Latest / Bloomberg Intelligence / PGIM Plans to Reduce Credit Risk In This Year’s Rallies (Podcast)

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PGIM Plans to Reduce Credit Risk In This Year’s Rallies (Podcast) · Bloomberg Intelligence

0:02
Speaker 1: Welcome to the Bloomberg Penel Podcast. I'm Paul swing you
0:05
Speaker 1: along with my co host Lisa Brahmas. Each day we
0:07
Speaker 1: bring you the most noteworthy and useful interviews for you
0:10
Speaker 1: and your money, whether at the grocery store or the
0:12
Speaker 1: trading floor. Find a Bloomberg Penl podcast on Apple podcast
0:16
Speaker 1: or wherever you listen to podcasts, as well as at
0:18
Speaker 1: Bloomberg dot com. On Wednesday, we heard from the Federal
0:24
Speaker 1: Reserve there on holds they are going to be patient.
0:27
Speaker 1: Today we get a job's report that on many accounts
0:31
Speaker 1: blew all expectations out of the water and port trade.
0:34
Speaker 1: A very strong US economy, So go figure try to
0:37
Speaker 1: square those two. I know that Mike Collins is trying
0:39
Speaker 1: to do that, and he's joining us here in our
0:41
Speaker 1: Bloombergetter Active Broker studio as Mike Collins, of course, senior
0:44
Speaker 1: investment Officer and senior portfolio manager at PGIM Fixed Income,
0:47
Speaker 1: which oversees about seven hundred and thirty billion dollars of assets. Mike,
0:52
Speaker 1: thank you so much for being here with us. What
0:56
Speaker 1: does today's blockbuster jobs number mean for the Federal Reserve? Yeah,
1:00
Speaker 1: good morning at Lisa and Paul it's uh, in our
1:02
Speaker 1: mind not to get too esoteric right off the start,
1:05
Speaker 1: but it's a it's a curve flattener, right because it
1:07
Speaker 1: blew out expectations in terms of the number of jobs,
1:11
Speaker 1: but the wage gains were more muted than expect and
1:14
Speaker 1: that continues to be the trend. Not to sound like
1:17
Speaker 1: Larry Cardlow, but it sounds like we're getting growth without
1:20
Speaker 1: the inflation, which is kind of panacea for the Federal Reserve.
1:24
Speaker 1: It means that they can continue to be patient um
1:27
Speaker 1: and they can continue to um stay on hold, probably
1:31
Speaker 1: indefinitely until either the economic data really picks up again
1:37
Speaker 1: or the markets continue to take off, right. I mean,
1:40
Speaker 1: if the stock markets up another ten percent and spreads
1:43
Speaker 1: are snapping tighter, and the Fed is meeting in March, uh,
1:47
Speaker 1: they're gonna have to deal with the financial stability issues.
1:50
Speaker 1: And I wouldn't be surprised to see them do another
1:53
Speaker 1: one eight or start pivoting at some point later this
1:56
Speaker 1: year and talking again about maybe trying to get another
1:59
Speaker 1: hike or two off before the end of the year.
2:02
Speaker 1: And that's not priced in it at all right now. Alright, So,
2:04
Speaker 1: given the devish FED, given the good numbers we saw today.
2:07
Speaker 1: Does that just give the markets the flashing green light
2:10
Speaker 1: to take on risk? Yeah, and that and that's the problem, right.
2:13
Speaker 1: I think the Fed has unwittingly given the market this
2:17
Speaker 1: this green light by saying we are on hold uh
2:20
Speaker 1: indefinitely right now. And they're even talking about, you know,
2:23
Speaker 1: slowing the pace of their balance sheet reduction and maybe
2:26
Speaker 1: ending you know, by the end of this year. So
2:28
Speaker 1: that's kind of a second green light. And that's something
2:32
Speaker 1: that UM worried us several years ago when they kept
2:35
Speaker 1: monetary policy really easy for a long time, we saw
2:38
Speaker 1: some of the speculative excess is starting to build. The
2:41
Speaker 1: leverage in the system was building, UM, the construction markets
2:44
Speaker 1: were maybe getting overheated in some areas, and and we
2:47
Speaker 1: worry that, you know, and maybe six or twelve months
2:50
Speaker 1: you could be back in that mode, and then the
2:53
Speaker 1: Fed's going to have to have to focus on the
2:54
Speaker 1: financial stability mandate uh to try to try to nip
2:58
Speaker 1: that in the bud. But now we're now, it's not
3:02
Speaker 1: six months from now, and we're long term investors. Okay, well,
3:06
Speaker 1: but here's my question, So your long term investors, what
3:09
Speaker 1: do you do in response to this? So, so what
3:12
Speaker 1: we're doing is we are trying to focus on the
3:16
Speaker 1: long term outlook, which is really for probably slowing growth
3:20
Speaker 1: over the next two or three years. We really think
3:23
Speaker 1: growth is going to go from three to two and
3:25
Speaker 1: a half to two to probably one and a half
3:27
Speaker 1: over the next few years in the U S. That's
3:29
Speaker 1: just the natural trend, I think. Um, so focus on that,
3:33
Speaker 1: but take advantage of near term opportunities. So right now
3:37
Speaker 1: that the technicals are really good in the credit markets,
3:40
Speaker 1: the reach for yield is back in vogue, right with
3:43
Speaker 1: the with the ECB and the pank of Japan sitting
3:45
Speaker 1: on their hands and and a relatively benign fed people
3:50
Speaker 1: are there's a food fight right now for bonds again.
3:52
Speaker 1: So we're riding that. We're overweight credit risk, taking advantage
3:56
Speaker 1: of those trends, taking advantage of the reasonably robust economy.
3:59
Speaker 1: Um Uh, pairing back risk on rallies are our m
4:03
Speaker 1: O here is to sell credit risk down on these
4:07
Speaker 1: big rallies. And we've seen retracement in the high shield
4:11
Speaker 1: Uh index. Okay, I'm sorry, my my head's my head's
4:14
Speaker 1: kind of spinning a little bit. So uh build go
4:17
Speaker 1: long credit exposure and sell it when it rallies. So
4:21
Speaker 1: I guess, uh what, Yes, selling to strength selling. I
4:27
Speaker 1: think selling to strength has been our our mode, right.
4:29
Speaker 1: But but then when there's any bit of a weakness
4:31
Speaker 1: build up more, you know, I mean we took advantage
4:34
Speaker 1: of it late last year. I think that was an overreaction. Uh.
4:37
Speaker 1: In credit, you saw some dislocations, You saw a lot
4:40
Speaker 1: of outflows from places like the bank loan market. There
4:43
Speaker 1: was an opportunity to add risk on the margin at
4:46
Speaker 1: that time. But I think a lot of that um rally,
4:49
Speaker 1: the markets move really fast, right, The markets always moved
4:51
Speaker 1: faster than you think. And it feels like the markets
4:54
Speaker 1: are pricing in now a fed on hold indefinitely. Um So,
4:57
Speaker 1: So if you continue to see spreads tighten in here,
5:00
Speaker 1: our our next move would be to cut credit risk alright.
5:02
Speaker 1: So it sounds a little bit like a trading mentality
5:05
Speaker 1: in this context of Prudential being one of the longest
5:08
Speaker 1: term investors I can think of. But have you, maybe
5:11
Speaker 1: even just in December, or are you generally rotating some
5:14
Speaker 1: of your portfolio out of investment grade into high yield
5:18
Speaker 1: for example? So, so the big trade we've done over
5:20
Speaker 1: the last year or two is already upgrade the quality
5:24
Speaker 1: of the portfolio significantly. All Right, again taking that, putting
5:28
Speaker 1: that long term hat on, and knowing that, you know,
5:30
Speaker 1: I don't know if it's in a year or five years,
5:32
Speaker 1: but you're gonna have a slowdown the economy and you're
5:34
Speaker 1: gonna have an increase in default rates. The leverage that
5:36
Speaker 1: has built up in the in the corporate sector, investment
5:39
Speaker 1: grade high yield to some extent the bank loan markets
5:42
Speaker 1: is disconcerting and that will come home to roost and
5:44
Speaker 1: result in more defaults. We know that. So what we've
5:47
Speaker 1: done is we've we've reduced our high yeld exposure, reduced
5:51
Speaker 1: pretty significantly our exposure investment grade industrials, investment grade corporate
5:55
Speaker 1: bonds globally, and moved up in the capital structure. We
5:58
Speaker 1: have a big position in very high quality, mostly triple
6:01
Speaker 1: A rated asset back securities, which gives you as much
6:03
Speaker 1: spread as you get in the corporate market without any
6:06
Speaker 1: of that idiosyncratic UH credit risk or event risk or
6:10
Speaker 1: default risk. And that's a really great opportunistic REALTI value
6:13
Speaker 1: trade that we've we've had on for a while now.
6:15
Speaker 1: All Right, so I'm going to hand you a crystal
6:17
Speaker 1: ball and I want you to look into it and
6:19
Speaker 1: tell us in two years or three years or whatever
6:22
Speaker 1: you see the next downturn, how bad will it be.
6:25
Speaker 1: It's not going to be bad. I mean, that's that's
6:27
Speaker 1: the other challenge here, right, This is never easy our
6:30
Speaker 1: base case because this cycle has been a lot different. Right.
6:33
Speaker 1: The regulatory response to the financial crisis was such that
6:37
Speaker 1: a lot of the normal relevering that you see hasn't happened. Right.
6:41
Speaker 1: The banks have delevered aggressively. Right. The banks are in
6:44
Speaker 1: the best financial condition they've been in our lives, and
6:46
Speaker 1: I was a bank analyst many years ago. They've never
6:49
Speaker 1: had so much capital and liquidity. Consumers on average in
6:52
Speaker 1: good shape, small business on average have not relevered. Right, So,
6:55
Speaker 1: so this is not going to be a big downturn.
6:57
Speaker 1: If we get when you're probably asset price correction, maybe
7:00
Speaker 1: growth slows to one percent or kind of bounces between
7:03
Speaker 1: zero and two percent for a few years um. But
7:06
Speaker 1: it's it's hard to really envision a big collapse in
7:09
Speaker 1: economic activity, at least in the US. Interesting. So I
7:12
Speaker 1: guess if I were to just summarize where you guys are,
7:15
Speaker 1: that's it's a and when I think a potential you
7:17
Speaker 1: guys are monstrous and you're thinking about long term your
7:19
Speaker 1: your policy holders. You're using this rally here to kind
7:22
Speaker 1: of just trade up in quality get position for what
7:25
Speaker 1: could be a software two or three year view. Is
7:27
Speaker 1: that a fair assessment? That that's fair? I mean the
7:29
Speaker 1: markets are actually giving us the opportunity right now, which
7:32
Speaker 1: is very unusual, to buy really high quality defensive assets
7:36
Speaker 1: like senior debt of banks and like these triple A
7:38
Speaker 1: asset BacT securities at really attractive spreads. So the markets
7:42
Speaker 1: are mispricing the limited amount of credit risk in those securities.
7:47
Speaker 1: Um and there there's probably overpricing or underpricing the credit
7:50
Speaker 1: risk in the corporate sector. So so you don't have
7:53
Speaker 1: to give up yield today to actually do this up
7:56
Speaker 1: in quality rotation. So that's a that's that trade is
7:58
Speaker 1: gonna work in the near term and in the term.
8:01
Speaker 1: Michael Collins, thank you very much for joining us. I
8:03
Speaker 1: think I learned a lot here about and if I
8:04
Speaker 1: were a prudential policy holder, I think I'd be feeling
8:07
Speaker 1: pretty comfortable. Mike Collins is a senior investment officer and
8:10
Speaker 1: senior portfolio manager at p G I M fixed income
8:30
Speaker 1: well over at Deutsche Bank, Christians saving the CEO chairman
8:34
Speaker 1: has very few options, it seems, for turning around Deutsche Bank.
8:37
Speaker 1: After an eighth straight quarter of declining revenue, reaction from
8:40
Speaker 1: investors and analysts suggested that the cost cutting at the
8:43
Speaker 1: heart of the CEO strategy won't be enough to keep
8:46
Speaker 1: markets at bay. To help us kind of dive a
8:48
Speaker 1: little bit deeper into this once Beheamoth of Global Banking
8:52
Speaker 1: is Jonathan Tyson. Jonathan is a senior banks analyst at
8:55
Speaker 1: Bloomberg Intelligence. He's on the phone with us from London.
8:58
Speaker 1: So Jonathan, thanks very much for joys. What do you
9:01
Speaker 1: think is the future of Deutsche Bank? Can it survive
9:04
Speaker 1: as a standalone entity? Um morning, not in his current form. No.
9:10
Speaker 1: I mean to put this very simply. If you go
9:13
Speaker 1: back a year, let's say um Consensus was expecting about
9:16
Speaker 1: thirty billion of revenue for the bank in twenties and
9:20
Speaker 1: about twenty billion of costs. Consensus is now expecting the
9:25
Speaker 1: same for costs, but twenty six billion of revenue. UM.
9:29
Speaker 1: The bank is targeting a returnal equity of four percent
9:32
Speaker 1: next year, and for that it is acknowledged that it's
9:35
Speaker 1: actually hoping that client activity picks up the market gets
9:38
Speaker 1: a bit better. So it's just unsustainable in the current form.
9:43
Speaker 1: And unfortunately, the damage to the franchise and the revenue
9:46
Speaker 1: outlook the more you cut costs and the growth in
9:49
Speaker 1: things like customer and all of the investment and expenses
9:53
Speaker 1: for things like anti money laundering means that there's very
9:57
Speaker 1: very little they can do in the current form. Okay,
9:59
Speaker 1: So give and that given the fact that Deutsche Bank
10:01
Speaker 1: probably will not remain independent according to your assessment, what's
10:06
Speaker 1: the likelihood that Commerce Bank is the likely merger candidate here?
10:11
Speaker 1: And is that a good thing? Well, when you look
10:14
Speaker 1: at Europe, I mean, it's understandable why European Commission, the
10:17
Speaker 1: ECB um, they're saying we need some champions over here,
10:20
Speaker 1: sort of supernational to take on the JP, Morgan's, etcetera.
10:24
Speaker 1: But just putting a Deutsch amount together with I don't
10:26
Speaker 1: know what Barclays or a new credit in itself doesn't
10:30
Speaker 1: really solve anything. So to start with, you do need
10:33
Speaker 1: to write size, you do need to get efficiencies, and
10:36
Speaker 1: for that reason you are looking at further domestic consolidation
10:40
Speaker 1: in Germany. So the reason that people keep coming out
10:42
Speaker 1: of the commerce Bank is again that's trading at points
10:45
Speaker 1: three times tangible. Just like Deutsche. They need to take
10:49
Speaker 1: an awful of cost base and out close more branches,
10:52
Speaker 1: get more synergies. So yes, I think the reason we
10:55
Speaker 1: keep arriving at the same conclusion is there's nothing that
10:58
Speaker 1: either bank can do top line. They've done it all
11:00
Speaker 1: that they can independently. So you need to create the
11:02
Speaker 1: bad will. Deutsch is the acquirer. They need to raise
11:05
Speaker 1: some capitals to do a deal. Then you need, for example,
11:09
Speaker 1: another couple of billion of synergies. When you put the
11:11
Speaker 1: two together, bear in mind that they're already targeting nine
11:14
Speaker 1: million for folding their domestic mortgage banks together would past
11:19
Speaker 1: bank in Deutsche. So yes, Unfortunately you've got to start
11:22
Speaker 1: domestically and then you can then have a sensible conversation
11:26
Speaker 1: about creating a big international merger. So where elsked Jonathan,
11:31
Speaker 1: would you expect to see consolidation besides Germany? Is it
11:34
Speaker 1: required in France for example, or the UK? What is
11:38
Speaker 1: just kind of the overall m and a outlook and
11:39
Speaker 1: consolidation outlook for European banking. Well, in the UK we've
11:44
Speaker 1: had a few of the smaller Challenger Banks UM coming together,
11:48
Speaker 1: CYBG and Metro's in trouble at the moment, so I
11:52
Speaker 1: think we'll see a little bit more over here in
11:54
Speaker 1: the UK. Italy you'll definitely see further consolidation, and a
11:57
Speaker 1: little bit more in Spain. But to to be honest,
12:00
Speaker 1: Germany is a pretty special market because it has a
12:04
Speaker 1: lot of spark Caster and Lander's Bank unlisted banks, and
12:07
Speaker 1: the reason that it's so unprofitable in Germany is because
12:09
Speaker 1: of these banks. So there can be there will be
12:12
Speaker 1: more consolidation in names that you've probably never heard of UM.
12:16
Speaker 1: And I think overall we will we have one or
12:18
Speaker 1: two big deals within the next eighteen months. Yes, I
12:21
Speaker 1: mean for us things like UNI credit to see at
12:24
Speaker 1: L makes an awful lot of sense. Maybe a bar
12:26
Speaker 1: plays and something like a BMP that could make sense
12:29
Speaker 1: as well. But I don't think, um, we're going to
12:31
Speaker 1: see anything big quite yet. But I do think over
12:35
Speaker 1: the next two to three years, in the absence of
12:37
Speaker 1: anything that's sort of exciting top line for these banks
12:40
Speaker 1: and they can't keep cutting costs, you need the mergers
12:43
Speaker 1: to create proper synergies. So here's a question, and this
12:47
Speaker 1: is kind of in the weeds a little bit. But
12:50
Speaker 1: one thing that I do when I look at Deutsche
12:53
Speaker 1: Bank's future is I look at their contingent capital bonds
12:56
Speaker 1: are convertible capital bonds, basically their tier one capital that
13:00
Speaker 1: is dead until they don't have enough capital raised to
13:04
Speaker 1: meet with regulations. So then all of a sudden they
13:07
Speaker 1: could potentially not pay interest on these bonds, or even
13:11
Speaker 1: these bonds could get wiped out in a worst case scenario.
13:14
Speaker 1: They're kind of all over the place today. Some are up,
13:16
Speaker 1: some are down. That is surprising to me. I would
13:19
Speaker 1: think that they would be plunging given the fact that
13:21
Speaker 1: Deutsche Bank got bad results essentially and that there's talk
13:25
Speaker 1: that it will not be existing as they standalone bank
13:28
Speaker 1: within the next three months. Can you explain the two
13:31
Speaker 1: things they're one, don't forget that a lot of these
13:33
Speaker 1: things are trading in a fair discounter face. And also
13:36
Speaker 1: if you go back to early two thousands and sixteen,
13:38
Speaker 1: that's when the eight ones plunged to about seventy something
13:42
Speaker 1: sent in in the euro Uh, it's all about your MDA,
13:45
Speaker 1: your maximum just description of the amount and can you
13:48
Speaker 1: honor coupons, can you pay um your bonuses et cetera.
13:53
Speaker 1: They talked about that on the care They've got a
13:55
Speaker 1: little bit of headroom. So I don't think anybody thinks
13:58
Speaker 1: because capital is still about thirteen and these things aren't
14:01
Speaker 1: going to get triggered um and at the moment because
14:03
Speaker 1: they've pretty much got a handle on cost now, I
14:06
Speaker 1: think we've got enough visibility that they can honor the coupons.
14:09
Speaker 1: It isn't really an issue. I mean, a lot of
14:12
Speaker 1: the European at ones are trading at a discount now,
14:15
Speaker 1: and we're seeing clients talking to us saying, well, why
14:17
Speaker 1: don't we just go short the equity along the eighty
14:19
Speaker 1: one because we know that we're going to get paid.
14:22
Speaker 1: I would sort of be in that camp in so
14:24
Speaker 1: much as I think the Deutsche and a lot of
14:27
Speaker 1: other banks will pay the coupon. We have seen one bank,
14:30
Speaker 1: a Greek bank, so that it's not paying the coupon
14:32
Speaker 1: this Yeah, but that's Greece, all right. Jonathan Tyson, thank
14:34
Speaker 1: you so much, really interesting analysis. Jonathan Tyes, senior banks
14:37
Speaker 1: analysts for Bloomberg Intelligence, joining us from London. Meanwhile, a
15:00
Speaker 1: big wild card for markets is also the price of oil,
15:03
Speaker 1: which plunged in the last three months of last year
15:07
Speaker 1: by forty percent by my measure, and has had an
15:10
Speaker 1: amazing rally so far year to date. What is going on?
15:13
Speaker 1: How much more does there is there for this uh,
15:16
Speaker 1: this commodity to rally? John Kilduff joining US now founding
15:19
Speaker 1: partner of Again Capital based in New York. John, you
15:22
Speaker 1: have been prescient when it comes to the price of oil.
15:25
Speaker 1: Where are we in this crude rally? Does it have
15:28
Speaker 1: more upside? Or is this basically the peak for a while?
15:32
Speaker 1: You guys are too kind with that. I have to say, um,
15:35
Speaker 1: at this point, if given the really the lack of
15:40
Speaker 1: a rally on the chaos that's going on in Venezuela here,
15:45
Speaker 1: and you know the continued uh negative data points coming
15:49
Speaker 1: out of Asia in particular in terms of the economy,
15:51
Speaker 1: it is my sense that prices appear to be peaking here.
15:56
Speaker 1: So peaking oil? What so? What is really so you're
16:00
Speaker 1: supplying demand? Are you suggesting there that generally in balance
16:03
Speaker 1: here at the moment. I think the Saudi Arabian particular
16:08
Speaker 1: is struggling and working hard to try to get it
16:12
Speaker 1: into balance. But we got a data point out of
16:15
Speaker 1: the US government yesterday. Now it's backward looking it's it's
16:17
Speaker 1: from November, but US production in November hit eleven point
16:21
Speaker 1: nine million barrels a day, a record. I have to
16:24
Speaker 1: believe we got higher than that in December, and it
16:26
Speaker 1: will be even higher number here for January when it
16:28
Speaker 1: finally gets uh tallied up. So the wave of oil
16:33
Speaker 1: keeps coming at this market. Uh. You saw x on
16:36
Speaker 1: Mobiles earnings this morning reference their own increase UH in production,
16:41
Speaker 1: and that's a trend that's going to continue this. The
16:43
Speaker 1: saddis really have their work cut out for them. It's
16:46
Speaker 1: really becoming harder for them with the slowdown that we're
16:49
Speaker 1: seeing in China. Well, John, I guess that. Then it
16:51
Speaker 1: raises a question if oil prices are peaking here, are
16:54
Speaker 1: they kind of kind of remain range bound or we
16:56
Speaker 1: headed for another oil plunge. I remind myself that in
17:03
Speaker 1: the bond market, the guys and gals keep always say
17:05
Speaker 1: don't fight the FED, and in the oil market you
17:07
Speaker 1: have to say, don't fight Saudi Arabia because they do
17:09
Speaker 1: have a lot of hefft still and power. So I
17:13
Speaker 1: do think we're gonna be uh somewhat range bound. But
17:16
Speaker 1: it returned back down to sub fifty dollar a barrel oil, Uh,
17:20
Speaker 1: you know isn't out of the question. And another interesting
17:23
Speaker 1: point that x On made today is that they're profitable
17:25
Speaker 1: in their Permian operations. That at thirty five dollars a
17:28
Speaker 1: barrel is remarkable revelation by them. So it shows you
17:32
Speaker 1: how sticky that that production is going to be. So
17:35
Speaker 1: that's part of the problem here for the for the
17:38
Speaker 1: oil market. So, John, you mentioned earnings Royal Dutch Shell
17:41
Speaker 1: reported last night. Uh, x On mobile this morning, Chevron
17:45
Speaker 1: this morning. Anything in those numbers that really stood out
17:48
Speaker 1: for you as it relates to your call for kind
17:50
Speaker 1: of you know, range bound oil, Well, I need that
17:54
Speaker 1: they did remarkably well. Um, I think surprised most folks
17:58
Speaker 1: because the headline, of course was that oil rightly crashed
18:01
Speaker 1: during the quarter. But the fact of the matter is
18:03
Speaker 1: oil prices actually you know, maintain themselves above fifty dollars
18:07
Speaker 1: a barrel right up until mid December. They were above
18:11
Speaker 1: sixty bucks of barrel through October, and we're you know,
18:15
Speaker 1: pushing sixty bucks through most of November. So it was
18:18
Speaker 1: a pretty good quarter price wise for the majors on
18:21
Speaker 1: that basis, and particularly the exposure a lot of them
18:24
Speaker 1: have to the international market and attack another ten dollars
18:27
Speaker 1: on top of that for the for the Brent uh
18:29
Speaker 1: mark or the international marker. So I think what I've
18:32
Speaker 1: been talking about when I've been on with you guys previously,
18:35
Speaker 1: you should get an exposure to these companies. Make sure
18:38
Speaker 1: there's an international aspect to them, because the relative tightness
18:43
Speaker 1: in the market and other issues that don't affect um
18:47
Speaker 1: them is that obviously in the U s there's a
18:51
Speaker 1: surfeed of production, there's bottlenecks, there's there's localized downward pressure
18:55
Speaker 1: on prices. You don't have that internationally, So you want
18:58
Speaker 1: to have that portfolio. UH Refining did great demand all
19:01
Speaker 1: quarter for refined products, jet fuel, diesel fuel, gasoline here
19:05
Speaker 1: United States remarkably strong. So they all seem to capitalize
19:09
Speaker 1: on that. The big guys that is, so we're talking
19:11
Speaker 1: about the big guys, let's talk about some of the
19:13
Speaker 1: little guys. Yesterday, Blackstones g s O unit reported a
19:17
Speaker 1: really poor earning, particularly tied to some distressed companies in
19:21
Speaker 1: the oil patch. And I'm wondering, if we do get
19:24
Speaker 1: sub fifty dollar oil for any sort of prolonged period,
19:27
Speaker 1: do you expect the insolvencies to sort of return in
19:30
Speaker 1: that industry. I do they for the most part, despite
19:35
Speaker 1: what Exambo said about thirty five dollar barrel oil, uh,
19:38
Speaker 1: the oil in costs for most of these companies, they
19:41
Speaker 1: start to struggle when we're under fifty dollars um. The banks,
19:45
Speaker 1: you know, the last go around on this, the banks
19:48
Speaker 1: didn't necessarily force a lot of them as many of
19:50
Speaker 1: them out of business as I thought they would. That
19:52
Speaker 1: sort of pretend and extent type of uh you know
19:56
Speaker 1: actions went on. I think this time, though, the gig
20:00
Speaker 1: be up and you will see a lot of consolidation.
20:02
Speaker 1: The thing to remember is that though that that oil
20:04
Speaker 1: production and that infrastructure doesn't go away, it just gets
20:07
Speaker 1: sold to somebody at a at a firesale price. So um.
20:14
Speaker 1: What what interesting thing I saw is that for Excen Mobile,
20:17
Speaker 1: the CEO will be on the earnings call for the
20:19
Speaker 1: first time in fifteen years. What's going on there? I
20:24
Speaker 1: think they've had a real wake up call there at
20:26
Speaker 1: Exon Mobile, you know, for so long, you know, they
20:28
Speaker 1: were considered sort of the you know class of the industry,
20:33
Speaker 1: and they stumbled. They brought a natural gas company at
20:37
Speaker 1: the heights of the natural gas uh you know, price structure. Um.
20:41
Speaker 1: And you know, they've been criticized for a lot of
20:43
Speaker 1: other different things and they're finally getting their act together. Um.
20:46
Speaker 1: And it's could finally be I think, returning to the
20:48
Speaker 1: kind of company that we all admired and it was
20:51
Speaker 1: so fantastic and still is to a large degree, don't
20:53
Speaker 1: get me wrong, but I think they realized that they
20:55
Speaker 1: can't hide in the shell anymore and they have to
20:57
Speaker 1: be more uh out there and and pressing their case.
21:01
Speaker 1: I mean, I saw a couple of interviews with the
21:02
Speaker 1: gentleman already this morning, and he was fantastic. It was
21:06
Speaker 1: shed a lot of light on the operations. Wasn't cag
21:08
Speaker 1: like they had been historically. It's it's a new company
21:11
Speaker 1: and I think there it's worth a look at this
21:14
Speaker 1: point for sure for investors. John Kildoff, thanks so much.
21:18
Speaker 1: John killed Off as a founding partner of Again Capital,
21:21
Speaker 1: joining us on the phone here in our bloombog leven
21:23
Speaker 1: three oh studios. Boy, we are right smack in the
21:41
Speaker 1: middle of tech earnings. We had blowout numbers from Google,
21:45
Speaker 1: but last night we had some numbers coming out of
21:46
Speaker 1: Amazon that were a little weaker than expected, particularly as
21:49
Speaker 1: it relates to their forward growth. So let's dig into
21:52
Speaker 1: some tech here today. As we like to do that,
21:55
Speaker 1: we always like to turn to our good friend Shira
21:57
Speaker 1: overy day. Shira is a technology calmness for Boomberg Opinion,
22:01
Speaker 1: and she joins us once again in our Bloomberg Interactive
22:03
Speaker 1: studio and shere came out with a really cool column
22:06
Speaker 1: today entitled Amazon Mystery, Where did all the growth go higher?
22:11
Speaker 1: Margins are great, but it's not exactly what investors have
22:13
Speaker 1: been paying for, which is I think a great take
22:15
Speaker 1: on what's happening at Amazon. It appears to be that
22:19
Speaker 1: after years and years and years and years of no
22:22
Speaker 1: profit and just focusing on top line revenue growth, Jeff
22:25
Speaker 1: Bezos company is actually starting to provide some significant profits.
22:30
Speaker 1: Pretty interesting. It is pretty interesting, you're right, Although I
22:33
Speaker 1: think the thing that really freaked out investors was that
22:37
Speaker 1: Amazon said this year nineteen would be another year of
22:41
Speaker 1: significant investment, at least compared to eighteen. We're spending growth
22:45
Speaker 1: kind of slowed, and as a result you saw profit
22:48
Speaker 1: margins getting um plumper, at least by Amazon's relatively modest standards.
22:53
Speaker 1: But the issue, of course is the top line appears
22:57
Speaker 1: to be the top line growth seems to be slowing considerably.
23:02
Speaker 1: And it's a little bit confounding how that's happening, honestly,
23:05
Speaker 1: because it does seem like US retail sales are going great.
23:09
Speaker 1: The US economy, where Amazon generates the vast majority of
23:12
Speaker 1: its revenue, is going great. Amazon seems to be gaining share,
23:16
Speaker 1: and yet the growth is slowing there. This is sort
23:19
Speaker 1: of the conundrum that you and I have talked about
23:22
Speaker 1: for years, which is that nobody looks at the profit
23:25
Speaker 1: margins of the Amazon. They never have. Is this the
23:28
Speaker 1: beginning of actually looking at the profit margins? I think
23:31
Speaker 1: it is, and I think that story started to change
23:35
Speaker 1: a year or so ago. And and look, you can
23:37
Speaker 1: see what's happening at Amazon to to grow that bottom line,
23:42
Speaker 1: which is they're getting an increasing share of revenue from
23:45
Speaker 1: businesses that are relatively higher profit margins. So Amazon Web Services,
23:50
Speaker 1: their cloud computing division. The revenue growth there continues at
23:54
Speaker 1: a really significant rate or so in in the quarter
24:00
Speaker 1: that has much higher margins than Amazon's e commerce business,
24:04
Speaker 1: something like thirty compared to five percent in their e
24:08
Speaker 1: commerce business. So as more of Amazon's overall revenue comes
24:12
Speaker 1: from AWS, you see the total company margins go up.
24:15
Speaker 1: Same for their digital advertising business. Same for Amazon is
24:19
Speaker 1: now selling more than half of the merchandise online is
24:24
Speaker 1: coming not from Amazon itself but from the outside companies
24:27
Speaker 1: that are using Amazon as a sales channel, and those
24:31
Speaker 1: sales are significantly more profitable for Amazon because they're just
24:35
Speaker 1: kind of taking a commission basically. So the stocks down
24:38
Speaker 1: almost four percent today, and I think that's primarily on
24:41
Speaker 1: the weaker than expected revenue guidance that you highlighted. The
24:45
Speaker 1: company called out in on their call last night that
24:47
Speaker 1: part of the reason for the more cautious revenue outlook
24:51
Speaker 1: was India. That is a big growth driver for them,
24:54
Speaker 1: but apparently there's been some regulatory changes there that are
24:57
Speaker 1: impacting their business. What's going on there, Yeah, India has
25:00
Speaker 1: been a really significant investment market for Amazon and Walmart two,
25:05
Speaker 1: which bought flip Card, a kind of large e commerce
25:09
Speaker 1: operation in India. India is basically now the new gold
25:12
Speaker 1: rush for a lot of tech companies around the world,
25:14
Speaker 1: including e commerce companies. But what the Indian government did
25:18
Speaker 1: is it it tightens some regulations that essentially prohibit companies
25:23
Speaker 1: like Amazon and Walmart, foreign companies from us selling goods
25:28
Speaker 1: on their own or having kind of their affiliated companies
25:33
Speaker 1: selling goods on their own as opposed to just being
25:35
Speaker 1: a middleman for sales by by local companies. And so
25:40
Speaker 1: that has meant that both Walmart and Amazon have had
25:42
Speaker 1: to remove a lot of items um from their India websites,
25:47
Speaker 1: which I think is is worrying investors. I want to
25:51
Speaker 1: shift gears a little bit because we also have been
25:54
Speaker 1: getting other tech earnings and Facebook, really, I gotta say,
25:57
Speaker 1: is the one that stands out the most to me
25:59
Speaker 1: of this hire earning season. Yesterday shares rose eleven percent.
26:03
Speaker 1: Today they're basically flat. I do also want to just
26:06
Speaker 1: give an update because yesterday we spoke about Facebook with
26:10
Speaker 1: David Garrity and he was saying that that that that
26:14
Speaker 1: Facebook had been removed from some Apple apps. It wasn't
26:17
Speaker 1: entirely accurate the way that we had originally framed it
26:20
Speaker 1: um and a Facebook spokesman just noted that we have
26:24
Speaker 1: our we have had our enterprise certification which enables our
26:27
Speaker 1: internal employee applications restored. We are in the process of
26:29
Speaker 1: getting our internal apps up and running. To be clear,
26:31
Speaker 1: this didn't have an impact on our consumer facing services,
26:34
Speaker 1: so there was never any kind of breach in a
26:37
Speaker 1: consumer's ability to download Facebook from their Apple products. But
26:40
Speaker 1: I'm just wondering shia in the light of some of
26:43
Speaker 1: the privacy crackdowns from other companies like Apple, etcetera. With Facebook,
26:50
Speaker 1: is Facebook really in the clear the way that the
26:52
Speaker 1: share price seems to suggest, or are they going to
26:54
Speaker 1: face more backlash year? So I think what's going to
26:57
Speaker 1: happen to Facebook is pretty similar to what's happened at
27:02
Speaker 1: Google over the last decade. So at Google too, that's
27:06
Speaker 1: a company that has faced a lot of regulatory and
27:10
Speaker 1: privacy questions UM for for many years, including if you remember,
27:14
Speaker 1: the Federal Trade Commission in the US UM launched a
27:20
Speaker 1: significant investigation into whether Google was abusing its monopoly on
27:23
Speaker 1: search and eventually came out that said said no. But
27:27
Speaker 1: it was a close call at the FTC, and and
27:30
Speaker 1: Google's face regulatory headaches in Europe and so on. So
27:33
Speaker 1: I think basically this is the new cost of doing
27:35
Speaker 1: business for for Google for a long time and now
27:38
Speaker 1: for Facebook, that it is just going to be a
27:40
Speaker 1: regular drumbeat of questions and pressure on that company around
27:46
Speaker 1: data privacy security. The way that they used the enormous
27:51
Speaker 1: databases of data they have on on billions of people,
27:56
Speaker 1: And no, I don't think it's going to affect business,
27:59
Speaker 1: but I think there will be questions for the rest
28:01
Speaker 1: of that company's life about whether they're kind of one
28:05
Speaker 1: regulatory investigation away from having a crippling business impact. So
28:09
Speaker 1: just following up on on Google. The company does report
28:12
Speaker 1: earnings Monday after the closed conference called four thirty Eastern time.
28:16
Speaker 1: What are you looking for in the results? So one
28:19
Speaker 1: thing I'm looking for is we saw this week from
28:22
Speaker 1: the big tech earnings that they're now significant questions around
28:26
Speaker 1: growth UM. And we started to see that last year,
28:29
Speaker 1: and I think all of the big tech companies now
28:31
Speaker 1: to a different degree have questions about where is the
28:35
Speaker 1: growth going to come from? And and Google faces that
28:39
Speaker 1: as well. So I think I'm going to focus a
28:42
Speaker 1: lot on the top line. UM. Google has made a
28:44
Speaker 1: lot of investments all over its business trying to find
28:48
Speaker 1: the next big business beyond digital advertising, and uh, it
28:53
Speaker 1: hasn't yet founded. But boy, you know, if you're gonna
28:56
Speaker 1: be a one trick pony, that is a really good pony.
28:58
Speaker 1: But their devices there's old, not kind of no, I
29:01
Speaker 1: mean for the basically everything Google invests in is just
29:07
Speaker 1: kind of a drop in the ocean compared to their
29:10
Speaker 1: core advertising business. But the good thing is that the
29:12
Speaker 1: core advertising business is so successful and remains successful and
29:17
Speaker 1: growing fast that they have a long leash to figure
29:20
Speaker 1: out whatever might come next. Shara Overday, thank you so
29:23
Speaker 1: much for being with us and taking time out of
29:25
Speaker 1: this incredibly busy week for you. Shara Oviday is technology
29:28
Speaker 1: columnist for US at Bloomberg Opinion. Thanks for listening to
29:34
Speaker 1: the Bloomberg P and L podcast. You can subscribe and
29:36
Speaker 1: listen to interviews at Apple Podcasts or whatever podcast platform
29:39
Speaker 1: you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney.
29:42
Speaker 1: I'm Lisa abram Woyds. I'm on Twitter at Lisa A.
29:45
Speaker 1: Bramwoit's one before the podcast. You can always catch us worldwide.
29:48
Speaker 1: I'm Bloomberg Radio.