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Smaller Companies Are Most Vulnerable to Tax-Cut Delays, Colas Says · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Bramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:15
  Speaker 1: you and your money, whether you're at the grocery store
• 0:17
  Speaker 1: or the trading floor. Find the Bloomberg p m L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. So
• 0:31
  Speaker 1: right now, the market action is posing a few questions
• 0:35
  Speaker 1: to people. First of all, how much were US stocks
• 0:38
  Speaker 1: baking in the likelihood of a pretty substantial tax cuts
• 0:42
  Speaker 1: for big corporations. And second, what the response is and
• 0:46
  Speaker 1: what the new revised outlook is based on the tax
• 0:50
  Speaker 1: plans that we have seen out of the House and Senate.
• 0:53
  Speaker 1: Here to answer those questions is Nick Kolas, co founder
• 0:56
  Speaker 1: of Data Trek Research in New York City. Uh. Nick,
• 1:00
  Speaker 1: we love speaking with you. Thank you so much for
• 1:02
  Speaker 1: joining us. You're also a Blomberg profit So at the
• 1:05
  Speaker 1: back in September, you noted that there did seem to
• 1:08
  Speaker 1: be quite a bit of hope priced into US stocks
• 1:13
  Speaker 1: based on a tax plan. What's your sense now, based
• 1:17
  Speaker 1: on what we've received, do you think that U S
• 1:20
  Speaker 1: docks should fall or should rise? Based on the tax
• 1:23
  Speaker 1: plans that we've seen, it's certainly clear that particularly small
• 1:26
  Speaker 1: cap stocks, the Russell and the SMP six hundred do
• 1:29
  Speaker 1: definitely anticipate some kind of tax relief, and that's the
• 1:32
  Speaker 1: segment of the market for which it really matters. Most
• 1:35
  Speaker 1: larger companies tend to have some tax shields overseas, the
• 1:38
  Speaker 1: smaller ones don't. And right after the election, small caps
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  Speaker 1: and they haven't given any of that back. So it's
• 1:43
  Speaker 1: clear that there is some anticipation for tax relief, particularly
• 1:47
  Speaker 1: in the small cap sector. Did they get it, well,
• 1:51
  Speaker 1: they get it, They should get it, Yes, there seems
• 1:53
  Speaker 1: to be there's no excuse for them not to get it.
• 1:56
  Speaker 1: You have Republican House, Senate, and President, and that is
• 1:59
  Speaker 1: the part of tax reform, and therefore if they can't
• 2:02
  Speaker 1: do it now, they can never. But we we've gotten
• 2:04
  Speaker 1: very different plans out of the House in the Senate.
• 2:06
  Speaker 1: There's a lot of lack of coherence there with respect
• 2:10
  Speaker 1: even when the timing is the implementation. Based on that,
• 2:14
  Speaker 1: you still think that we're going to get something and
• 2:15
  Speaker 1: it's going to help the small cap stocks enough to
• 2:17
  Speaker 1: to prevent a retracement. It does feel that way You're
• 2:20
  Speaker 1: absolutely right. This is Washington, and depending on Washington for
• 2:23
  Speaker 1: an investment catalyst is an exercise and patience at best.
• 2:27
  Speaker 1: And so you should get it where you get it
• 2:29
  Speaker 1: by Christmas. I don't know, it's probably fifty fifty, but
• 2:32
  Speaker 1: you should get it some time before the midterm elections
• 2:34
  Speaker 1: because it is a really critical issue going into mid terms.
• 2:38
  Speaker 1: How is this a more critical situation than the national
• 2:41
  Speaker 1: debt or the inability of the federal government to balance
• 2:44
  Speaker 1: the budget? Wow? Powerful question. Well, because you know, this
• 2:48
  Speaker 1: is the big sticking point with many of the Republicans
• 2:51
  Speaker 1: that are going to be needed to vote yes on
• 2:55
  Speaker 1: this to get this past. And you know, we go
• 2:58
  Speaker 1: through these cycles where everybody kind of talks about the
• 3:01
  Speaker 1: ominous federal debt and the national debt and then it
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  Speaker 1: just disappears. And I'm wondering, how, particularly the time when
• 3:09
  Speaker 1: the economy maybe not doing great, but it's not doing
• 3:11
  Speaker 1: you know, awful, why do we need this? Well, politically, obviously,
• 3:17
  Speaker 1: the Congress will feel they need it going into mid
• 3:19
  Speaker 1: term elections with a controversial president. They've got to show
• 3:22
  Speaker 1: their electorate's a win. And if the wind means lowering
• 3:25
  Speaker 1: their taxes, that might matter. More to mid terms than
• 3:28
  Speaker 1: the longer term, even more important issues of deficits UH
• 3:32
  Speaker 1: and the total deficit as you mentioned. So to me,
• 3:34
  Speaker 1: it's a political calculus that basically says, Okay, we have
• 3:37
  Speaker 1: some head wins because of the president. We need to
• 3:40
  Speaker 1: score a win for our constituents. So let's say no
• 3:43
  Speaker 1: tax plan gets passed. How much should small cap stocks
• 3:47
  Speaker 1: so off. You know, they already have fairly high valuations
• 3:51
  Speaker 1: twenty two to twenty four times next year's earnings versus
• 3:54
  Speaker 1: eighteen for the SMP, so they're pretty rich. And even
• 3:57
  Speaker 1: if they grow earning fift you still expect to see
• 4:00
  Speaker 1: at least a ten percent retracement just to hold their
• 4:03
  Speaker 1: pe multiples relatively constant. At these high levels, the offsetting
• 4:07
  Speaker 1: factor could be Q four. In two thousand eighteen earnings growth.
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  Speaker 1: We're looking for ten eleven percent growth in the fourth quarter,
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  Speaker 1: up from roughly five percent this quarter, So we are
• 4:16
  Speaker 1: getting some earnings acceleration, but it's probably not going to
• 4:18
  Speaker 1: be enough to offset the day from still having to
• 4:21
  Speaker 1: pay the thirty five percent tax rate. Nick, we're getting
• 4:24
  Speaker 1: a little bit of a sell off in the bond
• 4:25
  Speaker 1: market today, looking at the long end, particularly you're seeing
• 4:28
  Speaker 1: the ten year down ten thirty seconds. We've got to
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  Speaker 1: yield there of two point three seven percent, the long
• 4:33
  Speaker 1: bond at two point eight six percent. Let's say this
• 4:37
  Speaker 1: tax cut or reform goes through, we get something. What
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  Speaker 1: do you think that does to the bond market? You know,
• 4:43
  Speaker 1: it's a It's fascinating because the sell off yesterday was
• 4:46
  Speaker 1: attributed to this delay and the corporate tax rate, and
• 4:49
  Speaker 1: yet yields backed up. You wouldn't expect to see that
• 4:51
  Speaker 1: yields should go down because lower growth there for lower
• 4:54
  Speaker 1: transfer inflation. So I'm somewhat skeptical on the notion that
• 4:57
  Speaker 1: the choppiness we're seeing right now in box is even
• 5:00
  Speaker 1: related to the tax issue, but as none of the
• 5:02
  Speaker 1: other markets confirm it. As far as what will happen
• 5:06
  Speaker 1: next year, we're looking for the ten year to go
• 5:07
  Speaker 1: to roughly three percent next year and a steepening curve.
• 5:11
  Speaker 1: I mean, the Yeld curve right now has been scary.
• 5:13
  Speaker 1: It acts like a souffle that got shocked out of
• 5:15
  Speaker 1: the oven. It's flattened like an absolute pancake. And that's
• 5:19
  Speaker 1: worrisome because the steeper the Yeld curve, the more chance
• 5:22
  Speaker 1: we have for the bond market anticipating growth, and right
• 5:25
  Speaker 1: now the bond markets saying the short ends going up
• 5:28
  Speaker 1: on long ends and not we do need to see
• 5:29
  Speaker 1: the back end go up in yield relatively soon to
• 5:33
  Speaker 1: confirm all these anticipations for growth and the tax plan. Well,
• 5:36
  Speaker 1: I mean, just taking the bond market side for a minute.
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  Speaker 1: Even the tax plans that have been released so far,
• 5:42
  Speaker 1: economists don't think that they're going to that it would
• 5:45
  Speaker 1: actually materially boost growth over the short term or the
• 5:49
  Speaker 1: long term. Maybe they're talking less than a half a
• 5:51
  Speaker 1: percentage point to the GDP. So I'm just wondering, you
• 5:54
  Speaker 1: know where you're where you're getting your optimism. Well, the
• 5:58
  Speaker 1: trouble with doing the analysis on tax through history is
• 6:00
  Speaker 1: we don't have a lot of examples, particularly in the US.
• 6:03
  Speaker 1: The last major tax reformers in the nineteen eighties. So
• 6:06
  Speaker 1: it's hard to look at a back test of this
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  Speaker 1: kind of cause and effect and say definitively it does
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  Speaker 1: or a dozen't. The best math I've seen is it
• 6:13
  Speaker 1: may not cause immediate growth, but it does cause a
• 6:16
  Speaker 1: pick up an investment because corporations now feel their attack
• 6:20
  Speaker 1: situation is more understood, more level and right now, I'm
• 6:23
  Speaker 1: worried that this thing drags on so long the corporations
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  Speaker 1: say let's hold off on hiring, let's hold off on
• 6:28
  Speaker 1: investing until the tax plan gets fixed, and that could
• 6:30
  Speaker 1: put a damper in particularly key one of next year
• 6:33
  Speaker 1: if we don't see that come through. But over the
• 6:35
  Speaker 1: medium term it should have even natural rebound effect as
• 6:38
  Speaker 1: the issue is settled and corporations know how to plan.
• 6:41
  Speaker 1: Thanks very much for coming in. Thank you as always.
• 6:43
  Speaker 1: Nicholas is the co founder of Data Trek Research. He's
• 6:46
  Speaker 1: also a Bloomberg profit, one of the many that the
• 6:50
  Speaker 1: right for Bloomberg and offer actionable ideas about investments. And
• 6:54
  Speaker 1: once again, congratulations though on the founding of a Data
• 6:57
  Speaker 1: Trek Research. Thank you. So this week we've been getting
• 7:11
  Speaker 1: more information about the GOP tax cut plan. Right now
• 7:17
  Speaker 1: in focus is the Senate. Here for a quick update
• 7:20
  Speaker 1: on what we should be looking for with the Senate
• 7:23
  Speaker 1: bill in particular, Laura Davison joins us. She's a Bloomberg
• 7:26
  Speaker 1: tax reporter. Laura, is this is this really the most
• 7:29
  Speaker 1: important thing to be watching the Senate? And if so,
• 7:31
  Speaker 1: what what should we be watching? So history shows that
• 7:35
  Speaker 1: any tax bill will probably look more like what the
• 7:37
  Speaker 1: Senate puts together than what the houses the wall. The
• 7:39
  Speaker 1: House is moving first and is a little bit further
• 7:41
  Speaker 1: along in the process. Really, this week watched the Senate
• 7:43
  Speaker 1: as they go through the markup where they formally consider.
• 7:46
  Speaker 1: See what amendments are added, see what gets taken out.
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  Speaker 1: That will really give you a sense of the direction
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  Speaker 1: that the bill might go. Two things that will really
• 7:52
  Speaker 1: be under the microscope this week is one the delay
• 7:56
  Speaker 1: on this corporate tax rate. Right now, the Senate bill
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  Speaker 1: has it starting in twenty nineteen going to Uh that's
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  Speaker 1: sort of a big change of what Republicans have said
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  Speaker 1: that they want this big tax cut and they want
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  Speaker 1: it now. Uh. The other thing is for so called
• 8:08
  Speaker 1: passed through businesses, So these are lcs, partnerships, u s, corporations,
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  Speaker 1: and basically business rate that's been talked about that is
• 8:17
  Speaker 1: sort of effectively out the window in the in the
• 8:19
  Speaker 1: Senate plan. Uh, they basically have sort of this complicated formula.
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  Speaker 1: You get this deduction and then you tie it to
• 8:24
  Speaker 1: what your individual tax rate is. Uh. This is sort
• 8:27
  Speaker 1: of a whole new thing that was unveiled and people
• 8:29
  Speaker 1: are still kind of combing through and tax lawyers are
• 8:31
  Speaker 1: seeing what this would mean. But this is really a
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  Speaker 1: departure from for what we were thinking that could maybe
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  Speaker 1: be in the plan, you know, just a couple of
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  Speaker 1: weeks ago. Laura Davison, thank you so much for joining us,
• 8:40
  Speaker 1: and we will be catching up with you again next week.
• 8:42
  Speaker 1: Laura Davison, Limerick tax reporter. Coming to us right now
• 8:47
  Speaker 1: to weigh in on what we've seen so far is
• 8:49
  Speaker 1: Chris Mackie, founder of Solution Nomics based in New York. Chris,
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  Speaker 1: you spent quite a bit of time on Capitol Hill
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  Speaker 1: in recent weeks. What's the what's the sort of impression
• 9:00
  Speaker 1: from Congressmen who are involved in these negotiations right now?
• 9:04
  Speaker 1: Do they feel pretty confident they're gonna get something done? Well,
• 9:07
  Speaker 1: it's great to be with you. I don't know if
• 9:09
  Speaker 1: i'd call it confidence as much as need bordering on desperation. Um,
• 9:14
  Speaker 1: as well know there's been some legi legislative challenges and
• 9:18
  Speaker 1: that's creating a real sense of urgency. So I can't
• 9:21
  Speaker 1: say it's confidence. Uh, it's definitely more of a need now. Now,
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  Speaker 1: the issue is you've got a yawning gap between Republican
• 9:30
  Speaker 1: optimism about what attacks bill would do and democratic skepticism.
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  Speaker 1: That's gonna be a fundamental issue that will need to
• 9:38
  Speaker 1: be corrected. If we want to get permanent tax cuts,
• 9:42
  Speaker 1: they could put something through temporary before permanent. You gotta
• 9:45
  Speaker 1: bridge the gap. You know. I'm just trying to put
• 9:48
  Speaker 1: this together with the mission of solution omics, because you're
• 9:54
  Speaker 1: talking about reality based economic and global trades strategies. Has nothing,
• 10:02
  Speaker 1: supposedly nothing to do with politics. You want you you're
• 10:04
  Speaker 1: looking for a solution to the issues of economic inefficiency,
• 10:10
  Speaker 1: what you describe as a kind of broken tax system.
• 10:14
  Speaker 1: What if you got a clean sheet, what would be
• 10:17
  Speaker 1: maybe the one or two things that you would like
• 10:21
  Speaker 1: to be able to say to the you know, six
• 10:24
  Speaker 1: or seven hundred odd people plus their minions, that these
• 10:28
  Speaker 1: are the things that are most important in a nonpartisan approach,
• 10:33
  Speaker 1: certainly earned corporate tax cuts. The concept of r O
• 10:37
  Speaker 1: I I come from the world of business and finance.
• 10:40
  Speaker 1: The way you can get something done politically, if there's
• 10:43
  Speaker 1: a will by the politicians, is to set aside the
• 10:46
  Speaker 1: politics and use an objective metric like return on investment
• 10:50
  Speaker 1: instead of having the unconditional tax cuts that we have today,
• 10:54
  Speaker 1: which leads the Democrats and the Republicans debating about what
• 10:56
  Speaker 1: the results will be, come up with a concept for
• 11:00
  Speaker 1: in the world of M and A and earned approach.
• 11:02
  Speaker 1: So the earned corporate tax cut, that's the number one
• 11:05
  Speaker 1: thing I would do. How would just give an example
• 11:07
  Speaker 1: of how that would work with a corporation. Absolutely, so
• 11:10
  Speaker 1: the first thing would be corporations that are increasing jobs
• 11:13
  Speaker 1: in America, they get a tax cut. Companies that don't won't.
• 11:17
  Speaker 1: Now what this does, and this is the exciting part.
• 11:20
  Speaker 1: It actually reduces the tax cuts for companies not creating jobs,
• 11:25
  Speaker 1: which means more tax cuts for companies creating jobs. So
• 11:28
  Speaker 1: you actually increase, you accelerate the incentive of the tax cuts.
• 11:34
  Speaker 1: So far, based on what you've seen, and as Laura
• 11:37
  Speaker 1: was saying, the Senate bill is the one to really
• 11:39
  Speaker 1: watch because history shows that will be closer to what
• 11:42
  Speaker 1: it will look like. What do you think it will
• 11:44
  Speaker 1: do with respect to growth? Well as as it stands
• 11:49
  Speaker 1: right now, if they passed it tomorrow, the only guarantee
• 11:53
  Speaker 1: that we have is an increase in the debt. Now, well,
• 11:56
  Speaker 1: let's be clear here. Debt isn't necessarily a bad thing
• 12:00
  Speaker 1: all the time. It depends on when and what you're
• 12:03
  Speaker 1: getting in return. The concern is that we're lacking in
• 12:06
  Speaker 1: the debt without the certainty of a return. So again,
• 12:10
  Speaker 1: the better approach is to say, look, we're willing to
• 12:13
  Speaker 1: take on some of the debt if the country decides
• 12:15
  Speaker 1: they're willing to do that, as long as we're getting
• 12:17
  Speaker 1: a guarantee of the higher wages and a guarantee of
• 12:20
  Speaker 1: the stronger job growth. So that's why you need an
• 12:22
  Speaker 1: turnout concept. Well, Chris, do you get an audience when
• 12:26
  Speaker 1: you go down to Washington? I mean, do they know,
• 12:28
  Speaker 1: let you into the office, they give a cup of coffee,
• 12:30
  Speaker 1: and you kind of give your speech, and then they
• 12:32
  Speaker 1: kind of nod their heads and they say great, and
• 12:34
  Speaker 1: then they go right back to work. This seems pretty
• 12:36
  Speaker 1: straightforward it It doesn't seem like anyone could call you
• 12:41
  Speaker 1: out as being, uh, you know, anti growth or anti
• 12:44
  Speaker 1: fairness and all. What kind of reception do you get? Well,
• 12:47
  Speaker 1: I'll tell you what. It's um. The left and the right,
• 12:51
  Speaker 1: especially on you know, with the various media agree with
• 12:54
  Speaker 1: the concepts. And in Congress it's gaining traction. If you
• 12:57
  Speaker 1: look at yesterday, Senator Mark Warner was just giving a
• 13:00
  Speaker 1: talk with you know, one of your colleagues, Kevin Cirelli,
• 13:03
  Speaker 1: and he was saying, look, there's no conditions on the repatriation.
• 13:06
  Speaker 1: We need that there. So we are getting the traction.
• 13:09
  Speaker 1: We are getting the meetings and to the point where
• 13:11
  Speaker 1: they're saying, okay, can you flush this out for uce,
• 13:13
  Speaker 1: can you get us more detail? How can you operationalize that,
• 13:16
  Speaker 1: which led to something we call the corporate tax cut scorecard. Alright, so, um,
• 13:22
  Speaker 1: as the bill stands right now, though you're concerned that
• 13:25
  Speaker 1: it piles on debt without a commensurate uh kind of boost?
• 13:29
  Speaker 1: Is that correct? All right? My question is how much
• 13:33
  Speaker 1: time do they have to reconsider how what they've drafted,
• 13:37
  Speaker 1: considering the fact that we have a very tight deadline
• 13:39
  Speaker 1: before the end of the year, and as you were saying,
• 13:42
  Speaker 1: there's a feeling of desperation of wanting to get something done. Well,
• 13:46
  Speaker 1: the they have they could take all the time that
• 13:50
  Speaker 1: they need to come up with the tax policy, they
• 13:52
  Speaker 1: would have the greatest economic impact. But that's just on
• 13:56
  Speaker 1: the economic side. You've got to take the politics into account.
• 13:59
  Speaker 1: So the House is going to vote on their bill
• 14:03
  Speaker 1: under closed rule next week, which means no amendments. The Senate,
• 14:07
  Speaker 1: you know, they're filing amendments this weekend. They're going to
• 14:10
  Speaker 1: vote on it next week. Um, it's just a matter
• 14:14
  Speaker 1: of whether or not the process can be slowed down.
• 14:16
  Speaker 1: If the American people and if small businesses understood that
• 14:20
  Speaker 1: there will be companies that will be sending jobs overseas
• 14:23
  Speaker 1: and firing Americans that will get tax cuts, that could
• 14:27
  Speaker 1: motivate the public to say, look, we're all for tax reform,
• 14:30
  Speaker 1: but not this tax reform. Well, maybe you've got to
• 14:34
  Speaker 1: start a hashtag campaign or something like that. I mean,
• 14:38
  Speaker 1: this idea of the corporate tax cut scorecard, We've got
• 14:40
  Speaker 1: an example of it here. Seems pretty straightforward. Pim hashtag
• 14:44
  Speaker 1: r O I tax plan please consider I love it,
• 14:48
  Speaker 1: all right, we got we got them on board, all right.
• 14:50
  Speaker 1: That wasn't hard. I think that was the easy part.
• 14:53
  Speaker 1: Thanks very much. Chris Mackie is the founder of Solution
• 14:56
  Speaker 1: Nomics and really well done on the corporate tax cut scorecards.
• 15:00
  Speaker 1: A very interesting idea. New rules, New rules in China
• 15:15
  Speaker 1: unveiled at the government briefing today, giving global financial companies
• 15:20
  Speaker 1: access to the world's second largest economy. Here to tell
• 15:24
  Speaker 1: us more about it. As Tom orlec cheeked, Asia Economist
• 15:27
  Speaker 1: for Bloomberg and he joins us from Beijing. Tom, thank
• 15:30
  Speaker 1: you very much for being with us and staying up
• 15:32
  Speaker 1: for us so late in the day. Tell us about
• 15:35
  Speaker 1: this move and what it really means for the asset
• 15:39
  Speaker 1: managers and the financial companies that are doing business or
• 15:42
  Speaker 1: want to do business in China. Well, it's an extremely
• 15:45
  Speaker 1: striking announcement him. It comes at the end of Donald
• 15:49
  Speaker 1: Trump's today meeting with China's President Hi Jimping, will legitimately
• 15:54
  Speaker 1: be represented as a pretty substantial outcome of that summit. Um.
• 15:59
  Speaker 1: I think for China and for you and for the US,
• 16:02
  Speaker 1: there's a win on both sides. For China, they've got
• 16:05
  Speaker 1: a highly indebted economy, overstretched banks, banks which need a
• 16:10
  Speaker 1: capital infusion, banks which need an infusion of expertise and
• 16:13
  Speaker 1: how to manage risk. On the U s side, you've
• 16:16
  Speaker 1: got banks, You've got Wall Street who are hungry to
• 16:18
  Speaker 1: come into China. As the world's second largest financial market,
• 16:22
  Speaker 1: the world's fastest growing financial market, this opening move gives
• 16:26
  Speaker 1: something to both sides. Well, Tom, it certainly is an
• 16:30
  Speaker 1: opportunity for banks globally that have been wanting to get
• 16:33
  Speaker 1: into China. I wonder are people talking at all about
• 16:37
  Speaker 1: the fact that this is happening at a later stage
• 16:40
  Speaker 1: of China's credit cycle and at a time when non
• 16:43
  Speaker 1: performing loan volumes are spiking. Yeah, I think that's rightly so.
• 16:49
  Speaker 1: I mean foreign banks are being invited to the end
• 16:52
  Speaker 1: of China's credit party, not the beginning. We've had a
• 16:56
  Speaker 1: tumultuous eight nine year credit cycle in China. The debt
• 17:01
  Speaker 1: to GDP ratio has blown up, bank balance sheets have
• 17:04
  Speaker 1: blown up. The official data doesn't show many bad loans,
• 17:07
  Speaker 1: but most people think they're out there. China. Foreign banks
• 17:11
  Speaker 1: are not being invited in at the best time, But
• 17:14
  Speaker 1: that's why there would be. That's why they're being invited in.
• 17:17
  Speaker 1: But the problem very carry on. No, no, I. But
• 17:21
  Speaker 1: the reason why I'm asking this is because a lot
• 17:24
  Speaker 1: of people used to say, you know, if China blows up,
• 17:26
  Speaker 1: it's going to be a contained risk. It's not going
• 17:28
  Speaker 1: to affect the rest of the financial system because of
• 17:30
  Speaker 1: how insular the market is. Does this increase sort of
• 17:34
  Speaker 1: the global risk to the financial system? Well, um, I
• 17:40
  Speaker 1: think you can look at it two ways. Um, So
• 17:43
  Speaker 1: if China blew up right now, yes, the financial system
• 17:47
  Speaker 1: is contained. So the direct blow to your JP Morgan's,
• 17:51
  Speaker 1: your Bank of America's UM, your Deutsche banks will be
• 17:54
  Speaker 1: limited because they have a limited presence. At the same time,
• 17:57
  Speaker 1: if China blew up, China is the second largest economy
• 18:00
  Speaker 1: in the world, is the biggest trading nation in the world,
• 18:03
  Speaker 1: So all of the other countries which these US and
• 18:06
  Speaker 1: European banks operated in would take a significant hit, and
• 18:09
  Speaker 1: so the global financial system would take a hit through
• 18:12
  Speaker 1: the real economy. Now, what you're going to see now
• 18:15
  Speaker 1: is the world financial markets, the global financial institutions moving
• 18:19
  Speaker 1: into China hopefully to help up clear to help clear
• 18:22
  Speaker 1: up some of the problems, some of the mass in
• 18:24
  Speaker 1: China's financial system. That's a positive. At the same time,
• 18:28
  Speaker 1: it's going to mean the mechanisms for contagion, the networks
• 18:31
  Speaker 1: which connect China's financial system with the rest of the
• 18:34
  Speaker 1: world are going to be much stronger, much more integrated. Hey, Tom,
• 18:38
  Speaker 1: but I haven't kind of been here before because I
• 18:40
  Speaker 1: recall that you know, member HSBC, Holding City Bank, Standard
• 18:45
  Speaker 1: Chartered Bank of East Asia. I mean they all opened
• 18:47
  Speaker 1: mainland subsidy of mainland Chinese subsidiaries back in two thousand
• 18:52
  Speaker 1: and seven, as well as other foreign financial institutions what happened. Yes,
• 19:00
  Speaker 1: you're right, this is not the first time we've been here.
• 19:03
  Speaker 1: We had big foreign banks buying a steak in Chinese
• 19:06
  Speaker 1: banks HSBC, Royal Bank of Scotland, Bank of America, or
• 19:11
  Speaker 1: big steaks minority stakes in some of the big Chinese
• 19:14
  Speaker 1: banks HSBC and Standard Chartered have set up very limited
• 19:17
  Speaker 1: branch networks on the Chinese mainland. That was a little bang.
• 19:22
  Speaker 1: I think what we're seeing today is a big bang.
• 19:24
  Speaker 1: This isn't foreign banks being allowed to come in and
• 19:26
  Speaker 1: take minority stakes and open a few branches. This is
• 19:30
  Speaker 1: foreign banks being allowed to come in and take over
• 19:33
  Speaker 1: Chinese banks. Okay, but time, does this mean that that
• 19:36
  Speaker 1: foreign banks now they can come in rather than having
• 19:38
  Speaker 1: small losses, now they can have big losses. Well, I
• 19:42
  Speaker 1: think the hope is that they can help recapitalize, deal
• 19:46
  Speaker 1: with some of the stresses in China's financial system and
• 19:49
  Speaker 1: then position them for growth. But yes, I mean opportunity
• 19:53
  Speaker 1: and risk of flip sides of the same kind of
• 19:55
  Speaker 1: same coin. Time, do you have a sense of what
• 19:58
  Speaker 1: the demand is like from big global financial firms to
• 20:02
  Speaker 1: rush into China at this point? Will there be a
• 20:04
  Speaker 1: wave of banks flooding into China. I think if we
• 20:09
  Speaker 1: look at the way the markets reacted to this today,
• 20:11
  Speaker 1: to this today, there's been a pretty muted reaction. We
• 20:13
  Speaker 1: didn't see a big move in equity markets, we didn't
• 20:16
  Speaker 1: see a big move in the c n Y, and
• 20:19
  Speaker 1: I think that's because there's a sort of widespread recognition
• 20:21
  Speaker 1: that on both sides, whilst this is a big bang announcement,
• 20:25
  Speaker 1: the progress is going to be increments. It's going to
• 20:27
  Speaker 1: be gradual. China doesn't want to open up immediately to
• 20:31
  Speaker 1: a surge of inbounded investment in the financial sector. Foreign
• 20:35
  Speaker 1: firms are going to tread pretty cautiously as well. There's
• 20:38
  Speaker 1: political risk, there's credit risk, there's risk around whether money
• 20:43
  Speaker 1: that comes in is going to be able to get out.
• 20:45
  Speaker 1: Foreign firms are going to be wanting to kick the
• 20:46
  Speaker 1: tires pretty thoroughly before they make substantial plays in the
• 20:50
  Speaker 1: China market. Tom Or like, thank you so much for
• 20:53
  Speaker 1: joining us. I know it's late for you there. Tom Or,
• 20:55
  Speaker 1: like chief Asia economist for Bloomberg talking about China removing
• 21:00
  Speaker 1: limits on foreign ownership of Chinese banks and asset managers
• 21:04
  Speaker 1: really coming at an interesting time given where China is
• 21:07
  Speaker 1: in the credit cycle, time to bring in Dave Wilson,
• 21:22
  Speaker 1: Bloomberg Stocks commist and blogger at M Live. Go on
• 21:25
  Speaker 1: the Bloomberg Remember to send Dave an email and sign
• 21:27
  Speaker 1: up for his daily free email newsletter. Go ahead, just
• 21:30
  Speaker 1: send it to d Wilson at Bloomberg dot net. Become
• 21:33
  Speaker 1: a smarter investor and also joining us as Lindsay Upper
• 21:36
  Speaker 1: Specialty retail reporter for Bloomberg. Because of course we're going
• 21:39
  Speaker 1: to talk about J. C. Penny. Jacques Penny. The share
• 21:41
  Speaker 1: is up more than sixteen and a half percent right now,
• 21:44
  Speaker 1: Dave Wilson, what is sort of following? What is what
• 21:47
  Speaker 1: are you following this morning? Because I was looking again
• 21:49
  Speaker 1: today at Roku the follow on to yesterday's move. Stock
• 21:53
  Speaker 1: of Roku up eleven and a half percent today. Well,
• 21:58
  Speaker 1: you know, they are all these ten show deals out there.
• 22:01
  Speaker 1: They're kind of swirling around, and it seems like maybe
• 22:06
  Speaker 1: because it's a Friday that and you've got trading curtailed
• 22:10
  Speaker 1: a bit because of the Veterans Day holiday that, you know,
• 22:14
  Speaker 1: people are kind of cycling back to those deals. You know,
• 22:17
  Speaker 1: twenty one century Fox shares up two and a half
• 22:20
  Speaker 1: three pcent, depending on which class you look at, they
• 22:23
  Speaker 1: have to both in the SMP five hundred, and you've
• 22:26
  Speaker 1: had CNBC report that a deal between the Film and
• 22:29
  Speaker 1: Television Company and Disney has not been abandoned, So that's
• 22:32
  Speaker 1: still kind of kicking around. I was seeing a bit
• 22:35
  Speaker 1: of a rebound and Time Warner. Of course, there's all
• 22:37
  Speaker 1: the speculation we've had in the last couple of days
• 22:39
  Speaker 1: that A. T and T might have to sell CNN
• 22:42
  Speaker 1: to get the deal through that it's working on. Uh.
• 22:46
  Speaker 1: Time warners up two points Umber saying A T and
• 22:48
  Speaker 1: T also higher you've got the shopping mall on, but
• 22:52
  Speaker 1: didn't but didn't Stephen What didn't Randall Stevenson say? I mean,
• 22:56
  Speaker 1: he was at a conference yesterday. He said that he's
• 22:58
  Speaker 1: no interest. He said it would make no sense to
• 23:00
  Speaker 1: be selling CNN is part of the takeover for Time Warner. Indeed,
• 23:04
  Speaker 1: he did mean, not that that's you know, set in
• 23:06
  Speaker 1: stone anyway, but that's what he said. He did say that.
• 23:08
  Speaker 1: But it's just more a matter of you know, you're
• 23:11
  Speaker 1: getting a bit of a rebound and the shares you've got.
• 23:14
  Speaker 1: Mace Richard mentioned the mall owner. Third points Dan Loebe
• 23:18
  Speaker 1: with a steak and who knows where we go from there,
• 23:20
  Speaker 1: but nonetheless it stocks up one and a half percent.
• 23:22
  Speaker 1: And then the most intriguing one perhaps today, which sort
• 23:25
  Speaker 1: of leads us where we're going next, is Macy's. This
• 23:28
  Speaker 1: report out of Deal Reporter that you know, if Amazon
• 23:32
  Speaker 1: dot Com is going to go after a department store chain,
• 23:35
  Speaker 1: maybe they don't want to focus on Coals, even though
• 23:38
  Speaker 1: they have a partnership agreement with them. Maybe they would
• 23:40
  Speaker 1: be better off taking a look at Macy's and that
• 23:43
  Speaker 1: stocks up two point two percent at the moment. Well,
• 23:45
  Speaker 1: Macy's and of course j C. Penny shares almost eighteen
• 23:50
  Speaker 1: percent up, and Lindsay Rupp here is joining us UH
• 23:53
  Speaker 1: specialty retail reporter for Bloomberg. Lindsay, you know, here's the
• 23:57
  Speaker 1: question that I have for you. J C. Penny or
• 24:00
  Speaker 1: reported better than expected earnings, actual sales growth in the
• 24:04
  Speaker 1: same stores quarter over quarter. Is this just a blip
• 24:08
  Speaker 1: before a bigger downturn or is there something that j C.
• 24:12
  Speaker 1: Penny is doing that's materially changing the company's outlook. Well, so,
• 24:15
  Speaker 1: I hate to be the bearer of um not bad news,
• 24:20
  Speaker 1: but this sales pop came for them on the back
• 24:22
  Speaker 1: of a liquidation they had to get rid of a
• 24:24
  Speaker 1: bunch of inventory that wasn't working in women's apparel. I mean,
• 24:28
  Speaker 1: that's not a good thing. It They had a loss
• 24:31
  Speaker 1: this quarter because they had to liquidate all this inventory,
• 24:34
  Speaker 1: but it's better than keeping it around and not having
• 24:36
  Speaker 1: its soul, that's true. But they also had to liquidate
• 24:38
  Speaker 1: inventory in the second quarter too because they were closing
• 24:41
  Speaker 1: a lot of stores. So J. C. Penny is in
• 24:43
  Speaker 1: a time of intense transition. And one good thing they
• 24:46
  Speaker 1: did say is that, you know, they're putting appliances into
• 24:48
  Speaker 1: their stores right, trying to take share from Sears as
• 24:50
  Speaker 1: Sears continues its slow circle towards whatever it's inevitable end
• 24:55
  Speaker 1: will be. And uh, you know, they sat there their
• 24:57
  Speaker 1: comparable sales and appliances were up thirty percent, and you know,
• 25:01
  Speaker 1: the appliance sales more than doubled from last year. But
• 25:03
  Speaker 1: that's a new business for them, so we don't really know. Well,
• 25:06
  Speaker 1: I mean, that's a small base. We're assuming that it's
• 25:08
  Speaker 1: coming off of. So I think there are some green shoots.
• 25:11
  Speaker 1: I think they're trying to write things, um, but I
• 25:13
  Speaker 1: am surprised at the extent of this rally. Stock is
• 25:16
  Speaker 1: up more than seventeen and a half percent right now.
• 25:18
  Speaker 1: I remember speaking about this with Punamgyal, our Bloomberg intelligence expert.
• 25:22
  Speaker 1: When it comes to retail, we were speaking about it
• 25:24
  Speaker 1: in October when the company talked about that big inventory liquidation.
• 25:29
  Speaker 1: Is there a sort of factor about all of the
• 25:33
  Speaker 1: real estate that the company you know still currently owns
• 25:36
  Speaker 1: because they're still closing stores. They are still closing stores,
• 25:39
  Speaker 1: And I mean, I think we'll see every department store
• 25:41
  Speaker 1: and retailer reevaluate its fleet after the holidays. Um, Because
• 25:45
  Speaker 1: I don't think anyone's figured out what the right answer
• 25:47
  Speaker 1: is in terms of how many stores do you need
• 25:49
  Speaker 1: to have, how you optimize your stores and your online business.
• 25:53
  Speaker 1: You know, if people are going to shift online, how
• 25:55
  Speaker 1: many stores do you really need? But if you want
• 25:57
  Speaker 1: to use them as fulfillment, it's it's like a it's
• 25:59
  Speaker 1: a silly fluctuating equation. And the other thing that I
• 26:03
  Speaker 1: was missing out of this J. C. Penny report is
• 26:05
  Speaker 1: is any kind of discussion about holiday. Um, There there
• 26:08
  Speaker 1: wasn't really any forecast and about holiday. They they're excited
• 26:11
  Speaker 1: about what they're doing in Sephora and and toys and appliances,
• 26:15
  Speaker 1: but they need a good holiday that's going to be
• 26:18
  Speaker 1: really important for them. Well, David, come on in here,
• 26:20
  Speaker 1: because I'm curious, first of all, whether the optimism that
• 26:23
  Speaker 1: we're seeing in J. C. Petty and Macy's is spreading
• 26:26
  Speaker 1: into other UH retailers. Also, you know how how long
• 26:32
  Speaker 1: lasting this could be based on some technical aspects. Well,
• 26:35
  Speaker 1: you've got calls up three and a half percent, so
• 26:37
  Speaker 1: that's another plus north from th which had numbers out
• 26:39
  Speaker 1: late yesterday down one a quarter percent at the moment
• 26:43
  Speaker 1: that they didn't come in so well. But if you
• 26:45
  Speaker 1: want to understand why you've got a popping penny, you
• 26:47
  Speaker 1: have to go straight to short interest, the percentage of
• 26:51
  Speaker 1: shares available for trading that had been borrowed and sold
• 26:55
  Speaker 1: in anticipation at the price would fall. And when you
• 26:58
  Speaker 1: run those numbers, you see that short interest in penny
• 27:01
  Speaker 1: at least, according to our figures, fifty and a half
• 27:04
  Speaker 1: percent of the float. That is one of the ten
• 27:06
  Speaker 1: biggest percentages for any company on the New York Stock Exchange.
• 27:11
  Speaker 1: So you get any piece of good news, you're gonna
• 27:13
  Speaker 1: have these short sellers out there that are going to
• 27:15
  Speaker 1: have to buy what they previously sold, in other words,
• 27:18
  Speaker 1: cover their shorts and so you get these sort of
• 27:20
  Speaker 1: extreme moves even though what's really happening at the company
• 27:24
  Speaker 1: may not justify them. I'm trying to think cover cover
• 27:27
  Speaker 1: their shorts at j C. Penny. Oh no, oh no,
• 27:30
  Speaker 1: I won't go there, but I will tell you that
• 27:32
  Speaker 1: not this time a year anyway, it's long pants. Thank you.
• 27:35
  Speaker 1: Thank Speaking of which, Canada Goose we spoke about it yesterday,
• 27:38
  Speaker 1: the maker of those Parker's and down jackets and so on.
• 27:41
  Speaker 1: Stock is up another three percent today. Thanks very much.
• 27:44
  Speaker 1: Dave Wilson, Bloomberg Stocks Commas to send um an email.
• 27:46
  Speaker 1: D Wilson Bloomberg dot net signed up for his daily
• 27:49
  Speaker 1: free email newsletter and our thanks to Lindsay Up, specialty
• 27:52
  Speaker 1: retailer reporter for Bloomberg. Thanks for listening to the Bloomberg
• 27:57
  Speaker 1: P and L podcast. You can subscribe in Lessen Interviews
• 28:00
  Speaker 1: at Apple Podcasts, SoundCloud or whatever podcast platform you prefer.
• 28:05
  Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
• 28:08
  Speaker 1: on Twitter at Lisa Abramo wits one. Before the podcast,
• 28:12
  Speaker 1: you can always catch us worldwide on Bluebirg Radio