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Netflix Shares Plunge; Morgan Stanley Posts Steep Trading Slide · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg Penl podcast. I'm Paul Swinge. You
• 0:05
  Speaker 1: along with my co host Lisa Brahma Wicks. Each day
• 0:07
  Speaker 1: we bring you the most noteworthy and useful interviews for
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  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: at Bloomberg dot com. Well, we are just about through
• 0:23
  Speaker 1: the earnings results for the big banks. We had Morgan
• 0:25
  Speaker 1: Stanley report earnings this morning. Kind of a mixed bag,
• 0:28
  Speaker 1: I would say, from some of the big money center
• 0:31
  Speaker 1: banks and global investment banks. That kind of help us
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  Speaker 1: pass through what we are seeing. We welcome Ken. Leon
• 0:36
  Speaker 1: Ken is a global director of Industry and Equity Research
• 0:39
  Speaker 1: at c f R. A Ken, thanks so much for
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  Speaker 1: joining us. Let's start with Morgan Stanley since they just
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  Speaker 1: printed this morning. What would you take away there? So
• 0:48
  Speaker 1: it was an earning speed eight sets and they did
• 0:51
  Speaker 1: this really on the more stable businesses and wealth management.
• 0:57
  Speaker 1: Asset management and cost control areas that are really a
• 1:01
  Speaker 1: burden right now are tied to the capital markets. Uh,
• 1:05
  Speaker 1: the equity underwriting was flat sixtent come down, m and
• 1:11
  Speaker 1: A has really fallen off for Morgan, failing at other
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  Speaker 1: banks down eighteen percent, and of course trading as well.
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  Speaker 1: UM has been weak with investors on the sidelines as
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  Speaker 1: it relates to global worries about trade tariffs and things
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  Speaker 1: like that. So Ken wired shares basically flat this morning.
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  Speaker 1: Shares are flat UM, and I would say all the
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  Speaker 1: large banks had a terrific four week performance, you know,
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  Speaker 1: first starting with the June seven Federal Reserve approving their
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  Speaker 1: capital plans. UM. Morgan Fanley is up about ten percent
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  Speaker 1: since June. UM. Looking at the stock today, we reiterate
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  Speaker 1: our by recommendation. We have a forty nine dollar target
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  Speaker 1: price and feel that, uh, you know, the overhang just
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  Speaker 1: on the capital markets, you know, for Morgan Stanley to
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  Speaker 1: hit it out of the park or a fire on
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  Speaker 1: all cylinders need to see improvement related to investment banking.
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  Speaker 1: So Ken, let's talk to let's go to the capital
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  Speaker 1: market side of the business for these big banks here
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  Speaker 1: it's been you know, I'm just thinking back, you know,
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  Speaker 1: three or four or five quarters, it's been very difficult
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  Speaker 1: for these companies to put us some good numbers. And
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  Speaker 1: I'm just wondering, is this kind of a a cyclical
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  Speaker 1: issue just market conditions or is this something more secular
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  Speaker 1: about just kind of the profitability that these capital markets
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  Speaker 1: desks and businesses can generate for these big investment banks.
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  Speaker 1: It's a great question, and related to capital markets, particularly banking,
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  Speaker 1: it's it's cyclical. Um. You know, Morgan's Familey, Goldman and
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  Speaker 1: JP Morgan are usually typically in the top three rankings
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  Speaker 1: of anything you choose and underwriting, and then when it
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  Speaker 1: relates to their business, Morgans Faniley has been really moving
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  Speaker 1: away from kind of cyclical businesses to the ability to
• 3:00
  Speaker 1: have more stable recurring revenue and they're getting that from
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  Speaker 1: a Lard's wealth management franchise and the ability to expand that. Um.
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  Speaker 1: The difference really in performance for these stocks versus other
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  Speaker 1: others in the financial sectors predictability. So um, yes, capital
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  Speaker 1: markets is important, but I think directionally, whether you look
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  Speaker 1: at a Morgan Stanley or Goldman Sachs diversifying it to retail,
• 3:26
  Speaker 1: they're they're looking for more predictable businesses that give investors
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  Speaker 1: more confidence about their outlook. So Ken, you know, now
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  Speaker 1: that we have the major US banks all reporting, I'm wondering,
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  Speaker 1: what do you mean your big takeaways. The big takeaway
• 3:40
  Speaker 1: is focuses on the inverted deield curve or the forward curve,
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  Speaker 1: which suggests um a narrowing of net interest margin and
• 3:48
  Speaker 1: then lower net interest income and calibrating what that does
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  Speaker 1: for the earnings outlook. So that's a factor. But at
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  Speaker 1: the same time, there's other inputs into net interest income,
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  Speaker 1: which for the other large banks of that can be
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  Speaker 1: you know, of their total net revenue UM it's growth
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  Speaker 1: and investor accounts or in retail banking. Uh, the consumer
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  Speaker 1: is very strong. Yet each of these banks has sensitivity
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  Speaker 1: to net interest income, so they have to pull growth
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  Speaker 1: from non interest income, which is their businesses, and then
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  Speaker 1: also from cost control. The other big plus, because we
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  Speaker 1: we've moved the story away from the capital plans, these
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  Speaker 1: are very significant for all these acts. The ability to
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  Speaker 1: have significant return of capital with buy back and dividend
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  Speaker 1: increases including more in Stanley today now to ten point
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  Speaker 1: seven billion buy back six pin point seven percent dividend
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  Speaker 1: increased rays these banks are beginning to look at attractive
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  Speaker 1: total return yield stocks and you could not say that
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  Speaker 1: over the last seven to ten years. So I guess
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  Speaker 1: can one thing I'm struggling with I mean, I get
• 4:59
  Speaker 1: the sort buy back dividend story. It's just an income story.
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  Speaker 1: But going back to what you were talking about with
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  Speaker 1: the net interest margin, this has been offset in the
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  Speaker 1: past years of financial oppression in the wake of zero
• 5:11
  Speaker 1: rate policies. It's been offset by much higher capital markets activity.
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  Speaker 1: What does it say to you that we are not
• 5:19
  Speaker 1: seeing that acceleration in capital markets activity now and you
• 5:22
  Speaker 1: know the prospects going forward, even with lower rates ahead,
• 5:27
  Speaker 1: the prospects that perhaps capital markets are kind of done
• 5:30
  Speaker 1: as far as what they need to be doing well.
• 5:32
  Speaker 1: There's two areas here. First, related to interest rates, that
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  Speaker 1: this is a reversal to where we were at the
• 5:39
  Speaker 1: end of last year. So analysts were factoring and rising rates,
• 5:43
  Speaker 1: perhaps two to three increases, and that went away, So
• 5:47
  Speaker 1: then of course that reverse net interesting income. The other
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  Speaker 1: part of your question is really interesting and it really
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  Speaker 1: ties to what's going to spur the capital markets. We
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  Speaker 1: had Chairman Pal two weeks ago testifying essentially the worry
• 6:00
  Speaker 1: is about in the US at least investment capital investment
• 6:04
  Speaker 1: and plant and equipment um and there's been a delay
• 6:09
  Speaker 1: in doing that. There's also uncertainties that really tied to
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  Speaker 1: CEO confidence. Uh the ability to invest here or overseas
• 6:18
  Speaker 1: or even mergers and acquisitions for all these banks is down. UM.
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  Speaker 1: There is a good pipeline related to uh N N
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  Speaker 1: a UM, but it's been very challenging right now because
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  Speaker 1: the visibility is very difficult. Ken Leyan, thank you so
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  Speaker 1: much for being with us and for all of your insights.
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  Speaker 1: Can lea On, Global Director of Industry and Equity Research
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  Speaker 1: at c f r A Research. It's ten thirty three
• 7:01
  Speaker 1: on Wall Street. Time to check in with Bloomberg Opinion.
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  Speaker 1: We are so lucky to be joined by Shara O.
• 7:06
  Speaker 1: V Day Bloomberg opinion columnists focusing on all things technology. Obviously,
• 7:10
  Speaker 1: today the big story not just in technology but broadly
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  Speaker 1: across stock markets. Netflix shares down more than ten percent.
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  Speaker 1: They reported yesterday after the bell that they missed their
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  Speaker 1: subscriber forecast by what more than fifty percent, almost almost
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  Speaker 1: fifty percent, and that it's a subscriber base dropped in
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  Speaker 1: the United States. What happened? I do not know. I
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  Speaker 1: think the company's company. What is your explanation? The company's
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  Speaker 1: explanation was a couple of things. One is that Netflix
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  Speaker 1: increased prices for most subscription plans, both in the United
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  Speaker 1: States and in several other countries at the beginning of
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  Speaker 1: this year. Starting at the beginning of this year, and
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  Speaker 1: the company said that it missed its subscriber forecast um
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  Speaker 1: even more than an expected in as places where it
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  Speaker 1: increased prices, which to me shows a lack of pricing
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  Speaker 1: power for Netflix. Right if if the idea of Netflix
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  Speaker 1: is this thing is so valuable, people will pay whatever
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  Speaker 1: it costs to get access to it, I think this
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  Speaker 1: these second quarter numbers kind of deflated that idea. The
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  Speaker 1: second issue Netflix raised was it has, you know, It's outs,
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  Speaker 1: all of these kind of original programmings or stuff that
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  Speaker 1: it buys and airs exclusively on Netflix, and it said
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  Speaker 1: that the slate of programming in the second quarter drew
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  Speaker 1: in fewer subscribers than it had expected, which is not
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  Speaker 1: a great sign either for Netflix ability to kind of
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  Speaker 1: pick must watch programming, or frankly, for this implicit promise
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  Speaker 1: of Netflix that it doesn't really matter. Individual pieces of
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  Speaker 1: content are not that material. The thing that matters is
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  Speaker 1: this kind of buffet of offerings. So if people are
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  Speaker 1: looking at that buffet and making a decision to turn
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  Speaker 1: off Netflix or not subscribe to Netflix because of one
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  Speaker 1: or two shows. That maybe indicates that individual pieces of
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  Speaker 1: programming are more were important that Netflix suggests. And again
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  Speaker 1: I think that that dense the thesis behind the optimistic
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  Speaker 1: scenario about Netflix. Sure, I think you're spot on there.
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  Speaker 1: I think that and that raises I think probably the
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  Speaker 1: big issue for a lot of people that are concerned
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  Speaker 1: about this doctor bears out there that boy, it kind
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  Speaker 1: of sounds and looks like it's starting to sound starting
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  Speaker 1: to look like more of a just a traditional media
• 9:20
  Speaker 1: company where you gotta have hits, and you know, it's
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  Speaker 1: not just about having the you know, there's the secret
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  Speaker 1: sauce of oh I'm a streamer. Now did they talk
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  Speaker 1: at all about uh, to what extent did they talk
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  Speaker 1: about competition? Because we know that Disney Plus is launching
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  Speaker 1: this year than a T and T Comcast or launching
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  Speaker 1: their streamers next year? How did they kind of frame
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  Speaker 1: that up? Netflix, at least in the second quarter, downplayed
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  Speaker 1: the effective competition because it said, look, we were all
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  Speaker 1: aware of these looming competing Netflix like services from HBO
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  Speaker 1: or or from a T and T, s Time Warner division,
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  Speaker 1: from Apple, from NBC down the road. But those haven't
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  Speaker 1: started yet, right, So it's not like there's an immediate, uh,
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  Speaker 1: competitive threat out there that is currently launched Disney. I
• 10:08
  Speaker 1: forgot to mention Disney. So there's nothing new necessarily on
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  Speaker 1: the horizon. But you've got to think that some of
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  Speaker 1: the competition, it's it's in people's brains, right. If you know, hey,
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  Speaker 1: there's gonna be this new thing from Disney or from HBO,
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  Speaker 1: maybe that plays in people's minds that they're kind of
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  Speaker 1: saving money to see what Apple comes up with or
• 10:24
  Speaker 1: what Disney comes up with. But Netflix kind of said
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  Speaker 1: that that wasn't a factor in the second quarter. So
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  Speaker 1: this sounds bad, okay, I mean like just a suit
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  Speaker 1: a stute analysis from Trunch and Trunch analysis. Um, this
• 10:39
  Speaker 1: all sounds really bad. And certainly you're seeing a big
• 10:41
  Speaker 1: stock price move. Looks at the bonds. Some of them
• 10:44
  Speaker 1: traded down, you know, a couple of cents on the
• 10:46
  Speaker 1: dollar yesterday, but there's still trading above par. And this
• 10:50
  Speaker 1: is a company that has relied on debt markets to
• 10:53
  Speaker 1: continue to burn cash, and it seems like debt markets
• 10:55
  Speaker 1: believe in them. They're saying, we believe and you're seeing investors,
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  Speaker 1: analysts a cross wall streets saying we do believe also,
• 11:02
  Speaker 1: and we're going to say we should you should go
• 11:03
  Speaker 1: out and buy Netflix shares. What's the bull case from
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  Speaker 1: here that this was just a temporary blip and that
• 11:09
  Speaker 1: we'll see Netflix gain its mojo in the third quarter.
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  Speaker 1: I think the bull case is that, as you said
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  Speaker 1: that that this may be a blip, you see that
• 11:17
  Speaker 1: Netflix is expecting that it's going to return to more
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  Speaker 1: normal kind of subscriber growth numbers in this current third quarter.
• 11:24
  Speaker 1: But let me make it clear Netflix does not exist
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  Speaker 1: period without the faith of bond investors. This is a
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  Speaker 1: company that is burning three to three and a half
• 11:36
  Speaker 1: billion dollars in cash every single year. It is not
• 11:39
  Speaker 1: financially sustainable unless it can continue to borrow money at
• 11:44
  Speaker 1: cheap rates. Otherwise there is no Netflix. And so anything
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  Speaker 1: that dnse the story dense the optimism of both bond
• 11:52
  Speaker 1: and stock investors, which are kind of working in tandem
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  Speaker 1: here on Netflix. Anything that that dnse, that story threatens
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  Speaker 1: to kind of unraveled. This whole thing. Just a little
• 12:03
  Speaker 1: fun fact. Sure, Overday and I have bonded for for
• 12:07
  Speaker 1: months and months over the Netflix story because we share
• 12:11
  Speaker 1: joint interests account account, start account. We merely think that
• 12:16
  Speaker 1: bond investors are completely irrational? What and we do not.
• 12:22
  Speaker 1: I no longer write columns, so I'm not going to
• 12:24
  Speaker 1: say that. But they're just it's a hundred forty million
• 12:27
  Speaker 1: dollars of equity cushion underneath my I don't have to worry.
• 12:30
  Speaker 1: So that's that. That's kind of play. Bloomberg Opinion columnists.
• 12:33
  Speaker 1: You're overday, Thank you so much. Well, investors are trying
• 12:53
  Speaker 1: to gauge where the US economy is amidst you know,
• 12:56
  Speaker 1: weakening economies in Europe, slowing economy in China. How can
• 13:00
  Speaker 1: the US economy remain vibrant when many of its trading
• 13:03
  Speaker 1: partners are struggling to get the latest We welcome our guest,
• 13:07
  Speaker 1: God Lebanon, Chief Economists North America at the conference board.
• 13:11
  Speaker 1: Uh so, God, what's the data that you're seeing telling
• 13:14
  Speaker 1: you about the US economy? Well, so, our leading economic
• 13:17
  Speaker 1: index decline today, and that's not good news. But it's
• 13:21
  Speaker 1: not as bad as bad as it looks. I think
• 13:26
  Speaker 1: our index is slightly tilted towards the manufacturing sector, which
• 13:30
  Speaker 1: is doing not as well as the rest of the economy. Um.
• 13:35
  Speaker 1: I think, on the other hand, we have a very
• 13:38
  Speaker 1: strong consumer spending numbers in recent months. You know, there
• 13:42
  Speaker 1: was after the week winter there was a concern that
• 13:46
  Speaker 1: the consumer spending is going to remain in a slow territory.
• 13:50
  Speaker 1: But that's not the case. Um So, I think the
• 13:54
  Speaker 1: decline in the leading index is not as bad as
• 13:57
  Speaker 1: it looks. It's interesting though, to me, because this is
• 13:59
  Speaker 1: the story we keep hearing. The consumer is strong, industrials
• 14:03
  Speaker 1: and corporate America feeling less certain and certainly seeing less investment.
• 14:08
  Speaker 1: Uh So, is this sort of indicative of the consumer
• 14:13
  Speaker 1: being a lagging indicator and manufacturers being out front in
• 14:17
  Speaker 1: the economic cycle or the other way around. Well, in general,
• 14:21
  Speaker 1: consumer spending is actually leading business investment historically. I think
• 14:27
  Speaker 1: part of the weakness that we are seeing now in
• 14:31
  Speaker 1: business investment and in manufacturing is a result of the
• 14:33
  Speaker 1: weakness in the rest of the world. But I think,
• 14:37
  Speaker 1: and you know, if if manufacturing and business investment will
• 14:42
  Speaker 1: remain slow at some point, it will impact hiring and
• 14:45
  Speaker 1: and consumer spending as well. But at the moment, there
• 14:49
  Speaker 1: seems to be some stronger, stronger growth, independent growth, I
• 14:56
  Speaker 1: would say, from the consumer. So when we talk about
• 14:59
  Speaker 1: you highlight the man facturing sector we've we've had some
• 15:01
  Speaker 1: evidence that that has been weakening over the last several quarters.
• 15:05
  Speaker 1: I'm just trying to parse out how much of that
• 15:07
  Speaker 1: is just kind of trade concerns, Um, you know, maybe
• 15:11
  Speaker 1: corporate spending kind of pulling back in the face of
• 15:13
  Speaker 1: uncertainty about trade. Or is it just the kind of
• 15:16
  Speaker 1: a slowing or just part of the cycle here we
• 15:18
  Speaker 1: are ten plus years into a cycle. Do you have
• 15:20
  Speaker 1: a sense of how much it's just Hey, it's just
• 15:22
  Speaker 1: the psychle versus boy, I'm really concerned about some of
• 15:25
  Speaker 1: these macro geopolitical issues. I think it's it's both. We
• 15:28
  Speaker 1: we sometimes have cycles in manufacturing that don't spread to
• 15:32
  Speaker 1: the rest of the economy. Like twenty fifteen twenty sixteen
• 15:35
  Speaker 1: we had a genuine recession in manufacturing that the economy
• 15:40
  Speaker 1: continued to grow. I think the manufacturing, as I said,
• 15:44
  Speaker 1: is more impacted by the rest of the world, and
• 15:46
  Speaker 1: there is some significant weakness in some parts of the world.
• 15:51
  Speaker 1: So I think, um, it is a lot because of that.
• 15:55
  Speaker 1: But if consumer spending continues to grow at three plus
• 15:59
  Speaker 1: per cent and manufacturing at some point will pick up. So,
• 16:03
  Speaker 1: just to put this in a perspective, the zero point
• 16:04
  Speaker 1: three pc decline in the leading economic indicators. The index
• 16:09
  Speaker 1: is the first decline since last December. And you talked
• 16:12
  Speaker 1: about the manufacturing how that let it, But the housing
• 16:15
  Speaker 1: side of things, the real estate side, I'm trying to
• 16:18
  Speaker 1: figure out where that fits into the narrative because that
• 16:21
  Speaker 1: also contributed to the decline. Yeah, so housing has been
• 16:25
  Speaker 1: a weakness for a year. But I think one of
• 16:29
  Speaker 1: the main implications of the large drop in interest rates
• 16:33
  Speaker 1: that we have in the economy, and and over a
• 16:37
  Speaker 1: hundred basis point drop in long term rates will boost
• 16:41
  Speaker 1: the economy, and so a lot of the impact should
• 16:45
  Speaker 1: be through housing. We are seeing already some increase in
• 16:49
  Speaker 1: mortgage applications and I think housing will will improve for
• 16:55
  Speaker 1: the rest of the year. So, God, where are you
• 16:58
  Speaker 1: in the recession discussion? But there are certain parties out there,
• 17:02
  Speaker 1: a certain factions in the marketplace that feel like, Gee,
• 17:05
  Speaker 1: the timing, if nothing else would lead us to a
• 17:06
  Speaker 1: recession perhaps by mid twenty What is your data telling you.
• 17:11
  Speaker 1: I think the leading indicators are good for three to
• 17:15
  Speaker 1: six months and they're not signaling any recession during that time.
• 17:19
  Speaker 1: Beyond that, I think we have to think what what
• 17:23
  Speaker 1: will cause a recession? There could things could pop up,
• 17:28
  Speaker 1: but at the moment, I don't see anything obvious that
• 17:32
  Speaker 1: will cause a recession. So I think it's as likely
• 17:36
  Speaker 1: to happen in twenty twenty one, or twenty twenty two,
• 17:39
  Speaker 1: or or twenty twenty. But it's it's not the fact
• 17:43
  Speaker 1: that we just broke the historical record for the longest
• 17:46
  Speaker 1: expansion doesn't by itself mean that we are about to
• 17:50
  Speaker 1: face a recession. God Levanon, thank you so much for
• 17:52
  Speaker 1: being with us. God levan and is chief economist for
• 17:55
  Speaker 1: North America at the conference port Thanks for listening to
• 17:58
  Speaker 1: the Bloomberg Penl podcasts. You can subscribe and listen to
• 18:01
  Speaker 1: interviews at Apple Podcasts or whatever podcast platform you prefer.
• 18:04
  Speaker 1: I'm Paul Sweeney. I'm on Twitter at pt Sweeney. I'm
• 18:07
  Speaker 1: Lisa Abram Woyds. I'm on Twitter at Lisa Abram Woyds. One.
• 18:10
  Speaker 1: Before the podcast, you can always catch us worldwide. I'm
• 18:13
  Speaker 1: Bloomberg Radio.