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Amazon Growth, Crypto ETF Latest · Bloomberg Intelligence

0:01
Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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0:16
Speaker 2: Big Big Earnings week This week, we've got Amazon Molly
0:20
Speaker 2: after the closed Thursday, So I think it's time to
0:23
Speaker 2: get a preview of what we might see from Amazon.
0:26
Speaker 2: And when we talk about Amazon these days, it's both
0:29
Speaker 2: a retail story etail and a text retailer with its cloud. Yeah,
0:34
Speaker 2: with its cloud. So what do you do?
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Speaker 3: How do you get an expert on both?
0:37
Speaker 2: Well, you go to Bloomberg Intelligence because we have Punham Guoyle.
0:40
Speaker 2: She's a Bloomberg Intelligence senior analyst for e commerce and
0:43
Speaker 2: all that retail stuff. She joins us here, as does
0:45
Speaker 2: an Aragrana, senior analyst on a tech side for Bloomberg Intelligence.
0:51
Speaker 3: Pooham, let's start with you here.
0:52
Speaker 2: I'm gonna go back to the roots of Amazon as
0:55
Speaker 2: a retail story.
0:57
Speaker 3: Here.
0:57
Speaker 2: What do you expect to see and hear from Amazon
1:01
Speaker 2: this quarter about that core retail business.
1:04
Speaker 4: I think the retail business will be very strong for
1:07
Speaker 4: the fourth quarter. We already saw it in some of
1:09
Speaker 4: the industry numbers that were reported back in November and December,
1:12
Speaker 4: with really strong online sales, especially in November, and that
1:16
Speaker 4: momentum kind of continuing into December. So from the retail side,
1:20
Speaker 4: we expect Amazon to report a much stronger four Q
1:24
Speaker 4: and they'll still be driven Paul by the third party marketplace.
1:28
Speaker 4: So you know, Amazon's business is one P and third
1:31
Speaker 4: party where they sell stuff on their own and then
1:34
Speaker 4: they have sellers sell on the platform. We think the
1:37
Speaker 4: third party business will continue to outpace first party, but
1:40
Speaker 4: both will have strong growth rates.
1:43
Speaker 5: And that's just you know, that's just one piece of
1:45
Speaker 5: Amazon's business. I mean, granted a big piece, but just
1:48
Speaker 5: one of them. So An Rag, why don't you tell
1:50
Speaker 5: us a bit about the Amazon Web Service component and
1:53
Speaker 5: what that is going, what you were expecting out of that.
1:57
Speaker 6: Yeah, thank you. So, you know, AW is the biggest
2:00
Speaker 6: cloud infrastructure vendor out there, and what we have seen
2:03
Speaker 6: over the last two years, it has been a bit
2:05
Speaker 6: of slow down in the growth rates of AWS and
2:09
Speaker 6: the reason for that is it's a variable pricing model.
2:11
Speaker 6: You know, you pay what you use and in this
2:14
Speaker 6: economic downturn in the last I would say one and
2:17
Speaker 6: a half to two years. Companies are dialing back on
2:20
Speaker 6: their cloud usage. It's one way for them to control
2:22
Speaker 6: their cost. So that doesn't mean that they are not
2:25
Speaker 6: embracing cloud at the same pace. They're not just using
2:27
Speaker 6: as much. But we think that takes a u turn
2:30
Speaker 6: either in this quarter or the next quarter. We are
2:32
Speaker 6: fairly optimistic based on a survey we did. We think,
2:35
Speaker 6: you know, we are coming to a point with easy comparisons,
2:38
Speaker 6: so we are fairly optimistic that over the next twelve
2:41
Speaker 6: months we'll see rebound in growth rates for AWS and
2:45
Speaker 6: by default for for Microsoft also.
2:47
Speaker 2: So on our what's the I mean if I'm Amazon,
2:51
Speaker 2: Amazon Web Web Services, how do I position myself in
2:54
Speaker 2: this AI discussion here?
2:56
Speaker 3: I mean, if I'm the IR person, what am I telling.
2:59
Speaker 2: My executives to say when I get on this conference call?
3:02
Speaker 6: You know, one of the most important things. I think
3:04
Speaker 6: the message they have been telling people is, you know,
3:06
Speaker 6: you don't really need just open AI to go out
3:08
Speaker 6: and build your AI. You could say strategy. They work
3:13
Speaker 6: with a lot of open source companies or AI vendors
3:17
Speaker 6: that have the large language models. They work with Meta
3:20
Speaker 6: for example. They really promote a lot of Meta's large
3:23
Speaker 6: language model. So if I'm a company, you can go
3:25
Speaker 6: out and choose whichever raw material you want, whichever you know,
3:29
Speaker 6: large language model that you want, but you can host
3:32
Speaker 6: that on AWS. And that's how they're going to make
3:34
Speaker 6: money is by giving the building blocks of AI to companies.
3:38
Speaker 7: So, pun On, let's come back to the retail side
3:40
Speaker 7: of it.
3:40
Speaker 5: Obviously, the big news with Amazon today the termination of
3:43
Speaker 5: the one point for billion dollar deal with Irobod. I'm
3:48
Speaker 5: going to say, again, pretty sure Amazon's going to be okay,
3:52
Speaker 5: but maybe you could tell us a little bit more
3:53
Speaker 5: about like the you know, is this really material for
3:57
Speaker 5: them that this deal didn't go through? And of course,
3:59
Speaker 5: you know, we just keep hammering it time and time again,
4:02
Speaker 5: this m and A outlook.
4:03
Speaker 7: It's really tough.
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Speaker 4: Yeah, you know, we talked about this a little earlier
4:07
Speaker 4: and it's non material to Amazon just looking at the
4:09
Speaker 4: size of it, right, a billion dollars a little more
4:11
Speaker 4: than a billion dollars on Amazon scale of over six
4:14
Speaker 4: hundred billion dollars in GMB. It doesn't move the needle
4:18
Speaker 4: at all. But that said, it just reinforces our view
4:21
Speaker 4: that we've had for a long time that acquisitions for
4:24
Speaker 4: these companies will be more difficult given the scrutiny that
4:27
Speaker 4: they're under. So we do think that organic growth is
4:31
Speaker 4: what Amazon is going to have to focus on, and
4:33
Speaker 4: we think there's plenty of it on the retail side,
4:35
Speaker 4: on the advertising side, and on the cloud side.
4:38
Speaker 2: Just a little redhead crossing the Bloomberg truminal bring to
4:41
Speaker 2: your attention Renault to cancel and peer.
4:44
Speaker 3: Ipo, So not good news for the IPO market.
4:46
Speaker 2: We'll get some reporting on that coming up and pun
4:49
Speaker 2: them with the e commerce side of Amazon. What's your sense,
4:54
Speaker 2: you know, talking to the Amazons of the world, the
4:56
Speaker 2: Walmarts of the world. How's the consumer these days and
4:59
Speaker 2: how's this spending out there?
5:01
Speaker 4: The spending is pretty good. Surprisingly, you know, we've been
5:04
Speaker 4: talking about the consumer possibly falling off and really slowing
5:08
Speaker 4: down their spend, but we haven't seen it. The holiday
5:10
Speaker 4: numbers suggests that spending is strong. I'd still say, though,
5:13
Speaker 4: I think people are picking and choosing where they spend.
5:15
Speaker 4: They're deciding where they want to spend their dollars, and
5:17
Speaker 4: Amazon has been a place where they're more likely to
5:20
Speaker 4: spend it, given the fact that they get speed, convenience,
5:23
Speaker 4: and really everything that they want from there. But that said,
5:26
Speaker 4: I do think that on the low end you could
5:29
Speaker 4: see some issues arise as inflation and other concerns really
5:33
Speaker 4: do hamper their spending power.
5:36
Speaker 5: So Ana Punam was just saying how the growth story
5:40
Speaker 5: for Amazon is really going to come more from organic
5:42
Speaker 5: growth rather than acquiring it. So tell us about on
5:45
Speaker 5: the cloud side, if you see a lot of organic
5:48
Speaker 5: growth opportunities coming from that business.
5:51
Speaker 6: Yeah, no, we expect actually growth to pick up. We
5:54
Speaker 6: think the growth is going to be closer to twenty
5:56
Speaker 6: percent by the end of this year. You know, this
5:59
Speaker 6: is a market that has a long, long I would
6:02
Speaker 6: say runway overall cloud spending, it's still less than twenty
6:05
Speaker 6: percent of total tach spending, somewhere in that twenty to
6:08
Speaker 6: twenty five percent range. I think we have a long
6:11
Speaker 6: way to go, and Amazon is right in the middle
6:13
Speaker 6: of it. They are the biggest cloud infrastructure vendor, as
6:16
Speaker 6: I said, with over forty percent of the market share.
6:19
Speaker 6: So I feel fairly optimistic that this year we're going
6:22
Speaker 6: to see a rebound.
6:23
Speaker 2: So in the cloud infrastructure side of it, who do
6:25
Speaker 2: they compete against and is that forty percent market share
6:29
Speaker 2: something that they have to defend. Is that something they
6:31
Speaker 2: can grow. How's the competitive landscape look in the infrastructure space?
6:36
Speaker 6: Yeah, in five years if they get able to maintain it,
6:39
Speaker 6: I'll be very happy with that. Because what has happened is,
6:41
Speaker 6: you know, Microsoft has really gone out big over the
6:44
Speaker 6: last you know, seven, eight, ten years, and it is
6:47
Speaker 6: now the second biggest vendor. Now, surprisingly enough, this is
6:50
Speaker 6: a space where the smaller vendors cannot really make a
6:53
Speaker 6: dent because you need a lot of capital expenditures to
6:57
Speaker 6: come up with a cloud model. You or infrastructure business
7:00
Speaker 6: US can't do it in your garage. You really need
7:01
Speaker 6: billions of dollars off data centers in order to you know,
7:05
Speaker 6: really be good at this business. So right now there
7:07
Speaker 6: are two big vendors. AT's aws and it's Microsoft Azure,
7:11
Speaker 6: and then after that we have Google and you know
7:13
Speaker 6: the likes of Oracle and IBM after that.
7:16
Speaker 7: So last one here for you, poone.
7:17
Speaker 5: I'm just quick on the thirty seconds looking at pharmacy
7:19
Speaker 5: and grocery for Amazon.
7:21
Speaker 7: What are the next developments there?
7:23
Speaker 4: There's a long way to go there. We think they're
7:25
Speaker 4: still in very early innings and it's a harder market
7:27
Speaker 4: for them to crack with grocery, they're trying to build
7:30
Speaker 4: out their fresh business, but we really haven't seen that
7:32
Speaker 4: much progress there. And on pharmacy they're still very very
7:35
Speaker 4: early on. So those are businesses that we haven't even
7:38
Speaker 4: factored into our growth scenario for Amazon.
7:41
Speaker 1: Wow.
7:41
Speaker 2: Yeah, that's it seems like a tough nut for them
7:43
Speaker 2: to crack and for a lot of people. All right,
7:45
Speaker 2: put them Goyle on a rag rana. Two of our
7:48
Speaker 2: best analysts at Bloomberg Intelligence also.
7:50
Speaker 3: Absolutely are some of our very first.
7:52
Speaker 2: Folks we brought on board to Bloomberg Intelligence many moons ago,
7:56
Speaker 2: but they cover it give us a little preview there
7:57
Speaker 2: of Amazon because it is the giant retailer and it
8:01
Speaker 2: is a significant player in the cloud business. So you
8:04
Speaker 2: got to bring the two expert areas together, which we.
8:08
Speaker 3: Can do with Bloomberg Intelligence.
8:09
Speaker 2: And you can find Punam's and on a Rog's research
8:11
Speaker 2: as well as the other four hundred analyst of Bloomberg Intelligence.
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Speaker 2: B I go on the Bloomberg terminal, Best Research on
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Speaker 2: the Street.
8:20
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8:38
Speaker 2: Big big news is several weeks ago in the crypto
8:41
Speaker 2: space because we finally they finally got approval from the
8:44
Speaker 2: SEC for a spot Bitcoin ETF and that was huge
8:50
Speaker 2: for the crypto space and big, big news for the
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Speaker 2: ETF space as well. So let's dig in see how
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Speaker 2: things are progressing there. Austin re joins us. He's global
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Speaker 2: head of revenue and business at falcon X. What is
8:59
Speaker 2: falcons the largest institutional crypto prime brokeridge in the world. Austin,
9:05
Speaker 2: thanks so much for joining us here. Where are you based?
9:07
Speaker 2: Where is the falcon X?
9:09
Speaker 8: Yeah?
9:09
Speaker 9: First of all, thank you guys for having me so
9:11
Speaker 9: excited for the conversation. I'm actually based in San Francisco.
9:15
Speaker 9: The team has spread globally. We have an office in
9:17
Speaker 9: Silicon Valley, New York, Chicago, Singapore, Hong Kong, and London,
9:21
Speaker 9: so a little bit of everywhere.
9:22
Speaker 3: Who trades on your platform and what did they trade?
9:25
Speaker 9: Yeah, so we trade with a wide variety of institutional
9:27
Speaker 9: market participants, so that's everyone from today and topically ETF
9:31
Speaker 9: issuers who are active within the cryptocurrency space, to hedge funds,
9:35
Speaker 9: asset managers, venture capital firms, really anyone that's looking to
9:39
Speaker 9: access liquidity on the spot markets or in the derivative
9:42
Speaker 9: side of the cryptocurrency space. Our options business, it's the
9:45
Speaker 9: substantial growth over the past couple of quarters as well.
9:49
Speaker 9: So basically, if you're looking to get access to the
9:51
Speaker 9: asset class headge or exposure either in spot or derivatives markets,
9:54
Speaker 9: we work with a lot of those market participants.
9:56
Speaker 5: Yeah, tell us Austin, like, why that recent news from
9:59
Speaker 5: the SEC regarding the coinets was so important and what's
10:02
Speaker 5: that what that's meant for your business?
10:04
Speaker 9: Yeah, for sure. Look, I think if you look at
10:07
Speaker 9: what the ETF means in the mid to long term,
10:10
Speaker 9: really the unlock with the ETF is net new pools
10:13
Speaker 9: of capital that historically haven't had access to the cryptocurrency
10:16
Speaker 9: or digital asset market, specifically rias and financial advisors within
10:20
Speaker 9: the US so thirty trillion dollar markets roughly forty percent
10:24
Speaker 9: of US capital markets, and within that they haven't had
10:28
Speaker 9: an instrument to access this asset class yet. And so
10:31
Speaker 9: the thought is the ETF provides a regulated instrument through
10:34
Speaker 9: which these different market participants can get access and that
10:37
Speaker 9: will increase overall adoption over time. So in relation to
10:41
Speaker 9: our business there where we service where Spot liquidity provider
10:44
Speaker 9: to number the etf issuers within that we've partnered. We've
10:48
Speaker 9: partnered to provide liquidity and we did about thirty percent
10:51
Speaker 9: of the day one issuances. From a trading perspective itself.
10:54
Speaker 3: Interesting, Oh okay, very good.
10:55
Speaker 7: Ask.
10:56
Speaker 3: I wanted to know, like, how has that impacted your business?
10:58
Speaker 3: So you saw day one, we saw day one.
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Speaker 9: Look, this is something we've been preparing for for years
11:03
Speaker 9: at this point, right in terms of building out the
11:05
Speaker 9: liquidity at scale ability to transact significant size within this market.
11:10
Speaker 9: And so we've been working with different issuers, larger asset
11:13
Speaker 9: managers that they've been preparing their crypto strategies and I
11:16
Speaker 9: think Day one saw significant amount of flows and we
11:18
Speaker 9: continue to basically see consistent trading activity from those issues.
11:22
Speaker 2: Right, So, just for our listeners and for me, you're
11:24
Speaker 2: a prime brokerage. You're not in exchange like FTX, correct?
11:29
Speaker 10: Correct?
11:31
Speaker 3: Now you traded on FTX at some.
11:33
Speaker 9: Point, yeah, correct, So we're a prime brokerage. What that
11:36
Speaker 9: means is we aggregate liquidity from a number of different
11:39
Speaker 9: liquidity pools globally, exchanges, proprietary trading firms, market makers, and
11:44
Speaker 9: so we trade with all major venues around the world,
11:46
Speaker 9: depending on the structure where the client is in some
11:49
Speaker 9: uh in the regulatory jurisdiction, and our goal is to
11:52
Speaker 9: basically provide our clients the most seamless trading experience possible
11:56
Speaker 9: and an aggregation of that global liquidity within.
11:58
Speaker 5: You want to get and your clients mostly institutional.
12:01
Speaker 7: Money, correct, all institutions.
12:03
Speaker 5: Okay, So tell me then about like where the retail
12:07
Speaker 5: bitcoin trader stands right now and like their access to ETFs.
12:11
Speaker 9: Yeah, so it's an interesting question, right, and I think
12:14
Speaker 9: with the initial ETF rollout, the perspective would be that
12:18
Speaker 9: this would give broader access to the retail side of
12:20
Speaker 9: the market as well as segments of the institutional side
12:23
Speaker 9: of the market. What I would say is we're still
12:25
Speaker 9: early in this ETF cycle though right it was approved
12:28
Speaker 9: earlier this month, and within that you're still seeing some
12:31
Speaker 9: platforms not actually allow their end clients to trade this asset.
12:35
Speaker 1: Right.
12:35
Speaker 9: Vanguard is an example, seven trillion dollars of assets that
12:40
Speaker 9: are invested there. You're not seeing them basically allow access
12:44
Speaker 9: to Bitcoin ETF vehicles. You've seen some of the other
12:46
Speaker 9: brokerages still working through that cycle, and so from a
12:49
Speaker 9: retail investor perspective, it should open up access. But I
12:52
Speaker 9: think it's also a longer term cycle as to know
12:57
Speaker 9: how these really open up over time.
13:00
Speaker 2: We had Bitcoin ETF, do you expect other crypto spot
13:04
Speaker 2: ETFs to get approved?
13:06
Speaker 9: Yeah? So I think the next ETF that the market
13:10
Speaker 9: is looking at right now is the Ethereum ETF, and
13:14
Speaker 9: specifically within that, there's a perspective from some market participants
13:17
Speaker 9: that you could see in eth ETF approved later this year.
13:20
Speaker 9: What I would say is, in contrast to the Bitcoin
13:23
Speaker 9: ETF that realistically through Q three and Q four the
13:26
Speaker 9: market consensus was this was likely to happen the eth ETF,
13:30
Speaker 9: there's not the same level of consensus right now. So
13:32
Speaker 9: I think what we'll see right now we have different
13:34
Speaker 9: Some clients that anticipate this happening later this year, others
13:38
Speaker 9: think it's a longer road ahead. I think that the
13:40
Speaker 9: market is still waiting to determine what ultimately happens here.
13:43
Speaker 5: It looks like another catalyst potentially that the SEC is
13:46
Speaker 5: seeking comments on a proposal to allow options trading on
13:49
Speaker 5: blackrocks ETF.
13:50
Speaker 7: So how do you see that one unfolding?
13:52
Speaker 9: Yeah, So, I think one of the interesting elements in
13:57
Speaker 9: relation to the ETF approval itself is the potential to
14:00
Speaker 9: catalyze greater options market activity domestically in the United States.
14:05
Speaker 9: We've actually seen substantial options growth in our own business
14:08
Speaker 9: just for context, Q three to Q four falcon X's
14:10
Speaker 9: options business group ten x quarter over quarter, and so
14:14
Speaker 9: currently one of the largest options market participants on the
14:16
Speaker 9: institutional side of the market. And if I look at
14:19
Speaker 9: why that matters, right, people are looking for different ways
14:23
Speaker 9: to express their views within this market as well as
14:26
Speaker 9: to hedge their exposure. And over time, what you see
14:29
Speaker 9: as these options markets evolve around ETFs is actually greater
14:33
Speaker 9: liquidity going into those ETF instruments itself and in the
14:37
Speaker 9: future potentially a lowering of volatility.
14:40
Speaker 1: Right.
14:40
Speaker 9: So, if you look at gold as an analogy, gold
14:43
Speaker 9: ETF options markets around those ETFs, what you saw is
14:46
Speaker 9: over time that's a more liquid market, lower volatility within
14:49
Speaker 9: that market itself, and that actually attracts more capital over
14:52
Speaker 9: time because it's a more investable asset that is less volatile.
14:56
Speaker 2: Largest institutional crypto prime brokers in the world.
14:59
Speaker 3: How do you define that?
15:00
Speaker 10: How do I define largest?
15:02
Speaker 4: Like?
15:02
Speaker 3: Is it five volume transaction volume?
15:06
Speaker 1: Yeah?
15:06
Speaker 9: So defined from a volume perspective there, Right, So, like
15:09
Speaker 9: I mentioned, we're active both on spot markets, derivatives markets,
15:13
Speaker 9: and partnering with clients both in the US and globally.
15:16
Speaker 3: So what are other Like who do you compete with
15:18
Speaker 3: for that market share?
15:19
Speaker 9: Yeah? So Look, if I look at the crypto market
15:22
Speaker 9: and where prime brokers sits within this ecosystem, you have
15:27
Speaker 9: different players that are providing different products and services across
15:30
Speaker 9: the board.
15:30
Speaker 1: Right.
15:31
Speaker 9: It's not like traditional financial services where you can go
15:33
Speaker 9: to Gold Midzas or JP Morgan and get basically most
15:35
Speaker 9: things that you need from an institutional market participation perspective,
15:39
Speaker 9: So where we're focused is trading spot and derivatives markets,
15:43
Speaker 9: the extension of credit and solving capital efficiency for our customers,
15:46
Speaker 9: and providing technology to facilitate risk management. As it relates
15:50
Speaker 9: to competition, what you see is we compete with different
15:52
Speaker 9: players in each of those different segments. Those could be
15:55
Speaker 9: some of the proprietary trading firms in one, it could
15:58
Speaker 9: be other trading market part participants in the other. But
16:02
Speaker 9: from my perspective, look, there's a huge market opportunity here.
16:05
Speaker 9: The question is how we grow this over time. I think, Uh,
16:07
Speaker 9: the ETF is a great catalyst, and we're excited to
16:10
Speaker 9: continue with partner with you know, wide write and market
16:12
Speaker 9: participants to grow the pie.
16:14
Speaker 5: So I know that you're working with institutional clients, but
16:16
Speaker 5: I got to ask on behalf of myself and maybe
16:19
Speaker 5: other you know, retail participants who are maybe a little
16:21
Speaker 5: bit hesitant to get into crypto. There's obviously, I think
16:24
Speaker 5: since it began, just been a lot of skepticism around
16:27
Speaker 5: the asset and obviously with FTX imploding, like a lot
16:31
Speaker 5: of concerns about.
16:32
Speaker 7: The viability of it.
16:33
Speaker 5: So what's your pitch to somebody who's like, you know,
16:35
Speaker 5: not involved in crypto why they should?
16:38
Speaker 8: Yeah.
16:38
Speaker 9: So I don't spend much time actually convincing people to
16:41
Speaker 9: be active within the crypto's base.
16:43
Speaker 7: Probably because they already are with the people.
16:45
Speaker 9: You people come to me, right, they're actually active already, Yes,
16:49
Speaker 9: But like look within that, if I think, what's the
16:51
Speaker 9: value within crypto? Right, and where's the value within bitcoin?
16:54
Speaker 9: And why are people excited about the ETF as an
16:57
Speaker 9: example here, what you're looking at as a non soft
17:00
Speaker 9: and stored a value that's digitally scarce and solving what
17:04
Speaker 9: many refer to as a digital goal. Right, why does
17:07
Speaker 9: that matter today?
17:08
Speaker 1: Right?
17:08
Speaker 9: We're looking at a macroeconomic landscape of seventy plus elections globally,
17:13
Speaker 9: not just in the US. Within that, we didn't anticipate
17:16
Speaker 9: loose in monetary policy that could lead to inflation. Do
17:20
Speaker 9: you want to protect your assets against that? And then
17:22
Speaker 9: the other area that we see, you know, our clients
17:26
Speaker 9: investing within crypto is some believe it could be a
17:28
Speaker 9: good geopolitical hedge over time and increasingly uncertain geopolitical landscape.
17:33
Speaker 9: As you guys know, question is is a portion of
17:35
Speaker 9: your portfolio makes sense to act to allocate to this
17:38
Speaker 9: asset class. But obviously, you know, always recommend people look
17:43
Speaker 9: at all the risks and of course body volatility is.
17:45
Speaker 7: So read the fine print. I'm sure.
17:47
Speaker 3: Austin Reid, thanks so much for joining us.
17:49
Speaker 2: Really appreciate Austin Reid, Global Head of Revenues and Business
17:52
Speaker 2: at falcon X. Falcon X is the largest institutional crypto
17:56
Speaker 2: prime brokerage in the world, and we again all getting
17:59
Speaker 2: a lot small arder on crypto.
18:02
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
18:06
Speaker 1: weekdays at ten am Eastern on Apple car Playing and
18:09
Speaker 1: broud Otto with the Bloomberg Business App. Listen on demand
18:12
Speaker 1: wherever you get your podcasts, or watch us live on YouTube.
18:18
Speaker 2: Adam Coons joins us from Winthrop Capital here. We talked
18:21
Speaker 2: at him about the markets and so forth going forward. Adam,
18:25
Speaker 2: you know, we had that big, big September, I mean
18:29
Speaker 2: really kind of November December last year that just ripped equities,
18:34
Speaker 2: just went through the roof bods actually turned in positive performance.
18:38
Speaker 11: For the year.
18:39
Speaker 2: You know, what do you tell your clients here as
18:41
Speaker 2: we kind of start off another year, do we just
18:44
Speaker 2: kind of start from zero and try to find some
18:46
Speaker 2: winners out there?
18:47
Speaker 3: What's the theme for you this year?
18:49
Speaker 10: Yeah?
18:49
Speaker 8: I mean I think this year is going to definitely
18:50
Speaker 8: be a stock pickers year. I think fixed income will
18:53
Speaker 8: continue to be a primary story for returns and that's
18:58
Speaker 8: going to come despite what the FED does, Even if
19:00
Speaker 8: the FED doesn't lower rates as quickly as.
19:03
Speaker 10: Some are saying, and we do believe that.
19:05
Speaker 8: What we're thinking really fourth quarter before they make any
19:08
Speaker 8: cuts at all. Yeah, So we're we're a little bit
19:12
Speaker 8: divergent from the consensus, and that's really driven by if
19:16
Speaker 8: you look at what the Fed has done through this cycle.
19:18
Speaker 8: They obviously got it wrong with the transitory nonsense, and
19:21
Speaker 8: we think they're going to act slow to do the
19:23
Speaker 8: same thing. Right, they were slow to raise rates, suddenly
19:27
Speaker 8: did it. We think they're going to be slow to
19:29
Speaker 8: decrease interest rates because they don't want to be wrong again, right,
19:32
Speaker 8: They don't want to lower rates and then see another
19:34
Speaker 8: flash of inflation. So I think that's really going to
19:37
Speaker 8: squeeze the economy, and so that's going to be good
19:41
Speaker 8: for long term bonds. I think it's going to be
19:44
Speaker 8: somewhat of a difficult year for stocks, and that's driven
19:48
Speaker 8: by two things. One is what I just highlight is
19:50
Speaker 8: you're going to start to see economic weakness. But secondly,
19:52
Speaker 8: I mean, coming to this year, you nailed it is
19:55
Speaker 8: we had that rally coming into the end of the
19:57
Speaker 8: year that that really drove valuations to some somewhat unsustainable
20:01
Speaker 8: levels for specific companies. And I'm highlighting your Teslas or
20:04
Speaker 8: in the videos, and obviously you're seeing the result of
20:07
Speaker 8: that with Tesla missing and dropping quite a bit.
20:09
Speaker 5: So you're saying it's going to be good year for
20:11
Speaker 5: long term bonds. I'm looking at the thirty year right now.
20:14
Speaker 5: Yield peaks a little bit above five percent in October.
20:17
Speaker 5: That's when the pivot story started to become a bit
20:19
Speaker 5: more clear, and now we're at four thirty five.
20:22
Speaker 7: I think that's still attractive to get get you.
20:24
Speaker 8: I mean, look, it's really asymmetric right now in bonds,
20:27
Speaker 8: which is the attractive part of it. The worst case
20:30
Speaker 8: scenario is you get a fairly high yield to carry
20:34
Speaker 8: until we'd start to see that. You know, this secular
20:37
Speaker 8: trend in rates is not changed. Rates are going to
20:40
Speaker 8: go back down. Demographics and all those things are pushing that.
20:43
Speaker 8: So worst case scenarios, I get to hold bonds and
20:45
Speaker 8: a pretty high yield, you know, corporate bonds. I'm getting
20:47
Speaker 8: five percent, So I get to hold that until and
20:50
Speaker 8: wait until I'm right. And so ultimately I think that's
20:53
Speaker 8: the easiest, Like I said, from a wrist standpoint, asymmetric trade.
20:57
Speaker 2: You know, I was surprised, you know, looking at the
20:59
Speaker 2: performance and can come last year in twenty twenty three
21:01
Speaker 2: that the best performing sector was high yield.
21:04
Speaker 3: And that's in a world.
21:04
Speaker 2: Where everybody kept talking about our recession. I would have
21:07
Speaker 2: would have thought going into the year that maybe high
21:09
Speaker 2: yield would not be the place to be, but it
21:11
Speaker 2: really outperformed it did.
21:13
Speaker 8: I mean, and I think that goes hand in hand
21:15
Speaker 8: with what the equity markets did, right. They tend to
21:17
Speaker 8: correlate in certain pockets of the market, and so I
21:20
Speaker 8: think when we saw that rally that that helped tighten
21:23
Speaker 8: credit spreads. I mean, we really aren't seeing big increases
21:26
Speaker 8: in delinquencies. Yes they're going up a little bit, but
21:30
Speaker 8: recovery rates are stable. So it's just, yeah, it was
21:33
Speaker 8: it was a place to be because credit markets still
21:36
Speaker 8: look pretty solid.
21:37
Speaker 5: So in a year when rates are broadly going to
21:39
Speaker 5: be coming down, you think that's pretty accommodative for everybody.
21:43
Speaker 5: Is there really a place that you would say like
21:45
Speaker 5: you would not benefit from that and to avoid.
21:49
Speaker 10: Well, I think it really comes down to commodities.
21:52
Speaker 8: I'd stay probably away from that in the in the
21:54
Speaker 8: short term, especially kind of the oil commodities. But if
21:59
Speaker 8: you look at stocks, I think, once again, I think
22:01
Speaker 8: you want to stay away from the narrative based companies,
22:04
Speaker 8: like I said in Navidio or where the AI narrative
22:08
Speaker 8: has really gotten over it yeah, I've been over there
22:11
Speaker 8: for a while, but.
22:11
Speaker 7: I feel like it's just starting.
22:13
Speaker 8: I think there's going to be a pause, right and
22:15
Speaker 8: then because everyone's going to figure out, well, there's no
22:17
Speaker 8: monetization of the story of AI right.
22:20
Speaker 10: Now, so I think there will be a little bit
22:21
Speaker 10: of a pause with that.
22:23
Speaker 8: You'll still see the companies like Microsoft and alphabet that
22:26
Speaker 8: have an AI component but have a real business model, those.
22:29
Speaker 10: Will still do it, still do well.
22:30
Speaker 8: But the companies that really just kind of got over
22:33
Speaker 8: their skis last year, that's where I would stay away
22:35
Speaker 8: from right right now.
22:36
Speaker 2: So big earnings week this week from a lot of
22:38
Speaker 2: the high profile names, including Meta and Alphabetters. I call
22:43
Speaker 2: them Facebook and Google. Why change a good thing? I don't, right,
22:48
Speaker 2: But in any case, I know there are names that
22:51
Speaker 2: you guys have an interest in.
22:52
Speaker 3: How do you think about Facebook.
22:53
Speaker 2: Google that whole I guess digital advertising space.
22:56
Speaker 8: Well, I think it comes down to you know, once again,
22:59
Speaker 8: these or business models that have been able to adapt.
23:02
Speaker 8: Meta has gone through a little bit of an identity crisis,
23:05
Speaker 8: but I think they're back on the right track where
23:06
Speaker 8: they're able to adapt to what the consumer behavior and
23:10
Speaker 8: those shifts are. We still think the consumer can kind
23:12
Speaker 8: of push this cycle out and that's what's going to
23:14
Speaker 8: drive stocks like that, where advertising is really you know,
23:17
Speaker 8: at the end of the day, that the revenue driver.
23:19
Speaker 8: So that's why we think those companies can outperform relative
23:22
Speaker 8: to some of the hardware type companies.
23:24
Speaker 5: All right, so those ones are the communication slash tech sector.
23:28
Speaker 5: How about healthcare looks like that's one that you've got
23:30
Speaker 5: your eyes on too.
23:31
Speaker 8: It is, I mean, if you look at valuations, and
23:32
Speaker 8: I keep saying that word, it's obviously something that matters
23:35
Speaker 8: to this year a company like merk where you know
23:39
Speaker 8: it is trading very attractively relative to other companies in healthcare,
23:43
Speaker 8: and then also just in the S and P five hundred,
23:45
Speaker 8: but you know, it ran up significantly through covid obviously
23:48
Speaker 8: with with their vaccine, and then basically has given away
23:51
Speaker 8: all those gains. So what we see here as a
23:54
Speaker 8: company that has a nice amount of cash flow. Yes,
23:57
Speaker 8: the pipeline and the short term is a little bit questionable,
23:59
Speaker 8: but we think that they can pull off an M
24:01
Speaker 8: and a strategy that will kind of help prop up
24:04
Speaker 8: their pipeline in the future.
24:05
Speaker 5: I don't know, I mean, we just had our anti
24:06
Speaker 5: trust expert in here, I wouldn't be trying to get
24:08
Speaker 5: at the mn A right, that's.
24:10
Speaker 3: Fair, that is fair. It's hard.
24:11
Speaker 2: Yeah, it still seems like you can get healthcare deals
24:13
Speaker 2: done because usually what it is is like a big
24:15
Speaker 2: pharma company buying a little guy who got some cool
24:18
Speaker 2: yeah new thing coming.
24:20
Speaker 5: So maybe just not in like healthcare as far as
24:23
Speaker 5: like insurance, you know, obviously like the humanist sigma that
24:25
Speaker 5: didn't go so well.
24:26
Speaker 2: I mean, does Mark have It seems like if I'm
24:29
Speaker 2: going to have exposure to healthcare, it's got to have
24:31
Speaker 2: a g l P one angle, a.
24:33
Speaker 3: B CD drug.
24:34
Speaker 2: I was going to say they need, because does MERK have?
24:37
Speaker 8: Then they don't, and I think that Lily would be
24:41
Speaker 8: behind that. The valuation is really what's giving me pause there.
24:45
Speaker 8: But I would still own Lily. I probably wouldn't add
24:47
Speaker 8: to it or you know, particularly an Indianapolis. Yeah, I
24:51
Speaker 8: get Yeah, I love Indianapolis because I know that because
24:54
Speaker 8: a lot of my friends from business school went to
24:56
Speaker 8: indian Aples and begrudgingly, but they went there because it's.
24:58
Speaker 10: Ei Lily, Yep, you know that's the place.
25:00
Speaker 2: Yeah, exactly so so, but so your highest conviction trade
25:05
Speaker 2: is that high grade long duration zond so so boring.
25:09
Speaker 3: I know.
25:09
Speaker 2: So what's like, like, what's a piece of paper that
25:12
Speaker 2: you guys hold that you feel really comfortable with?
25:14
Speaker 8: I mean, I look, I really do like tech TMT.
25:17
Speaker 8: When you're looking at corporate bonds, you can go out
25:20
Speaker 8: there and are.
25:20
Speaker 2: You buying like on the Comcast and yes, absolutely Comcast Charter.
25:25
Speaker 10: I like Cox.
25:25
Speaker 3: Communication, Yeah, I like Coxy Communications.
25:27
Speaker 8: Yeah, yeah, I mean Oracle. Oracle is honestly, honestly one
25:32
Speaker 8: of the cheapest. It's triple bu but you're getting a
25:35
Speaker 8: lot of spread, Like so you're getting well north of
25:36
Speaker 8: five percent for you know, a well cash flowed company.
25:39
Speaker 10: I just it's a no brainer for Cox Communications.
25:42
Speaker 2: Man, I made a lot of fees off of those
25:44
Speaker 2: good people, smart people. They made your work for it,
25:46
Speaker 2: but they paid and they paid on time. Adam Coons
25:48
Speaker 2: thanks so much for joining us. Adam Kuons is Cheap
25:51
Speaker 2: portfolio manager for Winthrop Capital Management located in Indianapolis.
25:57
Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
26:01
Speaker 1: weekdays at ten am Eastern on applecar Play and and
26:04
Speaker 1: royd Otto with The Bloomberg Business. You can also listen
26:07
Speaker 1: live on Amazon Alexa from our flagship New York station.
26:11
Speaker 1: Just say Alexa playing Bloomberg eleven thirty.
26:15
Speaker 2: You kind of think about, you know, twenty twenty three
26:17
Speaker 2: and the rip we had there at the end of
26:19
Speaker 2: the year. It's like almost he's coming to twenty twenty four.
26:22
Speaker 3: Now what do I do?
26:23
Speaker 2: It seems like I might have gotten all my performance
26:25
Speaker 2: at the end of twenty three. Let's check with Katerina Simonendi.
26:28
Speaker 2: She probably has some good views here. She's the senior
26:30
Speaker 2: vice president Morgan Stanley Private Wealth Management. So, Katerina, what's
26:34
Speaker 2: kind of the message you started off you know, twenty
26:37
Speaker 2: twenty four with with your clients here after you know,
26:40
Speaker 2: a pretty good twenty twenty three.
26:43
Speaker 12: Paul and Molly, thank you for having me on the show.
26:47
Speaker 11: Yes, you know, surprisingly good and off twenty twenty three
26:52
Speaker 11: where we investors seem to be so excited about the
26:56
Speaker 11: potential for the raid cuts.
26:58
Speaker 12: You know, we saw this, you.
27:00
Speaker 11: Know, pretty remarkable year end. And also, you know, somewhat
27:04
Speaker 11: unusual was the fact that the seven large stocks essentially
27:09
Speaker 11: carried the market. So if you look at the performance
27:11
Speaker 11: that investors experienced in the some of the broad indexes
27:15
Speaker 11: like S and P five hundred for example. You know,
27:18
Speaker 11: there were two stories of the index. There was a
27:20
Speaker 11: story of this magnificent seven stocks and then the rest
27:23
Speaker 11: of the market. So when we look at twenty four,
27:26
Speaker 11: it definitely continues being the story of the FED and
27:29
Speaker 11: it is really the timeline of the rate cuts that
27:33
Speaker 11: we're looking at, you know, first, and then of course
27:36
Speaker 11: the earnings, because to some degree it is a little
27:39
Speaker 11: bit confusing for investors to figure out what they're hoping for.
27:42
Speaker 11: Are they hoping that rates are going to start coming
27:45
Speaker 11: down soon and we have significant doubts that that is
27:49
Speaker 11: going to start cutting in March, or are they hoping
27:52
Speaker 11: for good earnings for the stocks that they have in
27:55
Speaker 11: their portfolio.
27:55
Speaker 12: We think it's a little bit of both.
27:57
Speaker 5: Well, let's solve into that timeline for the FED cuts,
28:00
Speaker 5: because I feel like, you know, you can ask five
28:01
Speaker 5: people and get ten different answers on this of when
28:04
Speaker 5: the FED cuts are going to start. We hear March
28:06
Speaker 5: the earliest. Our previous guest said, you know, fourth.
28:09
Speaker 7: Quarter the earliest. So where do you stand in all
28:11
Speaker 7: that categorina? What do you think?
28:13
Speaker 12: Well, we think that March is a bit aggressive, and
28:19
Speaker 12: in our view, we expect that the rates cuts are
28:22
Speaker 12: going to start in June, and of course economic data
28:25
Speaker 12: will be something that will have to support it. So
28:28
Speaker 12: we're going to have to see some weakness because after all,
28:32
Speaker 12: well we can't forget that the rate cuts, you know,
28:34
Speaker 12: is it's economic stimulus, you know, this is what we
28:36
Speaker 12: do to stimulate the economy. But the question of course
28:40
Speaker 12: also is would FED be willing to do something preemptively?
28:43
Speaker 11: You know, if this week is a huge week, we
28:46
Speaker 11: have earnings, we have job data, we have the FED
28:50
Speaker 11: meeting that is coming up, and perhaps they give us
28:52
Speaker 11: some guidance as far as what they think on the timeline,
28:54
Speaker 11: you know, because if economy remains strong, you know, is
28:58
Speaker 11: it something that they're going to be willing to do.
29:00
Speaker 11: In our view, we expect less rate cuts that market
29:04
Speaker 11: is pricing in.
29:05
Speaker 2: All right, Katerina, what are you telling your clients here
29:07
Speaker 2: in twenty twenty four in terms of maybe stocks versus bonds?
29:12
Speaker 2: Is a client specific or do you have a kind
29:14
Speaker 2: of a balanced approach you like to take?
29:17
Speaker 12: Our message to clients right now is get out of cash.
29:21
Speaker 11: We have we tend to have a little bit of
29:23
Speaker 11: get out of cash because we tend to have a
29:25
Speaker 11: little bit of a short term memory. And you know,
29:27
Speaker 11: when we think about it, it seems like we've been
29:29
Speaker 11: earning five percent on cash forever, but reality is that
29:33
Speaker 11: it hasn't been a year. And our biggest conversations right
29:37
Speaker 11: now is extending the duration of fixed income portfolios, getting
29:42
Speaker 11: out of cash, positioning both in high quality equity, not
29:47
Speaker 11: necessarily the stocks that have done so well in the
29:50
Speaker 11: previous year, but maybe taking some profits there, but making
29:53
Speaker 11: sure that we have a nice, high quality, well balanced portfolios.
29:57
Speaker 11: On the equity side, you know, we like healthcare, we
29:59
Speaker 11: like in austrials, so we see opportunities in financials. But
30:02
Speaker 11: on the fixed income side, even more importantly, we're looking
30:06
Speaker 11: at extending the duration and the quality because this is
30:09
Speaker 11: this remarkable opportunity of picking up some of these high
30:12
Speaker 11: quality bonds and enjoying that five percent yield for longer.
30:16
Speaker 7: Is there a lot of that out there?
30:17
Speaker 5: I mean, especially looking at corporate issuance, like you're seeing
30:20
Speaker 5: much in that longer duration tenor.
30:23
Speaker 11: Well, moly, there is longer duration, but there's also intermediate
30:27
Speaker 11: and when we're looking really about you know, that message
30:30
Speaker 11: of getting out of cash, you know, even getting a
30:32
Speaker 11: CD that is few years out, you know, looking at
30:35
Speaker 11: some corporate bonds, investment grade corporate bonds, you know, just
30:39
Speaker 11: kind of trying to get as much of that yield
30:41
Speaker 11: as possible. We might not be able to get that
30:43
Speaker 11: yield going out fifteen twenty years, but we when we
30:46
Speaker 11: look five years out, have seven years out. You know,
30:49
Speaker 11: this is really something that is still out there.
30:51
Speaker 2: Absolutely so on the equity side of the equation, here
30:55
Speaker 2: are there some sectors that you and your team like
30:58
Speaker 2: right here that you're trying to conveyed your clients.
31:02
Speaker 11: Well, well, the first message is, of course, you know,
31:04
Speaker 11: trying to again you know, getting away from the the
31:08
Speaker 11: tech names that did so well, right, and it's the
31:12
Speaker 11: hardest thing to do to know when to take a
31:14
Speaker 11: profit and to reallocate, you know, to the areas that
31:17
Speaker 11: maybe have not done well, but our positions in our
31:19
Speaker 11: opinion better. And when we look historically, usually you know,
31:23
Speaker 11: after the rate cuts, large cap is this sector you
31:27
Speaker 11: know that usually just performs better immediately, but small and
31:31
Speaker 11: mid cap stocks you know, are not that far after.
31:35
Speaker 11: And in our review, with the potential for rate cuts,
31:39
Speaker 11: but also with some of the geopolitical concerns that we
31:42
Speaker 11: are dealing with, especially you know, some of the news
31:44
Speaker 11: that came out over the weekend as example, you know,
31:47
Speaker 11: we really are our return expectations for this year, the
31:50
Speaker 11: risk reward are kind of low.
31:52
Speaker 12: You know, we are setting.
31:54
Speaker 11: Expectations to the clients that this is going to be
31:56
Speaker 11: the year will reposition where we get those quality position
32:00
Speaker 11: sort of make sure that our portfolios are well diversified.
32:03
Speaker 11: We do like healthcare, we like industrials, we like financials,
32:07
Speaker 11: you know, they we like just generally dividend being stocks
32:10
Speaker 11: as this poor building block of the portfolios.
32:13
Speaker 12: But we're also.
32:14
Speaker 11: Setting timeline expectations that this is the positioning that is
32:18
Speaker 11: going to be more for twenty five and even twenty
32:21
Speaker 11: six after the raid cuts, after that stimulus hits the market,
32:24
Speaker 11: you know, when there is another wave of growth that
32:27
Speaker 11: clients will be able to enjoy.
32:28
Speaker 5: So Paul is a huge fan of the Russell two thousand,
32:32
Speaker 5: and I know it is a burning question for him.
32:35
Speaker 5: Is there a magnificent seven of the Russell two thousand?
32:40
Speaker 12: Ah?
32:40
Speaker 11: That's you know, how many sevens would it take to
32:43
Speaker 11: really make an impact, you know, in the index that
32:45
Speaker 11: has two thousand stocks.
32:47
Speaker 12: You know, that's that's the question.
32:49
Speaker 11: So I think that the answer, there is just broad
32:52
Speaker 11: index versus stock picking. In in our view, this is
32:57
Speaker 11: very much the year for this where valuations and earnings
33:03
Speaker 11: and competitive positioning of these individual names, that the individual
33:06
Speaker 11: stocks will make all the difference in the world for
33:10
Speaker 11: the investment portfolios for that alpha that access return above
33:15
Speaker 11: the market, and we actually would encourage investors to, you know,
33:18
Speaker 11: some would take profits and decrease their positions in the
33:21
Speaker 11: broad indexes that benefited from some of the stocks that
33:26
Speaker 11: you know performed well last year.
33:28
Speaker 2: Katerina, one last question about thirty seconds. What do you
33:31
Speaker 2: do with alternative investments? How do you kind of position
33:34
Speaker 2: them for your clients.
33:36
Speaker 11: We think alternative investments, you know, as far as diversifier
33:39
Speaker 11: or even return amplifier play essential role in the portfolio
33:44
Speaker 11: where appropriate. You know, it just really takes time to
33:47
Speaker 11: get educated in that space, but we think that at
33:51
Speaker 11: least ten to fifteen percent of the portfolio, you know,
33:53
Speaker 11: could really benefit from some alternative exposure.
33:56
Speaker 2: Katerina, thanks so much for joining us. As always, Katerina siminating.
34:00
Speaker 2: She is a senior vice president of Morgan Stanley Private
34:02
Speaker 2: Wealth Management, joining us to give us her thoughts on
34:05
Speaker 2: these markets.
34:07
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