Latest / Bloomberg Intelligence / America Is Lagging In The 5G Race: Harvard's Crawford (Podcast)

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America Is Lagging In The 5G Race: Harvard's Crawford (Podcast) · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg Penl Podcast. I'm Paul swing you
• 0:05
  Speaker 1: along with my co host Lisa Brahma Waits. Each day
• 0:07
  Speaker 1: we bring you the most noteworthy and useful interviews for
• 0:10
  Speaker 1: you and your money, whether at the grocery store or
• 0:12
  Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
• 0:15
  Speaker 1: podcast or wherever you listen to podcasts, as well as
• 0:17
  Speaker 1: that Bloomberg dot Com. Paul, we talk a lot about
• 0:22
  Speaker 1: the new tech Cold War between the US and China.
• 0:26
  Speaker 1: The front lines may just be fiber. And joining us
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  Speaker 1: now is Professor Susan Crawford of Harvard University joining us
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  Speaker 1: in New York. She is the author of a new book, Fiber,
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  Speaker 1: The Coming Tech Revolution and Why America Might miss It.
• 0:42
  Speaker 1: So what is this coming tech revolution that you foresee, Well,
• 0:46
  Speaker 1: imagine ubiquitous, unlimited, cheap data capacity throughout it entirely, sort
• 0:53
  Speaker 1: of an enormous market, and that's going to happen in
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  Speaker 1: China long before it happens here, and it would make
• 0:59
  Speaker 1: possible all kinds of new jobs, new developments, new ways
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  Speaker 1: of making a living. China has actually planned now to
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  Speaker 1: connect of their homes this enormous market to fiber optic.
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  Speaker 1: The US has no such plan for a national upgrade.
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  Speaker 1: But hold on here, I think my cell phone works
• 1:15
  Speaker 1: just fine. I get my movies downloaded quicker. I All
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  Speaker 1: I hear about is the cable companies and the telephone
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  Speaker 1: companies say how much money they're spending upgrading their systems,
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  Speaker 1: their wire you know, their infrastructure. Um, isn't that good enough.
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  Speaker 1: It's like the people who said, I have one light
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  Speaker 1: bulb in my house. Isn't that fine? Who needs refrigeration?
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  Speaker 1: Who needs any more appliances? The whole country needs cheap,
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  Speaker 1: ubiquitous fiber access in that last mile. Now, cable is happy,
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  Speaker 1: and there are great American set of companies. Because they've
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  Speaker 1: built out their infrastructure. Their capex is going way down
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  Speaker 1: year after year. Meanwhile, data use is going up and
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  Speaker 1: their profit margins are growing up. So as an investment, terrific,
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  Speaker 1: But for the country's ability to compete on the world stage,
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  Speaker 1: not so great. All right, So let's let's dig into this.
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  Speaker 1: You're talking five G, right, you're talking to me idea
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  Speaker 1: of building out that infrastructure. What sort of the knock
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  Speaker 1: on effect of not having a full scale five G
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  Speaker 1: infrastructure in place when it comes to operating businesses. Well,
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  Speaker 1: what five G and fiber are taken together, the complimentary.
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  Speaker 1: What they're going to make possible is human presence. You'll
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  Speaker 1: be able to work wherever you live, rather than having
• 2:21
  Speaker 1: to live where you work. You'll have eye contact with
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  Speaker 1: the people you're talking to them. It will be as
• 2:26
  Speaker 1: if there's just a pane of glass between you and
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  Speaker 1: the rest of the world. We've never experienced that in
• 2:31
  Speaker 1: the United States, and so imagine healthcare services at a
• 2:34
  Speaker 1: distance that actually feel real, and education and automated manufacturing,
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  Speaker 1: elder care, all kinds of new ways of living, especially
• 2:44
  Speaker 1: in an era of climate change, that are going to
• 2:46
  Speaker 1: be essential for the next millennium. So are we talking holograms?
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  Speaker 1: Are we talking screen? I mean? Is that how does
• 2:52
  Speaker 1: this sort of materialize? Again, try to imagine a pane
• 2:55
  Speaker 1: of glass between you and the rest of the world
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  Speaker 1: that there's so much data it's like a fifteen mile
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  Speaker 1: pipe of water in comparison to the two inches we
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  Speaker 1: have now going both directions, So all of your downloads
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  Speaker 1: where once somebody's upload, you're going to need to be
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  Speaker 1: able to be part of things uploading with a fantastic
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  Speaker 1: basically unlimited connection, and that makes possible eye contact, which
• 3:18
  Speaker 1: we've never had over our existing internet access networks. All right,
• 3:21
  Speaker 1: so A T and T, Verizon Dish, they've all spent
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  Speaker 1: tens of billions of dollars on spectrum. They're all in
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  Speaker 1: the very early stages of rolling out what they call
• 3:33
  Speaker 1: five G. Are you suggesting that without that five er
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  Speaker 1: to the home last mile it really won't be true
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  Speaker 1: five G? I'm suggesting that, you know, we may talk
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  Speaker 1: about Chinese China having a government run network. In developing countries,
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  Speaker 1: by the way, and not just in China, we'll have
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  Speaker 1: a in essence, a private government which is verising and
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  Speaker 1: a T T providing their flavor of fully managed five
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  Speaker 1: G services. What I'm talking about is the need for
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  Speaker 1: the country to have the what evalent of a street
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  Speaker 1: grid like basic dark fire all over the country that
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  Speaker 1: allows for lots of competing wireless providers, lots of five
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  Speaker 1: G providers in rural and urban and poor and rich areas.
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  Speaker 1: And our current path is not going to get us there.
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  Speaker 1: So how much would that cost? That's not my trouble,
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  Speaker 1: that's not my best Not how much will it cost
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  Speaker 1: not to do it? This is you know, how much
• 4:22
  Speaker 1: did it cost? To have a federal highway network. How
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  Speaker 1: much did it cost to have a transcontinental network? Right,
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  Speaker 1: so what are some of the costs to not having it?
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  Speaker 1: Oh my god. Uh, this next industrial revolution of very
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  Speaker 1: high capacity data flow back and forth symmetrical won't happen here.
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  Speaker 1: It'll happen in China and Japan and Korea and northern Europe,
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  Speaker 1: the places that actually have people working in this sandbox
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  Speaker 1: of new connectivity. So we we may have been the
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  Speaker 1: place where the internet showed up in the first place,
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  Speaker 1: and we were leading the world in the first generation
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  Speaker 1: of internet technology, but we won't for this next generation.
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  Speaker 1: So in your professor you you do highlight that there
• 5:02
  Speaker 1: are some town, some markets, some places in the US
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  Speaker 1: where maybe I guess these local markets aren't waiting for
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  Speaker 1: maybe the federal government or a private tel coda to
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  Speaker 1: kind of really wire up their community like it needs
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  Speaker 1: to be wired about what happened in those communities are
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  Speaker 1: actually about eight hundred of them across the country that
• 5:19
  Speaker 1: have taken their destinies into their own hands. We saw
• 5:21
  Speaker 1: the same story electricity places. They felt they were being
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  Speaker 1: squished by the equivalent of Comcast or Charter back in
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  Speaker 1: the early days decided to make sure there was utility
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  Speaker 1: providing basic electricity services, same things happening in places like Chattanooga, Louisville.
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  Speaker 1: San Francisco was on the road to doing this, and
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  Speaker 1: then Mayor ed Lee died, and so the current mayor
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  Speaker 1: doesn't see it as her priorities. Finance with a tax
• 5:44
  Speaker 1: on the local citizens. You know, patient capital of any
• 5:48
  Speaker 1: form could be a bond issue. It's a very sensible investment.
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  Speaker 1: It pays out until the sun explodes. You just have
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  Speaker 1: to wait for let's say a dozen years for your
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  Speaker 1: investment to come back. And private companies, it's not in
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  Speaker 1: their interest to do this. It's just not part of
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  Speaker 1: their profile. That's fine. Well, but this is exactly where
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  Speaker 1: I was going to go, which is, if it is
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  Speaker 1: going to pay until the sun comes home, then why
• 6:09
  Speaker 1: aren't the Comcast? Why why aren't the big cable companies
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  Speaker 1: doing it themselves? Because they're very happy. They suffer from
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  Speaker 1: neither oversight nor competition. They've made their capital expenditures. Now
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  Speaker 1: they just soak the network, and they soak all of us.
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  Speaker 1: There's nothing bad about this, not evil. Unconstrained though a
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  Speaker 1: private company is never going to provide a utility at
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  Speaker 1: reasonable prices to everyone. It's just like, you know, we're
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  Speaker 1: not going to rely on private companies for transit, or
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  Speaker 1: for electricity or for water. Doesn't make any sense. So
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  Speaker 1: this sounds like a scenario. You know my background, I've
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  Speaker 1: I've I've spent a lot of time looking at cable
• 6:43
  Speaker 1: companies and te toco companies, and I kind of know
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  Speaker 1: the history of how they invest and they think about returns.
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  Speaker 1: But you know, my sense is this sounds like when
• 6:50
  Speaker 1: you talk about a national true metric fiber to the
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  Speaker 1: home grid. This sounds like something that the Comcast of
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  Speaker 1: the world, in the Charters of the world, they're just
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  Speaker 1: gonna say, we're gonna stick with what we have until
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  Speaker 1: the government wants to come in and do something. Is
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  Speaker 1: that kind of how you think it has to be?
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  Speaker 1: I guess on this kind of scale, when you equated
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  Speaker 1: with the federal highway unit interstate highway system, we have
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  Speaker 1: always relied on private companies to provide us with telecommunications,
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  Speaker 1: but they've always been burdened with public obligations. Right now,
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  Speaker 1: there are no such obligations on those companies. And so
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  Speaker 1: what's happening is the entire country, including all American businesses
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  Speaker 1: are paying enormous amounts of rent to about four companies
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  Speaker 1: for data connectivity, and so of course they're happy with
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  Speaker 1: the status quo. I don't blame them, but we fix
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  Speaker 1: this with electricity, and we can fix it with communications.
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  Speaker 1: And we by the way, our telephone network originally was
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  Speaker 1: the envy of the world when it was first unveiled,
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  Speaker 1: and our basic, unlit fibergrids should be the envy of
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  Speaker 1: the world too. We should be looking the rest of
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  Speaker 1: the world in mirror and we're not. Professor Susan Crawford,
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  Speaker 1: thank you very much. Very interesting come uh discussion of
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  Speaker 1: course her new book, Fiber The Coming Revolution and why
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  Speaker 1: America might miss it. Uh. Susan Crafts, Professor of law
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  Speaker 1: at Harvard University, based in Boston, obviously, but with us
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  Speaker 1: in our broom Bloomberg Interactive Studios joining us now. Bill Barker,
• 8:27
  Speaker 1: portfolio manager of the Motley Fool Small mid cap growth Fund. Bill,
• 8:32
  Speaker 1: thank you so much for being with us. I want
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  Speaker 1: to start just with a daylight today. When you see
• 8:37
  Speaker 1: the naz Jack down one and a half percent, Dow
• 8:40
  Speaker 1: down one you know about the same. Are you diving in?
• 8:43
  Speaker 1: Are you buying and if so, where are you seeing opportunities? Well,
• 8:48
  Speaker 1: I think that the opportunities that have popped up today,
• 8:52
  Speaker 1: I guess Caterpillar is driving driving the news. But the
• 8:56
  Speaker 1: news isn't entirely unexpected. That is UH weakness from China
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  Speaker 1: UH and and the tariffs affecting the cost for Caterpillar
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  Speaker 1: isn't much of a surprise. So I think that the
• 9:10
  Speaker 1: companies that are less affected by that tend to be
• 9:14
  Speaker 1: the less global operators. You're talking about the small cap
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  Speaker 1: companies having UH more strength today, and I think that's
• 9:22
  Speaker 1: understandable given that they're less affected by by global concerns
• 9:27
  Speaker 1: at the moment. So what again, kind of what sectors
• 9:30
  Speaker 1: are you diving into? Presumably you know, hopefully you had
• 9:33
  Speaker 1: some cash coming out towards your end and you could
• 9:35
  Speaker 1: probably start the year as you sat down with your
• 9:37
  Speaker 1: team think about, Okay, maybe we're licking our chops a
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  Speaker 1: little bit here, we've got some names that maybe our
• 9:43
  Speaker 1: cheaper Where did you put money to work? And coming
• 9:46
  Speaker 1: out of that December swim, we've been putting money to
• 9:50
  Speaker 1: work and looking more at the information tech space and
• 9:53
  Speaker 1: anything else says it was hit the hardest at the
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  Speaker 1: end of the year, and uh, taking money from more
• 10:00
  Speaker 1: of the consumer staples sector where there was a lot
• 10:04
  Speaker 1: of strength last year. A couple of things were up,
• 10:07
  Speaker 1: you know, and in our fund that Uh, it's it's
• 10:11
  Speaker 1: a little hard to understand why they were that strong
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  Speaker 1: other than the fact that they they were less less
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  Speaker 1: exposed to the volatility. So I think that we're we're
• 10:22
  Speaker 1: looking at the some of the same names that we've
• 10:25
  Speaker 1: looked at for a long time and either tech or
• 10:28
  Speaker 1: or sort of stealth tech companies that look to have
• 10:31
  Speaker 1: a competitive advantage going on for five or ten years
• 10:34
  Speaker 1: at least, Bill, was the last time it made a
• 10:36
  Speaker 1: significant shift in your allocation. Uh, Well, we tend to
• 10:41
  Speaker 1: be buy and hold investors, so we don't we don't
• 10:44
  Speaker 1: make huge shifts based on temporary things. But we've steadily
• 10:50
  Speaker 1: gone more into the tech space over the last eighteen months,
• 10:54
  Speaker 1: so Bill, So, you know, we're kind of coming into
• 10:56
  Speaker 1: a lot of consumer earnings coming in here for the
• 10:58
  Speaker 1: fourth quarter earning season. How do you how do you
• 11:01
  Speaker 1: feel about the consumer You know, we we the U
• 11:03
  Speaker 1: S economy seems to be even a two or two
• 11:05
  Speaker 1: and a half percent a pretty solid place to be
• 11:08
  Speaker 1: vis a vis some of the other market markets globally,
• 11:11
  Speaker 1: How are you positioned on the consumer sector? You market
• 11:14
  Speaker 1: way to overweight to underweight, Well, we're overweight on consumer
• 11:19
  Speaker 1: discretionary and UH, there are a lot of a lot
• 11:22
  Speaker 1: of things there where we think that the you know,
• 11:25
  Speaker 1: the domestic spend is still pretty attractive for for a
• 11:28
  Speaker 1: number of sectors in the small and mid cap space.
• 11:32
  Speaker 1: And we're also overweight in UH transportation at the moment.
• 11:38
  Speaker 1: So I think that those are those are categories we
• 11:42
  Speaker 1: continue to be happy about. I think on the transportation space,
• 11:46
  Speaker 1: there is some concern I have to admit that with
• 11:50
  Speaker 1: a slowdown a still healthy US economy, but a somewhat
• 11:54
  Speaker 1: slowing from the growth rate that it had in two
• 11:57
  Speaker 1: thousand and eighteen, that you're going to see some volatility
• 12:01
  Speaker 1: and those and that that might provide more opportunities. Of course, Bill,
• 12:05
  Speaker 1: what's your highest conviction? Bet? Well, foreen what we've got
• 12:11
  Speaker 1: our specific name that in our fund has the highest allocations.
• 12:16
  Speaker 1: XPO Logistics, which is a company which has grown into
• 12:19
  Speaker 1: a seventeen billion dollar revenue company from about a four
• 12:22
  Speaker 1: hundred million dollar revenue six seven years ago. They've run
• 12:26
  Speaker 1: into some weakness as a stock in the last really
• 12:30
  Speaker 1: just four months UH due to one earnings earnings guidance
• 12:36
  Speaker 1: revision UH and also a short sellers report that impacted
• 12:41
  Speaker 1: the stock. But the stock has rebounded from the short
• 12:44
  Speaker 1: sellers report. It continues to be trading at the low
• 12:48
  Speaker 1: end of what it's been at for the last a
• 12:51
  Speaker 1: couple of years. But for a company that has managed
• 12:54
  Speaker 1: to expand about forty times at sales in seven years,
• 12:58
  Speaker 1: we're can hinue to be very confident in management there.
• 13:02
  Speaker 1: Bill Barker, thank you so much for joining us. Bill Barker,
• 13:04
  Speaker 1: portfolio manager at Motley Fool Asset Management, which overseas about
• 13:08
  Speaker 1: two and a half billion dollars in New York markets,
• 13:30
  Speaker 1: off over about about one point three percent, continuing the
• 13:33
  Speaker 1: volatility that we've seen over the last couple of months,
• 13:35
  Speaker 1: and to help us try to dig down a little
• 13:37
  Speaker 1: bit deeper in the market moves. Here, I would like
• 13:39
  Speaker 1: to welcome Jeff Salt. Jeff as the managing director and
• 13:43
  Speaker 1: chief investment strategist for Raymond James. He's based in St.
• 13:46
  Speaker 1: Petersburg floor, but fortunately for us, he is with us
• 13:49
  Speaker 1: today in a Bloomberg Interactive studios. Jeff, thanks so much
• 13:52
  Speaker 1: for joining us so let's frame this a little bit.
• 13:56
  Speaker 1: We have December and January. We have a huge downdraft
• 13:59
  Speaker 1: in December, rebound a little bit here in in January
• 14:03
  Speaker 1: coming into earnings. Someone certainty hear, how are you positioning
• 14:08
  Speaker 1: your What is your advice to your clients as you
• 14:10
  Speaker 1: go around New York this week, presumably to see your
• 14:12
  Speaker 1: institutional investors. What are you telling them as to how
• 14:16
  Speaker 1: they should be positioned given this volatility that we've seen. Well,
• 14:19
  Speaker 1: you saw selling climax back to three days in a
• 14:23
  Speaker 1: row back it ended on December, about a steep of
• 14:26
  Speaker 1: selling climax as I've seen in forty eight years in
• 14:29
  Speaker 1: this business. And we think that is the low, and
• 14:32
  Speaker 1: we told people that that the S and P should
• 14:34
  Speaker 1: rally back up to it overran that last week on
• 14:39
  Speaker 1: the potential for a Chinese trade deal and the cessation
• 14:44
  Speaker 1: of the of the shutdown at least on a short
• 14:46
  Speaker 1: term basis. But by my measurement, we have a proprietary
• 14:50
  Speaker 1: way to measure how much internal energy is in the market. Uh,
• 14:54
  Speaker 1: the markets internal energy has been used up by that
• 14:57
  Speaker 1: dash from twenty six to internal energy, there's there's we
• 15:03
  Speaker 1: have a proprietary way to measure how much energy is
• 15:07
  Speaker 1: built up in the markets. It doesn't tell us which
• 15:09
  Speaker 1: way it's going to be released, but but it tells
• 15:12
  Speaker 1: you that if a move starts, there is enough energy
• 15:16
  Speaker 1: in the market that it can turn into a decent move.
• 15:18
  Speaker 1: So what are the components? I'm sorry, what are the
• 15:20
  Speaker 1: components of energy? I've never heard that term before, and
• 15:22
  Speaker 1: I've been doing this business for thirty years. That's proprietary,
• 15:25
  Speaker 1: you know, I don't tell people. Okay, okay, So it's
• 15:28
  Speaker 1: proprietary to the point that you don't disclose anything. Okay, Well,
• 15:32
  Speaker 1: I guess then how do you know that it's not
• 15:33
  Speaker 1: going to be to the downside, especially given the fact
• 15:35
  Speaker 1: that we have today the results from Nvidia and Caterpillar
• 15:39
  Speaker 1: casting real Paul over markets. We have long term, intermediate term,
• 15:43
  Speaker 1: and short term proprietary models. The long term model flip
• 15:46
  Speaker 1: positive actually in October of eight, which is where most
• 15:49
  Speaker 1: stocks bottom. Ninety two point six percent of stocks traded
• 15:53
  Speaker 1: bottomed on October tenth. I've never of Oh eight. I've
• 15:56
  Speaker 1: never seen that the markets went lower. The indicries went
• 15:59
  Speaker 1: lower into March of oh nine because the financials kept
• 16:02
  Speaker 1: going down, but the majority of stocks bottomed are intermediate
• 16:05
  Speaker 1: and short term indicators flip more often than the long term.
• 16:09
  Speaker 1: In fact, the short term model flip negative on October two, uh,
• 16:13
  Speaker 1: and we told people if you have speculative trading positions,
• 16:16
  Speaker 1: you should sell them. We didn't do anything with with
• 16:19
  Speaker 1: long term investment positions, but in a lot of cases
• 16:21
  Speaker 1: I wish I had. So which sectors? Now are you
• 16:27
  Speaker 1: more inclined to? Are you, you know, kind of putting
• 16:29
  Speaker 1: at the top of your list when people say, hey,
• 16:31
  Speaker 1: where should I be putting some money to work? I
• 16:33
  Speaker 1: still like old tech, and I particularly like the two
• 16:36
  Speaker 1: sectors that were so out of favor last year, Energy
• 16:39
  Speaker 1: and financials. They are cheap. The energy stocks are trading
• 16:43
  Speaker 1: at the same valuation metrics as they were when crude
• 16:45
  Speaker 1: oil was twenty six bucks of barrel. Is old tech
• 16:48
  Speaker 1: things like Intel? Alright, So what do you think that
• 16:52
  Speaker 1: investors are missing? Why do you think they're undervalued right now?
• 16:55
  Speaker 1: I think they were chasing the new nifty fifty, the
• 16:58
  Speaker 1: Fang stocks, uh and ignoring you know, some of the
• 17:02
  Speaker 1: cheaper old technology names. Well, but why especially if we
• 17:06
  Speaker 1: see the slowdown in China is affecting a lot of
• 17:09
  Speaker 1: companies more than people had previously expected. Why why do
• 17:14
  Speaker 1: you think that there could be an upside surprise that
• 17:16
  Speaker 1: we get this this week? Because I still think earnings
• 17:18
  Speaker 1: are gonna do very well in this country. I think
• 17:21
  Speaker 1: people were under invested. Uh, cash levels had built up.
• 17:26
  Speaker 1: We are short term over bought. I was looking for
• 17:28
  Speaker 1: a pull back to the area. I'm not sure we'll
• 17:33
  Speaker 1: get that, but I'm not chasing stocks right here. So
• 17:38
  Speaker 1: how important are the macro issues out there to your outlook?
• 17:42
  Speaker 1: When we think about China and Brexit, seems like those
• 17:44
  Speaker 1: are some significant headwinds for the market. How do you
• 17:46
  Speaker 1: factor that in into your outlook? I don't think Brexit
• 17:50
  Speaker 1: is that big a deal, and I don't think China
• 17:52
  Speaker 1: is slowing that much. I mean six plus percent GDP grow. Sure,
• 17:55
  Speaker 1: it's down from double digits where it was a few
• 17:57
  Speaker 1: years ago, but it's still I wish we had x
• 18:00
  Speaker 1: percent GDP growth. I think the economy is is good.
• 18:05
  Speaker 1: I think earnings are going to continue to come in
• 18:07
  Speaker 1: better than people expect. And I think there's way too
• 18:10
  Speaker 1: much cash on the sidelines right here. So what do
• 18:12
  Speaker 1: you think that uh, the S and P is going
• 18:14
  Speaker 1: to return this year? We have a target of twenty six.
• 18:18
  Speaker 1: All right, and do you think which do you think?
• 18:20
  Speaker 1: Which index do you think is going to perform best
• 18:21
  Speaker 1: this year? I still like the small caps. Why, I
• 18:28
  Speaker 1: just get better growth out of those. There's a lot
• 18:30
  Speaker 1: of names. If I was gonna go back and manage
• 18:32
  Speaker 1: money again, uh, I would deal with actually the microcaps
• 18:36
  Speaker 1: where with very little research or no research coveries, because
• 18:40
  Speaker 1: that's where the mispriced pieces of paper are. So How
• 18:43
  Speaker 1: dependent on your outlook is the Fed, you know, maybe
• 18:47
  Speaker 1: being a little bit do wish this year? I think
• 18:49
  Speaker 1: the Fed is gonna be dolish this year. We've gotten
• 18:51
  Speaker 1: a couple of softer than expected economic figures. Um, I
• 18:55
  Speaker 1: don't think that is. You know, the Present Situations Index,
• 18:59
  Speaker 1: which is always called a recession, is making new highs.
• 19:02
  Speaker 1: There's I don't see where these people come off talking
• 19:05
  Speaker 1: about a recession this year and next. I just don't.
• 19:07
  Speaker 1: I don't see it. All right, jeff So, thank you
• 19:09
  Speaker 1: so much for being with us. We really appreciate it.
• 19:10
  Speaker 1: Jes So, with his optimistic view on the US equity markets,
• 19:14
  Speaker 1: Managing director and chief investment strategist, focused on equity research
• 19:18
  Speaker 1: for Raymond Jane's normally in St. Petersburg, Florida, but here
• 19:22
  Speaker 1: in the North just for the excitement of the colds
• 19:25
  Speaker 1: that we're about to get. Well. Caterpillar reported numbers this morning.
• 19:44
  Speaker 1: They missed the numbers that gave kind of a disappointing outlook. Um,
• 19:49
  Speaker 1: you know, and the stock is trading down eight percent,
• 19:51
  Speaker 1: not surprisingly, So let's dive in and break down the numbers.
• 19:54
  Speaker 1: Joining us as Karen uble Heart. Karen's a senior industrials
• 19:57
  Speaker 1: analysts and Bloomberg Intelligence. He joins us live in the
• 20:00
  Speaker 1: Bloomberg Interactive Broker studio. Karen, thanks for being with us.
• 20:03
  Speaker 1: So I know you've covered this name forever. Let's just
• 20:06
  Speaker 1: call it a long time. What do you think is
• 20:09
  Speaker 1: going on here with cat Is it just the time
• 20:12
  Speaker 1: in the cycle for them and there's not much they
• 20:14
  Speaker 1: can do? Or have they missed something? Uh? You know.
• 20:16
  Speaker 1: I think the surprise is how fast some of the
• 20:19
  Speaker 1: markets are deteriorating, like China. I think people expected that
• 20:24
  Speaker 1: was going to be a slower year, but we'd still
• 20:25
  Speaker 1: see some growth and in fact Asia was down and
• 20:28
  Speaker 1: China was down in the fourth quarter, which was the
• 20:30
  Speaker 1: big surprise. Um. I'd say that things are unraveling a
• 20:34
  Speaker 1: little quicker than people expected certainly and and uh, I
• 20:38
  Speaker 1: thought they would come in kind of close to consensus
• 20:41
  Speaker 1: for next year and they came in well there, their
• 20:43
  Speaker 1: first pass that next year is much lower than consensus.
• 20:47
  Speaker 1: So there are a couple of points that cave is
• 20:49
  Speaker 1: a surprise. First, they really identified for in exchange fluctuations
• 20:52
  Speaker 1: as is serious had when I'm struggling with that one
• 20:56
  Speaker 1: because I thought that they hedged these things. Isn't that
• 20:59
  Speaker 1: something it you kind of gird against And things didn't
• 21:03
  Speaker 1: really fluctuate that much. So what was that? Well, they
• 21:07
  Speaker 1: do had UM a portion of the you know, the
• 21:10
  Speaker 1: the UM known contracts they do, but you can still
• 21:13
  Speaker 1: have translation adjustments you don't don't expect UM. I think
• 21:17
  Speaker 1: that wasn't as it was a bigger than expected piece.
• 21:20
  Speaker 1: But it's really the demand side that's troublesome. UM construction
• 21:23
  Speaker 1: equipment was only up eight percent. It's been up double
• 21:25
  Speaker 1: digits for a while, and again the that was driven
• 21:29
  Speaker 1: by China, but other markets are slowing like Europe, and
• 21:32
  Speaker 1: the incremental margins were terrible in construction UM. That's been
• 21:35
  Speaker 1: the story for CAT that they've been able to really
• 21:37
  Speaker 1: bring a lot down to the bottom line because of
• 21:39
  Speaker 1: their UM cost cutting and pricing and other things. But
• 21:42
  Speaker 1: it sounds like the headwinds and costs were larger than expected.
• 21:45
  Speaker 1: To how's the American farmer doing? Uh? Well, you know
• 21:49
  Speaker 1: they're doing okay, but but um they're losing They've lost
• 21:53
  Speaker 1: a lot of demand from uh China number one and
• 21:57
  Speaker 1: from Mexico as well, and because of the tariffs and
• 22:00
  Speaker 1: the trade wars in South America is very happy to
• 22:04
  Speaker 1: uh take the demand and so interestingly there they they
• 22:09
  Speaker 1: haven't become more pessimistic. However, you know, demand for some
• 22:12
  Speaker 1: of their core products are weaker. What about the increasing
• 22:15
  Speaker 1: credit losses? That was a surprise for me and I
• 22:18
  Speaker 1: actually found that later when I was going through the
• 22:20
  Speaker 1: thirty page release reserved. They they took a bigger credit
• 22:25
  Speaker 1: loss and lowered and raised their reserves for problems in
• 22:28
  Speaker 1: their power business power finance. They finance big capital equipment
• 22:32
  Speaker 1: um that has been troublesome all year. But the up
• 22:37
  Speaker 1: end reserves was much larger than expect and that cost
• 22:39
  Speaker 1: him about a dime. I think, yeah, but what does
• 22:42
  Speaker 1: that tell you? Right? I mean, we have a sense
• 22:44
  Speaker 1: do we have a sense of what regions this was from?
• 22:47
  Speaker 1: Do we have a sense of you know which companies
• 22:49
  Speaker 1: which borrowers are not paid. My my, my, UM my
• 22:53
  Speaker 1: senses it's emerging markets. UM. They have mentioned they did
• 22:56
  Speaker 1: mention Latin America earlier in the year. UM. It's not
• 22:59
  Speaker 1: the power are like GE, it's UM stand by power.
• 23:02
  Speaker 1: It's UM primary UM electricity for you know, emerging markets
• 23:06
  Speaker 1: where they don't have big rids and UM that's big
• 23:09
  Speaker 1: capital equipment. CAT finances it UM. And they're having some
• 23:12
  Speaker 1: trouble with some of the customers and will get a
• 23:15
  Speaker 1: lot more color on that. That happened UM in mining
• 23:18
  Speaker 1: a couple of years ago. UM with Latin America customers. UM.
• 23:22
  Speaker 1: They this is long you know, five year financings you know,
• 23:26
  Speaker 1: in this case a lot longer. And there some people
• 23:30
  Speaker 1: aren't some customers aren't able to pay their bills. So
• 23:32
  Speaker 1: what historically, if if we are towards the end of
• 23:34
  Speaker 1: the cycle, and what kind of what a big companies
• 23:37
  Speaker 1: like Caterpillar whose customers make these are big purchases for them.
• 23:40
  Speaker 1: There are long term purchases for them, and they finance
• 23:43
  Speaker 1: them as you mentioned. I mean, what can a company
• 23:45
  Speaker 1: like Caterpillar do in the face of what looks like
• 23:48
  Speaker 1: slowing demand from two of the bigger regions Europe and China.
• 23:51
  Speaker 1: Is this something? Can they cut cost? What did they do?
• 23:54
  Speaker 1: What's what's interesting is UM they've been done a major
• 23:57
  Speaker 1: restructuring over the last several years and they have cut
• 24:00
  Speaker 1: close a lot UM. But they're gonna have to take
• 24:02
  Speaker 1: another round when volume comes down. A lot of that
• 24:03
  Speaker 1: was structural. Now as volume comes down, they're gonna have
• 24:06
  Speaker 1: to lay off people. They're gonna have to you know, uh,
• 24:08
  Speaker 1: cut more costs UM and they're pretty good at that.
• 24:11
  Speaker 1: But in the first couple of quarters when demand turns down,
• 24:14
  Speaker 1: they can't get ahead of the curve. So you could
• 24:16
  Speaker 1: see some you know, bad numbers for a quota or
• 24:18
  Speaker 1: two until they catch up. So I'm looking right now
• 24:20
  Speaker 1: and John Deer, they're there cred to fault swaps searching
• 24:23
  Speaker 1: the most in ten months is the cost to protect
• 24:26
  Speaker 1: against a default? Uh from from losses on instead. Also,
• 24:30
  Speaker 1: you're seeing shares fall more than two percent. Are they
• 24:33
  Speaker 1: going to face the same issues? How widespread do you
• 24:36
  Speaker 1: think that the caterpillars pain will be? Well, you know, UM,
• 24:39
  Speaker 1: historically dear Deer was you know, construction eight percent add
• 24:44
  Speaker 1: But they did a big acquisition in Europe and they're
• 24:46
  Speaker 1: now a third construction machinery. So that's why it's being
• 24:49
  Speaker 1: pulled down because it's a bigger part of Deer now.
• 24:52
  Speaker 1: And yes they'll be impacted as well. What can what
• 24:55
  Speaker 1: are these big industrial companies do when demand does turn
• 24:58
  Speaker 1: down in terms of time to compensate their shareholders, you know,
• 25:02
  Speaker 1: protect their stock price. I mean, where's Caterpillar now in
• 25:05
  Speaker 1: terms of buybacks and what can they do? What do
• 25:06
  Speaker 1: you expect them to do? They've they've accelerated there by
• 25:09
  Speaker 1: that buybacks or cash flow has been exceptionally strong. Um
• 25:12
  Speaker 1: several years ago, we were worried about that and they've
• 25:14
  Speaker 1: been coining cash for the last two years and they
• 25:17
  Speaker 1: accelerated by backs. They can do that to cushion the
• 25:19
  Speaker 1: blow some. But you know, when when a cycle turns down,
• 25:23
  Speaker 1: you kind of get out of the way of these stocks,
• 25:24
  Speaker 1: and you know, because they can't really offset with buybacks.
• 25:29
  Speaker 1: Karen euvil Heart, thank you so much for spending time.
• 25:31
  Speaker 1: We know you've got a crazily busy day as you
• 25:33
  Speaker 1: passed through these results, and we'll be listening in on
• 25:36
  Speaker 1: the earnings call. Karen jugil Heart is industrials analyst for
• 25:39
  Speaker 1: Bloomberg Intelligence Thanks for listening to the Bloomberg P and
• 25:43
  Speaker 1: L podcast. You can subscribe and listen to interviews at
• 25:46
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• 25:50
  Speaker 1: I'm on Twitter at pt Sweeney. I'm Lisa A. Bram Woyds.
• 25:52
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• 25:56
  Speaker 1: you can always catch us worldwide on Bloomberg Radio