Latest / The Financial Exchange Show / Why do market watchers think the stock market will keep going up?

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Why do market watchers think the stock market will keep going up? · The Financial Exchange Show

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This is the Financial Exchange with Mike Armstrong and Paul Lane.
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Speaker 2: Good morning, and welcome to the Financial Exchange. Here the
1:16
day after SMP and Dow hit all time highs, we're
1:19
continuing with earning season here. Before the bell this morning,
1:22
you had United Healthcare, Johnson and Johnson Bank from America,
1:26
Goldman Sachs, City Group, and Charles Schwab all reporting earnings.
1:29
Those are the only the companies over one hundred billion
1:32
dollars in market cap that I'm talking about here. Tomorrow
1:35
you'll have ASML and Abbott Labs reporting, and then Thursday
1:39
some heavy hitters here. So Thursday we'll hear from Taiwan Semiconductors, Netflix,
1:44
Morgan Stanley, among several others here. But today, starting things
1:49
off as they have been, banks driving the story here,
1:53
always the first companies to report during earning season, and
1:58
as we've talked about a lot of these bigger bangs.
2:01
Both Paul and I Wis were just discussing this right
2:03
before we went on air. They don't tell you a
2:05
ton about the direction of anything these days because these
2:10
the giant banks by and large are regulated most similar
2:14
to utilities. They had to give up a lot of
2:16
their more interesting niche businesses, such as you know, their
2:19
corporate loan divisions that got them into hot water leading
2:22
into the OA crisis. They have these huge caps on
2:25
how much assets and loans they can give out, and
2:28
so overall it's tough to glean much about the direction
2:33
of the economy from a big bank like Bank of America,
2:36
like JP Morgan. Rather, you get some interesting stories about,
2:39
you know, things going on, and in true times of
2:42
crisis you can tell because the weird thing about banks
2:46
and the way they report and account for things is
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when they think loans are going to go bad, they
2:52
have to account for them immediately, and so, you know,
2:55
like in twenty twenty, if you recall, they were taking
2:57
you know, billions of dollars worth of loan loss is
3:00
in their earnings, which they then didn't lose because the
3:04
US government basically backstopped the entire economy. But those are
3:07
the kind of interesting moments that you get from banks.
3:09
But in either case, it's been a very strong earning
3:12
season for all these major banks so far. I hesitate
3:15
to think of any big ones that have seen their
3:18
stock prices take a hit the day after earnings, but
3:23
operating from a higher bar here today with markets sitting
3:26
at all time highs. And like we said, you had
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both Goldman, Sacks and Bank of America reporting Goldman at
3:33
the moment down about eight tens of a percent, bank
3:35
of America down up about one and a third at
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the moment. Any highlights that you saw, Paul from Bank
3:43
of America here to start, I.
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Speaker 3: Would say, Mike, investment banking revenue that was up fifteen percent,
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a little more inclination that perhaps there is some more
3:53
appetite for deal activity. Typically with investment banking revenue largely
3:57
focus on mergers and acquisition and as well as IPOs,
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So a little bit of a bump there trading revenue
4:05
across the board. And really, when we talk about all
4:07
these banks mics, they as you mentioned, they are so
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heavily regulated, and the trends seem to overlap almost identically
4:14
across all the companies. You know, Bank of America reports
4:16
strong trading revenue, will cover gold and Sacks in a moment,
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they as well had some strong trading revenue in addition,
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And the only piece here that was a slight takeaway
4:27
I was interested in, is just the net interest income.
4:29
So just for listeners out there, net interest income is
4:32
derived from basically Bank of America has a slew ton
4:36
of deposits on their balance sheet and what they lend
4:39
against those deposits, so what they lend to corporations are
4:42
their entities out there. They make the spread between what
4:45
they pay you on your deposit versus.
4:47
Speaker 2: What they lend the money here last time.
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Speaker 3: Which is I always like to take a look at
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it because I am a Bank of America customer. Granted
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I keep very little money in there because they don't
4:55
pay anything. But they did see about a three percent
4:58
drop in net in interest income, which was actually much
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less than anticipated, so viewed as a positive. The reason
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for that being, once you have interest rates rising over
5:08
the course the last eighteen months the Federal Reserve kicking
5:10
those up, many depositors out there have woken up to
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the fact that gee, I can get a heck of
5:16
a lot better interest rate at a local credit union
5:19
or other alternatives out there on my cash. And it's
5:22
a concerted effort really by Bank of America. The reason
5:25
that they don't pay much on your deposits is because
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they don't want them. They're heavily regulated like we said,
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they can only lend so much, so they've kept those
5:33
deposit rates low for the longest time I can remember,
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just because they really don't have any appetite to take
5:40
on more deposits.
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Speaker 2: The perfect example of this scale. And you know the reason,
5:46
it's just tough for these big banks to really get
5:48
and understanding what's going on there. You think about your
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normal bank, right, let's talk about just a local he
5:54
need them bank that's right around the corner here, one
5:57
would kind of commonly think that, hey, as interests go up, okay,
6:01
that allows spreads to widen because typically banks don't pay
6:05
out as much on their deposits as maybe a new
6:08
online bank would need to attract new deposits. Deposits tend
6:12
to be sticky. They can then loan that money out
6:15
at a more compelling interest rate on the mortgage side
6:18
or car loan side of things, and so in a
6:20
higher interest rate environment, those banks are assumed to make
6:24
more money. When you think about a bank click Bank
6:26
of America. Certainly they participate in that too, because their
6:29
deposits are just as sticky as anybody else as and
6:32
they can make loans too. But what if higher interest
6:35
rates also leads to fewer companies that want to go
6:39
public in a public stock offering. Well, that's going to
6:43
hurt Bank of America's investment banking business. What does it
6:46
do to the stock market? Because Bank of America derives
6:48
a massive amount of their revenue from trading income from
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their Merrilynch division. What happens there? Does the stock market
6:55
take a hit, in which case their wealth management division
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won't be able to generate as much revenue there. Certainly,
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if rates are going up, your bond portfolio is taking
7:03
a hit, and you advise clients on their bond But like,
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there's all these different factors playing in here, which is
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why again, over the last few years, and largely, you know,
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because of Too Big to Fail, these companies have become
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giant utility companies buy and large. They've all done interesting things.
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They all have their little niches. Goldman had that partnership
7:23
with Apple that blew up in their face and was
7:25
kind of silly, But all of those were kind of
7:26
dropping the buckets, any of these little nuanced plays that
7:29
they have, And by and large, what it all seems
7:32
to be about is, hey, can you expand enough to
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attract every dollar of new deposits, you know via your
7:39
branches that you have all over and can you stay
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out of the way of the regulators. Some of these
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giant banks have done better at that than other Wells Fargo.
7:48
And if you stay out the way of the regulators,
7:50
they let you make money. They guarantee that you will
7:53
never fail. And yeah, it's you know, not a bad
7:58
business to be in. No, no, it isn't. What do
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you have from Goldman again, similar story here trading revenue
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and things like that, doing just fine. Yeah, it's worth noting.
8:07
Speaker 3: On Bank of America, their stop was their stock was
8:09
up about one and a half percent through early trading here.
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Taking a look at Goldman Sacks, similar sort of numbers
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where they're up I believe. Oh they were initially in
8:18
pre market up about three percent, but they're actually down
8:21
about point six percent at the moment. But they saw
8:24
a pretty significant revenue increase, with revenue coming in at
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twelve point seven billion that was seven percent higher than
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what it was a year ago. Profit in particular was
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up significantly as well, up forty five percent at three
8:37
billion dollars a year over year for Goldman Sacks, like
8:40
I mentioned, similar to Bank of America. Bank of America
8:43
saw a twelve percent increase on trading revenue eighteen percent
8:47
for Goldman Sacks, and their investment banking division also reported
8:51
a twenty percent increase in revenue. The wealth management side
8:56
of things picked up with a sixteen percent increase on
8:59
the revenue side, and so those wealth management ones, it's
9:03
really easy to sort of track. You know, you're going
9:05
to see the increases there because they are likely billing
9:09
on an advisory fee basis, and it's predicated on how
9:12
the stock market's doing, which we know here to date,
9:14
you know, up over twenty percent. That helps to me,
9:18
it does help quite a bit to me. Nothing else
9:20
here that particularly stands out, Mike, unless there was something
9:24
that really spoke out to you. Certainly the investment banking
9:27
division on both sides with Bank of America and Golden Sacks.
9:30
That's encouraging because that's deal activity, that's you know, confidence
9:34
in the market. You just think about the IPO market
9:37
in general dried up completely in twenty twenty two. I'm
9:40
not saying it's nearly as robust here as it was
9:42
in twenty one, but any type of activity out there
9:45
on the financial side of things investment banking is positive
9:48
because there's usually some confidence that comes with that type
9:51
of activity.
9:52
Speaker 2: Activity, even if it's not fetching the best prices, is
9:55
a sign of a healthy market right right. When we
9:57
think about the real unhealthiness in markets like say the
9:59
commercial office space market of the last few years, it's
10:02
been deemed unhealthy because there are almost no transactions. Nobody
10:04
was valuing these things, nobody wanted to go to market.
10:07
Even the fact that there is activity right now, albeit
10:09
less than we saw in twenty twenty one, is a
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good signal of activity and a good signal of again
10:15
confidence in this market. Right now, Let's take a quick
10:18
break when we come back the article that is written
10:23
just right before things come falling down. Can the stock
10:26
market keep going up? Market watchers think so? So tune
10:30
right in. We'll be talking about that next here on
10:32
the Financial Exchange.
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Speaker 2: Great news, Paul, The New York Times has answered everyone's
11:40
questions about whether or not the market can keep going up?
11:44
The title of the article can the stock market keep
11:46
going up? Market watchers think so? They then go on
11:50
over what is it four pages to not answer that
11:53
question in any meaningful way. What valuable insights did you
11:57
find from our New York Times subscription today, Paul?
12:00
Speaker 3: They picked up a great quote here from Christina Hopper,
12:02
the chief market strategist in Vesco quote, It's not a
12:05
normal cycle. Thank you for putting that in there. That's helpful.
12:11
I understand. I always try to take these pieces of
12:13
the grand stout when we talk about on the show,
12:15
we love to beat them up. It fits right in
12:17
our wheelhouse. But ultimately you have to churn out content
12:20
every single day. Some days are better than others for that.
12:24
But ultimately here I want to step away from some
12:27
of the commentary in this particular piece, which reference what
12:31
Goldman Sachs thinks the market's going to do or others
12:34
out there in the financial industry. And the more and
12:37
more you do this job, the less you want to
12:40
rely on those types of forecasts for where the market
12:43
is going to go from any of these major institutions,
12:45
which don't get me wrong, they have a huge R
12:47
and D budget to have very strong analyst on stuff,
12:50
but it's just so hard to project on such a
12:52
short term basis. I think the interesting question here is
12:56
when you look at valuations and things like that, not
12:59
to say that there is going to be in an
13:01
immediate reversion back down to the mean, but we do
13:04
have stocks that are priced high and expensive relative to
13:08
what they've been historically, and I think that is helpful
13:10
when you're looking at context for the longer term of
13:13
the market is.
13:13
Speaker 2: How many times were evaluations brought up in this story
13:16
here about no night talk market. I just went, oh, yeah, yeah,
13:19
I mem with you. I just one would think that'd
13:22
be a normal thing to put in here, like, oh,
13:23
you know, historically when you take a look at stock
13:25
prices today, they look pretty expensive. No, that's not mentioned here.
13:28
Just stick your finger in the air and feel which
13:31
way the wind is blown, I guess is the subject
13:33
of this article exactly.
13:35
Speaker 3: I mean, really the focus has been for the market
13:37
in general, is that the earnings growth that we've seen
13:40
on the S and P five hundred, a lot of it.
13:42
The folcome for it has been the Magnificent seven that
13:44
we talk about so frequently on the show. Five of
13:47
the seven in the Magnificent seven Nvidia, Microsoft, Amazon, Facebook,
13:52
and Google.
13:53
Speaker 2: In Q one of.
13:54
Speaker 3: Twenty twenty four, they contribute a very significant portion of
13:59
the earnings growth, where they had thirty seven percent year
14:01
over year earnings growth versus you looked at some of
14:04
the other companies in the S and P five hundred
14:06
outside of that seven, they had seen a bit of
14:08
a decline in earnings in Q one. Now, as the
14:11
rest of the year has gone on, similar trend has emerged,
14:13
but there was hope and optimism, particularly heading into next year,
14:16
that those other companies within the S and P five
14:19
hundred will continue to grow well rather grow their earnings
14:23
to keep in pace with that those megacaps, those magnificent seven.
14:27
To me, that's the interesting piece to focus on here
14:30
as we look forward is we've been carried very heavily
14:33
by the earnings growth from Nvidia and others in the
14:36
AI realm of things. Can the other sectors picked up
14:40
from an earnings perspective heading into Q four of this
14:43
year in Q one of next year. That's what is
14:45
of interest.
14:46
Speaker 2: There's a few pieces here. One there was a piece
14:49
that we covered last week from MarketWatch, and I disagreed
14:51
with the conclusion of it, but it basically laid out that, hey,
14:54
we're two years into this bowl market since you know,
14:56
the fall of twenty twenty two when things started bouncing
14:59
back from the two twenty five percent market correction, and
15:02
it came to conclusion that, look, this one that we're
15:04
in is not so weird and exceptional because look, market's
15:08
returned x percentage points. That's about average for the bull
15:11
market that you see, and it's only lasted two years.
15:13
The average last four or five, and so this one's
15:15
going to continue on. I disagree with the conclusion, but
15:18
at least they put some work into some stats behind
15:21
it to try and convince you of their argument. Here.
15:23
This is just it gives you nothing. There's no statistics
15:27
to back up anything. I think the important question we've
15:32
talked a lot about. You know, valuations long term are important.
15:35
They tell you nothing about timing, They tell you nothing
15:38
about whether this market can keep going up. I don't
15:40
think that's a valuable use of valuations on the stock market.
15:45
We've talked about this, right, It's really difficult to look
15:48
at something like that and say, oh, and because stocks
15:50
are pricing now, it means they're all going to come
15:52
falling apart. Usually it takes a catalyst of some sort
15:55
to make that happen. An interesting question to me is
16:00
has something structurally changed, Has something structurally changed about the
16:03
makeup of our economy, the makeup of our markets To
16:06
say that previous valuations since the nineteen sixties aren't relevant
16:12
to markets today, like that's I don't have an answer
16:14
to anybody there, but like that's certainly an argument that
16:18
some are making to justify buying stocks at twenty one
16:21
times future earnings. I think there's a few potential ones
16:25
that get thrown out there. Artificial intelligence gets thrown out
16:28
there all the time as the catalyst. That's you know, hey,
16:31
because of the you know, exceptional use cases of AI,
16:35
we're going to see earnings growth like you haven't dreamed
16:39
of before, and therefore a new level of price earnings
16:44
ratio is justified in this case. I would throw that
16:47
out the window, though, because nobody was talking about AI
16:51
in twenty twenty one, and pees were up here as well,
16:55
So I discount that one a little bit. To give
16:57
you some context, the last few times we've seen starnings
17:00
ratios in this realm was the last year or so
17:04
twenty twenty one, and then pre dot com bubble. Those
17:07
are the three periods of time that you can look
17:09
at and say stocks are as pricey as they were. Now.
17:13
You can make an argument about retirement, like, hey, you know,
17:15
because we've moved so much of our retirement system away
17:19
from pensions and towards four oh one k's that there's
17:21
just this constant giant borrower buyer of stocks that don't
17:26
really look at valuations or anything like that, and their
17:29
employers are matching contributions on top of that. Maybe there's
17:33
something there, although pensions were doing that to a large
17:36
degree before. Maybe they were more conservative in the sixties
17:38
than individual investors. Are the two only arguments that you know,
17:43
I can't really shoot a hole in. One would be,
17:47
you know, is there something to the argument of just
17:49
a new stage of American exceptionalism. China's falling by the
17:52
wayside in terms of their economy, Europe is struggling. Is
17:56
there something that truly, you know, has made America more
18:00
exceptional than the rest of the world right now when
18:02
you look at the potential for the future. And then
18:05
the second one would be if you look at twenty
18:09
twenty one, I would make a big argument that a
18:11
compelling reason for why stocks got so expensive was ludicrously
18:16
irresponsible government spending that flooded the market with money. You
18:22
had the Fed buying you know, all sorts of assets.
18:25
It just drove up asset prices. Could you make a
18:28
compelling argument to me that we're just going to continue
18:30
that kind of irresponsible government borrowing for another decade? Yeah, yeah,
18:34
you could. So Again, I think that results in terrible
18:38
things long term. But if you wanted to make the
18:40
argument to me that, hey, something between American exceptionalism and
18:44
government borrowing are forcing stock valuations up and that's not
18:47
going to correct itself anytime soon, I think you might
18:51
be wrong. But you know, I have a tough time
18:54
arguing against those pieces.
18:55
Speaker 3: The borrowing would be the shot in the foot on
18:59
the exception, the American acceptionalism at some point in time,
19:02
we talk about.
19:02
Speaker 2: It all the time, comes crashing down at some point
19:04
it's just cards. Is a house of cards at that point.
19:07
But I don't know. I'm trying to grasp at straws
19:11
here because you know what, stocks have been this pricey
19:13
for quite some time now, and it hasn't led to
19:15
any crisis yet. Just buyer beware. If you're using that
19:19
as your reason for buying, well, it hasn't all fallen
19:22
to hell yet, so might as well buy in. Let's
19:25
take a quick break. When we come back, Wall Street
19:27
Watches next.
19:41
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19:53
Street Watch a complete look at what's moving markets so far.
19:57
Today right here on the Financial Exchange Radio network.
20:00
Speaker 4: Markets are retreating slightly from yesterday's record highs after the
20:04
Dow and SMP five hundred notched new record highs. Markets
20:10
I already said that all right, then, well what talk?
20:14
Speaker 2: It didn't get me sleep?
20:15
Speaker 4: Now I need more coffee. I'm sorry, Wall streets of
20:18
reacting to the ramp up a third quarter earning season
20:21
as well, including more impressive results from banks. At the moment,
20:25
the Dow is off by nearly half a percent or
20:29
one hundred and eighty one points, SMP five hundred is
20:32
off about a third of a percent, and the Nasdaq
20:34
down by over three quarters of a percent. Russell two thousand, however,
20:37
is up nearly half a percent or nine points. Tenure
20:41
Treasury reel pulling back by two basis points now at
20:43
four point zero four percent, and crude oil is down
20:48
nearly five percent today, training just above seventy dollars a barrel.
20:52
Bank of America shares up by one percent and Goldman
20:55
Sack shares it down by three quarters of a percent
20:58
after both banks posted better and then expected third quarter results.
21:02
Bank of America's quarterly profit fell but still beat expectations,
21:06
while Goldman Sachs posted a forty five percent jump in
21:09
quarterly profit, also above forecasts. Meanwhile, Johnson and Johnson also
21:14
posted third quarter earnings this morning, where the healthcare products
21:17
giants saw higher than expected quarterly sales and earnings, but
21:20
trimmed its annual earnings guidance. Johnson and Johnson shares are
21:24
up by two and a half percent. Also this morning,
21:26
we saw earnings from Walgreens. They posted a three billion
21:30
dollar quarterly loss, but topped expectations for adjusted earnings and sales.
21:34
The retail drug store chain also said it plans to
21:37
close about twelve hundred stores over the next three years,
21:41
which should help cut costs. Walgreen shares rallying by over
21:45
eleven percent, and United Health Crew beat on top and
21:48
bottom lines in the third quarter. However, the healthcare company
21:51
cut its earnings guidance due to lingering disruptions from the
21:55
cyber attack it had earlier this year. That stock is
21:59
down by over eight percent. I'm Tucker Silvan. That's Wallstreet Watch.
22:05
Speaker 2: This week's edition of election jitters causing something. Long term
22:10
treasure yields are rising, and this time election jitters are
22:14
being blamed here since let's see going back here September sixteenth,
22:20
the yield on the ten year treasury, which a benchmark
22:23
interest rate that things like mortgages are based on and
22:27
tracks pretty well against mortgages, auto loans, other items, that
22:32
was sitting at three point sixty two percent as of
22:34
September sixteenth. It is since rallied considerably up to over
22:37
four percent now. And I don't know, Paul. I suppose
22:43
election jitters may be as good as any other reason
22:47
for a surge here, but I'm I'm just not seeing it.
22:51
I'm not sure why election jitters would be causing the
22:54
ten year to rise further, but that I guess that
22:57
haven't been said. I think I have some blindness towards this,
22:59
because clearly people put off decisions and delay things in anticipation,
23:06
like I do, buy that of an election, even if
23:08
they have no real concise reason as to what they
23:12
think is going to happen or what they would do
23:15
in the event of one thing or another. I just
23:18
speak to many, many people who say, yeah, I'm not
23:20
going to invest that money, or I'm not going to
23:22
buy that car, or I'm not going to go back
23:24
into the housing market until the election's done. And we
23:26
have more certainty, and I was like, well, what is
23:29
the election going to give you certainty on? But nonetheless
23:32
that that is a decision that I see frequently, and
23:34
so could it be factoring into treasure yields?
23:37
Speaker 3: I guess I never have understood it from the stock
23:40
market perspective, because we've covered the show so frequently that
23:44
the market's reaction to election results oftentimes goes counterintuitive to
23:49
what the general populace would think. So I would never
23:52
really hang my head on that. However, I'd be a
23:54
little more open to the possibility on the treasury rate
23:58
side of things, on the right outcomes, because the piece
24:01
that they mentioned here is that depending on who gets
24:04
into office, it impacts what the budget may look like
24:07
over the course of the next four plus years or so,
24:12
mentioning that if the deficit is going to expand at
24:15
a greater rate, to be clear, it's going to expand
24:17
under either presidential candidate, if the question is just how
24:21
much is it going to expand? But also what comes
24:23
into play very significantly there is what does Congress look
24:26
like as well? How easy is it going to be
24:29
to pass through whatever bills or initiatives that these presidents
24:32
are looking at. At least I can understand some of
24:35
the thinking behind that that if deficits continue to swell
24:39
at a level unanticipated or greater than expected, that means
24:44
more debt issues. Typically, what that's going to meet is
24:46
you're going to have to assess a higher rate of
24:48
interest on the longer end of the curve to finance
24:50
those efforts. I'm not saying it's perfect by any means,
24:53
but I can draw the line.
24:54
Speaker 2: Through it at least. Yeah, I guess that's where I
24:57
would buy it is split trol House, Senate, White House,
25:02
regardless of who's in control. Split control where you cannot
25:05
easily get bills through yields lower, yes, Republican control or
25:12
Democrat control of all three chambers or House Senate in
25:16
White House.
25:16
Speaker 3: Potential for years higher because of the ease of getting
25:20
something through, increasing spending because I think in.
25:24
Speaker 2: Either of those cases, tax rates are lower than we're
25:27
assuming right now. Because remember, tax rates are going up
25:30
automatically if Congress can't get their act together by twenty
25:32
twenty six. Tax rates are going up for almost every
25:35
American in twenty twenty six. If Congress doesn't get their
25:38
stuff together.
25:39
Speaker 3: Both presidential candidates have said they wanted to extend the
25:42
tax cuts.
25:43
Speaker 2: And that may or may not be possible if they
25:46
don't have control, because you know, if Donald Trump wins
25:49
and he doesn't get controlled the Senate, for example, then
25:52
they're not going to approve a tax cut for people
25:55
making a million dollars. They're just not And that's unlikely
25:59
to happen. If Kamala Harris gets in and you know,
26:03
tries to just keep the tax rates lower on individuals
26:08
making less than one hundred thousand dollars and bump up
26:10
the corporate tax rate also seems unlikely to happen. And
26:13
so unless they bring along the House and Senate, then
26:18
I can see a case for much more spending, much
26:23
more deficit increase, much more stuff that I think is
26:26
just terrible for the long term future of the US economy,
26:29
but in the short term could boost stocks and could
26:31
boost inflation and thereby bond yields on that anticipation of
26:35
additional government car.
26:36
Speaker 3: What are your thoughts on the terminal Fed funds rate
26:38
piece that they mentioned here that futures markets indicate a
26:41
certain estimated FED funds rate at the end of the year.
26:44
It was previously put out there at three point four percent.
26:47
So to be clear to everyone out there, is this
26:50
idea that anticipating federal Reserve cuts in the future, what
26:54
does it look like over the course of the next
26:56
you know, three to six months or so. Initially that
26:58
was three point four percent, then a little bit revised
27:01
lower to two point nine percent, sorry, two point nine
27:06
percent before the jobs report. After the jobs report three.
27:08
Speaker 2: Point four percent, So those have been revised up. And
27:12
I don't know that I take much away from the
27:14
terminal rate, because ultimately that's just where we think it's
27:17
going to be by year end. What I think is
27:19
more compelling and more interesting would be the lengthy discussions
27:23
that have been had at the Federal Reserve about the
27:25
neutral rate, right which pretty much universally it's agreed upon
27:30
that the neutral rate is now higher than it was
27:32
assumed in the twenty tens. That's been pretty widely accepted,
27:36
and they have different reasoning for it, but largely it's
27:39
deficits and government borrowing and economic activity all results in
27:43
a higher neutral rate. And the neutral rate, by the way,
27:46
just for I know, we're getting a bit technical here,
27:48
but the neutral rate is the hypothetical rate at which
27:53
federal Reserve policy is neither stimulative nor restrictive. The assumption
27:59
is that right now where we are stimulate or excuse me,
28:02
restrictive in terms of overall policy, which is why they're
28:05
lowering that rate. Prior to the pandemic, they were testing
28:09
out a neutral rate that might have been like sub
28:11
two percent. Now they're bumping that up a little bit
28:15
higher on the assumption that, hey, this new level of
28:19
inflation that we've seen as well as growth requires a
28:22
higher neutral.
28:23
Speaker 3: And just think about it very simplistically, of what you
28:26
can get on your bank deposits. There is kind of
28:29
a correlation there where the Federal Reserve, the Fed funds
28:32
rates usually impacts what you get on those deposits. Think
28:35
about what we were getting in twenty eighteen or twenty nineteen.
28:38
All of us became accustomed to the big fat zero.
28:42
So when we're talking about that neutral rate rising, that's
28:45
this indication that there isn't the appetite or there isn't
28:49
the comfort of having it be basically zero on a
28:52
money market. In's just it seems like it will settle
28:54
a little bit higher than where it was in that
28:56
twenty eighteen twenty nineteen span and even it predates that
28:59
too was for a long time nothing on cash.
29:01
Speaker 2: Let's take a quick break, and when we come back,
29:05
a little bit of an update on America's favorite airplane
29:08
manufacturer and only US manufacturer that's been just a dumpster
29:12
fire of the last five years. We'll be talking Boeing
29:14
right after.
29:14
Speaker 1: This breaking business and financial news first throughout the day,
29:20
only here on the Financial Exchange Radio Network. Thanks to
29:25
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29:28
With your comments and questions about today's show, and let
29:31
us know what you think about the stories we are covering.
29:34
This is the Financial Exchange Radio Network.
29:50
Speaker 2: Well, Paul Boeing, who's been again. I can't even list
29:55
all the faults over the last few years, but suffice
29:58
to say the stock price is down fifty six percent
30:00
over the last five years. About flat. Today on news
30:03
that they are going to be issuing new shares in
30:06
an attempt to raise at least ten billion dollars. Just structurally,
30:09
what are we talking about when a company goes and
30:11
raises money via a stock offering. I want to be
30:15
clear to people what exactly that means, because you can't
30:18
just wish up new shares out of well, I guess
30:21
you kind of can. But what you're actually doing here
30:25
is issuing new shares, which increases the pool of outstanding shares,
30:30
thereby diluting all shareholders of Boeing when they go and
30:34
do this, And why, I guess why? Now? Why does
30:38
Boeing need to go do this today? And what's the
30:41
overall impact?
30:42
Speaker 3: They need money is the big, the big factor there
30:45
where they are burning about a billion dollars a month.
30:49
I think through they're about eight and a half billion
30:53
through the first nine months of the year here. In
30:56
terms of the cash that they've spent, they've got thirty
30:59
three thousand machine is on strike. They've been on strike
31:01
for almost a month now. That's only furthering that cash
31:05
burn that they're seeing. They're anticipating basically burning ten billion
31:08
dollars over the course of this full year when it
31:10
wraps up in twenty twenty four, they have ten billion
31:13
dollars of cash and other reserves on their balance sheet.
31:17
As a result, at the rate that they're going at,
31:19
they need more capital. The biggest risk out there for
31:22
going I mean there are several, but a very large
31:24
one is their credit rating. Credit rating is how good
31:28
are you to pay back the debt that you're issuing,
31:31
and investment grade is a barometer out there where if
31:34
you fall below that level, you are scored as a
31:39
rated rather as junk debt. As a result of that,
31:42
when you get raised as junk debt as a company,
31:45
you have to offer a much larger a much higher
31:48
rate of interest, and the financing behind that, not to
31:50
mention the reputational hit that you take as a company
31:53
puts you in a really difficult spot. So as a result,
31:55
Mike mentioned there that they are going to raise as
31:59
much capital as they can through dead offerings and through
32:02
an equity offering here as well mention that about twenty
32:05
five billion dollars would need to be raised over the
32:07
course of the next three years. It's just been a
32:13
really unbelievably turbulent run pun intended for boweing. They haven't
32:17
turned a profit since twenty eighteen. My favorite was that, I'll.
32:20
Speaker 2: You write those down and underline them turbulent.
32:24
Speaker 3: Yeah, there would go, just comes right off the dome.
32:28
My favorite part of this whole thing was a lot
32:30
of this news was dumped at four point thirty on Friday,
32:33
ahead of a long weekend, which is just a classic
32:36
playbook movement. You have really really bad news, and they
32:41
have it. Seventeen thousand jobs will be cut from Boeing
32:44
as well.
32:45
Speaker 2: Yeah yeah, so, I mean, look on the dead side
32:47
of things. There's a whole bunch of reasons this is
32:49
a problem. But they occupy the lowest grade of credit quality,
32:54
lowest grade of investment grade bonds Boeing has right now,
32:57
so a single down grade would put them in junk tear.
33:00
We've talked about this before, I think, but there are
33:03
a number of buyers of debt who are either by
33:07
prospectus or by law, or by any number of rules,
33:11
prohibited from buying junk debt. And so you know, maybe
33:14
you're an insurance company, maybe you're a pension fund, all
33:17
sorts of different things that cap how much or whether
33:19
or not they can own junk debt at all that
33:21
would be forced to sell Boeing bonds and therefore drive
33:24
the yields up higher. In terms of the negotiations themselves,
33:28
you are seeing a labor official going to meet with
33:31
Boeing and the union trying to get this thing moving.
33:34
But the longer it goes on, obviously, the more downstream
33:38
companies are going to be affected and also see job cuts.
33:42
So there's these workers that are on strike, Boeing now
33:45
saying they're going to have to cut another seventeen thousand
33:47
jobs because of that strike and their problems, because hey,
33:50
why keep all these people on staff if they don't
33:52
have any work to do. You can think about all
33:55
the suppliers to Boeing who are also going to be
33:57
cutting jobs. And I don't know where this thing is.
34:01
I mean, we talked about how quickly it might go,
34:04
but clearly there is still a fair bit to be
34:08
decided here. I think the only good news that I'm
34:11
hearing is I'm not hearing anything right. The best news
34:15
that I can take away from what's going on with
34:17
this strike is that I haven't seen or heard an
34:19
update over the last few weeks, and that can mean
34:22
that progress is being made here. But there seem to
34:24
be some pretty big sticking points, largely around retirement that
34:30
these two are really disagreeing on Boeing and their union.
34:35
That is, there was a pension years ago. It has
34:38
since been frozen and eliminated for new employees. The union
34:41
workers want it back, the company's not willing to do so,
34:45
and that's a pretty big thing to get over right.
34:50
You know, it's not something pie in the sky, like
34:54
you know, the dock workers not wanting automation in the
34:57
ports like okay, well, the never going to happen. A
34:58
pension is something Boeing could feasibly do. It's not that
35:02
crazy to think they could go back and do it.
35:04
And I think the workers have a fair point on
35:07
all of this, And as we talked about, I thought
35:11
that the union workers really had the dominant hand on
35:14
this one. Longer it goes and you know, we all
35:17
have to feed our families. Well we'll see how that
35:18
all plays out.
35:20
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36:12
Speaker 1: The proceeding was paid for and the views expressed are
36:14
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36:22
Speaker 2: Paul, do you remember like a year ago when nvidio
36:24
stock was flying and its valuations were at pretty crazy numbers,
36:30
and we were sitting there saying, wow, I mean this
36:32
is pretty incredible. Their sales growth is strong, and this
36:35
is an incredibly well run company that's just delivering on
36:38
all sides. But how can they possibly continue to grow
36:41
at this pace? Yes, I do well. Yesterday they reached
36:44
a new all time high. Look, there's a piece of
36:50
this where like part of this is just highlighting that
36:52
I'm trying to eat a little bit of crow here
36:54
and point out that nobody has any idea how long
36:57
a momentum stock like this can continue. But they have
37:01
been priced at ludicrously high valuations for an extended period
37:06
of time now. And while there have been missteps here
37:11
and there, they had delays on their latest chips, and
37:14
you know this, that or the other. Yeah, there's harder
37:17
questions being asked of Microsoft and Google. There's not really
37:21
any tough questions being asked of in Nvidia, right Like
37:25
it's fair to ask Microsoft, hey, how are you going
37:27
to execute on these massively expensive investments you're making. But
37:32
for Nvidia, the cash just keeps pouring in and that's
37:37
been enough clearly for some investors to still get on
37:40
the bandwagon here.
37:41
Speaker 3: No, there is a continued demand in the space. They
37:44
are servicing all of these other companies with really large
37:47
budgets that want to pour a lot of R and
37:49
D into AI development, and Nvidia is the go to
37:53
source to provide those chips and data centers that surround
37:57
all of that research and discovery in that particular area.
38:01
Their pe has come down a bit, but they continue
38:04
to roar on the valuation side.
38:06
Speaker 2: Let's take a quick break here on the financial Exchange.
38:10
A lot more to cover in the second hour, including
38:13
a little review of this federal reserve JP Morgan called
38:17
the soft Landing last week. We'll talk a little bit
38:19
about Jero Powell and his Federal Reserve next on the
38:21
Financial Exchange