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Ukraine, Travel, And Markets · Bloomberg Intelligence

0:00
Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside
0:04
Speaker 1: my co host Matt Miller. Every business day we bring
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Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
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Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
0:15
Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
0:18
Speaker 1: at Bloomberg dot com slash podcast. Let's spring in. Bradford
0:23
Speaker 1: Evarand's portfolio manager and senior VP at Heartland Advisors. I
0:27
Speaker 1: want to talk to you bred about balance sheets. I
0:31
Speaker 1: started my career lending money to media companies, so we
0:34
Speaker 1: always looked at net at the bat and coverage ratios
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Speaker 1: and all that kind of good stuff. Now I've got
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Speaker 1: interest rates rising. Is there interest rate risk out there
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Speaker 1: for more companies? And maybe we're thinking about well, Paul
0:48
Speaker 1: to pleasure to be with you. Thanks for having me. Um.
0:50
Speaker 1: What I would just tell you is, you know, you
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Speaker 1: know Heartland we're we're a value boutique here in Milwaukee,
0:55
Speaker 1: and I managed one of our small cap portfolios and
0:58
Speaker 1: our goal is to invest or investment cycles, and you know,
1:01
Speaker 1: we seek to invest in undervalued small cap stocks that
1:06
Speaker 1: have strong balance sheets, paid dividends and generate strong free
1:08
Speaker 1: cash flow that I will just tell you that. You know,
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Speaker 1: we're in an environment where, you know, for most investors
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Speaker 1: at a high level, balance sheets only matter when there's
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Speaker 1: credit stress, and you know, most investors are focused on
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Speaker 1: earnings and earnings growth, and you know, balance sheets matter
1:24
Speaker 1: especially when the feed is raising its race and the
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Speaker 1: old the old match goes don't fight the feds. So
1:29
Speaker 1: we think, you know, our process, which you know, you
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Speaker 1: know has been tested through various bowl and bear markets
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Speaker 1: and through cycles, is a prudent strategy in this of
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Speaker 1: our because especially in small cap space, we have a
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Speaker 1: lot of companies that are improfitable. We have a lot
1:43
Speaker 1: of companies that are very shaky balance sheets, and we
1:46
Speaker 1: have a lot of companies that have very secularly challenged
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Speaker 1: growth outlooks. And so our job is to weed through
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Speaker 1: all that shafe and find things that are interesting and
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Speaker 1: have you have investment merit through um you know, through
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Speaker 1: an investment cycle that we look for between you know,
2:00
Speaker 1: two to three years. Is that the focus? Is that
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Speaker 1: your professional focus? Because I noticed you were recognized as
2:06
Speaker 1: a category king manager by the Wall Street Journal. I
2:09
Speaker 1: don't know what that is. So you know, Heartland has
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Speaker 1: long been known for value investing in the Heartland. Value
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Speaker 1: plus one, which I do lead manages, is a dividend
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Speaker 1: focused small cap fund that looks for undervalued small companies
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Speaker 1: which pay dividends. And you know, we we think we
2:26
Speaker 1: think low debt has merits always because you know, low
2:30
Speaker 1: debt companies have lower volatility than their high debt counterparts.
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Speaker 1: So that's an important dynamic, especially as the feed is
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Speaker 1: raising rates and lowers volatility, especially in a portfolio context.
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Speaker 1: You know, there's an environment also where you know, highly
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Speaker 1: levered companies have much less flexibility in terms of free
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Speaker 1: cash flow deployment, and especially as we're going through a
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Speaker 1: downturn or I should say maybe an economic that economy
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Speaker 1: that is peaking, and the feed that is is messaging
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Speaker 1: an aggressive rate cycle to tame the inflationary pressures. UH
3:00
Speaker 1: having having free cash flow flexibility to buy back stock
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Speaker 1: if it's under value, to service any debt you might
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Speaker 1: have to maintain your dividends, and then maybe you know,
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Speaker 1: look for attractive m and A opportunities when others are
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Speaker 1: not is really a recipe to win. Especially you know,
3:14
Speaker 1: we often see um and we saw this the COVID
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Speaker 1: crisis is balance sheets were very stress going into the
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Speaker 1: COVID crisis, and that was as a result of you know,
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Speaker 1: really interest rates being very low and many companies you know,
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Speaker 1: feast down that low leverage to acquire companies at high valuations.
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Speaker 1: And the end result of that was you know a
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Speaker 1: lot of pain for investors as as as we saw
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Speaker 1: the COVID recession, I can understand. I mean, how you
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Speaker 1: screen for UH small cap value stocks, especially then you
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Speaker 1: go look at the balance sheet and you can make
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Speaker 1: that judgment. How do you know if the company is
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Speaker 1: an M and a candidate, Well, we never really make
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Speaker 1: an investment with that as a as you know, the
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Speaker 1: necessary outcome. But usually what we find is, you know,
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Speaker 1: in the in the small cap space, higher quality companies
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Speaker 1: that are on the bargain bin um. They might be underloved,
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Speaker 1: under followed. But if if we have managed teams that
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Speaker 1: are effectively pursuing a strategy we like to call it
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Speaker 1: a self help strategy, which is really where where management
4:12
Speaker 1: teams are very internally focused. They're focused on reducing costs,
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Speaker 1: perhaps restructuring operations, or perhaps divesting non core assets that
4:20
Speaker 1: might be deluded to their overall organization. From a margin perspective,
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Speaker 1: we usually find those self help stories as being ones
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Speaker 1: where they don't need the macro economic environment really to
4:31
Speaker 1: give them tail winds to to to be successful in
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Speaker 1: driving operating leverage in margin expansion. They really need to
4:36
Speaker 1: focus on on on their internal asset base and their
4:39
Speaker 1: existing operations to drive value for shareholders. And especially in
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Speaker 1: an environment where perhaps the FETE is going to be
4:44
Speaker 1: on the prowel with higher interest rates, that we think
4:47
Speaker 1: that's going to be an effective place to be. And
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Speaker 1: just answer your question, Uh, those self help strategies, you know,
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Speaker 1: those companies that are perhaps underloved, under followed because of
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Speaker 1: some self inflicted internal issue. If they are successful in
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Speaker 1: pursuing that self help strategy on top of having a
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Speaker 1: strong balance sheet, those companies usually become a part of
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Speaker 1: large organizations over time. Andy Brad thinks so much for
5:06
Speaker 1: joining us. We really appreciated. Bradford Evans, portfolio manager and
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Speaker 1: senior VP at Heartland Advisor Small Cap Value. All right,
5:16
Speaker 1: here's the conversation of the morning, at least for me.
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Speaker 1: One of the questions that I've had as we look
5:21
Speaker 1: at what's unfolding in Ukraine over the last couple of
5:24
Speaker 1: months is what did the Russian people know? Did they
5:27
Speaker 1: do they know? The A that there's a war on
5:29
Speaker 1: be the conduct of the Russian military within Ukraine? And
5:33
Speaker 1: if so, what is their level of support for Mr
5:35
Speaker 1: Putin and this war? Unfortunately? Leonide Burschitski, columnist for Bloomberg Opinions,
5:41
Speaker 1: out with a column on that today. So leon and
5:45
Speaker 1: do you have a sense of what the Russian people
5:47
Speaker 1: know about what's going on in Ukraine? Well, uh, Russia
5:53
Speaker 1: has turned into a pretty close society recently, so I
5:57
Speaker 1: can only make an educated guess. But my educated guess
6:01
Speaker 1: is that they is that people inside Russia know a
6:05
Speaker 1: lot about what's going on, and they understand correctly what
6:09
Speaker 1: is going on. So they're not really taken in by
6:14
Speaker 1: the by the propaganda, even if they might say they are.
6:19
Speaker 1: So am I to assume then that they tacitly approve
6:25
Speaker 1: putting conduct in Ukraine? Well, you know, in a police state, uh,
6:32
Speaker 1: and sort of a copy of the Soviet Union that
6:36
Speaker 1: Russia has turned into. Now they're mostly business surviving, so
6:41
Speaker 1: it's not really um, you know, tacit agreement or acquiescence
6:48
Speaker 1: to what the Russian military is doing in Ukraine. It's
6:51
Speaker 1: it's you know, every man for himself and every woman.
6:56
Speaker 1: You know, people are just trying to basically avoid clashing
7:00
Speaker 1: directly with the regime mostly. Yeah, I mean it's understandable, um, right,
7:06
Speaker 1: when we see these surveys, I kind of wonder how
7:08
Speaker 1: many people were being honest. To hear from friends of
7:11
Speaker 1: mine that grew up in East Germany that they would
7:15
Speaker 1: not criticize the state publicly, not on the telephone, not
7:19
Speaker 1: at school, UM, for fear of being um, you know,
7:23
Speaker 1: punished exactly. And and this is you know, this is
7:27
Speaker 1: a time ownered Soviet instinct. Especially the older generation of
7:31
Speaker 1: Russians remember remembers how it used to be, and they
7:34
Speaker 1: would never whatever they think about what's going on, they
7:38
Speaker 1: would never publicly express those opinions or say anything on
7:43
Speaker 1: the phone or on Skype or on any method of
7:46
Speaker 1: remote communication, because they assume that even if the authorities
7:51
Speaker 1: aren't listening, they can listen in So, you know, here
7:54
Speaker 1: in the US, UM, and I guess in Western Europe
7:57
Speaker 1: as well. Younger generations don't really watch tell Vision anymore.
8:00
Speaker 1: Everyone um gets entertainment and information from the Internet. And
8:07
Speaker 1: I noticed, especially Europeans use VPNs a lot the what
8:11
Speaker 1: is that virtual personal network virtual private original private network.
8:17
Speaker 1: In your column you point out that even to Metri
8:19
Speaker 1: Pascoff uses a VPN, So does everybody in Russia have one? Uh? Well,
8:24
Speaker 1: the VPNs actually have been uh all of the top
8:29
Speaker 1: four most downloaded epps in March or VPNs in Russia. Um,
8:35
Speaker 1: and the fifth one was telegram, uh, you know, the
8:39
Speaker 1: encrypted messenger. And this allows people to get around state
8:42
Speaker 1: controls of the Internet. Basically, yes, it does. Uh. It
8:47
Speaker 1: allows them to get around state controls of both information
8:51
Speaker 1: and and and entertainment. Basically, the you know, those Western
8:58
Speaker 1: services lake Netflix that have with Russia are still accessible
9:02
Speaker 1: via VPN, so a lot of people download these to
9:05
Speaker 1: be able to, you know, watch their favorite UH TV series.
9:11
Speaker 1: You know. I've been thinking that at the very least
9:14
Speaker 1: Mr Putin will never ever be accepted back onto the
9:17
Speaker 1: world stage, will never see him at a G twenty summit.
9:20
Speaker 1: Now I'm wondering, as we go into the second and
9:22
Speaker 1: third month of this war Russia itself, are what is
9:26
Speaker 1: the feeling about Russia in terms of being part of
9:30
Speaker 1: the world community, Because it seems like at this point,
9:32
Speaker 1: based upon their behavior over the past couple of months
9:34
Speaker 1: in Ukraine that they are not welcomed in the world order.
9:38
Speaker 1: Does the average Russian even care about any of that? Well,
9:41
Speaker 1: the average Russian, as I said, it is probably business surviving.
9:45
Speaker 1: You know, those who have not left the country, those
9:48
Speaker 1: who have left the country are obviously feeling uh certain
9:54
Speaker 1: change of changing attitudes. And you know, Russians are not
10:00
Speaker 1: not welcome in many places where they used to be welcome,
10:03
Speaker 1: and they're not um you know, treated with um, you
10:09
Speaker 1: know as treason is in the same friendly way as
10:13
Speaker 1: as they used to be treated in many places. Uh.
10:16
Speaker 1: Inside Russia, people perhaps have not felt this yet, but
10:23
Speaker 1: it is a similar situation to the one that Germans
10:26
Speaker 1: found themselves in after World War Two. Yeah, I will
10:31
Speaker 1: actually even say, you know, Leonard, I was living in
10:34
Speaker 1: Berlin um around two thousand two, two thousand three, and
10:40
Speaker 1: I was welcome at all parties before the invasion of Iraq.
10:44
Speaker 1: That basically the day the US invaded Iraq, and if
10:48
Speaker 1: you recall at the time, it was without um the
10:51
Speaker 1: approval of Gerhard Schroeder and the German government. The day
10:54
Speaker 1: after that, I was like persona non grata. And it
10:57
Speaker 1: sounds silly, but it is absolutely true. I I felt
11:01
Speaker 1: it instantly. Do you feel the same kind of did
11:04
Speaker 1: you feel the same kind of turn or do your friends,
11:07
Speaker 1: um Russian friends around Berlin or in Western Europe feel
11:11
Speaker 1: the same kind of change all of a sudden, Well
11:14
Speaker 1: as somebody tried to set my daughter's school on fire,
11:18
Speaker 1: which is a biolinqual school. Uh. So you know, you
11:23
Speaker 1: get um, all sorts of people and all sorts of attitudes,
11:27
Speaker 1: and uh, you know, you get nasty reactions sometimes from
11:35
Speaker 1: some people when you speak Russian in public. Uh, you
11:39
Speaker 1: have to basically, well I can't really say take it
11:44
Speaker 1: and stride, but you have to accept it as um
11:49
Speaker 1: sort of normal retribution retribution for what the you know,
11:54
Speaker 1: the country's military is doing. I mean, as as Russians,
11:56
Speaker 1: we all bear part of the responsibility for not stopping
11:59
Speaker 1: this time Leonid, the thirty seconds left. How do you
12:02
Speaker 1: think this ends in Ukraine? H? Well, I I don't
12:08
Speaker 1: think it ends in the foreseeable future. Okay, but do
12:12
Speaker 1: you think the people, I mean, is Putin's position within
12:15
Speaker 1: Russia as strong as it ever has been. There's and
12:18
Speaker 1: there's relatively low risk that the people will overthrow him,
12:21
Speaker 1: overthrow the current the current level of repression. I don't
12:25
Speaker 1: think this is imminent in any way. All Right, lady Brushitski,
12:29
Speaker 1: thank you so much for joining us, giving us really
12:32
Speaker 1: fascinating column there for uh Bloomberg opinion, just talking about uh,
12:38
Speaker 1: you know, as someone who used to live in Russian
12:40
Speaker 1: and as a Russian now in Berlin, giving us his
12:42
Speaker 1: thoughts about what's happening in Ukraine from the Russian perspective,
12:46
Speaker 1: and again it just kind of begs a question, what
12:47
Speaker 1: did the Russian people really know? Uh? And based upon
12:50
Speaker 1: that knowledge, how supportive are they of the Russian state,
12:54
Speaker 1: the Russian Army, the Russian policy towards Ukraine. All right,
13:00
Speaker 1: let's talk about stocks here. Peter McNally joins US Series
13:03
Speaker 1: Global Lead looks at industrials, materials, energy, Third Bridge Group Limited. Uh, Peter,
13:09
Speaker 1: we had Delta come out with some numbers today, some
13:11
Speaker 1: good numbers, some good guidance. What's your call on the
13:14
Speaker 1: airline space here? Are we kind of back or are
13:17
Speaker 1: we still waiting for the business side of the of
13:20
Speaker 1: of flying to come back? Well, it's gonna be with you, guys.
13:24
Speaker 1: I mean, revenue is coming back. It has been, you know,
13:27
Speaker 1: particularly on the on the leisure side. There's still a
13:30
Speaker 1: ways to go though in business and long haul international.
13:35
Speaker 1: But what haven't come back yet have been profits, right.
13:37
Speaker 1: I mean, even though Delta in the second quarter is
13:40
Speaker 1: gonna get close close, not quite levels of revenue, it's
13:45
Speaker 1: fundamentally less profitable because costs are higher and it's both
13:49
Speaker 1: on labor which is the biggest cost, and fuel. But
13:52
Speaker 1: that's coming. I mean, Delta is managing well, Um, you
13:56
Speaker 1: know they'll be profitable most likely for the rest of
13:59
Speaker 1: the year. Um. But you know, relative to expectations, things
14:02
Speaker 1: have picked up for Delta. So what about uh, ticket
14:07
Speaker 1: prices are they able to do they have the pricing
14:09
Speaker 1: power to make up for rising fuel costs? Well, that
14:14
Speaker 1: was you know, one of the key messages I think
14:16
Speaker 1: that Delta delivered today is that they are getting you know,
14:19
Speaker 1: getting pricing. You know, it's not bringing them the whole
14:22
Speaker 1: way back, but on on a unit basis, um, they
14:26
Speaker 1: have recovered to uh actually record levels of you know,
14:30
Speaker 1: beyond where they were in twenty nineteen. There is pent
14:34
Speaker 1: up demand for travel, that is, that is fundamental and
14:37
Speaker 1: you know we're seeing it as you know, other countries
14:41
Speaker 1: open up. Um, you see the bookings in in international
14:45
Speaker 1: We've obviously been through that here in the leisure market
14:48
Speaker 1: in the United States, and you know, Delta in particular
14:53
Speaker 1: has been slow to add capacity. Now some of it
14:56
Speaker 1: in the industry is because of labor constraints, you know.
15:00
Speaker 1: We we saw Jet Blue last week, you know, actually
15:02
Speaker 1: cut some flights because uh, you know, for the summer,
15:05
Speaker 1: because they are concerned about staffing levels. Delta is managing
15:09
Speaker 1: this pretty well. Uh. They may be an outlier, um,
15:13
Speaker 1: you know, relative to the you know, to the industry,
15:16
Speaker 1: but that is something we're gonna watch, you know, through
15:18
Speaker 1: the summer. Yeah. I've just been on a couple of
15:21
Speaker 1: flights over the past couple of weeks and the load factor,
15:24
Speaker 1: as they say in the business, got to be near
15:27
Speaker 1: on My planes were were packed here. Where are we
15:30
Speaker 1: in terms of capacity? Have the airlines brought all their
15:33
Speaker 1: capacity back online? If they've taken some of those parked
15:36
Speaker 1: aircraft in the in the desert and brought him back. No,
15:39
Speaker 1: it's been it's been slow. I mean, it looks in
15:42
Speaker 1: the domestic leisure market, you know, you're basically there. But
15:45
Speaker 1: you know, Delta is still only in the mid eighties
15:48
Speaker 1: at this point in terms of capacity, and they're only
15:51
Speaker 1: adding a little bit you know here in the second quarter.
15:54
Speaker 1: Despite despite this, you know, uptick, the labor is don't
15:58
Speaker 1: be instant in the industry. You know, pilot just people
16:04
Speaker 1: servicing the planes. Well, it's you know, it's actually like
16:08
Speaker 1: a lot of things. I mean, Delta was even talking
16:10
Speaker 1: about how within the airport they're having to take over
16:14
Speaker 1: some of the operations themselves. Um, you know, the things
16:17
Speaker 1: that had you know, had normally been you know, been outsourced.
16:21
Speaker 1: But you know, Deltas hired like fifteen thousand people in
16:24
Speaker 1: the last year or so. Um, you know, they do
16:28
Speaker 1: seem to be getting out of it. But not every
16:30
Speaker 1: airline has been, let's say, as successful and hiring enough
16:34
Speaker 1: people to man all these you know, all these flights.
16:37
Speaker 1: And it began about a year ago where the airline
16:41
Speaker 1: started talking about pilot you know, and the constraints there
16:45
Speaker 1: and um, you know, labor issues are not going to
16:47
Speaker 1: go away in this industry. Peter. I've I've always felt
16:50
Speaker 1: like airlines in America don't have pricing power relative to
16:56
Speaker 1: you know history. When I was a kid, I remember
16:59
Speaker 1: flying out San Francisco to watch The Grateful Dead, and
17:02
Speaker 1: then I did it again when they had their fifty
17:04
Speaker 1: at the anniversary a few years back, and I paid
17:06
Speaker 1: the same price for the same ticket, you know, twenty
17:09
Speaker 1: years apart. So I thought that was a little bit weird.
17:12
Speaker 1: But then after having lived in Europe for a while,
17:14
Speaker 1: where I wouldn't have paid more than a hundred dollars
17:17
Speaker 1: for an international ticket, Um, I feel like there's something
17:22
Speaker 1: very different about this market. What what is the deal
17:24
Speaker 1: with the US market is just an oddly regulated pocket. Well,
17:30
Speaker 1: I mean, look, there's one thing that we learned or
17:34
Speaker 1: maybe was you know, we were reminded of through the
17:37
Speaker 1: pandemic is that investors, whether they're you know, credit or
17:41
Speaker 1: equity investors, don't stop giving airlines money, you know, and
17:45
Speaker 1: and we're able to finance this industry. We had startups,
17:48
Speaker 1: we had I p o s through the pandemic, and
17:51
Speaker 1: we've never seen a decline you know like this now.
17:55
Speaker 1: We we we've moved a lot of planes around and
17:58
Speaker 1: you know, fleets have in you know, reorganized and gotten
18:02
Speaker 1: more you know, more efficient. But you know, it is
18:05
Speaker 1: an industry that does you know, thrive on competition, and
18:08
Speaker 1: there's always new you know, new entrance you know coming in.
18:12
Speaker 1: It'll be interesting to watch you know, at the low
18:14
Speaker 1: end of the market. This fight that has emerged over
18:16
Speaker 1: spirit you know, this is the this is the ultra
18:19
Speaker 1: low cost carrier. You know that's out there, and you
18:22
Speaker 1: know to you know companies in there, they've they've been disruptive,
18:26
Speaker 1: you know, particularly in Florida, which was been been the
18:29
Speaker 1: hottest market in domestic travel, you know, since the since
18:34
Speaker 1: the recovery began nearly nearly two years ago. Good stuff,
18:38
Speaker 1: Peter McNally, thanks so much for joining us there. Timely
18:41
Speaker 1: discussion there with the good numbers coming out of Delta
18:44
Speaker 1: and they had some good guidness so about summer travel.
18:46
Speaker 1: So good to get Peter's thoughts there. He's global lead Industrials,
18:49
Speaker 1: Materials and Energy. Third Bridge Group is his gang over there,
18:53
Speaker 1: so good to get an update there. Alright, tough, tough
19:01
Speaker 1: first market for fixed income investors, and I've got a
19:04
Speaker 1: foto reserve that's hell bent on raising rates throughout this year.
19:07
Speaker 1: So what's the fixed income investor to do. Let's check
19:09
Speaker 1: in with Allie Peiffer. He does it for real, Managing
19:12
Speaker 1: director Fixed Income Coupital Markets at Raymond James ray j
19:16
Speaker 1: as we call him in the business, great little firm
19:18
Speaker 1: down there in Florida, competed against him for a long time.
19:21
Speaker 1: Good stuff, ellis UM talk to us about investing the
19:25
Speaker 1: fixed income markets these days? What do you do? That's
19:29
Speaker 1: a great question. It's it's the question I get almost
19:31
Speaker 1: every day. Good morning, UM. Well, we're saying what we
19:35
Speaker 1: found out over time is, you know, when the FED
19:37
Speaker 1: is in this kind of environment, is we like to
19:40
Speaker 1: do somewhat of a multi primed approach. One is we
19:43
Speaker 1: like cash flow in our our portfolios. As we've been
19:47
Speaker 1: telling clients to to maintain cash flow, advertising products such
19:51
Speaker 1: as mortgage backs to bring in UM cash that you
19:54
Speaker 1: can reinvest at the higher rates as the FED moves higher.
19:57
Speaker 1: We do like floaters at this point. We normally aren't
19:59
Speaker 1: big fans of floaters until the FED begins to move
20:02
Speaker 1: because that's when you actually capture most of the move
20:04
Speaker 1: from there from from the rising rates. UM, and then
20:07
Speaker 1: as far as the rest of the portfolio. Were we
20:10
Speaker 1: Barbell uh classic Barbell in a in a curve movement
20:14
Speaker 1: environment like it is, a flattening environment like it is.
20:17
Speaker 1: We like m more negatively convexed products like uh, you know,
20:22
Speaker 1: option embedded products like callables and mortgages that I mentioned earlier,
20:26
Speaker 1: and then we like more of our positive convexity on
20:28
Speaker 1: the back end of the curve where we can kind
20:30
Speaker 1: of control that risk factor a little bit. I haven't
20:32
Speaker 1: heard convexity terms since my finance class and a duke,
20:37
Speaker 1: do you not watch surveillance? Yeah, but it's up there
20:41
Speaker 1: with sitgeist among the most mentioned words on surveillance. He's
20:45
Speaker 1: got his own you know, he's got his own language.
20:47
Speaker 1: Convexity is a Faraoh thing and zeitgeist is tom Okay,
20:52
Speaker 1: I wonder what I wonder? What I wonder? At least
20:54
Speaker 1: it says just all things credit. So I don't know.
20:56
Speaker 1: So So in the corporate market do I go hire?
21:00
Speaker 1: You do I stay investment grade? What do I do? Um?
21:05
Speaker 1: Right now? I think you're you're better off on the
21:07
Speaker 1: corporate market in the in the investment grade, I think
21:10
Speaker 1: the risk is just um. You know, the FED normally
21:13
Speaker 1: doesn't end in a soft landing. We've only had one
21:16
Speaker 1: to my account, and so you know, I think the
21:21
Speaker 1: spreads of all widen across the curve. But you know,
21:24
Speaker 1: as far as an up in quality trade, I think
21:26
Speaker 1: still remains the right move at this point is there
21:29
Speaker 1: ever a time when someone who works in fixed income says, man,
21:32
Speaker 1: now is not not not a good time to be
21:34
Speaker 1: in fixed income. Yes, I have done that before. I mean,
21:42
Speaker 1: it's it is. It is one thing you have to
21:43
Speaker 1: be careful with. Obviously, in a balanced portfolio, UM, you
21:47
Speaker 1: want to be you know, probably underweight uh interest rate
21:50
Speaker 1: products at this point. But you know, we have a
21:52
Speaker 1: lot of clients who are depositories of money managers fixed
21:56
Speaker 1: income products, and it's like that they must maintain investments,
21:59
Speaker 1: and so we try to adjust their waitings accordingly in
22:03
Speaker 1: order to best fit that environment. So are your corporate
22:06
Speaker 1: clients ellis Um, do they feel like the parties over
22:09
Speaker 1: in terms of new issuance that the windows closing if
22:12
Speaker 1: not closed? Or what are you hearing from your corporate clients? Uh? No,
22:17
Speaker 1: I think I think the the product is still very
22:20
Speaker 1: violable at this point. I think we're still getting, um,
22:23
Speaker 1: you know, some some good flow. I mean, it's obviously
22:26
Speaker 1: things have changed with the with the flattening, but you know,
22:28
Speaker 1: when when you're looking at corporate credit, a lot of
22:30
Speaker 1: it gets swapped out once it's initiated. Um, that will
22:34
Speaker 1: tighten up as the fed titans. But I think there's
22:37
Speaker 1: there's still an open window at this point. I think
22:39
Speaker 1: we've got a little bit of time before we get
22:40
Speaker 1: to that close that you know what as it closes,
22:43
Speaker 1: was that it for the inversion? Do you feel like
22:45
Speaker 1: that was one and done? I do for now, um
22:49
Speaker 1: And And part of that is if you look at
22:51
Speaker 1: the you know, two S tense curve, which I've always
22:53
Speaker 1: used as is a very good measurement. I mean, all recessions,
22:56
Speaker 1: as we know, have been led by an inversion, but
22:59
Speaker 1: not all the versions was a recession. And in the
23:02
Speaker 1: three tends, the three month to tenure, not the three
23:04
Speaker 1: to tends, but the three month tenure is very wide
23:07
Speaker 1: still at a hundred ninety basis points um And, I
23:09
Speaker 1: don't think we're going to get that kind of indication
23:11
Speaker 1: of a recession until those two curves come more into alignment.
23:16
Speaker 1: And I think I understand quantitative easing, but now I'm
23:19
Speaker 1: being told by credit folks like you that there gonna
23:21
Speaker 1: be quantitative tightening. What does that look like? How does
23:26
Speaker 1: that actually get affected in the market. Well, the FED
23:30
Speaker 1: will uh in their portfolio, there's a certain amount of
23:33
Speaker 1: runoff with maturities and mortgage run off from their holdings,
23:37
Speaker 1: and so they're gonna allow that to to actually begin.
23:40
Speaker 1: In the past, every bit of runoff has been met
23:44
Speaker 1: or exceeded by their purchases. And when they when they
23:47
Speaker 1: stopped making new purchases, that's where they kind of left it. Uh,
23:50
Speaker 1: they kind of made it even at that point. So
23:52
Speaker 1: now they're gonna let that run off to a certain limit,
23:56
Speaker 1: and so they'll they'll build that up over time. I
23:58
Speaker 1: expect that to come in May at their next meeting, uh,
24:02
Speaker 1: and they'll wramp that up to about nine billion per month,
24:05
Speaker 1: which is an effect you know, it brings about a
24:07
Speaker 1: double barrel tightening uh in the market. I means you've
24:10
Speaker 1: got you've got them raising rates as well as taking
24:13
Speaker 1: liquidity out of the market by allowing this runoff, and
24:16
Speaker 1: so they're not putting that liquidity back into the system. Alright. So, uh,
24:21
Speaker 1: how far down do you think we can get? And
24:23
Speaker 1: what's the terminal rate? It's got about thirty seconds here,
24:26
Speaker 1: um as far down? Uh, you know, the truth be told,
24:29
Speaker 1: that's going to be a difficult one for them at
24:31
Speaker 1: this point. They're they're pretty much in a very difficult
24:33
Speaker 1: bind as far as terminal rate. You know, if you
24:35
Speaker 1: think about the FED. If they are right and hitting
24:38
Speaker 1: there to seventy medium projection in the dot plot, the
24:41
Speaker 1: terminal rate on tens is probably north of that in
24:44
Speaker 1: the you know, three and a quarter to three fifty range.
24:47
Speaker 1: I think that's a that's a real possibility on tens,
24:49
Speaker 1: but that should occur before the FED or at the
24:52
Speaker 1: time the FED begins to stop tightening. All right, now,
24:57
Speaker 1: that's good stuff. We will appreciate getting some of your
25:00
Speaker 1: able time. Ellis Pfeiffer, Managing Director, Fixed Income Counpital Markets
25:04
Speaker 1: for Raymond James again sees that fifty basis point hike
25:09
Speaker 1: in interest rates coming up at the next meeting in
25:11
Speaker 1: May UH and then the runoff likely to occur begin
25:15
Speaker 1: as well. Then thanks for listening to the Bloomberg Markets podcast.
25:22
Speaker 1: You can subscribe and listen to interviews with Apple Podcasts
25:25
Speaker 1: or whatever podcast platform you prefer. I'm Matt Miller. I'm
25:29
Speaker 1: on Twitter at Matt Miller. Put on fall Sweeney I'm
25:33
Speaker 1: on Twitter at pt Sweeney. Before the podcast, you can
25:36
Speaker 1: always catch us worldwide at Bloomberg Radio