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Boeing Deliveries Trail Airbus · Bloomberg Intelligence

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0:25
Speaker 3: So Southwest, so take our LUV is down fourteen percent,
0:29
Speaker 3: So the company plans to cut capacity this year, halt
0:32
Speaker 3: most hiring and review it spending plans and response to
0:35
Speaker 3: reduced aircraft deliveries from Boeing. Here's my question. Is this
0:40
Speaker 3: going to be as simple over the next year? All
0:42
Speaker 3: the airlines are going to raise their fees and they're
0:44
Speaker 3: going to say it's not our fall, we gotta cut
0:45
Speaker 3: capacity because of Boeing. I wonder if that's what we're
0:48
Speaker 3: gonna hear well? Joining us now is George ferguson Bloomberg
0:51
Speaker 3: Intelligence and your Aerospace, Defense and airlines analyst, George, is
0:54
Speaker 3: that the thing? Let's just blame Boeing for the things
0:56
Speaker 3: and then raise our prices well.
0:59
Speaker 4: So not everyone will be able to blame Boeing, right,
1:02
Speaker 4: So that there are airlines that are operating airbus aircraft
1:06
Speaker 4: companies like you know, Delta Jet Blue Frontier spirit. They
1:12
Speaker 4: won't have the problems that that airlines that are being
1:15
Speaker 4: supplied by Boeing will have, and they'll look to put
1:17
Speaker 4: as much capacity in the marketplace to take advantage of
1:20
Speaker 4: the fact that the airlines that are flying Boeing product
1:24
Speaker 4: aren't able to get all of the flying done that
1:26
Speaker 4: they want to do. You know, the truth too here
1:29
Speaker 4: is I think that you know, the Boeing challenges will
1:33
Speaker 4: provide a little bit of firmness to the marketplace. But
1:36
Speaker 4: I still see I think a US airline market that
1:38
Speaker 4: looks like it's got a it has plenty of capacity
1:43
Speaker 4: in it, and I still think fares.
1:45
Speaker 5: Are flatish to maybe.
1:47
Speaker 4: Going down for the year unless Boeing really curtails their
1:52
Speaker 4: deliveries for the year.
1:53
Speaker 1: Yeah, it's interesting because if I read this issue about
1:56
Speaker 1: Boeing and I read this cutting capacity, but my first
2:00
Speaker 1: thought is going to be that that means higher prices
2:02
Speaker 1: for consumers. So what accounts for the difference there?
2:06
Speaker 4: Well, first of all, I think the US market already
2:08
Speaker 4: had sufficient capacity last year, right, I think we're bouncing
2:12
Speaker 4: back from a pandemic.
2:14
Speaker 5: We saw a bunch of sort of revenge.
2:15
Speaker 4: Travel, you know, earlier in this in this bounce back,
2:19
Speaker 4: I don't and that was very leisure driven. I don't
2:22
Speaker 4: think we're going to see as much of the leisure
2:24
Speaker 4: driven travel this year, not that I got to pay
2:27
Speaker 4: whatever it's going to take to get down to Disney,
2:29
Speaker 4: so you'll see it maybe a small a smaller growth
2:33
Speaker 4: amount in leisure, and business isn't fully back.
2:36
Speaker 5: We know that. So we've got twenty nineteen more.
2:40
Speaker 4: Than twenty nineteen levels of capacity in the marketplace, less
2:43
Speaker 4: business and maybe a little more leisure. So when I
2:47
Speaker 4: add that all up again, I kind of see a
2:49
Speaker 4: market that looks like it's got plenty of capacity. If
2:52
Speaker 4: you look at the guidance that Southwest gave on revenue
2:55
Speaker 4: per available seat mile, they lowered that at this discussion,
3:01
Speaker 4: so tells me that the market is weaker. You know,
3:04
Speaker 4: at this guide's point, the market is weaker than they
3:06
Speaker 4: initially thought.
3:07
Speaker 5: And at the same time, fuel prices were a little
3:10
Speaker 5: bit higher. So what it looks like to.
3:11
Speaker 4: Me is Southwest numbers are going to come in lighter
3:14
Speaker 4: than we expected in one queue.
3:17
Speaker 5: That's not a super healthy market.
3:18
Speaker 4: That's on a market that's got so much constraint that
3:21
Speaker 4: they can price whatever they want to for airline tickets
3:24
Speaker 4: and make lots of profits.
3:25
Speaker 3: Okay, so it's a trifecta. Like they do have a
3:28
Speaker 3: specific Boeing issue and the fuel prices and then the
3:30
Speaker 3: broader softer market that's a general airline issue. United also
3:36
Speaker 3: told Boeing to stop building seven thirty seven Max ten
3:38
Speaker 3: jets for the carrier. Okay, that sounds dramatic and bad.
3:42
Speaker 3: What does that actually mean?
3:44
Speaker 4: You know, I think it sounds like Scott Kirby, the
3:46
Speaker 4: CEO of United, is just getting real about what he
3:49
Speaker 4: thinks Boeing can deliver in the near term. I guess
3:51
Speaker 4: you know, if you sit around and you kind of
3:53
Speaker 4: hope and hope and hope they're going to get the
3:55
Speaker 4: Max ten certified, and you wait on those deliveries based
3:58
Speaker 4: on that hope, and the certificatetion keeps getting pushed out
4:01
Speaker 4: and it's really hard to plan. So Scott Kirby said, hey, look,
4:05
Speaker 4: stop worrying about the Dash ten. Just bring me dashed on.
4:08
Speaker 4: He was saying, look, I just want airplanes. Bring me airplanes.
4:11
Speaker 4: I think the market's generally going to be strong for me.
4:13
Speaker 4: He's in the premium segment too, right, which I think
4:16
Speaker 4: from the guidance we saw today from airlines, premium is
4:19
Speaker 4: holding up better. So he wants airplanes. He wants to
4:22
Speaker 4: go out and find some of those three twenty one
4:24
Speaker 4: larger scale from Airbus. Again, I think it's okay. I
4:29
Speaker 4: think Scott's being a realist. There's a lot of challenges
4:31
Speaker 4: right now at Boeing, and it feels to me like
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Speaker 4: certification for the DASH seven and the Dash ten, you know,
4:37
Speaker 4: the DASH ten being the biggest variant of.
4:39
Speaker 5: The seven thirty seven.
4:40
Speaker 4: There's just almost no way they're going to get pushed
4:42
Speaker 4: out longer than what we expect given the problems in
4:45
Speaker 4: manufacturing and Boeing right now.
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Speaker 1: And what is that? So is there any redacross that
4:49
Speaker 1: we should start thinking about for Airbus?
4:52
Speaker 4: Well, I mean, here's the challenge of this industry right
4:56
Speaker 4: the readacross is look, Airbus ought to be able to
4:59
Speaker 4: go get a lot more.
5:00
Speaker 5: Orders for its Airbus A three twenty one.
5:02
Speaker 4: But the problem Scott has, and he's a really good
5:05
Speaker 4: customer and they're working hard to find him slots, is
5:08
Speaker 4: that they probably can't get him three twenty one's for
5:11
Speaker 4: four or five years from now. Wow, So that doesn't
5:13
Speaker 4: fix his near term problems, and customers that would be
5:17
Speaker 4: smaller than United have an even larger problem because the air
5:20
Speaker 4: bus isn't going to work as hard to try to
5:22
Speaker 4: get him into the delivery cadence. The industry is definitely
5:26
Speaker 4: is operating at sort of max capacity.
5:29
Speaker 2: Now.
5:30
Speaker 4: It's pushing its supply chains to do better, but we
5:33
Speaker 4: just don't see increases of you know, build rates kind
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Speaker 4: of more than ten percent per year at best.
5:39
Speaker 5: It's really hard to bring up that supply chain.
5:42
Speaker 4: So I think the duopoly means that Airbus can't really
5:45
Speaker 4: capitalize that well.
5:46
Speaker 3: On this just anecdotally. I flew to Houston for like
5:50
Speaker 3: a day last week, and I flew there on a
5:52
Speaker 3: new Boeing jet for United and back on an old
5:55
Speaker 3: one and a man that was different, a very different experience.
6:00
Speaker 6: Bring a wrench with you, Okay.
6:02
Speaker 3: I did text my husband and I was like, hey,
6:03
Speaker 3: so I'm on this Boeing plane just in case something happens.
6:07
Speaker 3: What did I know? I'm like that, what is the
6:09
Speaker 3: floor though? George? For Boeing, I mean the stock is
6:12
Speaker 3: literally dropping like a knife. Here are we looking at
6:14
Speaker 3: the October low? Is what we have to be watching, Like,
6:17
Speaker 3: where's the support and where is the support gonna actually
6:20
Speaker 3: come from?
6:21
Speaker 4: So like it's you know, Boeing has been through some
6:24
Speaker 4: real troubles and the bad news sort of keeps coming.
6:28
Speaker 4: Like it's hard to say what a price would be
6:31
Speaker 4: on that floor. I will say that I think they're
6:34
Speaker 4: purchase a Spirit that they've proposed could start to put
6:38
Speaker 4: a floor underneath their problems. I see that direct line
6:41
Speaker 4: of management from the Spirit floor in Wichita, Kansas, all
6:46
Speaker 4: the way up to Boeing in rent and Washington as
6:49
Speaker 4: being the ultimate solution to improving quality, you know, oversight.
6:54
Speaker 4: So I think we have to watch that development closely.
6:58
Speaker 4: It's going to require getting some of the Airbus business
7:01
Speaker 4: outside of Spirit, because Spirit builds products for the A
7:05
Speaker 4: three twenty for Airbus and the A three fifty. I
7:08
Speaker 4: don't think you want that inside Boeing. So this is
7:11
Speaker 4: going to be a complicated procedure, a complicated purchase. But
7:15
Speaker 4: I think that's the beginning of Boeing really getting to
7:18
Speaker 4: stabilize their builds, improve quality, and get and that's going
7:23
Speaker 4: to make the fa free up FAA time and open
7:26
Speaker 4: the FAA's mind up about certifying Max seven and ten.
7:31
Speaker 4: So I think that that's the beginning of it.
7:33
Speaker 1: I mean, if you think about what the challenges are
7:35
Speaker 1: facing Boeing, is there much of a difference to the
7:38
Speaker 1: company if we get a soft economic landing, a hard
7:40
Speaker 1: economic landing, or no landing.
7:43
Speaker 5: Honestly, I think for all the air framers there isn't. Right.
7:46
Speaker 4: So again, Airbus and Boeing building aircraft at rates much
7:51
Speaker 4: lower than their customers are demanding right now. You know,
7:54
Speaker 4: customers like Scott Kirby want to come in and buy
7:56
Speaker 4: a three twenty one's next three or four years.
7:58
Speaker 5: Can't get them. So I think even in a.
8:00
Speaker 4: Hard landing, soft landing, no recession environment, these folks just
8:06
Speaker 4: keep working on making the supply chain better, so the
8:09
Speaker 4: supply chain can put more of the components on the
8:12
Speaker 4: factory floor and build more aircraft.
8:14
Speaker 5: Although I would.
8:15
Speaker 4: Say maybe in a harder economic landing it might free
8:19
Speaker 4: up some of the labor that they need and keep
8:22
Speaker 4: some of the labor more stable at their suppliers. And
8:25
Speaker 4: that's really the challenge right here, is labor at the suppliers.
8:29
Speaker 4: Stabilizing it. You need smart people there who've been doing
8:33
Speaker 4: the process for a long time, so they do it
8:35
Speaker 4: right all the time, know the right processes and procedures.
8:38
Speaker 3: Hey, George, if anyone listens to the show or watches
8:40
Speaker 3: TV with me, I am a deal person. I like
8:43
Speaker 3: me deals. I like all the deals, whatever the deals.
8:46
Speaker 3: If I want to look for deals for flying, where
8:48
Speaker 3: am I going to get that? Like, is it literally
8:50
Speaker 3: going to have to be sort of regional companies exposed
8:54
Speaker 3: to Boeing? Am I going to have to get that
8:56
Speaker 3: granular here?
8:58
Speaker 5: Well? No, right way? I mean airline seats.
9:01
Speaker 4: I mean that all the CEOs would complain that I
9:04
Speaker 4: say this, but I really find them largely as commodities, right,
9:07
Speaker 4: and so if you're going to find lower fares, I
9:09
Speaker 4: think you're typically going to find them lower across the
9:12
Speaker 4: board we are seeing. You know, it does seem to
9:15
Speaker 4: me that non premium leisure is an area of especially
9:20
Speaker 4: good you know, a lot of seats available, especially good prices.
9:24
Speaker 4: Maybe and maybe the further down the curve you go
9:27
Speaker 4: on it, you may not want to go that far
9:28
Speaker 4: down to the spirits and frontiers would even be some
9:32
Speaker 4: of the best deals. But you know, Southwest guidance today
9:35
Speaker 4: means that even in a nicer, you know, a non
9:39
Speaker 4: premium product, they're still having challenges getting fair and so
9:42
Speaker 4: I think that's important.
9:43
Speaker 5: That's good.
9:44
Speaker 3: Oh man, fine, George ferguson Boomberg Intelligence and your aerospace,
9:48
Speaker 3: defense and airlines analysts. And let's be fair. I mean,
9:50
Speaker 3: like I want to sit in the front of the plane.
9:53
Speaker 1: Who doesn't.
9:53
Speaker 6: I mean, you know you want to pay, you want
9:55
Speaker 6: first class, but you want to pay Coach.
9:57
Speaker 3: Boom He gets me.
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10:19
Speaker 3: Small business optimism dropped nine month low. There's that. Also
10:22
Speaker 3: a CPI month on month coming in at four tens
10:25
Speaker 3: of one percent for February, so slightly higher sequentially. For
10:28
Speaker 3: the year, you're looking at three point two percent, also
10:31
Speaker 3: higher sequentially as well. So warmer wasn't hot, but did
10:36
Speaker 3: prove that January maybe wasn't a blip. I was calling
10:38
Speaker 3: it warm. Let's get the take now from Jeffrey Cleveland,
10:41
Speaker 3: a chief economist over at Peydon and Regal. He is
10:43
Speaker 3: standing by with us for more, Jeffrey, is warmer the
10:47
Speaker 3: right way to phrase a CPI report or is there
10:49
Speaker 3: another temperature degree word you might use?
10:53
Speaker 7: Maybe spicy, still say still too hot to handle?
10:58
Speaker 3: Okay?
10:59
Speaker 7: For Paul Makers, I think, I think, I think they're
11:01
Speaker 7: going to be unhappy with this sort of reading. So
11:04
Speaker 7: you know, maybe maybe one of those monikers would would
11:06
Speaker 7: work here.
11:09
Speaker 1: I like spicy, Yeah, I mean, especially in food, but
11:12
Speaker 1: maybe not so much in inflation readings. So can you
11:14
Speaker 1: talk a little bit to us a little bit about why,
11:16
Speaker 1: you know, you've got this concern about the what seems
11:20
Speaker 1: to me just to be a little bit of a
11:22
Speaker 1: over an overshoot versus expectations for inflation, because there's a
11:25
Speaker 1: lot of, you know, enthusiasm in the equity markets, for example,
11:28
Speaker 1: that the FED might be on track.
11:30
Speaker 7: Yeah, okay, So I think the context here is Powell
11:33
Speaker 7: appeared on Capitol Hill last week and he reiterated his
11:36
Speaker 7: view that we need to see monthly readings like we
11:40
Speaker 7: saw in the second half of last year.
11:42
Speaker 8: So I think he's referring there to core.
11:45
Speaker 7: PCE, not so much Core CPI, but we had some
11:48
Speaker 7: soft month to month change readings in the core measures
11:52
Speaker 7: in the second half of last year, so we need
11:53
Speaker 7: to see more of those, not necessarily better, but more,
11:56
Speaker 7: and a number like point four for core CPI month
12:00
Speaker 7: to month for January and again in February.
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Speaker 8: For me, that's too that's too hot.
12:06
Speaker 7: So it's it's going to disappoint policy makers from that
12:09
Speaker 7: perspective because they want to be convinced that inflation is
12:12
Speaker 7: going to sustainably return to two percent.
12:14
Speaker 8: I think this raises some questions. January could have been
12:18
Speaker 8: a fluke, but two months in a row not so much.
12:21
Speaker 3: So does that mean we have to lower our expectations
12:23
Speaker 3: for inflation like it's a trajectory, it's not the final
12:27
Speaker 3: destination kind of thing, as I think Powell's been alluding to.
12:30
Speaker 7: I think investors should imagine that the FED probably will
12:34
Speaker 7: cut rates this year, but it will happen later and.
12:38
Speaker 8: There'll be fewer cuts. So we have the first cut.
12:40
Speaker 7: In September and we have only two cuts for the year.
12:44
Speaker 7: That's going to be disappointing for only.
12:46
Speaker 3: Two cuts for the year.
12:47
Speaker 7: Okay, that's interesting, that's right, and that's looking at the
12:50
Speaker 7: destination where we think core inflation will end the year,
12:54
Speaker 7: but also thinking about the path to get there. You know,
12:58
Speaker 7: I think, well, there's not a one for one here
13:00
Speaker 7: between core CPI and core PCEE could imply that when
13:04
Speaker 7: we do see the core PCE numbers later this month,
13:07
Speaker 7: they will also be a bit spicy, and so that
13:11
Speaker 7: that's going to be again disappointing for policy makers.
13:14
Speaker 1: What do you make of the markets reaction? I mean,
13:17
Speaker 1: we had very little movement and bond youill to start with,
13:19
Speaker 1: but now equities are very firmly up.
13:22
Speaker 8: Yeah, yeah, I don't know.
13:23
Speaker 7: Maybe investors had a hint that things the inflation would
13:26
Speaker 7: come in stronger, That could be possible, or maybe it's
13:29
Speaker 7: just going to take a bit more time to digest
13:31
Speaker 7: the implications here.
13:33
Speaker 8: I also, I know, you know, just from talking to.
13:35
Speaker 7: Colleagues and co workers and competitors, you know, you hear
13:41
Speaker 7: kind of some positive spin here, the fact that February's
13:45
Speaker 7: core reading wasn't as bad or wasn't as hot as January's.
13:48
Speaker 7: So we did see we did see a little bit
13:52
Speaker 7: of a cooling relative to January.
13:54
Speaker 8: So maybe some good hints in there.
13:56
Speaker 7: But you know, I like to look just you know,
13:57
Speaker 7: looking at core CPI month a month, but also looking
13:59
Speaker 7: at median CPI. The median CPI just looking at the
14:03
Speaker 7: median price change that just dropped from Cleveland FED and
14:06
Speaker 7: that was also.
14:08
Speaker 8: Point four month to month after a point five.
14:10
Speaker 7: So I still think underlying core inflation is a bit
14:14
Speaker 7: too strong. Market probably will wake up to this over
14:17
Speaker 7: the over the next few days.
14:19
Speaker 3: Okay, so market wakes up to it. I appreciate your
14:21
Speaker 3: an economists, but what happens, Like, we've already seen some
14:24
Speaker 3: selling across the bond market. We've seen sort of the
14:26
Speaker 3: back end catch up a little bit here with yesterday
14:29
Speaker 3: is selling in the front end. What's going to be
14:31
Speaker 3: the ramification?
14:32
Speaker 8: Yeah, I think higher, higher bond yields across the curve.
14:36
Speaker 7: Implication would be, you know, pricing of fewer cuts, pushing
14:41
Speaker 7: out the timing of cuts. That could also have an
14:43
Speaker 7: impact on risk assets, equity prices, credit spreads in the
14:47
Speaker 7: bond market. I think that could ripple through as well.
14:50
Speaker 7: So you know, really it's the bond market that is
14:54
Speaker 7: the key driver here of everything else. So the implication
14:58
Speaker 7: is higher, higher bond fields for longer.
15:01
Speaker 1: So now I want to ask you about a theme
15:03
Speaker 1: that you know. Alex and I were discussing this earlier
15:05
Speaker 1: and we had some guests talking about the election coming
15:07
Speaker 1: up this year, how do you see things developing in
15:10
Speaker 1: the second half, and indeed in this second quarter or
15:12
Speaker 1: the fourth choir, I should say, because if you've only
15:14
Speaker 1: got two rate cuts, one of them's going to have
15:17
Speaker 1: to come either immediately after the election or in December,
15:21
Speaker 1: and so you must have a very particular view about
15:23
Speaker 1: what sentiment around lower interest rates is going to be
15:26
Speaker 1: at that time.
15:27
Speaker 7: Well, I just think back to twenty sixteen we saw
15:31
Speaker 7: rate hike at the end of the election year. There's
15:34
Speaker 7: been some other instances, you know, twenty eighteen we had
15:37
Speaker 7: four rate hikes throughout the year despite we had midterm elections.
15:40
Speaker 7: I think investors like to talk about elections, they love
15:44
Speaker 7: to talk about politics, but really I think it's going
15:47
Speaker 7: to be the inflation trajectory that determines what happens with
15:50
Speaker 7: interest rates, not the election. So really coming back to
15:55
Speaker 7: that path for core inflation and then ultimately the destination.
15:59
Speaker 7: If we're right that the a is bumpier and we
16:02
Speaker 7: end up with higher core inflation at the end of
16:04
Speaker 7: the year than the market currently expects, then we'll get
16:08
Speaker 7: fewer we'll get the fewer cuts the Fed funds rate
16:11
Speaker 7: will end up being higher.
16:12
Speaker 8: I think that's the key story the election.
16:14
Speaker 7: What happens there is not I don't think it's going
16:16
Speaker 7: to change that now for twenty twenty five, that's where
16:18
Speaker 7: the election really matters, right, because that could change the
16:21
Speaker 7: tone of fiscal policy in the coming year. So I
16:26
Speaker 7: do think if the Republicans take back the White House,
16:31
Speaker 7: then you could have a more aggressive or expansionary fiscal
16:34
Speaker 7: policy in twenty twenty five. And again that could have
16:37
Speaker 7: some some BONDI old implications, but it's probably a story
16:39
Speaker 7: for late twenty four and into twenty five.
16:42
Speaker 3: Let's put that aside for a second. So you see
16:45
Speaker 3: two this year, and then how many cuts? Then are
16:48
Speaker 3: you sort of mapping out for twenty twenty five, like
16:50
Speaker 3: the whole rate I think cut cycle.
16:52
Speaker 7: I think it's possible that you could see one, you know,
16:55
Speaker 7: sort of a pace per quarter in twenty twenty five
16:57
Speaker 7: of one cut per quarter, so you get an additional
17:01
Speaker 7: three or four in twenty twenty five, something like that.
17:04
Speaker 7: So certainly no slashing of the Fed funds rate, not
17:07
Speaker 7: anticipating on a twelve month horizon a recession. So I
17:12
Speaker 7: guess this would be more similar to what you saw
17:15
Speaker 7: in the mid nineteen nineties where we had, you know,
17:17
Speaker 7: the early nineteen nineties, the Fed hiked a lot, rates
17:20
Speaker 7: went up a lot, but the economy continued to grow
17:23
Speaker 7: throughout that decade.
17:24
Speaker 8: So the FED funds rate stayed.
17:25
Speaker 7: In a pretty narrow range from say, nineteen ninety five
17:28
Speaker 7: until nineteen late nineteen ninety eight.
17:31
Speaker 8: And there's nothing more like that.
17:33
Speaker 3: There's no dramatic falloff. Then, in that depective, the.
17:38
Speaker 7: Question is, how would you get a dramatic falloff? To me,
17:41
Speaker 7: it has to be an economic downturn. It has to
17:44
Speaker 7: be a recession, so you have to have that in
17:46
Speaker 7: your your forecast. We're more upbeat. We think the economy
17:49
Speaker 7: will continue to grow out over the next year.
17:51
Speaker 3: Doesn't he He is here even like looking about on YouTube,
17:54
Speaker 3: like his energy is like he's into it.
17:56
Speaker 8: He's he's He's still California. The California vibe here makes sense.
18:01
Speaker 1: The good weather, Yeah I know. But now look, let
18:03
Speaker 1: me ask you about consumer sentiment, because you know, there's
18:06
Speaker 1: the inflation squeeze pinches everyone's pockets, and yeah, inflation is easy,
18:10
Speaker 1: but the prices are still a heck of a lot
18:12
Speaker 1: higher than they were before. And this is something that
18:15
Speaker 1: we've been well established has been weighing on enthusiasm for
18:19
Speaker 1: the Joe Biden economic program. So how do you see
18:21
Speaker 1: consumer development, consumer sentiment developing.
18:25
Speaker 7: Well, just talking to virtually, you know, all clients, they say, hey, Jeffery,
18:29
Speaker 7: you're saying that inflation is cooling off. But you know,
18:32
Speaker 7: I still see prices elevated at the pump, or I
18:36
Speaker 7: still see expensive food prices. So I mean, the difference
18:40
Speaker 7: there is just rates versus level. Central bankers are focused
18:43
Speaker 7: on the rate of inflation. I think the average consumer
18:47
Speaker 7: is focused on the level of inflation. So that's the
18:50
Speaker 7: disconnect you see as a result, that's weighing on consumer sentiment.
18:54
Speaker 8: And so that's just a fact. I don't think there's
18:56
Speaker 8: any way around that.
18:57
Speaker 7: But this was brought to the attention here knows this,
19:00
Speaker 7: but Jerome Powell was asked about this last week on
19:02
Speaker 7: Capitol Hill and he said, look, we're we're not expecting
19:05
Speaker 7: to see price level fall, the average price level fall.
19:08
Speaker 7: That only happens in very adverse you know, economic scenarios
19:12
Speaker 7: like a recession. You know, what they're trying to achieve
19:15
Speaker 7: is a slowdown in the rate of increase, trying to
19:19
Speaker 7: get that back to two percent. But we've already talked
19:21
Speaker 7: about there's problems even then. I think inflation is a
19:24
Speaker 7: little bit stickier even on that slowdown.
19:26
Speaker 3: All right, really good stuff. Appreciate the positivity. Jeffrey Cleveland,
19:30
Speaker 3: chief economist at Paydon and Regal. He joins us there,
19:33
Speaker 3: but then the flip side, you have more, you know.
19:35
Speaker 3: Morgan Stanley's Mike Wilson says he doesn't see a need
19:38
Speaker 3: to raise the S and P five hundred target. There's
19:41
Speaker 3: no justification in the absence of broad earnings growth.
19:43
Speaker 9: Now.
19:43
Speaker 3: That is in contrast with an idea that maybe it's okay,
19:47
Speaker 3: like we're not going to need a huge downturn in
19:49
Speaker 3: order to get fed cuts. You can make do with
19:51
Speaker 3: five maybe six for the total cycle.
19:53
Speaker 1: I mean, going back to the nineteen nineties rates around
19:56
Speaker 1: five percent or so, that's very long way from what
19:59
Speaker 1: it was at twelve thirteen percent or what have you.
20:01
Speaker 1: And so if you think where are we right now,
20:03
Speaker 1: this is definitely an area that we can live with.
20:08
Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live
20:12
Speaker 2: weekdays at ten am Eastern on Affo car Playing and
20:15
Speaker 2: broyd Otto with the Bloomberg Business app, listen on demand
20:17
Speaker 2: wherever you get your podcasts, or watch us live on YouTube.
20:22
Speaker 3: Let's take another look from an investor perspective, what do
20:25
Speaker 3: you do now? Like we got through CPI, it was
20:27
Speaker 3: a little bit of a sell into the news and
20:29
Speaker 3: then buy the news kind of situation. We're still going
20:32
Speaker 3: to grind higher here. So it seems Bank of America
20:35
Speaker 3: now upgrading their earnings forecast, really looking at a hyper
20:38
Speaker 3: investment cycle when it comes to the big tech guys.
20:40
Speaker 2: So what do you do?
20:42
Speaker 3: Margie Pateel is senior portfolio manager at all Spring Global
20:45
Speaker 3: Investments and she joins us. Now, Margie, do you buy
20:47
Speaker 3: into this now?
20:48
Speaker 4: Like?
20:48
Speaker 3: Is there again? It feels like we just can't sell
20:52
Speaker 3: so you have to throw in the towel here and
20:53
Speaker 3: buy no matter what and hold on.
20:56
Speaker 10: Well, yes, because fundamental ad economy looks in good shape.
20:59
Speaker 10: It looks as if we're growing, say between two and
21:02
Speaker 10: three percent, which is good enough to have earnings up
21:04
Speaker 10: say ten or twelve percent for the year. So that's
21:08
Speaker 10: really pre attractive for equity investors. And you can see
21:11
Speaker 10: the FED is really betook between that'd like to cut rates,
21:14
Speaker 10: but they really can't when inflation is so stubbornly a
21:17
Speaker 10: little bit about their target.
21:19
Speaker 11: So that's why you're seeing mixed signals.
21:20
Speaker 10: Bottom markets are down a little bit in price, but
21:23
Speaker 10: equities up a little bit in price.
21:27
Speaker 1: Can you talk to me a little bit about your
21:29
Speaker 1: take on the equity market. Where do you see investors
21:31
Speaker 1: should be concentrating, Where do you see that they should
21:34
Speaker 1: be staying away a little bit?
21:36
Speaker 10: Well, I think it's still the same themes that we
21:38
Speaker 10: had last year. Although the market might be broadening out
21:41
Speaker 10: a little bit, it's still sticking with companies. It's fundamentally
21:44
Speaker 10: look like they have above average long term secular growth.
21:48
Speaker 10: So that says to me the tech sector is still
21:50
Speaker 10: going to be one of the strongest. Is certainly volvable
21:53
Speaker 10: as short term traders change their settlements here and there.
21:56
Speaker 11: Basically, I think.
21:57
Speaker 10: The trend is still your friend in technology, and I
22:00
Speaker 10: think in industrials, particularly those companies are going to benefit
22:03
Speaker 10: from shoring from higher capital investment in certain areas. I
22:07
Speaker 10: think those companies are going to do well, their price reasonably,
22:10
Speaker 10: and they should have growth that's actually pretty competitive even
22:13
Speaker 10: with some of the tech sectors. And we've had a
22:15
Speaker 10: little bit of turnaround in healthcare people really trash the
22:19
Speaker 10: sector because of the down earns from COVID, So I
22:22
Speaker 10: think we're seeing more money attracted to the healthcare sector.
22:26
Speaker 3: What about industrials, We just heard Techer talk about three
22:28
Speaker 3: M changing CEOs. That has been a really rough ride
22:32
Speaker 3: for three M. They pretty much like make everything, and
22:34
Speaker 3: they have so many parts of their business that sometimes
22:36
Speaker 3: that winds up hurting them. Where in the industrial space
22:38
Speaker 3: might you be looking.
22:40
Speaker 10: Well, I think three M is really a special case.
22:43
Speaker 10: You have to look at the company, the fundamentals. They
22:45
Speaker 10: just have a new CEO and look at it afresh.
22:49
Speaker 10: But as far as the rest of the industrials, I
22:51
Speaker 10: think that they should on balance look pretty attractive because
22:55
Speaker 10: a lot of them will benefit from higher capital expenditures.
22:58
Speaker 10: They'll benefit I think from the reshoring less competition from
23:02
Speaker 10: say China, for example, And also I think that as
23:06
Speaker 10: far as what we're seeing as far as the government
23:09
Speaker 10: with their encouraging more investment in semiconductors, with needing to
23:14
Speaker 10: upgrade the electrical grid, I think those companies are going
23:17
Speaker 10: to do surprisingly well. Their price reasonably, so I think
23:20
Speaker 10: they can easily be one of the more competitive sectors
23:23
Speaker 10: this year.
23:24
Speaker 1: What's your view on more consumer facing companies. We've still
23:28
Speaker 1: seen inflation quite powerful and consumers get still feeling squeezed,
23:32
Speaker 1: but at the same time it's a hot job market,
23:34
Speaker 1: hot salaries.
23:36
Speaker 10: Well, I think in the consumer sector, I think that
23:39
Speaker 10: the discretionary sector is likely to do it a bit
23:42
Speaker 10: better than the staples sector, simply because people do have
23:46
Speaker 10: more people have jobs. We have sours going up small enough,
23:51
Speaker 10: maybe not enough to totally compensate for inflation, and the
23:55
Speaker 10: staples I think is a sector that.
23:57
Speaker 11: I'm sort of warm on. I think it's going to
23:59
Speaker 11: be hard to there's.
24:00
Speaker 10: Excess capacity, they don't have pricing power, and fundamentally those
24:04
Speaker 10: markets are rather slow growth. So unless a company can
24:08
Speaker 10: reinvest himself in the stable side, we think the discretionaire
24:12
Speaker 10: is a better place to be for consumers.
24:14
Speaker 3: Hey, Margie, do my homework for me. I try and
24:16
Speaker 3: come up with a couple of themes every day, like
24:19
Speaker 3: these are the main questions that we're all thinking about.
24:21
Speaker 3: These are the main themes. I gotta tell you, I
24:24
Speaker 3: don't have one today. It might be me. I mean,
24:26
Speaker 3: I'll put it out there, it could very well be me.
24:29
Speaker 3: But what's my question today? What are the main questions
24:32
Speaker 3: we have.
24:33
Speaker 10: Now, Well, I think it's just more of the same
24:37
Speaker 10: and really do nothing because there's really not a lot
24:40
Speaker 10: of productive things to do here.
24:41
Speaker 3: Okay, so it's not my fault. My takeaway is that
24:43
Speaker 3: that's not my fault.
24:44
Speaker 10: Oh no, position, because they would love the cut rates,
24:48
Speaker 10: but they really can't when inflation is stubbornly high, trends
24:53
Speaker 10: coming down but not enough to justify cutting rates, and
24:56
Speaker 10: they're well aware of the interest rate burden with the
24:59
Speaker 10: huge deficit, so they really betwixt in between, and so
25:03
Speaker 10: they really can't do much except maybe, you know, talk
25:05
Speaker 10: every now and then, and the companies are just motoring
25:09
Speaker 10: right along. Our earnings are once again surprisingly good in
25:12
Speaker 10: the last quarter. I think they'll continue to be surprisingly good.
25:15
Speaker 10: We have enough growth to sustain higher stock levels, so
25:18
Speaker 10: I think we'll see stocks go up this year. Bonds
25:22
Speaker 10: be more or less in a trading range, I think,
25:24
Speaker 10: just because it'll be a little burden body supply of treasures,
25:27
Speaker 10: and I think that'll keep the yield spreads of corporate
25:30
Speaker 10: bonds narrower to treasures that would traditionally think and I
25:33
Speaker 10: think when you value stocks by looking what the yield
25:36
Speaker 10: is in the ten year treasury. You're going to miss
25:38
Speaker 10: a little bit because I think treasures are going to
25:40
Speaker 10: be somewhat higher than they would be if we have
25:42
Speaker 10: a so called normal market because of the very very
25:45
Speaker 10: high supply we have.
25:47
Speaker 1: You know, there's one theme that will never fail us
25:50
Speaker 1: and Alex, I think we can always have this in
25:51
Speaker 1: our back pocket. Is the election coming up, and I
25:54
Speaker 1: think it would be an interesting thing for you to
25:56
Speaker 1: talk a little bit about how you see these trends
25:59
Speaker 1: developing in this and half of the year, Bearing in
26:01
Speaker 1: mind that I think it's pretty safe to say that
26:04
Speaker 1: we're all gearing up for a very hardly closely faught election.
26:08
Speaker 10: Yes, well, I thought coming into the year that the
26:11
Speaker 10: first half of the year would be very chopping up
26:13
Speaker 10: and down and not really make a lot of.
26:15
Speaker 11: Headway either way.
26:16
Speaker 10: It's surprising me with how well we've done in the
26:19
Speaker 10: in nasdak and standard pours up well over six percent,
26:23
Speaker 10: dal Jones up maybe close to three percent, so that's a.
26:27
Speaker 11: Little better than I would have fought this point.
26:29
Speaker 10: My thinking is we may still chalk around with worries
26:31
Speaker 10: about slower growth, inflation or whatnot, but typically inflation in
26:36
Speaker 10: election years or good years for the equity market. So
26:39
Speaker 10: I think in the second half of the year, maybe
26:41
Speaker 10: towards the end part of the year, we should see
26:44
Speaker 10: a rather strong rally into the finish, regardless of which
26:47
Speaker 10: candidate wins, because I think that it'll just reflect the
26:51
Speaker 10: lack of uncertainty and the fact the economy still has
26:54
Speaker 10: a lot of sustainable growth. That's what people miss in
26:57
Speaker 10: looking for waitnesses as if FED ate rates. The economy
27:02
Speaker 10: is in great shape. There's no sector that's really out about,
27:04
Speaker 10: so I think the growth should continue.
27:07
Speaker 3: But to your point also, Jen, you know, if you
27:10
Speaker 3: played the themes the last election, they didn't do anything
27:13
Speaker 3: for you, Like clean energy stocks fell after President Biden,
27:17
Speaker 3: I mean taking went in office despite the IRA for example, right, Like,
27:21
Speaker 3: so even if you play those themes like doesn't always
27:24
Speaker 3: work out.
27:24
Speaker 1: Yeah, I mean you can have a theme, but what
27:26
Speaker 1: it does for you is a separate and.
27:28
Speaker 3: Very different story. Yeah. Hey, MARGI you sound really positive,
27:31
Speaker 3: you sound really bullish. I mean, why would the FED cut.
27:37
Speaker 10: Well, because I'd like to cut because they would like
27:39
Speaker 10: they would like to see inflation come down.
27:41
Speaker 11: It hasn't a blow actud. I think it's been a
27:43
Speaker 11: slow go on.
27:44
Speaker 10: Inflation and as I said, they really are aware of
27:47
Speaker 10: the burden that interest rates are going to have as
27:51
Speaker 10: they go higher for financing the federal deficit. It's it's
27:55
Speaker 10: not a small factor, So I think they have to
27:57
Speaker 10: be well aware of that, particularly when likely to continue
28:00
Speaker 10: to have definite financing as far as God can see.
28:05
Speaker 10: And I think they would like they feel that lower
28:07
Speaker 10: rates would be healthy, although I can't think of a
28:10
Speaker 10: market where if the ten years saber toween four and
28:12
Speaker 10: five percent, how that could be considered depression on the economy.
28:17
Speaker 11: I think companies have shown they're pretty resilient.
28:20
Speaker 10: They've restructured their balance sheet, and they're relatively insensitive to
28:24
Speaker 10: as particularly moves in short term rates and really long
28:28
Speaker 10: rates aren't high enough to do real corporate profits. So
28:31
Speaker 10: we think you really have to be positive. If you
28:33
Speaker 10: look at the history books, you'd say, yes, if that
28:36
Speaker 10: is going to cause a recession, but they haven't now
28:38
Speaker 10: in two years, and I don't think that that's they
28:42
Speaker 10: would like to do that. I think they'd like to
28:44
Speaker 10: tlimbrate their interest rate adjustments to not damage the economy.
28:49
Speaker 3: Yeah, all right, Margie, thanks Lott, We appreciate it. Thanks
28:51
Speaker 3: for Geponoma. That's margat Patel, senior portfolio manager at Allspring
28:54
Speaker 3: Global Investments.
28:57
Speaker 2: You're listening to the Bloomberg Intelligence. Catch us live weekdays
29:02
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29:05
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29:08
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29:12
Speaker 2: Alexa play. Bloomberg eleven thirty.
29:15
Speaker 3: Oracle stock of eleven percent so shares a rally at
29:18
Speaker 3: the infrastructure software A company reporting third quarter results the
29:21
Speaker 3: beat expectations on some key metrics. Here, we want to
29:23
Speaker 3: get more with Brody Ford Bloomberg, a tech reporter joining us.
29:27
Speaker 3: Hey Brody, why why was the street so surprised?
29:31
Speaker 9: There's been a big debate over the last year. Can
29:33
Speaker 9: Oracle transform from this kind of old school on premise,
29:37
Speaker 9: come to your office and install it on your servers
29:39
Speaker 9: kind of company to really offering cloud infrastructure the way
29:43
Speaker 9: we think about Amazon or Microsoft doing. The last couple
29:47
Speaker 9: of quarters, they were disappointing and people were starting to
29:49
Speaker 9: wonder is this a flash in the pan? Is their
29:52
Speaker 9: growth sustained? Yesterday they said, hey, no, we actually got
29:55
Speaker 9: billions more on orders than you expected. They had really
29:58
Speaker 9: strong bookings growth. That's kind of reignited that enthusiasm that hey,
30:02
Speaker 9: maybe Oracle really can be that, you know, fourth hyper
30:06
Speaker 9: scaler after Google, Amazon and Microsoft.
30:09
Speaker 1: But I guess you know, they've been having their ups
30:12
Speaker 1: and downs. Their shares got really badly hit relatively speaking,
30:15
Speaker 1: and so do you feel like the recovery today is
30:17
Speaker 1: for real or what's going to be the next waystation
30:20
Speaker 1: that investors have to look for.
30:21
Speaker 9: So what's convinced them is that when you're offering cloud services,
30:25
Speaker 9: people forget the cloud isn't in the sky, it's in
30:28
Speaker 9: data centers in Virginia and they need.
30:31
Speaker 8: To build them quote of the day.
30:34
Speaker 9: Yeah, and so Oracle said that they're going to spend
30:37
Speaker 9: ten billion dollars next year is building up these data centers.
30:39
Speaker 9: And keep in mind a couple of years back they
30:41
Speaker 9: were spending two billion new year on capex. Now it's ten.
30:45
Speaker 9: That's a real difference, and that's convincing investors that, hey,
30:47
Speaker 9: they are actually building out their physical infrastructure. In the
30:51
Speaker 9: AI era, everyone needs more cloud, everyone needs more of
30:55
Speaker 9: this computing power, and Oracle does seem prime to actually
30:59
Speaker 9: capture a lot of that demand. So people will be
31:01
Speaker 9: watching whether these data centers do go up in Virginia
31:04
Speaker 9: and other states.
31:05
Speaker 3: I thought we didn't like it when companies spend a
31:07
Speaker 3: lot of money on stuff.
31:09
Speaker 9: We like it if it's going to come back and
31:11
Speaker 9: give us something else, right, I mean, what was that time?
31:14
Speaker 3: So they're gonna in mess all this money? When do
31:15
Speaker 3: they make money off of the money they just spent.
31:17
Speaker 9: Yeah, it seems like it'd be pretty quick, because if
31:21
Speaker 9: you believe the executive's on the call, you know, executive
31:23
Speaker 9: grand stand Sometimes what they say that demand outpaces supply.
31:27
Speaker 9: They've been saying this for a while that with the
31:29
Speaker 9: AI era, everyone's rushing to get more computing power. They
31:32
Speaker 9: can't provide it. So the second these data centers go live,
31:35
Speaker 9: in theory, they should be able to convert that into
31:38
Speaker 9: revenue very quickly.
31:39
Speaker 1: Are they good at doing that quickly relative to other companies?
31:43
Speaker 9: They are known for ruthless operational efficiency, so they should
31:50
Speaker 9: they should be good at this, right, I mean, of
31:53
Speaker 9: course the market could change. Right, Everything looks rosy with
31:56
Speaker 9: AI right now be able to train their own models.
31:59
Speaker 9: Could we see a sea change? Hard to say, but
32:02
Speaker 9: yesterday they got eighty billion in bookings. Once you book
32:05
Speaker 9: you can't get out of it, so it's for a while.
32:09
Speaker 3: So I as some find it's interesting if we're gonna
32:10
Speaker 3: see cloud computing and AI be a cyclical industry or not, Like,
32:15
Speaker 3: clearly it's a structural shift. But will we see a
32:17
Speaker 3: ton of data centers come on at the same time,
32:19
Speaker 3: like from different companies, and then their core prices go
32:22
Speaker 3: down so the revenue isn't as hot, Like will it
32:24
Speaker 3: be cyclical like chips are, for example, or not?
32:26
Speaker 9: It's a good question. There's one rule of software compared
32:30
Speaker 9: to hardware that software is a lot stickier, right, I mean,
32:32
Speaker 9: you buy chips, you have them, you don't send me
32:35
Speaker 9: to buy more. Once you start giving money to solvetware providers,
32:40
Speaker 9: you plan on x amount of come you know, computational
32:43
Speaker 9: power that usually doesn't go down. I mean, is there
32:46
Speaker 9: a point where the growth will level off? Probably? I
32:49
Speaker 9: struggle to see it being like hardware, where hey, everybody
32:52
Speaker 9: bought computers this year. Now the computer makers are sol
32:56
Speaker 9: because nobody wants to buy.
32:57
Speaker 1: Anymore, and then it's all they've got you on the
32:59
Speaker 1: subscriptions basically like what we all have at home. But now,
33:03
Speaker 1: can you talk a little bit more about how Oracle
33:05
Speaker 1: is benefiting from AI.
33:06
Speaker 5: Yeah.
33:07
Speaker 9: Well, and that's the big question for a lot of
33:09
Speaker 9: software makers. Every software maker when they have positive results,
33:12
Speaker 9: they say in their commentary, this is due to AID anything.
33:18
Speaker 9: They call their new cloud version the Gen two AI.
33:22
Speaker 9: Is everybody using it for AI? No, But what we
33:26
Speaker 9: know is that AI requires a ton of computing power,
33:29
Speaker 9: and Oracle has marketed there specifically for being good at
33:32
Speaker 9: training AI models. And so there's reason to believe that
33:35
Speaker 9: folks are upping their demand due to AI needs. But
33:40
Speaker 9: is this more than a couple of percentage point difference.
33:43
Speaker 9: Most analysts don't think so at this point.
33:45
Speaker 3: So it's still the cloud. It's still it's the cloud,
33:48
Speaker 3: the data centers building all that up.
33:50
Speaker 9: Yeah, you know, think about you know, any company's running
33:52
Speaker 9: all these you know, records, the terminal or anything like that.
33:56
Speaker 9: Just it's more that kind of tradition stuff at this
33:57
Speaker 9: point than it is training models, though that's probably part
34:00
Speaker 9: of it.
34:01
Speaker 3: I did want to point out too that maybe you
34:02
Speaker 3: can comment on this one that Bank America, the reason
34:04
Speaker 3: why they upgrade their earnings in part was because of
34:07
Speaker 3: an investment cycle from big tech Microsoft, Amazon, Google, Meta
34:11
Speaker 3: spending one hundred and eighty billion dollars in cap X.
34:14
Speaker 3: They're in that reinvestment cycle, and I'm assuming you guys
34:16
Speaker 3: like Oracle are going to be beneficiaries. Is that a
34:19
Speaker 3: link I can make?
34:21
Speaker 9: I think it is probably more that they're all riding
34:25
Speaker 9: similar trends. You know, Amazon, Microsoft, they've spoken also in
34:29
Speaker 9: recent quarters that their customers are really focused on cutting costs.
34:33
Speaker 9: That for the most part, everybody had transported a bunch
34:36
Speaker 9: of things to the cloud and then they wanted to
34:38
Speaker 9: cut costs, and that behavior was starting to change, you know,
34:41
Speaker 9: the twenty twenty four budgets got approved. They started feeling
34:44
Speaker 9: good again, and the investment was going up. And so
34:47
Speaker 9: I think it's one that they're all riding a similar wave.
34:49
Speaker 9: I see.
34:50
Speaker 1: You know, let me ask you something internally about Oracle.
34:53
Speaker 1: Who's running the company? Is it Larry Ellison?
34:55
Speaker 9: It's crazy, right because you think about somebody like a
34:57
Speaker 9: Bill Gates that's the same generation. He hasn't been there
35:00
Speaker 9: for a decade or more. But yeah, Larry's still running that.
35:03
Speaker 9: I mean, he's his title is not CEO, but he's
35:06
Speaker 9: chairman and his CTO he's you know, on the earnings
35:09
Speaker 9: call talking back and forth with analysts. For someone of
35:13
Speaker 9: his age and his generation, it's rare to see him
35:15
Speaker 9: still running the company. But he continues to and there's
35:18
Speaker 9: no reason to believe that will change anytime soon. So
35:21
Speaker 9: it's interesting.
35:22
Speaker 1: What's the deal with that, though, I mean, why is
35:25
Speaker 1: he still around?
35:26
Speaker 9: Haven't you know you found a company, it's your life.
35:29
Speaker 9: And for the most part, investors still like him.
35:31
Speaker 5: People still see.
35:33
Speaker 9: Him as this kind of tech visionary type. You know,
35:37
Speaker 9: every single analyst day he takes questions for multiple hours.
35:41
Speaker 9: It always goes over time. It's almost like the you know,
35:44
Speaker 9: Putin's annual address when he goes with her reporters.
35:47
Speaker 3: It's great comparison. We definitely want to live with that comparison.
35:51
Speaker 3: But nonetheless, I do feel like the cloud is not
35:53
Speaker 3: in the sky, it is in Virginia, and data centers
35:56
Speaker 3: in Virginia might be the best line I've ever heard,
35:58
Speaker 3: which kind falling up yesterday when eq t he bought
36:00
Speaker 3: the Midstream company, they did say that they're like, all
36:04
Speaker 3: the data centers are going to be built in the South,
36:05
Speaker 3: and we need the natural gas to power them, so
36:07
Speaker 3: we're going to help send that there. Like I mean,
36:09
Speaker 3: like that's a that's a narrative that continues to be
36:12
Speaker 3: building within that A Brodi thanks a lot. Bertie Ford,
36:14
Speaker 3: Bloomberg type reporter, super enjoy your commentary, and that was
36:19
Speaker 3: really helpful. I have to say cloud infrastructure conversations can
36:22
Speaker 3: really really daze me. I did not get dazed on that.
36:25
Speaker 1: I did not because my stab body knows his onions,
36:27
Speaker 1: as they.
36:28
Speaker 3: Say, and he knows where the cloud is not in
36:30
Speaker 3: the sky in Virginia.
36:34
Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live
36:38
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36:41
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36:44
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36:48
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36:52
Speaker 3: Other stock that we're watching today is Cole's ticker kas
36:57
Speaker 3: ort Kiss. That stock is down by about two and
36:59
Speaker 3: a half. It's operating margin forecast for the year did
37:03
Speaker 3: trail consensus estimates, and the midpoint of its annual earnings
37:07
Speaker 3: target range also fell short. To be honest, I've been
37:10
Speaker 3: to a Cole's once, but they send out.
37:14
Speaker 6: The coals bucks, which you know, big discount. I'm surprised
37:17
Speaker 6: at you you don't get that in the mail. No,
37:20
Speaker 6: Cole's bucks. They're like little you know.
37:23
Speaker 3: I mean, I appreciated the store when I went in there,
37:26
Speaker 3: but I ordered a pair of shoes for my daughter
37:28
Speaker 3: and they came in completely the wrong size. There was
37:30
Speaker 3: a small chance I mis understood the size. But let's
37:33
Speaker 3: just blame Coles. I've been there once.
37:35
Speaker 1: I've never been Tucker.
37:38
Speaker 3: Oh yeah, this is where Tucker shops my pants. That
37:42
Speaker 3: maybe this is maybe this is Cole's problem. All right,
37:45
Speaker 3: let's get more insight. They need Jen and myself to get.
37:52
Speaker 8: There.
37:52
Speaker 6: Nobody would shop at a place I go shopping.
37:55
Speaker 3: No, just that they also need us to go All right,
37:58
Speaker 3: Mary Ross, Gilbert b But we'reg intelligence in your equity
38:00
Speaker 3: analyst who covers retail joins us. Now, is that the problem?
38:03
Speaker 3: Jenna and I need to go shop there and not
38:05
Speaker 3: just John Tucker.
38:08
Speaker 12: Well, Jena and Alex. They do have so Fora, and
38:12
Speaker 12: I'm sure that Sofa carries the brands that you care about.
38:15
Speaker 12: So so for has been a key driver for Coals,
38:19
Speaker 12: and that's the reason why their sales aren't that bad.
38:23
Speaker 12: You know, if you look at the comp sales, they
38:25
Speaker 12: fell one percent in the quarter at the stores, so
38:28
Speaker 12: total comp sales were down four point three percent, worse
38:31
Speaker 12: than consensus three percent estimate, but digital sales were down
38:35
Speaker 12: ten percent. And now going forward, after we get beyond
38:40
Speaker 12: the first quarter in twenty twenty four, we should see
38:44
Speaker 12: the overall comp sales do better. One with this SO
38:48
Speaker 12: for initiative, because the comparable sales for SO fora is
38:53
Speaker 12: was up twenty five percent in the fourth quarter, so
38:57
Speaker 12: we've been seeing double digit increases there, so that will help.
39:00
Speaker 12: But there's a number of other initiatives, including the news
39:03
Speaker 12: today that they're going to be putting Babies or US
39:06
Speaker 12: shops into about two hundred stores by the fall, and
39:10
Speaker 12: that really fills a void in the market. I'm sure
39:12
Speaker 12: you're aware that. Well what happened with Bye by a
39:15
Speaker 12: Baby and what about Member Toys r US that used
39:19
Speaker 12: to be a go to place when you were expecting
39:22
Speaker 12: or how you know a baby you could get go there,
39:25
Speaker 12: get your strollers, get all your products there. So that
39:29
Speaker 12: will also help be a driver, and along with the
39:32
Speaker 12: number of a number of initiatives that they're working on,
39:36
Speaker 12: including the home category.
39:38
Speaker 1: But I guess if we talk about what's good in
39:42
Speaker 1: their future, it sounds like it's a lot of stuff.
39:44
Speaker 8: That is not Coals.
39:45
Speaker 1: It's so far it's babies are us. What's the issue
39:50
Speaker 1: with the fundamental core coals offering.
39:54
Speaker 12: So they're revamping the merchandise because that was part of it,
39:57
Speaker 12: is just not having the right assortment. They're redoing shoes
40:01
Speaker 12: and they're going to be bringing in sketchers. They already
40:04
Speaker 12: have Nike, they have Audi Doos and now you're also
40:07
Speaker 12: going to see them bring in some youth brands. So
40:10
Speaker 12: they're going to bring in Quicksilver, Errol, Postall Madden limited
40:16
Speaker 12: to in Roxy, So those are also going to be
40:19
Speaker 12: helping on the apparel sides. So with the overall revamp
40:22
Speaker 12: that they're doing on apparel, and some of their private
40:25
Speaker 12: brands are actually they resonate pretty well, like for in Babies,
40:29
Speaker 12: they have Jumping Beans that does really well. So it's
40:33
Speaker 12: really a host of a lot of things that they've
40:35
Speaker 12: done with the stores. If you go in them now,
40:37
Speaker 12: they're a lot brighter. The culture there has really been boosted.
40:42
Speaker 12: We've noticed a difference just from a year ago on
40:45
Speaker 12: how much the stores have been transformed, and so that's helping.
40:50
Speaker 3: Yeah, that's so interesting. When I went and I was
40:52
Speaker 3: looking in you know, kids grow like weeds, right my
40:55
Speaker 3: daughter's nines. I was looking for pants and I was like,
40:57
Speaker 3: oh my god, they have Nike. I was like, genuinely
40:59
Speaker 3: like it. I had lots of those moments whilst walking around.
41:02
Speaker 1: I'm gonna have to check it out.
41:04
Speaker 6: It's also a place where I think you could still
41:06
Speaker 6: bring back your Amazon stuff.
41:09
Speaker 3: Yes, yes, yes, yes that too. That's an excellent point.
41:13
Speaker 3: So okay, we're listing the good stuff. So Mary, why
41:16
Speaker 3: why is a stock down two point six percent? Like,
41:19
Speaker 3: I just feel like it's getting beat up a little bit,
41:22
Speaker 3: and I'm wondering then the why.
41:25
Speaker 12: You know, So you were you raised a good point.
41:28
Speaker 12: You you brought up earlier that they're going to be
41:30
Speaker 12: missing consensus estimates for operating margin next year. And part
41:35
Speaker 12: of that is because we had a new ruling that
41:37
Speaker 12: came out from the Consumer Financial Bureau saying okay, we're
41:44
Speaker 12: going to cap late fees on credit cards to eight dollars.
41:47
Speaker 12: So when that's going to have a negative impact for
41:50
Speaker 12: department stores generally, because they tend to have the biggest exposure,
41:54
Speaker 12: and so Coles was one of them, they generate a
41:57
Speaker 12: fair amount of income from their credit card portfolio, and
42:01
Speaker 12: so they guided today that that income will be down
42:04
Speaker 12: mid teams and that's about one hundred and thirty five
42:07
Speaker 12: ish million is what we're estimating the impact this year.
42:11
Speaker 12: And that's not the fullier impact, but they do they
42:14
Speaker 12: introduced a co branded card and in twenty twenty five
42:18
Speaker 12: they hope to be able to offset the loss of
42:20
Speaker 12: income that you know they'll experience. But we'll see. But
42:24
Speaker 12: that's one of the reasons why you're going to see
42:26
Speaker 12: some pressure on the margin side is due to that
42:31
Speaker 12: that ruling that came out.
42:34
Speaker 1: So what's the consumer favorite these days? I mean, we
42:37
Speaker 1: see you've listed all these interesting brands turning up at Coal's,
42:41
Speaker 1: but is that enough to get the consumers through the door,
42:43
Speaker 1: or you know, can you think more broad Can you
42:45
Speaker 1: tell us a little bit more broadly about the retail space.
42:47
Speaker 1: Is there are there other shops that consumers are preferring
42:50
Speaker 1: these days?
42:52
Speaker 12: Yeah, well, clearly off price and when you think about
42:55
Speaker 12: what's happening here with Coals, they're buying more frequently, which
42:59
Speaker 12: is more of an off price strategy. They're all the
43:01
Speaker 12: buying occurs on a weekly Basis's ing Tom Kingsbury who's
43:05
Speaker 12: the CEO. He is the one who turned Burlington Stores
43:10
Speaker 12: into the fast growing off price retailer that it is,
43:13
Speaker 12: so has he lends a lot of credibility and a
43:16
Speaker 12: number of the initiatives that he's already employed is already
43:20
Speaker 12: demonstrating improvement. And so yes, you're seeing the consumer, especially
43:25
Speaker 12: the consumer that's attracted to Coals. They also shop at
43:28
Speaker 12: off price, and off price has been a big winner
43:31
Speaker 12: for that value consumer. And then other retailers that are
43:35
Speaker 12: doing well are those that are executing and really delivering
43:39
Speaker 12: on the merchandise. And so I'm speaking to apparel retailers
43:43
Speaker 12: like an Abercrombie Urban Outfitters with their anthropology and their
43:47
Speaker 12: free people brands. So it's really it's kind of a
43:51
Speaker 12: tale of two stories. Those that are executing are delivering
43:54
Speaker 12: on results, and here we're in a transition phase at
43:58
Speaker 12: Coals and they're hoping to be able to turn the
44:00
Speaker 12: tide of declining sales for this department store operator. And
44:04
Speaker 12: they do have one benefit. They're off the mall, not
44:08
Speaker 12: in the mall, and that that makes them different. So
44:11
Speaker 12: it's easier, you know, to get into the parking lot,
44:13
Speaker 12: get into the store, and get you know and get
44:15
Speaker 12: out again. So it's easier access. And like you pointed out,
44:19
Speaker 12: they have Amazon returns. It's not additive to sales, but
44:22
Speaker 12: it does bring in traffic. True, and then more importantly
44:25
Speaker 12: so FORA has been the biggest driver.
44:28
Speaker 3: True, really good stuff. Really appreciate that, Mary Ross Gilbert,
44:32
Speaker 3: Bloomberg Intelligence and Equity analysts covering retail. Right, you go
44:35
Speaker 3: return something, you go buy something. I mean that's literally
44:38
Speaker 3: my mom's entire life shopping.
44:41
Speaker 1: It's a very solid business strategy and.
44:43
Speaker 3: Return it and then I'm going to buy something when
44:44
Speaker 3: I'm also there.
44:45
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