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Paramount, Apple, and Rally · Bloomberg Intelligence

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Speaker 2: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside
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Speaker 2: Here's a deal. Emily and my Wheelhouse both potentially you know.
1:00
Speaker 2: Look at Paramount Global that's the old Viacom, CBS and
1:03
Speaker 2: Warner Brothers Discovery again the old time Warner stuff plus
1:07
Speaker 2: the Discovery that merger David zaslov as the CEO. Maybe
1:10
Speaker 2: those two companies getting together, which would be really interesting.
1:14
Speaker 2: Robert Fishman, he's a senior equity analyst at Moffatt Nathanson
1:18
Speaker 2: and Robert's longtime street analyst. Maffatt Nathanson pound for pound
1:22
Speaker 2: the best TMT research on the street in my opinion,
1:25
Speaker 2: that's why we like to talk to those guys when
1:27
Speaker 2: we can. Robert, thanks so much for taking the time
1:29
Speaker 2: to chat with us here. Give us the rational for
1:32
Speaker 2: a potential hookup between Discovery, Warner Brothers, Discovery and Paramount.
1:39
Speaker 3: Sure, thanks for having me. Well again, this is all
1:43
Speaker 3: speculation at this point. I mean that the reports suggest
1:46
Speaker 3: that they clearly met this week. In terms of the
1:49
Speaker 3: logic behind it, I think it really just comes back
1:52
Speaker 3: to the fact that traditional media is really starting to
1:57
Speaker 3: get more desperate. And why I say that is that
2:01
Speaker 3: the realities of the fundamental business at hand, with linear
2:05
Speaker 3: advertising falling off a cliff and cord cutting continuing to accelerate,
2:10
Speaker 3: and the costs of switching and pivoting over to streaming,
2:15
Speaker 3: has really challenged a lot of these companies. So now
2:18
Speaker 3: they're all looking to figure out how can we try
2:21
Speaker 3: to get stronger And the way that it seems most
2:25
Speaker 3: of these companies are trying to do that right now,
2:28
Speaker 3: at the very least, is trying to have conversations to
2:31
Speaker 3: figure out who they can combine with.
2:34
Speaker 4: Robert, how do you see this deal going down, this
2:37
Speaker 4: potential deal in Washington, It doesn't seem like the antrust
2:41
Speaker 4: regulation would be very welcome to a potential deal this large.
2:48
Speaker 3: Yeah, we were surprised by the timing of these conversations,
2:52
Speaker 3: and really comes back to two key points. Number one,
2:58
Speaker 3: there's a two year lock up right now for Warner
3:01
Speaker 3: Brothers Discovery as part of its last deal with WarnerMedia
3:06
Speaker 3: and AT and T to come through on the other
3:09
Speaker 3: side of the reverse Morris Trust. So that leads you
3:12
Speaker 3: to April twenty four. But then coming back to your question,
3:17
Speaker 3: given the regulatory landscape right now, it's hard for us
3:20
Speaker 3: to see how any deal would be approved in the
3:23
Speaker 3: current administration, or at the very least what would have
3:27
Speaker 3: significant review. And we pointed out in our report this
3:31
Speaker 3: morning the overlap between the linear cable networks and broadcasts,
3:37
Speaker 3: just from a viewership standpoint, would be something that clearly
3:42
Speaker 3: would be looked at a little bit more closely, I
3:45
Speaker 3: think given the potential combination.
3:48
Speaker 2: Hey, Robert, you know, nothing gets done here unless Sherry
3:51
Speaker 2: Redstone gives the green light. Sherry Redstone the chairperson of
3:55
Speaker 2: National Amusements, which is the control shareholder of Paramount. Do
3:59
Speaker 2: we have any reason to believe I mean, she could
4:01
Speaker 2: have sold these assets at any time over the last six, seven,
4:04
Speaker 2: eight years at a drop of a hat. Why now
4:07
Speaker 2: do you think she might be open to a transaction.
4:11
Speaker 5: It's a really great question.
4:13
Speaker 3: What we think is leading to all of this now
4:17
Speaker 3: is again like the realization as far as what the
4:21
Speaker 3: trajectory of the business is going forward. And I alluded
4:24
Speaker 3: to it to a couple of the headwinds facing the
4:26
Speaker 3: traditional business already in terms of advertising and cord cutting.
4:31
Speaker 3: But another big piece coming up is the renegotiations with
4:35
Speaker 3: a few of their affiliate distribution partners, and namely Charter,
4:40
Speaker 3: and if we all remember what happened with Disney just
4:44
Speaker 3: only a couple months ago, we do think that this
4:47
Speaker 3: is going to be the template that at the very
4:50
Speaker 3: least Charter and more likely other distributors are going to
4:54
Speaker 3: look to take going forward in future negotiations. So that
4:58
Speaker 3: will put an additional pressure on companies like Paramount, which
5:02
Speaker 3: we've essentially labeled them as one of these cheaters of
5:06
Speaker 3: the ecosystem because they're double dipping in terms of putting
5:10
Speaker 3: their premium content, namely NFL and other sports rights over
5:14
Speaker 3: the top on Paramount Plus. So we think Charter and
5:17
Speaker 3: others are going to look to right size that type
5:21
Speaker 3: of economics.
5:22
Speaker 2: He you know, Robert, you and your partners over there,
5:26
Speaker 2: Moufett the agency and again the top of the top
5:29
Speaker 2: of the top of TMT research. But quite frankly, I'm
5:31
Speaker 2: not picking up the phone call when you guys call.
5:33
Speaker 2: I mean, I just don't have any reason to believe, Like,
5:37
Speaker 2: I can't figure out how any of those any of
5:39
Speaker 2: you guys make money at Paramount or Warner Brothers, Discovery
5:42
Speaker 2: or maybe even Disney for that matter. This whole pivot
5:44
Speaker 2: to streaming. Do you guys have a view as to
5:47
Speaker 2: whether anybody can do this? I mean, Netflix has done
5:50
Speaker 2: it successfully, but that's a different model and different legacy.
5:54
Speaker 2: Can any of these traditional media companies make that pivot
5:56
Speaker 2: from you know, the you know, the cable model to
6:00
Speaker 2: the streaming model.
6:02
Speaker 3: Yeah, I mean we as you probably know what we've
6:04
Speaker 3: long had our doubts in terms of whether streaming is
6:07
Speaker 3: actually a good business. And it's clear that streaming is
6:10
Speaker 3: not as good of a business as the old traditional
6:14
Speaker 3: PATV business for these companies. And so as these companies
6:18
Speaker 3: are working through this pivot and now that they don't
6:21
Speaker 3: have the full leeway that Wall Street has initially gave them,
6:26
Speaker 3: you know, coming out of COVID, we're at the point
6:29
Speaker 3: now where they have to focus on cash flow and
6:31
Speaker 3: figure out how quickly these streaming services can really be profitable.
6:37
Speaker 3: And we do agree that that Netflix has clearly won
6:41
Speaker 3: that fight in terms of the streaming wars. We still
6:44
Speaker 3: do expect Disney to be a strong number two player
6:50
Speaker 3: essentially given the assets that they have, but we think
6:53
Speaker 3: it's going to be more challenging for a lot of
6:55
Speaker 3: these other traditional media companies to figure that out.
6:59
Speaker 4: What would be some of the implications for the viewers
7:02
Speaker 4: if this deal we're actually going to go through on
7:06
Speaker 4: content and viewership.
7:09
Speaker 3: Well, what we're going through now, just back to the
7:12
Speaker 3: last point, is essentially like this content rationalization period where
7:17
Speaker 3: I think we've been all living in this world that
7:20
Speaker 3: we've enjoyed endless content essentially, and there's almost too much
7:24
Speaker 3: out there that you can't even watch everything, and I'm
7:27
Speaker 3: sure everyone has their own playlists that that they haven't
7:30
Speaker 3: been able to get through. But I think to your question,
7:35
Speaker 3: going forward, we're going to see a pullback in the
7:37
Speaker 3: amount of content that's being spent at these companies again
7:40
Speaker 3: because they need to focus on their cash flows and
7:43
Speaker 3: generating real profits and that's a more challenging environment. Given
7:49
Speaker 3: that that backdrop that I keep talking about, and how
7:52
Speaker 3: they figure that out and how they pivot clearly content spending,
7:56
Speaker 3: what will be a central piece to that, to that.
7:59
Speaker 2: Puzzle, Robert, what's your top pick for twenty four?
8:03
Speaker 3: We actually cover sports betting too, so we're in favor
8:08
Speaker 3: of DraftKings and clearly that they've had a tremendous year
8:11
Speaker 3: that this past year, but we think the momentum for
8:15
Speaker 3: DraftKings and sports betting overall is going to continue into
8:18
Speaker 3: twenty four.
8:18
Speaker 2: I mean, what's the is or what's the bear case
8:21
Speaker 2: for sports betting? Because I can't really think of one.
8:23
Speaker 2: I mean, this is just ridiculous, the appetite for this stuff.
8:29
Speaker 3: Yeah. Again, DraftKings has taken a tremendous amount of share
8:33
Speaker 3: over twenty three and they're set up nicely into twenty
8:37
Speaker 3: four and what we really saw and was probably the
8:40
Speaker 3: most surprised about this past year was just how quickly
8:45
Speaker 3: and how efficiently expenses have been rained in, but not
8:50
Speaker 3: to any detriment to that top line to your point,
8:53
Speaker 3: because the market just keeps growing really quickly.
8:55
Speaker 2: All right, Robert, thanks so much for joining us. Really
8:57
Speaker 2: appreciate it. Robert Fishman, he's a senior equity analyst that
9:00
Speaker 2: Maffatt Nathanson talking about the potential tie up between Paramount
9:05
Speaker 2: Global that's the old ViacomCBS, big big media company, and
9:08
Speaker 2: Warner Brothers Discovery another big media company.
9:11
Speaker 3: EI.
9:11
Speaker 2: They're both big, a lot bigger than they were five
9:15
Speaker 2: years ago, but guess what, in this new world order,
9:18
Speaker 2: they're not big enough. And so it's that whole argument
9:21
Speaker 2: we've seen in many other industries scale and that's kind
9:25
Speaker 2: of that's certainly the play in the media space as well.
9:27
Speaker 2: So we'll stay on top of that, and the folks
9:29
Speaker 2: at Moffat Nathanson are some of the absolute best research
9:32
Speaker 2: voices on the street.
9:35
Speaker 6: You're listening to the team. Ken's are Live program Bloomberg
9:38
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9:49
Speaker 2: One of my all time favorites is here, Emily. You
9:52
Speaker 2: don't know this, but a Maletti, a head of active
9:55
Speaker 2: equity at Allspring Global Investments. It joins us here for
9:58
Speaker 2: get this liken how money falls Wisconsin or something. I
10:02
Speaker 2: don't know, but I went out there one time about
10:04
Speaker 2: twenty five years ago. When I keep going back, so
10:06
Speaker 2: and thanks so much for joining us here. Boy, this
10:09
Speaker 2: last I don't know, six seven eight weeks, it's been
10:12
Speaker 2: such a move in the equity markets, in the treasury market.
10:15
Speaker 2: You know you've seen this come and go a million times.
10:18
Speaker 2: What do you make of the last six seven eight weeks?
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Speaker 7: It's been a wild ride, Paul, And thanks for having
10:24
Speaker 7: me on. It was really nice to be on this week.
10:27
Speaker 7: And wish you all a merry Christmas and happy holidays.
10:29
Speaker 7: So thanks for having me back. Look, it's been a
10:33
Speaker 7: really wild ride. And you know we are getting that
10:36
Speaker 7: Santa Claus rally, certainly a little bit even early, but
10:41
Speaker 7: there's a lot now with the rally that we have
10:44
Speaker 7: that maybe took a little bit away from what we
10:47
Speaker 7: thought might happen in twenty twenty four. So I think
10:50
Speaker 7: now is the time.
10:51
Speaker 8: To be a little bit more disciplined about the way
10:55
Speaker 8: we enter the year.
10:57
Speaker 4: And I had the wonderful opportunity to actually meet you
11:00
Speaker 4: at your outlook event a few weeks ago, and I'm
11:04
Speaker 4: wondering if after that fed Duvish pivot you had to
11:08
Speaker 4: change anything from your twenty twenty four outlook.
11:13
Speaker 8: Well, Emily, you know, as we talk then it was
11:16
Speaker 8: interesting because a lot of the things that we were
11:18
Speaker 8: pointing out is where fundamentals were pointing us for twenty
11:22
Speaker 8: twenty four. And as soon as Powell kind of said
11:27
Speaker 8: the FED put is back on, those things really started
11:31
Speaker 8: to ramp up. Areas like small cap, right. You know,
11:35
Speaker 8: it's an area that we've been looking at really closely
11:38
Speaker 8: for the last couple of quarters. At least the market
11:41
Speaker 8: really hasn't been paying that much attention, but that's where
11:44
Speaker 8: our investment teams saw a lot of value. And as
11:48
Speaker 8: soon as it became clear from Powell that you know, look,
11:52
Speaker 8: rates are going lower, those that area of the market
11:57
Speaker 8: really really lit up. What I would say, though, Emily,
12:00
Speaker 8: is where we probably want to be a little bit
12:03
Speaker 8: more cautious is the type of small cap stocks that
12:06
Speaker 8: you know, investors enter into. There still are a lot
12:10
Speaker 8: of small cap names that don't have the best balance sheets.
12:13
Speaker 8: We're more interested in quality and looking at small cap
12:17
Speaker 8: stocks that have free cash flow, that have better balance sheets,
12:22
Speaker 8: those names and margins obviously to maybe the margins above
12:27
Speaker 8: twenty percent. Those were the names specifically that we were
12:30
Speaker 8: calling out that are durable and can last whatever we
12:33
Speaker 8: do see in twenty twenty four.
12:36
Speaker 2: Hey, and you know, one of the things that had
12:38
Speaker 2: I think concerned investors certainly for the first maybe nine
12:41
Speaker 2: months of this year was the lack of breath in
12:44
Speaker 2: this market, the Magnificent seven driving most of the performance.
12:47
Speaker 2: But that seems to have improved a little bit. We've
12:49
Speaker 2: had the Russell two thousand really outperforming over the last
12:53
Speaker 2: couple of months. How do you think that's going to
12:55
Speaker 2: play into twenty twenty four? Should you think you'll see
12:58
Speaker 2: some continued improvement in the bread out there? Or should
13:01
Speaker 2: I just jump on the Magnificent seven for next year?
13:05
Speaker 8: You know, Paul, it's so interesting because you know, as
13:08
Speaker 8: you and I both have been trained over time, fundamentals
13:12
Speaker 8: really do matter, and you know, it was as we
13:16
Speaker 8: really dug in and I did a lot of work
13:17
Speaker 8: on this. The Meg seven really did generate good returns
13:24
Speaker 8: in twenty twenty three because they had really good earnings
13:28
Speaker 8: relative to the rest of the market. And so, okay,
13:31
Speaker 8: i'll give them that, But when you look at the
13:34
Speaker 8: thirty percent plus earnings growth that many of the Meg
13:38
Speaker 8: stocks seven, or the many of the Meg seven had
13:41
Speaker 8: at least five names out of Megs seven grew earnings
13:44
Speaker 8: over thirty percent, many over forty percent in the third quarter,
13:48
Speaker 8: it's going to be really hard for them to top those.
13:52
Speaker 8: You know, compares now become very difficult in twenty twenty four.
13:56
Speaker 8: So I think we were also saying our compares are easier,
14:02
Speaker 8: and again that showed us where the breath of the
14:04
Speaker 8: market could be in twenty twenty four. That pointed to
14:08
Speaker 8: areas like small cap, but also areas like healthcare, where
14:13
Speaker 8: earning's growth appears to be the best almost of any
14:16
Speaker 8: other sector. As I look to twenty twenty four to
14:19
Speaker 8: twenty percent or more, earning's growth, No, look, it wasn't
14:24
Speaker 8: great in twenty twenty three, but we think the prospects
14:27
Speaker 8: there are pretty good in twenty twenty four, So driven
14:31
Speaker 8: by fundamentals, we think the breath is going to be
14:35
Speaker 8: much broader in twenty twenty four. And you know, not
14:39
Speaker 8: that the Meg seven are bad, it's just that the
14:43
Speaker 8: chances for them to top that growth rate is going
14:46
Speaker 8: to be a little bit more difficult.
14:48
Speaker 4: So then what does it tell you about the market
14:50
Speaker 4: that we're in that people are still buying the mag seven.
14:53
Speaker 4: You look at ETF flows. We saw a record inflow
14:58
Speaker 4: into spy s and P five hundre ETF last week,
15:01
Speaker 4: twenty billion dollars in. It looks like stocks more broadly,
15:04
Speaker 4: and a lot of this is coming from large cap
15:06
Speaker 4: sixty nine billion dollars into equity ETFs in December, that's
15:10
Speaker 4: the best month since twenty twenty one. What do you
15:14
Speaker 4: make of that? I guess euphoria just piling into these
15:17
Speaker 4: large cap stocks, or should people be pivoting into other areas?
15:21
Speaker 8: Then well, we personally think they should, Emily, and I
15:25
Speaker 8: think you know sometimes and look, I think investors generally
15:30
Speaker 8: speaking are very very smart. But one of the things
15:33
Speaker 8: that has gotten disjointed is this heavy overweight in these
15:39
Speaker 8: Meg seven stocks. And so you know, when you're buying
15:42
Speaker 8: an index, when you're buying the Russell three thousand growth
15:46
Speaker 8: when you're buying and all just the Russell three thousand.
15:49
Speaker 8: When you're buying the S and P, you're buying the
15:53
Speaker 8: most expensive names, and you're buying thirty forty percent of
15:57
Speaker 8: those names and much less of any And so while
16:01
Speaker 8: you might think you're diversified, you're buying, you know, very
16:06
Speaker 8: chunky portions of a few names and very few of
16:11
Speaker 8: the others. And so, you know, we think taking a
16:14
Speaker 8: much more active approach and having fewer names, but owning
16:20
Speaker 8: a broader portfolio makes sense at this point in the market,
16:24
Speaker 8: and we think returns can be better. Now. It's not
16:27
Speaker 8: surprising to me that those ETF flows are going there
16:30
Speaker 8: just because of the structure of the indexes. But we
16:33
Speaker 8: think it should change, and we think it will change
16:35
Speaker 8: when the performance of the other names starts to show
16:38
Speaker 8: that they can produce the fundamentals that I talked about earlier.
16:42
Speaker 2: Hey, and how about valuation here in the market. We've
16:44
Speaker 2: had a big, big move higher. I don't I'm not
16:46
Speaker 2: sure we've necessarily had a commensurate increase in earnings here.
16:50
Speaker 2: How do you guys think about evaluation here?
16:53
Speaker 8: Yeah, that's what makes me a little bit nervous, Paul,
16:55
Speaker 8: You know it. You know, certainly I can point to
16:58
Speaker 8: the four hundred and ninety three names that aren't as
17:01
Speaker 8: highly valued as the overall market. But I do think
17:05
Speaker 8: we do need to see some catchup, and we do
17:07
Speaker 8: need to see the fundamentals play out. And so, you know,
17:10
Speaker 8: I don't love the fact that we've had this really
17:12
Speaker 8: strong rally here, and I do think we're entering twenty
17:16
Speaker 8: twenty four with a much foggier environment. Yes, inflation has
17:21
Speaker 8: come down, but you know, we have problems with the
17:25
Speaker 8: Red Sea right now. The geopolitical risks as we enter
17:28
Speaker 8: twenty twenty four, you could say, are much higher than
17:31
Speaker 8: when we enter twenty twenty three. It's a political year,
17:35
Speaker 8: an election year. Now, typically those end up being up markets,
17:40
Speaker 8: but typically also pretty about little and so I think,
17:44
Speaker 8: you know, it's going to be much more challenging than
17:47
Speaker 8: investors believe today. That being said, we think will end
17:52
Speaker 8: up having an up year, but it's not going to
17:55
Speaker 8: be up, you know, double digit. We think it's going
17:58
Speaker 8: to be kind of up single digit, maybe high single digit,
18:01
Speaker 8: but expected to be a rocky one.
18:04
Speaker 4: What's the biggest macro risk for next year? That you
18:07
Speaker 4: don't think enough people are talking about.
18:09
Speaker 8: Yeah, I still think it's geopolitical, right, We're definitely focused
18:14
Speaker 8: on interest rates right now and whether the FED gets
18:17
Speaker 8: it right or wrong than you know, whether we have
18:19
Speaker 8: a softer hard landing. But it's always, you know, you know,
18:24
Speaker 8: Paul probably would also agree with this. It's never the
18:28
Speaker 8: things we spend the most time worrying about. It's the
18:30
Speaker 8: big surprises that come out of nowhere that really have
18:33
Speaker 8: the most dramatic impact of the market. And so you know,
18:37
Speaker 8: it seems to be that probably a geopolitical risk, but
18:41
Speaker 8: maybe one that we're not evening considering today.
18:44
Speaker 2: And as always, thank you so much for joining us.
18:46
Speaker 2: That is the great and malady head of active equities
18:49
Speaker 2: at all Spring Global Advisors. And I've said it before
18:51
Speaker 2: many times and I'll say it again pound for pound,
18:54
Speaker 2: I think some of the best investors I've ever come
18:57
Speaker 2: in contact with over my career. Or in Milwaukee. Why
19:00
Speaker 2: maybe it's the great University of Wisconsin, but boy, there's
19:04
Speaker 2: just so many firms large and small in Milwaukee that
19:08
Speaker 2: have some really smart investors and have really good track
19:12
Speaker 2: records over a long period of time. So you wouldn't
19:14
Speaker 2: necessarily think it. I'm telling you.
19:15
Speaker 4: Many maybe I have to take a reporting trip there.
19:17
Speaker 2: Absolutely, you're listening to the tape.
19:20
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19:37
Speaker 2: Let's talk Apple here, I mean here we are the
19:40
Speaker 2: holiday selling season. It's kind of important for people that
19:44
Speaker 2: sell stuff, and Apple is certainly a company that sells stuff.
19:48
Speaker 2: One of the things they sell are those watches. I'm
19:50
Speaker 2: not an Apple watch? Where or either of you an
19:52
Speaker 2: Apple watchwhear? Nope, right now there Nora's got it? Okay,
19:55
Speaker 2: great now, I like I'll watch it tells time. So,
19:59
Speaker 2: but apparently they have a little bit of an issue here.
20:01
Speaker 2: Mark German joins us here, a chief technology correspondent for
20:04
Speaker 2: Bloomberg News. Mark put into context a tell us what's
20:08
Speaker 2: happening with Apple, and b kind of put it into
20:11
Speaker 2: context like doesn't matter.
20:14
Speaker 5: Yes, it certainly matters. And to tell you what's happening here,
20:17
Speaker 5: it's an unprecedented situation.
20:20
Speaker 2: This is the.
20:20
Speaker 5: First time in the modern era, or probably in the
20:23
Speaker 5: entirety of Apple's forty plus year history, where the company
20:26
Speaker 5: is being forced to stop sales of one of its
20:29
Speaker 5: core products in the United States. That core product being
20:32
Speaker 5: the Apple Watch Series nine and the Apple Watch Ultra two.
20:36
Speaker 5: Those make up probably eighty plus percent of all Apple
20:39
Speaker 5: Watch sales, the two newest models. They only sell three models,
20:43
Speaker 5: so two of the three models are impacted. Here. There
20:45
Speaker 5: was a patent dispute with the company in southern California
20:48
Speaker 5: called Massimo, and the International Trade Commission of the US
20:51
Speaker 5: ruled that Apple is violating two of Mosamo's patents related
20:56
Speaker 5: to blood oxygen saturation.
20:58
Speaker 7: Right.
20:58
Speaker 5: That's the app on the Apple Watch. You click it,
21:01
Speaker 5: it'll tell you your blood oxygen. Most people are looking
21:04
Speaker 5: for a percentage between ninety five percent and one hundred percent.
21:07
Speaker 5: That's in violation. Two things happening a season to sist
21:11
Speaker 5: on Apple being able to sell the watch in the US,
21:14
Speaker 5: as well as an import band and injunction so they
21:18
Speaker 5: can no longer import Apple watches manufactured outside of the US.
21:22
Speaker 5: All Apple watches are built outside of the US. For
21:24
Speaker 5: those watching at home. So that's the fundamental issue there, right.
21:28
Speaker 5: So starting on Christmas Day, the end of the day,
21:31
Speaker 5: December twenty fifth, the Apple Watch sales in the US
21:34
Speaker 5: are no more when it comes to the Ultra two
21:36
Speaker 5: in the series nine. Now, given that we're talking now
21:39
Speaker 5: and it's Thursday morning, starting at three pm Eastern time,
21:43
Speaker 5: the Apple Watch will no longer be sold on Apple's
21:45
Speaker 5: online store. Apple retail stores in the US they have
21:48
Speaker 5: about two hundred and seventy of them. They're closed Christmas Day.
21:51
Speaker 5: So December twenty fourth, Christmas Eve is going to be
21:54
Speaker 5: the last day of in store retail sales. Now for
21:57
Speaker 5: those who still want to buy an Apple Watch before
21:59
Speaker 5: the end of the year, maybe for themselves or a
22:01
Speaker 5: gift and what have you. Apple's not allowed to tell
22:03
Speaker 5: you this for legal reasons, but I can tell you
22:06
Speaker 5: can still get one at Best Buy, Target, wherever they're
22:09
Speaker 5: sold other than Apple retail stores.
22:12
Speaker 4: What's the history between Apple and Massimo. I'm so curious
22:16
Speaker 4: how Apple got involved in a patent dispute. I mean,
22:21
Speaker 4: you think of Apple, one of the largest, most important companies.
22:24
Speaker 4: How could something like this happen to Apple?
22:28
Speaker 5: Yeah, so Massumo actually sued Apple in twenty twenty. In
22:32
Speaker 5: January twenty twenty related to ten patents on health sensing technology.
22:38
Speaker 5: Right then in September twenty twenty, Apple introduced the Apple
22:41
Speaker 5: Watch Series six. That was the first Apple Watch that
22:43
Speaker 5: includes the blood oxygen feature. Now, Massimo, they're known for
22:48
Speaker 5: their contributions and patents related to blood oxygen, so they
22:52
Speaker 5: preemptively sued Apple in anticipation of this watch coming out.
22:56
Speaker 5: Then once the watch came out, they filed an injunction
22:58
Speaker 5: claim with the International Trade Commission of the US asking
23:02
Speaker 5: for the watch sales to be banned. Now that was
23:04
Speaker 5: filed in twenty twenty one. That is not actually going
23:07
Speaker 5: into effect until, like I said, the end of the
23:09
Speaker 5: day Christmas Day, so it took two years in change
23:11
Speaker 5: for it actually to go into effect. Masimo says they
23:14
Speaker 5: met with Apple ten years ago, back in twenty thirteen,
23:17
Speaker 5: before the first Apple Watch was introduced. Apple promised them
23:21
Speaker 5: some sort of partnership or discussed hiring them or licensing
23:25
Speaker 5: from them. In the end, what Apple did as they
23:27
Speaker 5: ended up hiring about twenty to twenty five of their
23:30
Speaker 5: individual engineers and executives, hired them to come work at Apple,
23:34
Speaker 5: offered them more significant salaries and they worked on the
23:38
Speaker 5: Apple Watch without Apple needing to partner with Masimo. So
23:41
Speaker 5: Masimo considered this a trade secret violation, so they sued
23:45
Speaker 5: Apple over that. In addition to this, these hiring concerns
23:49
Speaker 5: plus the patent concerns that have been ongoing. Now the
23:52
Speaker 5: first lawsuit, like I said in the beginning of twenty twenty,
23:55
Speaker 5: and now this is the ultimate pushback against Apple, this
23:59
Speaker 5: injunction and the season desist. Now, what I will tell
24:02
Speaker 5: you is the lawsuit related to the trade secret situation
24:05
Speaker 5: that actually ended a few months ago and ended in
24:07
Speaker 5: a hung jury. So these two things well related the
24:09
Speaker 5: same companies. This ITC ruling was able to happen exclusive
24:14
Speaker 5: away from the lawsuit.
24:16
Speaker 2: Mark. What is Apple saying in response here?
24:20
Speaker 5: Yeah, Apple is saying that they're going to take every
24:22
Speaker 5: legal method possible to get the Apple Watch background sale.
24:25
Speaker 5: They're complying with the order. They believe it wouldn't be
24:28
Speaker 5: so hot if they didn't comply. What I'm hearing is
24:30
Speaker 5: that Apple's trying to fix this via a software update.
24:33
Speaker 5: So that software update has been in development now for
24:36
Speaker 5: several weeks. What needs to be done is they need
24:38
Speaker 5: to test it. They need to get some sort of
24:41
Speaker 5: testing done related to regulatory given that the Apple Watch
24:44
Speaker 5: is in some cases used for health purposes, right, so
24:47
Speaker 5: there's an extra layer of testing that needs to be
24:49
Speaker 5: done internally. That blood oxygen feature is not regulated, so
24:53
Speaker 5: they don't have to deal with the healthcare regulators or
24:55
Speaker 5: the FDA, But what they need to do is get
24:57
Speaker 5: approval from the US Customs Agency. Need to submit that
25:00
Speaker 5: software update to the agency. The agency has to review it,
25:03
Speaker 5: and then they make the final determination if the season
25:07
Speaker 5: desists and the import band should be lifted or not.
25:10
Speaker 4: When do you expect to see this actually hit Apple's earnings,
25:16
Speaker 4: Apple's stock price? I mean, I'm looking at the HCP
25:19
Speaker 4: function on the Bloomberg terminal right now. I see that
25:22
Speaker 4: this week is looking to be its first down week
25:25
Speaker 4: in over seven weeks seven week win streak. This will
25:28
Speaker 4: be the first down week, down about one point five
25:30
Speaker 4: percent right now. But when do we actually see this
25:32
Speaker 4: come up in the price action?
25:35
Speaker 5: Yeah, so the sales and the revenue for the first quarter,
25:41
Speaker 5: right that runs through the end of December, so December
25:45
Speaker 5: thirtieth or thirty first, So I don't anticipate an impact
25:48
Speaker 5: on Apple's revenue that they're going to announce for Q one.
25:51
Speaker 5: They'll announce those numbers at the tail end of January
25:54
Speaker 5: or at the beginning of February. But what I could
25:57
Speaker 5: tell you is that they're going to probably get impacted
26:00
Speaker 5: on their Q two or Q three, depending on how
26:03
Speaker 5: long this roll is for I would anticipate a several
26:05
Speaker 5: hundred million dollars head wind year, which is not extraordinarily
26:10
Speaker 5: material to Apple, but certainly is worth discussing. And it
26:13
Speaker 5: is the difference between a growth quarter and a non
26:15
Speaker 5: growth quarter.
26:16
Speaker 1: Right.
26:16
Speaker 5: All you have to do to grow is generate one
26:19
Speaker 5: dollar more than you did in the quarter of the
26:20
Speaker 5: year prior, Right, So if you're down several hundred million
26:23
Speaker 5: or a couple of billion, you're not going to get
26:26
Speaker 5: that flexibility, and you might have a down quarter when
26:28
Speaker 5: you otherwise would have had an up quarter. But the
26:30
Speaker 5: big question is how long this is going to take.
26:32
Speaker 5: My guess is probably around three months, unless we have
26:35
Speaker 5: some surprising stay order from the federal government or some
26:38
Speaker 5: sort of last minute detO. But I don't really expect
26:40
Speaker 5: either of those.
26:41
Speaker 2: Mark, what's the for What are you looking for out
26:44
Speaker 2: of Apple in twenty twenty fours? Are there any products
26:46
Speaker 2: that we need to be on the lookout for any
26:49
Speaker 2: new services that you think they might try to pursue,
26:52
Speaker 2: any any anything else that's on your horizon.
26:56
Speaker 5: Well, the Vision Pro right, that's all anyone in the
26:58
Speaker 5: Apple world is talking about right now. That's the first
27:00
Speaker 5: mixed reality headset. I don't think it's going to be
27:02
Speaker 5: a big revenue driver, but it's certainly going to be awesome.
27:05
Speaker 5: The other big thing is out.
27:06
Speaker 2: When do we know? And that's going to happen, the Vision.
27:09
Speaker 5: Pro that's going to come out by February, so probably
27:12
Speaker 5: at the tail end of January or.
27:13
Speaker 2: Now are you going to be one of those techniques
27:15
Speaker 2: that's going to get one of these?
27:17
Speaker 6: Yes?
27:18
Speaker 4: Yes, it will be the whole paycheck on a Vision pro.
27:22
Speaker 2: Se an expensive who's kidding who? All right, So that's
27:24
Speaker 2: coming up in February. That's interesting. Now, how's a company
27:27
Speaker 2: positioning that thing?
27:29
Speaker 5: Well, they're not. They haven't talked much about it since
27:31
Speaker 5: the introduction in June. It's pretty nascent. Like you said,
27:34
Speaker 5: it's pretty expensive.
27:36
Speaker 6: With tax.
27:37
Speaker 5: It's probably coming up against four thousand dollars throws for
27:40
Speaker 5: most people, and so it is pretty pricey. I think
27:44
Speaker 5: the big marketing. Push is going to start sort of
27:46
Speaker 5: more in the middle of the year, obviously, when they
27:48
Speaker 5: release cheaper models. That's going to be a significant development.
27:51
Speaker 5: You asked about services. I think you're going to see
27:54
Speaker 5: Apple walk into the generative AI space this year. You'll
27:57
Speaker 5: see introductions in June around jen Ai integrating large language
28:00
Speaker 5: models into the iPhone. So that's going to be a
28:02
Speaker 5: quite significant initiative for the company too, even though they're
28:04
Speaker 5: going to be about a year and a half behind
28:06
Speaker 5: everyone else.
28:07
Speaker 2: Mark, I don't know if you know it, but Michigan's
28:09
Speaker 2: playing in the Rose Bowl. You're in southern California. Are
28:12
Speaker 2: you going to the game?
28:13
Speaker 5: I will not, but I'll do well.
28:15
Speaker 2: Aren't you a good Michigan man, A.
28:18
Speaker 5: Good Michigan man. But I'm pretty focused on the Lakers
28:20
Speaker 5: these days.
28:21
Speaker 2: I see the jersey Kobe in the background, So good
28:25
Speaker 2: for you.
28:26
Speaker 6: You're listening to the tape. Can's are live program Bloomberg
28:29
Speaker 6: Markets weekdays at ten am Eastern on Bloomberg Radio, the
28:33
Speaker 6: tune in app, Bloomberg dot Com, and the Bloomberg Business app.
28:36
Speaker 6: You can also listen live on Amazon Alexa from our
28:39
Speaker 6: flagship New York station Just Say Alexa playing Bloomberg eleven thirty.
28:45
Speaker 2: A lot of folks as you think about twenty twenty four,
28:48
Speaker 2: as MS was just mentioning the sentiment seems so changed
28:52
Speaker 2: to really leaning towards that soft landing, but there's still
28:55
Speaker 2: some concern out there. Semashad joins us. She's a senior
28:58
Speaker 2: global investment strategist Principal Global Investors, joining us via zoom. Sima,
29:03
Speaker 2: thanks so much for taking the time here. I know
29:05
Speaker 2: you guys have your twenty twenty four outlook aut and
29:07
Speaker 2: I'm just seeing kind of the focus here on pivot, pivot, pivot.
29:11
Speaker 2: What do you mean by that in twenty four.
29:13
Speaker 9: Yeah, it's a play on that friend's line. Well, look,
29:18
Speaker 9: I think you know we published that a few weeks
29:20
Speaker 9: before the FED spoke. I don't think any of us
29:22
Speaker 9: anticipated that the FED would shift in such a manner
29:26
Speaker 9: and so quickly, but clearly, I think the inflation data
29:30
Speaker 9: is certainly backing up that idea that twenty twenty four
29:33
Speaker 9: is no longer just the year of the pause, but
29:36
Speaker 9: it's actually mainly going to be about the pivot, and
29:38
Speaker 9: for a risk acid it's almost whichever way you look
29:40
Speaker 9: at it, there's going to be nuances, But overall, this
29:43
Speaker 9: should be a fairly good year for risk acids simply
29:46
Speaker 9: because those central banks are going to be are going
29:48
Speaker 9: to be pivoting, and importantly, it's not going to be
29:51
Speaker 9: you know, it's going to be supported by a not
29:54
Speaker 9: too unhealthy backdrop as well.
29:56
Speaker 4: You've you've seen a lot of year end markets. How
30:01
Speaker 4: crazy has the buying frenzy inequities been for this year
30:05
Speaker 4: and just compared to the rest of your.
30:07
Speaker 9: Career, it's certainly very aggressive, you know, I think that
30:12
Speaker 9: it's aggressive, but it's also not entirely unexpected, because as
30:16
Speaker 9: we've been going through this year, every time we've been
30:18
Speaker 9: talking to investors, declines and this is anywhere around the world,
30:21
Speaker 9: in Asia, Europe, the US, it's pretty much the same thing.
30:24
Speaker 9: The questions that we've been getting are generally along the
30:26
Speaker 9: lines of, you know, when are we going to know
30:29
Speaker 9: what the Fed is doing? When will they peak? They're
30:31
Speaker 9: kind of just waiting to put their money to work,
30:34
Speaker 9: So the uncertainty has been clouding a lot of investors' minds,
30:38
Speaker 9: but they haven't had any concerns that this is going
30:40
Speaker 9: to be a downturn or there would be a downturn
30:43
Speaker 9: that would be very destructive that would see any kind
30:46
Speaker 9: of permanent disruption to the underlying economy. And if you
30:48
Speaker 9: don't think there's going to be permanent underlying damage, then
30:52
Speaker 9: essentially what you're doing is you're just trying to time
30:53
Speaker 9: the market so when you know things are clearly going
30:56
Speaker 9: to be an upward move. So as soon as we
30:58
Speaker 9: saw any indication actually at the Bank at the end
31:01
Speaker 9: of October that Chair Powell was having a slight shifting stance.
31:05
Speaker 9: That was, you know, opening the airwaves, opening the doors
31:09
Speaker 9: to a huge flood into that equity space. Now, I
31:13
Speaker 9: do actually think that Q one is going to be
31:15
Speaker 9: a little bit more volatile, and you're going to have
31:17
Speaker 9: to see investors be strong in the face of that volatility.
31:21
Speaker 9: But overall, as I look out over twenty twenty four,
31:23
Speaker 9: I think investors are right to be taking on this
31:26
Speaker 9: lightly more optimistic perspective semas.
31:28
Speaker 2: So the FED, I guess, was clear, maybe clearer than
31:31
Speaker 2: they wanted to be about their you know, being open
31:34
Speaker 2: to being a little bit more dubbish here. How about
31:36
Speaker 2: the the Bank of England, the European Central Bank? What
31:41
Speaker 2: are we hearing out of those institutions.
31:44
Speaker 9: So again it's a very very similar sentiment and again
31:46
Speaker 9: backed up similar to the US, by a clear decline
31:50
Speaker 9: in inflation. Actually in Europe and your area, it's been
31:53
Speaker 9: extra interesting because the inflation has been inflation has actually
31:58
Speaker 9: come down faster than it went which is unusual. You know,
32:01
Speaker 9: you kind of hear the analogies of inflation takes the
32:05
Speaker 9: escalator up and stares down. It's the opposite way for Europe.
32:07
Speaker 9: So inevitably the ECB has had to acknowledge that, and
32:11
Speaker 9: they have also taken on dubbish stance, same thing with
32:13
Speaker 9: the Bank of England. But I think the key difference
32:16
Speaker 9: that you're seeing is that they are retaining an element
32:18
Speaker 9: of caution. They are still worried that if they were
32:21
Speaker 9: to cut rates too early, you would see that renewed
32:23
Speaker 9: drive up in inflation. So whereas they're acknowledging that there's
32:26
Speaker 9: likely to be a pivot in twenty twenty four, they
32:29
Speaker 9: have pushed back a lot harder at the idea that
32:31
Speaker 9: you could see rate cuts as soon as March.
32:35
Speaker 4: If you were working at the FED, what would stop
32:39
Speaker 4: you from declaring victory right now? Is it the labor market.
32:47
Speaker 9: So it's a couple of things. I you know, I,
32:51
Speaker 9: like everyone else, has probably poured over wall of speech,
32:54
Speaker 9: the two different speeches that he gave a couple of
32:56
Speaker 9: weeks apart, and he had said at that point that
32:59
Speaker 9: he needed to see a couple of months of clear
33:01
Speaker 9: inflation evidence, and it was disinflation to that three month
33:04
Speaker 9: from three month rate was moving down sufficiently, and in
33:07
Speaker 9: the end he only saw one month of that, and
33:08
Speaker 9: he had enough evidence to me I would be a
33:11
Speaker 9: little bit more cautious. I'd say, well, look, let's get
33:13
Speaker 9: a series of those numbers to know for sure, because
33:16
Speaker 9: if you look back to the seventies eighties period when
33:19
Speaker 9: you did have very high inflation, the FED made the
33:21
Speaker 9: mistake of cutting rates too early and then that drove
33:24
Speaker 9: inflation to a new high. So I would certainly be
33:27
Speaker 9: a little bit more concerned, especially knowing that, as you know,
33:32
Speaker 9: an unemployment rate of three point seven percent is extraordinarily low.
33:36
Speaker 9: It's a very very tight labor market, and so I
33:38
Speaker 9: would need to see some more evidence of a slight
33:40
Speaker 9: economic slow down. Obviously I need a recession, but sending
33:43
Speaker 9: it more evidence of slowing economic activity and unwinding labor
33:47
Speaker 9: market before I felt sufficiently confident to start cutting interest rates.
33:52
Speaker 2: So similar where the good folks are principal global investors,
33:56
Speaker 2: Where do you guys see the opportunity in twenty twenty four.
33:59
Speaker 2: We've had such a move here in as last six, seven,
34:01
Speaker 2: eight weeks. I think people are very happy with the performance,
34:04
Speaker 2: but they're saying, oh boy, now what do I do
34:07
Speaker 2: in twenty twenty four?
34:09
Speaker 8: Right?
34:09
Speaker 9: And this is a time where you know, we have
34:11
Speaker 9: to start thinking about valuations. What are the valuations, what
34:14
Speaker 9: are the signals coming to us? So from the equity space,
34:18
Speaker 9: you know, we know that the Magnificent seven have driven
34:21
Speaker 9: you know, most of the games this year, but their
34:23
Speaker 9: valuations are very, very expensive. And although we are long
34:26
Speaker 9: term holders of some of those really big tech stocks,
34:29
Speaker 9: there is something to be said for some of that
34:30
Speaker 9: small cap universe. There's valuations attractive. If you believe that
34:33
Speaker 9: there's going to be a cyclical recovery around the second
34:36
Speaker 9: half of the year, then to me, this is a
34:37
Speaker 9: good time to be ready to write some of the
34:39
Speaker 9: volatility down in the first quart or so, but knowing
34:44
Speaker 9: that you will be well positioned for the upside. So
34:46
Speaker 9: I think that that valuation set level is important. From
34:49
Speaker 9: a credit perspective, credit spreads are extremely tight historic tights.
34:54
Speaker 9: Knowing that there's going to be a little bit of
34:55
Speaker 9: a slowdown in around Q two Q three, I worry
35:00
Speaker 9: a little bit about, certainly the lower quality aspects of
35:02
Speaker 9: the credit spectrum. So I'd be entirely focused on that
35:05
Speaker 9: core fixed income space. And the other part of this
35:07
Speaker 9: is is as much as we know or feel that
35:10
Speaker 9: there is going to be a central bank pivot, there
35:12
Speaker 9: is still a lingering inflation risk. You know, economic theory
35:16
Speaker 9: tells you as long as growth there's above target, there's
35:18
Speaker 9: always going to be the risk that inflation researches, and
35:21
Speaker 9: we know that bonds have not done very well in
35:23
Speaker 9: protecting when inflation is moving up. So I still think
35:26
Speaker 9: that there means you need to have some kind of
35:28
Speaker 9: exposure to relasi it's in your portfolio. It doesn't need
35:31
Speaker 9: to be too much, but at least that broad diversification,
35:33
Speaker 9: so you'll protect against a couple of scenarios, which to
35:36
Speaker 9: our minds they're not entirely throwaway. You still have to
35:39
Speaker 9: consider them.
35:40
Speaker 4: What about outside the US is that an area to
35:44
Speaker 4: invest in for twenty twenty four?
35:46
Speaker 9: I think there are certain opportunities. The main area that
35:48
Speaker 9: we're looking at the moment is it's still in emerging markets,
35:52
Speaker 9: but at ex China. The beauty at the moment is
35:55
Speaker 9: that you can actually think about emerging markets without having
35:58
Speaker 9: to consider some of the downturn that's going well in China.
36:01
Speaker 9: So the areas that we're looking at are Latin America primarily.
36:04
Speaker 9: Again we're looking at very very cheap valuations. You've got
36:07
Speaker 9: central banks which are already cutting interest rates, and also
36:11
Speaker 9: you have the ability to ride onto a secular theme
36:13
Speaker 9: of deglobalizations, so kind of the regionalization of supply chains,
36:18
Speaker 9: as well as the fact that some of the natural
36:20
Speaker 9: resources that would be coming into play as you think
36:23
Speaker 9: about the energy transition, are actually coming from Latin America.
36:26
Speaker 9: So you can have a number of cecular plays by
36:29
Speaker 9: positioning in Latin America at a time where valuations are
36:32
Speaker 9: extraordinarily attractive at this point.
36:35
Speaker 2: So China, it's such a big part of the MSCI.
36:38
Speaker 2: But I guess from your perspective, the risk is not
36:42
Speaker 2: the reward is not worth that risk.
36:45
Speaker 9: We do have yeah, we do have concerns about China
36:48
Speaker 9: still lingering. You know, we've seen from the recent conference
36:53
Speaker 9: that the policymakers are not planning to move in with
36:56
Speaker 9: big stimulus. They're still thinking about quality growth, which of
36:59
Speaker 9: course from a long term perspective is positive. But as
37:02
Speaker 9: long as you're not seeing the property market respond in
37:05
Speaker 9: a way that would improve confidence, then the Chinese economy
37:09
Speaker 9: is going to be struggling. And the one thing I
37:10
Speaker 9: come back to is if you do a quick comparison
37:12
Speaker 9: of the US property market and the Chinese property market,
37:15
Speaker 9: just to give you an idea. In the US, the
37:17
Speaker 9: property market accounts for about thirty percent of US household Well,
37:22
Speaker 9: in China that number is sixty percent.
37:23
Speaker 2: Wow.
37:24
Speaker 9: So as long as a property market is struggling in China,
37:26
Speaker 9: then it's very difficult to see in meaningful economic recovery.
37:29
Speaker 9: And without that recovery, I think investors stay very, very cautious,
37:33
Speaker 9: and you just don't see those flows back into Chinese equities.
37:36
Speaker 2: It's great analysis. I's always loved that data point. I'm
37:38
Speaker 2: going to use that. I will credit Seema, but I
37:41
Speaker 2: would definitely use that Simasha, senior global investment strategists over
37:44
Speaker 2: their principal global investments in London. One would street great
37:48
Speaker 2: part of town just outside of the city.
37:51
Speaker 1: Thanks for listening to the Bloomberg Markets podcast. You can
37:54
Speaker 1: subscribe and listen to interviews at Apple Podcasts or whatever
37:58
Speaker 1: podcast platform you prefer. I'm Matt Miller. I'm on Twitter
38:02
Speaker 1: at Matt Miller nineteen seventy three.
38:04
Speaker 2: And I'm Paul Sweeney. I'm on Twitter at pt Sweeney.
38:07
Speaker 2: Before the podcast, you can always catch us worldwide at
38:09
Speaker 2: Bloomberg Radio