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Supply Chain, Fixed Income, CVS, and Private Credit (Podcast) · Bloomberg Intelligence

0:00
Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside
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Speaker 1: my co host Matt Miller. Every business day, we bring
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Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
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Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
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Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
0:18
Speaker 1: at Bloomberg dot com slash podcast. So you know, I
0:22
Speaker 1: got lead class cow here in the studio. He covers
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Speaker 1: all the transportation, all the logistics, so he's the blame
0:28
Speaker 1: for all the supply chain stuff. But he does that
0:30
Speaker 1: for Bloomberg Intelligence. And I was just telling him, I
0:32
Speaker 1: just read this book book Everything, which is a book
0:36
Speaker 1: basically about the global container shipping business. And it was
0:39
Speaker 1: a summer beach read on the Jersey Shore because you
0:42
Speaker 1: look at these big ships off the coast of the
0:43
Speaker 1: Jersey Shore and you think about it, and it got
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Speaker 1: me thinking, that's a tough business. Boy, I mean, that
0:47
Speaker 1: is a tough business. And I saw that Marsk, you know,
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Speaker 1: one of the biggest container shipping companies. They reported some
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Speaker 1: numbers today. Lee, talk to us about Marsk and then
0:55
Speaker 1: help us think about where we are in this global
0:57
Speaker 1: supply chain challenge that really is a global sure shures
1:01
Speaker 1: omarics because like the number one and number two global
1:04
Speaker 1: container liner depending on the day in the month. Um.
1:06
Speaker 1: But you know, they reported great earnings and a lot
1:09
Speaker 1: of that had to do with going on their ocean business,
1:11
Speaker 1: which is really cool to what they are, and that's
1:14
Speaker 1: been driven by really really strong contractual rates. Um. You know.
1:17
Speaker 1: What we have seen though, is that you know, we're
1:19
Speaker 1: probably at peak earnings for these kind of container liner
1:22
Speaker 1: companies and rates are gonna get a lot weaker. And
1:25
Speaker 1: the spot market rates are down around seventy eight percent
1:28
Speaker 1: year of a year, where at levels that we haven't
1:30
Speaker 1: seen since they move a lot, don't they do. It's
1:32
Speaker 1: it's and its because it's it's a really common I mean,
1:35
Speaker 1: the liners won't tell you this, but it's a commoditized business.
1:37
Speaker 1: You know. They they ship a box from point A
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Speaker 1: to point b uh, and the lower price, the lowest price,
1:43
Speaker 1: that's the new price. And so it's it happens to
1:45
Speaker 1: be a very irrational market because a lot of the
1:47
Speaker 1: players are are subsidized if you will, by uh, you know,
1:51
Speaker 1: the country of origin of where they are. Because most
1:53
Speaker 1: of the players are the major players are based out
1:56
Speaker 1: of Asia. There's a couple of large European players that
1:59
Speaker 1: are a little more I would call them disciplined and
2:00
Speaker 1: rational when it comes to pricing. So you know, we
2:03
Speaker 1: expect like we're sailing past peak earnings. Uh, and you
2:07
Speaker 1: know next year is going to be a lot more
2:08
Speaker 1: challenging because of that irrational behavior. There's a great chart
2:13
Speaker 1: rolling around in the Bloomber terminal somewhere the shows these
2:16
Speaker 1: container freight rates just completely making a U turn and
2:19
Speaker 1: they're now back to I want to say, pre pandemic
2:21
Speaker 1: levels are almost there. Um what happened to where in
2:26
Speaker 1: a supply chain crisis Bush, by the way, has not
2:29
Speaker 1: been fixed yet as far as I as far as
2:31
Speaker 1: I understand, So why are these freight rates coming down
2:34
Speaker 1: if there's still this premium in theory to to bring
2:39
Speaker 1: things from abroad? Yeah, I mean it really has. It
2:41
Speaker 1: stems first and foremost from demand. So demand is off.
2:45
Speaker 1: So typically around now is what we call the peak
2:47
Speaker 1: season for freight as like retailers get ready for Christmas
2:50
Speaker 1: UH and the holidays, and as you know, a lot
2:52
Speaker 1: of like large big box retailers are complaining about their
2:55
Speaker 1: inventory is a little too high. Uh and then you
2:58
Speaker 1: have that you throw on top of that high inflation. Uh.
3:01
Speaker 1: So the you know, the consumer has been relatively uh resilient.
3:04
Speaker 1: But the reality is is this peak season is going
3:07
Speaker 1: to be very muted. There might be a little bit
3:09
Speaker 1: of of of a benefit not for the liner industry,
3:13
Speaker 1: but maybe for the trucking industry, um, you know in December.
3:16
Speaker 1: But you know, all expectations are is the peak is
3:19
Speaker 1: pretty much a wash this year. And some of that
3:21
Speaker 1: has to do with, um, you know, the demand trends
3:24
Speaker 1: that I talked about, but also a lot of it
3:26
Speaker 1: has to do with last year. The comparables were just
3:28
Speaker 1: off the chart. So all right, you covered not only
3:32
Speaker 1: you cover the whole transportation supply chain, if you will,
3:35
Speaker 1: the big uh ocean going ships that the railroads, the trucks,
3:39
Speaker 1: the whole thing. Let's talk about the railroads here. I
3:42
Speaker 1: get my container into a port, Um, are the rails
3:46
Speaker 1: prepared to get it to where it needs to go
3:48
Speaker 1: in a timely fashion and in a way that they
3:50
Speaker 1: can make money. Yeah? So the rails are you know,
3:53
Speaker 1: one of the one of the best businesses in my opinion,
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Speaker 1: with freight transportation. You know, they have really high margin business.
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Speaker 1: I've to see the barrier's entry are pretty high. No one,
4:03
Speaker 1: no one laying down track in North America. But what
4:07
Speaker 1: the Rails they're the problems that they were facing really
4:09
Speaker 1: has to do with labor. Uh. You know, a they
4:12
Speaker 1: had a tentative agreement that wasn't ratified by two unions
4:16
Speaker 1: and there's a true there's a real risk of of
4:19
Speaker 1: of a of a strike in mid November. We think
4:22
Speaker 1: that risk is pretty darn low. Um. And what the
4:25
Speaker 1: Rails have been doing over the last i'd say, since
4:29
Speaker 1: the depth of the pandemic, is trying to resource their
4:33
Speaker 1: networks through hiring and training new employees. And what they
4:36
Speaker 1: found is, you know, in in cycles passed, they would, uh,
4:40
Speaker 1: they would furlough their employees and they call them back
4:42
Speaker 1: up and the employees whould want to come back. But
4:44
Speaker 1: this time around, for some reason, the employers are like, yeah,
4:47
Speaker 1: I've had enough of being a railroader. I'm gonna go
4:49
Speaker 1: work in a warehouse, or I'm gonna go do something else,
4:52
Speaker 1: or maybe I'm gonna retire early. Who knows, because you know,
4:55
Speaker 1: you know, it is a hard job. It's outside, so
4:58
Speaker 1: you're in the hundred degree heat, the zero a degree cold, UM,
5:02
Speaker 1: but you know it is is a very well paid, unionized,
5:06
Speaker 1: unionized job. Thank you, Paul coming to my rescue with
5:11
Speaker 1: the mike. UM. Some of these issues that haven't been
5:14
Speaker 1: solved yet from from the rail strike perspective that UM
5:17
Speaker 1: that we were just talking about. I believe, correct me
5:19
Speaker 1: if I'm wrong. I think November nine, the next day
5:22
Speaker 1: that we're looking for. Um, if the kind of voting
5:25
Speaker 1: and negotiations don't fully go through, what are the ripple
5:29
Speaker 1: effects here? How bad could it get? I mean, you
5:32
Speaker 1: know the stats that I've seen, and I'm sure a
5:34
Speaker 1: lot of people have seen that are listening to this,
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Speaker 1: it's it could cost the economy two billion dollars a day.
5:39
Speaker 1: So no one wants that. I mean, the unions don't
5:41
Speaker 1: want that, the railroads don't want that, our politicians don't
5:44
Speaker 1: want that. I don't want that. UM. You know, so
5:47
Speaker 1: it will really muck up supply Chaine, just at a
5:50
Speaker 1: time when supply chains are trying to normalize, UM, and
5:54
Speaker 1: the speed of that normalization is really being driven by
5:57
Speaker 1: labor availability. And you know that's why we're you know, uh,
6:00
Speaker 1: you know, Paul, we're talking off the air before like
6:03
Speaker 1: why We're not using the R word. It is because
6:05
Speaker 1: you know, the consumer is still pretty resilient. Um. You know,
6:09
Speaker 1: you might get a recession that is shallow uh and short,
6:13
Speaker 1: but the end of the day, you know, freight demand
6:16
Speaker 1: doesn't look terrible. Over the next twelve months, it may
6:18
Speaker 1: not be as great as it was last year, which
6:21
Speaker 1: again right reopening, it was a real, real tough comp Alright, Lee,
6:24
Speaker 1: great Stuff has always loved getting you here in our
6:26
Speaker 1: Bloomberg Interactor broken studio. Even better to get a gold
6:29
Speaker 1: star for that, Lee Glasgow, sector head senior annalys He
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Speaker 1: comes all the freight transportation logistics, think freight containers, railroads,
6:36
Speaker 1: trucks and everything uh in between. He does that for
6:38
Speaker 1: Bloomberg Intelligence to be doing that on Wall Street four decades,
6:41
Speaker 1: so we appreciate getting his insights here. All right, this
6:47
Speaker 1: is what you do or this is what I do?
6:49
Speaker 1: What I want to talk fixed income? I go, I end,
6:51
Speaker 1: go on the Bloomberg terminal. That gets me the Bloomberg
6:53
Speaker 1: Index browser. I scrolled down to the Bloomberg u S
6:57
Speaker 1: Aggregate Total return Value unhedged index four bonds. It's a
7:03
Speaker 1: fifteen point five percent this year and fixed income nerves
7:06
Speaker 1: tell me that has never happened. So of course I
7:10
Speaker 1: feel like I got to jump in the deep end
7:12
Speaker 1: of the pool both feet and start buying. But let
7:14
Speaker 1: me check with the professional before I do that. Natalie
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Speaker 1: treviorth I, head of investment grade credit Strategy of Paident
7:19
Speaker 1: and Regal, joins us. So, Natalie, it's got to be
7:22
Speaker 1: the mother of all times to buy fixed income today?
7:26
Speaker 1: Am my writer wrong on that one? I think you're
7:29
Speaker 1: absolutely right. It's never been more attractive. The only issue
7:32
Speaker 1: is that keeps getting more and more attractive every day,
7:34
Speaker 1: so you continue to see these negative returns roll in.
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Speaker 1: So what's kind of just give us as we now
7:41
Speaker 1: have you know, nine ten months of hindsight here for
7:44
Speaker 1: the fixed income market. How did we get to this
7:47
Speaker 1: point here and how did it become like? Again, smart
7:49
Speaker 1: people like you tell me we've never seen this in
7:51
Speaker 1: fixed income before. Yeah, so we are priced for the
7:55
Speaker 1: perfection and credit at the end of two thousand and
7:58
Speaker 1: twenty one, weet very anemic credit spread, particularly in the
8:02
Speaker 1: front end of the curve. It was hard to even
8:04
Speaker 1: get half a percent and yield, and this forced some
8:06
Speaker 1: investors down the credit spectrum from investment grade down to
8:09
Speaker 1: high yield to clos. But what we see now is
8:12
Speaker 1: really a rate driven move by all of the said
8:15
Speaker 1: hikes so far that has driven these negative returns, and
8:18
Speaker 1: I think it's gone a lot further than people were
8:20
Speaker 1: anticipating at the beginning of the year. And as we
8:23
Speaker 1: get closer to the end of the hiking cycle, it
8:25
Speaker 1: feels like investors are getting a little bit more confident
8:28
Speaker 1: about wanting to redip their toes into the fixed income market.
8:31
Speaker 1: To know, the two year at four and a half
8:33
Speaker 1: to send is looking pretty attractive. Natalie, I love that
8:36
Speaker 1: you brought up the negative yielding debt because it really
8:38
Speaker 1: wasn't that long ago. Is only a year and year
8:40
Speaker 1: and a half ago. Now you can actually make money
8:43
Speaker 1: by having the privilege of lending to a lot of
8:45
Speaker 1: these sovereign at governments. But I have to ask, in
8:48
Speaker 1: this year and year and a half the amount of
8:50
Speaker 1: bond volatility, is that not discouraging in itself to hop
8:54
Speaker 1: into the bond market. Yeah, that bond volatility that we've
8:59
Speaker 1: seen in spreads has been a little bit discouraging, But
9:02
Speaker 1: you would think that as the absolute yield rise as
9:05
Speaker 1: an underlying treasury rates that investors should demand a higher
9:08
Speaker 1: risk premium for dipping down from treasuries into corporate. So
9:13
Speaker 1: I mean, I look at the two year here four
9:16
Speaker 1: point five. There's no real reason to take any extra
9:20
Speaker 1: risk by going out on the yield curve? Is there? Well,
9:24
Speaker 1: there is if you think things are going to get
9:26
Speaker 1: better and with the said is able to walk a
9:28
Speaker 1: straight of soft landing because you can get six percent
9:30
Speaker 1: by staying in pretty high quality front and investment, great corporate.
9:34
Speaker 1: So if we were to get a pause soon in
9:36
Speaker 1: the SuDS hiking cycle, and if credit spreads were to
9:40
Speaker 1: um tight and next year, you could actually get incremental
9:42
Speaker 1: positive return by taking that extra risk by moving into
9:46
Speaker 1: credit as opposed to treasuries alone. Well, Paul brings up
9:50
Speaker 1: the two year, and if actually look at the two
9:51
Speaker 1: year in the ten year and they kind of overlay
9:53
Speaker 1: it would say the terminal rates of what five percent,
9:57
Speaker 1: which is now being priced in peak in March three,
10:00
Speaker 1: it kind of seems like there's still a long way
10:02
Speaker 1: to go when it comes to the yield. How high
10:05
Speaker 1: can it go? Well, we think the curve can remain
10:09
Speaker 1: inverted for a while, so it wouldn't be too surprising
10:11
Speaker 1: to see the two year move up higher to that
10:13
Speaker 1: five percent, particularly, we think that that's gonna pause at
10:16
Speaker 1: this higher range. But we are seeing some investors who
10:19
Speaker 1: are anticipating cuts eventually, maybe not next year but the
10:24
Speaker 1: following year, and think locking in four percent on the
10:26
Speaker 1: ten year plus adding some credit spread on top of
10:28
Speaker 1: that is still attractive to locking longer term higher yields
10:32
Speaker 1: rather than before the reinvesting in a couple of years. Natalie,
10:36
Speaker 1: I started my career and as a credit research guy
10:39
Speaker 1: at the Chase Manhattan Bank. Do I have to break
10:40
Speaker 1: out some of my old credit models if I'm worried
10:44
Speaker 1: about a recession here and credit quality and all that stuff. Well,
10:47
Speaker 1: the good news is credit fundamentals are still actually pretty strong.
10:51
Speaker 1: Some of the negative news that we're seen in the
10:53
Speaker 1: equity market, such as dividend cuts are slowing down a
10:56
Speaker 1: share buybacks are actually positive for bondholders. Companies are really
11:00
Speaker 1: focused on managing their balance sheets and want to keep
11:03
Speaker 1: leverage and checked, so we don't think there's actually going
11:05
Speaker 1: to be a big downgrade wave here um as companies
11:08
Speaker 1: really want to make sure that they're maintaining their investment
11:11
Speaker 1: grade ratings. I thought we were done. We're not. Let
11:17
Speaker 1: me ask you about simply the high yield market here,
11:20
Speaker 1: there seems to be some divergence in terms of the
11:23
Speaker 1: commodity moves and commodity forecasts. If you are perhaps forecasting
11:29
Speaker 1: a recession, a lot of these oil prices and oil
11:31
Speaker 1: contracts were the first to fall, of the first to collapse.
11:34
Speaker 1: What does that do to high yield? Yeah, we think
11:38
Speaker 1: that could be a little bit challenging for high yield,
11:40
Speaker 1: but we are not forecasting the collapse. And the energy
11:42
Speaker 1: prices we think they stay kind of in this a
11:44
Speaker 1: D range or higher, and at this level of these
11:47
Speaker 1: companies are still are still throwing off quite a bit
11:49
Speaker 1: of free cash flow. We do think a lot of
11:52
Speaker 1: energy bonds of already priced in these um strong markets,
11:56
Speaker 1: So we think there could be some potential downside, but
11:58
Speaker 1: we don't think there's gonna be another wave of down
12:00
Speaker 1: grades like you saw immediately post the pandemic. All right, Natalie,
12:04
Speaker 1: great stuff. Really appreciate getting some of your time this morning, Natalie.
12:08
Speaker 1: Natalie Trevis, head of investment grade credit strategy at Paid
12:13
Speaker 1: and Regals. All right, let's talk technology here. You know,
12:19
Speaker 1: we had tech earnings over the last week. Broadly defined,
12:22
Speaker 1: they were disappointing particularly have any advertising exposure. And it
12:26
Speaker 1: kind of got me thinking, is there's gonna be a
12:28
Speaker 1: little bit of a reset in this market about how
12:30
Speaker 1: the market thinks about technology. So let's bring an Anora Rana.
12:33
Speaker 1: He's a senior software I T Services animlysts for Bloomberg Intelligence,
12:36
Speaker 1: joining us here in our Bloomberg Interactive Broker studio. So
12:39
Speaker 1: you know, I think really antorwag. Since the Great Financial Crisis,
12:43
Speaker 1: tech broadly defined has led this market higher. It's been
12:47
Speaker 1: the leader. It's had the premium valuation, the premium performance.
12:52
Speaker 1: Is that narrative? Is that changed in the last week
12:55
Speaker 1: to ten days. Yes, I think the biggest thing is
12:58
Speaker 1: way does it welcome from evaluation interview. We have seen
13:01
Speaker 1: massive spending in technology over the last five years. The
13:04
Speaker 1: pandemic spread it up, so companies were spending quite a
13:08
Speaker 1: bit on that. Then now when you see a recession
13:11
Speaker 1: on the horizon, you do pull back a little bit.
13:14
Speaker 1: Now you pull back, you sage, you put back hardware,
13:16
Speaker 1: equipment upgrades, you pull back software. All of those things happened.
13:21
Speaker 1: But you know, one of the things we would say
13:22
Speaker 1: is our biggest thing has been in the last six
13:25
Speaker 1: months we saw no revision estimates. That was our biggest
13:28
Speaker 1: complaint going in that we have not seen any revision
13:31
Speaker 1: of estimates. And one of the numbers I will highlight
13:34
Speaker 1: is in November of last year, when market was really
13:37
Speaker 1: at top, market was expecting let's say, for Microsoft, two
13:40
Speaker 1: thirty six billion dollars in revenue for calendar of three
13:44
Speaker 1: Tell about a month ago. Tell about I would say
13:47
Speaker 1: three weeks ago. They were still expecting that number too
13:50
Speaker 1: to be there. And I checked it last night. It's
13:52
Speaker 1: gone down to ten billion dollar reduction about a four.
13:56
Speaker 1: So so we are seeing numbers come down now. I
13:58
Speaker 1: think this is the time when side is going to
14:00
Speaker 1: take the numbers down, and I think that's what will
14:03
Speaker 1: drive the reset. Well, if you what does what does
14:06
Speaker 1: the reset look like? Then? I mean, are we looking
14:09
Speaker 1: at valuations that are coming back to I wanna perhaps
14:15
Speaker 1: even then we were thought that tech was borderline in
14:17
Speaker 1: a bubble. What does it look like? I would argue
14:19
Speaker 1: that now we are well below our pre pandemic levels
14:22
Speaker 1: at this point for all the technology stocks, including software,
14:25
Speaker 1: you know, Microsoft, Apple, all these companies. The thing that
14:28
Speaker 1: I do want to highlight is, let's say, for the
14:30
Speaker 1: sake of argument. For a company like Microsoft that has
14:32
Speaker 1: grown three to five years at about fifteen six in
14:35
Speaker 1: constant currency, they're still going to grow eight to ten
14:38
Speaker 1: percent over the next twelve months too, and then the
14:41
Speaker 1: year after that when it rebound comes back, it's going
14:43
Speaker 1: to come back actually stronger, because you just cannot live
14:46
Speaker 1: without upgrading some of this stuff. So it's a pause
14:49
Speaker 1: we're going to see for the next twelve months, but
14:52
Speaker 1: you know, I'll be a very optimistic about a bounce back.
14:55
Speaker 1: How about you know, I know the backbone of Bloomer
14:58
Speaker 1: Intelligence research is the data. We have the best data
15:01
Speaker 1: on Wall Street. We spend a lot of money for
15:04
Speaker 1: this data. And for you guys in the tech space,
15:06
Speaker 1: one of your sources, I knows I d C and
15:08
Speaker 1: they've got just kind of industry leading data as it
15:10
Speaker 1: relates to all amounts of spending across the technology stack.
15:15
Speaker 1: What are they saying over the next several years in
15:17
Speaker 1: terms of tech tech span given what we've just experienced
15:19
Speaker 1: over the last few years. So, I mean, I've built
15:21
Speaker 1: my own mental model which I can explain, and I
15:23
Speaker 1: think I DC is, you know, somewhere plus or minus
15:26
Speaker 1: two percent on that. The way I look at it.
15:28
Speaker 1: If the if the global world is going to grow
15:29
Speaker 1: at two to three, technology spending is going to be
15:32
Speaker 1: two to three times. So that so let's say four
15:34
Speaker 1: to nine pc um in that hardware is going to
15:36
Speaker 1: be low single digits. Software is going to be ten
15:39
Speaker 1: percent plus, and service is going to be around five
15:41
Speaker 1: to seven percent. So software is the key driver there
15:45
Speaker 1: in double digits. And and in fact, you could look
15:47
Speaker 1: at any company today's salesforce service now you will still
15:50
Speaker 1: see estimates above for this service now above, so we
15:55
Speaker 1: have a long way to go before we reach maturation
15:58
Speaker 1: in the software growth rates. What about kind of great
16:02
Speaker 1: sensitivity here? A lot of these big tech names were
16:05
Speaker 1: kind of the poster child of if the Fed hikes,
16:08
Speaker 1: these are the first names you sell. And and although
16:11
Speaker 1: that made sense when you have these massive balance sheets
16:13
Speaker 1: and all this cash and all this liquidity, what happens
16:17
Speaker 1: now some of that cash has been deployed and the
16:21
Speaker 1: rates market is kind of peeking and kind of stalling out.
16:24
Speaker 1: Doesn't that mean that tech should be now? I would
16:28
Speaker 1: say that the day we get this news that the
16:31
Speaker 1: pivot is there, we're gonna have one hell of a
16:33
Speaker 1: tech rally. Now, I don't know when that day. I mean,
16:37
Speaker 1: I don't know, I don't That's the thing I cannot predict.
16:39
Speaker 1: But um, that's gonna happen. I mean, it may not
16:42
Speaker 1: happen now, six months, twelve months, even longo, but that's
16:45
Speaker 1: the day we're going to have this conversation because all
16:48
Speaker 1: these companies are very resistant to any kind of a
16:52
Speaker 1: downtown and because of the work that they do. But
16:55
Speaker 1: we're already there. If you're looking at the market expectations,
16:57
Speaker 1: they're already stalling out at five in March. And there's
17:01
Speaker 1: an argument here that that's going to create some sort
17:03
Speaker 1: of floor for the equity market. But does that mean
17:07
Speaker 1: that tech leads that, Oh, it has to there is
17:09
Speaker 1: no no other way because that has the highest beta.
17:12
Speaker 1: Those are the ones that were killed more. That's where
17:14
Speaker 1: the discount rate really, you know, completely demolished the valuations
17:17
Speaker 1: of it. But I think, in in conjunction with what
17:20
Speaker 1: I said to Paul earlier, the revenue estimates and and
17:24
Speaker 1: and profit estimates needs to come down, and I think
17:27
Speaker 1: they started to come down. I think, you know, it
17:28
Speaker 1: could be another month or so when we see a
17:31
Speaker 1: bottom for that. I think that couple with the rates
17:33
Speaker 1: is what drives the market. Opted all right, let's talk
17:35
Speaker 1: about Microsoft um sat Natla Nadella, I think is one
17:39
Speaker 1: of the most under believe it or not, you know,
17:42
Speaker 1: the undervalued or under recognized folks out in silicon value
17:45
Speaker 1: what he's done with that company. But I'm looking at
17:47
Speaker 1: the f A function for Microsoft and a little bit
17:50
Speaker 1: of a slow down and growth in the twenty three
17:52
Speaker 1: consensu assessments eight and a half percent, presumably bacon in
17:55
Speaker 1: some type of recession. But then you look at six
17:58
Speaker 1: Wall Streets still predicting thirteen percent revenue growth. That's pretty
18:02
Speaker 1: darn good, is that. I would argue that it's going
18:06
Speaker 1: to be better than that, because it's going to be
18:08
Speaker 1: close to six. If I do not look at any
18:11
Speaker 1: effects headwinds at that point, we are assuming, you know,
18:14
Speaker 1: dollar cannot get stronger, you know, forever at that at
18:17
Speaker 1: that end. But even if I was to exclude this,
18:19
Speaker 1: because we saw this during the pandemic, if you were
18:21
Speaker 1: to go look at the data during the pandemic, and
18:24
Speaker 1: we published a note on this yesterday, that cloud growth
18:26
Speaker 1: rates dipped quite a bit in the four quarters since
18:29
Speaker 1: the pandemic started, and the year after that growth rates
18:32
Speaker 1: picked up. In that cloud business, which is very unusual
18:35
Speaker 1: because the size of that business is very large. So
18:37
Speaker 1: for growth rates to accelerate, and we think that's going
18:40
Speaker 1: the same thing is going to happen going into twenty four. Well,
18:44
Speaker 1: talking about cloud adoption here because I think, um, your
18:47
Speaker 1: colleague Man deep Thing actually talked about the fact that
18:51
Speaker 1: this is a market. I don't want to mess up
18:53
Speaker 1: the numbers here, but this is a market that has
18:55
Speaker 1: I want to like four or five, like a billion
18:57
Speaker 1: or trillion or some sort of big, big, big number,
19:01
Speaker 1: but that only a fraction of it has really been unlocked.
19:04
Speaker 1: But a lot of that is because a lot of
19:05
Speaker 1: these companies haven't actually adopted it fully. About thirty seconds here,
19:09
Speaker 1: how long is it gonna take to adopt fully? It's
19:11
Speaker 1: it's just going to be taken a lease to decade
19:13
Speaker 1: to get dinner. So we are looking at a decade
19:16
Speaker 1: of very strong cloud growth. The growth rates will be decelerate,
19:19
Speaker 1: but but it's going to take at least to decade.
19:21
Speaker 1: All right, I don't know great stuff, appreciate it always.
19:23
Speaker 1: We let to getting the overview of the text base
19:26
Speaker 1: and then digging down into some individual names. I guess
19:29
Speaker 1: the key issue for a lot of people, is will
19:31
Speaker 1: the tech sector continued to be a leading sector in
19:35
Speaker 1: this equity market when we get a turn upward or
19:38
Speaker 1: has that been rerated? On a Rock still feels bullish
19:40
Speaker 1: about the text space on Rock Ron senior Software and
19:43
Speaker 1: I T Services analyst for Bloomberg in intelligence. I'm gonna
19:50
Speaker 1: mis some ignorance here. C v S Healthcore, not CBS Television,
19:55
Speaker 1: which is a company I've followed forever, but CBS the
19:58
Speaker 1: healthcare company. I did know how big this company is.
20:02
Speaker 1: I mean it's a hundred and thirty billion in market capitalization.
20:07
Speaker 1: I mean it's got like three hundred thousand employees. Uh.
20:10
Speaker 1: Just a huge company, and it's just a big, big
20:12
Speaker 1: player in the healthcare space. And I need to do
20:15
Speaker 1: some more work on this thing. But anyway, they reported
20:17
Speaker 1: some numbers today, some good numbers. There's also some news
20:20
Speaker 1: out there about an opioid uh tenant to twelve billion
20:24
Speaker 1: dollar opio a pack. So we need to get a
20:25
Speaker 1: little bit smarter on this company. Uh, And so we
20:27
Speaker 1: asked Jonathan Palmer to come in near. Jonathan Palmer is
20:29
Speaker 1: a senior equity research analysts and team leader for the
20:32
Speaker 1: healthcare team at Bloomberg Intelligence. He's been covering the stock
20:35
Speaker 1: in this sector for decades. Here, Johnathan, give us you
20:38
Speaker 1: know again, I don't know anything about this company. What
20:40
Speaker 1: do I like? One or two sentences? What is this company?
20:42
Speaker 1: Why do I need to know more about it? Sure, Pauls,
20:46
Speaker 1: thanks for having me on. So CBS has really transformed
20:48
Speaker 1: itself for the last two decades. I mean, traditionally it
20:51
Speaker 1: was a retail pharmacy and that's what I called a
20:53
Speaker 1: PBM to help manage drug benefits. And then a couple
20:56
Speaker 1: of years ago they purchased the big insurre at to
20:59
Speaker 1: now become this three legged stool of healthcare retail PBM insurance.
21:05
Speaker 1: And really what they're trying to do is become, you know,
21:07
Speaker 1: a provider of healthcare services across the spectrum and and
21:11
Speaker 1: you know, come into people's home and provide them services
21:14
Speaker 1: at these retail locations. And they have a really big
21:16
Speaker 1: push lately, although they haven't executed on this plan. They
21:19
Speaker 1: want to move into primary care visa V like Amazon
21:22
Speaker 1: and one Medical. Well, what is the difference then, I mean,
21:27
Speaker 1: in our commercial break, you're just talking about how we
21:29
Speaker 1: all kind of think of CVS is still the pharmacy business.
21:32
Speaker 1: It's evolved from from that vision. What could it turn into? Sure?
21:38
Speaker 1: So I think their their vision is that they want
21:40
Speaker 1: to be a provider of healthcare services across the spectrum
21:44
Speaker 1: and continuum, and you know, they want to have you
21:47
Speaker 1: in their network in one form or another, whether that's
21:49
Speaker 1: in their pharmacy, you know, hopefully down the road in
21:52
Speaker 1: one of their doctor's offices and really help, uh, you know,
21:56
Speaker 1: manage that evolution of a patient's care. So they reported
21:59
Speaker 1: num Is today stock is trading up, uh IT stocks
22:03
Speaker 1: only down like four this year, so out performing the market.
22:05
Speaker 1: Talk to us about kind of what they reported today
22:08
Speaker 1: and kind of what's the call on the stock. Yeah,
22:11
Speaker 1: so the numbers today were pretty good. There was each
22:13
Speaker 1: of the three businesses performed pretty well, a little bit
22:15
Speaker 1: above expectations. Really, the big question coming into today was,
22:19
Speaker 1: you know, what does their outer year growth profile look like.
22:23
Speaker 1: They have had a plan in place where they expected
22:25
Speaker 1: to get to double digit EPs growth by two thousand
22:27
Speaker 1: twenty four. They've had a couple of setbacks lately. Uh
22:31
Speaker 1: they had some unfavorable rankings in their medicare plans and
22:35
Speaker 1: um More recently, they lost a big PBM contract u
22:38
Speaker 1: from one of their peers, UH Sentien, And so there
22:41
Speaker 1: was a question whether that double digit EPs targets still stood,
22:45
Speaker 1: and they released guidance this morning on a permanent guidance
22:48
Speaker 1: on on two thousand, twenty three. Um, they're gonna be
22:50
Speaker 1: high single digit EPs growth, which is in line with
22:52
Speaker 1: what they said, and they still planned to reach that
22:54
Speaker 1: double digit target in twenty four and it might come
22:58
Speaker 1: through a couple different flavors. It might be through acquisitions,
23:02
Speaker 1: or they might be buying back a lot of stock
23:03
Speaker 1: to get to that. I'm just looking at the f
23:06
Speaker 1: A functional on the Bloomberg terminal kind of gives you
23:07
Speaker 1: the consensus of what's out there from all the sales
23:09
Speaker 1: side UH and four it's eight point seven EPs scrolls
23:13
Speaker 1: in the streets a little bit cautious. They're also a
23:17
Speaker 1: story out today. You want to get your comment on CVS, Walmart,
23:21
Speaker 1: Walgreens reach tentative twelve billion dollar opioid pack. Give us
23:25
Speaker 1: the background here and and kind of this good news
23:28
Speaker 1: for the company. This is great news for the company.
23:30
Speaker 1: You know, the opioid issue has been overhanging, not so
23:33
Speaker 1: much for the pharmacies but the drug distributors for really
23:36
Speaker 1: the last almost five to ten years, and they were
23:38
Speaker 1: really the first targets of these legal actions. And so
23:42
Speaker 1: the distributors settled at the beginning of this year for
23:44
Speaker 1: about twenty billion dollars between the big three three like
23:47
Speaker 1: their McKesson, Amerisource, Bergen, and Cardinal Health. And so it's
23:52
Speaker 1: interesting to think about, you know, the the d a
23:55
Speaker 1: s and attorney generals in these various states. You know,
23:57
Speaker 1: we're going after people who could pay. And my thinking
24:00
Speaker 1: always that, well, we have CBS, we have Walgreens, we
24:02
Speaker 1: have Walmart. These are all pretty big companies in their
24:04
Speaker 1: ability to pay is there, And and now we've turned
24:07
Speaker 1: around and we've got a settlement, and so you know,
24:09
Speaker 1: I think what was an overhanging and unknown for a
24:11
Speaker 1: little while now has some clarity and visibility. And for CBS,
24:15
Speaker 1: it's five billion dollars over ten years. That's a very
24:18
Speaker 1: manageable number. Well, you mentioned Walmart as well. Walmart is
24:23
Speaker 1: not the only company to want kind of their their
24:26
Speaker 1: foot in healthcare. We've got Amazon, We've had Berkshire Hathaway
24:29
Speaker 1: as well, JP Morgan. I think at one point, is
24:32
Speaker 1: it fair to compare CBS is kind of broader vision
24:35
Speaker 1: to some of these um MAYA capped companies. It's interesting
24:39
Speaker 1: because I think everybody who is looking at the consumer
24:42
Speaker 1: is thinking that healthcare is there, you know, next obvious extension,
24:45
Speaker 1: and that's why you have Walmart and Amazon going there.
24:48
Speaker 1: I think CBS sees that that same vision as well,
24:51
Speaker 1: the consumer driven healthcare piece. But I think you know
24:54
Speaker 1: where they're a little bit different. Is there a more
24:56
Speaker 1: traditional healthcare provider Visa v their PBM and ensure and
25:00
Speaker 1: they look at their peer United Healthcare, which is the
25:03
Speaker 1: biggest insurer, and how they've more moved more to become
25:06
Speaker 1: more ingrained into the healthcare system, buying practices, buying facilities,
25:10
Speaker 1: you know, really managing patient end to end. So real
25:15
Speaker 1: quicker thir thirty seconds. If we're going into a recession,
25:17
Speaker 1: do I want to own healthcare stocks? You're asking a
25:20
Speaker 1: healthcare analysts health care of the tagline is healthcare is
25:24
Speaker 1: extremely defensive, and I mean, I think we've seen that
25:27
Speaker 1: play out in a number of recessionary environments. You know,
25:30
Speaker 1: people still get sick, they still go to the doctor,
25:32
Speaker 1: they still take drugs. You know that these are all
25:35
Speaker 1: pretty defensive sectors of the healthcare space. All right, good, stuff. Yeah,
25:40
Speaker 1: I mean, you know, Bloomberg Intelligence folks, B I go
25:43
Speaker 1: on the terminal. If you've got a terminal in front
25:45
Speaker 1: of you, B I go, and what you're gonna get
25:47
Speaker 1: there is world class investment research, equity research, credit research,
25:51
Speaker 1: and lots lots more. And we've got people like Jonathan Palmer,
25:54
Speaker 1: each a season Wall Street anald's standing behind this research,
25:57
Speaker 1: writing this research. They have some of that this best
26:00
Speaker 1: data in the business that informs their research. So, uh,
26:04
Speaker 1: if you need to get real smart on a topic
26:06
Speaker 1: on a stock like I do on CBS, b I
26:09
Speaker 1: go is your place to go. And we thank Jonathan Palmer.
26:12
Speaker 1: He's a senior equity research channels. He's a team leader
26:14
Speaker 1: leading our healthcare research at Bloomberg Intelligence and ed joined
26:18
Speaker 1: us here in a Bloomberg Interactive broker studio. So what
26:20
Speaker 1: does he get a gold star just talking to Shannali
26:26
Speaker 1: Bassk Bloomberg News. She covers all things Wall Street. Course
26:29
Speaker 1: she would talk on and choose down at Miami to
26:31
Speaker 1: private equity sware down there. So we're talking private equity,
26:34
Speaker 1: private credit. Uh So our next guest fits right in
26:37
Speaker 1: their Randy Swimmer, co head of Senior Lending and senior
26:40
Speaker 1: managing director at Churchill Asset Management. They do that private
26:43
Speaker 1: credit stuff over there. So, Randy, how does your business
26:47
Speaker 1: perform in a world of rising interest rates? You're in
26:51
Speaker 1: the credit business, So senior dead is floating great instrument.
26:56
Speaker 1: So it improves let's go up, total yields go up.
27:00
Speaker 1: We've been waiting for this moment for a long long time.
27:03
Speaker 1: But it's also less volatile because these are smaller companies.
27:06
Speaker 1: They don't trade, so it's obviously an improvement with higher rates,
27:09
Speaker 1: but it's also great for the kind of headline volatility
27:12
Speaker 1: that we've been subject to for a long time. That's
27:14
Speaker 1: also something that investors appreciate because when you look at
27:18
Speaker 1: public UH assets such as fixed income in public equities,
27:22
Speaker 1: they have been very correlated, which is not helpful. If
27:25
Speaker 1: you're sixty forty allocated portfolio. Everything's going down together. And
27:30
Speaker 1: you've seen the other asselete classes performance here today, it's
27:34
Speaker 1: been in the red. It's it's kind of ugly. Private
27:37
Speaker 1: credit in general has been doing really well UM and
27:39
Speaker 1: so that's that's the advantage. Floating rate, less correlated, better structure, security, security,
27:46
Speaker 1: and so forth. Randy, it is FED day, Happy FAED day.
27:51
Speaker 1: UH do we see a pivot today? I don't think so.
27:53
Speaker 1: There's been so much invested by the Fed in keeping
27:58
Speaker 1: on and and making sure that the market believes that
28:01
Speaker 1: their fight against inflation is real. Um. The data that
28:05
Speaker 1: has been coming out has been pretty bullish in terms
28:08
Speaker 1: of the economic strength. You're you're talking about GDP for
28:12
Speaker 1: the third quarter of two point six percent. That's pretty strong. Yeah,
28:15
Speaker 1: there were some export data that helped that. Job openings
28:19
Speaker 1: continue to go up. Unemployment, you know, still is low,
28:23
Speaker 1: the labor market is tight, wages are going up. I
28:25
Speaker 1: mean you're talking about you know, I've been calling it
28:28
Speaker 1: a precession all your Well, you're welcome to you that
28:31
Speaker 1: term because yeah, thank you. UM. But because in a precession,
28:36
Speaker 1: we think that a recession is coming. Everybody's predicting something
28:39
Speaker 1: next year. But the economics right now are too strong.
28:42
Speaker 1: So your business, you tend to finance, you know, private
28:47
Speaker 1: equity deals, mid market type of deals. Give us a
28:50
Speaker 1: kind of typical deal for Churchill Asset Management. Sure, so
28:54
Speaker 1: we have private equity sponsor relationships that come to us
28:58
Speaker 1: for UH to solve multiple of variety of solutions up
29:02
Speaker 1: and down the capital structure. So they'll come to say, hey,
29:05
Speaker 1: we're looking at a very interesting commercial landscaping business. You know,
29:09
Speaker 1: thirty five million, but the revenues um. The great thing
29:13
Speaker 1: about commercial landscaping is in real estate, even if there's
29:16
Speaker 1: no one in the building, somebody has always got to
29:18
Speaker 1: be cutting the lawn, mowing the grass, hedge hedge clipping,
29:22
Speaker 1: by the way, different kind of hedge fund uh and
29:24
Speaker 1: and uh snow plowing. And so that's a kind of
29:27
Speaker 1: business that is steady eddy throughout any season and any cycle. Um.
29:32
Speaker 1: And with a good sponsor that's going to put in
29:34
Speaker 1: fifty equity into the deal below you, it's an attractive
29:37
Speaker 1: investment for our investors because they're protected and then the
29:41
Speaker 1: debt itself has covenants, so if the performance deteriorates, we're
29:45
Speaker 1: back at the table negotiating. Plus, the private equity sponsors
29:48
Speaker 1: that we deal with, they focus and specialized in defensive sectors,
29:52
Speaker 1: so healthcare, technology, business services, all of which have been
29:56
Speaker 1: doing very very well through COVID and we expect would
29:58
Speaker 1: do well during recession. So just ask this Questiontionale, but
30:02
Speaker 1: I'm gonna ask it to you is won't get your take.
30:04
Speaker 1: I believe there's a consensus that the private markets operated
30:07
Speaker 1: a little bit of a lag relative to the public markets.
30:10
Speaker 1: If there is a reckoning in the public markets, which
30:13
Speaker 1: arguably there already has been for the past ten months
30:15
Speaker 1: of equity carnage, does that mean the private markets are
30:19
Speaker 1: due for one as well. Yeah. I don't think it's
30:21
Speaker 1: so much a lag. It's that it's operating um with
30:24
Speaker 1: with different parameters. Because these companies are private, unrated, and
30:28
Speaker 1: the debt doesn't trade, you don't see the obvious reaction.
30:33
Speaker 1: So if you know the markets public equity markets are down,
30:36
Speaker 1: you see an instant reaction in the bond markets, for example,
30:40
Speaker 1: you don't see that. It's not that it's lagging, it's
30:42
Speaker 1: just that it responds to different things. Because these companies
30:45
Speaker 1: are private, and the advantage of private credit, which is
30:48
Speaker 1: what the issuers and investors are seeing right now, is
30:51
Speaker 1: headline risk will go up and down, and you'll see
30:53
Speaker 1: the public equity markets, for example, go up five hundred
30:56
Speaker 1: points one day, down five the next day with no
30:59
Speaker 1: discernible diff for instant data. The private private credit markets
31:02
Speaker 1: and private equity are much more stable, so they tend
31:05
Speaker 1: to respond more to long term changes in the economy
31:10
Speaker 1: in markets um but that makes them in this world
31:13
Speaker 1: of high voltility of very favorite asset class. Um. You know,
31:17
Speaker 1: we look at our portfolio right now, it's actually doing
31:20
Speaker 1: really well. We have we're three hundred companies in the
31:22
Speaker 1: portfolio and and the vast majority of them are performing
31:26
Speaker 1: well in terms of revenues and earnings, again because of
31:29
Speaker 1: the sectors that they're in, which are defensive. I hear.
31:32
Speaker 1: Maybe it's just me, but it seems like over the
31:33
Speaker 1: last couple of years, I've heard more and more and
31:35
Speaker 1: more about the private credit business and how it's such
31:38
Speaker 1: a good business. Um, what's the fundraising environment out that.
31:43
Speaker 1: I'm not sure if you guys are in a fundraising
31:44
Speaker 1: mode or not, but what's the environment out there for
31:46
Speaker 1: raising private credit capital? So we just publicly issued pressure
31:50
Speaker 1: release saying that we had raised twelve billion dollars over
31:53
Speaker 1: the last twelve eighteen months. So the fund fundraising environment
31:57
Speaker 1: for us has been very good. Um. Look right now,
32:00
Speaker 1: investors like you all are cautious. They're looking at the signs,
32:03
Speaker 1: the kinds of signs that we talked about with the
32:05
Speaker 1: economy potential recession, and so everyone's kind of taking that
32:09
Speaker 1: extra layer of due diligence of time and thinking, hey,
32:13
Speaker 1: what's the rush to do this? Now? We're not market timers.
32:17
Speaker 1: We're basically we've been doing this, you know, close to
32:19
Speaker 1: twenty years at Churchill or the long track records successfully
32:22
Speaker 1: over many cycles are are basically stories. Do this with
32:26
Speaker 1: us for the long run because we don't know and
32:29
Speaker 1: you don't know when the next recession is going to come.
32:31
Speaker 1: So want to you know, hit your wagon to affirm
32:34
Speaker 1: and to an asset class that is going to be
32:37
Speaker 1: here for the long run, that performs well during all
32:39
Speaker 1: the downturns. You know, we had positive returns during the
32:42
Speaker 1: o idline crisis. Why not you know, be in that
32:46
Speaker 1: and then benefit right now to what I think is
32:49
Speaker 1: the best market and private credit for over a decade.
32:52
Speaker 1: We're seeing yield to leverage at record highs. We're seeing
32:56
Speaker 1: um structures tighter, we're seeing leverage or by a turn
33:01
Speaker 1: or more of the Badah. I actually think this is
33:03
Speaker 1: a great time to be investing, but you have to
33:05
Speaker 1: do it with someone who's been through the downturns before successfully. Well,
33:08
Speaker 1: speaking of downturns, go about thirty seconds here, when do
33:11
Speaker 1: we see the next one? Well, we were not in
33:14
Speaker 1: the business of predicting. We have to predicts. Now. We
33:18
Speaker 1: we are always saying it's coming next year. In fact,
33:20
Speaker 1: we model a recession in every deal we do for
33:24
Speaker 1: next year. So in our investment committee, and we've got
33:27
Speaker 1: one this afternoon, I'm sure that will show we're going
33:29
Speaker 1: to be intercession next year. If it doesn't happen. My
33:32
Speaker 1: personal belief is that it's going to be a softer
33:34
Speaker 1: recession than a harder recession. I think it's gonna be
33:37
Speaker 1: more like two thousand, two thousand one than O eight
33:39
Speaker 1: oh nine. Because the banks and the finishing systems good shape.
33:43
Speaker 1: We'll be in good shape no matter what kind of
33:45
Speaker 1: recession it is. All right, Randy, good stuff is always
33:47
Speaker 1: really appreciate. Making the long commute, oh from your office
33:50
Speaker 1: is over here to seven thirty one Lex Randy strmercoh
33:53
Speaker 1: Had of Senior Lending. He's a senior managing director Churchill
33:56
Speaker 1: Acts Asset Management. Talking about the private credit business, and
33:59
Speaker 1: again maybe it's to me, but I've been hearing a
34:01
Speaker 1: lot more about the private credit business. It's a good business,
34:04
Speaker 1: it's attracting a lot of capital. I'm seeing more and
34:06
Speaker 1: more big names kind of get into that space. Thanks
34:11
Speaker 1: for listening to the Bloomberg Markets podcast. You can subscribe
34:15
Speaker 1: and listen to interviews with Apple Podcasts or whatever podcast
34:18
Speaker 1: platform you prefer. I'm Matt Miller. I'm on Twitter at
34:22
Speaker 1: Matt Miller three. On Fall Sweeney, I'm on Twitter at
34:26
Speaker 1: pt Sweeney. Before the podcast, you can always catch us
34:29
Speaker 1: worldwide at Bloomberg Radio