't really exist, so
where is the cash bid for equities? That that to me means that buy backs are the supporting factor in markets that do prevent us from having these kind of volatility spirals. So I don't think they're like I think we'd maybe end up in the same place. But the sharp ratios would be you know, a heck of a lot worse without buy back. Can I just say one thing about buy back? So there was just a note a couple of weeks ago. They've got a huge amount
of attention with golden things saying that. You know, net of issuance, you get about four billion dollars worth the buy backs in the US market this year, and it dwarfs all other net money that comes into the market at the same time. You look at Bloomberg data, something like ninety trillion dollars worth of stock trades every or
in the US US sort of tagged stock market. So four in a billion dollars of net cash at the margin is certainly a lot of money, but it's a drop in the bucket compared to an amount of stock that goes back and forth every day. It's basically one day's value traded um. It matters, certainly, and it's net
pure we net. It's easy to measure, but it doesn't entirely take into account the gross buying and selling that goes on in the market every day, basically people bringing their their paychecks to the market and people cashing them out. There's obviously ninety trillion arts with selling every year as well. Um So framed like that, it's not quite as obvious to me how how it single handedly juices the market.
So we're still likely to see buybacks in the near term, absolutely, and there's still a lot of money on the sidelines that it seems like could come in to propel this higher. But what about the valuation case, Because the argument can be made that tech stocks in particular are maybe looking expensive, but you also have the handful of people, many people out there pointing to interest rates saying well, they're low, and if you're saying that stocks are expensive, you're missing
the whole point. Yeah. So I've been talking about this for about ten days, which means I've been wrong for ten days, and just looking at things like, you know, the NASDAC one hundreds forward p premium to the SMP five hundred, that's essentially taken out its peak ratio of NASDAC SMP again, taken out that peak high. It's since the dot com bubble and then outright and the outright things where I I really start to focus in on because when the forward p of the NASDACK gets to
twenty two, that's when things have tended to break. So either you have to have the forward p in terms of the earnings estimates really going up nicely right now, or you should maybe see you know, the price, do a little bit of work, maybe go a little sideways, because we are not too far off from that level now.
But again, like I think Credit SUITEZ recently or or socked in one of the one of those banks made the case, made the case that you know, in the melt up scenarios in which we are envisaging these kind of valuation things, especially with high growth, names go completely out the window, and it's a complete joke to even cast any faith in this. This reminds me of a good story you had out, Sarah. I love the headline, all the stuff bears are saying to spoil the SMP
record party. Chris over here is laughing because the headline was a baby of his something to blame. I could, I could, I could have predicted that it. Yeah, well, why is it that we can enjoy a record without without seeing what these pesky bears have to say? Is
it just risk management or story? Well, when it comes to the bear argument, there are a lot of bears out there, and part of the argument is is just that, Okay, yes we're back to those record highs, but we can't sustain a seventent rally that we've seen this year at the pace that we have seen it. They also point to fourth quarter earnings, but the issue is first quarter earnings has been a lot better than expected, and now it seems like that is falling off the back end.
And then the valuation case. There are the bears out there that will look at the market and tell you that it does look expensive to them, and at this point in time they would rather be taking profits than throwing their money at this market. But look, one thing I'm so happy about with with this all time high and the one that we previously had in September, like what was going on in September that screamed all time high? Like where where? Where was the kind of euphoria? Where
was the dancing in the streets? Don't see it now either. The only time I've seen anything this cycle that resembled what I am told in all time high should look like is January. I want another one of those blow off tops. Yeah that was a great fun, Sarah. I'm curious if any of these bears we're talking about two things that are sort of on my mind. One is the strong rallying dollar that we've seen, and also this sort of creep higher in oil prices. Uh you know
West Texas interpetated oils in the neighborhood of what sixty six? There? Is it? What we get to the point where we have to worry about oil prices again? We're you know, is this economy so leveraged to oil production that it's
it's the higher the better. So starting with oil, I would say the majority of investors I've spoken, particularly in this last week, they're not so worried about higher oil prices because now you look at the US and we are a net exporter of oil, and they say this could actually benefit the U. S economy in a way
because of the businesses on the dollar component. I will say I was speaking with someone this past week who said, the dollar is now getting to levels that we are getting concerned about, especially for some of these more multinational companies that do a lot of their business overseas, because
this could harm them. You have a stronger dollar overseas that could potentially mean lower sales are not as competitive and you but you haven't really seen that like three m a side during that happened, but you haven't really seen that generally priced int equities like look at the look at the pocket of US that we've been talking about is underperforming the most recently, you know, the Russell persistently. It should be a you know, domestic focus, a bigger
beneficiary of the strong dollar. Quickly. On the oil point, it's been interesting just from a mathematical standpoint, the positive correlation between changes in oil and changes in the s pretty durn high. So that's actually it's actually been like positively correlated, good contributor to the rally. But again on the dollar side, the the fun thing is that it does seem to be hurting the rest of the world.
If you look at you know, M S c I all World x US and then you know, running correlations with the Bloomberg Dollar Spot Index, you'll actually see that the dollar strength is weighing on the rest of the world equities. And a large part of that is just this strait currency translation effect that it's having. You know, those are price and local and then once you convert into US, you know, you're you're fighting against the tide there.
But that's what I think is the interesting point because we know generally a strong dollar is is not good for the world. It tightens credit conditions globally, so I can understand why oil prices are rising. It's really centered around supply. This week was really peaked after the Trump administration came out and said that they were going to end the waivers as it relates to exports from Iran. But when it comes to the dollar, I'm having a bit harder of a time understanding just the momentum that
we continue to see. I mean, is this just another re Ducks where everyone thought we would see a weaker dollar, but maybe that's not the case exactly and almost for
the same reason. I think that if you look at the strength in the equity market, like TDS economists and TV strategists Mark McCormick, he's been on this for a while saying essentially, if you think the US equity market is going to outperform, if you think, you know, rate spreads around the world are going to be fairly stable, then portfolio inflows into US equities should be a driver of the dollar. And I think it's it's a story that fits for now, so I like it. I like
it too then Chris, are you worried about the dollar? No? No, uh yeah, you see things like the three mble up this week. You remember that it can it can do damage the big profit edifice. But and and like Luke was saying, it's uh the main sort of temperature taker on financial conditions. So yeah, along with everything else, it's a kind of a secondary concern. It's what about the relationship between oil and energy stocks though, because you look
at crude up about this year. Energy can this kind of just add to that bowl case in a way, right, because energy hasn't been a huge particiption. I mean, energy is up a lot of energy stocks. But yeah, right, there's an argument that it hasn't caught up with with oil yet. Um and you know, another one of these basically arguments that some good things left to happen in the market and that that's going to be energy stocks rallies. Kind of difficult to get to be that disappointed. Look
at what happened recently. What was the It was Snovis buying anti darko. If you look Abron Chevron, Chevron buying anti Darko. So if you look at that, you know, look at x l E. So you're more integrated players and how they've done versus how x OP the producers explorers have done. Look at that, track the oil price, see the gap, and you know the transaction completely and
immediately makes sense. So I wonder if you know the market will start to say, hey, you know we're gonna be Chevron, We're gonna buy the producers, and I will say there is an e t F that tracks oil services companies and that et F is up more So you do see a difference when you dial in and really look on these coming natural guess is not having a great year, right so x and I'm SURES and
gigantic natural gas producer, Luke. You keep a pretty close eye on volatility markets, and now with this rally its all time highs. We see the VIX CBOE Volatility Index at what about twelve and a half twelve and change, but moving higher, but moving higher, training higher, but moving high. I think that's been the most interesting development that's taken place with the VIX as we kind of made this
martial all time highs. You'll remember that in January, uh stocks up, valls up was a persistent common theme and everyone was trying to make excuses for it and talk around it, and then faultel the exploded, and uh, you know, we realized that maybe that was a warning sign. Last time we had stocks up falls up was June and we got you know, like a three percent sell off and the immediate aftermath. But this kind of this is
something I'm watching, as you know. It's a sign that people are starting to either heade of this or wildly chase upside. And from what I can tell, looking at the implied volatilities of you know, out of the money options on the SMP five, it seems more that the downside being sought is the factory here. So folks, folks are starting to get worried about this as we you know, as we hit all time highs during earning season but still have a supportive but definitely not stellar macro back.
You know what, another year follows up stocks up the whole year, Right, I think people would take that they'd be willing to live with a fifteen or twenty ViXS if they could get the We're not at that point in two thousand and eighteen where there's so much complacency. People were selling the VIC shorting the VIS basically to you know, pick up those nickels in front of the steam roller. Do you get the sense that we're not
due for repeat of that as the lesson been learned? Well, I think just like a the products are gone, so we can't we can't so that that can't happen. That can't happen again. We can't have we can't have a repeat. We we will not have a repeat. That just that source of fire currently does not exist. But other other factors are essentially a positioning. We've all talked about flow
less rally, that's something that augurs against a repeat. And also just levels of realized are a little lower now than they were in January, and levels have implied are a little higher. Like the opposite dynamic, the volatility risk premium is a lot higher. Now you can make a lot You can assume you will make a lot more money if you're selling ball now as opposed to when you were selling ball. That was really the That was a penny, that was not a dime in front of
the steam roller. One man's penny is another man's time Canadian Canadian Canadian dollars, which brings us to you know what time? It is craziest thing, Mike ever saw in markets this week. This is a segment that we will be doing most every week, and Mike's going to come to us and he's going to ask us what the craziest thing we saw, and we have to come up
with something better than him. Europe first, Chris so, I liked the price action Wednesday morning before anyone was at their desks and p G and E, which was when it rose two and then retraced the whole thing in five minutes after some industry journal reported that uh Warren Buffett was going to buy them, and then he immediately told Becky Quick on CNBC Didday that he that he wasn't.
So I did. I did a little TSM on it, and twelve and a half million dollars worth of stock traded in that window and something like five shares, so lots of winners and losers. Yeah, that's pretty good. I'm not feeling too. I was away from the desk for two days this week, so I'm gonna give myself a past. But one thing I saw, and it happened on Thursday, on Thursday morning, right out of the gate company. I had never heard of it. Zero zero, So they were tumbling ten per cent out of the gate. No one
could really figure out why. And it turns out that apparently people were, you know, they were thinking they were going to get acquired relatively soon. But the company had set up meetings at a conference and a couple of months, and then investors assumed, Hey, I guess that means they're not going to sell themselves by then, and you know, people have freaked out, and the stock was down ten percent assumption at its best, but that logic governs. I
mean people that those those those conference meetings. I was trying to pretend this wasn't crazy. Probably probably reported the thing about the conference. Anyway, Sarah, what craziness have you witnessed this week? I'm gonna go with Tesla, and not because it's stock is down around the lowest level, but because just ahead of their earnings the day before this week, Elon Musk came out on stage at a conference and said that they are going to have completely autonomous robotaxis
potentially on the road within a year. That was pretty crazy, all right. I got a couple of crazy things. The first one all this hype about gen Z. It makes me nervous for one reason. Why is that Generation Z that's the last letter. You've seen table, you've seen table. The next The next generation is Generation Alpha. I can tell you that. Okay. And all this mystery about oh, they're spending habits, I'll tell you where they're spending habits come from. I'm the father of three gen Z kids.
It's all me. Yeah, but that's not spending habits. What's a good allowance these days? That depends how they keep the room clean and all that. And what's the dollar figure twenty a week or so? No, Wow, that's high that they milk a lot more off you than that, believe me. Alright, craziest thing I've ever seen. And I'm confessed this is not directly related to markets, but it's
pretty close. I love the sec settlements with some hedge fund manager who gets in trouble, and we always do a great job of saying, Okay, he stole x million from clients, but the question always is what did he spend it on? So this guy in Massachusetts got in trouble for ripping off his clients and buying Taylor Swift tickets with it. Luke, I feel like that's get behind that's that's he didn't buy Taylor Swift tickets. He invested. That is an appreciating asset. It's not a bad trade.
If you get him my book value and face value and some before the show. It might be the largest Taylor Swift fan out And it is amazing because you know, right now, essentially as as we're going live, this is this is FO six, this is the big day. I'm sure, I'm sure everyone else has been following Taylor Swifts. Can't count down on our Instagram too. We don't know what's coming.
We we know it's big. Hopefully it's not an engagement, but maybe a new music video or something like Hopefully, Sir, I think that's got to be all the time we have. We have to leave it there. But Luke Kawa, Taylor Swift enthusiasts, and Chris Nangi, thanks so much for joining us today. Thanks my pleasure. What Goes Up will be back next week. Until then, you can find us on the Bloomberg Terminal website and app, Apple Podcasts, or wherever
you listen. We'd love it if you took the time to rate and review the show so more listeners can find us. And you can find us on Twitter, follow me at at Sara Ponzeck. Mike is at Reaganonymous, our guest Chris Nagi is at Chris nag One, and Luke Kawa is at l J Kawa. What Goes Up is produced by tober Foreheads. The head of Bloomberg Podcast is Francesco Leafy. Thanks for listening, See you next time.